Marsh & McLennan Companies, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; comparisons are with Q1 2013 unless noted. MMC is a global professional services firm operating through Risk and Insurance Services (Marsh and Guy Carpenter) and Consulting (Mercer and Oliver Wyman Group).
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Revenue | $3.264 billion | $3.126 billion | +4% reported and underlying |
| Operating income | $673 million | $607 million | +11% |
| Operating margin | 20.6% | 19.4% | +1.2 percentage points |
| Income from continuing operations | $457 million | $412 million | +11% |
| Net income attributable to MMC | $443 million | $413 million | +7% |
| Diluted EPS, continuing operations | $0.80 | $0.72 | +11% |
| Diluted EPS, attributable net income | $0.80 | $0.74 | +8% |
| Cash from operations | $(380) million | $(593) million | Less cash used |
| Capital expenditures | $99 million | $88 million | — |
Operating expenses rose 3%, slower than revenue growth. The effective tax rate was 29.5%, versus 29.9%. Investment income declined to $13 million from $21 million; Q1 2014 included $7 million of Trident III performance fees no longer subject to clawback and about $6 million of private-equity mark-to-market gains. Q1 2013 included $20 million of Trident II gains, including deferred performance fees.
Segments
- Risk and Insurance Services: Revenue $1.839 billion, up 4% reported and 3% underlying; operating income $493 million, up 5%; margin 26.8%, versus 26.4%. Marsh underlying revenue grew 4%; Guy Carpenter was flat.
- Consulting: Revenue $1.432 billion, up 5% reported and underlying; operating income $225 million, up 20%; margin 15.8%, versus 13.7%. Mercer underlying revenue grew 3% and Oliver Wyman 11%.
Balance sheet, cash flow and capital
- Cash and cash equivalents were $1.380 billion at March 31, down from $2.303 billion at year-end. Operating cash use of $380 million included a $764 million reduction in accrued compensation and benefits; the comparable reduction was $727 million in Q1 2013. MMC attributed cash-flow movements generally to timing of working capital and pension funding.
- Investing activities used $416 million, including $319 million for acquisitions and $99 million for capital expenditures. Financing activities used $118 million, including $137 million of dividends and $100 million of share repurchases.
- Total debt was approximately $3.051 billion: $432 million short-term and $2.619 billion long-term. MMC had $100 million of commercial paper outstanding, a $50 million term loan, and no borrowings under its $1.2 billion revolving credit facility.
- Current assets were $5.563 billion and current liabilities $3.343 billion. These figures include fiduciary-related balances that are not available for corporate use; fiduciary assets and liabilities were each $4.814 billion and are offset on the balance sheet.
- MMC repurchased approximately 2.0 million shares for $100 million and paid dividends of $137 million ($0.25 per share). The quarterly dividend declared was $0.50 per share; $274 million of dividends were declared during the quarter. About $463 million remained under the repurchase authorization.
Material developments, outlook and risks
- MMC completed six acquisitions in Q1 for total consideration of $444 million, including $331 million cash and $113 million deferred or estimated contingent consideration. Acquired goodwill was $267 million and intangible assets $189 million. Acquisitions contributed about $21 million of revenue and $1 million of net operating income during the quarter.
- MMC amended its revolving credit facility in March, increasing capacity from $1.0 billion to $1.2 billion and extending maturity to March 2019. The facility includes quarterly coverage and leverage tests. Senior debt ratings were Baa1 at Moody’s and A- at S&P, both with stable outlooks.
- The U.K. defined-benefit pension plans will close to future accruals effective August 1, 2014, with a new defined-contribution arrangement. Remeasurement increased the projected benefit obligation by about $147 million and reduced funded status by about $137 million. A $65 million curtailment gain was largely offset by transition-benefit costs. MMC expected about $130 million of pension contributions for the remainder of 2014, including approximately $113 million to non-U.S. plans.
- No specific earnings or revenue guidance was provided in the filing. Management reported positive underlying growth across Marsh’s major geographies and strong Oliver Wyman growth; Guy Carpenter’s underlying revenue was flat. Future Trident III performance-fee recognition depends on investment realizations and is not controlled by MMC.
- Key risks include errors-and-omissions claims, competition and client retention, employee retention, cybersecurity and data protection, regulatory and anti-corruption compliance, acquisitions and integration, pension funding, foreign-exchange movements, interest-rate and counterparty risks, and tax uncertainty. The filing states that the possible loss range for described legal and regulatory matters generally cannot be reasonably estimated; adverse outcomes could materially affect future results or cash flows. A New York regulator subpoenaed Mercer in November 2013 regarding a review of New York public pension funds.
Important facts for investors to verify
- Whether underlying revenue and margin gains continue, particularly in Consulting and Oliver Wyman.
- Cash conversion and working-capital trends, given negative operating cash flow despite higher earnings.
- Acquisition integration, purchase-accounting adjustments, and contingent consideration obligations.
- Debt maturities, revolver covenant compliance, and the effect of pension funding and U.K. plan changes.
- Developments in errors-and-omissions litigation, regulatory matters, and tax audits; the filing does not provide a clear aggregate potential-loss estimate.