Business Context and Reporting Period
This Form 10-Q covers Aon Corporation for the quarterly period ended March 31, 1999. The company operates primarily in Insurance Brokerage and Other Services, Consulting, and Insurance Underwriting. Financial data reflects a three-for-two stock split authorized in March 1999, payable in May 1999, which has been retroactively applied to share counts and per-share data.
Key Financial Metrics
| Metric | Q1 1999 | Q1 1998 |
|---|---|---|
| Total Revenue | $1,699 million | $1,562 million |
| Net Income | $50 million | $139 million |
| Net Income Available to Common Stockholders | $49 million | $138 million |
| Diluted EPS | $0.19 | $0.53 |
| Operating Cash Flow | $263 million | $256 million |
| Total Assets | $20,484 million | $19,688 million (Dec 31, 1998) |
| Total Liabilities | $16,747 million | $15,821 million (Dec 31, 1998) |
| Stockholders' Equity | $2,887 million | $3,017 million (Dec 31, 1998) |
| Cash and Short-term Investments | $3,408 million | $2,944 million (Dec 31, 1998) |
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 9% ($137 million) year-over-year, driven by brokerage acquisitions and internal growth. Brokerage commissions rose 12%.
- Profit Decline: Net income dropped 64% to $50 million. This decline is primarily attributed to special charges of $163 million (pre-tax) or $102 million (after-tax) recorded in Q1 1999. Excluding these charges, income before tax would have increased 9%.
- Expense Increase: Total expenses rose 21% ($279 million). Excluding special charges, expenses increased 9% due to investments in new business initiatives and technology.
- Segment Performance:
- Brokerage: Revenue up 12%; Pretax income (excl. charges) up 10%.
- Consulting: Revenue up 4%; Pretax income (excl. charges) up 13%.
- Underwriting: Revenue up 5%; Pretax income flat ($64 million vs. $65 million).
Guidance, Outlook, Risks, and Unusual Items
Unusual Items and Special Charges
The $163 million in special charges included:
- Restructuring: $99 million for severance and pension benefits for 900 positions (U.S., Canada, and Europe consolidation).
- Pension Misselling: $43 million in the Consulting segment for redress payments to UK customers regarding private pension plans.
- Lease Abandonments: $21 million related to consolidating worldwide brokerage operations.
Management projects annualized cost savings of approximately $50 million from these restructuring actions.
Outlook and Management Commentary
Management anticipates continued positive cash flow and adequate liquidity to service debt and dividends. The company expects the effective tax rate to increase by approximately one percentage point due to the sale of tax-exempt bonds and reinvestment in taxable foreign securities.
Risks and Contingencies
- Year 2000 (Y2K): Aon is actively remediating systems with projected total costs of $70 million. As of March 31, 1999, $53 million has been incurred. Risks include potential system failures and third-party non-compliance, though management believes contingency plans are effective.
- Tax Dispute: The IRS proposed adjustments regarding retro-rated extended warranty contracts for 1990-1993, potentially increasing tax obligations by approximately $94 million plus interest. Aon is contesting this vigorously.
- Market Conditions: Risks include downward pressure on commercial property and casualty premiums and fluctuations in foreign exchange rates.
Investor Verification Checklist
- Special Charges Impact: Verify the sustainability of earnings by analyzing results excluding the $102 million after-tax special charges.
- Y2K Remediation Status: Confirm the completion of testing for mission-critical applications and the status of third-party carrier compliance.
- IRS Dispute Resolution: Monitor the outcome of the administrative appeal regarding the $94 million proposed tax adjustment.
- Stock Split Mechanics: Ensure all per-share metrics are adjusted for the three-for-two split effective May 17, 1999.
- Debt Maturity: Note the $100 million debt security due October 1, 1999, which is anticipated to be redeemed.