Marsh & McLennan Companies, Inc. — 2009 Form 10-K
Business and reporting period: This filing covers the fiscal year ended December 31, 2009 (with quarterly data for Q4), not a standalone quarterly report. MMC is a global professional services firm operating through Risk and Insurance Services (Marsh and Guy Carpenter), Consulting (Mercer and Oliver Wyman Group), and Risk Consulting & Technology (Kroll). It reported approximately 52,000 employees and operations in more than 100 countries.
Financial results and liquidity
| Metric | 2009 | 2008 |
|---|---|---|
| Revenue | $10.493 billion | $11.518 billion |
| Operating income | $509 million | $248 million |
| Operating margin | 4.9% | 2.2% |
| Income (loss) from continuing operations | $242 million | ($69 million) |
| Net income (loss) attributable to MMC | $227 million; diluted EPS $0.42 | ($73 million); diluted EPS ($0.14) |
| Cash from operations | $640 million | $940 million |
- Revenue fell 9% reported and 5% on an underlying basis; foreign currency translation reduced revenue by 4%.
- Segment operating income: Risk and Insurance Services $796 million (15.1% margin), Consulting $405 million (8.8% margin), and Risk Consulting & Technology loss of $272 million. Kroll’s segment results included a $315 million goodwill impairment.
- Cash and cash equivalents were $1.777 billion. Working capital was $1.228 billion. Total debt was approximately $3.592 billion, including $558 million current and $3.034 billion long-term debt. The $1.0 billion revolving credit facility had no year-end borrowings.
- Cash from operations less capital expenditures was approximately $335 million. Dividends paid were $431 million, or $0.80 per share. No shares were repurchased in Q4; $700 million remained under the repurchase authorization.
- Contractual obligations totaled $8.292 billion, including debt principal and interest, leases, service agreements, and other long-term obligations. Fiduciary cash is segregated and unavailable for general corporate use.
Material changes versus prior period
- Underlying revenue declined in Consulting (7%) and Risk Consulting & Technology (10%); Risk and Insurance Services declined 1%. Within the latter, Guy Carpenter grew 8% underlying, while Marsh declined 1% and fiduciary interest income fell 60%.
- Operating income improved from 2008, but both years included substantial unusual charges. Excluding goodwill impairment, class-action settlement, restructuring and other noteworthy items, management reported operating income of approximately $1.3 billion in 2009 versus $1.2 billion in 2008.
- MMC recorded a $315 million Kroll goodwill impairment in 2009, following $540 million in 2008. Goodwill and intangible assets were $7.173 billion at year-end, about 47% of total assets.
- MMC recorded a $230 million net charge for settlements of securities and ERISA class actions. It paid $435 million into settlement funds in December and accrued a further $25 million; the total agreed settlement payments were $460 million, with $230 million covered by insurance.
- Revenue and operating performance were pressured by the weak economy, lower client spending, pricing and utilization pressure, and currency movements. Cost reductions helped: reported compensation and other operating expenses declined, and MMC eliminated approximately 2,440 positions through 2009 restructuring actions.
Outlook, commentary, risks and contingencies
- MMC gave no specific revenue or earnings guidance. It expected approximately $200 million of annualized savings from 2009 restructuring actions and forecast 2010 pension expense to increase by about $110 million. Expected 2010 pension contributions were approximately $25 million to U.S. non-qualified plans and $250 million to non-U.S. plans.
- Management cited economic conditions as a key risk, particularly for Consulting and Kroll, where clients reduced spending. Other material risks include insurance pricing and premium cycles, competition, employee retention, collections, foreign exchange, counterparty risk, pension assumptions, regulation, privacy and cybersecurity, and acquisition integration.
- The Alaska Retirement Management Board lawsuit against Mercer alleges professional negligence, fraud and related claims and seeks at least $2.8 billion, plus possible treble and punitive damages. Mercer’s motion to dismiss was denied; trial was scheduled for July 2010. MMC reported limited insurance and did not accrue a loss beyond legal fees because a loss was not considered both probable and reasonably estimable.
- Other pending matters include a Connecticut action against Guy Carpenter and remaining litigation and regulatory matters related to brokerage compensation practices and the Putnam disposition. The filing says the range of possible losses for many proceedings could not be reasonably estimated.
- MMC’s effective tax rate was 14.5%, and management cautioned that it may remain variable. Additional valuation allowances of up to $170 million could be required if sufficient taxable income is not generated.
- Both Moody’s and S&P rated senior debt at the lowest investment-grade level cited in the filing (Baa2 and BBB-, respectively), with stable outlooks. A downgrade below investment grade could increase financing costs and operational pressures.
Most important facts for investors to verify
- Underlying revenue trends and whether Consulting and Kroll demand and profitability recover.
- The assumptions and sensitivity behind the $315 million Kroll impairment and the remaining goodwill, particularly for Kroll and Oliver Wyman.
- Developments in the Alaska Mercer case and other legal matters, including insurance coverage, potential exposure and any future accruals.
- Cash generation, debt maturities, credit-facility covenant compliance, and capacity to fund dividends and pension obligations.
- Whether the projected restructuring savings are realized and whether pension expense and contributions track management’s estimates.
Audit and controls: Deloitte & Touche issued unqualified opinions on the consolidated financial statements and internal control over financial reporting as of December 31, 2009.