Marsh & McLennan Companies, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual report, not a standalone fourth-quarter filing; quarterly figures below are unaudited. Amounts are in U.S. dollars unless noted.
Business context
MMC is a global professional services firm operating through Risk and Insurance Services (Marsh and Guy Carpenter) and Consulting (Mercer and Oliver Wyman Group). It reported 76,000 colleagues and operations in more than 130 countries. The April 1, 2019 acquisition of Jardine Lloyd Thompson Group (JLT) materially expanded the business; JLT results are included from the acquisition date, limiting direct year-over-year comparability.
Financial performance and liquidity
| Metric | 2019 | 2018 | Change or context |
|---|---|---|---|
| Revenue | $16.652 billion | $14.950 billion | Up 11%; underlying growth was 4% |
| Operating income | $2.677 billion | $2.761 billion | Down 3%; operating margin approximately 16.1%, versus 18.5% |
| Net income attributable to MMC | $1.742 billion | $1.650 billion | Up 6% |
| Diluted EPS | $3.41 | $3.23 | Up 6% |
| Cash from operations | $2.361 billion | $2.428 billion | Down 3% |
| Cash and cash equivalents | $1.155 billion | $1.066 billion | At year-end |
| Total debt | Approximately $12.0 billion | Approximately $5.8 billion | Increased substantially to finance JLT |
| Working capital | $389 million | $1.010 billion | Declined year over year |
Investing activities used $5.671 billion, including $5.505 billion net cash paid for acquisitions. Financing activities provided $3.306 billion. Cash from operations was broadly stable, while acquisition spending and debt issuance reshaped the balance sheet. The company reported $4.608 billion of commissions and fees receivable at year-end.
Risk and Insurance Services revenue was $9.599 billion, up 17% reported and 4% underlying; operating income was $1.833 billion, down 2%, and margin fell to 19.1% from 22.7%. Consulting revenue was $7.143 billion, up 5% reported and 3% underlying; operating income rose 10% to $1.210 billion, with margin improving to 16.9% from 16.2%.
Fourth-quarter revenue was $4.264 billion versus $3.712 billion in 2018; operating income was $592 million versus $621 million. Net income attributable to MMC was $391 million versus $153 million, and diluted EPS was $0.76 versus $0.30. The filing does not provide a standalone fourth-quarter underlying growth comparison in the cited quarterly data.
Material changes and unusual items
- JLT added approximately $1.2 billion of revenue from acquisitions made in 2019 to reported full-year results. The 2019 comparison includes JLT only from April 1; management’s 4% underlying growth measure compares against an estimated combined prior-year base and is non-GAAP.
- JLT-related integration, restructuring and acquisition costs totaled $485 million in 2019; other restructuring costs were $112 million. Together, these reduced operating income by $597 million.
- Management estimated approximately $700 million of total JLT integration and restructuring charges, about $625 million cash, with most remaining costs expected in 2020 and the balance in 2021. It expected at least $350 million of run-rate savings by the end of 2021; approximately $125 million had been realized in 2019. Plans and estimates remained subject to refinement.
- Interest expense increased to $524 million from $290 million, primarily reflecting acquisition financing. MMC issued approximately $6.5 billion of debt in 2019 and repaid acquired JLT debt and other maturities.
- The effective tax rate was 27.3%, up from 25.6% in 2018. Diluted EPS growth also reflected a lower effective tax rate and the prior-year derivative losses associated with acquisition financing.
- MMC adopted lease accounting in 2019, recognizing $1.9 billion of lease liabilities and $1.7 billion of right-of-use assets at transition. The adoption had no material income-statement impact.
Outlook, risks and contingencies
Management stated that JLT integration was tracking ahead of prior guidance on identified efficiencies, while noting that integration plans and cost and savings estimates could change. The filing does not provide formal revenue, earnings or EPS guidance.
- Leverage and credit: Senior debt was rated A- by S&P and Baa1 by Moody’s, both with Negative outlooks. Debt service, refinancing, ratings and financing access are key sensitivities after the JLT borrowing.
- Regulatory matters: European Commission and Brazilian competition authorities were investigating alleged sharing of commercially sensitive information in aviation insurance and reinsurance broking. The company said outcomes and timing could not be predicted. The U.K. FCA had discontinued its related investigation and advised it would take no further action against Marsh and JLT in that matter.
- Legal exposures: MMC faces errors-and-omissions, fiduciary-duty and other claims. A liability is recorded when loss is probable and reasonably estimable; the filing says some possible losses cannot currently be estimated. The auditor identified the E&O liability estimate as a critical audit matter.
- Acquired pension exposure: Worldwide defined-benefit obligations were approximately $17.6 billion, against approximately $17.0 billion of plan assets. JLT added $255 million of net pension liabilities. Funding needs are sensitive to discount rates, asset returns and local funding rules.
- Data and integration risks: Cybersecurity, privacy compliance and integration of JLT systems remain material risks. MMC reported past security incidents but said they had not had a material adverse effect to date.
- Other sensitivities: Foreign exchange, Brexit, economic conditions, receivables collection, competition, talent retention and changes in insurance pricing and regulation may affect results. Approximately 53% of revenue came from outside the U.S.
- JLT pension-advice matter: MMC reported an approximately £65 million (about $85 million) gross liability for JLT’s enhanced-transfer-value pension advice review, expected to be partially offset by insurance and indemnification claims.
The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting. Management and the auditor excluded JLT from the 2019 internal-control assessment; JLT represented about 5% of year-end assets and 7% of 2019 revenue.
Key facts for investors to verify
- Whether underlying growth and integration savings materialize, and how much of the projected $350 million run-rate savings is achieved by the end of 2021.
- Actual remaining JLT integration cash costs, their timing, and any revisions to the approximately $700 million cost estimate.
- Debt reduction, refinancing needs and credit-rating outlook following the acquisition-related increase in debt.
- Progress and potential financial consequences of the European Commission and Brazilian investigations, E&O claims and JLT’s pension-advice liability.
- Receivables collection, working-capital trends and pension funding requirements, including sensitivity to interest rates and investment returns.
- Comparable operating performance excluding JLT and unusual items; reported revenue growth alone is not a like-for-like measure.