Marsh & McLennan Companies, Inc. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012. Amounts are in U.S. dollars; financial statement figures are in millions except per-share data. The company is a global professional services firm operating through Risk and Insurance Services and Consulting.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $3,026 | $2,928 | $6,077 | $5,812 |
| Operating income | $518 | $465 | $1,045 | $937 |
| Income from continuing operations | $339 | $286 | $693 | $605 |
| Net income attributable to the Company | $329 | $282 | $676 | $607 |
| Diluted EPS attributable to the Company | $0.59 | $0.50 | $1.22 | $1.09 |
| Cash provided by operating activities | — | $66 | $330 |
- Q2 revenue increased 3% reported and 5% underlying; first-half revenue increased 5% reported and 6% underlying. Foreign exchange reduced reported revenue growth.
- Q2 operating margin was approximately 17.1%, versus 15.9% a year earlier; first-half margin was approximately 17.2%, versus 16.1%.
- Q2 Risk and Insurance Services revenue was $1,698 and operating income $401, up from $1,620 and $356. Consulting revenue was $1,341 and operating income $172, versus $1,319 and $152. Segment operating margins improved to 23.6% from 22.0% and 12.8% from 11.5%, respectively.
- Q2 diluted EPS from continuing operations was $0.60, versus $0.50. Investment income was $4 in Q2, compared with a $6 loss a year earlier; first-half investment income was $24 versus $13.
Balance sheet, cash flow and capital
- At June 30, cash and cash equivalents were $1,504, total debt was $2,922 ($259 short-term and $2,663 long-term), and total equity was $6,344. Cash less debt implies net debt of approximately $1,418. The $4,449 of fiduciary cash and investments is restricted for client-related purposes and is not available for general corporate use.
- Current assets were $5,195 and current liabilities $3,170. The $1.0 billion revolving credit facility had no borrowings outstanding.
- First-half operating cash flow fell to $66 from $330, reflecting working-capital movements and $200 of discretionary pension contributions made in Q1. Capital expenditures were $149; operating cash flow less capital expenditures was negative $83, versus positive $188 in the prior-year period. Cash declined $609 during the half-year.
- First-half financing used $360, including $242 of dividends paid and $100 of treasury-share purchases; investing used $284, including $129 for acquisitions. Q2 repurchases totaled 3.1 million shares for $100, with approximately $453 million remaining authorized.
- The company paid $347 in pension contributions during the first half, including discretionary contributions of $100 each to U.S. and U.K. plans. It expected approximately $160 of additional non-U.S. plan contributions and a similar level of non-qualified plan contributions in the remainder of 2012.
Material changes and management commentary
- Growth was broad-based, with Q2 underlying revenue up 6% in Risk and Insurance Services and 4% in Consulting. Marsh reported particularly strong underlying growth in Latin America and Asia Pacific; Oliver Wyman’s underlying revenue rose 8%.
- Operating expenses rose 2% in Q2 and 3% in the first half. Management attributed underlying increases primarily to incentive compensation, benefits, salaries and consulting costs.
- Corporate expense increased to $57 in Q2 from $45, mainly from accelerated amortization of equity awards for retirement-eligible senior executives and higher costs for corporate initiatives.
- The company completed eight acquisitions in the first half. Total consideration for 2012 acquisitions was $183; remaining deferred payments and estimated contingent consideration were also recorded as liabilities.
- No formal earnings or revenue guidance is provided in the supplied filing text. Management noted that, after the U.S. discretionary pension contribution and changes to pension funding rules, it did not expect required contributions to the U.S. tax-qualified plan through 2014.
Risks, contingencies and unusual items
- Foreign-currency translation reduced Q2 other comprehensive income by $177 after tax. Management estimated that a 10% move in major currencies, sustained for a year, could change full-year operating income by approximately $50 in either direction.
- Errors-and-omissions claims, particularly involving Marsh and Mercer in the U.S. and U.K., remain a significant exposure. The balance sheet included $466 of liabilities for errors and omissions. Seven policyholder actions relating to prior market-service-agreement allegations remained pending; the company said it could not reasonably estimate possible losses for certain developing matters, and adverse outcomes could materially affect results or cash flows.
- Gross unrecognized tax benefits were $176 at June 30, up from $143 at year-end. The company said these could decrease by up to approximately $50 within twelve months through audit settlements and expiring statutes.
- Other risks identified include pension funding and plan returns, economic and market conditions including the European debt crisis, interest rates and counterparty credit, foreign exchange, competition, regulatory compliance, cybersecurity and business continuity.
Key facts for investors to verify
- Whether operating cash flow recovers from the first-half decline and how working capital and pension funding affect cash generation.
- Underlying growth and margin trends by segment, including the contribution from acquisitions and the impact of currency movements.
- Future pension contributions, plan funding status and the effect of discount-rate or market changes.
- Developments in E&O claims, pending policyholder litigation and other contingencies for which losses are not currently estimable.
- Tax audit outcomes and changes in unrecognized tax benefits, alongside capital allocation among dividends, repurchases and acquisitions.