Marsh & McLennan Companies, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. This is an annual report; unaudited fourth-quarter results are also included. The company provides risk, insurance, reinsurance and consulting services through Risk and Insurance Services (Marsh and Guy Carpenter) and Consulting (Mercer and Oliver Wyman Group), with approximately 60,000 employees operating in more than 130 countries.
Financial performance
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Revenue | $13.211 billion | $12.893 billion | +2% reported; +3% underlying |
| Operating income | $2.664 billion | $2.419 billion | +10% |
| Operating margin | 20.2% | 18.8% | +1.4 percentage points |
| Net income attributable to the Company | $1.768 billion | $1.599 billion | +11% |
| Diluted EPS from continuing operations | $3.38 | $2.98 | +13% |
| Cash provided by operations | $2.007 billion | $1.888 billion | +$119 million |
Revenue growth included a 2% negative foreign-currency effect and a 2% contribution from acquisitions and dispositions. Operating expenses rose 1%. Segment results: Risk and Insurance Services revenue was $7.143 billion (+4%) and operating income $1.753 billion (+14%), with a 24.5% margin versus 22.4%. Consulting revenue was $6.112 billion (+1% reported; +3% underlying) and operating income $1.103 billion (+3%), with an 18.1% margin versus 17.7%.
Fourth-quarter 2016 revenue was $3.364 billion, operating income $633 million, net income attributable to the Company $436 million and diluted EPS $0.84. Fourth-quarter 2015 figures were $3.338 billion, $594 million, $375 million and $0.71, respectively.
Cash, debt and liquidity
- Year-end cash and cash equivalents were $1.026 billion, down from $1.374 billion. Working capital was $802 million, compared with $1.336 billion a year earlier.
- Year-end short-term debt was $312 million and long-term debt $4.495 billion. The company had $50 million of commercial paper outstanding and no borrowings under its $1.5 billion revolving credit facility, which runs to November 2020.
- Cash used in investing was $1.056 billion, including $813 million net cash spent on acquisitions; capital expenditures were $253 million. Cash used in financing was $1.067 billion, including $800 million of share repurchases and $682 million of dividends.
- The company paid dividends of $1.30 per share in 2016, up from $1.18 in 2015. It had authorization to repurchase approximately $2.4 billion of shares at year-end.
- Fiduciary funds are segregated and unavailable for corporate use. The company reported approximately $850 million in cash and cash equivalents in foreign operations considered permanently invested, substantially for local investment and working-capital needs.
Material changes, outlook and unusual items
- Underlying revenue increased 3% in both segments. In Mercer, underlying growth in Investments (+6%), Talent (+5%) and Health (+3%) was partly offset by flat Retirement revenue.
- The company completed 15 acquisitions in 2016 for approximately $901 million of total consideration; net acquisition cash outflow was $813 million. Bluefin expanded Marsh’s U.K. SME brokerage presence. A proposed MMA acquisition of J. Smith Lanier was announced in January 2017, subject to customary approvals.
- Other notable 2016 items included a $44 million restructuring charge, a $11 million gain related to deconsolidating Marsh India and a $6 million gain on the sale of Mercer’s U.S. defined-contribution recordkeeping business. A change in estimating non-U.S. pension service and interest costs reduced 2016 pension expense by approximately $45 million.
- U.S. defined-benefit pension accruals ended after December 31, 2016; the company added an automatic 4% defined-contribution contribution for most U.S. employees, in addition to its existing match. Management expects 2017 defined-benefit pension expense to fall about $120 million; after the added defined-contribution expense, the estimated net expense reduction is about $30 million, net of bonus.
- Expected 2017 pension contributions were approximately $32 million for U.S. plans and $224 million for non-U.S. plans. The company also renewed support for U.K. deficit contributions of up to GBP 450 million over seven years under specified circumstances.
- The filing gives no specific consolidated revenue or earnings guidance. Management identifies foreign exchange, Brexit-related uncertainty, macroeconomic and political conditions, competition, technology disruption, employee retention, pension assumptions and cybersecurity/data protection as material risks. The company says it has experienced cybersecurity incidents, though none had materially affected its business or operations to date.
- Pending litigation, regulatory matters and professional errors-and-omissions claims could result in material losses; for matters still developing, the company says it cannot reasonably estimate the possible loss range. The FCA’s U.K. asset-management market study could lead to further review or remedies affecting Mercer.
Most important facts for investors to verify
- Whether underlying growth and segment margin gains persist, especially amid acquisition and foreign-currency effects.
- How acquisition integration, contingent consideration and the announced J. Smith Lanier transaction affect returns and cash deployment.
- Whether the expected pension expense reduction is realized and how funding requirements, discount rates and investment returns affect future cash needs.
- Whether cybersecurity, privacy regulation, litigation or regulatory developments produce costs or liabilities beyond amounts recorded; the filing does not provide a clear aggregate potential-loss estimate.
- How cash availability, debt maturities, foreign-fund repatriation, dividends and buybacks evolve; the company issued $1 billion of additional senior notes in January 2017.
The financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting as of December 31, 2016.