Marsh & McLennan Companies, Inc. — FY 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing also presents unaudited 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 55,000 employees and operations in more than 130 countries.
Financial performance
| Metric | FY 2013 | FY 2012 | Change |
|---|---|---|---|
| Revenue | $12.261 billion | $11.924 billion | +3% reported and underlying |
| Operating income | $2.077 billion | $1.829 billion | +14% |
| Operating margin | 16.9% | 15.3% | +1.6 percentage points |
| Income from continuing operations | $1.379 billion | $1.204 billion | +15% |
| Net income attributable to MMC | $1.357 billion | $1.176 billion | +15% |
| Diluted EPS attributable to MMC | $2.43 | $2.13 | +14% |
| Operating cash flow | $1.341 billion | $1.322 billion | +1% |
Revenue was approximately 54% Risk and Insurance Services and 46% Consulting. Risk and Insurance Services revenue rose 4% reported (3% underlying) to $6.596 billion; operating income increased 7% to $1.421 billion and margin improved to 21.5% from 21.0%. Consulting revenue rose 2% to $5.701 billion; operating income increased 22% to $845 million and margin expanded to 14.8% from 12.3%. Growth was strongest in Guy Carpenter (5% underlying), Mercer (4%), and Marsh (3%); Oliver Wyman underlying revenue declined 1%.
Fourth quarter: Revenue was $3.115 billion versus $3.002 billion in Q4 2012; operating income was $489 million versus $406 million; continuing-operations income was $307 million versus $265 million; and diluted EPS attributable to MMC was $0.54 versus $0.47.
Cash, debt and liquidity
- Cash and cash equivalents were $2.303 billion at year-end, nearly unchanged from $2.301 billion. Working capital was $2.491 billion, up from $2.399 billion.
- Short-term debt was $334 million and long-term debt $2.621 billion, or $2.955 billion combined. The company had a $1.0 billion revolving credit facility with no year-end borrowings and a separate $50 million term-loan balance.
- Operating cash flow of $1.341 billion was offset by $446 million of investing outflows and $834 million of financing outflows. Capital expenditures were $401 million; acquisitions used $142 million in cash.
- MMC repurchased 13.2 million shares for $550 million and paid $533 million in dividends during 2013. The annual dividend was $0.96 per share. Approximately $563 million remained authorized for repurchases.
- Fiduciary cash and investments of $4.234 billion were matched by fiduciary liabilities and are not available for general corporate use. Approximately $1.4 billion of cash held in foreign operations was considered permanently invested; MMC said it did not intend to repatriate that amount.
Changes, outlook and unusual items
- Revenue growth of 3% accompanied a 1% increase in operating expenses, supporting higher operating income. Management cited expense discipline and efficiency efforts; higher incentive compensation and pension costs were partly offset by lower professional-indemnity claim costs.
- Investment income was $69 million, including $40 million of Trident III performance fees and $15 million of final Trident II performance fees. Trident II was fully harvested and distributed in Q4.
- A $24 million charge followed the early redemption of $250 million of 2015 notes. MMC issued $500 million of senior notes in 2013 and repaid $250 million of maturing debt. Restructuring charges were $22 million.
- There is no consolidated revenue or EPS guidance in the provided filing text. Management expected 2014 pension expense to decline about $128 million versus 2013, partly offset by compensation considerations. Expected 2014 pension contributions were approximately $25 million to U.S. plans and $160 million to non-U.S. plans.
- In January 2014, MMC amended its U.K. defined-benefit plans, closing them to future accruals from August 1, 2014 and transitioning to a defined-contribution arrangement. The remeasurement increased the projected benefit obligation by about $147 million and reduced funded status by about $137 million. A $63 million curtailment gain was expected in Q1 2014, mostly offset by transition benefits.
Risks and contingencies
Key risks include professional errors-and-omissions claims, regulatory and legal exposure, potential conflicts associated with insurer compensation, cybersecurity and privacy incidents, competition and talent retention, economic conditions, currency and interest-rate movements, pension funding volatility, and the ability to integrate acquisitions. MMC reported pending policyholder litigation and a November 2013 subpoena to Mercer from the New York Department of Financial Services concerning a review of New York public pension funds. The filing states it cannot reasonably estimate the range or impact of certain developing contingencies; adverse outcomes could materially affect a future period. Goodwill and intangible assets totaled $7.365 billion, approximately 44% of total assets; the 2013 impairment review found no goodwill impairment. Moody’s rated senior debt Baa2 with a Positive outlook; S&P rated it A- with a Stable outlook.
Investor verification priorities
- Check the sustainability and composition of earnings growth, particularly Trident performance fees and segment-level margin expansion.
- Review pension assumptions, U.K. plan changes, required contributions, and sensitivity to discount rates and asset returns.
- Monitor the outcome and potential financial exposure of E&O claims, policyholder lawsuits, and the Mercer regulatory inquiry.
- Assess cash availability across jurisdictions, debt maturities, and the balance between acquisitions, dividends, and share repurchases.
- Evaluate whether acquisition integration and underlying growth can offset currency effects, competitive pressure, and weaker Oliver Wyman revenue.