Business Context and Reporting Period
Company: Marsh & McLennan Companies, Inc. (MMC)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2006
Business Overview: MMC is a global professional services firm operating in four segments: Risk and Insurance Services (Marsh, Guy Carpenter), Risk Consulting and Technology (Kroll), Consulting (Mercer), and Investment Management (Putnam). The company employs approximately 55,000 people in over 100 countries.
Key Financial Metrics
| Metric (in millions) | Q3 2006 | Q3 2005 | 9 Months 2006 | 9 Months 2005 |
|---|---|---|---|---|
| Operating Revenue | $2,884 | $2,779 | $8,889 | $8,826 |
| Operating Income | $320 | $187 | $1,055 | $741 |
| Net Income | $176 | $69 | $764 | $369 |
| Diluted EPS (Net Income) | $0.31 | $0.12 | $1.36 | $0.68 |
| Cash from Operations (9M) | $137 (2006) vs $109 (2005) | |||
| Cash and Equivalents | $1,682 (Sep 30, 2006) | |||
| Total Debt (Short + Long Term) | $5,083 (Sep 30, 2006) |
Material Changes vs. Prior Period
- Profitability Surge: Operating income for the nine months ended September 30, 2006, increased 42% to $1.055 billion, driven by a 3% decrease in operating expenses and a 1% increase in revenue. Q3 operating income rose 71% year-over-year.
- Discontinued Operations: Net income for the nine months includes a significant $173 million gain from discontinued operations, primarily due to the sale of Sedgwick Claims Management Services (SCMS) in January 2006. Conversely, the sale of Price Forbes (U.K. wholesale brokerage) in September 2006 resulted in a loss included in discontinued operations.
- Segment Performance:
- Risk and Insurance Services: Revenue declined 4% year-to-date due to lower insurance premium rates and declining market service revenue. However, operating margin improved significantly to 13.5% from 5.7% due to cost savings.
- Consulting: Revenue increased 10% year-to-date, driven by strong growth in Mercer's specialty consulting (18%) and human resource consulting (7%).
- Investment Management (Putnam): Revenue declined 10% due to a decrease in average assets under management (AUM), which fell to $182 billion from $192 billion the prior year.
- Restructuring: MMC announced a new "2006 Plan" in September, incurring $41 million in charges, aimed at generating $350 million in annualized savings by 2008. Savings from the 2005 Plan are estimated at $400 million annually.
Guidance, Outlook, and Risks
- Restructuring Outlook: Management expects the 2006 restructuring plan to result in $350 million in annualized savings by the end of 2008, with total charges estimated at $225 million. Phase 1 is expected to be completed by Q1 2007.
- Putnam AUM: Management expects net outflows for Putnam to improve in Q4 2006, though gross inflows may slow as customers await the results of a market check announced in September 2006.
- Legal and Regulatory Risks:
- Market Service Agreements: Significant ongoing litigation and regulatory proceedings (including NYAG, Connecticut, and Florida actions) regarding alleged bid-rigging and undisclosed commissions. MMC has established an $850 million fund for policyholder compensation, with payments ongoing through 2008.
- Putnam Market-Timing: Over 70 civil complaints filed regarding market-timing and late trading. While some claims against MMC have been dismissed, proceedings against Putnam continue. MMC has agreed to guarantee Putnam's indemnification obligations.
- Accounting Changes: Adoption of SFAS 158 (pension accounting) is expected to reduce stockholders' equity by approximately $1 billion at year-end 2006, with no impact on income or cash flows.
- Debt Ratings: Senior debt is rated Baa2 (Moody's) and BBB (S&P) with a negative outlook from both agencies.
Investor Verification Checklist
- Discontinued Operations Impact: Verify the sustainability of earnings by excluding the $173 million gain from the sale of SCMS included in the nine-month net income.
- Putnam Net Flows: Monitor the trend of net redemptions at Putnam Investments, which averaged $15.7 billion in outflows for the first nine months of 2006.
- Legal Reserves: Review the adequacy of reserves for the $850 million NYAG settlement fund and potential liabilities from ongoing market-timing and market service agreement litigation.
- Restructuring Execution: Track the realization of the projected $350 million in annualized savings from the 2006 restructuring plan against the $225 million in expected charges.
- Pension Liability: Confirm the impact of SFAS 158 adoption on the balance sheet, specifically the reduction in equity and increase in liabilities related to defined benefit plans.