Marsh & McLennan Companies, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. The company is a global professional services firm operating through Risk and Insurance Services (Marsh and Guy Carpenter) and Consulting (Mercer and Oliver Wyman Group). Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $2,845 | $2,806 | $8,922 | $8,618 |
| Operating income | $378 | $310 | $1,423 | $1,247 |
| Income from continuing operations | $246 | $133 | $939 | $738 |
| Net income attributable to company | $241 | $130 | $917 | $737 |
| Diluted EPS, continuing operations | $0.43 | $0.23 | $1.66 | $1.30 |
| Operating margin | 13.3% | 11.0% | 16.0% | 14.5% |
- Q3 revenue rose 1% reported and 3% on an underlying basis; nine-month revenue rose 4% reported and 5% underlying. Foreign currency reduced reported growth in both periods.
- Q3 operating income increased 22%. Risk and Insurance Services operating income was $234 million, up from $186 million, with a 15.5% margin versus 12.6%; Consulting was $193 million, up from $161 million, with a 14.3% margin versus 12.0%.
- Nine-month operating income increased about 14%. Risk and Insurance Services earned $1,052 million (21.2% margin) and Consulting $524 million (13.1% margin). Corporate and other costs rose to $153 million from $119 million for the nine months.
- Q3 net income included $1 million from discontinued operations; nine-month discontinued operations were a $1 million loss. Q3 diluted EPS from continuing operations was $0.43, while diluted EPS attributable to the company was $0.44.
Cash flow, balance sheet and capital
- Nine-month operating cash flow was $750 million, down from $995 million. Investing used $369 million, including $249 million of capital expenditures and $153 million of acquisition-related cash outflow. Financing used $524 million, including $369 million of dividends and $180 million of share repurchases.
- Cash and cash equivalents were $2.044 billion at September 30, 2012, compared with $2.113 billion at year-end 2011. Fiduciary cash and investments are segregated, are offset by fiduciary liabilities, and are unavailable for corporate use.
- Total debt was approximately $2.919 billion, including $259 million current and $2.660 billion long-term; cash exceeded debt by about $875 million. The $1.0 billion revolving credit facility had no borrowings outstanding. The company reported stable outlooks and senior debt ratings of Baa2 from Moody’s and BBB from S&P.
- Current assets were $5.651 billion and current liabilities $3.506 billion. Pension and related benefit liabilities were $1.594 billion. Total equity was $6.580 billion.
- During the first nine months, the company paid $0.67 per share in dividends and repurchased 5.4 million shares for $180 million. Approximately $373 million remained authorized for repurchases.
Changes, outlook and notable items
- Underlying Q3 growth was broad-based: Marsh grew 4%, Mercer 3%, and Oliver Wyman 3%; Guy Carpenter grew 1%. For the first nine months, underlying growth was 6% in Risk and Insurance Services and 4% in Consulting.
- Management attributed expense pressures to higher incentive compensation and benefits costs, partly offset by foreign-exchange effects and credits from lower estimated acquisition contingent consideration. A $32 million reduction in the contingent-consideration liability benefited results; the filing describes the adjustment as based on updated projections.
- The company recorded an $8 million intangible-asset impairment in Risk and Insurance Services and a $4 million Q3 investment loss, including impairment of a debt security. Q3 tax rate was 26.8%, down from 32.8%, reflecting tax benefits including expired statutes of limitations and a favorable contingent-consideration tax adjustment; the nine-month rates were 29.2% and 30.4%.
- The company made ten acquisitions in the first nine months, with total consideration of $205 million, and disclosed two subsequent acquisitions for approximately $60 million. 2012 acquisitions contributed approximately $31 million of Q3 revenue and $6 million of net operating income.
- No formal revenue, earnings or EPS guidance is provided in the supplied filing text. Management expected approximately $90 million of additional non-U.S. pension contributions for the remainder of 2012 and stated it did not expect contributions to the U.S. tax-qualified plan through 2014, reflecting prior discretionary contributions and pension-funding legislation.
- Key risks include errors-and-omissions claims, litigation and regulatory matters, pension funding, economic and currency conditions, client and employee retention, acquisitions, taxes, data security and compliance. The company could not reasonably estimate the possible loss range for the described developing claims; adverse outcomes could materially affect future results. Five policyholder actions related to prior market-service-agreement allegations remained pending.
- Management estimated that a 10% move in major currencies against the U.S. dollar could change full-year operating income by approximately $50 million. A 10% change in short-term rates (10 basis points, as stated in the filing) was estimated to change annual interest income by approximately $1 million.
Important facts for investors to verify
- Whether underlying revenue growth and improved segment margins continue, particularly given currency headwinds and Guy Carpenter’s moderating pricing environment.
- How much of operating-income improvement reflects recurring performance versus the $32 million contingent-consideration credit and lower prior-period comparison items.
- Cash conversion and working-capital trends, pension contributions, and the company’s ability to sustain dividends and repurchases while funding acquisitions and capital spending.
- Developments in errors-and-omissions claims and other litigation, tax audits and uncertain tax benefits, pension funding, and the contingent liabilities and guarantees described in the filing.