Aon Plc (Aon Corporation) 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 1999, and the six months ended on that date. Aon Corporation operates primarily in three segments: Insurance Brokerage and Other Services, Consulting, and Insurance Underwriting. The financial statements reflect a three-for-two stock split effective May 17, 1999. The results are unaudited but include normal recurring adjustments.
Key Financial Metrics
| Metric (Millions) | Q2 1999 | Q2 1998 | 6 Mo 1999 | 6 Mo 1998 |
|---|---|---|---|---|
| Total Revenue | $1,723 | $1,623 | $3,422 | $3,184 |
| Net Income | $151 | $140 | $201 | $278 |
| Net Income Available to Common | $150 | $139 | $200 | $277 |
| Diluted EPS | $0.57 | $0.54 | $0.76 | $1.07 |
| Operating Cash Flow (6 Mo) | $357 (vs $784 in 1998) | |||
| Total Assets | $21,004 (as of June 30, 1999) | |||
| Total Liabilities | $17,036 (as of June 30, 1999) | |||
| Stockholders' Equity | $3,118 (as of June 30, 1999) |
Debt and Liquidity: Short-term borrowings were $926 million and notes payable were $814 million as of June 30, 1999. In Q2 1999, Aon issued $250 million of 6.9% debt securities due in 2004 to reduce short-term commercial paper. Cash and cash equivalents totaled $1,038 million.
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 6% in Q2 1999 and 7% for the six months ended June 30, 1999, driven by brokerage acquisitions and internal growth.
- Profitability Decline (6 Mo): Net income for the six months decreased 28% ($77 million) compared to 1998. This decline is primarily attributable to special charges of $163 million (pre-tax) recorded in Q1 1999 related to restructuring and pension misselling.
- Excluding Special Charges: Income before income tax for the six months increased 9% year-over-year when excluding the $163 million in special charges.
- Segment Performance:
- Brokerage: Revenue up 7% (Q2) and 9% (6 Mo). U.S. revenue grew 18%.
- Consulting: Revenue up 4% (Q2) and 4% (6 Mo). Pretax income increased 27% in Q2.
- Underwriting: Revenue up 4% (Q2) and 4% (6 Mo), with growth in direct sales and extended warranty lines.
- Cash Flow: Operating cash flow decreased $427 million year-over-year for the six-month period, largely due to the timing of receivables/payables settlements and the impact of special charges.
Guidance, Outlook, Risks, and Unusual Items
- Special Charges: Q1 1999 included $163 million in charges ($102 million after-tax). This included $99 million for severance and pension benefits for 900 positions and $43 million for redress payments regarding U.K. private pension plans. Remaining payments are expected by Q1 2000 and early 2001.
- Year 2000 (Y2K) Readiness: Aon projects total remediation costs of approximately $70 million, with $57 million incurred by June 30, 1999. The company expects to complete substantially all efforts by Q3 1999. Risks include potential system failures and third-party non-compliance.
- Contingencies:
- IRS Dispute: The IRS proposed tax adjustments of approximately $94 million (plus interest) for years 1990-1993 regarding retro-rated extended warranty contracts. Aon is contesting this vigorously.
- Allianz Lawsuit: Aon is a defendant in a lawsuit filed by Allianz Life Insurance regarding reinsurance coverages. Aon believes it has meritorious defenses.
- Acquisitions: In July 1999 (subsequent event), Aon acquired Nikols Sedgwick, an Italian broker, financed by internal funds.
- Outlook: Management anticipates continued positive cash flow and adequate liquidity. Annualized cost savings from Q1 restructuring are projected at approximately $50 million.
Investor Verification Checklist
- Special Charge Impact: Verify the remaining cash outflow schedule for the $163 million in Q1 special charges (severance and pension redress).
- Y2K Costs and Risks: Confirm the final cost of Y2K remediation and the status of third-party carrier compliance assessments.
- IRS Dispute Resolution: Monitor the administrative appeal regarding the $94 million proposed tax adjustment on extended warranty contracts.
- Debt Structure: Review the impact of the new $250 million 6.9% debt issuance on future interest expense and liquidity.
- Segment Margins: Assess the sustainability of margin improvements in the Consulting segment versus pricing pressures in the Brokerage segment.