Business context and reporting period
Marsh & McLennan Companies, Inc. (MMC) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2017. MMC is a global professional services firm operating through Risk and Insurance Services (Marsh and Guy Carpenter) and Consulting (Mercer and Oliver Wyman Group), with more than 60,000 employees and operations in over 130 countries.
Financial performance
Amounts are in millions of dollars, except per-share data and percentages.
| Metric | Q2 2017 | Q2 2016 | H1 2017 | H1 2016 |
|---|---|---|---|---|
| Revenue | $3,495 | $3,376 | $6,998 | $6,712 |
| Operating income | $764 | $726 | $1,573 | $1,459 |
| Operating margin | 21.9% | 21.5% | 22.5% | 21.7% |
| Net income attributable to MMC | $501 | $472 | $1,070 | $953 |
| Diluted EPS | $0.96 | $0.90 | $2.05 | $1.81 |
| Operating cash flow | Not provided by quarter | $343 | $229 |
- Q2 revenue rose 4% reported and 3% underlying; operating income increased 5%. H1 revenue rose 4% reported and 3% underlying; operating income increased 8%.
- Q2 Risk and Insurance Services revenue grew 4% (2% underlying) and operating income rose to $528 from $490; segment margin was 27.5% versus 26.6%. Consulting revenue grew 3% (4% underlying), while operating income was $283 versus $285; margin was 17.8% versus 18.5%.
- H1 Risk and Insurance Services revenue was $3,905 and operating income $1,141; Consulting revenue was $3,118 and operating income $524.
- H1 diluted EPS growth reflected higher earnings and fewer diluted shares, as well as a $48 tax benefit from adopting share-based compensation accounting. Excluding that tax benefit, the H1 effective tax rate was 29.1%, versus 29.0% in H1 2016.
Cash, debt and liquidity
- Cash and cash equivalents were $966 at June 30, 2017, down $60 from year-end 2016. H1 operating cash flow of $343 less capital expenditures of $144 implies approximate free cash flow of $199; this is a derived, non-GAAP measure.
- Cash used in investing was $538, including $412 net cash paid for acquisitions, versus $190 used in H1 2016. Financing provided $16, compared with $376 used in the prior-year period. MMC paid $351 in dividends and repurchased $400 of shares during H1.
- Short- and long-term debt totaled $5,641, up from $4,807 at December 31, 2016; cash-adjusted debt was approximately $4,675. Long-term debt was $5,479. MMC had $150 of commercial paper outstanding and no borrowings under its $1.5 billion revolving credit facility, which expires in November 2020.
- Fiduciary cash and investments are held for clients and are unavailable for corporate use. The company reported $5,039 of fiduciary liabilities, offset by the same amount of fiduciary assets.
Material changes, outlook and risks
- MMC completed five Risk and Insurance Services acquisitions in H1, with total purchase consideration of $510; acquired entities contributed $63 of H1 revenue and $15 of operating income. Goodwill increased to $8,821, primarily reflecting acquisitions and foreign exchange.
- Interest expense increased to $60 in Q2 from $48 and to $118 in H1 from $94, mainly due to higher average debt. In January, MMC issued $1 billion of senior notes, including $500 million due 2022 and $500 million due 2047.
- Management provided no specific earnings or revenue guidance in this filing. It expects to contribute approximately $136 to pension plans during the remainder of 2017. The 2018 revenue-recognition standard is expected to significantly change quarterly revenue timing in reinsurance broking, including accelerated recognition; the annual revenue impact was not fully quantified.
- Regulatory matters include the U.K. FCA investigation into possible sharing of competitively sensitive information in aviation insurance and reinsurance broking, and July 2017 inspections in Dublin related to potential anti-competitive practices in commercial motor insurance. MMC is cooperating; timing, outcome and financial impact cannot be predicted. The FCA was also considering referral of the U.K. investment consulting industry to the CMA.
- Other key exposures include professional errors-and-omissions claims, pension funding and market assumptions, foreign-exchange movements, cybersecurity, regulatory compliance, and acquisition-related contingent consideration. The filing states that possible losses for developing legal and regulatory matters generally cannot be reasonably estimated.
Most important facts for investors to verify
- Whether underlying revenue growth and Consulting profitability improve, particularly in Mercer’s Defined Benefit Consulting & Administration business.
- The ultimate outcome and potential financial consequences of the U.K. and Irish competition investigations and other contingent claims.
- Debt growth, refinancing and interest costs, alongside cash generation after acquisitions, dividends and share repurchases.
- The durability of earnings growth after accounting for the $48 share-based compensation tax benefit.
- The quantified effects of the 2018 revenue-recognition change and future pension contributions and funding requirements.