Marsh & McLennan Companies, Inc. — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. The filing also reports fourth-quarter results. MMC is a global professional services firm operating through Risk and Insurance Services (Marsh and Guy Carpenter) and Consulting (Mercer and Oliver Wyman Group), with approximately 54,000 employees and clients in more than 100 countries.
Financial performance
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Revenue | $11.924 billion | $11.526 billion |
| Operating income | $1.829 billion | $1.638 billion |
| Operating margin | 15.3% | 14.2% |
| Income from continuing operations | $1.204 billion | $982 million |
| Net income attributable to MMC | $1.176 billion | $993 million |
| Diluted EPS attributable to MMC | $2.13 | $1.79 |
| Cash from operations | $1.322 billion | $1.705 billion |
Revenue grew 3% reported and 4% on an underlying basis; operating income rose 12%. Management attributed improved operating income to revenue growth and expense discipline. Risk and Insurance Services revenue was $6.581 billion, with operating income of $1.374 billion and a 20.9% margin. Consulting revenue was $5.382 billion, with operating income of $652 million and a 12.1% margin.
Fourth quarter: Revenue was $3.002 billion versus $2.908 billion in Q4 2011; operating income was $406 million versus $391 million; income from continuing operations was $265 million versus $244 million; and net income attributable to MMC was $259 million versus $256 million.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $2.301 billion at year-end, up from $2.113 billion. Working capital was $2.399 billion; total assets were $16.288 billion.
- Debt was $2.918 billion in total, including $260 million current and $2.658 billion long-term. The company reported no borrowings under its $1.0 billion revolving credit facility or $50 million delayed-draw term facility.
- Senior debt ratings were Baa2 from Moody’s and BBB from S&P, both with stable outlooks. The company repaid $250 million of maturing senior notes in February 2013.
- Dividends paid were $497 million ($0.90 per share). MMC repurchased 6.9 million shares for approximately $230 million during 2012; approximately $323 million remained authorized at year-end.
- Cash from operations declined from 2011, primarily because 2011 included $322 million in U.S. federal tax refunds. Capital expenditures were $320 million; operating cash flow less capital expenditures was approximately $1.002 billion.
Material changes and unusual items
- Underlying revenue increased 5% in Risk and Insurance Services and 4% in Consulting. Marsh grew 5% underlying, Guy Carpenter 6%, Mercer 4%, and Oliver Wyman 3%.
- Operating expenses increased 2% reported. Underlying expense growth reflected higher incentive compensation and benefits costs and restructuring costs, partly offset by credits for lower acquisition-related contingent consideration estimates.
- MMC recorded $78 million of 2012 restructuring costs, including $58 million in Consulting; approximately $51 million was recorded in Q4, including costs related to exiting part of Mercer’s Canadian outsourcing business. It also recorded an $8 million intangible asset impairment.
- 2012 income included a $44 million reduction in estimated acquisition-related contingent consideration liabilities and $24 million of investment income. The 2011 comparison included a $72 million debt-extinguishment charge. The 2010 comparison was affected by a $400 million net charge for the Alaska Retirement Management Board settlement and significant Kroll disposition gains.
- MMC completed 15 acquisitions in 2012, with $230 million of net cash outflow for current-year acquisitions. The Marsh Business Process Outsourcing business sale was completed in August 2012.
Outlook, risks and contingencies
The filing provides no specific consolidated revenue or earnings guidance. Management expected 2013 pension expense to increase approximately $30 million before potential offsets. It expected 2013 pension contributions of approximately $25 million to U.S. plans and $623 million to non-U.S. plans, including approximately $452 million to U.K. plans.
Key exposures include professional errors-and-omissions claims, especially involving Marsh and Mercer; extensive regulatory and licensing requirements; client data security and privacy; economic weakness, insurance-market premium trends and competition; foreign exchange and interest-rate changes; and pension funding and assumption risk. The company reported worldwide pension obligations of approximately $13.8 billion and plan assets of approximately $12.2 billion at year-end. Its 2012 discount-rate declines increased measured pension liabilities and actuarial losses.
Four policyholder actions relating to prior Marsh compensation practices remained pending in federal court. MMC also described other claims, regulatory matters, guarantees and retained Kroll-related liabilities; it said it could not reasonably estimate the possible loss range for the developing matters. Additional domestic deferred-tax valuation allowances of up to approximately $270 million could be required if sufficient taxable income is not generated. Goodwill and intangible assets totaled $7.261 billion; management concluded goodwill was not impaired in 2012. The company’s financial statements and internal control over financial reporting received unqualified audit opinions.
Important facts for investors to verify
- Whether underlying revenue growth and operating-margin improvement continue, particularly in Consulting and across international markets.
- Actual cash conversion and working-capital trends, given the year-over-year decline in operating cash flow.
- U.K. pension funding requirements following the valuation and trustee negotiations, and the effect of discount rates and asset returns on pension costs.
- Developments and potential financial exposure from E&O claims, pending litigation, regulatory matters and retained disposal-related indemnities.
- Whether acquisition performance, contingent consideration estimates, restructuring actions and tax-asset recoverability support reported earnings and cash flow.