Business context and reporting period
Marsh & McLennan Companies, Inc. is a global professional services firm operating through Risk and Insurance Services (Marsh and Guy Carpenter) and Consulting (Mercer and Oliver Wyman). This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2018; comparisons are with the corresponding 2017 periods. Amounts are in U.S. dollars unless noted.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $3.504bn | $3.341bn | $11.238bn | $10.339bn |
| Operating income | $541m | $535m | $2.140bn | $1.985bn |
| Net income attributable to MMC | $276m | $393m | $1.497bn | $1.463bn |
| Diluted EPS | $0.54 | $0.76 | $2.93 | $2.81 |
| Operating margin | 15.4% | 16.0% | 19.0% | 19.2% |
- Q3 revenue rose 5% reported and 5% underlying; nine-month revenue rose 9% reported and 4% underlying. Management reported underlying operating earnings up 3% in Q3 and flat for the nine months.
- Risk and Insurance Services revenue was $1.863bn in Q3 and $6.303bn for nine months; operating income was $293m and $1.481bn, respectively. Consulting revenue was $1.656bn and $4.974bn; operating income was $291m and $805m. Q3 margins were 15.7% for Risk and Insurance Services and 17.6% for Consulting.
- Nine-month operating cash flow was $1.319bn, versus $1.137bn in 2017. Capital expenditures were $222m; operating cash flow less capital expenditures was approximately $1.097bn. Cash and cash equivalents declined $254m from year-end to $951m.
- At September 30, cash was $951m, current assets $5.966bn and current liabilities $4.727bn. Short-term debt was $638m and long-term debt $5.512bn, or $6.150bn total. Cash less reported debt was approximately $5.199bn net debt. Fiduciary assets are not available for corporate use.
- Nine-month financing included $675m of share repurchases and $594m of dividends paid. The declared dividend rate was $1.58 per share for the nine-month period, including dividend equivalents.
Material changes versus prior comparable periods
- Q3 net income attributable to MMC fell 30% and diluted EPS fell 29%, despite higher revenue and slightly higher operating income. Key factors included a $100m loss on the JLT-related FX contract, an $81m impairment charge on the Alexander Forbes investment, and higher interest expense; lower taxes and fewer diluted shares partly offset these items.
- Nine-month net income rose 2% and diluted EPS rose 4%. Reported revenue growth included acquisitions, currency movements and the new revenue standard. Underlying revenue increased 4% in both segments over nine months.
- Revenue-standard adoption increased opening retained earnings by $364m. It shifted revenue and costs between quarters, notably accelerating recognition of reinsurance brokerage revenue. For the nine months, it reduced reported revenue by $127m and operating income by $69m versus legacy accounting; prior-year comparatives were not restated. Management said it did not expect a significant impact on annual revenue.
- Foreign-currency translation reduced equity by approximately $535m in the first nine months. Goodwill rose to $9.435bn, including $410m from 2018 acquisitions.
Outlook, management commentary, risks and unusual items
- JLT acquisition: MMC agreed to acquire Jardine Lloyd Thompson for £19.15 per share, valuing the deal at approximately £4.3bn (about $5.6bn at the cited exchange rate). Completion was expected in spring 2019, subject to shareholder, court, antitrust and other approvals, and no later than December 31, 2019. The company entered a £5.2bn bridge facility, with no borrowings outstanding at September 30, and a deal-contingent FX contract to hedge the purchase price. The contract generated a $100m unrealized loss in Q3; further fair-value gains or losses could be significant.
- Costs and operations: Marsh’s simplification program generated $84m of severance and consulting costs through September 30, with approximately $20m of additional costs expected. MMC also recorded a $46m pretax gain from selling a risk-management software and services business, included in revenue.
- Taxes: The effective tax rate was 27.5% in Q3 and 25.2% for nine months. Estimates related to the Tax Cuts and Jobs Act remained provisional; management noted possible further adjustments as guidance and tax-return analysis were completed. The filing estimates $214m of remaining transition-tax payments, excluded from its contractual-obligations table.
- Pensions and liquidity: MMC expected to contribute a further $22m to defined-benefit plans during the remainder of 2018. It also warned a non-cash UK pension settlement charge of $35m–$40m or more might be recognized in Q4, depending on participant elections. The five-year revolving credit facility was increased to $1.8bn in October 2018; no amounts were drawn at quarter-end. Moody’s and S&P had negative outlooks on the company’s ratings.
- Regulatory and legal: European Commission investigations concern possible information-sharing in aviation insurance/reinsurance and possible anticompetitive conduct in Irish commercial motor insurance. The FCA discontinued its aviation-sector investigation of Marsh in May 2018 but was conducting a wholesale-broker market study, with a report expected in Q1 2019. MMC said it could not predict the investigations’ outcome or potential financial impact. Ordinary-course claims and other contingencies may also result in material losses; a reasonably estimable loss range was not provided.
- Other disclosed risks include cyber and data-security incidents, foreign-exchange and interest-rate movements, tax-law changes, acquisition integration and execution, and macroeconomic or regulatory developments. The filing provides no broad earnings or revenue guidance.
Important facts for investors to verify
- Track JLT closing conditions, financing plans, integration risks and the FX contract’s subsequent fair-value impact.
- Assess underlying growth and margins separately from revenue-standard timing effects, acquisitions, currency movements and the software-business disposal gain.
- Review the Alexander Forbes investment valuation and whether further impairment or market-value changes arise.
- Monitor debt maturities, cash generation, shareholder distributions, ratings outlooks and the company’s post-acquisition leverage.
- Follow the EU competition investigations, FCA market study, Tax Cuts and Jobs Act estimates and possible Q4 pension settlement charge; the filing does not quantify potential losses for the regulatory and legal matters.