Date of report (Date of earliest event reported) | July 26, 2018 |
Marsh & McLennan Companies, Inc. |
(Exact Name of Registrant as Specified in its Charter) |
Delaware | 1-5998 | 36-2668272 |
(State or Other Jurisdiction of Incorporation) | (Commission File Number) | (IRS Employer Identification No.) |
1166 Avenue of the Americas, New York, NY | 10036 |
(Address of Principal Executive Offices) | (Zip Code) |
Registrant’s telephone number, including area code | (212) 345-5000 |
o | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
o | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
o | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
o | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Emerging growth company o | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o |
MARSH & McLENNAN COMPANIES, INC. | ||
By: | /s/ Katherine J. Brennan | |
Name: | Katherine J. Brennan | |
Title: | Deputy General Counsel, Chief Compliance Officer & Corporate Secretary | |
• | the impact of any investigations, reviews, market studies or other activity by regulatory or law enforcement authorities, including the ongoing investigations by the European Commission, the Australian Royal Commission and the U.K. FCA; |
• | the impact from lawsuits, other contingent liabilities and loss contingencies arising from errors and omissions, breach of fiduciary duty or other claims against us; |
• | our organization's ability to maintain adequate safeguards to protect the security of our information systems and confidential, personal or proprietary information, particularly given the large volume of our vendor network and the need to patch software vulnerabilities; |
• | our ability to compete effectively and adapt to changes in the competitive environment, including to respond to disintermediation, digital disruption and other types of innovation; |
• | the financial and operational impact of complying with laws and regulations where we operate, including cybersecurity and data privacy regulations such as the E.U.’s General Data Protection Regulation, anti-corruption laws and trade sanctions regimes; |
• | the regulatory, contractual and reputational risks that arise based on insurance placement activities and various broker revenue streams; |
• | the extent to which we manage risks associated with the various services, including fiduciary and investments and other advisory services; |
• | our ability to successfully recover if we experience a business continuity problem due to cyberattack, natural disaster or otherwise; |
• | the impact of changes in tax laws, guidance and interpretations, including related to certain provisions of the U.S. Tax Cuts and Jobs Act, or disagreements with tax authorities; |
• | the impact of fluctuations in foreign exchange and interest rates on our results; |
• | the impact of macroeconomic, political, regulatory or market conditions on us, our clients and the industries in which we operate; and |
• | the impact of changes in accounting rules or in our accounting estimates or assumptions, including the impact of the adoption of the new revenue recognition, pension and lease accounting standards. |
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Revenue | $ | 3,734 | $ | 3,495 | $ | 7,734 | $ | 6,998 | ||||||||
Expense: | ||||||||||||||||
Compensation and Benefits | 2,135 | 1,998 | 4,359 | 4,003 | ||||||||||||
Other Operating Expenses | 908 | 796 | 1,776 | 1,545 | ||||||||||||
Operating Expenses | 3,043 | 2,794 | 6,135 | 5,548 | ||||||||||||
Operating Income | 691 | 701 | 1,599 | 1,450 | ||||||||||||
Other Net Benefit Credits (a) | 65 | 63 | 131 | 123 | ||||||||||||
Interest Income | 3 | 2 | 6 | 4 | ||||||||||||
Interest Expense | (68 | ) | (60 | ) | (129 | ) | (118 | ) | ||||||||
Investment Income | 28 | 5 | 28 | 5 | ||||||||||||
Income Before Income Taxes | 719 | 711 | 1,635 | 1,464 | ||||||||||||
Income Tax Expense | 183 | 204 | 403 | 379 | ||||||||||||
Net Income Before Non-Controlling Interests | 536 | 507 | 1,232 | 1,085 | ||||||||||||
Less: Net Income Attributable to Non-Controlling Interests | 5 | 6 | 11 | 15 | ||||||||||||
Net Income Attributable to the Company | $ | 531 | $ | 501 | $ | 1,221 | $ | 1,070 | ||||||||
Net Income Per Share Attributable to the Company: | ||||||||||||||||
- Basic | $ | 1.05 | $ | 0.98 | $ | 2.41 | $ | 2.08 | ||||||||
- Diluted | $ | 1.04 | $ | 0.96 | $ | 2.38 | $ | 2.05 | ||||||||
Average Number of Shares Outstanding | ||||||||||||||||
- Basic | 507 | 514 | 507 | 514 | ||||||||||||
- Diluted | 512 | 520 | 513 | 521 | ||||||||||||
Shares Outstanding at 6/30 | 505 | 513 | 505 | 513 |
(a) Effective January 1, 2018, ASC 715, as amended, changed the presentation of net periodic pension cost and net periodic postretirement cost. The Company has restated prior years and quarters for this revised presentation. |
The Company adopted the new revenue standard ("ASC 606") using the modified retrospective method, applied to all contracts. The guidance requires entities that elected the modified retrospective method to disclose the impact to financial statement line items as a result of applying the new guidance (rather than previous U.S. GAAP). The table below shows the impacts on the consolidated statement of income. |
Three Months Ended June 30, 2018 | Six Months Ended June 30, 2018 | |||||||||||||||||||||||
As Reported | Revenue Standard Impact | Prior to Adoption | As Reported | Revenue Standard Impact | Prior to Adoption | |||||||||||||||||||
Revenue | $ | 3,734 | $ | (24 | ) | $ | 3,710 | $ | 7,734 | $ | (185 | ) | $ | 7,549 | ||||||||||
Expense: | ||||||||||||||||||||||||
Compensation and Benefits | 2,135 | (10 | ) | 2,125 | 4,359 | (70 | ) | 4,289 | ||||||||||||||||
Other Operating Expenses | 908 | — | 908 | 1,776 | — | 1,776 | ||||||||||||||||||
Operating Expenses | 3,043 | (10 | ) | 3,033 | 6,135 | (70 | ) | 6,065 | ||||||||||||||||
Operating Income | 691 | (14 | ) | 677 | 1,599 | (115 | ) | 1,484 | ||||||||||||||||
Other Net Benefit Credits | 65 | — | 65 | 131 | — | 131 | ||||||||||||||||||
Interest Income | 3 | — | 3 | 6 | — | 6 | ||||||||||||||||||
Interest Expense | (68 | ) | — | (68 | ) | (129 | ) | — | (129 | ) | ||||||||||||||
Investment Income | 28 | — | 28 | 28 | — | 28 | ||||||||||||||||||
Income Before Income Taxes | 719 | (14 | ) | 705 | 1,635 | (115 | ) | 1,520 | ||||||||||||||||
Income Tax Expense | 183 | (4 | ) | 179 | 403 | (30 | ) | 373 | ||||||||||||||||
Net Income Before Non-Controlling Interests | 536 | (10 | ) | 526 | 1,232 | (85 | ) | 1,147 | ||||||||||||||||
Less: Net Income Attributable to Non-Controlling Interests | 5 | — | 5 | 11 | — | 11 | ||||||||||||||||||
Net Income Attributable to the Company | $ | 531 | $ | (10 | ) | $ | 521 | $ | 1,221 | $ | (85 | ) | $ | 1,136 | ||||||||||
Net Income Per Share Attributable to the Company: | ||||||||||||||||||||||||
- Basic | $ | 1.05 | $ | (0.02 | ) | $ | 1.03 | $ | 2.41 | $ | (0.17 | ) | $ | 2.24 | ||||||||||
- Diluted | $ | 1.04 | $ | (0.02 | ) | $ | 1.02 | $ | 2.38 | $ | (0.16 | ) | $ | 2.22 | ||||||||||
Average Number of Shares Outstanding | ||||||||||||||||||||||||
- Basic | 507 | 507 | 507 | 507 | 507 | 507 | ||||||||||||||||||
- Diluted | 512 | 512 | 512 | 513 | 513 | 513 | ||||||||||||||||||
Shares Outstanding at 6/30 | 505 | 505 | 505 | 505 | 505 | 505 |
Components of Revenue Change* | |||||||||||||||||||||||
Three Months Ended June 30, | % Change GAAP Revenue | Currency Impact | Acquisitions/ Dispositions/ Other Impact | Revenue Standard Impact | Underlying Revenue | ||||||||||||||||||
2018 | 2017 | ||||||||||||||||||||||
Risk and Insurance Services | |||||||||||||||||||||||
Marsh | $ | 1,749 | $ | 1,614 | 8 | % | 2 | % | 1 | % | — | 5 | % | ||||||||||
Guy Carpenter | 332 | 293 | 13 | % | 1 | % | — | 7 | % | 5 | % | ||||||||||||
Subtotal | 2,081 | 1,907 | 9 | % | 2 | % | 1 | % | 1 | % | 5 | % | |||||||||||
Fiduciary Interest Income | 15 | 9 | |||||||||||||||||||||
Total Risk and Insurance Services | 2,096 | 1,916 | 9 | % | 2 | % | 1 | % | 1 | % | 5 | % | |||||||||||
Consulting | |||||||||||||||||||||||
Mercer | 1,158 | 1,109 | 5 | % | 2 | % | 1 | % | — | 2 | % | ||||||||||||
Oliver Wyman Group | 492 | 483 | 2 | % | 3 | % | — | — | (2 | )% | |||||||||||||
Total Consulting | 1,650 | 1,592 | 4 | % | 2 | % | 1 | % | — | 1 | % | ||||||||||||
Corporate / Eliminations | (12 | ) | (13 | ) | |||||||||||||||||||
Total Revenue | $ | 3,734 | $ | 3,495 | 7 | % | 2 | % | 1 | % | 1 | % | 3 | % |
Components of Revenue Change* | |||||||||||||||||||||||
Three Months Ended June 30, | % Change GAAP Revenue | Currency Impact | Acquisitions/ Dispositions/ Other Impact | Revenue Standard Impact | Underlying Revenue | ||||||||||||||||||
2018 | 2017 | ||||||||||||||||||||||
Marsh: | |||||||||||||||||||||||
EMEA | $ | 526 | $ | 497 | 6 | % | 5 | % | — | — | 1 | % | |||||||||||
Asia Pacific | 183 | 168 | 9 | % | 2 | % | — | — | 6 | % | |||||||||||||
Latin America | 99 | 99 | — | (5 | )% | 3 | % | — | 3 | % | |||||||||||||
Total International | 808 | 764 | 6 | % | 3 | % | 1 | % | — | 2 | % | ||||||||||||
U.S. / Canada | 941 | 850 | 11 | % | — | 2 | % | 1 | % | 8 | % | ||||||||||||
Total Marsh | $ | 1,749 | $ | 1,614 | 8 | % | 2 | % | 1 | % | — | 5 | % | ||||||||||
Mercer: | |||||||||||||||||||||||
Defined Benefit Consulting & Administration | $ | 320 | $ | 340 | (6 | )% | 3 | % | (3 | )% | — | (6 | )% | ||||||||||
Investment Management & Related Services | 232 | 192 | 20 | % | 2 | % | 6 | % | — | 12 | % | ||||||||||||
Total Wealth | 552 | 532 | 4 | % | 3 | % | — | — | 1 | % | |||||||||||||
Health | 429 | 423 | 2 | % | 1 | % | — | (1 | )% | 1 | % | ||||||||||||
Career | 177 | 154 | 15 | % | 2 | % | 6 | % | — | 7 | % | ||||||||||||
Total Mercer | $ | 1,158 | $ | 1,109 | 5 | % | 2 | % | 1 | % | — | 2 | % |
Note: |
Underlying revenue measures the change in revenue using consistent currency exchange rates, excluding the impact of certain items that affect comparability such as: acquisitions, dispositions, transfers among businesses, changes in estimate methodology and the impact of the new revenue standard. |
* Components of revenue change may not add due to rounding. |
Components of Revenue Change* | |||||||||||||||||||||||
Six Months Ended June 30, | % Change GAAP Revenue | Currency Impact | Acquisitions/ Dispositions/Other Impact | Revenue Standard Impact | Underlying Revenue | ||||||||||||||||||
2018 | 2017 | ||||||||||||||||||||||
Risk and Insurance Services | |||||||||||||||||||||||
Marsh | $ | 3,443 | $ | 3,210 | 7 | % | 3 | % | 2 | % | (1 | )% | 3 | % | |||||||||
Guy Carpenter | 969 | 678 | 43 | % | 2 | % | — | 35 | % | 6 | % | ||||||||||||
Subtotal | 4,412 | 3,888 | 13 | % | 3 | % | 2 | % | 5 | % | 4 | % | |||||||||||
Fiduciary Interest Income | 28 | 17 | |||||||||||||||||||||
Total Risk and Insurance Services | 4,440 | 3,905 | 14 | % | 3 | % | 2 | % | 5 | % | 4 | % | |||||||||||
Consulting | |||||||||||||||||||||||
Mercer | 2,329 | 2,186 | 7 | % | 3 | % | 1 | % | — | 3 | % | ||||||||||||
Oliver Wyman Group | 989 | 932 | 6 | % | 4 | % | — | — | 2 | % | |||||||||||||
Total Consulting | 3,318 | 3,118 | 6 | % | 3 | % | 1 | % | — | 3 | % | ||||||||||||
Corporate / Eliminations | (24 | ) | (25 | ) | |||||||||||||||||||
Total Revenue | $ | 7,734 | $ | 6,998 | 11 | % | 3 | % | 1 | % | 3 | % | 4 | % |
Components of Revenue Change* | |||||||||||||||||||||||
Six Months Ended June 30, | % Change GAAP Revenue | Currency Impact | Acquisitions/ Dispositions/Other Impact | Revenue Standard Impact | Underlying Revenue | ||||||||||||||||||
2018 | 2017 | ||||||||||||||||||||||
Marsh: | |||||||||||||||||||||||
EMEA | $ | 1,169 | $ | 1,086 | 8 | % | 8 | % | — | — | (1 | )% | |||||||||||
Asia Pacific | 347 | 320 | 8 | % | 3 | % | — | — | 5 | % | |||||||||||||
Latin America | 183 | 179 | 2 | % | (4 | )% | 2 | % | — | 4 | % | ||||||||||||
Total International | 1,699 | 1,585 | 7 | % | 6 | % | — | — | 1 | % | |||||||||||||
U.S. / Canada | 1,744 | 1,625 | 7 | % | — | 4 | % | (2 | )% | 6 | % | ||||||||||||
Total Marsh | $ | 3,443 | $ | 3,210 | 7 | % | 3 | % | 2 | % | (1 | )% | 3 | % | |||||||||
Mercer: | |||||||||||||||||||||||
Defined Benefit Consulting & Administration | $ | 659 | $ | 674 | (2 | )% | 5 | % | (2 | )% | — | (5 | )% | ||||||||||
Investment Management & Related Services | 458 | 378 | 21 | % | 4 | % | 4 | % | — | 14 | % | ||||||||||||
Total Wealth | 1,117 | 1,052 | 6 | % | 4 | % | — | — | 2 | % | |||||||||||||
Health | 871 | 838 | 4 | % | 2 | % | (1 | )% | (1 | )% | 4 | % | |||||||||||
Career | 341 | 296 | 15 | % | 3 | % | 6 | % | — | 6 | % | ||||||||||||
Total Mercer | $ | 2,329 | $ | 2,186 | 7 | % | 3 | % | 1 | % | — | 3 | % |
Note: |
Underlying revenue measures the change in revenue using consistent currency exchange rates, excluding the impact of certain items that affect comparability such as: acquisitions, dispositions, transfers among businesses, changes in estimate methodology and the impact of the new revenue standard. |
* Components of revenue change may not add due to rounding. |
Overview |
The Company reports its financial results in accordance with accounting principles generally accepted in the United States (referred to in this release as "GAAP" or "reported" results). The Company also refers to and presents below certain additional non-GAAP financial measures, within the meaning of Regulation G under the Securities Exchange Act of 1934. These measures are: adjusted operating income (loss), adjusted operating margin, adjusted income, net of tax and adjusted earnings per share (EPS). The Company has included reconciliations of these non-GAAP financial measures to the most directly comparable financial measure calculated in accordance with GAAP in the following tables. |
The Company believes these non-GAAP financial measures provide useful supplemental information that enables investors to better compare the Company’s performance across periods. Management also uses these measures internally to assess the operating performance of its businesses, to assess performance for employee compensation purposes and to decide how to allocate resources. However, investors should not consider these non-GAAP measures in isolation from, or as a substitute for, the financial information that the Company reports in accordance with GAAP. The Company's non-GAAP measures include adjustments that reflect how management views our businesses, and may differ from similarly titled non-GAAP measures presented by other companies. |
Adjusted Operating Income (Loss) and Adjusted Operating Margin |
Adjusted operating income (loss) is calculated by excluding the impact of certain noteworthy items from the Company's GAAP operating income or (loss). The following tables identify these noteworthy items and reconcile adjusted operating income (loss) to GAAP operating income or loss, on a consolidated and segment basis, for the three months ended June 30, 2018. The following tables also present adjusted operating margin. For the three months ended June 30, 2018, adjusted operating margin is calculated by dividing adjusted operating income by consolidated or segment GAAP revenue. |
Risk & Insurance Services | Consulting | Corporate/ Eliminations | Total | |||||||||||||
Three Months Ended June 30, 2018 | ||||||||||||||||
Operating income (loss) | $ | 472 | $ | 267 | $ | (48 | ) | $ | 691 | |||||||
Add (Deduct) impact of Noteworthy Items: | ||||||||||||||||
Restructuring (a) | 55 | — | 3 | 58 | ||||||||||||
Adjustments to acquisition related accounts (b) | 5 | 1 | — | 6 | ||||||||||||
Other | — | (1 | ) | — | (1 | ) | ||||||||||
Operating income adjustments | 60 | — | 3 | 63 | ||||||||||||
Adjusted operating income (loss) | $ | 532 | $ | 267 | $ | (45 | ) | $ | 754 | |||||||
Operating margin | 22.5 | % | 16.2 | % | N/A | 18.5 | % | |||||||||
Adjusted operating margin | 25.4 | % | 16.2 | % | N/A | 20.2 | % | |||||||||
(a) Includes severance and related charges from restructuring activities, adjustments to restructuring liabilities for future rent under non-cancellable leases and other real estate costs, and restructuring costs related to the integration of recent acquisitions. Risk and Insurance Services in 2018 reflects severance and consulting costs related to the Marsh simplification initiative. |
(b) Primarily includes the change in fair value as measured each quarter of contingent consideration related to acquisitions. |
Note: |
Comparative financial information for the three months ended June 30, 2017 is presented on page 10. |
As discussed earlier, the Company has adopted the new revenue standard using the modified retrospective method, which requires the disclosure of the impacts of the standard on each financial statement line item. The non-GAAP measures below present an analysis of results reflecting 2018 financial information excluding the impact of the application of ASC 606, to facilitate a comparison to the 2017 results. Except for the adjustment for the effects of ASC 606 in 2018, these non-GAAP measures are calculated as described on the prior page. |
Risk & Insurance Services | Consulting | Corporate/ Eliminations | Total | |||||||||||||
Three Months Ended June 30, 2018 | ||||||||||||||||
Operating income (loss) without adoption | $ | 458 | $ | 267 | $ | (48 | ) | $ | 677 | |||||||
Add (Deduct) impact of Noteworthy Items: | ||||||||||||||||
Restructuring (a) | 55 | — | 3 | 58 | ||||||||||||
Adjustments to acquisition related accounts (b) | 5 | 1 | — | 6 | ||||||||||||
Other | — | (1 | ) | — | (1 | ) | ||||||||||
Operating income adjustments | 60 | — | 3 | 63 | ||||||||||||
Adjusted operating income (loss) | $ | 518 | $ | 267 | $ | (45 | ) | $ | 740 | |||||||
Operating margin - Comparable basis | 22.2 | % | 16.2 | % | N/A | 18.3 | % | |||||||||
Adjusted operating margin - Comparable basis | 25.0 | % | 16.2 | % | N/A | 20.0 | % | |||||||||
Three Months Ended June 30, 2017 | ||||||||||||||||
Operating income (loss) | $ | 482 | $ | 265 | $ | (46 | ) | $ | 701 | |||||||
Add (Deduct) impact of Noteworthy Items: | ||||||||||||||||
Restructuring (a) | — | 13 | 2 | 15 | ||||||||||||
Adjustments to acquisition related accounts (b) | 7 | 2 | — | 9 | ||||||||||||
Operating income adjustments | 7 | 15 | 2 | 24 | ||||||||||||
Adjusted operating income (loss) | $ | 489 | $ | 280 | $ | (44 | ) | $ | 725 | |||||||
Operating margin | 25.2 | % | 16.6 | % | N/A | 20.1 | % | |||||||||
Adjusted operating margin | 25.5 | % | 17.6 | % | N/A | 20.7 | % |
(a) Includes severance and related charges from restructuring activities, adjustments to restructuring liabilities for future rent under non-cancellable leases and other real estate costs, and restructuring costs related to the integration of recent acquisitions. Risk and Insurance Services in 2018 reflects severance and consulting costs related to the Marsh simplification initiative. Consulting in 2017 reflects severance related to the Mercer business restructure. |
(b) Primarily includes the change in fair value as measured each quarter of contingent consideration related to acquisitions. |
Overview |
The Company reports its financial results in accordance with accounting principles generally accepted in the United States (referred to in this release as "GAAP" or "reported" results). The Company also refers to and presents below certain additional non-GAAP financial measures, within the meaning of Regulation G under the Securities Exchange Act of 1934. These measures are: adjusted operating income (loss), adjusted operating margin, adjusted income, net of tax and adjusted earnings per share (EPS). The Company has included reconciliations of these non-GAAP financial measures to the most directly comparable financial measure calculated in accordance with GAAP in the following tables. |
The Company believes these non-GAAP financial measures provide useful supplemental information that enables investors to better compare the Company’s performance across periods. Management also uses these measures internally to assess the operating performance of its businesses, to assess performance for employee compensation purposes and to decide how to allocate resources. However, investors should not consider these non-GAAP measures in isolation from, or as a substitute for, the financial information that the Company reports in accordance with GAAP. The Company's non-GAAP measures include adjustments that reflect how management views our businesses, and may differ from similarly titled non-GAAP measures presented by other companies. |
Adjusted Operating Income (Loss) and Adjusted Operating Margin |
Adjusted operating income (loss) is calculated by excluding the impact of certain noteworthy items from the Company's GAAP operating income or (loss). The following tables identify these noteworthy items and reconcile adjusted operating income (loss) to GAAP operating income or loss, on a consolidated and segment basis, for the six months ended June 30, 2018. The following tables also present adjusted operating margin. For the six months ended June 30, 2018, adjusted operating margin is calculated by dividing adjusted operating income by consolidated or segment GAAP revenue. |
Risk & Insurance Services | Consulting | Corporate/ Eliminations | Total | |||||||||||||
Six Months Ended June 30, 2018 | ||||||||||||||||
Operating income (loss) | $ | 1,188 | $ | 514 | $ | (103 | ) | $ | 1,599 | |||||||
Add (Deduct) impact of Noteworthy Items: | ||||||||||||||||
Restructuring (a) | 58 | 1 | 5 | 64 | ||||||||||||
Adjustments to acquisition related accounts (b) | 9 | 1 | — | 10 | ||||||||||||
Other | — | (1 | ) | — | (1 | ) | ||||||||||
Operating income adjustments | 67 | 1 | 5 | 73 | ||||||||||||
Adjusted operating income (loss) | $ | 1,255 | $ | 515 | $ | (98 | ) | $ | 1,672 | |||||||
Operating margin | 26.8 | % | 15.5 | % | N/A | 20.7 | % | |||||||||
Adjusted operating margin | 28.3 | % | 15.5 | % | N/A | 21.6 | % |
(a) Includes severance and related charges from restructuring activities, adjustments to restructuring liabilities for future rent under non-cancellable leases and other real estate costs, and restructuring costs related to the integration of recent acquisitions. Risk and Insurance Services in 2018 reflects severance and consulting costs related to the Marsh simplification initiative. |
(b) Primarily includes the change in fair value as measured each quarter of contingent consideration related to acquisitions. |
Note: |
Comparative financial information for the six months ended June 30, 2017 is presented on page 12. |
Reconciliation of Non-GAAP Measures - Comparable Accounting Basis (cont’d) |
Risk & Insurance Services | Consulting | Corporate/ Eliminations | Total | |||||||||||||
Six Months Ended June 30, 2018 | ||||||||||||||||
Operating income (loss) without adoption | $ | 1,068 | $ | 519 | $ | (103 | ) | $ | 1,484 | |||||||
Add (Deduct) impact of Noteworthy Items: | ||||||||||||||||
Restructuring (a) | 58 | 1 | 5 | 64 | ||||||||||||
Adjustments to acquisition related accounts (b) | 9 | 1 | — | 10 | ||||||||||||
Other | — | (1 | ) | — | (1 | ) | ||||||||||
Operating income adjustments | 67 | 1 | 5 | 73 | ||||||||||||
Adjusted operating income (loss) | $ | 1,135 | $ | 520 | $ | (98 | ) | $ | 1,557 | |||||||
Operating margin - Comparable basis | 25.2 | % | 15.6 | % | N/A | 19.7 | % | |||||||||
Adjusted operating margin - Comparable basis | 26.7 | % | 15.6 | % | N/A | 20.6 | % | |||||||||
Six Months Ended June 30, 2017 | ||||||||||||||||
Operating income (loss) | $ | 1,050 | $ | 490 | $ | (90 | ) | $ | 1,450 | |||||||
Add (Deduct) impact of Noteworthy Items: | ||||||||||||||||
Restructuring (a) | 4 | 16 | 4 | 24 | ||||||||||||
Adjustments to acquisition related accounts (b) | (10 | ) | 3 | — | (7 | ) | ||||||||||
Operating income adjustments | (6 | ) | 19 | 4 | 17 | |||||||||||
Adjusted operating income (loss) | $ | 1,044 | $ | 509 | $ | (86 | ) | $ | 1,467 | |||||||
Operating margin | 26.9 | % | 15.7 | % | N/A | 20.7 | % | |||||||||
Adjusted operating margin | 26.7 | % | 16.3 | % | N/A | 21.0 | % |
(a) Includes severance and related charges from restructuring activities, adjustments to restructuring liabilities for future rent under non-cancellable leases and other real estate costs, and restructuring costs related to the integration of recent acquisitions. Risk and Insurance Services in 2018 reflects severance and consulting costs related to the Marsh simplification initiative. Consulting in 2017 reflects severance related to the Mercer business restructure. |
(b) Primarily includes the change in fair value as measured each quarter of contingent consideration related to acquisitions. |
Adjusted Income, Net of Tax and Adjusted Earnings per Share |
Adjusted income, net of tax is calculated as the Company's GAAP income from continuing operations, adjusted to reflect the after-tax impact of the operating income adjustments set forth in the preceding tables and investments gains or losses related to the impact of mark-to-market adjustments on certain equity securities previously recorded to equity. Adjusted EPS is calculated by dividing the Company’s adjusted income, net of tax, by MMC's average number of shares outstanding-diluted for the relevant period. The following tables reconcile adjusted income, net of tax to GAAP income from continuing operations and adjusted EPS to GAAP EPS for the three and six months ended June 30, 2018. |
Three Months Ended June 30, 2018 | ||||||||||||
Amount | Adjusted EPS | |||||||||||
Income from continuing operations | $ | 536 | ||||||||||
Less: Non-controlling interest, net of tax | 5 | |||||||||||
Subtotal | $ | 531 | $ | 1.04 | ||||||||
Operating income adjustments | $ | 63 | ||||||||||
Investments adjustment (a) | (26 | ) | ||||||||||
Impact of income taxes | (6 | ) | ||||||||||
31 | 0.06 | |||||||||||
Adjusted income, net of tax | $ | 562 | $ | 1.10 | ||||||||
Six Months Ended June 30, 2018 | ||||||||||||
Amount | Adjusted EPS | |||||||||||
Income from continuing operations | $ | 1,232 | ||||||||||
Less: Non-controlling interest, net of tax | 11 | |||||||||||
Subtotal | $ | 1,221 | $ | 2.38 | ||||||||
Operating income adjustments | $ | 73 | ||||||||||
Investments adjustment (a) | (18 | ) | ||||||||||
Impact of income taxes | (10 | ) | ||||||||||
Adjustments to provisional 2017 tax estimates (b) | 3 | |||||||||||
48 | 0.09 | |||||||||||
Adjusted income, net of tax | $ | 1,269 | $ | 2.47 |
(a) Mark-to-market adjustments for investments classified as available for sale under prior guidance were recorded to equity, net of tax. Beginning January 1, 2018 such adjustments must be recorded as part of investment income. Prior periods were not restated. The Company excludes such mark-to-market gains or losses from its calculation of adjusted earnings per share. The Company recorded mark-to-market gains of $26 million and $18 million for the three and six-month periods ended June 30, 2018, respectively, which are included in Investment Income in the Consolidated Statement of Income. |
(b) Relates to adjustments to provisional 2017 year-end estimates of transition taxes and U.S. deferred tax assets and liabilities from U.S. tax reform. |
Note: |
Comparative financial information for the three and six months ended June 30, 2017 is presented on page 14. |
As discussed earlier, the Company adopted the new revenue standard using the modified retrospective method, which requires the disclosure of the impacts of the standard on each financial statement line item. The non-GAAP measures below present an analysis of results reflecting 2018 financial information excluding the impact of the application of ASC 606, to facilitate a comparison to the 2017 results. Except for the adjustment for the effects of ASC 606 in 2018, these non-GAAP measures are calculated as described on the prior page. |
Three Months Ended June 30, 2018 | Three Months Ended June 30, 2017 | |||||||||||||||||||||||
Amount | Adjusted EPS | Amount | Adjusted EPS | |||||||||||||||||||||
Income from continuing operations, (2018 prior to the impact of ASC 606) | $ | 526 | $ | 507 | ||||||||||||||||||||
Less: Non-controlling interest, net of tax | 5 | 6 | ||||||||||||||||||||||
Subtotal | $ | 521 | $ | 1.02 | $ | 501 | $ | 0.96 | ||||||||||||||||
Operating income adjustments | $ | 63 | $ | 24 | ||||||||||||||||||||
Investments adjustment (a) | (26 | ) | — | |||||||||||||||||||||
Impact of income taxes | (6 | ) | (7 | ) | ||||||||||||||||||||
31 | 0.06 | 17 | 0.04 | |||||||||||||||||||||
Adjusted income, net of tax | $ | 552 | $ | 1.08 | $ | 518 | $ | 1.00 |
Six Months Ended June 30, 2018 | Six Months Ended June 30, 2017 | |||||||||||||||||||||||
Amount | Adjusted EPS | Amount | Adjusted EPS | |||||||||||||||||||||
Income from continuing operations, (2018 prior to the impact of ASC 606) | $ | 1,147 | $ | 1,085 | ||||||||||||||||||||
Less: Non-controlling interest, net of tax | 11 | 15 | ||||||||||||||||||||||
Subtotal | $ | 1,136 | $ | 2.22 | $ | 1,070 | $ | 2.05 | ||||||||||||||||
Operating income adjustments | $ | 73 | $ | 17 | ||||||||||||||||||||
Investments adjustment (a) | (18 | ) | — | |||||||||||||||||||||
Impact of income taxes | (10 | ) | (6 | ) | ||||||||||||||||||||
Adjustments to provisional 2017 tax estimates (b) | 3 | — | ||||||||||||||||||||||
48 | 0.09 | 11 | 0.03 | |||||||||||||||||||||
Adjusted income, net of tax | $ | 1,184 | $ | 2.31 | $ | 1,081 | $ | 2.08 |
(a) Mark-to-market adjustments for investments classified as available for sale under prior guidance were recorded to equity, net of tax. Beginning January 1, 2018 such adjustments must be recorded as part of investment income. Prior periods were not restated. The Company excludes such mark-to-market gains or losses from its calculation of adjusted earnings per share. The Company recorded mark-to-market gains of $26 million and $18 million for the three and six-month periods ended June 30, 2018, respectively, which are included in Investment Income in the Consolidated Statement of Income. |
(b) Relates to adjustments to provisional 2017 year-end estimates of transition taxes and U.S. deferred tax assets and liabilities from U.S. tax reform. |
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||
Excludes Impact of Revenue Standard | Excludes Impact of Revenue Standard | |||||||||||||||||||||||
2018 | 2018 | 2017 | 2018 | 2018 | 2017 | |||||||||||||||||||
Consolidated | ||||||||||||||||||||||||
Compensation and Benefits | $ | 2,135 | $ | 2,125 | $ | 1,998 | $ | 4,359 | $ | 4,289 | $ | 4,003 | ||||||||||||
Other operating expenses | 908 | 908 | 796 | 1,776 | 1,776 | 1,545 | ||||||||||||||||||
Total Expenses | $ | 3,043 | $ | 3,033 | $ | 2,794 | $ | 6,135 | $ | 6,065 | $ | 5,548 | ||||||||||||
Depreciation and amortization expense | $ | 79 | $ | 79 | $ | 76 | $ | 159 | $ | 159 | $ | 156 | ||||||||||||
Identified intangible amortization expense | 43 | 43 | 40 | 88 | 88 | 80 | ||||||||||||||||||
Total | $ | 122 | $ | 122 | $ | 116 | $ | 247 | $ | 247 | $ | 236 | ||||||||||||
Stock option expense | $ | 3 | $ | 3 | $ | 3 | $ | 17 | $ | 17 | $ | 17 | ||||||||||||
Capital expenditures | $ | 77 | $ | 77 | $ | 82 | $ | 135 | $ | 135 | $ | 144 | ||||||||||||
Operating cash flows | $ | 777 | $ | 777 | $ | 742 | $ | 413 | $ | 413 | $ | 343 | ||||||||||||
Risk and Insurance Services | ||||||||||||||||||||||||
Compensation and Benefits | $ | 1,145 | $ | 1,132 | $ | 1,014 | $ | 2,313 | $ | 2,238 | $ | 2,039 | ||||||||||||
Other operating expenses | 479 | 479 | 420 | 939 | 939 | 816 | ||||||||||||||||||
Total Expenses | $ | 1,624 | $ | 1,611 | $ | 1,434 | $ | 3,252 | $ | 3,177 | $ | 2,855 | ||||||||||||
Depreciation and amortization expense | $ | 35 | $ | 35 | $ | 35 | $ | 72 | $ | 72 | $ | 70 | ||||||||||||
Identified intangible amortization expense | 35 | 35 | 33 | 72 | 72 | 65 | ||||||||||||||||||
Total | $ | 70 | $ | 70 | $ | 68 | $ | 144 | $ | 144 | $ | 135 | ||||||||||||
Consulting | ||||||||||||||||||||||||
Compensation and Benefits | $ | 902 | $ | 905 | $ | 901 | $ | 1,858 | $ | 1,863 | $ | 1,792 | ||||||||||||
Other operating expenses | 481 | 481 | 426 | 946 | 946 | 836 | ||||||||||||||||||
Total Expenses | $ | 1,383 | $ | 1,386 | $ | 1,327 | $ | 2,804 | $ | 2,809 | $ | 2,628 | ||||||||||||
Depreciation and amortization expense | $ | 26 | $ | 26 | $ | 24 | $ | 51 | $ | 51 | $ | 51 | ||||||||||||
Identified intangible amortization expense | 8 | 8 | 7 | 16 | 16 | 15 | ||||||||||||||||||
Total | $ | 34 | $ | 34 | $ | 31 | $ | 67 | $ | 67 | $ | 66 |
(Unaudited) June 30, 2018 | December 31, 2017 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 1,036 | $ | 1,205 | ||||
Net receivables | 4,601 | 4,133 | ||||||
Other current assets | 538 | 224 | ||||||
Total current assets | 6,175 | 5,562 | ||||||
Goodwill and intangible assets | 10,411 | 10,363 | ||||||
Fixed assets, net | 698 | 712 | ||||||
Pension related assets | 1,808 | 1,693 | ||||||
Deferred tax assets | 532 | 669 | ||||||
Other assets | 1,535 | 1,430 | ||||||
TOTAL ASSETS | $ | 21,159 | $ | 20,429 | ||||
LIABILITIES AND EQUITY | ||||||||
Current liabilities: | ||||||||
Short-term debt | $ | 439 | $ | 262 | ||||
Accounts payable and accrued liabilities | 2,246 | 2,083 | ||||||
Accrued compensation and employee benefits | 1,103 | 1,718 | ||||||
Accrued income taxes | 216 | 199 | ||||||
Dividends payable | 212 | — | ||||||
Total current liabilities | 4,216 | 4,262 | ||||||
Fiduciary liabilities | 5,118 | 4,847 | ||||||
Less - cash and investments held in a fiduciary capacity | (5,118 | ) | (4,847 | ) | ||||
— | — | |||||||
Long-term debt | 5,813 | 5,225 | ||||||
Pension, post-retirement and post-employment benefits | 1,768 | 1,888 | ||||||
Liabilities for errors and omissions | 303 | 301 | ||||||
Other liabilities | 1,262 | 1,311 | ||||||
Total equity | 7,797 | 7,442 | ||||||
TOTAL LIABILITIES AND EQUITY | $ | 21,159 | $ | 20,429 |
Note: |
Effective January 1, 2018, the Company, upon the adoption of the new revenue recognition standard, recorded a cumulative effect adjustment, net of tax resulting in an increase to the opening balance of retained earnings of $364 million, with offsetting increases/decreases to other balance sheet accounts, e.g. accounts receivable, other current assets, other assets and deferred income taxes. |
As discussed earlier, the Company adopted the new revenue standard (ASC 606) using the modified retrospective method, applied to all contracts. The guidance requires entities that elected the modified retrospective method to disclose the impact to financial statement line items as a result of applying the new guidance (rather than previous U.S. GAAP). The table below shows the impacts on the consolidated balance sheet. |
June 30, 2018 | ||||||||||||
As Reported | Impact of Revenue Standard | Prior to Adoption | ||||||||||
ASSETS | ||||||||||||
Current assets: | ||||||||||||
Cash and cash equivalents | $ | 1,036 | $ | — | $ | 1,036 | ||||||
Net receivables | 4,601 | (254 | ) | 4,347 | ||||||||
Other current assets | 538 | (298 | ) | 240 | ||||||||
Total current assets | 6,175 | (552 | ) | 5,623 | ||||||||
Goodwill and intangible assets | 10,411 | — | 10,411 | |||||||||
Fixed assets, net | 698 | — | 698 | |||||||||
Pension related assets | 1,808 | — | 1,808 | |||||||||
Deferred tax assets | 532 | 133 | 665 | |||||||||
Other assets | 1,535 | (230 | ) | 1,305 | ||||||||
TOTAL ASSETS | $ | 21,159 | $ | (649 | ) | $ | 20,510 | |||||
LIABILITIES AND EQUITY | ||||||||||||
Current liabilities: | ||||||||||||
Short-term debt | $ | 439 | $ | — | $ | 439 | ||||||
Accounts payable and accrued liabilities | 2,246 | (177 | ) | 2,069 | ||||||||
Accrued compensation and employee benefits | 1,103 | — | 1,103 | |||||||||
Accrued income taxes | 216 | — | 216 | |||||||||
Dividends payable | 212 | — | 212 | |||||||||
Total current liabilities | 4,216 | (177 | ) | 4,039 | ||||||||
Fiduciary liabilities | 5,118 | — | 5,118 | |||||||||
Less - cash and investments held in a fiduciary capacity | (5,118 | ) | — | (5,118 | ) | |||||||
— | — | — | ||||||||||
Long-term debt | 5,813 | — | 5,813 | |||||||||
Pension, post-retirement and post-employment benefits | 1,768 | — | 1,768 | |||||||||
Liabilities for errors and omissions | 303 | — | 303 | |||||||||
Other liabilities | 1,262 | (23 | ) | 1,239 | ||||||||
Total equity | 7,797 | (449 | ) | 7,348 | ||||||||
TOTAL LIABILITIES AND EQUITY | $ | 21,159 | $ | (649 | ) | $ | 20,510 |