Marsh & McLennan Companies, Inc. — Q1 2010 Form 10-Q
Reporting period: Three months ended March 31, 2010; comparisons are with Q1 2009 unless otherwise noted. Amounts are in millions of dollars except per-share data. MMC is a global professional services firm operating in Risk and Insurance Services, Consulting, and Risk Consulting & Technology.
Financial results and liquidity
| Metric | Q1 2010 | Q1 2009 | Change / context |
|---|---|---|---|
| Revenue | $2,795 | $2,609 | Up 7%; flat on an underlying basis |
| Operating income | $439 | $324 | Up 35%; operating margin 15.7% vs. 12.4% |
| Income from continuing operations | $274 | $179 | Up 53% |
| Net income attributable to MMC | $248 | $176 | Up 41%; includes a $22 net discontinued-operations loss in 2010 |
| Diluted EPS | $0.49 continuing; $0.45 net income | $0.33 | 2010 continuing-operations EPS was $0.49; net-income EPS was $0.45 |
| Operating cash flow | $(251) | $(450) | Cash use narrowed; Q1 cash flows are typically negative due to incentive-compensation payments |
| Investing cash flow | $(142) | $(62) | Includes acquisition spending, partly offset by disposition proceeds |
| Financing cash flow | $(156) | $260 | Prior-year period included debt issuance |
Compensation and benefits expense was $1,650 (up from $1,571); other operating expense was $706 (down from $714). The effective tax rate was 29.9%, versus 30.9%.
Segment performance: Risk and Insurance Services revenue was $1,492, operating income $347 and margin 23.3% (prior year $1,372, $297 and 21.6%). Consulting revenue was $1,155, operating income $116 and margin 10.0% (prior year $1,083, $73 and 6.7%). Risk Consulting & Technology revenue was $162, operating income $16 and margin 9.9% (prior year $167, $4 and 2.4%).
At March 31, cash and cash equivalents were $1,167, down from $1,777 at year-end 2009. Current assets were $4,592 and current liabilities $3,174. Short-term debt was $558 and long-term debt $3,032, approximately $3.59 billion combined. Stockholders’ equity was $6,014. MMC had no borrowings on its $1.0 billion revolving credit facility. Senior debt was rated Baa2 by Moody’s and BBB- by S&P, both with stable outlooks.
Material changes versus prior period
- Revenue growth reflected currency effects and acquisitions; underlying revenue was flat overall. Risk and Insurance Services was flat underlying, Consulting grew 1%, and Risk Consulting & Technology declined 2%.
- Operating income increased by $115, with segment gains and lower restructuring and related charges contributing. Underlying operating expenses declined 4%, while reported expenses rose 3%, mainly due to foreign exchange and acquisitions.
- Investment income was $8 versus a $15 loss, principally reflecting realized securities gains in 2010 compared with private-equity mark-to-market losses in 2009.
- Discontinued operations were a $22 net loss versus $1 of income, including a $22 after-tax disposal loss related to Kroll Laboratory Specialists (KLS).
- Q1 2010 acquisition consideration for Haake and Thomas Rutherfoord totaled $253, including $178 in shares and $55 of estimated contingent consideration. MMC also paid $194 into escrow for HSBC Insurance Brokers, acquired April 1; Marsh acquired the Bostonian Group on April 30. The filing reports approximately $230 paid for the HSBC and Bostonian acquisitions.
Outlook, management commentary, risks and unusual items
- The filing provides no numerical revenue or earnings guidance. Management said the effective tax rate is expected to remain variable in the short term and then moderate; it is sensitive to earnings mix, tax matters, and potential tax-law changes.
- Management described continued soft commercial property-casualty insurance conditions and downward pressure on premium rates. Mercer’s underlying revenue declined 1%, while Oliver Wyman’s grew 6% underlying, led by financial services. Kroll’s underlying revenue fell 2%.
- The Alaska Retirement Management Board lawsuit against Mercer was scheduled for trial in July 2010. The amended complaint seeks at least $2.8 billion, plus treble and punitive damages and other relief. MMC stated it had not recorded a liability beyond legal defense fees because loss was not then both probable and reasonably estimable; available third-party insurance for this claim was limited.
- Other exposures include a Connecticut action against Guy Carpenter, errors-and-omissions claims, remaining brokerage-compensation-related litigation, and Putnam-related matters. MMC said it generally could not estimate possible losses for these matters; adverse outcomes, particularly the Alaska case, could materially affect future results, financial condition or cash flows.
- MMC recorded $9 of restructuring costs in Q1 and had $215 of remaining restructuring liabilities at March 31, primarily future severance and lease obligations. Pension-related liabilities included $914 excluded from the contractual-obligations schedule; MMC expected approximately $216 of contributions for the remainder of 2010 to specified non-U.S. and U.S. non-qualified plans.
- Contractual obligations totaled $8,178, including debt, interest, operating leases and service agreements. The schedule excludes certain tax, guarantee and pension liabilities. The company identified currency, interest-rate, investment-value, client-retention, employee-retention, regulatory and economic risks.
- Disclosure controls were reported effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether underlying revenue and segment profitability improve, particularly in Marsh, Mercer and Kroll, amid soft insurance pricing and uneven consulting demand.
- Developments and potential financial exposure in the Alaska Mercer litigation, including trial outcomes, possible damages and insurance coverage.
- Cash conversion, working-capital seasonality, acquisition-related payments and the effect of the HSBC and Bostonian acquisitions on debt and liquidity.
- Debt maturities, credit ratings and compliance with the revolving facility’s leverage and coverage covenants.
- Changes in pension funding requirements, uncertain tax benefits and the effective tax rate.
- Reported EPS and segment figures against the primary financial statements and notes; the MD&A summary contains an apparent EPS labeling inconsistency, so the statement-of-income figures are used above.