01—Abstract
Summary
Summary of the 10-K filed February 28, 2011. Cited figures are marked; the original filing is the authoritative source.
Marsh & McLennan Companies (MMC) reported a strong 2010 rebound in its 10-K filed February 2011.
Revenue rose 7% to $10.55 billiona, and net income attributable to the Company reached $855 million, versus $227 million in 2009. Results were held back by a $400 million net charge (after insurance) to settle the Alaska Retirement Management Board litigation against Mercer, which cut Consulting segment operating income to $129 million. Excluding that and other restructuring and noteworthy items, consolidated operating income was about $1.5 billion in 2010 versus $1.3 billion in 2009.
Underlying revenue growth was 3%, with acquisitions adding 3% and currency 1%. The balance sheet and cash flow picture is mixed. Operating cash flow was $722 millionb, up from $640 million, and the company repurchased about $86 million of stock under a new $500 million authorization.
It sold Kroll for $1.13 billionc in August 2010, which funded debt repayment and acquisitions. Senior debt is rated Baa2 by Moody's and BBB- by S&P, the lowest investment-grade rating at S&P, with a negative outlook there. Pension obligations of roughly $11 billion remain a meaningful earnings and cash sensitivity, and the company expects a further pension expense increase of about $60 million in 2011.
Key risks for investors include errors and omissions litigation, which the company says can be significant and is largely uninsured, a heavy reliance on non-U.S. operations (56% of operating segment revenue), and goodwill and intangibles of $6.8 billiond, about 45% of total assets. Consulting, in particular Mercer and Oliver Wyman, is exposed to client spending cuts and pension-plan trends.
02—Key points
Key Highlights
- Revenue rose 7% to $10.55 billion in 2010 (underlying +3%, acquisitions +3%, currency +1%); net income attributable to the Company was $855 million, or $1.55 diluted EPS, versus $0.42 in 2009.
- Operating income was $939 million, including a $400 million net Alaska/ARMB settlement charge at Mercer and $139 million of restructuring and other noteworthy charges; excluding these items it was about $1.5 billion versus $1.3 billion in 2009.
- Risk and Insurance Services (Marsh and Guy Carpenter) grew operating income 22% to $972 million with a 16.9% margin, while Consulting operating income fell to $129 million from $405 million, largely because of the Alaska charge.
- Kroll was sold to Altegrity for $1.13 billion on August 3, 2010, completing the exit from the Risk Consulting and Technology segment and producing a $282 million gain in discontinued operations.
- Operating cash flow was $722 million; the company paid $452 million in dividends ($0.81 per share), repurchased about $86 million of stock, and repaid $550 million of 5.15% senior notes.
- Credit ratings are Baa2 (Moody's, stable) and BBB- (S&P, negative outlook), and the filing warns that a downgrade below investment grade would raise operating costs and competitive pressure.
- Pension obligations of about $11 billion and goodwill/intangibles of $6.8 billion (about 45% of total assets) create sensitivity to market conditions and potential impairment, and E&O claims remain a significant uninsured exposure.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2010filed February 28, 2011Financial Statements
FY2010 against FY2009
| Line item | FY2010FY2009 | Change |
|---|---|---|
| Revenue | $10.55B$9.83B | +7.3% |
| Operating Expenses | $9.61B$9.05B | +6.2% |
| Operating Income | $939.00M$778.00M | +20.7% |
| Interest Expense | $233.00M$241.00M | −3.3% |
| Net Income | $855.00M$227.00M | +276.7% |
| EPS (Basic) | $1.56$0.43 | +262.8% |
| EPS (Diluted) | $1.55$0.42 | +269.0% |
| Shares Outstanding (Basic) | 540.00M522.00M | +3.4% |
| Shares Outstanding (Diluted) | 544.00M524.00M | +3.8% |
05—Questions
Frequently Asked Questions
Why did net income rise so sharply in 2010?
Net income attributable to the Company rose to $855 million from $227 million, mainly because 2009 included a $230 million net charge for the securities and ERISA class action settlement and discontinued operations swung from a $290 million loss to a $306 million gain. The 2010 gain on the Kroll sale and a $277 million tax benefit tied to that sale also helped. Continuing operations income rose more modestly, to $565 million from $531 million, even after the $400 million Alaska charge.
How large is the Alaska/Mercer settlement, and is the matter fully resolved?
Mercer paid $500 million to resolve the Alaska Retirement Management Board litigation, of which $100 million was covered by insurance, leaving a $400 million net charge in 2010. Mercer expressly denied liability, and the settlement resolved all claims by the ARMB and the State of Alaska related to work performed from 1992 to 2004.
What are the main risks to the balance sheet and credit profile?
Senior debt stands at about $3.0 billion. Moody's rates it Baa2 with a stable outlook and S&P rates it BBB- with a negative outlook, the lowest investment-grade rung at S&P. A downgrade would raise financing costs and could limit access to funding. Pension obligations of about $11 billion, goodwill and intangibles of $6.8 billion, and a potential $250 million of additional valuation allowances on U.S. deferred tax assets are further sources of earnings and capital volatility.
How much of the business is outside the United States, and how does currency affect results?
In 2010, 56% of operating segment revenue came from outside the U.S. Marsh's revenue is largely earned in local currency, while expenses are mostly in the same local currency, which partly offsets currency translation effects. Management estimates a 10% move in the euro, sterling, Australian dollar and Canadian dollar in the same direction against the dollar would change full-year net operating income by roughly $50 million.
What is the outlook for pensions and capital returns?
The company expects to contribute about $20 million to its U.S. non-qualified plans and about $300 million to non-U.S. plans in 2011, and pension expense is expected to rise by about $60 million, before offsets from incentive compensation and currency. The Board authorized a $500 million buyback in September 2010, of which about $414.5 million remained at year-end, and the dividend was $0.81 per share in 2010.
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