Marsh & McLennan Companies, Inc. — FY 2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010. This is an annual report, not a standalone quarterly filing; selected fourth-quarter figures are included below. Unless stated otherwise, amounts are in millions of dollars.
Business context
MMC 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 51,000 employees and served clients in more than 100 countries. In August 2010, MMC sold Kroll, its former Risk Consulting and Technology business, and reports Kroll as discontinued operations.
Financial performance
| Metric | FY 2010 | FY 2009 | Change / context |
|---|---|---|---|
| Revenue | $10,550 | $9,831 | Up 7%; underlying revenue up 3%, with 3% from acquisitions and 1% from currency |
| Operating income | $939 | $778 | Up 21%; reported operating margin was 8.9%, versus 7.9% |
| Income from continuing operations | $565 | $531 | Up 6% |
| Net income attributable to MMC | $855 | $227 | Includes discontinued operations; FY 2010 includes a substantial disposal-related tax benefit |
| Diluted EPS, continuing operations | $1.00 | $0.96 | Up 4% |
| Diluted EPS, total | $1.55 | $0.42 | Includes discontinued operations |
| Cash from operations | $722 | $640 | Up $82 |
| Cash and cash equivalents at year-end | $1,894 | $1,707 | Fiduciary funds are segregated and unavailable for general corporate use |
| Working capital | $2,171 | $1,216 | Year-end financial data |
| Debt | $3,034 | $3,592 | 2010 comprised $8 current and $3,026 long-term debt |
| Dividends per share | $0.81 | $0.80 | Annual amount |
Segments: Risk and Insurance Services revenue was $5,764, up 9%, and operating income was $972, with a 16.9% margin (15.1% in 2009). Consulting revenue was $4,835, up 5%, while operating income fell to $129 from $405, with a 2.7% margin (8.8% in 2009). The Consulting result reflects the $400 net charge related to the Alaska settlement; excluding that and other specified items, management reported that Consulting operating income increased 16%.
Fourth quarter: Revenue was $2,785 versus $2,563 in Q4 2009; operating income was $325 versus a $28 loss; income from continuing operations was $192 versus a $5 loss; and net income attributable to MMC was $203 versus $23. Diluted total EPS was $0.37 versus $0.04.
Material changes and unusual items
- MMC received $1.13 billion from the Kroll sale and $110 million from the sale of Kroll Laboratory Specialists. Discontinued operations contributed $306 to FY 2010 net income, including a $277 tax benefit associated with the Kroll disposition. The filing says approximately $230 million of that tax benefit was expected to be realized in the first half of 2011.
- Mercer settled Alaska Retirement Management Board litigation for $500 million in June 2010; $100 million was covered by insurance. MMC recorded a $400 net charge. Mercer denied liability.
- MMC recorded $141 of restructuring and other noteworthy charges in 2010. Restructuring actions initiated during 2010 cost $114, eliminated approximately 840 positions across the businesses and were expected to generate approximately $100 in annualized savings.
- Eight acquisitions were completed in 2010 for total consideration of $754, comprising $490 cash, $183 in shares and $81 estimated contingent consideration. Acquisition and disposition effects contributed to reported revenue growth.
- Risk and Insurance Services operating income improved, while Consulting’s reported income declined sharply because of the Alaska settlement charge. Consulting underlying revenue increased 3%; Mercer’s retirement revenue declined 4%, while Oliver Wyman Group underlying revenue increased 7%.
Liquidity, debt and outlook
Operating cash flow was $722; investing activities provided $535, principally reflecting business-sale proceeds, while financing activities used $1,130, including debt repayments, dividends and share repurchases. MMC repaid $550 of senior notes that matured in 2010 and had no borrowings outstanding under its $1.0 billion revolving credit facility at year-end. Senior debt was rated Baa2 by Moody’s and BBB- by S&P; S&P’s outlook was negative and Moody’s outlook stable.
Management did not provide a company-wide revenue or earnings forecast in the supplied filing text. It expected 2011 pension expense to increase by approximately $60 before partly offsetting compensation effects and possible currency movements, and projected 2011 contributions of approximately $20 to U.S. non-qualified plans and $300 to non-U.S. plans. The company’s deferred tax asset assessment also carries uncertainty: MMC disclosed that additional valuation allowances of up to approximately $250 could be required if sufficient taxable income is not generated.
Risks, contingencies and controls
- Professional errors-and-omissions claims, litigation and regulatory matters may create significant liabilities; the filing states that it cannot estimate the possible loss range for certain developing matters. Insurance availability has declined for policy years beginning in 2002.
- MMC reported approximately $11 billion of pension obligations and significant actuarial losses; funded status and required contributions are sensitive to investment returns, discount rates and other assumptions.
- Other key exposures include weak economic conditions and client demand, competitive pricing, talent retention, acquisition integration, foreign exchange, credit ratings, regulatory compliance, data privacy and business continuity.
- The company had $6.8 billion of goodwill and intangible assets, about 45% of total assets; impairment estimates depend on assumptions about future performance. The 2010 annual goodwill review found no impairment.
- Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls were effective.
Most important facts for investors to verify
- How much of earnings growth reflects recurring operations versus the Kroll disposal, its tax benefit and other discontinued-operation items.
- Whether the expected $100 annualized restructuring savings are achieved and whether underlying Consulting profitability recovers after the Alaska settlement.
- Developments in E&O claims, remaining litigation and indemnities, including the approximately $195 liability for Putnam-related indemnities and retained Kroll-related exposure.
- Pension funding needs and sensitivity to market returns and discount rates, particularly the expected 2011 non-U.S. contributions.
- Progress in integrating acquisitions, and the effect of acquisition-driven growth, contingent consideration and goodwill on future results and cash requirements.