Marsh & McLennan Companies, Inc. — FY 2015 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2015; it is not a standalone quarterly filing. MMC is a global professional-services firm with about 60,000 employees and two segments: Risk and Insurance Services (Marsh and Guy Carpenter) and Consulting (Mercer and Oliver Wyman Group). The company reported fourth-quarter figures separately in its unaudited quarterly data.
Financial performance
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Revenue | $12.893 billion | $12.951 billion |
| Operating income | $2.419 billion | $2.301 billion |
| Operating margin | 18.8% | 17.8% |
| Net income attributable to MMC | $1.599 billion | $1.465 billion |
| Diluted EPS from continuing operations | $2.98 | $2.61 |
| Cash from operations | $1.888 billion | $2.119 billion |
- Fourth quarter: Revenue was $3.338 billion versus $3.246 billion in Q4 2014; operating income was $594 million versus $536 million; net income attributable to MMC was $375 million versus $294 million; diluted EPS was $0.71 versus $0.54.
- Segment results: Risk and Insurance Services revenue was $6.869 billion and operating income $1.539 billion (22.4% margin). Consulting revenue was $6.064 billion and operating income $1.075 billion (17.7% margin).
- Underlying revenue growth: Consolidated revenue rose 4% on an underlying basis, excluding currency and acquisition/disposition effects. Risk and Insurance Services grew 3%; Consulting grew 5%. Reported revenue was nearly flat, reflecting a 6% adverse currency impact.
- Cash, liquidity and debt: Year-end cash and cash equivalents were $1.374 billion; current assets were $5.044 billion and current liabilities $3.708 billion, with working capital of $1.336 billion. Short- and long-term debt totaled approximately $4.414 billion. Long-term debt was $4.402 billion, up from $3.368 billion. The company had no borrowings on its $1.5 billion revolving facility at year-end.
- Capital returns and investment: MMC repurchased 24.8 million shares for $1.4 billion and paid $632 million in dividends. Investing cash outflow was $1.265 billion, including $952 million for acquisitions and $325 million in capital expenditures.
Material changes versus the prior period
- Operating income increased 5% and diluted continuing-operations EPS increased from $2.61 to $2.98, despite a slight reported revenue decline. Lower expenses and fewer diluted shares supported the improvement.
- Risk and Insurance Services operating income rose 2%; Consulting operating income rose 8%. Underlying revenue increased in both segments, while currency translation reduced reported results.
- Operating cash flow declined from $2.119 billion to $1.888 billion. Cash and cash equivalents fell by $584 million, including a $301 million adverse foreign-exchange effect on cash.
- Debt increased by about $1.0 billion during 2015, including issuance of $500 million in five-year notes and $600 million in 10.5-year notes.
Outlook, management commentary, risks and unusual items
- Management attributed the reported revenue weakness primarily to the stronger U.S. dollar and highlighted underlying growth across the businesses. The filing provides no general revenue or earnings guidance.
- The company estimated that, if January 31, 2016 exchange rates held through 2016, currency translation would reduce full-year income by about $50 million, with much of the effect expected in Q1.
- MMC expected 2016 contributions of approximately $26 million to U.S. non-qualified pension plans and $191 million to non-U.S. plans. It also expected defined-benefit pension expense to decrease by about $165 million versus 2015; a methodology change was expected to reduce 2016 non-U.S. service and interest costs by about $45 million.
- Unusual items included a $125 million net credit from terminating the U.S. post-65 retiree medical reimbursement plan and a $37 million pretax gain on the sale of Mercer’s U.S. defined-contribution recordkeeping business. The company also recognized $38 million of investment income, primarily from Trident III carried interest. In 2014, a $137 million debt-extinguishment charge reduced earnings.
- Key exposures include professional errors-and-omissions and fiduciary-duty claims, regulatory and compensation-related scrutiny, cybersecurity and privacy breaches, acquisition integration and goodwill impairment, pension funding and assumptions, foreign-exchange movements, and macroeconomic or market-driven demand changes. The filing states that it cannot reasonably estimate possible losses for certain pending matters; adverse outcomes could materially affect results or cash flows.
- MMC reported approximately $14.8 billion of pension obligations and $14.0 billion of related plan assets at year-end. Goodwill and intangible assets totaled about $8.9 billion. The company assessed goodwill in 2015 and found no impairment. Its investment in Alexander Forbes had a $230 million carrying value versus an estimated market value of $166 million; MMC concluded it was not impaired.
- Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal controls were effective at year-end.
Important facts for investors to verify
- How much of future revenue and earnings growth is organic and how much depends on acquisitions, and whether underlying growth persists across both segments.
- The sustainability of earnings growth after considering the $125 million retiree-plan credit, the $37 million disposal gain, investment income and the prior-year debt-extinguishment charge.
- Debt growth, scheduled maturities, capacity under the revolving facility, and the company’s balance among acquisitions, share repurchases and dividends.
- Foreign-exchange sensitivity and the impact of currency translation on reported revenue, profit, cash and equity.
- Pension funding needs and sensitivity to discount rates, asset returns and other actuarial assumptions; also monitor the Alexander Forbes investment and legal contingencies.