Business Context and Reporting Period
Company: Marsh & McLennan Companies, Inc. (MMC)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2008
Business Overview: MMC is a global professional services firm providing advice and solutions in risk, strategy, and human capital. It operates through three segments: Risk and Insurance Services (Marsh, Guy Carpenter), Consulting (Mercer, Oliver Wyman Group), and Risk Consulting & Technology (Kroll). As of December 31, 2008, the company employed approximately 54,400 people worldwide.
Key Financial Metrics
| Metric | 2008 | 2007 |
|---|---|---|
| Revenue | $11,587 million | $11,177 million |
| Operating Income | $263 million | $846 million |
| Net (Loss) Income | $(73) million | $2,475 million |
| Operating Margin | 2.3% | 7.6% |
| Operating Cash Flow | $837 million | $(385) million |
| Total Assets | $15,206 million | $17,359 million |
| Long-term Debt | $3,194 million | $3,604 million |
| Stockholders' Equity | $5,722 million | $7,822 million |
| Dividends Paid Per Share | $0.80 | $0.76 |
Material Changes vs. Prior Period
- Profitability Decline: Net income swung from a $2.475 billion profit in 2007 to a $73 million loss in 2008. This was primarily driven by a $540 million goodwill impairment charge in the Risk Consulting & Technology segment and $388 million in restructuring and related charges.
- Revenue Growth: Consolidated revenue increased 4% to $11.6 billion, driven by a 2% increase in underlying revenue, 1% from acquisitions, and 1% from foreign currency translation.
- Segment Performance:
- Risk and Insurance Services: Operating income increased 35% to $460 million despite higher restructuring charges.
- Consulting: Operating income decreased 8% to $555 million due to economic headwinds and restructuring costs.
- Risk Consulting & Technology: Recorded an operating loss of $497 million (compared to $98 million income in 2007) largely due to the $540 million goodwill impairment and the sale of restructuring businesses.
- Discontinued Operations: 2007 results included a $1.9 billion gain from the sale of Putnam Investments. 2008 discontinued operations resulted in a net loss of $4 million.
Guidance, Outlook, Risks, and Unusual Items
- Restructuring: MMC implemented restructuring actions in 2008 eliminating approximately 2,800 positions. The company expects to incur additional restructuring charges in the first half of 2009.
- Goodwill Impairment: A $540 million charge was recorded in the Risk Consulting & Technology segment following an interim impairment test. The annual review in Q3 2008 concluded no further impairment was necessary at that time.
- Legal and Regulatory Risks: Significant exposure exists regarding "errors and omissions" (E&O) claims, specifically lawsuits by the Alaska Retirement Management Board and Milwaukee County against Mercer. The company faces potential liabilities from the NYAG settlement regarding brokerage compensation practices.
- Pension Obligations: Global defined benefit pension obligations totaled approximately $8.5 billion. The severe downturn in equity markets in 2008 negatively impacted plan assets, increasing the projected benefit obligation for U.S. plans by $300 million due to lower discount rates.
- Market Conditions: Management highlighted the impact of the global financial crisis, noting reduced client spending on consulting services and increased counterparty risk in investment portfolios.
Investor Verification Checklist
- Goodwill Valuation: Verify the assumptions used in the goodwill impairment test for the Risk Consulting & Technology segment and monitor for future impairment risks given the economic environment.
- Legal Contingencies: Review the status of the Alaska Retirement Management Board and Milwaukee County lawsuits against Mercer, as well as the NYAG settlement fund utilization.
- Pension Funding: Assess the impact of continued low interest rates and equity market volatility on future pension contribution requirements and earnings volatility.
- Restructuring Costs: Monitor the realization of the projected $290 million in annualized cost savings from 2008 restructuring actions against actual expense reductions in 2009.
- Discontinued Operations: Confirm the final tax and indemnity adjustments related to the 2007 Putnam sale, which continue to impact 2008 results.