Business context and reporting period
Marsh & McLennan Companies, Inc. (MMC) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2014. MMC is a global professional services firm operating through Risk and Insurance Services (Marsh and Guy Carpenter) and Consulting (Mercer and Oliver Wyman Group).
Financial performance and position
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $3.300B | $3.088B | $6.564B | $6.214B |
| Operating income | $647M | $577M | $1.320B | $1.184B |
| Income from continuing operations | $440M | $400M | $897M | $812M |
| Net income attributable to MMC | $431M | $388M | $874M | $801M |
| Diluted EPS, continuing operations | $0.78 | $0.70 | $1.58 | $1.42 |
| Diluted EPS, attributable net income | $0.77 | $0.69 | $1.57 | $1.44 |
- Q2 operating margin was approximately 19.6%, versus 18.7% a year earlier; first-half margin was approximately 20.1%, versus 19.1%.
- Q2 revenue increased 7% reported and 5% underlying; first-half revenue rose 6% reported and 4% underlying. Q2 segment operating income was $448M for Risk and Insurance Services and $247M for Consulting. Consulting benefited from 17% underlying growth at Oliver Wyman; Mercer underlying revenue grew 2%.
- For the six months, operating cash flow was $258M, compared with cash used of $163M in 2013. Capital expenditures were $202M. Cash and cash equivalents ended at $2.005B, down from $2.303B at year-end 2013.
- At June 30, total debt was approximately $3.545B ($333M short-term and $3.212B long-term), versus $2.955B at December 31, 2013. Cash less reported debt was approximately $1.540B. A $600M, 3.50% 10-year note issuance contributed to the increase; the $320M notes due in July 2014 were subsequently repaid.
- Total current assets were $6.414B and current liabilities $3.530B. Fiduciary assets and liabilities of $5.237B are offset on the balance sheet and are not available for corporate use.
Material changes versus prior periods
- Q2 operating income rose 12%, while net income attributable to MMC increased 11%. Management attributed improved continuing-operations income principally to higher operating income and a lower effective tax rate, partly offset by lower investment income.
- First-half Consulting operating income increased to $472M from $392M; Risk and Insurance Services increased to $941M from $889M. Q2 segment margins were 16.2% for Consulting (14.5% prior year) and 25.0% for Risk and Insurance Services (24.9%).
- MMC completed nine acquisitions in the first half, with total consideration of $534M, including $394M cash and $140M deferred or estimated contingent consideration. Acquisition cash outflow was $383M, compared with $91M in the first half of 2013.
- Share repurchases were $350M and dividends paid were $275M in the first half. The board authorized repurchases up to $2B; approximately $1.8B remained authorized at June 30.
- Operating cash flow improved year over year partly because pension contributions were substantially lower: $106M in the first half of 2014 versus $473M in 2013, which included a $250M U.K. prefunding contribution and a $70M discretionary Canadian contribution.
Outlook, management commentary, risks and unusual items
- The filing provides no consolidated revenue or earnings guidance. Management expected to recognize approximately $25M of deferred Trident III performance fees in Q3 2014; timing of the remaining deferred fees, approximately $37M at June 30, was uncertain and outside MMC’s control.
- Mercer agreed to acquire a 34% stake in Alexander Forbes for approximately $312M. MMC purchased 14.9% for approximately $140M in July; the remaining 19.1% was expected by early October, subject to regulatory approval. The investment is to be accounted for under the equity method.
- MMC recognized a $65M first-quarter U.K. pension curtailment gain, largely offset by transition-benefit costs. The U.K. defined benefit plans were scheduled to close to future accruals on August 1, 2014. The remeasurement increased the projected benefit obligation by approximately $147M and reduced funded status by approximately $137M.
- Key exposures include errors-and-omissions claims, regulatory and legal proceedings, pension funding, foreign exchange, interest rates, counterparty credit, cybersecurity and data protection, competition, acquisition integration, and tax-law changes. The company stated it could not reasonably estimate possible losses for certain developing contingencies; adverse outcomes could materially affect future results, financial condition or cash flows.
- Management estimated that a 10% move in major currencies against the U.S. dollar, held constant for a year, could change full-year net operating income by approximately $50M. The filing also estimated a $2M annual interest-income sensitivity to an 8-basis-point change in short-term rates.
- Other notable items: the effective tax rate was 27.6% in Q2 versus 28.9% prior year; gross unrecognized tax benefits were $105M at June 30. The $1.2B revolving credit facility had no borrowings outstanding, and debt ratings were Baa1 (Moody’s) and A- (S&P), both with stable outlooks.
Important facts for investors to verify
- Whether underlying growth and margin improvement continue, particularly at Oliver Wyman and across Mercer’s businesses.
- Actual costs, integration progress and returns from the nine acquisitions, and completion and accounting treatment of the Alexander Forbes investment.
- Cash conversion and liquidity trends, including the effects of working capital, pension contributions, buybacks, dividends and debt maturities.
- Developments in pension funding and the impact of the U.K. plan changes and future contribution requirements.
- Resolution and potential financial exposure from legal, regulatory, tax and errors-and-omissions matters, for which possible loss ranges were not provided.