Business context and reporting period
Marsh & McLennan Companies, Inc. (MMC) is a global professional services firm operating through Risk and Insurance Services (Marsh and Guy Carpenter) and Consulting (Mercer and Oliver Wyman Group). This unaudited Form 10-Q covers the three months ended March 31, 2013, compared with the same quarter of 2012. Effective January 1, 2013, Corporate Benefits and Association businesses moved from Marsh to Mercer; prior-period segment data was reclassified.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Revenue | $3.126 billion | $3.051 billion | +2% |
| Operating income | $607 million | $527 million | +15% |
| Operating margin | 19.4% | 17.3% | +2.1 percentage points |
| Income from continuing operations | $412 million | $354 million | +16% |
| Net income attributable to MMC | $413 million | $347 million | +19% |
| Diluted EPS, continuing operations | $0.72 | $0.63 | +14% |
| Diluted EPS, MMC net income | $0.74 | $0.63 | +17% |
Revenue growth was 2% on an underlying basis, excluding currency and acquisition/disposition effects. Risk and Insurance Services revenue increased 5% reported and 3% underlying; Consulting revenue decreased 1% reported and was flat underlying. Segment operating income increased 14% in both Risk and Insurance Services ($468 million) and Consulting ($187 million). Segment margins were 26.4% and 13.7%, respectively, versus 24.4% and 12.0% a year earlier. The consolidated effective tax rate was 29.9%, compared with 30.2%.
Cash flow, liquidity and debt
Operating activities used $593 million of cash, versus $503 million used in Q1 2012, reflecting working-capital movements and pension funding. Investing activities provided $8 million, compared with $116 million used; capital expenditures were $88 million versus $51 million. Financing activities used $364 million, compared with $145 million, including $250 million to repay maturing notes, $127 million of dividends, and $100 million of share repurchases. Cash decreased $1.038 billion to $1.263 billion; foreign exchange reduced cash by $89 million.
At March 31, 2013, total debt was $2.715 billion ($10 million short-term and $2.705 billion long-term), compared with $2.918 billion at year-end 2012. The company had no borrowings under its $1.0 billion revolving credit facility and had $50 million drawn under a delayed-draw term loan. Cash and cash equivalents were $1.263 billion; fiduciary cash and investments are not available for corporate use. MMC reported $5.097 billion of current assets and $2.840 billion of current liabilities. Its senior debt was rated Baa2 by Moody’s and BBB by S&P.
Material changes, outlook and notable items
- Operating income rose 15% as revenue increased and total operating expenses declined slightly. Compensation and benefits increased to $1.803 billion from $1.796 billion; other operating expenses fell to $716 million from $728 million.
- Marsh reported 4% underlying revenue growth, with strength in Latin America and Asia Pacific. Guy Carpenter grew 4% underlying, supported by new business and retention. Mercer grew 3%, while Oliver Wyman declined 9% underlying amid weakness in Europe and a slowdown in North America.
- Q1 net income included $12 million from discontinued operations, primarily tax indemnities related to the Putnam sale. MMC recorded $21 million of investment income, including gains associated with Trident II.
- MMC contributed approximately $402 million to defined-benefit pension plans in Q1, including discretionary UK and Canadian contributions. It expected approximately $246 million of additional contributions during the remainder of 2013. Management reported no expected U.S. tax-qualified plan contributions through 2014, considering pension-funding legislation.
- No acquisitions were made in Q1 2013. MMC recorded $7 million of restructuring costs, primarily severance. No specific earnings or revenue guidance was provided in the filing.
- Management cited risks including errors-and-omissions claims, regulatory and legal proceedings, pension funding, market and currency changes, competition, client and employee retention, data security, tax uncertainty, and acquisition integration. The company could not reasonably estimate a range of potential losses for certain pending matters; adverse outcomes could materially affect future results or cash flows.
Important facts for investors to verify
- Whether underlying revenue growth continues, particularly at Oliver Wyman, and whether Risk and Insurance Services maintains its margin gains.
- The effect of substantial pension contributions on operating cash flow, future funding needs, and the funded status of plans.
- Cash availability and liquidity, including the distinction between corporate cash and fiduciary funds, and compliance with credit-facility covenants.
- Developments in errors-and-omissions claims, pending policyholder lawsuits, guarantees, and other contingencies for which potential losses are not presently estimable.
- Whether tax settlements, repatriation decisions, foreign exchange changes, and investment valuations affect future earnings and cash flow.