Aon Corporation — Q1 2010 Form 10-Q
Reporting period: Three months ended March 31, 2010. The filing is by Aon Corporation, the registrant named in the 10-Q. Aon provides insurance brokerage and risk services, and consulting and outsourcing services.
Financial performance
| Metric | Q1 2010 | Q1 2009 | Change / context |
|---|---|---|---|
| Total revenue | $1.904 billion | $1.846 billion | Up 3%; foreign exchange and acquisitions offset a 3% organic revenue decline and lower fiduciary investment income. |
| Operating income | $273 million | $366 million | Down 25%; reported operating margin fell to 14.3% from 19.8%. |
| Continuing income attributable to Aon shareholders | $178 million | $230 million | Down 23%. |
| Diluted EPS from continuing operations | $0.63 | $0.79 | Down 20%; adjusted diluted EPS, excluding restructuring charges and related taxes, was $0.83. |
| Net income attributable to Aon shareholders | $178 million | $280 million | Prior-year results included $50 million of discontinued-operations income. |
| Cash provided by operating activities | $464 million | $553 million | Included $396 million and $512 million, respectively, from changes in fiduciary funds. Excluding those changes, operating cash flow was $68 million versus $41 million. |
| Cash and short-term investments | $734 million | $639 million | At March 31, 2010 and December 31, 2009, respectively; $186 million of cash was restricted. |
| Total debt | Approximately $2.1 billion | Approximately $2.0 billion | Debt to Aon shareholder capital was 28.0%, versus 27.2% at year-end. |
Fiduciary assets of $11.1 billion were matched by fiduciary liabilities and are not available for general corporate purposes. Working capital was $1.5 billion. Aon reported $5.5 billion of total equity at March 31, 2010.
Reported segment operating margins were 16.2% for Risk and Insurance Brokerage Services and 15.2% for Consulting. Aon’s adjusted operating margins, excluding restructuring charges, were 18.3% overall, 20.5% for Risk and Insurance Brokerage Services, and 17.4% for Consulting. Aon does not provide a free-cash-flow figure in the supplied filing text.
Material changes and drivers
- Commissions, fees and other revenue increased 4% to $1.891 billion, while fiduciary investment income declined to $13 million from $25 million as interest rates fell.
- Organic revenue declined 3% overall. Risk and Insurance Brokerage Services organic revenue fell 3%; Consulting organic revenue fell 1%. Foreign exchange contributed positively to reported revenue in both segments.
- Operating expenses rose 10% to $1.631 billion. The comparison was affected by an $83 million U.S. pension curtailment gain in Q1 2009, higher restructuring charges in Q1 2010, and unfavorable currency effects; savings and expense controls partly offset these factors.
- Q1 2010 restructuring charges were $76 million, versus $43 million in Q1 2009. The 2009 period also included discontinued-operations gains, including the AIS sale.
- Interest expense increased to $34 million from $29 million, mainly reflecting Aon’s 2009 euro debt issuance at a 6.25% rate. The effective tax rate on continuing operations was 24.9%, compared with 31.5%; management attributed the 2010 rate partly to favorable deferred-tax adjustments.
- Currency translation reduced accumulated other comprehensive income during the quarter, including a $141 million negative foreign-currency translation adjustment.
Outlook, risks and unusual items
- Management described soft insurance pricing, recession-related reductions in insured exposures, client cost-cutting and risk retention, and weakness in certain sectors as continuing headwinds. It cited strong retention and new-business growth in some markets, but organic revenue still declined.
- Management expected 2010 cash generated by operations to cover debt service, restructuring, capital expenditures, acquisitions, share repurchases and dividends. It said available credit facilities could address cash-flow timing needs. This is an expectation, not a guarantee.
- Management expected the underlying full-year 2010 tax rate to be approximately 28%, and planned approximately $356 million of 2010 pension contributions. Q1 contributions were $81 million.
- The 2007 restructuring plan had an estimated total cost of $750 million, with $721 million incurred by quarter-end; management estimated annualized savings of approximately $536 million by year-end 2010. The Aon Benfield plan had estimated total costs of $155 million and projected savings of $90–$100 million in 2010 and $122 million in 2011. Actual savings, costs and timing could differ.
- The Euro credit facility, with stated capacity of €650 million, was scheduled to expire in October 2010; $75 million was drawn at quarter-end. Aon reported compliance with its credit covenants. The U.S. revolving facility had $400 million of capacity and no borrowings.
- New VIE guidance led Aon to consolidate PEPS I effective January 1, 2010, including $47 million of long-term debt and $57 million of cash, of which $52 million was restricted. Aon also reported $42 million of unfunded commitments related to PEPS I.
- Material uncertainties include ongoing SEC and DOJ anti-corruption investigations; litigation and claims, including an appealed class-certification decision involving former subsidiary Resource Life; and errors-and-omissions exposures for which some historical insurance coverage is exhausted or materially depleted. Management said current information did not indicate a material adverse effect on consolidated financial position, but unfavorable outcomes could materially affect results or cash flows in a period.
- Other identified risks include continued economic weakness, insurance pricing and capacity changes, pension funding and investment assumptions, foreign exchange and interest rates, credit ratings, regulatory changes, and the ability to achieve restructuring and Benfield integration benefits. The filing states that actual results may differ materially from forward-looking estimates.
Important facts for investors to verify
- Whether organic revenue stabilizes and whether the soft insurance market, declining exposure units and lower fiduciary yields continue to pressure revenue.
- Whether reported and adjusted margins improve as restructuring charges subside, and whether management achieves its stated restructuring savings without additional costs.
- Whether operating cash flow excluding fiduciary-fund movements supports planned pension contributions, debt obligations, dividends and repurchases.
- How the October 2010 Euro facility maturity was addressed, and whether debt, covenant headroom or credit ratings changed after quarter-end.
- Developments in the SEC and DOJ investigations, Resource Life litigation, other legal contingencies, and the scope of any related financial exposure.
- The effects of PEPS I consolidation, including restricted cash, debt and unfunded commitments, and the completion of purchase-price allocations for recent acquisitions.