Marsh & McLennan Companies, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. The company provides risk, insurance, consulting and investment-related services through Risk and Insurance Services (Marsh and Guy Carpenter) and Consulting (Mercer and Oliver Wyman). Results include JLT, acquired April 1, 2019; Q1 2019 does not, affecting reported comparisons. Unless stated otherwise, amounts are in U.S. dollars.
Financial performance and liquidity
- Revenue: $4.651 billion, up 14% reported. Compared with 2019 revenue adjusted to include JLT, revenue rose 3%: underlying growth was 5%, offset by a 1% foreign-currency decline.
- Operating income: $1.070 billion, up 14%; operating margin was approximately 23.0%, broadly unchanged from approximately 23.0% a year earlier.
- Net income attributable to MMC: $754 million, up 5% from $716 million. Diluted EPS was $1.48, versus $1.40.
- Segment results: Risk and Insurance Services revenue was $2.911 billion and operating income $854 million; its margin declined to 29.4% from 30.2%. Consulting revenue was $1.762 billion and operating income $282 million; its margin declined to 16.0% from 16.7%.
- Cash flow: Operations used $638 million, compared with $276 million used in Q1 2019. Investing used $245 million; financing provided $1.340 billion. Capital expenditures were $118 million.
- Cash and debt: Cash and cash equivalents were $1.480 billion, up from $1.155 billion at year-end 2019. Short-term debt was $2.409 billion and long-term debt $11.231 billion, totaling $13.640 billion. Fiduciary funds are restricted and not available for corporate use.
- Other metrics: Effective tax rate was 23.8%, versus 23.0%. Dividends declared were $0.91 per share; $232 million was paid during the quarter. No shares were repurchased.
Material changes versus the comparable period
- On an adjusted comparison including JLT in both periods, consolidated underlying revenue grew 5%; Risk and Insurance Services grew 5% and Consulting 3%. Reported revenue growth of 14% reflects, in part, JLT’s inclusion in 2020 but not Q1 2019.
- Operating income rose 14%, while net income rose 5% and diluted EPS rose from $1.40 to $1.48. Lower corporate interest income and the absence of a 2019 acquisition-derivative gain partly offset stronger operating income.
- Operating cash outflow increased to $638 million from $276 million, mainly reflecting working-capital timing, including compensation payments. Short-term debt rose from $1.215 billion at year-end to $2.409 billion.
- Foreign-currency translation reduced equity by $930 million before tax-related effects; total other comprehensive loss, net of tax, was $792 million. This drove comprehensive loss attributable to MMC of $38 million, despite positive net income.
Outlook, commentary, risks and unusual items
- COVID-19: Nearly all colleagues worked remotely by March-end, with management reporting virtually no disruption to client service. The pandemic’s effects on demand, new business, receivables collection, profitability, cash flow and liquidity remained uncertain; management did not provide quantified COVID-19 earnings guidance.
- JLT integration: Management estimated total pre-tax integration and restructuring charges of about $700 million, approximately $625 million cash. It reported $335 million incurred in 2019 and $80 million in Q1 2020, with about $285 million expected thereafter, mostly during the remainder of 2020. Expected run-rate savings were at least $350 million; management said it was tracking ahead of prior guidance. Plans and estimates remained subject to change.
- Funding and liquidity: The company entered into a new $1 billion unsecured revolving credit facility in April 2020, undrawn as of the report date, and said it was reducing expenses and capital expenditures. Moody’s and S&P rated senior debt Baa1 and A-, respectively, both with negative outlooks. The company is subject to coverage and leverage covenants.
- Contingencies: MMC reported an approximately $91 million gross liability for JLT-related U.K. pension-transfer advice matters, expected to be partly offset by insurance and indemnification. It also disclosed ongoing litigation and regulatory investigations, including aviation-broking competition matters and investigations concerning JLT-related payments; outcomes and potential losses were not clear.
- Other notable items: Q1 included $80 million of JLT integration and restructuring costs. The company repaid $500 million of maturing senior notes, borrowed $2 billion through term-loan and revolving facilities, and reported $193 million of commercial paper outstanding. CARES Act provisions deferred approximately $47 million of U.S. pension contributions to January 1, 2021.
Important facts for investors to verify
- How COVID-19 affects client demand, revenue growth, receivables collectability and operating cash flow in subsequent quarters.
- Whether JLT integration costs remain near estimates and whether the stated savings are achieved on schedule.
- Debt maturities, access to credit markets, covenant headroom and the effect of negative rating outlooks on financing costs.
- Developments in disclosed litigation, regulatory matters and the JLT pension-advice liability, including potential insurance recoveries.
- Whether reported performance remains consistent with underlying growth after accounting for JLT, currency movements, acquisitions and dispositions.