Marsh & McLennan Companies, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 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 are in U.S. dollars.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $5.379B | $5.017B | $10.928B | $10.100B |
| Operating income | $1.364B | $1.228B | $2.809B | $2.586B |
| Net income attributable to MMC | $967M | $820M | $2.038B | $1.803B |
| Diluted EPS | $1.91 | $1.60 | $4.01 | $3.51 |
| Operating margin | 25.4% | 24.5% | 25.7% | 25.6% |
Reported revenue grew 7% in Q2 and 8% for the first half; underlying revenue growth was 10% in both periods. Management attributed growth to strong demand, new business, retention and pricing. Foreign exchange reduced reported revenue growth by 4 percentage points in Q2 and 3 points year to date.
Q2 Risk and Insurance Services revenue was $3.313B, up 5% reported and 9% underlying; operating income was $967M and margin 29.2% (30.2% prior year). Consulting revenue was $2.084B, up 10% reported and underlying; operating income was $475M and margin 22.8% (18.1% prior year). Consulting results included a $112M gain on the Mercer U.S. affinity business sale.
For the six months, operating cash flow was $580M, down from $750M. Investing activities used $258M; financing activities provided $498M. Capital expenditures were $239M, dividends paid were $547M and share repurchases were $1.1B. Cash and cash equivalents were $909M at June 30, versus $1.752B at year-end 2021. An additional $10.530B of fiduciary cash was held for clients and is not available for corporate use.
At June 30, short-term debt was $1.311B, including $944M of commercial paper, and long-term debt was $10.487B. The company had no borrowings under its $2.8B revolving credit facility. Total current liabilities were $7.016B and total equity was $10.917B.
Material changes and unusual items
- Q2 diluted EPS rose 19%; first-half diluted EPS rose 14%. The company cited higher operating income and fewer shares outstanding as contributors.
- First-half results included a $112M gain on the sale of Mercer’s U.S. affinity business and $52M of Russia deconsolidation and related charges. These items are not representative of recurring operating performance.
- Foreign currency translation reduced first-half equity by approximately $1.0B. Goodwill declined to $15.963B from $16.317B, primarily due to foreign exchange.
- Operating expenses increased 6% in Q2 and 8% year to date, reflecting higher headcount, incentive compensation and travel costs; lower depreciation and amortization partly offset the increase.
- First-half restructuring costs were $58M. The effective tax rate was 25.5% in Q2 and 24.6% for the first half, compared with 31.6% and 27.9%, respectively, in 2021; prior-year rates included a $100M U.K. deferred-tax remeasurement charge.
Outlook, risks and contingencies
The filing provides no specific numerical revenue or earnings guidance. Management reported strong demand and resilient operations but emphasized uncertainty related to the economic outlook, COVID-19 developments, inflation, slower growth or recession, market volatility and the war in Ukraine. The company agreed to exit its Russian businesses and transfer them to local management, subject to regulatory approvals.
Other identified risks include foreign-exchange exposure, cyberattacks, talent retention, competition and technological disruption, regulatory and sanctions compliance, tax matters, conflicts of interest, and errors-and-omissions claims. The company disclosed ongoing litigation and regulatory matters, including Greensill-related proceedings, a Brazil antitrust investigation and legacy JLT matters. It states that adverse outcomes could materially affect future results, financial condition or cash flows; for many matters, the possible loss range cannot currently be estimated. The JLT pension advice redress review was substantially complete, with $8M remaining accrued at June 30.
In July, the board raised the quarterly dividend 10%, from $0.535 to $0.590 per share. The company had approximately $5.2B remaining under its share repurchase authorization at June 30. Management estimated that, if exchange rates at June 30 remained constant through year-end, currency translation would reduce full-year operating income by approximately $62M.
Important facts for investors to verify
- Underlying revenue growth and segment margins, particularly the sustainability of Consulting’s Q2 margin increase.
- Cash conversion: first-half operating cash flow declined despite higher net income; assess working-capital movements and pension contributions.
- Debt maturities, commercial paper refinancing and liquidity needs alongside planned repurchases and the higher dividend.
- Completion and final financial impact of the Russia exit, including required regulatory approvals.
- Potential exposure from litigation, regulatory proceedings, tax uncertainties and contingent acquisition consideration.
- Foreign-exchange sensitivity and whether the estimated full-year currency impact changes.