MMC Reports Third Quarter 2008 Results
GAAP EPS Declines Due to Gain on Sale of Putnam Investments in 2007
Third Quarter Adjusted EPS Flat With Prior Year
Marsh & McLennan Companies, Inc.
Marsh & McLennan Companies, Inc. (MMC) today reported financial results for the
third quarter ended September 30, 2008.
In the quarter, consolidated revenue was $2.8 billion, up 5 percent from the
third quarter of 2007. Revenue growth was 2 percent on an underlying basis,
which measures the change in revenue before the impact of acquisitions and
dispositions, using consistent currency exchange rates. For the nine months
ended September 30, consolidated revenue was $8.9 billion, an increase of 8
percent, or 3 percent on an underlying basis, from the comparable period in
2007.
Year-over-year net income comparisons were affected by MMC's gain of $1.9
billion, net of tax, on the divestiture of Putnam Investments in August 2007,
reflected in discontinued operations. In the third quarter of 2008, MMC's net
loss was $8 million, or $.02 per share, compared with net income of $1.9
billion, or $3.60 per share, last year. Income from continuing operations in the
third quarter of 2008, net of tax, was $18 million, or $.03 per share, compared
with $80 million, or $.15 per share, last year. Third quarter 2008 results
include an increase in professional liability reserves of $33 million, or $.04
per share, due to a recent adverse decision affecting Marsh.
On an adjusted basis, as presented in the attached supplemental schedules,
earnings per share in the third quarter of 2008 was $.21 per share, flat with
last year. Adjusted earnings per share was $1.08 for the first nine months
compared with $1.09 in 2007.
MMC's results for the nine months ended September 30, 2008 include the
previously reported non-cash goodwill impairment charge of $540 million in the
Risk Consulting and Technology segment. This resulted in a net loss of $153
million, or $.30 per share. In the comparable period of 2007, net income was
$2.4 billion, or $4.31 per share, reflecting the gain on the divestiture of
Putnam Investments.
Brian Duperreault, president and chief executive officer of MMC, said: 'I am
pleased with MMC's solid performance, not only in the third quarter but also
throughout the year. Results for the quarter were driven by continued
improvement at Marsh. Guy Carpenter's alignment of expenses with revenue levels
enabled it to maintain profitability on a year-over-year basis. Mercer reported
excellent performance, with strong revenue growth across its businesses as well
as margin improvement and increased profitability. Oliver Wyman had a difficult
quarter due to adverse economic and financial market conditions. Kroll's growth
in profitability was driven by its risk mitigation and litigation support
businesses. Looking at our progress to date, I am encouraged by MMC's operating
results, and optimistic about the future.'
Risk and Insurance Services
MMC's Risk and Insurance Services segment revenue in the third quarter of 2008
was $1.3 billion, an increase of 1 percent from the third quarter of 2007. For
the first nine months of 2008, segment revenue was $4.2 billion, an increase of
4 percent from the prior year. The operating loss in the third quarter of 2008
was $28 million, including charges for noteworthy items of $97 million and the
increase in professional liability reserves of $33 million. In the third
quarter, adjusted operating income, which excludes only noteworthy items,
increased to $69 million from $5 million last year, due to Marsh's improved
operating performance.
Marsh's revenue in the third quarter was $1.1 billion, an increase of 3 percent
from last year, or 1 percent on an underlying basis. The strongest underlying
growth was in Asia Pacific, with 11 percent growth; EMEA, with 4 percent growth;
and Latin America, with 3 percent growth. Marsh's client revenue retention in
the quarter improved on a year-over-year basis, continuing the trend seen
throughout the year. New business remained strong in the current quarter, at
levels consistent with the year-ago period. Marsh's third quarter results were
achieved in an environment of continued price competition in the global
commercial property and casualty insurance marketplace.
Reinsurance premium rates continued to decline globally in the third quarter
across most coverages, with clients' risk retention levels remaining high. Guy
Carpenter's third quarter revenue declined 9 percent to $205 million, compared
with the prior year's quarter. Restructuring efforts and continuing cost
discipline have better aligned revenue and expense levels, allowing Guy
Carpenter's profitability on an adjusted basis to remain unchanged compared with
the third quarter of 2007.
Consulting
MMC's Consulting segment revenue grew 9 percent to $1.3 billion in the third
quarter of 2008. Operating income was $157 million, an increase of 6 percent
from $148 million in the third quarter of 2007. For the first nine months of
2008, segment revenue grew 12 percent to $4 billion.
Mercer increased revenue 12 percent to $951 million in the third quarter, with
strong revenue growth achieved throughout its operations. On an underlying
basis, revenue increased 10 percent in the quarter. Mercer's consulting
operations, with revenue of $691 million, had underlying growth of 11 percent;
outsourcing, with revenue of $183 million, had 7 percent growth; and investment
consulting and management, with revenue of $77 million, had 12 percent growth.
Mercer's underlying revenue growth through the first nine months of the year was
9 percent.
Oliver Wyman's revenue increased 1 percent to $377 million in the third quarter
and declined 5 percent on an underlying basis due to ongoing adverse global
economic and financial market conditions. For the first nine months of 2008,
Oliver Wyman's underlying revenue growth was 1 percent.
Risk Consulting and Technology
MMC's Risk Consulting and Technology segment revenue declined 2 percent to $254
million in the third quarter of 2008. Operating income was $28 million, compared
with $29 million in the prior year's quarter. For the first nine months of 2008,
segment revenue grew 7 percent to $792 million.
Kroll's revenue of $218 million in the third quarter increased 4 percent from
the year-ago quarter and declined 1 percent on an underlying basis. On an
underlying basis, a 12 percent increase in Kroll's risk mitigation and response
business and a 3 percent increase in the litigation support and data recovery
business were offset by a decline of 15 percent in background screening. Kroll's
operating income increased by 14 percent in the quarter.
Revenue for the segment's corporate advisory and restructuring business was $36
million in the third quarter, a decline of 25 percent from the prior year. This
led to an operating loss in the quarter.
Other Items
MMC had an investment loss in the third quarter of 2008 of $23 million, or $.03
per share, primarily due to mark-to-market declines in private equity
investments.
The loss in discontinued operations, net of tax in the third quarter of 2008
primarily results from tax adjustments related to the Putnam sale. An increase
in the effective tax rate in the third quarter of 2007, which resulted from the
unfavorable impact of tax rate changes in the United Kingdom and Germany,
affected last year's results by approximately $.04 per share.
MMC's liquidity remains strong. At the end of the third quarter of 2008, cash
and cash equivalents were $1.5 billion, an increase of $300 million for the
quarter. Net debt, which is total debt less cash and cash equivalents, was $2.1
billion at the end of the third quarter of 2008, compared with $2.4 billion at
the end of the second quarter of 2008. MMC has no commercial paper or bank loans
outstanding, and its next debt maturity is in June 2009.
Conference Call
A conference call to discuss third quarter 2008 results will be held today at
8:30 a.m. Eastern Time. To participate in the teleconference, please dial 877
857 6144. Callers from outside the United States should dial 719 325 4744. The
access code for both numbers is 8454332. The live audio webcast may be accessed
at www.mmc.com. A replay of the webcast will be available approximately two
hours after the event at the same web address.
MMC is a global professional services firm providing advice and solutions in the
areas of risk, strategy and human capital. It is the parent company of a number
of the world's leading risk experts and specialty consultants, including Marsh,
the insurance broker and risk advisor; Guy Carpenter, the risk and reinsurance
specialist; Mercer, the provider of HR and related financial advice and
services; Oliver Wyman, the management consultancy; and Kroll, the risk
consulting firm. With more than 55,000 employees worldwide and annual revenue
exceeding $11 billion, MMC provides analysis, advice and transactional
capabilities to clients in more than 100 countries. Its stock (ticker symbol:
MMC) is listed on the New York, Chicago and London stock exchanges. MMC's
website address is www.mmc.com.
This press release contains 'forward-looking statements,' as defined in the
Private Securities Litigation Reform Act of 1995. These statements, which
express management's current views concerning future events or results, use
words like 'anticipate,' 'assume,' 'believe,' 'continue,' 'estimate,' 'expect,'
'intend,' 'plan,' 'project' and similar terms, and future or conditional tense
verbs like 'could,' 'may,' 'might,' 'should,' 'will' and 'would.' For example,
we may use forward-looking statements when addressing topics such as: changes in
our business strategies and methods of generating revenue; the development and
performance of our services and products; market and industry conditions,
including competitive and pricing trends; changes in the composition or level of
MMC's revenues; our cost structure and the outcome of cost-saving or
restructuring initiatives; the outcome of contingencies; dividend policy and
share repurchase programs; the expected impact of acquisitions and dispositions;
pension obligations; cash flow and liquidity; future actions by regulators; the
impact of changes in accounting rules; and changes in senior management.
Forward-looking statements are subject to inherent risks and uncertainties.
Factors that could cause actual results to differ materially from those
expressed or implied in our forward-looking statements include:
-- the challenges we face in achieving profitable revenue growth and
improving operating margins at Marsh;
-- the extent to which we retain existing clients and attract new business,
and our ability to incentivize and retain key employees;
-- the impact on risk and insurance services commission revenues of changes
in the availability of, and the premiums insurance carriers charge for,
insurance and reinsurance products, including the impact on premium
rates and market capacity attributable to catastrophic events;
-- the impact on renewals in our risk and insurance services segment of
pricing trends in particular insurance markets, fluctuations in the
general level of economic activity and decisions by insureds with
respect to the level of risk they will self-insure;
-- revenue fluctuations in risk and insurance services relating to the
effect of new and lost business production and the timing of policy
inception dates;
-- the impact on our consulting segment of pricing trends, utilization
rates, the general economic environment and legislative changes
affecting client demand;
-- the impact of competition, including with respect to pricing, the
emergence of new competitors, and the fact that many of Marsh's
competitors are not constrained in their ability to receive contingent
commissions;
-- the impact of current financial market conditions on our results of
operations and financial condition;
-- the potential impact of legislative, regulatory, accounting and other
initiatives which may be taken in response to the current financial
crisis;
-- our exposure to potential liabilities arising from errors and omissions
claims against us, including claims of professional negligence in
providing actuarial services, such as those alleged by the Alaska
Retirement Management Board against Mercer;
-- the ultimate economic impact on MMC of contingencies described in the
notes to our financial statements, including the risk of a significant
adverse outcome in the shareholder lawsuit against MMC concerning the
late 2004 decline in MMC's share price;
-- our ability to meet our financing needs by generating cash from
operations and accessing external financing sources, including the
impact of current economic conditions on our cost of financing or
ability to borrow;
-- the potential impact of rating agency actions on our cost of financing
and ability to borrow, as well as on our operating costs and competitive
position;
-- changes in the funded status of our global defined benefit pension plans
and the impact of any increased pension funding resulting from those
changes;
-- our ability to make strategic acquisitions and dispositions and to
integrate, and realize expected synergies, savings or strategic benefits
from, the businesses we acquire;
-- the impact on net income of foreign exchange and/or interest rate
fluctuations;
-- changes in applicable tax or accounting requirements;
-- potential income statement effects from the application of FIN 48
('Accounting for Uncertainty in Income Taxes') and SFAS 142 ('Goodwill
and Other Intangible Assets'), including the effect of any subsequent
adjustments to the estimates MMC uses in applying these accounting
standards;
-- the impact of, and potential challenges in complying with, legislation
and regulation in the jurisdictions in which we operate, particularly
given the global scope of our businesses and the possibility of
conflicting regulatory requirements across the jurisdictions in which we
do business; and
-- other risks detailed from time to time in MMC's filings with the
Securities and Exchange Commission.
The factors identified above are not exhaustive. MMC and its subsidiaries
operate in a dynamic business environment in which new risks may emerge
frequently. Accordingly, MMC cautions readers not to place undue reliance on its
forward-looking statements, which speak only as of the dates on which they are
made. MMC undertakes no obligation to update or revise any forward-looking
statement to reflect events or circumstances arising after the date on which it
is made. Further information concerning MMC and its businesses, including
information about factors that could materially affect our results of operations
and financial condition, is contained in MMC's filings with the Securities and
Exchange Commission, including the 'Risk Factors' section of MMC's most recently
filed Annual Report on Form 10-K.
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Marsh & McLennan Companies, Inc.
Consolidated Statements of Income
(In millions, except per share figures)
(Unaudited)
Three Months Nine Months
Ended Ended
September 30, September 30,
--------------- ---------------
2008 2007 2008 2007
------- ------- ------- -------
Revenue $2,838 $2,716 $8,925 $8,262
------- ------- ------- -------
Expense:
Compensation and Benefits 1,811 1,778 5,524 5,109
Other Operating Expenses 957 822 2,697 2,462
Goodwill Impairment Charge - - 540 -
------- ------- ------- -------
Total Expense 2,768 2,600 8,761 7,571
------- ------- ------- -------
Operating Income 70 116 164 691
Interest Income 10 30 40 64
Interest Expense (54) (65) (165) (211)
Investment Income (Loss) (23) 78 (31) 163
------- ------- ------- -------
Income Before Income Taxes and
Minority Interest Expense 3 159 8 707
Income Taxes (18) 75 142 251
Minority Interest Expense, Net of Tax 3 4 8 8
------- ------- ------- -------
Income (Loss) from Continuing
Operations 18 80 (142) 448
Discontinued Operations, Net of Tax (26) 1,865 (11) 1,942
------- ------- ------- -------
Net Income (Loss) $ (8) $1,945 $ (153) $2,390
======= ======= ======= =======
Basic Net Income (Loss) Per Share
- Continuing Operations $ 0.04 $ 0.15 $(0.28) $ 0.82
======= ======= ======= =======
- Net Income (Loss) $(0.02) $ 3.64 $(0.30) $ 4.39
======= ======= ======= =======
Diluted Net Income (Loss) Per Share
- Continuing Operations $ 0.03 $ 0.15 $(0.28) $ 0.81
======= ======= ======= =======
- Net Income (Loss) $(0.02) $ 3.60 $(0.30) $ 4.31
======= ======= ======= =======
Average Number of Shares Outstanding
- Basic 513 534 514 545
======= ======= ======= =======
- Diluted 523 540 514 553
======= ======= ======= =======
Shares Outstanding at 9/30 514 520 514 520
======= ======= ======= =======
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Marsh & McLennan Companies, Inc.
Supplemental Information - Revenue Analysis
Three Months Ended
(Millions) (Unaudited)
Components of Revenue
Change
---------------------------
Acquis-
itions/
Three Months
Ended Dispos-
September 30, % Change Currency itions Underlying
--------------- GAAP
2008 2007 Revenue Impact Impact Revenue
------- ------- -------- ---------------------------
Risk and
Insurance
Services
Marsh $1,070 $1,037 3% 2% - 1%
Guy Carpenter 205 226 (9)% 1% - (10)%
------- -------
Total Risk and
Insurance
Services 1,275 1,263 1% 2% - (1)%
------- -------
Consulting
Mercer 951 844 12% 1% 1% 10%
Oliver Wyman
Group 377 374 1% 2% 4% (5)%
------- -------
Total
Consulting 1,328 1,218 9% 1% 2% 6%
------- -------
Risk Consulting &
Technology
Kroll 218 210 4% - 5% (1)%
Corporate
Advisory and
Restructuring 36 48 (25)% (3)% - (22)%
------- -------
Total Risk
Consulting &
Technology 254 258 (2)% (1)% 4% (5)%
------- -------
Total Operating
Segments 2,857 2,739 4% 1% 1% 2%
Corporate
Eliminations (19) (23)
------- -------
Total Revenue $2,838 $2,716 5% 2% 1% 2%
======= =======
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Revenue Details
The following table provides more detailed revenue information for certain of
the components presented above:
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Components of Revenue
Change
---------------------------
Acquis-
itions/
Three Months
Ended Dispos-
September 30, % Change Currency itions Underlying
------------- GAAP
2008 2007 Revenue Impact Impact Revenue
------ ------ -------- ---------------------------
Marsh:
EMEA $ 370 $ 345 7% 3% - 4%
Asia Pacific 110 96 15% 4% - 11%
Latin America 65 60 9% 11% (5)% 3%
------ ------
Total
International 545 501 9% 5% (1)% 5%
U.S. and Canada 525 536 (2)% - - (2)%
------ ------
Total Marsh $1,070 $1,037 3% 2% - 1%
====== ======
Mercer:
Retirement $ 299 $ 255 17% 1% 5% 11%
Health and Benefits 238 210 13% 1% - 12%
Other Consulting
Lines 154 140 10% 2% (1)% 9%
------ ------
Total Mercer
Consulting 691 605 14% 1% 2% 11%
Outsourcing 183 171 7% - - 7%
Investment
Consulting &
Management 77 68 13% - 1% 12%
------ ------
Total Mercer $ 951 $ 844 12% 1% 1% 10%
====== ======
Kroll:
Litigation Support
and Data Recovery $ 82 $ 69 18% 1% 14% 3%
Background
Screening 65 78 (16)% (1)% - (15)%
Risk Mitigation and
Response 71 63 12% - - 12%
------ ------
Total Kroll $ 218 $ 210 4% - 5% (1)%
====== ======
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Notes
Underlying revenue measures the change in revenue, before the impact
of acquisitions and dispositions, using consistent currency exchange
rates.
Interest income on fiduciary funds included in revenue amounted to $40
million and $53 million for the three months ended September 30, 2008
and 2007, respectively.
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Marsh & McLennan Companies, Inc.
Supplemental Information - Revenue Analysis
Nine Months Ended
(Millions) (Unaudited)
Components of Revenue
Change
---------------------------
Acquis-
itions/
Nine Months
Ended Dispos-
September 30, % Change Currency itions Underlying
--------------- GAAP
2008 2007 Revenue Impact Impact Revenue
------- ------- -------- ---------------------------
Risk and
Insurance
Services
Marsh $3,508 $3,303 6% 4% - 2%
Guy Carpenter 682 735 (7)% 2% - (9)%
------- -------
Total Risk and
Insurance
Services 4,190 4,038 4% 4% - -
------- -------
Consulting
Mercer 2,835 2,486 14% 4% 1% 9%
Oliver Wyman
Group 1,162 1,079 8% 4% 3% 1%
------- -------
Total
Consulting 3,997 3,565 12% 4% 1% 7%
------- -------
Risk Consulting &
Technology
Kroll 678 604 12% 1% 6% 5%
Corporate
Advisory and
Restructuring 114 136 (16)% (1)% - (15)%
------- -------
Total Risk
Consulting &
Technology 792 740 7% 1% 5% 1%
------- -------
Total Operating
Segments 8,979 8,343 8% 4% 1% 3%
Corporate
Eliminations (54) (81)
------- -------
Total Revenue $8,925 $8,262 8% 4% 1% 3%
======= =======
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Revenue Details
The following table provides more detailed revenue information for certain of
the components presented above:
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Components of Revenue
Change
---------------------------
Acquis-
itions/
Nine Months
Ended Dispos-
September 30, % Change Currency itions Underlying
------------- GAAP
2008 2007 Revenue Impact Impact Revenue
------ ------ ---------- ---------------------------
Marsh:
EMEA $1,402 $1,261 11% 7% - 4%
Asia Pacific 328 279 17% 8% - 9%
Latin America 173 158 10% 13% (5)% 2%
------ ------
Total
International 1,903 1,698 12% 8% - 4%
U.S. and Canada 1,605 1,605 - 1% - (1)%
------ ------
Total Marsh $3,508 $3,303 6% 4% - 2%
====== ======
Mercer:
Retirement $ 922 $ 800 15% 4% 4% 7%
Health and
Benefits 700 623 12% 3% - 9%
Other Consulting
Lines 420 371 13% 4% (1)% 10%
------ ------
Total Mercer
Consulting 2,042 1,794 14% 4% 2% 8%
Outsourcing 553 499 11% 3% (1)% 9%
Investment
Consulting &
Management 240 193 24% 5% - 19%
------ ------
Total Mercer $2,835 $2,486 14% 4% 1% 9%
====== ======
Kroll:
Litigation
Support and Data
Recovery $ 257 $ 196 31% 2% 19% 10%
Background
Screening 206 224 (8)% - - (8)%
Risk Mitigation
and Response 215 184 16% 2% - 14%
------ ------
Total Kroll $ 678 $ 604 12% 1% 6% 5%
====== ======
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Notes
Underlying revenue measures the change in revenue, before the impact
of acquisitions and dispositions, using consistent currency exchange
rates.
Interest income on fiduciary funds included in revenue amounted to
$123 million and $149 million for the nine months ended September 30,
2008 and 2007, respectively.
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Marsh & McLennan Companies, Inc.
Non-GAAP Measures
Three Months Ended September 30
(Millions) (Unaudited)
MMC presents below certain additional financial measures that are
'non-GAAP measures,' within the meaning of Regulation G under the
Securities Exchange Act of 1934. These measures are: adjusted
operating income; adjusted operating margin and adjusted income, net
of tax.
MMC presents these non-GAAP measures to provide investors with
additional information to analyze the company's performance from
period to period. Management also uses these measures to assess
performance for incentive compensation purposes and to allocate
resources in managing MMC's businesses. However, investors should not
consider these non-GAAP measures in isolation from, or as a
substitute for, the financial information that MMC reports in
accordance with GAAP. MMC's non-GAAP measures reflect subjective
determinations by management, and may differ from similarly titled
non-GAAP measures presented by other companies.
Adjusted Operating Income and Adjusted Operating Margin
Adjusted operating income is calculated by excluding the impact of
certain noteworthy items from MMC's GAAP operating income. The
following table identifies these noteworthy items and reconciles
adjusted operating income to GAAP operating income, on a consolidated
and segment basis, for the three months ended September 30, 2008 and
2007. The following tables also present adjusted operating margin,
which is calculated by dividing adjusted operating income by
consolidated or segment GAAP revenue.
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Risk
Risk & Consulting
Insurance &
Services Consulting Technology Corporate Total
---------- ---------- ---------- --------- -----
Three Months Ended
September 30, 2008
---------------------
Operating income $(28) $ 157 $ 28 $ (87) $ 70
---------- ---------- ---------- --------- -----
Add impact of
noteworthy items:
Restructuring
Charges (a) 68 1 - 49 (b) 118
Settlement, Legal
and Regulatory (c) 15 - - - 15
Accelerated
Amortization/
Depreciation 14 - - - 14
---------- ---------- ---------- --------- -----
Operating income
adjustments 97 1 - 49 147
---------- ---------- ---------- --------- -----
Adjusted operating
income $ 69 $ 158 $ 28 $ (38) $217
========== ========== ========== ========= =====
Operating margin N/A 11.8% 11.0% N/A 2.5%
========== ========== ========== ========= =====
Adjusted operating
margin 5.4% 11.9% 11.0% N/A 7.6%
========== ========== ========== ========= =====
Three Months Ended
September 30, 2007
---------------------
Operating income $(11) $ 148 $ 29 $ (50) $116
---------- ---------- ---------- --------- -----
Add impact of
noteworthy items:
Restructuring
Charges (a) 3 - - 11 14
Settlement, Legal
and Regulatory (c) 12 - - - 12
Accelerated
Amortization/
Depreciation 1 1 - 1 3
---------- ---------- ---------- --------- -----
Operating income
adjustments 16 1 - 12 29
---------- ---------- ---------- --------- -----
Adjusted operating
income $ 5 $ 149 $ 29 $ (38) $145
========== ========== ========== ========= =====
Operating margin N/A 12.2% 11.2% N/A 4.3%
========== ========== ========== ========= =====
Adjusted operating
margin 0.4% 12.2% 11.2% N/A 5.3%
========== ========== ========== ========= =====
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(a) Primarily includes severance from restructuring activities and
related charges, costs for future rent and other real estate costs,
and fees and consulting costs related to cost reduction activities.
(b) Represents future rent and other real estate costs to exit five
floors in MMC's New York headquarters building.
(c) Reflects legal fees arising out of the civil complaint relating to
market service agreements and other issues filed against MMC and
Marsh by the New York State Attorney General in October 2004 and
settled in January 2005, including indemnification of former
employees for legal fees.
Noteworthy items exclude a credit of $10 million for a payment
received in the third quarter of 2008 from U.S. Investigations
Services Inc. in connection with the hiring of MMC's former CEO. This
amount was recorded in operating income as a reduction of corporate
expense. Noteworthy items also exclude a $33 million charge in the
third quarter of 2008 to increase professional liability reserves
recorded in risk and insurance services. These items are therefore
included in both operating income and adjusted operating income.
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Marsh & McLennan Companies, Inc.
Non-GAAP Measures
Nine Months Ended September 30
(Millions) (Unaudited)
MMC presents below certain additional financial measures that are
'non-GAAP measures,' within the meaning of Regulation G under the
Securities Exchange Act of 1934. These measures are: adjusted
operating income; adjusted operating margin and adjusted income, net
of tax.
MMC presents these non-GAAP measures to provide investors with
additional information to analyze the company's performance from
period to period. Management also uses these measures to assess
performance for incentive compensation purposes and to allocate
resources in managing MMC's businesses. However, investors should not
consider these non-GAAP measures in isolation from, or as a
substitute for, the financial information that MMC reports in
accordance with GAAP. MMC's non-GAAP measures reflect subjective
determinations by management, and may differ from similarly titled
non-GAAP measures presented by other companies.
Adjusted Operating Income and Adjusted Operating Margin
Adjusted operating income is calculated by excluding the impact of
certain noteworthy items from MMC's GAAP operating income. The
following table identifies these noteworthy items and reconciles
adjusted operating income to GAAP operating income, on a consolidated
and segment basis, for the nine months ended September 30, 2008 and
2007. The following tables also present adjusted operating margin,
which is calculated by dividing adjusted operating income by
consolidated or segment GAAP revenue.
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Risk
Risk & Consulting
Insurance &
Services Consulting Technology Corporate Total
---------- ---------- ---------- --------- ------
Nine Months Ended
September 30, 2008
--------------------
Operating income $ 356 $ 473 $(470) $(195) $ 164
---------- ---------- ---------- --------- ------
Add impact of
noteworthy items:
Restructuring
Charges (a) 129 1 7 67 (b) 204
Settlement, Legal
and Regulatory
(c) 38 - - - 38
Goodwill
Impairment Charge - - 540 - 540
Other 3 - - - 3
Accelerated
Amortization/
Depreciation 14 - - - 14
---------- ---------- ---------- --------- ------
Operating
income
adjustments 184 1 547 67 799
---------- ---------- ---------- --------- ------
Adjusted operating
income $ 540 $ 474 $ 77 $(128) $ 963
========== ========== ========== ========= ======
Operating margin 8.5% 11.8% N/A N/A 1.8%
========== ========== ========== ========= ======
Adjusted operating
margin 12.9% 11.9% 9.7% N/A 10.8%
========== ========== ========== ========= ======
Nine Months Ended
September 30, 2007
--------------------
Operating income $ 292 $ 445 $ 83 $(129) $ 691
---------- ---------- ---------- --------- ------
Add (deduct) impact
of noteworthy
items:
Restructuring
Charges (a) 31 1 - 22 54
Settlement, Legal
and Regulatory
(c) 38 - - - 38
Accelerated
Amortization/
Depreciation 9 6 - 4 19
Other (d) - - - (14) (14)
---------- ---------- ---------- --------- ------
Operating
income
adjustments 78 7 - 12 97
---------- ---------- ---------- --------- ------
Adjusted operating
income $ 370 $ 452 $ 83 $(117) $ 788
========== ========== ========== ========= ======
Operating margin 7.2% 12.5% 11.2% N/A 8.4%
========== ========== ========== ========= ======
Adjusted operating
margin 9.2% 12.7% 11.2% N/A 9.5%
========== ========== ========== ========= ======
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(a) Primarily includes severance from restructuring activities and
related charges, costs for future rent and other real estate costs,
and fees and consulting costs related to cost reduction activities.
(b) Restructuring charges include $49 million of future rent and other
real estate costs to exit five floors in MMC's New York headquarters
building.
(c) Reflects legal fees arising out of the civil complaint relating to
market service agreements and other issues filed against MMC and
Marsh by the New York State Attorney General in October 2004 and
settled in January 2005, including indemnification of former
employees for legal fees.
(d) Represents an adjustment related to the separation of former MMC
senior executives.
Noteworthy items exclude a credit of $10 million for a payment
received in the third quarter of 2008 from U.S. Investigations
Services Inc. in connection with the hiring of MMC's former CEO. This
amount was recorded in operating income as a reduction of corporate
expense. Noteworthy items also exclude a $33 million charge in the
third quarter of 2008 to increase professional liability reserves
recorded in risk and insurance services. These items are therefore
included in both operating income and adjusted operating income.
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Marsh & McLennan Companies, Inc.
Non-GAAP Measures
Three and Nine Months Ended September 30
(Millions) (Unaudited)
Adjusted Income, net of tax
Adjusted income, net of tax is calculated as: (i) MMC's GAAP income
(loss) from continuing operations, adjusted (a) to reflect the after-
tax impact of the operating income adjustments set forth in the
preceding table and (b) to include the operating income, net of tax,
of MMC's former subsidiary, Putnam (included in discontinued
operations through August 2, 2007); divided by (ii) MMC's average
number of shares outstanding--diluted for the period.
Adjusted income, net of tax does not include gains or losses from the
sales of operations included in discontinued operations, but, as
noted above, does include the operating income of Putnam in 2007.
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Reconciliation of the Impact of Non-GAAP Measures on Diluted Earnings
Per Share - Three Months Ended
Three
Months
Three Months Diluted Ended Diluted
Ended 2008 EPS 2007 EPS
------------ ------- --------- -------
Income from continuing
operations $18 $0.03 $80 $0.15
Add impact of operating income
adjustments $147 $29
Deduct impact of income tax
expense (54) (9)
----- ----
93 0.18 20 0.04
------ ------- ---- -------
Income from continuing
operations, as adjusted 111 0.21 100 0.19
Add Putnam operating income,
net of tax - - 13 0.02
------ ------- ---- -------
Adjusted income, net of tax $111 $0.21 $113 $0.21
====== ======= ==== =======
Reconciliation of the Impact of Non-GAAP Measures on Diluted Earnings
Per Share - Nine Months Ended
Nine
Months
Nine Months Diluted Ended Diluted
Ended 2008 EPS 2007 EPS
------------ ------- --------- -------
(Loss) income from continuing
operations $(142) $(0.28) $448 $0.81
Add impact of operating income
adjustments $799 $97
Deduct impact of income tax
expense (94) (31)
----- ----
705 1.36 66 0.12
------ ------- ---- -------
Income from continuing
operations, as adjusted 563 1.08 514 0.93
Add Putnam operating income,
net of tax - - 90 0.16
------ ------- ---- -------
Adjusted income, net of tax $563 $1.08 $604 $1.09
====== ======= ==== =======
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Marsh & McLennan Companies, Inc.
Consolidated Balance Sheets
(Millions) (Unaudited)
September 30, December 31,
2008 2007
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,461 $ 2,133
Net receivables 2,914 2,874
Other current assets 430 447
------------- ------------
Total current assets 4,805 5,454
Goodwill and intangible assets 7,335 7,759
Fixed assets, net 1,037 992
Pension related asset 1,318 1,411
Other assets 1,531 1,743
------------- ------------
TOTAL ASSETS $16,026 $17,359
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 408 $ 260
Accounts payable and accrued liabilities 1,686 1,670
Regulatory settlements-current portion - 177
Accrued compensation and employee benefits 1,116 1,290
Accrued income taxes - 96
Dividends payable 104 -
------------- ------------
Total current liabilities 3,314 3,493
Fiduciary liabilities 3,774 3,612
Less - cash and investments held in a
fiduciary capacity (3,774) (3,612)
------------- ------------
- -
Long-term debt 3,197 3,604
Pension, postretirement and postemployment
benefits 788 709
Liabilities for errors and omissions 586 596
Other liabilities 1,225 1,135
Total stockholders' equity 6,916 7,822
------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $16,026 $17,359
============= ============
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Marsh & McLennan Companies, Inc.
Media:
Christine Walton, 212-345-0675
christine.walton@mmc.com
or
Investors:
Mike Bischoff, 212-345-5470
jmichael.bischoff@mmc.com
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