Business Context and Reporting Period
Company: Marsh & McLennan Companies, Inc. (MMC)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2008
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, Corporate Advisory). The company operates in over 100 countries with more than 55,000 employees.
Key Financial Metrics
| Metric (in millions) | Q3 2008 | Q3 2007 | 9 Months 2008 | 9 Months 2007 |
|---|---|---|---|---|
| Revenue | $2,838 | $2,716 | $8,925 | $8,262 |
| Operating Income | $70 | $116 | $164 | $691 |
| Net Income (Loss) | $(8) | $1,945 | $(153) | $2,390 |
| Operating Margin | 2.5% | 4.3% | 1.8% | 8.4% |
| Cash from Operations (9mo) | $199 (2008) vs $(30) (2007) | |||
| Cash & Equivalents | $1,461 (Sep 30, 2008) vs $2,133 (Dec 31, 2007) | |||
| Total Debt | $3,605 (Sep 30, 2008) vs $3,864 (Dec 31, 2007) |
Note: Q3 2007 Net Income includes a $1.865 billion gain from discontinued operations (Putnam sale). Q3 2008 Net Loss includes a $26 million loss from discontinued operations.
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenue increased 5% in Q3 2008 and 8% for the nine-month period compared to 2007. Underlying revenue growth was 2% for Q3 and 3% for the nine months, driven by foreign currency impacts and acquisitions.
- Operating Income Decline: Operating income dropped significantly year-over-year. For the nine months ended Sep 30, 2008, operating income was $164 million compared to $691 million in 2007. This decline is primarily due to a $540 million goodwill impairment charge recorded in the Risk Consulting & Technology segment in the first half of 2008.
- Segment Performance:
- Risk & Insurance Services: Operating income increased 22% for the nine months (excluding impairment), driven by Marsh's growth, though Guy Carpenter saw a 10% underlying revenue decline due to lower reinsurance rates.
- Consulting: Operating income increased 6% for the nine months, with Mercer showing strong underlying growth (9%) while Oliver Wyman faced headwinds from global economic conditions.
- Risk Consulting & Technology: Reported an operating loss of $470 million for the nine months, largely due to the $540 million goodwill impairment.
- Restructuring Costs: MMC incurred $160 million in restructuring costs for the first nine months of 2008, including $49 million in Q3 related to exiting office space in New York and London. This resulted in the elimination of approximately 1,600 positions.
Guidance, Outlook, Risks, and Unusual Items
- Unusual Items:
- Goodwill Impairment: A $540 million non-cash charge in the Risk Consulting & Technology segment reduced operating income significantly.
- Discontinued Operations: Q3 2007 results were heavily influenced by the $1.9 billion net gain from the sale of Putnam Investments. Q3 2008 discontinued operations reflect tax adjustments related to that sale and a loss on the disposal of Kroll Crucible.
- Professional Liability: A $33 million charge was recorded in Q3 2008 related to a professional liability claim in the Risk and Insurance Services segment.
- Liquidity and Capital: Cash and cash equivalents decreased to $1.461 billion from $2.133 billion at year-end 2007. The company maintained a $1.2 billion revolving credit facility with no outstanding borrowings as of Sep 30, 2008. Dividends paid were $308 million for the nine months.
- Legal and Regulatory Risks:
- NYAG Settlement: Ongoing litigation and settlements related to brokerage compensation practices (Market Service Agreements). A settlement with policyholders is preliminarily approved, utilizing the remaining $850 million fund.
- Actuarial Claims: Significant lawsuits pending against Mercer, including a claim by the Alaska Retirement Management Board alleging damages of at least $1.8 billion and a Milwaukee County claim seeking over $300 million.
- Putnam Indemnities: MMC retains indemnification obligations to Great-West Lifeco regarding Putnam-related litigation, with a remaining liability of approximately $239 million.
- Outlook: Management notes challenges in achieving profitable revenue growth at Marsh and the impact of the global financial crisis on client demand and pricing trends. No specific forward-looking financial guidance was provided in this text.
Investor Verification Checklist
- Goodwill Impairment: Verify the specific reporting units within Risk Consulting & Technology that triggered the $540 million impairment and the assumptions used in the valuation.
- Legal Exposure: Assess the potential financial impact of the Alaska Retirement Management Board lawsuit ($1.8B claim) and the Milwaukee County lawsuit ($300M+ claim) against Mercer.
- Restructuring Savings: Confirm the realization of the projected $170 million in annualized cost savings from the 2008 restructuring actions.
- Discontinued Operations: Review the final tax implications of the Putnam sale adjustments recorded in Q3 2008 discontinued operations.
- Reinsurance Market: Monitor Guy Carpenter's revenue trends given the reported 10% underlying decline due to falling reinsurance premium rates.