Business Context and Reporting Period
Company: Marsh & McLennan Companies, Inc. (MMC)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2009
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). The company operates in over 100 countries with approximately 54,000 employees.
Key Financial Metrics
| Metric (in millions) | Q1 2009 | Q1 2008 |
|---|---|---|
| Revenue | $2,629 | $3,039 |
| Operating Income | $331 | $(88) |
| Net Income (Attributable to MMC) | $176 | $(210) |
| Diluted EPS | $0.33 | $(0.40) |
| Cash and Cash Equivalents | $1,414 | $1,285 |
| Total Debt (Short + Long Term) | $3,998 | $3,602 |
| Operating Cash Flow | $(450) | $(415) |
Margins: Operating margin improved significantly to 12.6% in Q1 2009 compared to a negative margin in Q1 2008, primarily due to the absence of a goodwill impairment charge recorded in the prior year.
Material Changes vs. Prior Period
- Revenue Decline: Consolidated revenue decreased 13% year-over-year. On an underlying basis (excluding currency and acquisitions/dispositions), revenue declined 4%.
- Risk & Insurance Services: Revenue down 8% (1% underlying decline). Guy Carpenter saw a 10% underlying increase, offset by a 1% underlying decline at Marsh and a 57% drop in fiduciary interest income due to lower rates.
- Consulting: Revenue down 16% (7% underlying decline). Mercer declined 2% underlying; Oliver Wyman declined 19% underlying due to adverse economic conditions.
- Risk Consulting & Technology: Revenue down 27% (8% underlying decline), reflecting divestitures and lower demand at Kroll.
- Profitability Improvement: Operating income turned from a loss of $88 million in Q1 2008 to a profit of $331 million in Q1 2009. The Q1 2008 loss included a non-cash goodwill impairment charge of $425 million in the Risk Consulting & Technology segment.
- Expense Reduction: Total operating expenses decreased 27% to $2,298 million. Excluding the prior year impairment, underlying expenses decreased 5% due to lower compensation costs, travel, and facilities expenses.
- Foreign Exchange Impact: Currency fluctuations negatively impacted operating income by approximately $41 million (12%) compared to the prior year.
Guidance, Outlook, Risks, and Unusual Items
- Restructuring: MMC initiated new restructuring actions in Q1 2009, incurring a $25 million charge primarily for severance related to 320 positions at Marsh. Expected annualized savings are $27 million.
- Debt Refinancing: In Q1 2009, MMC issued $400 million of 9.25% ten-year senior notes to refinance $400 million of notes maturing in June 2009.
- Legal Contingencies: Significant litigation risks remain, including:
- Brokerage Compensation Practices: Ongoing shareholder and policyholder lawsuits related to the NYAG settlement. A trial court approved a settlement in February 2009, but it has been appealed.
- Mercer Litigation: Lawsuits filed by the Alaska Retirement Management Board (seeking up to $2.8 billion) and Milwaukee County (seeking over $300 million) alleging professional negligence.
- Putnam Matters: Ongoing "market-timing" related litigation where MMC has indemnification obligations.
- Forward-Looking Risks: Management highlights risks related to the financial crisis, including counterparty risk, credit rating impacts on financing costs, pension funding obligations, and the ability to retain clients and key employees.
- Dividends: Dividends declared were $0.40 per share, consistent with the prior year.
Investor Verification Checklist
- Goodwill Impairment: Verify the absence of further impairment charges in future quarters, given the $425 million charge in Q1 2008.
- Legal Exposure: Monitor the status of the Alaska and Milwaukee County lawsuits against Mercer and the appeal of the NYAG policyholder settlement, as potential liabilities could be material.
- Underlying Revenue Trends: Assess whether the 4% underlying revenue decline stabilizes, particularly in the Consulting segment where Oliver Wyman saw a 19% underlying drop.
- Debt Maturity: Confirm the successful repayment of the $400 million senior notes maturing in June 2009 using the proceeds from the new issuance.
- Foreign Exchange Sensitivity: Evaluate the impact of currency fluctuations on future earnings, which negatively impacted Q1 2009 results by $41 million.