Business context and reporting period
Marsh & McLennan Companies, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2016. The global professional services firm operates through Risk and Insurance Services (Marsh and Guy Carpenter) and Consulting (Mercer and Oliver Wyman Group). Unless stated otherwise, amounts are in millions of dollars.
Financial performance
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Revenue | $3,376 | $3,225 | $6,712 | $6,440 |
| Operating income | $726 | $629 | $1,459 | $1,364 |
| Income from continuing operations | $480 | $429 | $970 | $927 |
| Net income attributable to the Company | $472 | $419 | $953 | $901 |
| Diluted EPS | $0.90 | $0.77 | $1.81 | $1.66 |
- Q2 revenue rose 5% reported and 3% on an underlying basis; first-half revenue rose 4% on both measures. Foreign exchange reduced reported growth in both periods.
- Q2 operating income increased 16%; management attributed this mainly to revenue growth, partly offset by higher expenses. First-half operating income increased 7%.
- Q2 Risk and Insurance Services operating income was $490 (margin 26.6%, versus 24.4%); Consulting operating income was $285 (margin 18.5%, versus 16.7%). First-half segment margins were 27.6% and 17.6%, respectively.
- Effective tax rate was 29.5% in Q2 versus 27.9%; first-half rate was 29.0% versus 28.6%. Higher interest expense and lower investment income partly offset Q2 operating-income growth.
- First-half operating cash flow was $229 versus $112. Capital expenditures were $114, implying cash flow after capital expenditures of $115, compared with negative $64 in the prior-year period.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $974 at June 30, 2016, down from $1,374 at year-end 2015. Current assets were $4,930 and current liabilities $3,504.
- Total short- and long-term debt was $4,757, including $261 current and $4,496 long-term, compared with $4,414 at year-end. The company issued $350 of 3.30% seven-year notes in March. No borrowings were outstanding under its $1.5 billion revolving facility or $150 million uncommitted line.
- Cash used in financing was $376, including $410 of treasury-share purchases and $326 of dividends paid. The company repurchased approximately 7 million shares for $425 and had about $730 remaining under its repurchase authorization.
- Cash used in investing was $190, including $77 for acquisitions. Fiduciary cash and investments of $4,538 are segregated for clients and are not available for corporate use.
- Pension, post-retirement and post-employment benefit liabilities totaled $2,004 on the balance sheet. The company expects remaining 2016 pension contributions of approximately $114.
Changes, outlook and material items
- Revenue growth was broad, though underlying performance varied. In Q2, Risk and Insurance Services underlying revenue grew 2% and Consulting grew 5%. Marsh’s U.S./Canada underlying revenue was flat in the quarter; Guy Carpenter grew 3% underlying.
- Management expects Oliver Wyman underlying revenue to decline in Q3 2016, citing a strong prior-year comparison, particularly in Financial Services, and uncertainty surrounding Brexit. No broader quantified earnings or revenue guidance is provided in the filing.
- Foreign-currency translation reduced equity by $320 in the first half. If June 30 exchange rates remained constant through 2016, management estimated currency translation of foreign earnings would reduce full-year income by approximately $15.
- Marsh India was deconsolidated in Q2 following changes to comply with Indian regulations; the company recognized an approximately $12 pretax gain in revenue and will account for its interest under the equity method.
- Five acquisitions were completed in the first half for total consideration of $105. The filing also reports an $18 net increase in estimated contingent consideration liabilities for prior-period acquisitions.
- Risks include cyber incidents and business continuity, professional liability claims, competition and technology change, economic and political uncertainty including Brexit, foreign exchange and interest-rate movements, pension obligations, tax changes, and legal and regulatory compliance. The company reports ordinary-course litigation and investigations; apart from recorded liabilities, it cannot reasonably estimate possible losses, and adverse outcomes could materially affect future results.
- Other sensitivities and contingencies include a $1.9 billion estimated underfunded-plan pension obligation excluded from contractual-obligation totals, and $70 of unrecognized tax benefits. The company says Alexander Forbes’ market value was below its $235 carrying value ($190 market value) but concluded the investment was not impaired at June 30.
Important facts for investors to verify
- Whether underlying revenue and segment margin growth continue, particularly in U.S./Canada brokerage and Mercer and Oliver Wyman businesses.
- Q3 Oliver Wyman performance and any subsequent business effects from Brexit, currency volatility, or broader economic conditions.
- Cash conversion and working-capital trends, including the timing of accrued compensation payments, dividends, buybacks, and acquisition spending.
- Debt maturities, pension funding needs, and the company’s capacity to sustain repurchases and dividends while maintaining liquidity.
- Developments in litigation, regulatory matters, contingent acquisition consideration, and the valuation of the Alexander Forbes investment.