Aon Corporation — FY 2009 Form 10-K
Reporting period: Fiscal year ended December 31, 2009. The filing also reports fourth-quarter results. Aon provides risk and insurance brokerage and human capital consulting services; Risk and Insurance Brokerage Services generated about 83% of FY 2009 revenue and Consulting about 17%.
Financial performance
| Metric | FY 2009 | FY 2008 |
|---|---|---|
| Total revenue | $7.595 billion | $7.528 billion |
| Operating income | $1.021 billion | $940 million |
| Income from continuing operations | $681 million; $636 million attributable to Aon stockholders | $637 million; $621 million attributable to Aon stockholders |
| Diluted EPS from continuing operations attributable to Aon stockholders | $2.19 | $2.04 |
| Net income attributable to Aon stockholders | $747 million | $1.462 billion |
| Cash provided by operating activities | $375 million | $959 million |
- Revenue rose 1%; commissions, fees and other revenue increased to $7.521 billion, while fiduciary investment income fell to $74 million from $171 million as interest rates declined.
- Operating margin from continuing operations improved to 13.4% from 12.5%. Management reported adjusted pretax margin of 17.2% for Aon overall, 20.0% for Risk and Insurance Brokerage Services, and 17.4% for Consulting. These adjusted figures exclude restructuring and certain other costs and are non-GAAP measures.
- Risk and Insurance Brokerage Services revenue was $6.305 billion, up 2%, including Benfield-related growth; segment operating income was $900 million, up 6%. Organic revenue declined 1% amid weak economic conditions and soft insurance pricing.
- Consulting revenue was $1.267 billion, down 7%; organic revenue declined 2%. The decline reflected economic weakness, foreign exchange and termination of an AT&T outsourcing contract. Segment operating income was $203 million, down 2%.
- FY net income fell substantially because 2008 included a large gain on the sale of CICA and Sterling. Discontinued operations contributed $111 million in 2009 versus $841 million in 2008; continuing-operations earnings and EPS increased.
Fourth-quarter results
In Q4 2009, revenue was $2.073 billion, operating income $241 million, income from continuing operations $162 million, and net income attributable to Aon stockholders $198 million. Q4 2008 revenue was $1.906 billion, operating income $236 million, continuing-operations income $127 million, and Aon-attributable net loss $6 million; discontinued operations included significant sale-related items and losses.
Cash flow, balance sheet and capital
- Operating cash flow was $375 million, down from $959 million. Excluding changes in client-held funds, operating cash flow was $465 million, up $31 million year over year. Client fiduciary funds are segregated and unavailable for corporate use.
- Cash and short-term investments available to the company were $639 million at year-end, including $85 million restricted. Working capital was $1.3 billion, down $374 million.
- Total debt was approximately $2.008 billion, up $31 million; debt to Aon-attributable total capital was 27.2%. Aon issued €500 million of 6.25% senior unsecured debt due 2014, largely to repay Euro-facility borrowings.
- Undrawn committed credit facilities totaled about $1.3 billion. Aon reported compliance with facility covenants; senior debt ratings were BBB+ (S&P and Fitch) and Baa2 (Moody’s), with stable outlooks.
- Defined-benefit pension contributions were $437 million in 2009. Pension and other post-employment liabilities rose to $1.889 billion, with funded deficits and actuarial losses remaining significant.
- Aon repurchased $590 million of shares and paid $165 million in dividends during 2009. The annual dividend was $0.60 per share. In January 2010, the board authorized a new share-repurchase program of up to $2 billion, to begin after the existing authorization is completed.
Outlook, management commentary and risks
- Management described recessionary headwinds, falling property and casualty insurance rates, lower insurable exposures, client pressure to reduce spending and increase risk retention, and weakness in sectors including financial services and construction.
- No formal revenue or EPS guidance is provided in the supplied filing text. Management expected 2010 operating cash generation to cover debt service, contractual obligations, restructuring, capital expenditures, repurchases and dividends, while retaining access to undrawn credit facilities.
- Management expected approximately $381 million of pension contributions and $290 million of restructuring payments in 2010. The Aon Benfield plan was estimated to cost $155 million in total, with annualized savings targeted at $122 million in 2011. The 2007 restructuring plan was estimated at $750 million in cumulative charges, with approximately $536 million of annualized savings targeted by the end of 2010. Savings and costs are estimates and not assured.
- Unusual items included $412 million of restructuring charges, offset in part by a net $78 million pension curtailment gain; discontinued-operation sale gains and tax benefits; and the 2009 deconsolidation of Juniperus and JCHL. Aon reported $36 million of pretax income from Juniperus and JCHL and a $73 million remaining investment exposure.
- Legal and regulatory matters include continuing SEC and DOJ anti-corruption investigations following a 2009 U.K. FSA fine of £5.25 million, an approved $30 million securities class-action settlement, a proposed $1.8 million ERISA settlement subject to approval, and other litigation and E&O claims. Management said these matters were not expected to materially affect consolidated financial position, but an unfavorable outcome could materially affect results or cash flows in a particular period.
- Principal risks include the insurance pricing cycle and economic conditions, competition, foreign exchange and interest-rate movements, pension funding and assumptions, regulatory changes, litigation and E&O exposure, integration and realization of Benfield and restructuring benefits, and access to capital if credit ratings deteriorate.
Important facts for investors to verify
- Whether organic revenue stabilizes as insurance pricing, client exposures and demand recover; reported growth benefited from Benfield while organic revenue declined.
- Whether targeted restructuring savings are achieved and how much additional expense and cash outlay remain under both plans.
- Whether pension funding requirements, discount rates and asset returns lead to further contributions or changes in reported equity and earnings.
- Developments and potential financial exposure from SEC/DOJ investigations, the Resource Life class action, other litigation and self-insured E&O claims.
- Available corporate liquidity and debt maturities, distinguishing company cash from fiduciary assets held for clients.
- The recurring earnings and cash contribution of discontinued operations, acquisitions, pension curtailments and other unusual items relative to underlying continuing operations.