Aon Corporation (10-Q) — Quarter Ended September 30, 2010
The filing is for Aon Corporation, the registrant named in the 10-Q, and covers the third quarter and first nine months of 2010. Aon operates in Risk and Insurance Brokerage Services and Consulting. The results exclude Hewitt Associates, acquired on October 1, 2010, after the reporting period.
Financial Performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Total revenue | $1,801 million | $1,794 million | $5,603 million | $5,522 million |
| Operating income | $263 million | $194 million | $804 million | $780 million |
| Income from continuing operations attributable to Aon shareholders | $144 million | $117 million | $501 million | $494 million |
| Diluted EPS from continuing operations | $0.51 | $0.40 | $1.78 | $1.69 |
| Net income attributable to Aon shareholders, including discontinued operations | $144 million | $120 million | $475 million | $549 million |
- GAAP operating margin was 14.6% in Q3, compared with 10.8% in Q3 2009, and 14.3% for the first nine months, compared with 14.1%.
- Management’s adjusted operating margin was 16.1% for Q3 and 17.6% year to date. Adjusted diluted EPS from continuing operations was $0.61 and $2.26, respectively. These are non-GAAP measures.
- Q3 revenue was essentially flat. Nine-month revenue increased 1%; organic revenue was unchanged in Q3 and declined 1% year to date. Consulting growth and acquisitions partly offset organic weakness in brokerage and lower fiduciary investment income.
- Q3 operating income improved substantially, mainly from lower restructuring costs and savings. Nine-month operating income rose modestly, while pretax continuing income declined 4% to $699 million, partly reflecting a prior-year pension curtailment gain and a 2010 pension adjustment.
Cash Flow, Debt and Liquidity
- Cash provided by operating activities was $773 million for the first nine months, versus $181 million in 2009. Excluding changes in client fiduciary funds, operating cash flow was $307 million versus $135 million. Client funds are not available for general corporate use.
- Cash and cash equivalents plus short-term investments totaled $2.449 billion at September 30. Approximately $1.6 billion was restricted, primarily proceeds from debt issued for the Hewitt acquisition.
- Total debt was $3.756 billion, up from $2.008 billion at December 31, 2009; debt as a percentage of Aon shareholder capital was 39.3%, versus 27.2%. Aon reported compliance with debt covenants.
- Management said operating cash flow, available credit and capital-market access were expected to meet foreseeable liquidity needs. The filing cautions that fiduciary assets cannot be used for corporate purposes; reported current assets and liabilities include matching fiduciary balances.
Material Changes and Unusual Items
- On October 1, Aon completed its approximately $4.93 billion cash-and-stock acquisition of Hewitt. Consideration included about $2.457 billion cash, 61 million Aon shares and converted options. Aon issued $1.5 billion of notes and drew $1.0 billion under a term loan to help fund the transaction. Hewitt’s results and acquired balance sheet are not included in this 10-Q; purchase accounting and pro forma results were not yet available.
- Aon recorded $33 million of Hewitt-related acquisition, integration and financing costs in the first nine months, including $14 million in interest expense. It also recorded a $49 million non-cash pension expense related to correcting a prior pension calculation error.
- Year-to-date discontinued operations included a $38 million pretax expense for the Buckner litigation settlement; total net income attributable to shareholders fell to $475 million from $549 million, despite higher continuing-operations earnings.
- On October 14, Aon announced a Hewitt-related restructuring expected to cost about $325 million through 2013, eliminate approximately 1,500–1,800 positions, and generate about $280 million of annual savings from the plan by 2013. Including other identified savings, management expects approximately $355 million of annual savings in 2013. These are estimates and depend on implementation and assumptions.
Management Commentary, Outlook and Risks
Management cited the continuing global recession, soft insurance pricing, reduced client exposure units and cost-conscious purchasing as headwinds. Brokerage is sensitive to premium rates and client activity; consulting and outsourcing face weak demand and pricing pressure. Management also expects the Aon Benfield restructuring to affect operations into 2011. No clear full-year revenue or EPS guidance is provided; management estimated an underlying continuing-operations tax rate of about 30% for Q4, including Hewitt.
- Key risks include successful integration of Hewitt, retention of clients and employees, realization and timing of projected savings, competitive and pricing pressure, currency and interest-rate movements, pension funding needs, and credit-rating changes.
- The SEC and Department of Justice continued investigating anti-corruption matters; Aon said it was cooperating and could not predict the outcome.
- Aon disclosed a range of legal and professional-liability matters, including the Buckner settlement and claims relating to insurance placements. Management did not expect the matters, based on information then available, to materially affect consolidated financial position, but said an unfavorable resolution could materially affect results or cash flows in a particular period.
- Moody’s outlook was negative; S&P and Fitch outlooks were stable. A downgrade could raise borrowing costs or limit access to capital.
Most Important Facts for Investors to Verify
- Hewitt’s final purchase accounting, acquired assets and liabilities, pro forma results, and subsequent contribution to revenue, earnings and cash flow.
- Actual financing, leverage and interest costs following the acquisition, including the term loan draw and post-acquisition debt profile.
- Progress against the Hewitt restructuring’s estimated $325 million costs and $355 million annual savings, and against the existing restructuring programs.
- Organic growth and margins by segment, particularly continued brokerage weakness and the durability of Consulting growth.
- Developments in the SEC/DOJ investigations, material legal contingencies, and pension funding requirements.
- Cash availability after excluding restricted and fiduciary funds, and the effect of any credit-rating or market-access changes.