Marsh & McLennan Companies, Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. The company is a global professional services firm operating through Risk and Insurance Services (Marsh and Guy Carpenter) and Consulting (Mercer and Oliver Wyman Group).
Key financial results
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $3.115bn | $3.141bn | $9.555bn | $9.705bn |
| Operating income | $461m | $445m | $1.825bn | $1.765bn |
| Operating margin | 14.8% | 14.2% | 19.1% | 18.2% |
| Income from continuing operations | $329m | $305m | $1.256bn | $1.202bn |
| Net income attributable to the company | $323m | $297m | $1.224bn | $1.171bn |
| Diluted EPS, continuing operations | $0.60 | $0.54 | $2.27 | $2.12 |
| Cash from operations | — | — | $980m | $1.141bn |
- Q3 revenue declined 1% as reported, but underlying revenue grew 4%; a 7% foreign-exchange headwind was partly offset by 2% growth from acquisitions. Nine-month underlying revenue grew 3% despite a 2% reported decline.
- Q3 operating income increased 4% as expenses fell 2%. Nine-month operating income rose 3%. Q3 segment operating margins were 14.2% for Risk and Insurance Services and 18.5% for Consulting; nine-month margins were 23.1% and 17.6%, respectively.
- At September 30, cash and cash equivalents were $1.330bn, down from $1.958bn at year-end 2014. Current assets were $5.526bn and current liabilities $3.404bn. Fiduciary funds are segregated and unavailable for corporate use.
- Total short- and long-term debt was $4.484bn, versus $3.387bn at December 31, 2014. The company issued $500m of 2.35% five-year notes in March and $600m of 3.75% 10.5-year notes in September. Its $1.2bn revolving credit facility had no borrowings outstanding.
- Nine-month investing cash outflow was $743m, including $431m net cash used for acquisitions and $249m for capital expenditures. Financing cash outflow was $630m, including $1.325bn of share repurchases and $468m of dividends paid.
Material changes and unusual items
- Foreign currency translation reduced reported revenue by 7% in both Q3 and the nine-month period. Management cited the stronger U.S. dollar and higher retirement benefit costs as headwinds.
- Nine-month results included an approximately $125m net benefit from terminating the U.S. post-65 retiree medical reimbursement plan. This benefited operating expenses and makes comparisons less representative of underlying performance.
- Q3 investment income was $34m, primarily reflecting recognition of remaining deferred performance fees after Trident III’s final investments were harvested.
- The company repurchased approximately 23.4m shares for $1.3bn in the first nine months; about $1.2bn remained authorized at September 30. The nine-month dividend declared was $1.18 per share.
- Sixteen acquisitions were completed in the first nine months for total consideration of $602m. The proposed approximately $400m cash acquisition of U.K. broker Jelf was expected to close in Q4, subject to customary conditions and approvals.
Outlook, risks and contingencies
- No formal revenue or earnings guidance is provided in the filing. Management estimated that, if September 30 exchange rates persisted, currency translation would reduce full-year 2015 net operating income by approximately $140m year over year. It also expected full-year pension-cost increases to be lower than the $115m previously disclosed, with foreign exchange expected to offset much of that improvement.
- Management estimated that a 10% move in major currencies against the U.S. dollar would change full-year net operating income by approximately $60m versus the prior year. Non-U.S. operations account for about 55% of revenue.
- Defined-benefit pension funding remains a significant obligation: underfunded-plan net liabilities were approximately $1.9bn, excluded from the contractual-obligations table. The company expected additional contributions of about $59m in the remainder of 2015.
- The company faces ordinary-course errors-and-omissions claims, lawsuits and regulatory inquiries. It records a liability when loss is probable and reasonably estimable, but could not estimate a range of possible losses for other matters; adverse outcomes could materially affect future results, financial condition or cash flows.
- Other stated risks include cybersecurity and confidential-data protection, competition, foreign exchange, pension assumptions and funding, client and employee retention, acquisitions and integration, regulatory compliance, tax changes, counterparty credit and business continuity. The company reported effective disclosure controls and no material change in internal control during the quarter.
Important facts for investors to verify
- Underlying revenue and operating performance by segment, separating organic growth from currency and acquisition effects.
- The sustainability of earnings excluding the $125m pension-plan termination benefit and Q3 Trident III performance-fee recognition.
- Cash conversion and liquidity, including the impact of buybacks, dividends, acquisitions and future pension contributions.
- Debt maturities, interest costs and remaining share-repurchase authorization, as well as the funding and closing status of the Jelf acquisition.
- Developments in pension funding, contingent acquisition consideration and legal or regulatory matters for which potential losses are not currently estimable.