01—Abstract
Summary
Summary of the 10-K filed March 27, 2001. Cited figures are marked; the original filing is the authoritative source.
Aon Corporation's fiscal 2000 10-K shows a company whose operating businesses grew but whose reported earnings were pressured by non-operating items and restructuring.
Total revenue rose 4% to $7.375 billiona, and net income climbed 35% to $474 million ($1.79 diluted EPS), though that increase was flattered by lower special charges ($50 million after-tax versus $195 million in 1999). Excluding special charges and the accounting change, income fell 3% to $531 million ($2.01 per share), the first year-over-year EPS decline in the company's history, driven primarily by a $93 million drop in Corporate and Other revenue from weaker gains on securities disposals and lower equity-related revenue. The three operating segments all grew: Insurance Brokerage and Other Services pretax income rose 12%, Consulting rose 36% (helped by the ASA acquisition), and Insurance Underwriting rose 4%.
Management is betting heavily on a business transformation plan announced in November 2000, which targets $250 million to $325 millionb in total pretax costs and $150 million to $200 million in annualized savings by the end of 2001, mainly through eliminating about 3,000 positions. Execution risk is real: the plan involves both special charges and transition costs, and management has deferred material debt reduction until the plan is substantially implemented.
For investors, the key considerations are the quality of operating growth versus the volatile corporate investment portfolio, the leverage embedded in the balance sheet (notes payable of $1.8 billionc, $800 million of capital securities, and $874 million of commercial paper), and whether the transformation savings materialize on schedule. The filing also flags contingent exposures, including an IRS challenge on extended warranty deductions (about $94 million plus interest across 1990 to 1993) and the Allianz/Unicover litigation, though management does not expect these to have a material adverse effect on financial position.
02—Key points
Key Highlights
- Total revenue rose 4% to $7.375 billion; organic growth was about 8% across segments, with the U.S. representing 59% of revenue.
- Reported net income increased 35% to $474 million ($1.79 diluted EPS), but excluding special charges and the accounting change, EPS fell 3% to $2.01, the first annual decline in company history.
- Business transformation plan: $250-325 million pretax cost, $150-200 million annualized savings targeted by Q4 2001, and roughly 3,000 positions (about 6% of the 51,000 workforce) to be eliminated.
- Corporate and Other segment revenue fell 57% to $71 million, and its pretax loss widened to $242 million, reflecting lower gains on securities disposals and interest expense.
- Consulting pretax income rose 36% to $109 million, aided by the Actuarial Sciences Associates acquisition, while Insurance Brokerage pretax income grew 12% to $766 million.
- Total stockholders' equity increased 11% to $3.388 billion ($13.02 per share), and the dividend rose to $0.87 per share from $0.82.
- Cash from operations improved to $739 million from $462 million, but the company is deferring material debt reduction until the transformation plan is largely implemented.
03—Questions
Frequently Asked Questions
Why did EPS decline on an underlying basis even though net income rose 35%?
The 35% increase in reported net income mostly reflects lower special charges in 2000 ($50 million after-tax) compared with 1999 ($195 million). Before special charges and the accounting change, net income fell 3% to $531 million, and EPS fell from $2.07 to $2.01. The main cause was a $93 million drop in Corporate and Other revenue, driven by lower gains on securities disposals and weaker equity-related valuations, which management says was not an operating problem.
What is the business transformation plan and what should investors expect from it?
Announced November 2, 2000, the plan aims to improve client service and profitability by consolidating administrative functions into processing centers, rolling out new technology, and streamlining U.K. and U.S. operations. Total pretax costs are estimated at $250-325 million, with $150-200 million in annualized savings expected at full run rate by Q4 2001. Most special charges were to be recorded by Q1 2001, with the remainder in Q2 2001, and transition costs were expected to decline significantly by Q3 2001.
How leveraged is Aon, and is its debt a concern?
Notes payable were $1.798 billion at year-end 2000, up from $1.611 billion, and the company also has $800 million of 8.205% capital securities and $874 million of commercial paper outstanding, backed by $1.2 billion of credit lines. Interest expense rose 33% to $140 million. Management said it expects operating cash flows to cover dividends and debt service, but it plans to defer material debt reduction until the transformation plan is substantially complete.
What are the main legal and tax risks disclosed?
The IRS has challenged the deductibility of obligations under retro-rated extended warranty contracts for 1990-1993, with proposed additional tax of roughly $74 million, $3 million, $5 million and $12 million (plus interest) by year, which Aon is contesting through administrative appeal. A separate Allianz lawsuit concerns Unicover-related reinsurance placements, and U.K. pension-advice reviews require client compensation. Management believes these will not have a material adverse effect on consolidated financial position, but acknowledges that quarterly or annual results could be materially affected by an unfavorable outcome.
04—Continue