Aon Corporation — FY2010 Form 10-K
Reporting period: Year ended December 31, 2010; filed February 25, 2011. This is an annual report, not a standalone fourth-quarter filing. The registrant is identified in the filing as Aon Corporation.
Business context
Aon provides insurance and reinsurance brokerage, risk management, human resources consulting and outsourcing. Its two segments are Risk Solutions and HR Solutions. The October 1, 2010 acquisition of Hewitt Associates expanded HR Solutions; Hewitt’s results are included from the acquisition date. Risk Solutions generated approximately 75% of 2010 revenue.
Financial results and liquidity
| Metric | FY2010 | FY2009 |
|---|---|---|
| Total revenue | $8.512 billion | $7.595 billion |
| Operating income | $1.226 billion | $1.021 billion |
| GAAP operating margin | 14.4% | 13.4% |
| Income from continuing operations attributable to Aon stockholders | $733 million | $636 million |
| Diluted EPS from continuing operations | $2.46 | $2.19 |
| Net income attributable to Aon stockholders | $706 million | $747 million |
| Cash provided by operating activities | $787 million | $407 million |
- Organic revenue growth was flat overall: flat in Risk Solutions and 1% in HR Solutions. Adjusted diluted EPS from continuing operations was $3.12; management described it as similar to 2009. Adjusted operating margin was 17.6% company-wide, 20.4% in Risk Solutions and 14.9% in HR Solutions.
- FY2010 operating cash flow excluding changes in client-held funds was $768 million. Investing activities used $2.558 billion, primarily reflecting acquisitions; financing activities provided $1.838 billion.
- Cash and short-term investments were approximately $1.1 billion at year-end, including $60 million restricted. Client fiduciary assets are segregated and unavailable for general corporate use.
- Total debt was approximately $4.506 billion, up about $2.5 billion, principally to finance Hewitt. Short- and long-term committed credit facilities totaled approximately $1.253 billion; neither was drawn at year-end, and Aon reported covenant compliance.
- Working capital was $1.6 billion. The company paid $0.60 per share in dividends and repurchased $250 million of stock.
Fourth-quarter and year-over-year comparison
- Fourth-quarter 2010 revenue was $2.909 billion, versus $2.073 billion in fourth-quarter 2009; operating income was $422 million versus $241 million, and net income was $241 million versus $218 million.
- Full-year revenue rose 12%, driven mainly by Hewitt and other acquisitions, plus favorable currency translation; lower fiduciary investment income partly offset the increase. The reported increase is not equivalent to organic growth.
- Risk Solutions revenue increased 2% and operating margin improved to 18.6% from 14.3%, helped by restructuring savings and lower restructuring charges. HR Solutions revenue increased 67% with Hewitt included, while its reported margin fell to 11.1% from 16.0%, reflecting business mix, acquired-asset amortization and integration/restructuring costs.
- Continuing-operations earnings improved, but reported net income attributable to Aon stockholders declined because discontinued operations shifted from $111 million of income in 2009 to a $27 million loss in 2010. The 2010 loss chiefly reflected the Buckner legacy litigation settlement.
Outlook, commentary and risks
- Management cited a soft insurance-pricing market, pricing pressure across both segments and weak economic conditions, while noting that exposure volumes appeared to be stabilizing. It expected pricing declines in retail and reinsurance brokerage to continue into 2011.
- The underlying continuing-operations tax rate was 28.5% in 2010; management estimated approximately 30% for 2011, partly reflecting the post-Hewitt geographic earnings mix. The filing provides no specific company-wide revenue or earnings guidance.
- The Hewitt integration plan runs through 2013, with estimated cumulative costs of $325 million and approximately $280 million in annual savings expected by 2013. Aon also cited approximately $355 million in total annual savings across Aon Hewitt in 2013, including other efficiency initiatives. The Benfield plan was expected to deliver approximately $122 million of annual savings in 2011. Savings, costs and timing are estimates and not assured.
- Management expected approximately $403 million of contributions to major pension plans in 2011, compared with $288 million in 2010. Pension obligations, market returns and discount-rate assumptions could affect earnings, equity and cash needs.
- Key risks include integration and realization of Hewitt synergies; elevated debt and refinancing needs, including $372 million of Canadian-dollar debt due in April 2011 for which Aon was exploring refinancing alternatives; continued soft pricing and economic weakness; regulatory and anti-corruption investigations; litigation and errors-and-omissions exposure, including self-insured historical claims; foreign-exchange movements; and execution of restructuring savings.
- The SEC and U.S. Department of Justice continued investigating anti-corruption matters; Aon said it was cooperating and could not predict the outcome. The filing also describes unresolved client and professional-liability suits; management did not expect the matters, based on information then available, to materially affect consolidated financial position, but quarterly or annual results or cash flows could be affected by an adverse resolution.
- The Hewitt purchase-price allocation was preliminary and subject to revision. The auditor gave an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
Important facts for investors to verify
- How much of reported growth and earnings reflects Hewitt, acquisitions, currency and one-time items versus organic performance; review the pro forma results and segment trends.
- Whether Aon meets its integration and restructuring targets, including the stated savings, cash costs and job reductions.
- Refinancing or repayment of the April 2011 Canadian-dollar debt maturity, debt-service capacity and credit-rating outlook.
- Actual pension contributions and changes in funded status, actuarial assumptions and required future funding.
- Developments in the SEC/DOJ anti-corruption investigations and material litigation or E&O claims, including the extent of insurance recovery and self-insurance.