Aon Corporation — FY 2011 Form 10-K
Business context and reporting period
The filing is Aon Corporation’s Form 10-K for the fiscal year ended December 31, 2011, with quarterly data for Q4 2011. The company provides insurance and reinsurance brokerage and risk consulting, plus human-resources consulting and outsourcing, through Risk Solutions and HR Solutions. It reported approximately 62,000 employees operating in more than 120 countries. The filing registrant is Aon Corporation; the supplied company metadata says Aon Plc.
Hewitt, acquired in October 2010, materially expanded HR Solutions and affects year-over-year comparability. The filing also reports a planned transfer of Health and Benefits consulting from HR Solutions to Risk Solutions effective January 1, 2012.
Financial results and liquidity
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Total revenue | $11.287 billion | $8.512 billion |
| Operating income | $1.606 billion | $1.226 billion |
| Income from continuing operations | $1.006 billion | $759 million |
| Continuing-operations income attributable to Aon stockholders | $975 million | $733 million |
| Diluted continuing-operations EPS | $2.86 | $2.46 |
| Net income attributable to Aon stockholders | $979 million | $706 million |
| Operating cash flow | $1.018 billion | $783 million |
| Cash and short-term investments | Approximately $1.1 billion | Approximately $1.1 billion |
| Total debt | $4.492 billion | $4.506 billion |
Revenue rose 33%, primarily reflecting Hewitt and other acquisitions, 2% organic growth and favorable currency effects. GAAP operating margin was 14.2%; management’s adjusted operating margin was 15.8%. Adjusted diluted EPS from continuing operations was $3.29, up 5% from $3.12. These adjusted measures exclude specified restructuring, integration, receivables write-off and UK-reincorporation costs.
Risk Solutions revenue was $6.817 billion, up 6%, with 2% organic growth; operating income was $1.314 billion and margin was 19.3%, versus 18.6%. HR Solutions revenue was $4.501 billion, up 113% largely due to Hewitt, but organic growth was flat; operating income was $448 million and margin was 10.0%, versus 11.1%.
In Q4 2011, revenue was $2.994 billion versus $2.909 billion in Q4 2010; operating income was $435 million versus $422 million; continuing-operations income was $280 million versus $242 million; and diluted continuing-operations EPS was $0.82 versus $0.67.
Capital uses included $241 million of capital expenditures, $477 million of pension contributions, $200 million of dividends and $828 million of share repurchases during 2011. The company repurchased 16.4 million shares under its 2010 program at an average $50.39 per share. The annual dividend was $0.60 per share. Client fiduciary funds are not available for general corporate use: fiduciary assets totaled $10.838 billion, including $4.190 billion of cash and investments, matched by fiduciary liabilities.
At year-end, Aon had $337 million of current debt and $4.155 billion of long-term debt. It reported $50 million of commercial paper outstanding and no borrowings under its $400 million U.S. and €650 million European revolving facilities; it was in covenant compliance. Working capital was $1.7 billion. Management attributed a temporary cash-collection reduction to delayed HR Solutions invoicing and expected the roughly $300 million effect to reverse in the first half of 2012.
Material changes, outlook and risks
- Management described a challenging global economy, soft insurance pricing, client cost pressures and reduced exposure units. Pricing showed signs of stabilizing and improving in 2011, and management expected that trend to continue slowly into 2012.
- Management estimated a 2012 underlying tax rate of approximately 29% and pension contributions of approximately $541 million. It expected $143 million of restructuring cash payments in 2012.
- The Hewitt restructuring plan is expected to cost approximately $325 million through 2013; approximately 1,080 positions had been eliminated and $157 million of charges recognized by year-end 2011. Aon forecast approximately $280 million of annual savings from this plan in 2013 and approximately $355 million in total company annual savings in 2013, subject to execution and assumptions.
- The Benfield restructuring plan closed in January 2012; approximately 785 positions had been eliminated, $153 million of charges recognized, and approximately $144 million of annualized savings was anticipated in 2012.
- On January 13, 2012, Aon announced a proposed move of its incorporation and corporate headquarters to the U.K., subject to shareholder approval, with an expected Q2 2012 close. Risks include tax treatment, added costs, shareholder and regulatory approvals, credit-facility amendments, DTC eligibility and possible index exclusion.
- Pension obligations are sensitive to discount rates and investment returns. The filing reported funded-status deficits of $1.332 billion for U.S. pension plans and $485 million for international pension plans, in addition to other post-retirement obligations.
- Legal and regulatory matters include a December 2011 FCPA settlement: a $1.8 million DOJ penalty and $14.5 million in SEC disgorgement and prejudgment interest. Other E&O, fiduciary, tax and litigation matters remain; management said their ultimate outcomes cannot be determined, and unfavorable outcomes could affect period results or cash flows.
- Other principal risks include competition and pricing, Hewitt integration and outsourcing-contract profitability, foreign exchange, cyber and data-security incidents, client-fund handling, regulatory changes, and pension funding. Management reported no goodwill impairment in 2011.
Most important facts for investors to verify
- Separate acquisition-driven growth from organic growth, particularly for Hewitt and the flat organic performance in HR Solutions.
- Track the delayed HR invoicing and expected first-half 2012 cash-flow recovery, including whether receivables normalize as management anticipated.
- Assess progress against restructuring costs, eliminated positions and projected savings, alongside HR Solutions’ margin pressure.
- Review pension funding needs, assumptions and the planned $541 million 2012 contribution, as well as debt maturities and refinancing capacity.
- Confirm the status and realized costs, tax consequences, DTC arrangements and listing implications of the proposed U.K. reorganization.
- Monitor the cited legal matters and any changes in reserves, insurance recoveries or potential cash exposure.
Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting as of December 31, 2011.