Marsh & McLennan Companies, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Unaudited consolidated results. The company provides risk and insurance services through Marsh and Guy Carpenter, and consulting services through Mercer and Oliver Wyman Group.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $5.017 billion | $4.189 billion | $10.100 billion | $8.840 billion |
| Operating income | $1.228 billion | $885 million | $2.586 billion | $1.955 billion |
| Net income attributable to MMC | $820 million | $572 million | $1.803 billion | $1.326 billion |
| Diluted EPS | $1.60 | $1.12 | $3.51 | $2.60 |
| Cash provided by operations | Not presented for quarter | $750 million | $578 million |
Q2 revenue rose 20% year over year, including 13% underlying growth; first-half revenue increased 14%, including 9% underlying growth. Operating income increased 39% in Q2 and 32% in the first half. Calculated consolidated operating margins were approximately 24.5% in Q2 2021 versus 21.1% in Q2 2020, and 25.6% for the first half versus 22.1% a year earlier.
- Risk and Insurance Services: Q2 revenue was $3.141 billion, up 21% (13% underlying); operating income was $950 million and margin was 30.2%, compared with 26.7%. First-half revenue was $6.366 billion, up 15% (10% underlying); operating income was $2.010 billion and margin was 31.6%, compared with 28.1%.
- Consulting: Q2 revenue was $1.892 billion, up 17% (12% underlying); operating income was $344 million and margin was 18.1%, compared with 15.8%. First-half revenue was $3.765 billion, up 11% (8% underlying); operating income was $705 million and margin was 18.7%, compared with 15.9%.
Management attributed growth to economic recovery, strong new business, solid retention and market pricing in Risk and Insurance Services, and stronger project demand and investment-management fees in Consulting. Higher incentive compensation, salaries and headcount raised underlying costs; lower travel and certain other costs partly offset increases in the first half.
Cash, debt and liquidity
- Cash and cash equivalents were $888 million at June 30, 2021, down from $2.089 billion at December 31, 2020. Operating cash flow was $750 million; investing activities used $437 million and financing activities used $1.491 billion during the first half.
- Cash use included $478 million of dividends, $434 million paid for share repurchases, $509 million of debt repayments and $363 million of net acquisition spending. Capital expenditures were $151 million.
- Short-term debt was $516 million and long-term debt was $10.257 billion, totaling $10.773 billion, down from $11.313 billion at year-end. The company repaid $500 million of notes in April. It had no commercial paper outstanding and no borrowings under its new $2.8 billion revolving facility at quarter-end.
- Current assets were $7.573 billion and current liabilities were $5.816 billion. Fiduciary assets are unavailable for corporate use and are presented against fiduciary liabilities, not as a source of company liquidity.
Material changes, outlook and notable items
- A $100 million net tax charge in Q2 reflected remeasurement of U.K. deferred tax assets and liabilities after legislation raised the U.K. corporate tax rate from 19% to 25%, effective April 1, 2023. The effective tax rate was 31.6% in Q2 and 27.9% for the first half, versus 26.2% and 24.9% in the comparable 2020 periods.
- Investment income was $19 million in Q2 and $30 million for the first half, versus losses of $31 million and $33 million in 2020, mainly reflecting private-equity investment gains compared with prior-year losses.
- The company recorded a $50 million net gain on business sales in Q2, primarily related to a U.K. commercial networks business. It also completed two Risk and Insurance Services acquisitions in the first half, with $505 million of total consideration.
- JLT integration and restructuring is in its final stages. The company reported $42 million of related costs in the first half, compared with $137 million in 2020, and said it had exceeded its initial $350 million savings estimate. It expects at least $425 million of annualized savings upon completion and approximately $97 million of remaining costs, substantially in 2021, including about $86 million in cash expenditures.
- Management said the business benefited from global economic recovery but gave no formal revenue or earnings guidance in the provided filing text. COVID-19 remains a source of uncertainty because of possible outbreaks, variants, renewed restrictions and uneven vaccine distribution. The company said COVID-19 had not materially adversely affected its financial position or estimates through June 30, 2021.
- Material risk areas include cybersecurity and data privacy, professional liability claims, regulatory scrutiny, competition and technological disruption, talent retention, tax changes, foreign-exchange movements, COVID-19 and risks associated with insurance placement and insurer revenue streams.
Contingencies and other risks
The company faces claims, lawsuits, investigations and regulatory proceedings in the ordinary course of business. The filing describes, among other matters, a Brazilian antitrust proceeding involving Marsh and JLT, investigations concerning historical JLT payments related to Ecuadorian reinsurance placements, and Greensill-related insurance matters. For JLT pension-transfer advice reviews, the recorded gross redress liability was £99 million ($137 million) at June 30, 2021, down from £155 million at year-end after payments. The company anticipated completing the remaining review and making most payments by the end of Q3 2021; it expects possible offsets from contractual indemnity and insurance recoveries. The ultimate outcomes and financial effects of these matters are uncertain and could be material.
Important facts for investors to verify
- Whether underlying revenue growth and segment margins persist as economic recovery and insurance-market pricing evolve.
- Progress against the $425 million annualized JLT savings target, and timing and cash cost of the remaining integration work.
- Cash generation, debt repayment capacity and capital allocation, including ongoing repurchases and dividends.
- The final cost and timing of the U.K. pension-advice redress matter and any recoveries under indemnities or insurance.
- Effects of COVID-19 developments, foreign-exchange changes and the U.K. tax-rate increase on future results and cash flows.