Marsh & McLennan Companies, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also provides unaudited quarterly results. Marsh & McLennan 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 66,000 employees.
Financial performance
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $14.95 billion | $14.02 billion |
| Operating income | $2.76 billion | $2.66 billion |
| Operating margin | 18.5% | 18.9% |
| Income before taxes | $2.24 billion | $2.64 billion |
| Net income attributable to the Company | $1.65 billion | $1.49 billion |
| Diluted EPS | $3.23 | $2.87 |
| Cash from operations | $2.43 billion | $1.89 billion |
| Cash and cash equivalents at year-end | $1.07 billion | $1.21 billion |
| Total consolidated debt | $5.82 billion | $5.49 billion |
| Working capital | $1.01 billion | $1.30 billion |
- Revenue increased 7% as reported and 4% on an underlying basis. Risk and Insurance Services revenue rose 8% (5% underlying) to $8.23 billion; Consulting rose 5% (3% underlying) to $6.78 billion.
- Risk and Insurance Services operating income increased 8% to $1.86 billion, with a 22.7% margin, unchanged from 2017. Consulting operating income declined 1% to $1.10 billion; its margin fell to 16.2% from 17.2%.
- Operating income grew 4%, while the consolidated operating margin declined from 18.9% to 18.5% as expenses rose 7%. Cash from operations increased by approximately $535 million. Investing activities used $1.09 billion, including $884 million for acquisitions and $314 million in capital expenditures; financing activities used $1.31 billion.
- Year-end total assets were $21.58 billion and total equity was $7.58 billion. Current assets were $5.93 billion versus current liabilities of $4.92 billion. Commissions and fees receivable were $3.98 billion.
Material changes and unusual items
- Net income increased 11% and diluted EPS increased 13%, even as pretax income fell 15%. The comparison reflects lower 2018 tax expense (25.6% effective rate versus 42.9% in 2017, which included a $460 million provisional U.S. tax-reform charge), higher operating earnings, fewer average diluted shares, higher interest expense and significant 2018 charges.
- 2018 results included a $441 million loss on acquisition-related derivative contracts: $325 million on the GBP purchase-price contract for the pending JLT acquisition and $116 million on Treasury locks. The Treasury locks were settled in January 2019 for $122 million; a further $6 million charge was expected in first-quarter 2019.
- The Company recorded an $83 million impairment charge on its Alexander Forbes investment and a $42 million non-cash U.K. pension settlement charge. Restructuring and related costs included $96 million for Marsh simplification, $51 million for Mercer restructuring and $14 million of other restructuring costs.
- Quarterly data show fourth-quarter 2018 revenue of $3.71 billion, operating income of $621 million, net income attributable to the Company of $153 million and diluted EPS of $0.30. Fourth-quarter 2017 figures were $3.69 billion, $670 million, $29 million and $0.06, respectively; 2017 earnings included the tax-reform charge.
Outlook, financing and risks
- The proposed cash acquisition of Jardine Lloyd Thompson (JLT), valued at approximately £4.3 billion (about $5.6 billion at the stated exchange rate), was expected to close in spring 2019, subject to court, regulatory and other approvals. The Company issued $5 billion of senior notes in January 2019 to help fund the transaction and repay certain JLT debt; additional financing needs and integration outcomes remained relevant.
- Management expected approximately $28 million of U.S. and $65 million of non-U.S. defined-benefit pension contributions in 2019. Mercer expected an additional $20–30 million in 2019 restructuring costs.
- Senior debt was rated A- by S&P and Baa1 by Moody’s, both with negative outlooks. The filing cites acquisition-related leverage, refinancing and financing-cost exposure, as well as significant defined-benefit obligations (approximately $14.5 billion) and plan assets (approximately $14.4 billion) at year-end.
- Principal risks include completion and integration of JLT; ongoing European Commission, Irish and Brazilian competition matters; errors-and-omissions and fiduciary claims; cybersecurity, privacy and vendor risks; regulatory change; economic and insurance-market conditions; Brexit and foreign-exchange volatility; and investment, pension and tax uncertainty. The Company stated that it could not predict the investigations’ outcomes or ultimate impact.
- Accounting changes in 2018 accelerated or shifted some revenue and expense recognition between quarters; management said the new revenue standard did not materially affect annual revenue. The Company expected to recognize a lease liability of approximately $1.8 billion upon adopting the lease standard in 2019, with minimal income-statement impact.
Investor verification priorities
- Track JLT closing conditions, final funding and debt levels, integration costs, and the realization of expected benefits.
- Assess underlying segment growth and Consulting’s margin decline against rising compensation and restructuring expenses.
- Separate derivative fair-value movements and other unusual charges from recurring operating performance; verify the post-close and subsequent-period effects.
- Monitor competition investigations and other legal contingencies, for which the filing does not provide a clear estimate of possible losses.
- Review receivables collection, cash conversion, pension funding and debt-rating outlook; fiduciary cash is segregated and unavailable for general corporate purposes.
The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting.