Marsh & McLennan Companies, Inc. — Q3 2014 Form 10-Q
Business context and reporting period
Global professional services firm operating through Risk and Insurance Services (Marsh and Guy Carpenter) and Consulting (Mercer and Oliver Wyman). This unaudited report covers the three and nine months ended September 30, 2014; comparisons are with the corresponding 2013 periods. Amounts are in U.S. dollars.
Key financial results
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $3,141 million | $2,932 million | $9,705 million | $9,146 million |
| Operating income | $445 million | $404 million | $1,765 million | $1,588 million |
| Income from continuing operations | $305 million | $260 million | $1,202 million | $1,072 million |
| Net income attributable to the Company | $297 million | $253 million | $1,171 million | $1,054 million |
| Diluted EPS, continuing operations | $0.54 | $0.45 | $2.12 | $1.88 |
| Operating cash flow | Not separately presented | Not separately presented | $1,141 million | $575 million |
- Q3 revenue increased 7% reported and 5% underlying; nine-month revenue rose 6% reported and 5% underlying.
- Q3 operating margin was 14.2%, versus 13.8% a year earlier. Risk and Insurance Services margin was 14.2% versus 14.8%; Consulting margin improved to 17.8% from 16.1%.
- For the first nine months, segment revenue and operating income were: Risk and Insurance Services, $5,240 million and $1,170 million; Consulting, $4,493 million and $746 million. Consulting operating income increased $122 million year over year, while Risk and Insurance Services increased $59 million.
- Effective tax rate was 29.6% for Q3 and 28.9% for the nine-month period, down from 32.1% and 30.1%, respectively, in 2013.
Financial position, liquidity and capital allocation
- At September 30, cash and cash equivalents were $2,649 million; total debt was $4,019 million, including $640 million current and $3,379 million long-term. Cash less reported debt was approximately negative $1,370 million.
- Current assets were $6,852 million and current liabilities $4,130 million. The Company also had a $1.2 billion revolving credit facility, with no borrowings outstanding at quarter-end.
- Nine-month investing cash outflow was $816 million, including $406 million net cash used for acquisitions and $285 million for capital expenditures. Financing cash flow was positive $130 million; the Company repurchased $600 million of shares and paid $429 million in dividends.
- Shareholders’ equity was $7,915 million, compared with $7,975 million at year-end 2013. Foreign currency translation contributed to a $288 million Q3 decline in comprehensive income attributable to the Company, which was $9 million.
Material changes, outlook and notable items
- Oliver Wyman delivered strong Q3 underlying revenue growth of 16%; management said growth was expected to moderate in Q4. The filing provides no broader quantified earnings or revenue guidance.
- The Company completed 12 acquisitions in the first nine months for total consideration of $573 million, including $147 million of deferred or contingent consideration. It also acquired a 14.9% stake in Alexander Forbes for approximately $137 million in July and paid approximately $166 million for a further 19.1% in October.
- In October, the Company redeemed $630 million of debt; the approximately $135 million early-redemption cost was expected to be recorded in Q4 2014. This was subsequent to the reporting date.
- The U.K. defined benefit plans were closed to future accruals effective August 1, 2014. Remeasurement increased the projected benefit obligation by approximately $147 million and reduced funded status by approximately $137 million; a $65 million curtailment gain was recorded in Q1, largely offset by transition benefits.
- Key risks include errors-and-omissions claims and litigation, regulatory and tax matters, pension funding, foreign exchange, cybersecurity and business continuity, acquisition integration, and investment and counterparty risks. The Company said it could not reasonably estimate the possible loss range for certain legal matters; adverse outcomes could materially affect future results or cash flows.
- Management completed its Q3 qualitative goodwill assessment and concluded no impairment test was required and goodwill was not impaired. The Company reported effective disclosure controls and no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether underlying revenue and Consulting profitability remain strong, particularly if Oliver Wyman growth moderates.
- The Q4 effect of the $135 million debt-redemption charge and the subsequent debt redemption on financing costs and liquidity.
- Future pension funding needs, including the U.K. plans’ 2015 funding assessment and remaining 2014 contributions.
- Cash requirements and returns associated with acquisitions and the Alexander Forbes investment, alongside continued share repurchases and dividends.
- Developments in legal, regulatory and tax contingencies, for which the filing does not provide a clear aggregate loss estimate.