Business Context and Reporting Period
Company: Marsh & McLennan Companies, Inc. (MMC)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and six months ended June 30, 2010
Business Overview: MMC is a global professional services firm organized into three segments: Risk and Insurance Services (Marsh, Guy Carpenter), Consulting (Mercer, Oliver Wyman), and Risk Consulting & Technology (Kroll).
Key Structural Change: On August 3, 2010, MMC completed the sale of its Risk Consulting & Technology segment (Kroll) to Altegrity, Inc. for $1.13 billion. Kroll's results are reported as discontinued operations for the periods presented.
Key Financial Metrics
| Metric (in millions) | Q2 2010 | Q2 2009 | 6M 2010 | 6M 2009 |
|---|---|---|---|---|
| Revenue | $2,606 | $2,470 | $5,241 | $4,913 |
| Operating Income (Loss) | $(50) | $294 | $375 | $611 |
| Net Income Attributable to MMC | $236 | $(193) | $484 | $(17) |
| Diluted EPS (Net Income) | $0.43 | $(0.37) | $0.88 | $(0.03) |
| Cash and Cash Equivalents | $1,475 | $1,225 | $1,475 | $1,225 |
| Total Debt (Short + Long Term) | $3,588 | $3,592 | $3,588 | $3,592 |
| Operating Cash Flow (6M) | $272 | $(236) | $272 | $(236) |
Note: Net income for Q2 2010 and 6M 2010 includes significant gains from discontinued operations ($271M and $249M, respectively) primarily due to a tax benefit related to the Kroll sale.
Material Changes vs. Prior Period
- Operating Loss in Q2 2010: MMC reported an operating loss of $50 million in Q2 2010 compared to $294 million income in Q2 2009. This was driven by a $400 million net charge in the Consulting segment related to the settlement of litigation with the Alaska Retirement Management Board (ARMB).
- Revenue Growth: Consolidated revenue increased 6% in Q2 2010 and 7% for the six months ended June 30, 2010, compared to the prior year. Underlying revenue growth was 1% for the quarter and flat for the six-month period.
- Segment Performance:
- Risk and Insurance Services: Operating income increased to $258 million (Q2) and $605 million (6M) due to acquisitions and underlying growth in Guy Carpenter and Marsh, despite soft market conditions.
- Consulting: Reported an operating loss of $275 million (Q2) and $159 million (6M) due to the Alaska settlement charge. Excluding this charge, operating income would have been $125 million (Q2) and $241 million (6M).
- Discontinued Operations: The classification of Kroll as discontinued operations resulted in a $265 million deferred tax benefit recorded in Q2 2010, significantly boosting net income.
Guidance, Outlook, and Risks
- Alaska Settlement: Mercer agreed to pay $500 million to resolve the ARMB lawsuit, with $100 million covered by insurance. The net charge of $400 million was recorded in Q2 2010. Payment is expected in Q3 2010.
- Kroll Disposition: The sale of Kroll for $1.13 billion closed in August 2010. Proceeds are expected to fund the maturity of $550 million in senior notes due in Q3 2010.
- Acquisitions: MMC completed four acquisitions in the first half of 2010 (Haake, Thomas Rutherfoord, HSBC Insurance Brokers, Bostonian Group) totaling $472 million in consideration, expanding its Risk and Insurance Services footprint.
- Restructuring: MMC incurred $41 million in restructuring costs in the first six months of 2010, primarily for severance and benefits, with expected annualized savings of $35 million.
- Tax Rate Volatility: The effective tax rate for Q2 2010 was 67.4% due to the Alaska settlement tax benefit. Excluding this, the rate was 32.3%. Management expects the effective tax rate to remain highly variable in the short term.
- Goodwill Impairment Risk: Management noted that the fair value of the Oliver Wyman reporting unit is sensitive to future revenue projections and market multiples, highlighting a risk of potential impairment in future tests.
Investor Verification Checklist
- Alaska Settlement Impact: Verify the cash outflow timing for the $400 million net settlement payment and confirm the insurance recovery of $100 million.
- Kroll Sale Proceeds: Confirm the receipt of $1.13 billion from the Kroll sale and its application toward the $550 million debt maturity in Q3 2010.
- Continuing Operations Profitability: Analyze operating income excluding discontinued operations to assess the core business performance, which showed a loss in Q2 2010 due to the settlement charge.
- Goodwill Valuation: Monitor the third-quarter 2010 goodwill impairment test results, particularly for the Oliver Wyman reporting unit, given the disclosed sensitivity to market multiples.
- Acquisition Integration: Review the integration progress and cost synergies from the four acquisitions made in the first half of 2010.