Marsh & McLennan Companies, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Unaudited results; comparisons are with Q1 2022 unless otherwise stated. The company provides risk and insurance services through Marsh and Guy Carpenter, and consulting services through Mercer and Oliver Wyman Group.
Financial performance
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $5.924 billion | $5.549 billion |
| Operating income | $1.726 billion | $1.445 billion |
| Operating margin | 29.1% | 26.0% |
| Net income attributable to the company | $1.235 billion | $1.071 billion |
| Diluted EPS | $2.47 | $2.10 |
| Operating cash flow | $(819) million | $(702) million |
| Capital expenditures | $84 million | $122 million |
| Interest expense | $136 million | $110 million |
| Effective tax rate | 24.7% | 23.7% |
Revenue increased 7% reported and 9% on the company’s non-GAAP underlying basis, which excludes currency and specified acquisition, disposition and other impacts. Operating income rose 19%; diluted EPS increased 18%. Consolidated results included $91 million of fiduciary interest income versus $4 million a year earlier. This income is generated on client funds and those fiduciary funds are not available for corporate use.
- Risk and Insurance Services: Revenue of $3.906 billion, up 10% reported and 11% underlying; operating income was $1.395 billion versus $1.121 billion, and margin was 35.7% versus 31.6%. Growth reflected new business, retention, pricing and tighter reinsurance market conditions.
- Consulting: Revenue of $2.031 billion, up 1% reported and 5% underlying; operating income was $411 million versus $392 million, and margin was 20.2% versus 19.5%. Mercer underlying revenue grew 7%; Oliver Wyman Group underlying revenue was flat.
Liquidity, debt and capital
At March 31, 2023, cash and cash equivalents available for corporate purposes were $1.006 billion, down from $1.442 billion at December 31, 2022. An additional $10.834 billion was held in a fiduciary capacity and is not corporate liquidity. Total short- and long-term debt was $12.952 billion, compared with $11.495 billion at year-end; the filing reports $2.111 billion short-term and $10.841 billion long-term. Short-term debt included $594 million of commercial paper and $250 million borrowed under an uncommitted facility, as well as current maturities of long-term debt. The company had a $2.8 billion revolving credit facility with no borrowings outstanding at quarter-end.
Financing activities provided $773 million, including $594 million in net commercial paper proceeds, $250 million in facility borrowings and $589 million in proceeds from a March debt issuance, partly offset by share repurchases and dividends. Investing activities used $368 million, including $263 million for acquisitions and a related advance. The company repurchased 1.8 million shares for $300 million and paid $296 million in dividends. The March 2023 dividend was $0.59 per share.
Material changes and unusual items
- Revenue increased across both segments. Currency translation reduced reported growth by 3 percentage points; acquisitions and other items contributed a net 1 percentage point, per the company’s reconciliation.
- Expenses increased 2% reported. Management cited higher headcount and travel and entertainment costs; segment expense growth also reflected incentive compensation in Risk and Insurance Services.
- Interest expense rose $26 million, reflecting debt issued in October 2022 and March 2023 and higher rates on short-term borrowing. Investment income fell to $2 million from $26 million, primarily due to lower private-equity investment income and prior-year investment gains.
- Q1 2022 included a $39 million loss on deconsolidating the Russian businesses, plus $13 million of related charges. Q1 2023 included a $19 million loss on the planned sale of a small Canadian financial advisory business and $17 million of pre-acquisition integration costs related to Westpac. The company also recorded $51 million of insurance and indemnity recoveries related to a legacy JLT legal matter.
- The company incurred $53 million of restructuring costs in Q1 2023. It estimates total charges of $375–$400 million for the program begun in Q4 2022, with $243 million incurred through March 31; most remaining charges are expected in 2023. Management estimates savings of $280–$310 million by 2024. Plans and estimates remain subject to refinement.
Outlook, risks and contingencies
The filing provides no specific consolidated revenue or earnings guidance. Management described continued demand for advice and services and cited renewal growth, pricing and client retention as drivers. It also noted weaker overall market demand at Oliver Wyman and market volatility affecting Mercer wealth investment-management fees. On April 1, 2023, the company completed the Westpac financial advisory business acquisition and transfer of pension funds to Mercer Australia; the $252 million advance had been made before quarter-end.
Key stated risks include macroeconomic and geopolitical conditions, inflation and interest-rate changes, cyberattacks, talent retention, competition and technological change, conflicts of interest, tax-law changes, and regulatory, contractual and reputational risks. The company faces claims and proceedings, including a Brazilian antitrust investigation and matters associated with Greensill-related insurance placements. It said it cannot reasonably estimate the possible loss range for these matters; adverse outcomes could materially affect future results, financial condition or cash flows. Unrecognized tax benefits were $107 million, with up to approximately $53 million potentially decreasing within 12 months through audit settlements or statute expirations. Disclosure controls were concluded to be effective.
Important facts for investors to verify
- Whether reported growth and segment trends persist, particularly excluding the substantial increase in fiduciary interest income.
- Cash conversion and working-capital movements: operating cash outflow was $819 million, including significant changes in receivables and accrued compensation.
- Debt maturities, refinancing needs and the cost of short-term borrowing; short-term debt increased to $2.111 billion.
- Actual restructuring charges, timing and realized savings against management’s estimates.
- Integration, purchase accounting and subsequent-period results for the Westpac transaction, completed April 1, 2023.
- Developments in legal, regulatory and tax matters for which the company has not provided a reasonably estimable possible-loss range.