Marsh & McLennan Companies, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparisons are with Q1 2014 unless otherwise noted. The company is a global professional services firm operating 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 amounts are in millions except per-share data.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change / context |
|---|---|---|---|
| Revenue | $3,215 | $3,264 | Down 1% reported; up 4% underlying, with a 6% negative currency impact |
| Operating income | $735 | $673 | Up 9%; operating margin approximately 22.9% versus 20.6% |
| Income from continuing operations | $498 | $457 | Up 9% |
| Net income attributable to the company | $482 | $443 | Up 9% |
| Diluted EPS, continuing operations | $0.89 | $0.80 | Up 11% |
| Effective tax rate | 29.2% | 29.5% | Slightly lower |
Revenue in Risk and Insurance Services was $1,803, down 2% reported and up 3% underlying; segment operating income rose 8% to $533, with a 29.6% margin versus 26.8%. Consulting revenue was $1,421, down 1% reported and up 5% underlying; operating income rose 10% to $248, with a 17.4% margin versus 15.8%. Currency translation reduced reported revenue by 6% in each segment.
Consolidated expenses fell 4%, while operating expenses were flat on an underlying basis. Results included a roughly $125 million net credit from terminating the U.S. post-65 retiree medical reimbursement plan. Management said this benefit more than offset higher pension costs and other expense pressures; thus the operating-income increase was not solely reflective of recurring operating improvement.
Cash flow, liquidity, and debt
- Operating cash flow was a use of $530, compared with a use of $380 in Q1 2014. Management attributed the seasonal cash use primarily to cash-award payments, generally made in the first quarter, and the timing of working-capital payments; contributions to pension and other benefit plans exceeded current-period expense by $134. A $82 indemnification receipt related to the Putnam disposition reduced operating cash used.
- Investing cash outflow was $194, versus $416, including $91 of capital expenditures and $16 of net cash paid for current-quarter acquisitions. Financing cash inflow was $71, including $500 of proceeds from a five-year note issuance, partly offset by $300 of share repurchases and $151 of dividends paid.
- Cash and cash equivalents were $1,104 at March 31, down from $1,958 at December 31, 2014. Fiduciary cash and investments of $4,585 are not available for corporate use.
- Total debt was $3,889: $61 short-term and $3,828 long-term. The company issued $500 of 2.35% five-year senior notes in March for general corporate purposes. Its $1.2 billion revolving credit facility had no borrowings outstanding; a separate term loan had $50 outstanding. Senior debt ratings were Baa1 (Moody’s) and A- (S&P), both with stable outlooks.
- The company repurchased 5.3 million shares for $300 during the quarter and had approximately $1.0 billion remaining under its repurchase authorization. Dividends paid were $151, or $0.28 per share.
Material changes, outlook, and risks
- The stronger U.S. dollar reduced translated revenue and earnings. If March 31 exchange rates remained in effect through 2015, management estimated a roughly $120 million reduction in full-year operating income from currency translation. A 10% movement in major currencies, held constant for a year, was estimated to change full-year operating income by approximately $54 million.
- Underlying revenue grew across both segments. Marsh and Consulting each reported 4% and 5% underlying growth, respectively; Oliver Wyman reported 8% underlying growth. Mercer’s Retirement revenue was flat underlying, while Investments grew 13%.
- No formal earnings or revenue guidance is provided in the supplied filing text. Management noted lower interest rates increased worldwide pension expense and that future pension funding may depend on asset returns, discount rates, and plan funding assessments. It expected approximately $152 million of additional pension contributions during the remainder of 2015.
- Other notable items included a $75 million Mercer investment in Benefitfocus and three small acquisitions with $32 million total purchase consideration. Investment income declined to $2 from $13, partly because Q1 2014 included a $7 million Trident carried-interest gain. Deferred Trident III performance fees of approximately $20 million remained subject to uncertain recognition timing.
- Risks include foreign-exchange volatility, cybersecurity and protection of confidential information, competition, retention of clients and key employees, pension funding and market assumptions, professional errors-and-omissions claims, regulatory compliance, and acquisition integration. The company disclosed litigation and regulatory matters for which it generally could not estimate a reasonably possible loss range; adverse outcomes could materially affect future results or cash flows.
Important facts for investors to verify
- How much of the operating-income improvement is sustainable after excluding the approximately $125 million retiree-medical-plan termination credit, and how pension costs evolve.
- Whether underlying revenue growth continues and how currency movements affect reported results, especially against management’s estimated $120 million full-year translation headwind at March-end rates.
- Cash conversion and liquidity, including seasonal first-quarter compensation payments, pension contributions, and the decline in cash balances.
- Debt and capital allocation, including the use of note proceeds, ongoing repurchases, dividends, and remaining repurchase authorization.
- Developments in litigation, regulatory matters, contingent acquisition consideration, and pension funding obligations; the filing does not provide a clear aggregate potential-loss estimate for the unresolved matters.