Business context and reporting period
Marsh & McLennan Companies, Inc. (MMC) filed this unaudited Form 10-Q for the quarter ended March 31, 2012. The global professional services firm operates 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 figures are generally in millions, except per-share data.
Financial performance
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Revenue | $3,051 | $2,884 | +6% |
| Operating income | $527 | $472 | +12% |
| Operating margin | 17.3% | 16.4% | +0.9 percentage points |
| Income from continuing operations | $354 | $319 | +11% |
| Net income attributable to MMC | $347 | $325 | +7% |
| Diluted EPS from continuing operations | $0.63 | $0.56 | +13% |
| Cash used in operating activities | $503 | $376 | $127 more used |
Underlying revenue, which excludes currency and acquisition/disposition effects, grew 6% overall: 7% in Risk and Insurance Services and 4% in Consulting. Risk and Insurance Services operating income rose to $417 million from $383 million, with a 23.9% margin versus 23.4%. Consulting operating income rose to $159 million from $128 million, with a 12.1% margin versus 10.2%. Corporate expense increased to $50 million from $42 million.
The effective tax rate was 30.2%, versus 28.6% reported in Q1 2011; excluding the prior-year IRS audit settlement benefit, the 2011 rate was 31.6%. Investment gains were $20 million, primarily reflecting mark-to-market increases on private equity investments. Q1 2011 net income included $12 million from discontinued operations, primarily a Putnam-related tax recovery; Q1 2012 had none.
Cash, liquidity and debt
Cash and cash equivalents were $1.410 billion at March 31, 2012, down $703 million from year-end. MMC reported total debt of approximately $2.923 billion: $259 million short-term and $2.664 billion long-term. The $1.0 billion revolving credit facility had no borrowings outstanding. Cash less reported debt was approximately negative $1.513 billion. Fiduciary cash and investments are matched by fiduciary liabilities and are not available for corporate use.
Operating cash outflow was attributed in part to the typical first-quarter payment of accrued incentive compensation; MMC also made $200 million of discretionary U.S. and U.K. pension contributions. Investing cash outflow was $116 million, including $53 million net cash for current-quarter acquisitions; financing cash outflow was $145 million. The company refinanced $250 million of 6.25% notes that matured by issuing $250 million of five-year notes at 2.3%. Dividends paid were $121 million, or $0.22 per share. The quarterly dividend declared was $0.44 per share, including dividend equivalents as shown in the equity statement.
MMC reported $1.606 billion of pension, postretirement and postemployment benefit liabilities on the balance sheet and approximately $1.3 billion of pension liabilities excluded from its contractual-obligations schedule. It contributed $273 million to pension plans in Q1, including the $200 million discretionary contributions, and expected approximately $246 million of further contributions to non-qualified U.S. and non-U.S. plans during the remainder of 2012.
Material changes and unusual items
- All major businesses increased revenue. Marsh underlying revenue grew 7%, including 18% in Latin America and 10% in Asia Pacific; Guy Carpenter grew 7%. Mercer grew 4% and Oliver Wyman 6% on an underlying basis.
- Operating expenses rose 5%; management attributed underlying increases mainly to incentive compensation, benefits, salaries and consulting costs. Consulting’s improved operating income and margin outpaced its 2% expense growth.
- MMC completed six acquisitions during the quarter. Total consideration was $148 million, including $89 million of preliminary goodwill and $66 million of acquired intangible assets. Acquisitions contributed approximately $20 million of revenue and $1 million of net operating income in Q1.
- Goodwill was $6.675 billion at March 31, 2012. The filing reports no impairment charge for the quarter. Restructuring costs were $4 million; the related liability was $159 million at quarter-end.
- MMC repurchased no shares in Q1; approximately $553 million remained authorized for repurchases.
Outlook, risks and contingencies
The filing provides no specific numerical revenue, earnings or margin guidance. Management noted that operating cash flow is typically negative in the first quarter because of incentive-compensation payments. It expected approximately $246 million of additional pension contributions during the rest of 2012 and planned to finalize later in the year the portion of foreign earnings to repatriate versus permanently reinvest.
Key disclosed risks include errors-and-omissions claims, regulatory and legal matters, pension funding, economic and market conditions (including the European debt crisis and Euro uncertainty), foreign-exchange movements, tax changes and examinations, competition, acquisition integration, client and employee retention, cybersecurity and business continuity. Eight policyholder actions related to the Marsh market-service-agreement matter remained pending. The company stated that it could not reasonably estimate the possible loss range for certain developing matters; adverse outcomes could materially affect future results, financial condition or cash flows. Unrecognized tax benefits were $144 million, with a possible decrease of up to approximately $60 million within 12 months from audit settlements and statute expirations.
Market-risk sensitivities disclosed: a 10% change in short-term interest rates was estimated to change annual interest income by approximately $3 million; a 10% move in major currencies against the U.S. dollar was estimated to change full-year net operating income by approximately $50 million. These are sensitivities, not forecasts.
Important facts for investors to verify
- Whether underlying revenue growth and segment margin gains persist, particularly given higher compensation and benefit costs.
- How much of the first-quarter operating cash outflow reflects seasonal incentive payments and discretionary pension contributions, and whether cash conversion improves over the year.
- Actual pension funding needs, plan funded-status changes and the timing of the expected additional contributions.
- Acquisition integration, contingent consideration and purchase-accounting adjustments; Q1 acquisition values were preliminary.
- Developments in pending litigation, errors-and-omissions claims, regulatory matters and tax audits, for which potential outcomes may be uncertain.
- Foreign-currency, interest-rate and investment exposures, and any changes in repatriation plans or borrowing costs.