How serious is the Putnam market-timing issue for MMC's finances?

Management could not estimate the financial impact of the pending litigation and regulatory proceedings. It believes the outcome should not have a material adverse effect on MMC's consolidated financial position or cash flows, but it may be material to operating results in a given period. MMC has also guaranteed Putnam's indemnification obligations to its funds. Putnam's civil penalties have not yet been determined, so no provision has been recorded for them.

Which segment drove MMC's 2003 growth?

Risk and Insurance Services (Marsh) drove most of the growth. Its revenue rose 16% to $6.9 billion, with 13% underlying growth, and operating income rose 18% to $1.75 billion. Consulting (Mercer) grew 15% in reported terms, but only 3% on an underlying basis. Investment Management (Putnam) declined, with revenue down 8% to $2.0 billion and operating income down 11% to $497 million.

What are the risks to Putnam's future revenue?

Putnam's revenue depends on assets under management, which can fall because of market declines or net redemptions. In late January 2004 Putnam announced limits on fund expense ratios and reduced front-end sales charges, which may reduce revenue. Assets under management fell to $233 billion by February 29, 2004. The filing also warns that the loss of advisory contracts, reductions in 12b-1 fees, or the failure of fund trustees to renew plans could have a material adverse effect.

How is MMC returning cash to shareholders?

In 2003 MMC repurchased 26.1 million shares for about $1.2 billion and paid $631 million in dividends ($1.18 per share). The company plans to continue share repurchases in 2004, subject to market conditions. Its dividend has increased for 41 consecutive years.

Is MMC's debt load a concern?

Total debt was about $3.4 billion at year-end 2003, essentially unchanged from 2002. Most of it is long-term, and MMC extended the maturity of over half its debt over the prior two years. It maintains revolving credit facilities of more than $2.4 billion to support commercial paper, and the revolving credit agreements require a minimum consolidated net worth of $3.5 billion. Stockholders' equity of $5.45 billion comfortably exceeds that covenant.

MRSH/MMC 10-K FY2003 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 15, 2004. Cited figures are marked; the original filing is the authoritative source.

Marsh & McLennan Companies (MMC) reported a strong 2003 operating year, with consolidated revenue up 11% to $11.6 billion^a, net income up 13% to $1.54 billion, and diluted EPS up 15% to $2.81.

The growth was driven by the Risk and Insurance Services segment (Marsh Inc.), where revenue rose 16% to $6.9 billion^b and operating income rose 18% to $1.8 billion, and by Mercer consulting, whose revenue rose 15% to $2.7 billion (only 3% on an underlying basis). Cash generation was solid: operating cash flow was $1.9 billion, and the company repurchased 26.1 million shares for about $1.2 billion and paid $631 million in dividends. The dominant risk for investors is the Putnam Investments market-timing scandal.

The SEC and the Massachusetts Secretary of the Commonwealth brought administrative proceedings in October 2003, and MMC faces roughly 70 civil actions, including ten securities class actions and an ERISA suit. Putnam's assets under management fell from $251 billion to $240 billion^c at year-end, with $61 billion in net redemptions, and further fell to $233 billion by February 29, 2004. Putnam's 2003 operating income declined 11% to $497 million, and management has said future revenue may be pressured by fund expense caps and reduced front-end sales charges.

Management could not estimate the financial impact of the litigation, though it believes the outcome should not have a material adverse effect on MMC's consolidated financial position or cash flows, while acknowledging it could be material to results in a given period. MMC's balance sheet remains sound, with total stockholders' equity of $5.45 billion^d, long-term debt of $2.9 billion, and total debt of $3.4 billion.

The company has also increased its dividend for 41 consecutive years. Investors should weigh the strong core franchise and cash flow against the uncertainty around Putnam's legal exposure and its ongoing asset outflows.

02—Key points

Key Highlights

Consolidated 2003 revenue rose 11% to $11.6 billion; net income rose 13% to $1.54 billion; diluted EPS rose 15% to $2.81.
Risk and Insurance Services (Marsh) was the standout segment: revenue up 16% to $6.9 billion (13% underlying) and operating income up 18% to $1.75 billion, with an operating margin of 25.5%.
Putnam's market-timing scandal led to SEC and Massachusetts administrative proceedings, roughly 70 civil actions, and ERISA suits; Putnam recorded $24 million of net costs in Q4 2003, with civil penalties not yet determined.
Putnam assets under management fell to $240 billion at year-end 2003 (from $251 billion), driven by $61 billion in net redemptions, and further declined to $233 billion by February 29, 2004.
Mercer consulting revenue grew 15% to $2.7 billion, but underlying growth was only 3%, with most of the increase coming from the Oliver Wyman acquisition and foreign exchange.
Strong cash generation: $1.9 billion of operating cash flow, $1.2 billion in share repurchases (26.1 million shares), and $631 million in dividends paid ($1.18 per share).
Balance sheet: stockholders' equity of $5.45 billion, long-term debt of $2.9 billion, and a 41-year record of consecutive dividend increases.

03—Questions

Frequently Asked Questions

How serious is the Putnam market-timing issue for MMC's finances?
Management could not estimate the financial impact of the pending litigation and regulatory proceedings. It believes the outcome should not have a material adverse effect on MMC's consolidated financial position or cash flows, but it may be material to operating results in a given period. MMC has also guaranteed Putnam's indemnification obligations to its funds. Putnam's civil penalties have not yet been determined, so no provision has been recorded for them.
Which segment drove MMC's 2003 growth?
Risk and Insurance Services (Marsh) drove most of the growth. Its revenue rose 16% to $6.9 billion, with 13% underlying growth, and operating income rose 18% to $1.75 billion. Consulting (Mercer) grew 15% in reported terms, but only 3% on an underlying basis. Investment Management (Putnam) declined, with revenue down 8% to $2.0 billion and operating income down 11% to $497 million.
What are the risks to Putnam's future revenue?
Putnam's revenue depends on assets under management, which can fall because of market declines or net redemptions. In late January 2004 Putnam announced limits on fund expense ratios and reduced front-end sales charges, which may reduce revenue. Assets under management fell to $233 billion by February 29, 2004. The filing also warns that the loss of advisory contracts, reductions in 12b-1 fees, or the failure of fund trustees to renew plans could have a material adverse effect.
How is MMC returning cash to shareholders?
In 2003 MMC repurchased 26.1 million shares for about $1.2 billion and paid $631 million in dividends ($1.18 per share). The company plans to continue share repurchases in 2004, subject to market conditions. Its dividend has increased for 41 consecutive years.
Is MMC's debt load a concern?
Total debt was about $3.4 billion at year-end 2003, essentially unchanged from 2002. Most of it is long-term, and MMC extended the maturity of over half its debt over the prior two years. It maintains revolving credit facilities of more than $2.4 billion to support commercial paper, and the revolving credit agreements require a minimum consolidated net worth of $3.5 billion. Stockholders' equity of $5.45 billion comfortably exceeds that covenant.

04—Continue

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