Business Context and Reporting Period
Company: Marsh & McLennan Companies, Inc. (MMC)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 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 & Restructuring). The company operates in over 100 countries with more than 55,000 employees.
Key Financial Metrics
| Metric (in millions) | Q2 2008 | Q2 2007 | 6 Months 2008 | 6 Months 2007 |
|---|---|---|---|---|
| Revenue | $3,048 | $2,785 | $6,087 | $5,546 |
| Operating Income | $182 | $239 | $94 | $575 |
| Net Income (Loss) | $65 | $177 | $(145) | $445 |
| Diluted EPS (Net) | $0.13 | $0.31 | $(0.28) | $0.79 |
| Cash and Equivalents | $1,165 | $2,133 (Dec 31, 2007) | $1,165 | $2,089 (Dec 31, 2007) |
| Total Debt (Short + Long) | $3,607 | $3,864 (Dec 31, 2007) | $3,607 | $3,864 (Dec 31, 2007) |
| Operating Cash Flow (6 Mo) | $(379) used |
Note: Operating margins for the six months ended June 30, 2008, were significantly impacted by a $540 million goodwill impairment charge.
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenue increased 9% in Q2 2008 and 10% for the six-month period compared to 2007. Underlying revenue growth was 4% for both periods, driven by foreign currency impacts and acquisitions.
- Profitability Decline: Net income turned to a loss of $145 million for the six months ended June 30, 2008, compared to a profit of $445 million in the prior year. This was primarily due to a $540 million non-cash goodwill impairment charge in the Risk Consulting & Technology segment.
- Segment Performance:
- Risk and Insurance Services: Operating income increased 27% (excluding impairment) driven by Marsh, offset by declines at Guy Carpenter due to lower reinsurance rates.
- Consulting: Operating income increased 6% (excluding impairment), driven by strong growth at Mercer.
- Risk Consulting & Technology: Reported an operating loss of $498 million for the six months due to the $540 million impairment charge. Underlying revenue grew 5%.
- Cash Flow: Operating cash flow turned negative ($379 million used) for the six months ended June 30, 2008, compared to $269 million used in the prior year, largely due to changes in working capital and the timing of payments.
Guidance, Outlook, and Risks
- Management Commentary: Management noted that excluding the goodwill impairment charge, consolidated operating income for the first six months of 2008 increased 10% to $634 million. The company continues to monitor and control expenses, with restructuring actions in 2008 expected to yield $100 million in annualized cost savings.
- Restructuring: MMC implemented restructuring activities resulting in $79 million in costs for the first six months of 2008, eliminating approximately 978 positions across the firm.
- Legal and Contingencies:
- Brokerage Compensation Practices: MMC is involved in numerous lawsuits and regulatory investigations regarding market service agreements. A settlement agreement was reached in June 2008 for policyholder class actions using the remaining funds from an $850 million settlement fund.
- Shareholder Litigation: Pending securities class actions and derivative suits allege misrepresentations regarding Marsh's business practices.
- Putnam Indemnities: MMC retains indemnification obligations related to the sale of Putnam Investments, with a remaining liability of approximately $240 million as of June 30, 2008.
- Alaska Retirement Management Board: A lawsuit alleges professional negligence by Mercer, seeking damages of at least $1.8 billion.
- Forward-Looking Risks: Risks include the impact of catastrophic events on insurance markets, pricing trends, foreign exchange fluctuations, and the outcome of pending legal proceedings.
Investor Verification Checklist
- Goodwill Impairment: Verify the final step-two impairment assessment for the Risk Consulting & Technology segment and potential for further charges.
- Legal Exposure: Monitor the status of the Alaska Retirement Management Board lawsuit and the resolution of the NYAG-related policyholder class actions.
- Segment Margins: Assess the sustainability of operating margins in the Risk and Insurance Services segment given competitive pricing pressures and Guy Carpenter's revenue decline.
- Liquidity Position: Review the trend in operating cash flows and the company's ability to fund debt maturities and dividends without external financing.
- Restructuring Savings: Track the realization of the projected $100 million in annualized cost savings from 2008 restructuring actions.