Marsh & McLennan Companies, Inc. — 2017 Q3 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017; comparisons are with the same 2016 periods unless noted. Figures are in millions of dollars except per-share data. The company provides risk and insurance services through Marsh and Guy Carpenter, and consulting through Mercer and Oliver Wyman Group.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $3,341 | $3,135 | $10,339 | $9,847 |
| Operating income | $597 | $572 | $2,170 | $2,031 |
| Net income attributable to company | $393 | $379 | $1,463 | $1,332 |
| Diluted EPS | $0.76 | $0.73 | $2.81 | $2.54 |
| Operating margin | 17.9% | 18.2% | 21.0% | 20.6% |
| Operating cash flow | — | — | $1,137 | $1,112 |
Q3 revenue and operating income each grew 7%; diluted EPS increased 4%. Nine-month revenue grew 5%, operating income 7%, net income attributable to the company 10%, and diluted EPS 11%. Underlying revenue growth, excluding currency and acquisition/disposition effects, was 3% in both periods. The nine-month earnings comparison benefited from a $58 million reduction in tax expense following adoption of share-based compensation accounting guidance.
Q3 segment revenue and operating income were $1,763 million and $314 million for Risk and Insurance Services, versus $1,632 million and $315 million a year earlier; its operating margin declined to 17.8% from 19.2%. Consulting revenue and operating income were $1,587 million and $329 million, versus $1,513 million and $308 million; its margin was 20.7% versus 20.4%. Nine-month segment operating income was $1,455 million for Risk and Insurance Services and $853 million for Consulting.
Cash, debt, and liquidity
At September 30, cash and cash equivalents were $1,078 million, up from $1,026 million at year-end 2016. Total debt was $5,488 million, including $13 million short-term and $5,475 million long-term, compared with $4,807 million at year-end. Cash less total debt was approximately $4,410 million. The company had no commercial paper outstanding and no borrowings under its $1.5 billion revolving credit facility; the facility expires in November 2020 and is subject to financial covenants. Fiduciary assets and liabilities of $5,128 million are held for clients and are not available for corporate use.
Nine-month cash flow included $1,137 million from operations, $859 million used in investing, and $527 million used in financing. Investing outflows included $629 million for acquisitions and $217 million for capital expenditures. Financing included $600 million of share repurchases and $545 million of dividends paid. The company reported $9,970 million of contractual obligations, including debt, interest, leases and service agreements; this excludes pension liabilities and certain contingencies.
Material changes, outlook, and risks
- Acquisition spending increased substantially: 2017 nine-month net cash outflow for acquisitions was $629 million, versus $88 million in 2016. The company completed eight acquisitions and recorded $533 million of acquisition goodwill.
- Management provided no specific earnings or revenue forecast. It expects adoption of the new revenue recognition standard on January 1, 2018, using the modified retrospective method. Revenue timing is expected to shift materially among quarters, particularly for reinsurance broking, but management does not expect a significant annual revenue impact. Some contract-related costs will also be capitalized; the total impact had not been fully quantified.
- Management expected a possible non-cash U.K. pension settlement charge of $30–$50 million or more in Q4 2017, depending on participant lump-sum elections. It also expected approximately $63 million of additional pension contributions during the remainder of 2017.
- Marsh was included in European Commission investigations concerning aviation and aerospace insurance/reinsurance broking and commercial motor insurance in Ireland. The U.K. aviation-sector investigation was discontinued after the Commission opened its investigation. The company said the matters were at an early stage and their timing, outcome, and impact could not be predicted; adverse outcomes could materially affect results, financial condition, or cash flows.
- Other exposures include errors-and-omissions claims, regulatory and legal proceedings, cyber and business-continuity risks, foreign exchange and interest-rate movements, pension obligations, and changing tax rules. The company said it could not estimate a loss range for developing legal matters. Its annual third-quarter goodwill assessment found no impairment; Alexander Forbes, carried at $268 million versus market value of $225 million, was also determined not to be impaired.
Most important facts for investors to verify
- Whether underlying revenue growth and operating margins persist, particularly the Q3 margin decline in Risk and Insurance Services.
- The actual Q4 pension settlement charge and required pension contributions.
- The outcome and potential financial effects of the European Commission investigations and other contingent claims.
- The quantified transition effects of the 2018 revenue standard, including quarterly timing changes and contract assets or capitalized costs.
- Acquisition integration, purchase consideration, debt levels, and the company’s continued allocation of cash to repurchases and dividends.