Business context and reporting period
Marsh & McLennan Companies, Inc. (MMC) is a global professional-services firm operating through Risk and Insurance Services (Marsh and Guy Carpenter) and Consulting (Mercer and Oliver Wyman). This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2020. The 2019 comparison is affected by the April 1, 2019 JLT acquisition; 2019 year-to-date results exclude JLT’s first-quarter operations.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $3.968bn | $3.968bn | $12.808bn | $12.388bn |
| Operating income | $540m | $467m | $2.495bn | $2.085bn |
| Net income attributable to MMC | $316m | $303m | $1.642bn | $1.351bn |
| Diluted EPS | $0.62 | $0.59 | $3.21 | $2.64 |
- Q3 revenue was flat year over year; underlying revenue declined 1%. Nine-month revenue rose 3%, with underlying growth of 1%.
- Operating margin was 13.6% in Q3 versus 11.8% in 2019, and 19.5% for the nine months versus 16.8%.
- Q3 Risk and Insurance Services revenue rose 4% to $2.291bn, while Consulting revenue fell 5% to $1.696bn. Nine-month revenue rose 8% in Risk and Insurance Services and fell 4% in Consulting. Underlying nine-month growth was 3% and negative 2%, respectively.
- Q3 segment operating margins: Risk and Insurance Services 14.5% versus 9.9%; Consulting 16.4% versus 17.7%. Nine-month margins were 24.1% versus 20.4% and 16.1% versus 16.6%, respectively.
- Effective tax rate was 30.3% in Q3 versus 26.0%; the nine-month rates were 26.0% versus 27.8%. Q3 and year-to-date 2020 rates include the cost of remeasuring the U.K. deferred tax liability, partly offset by tax benefits from a new international funding structure.
- Operating cash flow was $1.999bn for the nine months, up from $1.291bn. Capital expenditures were $278m. Cash and cash equivalents were $2.388bn at September 30, 2020, versus $1.155bn at year-end 2019.
- Total debt was $12.748bn, comprising $1.216bn short-term and $11.532bn long-term debt, versus $11.956bn at year-end 2019. Cash less reported debt was approximately $10.360bn; fiduciary funds are not available for corporate use.
- Current assets were $8.312bn and current liabilities $6.530bn. The company reported $500m outstanding under its two-year term loan, no commercial paper outstanding, and no borrowings under its revolving credit facilities at quarter-end.
- MMC paid $702m in dividends during the first nine months. No shares were repurchased in the period, and the company said it did not expect repurchases for the remainder of 2020.
Material changes versus the prior comparable period
- Q3 operating income increased 15%, despite unchanged revenue, as operating expenses fell 2%. Management attributed lower costs to reduced travel, meetings and outside services, JLT integration savings, and lower integration-related charges; higher salaries and incentive compensation partly offset the savings.
- Nine-month operating income rose 20%. Comparisons reflect lower JLT transaction and integration costs in 2020 and the absence of JLT’s first-quarter 2019 results in MMC’s reported 2019 figures.
- Consulting faced weaker underlying demand, notably Mercer Career (down 11% in Q3) and Oliver Wyman (underlying revenue down 6%). Marsh U.S./Canada underlying revenue grew 5% in Q3.
- Investment results shifted to a $14m Q3 loss and $47m nine-month loss, compared with income of $7m and $20m in 2019. 2020 losses included Alexander Forbes (AF) mark-to-market effects and a $23m loss on AF share sales.
- Operating cash flow increased by $708m year over year. Financing cash flow was a $163m use, compared with $4.337bn provided in 2019, when significant debt issuance funded the JLT acquisition.
Outlook, management commentary, risks and unusual items
- MMC provided no quantified revenue or earnings guidance in the filing. Management said it expected to continue serving clients effectively while employees worked remotely, but the timing and extent of office returns remained uncertain. The company’s estimates generally assumed gradual lifting of global restrictions through the rest of 2020 and into 2021; actual effects may differ.
- JLT integration and restructuring costs are estimated at about $700m pretax, including approximately $625m cash charges. MMC had incurred $335m in 2019 and $181m in the first nine months of 2020; remaining costs were expected in Q4 2020 and 2021. Cost savings of about $339m had been realized through September 30, and management expected to exceed $350m of run-rate savings. Plans and estimates may change.
- COVID-19 risks include weaker demand or new business, profitability and cash-flow impacts, delayed or uncollectible receivables, and operational disruption. Management reported minimal disruption to client service through Q3, but noted significant uncertainty about future developments.
- MMC’s senior debt ratings were A- by S&P and Baa1 by Moody’s; both agencies had negative outlooks. Debt covenants, access to capital and refinancing remain relevant risks. The company reported no covenant breach in the supplied filing text.
- Legal and regulatory exposures include ordinary-course errors-and-omissions claims, pandemic-coverage claims, aviation-sector competition investigations, and investigations related to former JLT third-party payments. The filing says outcomes and potential losses for several matters cannot currently be predicted or reasonably estimated.
- JLT’s U.K. enhanced-transfer-value pension-advice review liability was estimated at approximately £62m ($79m) gross at September 30, 2020, up from £59m ($77m) before the acquisition. The estimate may increase significantly; MMC expects partial offsets from insurance and indemnification claims.
- Other notable items include a $9m JLT-related right-of-use asset impairment, no goodwill impairment identified in the 2020 qualitative assessment, and $60m of foreign-exchange-driven increase in the U.S.-dollar value of euro-note debt during the first nine months.
Important facts for investors to verify
- Whether underlying revenue trends, particularly in Consulting, improve or weaken as COVID-19 and economic conditions evolve.
- Actual remaining JLT integration costs, cash outlays and savings relative to management’s estimates.
- Debt maturity, covenant and rating outlook developments, including the company’s access to capital and liquidity needs.
- Collectability of receivables and the effect of COVID-19 on cash flow and client activity; fiduciary assets should not be treated as corporate liquidity.
- Progress and final exposure from the JLT pension-advice review and other litigation or regulatory matters, including potential insurance recoveries.
- Future investment marks, U.K. tax effects, pension funding needs and other items that could affect earnings, cash flow or the effective tax rate.