Business Context and Reporting Period
Company: Marsh & McLennan Companies, Inc. (MMC)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2008
Business Overview: MMC is a global professional services firm organized into three segments: Risk and Insurance Services (Marsh, Guy Carpenter, Risk Capital Holdings), Consulting (Mercer, Oliver Wyman), and Risk Consulting & Technology (Kroll, Corporate Advisory & Restructuring). The company operates in over 100 countries with more than 55,000 employees.
Key Financial Metrics
| Metric (in millions, except per share) | Q1 2008 | Q1 2007 |
|---|---|---|
| Operating Revenue | $3,047 | $2,812 |
| Operating (Loss) Income | $(80) | $387 |
| Net (Loss) Income | $(210) | $268 |
| Diluted EPS (Net) | $(0.40) | $0.47 |
| Cash and Cash Equivalents | $1,285 | $2,133 (Dec 31, 2007) |
| Long-term Debt | $3,602 | $3,604 (Dec 31, 2007) |
| Operating Cash Flow | $(463) | $(383) |
Note: Operating cash flow is typically negative in Q1 due to the timing of incentive compensation payments.
Material Changes vs. Prior Period
- Goodwill Impairment: The primary driver of the operating loss was a non-cash goodwill impairment charge of $425 million recorded in the Risk Consulting & Technology segment. This charge resulted from an interim impairment test triggered by a management reorganization and challenging market conditions (specifically in mortgage markets and corporate advisory).
- Revenue Growth: Consolidated revenue increased 8% to $3.047 billion. Underlying revenue (excluding currency and acquisition impacts) grew 2%.
- Segment Performance:
- Consulting: Revenue increased 15% (8% underlying) and operating income rose 10% to $151 million.
- Risk and Insurance Services: Revenue increased 2% (4% underlying decline). Operating income decreased to $240 million, driven by reduced earnings from Risk Capital Holdings and Guy Carpenter.
- Risk Consulting & Technology: Revenue increased 10% (3% underlying), but the segment reported an operating loss of $410 million due to the impairment charge.
- Investment Income: Investment income dropped significantly from $49 million in Q1 2007 to $6 million in Q1 2008, largely due to decreased mark-to-market gains in private equity funds.
Guidance, Outlook, and Risks
- Outlook: Management expects Risk Capital Holdings revenue to be negative in Q2 2008 based on recent security market levels. The effective tax rate for ongoing operations is projected to be between 30% and 32% for the remainder of 2008.
- Restructuring: MMC implemented restructuring actions in Q1 2008 costing $25 million (eliminating 206 positions). Additional restructuring at Guy Carpenter is expected in Q2 2008, with estimated costs of $30 million and expected annualized savings of $40 million.
- Share Repurchases: MMC completed an $800 million accelerated share repurchase agreement in March 2008, acquiring 32 million shares at an average price of $24.94. The company retains $700 million in remaining authorization.
- Legal and Contingencies:
- NYAG Settlement: $170 million remains to be paid into the policyholder compensation fund by June 1, 2008.
- Putnam Indemnities: A liability of approximately $250 million remains related to indemnities provided to Great-West Lifeco for Putnam-related litigation and tax matters.
- Litigation: Numerous lawsuits remain pending regarding brokerage compensation practices, market-timing, and errors and omissions. Management states that while losses are probable and estimable for some, the ultimate impact of others cannot be reasonably estimated.
Investor Verification Checklist
- Goodwill Impairment Finalization: Verify the outcome of the "Step Two" impairment test for the Risk Consulting & Technology segment, which was not completed as of March 31, 2008. The final charge could differ from the $425 million interim estimate.
- Risk Capital Holdings Volatility: Monitor the performance of private equity investments, as this unit is highly sensitive to market conditions and is expected to generate negative revenue in Q2 2008.
- Legal Exposure: Review updates on the NYAG settlement payments and the status of the Putnam-related indemnity liabilities, which carry significant uncertainty regarding final settlement amounts.
- Restructuring Execution: Track the execution of planned restructuring at Guy Carpenter in Q2 2008 to ensure expected cost savings are realized.
- Liquidity Position: Confirm the company's ability to meet the $170 million NYAG settlement payment due in June 2008 and manage debt maturities, noting the recent reduction in cash and cash equivalents.