Business Context and Reporting Period
Company: Marsh & McLennan Companies, Inc. (MMC)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended September 30, 2001
Business Overview: MMC is a global professional services firm operating in three segments: Risk and Insurance Services (Marsh), Investment Management (Putnam), and Consulting (Mercer). The period was significantly impacted by the September 11, 2001 terrorist attacks, which resulted in the loss of 295 employees and the destruction of the company's World Trade Center headquarters.
Key Financial Metrics
| Metric (in millions) | Q3 2001 | Q3 2000 | 9M 2001 | 9M 2000 |
|---|---|---|---|---|
| Revenue | $2,371 | $2,535 | $7,470 | $7,681 |
| Operating Income | $312 | $526 | $1,483 | $1,659 |
| Net Income | $168 | $282 | $830 | $895 |
| Diluted EPS | $0.58 | $0.97 | $2.87 | $3.12 |
| Operating Margin | 13.2% | 20.7% | 19.9% | 21.6% |
| Cash & Equivalents | $600 | $240 | $600 | $341 |
| Short-term Debt | $1,011 | $337 | $1,011 | $337 |
| Long-term Debt | $2,346 | $2,347 | $2,346 | $2,347 |
| Operating Cash Flow (9M) | $872 (2001) vs $810 (2000) |
Material Changes vs. Prior Period
- Revenue Decline: Consolidated revenue decreased 6% in Q3 and 3% for the nine months compared to 2000. This was driven primarily by a 29% drop in Investment Management revenue due to a 23% decline in average assets under management (AUM) at Putnam. Conversely, Risk and Insurance Services revenue grew 8% in Q3 due to higher premium rates and new business.
- September 11 Charges: MMC recorded a pretax charge of $173 million in Q3 2001 related to the terrorist attacks. This included $55 million for victim/employee benefits, $32 million in asset write-offs, $25 million in business disruption costs, and $61 million in restructuring charges. These charges reduced diluted EPS by $0.38.
- Profitability: Operating income declined 41% in Q3 and 11% for the nine months. Excluding the September 11 charges, underlying operating expenses decreased approximately 4% in Q3 due to lower incentive compensation and cost controls.
- Liquidity: Cash and cash equivalents increased to $600 million from $240 million at year-end 2000, supported by strong operating cash flow ($872 million for 9M) and increased commercial paper borrowings ($675 million increase) to fund share repurchases and investments.
Guidance, Outlook, and Risks
- Outlook: Management anticipates internally generated funds will meet operating requirements, dividends, and debt repayments. The company expects to complete the September 11-related restructuring plan by December 31, 2001.
- Insurance Recoveries: $126 million in insurance recoveries related to September 11 have been recorded. Additional recoveries are expected to be significant but are contingent on future events (e.g., replacement of assets, new leasehold interests).
- Market Risks: Investment Management revenue remains sensitive to equity market volatility and net redemptions. The Risk and Insurance Services segment faces a tightening global insurance market with reduced capacity and rising rates following the attacks.
- Contingencies: MMC faces an estimated contingent exposure of $205 million related to a UK Personal Investment Authority review of pension plans, though essentially all is expected to be recovered from insurers.
- Accounting Changes: Starting January 1, 2002, MMC will cease amortization of goodwill under new FASB standards (SFAS 142), expected to increase reported annual earnings by at least $0.40 per share.
Investor Verification Checklist
- September 11 Impact: Verify the timeline and sufficiency of insurance recoveries ($126M recorded vs. total charges) and the status of the $61M restructuring plan.
- Investment Management AUM: Monitor Putnam's assets under management ($286B at quarter-end) for continued volatility or net redemptions impacting fee revenue.
- Debt Structure: Review the increase in short-term debt (commercial paper) from $337M to $1,011M and its impact on interest expense and liquidity.
- UK Pension Contingency: Track the $205M contingent exposure regarding UK pension redress and the certainty of insurance recoveries.
- Goodwill Accounting: Assess the impact of the upcoming cessation of goodwill amortization on future earnings comparisons.