Aon plc (AON) — Form 10-Q Summary
Reporting period: Three months ended March 31, 2012. The quarter’s financial statements principally reflect Aon Corporation, before Aon plc became the group’s publicly held parent on April 2, 2012.
Financial performance
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Total revenue | $2.841 billion | $2.759 billion | +3%; organic growth was 4%, partly offset by unfavorable currency |
| Operating income | $402 million | $398 million | +1% |
| Operating margin, GAAP | 14.1% | 14.4% | Down 0.3 percentage points |
| Adjusted operating margin | 18.6% | 19.4% | Down 0.8 percentage points |
| Income from continuing operations | $249 million | $253 million | Down 2% |
| Net income attributable to Aon stockholders | $238 million | $246 million | Down 3% |
| Diluted EPS, continuing operations, GAAP | $0.71 | $0.71 | Flat |
| Adjusted diluted EPS, continuing operations | $0.98 | $0.99 | Down $0.01 |
Operating expenses rose 3% to $2.439 billion. The effective tax rate was 28.0%, compared with 29.0% a year earlier. Q1 2012 included $20 million of restructuring charges, $104 million of intangible amortization, and $3 million of headquarters relocation costs; management’s adjusted measures exclude these items. Foreign currency reduced adjusted diluted EPS by approximately $0.02.
Segments and material comparisons
- Risk Solutions: Revenue was $1.905 billion, up 3%; organic revenue growth was 4%. Operating income increased to $366 million from $347 million, and GAAP margin improved to 19.2% from 18.7%. Management cited renewal-book performance, new business, and restructuring benefits, partly offset by currency effects and investment in talent and GRIP solutions.
- HR Solutions: Revenue was $945 million, up 3%; management reported 3% organic growth in its quarterly overview. Operating income fell to $73 million from $83 million, and GAAP margin declined to 7.7% from 9.1%. Drivers included acquisition-related amortization, investment in health-care exchanges and HR BPO, pricing pressure in benefits administration, and unfavorable revenue mix, partly offset by restructuring benefits.
- Management identified benefits-administration price compression, lower discretionary demand for retirement consulting, and weakness in construction, private equity, and mergers and acquisitions as business headwinds.
Cash flow, debt, and liquidity
- Operating cash flow was an outflow of $15 million, versus an inflow of $155 million in Q1 2011. The quarter included a $451 million decline in accounts payable and accrued liabilities, largely related to incentive payments, and $110 million of pension contributions in excess of pension expense.
- Investing activities provided $222 million; financing activities used $166 million. Cash and cash equivalents increased $51 million to $323 million. Cash plus short-term investments totaled $833 million at quarter-end, of which approximately $213 million was restricted.
- Total debt was approximately $4.5 billion, down $38 million from year-end; debt-to-total-capital attributable to Aon stockholders was 53.3%, versus 55.6%. No commercial paper or revolving-credit borrowings were outstanding at March 31.
- Approximately $1.3 billion of committed credit facilities was available. Aon reported compliance with debt covenants. Fiduciary assets and related liabilities were each $11.795 billion; fiduciary funds are client funds and are not available for corporate liquidity.
- Q1 share repurchases were $100 million and dividends were $49 million. The quarterly dividend was $0.15 per share.
Outlook, commentary, and risks
- Management expected the underlying 2012 tax rate to be approximately 28%, and expected operating cash generation to cover debt service, contractual obligations, restructuring, capital spending, repurchases, and dividends. It expected approximately $418 million of pension contributions for the remainder of 2012.
- The Hewitt restructuring was expected to continue into 2013, with estimated cumulative costs of $325 million. Through March 31, about 1,186 positions had been eliminated and $169 million of costs incurred. Management estimated approximately $280 million of annual restructuring savings in 2013 and approximately $355 million of combined annual Aon Hewitt savings, including other integration savings; actual costs, timing, and savings may differ. The Benfield restructuring was completed in Q1 2012.
- Management expected insurance pricing stabilization and improvement to continue gradually through the rest of 2012. It also expected a temporary increase of approximately $400 million in unbilled and accounts receivable to normalize by year-end.
- The April 2 redomestication to an English parent creates tax, regulatory, execution, and cost uncertainties. Aon warned that U.S. authorities could challenge its non-U.S. tax status or expected tax benefits, and that U.K. tax treatment and future legislation could affect liabilities. The company also cited possible added ongoing costs.
- Legal exposures include errors-and-omissions and other ordinary-course claims, including Northrop, Opry Mills, and a potential Philips UK pension-fund claim; outcomes and possible losses for several matters were not estimable. The New Jersey insurance-industry class settlement received court approval in March 2012, but objectors appealed in April. Management did not expect the matters, based on information then available, to materially adversely affect consolidated financial position, while noting an unfavorable resolution could materially affect a particular period’s results or cash flows.
- Other key risks include economic weakness and competitive pricing, foreign-exchange and interest-rate movements, pension funding, credit-rating changes, client retention, restructuring and acquisition integration, and operational or data-security disruptions.
Important facts for investors to verify
- Whether organic growth and the expected gradual improvement in insurance pricing persist, particularly amid the disclosed sector weakness and HR Solutions pricing pressure.
- Progress against restructuring costs, job reductions, and the projected 2013 savings, including whether savings are achieved without offsetting reinvestment or disruption.
- Cash conversion and working-capital normalization, pension funding requirements, and the distinction between corporate cash and fiduciary funds.
- Debt capacity, covenant compliance, and the effects of ratings or market changes on financing costs and access.
- Developments in redomestication-related tax positions and the material legal claims, including appeals of the class settlement.