Marsh & McLennan Companies, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. The company is a global professional services firm operating through Risk and Insurance Services (Marsh and Guy Carpenter) and Consulting (Mercer and Oliver Wyman Group).
Financial results
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $4.071 billion | $4.000 billion | +2% reported; +4% underlying |
| Operating income | $938 million | $908 million | +3% |
| Operating margin | 23.0% | 22.7% | +0.3 percentage points |
| Net income attributable to the company | $716 million | $690 million | +4% |
| Diluted EPS | $1.40 | $1.34 | +4% |
| Cash used in operations | $276 million | $364 million | Use decreased $88 million |
Underlying operating earnings increased 7%, partly offset by 2% impacts from currency translation and acquisitions, respectively. The effective tax rate was 23%, versus 23.9% a year earlier.
- Risk and Insurance Services: Revenue was $2.423 billion, up 3% reported and 5% underlying; operating income was $733 million versus $716 million. Segment margin was 30.2%, compared with 30.5%.
- Consulting: Revenue was $1.673 billion, essentially flat reported and up 2% underlying; operating income increased to $279 million from $247 million. Segment margin rose to 16.7% from 14.8%.
Financial position, cash flow and debt
At March 31, 2019, cash and cash equivalents were $1.117 billion. Current assets were $12.675 billion and current liabilities were $5.739 billion; current assets included $6.359 billion held in acquisition escrow, not ordinary operating cash. Total short- and long-term debt was $13.034 billion, up from $5.824 billion at year-end 2018. Equity was $7.986 billion, compared with $7.584 billion.
Operating cash outflow was $276 million, principally reflecting working-capital and compensation-payment timing. Financing provided $6.826 billion, primarily from debt issuance; investing used $187 million. The company issued approximately $6.5 billion of debt proceeds in Q1 to fund the pending JLT transaction. It had $748 million of commercial paper outstanding and no borrowings under its revolving credit facility at quarter-end. Ratings were A- (S&P) and Baa1 (Moody’s), both with negative outlooks.
Material developments, outlook and risks
- JLT acquisition: The acquisition closed April 1, 2019, after the reporting date. JLT shareholders received £19.15 per share, valuing the equity at approximately $5.6 billion; approximately $1 billion of JLT debt was assumed, with about $450 million repaid in April. Escrow proceeds were released following closing.
- Integration and unusual items: Q1 included acquisition-related financing and hedging effects. Management said the items described collectively had no net impact on Q1 results. The company reported a $29 million income-statement gain from the fair-value change in acquisition-related derivative contracts; its discussion also identifies a $42 million unrealized FX-contract gain and a $12 million loss expected in Q2 upon settlement. It recorded $20 million of JLT-related restructuring costs in Q1 and expected to initiate integration and restructuring actions in Q2. The filing does not provide a quantified estimate of total future integration costs or synergies.
- Operating trends: Management cited broad underlying growth in Risk and Insurance Services and Oliver Wyman; Mercer’s underlying revenue was flat, with Wealth down 3%, Health up 3% and Career up 2%. Higher restructuring, JLT-related legal costs and incentive compensation contributed to underlying expense growth.
- Contingencies: EU and Irish competition investigations involving insurance brokerage activities, and a Brazilian antitrust proceeding, remained ongoing. The company was cooperating but could not predict outcomes or estimate potential losses; adverse outcomes could materially affect results, financial condition or cash flows. The company also faces professional-services claims and other legal matters.
- Other exposures: The filing identifies risks from JLT integration and debt repayment, cybersecurity and data privacy, foreign exchange and interest rates, macroeconomic and regulatory conditions, tax matters, and collection of receivables. Management provided no general earnings or revenue guidance in the supplied filing text. It expected approximately $72 million of additional pension contributions during the remainder of 2019.
Investor facts to verify
- Post-close JLT financing, acquired debt, integration costs, realized synergies and the effect on leverage and liquidity.
- The Q2 settlement loss on the JLT FX contract and the reconciliation of the $42 million disclosed FX gain to the $29 million income-statement derivative line.
- Developments, potential penalties and financial exposure from the EU, Irish and Brazilian competition matters and other claims.
- Whether underlying revenue growth and margins continue, particularly in Mercer’s Wealth business, and how restructuring and compensation costs evolve.
- Debt-service capacity, credit-rating outlook and cash available for corporate use, distinguishing it from fiduciary balances and acquisition escrow.