Marsh & McLennan Companies, Inc. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. The filing also reports unaudited fourth-quarter results. Amounts are in U.S. dollars unless stated otherwise.
Business context
Marsh & McLennan is a global professional services firm operating through Risk and Insurance Services (Marsh and Guy Carpenter) and Consulting (Mercer and Oliver Wyman Group). It had approximately 57,000 employees and served clients in more than 130 countries. Risk and Insurance Services generated approximately 54% of 2014 revenue; Consulting generated approximately 46%.
Key financial results
| Metric | 2014 | 2013 |
|---|---|---|
| Revenue | $12.951 billion | $12.261 billion |
| Operating income | $2.301 billion | $2.077 billion |
| Operating margin | 17.8% | 16.9% |
| Income from continuing operations | $1.471 billion | $1.379 billion |
| Net income attributable to the Company | $1.465 billion | $1.357 billion |
| Diluted EPS, continuing operations | $2.61 | $2.42 |
| Diluted EPS, including discontinued operations | $2.65 | $2.43 |
| Cash from operations | $2.112 billion | $1.341 billion |
| Capital expenditures | $368 million | $401 million |
| Cash and cash equivalents at year-end | $1.958 billion | $2.303 billion |
| Long-term debt at year-end | $3.376 billion | $2.621 billion |
| Working capital at year-end | $2.350 billion | $2.491 billion |
Revenue grew 6% reported and 5% on an underlying basis. Operating income rose 11%; the effective tax rate was 28.5%, versus 30.1%. Operating cash flow increased substantially, with roughly half of the increase attributed to lower pension contributions. Cash flow less capital expenditures was approximately $1.744 billion, compared with $940 million in 2013.
Fourth-quarter results
Fourth-quarter 2014 revenue was $3.246 billion, compared with $3.115 billion in fourth-quarter 2013. Operating income was $536 million, versus $489 million. Income from continuing operations was $269 million, versus $307 million; net income attributable to the Company was $294 million, versus $303 million. Diluted EPS from continuing operations was $0.48, versus $0.54; diluted EPS including discontinued operations was $0.54 in both periods. The quarter included a $137 million pre-tax debt-extinguishment charge. Discontinued operations contributed $30 million after tax in Q4 2014.
Segments and material changes
- Risk and Insurance Services: Revenue was $6.931 billion, up 5% reported and 3% underlying. Operating income increased 6% to $1.509 billion; margin improved to 21.8% from 21.5%. Marsh underlying revenue rose 4%; Guy Carpenter’s rose 2%.
- Consulting: Revenue was $6.059 billion, up 6% reported and underlying. Operating income increased 18% to $996 million; margin improved to 16.4% from 14.8%. Mercer underlying revenue grew 3%, while Oliver Wyman Group grew 15%.
- Foreign currency reduced reported revenue growth by approximately 1 percentage point overall. The U.S. dollar’s strengthening also reduced equity through $515 million of foreign-currency translation adjustments.
- The Company completed 21 acquisitions during 2014 and paid $554 million net of cash acquired. It also invested approximately $303 million in a 34% stake in South Africa’s Alexander Forbes, accounted for under the equity method.
Liquidity, debt and capital allocation
Year-end cash was $1.958 billion, including approximately $1.3 billion held in foreign operations and considered permanently invested; fiduciary cash is segregated and unavailable for corporate use. Current assets were $6.055 billion and current liabilities $3.705 billion. Total debt, including current maturities, was approximately $3.387 billion. A $1.2 billion revolving credit facility, expiring in 2019, had no borrowings outstanding at year-end; the Company also had a $50 million term-loan borrowing. Senior debt was rated Baa1 by Moody’s and A- by S&P, both with stable outlooks.
The Company repurchased 15.5 million shares for $800 million and paid $582 million in dividends during 2014. Approximately $1.3 billion remained authorized for repurchases. Investing cash outflow was $1.222 billion, including acquisitions, the Alexander Forbes investment and capital spending.
Outlook, commentary and risks
- No specific consolidated revenue or earnings guidance is provided in the filing. Management estimated that, if January 31, 2015 exchange rates held through the year, currency translation would reduce 2015 income by approximately $125 million, with a significant portion of the effect expected in Q1.
- Management expected 2015 defined-benefit pension expense to increase by approximately $115 million, primarily reflecting lower discount rates and the absence of a 2014 curtailment gain. Expected 2015 contributions were approximately $25 million to U.S. plans and $169 million to non-U.S. plans.
- In 2014, the Company closed its U.K. defined-benefit plans to future accruals and replaced them with a defined-contribution arrangement. The discount-rate decrease increased pension obligations and contributed to substantial actuarial losses recorded in other comprehensive income.
- Key risks include professional errors-and-omissions claims and other litigation, regulatory and compensation-related conflicts risks, cybersecurity and privacy incidents, pension assumptions and funding needs, foreign exchange exposure, client retention and competition, acquisition integration and possible goodwill impairment, and dependence on subsidiary distributions for parent-company liquidity.
- The Company recorded a $28 million after-tax gain in 2014 related to settlement of Putnam indemnity matters. It paid $137 million to extinguish debt early. No goodwill impairment was identified in the 2014 annual assessment. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether underlying growth and segment margin improvement continue, particularly Oliver Wyman’s strong 2014 growth.
- The realized 2015 impact of currency movements versus the filing’s estimated $125 million income reduction.
- Pension funding, expense and funded-status developments as discount rates and asset returns change.
- Debt maturity and refinancing plans, liquidity available outside fiduciary accounts, and capacity for dividends and repurchases.
- Acquisition returns and integration, contingent consideration, and the carrying value of goodwill and other intangibles.
- Developments in E&O claims, regulatory matters, cybersecurity incidents and tax contingencies; the filing does not provide a clear aggregate range of possible losses for several contingencies.