Marsh & McLennan Companies, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. MMC is a global professional services firm operating through Risk and Insurance Services (Marsh and Guy Carpenter) and Consulting (Mercer and Oliver Wyman). The April 1, 2019 acquisition of Jardine Lloyd Thompson (JLT) materially affects comparisons: Q2 2019 includes JLT, while reported 2018 results do not.
Key financial results
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $4.349bn | $3.734bn | $8.420bn | $7.734bn |
| Operating income | $680m | $691m | $1.618bn | $1.599bn |
| Net income attributable to MMC | $332m | $531m | $1.048bn | $1.221bn |
| Diluted EPS | $0.65 | $1.04 | $2.05 | $2.38 |
| Operating margin | 15.6% | 18.5% | 19.2% | 20.7% |
Reported revenue grew 16% in Q2 and 9% in the first half. On management’s comparison including JLT in the prior-year base, underlying revenue growth was 4% in both periods; currency reduced growth by 3% in each period. Segment operating margins were 20.1% for Risk and Insurance Services and 15.5% for Consulting in Q2; first-half margins were 25.0% and 16.1%, respectively.
Operating cash flow was $241m for the first half, down from $413m. Cash and cash equivalents were $1.294bn at June 30, up from $1.066bn at year-end. Investing activities used $5.430bn, principally reflecting $5.5bn of net acquisition cash outflows; financing activities provided $5.324bn, mainly from debt issuance. The current ratio was approximately 1.18, based on current assets of $7.526bn and current liabilities of $6.382bn.
Total debt was approximately $13.122bn at June 30, versus $5.824bn at December 31, 2018; cash less reported debt was approximately negative $11.828bn. Interest expense rose to $141m in Q2 from $68m and to $261m in the first half from $129m, primarily due to JLT financing. MMC reported $549m of commercial paper and $300m drawn under a term loan at quarter-end; its $1.8bn revolving credit facility had no borrowings. Lease accounting adoption added $2.016bn of right-of-use assets and $2.328bn of lease liabilities at June 30.
Material changes and unusual items
- Q2 operating income declined 2% despite higher revenue; first-half operating income increased 1%. Underlying business improvement was offset by JLT-related acquisition, integration and restructuring expenses and higher acquired-intangible amortization.
- Management identified $275m of Q2 and $311m of first-half costs affecting pretax income from JLT-related items: operating impacts of $206m and $271m, respectively, plus derivatives and debt extinguishment. The Q2 effective tax rate was 37.4% versus 25.6%; the first-half rate was 28.2% versus 24.7%. JLT-related nondeductible costs and the aerospace-business disposition affected the tax rate.
- MMC paid approximately $5.6bn for JLT shares and assumed approximately $1bn of JLT debt, which it repaid in April and June. Preliminary purchase accounting recorded $4.9bn of goodwill and $1.8bn of acquired intangible assets; valuations remain subject to adjustment.
- JLT integration and restructuring costs are estimated at approximately $375m, with about half expected in 2019 and the remainder over the following two years. Management expects annualized savings of approximately $250m by 2021, including $75m in 2019 and $175m in 2020.
- MMC declared dividends of $0.455 per share in Q2 and repurchased approximately 1.0m shares for $100m during the first half.
Outlook, risks and contingencies
- Management’s savings and integration estimates depend on developing plans for combining operations, consolidating real estate and migrating JLT systems; actual costs, timing and savings may differ.
- Risks highlighted include successful JLT integration, elevated debt and repayment terms, cybersecurity and data protection, competition and digital disruption, macroeconomic and foreign-exchange movements, and client receivables collection. A 10% move in major currencies against the U.S. dollar, if sustained, was estimated to change annual net operating income by approximately $67m; prevailing exchange rates were expected to reduce full-year net operating income by approximately $36m year over year.
- MMC and JLT are subject to ongoing competition investigations concerning aviation insurance and reinsurance, including a European Commission investigation and a Brazilian proceeding. The filing says timing, outcome and ultimate impact cannot be predicted. The FCA stated it would take no further action in the U.K. aviation matter and the European Commission closed a separate Irish motor-insurance matter as to Marsh.
- The company recorded a gross $82.7m liability for JLT employee-benefit pension-transfer advice matters, expected to be partly offset by insurance and indemnification recoveries. Other professional-services claims and proceedings remain; the filing does not provide a clear estimable range of possible losses for many matters.
- Moody’s and S&P rated MMC’s senior debt Baa1 and A-, respectively, and both assigned a negative outlook. Management reported disclosure controls as effective; JLT controls were still under review as integration proceeded.
Investor verification priorities
- Track JLT integration costs against the approximately $375m estimate and verify delivery and timing of the stated cost savings.
- Assess debt reduction, interest expense, refinancing needs and compliance with credit-facility covenants after the acquisition financing.
- Monitor underlying revenue growth by segment separately from acquisition and currency effects, particularly Guy Carpenter and Mercer.
- Follow developments and potential financial exposure from competition investigations, pension-advice claims, and other litigation and errors-and-omissions contingencies.
- Review operating cash conversion and working-capital trends, including receivables, as reported first-half operating cash flow declined year over year.