Marsh & McLennan Companies, Inc. — Q1 2018 Form 10-Q
Business context and reporting period
For the three months ended March 31, 2018. 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).
Key financial metrics
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $4.000 billion | $3.503 billion |
| Operating income | $908 million | $749 million |
| Net income attributable to the Company | $690 million | $569 million |
| Diluted EPS | $1.34 | $1.09 |
| Operating cash flow | $(364) million | $(399) million |
Reported revenue rose 14%; operating income rose 21%; diluted EPS rose 23%. Operating margin was approximately 22.7%, versus 21.4% a year earlier. The effective tax rate was 23.9%, compared with 23.3%.
Revenue by segment: Risk and Insurance Services was $2.344 billion, up 18% (3% underlying); Consulting was $1.668 billion, up 9% (5% underlying). Risk and Insurance Services operating income increased to $716 million from $568 million, with margin of 30.5% versus 28.6%. Consulting operating income increased to $247 million from $225 million, with margin of 14.8% versus 14.7%.
At March 31, cash and cash equivalents were $1.168 billion, total debt was approximately $6.327 billion, and net debt was approximately $5.159 billion. Cash declined $37 million from year-end. Current assets were $6.270 billion and current liabilities $4.122 billion. The company had no borrowings under its $1.5 billion revolving credit facility; $249 million of commercial paper was outstanding. Debt increased from approximately $5.487 billion at December 31, 2017.
Material changes versus the prior comparable period
- Q1 revenue and earnings comparisons were materially affected by adopting the new revenue recognition standard on January 1, 2018. The company reported a $364 million increase to opening retained earnings and did not restate 2017.
- For Q1 2018, the company estimated the new standard increased reported revenue by $161 million, operating income by $101 million and net income by $75 million versus legacy accounting. On a legacy-GAAP basis, Q1 revenue would have been $3.839 billion and net income attributable to the Company $615 million. Management said the standard is not expected to significantly affect annual revenue, but shifts revenue between quarters, particularly for reinsurance brokerage.
- Management attributed consolidated operating-income growth to the revenue standard (+14%), foreign currency translation (+4%), acquisitions (+2%) and underlying growth (+2%). Reported revenue growth also reflected currency (+4%), acquisitions and other (+1%), and the revenue standard (+5%); underlying revenue growth was 4%.
- Operating cash use improved from $399 million to $364 million, but remained negative. Working-capital movements included a $905 million use from accrued compensation and employee benefits and a $357 million use from net receivables.
- Q1 2018 acquisition cash outflow was $24 million, compared with $411 million in Q1 2017. The company completed four small acquisitions for total consideration of $36 million.
Outlook, commentary, risks and unusual items
- No specific earnings or revenue guidance was provided. Management cited underlying revenue growth and expects the new revenue standard to shift quarterly timing without a significant annual revenue impact.
- The Tax Cuts and Jobs Act continued to affect the tax rate. Q1 adjustments to 2017 provisional tax estimates increased tax expense by $3 million; those estimates may be revised during 2018. The company estimated it would repatriate $3.4 billion of foreign earnings previously considered indefinitely reinvested and recorded a $240 million provisional transition-tax charge in Q4 2017.
- Operating and legal risks include European Commission investigations involving aviation/aerospace broking and commercial motor insurance in Ireland, the FCA’s U.K. wholesale insurance broker market study, and the U.K. CMA investigation of investment consulting and fiduciary management. The company is cooperating; timing, outcomes and financial impacts cannot presently be predicted. No reasonably estimable range of loss was provided for these matters.
- Other identified risks include professional-liability claims, cybersecurity and data privacy, competition and disruption, regulation, foreign exchange and interest-rate movements, tax uncertainty, and macroeconomic conditions. Management cautioned that adverse determinations in legal or regulatory matters could materially affect future results, financial condition or cash flows.
- Contractual obligations totaled $11.562 billion, including $1.978 billion of net operating leases. The company expects adoption of the new lease standard to add material right-of-use assets and lease liabilities to its balance sheet.
- Cash from operations is seasonal and affected by collection and payment timing. Fiduciary funds of $5.140 billion are held for clients and are not available for corporate use. The company repurchased $250 million of shares and paid $189 million in dividends during the quarter.
Important facts for investors to verify
- Assess performance on a comparable basis by separating the $161 million revenue-standard effect, currency, acquisitions and underlying growth.
- Review whether reinsurance revenue estimates, variable consideration and capitalized contract costs are supportable; these involve significant judgments and can shift revenue and expenses among quarters.
- Track cash conversion, receivable growth, seasonal compensation payments, debt levels and the use of commercial paper, alongside the company’s share repurchases and dividends.
- Monitor the unresolved competition inquiries, other professional-liability contingencies, and any subsequent disclosures of potential financial exposure.
- Check future updates to provisional TCJA accounting, foreign-earnings repatriation plans, pension funding and the expected balance-sheet impact of lease adoption.