Business Context and Reporting Period
Company: Marsh & McLennan Companies, Inc. (MMC)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Business Overview: MMC is a global professional services firm operating through three segments: Risk and Insurance Services (Marsh, Guy Carpenter), Consulting (Mercer, Oliver Wyman), and Risk Consulting & Technology (Kroll). The company employs approximately 53,000 people in over 100 countries.
Key Financial Metrics
| Metric (in millions) | Q2 2009 | Q2 2008 | YTD 6mo 2009 | YTD 6mo 2008 |
|---|---|---|---|---|
| Revenue | $2,629 | $3,033 | $5,238 | $6,057 |
| Operating Income (Loss) | $(21) | $180 | $303 | $90 |
| Net Income (Loss) Attributable to MMC | $(193) | $65 | $(17) | $(145) |
| Diluted EPS (Net Income) | $(0.37) | $0.12 | $(0.03) | $(0.28) |
| Cash and Cash Equivalents | $1,291 | $1,685 (Dec 31, 2008) | $1,291 | $2,133 (Dec 31, 2008) |
| Total Debt (Short + Long Term) | $3,597 | $3,602 (Dec 31, 2008) | $3,597 | $3,602 (Dec 31, 2008) |
| Operating Cash Flow (6mo) | $(236) | $(317) | $(236) | $(317) |
Material Changes vs. Prior Period
- Revenue Decline: Consolidated revenue decreased 13% in Q2 2009 and 14% YTD compared to 2008. On an underlying basis (excluding currency and M&A impacts), revenue declined 6% in Q2 and 5% YTD.
- Risk & Insurance Services: Revenue was flat on an underlying basis, driven by an 11% underlying increase at Guy Carpenter offset by a 60% drop in fiduciary interest income.
- Consulting: Revenue declined 17% (9% underlying), with significant drops at Oliver Wyman (19% underlying) and Mercer (5% underlying).
- Risk Consulting & Technology: Revenue declined 40% (20% underlying) due to divestitures and lower demand at Kroll.
- Goodwill Impairment: A non-cash goodwill impairment charge of $315 million was recorded in Q2 2009 (vs. $115 million in Q2 2008) related to the Risk Consulting & Technology segment. This charge turned operating income into a loss for the quarter.
- Excluding impairment charges, operating income was $294 million in Q2 2009, nearly flat compared to $295 million in Q2 2008.
- Expense Reduction: Operating expenses decreased 7% in Q2 and 17% YTD. Excluding goodwill impairment, underlying expenses decreased 7% due to restructuring and cost controls.
- Restructuring costs totaled $92 million YTD 2009, eliminating approximately 1,380 positions across the firm.
- Discontinued Operations: Kroll Government Services (KGS) was sold in Q2 2009. The sale resulted in a net loss of $30 million for the quarter and $33 million YTD, classified as discontinued operations.
Guidance, Outlook, Risks, and Contingencies
- Outlook: Management expects the effective tax rate to remain highly variable in the short term due to non-deductible goodwill impairments and other items. The company continues to focus on cost control and restructuring to improve margins.
- Legal Contingencies:
- Securities Class Action: A purported securities class action regarding the 2004 share price decline is scheduled for trial in early 2010.
- ERISA Class Action: A pending ERISA class action regarding retirement plan investments is also scheduled for trial in early 2010.
- Alaska Retirement Management Board: A lawsuit against Mercer alleging professional negligence seeks damages of at least $2.8 billion; trial is scheduled for March 2010. MMC has not recorded a liability as the loss is not deemed probable and estimable.
- Brokerage Practices: Settlements with state regulators are ongoing, with one action in Ohio remaining pending.
- Liquidity: MMC maintains a $1.2 billion revolving credit facility with no borrowings outstanding as of June 30, 2009. The company paid $207 million in dividends YTD 2009. Credit ratings remain stable (Baa2/BBB-).
- Market Risks: The company faces exposure to foreign currency fluctuations, interest rate changes, and equity market volatility affecting its investment portfolio and fiduciary funds.
Investor Verification Checklist
- Goodwill Impairment Finalization: Verify the final Step 2 impairment assessment for the Risk Consulting & Technology segment, which was estimated at $315 million but subject to finalization in Q3 2009.
- Legal Exposure: Monitor the outcomes of the Alaska Retirement Management Board lawsuit and the securities/ERISA class actions scheduled for trial in 2010, as potential liabilities could be significant.
- Underlying Revenue Trends: Assess the sustainability of the underlying revenue decline in the Consulting segment, particularly Oliver Wyman, amidst the global economic recession.
- Restructuring Savings: Track the realization of the expected $110 million in annualized cost savings from the 2009 restructuring actions.
- Effective Tax Rate: Review future tax rate volatility driven by non-deductible charges and the geographic mix of earnings.