Marsh & McLennan Companies, Inc. — Q1 2022 10-Q
Reporting period: Three months ended March 31, 2022. The company is a global professional services firm operating through Risk and Insurance Services (Marsh and Guy Carpenter) and Consulting (Mercer and Oliver Wyman Group). All amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $5.549 billion | $5.083 billion | +9% reported; +10% underlying |
| Operating income | $1.445 billion | $1.358 billion | +6% |
| Operating margin | 26.0% | 26.7% | Down 0.7 percentage points |
| Net income attributable to the company | $1.071 billion | $983 million | +9% |
| Diluted EPS | $2.10 | $1.91 | +10% |
| Operating cash flow | -$702 million | -$408 million | Cash use increased $294 million |
| Capital expenditures | $122 million | $69 million | Increased $53 million |
Revenue growth reflected strong demand for advice and services. Operating expenses rose 10%, faster than revenue, mainly due to increased headcount and incentive compensation. The effective tax rate was 23.7%, versus 24.5% a year earlier. Net investment income increased to $26 million from $11 million, primarily reflecting higher mark-to-market gains.
Segments and material changes
- Risk and Insurance Services: Revenue was $3.549 billion, up 10% reported and 11% underlying. Operating income increased to $1.121 billion from $1.060 billion; margin declined to 31.6% from 32.9%. Management cited new business, retention and market pricing.
- Consulting: Revenue was $2.010 billion, up 7% reported and 10% underlying. Operating income rose to $392 million from $361 million; margin improved to 19.5% from 19.3%. Oliver Wyman revenue increased 14% reported, while Mercer increased 4%.
- Foreign currency translation reduced consolidated revenue growth by 2 percentage points. Acquisitions and other items contributed 1 percentage point.
- Q1 results included $52 million of Russia-related deconsolidation and other charges. The filing identifies $39 million as the loss on deconsolidation included in revenue; the remaining portion is described as other related charges.
- Other items affecting pretax income included $30 million restructuring costs, $30 million legal claims related to strategic recruiting, $13 million of JLT acquisition-related costs and other items, a $10 million recovery related to a legacy JLT E&O matter, and $10 million of contingent-consideration changes. Total listed items were $125 million, compared with $47 million in Q1 2021.
Cash, debt and liquidity
- Cash and cash equivalents were $772 million at March 31, 2022, down from $1.752 billion at December 31, 2021. The company also held $10.461 billion of fiduciary cash, which is not available for corporate use.
- Total debt was approximately $11.743 billion, including $825 million of commercial paper and $366 million of current long-term debt. Long-term debt was $10.552 billion. The company had no borrowings under its $2.8 billion revolving credit facility; commercial paper carried a 0.91% average effective rate.
- Operating cash use was driven in part by seasonal working-capital movements, including a $1.528 billion decrease in accrued compensation and employee benefits. Financing cash flow was positive $855 million, including $825 million of net commercial-paper proceeds, $500 million of share repurchases and $272 million of dividends paid.
- The board authorized an additional $5 billion share-repurchase program in March. Approximately $5.8 billion remained authorized at quarter-end. Dividends declared were $1.07 per share.
- Ratings were A- from S&P and Baa1 from Moody’s for senior debt, both with Stable outlooks.
Outlook, risks and notable matters
- The filing provides no specific earnings or revenue guidance. Management described demand as strong but cautioned that economic and COVID-19 developments remain uncertain.
- The company announced it would exit its Russian businesses and transfer ownership to local management. Completion was subject to Russian regulatory approval. Sanctions, counter-sanctions, restricted payment channels and currency access affected the company’s ability to control and operate those businesses.
- Management cited risks from geopolitical and macroeconomic conditions, inflation, cyberattacks, regulation and sanctions, talent retention, competition and technology disruption, conflicts of interest, tax matters, and litigation or investigations. COVID-19 impacts remain uncertain.
- Legal matters include investigations concerning alleged information sharing in Brazil’s aviation insurance sector; ongoing U.K. authorities’ inquiries relating to JLT payments in Ecuador; multiple Greensill-related proceedings and investigations; and the JLT U.K. pension-transfer advice review. The related JLT redress liability was £10 million ($13 million) at quarter-end; the company expected substantially all remaining calculations and payments to be completed by the end of Q2 2022. Potential losses on other matters are not reasonably estimable, and adverse outcomes could materially affect future results or cash flows.
- After quarter-end, on April 1, 2022, Mercer sold its U.S. affinity business for approximately $145 million cash proceeds and recorded an expected net gain of approximately $110 million.
- Foreign exchange translation reduced equity by $169 million in Q1. The company estimated that a 10% move in major currencies in the same direction against the U.S. dollar could change full-year net operating income by approximately $62 million; if March 31 exchange rates persisted, translation was expected to reduce 2022 net operating income by approximately $34 million.
Key facts for investors to verify
- Whether underlying growth and operating margins remain resilient as compensation and other costs rise.
- How much of the Q1 cash outflow reflects seasonal timing, and the effect of continued repurchases, dividends and pension contributions on liquidity and debt.
- Progress, approvals and any further financial consequences of the Russia exit and deconsolidation.
- Outcomes and potential financial exposure from the disclosed legal, regulatory and pension-advice matters.
- Completion and realized proceeds of the U.S. affinity business sale, and whether its reported gain is recognized as expected.