MARSH & MCLENNAN COMPANIES, INC. quarterly report, Q2 FY2015

Marsh & McLennan Companies, Inc. — Q2 2015 Form 10-Q

Business context and period: Global professional services firm operating through Risk and Insurance Services (Marsh and Guy Carpenter) and Consulting (Mercer and Oliver Wyman). This unaudited report covers the quarter and six months ended June 30, 2015; comparisons are with the same 2014 periods. Amounts are in U.S. dollars and, unless stated otherwise, millions.

Key financial results

Metric	Q2 2015	Q2 2014	Six months 2015	Six months 2014
Revenue	$3,225	$3,300	$6,440	$6,564
Operating income	$629	$647	$1,364	$1,320
Income from continuing operations	$429	$440	$927	$897
Net income attributable to the Company	$419	$431	$901	$874
Diluted EPS, continuing operations	$0.77	$0.78	$1.66	$1.58
Cash provided by operations	Not separately reported	Not separately reported	$106	$258

• Q2 consolidated operating income margin was approximately 19.5%, versus 19.6% a year earlier. Risk and Insurance Services operating margin was 24.4% versus 25.0%; Consulting margin improved to 16.7% from 16.2%.
• At June 30, cash and cash equivalents were $930, down from $1,958 at December 31, 2014. Short- and long-term debt totaled $3,936, versus $3,387 at year-end. The company had $50 of commercial paper outstanding and no borrowings on its $1.2 billion revolving credit facility.
• Total current assets were $5,299 and current liabilities $3,208. Fiduciary assets and liabilities of $4,869 are offset on the balance sheet and fiduciary funds are unavailable for corporate use.
• Six-month investing cash use was $528, including $176 of capital expenditures and $260 for acquisitions. Financing cash use was $488, including $775 of share repurchases and $302 of dividends paid. Cash declined by $1,028 during the six months.

Material changes and drivers

• Reported revenue fell 2% in both Q2 and the first half, but underlying revenue grew 3% and 3%, respectively. Foreign currency translation reduced reported revenue by 7% in each period; acquisitions added 1% in Q2 and 1% in the first half.
• In Q2, underlying revenue grew 2% in Risk and Insurance Services and 4% in Consulting. For the first half, both segments’ reported revenue declined, while underlying revenue grew 2% and 4%, respectively.
• Q2 operating income decreased 3% as lower reported revenue and higher retirement-benefit costs outweighed lower reported expenses. Management cited the stronger U.S. dollar and increased retirement costs as continuing headwinds.
• First-half operating income rose to $1,364 from $1,320, partly reflecting a $125 net credit recognized in Q1 following termination of the U.S. post-65 retiree medical reimbursement plan. This unusual benefit aided the comparison; underlying expenses also rose, chiefly from salaries and retirement costs.
• Average diluted shares declined to 541 million in Q2 from 556 million, supporting per-share results as share repurchases more than offset shares issued under employee plans.

Outlook, risks and unusual items

• No formal revenue or earnings guidance is provided in the supplied filing text. Management estimated that, if June 30 exchange rates persisted through 2015, currency translation would reduce full-year net operating income by approximately $135 versus the prior year. A 10% movement in major currencies in the same direction against the U.S. dollar was estimated to change full-year net operating income by approximately $65.
• The company expects approximately $106 of additional pension contributions in the remainder of 2015: about $12 to U.S. plans and $94 to non-U.S. plans. Pension funding needs may vary with asset performance, discount rates and funded status.
• Management said expected closings of the remaining two Trident III investments in Q3 2015 could lead to recognition of approximately $25–$28 of deferred performance fees.
• First-half operating cash flow was lower than in 2014. The filing identifies working-capital timing, including cash award payments and accrued compensation, as relevant; discontinued-operations indemnification payments related to the Putnam disposition reduced operating cash flow by $82.
• The company completed eight acquisitions in the first half, with total consideration of $331, including $95 of deferred and estimated contingent consideration. The contingent-consideration liability was $244 at June 30; its fair value depends on acquired businesses’ projected revenue and earnings.
• Risks include foreign-exchange movements, pension obligations, client and employee retention, cyber and data security, errors-and-omissions claims, regulatory compliance, acquisition integration, counterparty credit and interest rates. The company disclosed numerous ordinary-course claims and regulatory matters; except where losses are probable and estimable, it could not reasonably estimate a range of potential losses. Adverse outcomes could materially affect a future period.
• Unrecognized tax benefits were $100 at June 30; the company said up to approximately $24 could decrease within twelve months through audit settlements or statute expirations. The filing also identifies potential tax-rate sensitivity to earnings mix and future U.S. tax-law changes.

Important facts for investors to verify

1. How much reported revenue and earnings growth is obscured by currency effects, and whether underlying growth continues across regions and businesses.
2. Whether operating cash generation recovers after the first-half decline and the $82 Putnam-related operating cash outflow.
3. Debt, cash balances, repurchase pace and dividend commitments, particularly given $775 of first-half buybacks and the $1.8 billion remaining repurchase authorization.
4. The sustainability of earnings excluding the $125 pension-plan termination credit, and future pension contributions and funded-status changes.
5. Updates on contingent acquisition payments, Trident III fee realization, tax matters and material litigation or regulatory contingencies.