Marsh & McLennan Companies, Inc. — Q3 2019 Form 10-Q
Business context and reporting period
Quarter ended September 30, 2019; comparative figures are for Q3 and the first nine months of 2018. The global professional services firm operates Risk and Insurance Services (Marsh and Guy Carpenter) and Consulting (Mercer and Oliver Wyman). Results include JLT from its April 1, 2019 acquisition; prior-year reported results do not, limiting comparability.
Key financial metrics
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $3.968bn | $3.504bn | $12.388bn | $11.238bn |
| Operating income | $467m | $541m | $2.085bn | $2.140bn |
| Net income attributable to the Company | $303m | $276m | $1.351bn | $1.497bn |
| Diluted EPS | $0.59 | $0.54 | $2.64 | $2.93 |
| Operating margin | 11.8% | 15.4% | 16.8% | 19.0% |
Q3 reported revenue rose 13%; management reported 5% underlying growth after adjusting for currency and acquisition/disposition effects, including a combined-company comparison for JLT. Nine-month reported revenue rose 10%, with 4% underlying growth. Q3 revenue growth was 6% underlying in Risk and Insurance Services and 4% in Consulting.
Cash provided by operations was $1.291bn for the nine months, versus $1.319bn a year earlier. Cash and cash equivalents were $1.213bn at September 30, 2019, versus $1.066bn at December 31, 2018. Cash used in investing was $5.504bn, principally reflecting $5.5bn of net acquisition outflows; financing provided $4.337bn.
Total short- and long-term debt was $12.568bn at September 30, 2019, compared with $5.824bn at year-end 2018. Long-term debt was $11.429bn and short-term debt $1.139bn. The Company had $325m of commercial paper outstanding and no borrowings on its $1.8bn revolving credit facility. Cash is not directly comparable to fiduciary funds: $7.547bn held for clients is unavailable for corporate use.
Material changes versus prior period
- JLT contributed $352m of Q3 revenue and $848m for the nine months since acquisition; reported comparisons therefore reflect both acquired revenue and acquisition-related costs.
- Q3 operating income declined 14% despite higher revenue, as increased JLT integration and restructuring costs and incentive compensation more than offset improvement in ongoing operations. Nine-month operating income declined 3%.
- Interest expense increased $64m in Q3 and $196m for the nine months, primarily due to debt issued to finance JLT. Nine-month diluted EPS fell 10%, while Q3 diluted EPS rose from $0.54 to $0.59, partly reflecting lower tax expense and prior-year unusual charges.
- Foreign-currency translation reduced equity by $366m in the first nine months. Goodwill rose to $14.286bn, largely from JLT, and the Company reported no goodwill impairment in its third-quarter annual review.
Outlook, management commentary, risks and unusual items
- Management expects at least $375m of JLT integration and restructuring costs over three years; $192m had been incurred through September 30. It expects at least $250m of related cost savings over three years, and said it was tracking ahead of prior savings guidance of $75m in 2019, $175m in 2020, and $250m in 2021. Plans and estimates remain subject to change.
- Q3 included $77m of JLT integration and restructuring costs; nine-month costs were $192m. JLT acquisition-related costs were $21m in Q3 and $133m for the nine months. The filing provides no consolidated earnings guidance.
- Regulatory competition investigations concerning alleged sharing of sensitive information in aviation insurance and reinsurance continue at the European Commission and in Brazil. The Company says timing, outcome, and ultimate impact cannot be predicted; a material adverse effect cannot be ruled out.
- The Company recorded an approximately $83m gross liability for JLT-related enhanced-transfer-value pension advice matters, expected to be partly offset by insurance and indemnification recoveries.
- Other key exposures include professional errors-and-omissions claims, cybersecurity and data privacy, JLT integration and systems migration, foreign exchange, debt repayment and credit ratings, and tax matters. Moody’s and S&P ratings outlooks were negative. Management estimated that a 10% move in major currencies, if sustained, could change full-year net operating income by about $54m.
Important facts for investors to verify
- Underlying revenue growth and the contribution and integration progress of JLT, including whether expected cost savings offset integration costs.
- Debt levels, interest expense, ratings outlook, refinancing needs, and capacity to fund dividends and other capital uses.
- Resolution and potential financial impact of the aviation-market investigations and JLT pension-advice matter.
- Cash conversion and working-capital trends; distinguish corporate cash from fiduciary assets held for clients.
- Whether purchase-price allocation estimates, restructuring costs, and expected savings change as integration plans are finalized.