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MARSH & MCLENNAN COMPANIES, INC. – 10-K – Management's Discussion and Analysis of Financial Condition and Results of Operations.
General
Marsh & McLennan Companies Inc. , and its consolidated subsidiaries (the "Company") is a global professional services firm offering clients advice in the areas of risk, strategy and people. The Company's more than 85,000 colleagues advise clients in over 130 countries. With annual revenue of over$20 billion , the Company helps clients navigate an increasingly dynamic and complex environment through four market-leading businesses. Marsh provides data-driven risk advisory services and insurance solutions to commercial and consumer clients.Guy Carpenter develops advanced risk, reinsurance and capital strategies that help clients grow profitably and identify and capitalize on emerging opportunities. Mercer delivers advice and technology-driven solutions that help organizations redefine the future of work, shape retirement and investment outcomes, and advance health and well-being for a changing workforce.Oliver Wyman Group serves as a critical strategic, economic and brand advisor to private sector and governmental clients.
The Company conducts business through two segments:
•Risk and Insurance Services includes risk management activities (risk advice, risk transfer and risk control and mitigation solutions) as well as insurance and reinsurance broking and services. The Company conducts business in this segment through Marsh andGuy Carpenter . •Consulting includes health, wealth and career solutions and products, and specialized management, strategic, economic and brand consulting services. The Company conducts business in this segment throughMercer and Oliver Wyman Group .
The consolidated results of operations in the Management Discussion & Analysis
("MD&A") includes an overview of the Company's consolidated 2022 results
compared to the 2021 results, and should be read in conjunction with the
consolidated financial statements and notes. This section also includes a
discussion of the key drivers impacting the Company's financial results of
operations both on a consolidated basis and by reportable segments.
We describe the primary sources of revenue and categories of expense for each
segment in the discussion of segment financial results. A reconciliation of
segment operating income to total operating income is included in Note 17,
Segment Information, in the notes to the consolidated financial statements
included in Part II, Item 8, of this report.
For information and comparability of the Company's results of operations and
liquidity and capital resources for fiscal year 2020, refer to "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" of our Form 10-K for the fiscal year ended
This MD&A contains forward-looking statements as defined in the Private
Securities Litigation Reform Act of 1995. Refer to "Information Concerning
Forward-Looking Statements" at the outset of this report.
Financial Highlights
•Consolidated revenue in 2022 was
2021, or 9% on an underlying basis.
•Consolidated operating income decreased$32 million , or 1% to$4.3 billion in 2022, compared with 2021. Net income attributable to the Company was$3.0 billion . Earnings per share decreased from$6.13 to$6.04 , or 1% from the prior year. •Risk and Insurance Services revenue in 2022 was$12.6 billion , an increase of 5%, or 9% on an underlying basis. Operating income was$3.1 billion in both 2022 and 2021. •Consulting revenue in 2022 was$8.1 billion , an increase of 5%, or 8% on an underlying basis. Operating income was$1.6 billion and$1.5 billion in 2022 and 2021, respectively. •The Company's results of operations in 2022 were impacted by restructuring activities of$427 million , primarily related to severance and lease exit charges for activities focused on workforce actions, technology rationalization and reductions in real estate.
•The Company completed 20 acquisitions in 2022, the largest being the
acquisition of
Insurance
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Consulting segment.
•In 2022, Mercer sold its
marketing, brokerage and administration to association and affinity groups for
cash proceeds of approximately
•The Company issued senior notes of
2052, and repaid senior notes of
•In 2022, the Company repurchased 12.2 million shares for
For additional details, refer to the consolidated results of operations and
liquidity and capital resources sections in this MD&A.
Acquisitions and dispositions impacting the Risk and Insurance Services and
Consulting segments are discussed in Note 5, Acquisitions and Dispositions, in
the notes to the consolidated financial statements.
Deconsolidation of
OnFebruary 24, 2022 , Russian forces launched a military invasion ofUkraine . In response,the United States (U.S. ), theEuropean Union (E.U.),United Kingdom (U.K. ) and other governments have imposed significant economic sanctions onRussia , andRussia has responded with counter-sanctions. The Company concluded that it did not meet the accounting criteria for control over its wholly-owned Russian businesses due to the evolving trade and economic sanctions, and recorded a loss of$52 million on the deconsolidation of the Russian businesses and other related charges. Subsequently, the Company entered into a definitive agreement to exit its businesses inRussia and transfer ownership to local management, pending regulatory approvals. Refer to Note 5, Acquisitions and Dispositions, in the notes to the consolidated financial statements for additional information on the deconsolidation of the Russian businesses.
The war in
macroeconomic uncertainty. The Company continues to monitor the ongoing
situation and its potential impact on our business, financial condition, results
of operations and cash flows.
Business Update related to COVID-19
For nearly three years, the COVID-19 pandemic has impacted businesses globally
including in every geography in which the Company operates. Our businesses have
remained resilient throughout the pandemic and demand for our advice and
services remains strong. The ultimate extent of the impact of COVID-19 to the
Company will depend on future developments that it is unable to predict.
Factors that could adversely affect the Company's financial statements related
to the financial and operational impact of COVID-19 are included in "Item 1A -
Risk Factors" in Part I of this report.
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Consolidated Results of Operations
For the Years EndedDecember 31 , (In millions, except per share data) 2022 2021 2020 Revenue$ 20,720 $ 19,820 $ 17,224 Expense Compensation and benefits 12,071 11,425 10,129 Other operating expenses 4,369 4,083 4,029 Operating expenses 16,440 15,508 14,158 Operating income$ 4,280 $ 4,312 $ 3,066 Income before income taxes$ 4,082 $ 4,208 $ 2,793
Net income before non-controlling interests
$ 2,046 Net income attributable to the Company$ 3,050 $ 3,143 $ 2,016 Net income per share attributable to the Company - Basic$ 6.11 $ 6.20 $ 3.98 - Diluted$ 6.04 $ 6.13 $ 3.94 Average number of shares outstanding - Basic 499 507
506
- Diluted 505 513
512
Shares outstanding at December 31, 495 504
508
Consolidated operating income decreased$32 million , or 1% to$4.3 billion in 2022, compared to the prior year, reflecting a 5% increase in revenue and a 6% increase in expenses. Revenue growth was driven by increases of 5% in both Risk and Insurance Services and Consulting, reflecting the continued strong demand for our advice and services and the expansion of the global economy. The increase in expenses is primarily due to increased headcount and higher incentive compensation, as well as severance and lease exit charges. Expenses also reflect higher travel and entertainment costs, partially offset by lower depreciation and amortization primarily in the Risk and Insurance Services segment in 2022 compared to the prior year. In 2022, net operating income was also impacted by foreign exchange movements across both segments due to the strengthening of theU.S. dollar. Diluted earnings per share decreased from$6.13 to$6.04 , or 1% from the prior year. The decrease is primarily the result of lower operating income, other net benefits credits and investment income, and higher interest expense in 2022, compared to the prior year. The decrease in net income attributable to the Company was offset by lower income taxes in 2022. Income taxes for 2021, included a net charge of$110 million for the re-measurement of deferred tax assets and liabilities due to the enactment of a tax rate increase from 19% to 25% in theU.K , partially offset by no tax impact on the gain related to the consolidation ofMarsh India . 40
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In 2022 and 2021, the Company's results of operations and earnings per share
were impacted by the following items:
For the Years EndedDecember 31 , (In millions) 2022 2021 2020 Restructuring, excluding JLT$ 312 $ 70 $ 89 Changes in contingent consideration 49 57 26 JLT integration and restructuring costs 115 93 251 JLT acquisition-related costs and other 28 81 54 JLT legacy legal charges 1 (69) 161 Legal claims 30 62 - Disposal of businesses (122) (49) (8) Pre-acquisition related costs 21 - - Deconsolidation of Russian businesses and other related charges 52 - - Gain on consolidation of business - (267) - Other - - 5 Impact on income before taxes
•Restructuring, excluding JLT: Primarily includes severance and lease exit charges for activities focused on workforce actions, rationalization of technology and functional resources, and reductions in real estate. Costs also reflect charges for Marsh's operational excellence program. These costs are discussed in more detail in Note 14, Restructuring Costs, in the notes to the consolidated financial statements. •Changes in contingent consideration: Includes the change in fair value of contingent consideration related to acquisitions and dispositions measured each quarter. •JLT integration and restructuring costs: Primarily reflects lease exit charges for a legacy JLTU.K. location in 2022. In 2021, costs incurred include severance, lease exit charges, technology costs, and consulting services related to the integration of JLT. The Company completed the integration of JLT in 2022.
•JLT acquisition-related costs and other: Retention costs and legal charges
related to the acquisition of JLT.
•JLT legacy legal charges: Charges and recoveries related to legacy JLT legal matters. In 2021, the Company recorded a$36 million reduction in the liability for a legacy JLT errors and omissions ("E&O") related to the suitability of advice provided to individuals for defined benefit pension transfers in theU.K. , as well as$33 million of recoveries under indemnities and insurance. The reduction in liability primarily reflects lower redress payments than previously estimated, partially offset by higher costs to review and calculate redress. Refer to Note 16, Claims, Lawsuits and Other Contingencies, in the notes to the consolidated financial statements.
•Legal claims: The Company recorded settlement and legal costs related to
strategic recruiting.
•Disposal of businesses: Primarily reflects a net gain of$112 million on sale of the MercerU.S. affinity business in 2022, that provided insurance marketing, brokerage and administration to association and affinity groups. In 2021, the amount primarily reflects a gain on the sale of theU.K. commercial networks business that provided broking and back-office solutions for small independent brokers. These amounts are reflected as a component of revenue in the consolidated statements of income and excluded from the calculations of underlying revenue. •Pre-acquisition related costs: Includes integration costs for the pending Westpac Banking Corporation superannuation fund transaction inAustralia , which is expected to close in the first half of 2023. Refer to Note 5, Acquisitions and Dispositions, in the notes to the consolidated financial statements. 41 --------------------------------------------------------------------------------
•Deconsolidation of Russian businesses and other related charges: Loss on
deconsolidation of Russian businesses of
the consolidated statements of income and excluded from the calculations of
underlying revenue.
•Gain on consolidation of business: In 2021, the Company increased its ownership inMarsh India from 49% to 92%. Prior to the increase in ownership, the Company accounted for the investment under the equity method of accounting. In connection with the increased investment inMarsh India , the Company recorded a gain of$267 million , related to the re-measurement of its previously held investment to fair value. 42
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Consolidated Revenue and Expense
Revenue - Components of Change
The Company conducts business in 130 countries. As a result, foreign exchange rate movements may impact period-to-period comparisons of revenue. Similarly, certain other items such as the revenue impact of acquisitions and dispositions, including transfers among businesses, may impact period-to-period comparisons of revenue. Underlying revenue measures the change in revenue from one period to another by isolating these impacts.
The impact of foreign currency exchange fluctuations, acquisitions and
dispositions, including transfers among businesses, on the Company's operating
revenues by segment is as follows:
Year Ended %
December 31 , Change
Components of Revenue Change**
% Change Revenue excl. Acquisitions/
(In millions, except GAAP Marsh India Dispositions/ Other
percentages) 2022 2021 Revenue Gain* Currency Impact Impact Underlying Revenue
Risk and Insurance Services
Marsh $ 10,505 $ 10,203 3 % 6 % (3) % 1 % 8 %
Guy Carpenter 2,020 1,867 8 % (2) % 1 % 9 %
Subtotal 12,525 12,070 4 % 6 % (3) % 1 % 8 %
Fiduciary Interest Income 120 15
Total Risk and Insurance
Services 12,645 12,085 5 % 7 % (3) % 1 % 9 %
Consulting
Mercer 5,345 5,254 2 % (5) % 1 % 6 %
Oliver Wyman Group 2,794 2,535 10 % (4) % 1 % 13 %
Total Consulting 8,139 7,789 5 % (5) % 1 % 8 %
Corporate Eliminations (64) (54)
Total Revenue $ 20,720 $ 19,820 5 % 6 % (4) % 1 % 9 %
* Percentage change excludes the gain from the consolidation of
** Components of revenue change may not add due to rounding.
The following table provides more detailed revenue information for certain of
the components presented above:
Year Ended %
December 31 , Change
Components of Revenue Change**
% Change Revenue excl. Acquisitions/
(In millions, except GAAP Marsh India Dispositions/ Other
percentages) 2022 2021 Revenue Gain* Currency Impact Impact Underlying Revenue
Marsh:
EMEA $ 2,879 $ 2,946 (2) % (7) % (3) % 8 %
Asia Pacific 1,333 1,462 (9) % 12 % (8) % 6 % 13 %
Latin America 502 453 11 % (1) % - 11 %
Total International 4,714 4,861 (3) % 3 % (7) % - 10 %
U.S./Canada 5,791 5,342 8 % - 1 % 7 %
Total Marsh $ 10,505 $ 10,203 3 % 6 % (3) % 1 % 8 %
Mercer:
Wealth $ 2,366 $ 2,509 (6) % (6) % - -
Health 2,017 1,855 9 % (3) % 3 % 9 %
Career 962 890 8 % (6) % - 14 %
Total Mercer $ 5,345 $ 5,254 2 % (5) % 1 % 6 %
* Percentage change excludes the gain from the consolidation of
** Components of revenue change may not add due to rounding.
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Consolidated Revenue
Consolidated revenue increased$900 million , or 5%, to$20.7 billion in 2022, compared to$19.8 billion in 2021. Consolidated revenue increased 9% on an underlying basis and 1% from acquisitions, partially offset by a decrease of 4% from the impact of foreign currency translation. On an underlying basis, revenue increased 9% and 8% in 2022, in the Risk and Insurance Services and Consulting segments, respectively. Underlying revenue growth in the Risk and Insurance Services and Consulting segments was driven by the continued strong demand for our advice and services, the expansion of the global economy, new business growth, and solid retention including continued benefits from pricing in the market place.
Consolidated Operating Expenses
Consolidated operating expenses increased$932 million , or 6%, to$16.4 billion in 2022, compared to$15.5 billion in 2021, reflecting increases of 10% on an underlying basis and 1% from acquisitions, partially offset by a decrease of 4% from the impact of foreign currency translation. On an underlying basis, expenses increased 9% in 2022, in both the Risk and Insurance Services and Consulting segments. The increase in underlying expenses is primarily due to increased headcount and higher incentive compensation, as well as severance and lease exit charges. Expenses also reflect higher travel and entertainment costs, partially offset by lower depreciation and amortization primarily in the Risk and Insurance Services segment in 2022 compared to the prior year. In 2022, the Company incurred$427 million of restructuring costs, primarily severance and lease exit charges, of which$219 million related to the Company's activities focused on workforce actions, rationalization of technology and functional services, and reductions in real estate. These activities were initiated in the fourth quarter of 2022 and the Company expects related estimated savings in 2023 to be in the range of$125 million to$150 million . Based on current estimates, the Company anticipates these activities will continue throughout 2023 and into 2024. However, additional charges are unlikely to exceed costs incurred in 2022. The Company's plans are still being finalized, which may change the expected timing, estimates of expected costs and related savings, as the Company continues to refine its detailed plans for each business and location.
Expenses also reflect lease exit charges of
Insurance Services segment for a legacy JLT
details, refer to Note 14, Restructuring Costs, in the notes to the consolidated
financial statements.
Risk and Insurance Services In the Risk and Insurance Services segment, the Company's subsidiaries and other affiliated entities act as brokers, agents or consultants for insureds, insurance underwriters and other brokers in the areas of risk management, insurance broking, insurance program management, risk consulting, analytical modeling and alternative risk financing services, primarily under the name of Marsh, and engage in specialized reinsurance broking, strategic advisory services and analytics solutions, primarily under the name ofGuy Carpenter . Marsh andGuy Carpenter are compensated for brokerage and consulting services through commissions and fees. Commission rates and fees vary in amount and can depend on a number of factors, including the type of insurance or reinsurance coverage provided, the particular insurer or reinsurer selected, and the capacity in which the broker acts and negotiates with clients. Revenues can be affected by premium rate levels in the insurance/reinsurance markets, the amount of risk retained by insurance and reinsurance clients, and by the value of the risks that have been insured since commission-based compensation is frequently related to the premiums paid by insureds and reinsureds. In many cases, fee compensation may be negotiated in advance, based on the type of risk, coverage required and service provided by the Company and ultimately, the extent of the risk placed into the insurance market or retained by the client. The trends and comparisons of revenue from one period to the next can be affected by changes in premium rate levels, fluctuations in client risk retention and increases or decreases in the value of risks that have been insured, as well as new and lost business, and the volume of business from new and existing clients. 44 -------------------------------------------------------------------------------- In addition to compensation from its clients, Marsh also receives other compensation, separate from retail fees and commissions, from insurance companies. This other compensation includes, among other things, payment for consulting and analytics services provided to insurers; compensation for administrative and other services (including fees for underwriting services and services provided to or on behalf of insurers relating to the administration and management of quota shares, panels and other facilities in which insurers participate); and contingent commissions, which are paid by insurers based on factors such as volume or profitability of Marsh's placements, primarily driven byMarsh McLennan Agency ("MMA") and parts of Marsh's international operations. Marsh andGuy Carpenter receive interest income on certain funds (such as premiums and claims proceeds) held in a fiduciary capacity for others. The investment of fiduciary funds is regulated by state and other insurance authorities. These regulations typically require segregation of fiduciary funds and limit the types of investments that may be made. Interest income from these investments varies depending on the amount of funds invested and applicable interest rates, both of which vary from time to time. For presentation purposes, fiduciary interest income is segregated from the other revenues of Marsh andGuy Carpenter and separately presented within the segment, as shown in the previous revenue by segments tables.
The results of operations for the Risk and Insurance Services segment are as
follows:
(In millions, except percentages) 2022 2021 2020 Revenue$ 12,645 $ 12,085 $ 10,337 Compensation and benefits 6,938 6,506 5,690 Other operating expenses 2,618 2,499 2,301 Operating expenses 9,556 9,005 7,991 Operating income$ 3,089 $ 3,080 $ 2,346 Operating income margin 24.4% 25.5% 22.7% Revenue Revenue in the Risk and Insurance Services segment increased$560 million , or 5%, to$12.6 billion in 2022, compared with$12.1 billion in 2021. Revenue increased by 7% excluding the Marsh India gain in 2021. This reflects increases of 9% on an underlying basis and 1% from acquisitions, offset by a decrease of 3% from the impact of foreign currency translation. Interest earned on fiduciary funds increased by$105 million to$120 million , compared to$15 million in the prior year. The increase in underlying revenue in the Risk and Insurance Services segment was primarily due to growth in new business from existing clients, investments in talent, and solid retention including continued benefits from pricing in the marketplace. The increase in interest earned on fiduciary funds in 2022 is a result of higher interest rates compared to the prior year. In Marsh, revenue increased$302 million , or 3%, to$10.5 billion in 2022, compared to$10.2 billion in 2021. Revenue increased by 6% excluding the Marsh India gain in 2021. This reflects increases of 8% on an underlying basis and 1% from acquisitions, offset by a decrease of 3% from the impact of foreign currency translation. On an underlying basis,U.S. /Canada rose 7%.Total International operations produced underlying revenue growth of 10%, reflecting growth of 13% inAsia Pacific , 11% inLatin America and 8% in EMEA. Results in 2022 also include a charge of$27 million related to the loss on deconsolidation of the Company's Russian businesses. In 2021, revenue from acquisitions reflected a gain of$267 million related to the re-measurement of the previously held equity method investment inMarsh India and a net gain of approximately$50 million related to the disposition of the commercial networks business in theU.K. At Guy Carpenter, revenue increased$153 million , or 8%, to$2.0 billion in 2022, compared with$1.9 billion in 2021. This reflects increases of 9% on an underlying basis and 1% from acquisitions, offset by a decrease of 2% related to the impact of foreign currency translation.
The Risk and Insurance Services segment completed 16 acquisitions in 2022.
Information regarding these acquisitions is included in Note 5, Acquisitions and
Dispositions, in the notes to the consolidated financial statements.
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Operating Expenses
Expenses in the Risk and Insurance Services segment increased$551 million , or 6%, to$9.6 billion in 2022, compared with$9.0 billion in 2021. This reflects increases of 9% on an underlying basis and 1% from acquisitions, offset by a decrease of 4% from the impact of foreign currency translation. The increase in underlying expenses in 2022 is primarily due to increased headcount and higher incentive compensation, as well as severance and lease exit charges. In 2022, the Company incurred$254 million for restructuring costs in Risk and Insurance Services, of which$104 million related to the Company's activities focused on workforce actions, rationalization of technology and functional services, and reductions in real estate. Expenses also reflect higher lease related exit costs for a legacy JLTU.K. location of$89 million , and higher travel and entertainment costs, partially offset by lower depreciation and amortization in 2022, compared to the prior year. Consulting The Company conducts business in its Consulting segment throughMercer and Oliver Wyman Group . Mercer delivers advice and technology-driven solutions that help organizations redefine the future of work, shape retirement and investment outcomes, and advance health and well-being for a changing workforce. Oliver Wyman serves as a critical strategic, economic and brand advisor to private sector and governmental clients. The major component of revenue in the Consulting business is fees paid by clients for advice and services. Mercer, principally through its health line of business, also earns revenue in the form of commissions received from insurance companies for the placement of group (and occasionally individual) insurance contracts, primarily life, health and accident coverages. Revenue for Mercer's investment management business and certain of Mercer's defined benefit and contribution administration services consists principally of fees based on assets under management or administration. For a majority of the Mercer managed investment funds, revenue is recorded on a gross basis with sub-advisor fees included in other operating expenses. Revenue in the Consulting segment is affected by, among other things, global economic conditions, including changes in clients' particular industries and markets. Revenue is also affected by competition due to the introduction of new products and services, broad trends in employee demographics, including levels of employment and the effect of government policies and regulations. Revenues from investment management services and retirement trust and administrative services are significantly affected by the level of assets under management or administration, which is impacted by securities market performance.
The results of operations for the Consulting segment are as follows:
(In millions, except percentages) 2022 2021 2020 Revenue$ 8,139 $ 7,789 $ 6,976 Compensation and benefits 4,626 4,435 3,995 Other operating expenses 1,960 1,850 1,987 Operating expenses 6,586 6,285 5,982 Operating income$ 1,553 $ 1,504 $ 994 Operating income margin 19.1% 19.3% 14.3% Revenue
Consulting revenue increased
compared with
underlying basis and 1% from acquisitions, partially offset by a decrease of 5%
from the impact of foreign currency translation.
Mercer's revenue increased$91 million , or 2%, to$5.3 billion in 2022, compared to the prior year. This reflects increases of 6% on an underlying basis and 1% from dispositions, offset by a decrease of 5% from the impact of foreign currency translation. On an underlying basis, revenue for Career and Health increased 14%, and 9%, respectively, while underlying revenue for Wealth remained flat. 46 -------------------------------------------------------------------------------- The increase in underlying revenue at Mercer in 2022 was primarily due to continued strong demand for our advice and services and the expansion of the global economy. The increase in Career products and services was due to continued demand for solutions linked to new ways of working, skill gaps, workforce transformation and diversity & inclusion issues. Health continued to benefit from growth in new business, higher retention, increased enrolled lives from a strong labor market, and medical inflation. Underlying revenue in Wealth grew in retirement solutions in 2022, offset by a decrease in investment management fees from the decline in assets under management due to market volatility on investments.
Results in 2022 also include a net gain of
Mercer
Oliver Wyman Group's revenue increased$259 million , or 10%, to$2.8 billion in 2022, compared with$2.5 billion in 2021, reflecting increases of 13% on an underlying basis and 1% from acquisitions, offset by a decrease of 4% from the impact of foreign currency translation. The increase in underlying revenue at Oliver Wyman in 2022 was primarily due to increased demand for project-based services across all industries. Results in 2022, also include a charge of$12 million related to the loss on deconsolidation of the Company's Russian businesses. The Consulting segment completed 4 acquisitions in 2022. Information regarding these acquisitions is included in Note 5, Acquisitions and Dispositions, in the notes to the consolidated financial statements.
Operating Expenses
Consulting expenses increased
compared to
underlying basis, partially offset by a decrease of 5% from the impact of
foreign currency translation.
The increase in underlying expenses in the Consulting segment in 2022 is primarily due to increased headcount and higher incentive compensation, as well as severance and lease exit charges. In 2022, the Company incurred$77 million for restructuring costs in Consulting, of which$53 million related to the Company's activities focused on workforce actions, rationalization of technology and functional services, and reductions in real estate.
Expenses also reflect higher travel and entertainment costs compared to the
prior year. Results in 2021 also included a
liability for a legacy JLT E&O, including recoveries under indemnities and
insurance, recorded in other expenses.
Corporate and Other
Corporate expenses increased$90 million , or 33% to$362 million in 2022, compared with$272 million in 2021. This reflects an increase of 34% on an underlying basis, offset by a decrease of 1% from the impact of foreign currency translation. The increase in underlying expenses is primarily related to$62 million in lease exit charges for reductions in real estate.
Interest
Interest expense was$469 million in 2022, compared to$444 million in 2021. Interest expense increased$25 million due to higher short term borrowings in 2022 at higher interest rates compared to the prior year.
Investment Income (Loss)
The caption "Investment income (loss)" in the consolidated statements of income comprises realized and unrealized gains and losses from investments. It includes, when applicable, other than temporary declines in the value of securities, mark-to-market increases or decreases in equity investments with readily determinable fair values and equity method gains or losses on its investments in private equity funds. The Company's investments may include direct investments in insurance, consulting or other strategically linked companies and investments in private equity funds. The Company recorded net investment income of$21 million in 2022, compared to$61 million in 2021. Net investment income in 2022 is driven primarily by lower mark-to-market gains from the Company's private equity investments compared to the prior year. Income and Other Taxes
The Company's consolidated effective tax rate for 2022 and 2021 was 24.4% and
24.6%, respectively.
47 -------------------------------------------------------------------------------- The tax rates in both years reflect the impact of discrete tax matters such as excess tax benefits related to share-based compensation, enacted tax legislation, changes in uncertain tax positions, deferred tax adjustments, non-taxable adjustments related to contingent consideration for acquisitions, and valuation allowances for certain tax credits. The rates in both years also reflect tax benefits from planning that postponed the utilization of current year losses in theU.K. to a future year when the tax rate will be 25%. The excess tax benefit related to share-based payments is the most significant discrete item in 2022, reducing the effective tax rate by 0.7%. The reduction in 2021 was also 0.7%. The effective tax rate for 2021 reflects a net charge of$100 million related to the re-measuring of the Company'sU.K. deferred tax assets and liabilities upon enactment of legislation onJune 10, 2021 , increasing theU.K. corporate income tax rate from 19% to 25%, effectiveApril 1, 2023 . The re-measurement of the Company'sU.K. deferred tax assets and liabilities was the most significant discrete item in the prior year, increasing the Company's effective tax rate by 2.6% in 2021. The effective tax rate in 2021 also decreased 1.5% due to the Company not recording a tax on the gain from the fair value re-measurement of the Company's previously-held equity method investment inMarsh India when the Company increased its ownership interest from 49% to 92%. The Company does not intend to dispose the business and has indefinitely reinvested this gain. The effective tax rate may vary significantly from period to period. The effective tax rate is sensitive to the geographic mix of earnings and the cost to repatriate the Company's earnings, which may result in higher or lower effective tax rates. Therefore, a shift in the mix of profits among jurisdictions, or changes in the Company's repatriation strategy to access offshore cash, can affect the effective tax rate. In 2022, pre-tax income in theU.K. ,Barbados ,Canada ,Ireland ,Bermuda ,Australia ,Japan , India, andGermany accounted for approximately 65% of the Company's total non-U.S. pre-tax income, with effective rates in those countries of 17.8%, 1.2%, 26.8%, 11.9%, 3.7%, 29.3%, 32.8%, 24.9%, and 32.6%, respectively. In addition, losses in certain jurisdictions cannot be offset by earnings from other operations and may require valuation allowances that affect the rate in a particular period, depending on estimates of the value of associated deferred tax assets which can be realized. A valuation allowance was recorded to reduce deferred tax assets to the amount that the Company believes is more likely than not to be realized. Details are provided in Note 7, Income Taxes, in the notes to the consolidated financial statements. The effective tax rate is also sensitive to changes in unrecognized tax benefits, including the impact of settled tax audits and expired statutes of limitations.
Changes in tax laws, rulings, policies or related legal and regulatory
interpretations occur frequently and may also have significant favorable or
adverse impacts on our effective tax rate.
OnAugust 16, 2022 , the Inflation Reduction Act of 2022 ("IRA") was enacted into law. The Company evaluated the provisions of the new legislation, the most significant of which are the corporate alternative minimum tax and the share repurchase tax. The IRA is effective as ofJanuary 1, 2023 , and will not have a significant impact on the Company's financial results of operations. As aU.S. -domiciled parent holding company, the Company is the issuer of essentially all of the Company's external indebtedness, and incurs the related interest expense in theU.S. The Company's interest expense deductions are not currently limited. Further, most senior executive and oversight functions are conducted in theU.S. and the associated costs are incurred primarily in theU.S. Some of these expenses may not be deductible in theU.S. , which may impact the effective tax rate. Changes to theU.S. tax law in recent years have allowed the Company to repatriate foreign earnings without incurring additionalU.S. federal income tax costs as foreign income is generally already taxed in theU.S. However, permanent reinvestment continues to be a component of the Company's global capital strategy. The Company continues to evaluate its global investment and repatriation strategy in light of our capital requirements and potential costs of repatriation, which are generally limited to local country withholding taxes. The Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") was signed into law onMarch 27, 2020 . The CARES Act provided over$2 trillion in economic relief to individuals, governmental agencies and companies, to deal with the public health and economic impacts of COVID-19. Pursuant to the CARES Act, the Company deferred payroll taxes due fromMarch 27, 2020 throughDecember 31, 2020 , and paid 50% in 2021 and 2022, respectively. 48 --------------------------------------------------------------------------------
Liquidity and Capital Resources
The Company is organized as a legal entity separate and distinct from its operating subsidiaries. As the Company does not have significant operations of its own, the Company is dependent upon dividends and other payments from its operating subsidiaries to pay principal and interest on its outstanding debt obligations, pay dividends to stockholders, repurchase its shares and pay corporate expenses. The Company can also provide financial support to its operating subsidiaries for acquisitions, investments and certain parts of their business that require liquidity, such as the capital markets business ofGuy Carpenter . Other sources of liquidity include borrowing facilities in financing cash flows. The Company derives a significant portion of its revenue and operating profit from operating subsidiaries located outside of theU.S. Funds from those operating subsidiaries are regularly repatriated to theU.S. out of annual earnings. AtDecember 31, 2022 , the Company had approximately$921 million of cash and cash equivalents in its foreign operations, which includes$325 million of operating funds required to be maintained for regulatory requirements or as collateral under certain captive insurance arrangements. The Company expects to continue its practice of repatriating available funds from its non-U.S. operating subsidiaries out of current annual earnings. Where appropriate, a portion of the current year earnings will continue to be permanently reinvested. In 2022, the Company recorded foreign currency translation adjustments which decreased net equity by$1 billion . Continued strengthening of theU.S. dollar against foreign currencies would further decrease the translatedU.S. dollar value of the Company's net investments in its non-U.S. subsidiaries, as well as the translatedU.S. dollar value of cash repatriations from those subsidiaries. Cash and cash equivalents on our consolidated balance sheets includes funds available for general corporate purposes. Funds held on behalf of clients in a fiduciary capacity are segregated and shown separately in the consolidated balance sheets as an offset to fiduciary liabilities. Fiduciary funds cannot be used for general corporate purposes, and should not be considered as a source of liquidity for the Company. Operating Cash Flows The Company provided$3.5 billion of cash from operations in both 2022 and 2021. These amounts reflect the net income of the Company during those periods, excluding gains or losses from investments, adjusted for non-cash charges and changes in working capital which relate primarily to the timing of payments of accrued liabilities, including incentive compensation, or receipts of receivables and pension contributions. The Company used cash of$193 million related to its restructuring activities in 2022, compared to$178 million in 2021. Pension Related Items Contributions In 2022, the Company contributed$30 million to itsU.S. defined benefit pension plans and$139 million to its non-U.S. defined benefit pension plans. In 2021, the Company contributed$35 million to itsU.S. defined benefit pension plans and$95 million to its non-U.S. defined benefit pension plans. In theU.S. , contributions to the tax-qualified defined benefit plans are based on Employee Retirement Income Security Act ("ERISA") guidelines and the Company generally expects to maintain a funded status of 80% or more of the liability determined in accordance with the ERISA guidelines. In 2022, the Company made contributions of$30 million to its non-qualified plans and expects to contribute approximately$31 million in 2023. The Company was not required to and made no contributions to itsU.S. qualified plans in 2022, and is not required to make any contributions in 2023. Outside theU.S. , the Company has a large number of non-U.S. defined benefit pension plans, the largest of which are in theU.K. , which comprise approximately 79% of non-U.S. plan assets atDecember 31, 2022 . Contribution rates for non-U.S. plans are generally based on local funding practices and statutory requirements, which may differ significantly from measurements in accordance withU.S. GAAP.
The Company contributed
section) in 2022. The Company's contributions to its
JLT section) for 2023 are expected to be approximately
49 -------------------------------------------------------------------------------- In theU.K. , the assumptions used to determine pension contributions are the result of legally-prescribed negotiations between the Company and the plans' trustee that typically occur every 3 years in conjunction with the actuarial valuation of the plans. Currently, this results in a lower funded status compared toU.S. GAAP and may result in contributions irrespective of theU.S. GAAP funded status. In 2021, the JLT Pension Scheme was merged into theMMC U.K. Pension Fund with a new segregated JLT section created. The Company made deficit contributions of$103 million to the JLT section in 2022, and is expected to make contributions totaling approximately$39 million in 2023. For theMMC U.K. Pension Fund , excluding the JLT section, an agreement was reached with the trustee in the fourth quarter of 2022, based on the surplus funding position atDecember 31, 2021 . In accordance with the agreement, no deficit funding is required until 2026. The funding level will be re-assessed during 2025 as part of theDecember 31, 2024 actuarial valuation to determine if contributions are required in 2026. As part of a long-term strategy which depends on having greater influence over asset allocation and overall investment decisions, inDecember 2022 , the Company renewed its agreement to support annual deficit contributions by theU.K. operating companies under certain circumstances, up to £450 million (or$541 million ) over a 7-year period.
The Company expects to contribute approximately
defined benefit plans in 2023, comprising approximately
plans and
Changes in Funded Status and Expense
The year-over-year change in the funded status of the Company's pension plans is impacted by the difference between actual and assumed results, particularly with regard to return on assets, and changes in the discount rate, as well as the amount of Company contributions, if any. Unrecognized actuarial losses as ofDecember 31, 2022 were approximately$1.4 billion and$2.6 billion for theU.S. plans and non-U.S. plans, respectively, compared with losses of$1.8 billion and$2.9 billion as ofDecember 31, 2021 . The decreases in both theU.S. and non-U.S. plans were primarily due to an increase in the discount rate used to measure plan liabilities and the impact of foreign exchange, partially offset by a decrease in asset values. In the past several years, the amount of unamortized losses has been significantly impacted, both positively and negatively, by actual asset performance and changes in discount rates. The discount rate used to measure plan liabilities in 2022 increased in theU.S. andU.K. , the Company's largest plans, following an increase in 2021 and a decrease in 2020. An increase in the discount rate decreases the measured plan benefit obligation, resulting in actuarial gains, while a decrease in the discount rate increases the measured plan obligation, resulting in actuarial losses. In 2022, the Company's defined benefit pension plan assets had losses of 18.3% and 29.2% in theU.S. andU.K. , respectively, as compared to gains of 13.2% and 1.9% in theU.S. andU.K. , respectively, in 2021. Overall, based on the measurement atDecember 31, 2022 , net benefit credits related to the Company's defined benefit plans are expected to decrease in 2023 by approximately$12 million compared to 2022, reflecting a decrease in theU.S. plans of$40 million , offset by an increase in non-U.S. plans of approximately$28 million .
The Company's accounting policies for its defined benefit pension plans,
including the selection of and sensitivity to assumptions, are discussed in
Management's Discussion of Critical Accounting Policies. For additional
information regarding the Company's retirement plans, refer to Note 1, Summary
of Significant Accounting Policies, and Note 8, Retirement Benefits, in the
notes to the consolidated financial statements.
Financing Cash Flows
Net cash used for financing activities was
Credit Facilities
The Company has a multi-currency unsecured$2.8 billion five-year revolving credit facility (the "Credit Facility"), entered into inApril 2021 . The interest rate on the Credit Facility is based on LIBOR plus a fixed margin which varies with the Company's credit ratings. The Credit Facility expires inApril 2026 and requires the Company to maintain certain coverage and leverage ratios which are tested quarterly. The Credit Facility includes provisions for determining a LIBOR successor rate in the event LIBOR reference 50 --------------------------------------------------------------------------------
rates are no longer available or in certain other circumstances which are
determined to make using an alternative rate desirable. As of
and 2021, the Company had no borrowings under this facility.
In
facility. The facility expires in
leverage ratios as the Credit Facility. The Company had no borrowings
outstanding under this facility at
The Company also maintains other credit facilities, guarantees and letters of credit with various banks aggregating$514 million atDecember 31, 2022 , and$508 million atDecember 31, 2021 . There were no outstanding borrowings under these facilities as ofDecember 31, 2022 or as ofDecember 31, 2021 .
Debt
InOctober 2022 , the Company issued$500 million of 5.75% senior notes due 2032 and$500 million of 6.25% senior notes due 2052. The Company used the net proceeds from these issuances for general corporate purposes, and repaid$350 million of 3.30% senior notes inNovember 2022 , with an original maturity date ofMarch 2023 . InOctober 2022 , the Company increased its short-term commercial paper financing program to$2.8 billion from$2 billion . The Company had no commercial paper outstanding atDecember 31, 2022 . InDecember 2021 , the Company issued$400 million of 2.375% senior notes due 2031 and$350 million of 2.90% senior notes due 2051. The Company used the net proceeds from these issuances for general corporate purposes, and repaid$500 million of 2.75% senior notes with an original maturity date ofJanuary 2022 , inDecember 2021 .
On
The Company's senior debt is currently rated A- byStandard & Poor's ("S&P"), Baa1 by Moody's and A- by Fitch. The Company's short-term debt is currently rated A-2 by S&P, P-2 by Moody's and F2 by Fitch. The Company carries a Positive outlook with Moody's and a Stable outlook with S&P and Fitch.
Share Repurchases
On
additional
existing share repurchase program, which had approximately
remaining authorization as of
In 2022, the Company repurchased 12.2 million shares of its common stock for$1.9 billion . As ofDecember 31, 2022 , the Company remained authorized to repurchase up to approximately$4.3 billion in shares of its common stock. There is no time limit on this authorization. In 2021, the Company repurchased 7.9 million shares of its common stock for$1.2 billion .
Dividends
The Company paid dividends on its common stock shares of
share) in 2022 and
51
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Contingent Payments Related To Acquisitions
The classification of contingent consideration in the consolidated statements of
cash flows is dependent upon whether the receipt or payment was part of the
initial liability established on the acquisition date (financing) or an
adjustment to the acquisition date liability (operating).
The following amounts are included in the consolidated statements of cash flows
as operating and financing activities:
For the Years EndedDecember 31 , (In millions) 2022 2021 2020
Operating:
Contingent consideration payments for prior year acquisitions
Receipt of contingent consideration for dispositions
- 19 - Acquisition/disposition related net charges for adjustments 49 57 26 Adjustments and payments related to contingent consideration$ 11 $ 27 $ (22) Financing: Contingent consideration for prior year acquisitions$ (32) $ (28) $ (54) Deferred consideration related to prior year acquisitions (126) (89) (68)
Payments of deferred and contingent consideration for acquisitions
Receipt of contingent consideration for dispositions $
3
For acquisitions completed in 2022, and in prior years, remaining estimated future contingent payments of$377 million and deferred consideration payments of$142 million , are recorded in accounts payable and accrued liabilities or other liabilities in the consolidated balance sheets atDecember 31, 2022 .
Derivatives - Net Investment Hedge
The Company has investments in various subsidiaries with Euro functional currencies. As a result, the Company is exposed to the risk of fluctuations between the Euro andU.S. dollar exchange rates. As part of its risk management program, the Company issued €1.1 billion senior notes, and designated the debt instruments as a net investment hedge of its Euro denominated subsidiaries. The hedge is re-assessed each quarter to confirm that the designated equity balance at the beginning of each period continues to equal or exceed 80% of the outstanding balance of the Euro debt instrument and that all the critical terms of the hedging instrument and the hedged net investment continue to match. If the hedge is highly effective, the change in the debt balance related to foreign exchange fluctuations is recorded in accumulated other comprehensive loss in the consolidated balance sheets. TheU.S. dollar value of the Euro notes decreased by$82 million in 2022 related to the change in foreign exchange rates. The Company concluded that the hedge was highly effective and recorded a gain as a decrease to accumulated other comprehensive loss for the year endedDecember 31, 2022 .
Fiduciary Liabilities
Since cash and cash equivalents held in a fiduciary capacity are not available for corporate use, they are shown in the consolidated balance sheets as an offset to fiduciary liabilities. Financing cash flows reflect an increase of$1.7 billion and$1.2 billion in 2022 and 2021, respectively, related to fiduciary liabilities.
Investing Cash Flows
Net cash used for investing activities amounted to
compared with
The Company paid$572 million and$859 million , net of cash, cash equivalents and cash and cash equivalents held in a fiduciary capacity acquired, for acquisitions it made in 2022 and 2021, respectively, including the Company's increased ownership interest inMarsh India from 49% to 92% inDecember 2021 . 52 -------------------------------------------------------------------------------- In 2022, the Company sold certain business, primarily Mercer'sU.S. affinity business, for cash proceeds of approximately$155 million , partially offset by$36 million primarily related to cash and cash equivalents held in a fiduciary capacity in the disposed businesses. In 2021, the Company sold certain of its businesses, primarily in theU.S. andU.K. , for cash proceeds of approximately$84 million . In the third quarter of 2022, the Company sold the remaining investment in the common stock ofAlexander Forbes ("AF"), for cash proceeds of approximately$62 million . The Company's additions to fixed assets and capitalized software, which amounted to$470 million in 2022 and$406 million in 2021, primarily related to computer equipment purchases, the refurbishing and modernizing of office facilities, and software development costs. The Company has commitments for potential future investments of approximately$160 million in private equity funds that invest primarily in financial services companies, including a$100 million commitment to invest in a private equity fund entered into onApril 1, 2022 .
Commitments and Obligations
The following sets forth the Company's future contractual obligations by type as ofDecember 31, 2022 : Payment due by Period 1-3 4-5 After 5 (In millions) Total Within 1 Year Years Years Years
Current portion of long-term debt
Long-term debt 11,304 - 2,138 1,224 7,942 Interest on long-term debt 6,021 458 794 692 4,077 Net operating leases 2,228 362 615 500 751 Service agreements 509 256 194 59 - Other long-term obligations (a) 600 253 274 68 5 Total$ 20,930 $ 1,597 $ 4,015 $ 2,543 $ 12,775
(a) Primarily reflects future payments of deferred and contingent purchase
consideration.
The table does not include the liability for unrecognized tax benefits of$97 million as the Company is unable to reasonably predict the timing of settlement of these liabilities, other than approximately$32 million that may become payable within one year. The table also does not include the remaining transitional tax payments related to the Tax Cuts and Jobs Act ("TCJA") of$62 million , which will be paid in installments beginning in 2023 through 2026. 53 --------------------------------------------------------------------------------
Management's Discussion of Critical Accounting Policies and Estimates
Management makes estimates and judgments that affect reported amounts of assets, liabilities, revenue and expenses, and disclosure of contingent assets and liabilities. Management considers the following policies to be critical to understanding the Company's financial statements because their application places the most significant demands on management's judgment, and requires management to make estimates about the effect of matters that are inherently uncertain. Actual results may differ from those estimates.
Revenue Recognition
In the Risk and Insurance Services segment, judgments related to the amount of variable revenue consideration to ultimately be received on placement of quota share reinsurance treaties and contingent commission from insurers, which was previously recognized when the contingency was resolved, now requires significant judgments and estimates. Management also makes significant judgments and estimates to measure the progress toward completing performance obligations and realization rates for consideration related to contracts as well as potential performance-based fees in the Consulting segment.
The Company capitalizes the incremental costs to obtain contracts primarily
related to commissions or sales bonus payments. These deferred costs are
amortized over the expected life of the underlying customer relationships. The
Company also capitalizes certain pre-placement costs that are considered
fulfillment costs that are amortized at a point in time when the associated
revenue is recognized.
Refer to Note 2, Revenue, in the notes to the consolidated financial statements
for additional information.
Legal and Other Loss Contingencies
The Company and its subsidiaries are subject to numerous claims, lawsuits and proceedings including claims for E&O. The Company records a liability when a loss is both probable and reasonably estimable which requires significant management judgment. The Company utilizes case level reviews by inside and outside counsel, an internal actuarial analysis by Oliver Wyman, a subsidiary of the Company, and other methods to estimate potential losses. The liability is reviewed quarterly and adjusted based on claims developments. In many cases, the Company has not recorded a liability, other than for legal fees to defend the claim, because the Company is unable, at present time, to make a determination that a loss is both probable and reasonably estimable. Given the unpredictability of E&O claims and of litigation that could arise from such claims, it is possible that an adverse outcome in a particular matter could have a material adverse effect on the Company's businesses, results of operations, financial condition or cash flows in a given quarterly or annual period. In addition, to the extent that insurance coverage is available, significant management judgment is required to determine the amount of recoveries that are probable of collection under the Company's various insurance programs.
Retirement Benefits
The Company maintains qualified and non-qualified defined benefit pension and defined contribution plans for its eligibleU.S. employees and a variety of defined benefit and defined contribution plans for its eligible non-U.S. employees. The Company's policy for funding its tax-qualified defined benefit retirement plans is to contribute amounts at least sufficient to meet the funding requirements set forth inU.S. and applicable foreign laws. The Company recognizes the funded status of its over-funded defined benefit pension and retiree medical plans as a net benefit plan asset and its unfunded and underfunded plans as a net benefit plan liability. The gains or losses and prior service costs or credits that have not been recognized as components of net benefit (credit) costs are recorded as a component of Accumulated Other Comprehensive Income ("AOCI"), net of tax, in the Company's consolidated balance sheets. The gains and losses that exceed specified corridors, 10% of the greater of the projected benefit obligation or the market-related value of plan assets, are amortized prospectively out of AOCI over a period that approximates the remaining life expectancy of participants in plans where substantially all participants are inactive or the average remaining service period of active participants for plans with active participants. The vast majority of 54 --------------------------------------------------------------------------------
unrecognized losses relate to inactive plans and are amortized over the
remaining life expectancy of the participants.
The determination of net periodic benefit (credit) cost is based on a number of assumptions, including an expected long-term rate of return on plan assets, the discount rate, mortality and assumed rate of salary increase. The assumptions used in the calculation of net periodic pension costs and pension liabilities are disclosed in Note 8, Retirement Benefits, in the notes to the consolidated financial statements. The long-term rate of return on plan assets assumption is determined for each plan based on the facts and circumstances that exist as of the measurement date, and the specific portfolio mix of each plan's assets. The Company utilizes a model developed by Mercer, a subsidiary of the Company, to assist in the determination of this assumption. The model takes into account several factors, including: target portfolio allocation, investment, administrative and trading expenses incurred directly by the plan trust, historical portfolio performance, relevant forward-looking economic analysis, and expected returns, variances and correlations for different asset classes. These measures are used to determine probabilities using standard statistical techniques to calculate a range of expected returns on the portfolio. The target asset allocation for theU.S. plans is 50% equities and equity alternatives and 50% fixed income. At the end of 2022, the actual allocation for theU.S. plans was 61% equities and equity alternatives and 39% fixed income. The target asset allocation for theU.K. plans, which comprise approximately 79% of non-U.S. plan assets, is 14% equities and equity alternatives and 86% fixed income. At the end of 2022, the actual allocation for theU.K. plans was 16% equities and equity alternatives and 84% fixed income. The discount rate selected for eachU.S. plan is based on a model bond portfolio with coupons and redemptions that closely match the expected liability cash flows from the plan. Discount rates for non-U.S. plans are based on appropriate bond indices adjusted for duration. In theU.K. , the plan duration is reflected using the Mercer yield curve. The following table shows the weighted average assumed rate of return and the discount rate at theDecember 31, 2022 measurement date used to measure pension expense in 2023 for the total Company, theU.S. and the Rest of World ("ROW").Total Company U.S.
ROW
Assumed rate of return on plan assets 5.31 % 6.49 % 4.74 % Discount rate 5.16 % 5.53 % 4.89 % Holding all other assumptions constant, a 0.5 percentage point change in the rate of return on plan assets and discount rate assumptions would affect net periodic pension cost for theU.S. andU.K. plans, which together comprise approximately 85% of total pension plan liabilities, as follows: 0.5 Percentage 0.5 Percentage Point Increase Point Decrease (In millions) U.S. U.K. U.S. U.K. Assumed rate of return on plan assets$ (24) $ (45) $ 24 $ 45 Discount Rate$ (1) $ 6 $ 1 $ (8) The impact of discount rate changes relates to the increase or decrease in actuarial gains or losses being amortized through net periodic pension cost, as well as the increase or decrease in interest expense, with all other facts and assumptions held constant. It does not contemplate nor include potential future impacts a change in the interest rate environment and discount rates might cause, such as the impact on the market value of the plans' assets. In addition, the assumed return on plan assets would likely be impacted by changes in the interest rate environment and other factors, including equity valuations, since these factors reflect the starting point used in the Company's projection models. For example, a reduction in interest rates may result in a reduction in the assumed return on plan assets. Changing the discount rate and leaving the other assumptions constant, may also not be representative of the impact on expense, because the long-term rates of inflation and salary increases are often correlated with the discount rate. Changes in these assumptions will not necessarily have a linear impact on the net periodic pension cost. 55 -------------------------------------------------------------------------------- The Company contributes to certain health care and life insurance benefits provided to its retired employees. The cost of these post-retirement benefits for employees in theU.S. is accrued during the period up to the date employees are eligible to retire but is funded by the Company as incurred. The key assumptions and sensitivity to changes in the assumed health care cost trend rate are discussed in Note 8, Retirement Benefits, in the notes to the consolidated financial statements.
Income Taxes
Significant judgment is required in determining the annual effective tax rate
and in evaluating uncertain tax positions. The Company reports a liability for
unrecognized tax benefits resulting from uncertain tax positions taken or
expected to be taken in a tax return. The evaluation of a tax position is a
two-step process:
•First, the Company determines whether it is more-likely-than-not a tax position
will be sustained upon tax examination, including resolution of any related
appeals or litigation, based on only the technical merits of the position. If a
tax position does not meet the more-likely-than-not recognition threshold, the
benefit of that position is not recognized in the financial statements.
•The second step is measurement. A tax position that meets the
more-likely-than-not recognition threshold is measured to determine the amount
of benefit to recognize in the financial statements. The tax position is
measured as the largest amount of benefit that is greater than 50% likely to be
realized upon ultimate resolution with a taxing authority. Uncertain tax
positions are evaluated based upon the facts and circumstances that exist at
each reporting period and involve significant management judgment. Subsequent
changes in judgment based upon new information may lead to changes in
recognition, de-recognition, and measurement. Adjustments may result, for
example, upon resolution of an issue with the taxing authorities, or expiration
of a statute of limitations barring an assessment for an issue.
The Company recognizes interest and penalties, if any, related to unrecognized
tax benefits in income tax expense. The Company's accounting policy follows the
portfolio approach that leaves stranded income tax effects in accumulated other
comprehensive income.
Certain items are included in the Company's tax returns at different times than
the items are reflected in the financial statements. As a result, the annual tax
expense reflected in the consolidated statements of income is different than
that reported in the tax returns. Some of these differences are permanent, such
as non-deductible expenses, and some differences are temporary and reverse over
time, such as depreciation expense. Temporary differences create deferred tax
assets and liabilities, which are measured at existing tax rates. Deferred tax
liabilities generally represent tax expense recognized in the financial
statements for which payment has been deferred, or expense for which a deduction
has been taken already in the tax return but the expense has not yet been
recognized in the financial statements. Deferred tax assets generally represent
items that can be used as a tax deduction or credit in tax returns in future
years for which a benefit has already been recorded in the financial statements.
The Company evaluates all significant available positive and negative evidence,
including the existence of losses in recent years and its forecast of future
taxable income by jurisdiction, in assessing the need for a valuation allowance
against deferred tax assets. The Company also considers tax planning strategies
that would result in realization of deferred tax assets, and the presence of
taxable income in prior period tax filings in jurisdictions that allow for the
carry back of tax attributes pursuant to the applicable tax law. The underlying
assumptions the Company uses in forecasting future taxable income require
significant judgment and take into account the Company's recent performance. The
ultimate realization of deferred tax assets is dependent on the generation of
future taxable income during the periods in which temporary differences or
carry-forwards are deductible or creditable. Valuation allowances are
established for deferred tax assets when it is estimated that it is
more-likely-than-not that future taxable income will be insufficient to fully
use a deduction or credit in that jurisdiction.
56
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Fair Value Determinations
Goodwill Impairment Testing - The Company is required to assess goodwill and any indefinite-lived intangible assets for impairment annually, or more frequently if circumstances indicate impairment may have occurred. The Company performs the annual impairment assessment for each of its reporting units during the third quarter of each year. A company can assess qualitative factors to determine whether it is necessary to perform a quantitative goodwill impairment test. Alternatively, the Company may elect to proceed directly to the quantitative goodwill impairment test. In 2022, the Company elected to perform a qualitative impairment assessment. As part of its assessment, the Company considered numerous factors, including:
•that the fair value of each reporting unit exceeds its carrying value by a
substantial margin based on its most recent quantitative assessment in 2019;
•whether significant acquisitions or dispositions occurred which might alter the
fair value of its reporting units;
•macroeconomic conditions and their potential impact on reporting unit fair
values;
•actual performance compared with budget and prior projections used in its
estimation of reporting unit fair values;
•industry and market conditions; and
•the year-over-year change in the Company's share price.
The Company completed its qualitative assessment in the third quarter of 2022 and concluded that a quantitative goodwill impairment test was not required in 2022 and that goodwill was not impaired.
Purchase Price Allocation
Assets acquired and liabilities assumed, including contingent consideration, as part of a business acquisition are generally recorded at their fair value at the date of acquisition. The excess of purchase price over the fair value of assets acquired and liabilities assumed is recorded as goodwill. Determining fair value of identifiable assets, particularly intangibles, and liabilities acquired also requires management to make estimates, which are based on all available information and in some cases assumptions with respect to the timing and amount of future revenues and expenses associated with an asset. These estimates directly impact the amount of identified intangible assets recognized and the related amortization expense in future periods.
New Accounting Pronouncements
Note 1, Summary of Significant Accounting Policies, in the notes to the
consolidated financial statements contains a summary of the Company's
significant accounting policies, including a discussion of recently issued
accounting pronouncements and their impact or potential future impact on the
Company's financial results, if determinable, under the sub-heading "New
Accounting Pronouncements."
57
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