10-QPeriod: Q2 FY2010

Aon plc Quarterly Report for Q2 Ended Jun 30, 2010

Filed August 6, 2010For Securities:AON

Summary

Aon plc's (AON) 10-Q filing for the period ending June 30, 2010, reveals a company navigating a challenging economic environment characterized by a soft insurance pricing market and declining insurable risks. Despite these headwinds, Aon demonstrated resilience, with total revenue increasing slightly year-over-year, driven by acquisitions and favorable foreign currency translation, partially offset by organic revenue declines. The company achieved an improved operating margin due to effective expense management and lower restructuring costs, although compensation and benefits expenses saw an increase driven by pension adjustments and unfavorable foreign currency impacts. A significant development highlighted is the announced agreement to merge with Hewitt Associates, Inc., a move expected to create a larger, more integrated human resource solutions provider. This transaction, valued at approximately $4.9 billion, is expected to close in mid-November 2010 and is being financed through a combination of debt and equity. Net income attributable to Aon stockholders saw a slight increase for the quarter but a decrease for the six-month period, reflecting the impact of discontinued operations and various restructuring charges. The company continues to manage its capital effectively through share repurchases and dividend payments, while also proactively managing its liquidity and debt. Investors should pay close attention to the strategic integration of Hewitt and its potential impact on future earnings, operational efficiency, and market position, as well as the ongoing efforts to manage costs and navigate the macroeconomic landscape.

Financial Highlights

52 data points
Beta

Revenue

$1.90B

Net Income

$153.00M

8.1% Net Margin

EPS (Diluted)

$0.54

Total Assets

$23.96B

Cash & Equivalents

$260.00M

Free Cash Flow

$378.00M

Financial Statements
Beta
Revenue$1.90B
Operating Expenses$1.63B
Operating Income$268.00M
Interest Expense$33.00M
Net Income$153.00M
EPS (Basic)$0.55
EPS (Diluted)$0.54
Shares Outstanding (Basic)278.40M
Shares Outstanding (Diluted)282.60M

Key Highlights

  • 1Total revenue for the quarter ended June 30, 2010, increased slightly to $1.9 billion, with year-to-date revenue at $3.8 billion, driven by acquisitions and foreign currency impacts, despite an organic revenue decline.
  • 2The company announced a significant agreement to merge with Hewitt Associates, Inc. for approximately $4.9 billion, creating a combined entity in the human resource solutions space, expected to close in mid-November 2010.
  • 3Operating income improved for the quarter, and operating margin also increased due to effective expense management and lower restructuring charges, partially offset by increased pension costs.
  • 4Net income attributable to Aon stockholders was $153 million for the quarter, a slight increase from the prior year, but decreased to $331 million for the six months ended June 30, 2010, compared to $429 million in the prior year.
  • 5The company continues its share repurchase program, buying back $100 million worth of stock in the first six months of 2010.
  • 6Restructuring charges related to the Aon Benfield and 2007 plans continue to impact expenses, though savings are being realized, and these activities are expected to continue into 2011 and beyond.
  • 7Aon is actively managing its liquidity, with cash and cash equivalents and short-term investments totaling $734 million at June 30, 2010, and has secured significant financing commitments for the Hewitt merger.

Frequently Asked Questions

The proposed merger with Hewitt, valued at approximately $4.9 billion, is expected to create a leading human resource solutions provider. Aon anticipates the transaction will be accretive to GAAP earnings per share in 2012 and on an adjusted basis in 2011. The merger is being financed through a combination of debt, including a $1 billion term loan and a $1.5 billion bridge loan facility, and potentially senior notes. This will significantly increase Aon's debt levels, which could impact financial flexibility and increase borrowing costs.

Aon is experiencing headwinds from a challenging global recession, marked by a soft insurance pricing market and declining insurable risks. While organic revenue declined 1% for the quarter and 2% year-to-date, total revenue saw a slight increase due to acquisitions (like Allied North America) and favorable foreign currency translation. The Risk and Insurance Brokerage Services segment, which constitutes the majority of revenue, saw a modest increase, while the Consulting segment also grew, driven by acquisitions and organic growth in certain areas.

Aon's profitability is impacted by several factors. Restructuring charges related to the Aon Benfield and 2007 plans continue to be recognized, though expected cost savings are being realized. Compensation and benefits expenses increased, largely due to a $49 million non-cash pension expense adjustment and unfavorable foreign currency translation, which offset lower restructuring costs. Additionally, a loss from discontinued operations was recorded in the second quarter, primarily due to a settlement of legacy litigation.

Aon maintains a strong balance sheet with $734 million in cash and cash equivalents and short-term investments as of June 30, 2010. The company is securing significant debt financing for the Hewitt merger, totaling up to $2.5 billion, which, combined with existing credit facilities, is expected to provide sufficient liquidity. Aon also continues its share repurchase program and dividend payments, demonstrating a commitment to capital management. However, the increased debt load from the merger will be closely monitored by rating agencies, with Moody's having already changed its outlook to negative.