Marsh & McLennan Companies, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Amounts are in millions of U.S. dollars unless noted. MMC provides risk, insurance, reinsurance, HR, investment, and management consulting services through Risk and Insurance Services and Consulting.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $4,189 | $4,349 | $8,840 | $8,420 |
| Operating income | $885 | $680 | $1,955 | $1,618 |
| Net income attributable to MMC | $572 | $332 | $1,326 | $1,048 |
| Diluted EPS | $1.12 | $0.65 | $2.60 | $2.05 |
| Operating margin | 21.1% | 15.6% | 22.1% | 19.2% |
| Cash from operations | — | $578 | $241 |
Q2 revenue declined about 4% year over year, including a 2% decline in underlying revenue and a 2% foreign-currency impact. For the first half, reported revenue rose 5%, but underlying revenue grew 2%; comparison is affected by JLT, acquired April 1, 2019, whose first-quarter 2019 results were excluded from MMC’s reported results.
- Risk and Insurance Services: Q2 revenue $2,603, up 1%; operating income $696 versus $517. Six-month revenue $5,514, up 10%, and operating income $1,550 versus $1,250. Q2 underlying revenue grew 2%; Guy Carpenter performed strongly, while Marsh was flat overall.
- Consulting: Q2 revenue $1,616, down 10%; operating income $255 versus $278. Six-month revenue $3,378, down 3%, and operating income $537 versus $557. Q2 underlying revenue declined 6%, including weakness in Oliver Wyman and Mercer Career.
Q2 operating income improved despite lower revenue as expenses fell 10%, reflecting lower integration and acquisition costs, travel and meeting restrictions, cost controls, and lower incentive compensation. Q2 diluted EPS also benefited from a lower effective tax rate: 26.2% versus 37.4%. First-half effective tax rates were 24.9% and 28.2%, respectively.
Cash, debt, and liquidity
- Cash and cash equivalents were $1,711 at June 30, 2020, versus $1,155 at year-end 2019. Cash from operations was $578; capital expenditures were $200. Net investing cash outflow was $564 and financing cash inflow was $621.
- Total debt was approximately $13,201 ($1,216 short-term and $11,985 long-term), compared with $11,956 at year-end 2019. Cash less debt implies net debt of approximately $11,490. Long-term debt carrying value increased, in part, with new borrowing.
- MMC issued $750 of 2.25% notes due 2030, had $1,000 outstanding under one- and two-year term loans, and had no commercial paper outstanding. Its $1.8 billion revolving facility had no balance at quarter-end; a new $1 billion revolver also had no borrowings. Debt covenants require specified coverage and leverage ratios.
- MMC paid $466 in dividends during the first half ($0.91 per share). It made no share repurchases and said it did not expect to repurchase shares during the remainder of 2020. The existing repurchase authorization remained approximately $2.4 billion.
- Fiduciary cash and investments are held for clients and are not available for corporate use. The filing reports $7,441 of fiduciary assets and matching liabilities at quarter-end.
Material changes, outlook, and risks
- COVID-19: Nearly all colleagues worked remotely through Q2, with management reporting virtually no disruption to client service. MMC reduced travel, meeting, and other discretionary costs and took steps to preserve liquidity. Management’s financial estimates assumed gradual lifting of lockdowns beginning in Q3 but recessionary conditions continuing through at least year-end 2020; actual effects remain uncertain.
- Revenue estimate: MMC recorded a $36 reduction in Q2 estimated commissions, mainly at Marsh in the U.S. and EMEA, reflecting updated exposure and economic estimates. Further adjustments may be required.
- JLT integration: Expected total pre-tax integration and restructuring charges remain about $700, approximately $625 cash. MMC had incurred $335 in 2019 and $137 in the first half of 2020, with about $228 expected, mostly in the remaining two quarters of 2020. Management expects at least $350 of annual run-rate savings; approximately $275 had been realized through June 30, 2020, with the remainder expected by the end of 2021. Plans and estimates may change.
- Unusual items: Q2 investment loss was $31, including a loss related to sales of Alexander Forbes shares and private-equity investments; Q2 2019 had $32 of debt-extinguishment costs and a $37 charge for acquisition-related derivatives. A $11 real-estate right-of-use asset impairment was recorded in Q2 2020. Six-month foreign-currency translation reduced equity by $693.
- Legal and regulatory exposure: MMC faces ordinary-course errors-and-omissions claims and regulatory investigations, including aviation insurance/reinsurance competition matters and an investigation involving historical JLT payments. Outcomes and potential losses cannot presently be predicted. MMC recorded an approximately $83 gross liability for JLT’s U.K. enhanced-transfer-value pension advice matter, expected to be partly offset by insurance and indemnification.
- Other financial risks: Senior debt ratings were A- from S&P and Baa1 from Moody’s, both with negative outlooks. Risks include pandemic-related changes in revenue, receivable collection, profitability, cash flow and liquidity; market access and debt covenant compliance; investment volatility; foreign exchange; cyber threats; and tax and litigation contingencies. MMC said its disclosure controls were effective.
No specific consolidated earnings or revenue guidance for future periods is provided. The filing does provide the integration-cost and savings expectations described above. Under the CARES Act, MMC deferred approximately $47 of U.S. qualified defined-benefit pension contributions until January 1, 2021.
Important facts for investors to verify
- Underlying revenue trends and whether Q2’s $36 commission estimate reduction leads to further adjustments.
- Progress, remaining cash costs, timing, and realization of JLT integration savings versus management’s targets.
- Debt maturities, interest expense, covenant headroom, ratings outlooks, and refinancing conditions.
- Cash-flow quality, including the effect of working-capital movements and the distinction between corporate and fiduciary funds.
- Developments in COVID-19 impacts, receivable collectability, investment values, and the identified legal and regulatory matters.