Marsh & McLennan Companies Inc. (MMC) reported its third quarter operating earnings of 23 cents per share came in a penny lower than the Zacks Consensus Estimate, while a penny higher than that reported in the year-ago quarter. Operating earnings, which exclude one-time items in both the periods, climbed to $127 million against $123 million.
With the steady recovery in the economic environment, Marsh & McLennan posted improved results on account of top line growth in all lines of businesses that also drove the operating margin. These were partially offset by higher operating expenses along with tax expenses.
On a reported basis, Marsh & McLennan witnessed net income of $130 million or 24 cents per share in the reported quarter, modestly down from $168 million or 30 cents per share in the prior year quarter.
Consolidated revenues were $2.81 billion, up 11.2% year over year and 5% on an underlying basis. This also exceeded the Zacks Consensus Estimate of $2.73 billion.
Besides, total expenses increased 9.2% year over year to $2.5 billion as compensation and benefits grew 10.5% to $1.75 billion and other expenses rose 6.3% to $743 million. Even tax expenses were $65 million against $55 million in the year-ago quarter. Adjusted operating margin edged up to 11.3% from 10.7% in the year-ago period.
Segment Results
Revenues for the Risk and Insurance Services segment were $1.5 billion, up 11% year over year and 5% on an underlying basis. However, operating income was significantly higher by 31% year over year reaching $186 million, reflecting improved performance at Marsh and Guy Carpenter.
Marsh's revenues were $1.2 billion, up 12% year over year and 6% on an underlying basis, driven by strong new businesses and growth across geography in the quarter. Underlying revenue for international operations grew 8%, reflecting 13% growth in Latin America and Asia Pacific and 6% in EMEA. Besides, underlying revenue grew 3% in the US-Canada region.
Guy Carpenter's revenues during the reported quarter were $251 million, up 8% year over year and 3% on an underlying basis.
The Consulting segment's revenues increased 11% year over year to $1.3 billion. The segment increased 6% on an underlying basis. Besides, adjusted operating income increased 17% year over year to $168 million.
Mercer's revenues increased 11% year over year to $975 million and 4% on an underlying basis. Mercer's consulting operations had revenues of $673 million, up 5% on an underlying basis. Outsourcing revenues rose 1% year over year at $186 million, whereas, investment consulting and management revenues increased 10% year over year to $116 million.
Oliver Wyman’s revenues increased 13% to $364 million in the reported quarter and increased 9% on an underlying basis.
Financial Update
Marsh & McLennan exited the reported quarter with cash and cash equivalents of $1.7 billion, flat from the year-ago quarter. Long-term debt declined to $2.67 billion from $3.03 billion at the end of 2010.
As of September 30, 2011, Marsh & McLennan had total assets increased to $15.12 billion and total shareholders’ equity grew to $6.47 billion from 2010 end.
Additionally, during the reported quarter, Marsh & McLennan completed a tender offer that resulted in the retirement of $600 million of the senior notes scheduled to mature in 2014 and 2015. In July this year, Marsh & McLennan also issued $500 million of 4.80% senior notes due 2021.
Share Repurchase Update
On August 17, 2011, the board of Marsh & McLennan announced the authorization and approval of its stock repurchase program of $500 million, thereby expanding it to $1.0 billion. However, no time limit has been decided for execution of the plan.
Over the last year, the company has repurchased a total of 15.6 million shares for $447 million, including 4.4 million shares in the third quarter of 2011.
Dividend Update
On September 21, 2011, the board of Marsh & McLennan announced a quarterly dividend of 22 cents per share on its common stock, payable on November 15, 2011 to the shareholders of record as on October 11, 2011.
In July 2011, the company has raised its dividend by a cent to 22 cents per share, marking the second dividend hike within a year of implementing the previous increase.
Our Take
The recent acquisitions are crucial for new business generation and client retention, which has been facing substantial declines due to the company’s antitrust litigation charges coupled with a soft pricing environment.
Overall, as a leading global broker, Marsh & McLennan has a history of outperforming its peers due to its size, diverse product offering, global presence and technical expertise. Despite sluggish organic growth, the company is still a dominant player in its industry, quite next to the leading Aon Corp. (AON).
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