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 Group). This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2023; comparisons are with the corresponding 2022 periods. Amounts below are in U.S. dollars unless noted.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $5.382bn | $4.770bn | $17.182bn | $15.698bn |
| Operating income | $996m | $791m | $4.179bn | $3.600bn |
| Operating margin | 18.5% | 16.6% | 24.3% | 22.9% |
| Net income attributable to MMC | $730m | $546m | $3.000bn | $2.584bn |
| Diluted EPS | $1.47 | $1.08 | $6.01 | $5.11 |
Q3 revenue rose 13% reported and 10% on an underlying basis; nine-month revenue rose 9% reported and 10% underlying. Operating income increased 26% in Q3 and 16% year to date. Management attributed growth to client demand, new and renewal business, retention, higher insurance and reinsurance rates, and increased fiduciary interest income. The Q3 effective tax rate was 20.6% (24.6% prior year); the nine-month rate was 23.7% (24.6%).
Segments: Q3 Risk and Insurance Services revenue was $3.190bn (+12% reported, +11% underlying) and operating income $640m, with a 20.0% margin (18.7% prior year). Nine-month revenue was $10.818bn (+12%) and operating income $3.192bn, with a 29.5% margin (27.0%). Q3 Consulting revenue was $2.206bn (+13% reported, +9% underlying) and operating income $424m, with a 19.2% margin (17.9%). Nine-month revenue was $6.409bn (+6% reported, +7% underlying) and operating income $1.223bn, with a 19.1% margin (20.1%).
Cash flow, debt and liquidity
Nine-month cash provided by operations was $2.475bn, up from $1.963bn. Investing activities used $943m, including $619m net cash for acquisitions; financing activities provided $1.215bn. Capital expenditures were $296m. The company paid $944m in dividends and repurchased $900m of stock during the period.
At September 30, cash and cash equivalents available for corporate purposes were $2.901bn, compared with $1.442bn at year-end 2022. A further $11.828bn was held in a fiduciary capacity and is not available for corporate use. Short- and long-term debt totaled $13.649bn, versus $11.495bn at year-end; reported short-term debt was $1.868bn and long-term debt $11.781bn. Debt issuance during the period included $600m of 5.45% notes due 2053 in March and $1.6bn of notes issued in September. The company reported no commercial paper outstanding at quarter-end and no borrowings on its revolving credit facility.
In October 2023, after quarter-end, MMC expanded its revolving credit facility from $2.8bn to $3.5bn and extended it to October 2028; it also repaid $250m of notes at maturity. Fiduciary cash and corresponding liabilities should not be treated as corporate liquidity or ordinary operating obligations.
Material changes, outlook and risks
- Both segments grew, but Consulting’s nine-month operating income was nearly flat year over year and its margin declined by 1.0 percentage point. Risk and Insurance Services benefited materially from fiduciary interest income, which rose to $330m for nine months from $57m.
- Compensation and benefits rose with headcount and incentive compensation. Year-to-date expenses also reflected higher travel, technology and outside-services costs. Interest expense increased to $427m from $342m for nine months, reflecting higher debt and interest rates.
- A $48m release of a valuation allowance on non-U.S. deferred tax assets benefited Q3 results and lowered the effective tax rate by 4.8 percentage points. The benefit is a discrete item, not necessarily indicative of the ongoing tax rate.
- MMC had incurred approximately $325m of restructuring costs through September 30, within an estimated total of $425m–$475m. Most remaining costs were expected by year-end 2023. Management estimated savings of approximately $400m, including $225m in 2023, with most remaining savings expected in 2024; plans and timing may change.
- MMC completed 12 acquisitions in the first nine months, with $711m total purchase consideration; purchase-price allocations remain preliminary. Acquired businesses contributed approximately $91m of nine-month revenue and $14m of operating income. Westpac-related integration expenses were $32m year to date.
- Legal matters include a Brazil antitrust proceeding and litigation and investigations associated with Greensill. The filing says outcomes and potential losses cannot currently be reasonably estimated; adverse outcomes could materially affect a future period. In October, MMC separately settled a competitor recruiting claim for $70m, including legal expense reimbursement.
- No specific company-wide revenue or earnings guidance is provided in the filing. Management cited macroeconomic and geopolitical uncertainty, inflation, cyber risk, talent retention, competition and technological disruption, regulatory and tax changes, and potential conflicts of interest as risks. The OECD Pillar 2 minimum tax is expected to take effect in the U.K. in 2024; its future impact remains under evaluation.
Important facts for investors to verify
- How much of revenue and earnings growth is sustainable underlying growth versus acquisition activity, foreign exchange, and higher fiduciary interest income.
- Whether Consulting can restore its year-to-date operating margin and whether restructuring savings meet management’s estimates and timing.
- How increased debt and interest expense affect future earnings, and how MMC allocates cash among debt repayment, acquisitions, dividends and buybacks.
- The final acquisition accounting and realized performance of recent acquisitions, particularly Westpac and Graham Company.
- Developments in the Greensill-related matters, Brazil proceeding and other claims, for which the filing does not provide a clear estimate of potential losses.
- The future effect of Pillar 2 and other tax developments; the quarter’s $48m valuation-allowance release is not a recurring operating item.