Marsh & McLennan Companies, Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. The company is a global professional-services firm operating through Risk and Insurance Services (Marsh and Guy Carpenter) and Consulting (Mercer and Oliver Wyman). Amounts below are in millions of dollars, except per-share data.
Key financial results
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $2,806 | $2,524 | $8,618 | $7,765 |
| Operating income | $310 | $239 | $1,247 | $614 |
| Income from continuing operations | $133 | $128 | $738 | $373 |
| Net income attributable to the Company | $130 | $168 | $737 | $652 |
| Diluted EPS, continuing operations | $0.23 | $0.22 | $1.30 | $0.65 |
| Diluted EPS, attributable net income | $0.24 | $0.30 | $1.33 | $1.18 |
- Q3 revenue increased 11% year over year, or 5% on an underlying basis excluding currency and acquisition/disposition effects. Nine-month revenue also rose 11%, or 5% underlying.
- Q3 operating income rose 30%; implied operating margin was approximately 11.0%, versus 9.5% a year earlier. Nine-month operating income more than doubled, but the 2010 comparison included a $400 million charge for the Alaska Retirement Management Board settlement. Excluding that charge, nine-month operating income increased 23%.
- Q3 net income declined despite higher continuing-operations income, primarily because Q3 2010 included $43 million of discontinued-operations income versus $2 million in Q3 2011, and Q3 2011 included a $72 million debt-extinguishment charge. Nine-month 2010 net income also benefited from $292 million of discontinued-operations income, principally Kroll-related sale and tax effects.
- Q3 segment results: Risk and Insurance Services revenue was $1,475 million and operating income $186 million (12.6% margin); Consulting revenue was $1,339 million and operating income $161 million (12.0% margin). Underlying revenue growth was 5% and 6%, respectively.
Cash flow, balance sheet and capital
- Cash from operations was $995 million for the first nine months of 2011, versus $50 million in 2010. The 2011 period included $322 million of U.S. federal tax refunds; the filing says the refunds did not affect income tax expense in the quarter received.
- Investing activities used $273 million, including $205 million of capital expenditures and $134 million of acquisition-related cash outflow. Financing activities used $891 million. Cash declined $180 million to $1,714 million from year-end 2010.
- At September 30, cash was $1,714 million; short-term debt was $260 million and long-term debt $2,670 million, for total debt of $2,930 million and net debt of approximately $1,216 million. Debt figures exclude fiduciary liabilities, which are fully offset by fiduciary assets and unavailable for corporate use.
- Total current assets were $5,030 million and current liabilities $3,384 million. Total equity was $6,465 million. Pension, postretirement and postemployment benefit liabilities were $1,148 million; the contractual-obligations discussion separately identifies $871 million of pension liabilities.
- The company repurchased 12.2 million shares for $361 million in the first nine months, and paid $358 million in dividends. Remaining share-repurchase authorization was approximately $553 million. The declared dividend was $0.86 per share for the nine-month period.
- In July, the company repurchased $600 million of 2014 and 2015 notes, funded with proceeds from a new $500 million, 4.80% ten-year note issue and cash. The resulting $72 million tender-premium and extinguishment charge reduced Q3 earnings. On October 13, 2011, it replaced its existing facility with a new $1.0 billion, five-year unsecured revolving credit facility; no borrowings were outstanding under the prior facility at quarter-end.
Changes, outlook and risks
- Both operating segments grew. Q3 underlying revenue increased 6% at Marsh, 3% at Guy Carpenter, 4% at Mercer and 9% at Oliver Wyman. Management cited particularly strong Marsh growth in Latin America and Asia Pacific and continued growth at Oliver Wyman.
- Operating expenses rose 9% in Q3; management attributed the underlying increase mainly to compensation and benefits, pension costs, consulting costs and asset-based fees, partly offset by lower restructuring costs. Nine-month 2011 restructuring costs were $16 million, compared with $87 million in the comparable 2010 period.
- The company made seven acquisitions in the first nine months of 2011 for total consideration of $132 million. In August, Marsh agreed to acquire Alexander Forbes’ brokerage business in South Africa, subject to regulatory and other approvals, with completion targeted for Q4 2011.
- No specific earnings or revenue guidance is provided in the supplied filing text. Management noted that effective tax rates are expected to remain variable, with variation expected to moderate as certain unusual items decline. Tax rates remain sensitive to geographic earnings mix, repatriation, tax-law changes, audits and uncertain tax positions.
- Key risks include errors-and-omissions claims, regulatory and legal matters, pension funding and asset performance, economic and market conditions, foreign-exchange movements, competition and pricing, acquisitions and integration, retention of clients and employees, and compliance with anti-corruption and other laws. The company says it cannot reasonably estimate possible losses for certain developing contingencies; adverse outcomes could materially affect future results, financial condition or cash flows.
- Market sensitivities disclosed: a 10% change in specified major currencies against the U.S. dollar was estimated to change full-year operating income by approximately $60 million; a 10% change in short-term rates was estimated to change annual interest income, including fiduciary interest, by approximately $2 million.
Most important facts for investors to verify
- Underlying growth and margin trends by segment, including whether reported growth persists after currency and acquisition effects.
- How much operating cash generation is sustainable after the $322 million tax refunds and working-capital movements.
- Debt maturity and refinancing profile, leverage, and compliance with the new revolving-credit facility’s coverage and leverage covenants.
- Potential range and insurance recoverability of errors-and-omissions, litigation, regulatory and indemnity exposures; the filing provides no clear aggregate loss estimate.
- Pension funding needs, tax-rate variability and the timing of possible reductions in unrecognized tax benefits, which could fall by up to approximately $80 million within twelve months.
- Completion and integration of the Alexander Forbes transaction, and the remaining share-repurchase authorization and related capital-allocation plans.