Marsh & McLennan Companies, Inc. — Q1 2021 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with Q1 2020 unless noted. Marsh McLennan is a global professional services firm operating through Risk and Insurance Services (Marsh and Guy Carpenter) and Consulting (Mercer and Oliver Wyman).
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $5.083 billion | $4.651 billion | +9%; +6% underlying |
| Operating income | $1.358 billion | $1.070 billion | +27% |
| Operating margin | 26.7% | 23.0% | +3.7 percentage points |
| Net income attributable to the Company | $983 million | $754 million | +30% |
| Diluted EPS | $1.91 | $1.48 | +29% |
| Cash from operations | $(408) million | $(638) million | Outflow narrowed |
| Capital expenditures | $69 million | $118 million | Down $49 million |
Risk and Insurance Services revenue was $3.225 billion (+11%; +7% underlying), with operating income of $1.060 billion and a 32.9% margin (29.4% prior year). Consulting revenue was $1.873 billion (+6%; +3% underlying), with operating income of $361 million and a 19.3% margin (16.0% prior year). The effective tax rate increased to 24.5% from 23.8%.
Financial position and liquidity
- Cash and cash equivalents were $1.120 billion at March 31, 2021, versus $2.089 billion at December 31, 2020. Operating cash flow was negative, chiefly reflecting seasonal working-capital outflows, including accrued compensation payments.
- Total debt was approximately $11.257 billion: $1.015 billion short-term and $10.242 billion long-term. The Company reported no commercial paper or borrowings under its revolving facilities at quarter-end.
- Current assets were $7.549 billion and current liabilities were $6.123 billion. Fiduciary assets are restricted to client-related purposes and are not available for corporate liquidity.
- Cash dividends paid were $237 million; the declared dividend was $0.93 per share. The Company repurchased approximately 1.0 million shares for $119 million during the quarter.
Material changes and management commentary
- Management attributed growth to new business, strong client retention and, to a lesser extent, market pricing in Risk and Insurance Services; Consulting benefited from demand for project-based work, particularly at Oliver Wyman.
- Underlying expenses were slightly lower overall, as reduced travel, entertainment, meeting and outside-service costs more than offset higher incentive compensation and headcount. Consolidated operating expenses nevertheless rose 4%, including currency and acquisition effects.
- JLT integration and restructuring costs were $23 million, compared with $80 million a year earlier. Cumulative costs since the 2019 acquisition were $609 million. Management expected to incur the remaining $116 million substantially during 2021, including approximately $100 million of cash expenditures, and reported that savings had exceeded the original $350 million estimate; it expected at least $425 million in annualized savings at completion.
- No acquisitions or dispositions were completed in Q1. On April 1, the Company acquired PayneWest Insurance and The Pryor Group. On April 2, it entered a new $2.8 billion five-year revolving credit facility, replacing prior facilities; on April 9 it increased its commercial paper program limit to $2.0 billion. It repaid $500 million of senior notes on April 15.
Outlook, risks and contingencies
- The filing gives no consolidated revenue or earnings guidance. Management said the global economy showed signs of recovery, but uncertainty remained around COVID-19, including renewed infection waves, variants, restrictions and vaccine effectiveness and distribution. Most colleagues continued to work remotely, expected to continue through much of 2021.
- Material risk areas include COVID-19 effects on revenue, profitability, cash flow and receivables; professional-liability claims; regulatory investigations and compliance; cybersecurity and data privacy; competition and technological change; talent retention; tax changes; and foreign-exchange exposure.
- JLT pension-transfer advice reviews remained a significant contingency. The recorded gross liability was £134 million ($185 million) at March 31, 2021, down from £155 million ($210 million) at December 31, 2020. The Company expects partial offsets from contractual indemnity and insurance, but the ultimate outcome and impact are uncertain.
- Other disclosed matters include a Brazilian antitrust proceeding, investigations concerning historical payments related to Ecuadorian insurance placements, and claims connected with Greensill-related trade credit insurance. The Company stated that adverse outcomes in one or more matters could materially affect future results, financial condition or cash flows; it generally could not estimate possible losses.
- Foreign-currency translation reduced equity by $91 million in Q1. Management estimated that a 10% move in major currencies against the U.S. dollar could change annual net operating income by approximately $57 million.
Most important facts for investors to verify
- Whether underlying revenue growth and higher segment margins persist as pandemic-related cost reductions normalize.
- Progress, timing, cash costs and realized savings from completing the JLT integration and restructuring.
- Cash conversion and liquidity through the year, including the effect of seasonal working capital, debt maturities and dividends and repurchases.
- Developments in the JLT pension-transfer liability, expected indemnity and insurance recoveries, and other legal or regulatory contingencies.
- Impact of COVID-19, foreign exchange and tax developments on full-year results; the filing provides no full-year earnings guidance.