Aon Corporation — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011; unaudited. The filing registrant is Aon Corporation. Comparisons are with the corresponding 2010 periods unless stated otherwise.
Business context
Aon operates Risk Solutions, an insurance and reinsurance brokerage and advisory business, and HR Solutions, a human-resources consulting and outsourcing business. The October 2010 Hewitt acquisition substantially expanded HR Solutions, making year-over-year reported revenue comparisons acquisition-driven.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Total revenue | $2.811 billion | $1.898 billion | $5.570 billion | $3.802 billion |
| Operating income | $434 million | $268 million | $830 million | $541 million |
| Continuing income attributable to Aon shareholders | $256 million | $179 million | $500 million | $357 million |
| Net income attributable to Aon shareholders | $258 million | $153 million | $504 million | $331 million |
| Diluted EPS from continuing operations | $0.75 | $0.63 | $1.45 | $1.27 |
| GAAP operating margin | 15.4% | 14.1% | 14.9% | 14.2% |
Organic revenue growth was 1% for both the quarter and first six months. Q2 organic growth was 2% in Risk Solutions and flat in HR Solutions. Adjusted diluted EPS from continuing operations was $0.83 for Q2 and $1.63 year to date, versus $0.81 and $1.65, respectively. Adjusted operating margin was 16.1% for Aon in both 2011 periods; management said adjusted margins declined from the comparable 2010 periods.
Hewitt primarily drove reported revenue growth: HR Solutions revenue rose to $1.090 billion from $317 million in Q2, while Risk Solutions revenue rose 9% to $1.728 billion. Risk Solutions reported operating margin improved to 20.5% from 19.2%; HR Solutions margin declined to 10.6% from 14.2%, largely reflecting business mix and higher Hewitt-related intangible amortization.
Cash flow, debt and liquidity
- Six-month operating cash flow was $1.161 billion, compared with $883 million. Excluding client fiduciary funds, operating cash flow was $419 million versus $250 million. Fiduciary cash flows are not available for general corporate use.
- Investing cash use was $562 million and financing cash use was $632 million. Financing included $653 million of treasury-stock purchases, debt issuance and repayment associated with refinancing, and $100 million of shareholder dividends.
- Cash and cash equivalents were $300 million; short-term investments were $515 million at June 30. Of these balances, $200 million was restricted. Cash and short-term investments together were $815 million.
- Total debt was approximately $4.531 billion, compared with approximately $4.506 billion at December 31, 2010. Aon issued $500 million of 3.125% notes due 2016 and borrowed $450 million under a term loan due in 2013, using proceeds to repay its prior Hewitt-related term facility. The new loan’s effective annualized rate was approximately 1.56% at quarter-end.
- Aon reported $1.3 billion of available committed credit facilities and compliance with its debt covenants. Management said operating cash flow and available credit were expected to meet foreseeable liquidity needs.
Changes, outlook and notable items
- Reported revenue grew 48% in Q2 and 47% for the first six months, principally from Hewitt and other acquisitions, favorable currency effects, and 1% organic growth. Management cited continued competitive pricing pressure, weak economic activity, client cost control and sector-specific weakness.
- Hewitt-related restructuring is expected to cost approximately $325 million through completion, with activities extending into 2013. About 860 jobs had been eliminated and $106 million of costs incurred through June 30. The plan is expected to generate approximately $280 million in annual savings by 2013; Aon estimated total annual Aon Hewitt savings of approximately $355 million including other integration initiatives. Actual cost, timing and savings may differ.
- Q2 and first-half results included a $19 million loss on extinguishment of debt and a $13 million write-down of investments affected by earthquakes in New Zealand and Japan. Aon also reported higher intangible amortization following acquisitions.
- Management expected an underlying 2011 tax rate of approximately 29%; reported rates were 24.7% for Q2 and 26.8% year to date, reflecting geographic mix and favorable discrete items.
- Risks include a prolonged soft insurance market, pricing and demand pressure, interest-rate and foreign-exchange movements, pension funding requirements, acquisition integration and realization of savings, and litigation and regulatory inquiries. SEC and DOJ investigations concerning anti-corruption compliance remained ongoing; the filing did not predict their timing or outcome. Management did not expect the disclosed claims, based on current information, to materially harm consolidated financial position, while acknowledging that an unfavorable resolution could materially affect results or cash flows in a particular period.
Important facts for investors to verify
- How much of growth and earnings improvement is sustainable organically after separating Hewitt, other acquisitions and foreign exchange effects.
- Whether HR Solutions can recover margins as Hewitt integration proceeds and amortization and restructuring costs evolve.
- Progress against the restructuring plan’s estimated $325 million cost and $355 million annual savings, including actual cash costs and timing.
- Debt refinancing terms, debt-service capacity, restricted cash, pension contributions and the availability of credit facilities.
- Developments in the SEC/DOJ anti-corruption investigations and material client litigation or E&O claims, including potential effects on cash flows.