Aon Corporation — First-Quarter 2011 Form 10-Q
Business context and period. Unaudited results for the three months ended March 31, 2011, compared with the three months ended March 31, 2010. Aon operates Risk Solutions (insurance and reinsurance brokerage and advisory services) and HR Solutions (human resources consulting and outsourcing). The results include Hewitt, acquired October 1, 2010, so year-over-year growth reflects a significant acquisition contribution.
Financial results and condition
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Total revenue | $2.759 billion | $1.904 billion |
| Operating income | $396 million | $273 million |
| Operating margin, GAAP | 14.4% | 14.3% |
| Income from continuing operations attributable to Aon stockholders | $244 million | $178 million |
| Diluted EPS from continuing operations, GAAP | $0.71 | $0.63 |
| Adjusted diluted EPS from continuing operations | $0.80 | $0.83 |
| Cash provided by operating activities | $582 million | $467 million |
Amounts are in U.S. dollars. Adjusted EPS and adjusted margins are non-GAAP measures defined by the company. Adjusted operating margin was 16.0% versus 18.3%; Risk Solutions was 19.0% versus 20.5%, and HR Solutions was 14.4% versus 17.4%.
- Revenue and segments: Revenue rose 45%, primarily because of Hewitt, with 2% organic growth overall. Risk Solutions revenue was $1.649 billion, up 4%, with 2% organic growth. HR Solutions revenue was $1.117 billion; organic growth was flat. HR consulting organic revenue grew 4%, while outsourcing declined 3% organically.
- Expenses and earnings: Operating expenses increased to $2.363 billion from $1.631 billion, largely reflecting Hewitt, including $61 million more intangible amortization, and unfavorable foreign exchange. Continuing-operations income before tax increased to $356 million from $247 million. The effective tax rate rose to 29.0% from 24.9%.
- Cash flow: Operating cash flow included a $427 million increase in funds held for clients, offset by a corresponding investing cash outflow. Excluding the change in client funds, operating cash flow was $155 million versus $71 million. Capital expenditures were $56 million. Cash and cash equivalents increased to $682 million from $346 million; cash plus short-term investments totaled about $1.27 billion.
- Liquidity and debt: Total debt was approximately $4.91 billion, up about $0.4 billion from year-end; debt to Aon stockholders’ capital was 36.8%, versus 35.3%. Aon reported $8.49 billion in total equity and working capital of about $1.95 billion. It had $1.3 billion of committed credit facilities available and no borrowings under them. Cash and short-term investments included $179 million restricted; fiduciary assets are matched by fiduciary liabilities and are not available for general corporate use.
- Capital returns: Aon repurchased 6.8 million shares for $350 million and paid $51 million in dividends. The quarterly dividend was $0.15 per share.
Material changes, outlook and risks
- Hewitt contributed substantially to reported revenue and operating income, but increased amortization, integration costs and interest expense. Interest expense rose to $63 million from $34 million.
- Management cited competitive pricing, soft insurance markets, weak economic activity, client cost-cutting and sector-specific weakness as continuing headwinds. Foreign currency movements reduced adjusted EPS by an estimated $0.02 in the quarter.
- Management expected the full-year 2011 underlying tax rate to be approximately 30%. It said operating cash flow was expected to cover debt service, contractual obligations, restructuring, capital spending, share repurchases and dividends. The filing provides no specific full-year revenue or EPS guidance.
- The Hewitt restructuring plan is expected to continue through 2013, with estimated cumulative costs of $325 million and approximately $280 million in annual savings in 2013 before potential reinvestment. Aon reported $75 million of costs incurred to date and about 730 job eliminations. Including other integration savings, management expected approximately $355 million of annual Aon Hewitt savings in 2013; actual costs, savings and timing may differ.
- The Aon Benfield restructuring plan had estimated total costs of $155 million, with $12 million expected to be charged to future earnings; restructuring activity was expected to continue in 2011.
- Contingencies include ongoing SEC and DOJ investigations into anti-corruption matters, as well as client litigation, including Northrop Grumman and Opry Mills claims. Aon reached a $550,000 settlement, subject to dismissal, of consolidated insurance-industry class claims; some individual opt-out claims remain. Management said the matters were not expected to materially affect consolidated financial position, but an unfavorable outcome could materially affect results or cash flows in a particular period.
- On April 26, 2011, after quarter-end, Aon completed its Glenrand MIB acquisition for $78 million cash plus $11 million held in escrow pending resolution of a legal dispute.
Important facts for investors to verify
- How much of reported growth and future performance is attributable to Hewitt versus organic growth, especially HR outsourcing.
- Whether projected Hewitt integration and restructuring savings are achieved on schedule and without greater-than-estimated costs.
- Trends in adjusted margins, intangible amortization, interest expense and the effective tax rate.
- Cash generation excluding fiduciary client funds, pension funding requirements, and the availability and geographic accessibility of corporate cash.
- Developments in the SEC/DOJ investigations and significant client litigation, including potential effects on costs, cash flows and reputation.