Aon Corporation (Aon plc filing metadata) — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2011. The filing identifies the registrant as Aon Corporation. Financial figures are in U.S. dollars; dollar amounts below are in millions unless noted.
Business context and results
Aon operates through Risk Solutions, an insurance and reinsurance brokerage and advisory business, and HR Solutions, which provides human capital consulting and outsourcing. Results include Hewitt from October 1, 2010, making year-over-year comparisons materially affected by the acquisition.
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue | $2,723 | $1,801 | $8,293 | $5,603 |
| Operating income | $341 | $263 | $1,171 | $804 |
| Income from continuing operations | $208 | $147 | $726 | $517 |
| Net income attributable to Aon stockholders | $198 | $144 | $702 | $475 |
| Diluted EPS from continuing operations | $0.59 | $0.51 | $2.04 | $1.78 |
| GAAP operating margin | 12.5% | 14.6% | 14.1% | 14.3% |
Q3 revenue increased 51%; nine-month revenue increased 48%. Management attributed the growth primarily to Hewitt and other acquisitions, favorable foreign exchange, and modest organic growth. Organic revenue growth, a non-GAAP measure, was 1% for both periods. Q3 organic growth was 3% in Risk Solutions and a 2% decline in HR Solutions; nine-month growth was 2% in Risk Solutions and flat in HR Solutions.
Adjusted diluted EPS from continuing operations, a non-GAAP measure excluding restructuring and Hewitt-related costs and related tax effects, was $0.69 for Q3 and $2.32 for the nine months, versus $0.61 and $2.26, respectively. Adjusted operating margin was 14.3% for Aon overall in Q3 and 15.5% year to date. In HR Solutions, GAAP margins fell substantially, primarily due to Hewitt-related intangible amortization.
Cash flow, balance sheet and liquidity
- Cash flow: Nine-month operating cash flow was $1,413, versus $794 in 2010; investing used $619, versus $2,288; financing used $809, versus providing $1,578. Cash and cash equivalents declined $51 to $295. Operating cash flow included a $626 increase in funds held for clients, which is offset in investing cash flow; those fiduciary funds are not available for corporate use.
- Cash and liquidity: Cash plus short-term investments totaled $902 at September 30, down $229 from year-end; $183 was restricted. Management reported approximately $1.3 billion of committed credit facilities available and no borrowings under the revolving facilities. The filing says operating cash flow and available facilities are expected to cover foreseeable liquidity needs.
- Debt: Total debt was approximately $4.6 billion, up $72 from December 31, 2010; debt to total capital attributable to Aon stockholders was 35.7%, versus 35.3%. Long-term debt was $4,415. The company issued $500 of 3.125% notes due 2016 and a $450 variable-rate term loan due October 2013, and used proceeds to repay the Hewitt-related 2010 term facility. It recorded a $19 loss on extinguishment of that debt.
- Capital returns and investment: Aon repurchased 16.4 million shares for $828 in the first nine months and paid $150 in dividends. Capital expenditures were $151; business acquisitions used $102.
- Other balance-sheet items: Total assets were $28,745 and total liabilities $20,466. Fiduciary assets and matching liabilities were each $10,315 and should not be treated as corporate liquidity.
Material changes and management commentary
- Risk Solutions Q3 revenue rose 9% to $1,617, with 3% organic growth; operating income was $308 and GAAP operating margin was 19.0%, up from 17.4%. Nine-month revenue rose 7% to $4,994.
- HR Solutions Q3 revenue rose to $1,112 from $321, largely due to Hewitt; organic revenue declined 2%. Operating income was $77, but GAAP margin declined to 6.9% from 16.8%. Nine-month revenue was $3,319 and GAAP margin 9.5%.
- Interest expense increased by $10 in Q3 and $69 year to date, principally reflecting debt associated with the Hewitt acquisition. Amortization of intangible assets rose $61 in Q3 and $187 year to date.
- Management cited a soft insurance market, competitive pricing, weak economic activity, client cost reductions and lower discretionary spending as headwinds. It also noted a temporary $343 increase in unbilled receivables versus June 30, which reduced Q3 cash collections by approximately $150; management expected the effect to reverse near term.
Outlook, restructuring and risks
- Management expected the 2011 underlying tax rate to be approximately 29%, and said 2011 operating cash flow should be sufficient to service debt and contractual obligations, fund restructuring and capital expenditures, support share repurchases, and pay dividends. These are expectations, not guarantees.
- The Hewitt integration and restructuring plan is expected to cost approximately $325 cumulatively and affect operations into 2013. By September 30, about 1,030 positions had been eliminated and $132 of expense incurred. The company estimated approximately $280 of annual restructuring savings in 2013 and approximately $355 of combined annual Aon Hewitt savings including other integration actions; costs, timing and savings may vary.
- The Aon Benfield restructuring plan was estimated to cost $160 in total, with $28 expected to be recorded in future earnings, all in Q4 2011. Management estimated cumulative cost savings of approximately $139 in 2012.
- Material uncertainties include economic and pricing conditions, foreign-exchange and interest-rate movements, pension funding, acquisition integration and realization of savings, regulatory compliance, and litigation and errors-and-omissions claims. SEC and DOJ investigations concerning anti-corruption compliance continued; Aon said it could not predict their timing or outcome. Certain client lawsuits also remained unresolved, including claims related to Northrop Grumman and Opry Mills. Management said the matters were not expected to materially adversely affect consolidated financial position based on current information, while acknowledging an unfavorable outcome could materially affect results or cash flow in a particular period.
- A settlement memorandum for consolidated insurance-industry class claims called for a $550,000 payment and remained subject to court approval. Some individual opt-out claims remained pending.
Important facts for investors to verify
- How much reported growth and EPS improvement reflects Hewitt, currency and other acquisitions versus sustainable organic growth.
- Whether HR Solutions margins recover as Hewitt integration progresses and amortization, restructuring and integration costs change.
- Whether the temporary unbilled-receivables and cash-collection effects reverse as management expected, and how pension contributions affect cash generation.
- Actual restructuring costs, job reductions, timing and realized savings compared with management estimates.
- Developments in the SEC/DOJ investigations, significant client litigation and other contingent claims, as well as debt, refinancing and credit-rating conditions.