Aon Plc quarterly report, Q2 FY2012

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Aon plc — Q2 2012 Form 10-Q

Business context and reporting period

Quarter ended June 30, 2012; unaudited results are compared with Q2 and the first six months of 2011. Aon provides insurance and reinsurance brokerage and human-capital consulting and administration through Risk Solutions and HR Solutions. On April 2, 2012, Aon completed its redomestication, making Aon plc, incorporated in England and Wales, the publicly held parent and moving the corporate headquarters to London.

Financial performance and position

  • Revenue: Q2 total revenue was $2.821 billion, up $10 million (less than 1%); first-half revenue was $5.662 billion, up 2%. Organic revenue growth was 4% in both periods. In Q2, 4% organic growth was offset by a 4% unfavorable foreign-exchange impact; first-half growth also reflected acquisitions, partly offset by currency.
  • Profit and EPS: Q2 operating income was $394 million (down 10%), continuing-operations income attributable to Aon shareholders was $247 million (down 4%), and diluted continuing-operations EPS was $0.73 (versus $0.75). First-half figures were $796 million operating income (down 5%), $485 million attributable continuing-operations income (down 3%), and $1.44 diluted EPS (versus $1.45). Adjusted diluted EPS, a non-GAAP measure, was $1.02 for Q2 and $1.99 for the first half, versus $1.03 and $2.02.
  • Margins: GAAP operating margin was 14.0% in Q2 versus 15.7%, and 14.1% for the first half versus 15.0%. Adjusted margin was 18.6% in both 2012 periods, versus 19.6% and 19.5%. Risk Solutions Q2 revenue was $1.899 billion and operating margin 20.2% (up from 19.8%); HR Solutions revenue was $931 million and operating margin 6.2% (down from 10.5%).
  • Cash flow: First-half operating cash flow was $269 million, down from $419 million; investing activities provided $93 million and financing activities used $366 million. Cash and cash equivalents increased $14 million to $286 million. Operating cash flow was pressured by a $500 million decrease in accounts payable and accrued liabilities and pension contributions.
  • Debt and liquidity: Total debt was approximately $4.49 billion, down $2 million from year-end; debt was 35.5% of Aon shareholders’ capital. Cash and short-term investments totaled $802 million, including $190 million restricted or required for U.K. operations. Client fiduciary funds are segregated and unavailable for corporate use. Approximately $1.2 billion of committed credit facilities was available, with no borrowings under the revolving facilities; Aon reported covenant compliance.
  • Other balance-sheet items: Total assets were $30.8 billion, total liabilities $22.6 billion, and equity $8.2 billion. Fiduciary assets and matching liabilities were each $12.7 billion. Aon repurchased $350 million of shares and paid $102 million in dividends in the first half.

Material changes versus prior comparable periods

  • Revenue growth was supported by 4% organic growth, but foreign exchange and lower fiduciary investment income limited reported growth. Q2 fiduciary investment income declined to $8 million from $12 million.
  • Risk Solutions operating income increased 2% in Q2 and 3% in the first half; margins improved, reflecting organic growth and restructuring benefits. HR Solutions operating income fell 39% in Q2 and 26% in the first half, with lower margins.
  • Higher intangible amortization, growth investments and redomestication costs weighed on reported operating results. Intangible amortization was $104 million in Q2 and $208 million in the first half. Headquarters relocation costs were $14 million and $17 million, respectively.
  • Other income was $12 million in Q2 and the first half, versus expenses of $29 million and $14 million in 2011. Q2 2012 included an $18 million foreign-currency remeasurement gain and an $8 million investment-sale loss; Q2 2011 included a $19 million debt-extinguishment loss.
  • First-half comprehensive income attributable to Aon shareholders was $422 million versus $723 million, mainly reflecting foreign-currency translation losses of $93 million in 2012 versus gains of $197 million in 2011.

Outlook, management commentary, risks and contingencies

  • Management expected the underlying 2012 tax rate to be approximately 28%. It expected cash generated in 2012 to cover debt service, contractual obligations, restructuring, capital expenditures, share repurchases and dividends, and stated liquidity was sufficient for the foreseeable future. No specific full-year revenue or EPS guidance is stated in the filing.
  • Management expected insurance pricing stabilization and gradual improvement to continue through the remainder of 2012, while describing the market as still soft. It cited economic weakness in continental Europe and sector weakness in construction, private equity and M&A; HR Solutions faced benefits-administration price compression and weaker discretionary retirement-consulting demand in Europe.
  • The Aon Hewitt restructuring plan is expected to cost about $325 million through completion and affect continuing operations into 2013. By June 30, about 1,540 jobs had been eliminated and $182 million of costs incurred. Management projected approximately $280 million of annual plan savings in 2013 and about $355 million in total annual restructuring and integration savings; actual costs, savings and timing may vary. Aon expected approximately $314 million of additional pension contributions in the remainder of 2012.
  • Key risks include European sovereign-debt and euro uncertainty, currency and interest-rate movements, counterparty and investment risk, economic weakness, competition and pricing pressure, regulation, pension funding, litigation and errors-and-omissions claims, technology or cybersecurity disruption, and execution of Hewitt integration and savings plans.
  • Contingencies include several professional-liability matters, including Northrop Grumman and Opry Mills claims and a potential Philips pension-fund claim; outcomes and potential losses were not estimable. Management said the matters were not expected to materially affect consolidated financial position, but an unfavorable resolution could materially affect results or cash flows in a particular period. A previously agreed $550,000 settlement of consolidated insurance-industry class claims received trial-court approval in March 2012; objectors appealed. Letters of credit were $67 million, maximum client-premium guarantee exposure was about $34 million, and limited-partnership funding commitments totaled up to $59 million.

Important facts for investors to verify

  • Whether reported organic growth converts into sustained revenue and earnings growth after currency effects.
  • Whether HR Solutions margins recover despite pricing compression and investment spending, and whether projected savings are realized on schedule.
  • Cash-flow normalization: management expected approximately $375 million of elevated unbilled and accounts receivable to reverse and return to normalized levels by year-end 2012.
  • Actual pension contributions, restructuring costs, and share-repurchase pace, alongside available liquidity and covenant headroom.
  • Developments in the European risk environment, material litigation and claims, and the effects of the redomestication and U.K. regulatory requirements.