Marsh & McLennan Companies, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Unless otherwise stated, amounts are in millions of U.S. dollars. The company provides risk and insurance services through Marsh and Guy Carpenter, and consulting through Mercer and Oliver Wyman Group.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $3,336 | $3,215 | +4% |
| Operating income | $733 | $735 | Approximately flat |
| Operating margin | 22.0% | 22.9% | Down approximately 0.9 percentage points |
| Income from continuing operations | $490 | $498 | Down 2% |
| Net income attributable to the company | $481 | $482 | Approximately flat |
| Diluted EPS, continuing operations | $0.91 | $0.89 | +2% |
| Cash used for operations | $581 | $523 | Greater outflow |
Underlying revenue increased 4%; acquisitions contributed 3% and foreign currency translation reduced reported revenue by 3%. The effective tax rate was 28.6%, versus 29.2%. Interest expense rose to $46 from $36, while investment results shifted to a $3 loss from $2 income.
Segments
- Risk and Insurance Services: Revenue of $1,868, up 4% reported and 2% underlying; operating income of $535 versus $533. Margin was 28.6%, down from 29.6%.
- Consulting: Revenue of $1,478, up 4% reported and 6% underlying; operating income of $245 versus $248. Margin was 16.6%, down from 17.4%. Oliver Wyman revenue rose 14% reported and 15% underlying; Mercer revenue was flat reported and up 3% underlying.
Balance sheet, liquidity and cash flow
- Cash and cash equivalents were $918 at March 31, down from $1,374 at December 31, 2015. The company used $581 in operating cash, provided $245 through financing and used $126 in investing; cash decreased $456 overall.
- Total debt was approximately $5,013, comprising $265 short-term and $4,748 long-term, compared with approximately $4,414 at year-end. The increase included $252 of commercial paper and a $350 issuance of seven-year notes at 3.30%.
- The company had no borrowings under its $1.5 billion revolving credit facility, which expires in November 2020. It also had a $150 million uncommitted credit line with no borrowings. Cash and credit availability should be considered separately; fiduciary funds are not available for corporate use.
- Operating cash outflow was primarily driven by first-quarter cash award payments and working-capital timing, including a $931 decrease in accrued compensation and benefits.
- Capital expenditures were $51, acquisitions used $75 net of acquired cash, dividends paid were $161, and share repurchases were $200. Approximately $955 million remained authorized under the repurchase program.
- Contractual obligations totaled $9,368, including debt, interest, operating leases and service agreements. The filing also identifies approximately $1.9 billion of underfunded pension liabilities, excluded from that obligations table.
Material changes and unusual items
- Operating income was nearly unchanged despite 4% revenue growth, partly reflecting the prior-year comparison: Q1 2015 included an approximately $125 million benefit from termination of a U.S. post-65 retiree medical reimbursement plan. Higher salaries and incentive compensation also contributed to expense growth; lower defined-benefit pension expense partly offset these factors.
- Diluted EPS increased despite lower continuing-operations income, supported by a 4% reduction in average diluted shares outstanding. The company repurchased approximately 3.5 million shares in the quarter.
- Comprehensive income attributable to the company was $604 versus $239 a year earlier, primarily reflecting the comparison in pension-related and foreign-currency other comprehensive income.
- The company completed four acquisitions for total consideration of $103, including $77 cash and $26 deferred or estimated contingent consideration. Acquired businesses contributed approximately $2 of revenue in the quarter.
Outlook, risks and contingencies
- The filing provides no specific earnings or revenue guidance. If March 31 exchange rates remained constant through 2016, management estimated foreign-currency translation would reduce full-year income by approximately $25.
- Management expected remaining-2016 pension contributions of approximately $19 to U.S. plans and $147 to non-U.S. plans. Contributions may vary with asset performance, discount rates and other factors. A separate contingent guarantee agreement could support U.K. pension deficit contributions of up to GBP 450 million over seven years under specified circumstances.
- Key stated risks include foreign-exchange, interest-rate and market movements; cybersecurity and business continuity; regulatory and tax changes; competition and technology; acquisition integration; employee retention; and errors-and-omissions or fiduciary-duty claims.
- The company faces ordinary-course litigation and regulatory matters, including professional-services claims. It stated that, except where liabilities have been established, it could not reasonably estimate the possible loss range; adverse outcomes could materially affect future results, financial condition or cash flows. The balance sheet included $319 of liabilities for errors and omissions.
- Alexander Forbes had a $230 carrying value versus an estimated $197 market value at quarter-end. The company considered the decline and determined the investment was not impaired.
- Disclosure controls and procedures were reported effective, with no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Assess whether underlying revenue growth can continue, particularly in Consulting and Oliver Wyman, and whether segment margins stabilize after their year-over-year declines.
- Track operating cash conversion and first-quarter working-capital seasonality, including cash award payments and receivables.
- Review the increase in debt, the use of commercial paper, and covenant headroom under the revolving credit facility.
- Monitor foreign-exchange exposure and pension funding requirements, including the conditional U.K. guarantee.
- Follow developments in litigation, regulatory inquiries, contingent acquisition payments and the Alexander Forbes investment valuation.