Marsh & McLennan Companies, Inc. — Q3 2010 Form 10-Q
Reporting period: Three and nine months ended September 30, 2010. Amounts are in millions of dollars, except per-share data. MMC provides risk and insurance services through Marsh and Guy Carpenter, and consulting through Mercer and Oliver Wyman Group. Kroll was sold on August 3, 2010 and is reported in discontinued operations.
Financial performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Revenue | $2,524 | $2,354 | $7,765 | $7,267 |
| Operating income | $239 | $195 | $614 | $806 |
| Operating margin | 9.5% | 8.3% | 7.9% | 11.1% |
| Income from continuing operations | $128 | $207 | $373 | $536 |
| Net income attributable to MMC | $168 | $221 | $652 | $204 |
| Diluted EPS, continuing operations | $0.22 | $0.38 | $0.65 | $0.98 |
| Diluted EPS, MMC net income | $0.30 | $0.41 | $1.18 | $0.38 |
- Q3 revenue rose 7% year over year, or 4% on an underlying basis; nine-month revenue rose 7%, or 2% underlying. Q3 segment underlying growth was 2% in Risk and Insurance Services and 6% in Consulting.
- Q3 operating income increased 23%, with operating margin improving to 9.5%. Nine-month operating income fell 24%, chiefly reflecting the $400 million net Alaska settlement charge recorded in Consulting.
- Excluding the Alaska settlement charge, management said nine-month operating income would have been approximately $1.0 billion, 26% above the prior year. This is a company-presented adjustment, not reported GAAP operating income.
- Nine-month net income includes $292 million from discontinued operations, versus a $320 million loss in 2009. The 2010 amount includes Kroll and KLS disposal results and a $265 million deferred tax benefit related to the Kroll sale.
Cash flow, liquidity and debt
- Cash from operations was $50 million for the first nine months, down from $405 million a year earlier. Cash used for financing was $931 million; investing provided $817 million, including $1.13 billion from the Kroll sale and $110 million from the KLS disposition.
- Cash and cash equivalents were $1.695 billion at September 30, compared with $1.707 billion at year-end 2009. The company reported $3.028 billion of long-term debt and $9 million of short-term debt, versus $3.034 billion and $558 million, respectively, at year-end.
- MMC repaid $550 million of senior notes that matured during Q3, using proceeds from the Kroll disposition. Management expected interest expense to decrease beginning in Q4.
- No borrowings were outstanding under the $1.0 billion revolving credit facility at quarter-end. The facility has quarterly coverage and leverage tests. MMC reported senior ratings of Baa2 from Moody’s and BBB- from S&P; S&P’s outlook was negative and Moody’s outlook stable.
- Nine-month dividends paid were $333 million. The board authorized a $500 million share repurchase program in September; no shares were repurchased during Q3.
Material changes, outlook and risks
- MMC paid $500 million to settle the Alaska Retirement Management Board matter; $100 million was covered by insurance. The settlement resolved related claims against Mercer and reduced nine-month earnings by approximately $0.44 per share after tax. The filing also reports a $160 million tax benefit related to the settlement.
- MMC recorded $61 million of restructuring costs for actions initiated in 2010, including acquisition-related cost reductions, and $26 million for earlier actions. The new actions eliminated approximately 510 positions; management expected annualized savings of about $55 million.
- MMC completed six 2010 acquisitions for total consideration of $530 million, including cash, shares and contingent consideration. Acquired goodwill was $346 million. The company’s third-quarter annual goodwill review found no impairment.
- Management cited continued soft commercial property-casualty pricing and reduced industry premium volumes. It also noted lower fiduciary interest income, which declined 13% in Q3, largely due to lower interest rates.
- The filing gives no broad earnings or revenue forecast. It expected approximately $75 million of additional pension contributions in the remainder of 2010, bringing expected full-year contributions to about $450 million.
- Material risks include errors-and-omissions claims, regulatory and legal matters, pension funding needs, foreign-exchange and investment exposure, client retention, competition, and potential rating downgrades. Several claims remain unresolved and the company said it could not reasonably estimate possible losses for many matters; adverse outcomes could materially affect results, financial position or cash flows.
Important facts for investors to verify
- Reconcile reported nine-month earnings with the $400 million Alaska settlement charge and the tax benefits attributed to the settlement and Kroll disposition.
- Assess the quality and sustainability of the $50 million operating cash flow, including working-capital movements, settlement payments and pension contributions.
- Track underlying revenue trends by segment, especially Mercer retirement consulting and insurance-market pricing, separately from acquisitions and currency effects.
- Monitor the realization of the projected $55 million annual restructuring savings, acquisition integration, and contingent and deferred acquisition payments.
- Review developments in E&O claims, regulatory matters, the Alaska settlement implications, pension funding and credit-rating outlooks.