Marsh & McLennan Companies, Inc. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; comparisons are with Q1 2010 unless otherwise noted. Amounts are in millions of dollars, except per-share figures. The company operates through Risk and Insurance Services (Marsh and Guy Carpenter) and Consulting (Mercer and Oliver Wyman Group); Kroll was sold in August 2010.
Financial performance
| Metric | Q1 2011 | Q1 2010 | Change / context |
|---|---|---|---|
| Revenue | $2,884 | $2,635 | Up 9% reported; up 5% on an underlying basis |
| Operating expenses | $2,412 | $2,210 | Up 9%; underlying expenses increased 4% |
| Operating income | $472 | $425 | Up 11%; operating margin 16.4% vs. 16.1% |
| Income from continuing operations | $319 | $274 | Up 16%; diluted EPS of $0.56 vs. $0.49 |
| Net income attributable to the company | $325 | $248 | Diluted EPS of $0.58 vs. $0.45 |
| Cash used for operations | $376 | $251 | Higher cash use; first-quarter outflows are typically seasonal |
| Cash and cash equivalents | $1,330 | $1,894 at Dec. 31, 2010 | Quarter-end balance decreased $564 |
| Total debt | $3,032 | $3,034 at Dec. 31, 2010 | Short-term debt rose to $261, primarily reflecting reclassification of debt due within a year |
Cash used in investing was $168, including approximately $90 net cash paid for Q1 acquisitions and $67 of capital expenditures. Financing used $128, including $117 of dividends paid. The declared dividend was $0.42 per share, compared with $0.40 a year earlier. Cash less total debt was approximately negative $1,702 at March 31, versus negative $1,140 at year-end; fiduciary cash is not available for corporate use.
Segments and changes versus prior period
- Risk and Insurance Services: Revenue was $1,634, up 10% reported and 4% underlying; operating income was $383 vs. $347, with margin of 23.4% vs. 23.3%. Marsh underlying revenue rose 4%; Guy Carpenter rose 7%. Growth was strong in Asia Pacific and Latin America.
- Consulting: Revenue was $1,261, up 9% reported and 6% underlying; operating income was $128 vs. $116, with margin of 10.2% vs. 10.0%. Mercer underlying revenue rose 5% and Oliver Wyman’s rose 9%. Mercer outsourcing revenue was flat underlying, affected by the loss of a large client following that client’s acquisition.
- Foreign exchange contributed about 1 percentage point and acquisitions net of dispositions about 4 percentage points to consolidated revenue growth. Acquisitions included three in Risk and Insurance Services and one in Consulting; total consideration was $106, including $13 of estimated contingent consideration.
- Operating expenses increased with higher compensation and benefits, including pension costs. The company recorded $4 of restructuring costs in Q1 2011.
Liquidity, debt, and other financial matters
- The company had no borrowings under its $1.0 billion unsecured revolving credit facility at March 31, 2011; the facility includes quarterly-tested coverage and leverage covenants.
- In February, it entered into $250 of interest-rate swaps on notes due 2014, converting the hedged portion from fixed-rate to floating-rate exposure. It reported no hedge ineffectiveness in the period.
- Management said operating cash flow is typically negative in the first quarter, mainly because of incentive-compensation payments. The filing does not provide full-year cash-flow guidance.
- The company expected to contribute approximately $255 to non-U.S. and U.S. non-qualified pension plans during the remainder of 2011, following $65 of contributions in Q1.
- Credit ratings were Baa2 from Moody’s and BBB- from S&P for senior debt; Moody’s outlook was stable and S&P’s was negative.
Taxes, unusual items, risks, and outlook
- The Q1 effective tax rate was 28.6%, including a benefit from settlement of the IRS audit for 2006–2008; excluding that benefit, the company reported 31.6%. Q1 2010’s 27.3% rate included a benefit from releasing international valuation allowances; excluding it, the rate was 30.3%. Management expects tax rates to remain variable.
- Net investment income was $19 vs. $8, primarily reflecting mark-to-market gains on private-equity fund investments in 2011; the prior-year amount primarily reflected realized securities gains.
- Discontinued operations contributed $12 after tax in Q1 2011, versus a $22 loss in Q1 2010. The 2011 tax credit primarily reflected a recovery under the Putnam sale indemnity; the prior-year period included the KLS disposal loss and related tax expense.
- Material exposures include professional errors-and-omissions claims, particularly involving Marsh and Mercer; some potential losses cannot currently be reasonably estimated. The company warns that adverse outcomes in pending matters could materially affect future results, financial position, or cash flows. Matters include remaining policyholder lawsuits related to Marsh’s historical market-service agreements, a Putnam-related investor action, and limited Kroll-related indemnity obligations.
- Other stated risks include client retention and competition, acquisitions and integration, pension funding, foreign exchange, tax and regulatory changes, financing ratings, and business continuity. The filing gives no specific earnings or revenue guidance.
Important facts for investors to verify
- Whether underlying revenue growth and segment margins continue, and how much growth depends on acquisitions or currency effects.
- Whether cash conversion improves after the seasonally heavy first quarter, given cash declined by $564 and operating cash use increased year over year.
- The effect of upcoming debt maturities, the negative S&P outlook, and the company’s ability to maintain credit-facility covenants.
- Future tax rates after the IRS settlement benefit, and potential changes in unrecognized tax benefits, reported at $145 at quarter-end.
- Developments in errors-and-omissions claims, indemnities, pension funding, and other contingencies for which the filing cannot estimate a possible loss range.