Marsh & McLennan Companies, Inc. — Q3 2009 Form 10-Q
Reporting period: Three and nine months ended September 30, 2009. MMC is a global professional services firm operating in Risk and Insurance Services, Consulting, and Risk Consulting & Technology.
Financial performance
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Revenue | $2.523bn | $2.819bn | $7.761bn | $8.876bn |
| Operating income | $216m | $64m | $519m | $154m |
| Operating margin | 8.6% | 2.3% | 6.7% | 1.7% |
| Net income (loss) attributable to MMC | $221m | $(8)m | $204m | $(153)m |
| Diluted EPS attributable to MMC | $0.41 | $(0.02) | $0.38 | $(0.30) |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $405m | $303m |
- Q3 revenue declined 11% year over year, or 7% on an underlying basis. Nine-month revenue fell 13%, or 5% underlying.
- Q3 operating expenses fell 16%; nine-month expenses fell 17%, including goodwill impairment charges of $315m in 2009 and $540m in 2008. Excluding impairment, nine-month operating income was $834m versus $694m.
- Q3 investment income was $21m, versus a $23m loss a year earlier. Nine-month investment loss was $25m versus $31m. Q3 pretax income was $181m; a $40m income tax benefit included a $95m benefit from changes in prior-year unrecognized tax benefits and related interest.
- Cash and cash equivalents were $1.813bn at September 30, 2009, versus $1.685bn at December 31, 2008. Total debt was approximately $3.595bn: $558m current and $3.037bn long-term. The filing reports no commercial paper borrowings at quarter-end.
- Current assets were $4.876bn and current liabilities $3.401bn. MMC paid $322m in dividends in the first nine months; dividends declared were $0.80 per share for the period.
Segment trends and changes
- Risk and Insurance Services: Q3 revenue was $1.226bn, down 4% (3% underlying); operating income was $127m versus a $28m loss. Nine-month revenue declined 6% (1% underlying), while operating income increased to $669m from $356m. Guy Carpenter grew underlying revenue 6% in Q3 and 9% year to date; Marsh declined 2% and 1%, respectively. Lower fiduciary interest income materially weighed on reported revenue.
- Consulting: Q3 revenue fell 14% (10% underlying) to $1.144bn, and operating income fell to $105m from $157m. Nine-month revenue declined 16% (9% underlying) to $3.370bn, with operating income of $274m versus $473m. Management cited weaker demand, fewer discretionary assignments, reduced client payrolls, and challenging economic and financial markets.
- Risk Consulting & Technology: Q3 revenue declined 27% to $170m, including divested businesses; underlying revenue fell 8%. Operating income was $20m versus $22m. Nine-month revenue fell 33% to $498m and the segment reported a $292m operating loss, including the $315m goodwill impairment charge. The 2008 period included a $540m impairment charge.
- MMC recorded $146m of 2009 restructuring costs through September, associated with approximately 1,840 eliminated positions. Management expected approximately $150m of annualized savings from those actions. A further $16m related to earlier restructuring programs was recorded; $242m remained in liabilities for those prior actions.
Liquidity, outlook, risks and unusual items
- Operating cash flow for the first nine months rose to $405m from $303m. Investing used $114m and financing used $358m. Capital expenditures were $209m, down from $334m. Pension contributions were $334m, compared with $200m in the prior-year period.
- On October 23, 2009, MMC entered a new $1.0bn, three-year unsecured revolving credit facility, replacing its $1.2bn facility. The new facility contains quarterly-tested coverage and leverage covenants. Debt ratings were Baa2 from Moody’s and BBB- from S&P, both with stable outlooks.
- MMC reported a $315m non-cash goodwill impairment in Q2 2009 related to the retained Kroll reporting unit; the assessment was finalized in Q3 with no adjustment. The company’s annual Q3 2009 goodwill review found no further impairment.
- Management said the effective tax rate is expected to remain highly variable in the near term and significantly variable for the foreseeable future, affected by geographic earnings mix, tax settlements, nondeductible items, and possible tax-law changes. The nine-month reported rate was 27%.
- Major contingencies include securities and ERISA class actions expected to go to trial in 2010, the Alaska Retirement Management Board lawsuit against Mercer seeking at least $2.8bn and scheduled for trial in March 2010, and a Connecticut action against Guy Carpenter. MMC said it could not reasonably estimate potential losses for many matters; it had not accrued a liability for the Alaska claim beyond legal defense costs because loss was not determined to be both probable and reasonably estimable. Adverse outcomes could materially affect future results, financial position, or cash flows.
- Other identified risks include economic conditions, consulting demand and pricing, client retention and collections, professional errors-and-omissions claims, pension funding, foreign exchange, regulation, and competition. The filing provides no formal consolidated earnings or revenue guidance.
Most important facts for investors to verify
- Underlying revenue and margin trends, particularly continuing weakness in Consulting and the extent of improvement in Risk and Insurance Services.
- Whether restructuring delivers the stated approximately $150m annualized savings and how remaining restructuring liabilities are paid.
- Cash conversion, working-capital movements, pension contributions, and the company’s ability to meet debt obligations and the new facility’s covenants.
- Developments in the major litigation matters, especially the Mercer Alaska claim and the securities and ERISA cases, for which potential losses are not clearly estimable.
- The durability of the Q3 tax benefit and the effect of future tax settlements, impairment charges, or other unusual items on reported earnings.