How did MMC perform financially in 2000?

MMC reported revenue of $10.16 billion, up 11% from $9.16 billion in 1999. Net income rose 23% to $1.18 billion, and diluted EPS was $4.10 versus $2.62 in 1999, which included $337 million of special charges. Excluding those charges, 1999 diluted EPS was $3.48, so underlying EPS growth was about 18%. Operating income reached $2.18 billion, and return on average equity was 25%.

Which business segment contributed the most, and how did each perform?

Investment management (Putnam) had the fastest growth, with revenue up 21% to $3.24 billion and an operating margin of 31.7%, the highest of the three segments. Risk and insurance services (Marsh) remained the largest by revenue at $4.78 billion, growing 6%, with operating income up 17% to $944 million. Consulting (Mercer) revenue rose 9% to $2.14 billion, and operating income grew 20% to $312 million.

What are the main risks for investors?

Putnam's revenue depends heavily on equity market levels. Assets under management fell $21 billion in 2000 as market declines outweighed $33 billion of net new sales, so a continued market decline would reduce fee revenue. Other risks include the UK pension redress review (about $350 million of contingent exposure, with $250 million expected from insurers), errors and omissions claims, and integration execution for Sedgwick and newly formed MMC Enterprise Risk. Management states that litigation is not expected to have a material adverse effect.

How is MMC's balance sheet and capital position?

Total assets were $13.77 billion and stockholders' equity was $5.23 billion at year-end 2000. Long-term debt was $2.35 billion, and short-term debt fell to $337 million from $1.13 billion. Cash and equivalents were $240 million. The company cut net debt by about $800 million during 2000 and has a $1.2 billion revolving credit facility, which expires in 2001, plus a $1.0 billion facility expiring in 2002, with no amounts drawn at year-end.

What is management's outlook and capital return plan?

The filing indicates that pricing in U.S. commercial insurance has been rising, with increases averaging about 10% by mid-2000 and continuing into 2001, which benefits Marsh's brokerage revenue. Management expects the Sedgwick integration to yield about $40 million of additional net savings in 2001. MMC paid $1.90 per share in dividends in 2000 and expects to increase share repurchases beginning in the first quarter of 2001. The filing contains forward-looking statements that carry substantial risk and uncertainty.

MRSH/MMC 10-K FY2000 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 29, 2001. Cited figures are marked; the original filing is the authoritative source.

Marsh & McLennan Companies, Inc. (MMC) reported a strong fiscal 2000 in its 10-K filed March 29, 2001.

Consolidated revenue rose 11% to $10.16 billion^a, and net income increased 23% to $1.18 billion, or $4.10 per diluted share. Operating income reached $2.18 billion, up from $1.47 billion in 1999, though the comparison is distorted by $337 million of 1999 special charges tied to the Sedgwick acquisition. Excluding those charges, diluted EPS grew 18% from $3.48.

All three segments grew: risk and insurance services (Marsh) revenue rose 6% to $4.78 billion^b, investment management (Putnam) revenue rose 21% to $3.24 billion, and consulting (Mercer) revenue rose 9% to $2.14 billion. Segment operating margins improved in each business. The filing also highlights several risks and watch items.

Putnam's assets under management fell to $370 billion^c at year-end from $391 billion, as a roughly $54 billion market-driven decline offset $33 billion of net new sales, reflecting exposure to equity market volatility. Management expects to benefit from firmer U.S. commercial insurance pricing, with rates up roughly 10% by mid-2000 and still rising into 2001. Balance sheet items to monitor include $2.35 billion of long-term debt, a $1.0 billion commercial paper program classified as long-term, and an ongoing UK Personal Investment Authority pension redress review with contingent exposure estimated at about $350 million, of which $250 million is expected to be recovered from insurers.

From a cash flow standpoint, operating cash generation was $1.36 billion^d, covering dividends of $514 million and capital expenditures of $512 million. Management expects to step up share repurchases starting in the first quarter of 2001. Investors should note that the filing largely incorporates financial statements and MD&A by reference from the 2000 Annual Report, and that the company stated litigation (principally errors and omissions claims) is not expected to be material.

02—Key points

Key Highlights

Revenue rose 11% to $10.16 billion in 2000, with growth across all three segments; excluding FX, acquisitions and dispositions, revenue grew about 12%.
Diluted EPS of $4.10 rose 18% excluding 1999 special charges (from $3.48); reported diluted EPS increased from $2.62 to $4.10.
Risk and Insurance Services (Marsh) revenue grew 6% to $4.78 billion, with operating margin improving to 19.7% and Sedgwick integration savings of about $90 million in 2000.
Investment Management (Putnam) revenue grew 21% to $3.24 billion and operating margin rose to 31.7%, though year-end AUM declined to $370 billion from $391 billion on equity market declines.
Consulting (Mercer) revenue grew 9% to $2.14 billion, with operating income up 20% to $312 million and margin expansion to 14.6%.
Operating cash flow was $1.36 billion, funding $514 million in dividends and $512 million in capital expenditures; net debt was reduced by about $800 million during 2000.
Contingent exposures remain, including the UK Personal Investment Authority pension redress review (estimated $350 million gross, $250 million expected from insurers) and ongoing errors and omissions litigation.

03—Questions

Frequently Asked Questions

How did MMC perform financially in 2000?
MMC reported revenue of $10.16 billion, up 11% from $9.16 billion in 1999. Net income rose 23% to $1.18 billion, and diluted EPS was $4.10 versus $2.62 in 1999, which included $337 million of special charges. Excluding those charges, 1999 diluted EPS was $3.48, so underlying EPS growth was about 18%. Operating income reached $2.18 billion, and return on average equity was 25%.
Which business segment contributed the most, and how did each perform?
Investment management (Putnam) had the fastest growth, with revenue up 21% to $3.24 billion and an operating margin of 31.7%, the highest of the three segments. Risk and insurance services (Marsh) remained the largest by revenue at $4.78 billion, growing 6%, with operating income up 17% to $944 million. Consulting (Mercer) revenue rose 9% to $2.14 billion, and operating income grew 20% to $312 million.
What are the main risks for investors?
Putnam's revenue depends heavily on equity market levels. Assets under management fell $21 billion in 2000 as market declines outweighed $33 billion of net new sales, so a continued market decline would reduce fee revenue. Other risks include the UK pension redress review (about $350 million of contingent exposure, with $250 million expected from insurers), errors and omissions claims, and integration execution for Sedgwick and newly formed MMC Enterprise Risk. Management states that litigation is not expected to have a material adverse effect.
How is MMC's balance sheet and capital position?
Total assets were $13.77 billion and stockholders' equity was $5.23 billion at year-end 2000. Long-term debt was $2.35 billion, and short-term debt fell to $337 million from $1.13 billion. Cash and equivalents were $240 million. The company cut net debt by about $800 million during 2000 and has a $1.2 billion revolving credit facility, which expires in 2001, plus a $1.0 billion facility expiring in 2002, with no amounts drawn at year-end.
What is management's outlook and capital return plan?
The filing indicates that pricing in U.S. commercial insurance has been rising, with increases averaging about 10% by mid-2000 and continuing into 2001, which benefits Marsh's brokerage revenue. Management expects the Sedgwick integration to yield about $40 million of additional net savings in 2001. MMC paid $1.90 per share in dividends in 2000 and expects to increase share repurchases beginning in the first quarter of 2001. The filing contains forward-looking statements that carry substantial risk and uncertainty.

04—Continue

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