Aon plc — Q3 2012 Form 10-Q
Business context and period. Aon provides insurance and reinsurance brokerage and human-resources consulting and outsourcing through Risk Solutions and HR Solutions. This unaudited report covers the quarter and nine months ended September 30, 2012, compared with the same 2011 periods. Aon completed its redomestication as a U.K.-incorporated parent on April 2, 2012.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Total revenue | $2.737bn | $2.723bn | $8.399bn | $8.293bn |
| Operating income | $339m | $328m | $1.135bn | $1.166bn |
| Operating margin, GAAP | 12.4% | 12.0% | 13.5% | 14.1% |
| Net income attributable to Aon shareholders | $204m | $198m | $688m | $702m |
| Diluted EPS, continuing operations | $0.62 | $0.59 | $2.06 | $2.04 |
| Operating cash flow | — | — | $867m | $787m |
Q3 organic revenue growth was 4% overall: 3% in Risk Solutions and 4% in HR Solutions. Adjusted operating margin was 17.5% overall (20.0% Risk Solutions; 17.5% HR Solutions), versus 17.2% overall in Q3 2011. Nine-month adjusted margin was 18.3%, versus 18.7% (Risk Solutions 21.1%; HR Solutions 16.5%). Adjusted diluted EPS was $0.95 for Q3 and $2.94 year to date, versus $0.88 and $2.90, respectively. These adjusted measures are non-GAAP.
For the first nine months, revenue growth of 1% reported reflected 4% organic growth offset by a 3% unfavorable foreign-exchange impact. Operating income declined 3%, while shareholder net income declined 2%. The quarter’s reported revenue rose 1%, with 4% organic growth offset by 3% unfavorable currency impact. Q3 other expense was $9m, including a $24m foreign-currency remeasurement loss partly offset by $8m of hedging gains.
Balance sheet, cash flow and liquidity
- At September 30, cash and cash equivalents were $290m and short-term investments $718m; together they totaled approximately $1.0bn. $212m was restricted or required operating funds. Client fiduciary funds are segregated and unavailable for general corporate use.
- Total debt was approximately $4.4bn, down $90m from year-end 2011; long-term debt was $4.111bn and current debt $291m. No commercial paper or revolving-credit borrowings were outstanding at quarter-end. Debt was 34.7% of total capital attributable to Aon shareholders, versus 35.8% at year-end.
- Working capital was approximately $1.7bn and essentially unchanged from December 31, 2011. Aon reported $8.4bn of equity and $8.4bn of net assets. The fair value of long-term debt was $4.618bn versus its $4.111bn carrying value.
- Nine-month investing cash use was $68m, including $201m of capital expenditures and $97m for acquisitions. Financing cash use was $796m, including $625m of share repurchases and $153m of shareholder dividends. Cash increased $18m to $290m.
- Aon had approximately $1.2bn of committed credit facilities available and was compliant with debt covenants. Management expected operating cash flow and available facilities to cover foreseeable liquidity needs.
Changes, outlook and management commentary
- Risk Solutions’ nine-month revenue increased 1% and operating income increased 2%; margin improved to 19.0% from 18.7%. Results benefited from organic growth and restructuring savings, partly offset by investment and talent spending and lower fiduciary investment income.
- HR Solutions’ nine-month revenue increased 2%, but operating income fell 12% to $211m and margin declined to 7.4% from 8.6%. Management cited increased intangible amortization, investment in health-care exchanges and HR outsourcing, pricing compression in benefits administration, and unfavorable revenue mix. Q3 operating income improved to $80m from $61m.
- Management cited economic weakness in continental Europe and selected sectors, a still-soft insurance market, benefits-administration price compression, and weaker discretionary demand for international retirement consulting. It expected stabilization and gradual improvement in retail brokerage pricing through the remainder of 2012.
- The Aon Hewitt restructuring is expected to continue into 2013, with estimated total costs of approximately $325m; $214m had been incurred and more than 1,800 jobs eliminated by quarter-end. Management estimated approximately $280m annual restructuring savings in 2013 and approximately $355m total annual cost savings including other integration initiatives. Estimates and timing may vary. Aon also expected $12m more redomestication-related costs through 2013.
- Management expected an underlying 2012 continuing-operations tax rate of approximately 26%, reflecting initial redomestication benefits. Q3’s 23.2% effective rate benefited from discrete tax items. No formal full-year earnings or revenue guidance is stated in the filing.
- For the remainder of 2012, Aon expected approximately $187m in additional pension contributions; it made $454m of contributions in the first nine months. It also made an approximately $80m discretionary U.K. pension contribution on October 1, after quarter-end.
Risks, contingencies and unusual items
Material exposures include foreign-exchange and interest-rate movements, economic weakness, competitive and pricing pressure, pension funding, credit-rating changes, regulation, and execution of restructuring and Hewitt integration. Aon reported that a U.K. Takeover Panel proposal could bring it under the U.K. Takeover Code, potentially complicating takeover offers. Aon hedges currency and interest-rate exposures and does not use derivatives for speculation.
Legal matters include errors-and-omissions claims and lawsuits involving Northrop Grumman and Opry Mills, as well as a potential Philips U.K. pension-fund claim; outcomes and possible losses were not estimable. Management did not expect the matters, based on current information, to materially affect consolidated financial position, but unfavorable outcomes could materially affect results or cash flows in a particular period. Aon also disclosed $69m of letters of credit, up to $36m of contingent client-premium guarantees, and $55m of potential limited-partnership funding commitments.
Notable reporting items include the redomestication and associated share-capital changes, a new $5bn share-repurchase authorization (with $4.5bn remaining), increased amortization of acquisition-related intangibles, and restructuring charges. The nine-month 2011 comparison included a $19m debt-extinguishment loss. Results for the interim periods are not necessarily indicative of full-year results.
Investor verification points
- Reconcile GAAP results with the non-GAAP adjusted EPS and margin measures, including excluded restructuring, amortization, and relocation costs.
- Assess whether organic growth, currency effects, and market pricing trends persist, especially in Risk Solutions and benefits administration.
- Track HR Solutions’ margin recovery, growth investments, and anticipated price compression.
- Verify restructuring costs, realization and timing of projected savings, and remaining redomestication costs.
- Monitor pension contributions, debt and facility capacity, share repurchases, and the availability of cash outside fiduciary and restricted balances.
- Follow the disclosed legal claims, regulatory developments, and potential application of the U.K. Takeover Code.