Marsh & McLennan Companies, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; filed February 17, 2021. The company is a global professional services firm operating through Risk and Insurance Services (Marsh and Guy Carpenter) and Consulting (Mercer and Oliver Wyman Group). Figures below are in U.S. dollars; “underlying” comparisons adjust for currency and acquisition, disposition and transfer effects.
Financial performance
| Metric | FY2020 | FY2019 | Change / context |
|---|---|---|---|
| Revenue | $17.224 billion | $16.652 billion | Up 3% reported; up 1% underlying versus 2019 including JLT |
| Operating income | $3.066 billion | $2.677 billion | Up 15%; operating margin 17.8%, compared with 16.1% |
| Income before taxes | $2.793 billion | $2.439 billion | Up 14% |
| Net income attributable to MMC | $2.016 billion | $1.742 billion | Up 16%; net margin approximately 11.7%, compared with 10.5% |
| Diluted EPS | $3.94 | $3.41 | Up 16% |
| Cash from operations | $3.382 billion | $2.361 billion | Capital expenditures were $348 million; operating cash flow less capital expenditures was approximately $3.034 billion |
| Cash and cash equivalents | $2.089 billion | $1.155 billion | Fiduciary funds are segregated and unavailable for general corporate use |
| Total debt | $11.313 billion | $11.956 billion | Includes $517 million current portion; no commercial paper outstanding at year-end |
| Working capital | $1.599 billion | $389 million | Improved year over year |
| Dividends paid | $943 million; $1.84/share | $890 million; $1.74/share | No common-share repurchases in 2020 |
Segments
- Risk and Insurance Services: Revenue of $10.337 billion, up 8% reported and 3% underlying. Operating income was $2.346 billion, up 28%; margin increased to 22.7% from 19.1%. Underlying growth was 3% at Marsh and 6% at Guy Carpenter. Fiduciary interest income fell to $46 million from $105 million, mainly due to lower interest rates.
- Consulting: Revenue of $6.976 billion, down 2% reported and underlying. Operating income fell 18% to $994 million; margin declined to 14.3% from 16.9%. Mercer underlying revenue fell 1% (Career down 8%, Wealth down 1%, Health up 2%); Oliver Wyman Group underlying revenue fell 4%.
Fourth-quarter snapshot
Q4 2020 revenue was $4.416 billion, operating income $571 million, net income attributable to MMC $374 million and diluted EPS $0.73. Q4 2019 figures were $4.264 billion, $592 million, $391 million and $0.76, respectively.
Material changes and unusual items
- The JLT acquisition closed in April 2019, so reported year-over-year comparisons are affected by different periods of JLT ownership. Management’s underlying revenue comparison treats MMC and JLT as combined from January 1, 2019.
- FY2020 included $555 million of restructuring, JLT integration/acquisition costs and a JLT legacy errors-and-omissions provision, including a $161 million provision for legacy advice concerning U.K. defined-benefit pension transfers.
- Management reported underlying expenses down 2%, citing integration savings and lower travel, entertainment and meeting costs, partly offset by higher incentive compensation, severance and the legacy E&O provision. COVID-19 reduced revenue growth, particularly in discretionary businesses.
- JLT integration was substantially complete. MMC reported that it had exceeded the initial $350 million savings estimate and expected approximately $425 million in annualized savings upon completion in 2021. It expected another $139 million of integration costs, $134 million cash, in 2021.
Liquidity, debt and obligations
MMC repaid $700 million of maturing senior notes and prepaid $300 million of floating-rate notes in December 2020; it issued $750 million of 2.25% senior notes due 2030 in May. At year-end, it had no borrowings under its $1.8 billion five-year revolving facility or its $1 billion 364-day revolving facility. The company’s senior debt ratings were A- from S&P (Stable outlook) and Baa1 from Moody’s (Negative outlook). Contractual obligations included $11.383 billion of debt principal, $5.454 billion of interest and $2.570 billion of net operating leases.
Defined-benefit pension obligations totaled approximately $19.9 billion, with plan assets of approximately $19.1 billion at December 31, 2020. Management expected 2021 contributions of approximately $37 million to U.S. plans and $87 million to non-U.S. plans.
Outlook, risks and contingencies
- MMC provided no quantified company-wide revenue or earnings guidance in the supplied filing text. Management expected most colleagues to continue working remotely for most of 2021 and said it expected to continue serving clients effectively.
- COVID-19’s future effects remained uncertain, including client demand, new business, margins, receivable collection, cash flow, liquidity, investment assets and potential pandemic-related E&O claims. The 2020 revenue impact was partly mitigated by expense controls.
- The expanded FCA review of JLT pension-transfer advice had a gross estimated redress liability of £155 million (approximately $210 million) at year-end, including expected review costs. The company expected some offset from a contractual indemnity and insurance recoveries and expected to complete the remaining file reviews by the end of Q2 2021.
- The filing identifies ongoing legal and regulatory exposures, including the FCA legacy JLT matter, Brazil aviation-broking antitrust proceedings, and investigations into payments by a JLT business to a third-party introducer in Ecuador. Outcomes and potential losses for certain proceedings could not be reasonably estimated. The company’s reported E&O liability was $639 million at year-end.
- Other material risks include cybersecurity and data privacy, professional-liability claims, regulation of broker compensation, competition and digital disruption, talent retention, foreign exchange, pension funding, acquisition integration, receivable collection and leverage. Goodwill was $15.517 billion; the 2020 qualitative impairment assessment found no impairment.
- The company reported a 26.7% effective tax rate for 2020, versus 27.3% in 2019, and cautioned that tax rates may vary. It also noted potential U.S. tax law changes and uncertainty around tax positions.
Investor verification priorities
- Review the underlying, acquisition-adjusted revenue trend and the contrasting segment performance, especially the Consulting decline and lower margins.
- Track the final costs and realization of the stated $425 million JLT annualized savings target, including remaining 2021 integration spending.
- Assess the final FCA pension-transfer redress amount, timing, and recoveries under indemnity and insurance arrangements; monitor other E&O and regulatory matters.
- Evaluate debt reduction, refinancing needs, credit-rating outlooks and the company’s capacity to fund dividends, acquisitions and pension contributions.
- Monitor COVID-19 effects on client demand, collections, cash generation, remote-work operations and cybersecurity exposure.
The financial statements received an unqualified audit opinion, and the auditor reported effective internal control over financial reporting as of December 31, 2020.