01—Abstract
Summary
Summary of the 10-K/A filed March 24, 1999. Cited figures are marked; the original filing is the authoritative source.
This is Amendment No. 1 to Marsh & McLennan Companies' (NYSE ticker MMC, as stated in the filing) 10-K for fiscal 1997.
It restates 1997 results after management determined that certain costs accrued for the 1997 Johnson & Higgins (J&H) acquisition and London real estate consolidations should have been expensed as incurred. Special charges fell by $53 million to $243.8 milliona, which raised restated 1997 net income to $434.2 million from $399.4 million originally reported. Diluted EPS was restated to $2.60 from $2.39.
Revenue rose 36% to $6,008.6 millionb, driven mainly by the J&H combination (completed March 27, 1997, for about $1.8 billion) and the CECAR acquisition. Excluding acquisitions, dispositions and special charges, revenue grew about 14%, and investment management revenue rose 41% on higher assets under management. The segment picture was mixed.
Investment management (Putnam) was the strongest performer, with operating income of $462.8 millionc on a 24.6% margin and year-end assets under management of $235.1 billion, up from $173.4 billion. Risk and insurance services had a 9.7% reported operating margin, or 17.8% excluding special charges. Consulting earned an 11.1% margin before special charges.
Balance sheet leverage increased sharply: total assets reached $7,912.0 million and long-term debt rose to $1,239.8 milliond from $458.2 million, largely to finance the J&H cash consideration. Management expects roughly $200 million in gross annual savings from the J&H integration once it is completed by the end of 1999.
For investors, the key points are the restatement itself, the earnings-quality implications of heavy acquisition-related charges, the rising debt load, and the dependence of results on asset-based fee growth at Putnam. The filing also notes that the 1997 financial statements are subject to restatement and that the auditors' report on Note 16 is dated March 19, 1999.
02—Key points
Key Highlights
- Restated 1997 net income of $434.2 million, up from $399.4 million originally reported, after special charges were reduced by $53 million; restated diluted EPS is $2.60 versus $2.39 previously reported.
- Revenue grew 36% to $6,008.6 million in 1997, mainly from the Johnson & Higgins combination and CECAR acquisition; organic revenue growth was approximately 14%.
- Investment management (Putnam) was the standout segment, with revenue up 41% to $1,882.4 million, operating income of $462.8 million, and year-end assets under management of $235.1 billion.
- Special charges totaled $243.8 million in 1997 (restated), mainly for J&H merger costs, London real estate, and EDP asset disposals, weighing on reported operating margins.
- Total assets rose to $7,912.0 million and long-term debt to $1,239.8 million from $458.2 million, reflecting bank borrowings used to finance the J&H cash consideration of about $600 million.
- Management expects gross annual savings of about $200 million from the J&H integration by the end of 1999, with net savings of about $125 million in 1999 after incremental goodwill amortization.
- Dividends paid rose to $1.90 per share in 1997 from $1.65, and return on average stockholders' equity fell to 17% from 26%, largely because of the larger equity base after the J&H stock issuance.
03—Questions
Frequently Asked Questions
Why was the 1997 financial information restated, and how much did it change?
Management concluded that certain costs accrued in connection with the 1997 J&H acquisition and certain London real estate consolidations should be expensed as incurred rather than accrued. This reduced special charges by $53 million. As a result, 1997 operating income rose to $797.8 million from $744.8 million, net income rose to $434.2 million from $399.4 million, and diluted EPS rose to $2.60 from $2.39. Total assets were essentially unchanged at $7,912.0 million, while stockholders' equity rose to $3,233.6 million from $3,198.8 million.
What drove the large increase in revenue and debt in 1997?
The March 1997 combination with Johnson & Higgins, valued at about $1.8 billion (roughly one-third cash and two-thirds stock), was the main driver. The company also bought CECAR for about $200 million in January 1997. The cash portion was financed with bank borrowings, which pushed long-term debt to $1,239.8 million at year-end 1997 from $458.2 million a year earlier. Interest expense rose to $106.4 million from $61.6 million.
How is the Putnam investment management business performing?
Putnam had a strong year. Revenue rose 41% to $1,882.4 million, driven by higher average assets under management of $205.8 billion, up from $148.5 billion. Year-end assets reached $235.1 billion, with about 69% in equities. Operating margin was 24.6%, slightly below 25.3% in 1996, as expenses rose 42% on staff growth and higher incentive compensation. Because fees are tied to asset levels, results are sensitive to equity and bond market valuations.
What are the key risks and integration plans investors should watch?
Key risks include the cost and pace of the J&H integration, since the actions are expected to be substantially complete by the end of 1998 and merger costs of about $310 million were recorded in total. The company expects about $125 million of cash payments in 1998, and remaining J&H acquisition payments of about $500 million are due in annual installments over four years after closing. Other items to monitor are the higher debt load, an open IRS challenge to 12b-1 fee tax treatment at Putnam, and the Aiena lawsuit over the allocation of J&H consideration. Management does not believe these matters will have a material adverse effect.
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