01—Abstract
Summary
Summary of the 10-K filed March 29, 1999. Cited figures are marked; the original filing is the authoritative source.
Aon Corporation (NYSE: AON) reported full-year 1998 results that showed strong top-line growth driven largely by acquisitions.
Total revenue rose 13% to $6.5 billiona, brokerage commissions and fees climbed 16% to $4.2 billion, and net income reached $541 million, or $3.11 per diluted share, versus $299 million ($1.68) in 1997. Excluding 1997 special charges, pretax income grew 30%. Management attributed the growth mainly to business combinations (about $374 million invested in 1998 acquisitions such as Le Blanc de Nicolay, Gil y Carvajal and Auto Insurance Specialists) and to cost savings from consolidating brokerage operations.
Organic growth in core brokerage was more modest, at roughly 4%. The filing also flags headwinds. Management announced a first-quarter 1999 pretax special charge of $100 to $150 millionb tied to a possible restructuring of international operations, including European workforce reductions and a voluntary early retirement program in the U.S. and Canada.
Reinsurance brokerage faced market pressure, and the company is contesting an IRS revenue agent's report that could raise current taxes on extended warranty contracts. Year 2000 remediation is projected at about $70 millionc, and the company has a three-for-two stock split payable May 17, 1999. Investors should weigh the strong acquisition-led growth and cash generation (operating cash flow of $864 million) against rising leverage, goodwill-heavy intangible assets of $3.5 billion, and near-term restructuring costs.
02—Key points
Key Highlights
- Revenue up 13% to $6.5 billion; brokerage commissions and fees up 16% to $4.2 billion, largely from acquisitions
- Net income of $541 million ($3.11 diluted EPS) vs. $299 million ($1.68) in 1997, which included $108 million of after-tax special charges
- Income before tax excluding special charges rose 30% to about $932 million on a comparable basis (reported pretax income $931 million)
- Operating cash flow of $864 million, up $80 million from 1997; ~$1.4 billion invested in investing activities including $374 million in acquisitions
- Q1 1999 pretax special charge expected at $100 to $150 million for international restructuring and a U.S./Canada early retirement program
- Balance sheet: total assets $19.7 billion, stockholders' equity $3.0 billion, intangible assets $3.5 billion, and $800 million of 8.205% capital securities
- Three-for-two stock split approved March 19, 1999 (payable May 17, 1999); 1998 dividends of $1.10 per share pre-split
03—Questions
Frequently Asked Questions
What drove Aon's revenue growth in 1998?
Most of the 13% increase in total revenue to $6.5 billion came from business combinations, especially brokerage acquisitions made in 1997 (Alexander & Alexander, Minet, Jauch & Hubener) and 1998 (Le Blanc de Nicolay, Gil y Carvajal, Auto Insurance Specialists). Excluding acquisitions, core brokerage revenue grew only about 4%, reflecting competitive pricing in property and casualty.
Why did net income more than double from 1997 to 1998?
The comparison is distorted by 1997 special charges of about $108 million after tax ($0.64 per share) tied to the A&A acquisition restructuring. Net income rose to $541 million from $299 million, while income excluding special charges grew about 30% on a pretax basis, driven by acquisitions, consolidation savings and internal growth.
What are the main risks or near-term costs investors should know about?
Aon expects a first-quarter 1999 pretax special charge of $100 to $150 million for international restructuring and early retirement. The company also faces an IRS proposal that could increase taxes by roughly $94 million plus interest for 1990 to 1993 (which Aon is contesting), Year 2000 costs of about $70 million, and significant goodwill and debt levels from acquisitions, including $1.4 billion of borrowings under the European credit facility and commercial paper.
How is Aon's capital position and dividend policy?
Stockholders' equity was $3.0 billion ($17.74 per share), up from $2.8 billion. Aon paid $1.10 per share in dividends in 1998 (about $194 million total), and the board approved a three-for-two stock split in March 1999. Management says cash flow is sufficient to meet short- and long-term needs, with $1.1 billion of back-up credit lines supporting commercial paper of $436 million.
What does Aon's insurance underwriting business contribute?
Insurance underwriting, through Combined Insurance and Virginia Surety/London General, generated about $1.9 billion of revenue and $283 million of pretax income in 1998, roughly 30% of revenue but a smaller share of profit relative to brokerage. The segment is driven by extended warranty and direct-sales accident and health products, with growth in appliance and electronics warranties.
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