Marsh & McLennan Companies, Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. Amounts are in millions of dollars, except per-share data. MMC is a global professional services firm with two segments: Risk and Insurance Services (Marsh and Guy Carpenter) and Consulting (Mercer and Oliver Wyman Group). Kroll was sold in August 2010; its comparative 2010 results are reported in discontinued operations.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $2,928 | $2,606 | $5,812 | $5,241 |
| Operating income (loss) | $465 | $(50) | $937 | $375 |
| Continuing-operations income (loss) | $286 | $(29) | $605 | $245 |
| Net income attributable to MMC | $282 | $236 | $607 | $484 |
| Diluted EPS, continuing operations | $0.50 | $(0.06) | $1.06 | $0.43 |
| Diluted EPS, MMC net income | $0.50 | $0.43 | $1.09 | $0.88 |
- Q2 revenue increased 12%; underlying revenue growth was 5%. For the first half, revenue increased 11%, with 5% underlying growth. Underlying growth excludes foreign-exchange and acquisition/disposition impacts.
- Q2 consolidated operating margin was approximately 15.9%; first-half margin was approximately 16.1%. Q2 2010 included a $400 million Mercer charge tied to settlement of Alaska Retirement Management Board litigation. Excluding that charge, Q2 2010 operating income was $350 million; Q2 2011 was $115 million higher.
- Q2 Risk and Insurance Services revenue was $1,620 and operating income $356 (22.0% margin), versus $1,459 and $258 (17.7%). Consulting revenue was $1,319 and operating income $152 (11.5% margin), versus $1,168 and a $275 operating loss, which included the Alaska settlement charge.
- Q2 underlying revenue grew 5% in both segments. Within Consulting, underlying growth was 4% at Mercer and 8% at Oliver Wyman. First-half underlying growth was 5% in Risk and Insurance Services and 6% in Consulting.
- Q2 operating expenses were 7% lower year over year because the 2010 comparison included the $400 million settlement charge. Excluding it, expenses rose 9%, reflecting 2% underlying growth, 5% currency impact, and 2% acquisition impact. Higher compensation, pension, consulting, and asset-based costs contributed.
- Q2 investment loss was $6, compared with income of $18 in 2010, mainly reflecting private-equity mark-to-market losses and a cost-basis investment impairment. First-half investment income was $13, down from $26.
Cash flow, liquidity, and capital
- First-half operating cash flow was $330, compared with $272 in 2010. Investing used $221 and financing used $471; cash declined $235 to $1,659.
- Cash and cash equivalents were $1,659 at June 30, 2011, versus $1,894 at December 31, 2010. Current assets were $5,186 and current liabilities $3,242.
- Total short- and long-term debt was $3,033 at June 30, compared with $3,034 at year-end; $260 was classified as current. Long-term debt carrying value was $2,773. No borrowings were outstanding under the $1.0 billion revolving credit facility.
- MMC paid $235 in dividends and repurchased 7.8 million shares for approximately $235 during the first half. The quarterly dividend declared was $0.64 per share; cash dividends paid in the first half were $0.42 per share. Approximately $179 remained authorized for repurchases.
- Capital expenditures were $142; cash paid for acquisitions, net of cash acquired, was approximately $98. The company received $322 in U.S. federal tax refunds during Q2, including $110 related to settlement of the 2006–2008 IRS audit.
Material changes, outlook, and risks
- Management reported broad-based revenue growth, including strong Marsh growth in Latin America, continued Guy Carpenter new-business growth and client retention, and strength in Mercer health and benefits, rewards/talent, and investment consulting. Mercer retirement and U.S. outsourcing were weaker areas.
- The filing provides no formal numerical earnings or revenue guidance. Management noted that effective tax rates are expected to remain significantly variable, though variation may moderate; the rate is sensitive to geographic earnings mix, repatriation, tax audits, and tax-law changes.
- On July 15, 2011, after quarter-end, MMC purchased $600 million of 2014 and 2015 notes, funded by a $500 million, 10-year note issuance at 4.80% and cash on hand. It expects to record an approximately $73 million debt-extinguishment charge in Q3.
- MMC contributed $170 million to U.S. non-qualified and non-U.S. pension plans in the first half and expected to contribute approximately $150 million more during 2011. Pension costs increased year over year.
- Key exposures include errors-and-omissions claims, litigation and regulatory proceedings, pension funding, currency and investment-market movements, tax uncertainty, acquisitions and integration, client and employee retention, competition, and business continuity. The filing says it cannot reasonably estimate the possible loss range for certain developing legal matters; adverse outcomes could materially affect future results or cash flows.
- Credit ratings were Baa2/BBB- for senior debt, with stable outlook from Moody’s and negative outlook from S&P. Management estimated that a 10% movement in major currencies against the U.S. dollar, sustained for a year, could change annual operating income by approximately $65 million.
Most important facts for investors to verify
- Separate underlying growth and operating performance from currency, acquisitions, divestitures, and the $400 million 2010 settlement charge.
- Track segment-level margins and whether Mercer’s retirement and U.S. outsourcing trends improve.
- Assess cash generation and liquidity alongside the subsequent $600 million debt tender, its $73 million expected charge, and the new note financing.
- Monitor pension funding needs, effective-tax-rate variability, and possible further changes in unrecognized tax benefits.
- Review developments in professional-liability claims and other contingencies; some potential losses are not estimable from the filing.