Marsh & McLennan Companies, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. This is an annual report; selected quarterly data separately reports fourth-quarter results. The company is a global professional-services firm operating in more than 130 countries, principally through Risk and Insurance Services (Marsh and Guy Carpenter) and Consulting (Mercer and Oliver Wyman Group).
Financial performance
| Metric | 2017 | 2016 | Change or context |
|---|---|---|---|
| Revenue | $14.024 billion | $13.211 billion | Up 6%; underlying growth 3% |
| Operating income | $2.856 billion | $2.664 billion | Up 7%; operating margin approximately 20.4% versus 20.2% |
| Income before taxes | $2.643 billion | $2.480 billion | Up 7%; higher interest expense partly offset operating-income growth |
| Income from continuing operations | $1.510 billion | $1.795 billion | Down, primarily reflecting tax reform charges |
| Net income attributable to the company | $1.492 billion | $1.768 billion | Diluted EPS was $2.87 versus $3.38 |
| Operating cash flow | $1.893 billion | $2.007 billion | Down $114 million |
| Cash and cash equivalents | $1.205 billion | $1.026 billion | Year-end balance; includes foreign cash, some of which is restricted for operating or regulatory purposes |
| Long-term debt | $5.225 billion | $4.495 billion | Short-term debt was $262 million; no commercial paper outstanding at year-end |
| Working capital | $1.300 billion | $802 million | Improved year over year |
Risk and Insurance Services revenue was $7.630 billion, up 7% (3% underlying), and operating income was $1.871 billion, up 7%, with a 24.5% margin. Consulting revenue was $6.444 billion, up 5% (4% underlying), and operating income was $1.174 billion, up 6%, with an 18.2% margin. Marsh revenue grew 7%, Guy Carpenter 4%, Mercer 5%, and Oliver Wyman Group 7%.
The company generated $1.893 billion of operating cash flow and used $956 million in investing activities, including $655 million for acquisitions and $302 million for capital expenditures. Financing activities used $1.009 billion, including $900 million of share repurchases and $740 million of dividends. The annual dividend was $1.43 per share, up from $1.30. The company repurchased 11.5 million shares during 2017 and had approximately $1.5 billion remaining under its authorization.
Material changes versus the prior year
- Revenue growth accelerated from 2% reported in 2016 to 6% in 2017; underlying growth was 3% in both years. Acquisitions contributed to 2017 growth, particularly in Risk and Insurance Services.
- Operating income rose 7%, but net income attributable to the company fell 16% and diluted EPS declined from $3.38 to $2.87. The principal factor was the $460 million provisional charge related to U.S. tax reform, which reduced diluted EPS by $0.89.
- Interest expense rose to $237 million from $189 million, primarily due to higher average debt following the issuance of $1 billion in senior notes in January 2017.
- Year-end total assets increased to $20.429 billion from $18.190 billion. Goodwill and other intangible assets were approximately $10.4 billion, about 51% of total assets.
Outlook, management commentary, risks and unusual items
- Tax reform: The 2017 provisional tax charge comprised $240 million for transition taxes and related effects and $220 million from remeasuring U.S. deferred tax balances. The company expects the reduced U.S. corporate tax rate and territorial system to lower its ongoing effective tax rate and U.S. cash taxes, but estimates remained subject to change during 2018. It anticipated repatriating approximately $3.4 billion of previously indefinitely invested foreign earnings; the transition tax is payable over eight years.
- 2018 items: Management expected defined-benefit pension expense to decline by approximately $90 million versus 2017, subject in part to future lump-sum elections. Expected 2018 pension contributions were approximately $27 million for U.S. plans and $82 million for non-U.S. plans. The company adopted new revenue-recognition guidance on January 1, 2018 and estimated a $325 million to $425 million increase to opening retained earnings, with significant quarterly timing shifts in reinsurance revenue but no significant expected year-over-year impact on annual revenue.
- Regulatory and legal matters: European Commission investigations concerned aviation and aerospace broking information exchange and possible coordination, and possible anticompetitive conduct in Irish commercial motor insurance. The FCA also initiated a U.K. wholesale insurance broker market study; a separate CMA investigation covers U.K. investment consulting and fiduciary management markets. These matters were at early stages, and outcomes and potential effects were not predictable. The company could not estimate the range of possible losses for certain pending matters.
- Other key risks: Errors-and-omissions and fiduciary claims; cybersecurity incidents and third-party data exposures; regulatory, privacy and compensation-related changes; digital disruption and competition; acquisition integration and goodwill impairment; foreign-exchange movements; market and interest-rate effects on pension obligations and investment-related fees; and client receivable collection. The company reported approximately $3.8 billion of commissions and fees receivable at year-end.
- Unusual items: The U.K. pension plans triggered a $54 million non-cash settlement charge in 2017. In fourth-quarter 2017, revenue was $3.685 billion and operating income $686 million, while income from continuing operations was $28 million and diluted EPS was $0.05, including the tax-reform charge. The company reported no goodwill impairment in 2017.
No specific revenue or earnings guidance for 2018 is provided in the filing. The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
Important facts for investors to verify
- How final tax-reform accounting, tax guidance and repatriation plans affect the effective tax rate, cash taxes and liquidity.
- Developments and potential remedies or liabilities in the European and U.K. regulatory investigations and market reviews.
- Whether underlying growth, margins and cash conversion remain resilient as acquisition contributions and market conditions change.
- Debt maturities, interest costs, pension funding needs and the extent to which buybacks and dividends are supported by recurring cash generation.
- Progress in managing cyber and data-protection risks, and the implementation effects of new revenue-recognition and lease-accounting standards.