Marsh & McLennan Misses on Taxes - Analyst Blog

Marsh & McLennan Companies Inc. (MMC) reported its third quarter adjusted operating income of $146.0 million or 27 cents per share, a penny less than the Zacks Consensus Estimate of 28 cents. This also compares unfavorably with the income of $252.0 million or earnings of 48 cents in the year-ago quarter. Adjusted operating earnings per share in both the periods exclude one-time items.

With the prolonged weak economic environment, Marsh & McLennan managed to post improved results on account of top line growth in all lines of businesses. However, this growth was offset by investment losses along with increased operating and income tax expenses.

On a reported basis, Marsh & McLennan witnessed net income of $168.0 million after-tax or 30 cents per share in the reported quarter, down from $221.0 million after-tax or 41 cents per share in prior year quarter. The results included discontinued operations, net of tax, of $43 million or 8 cents per share in the quarter, as opposed to a loss of $18 million or 3 cents per share in the prior year quarter.

Consolidated revenues were $2.52 billion, up 7.2% year over year and 4% on an underlying basis. This also came in marginally above the Zacks Consensus Estimate of $2.51 billion.

However, Marsh & McLennan had an investment loss of $2 million, down significantly from an income of $22 million in the year-ago quarter. Besides, total expenses increased 5.8% year over year to $2.29 billion. Particularly, tax expenses were $55 million against a tax benefit of $46 million in the year-ago quarter.

Segment Results

Revenues for the Risk and Insurance Services segment were $1.3 billion, up 8% year over year and 3% on an underlying basis. However, operating income was significantly higher by 12% year over year at $142 million, reflecting improved performance at Marsh and Guy Carpenter, as well as acquisitions.

Marsh's revenues were $1.1 billion, up 9% year over year and 3% on an underlying basis. Guy Carpenter's revenues during the reported quarter were $233 million, up 4% year over year and 3% on an underlying basis. Both Marsh and Guy Carpenter drove the top line on strong new businesses in the quarter.

The Consulting segment's revenues increased 5% year over year to $1.2 billion. The segment increased 6% on an underlying basis. Besides, adjusted operating income increased 11% year over year to $144 million.

Mercer's revenues increased 6% year over year to $881 million and 6% on an underlying basis. Mercer's consulting operations had revenues of $622 million, up 5% on an underlying basis. Outsourcing revenues grew 4% year over year to $168 million, whereas, investment consulting and management revenues increased 17% year over year to $91 million.

Oliver Wyman's revenues increased 3% to $322 million in the reported quarter and increased 6% on an underlying basis.

Financial Update

Marsh & McLennan exited the quarter with cash and cash equivalents of $1.70 billion and long-term debt of $3.03 billion. As of September 30, 2010, Marsh & McLennan had total assets of $14.0 billion and total shareholders' equity of $6.42 billion.

On August 3, Marsh & McLennan completed the sale of Kroll Inc. to Altegrity Inc. for $1.13 billion in cash.

On September 15, Marsh & McLennan funded the maturity of its $550 million senior notes with an interest rate of 5.15%. The next debt maturity is $250 million of senior notes due March 15, 2012.

Simultaneously, the board of Marsh & McLennan also authorized a $500 million share repurchase program.

Dividend Update

On September 15, the board of Marsh & McLennan declared a quarterly dividend of 21 cents per share on its common stock, thereby increasing it by 5%. The hiked dividend is payable on November 15, 2010 to the shareholders of record as on October 8, 2010.

Our Take

Marsh & McLennan continues to experience decent growth as a result of well-executed restructuring initiatives, including the divestment plan for Kroll. Going forward, results should somewhat benefit from improved pricing, which will be largely offset by the volatility of the U.S. dollar and tepid revenue growth and lower margins from the consulting business due to the ongoing sluggish economic recovery.

Nevertheless, management aims toproduce long-term growth by maintaining low capital requirements, generate high levels of cash and reduce the company's risk profile. Moreover, the recent dividend hike and upcoming share buyback program is expected to inject confidence among the investors.

Currently, Marsh & McLennan carries a Zacks #3 Rank, which translates into a short-term Hold recommendation, indicating no clear directional pressure on the shares over the near term.

 
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