XFRA:9H6 Aon PLC Quarterly Report 10-Q Filing - 6/30/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2012

 

OR

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file number 1-7933

 

Aon plc

(Exact Name of Registrant as Specified in Its Charter)

 

ENGLAND AND WALES

 

98-1030901

(State or Other Jurisdiction of

 

(I.R.S. Employer

Incorporation or Organization)

 

Identification No.)

 

8 DEVONSHIRE SQUARE, LONDON, ENGLAND

 

EC2M 4PL

(Address of Principal Executive Offices)

 

(Zip Code)

 

+44 20 7623 5500

(Registrant’s Telephone Number,

Including Area Code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES  x  NO  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES  x  NO  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  YES o NO x

 

Number of Class A Ordinary Shares of Aon plc, $0.01 nominal value, outstanding as of June 30, 2012:  322,406,542

 

 

 



 

Part I Financial Information

ITEM 1. FINANCIAL STATEMENTS

 

Aon plc

Condensed Consolidated Statements of Income

(Unaudited)

 

 

 

Three Months Ended

 

Six Months Ended

(millions, except share data) 

 

June 30,
2012

 

June 30,
2011

 

June 30,
2012

 

June 30,
2011

 

Revenue

 

 

 

 

 

 

 

 

 

Commissions, fees and other

 

$

2,813

 

$

2,799

 

$

5,642

 

$

5,547

 

Fiduciary investment income

 

8

 

12

 

20

 

23

 

Total revenue

 

2,821

 

2,811

 

5,662

 

5,570

 

 

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

1,639

 

1,612

 

3,300

 

3,209

 

Other general expenses

 

788

 

759

 

1,566

 

1,523

 

Total operating expenses

 

2,427

 

2,371

 

4,866

 

4,732

 

Operating income

 

394

 

440

 

796

 

838

 

Interest income

 

2

 

4

 

5

 

10

 

Interest expense

 

(57

)

(63

)

(116

)

(126

)

Other income (expense)

 

12

 

(29

)

12

 

(14

)

Income from continuing operations before income taxes

 

351

 

352

 

697

 

708

 

Income taxes

 

96

 

87

 

193

 

190

 

Income from continuing operations

 

255

 

265

 

504

 

518

 

 

 

 

 

 

 

 

 

 

 

(Loss) income from discontinued operations before income taxes

 

(1

)

1

 

(1

)

5

 

Income taxes

 

 

(1

)

 

1

 

(Loss) income from discontinued operations

 

(1

)

2

 

(1

)

4

 

 

 

 

 

 

 

 

 

 

 

Net income

 

254

 

267

 

503

 

522

 

Less: Net income attributable to noncontrolling interests

 

8

 

9

 

19

 

18

 

Net income attributable to Aon shareholders

 

$

246

 

$

258

 

$

484

 

$

504

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to Aon shareholders

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

247

 

$

256

 

$

485

 

$

500

 

(Loss) income from discontinued operations

 

(1

)

2

 

(1

)

4

 

Net income

 

$

246

 

$

258

 

$

484

 

$

504

 

Basic net income per share attributable to Aon shareholders

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.74

 

$

0.76

 

$

1.46

 

$

1.48

 

Discontinued operations

 

 

 

 

0.01

 

Net income

 

$

0.74

 

$

0.76

 

$

1.46

 

$

1.49

 

 

 

 

 

 

 

 

 

 

 

Diluted net income per share attributable to Aon shareholders

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.73

 

$

0.75

 

$

1.44

 

$

1.45

 

Discontinued operations

 

 

 

 

0.01

 

Net income

 

$

0.73

 

$

0.75

 

$

1.44

 

$

1.46

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends per share paid on ordinary shares

 

$

0.16

 

$

0.15

 

$

0.31

 

$

0.30

 

Weighted average ordinary shares outstanding - basic

 

332.0

 

337.7

 

332.2

 

338.7

 

Weighted average ordinary shares outstanding - diluted

 

335.6

 

342.7

 

336.1

 

344.0

 

 

See accompanying notes to the Condensed Consolidated Financial Statements (unaudited).

 

2



 

Aon plc

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

 

 

 

Three Months Ended

 

Six Months Ended

 

(millions) 

 

June 30, 2012

 

June 30, 2011

 

June 30, 2012

 

June 30, 2011

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

254

 

$

267

 

$

503

 

$

522

 

Less: Net income attributable to noncontrolling interests

 

8

 

9

 

19

 

18

 

Net income attributable to Aon shareholders

 

$

246

 

$

258

 

$

484

 

$

504

 

Other comprehensive (loss) income, net of tax:

 

 

 

 

 

 

 

 

 

Change in fair value of derivatives

 

(17

)

(1

)

(10

)

(5

)

Foreign currency translation adjustments

 

(197

)

2

 

(93

)

197

 

Post-retirement benefit obligation

 

18

 

15

 

39

 

27

 

Total other comprehensive (loss) income

 

(196

)

16

 

(64

)

219

 

Less: Other comprehensive loss attributable to noncontrolling interests

 

(3

)

 

(2

)

 

Total other comprehensive (loss) income attributable to Aon shareholders

 

(193

)

16

 

(62

)

219

 

Comprehensive income attributable to Aon shareholders

 

$

53

 

$

274

 

$

422

 

$

723

 

 

See accompanying notes to the Condensed Consolidated Financial Statements (unaudited).

 

3



 

Aon plc

Condensed Consolidated Statements of Financial Position

 

(millions, except nominal and par value) 

 

June 30, 2012

 

Dec. 31, 2011

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

Cash and cash equivalents

 

$

286

 

$

272

 

Short-term investments

 

516

 

785

 

Receivables, net

 

3,075

 

3,183

 

Fiduciary assets

 

12,736

 

10,838

 

Other current assets

 

443

 

427

 

Total Current Assets

 

17,056

 

15,505

 

Goodwill

 

8,713

 

8,770

 

Intangible assets, net

 

3,106

 

3,276

 

Fixed assets, net

 

797

 

783

 

Investments

 

200

 

239

 

Other non-current assets

 

935

 

979

 

TOTAL ASSETS

 

$

30,807

 

$

29,552

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

LIABILITIES

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

Fiduciary liabilities

 

$

12,736

 

$

10,838

 

Short-term debt and current portion of long-term debt

 

392

 

337

 

Accounts payable and accrued liabilities

 

1,339

 

1,832

 

Other current liabilities

 

733

 

753

 

Total Current Liabilities

 

15,200

 

13,760

 

Long-term debt

 

4,098

 

4,155

 

Pension and other post employment liabilities

 

1,967

 

2,192

 

Other non-current liabilities

 

1,332

 

1,325

 

TOTAL LIABILITIES

 

22,597

 

21,432

 

 

 

 

 

 

 

EQUITY

 

 

 

 

 

Ordinary shares (2012 - $0.01 nominal value; 2011 - $1.00 par value) Authorized: 750 shares (issued: 2012 - 322.4; 2011 - 386.4)

 

3

 

386

 

Additional paid-in capital

 

4,279

 

4,021

 

Retained earnings

 

6,302

 

8,594

 

Treasury shares at cost (shares: 2012 - 0; 2011 - 59.6)

 

 

(2,553

)

Accumulated other comprehensive loss

 

(2,432

)

(2,370

)

TOTAL AON SHAREHOLDERS’ EQUITY

 

8,152

 

8,078

 

Noncontrolling interests

 

58

 

42

 

TOTAL EQUITY

 

8,210

 

8,120

 

TOTAL LIABILITIES AND EQUITY

 

$

30,807

 

$

29,552

 

 

See accompanying notes to the Condensed Consolidated Financial Statements (unaudited).

 

4



 

Aon plc

Condensed Consolidated Statement of Shareholders’ Equity

(Unaudited)

 

(millions)

 

Shares

 

Ordinary
Shares and
Additional
Paid-in Capital

 

Retained
Earnings

 

Treasury
Stock

 

Accumulated Other
Comprehensive
Loss, Net of Tax

 

Non-
controlling
Interests

 

Total

 

Balance at December 31, 2011

 

386.4

 

$

4,407

 

$

8,594

 

$

(2,553

)

$

(2,370

)

$

42

 

$

8,120

 

Net income

 

 

 

484

 

 

 

19

 

503

 

Retirement of treasury shares

 

(60.0

)

(60

)

(2,412

)

2,472

 

 

 

 

Shares issued - employee benefit plans

 

1.3

 

(10

)

 

 

 

 

(10

)

Shares purchased

 

(5.3

)

 

(250

)

(100

)

 

 

(350

)

Shares reissued - employee benefit plans

 

 

(181

)

(12

)

181

 

 

 

(12

)

Tax benefit - employee benefit plans

 

 

21

 

 

 

 

 

21

 

Share-based compensation expense

 

 

105

 

 

 

 

 

105

 

Dividends to shareholders

 

 

 

(102

)

 

 

 

(102

)

Change in net derivative gains/losses

 

 

 

 

 

(10

)

 

(10

)

Net foreign currency translation adjustments

 

 

 

 

 

(91

)

(2

)

(93

)

Net post-retirement benefit obligation

 

 

 

 

 

39

 

 

39

 

Purchase of subsidiary shares from non-controlling interest

 

 

 

 

 

 

5

 

5

 

Dividends paid to non-controlling interests on subsidiary common stock

 

 

 

 

 

 

(6

)

(6

)

Balance at June 30, 2012

 

322.4

 

$

4,282

 

$

6,302

 

$

 

$

(2,432

)

$

58

 

$

8,210

 

 

See accompanying notes to the Condensed Consolidated Financial Statements (unaudited).

 

5



 

Aon plc

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

Six Months Ended

 

(millions) 

 

June 30,
2012

 

June 30,
2011

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

Net income

 

$

503

 

$

522

 

Adjustments to reconcile net income to cash provided by operating activities:

 

 

 

 

 

Gain from sales of businesses, net

 

 

(4

)

Depreciation of fixed assets

 

112

 

111

 

Amortization of intangible assets

 

208

 

182

 

Share-based compensation expense

 

105

 

121

 

Deferred income taxes

 

23

 

17

 

Change in assets and liabilities:

 

 

 

 

 

Fiduciary receivables

 

(1,501

)

(680

)

Short term investments - funds held on behalf of clients

 

(519

)

(742

)

Fiduciary liabilities

 

2,020

 

1,422

 

Receivables, net

 

81

 

(18

)

Accounts payable and accrued liabilities

 

(500

)

(303

)

Restructuring reserves

 

(38

)

(54

)

Current income taxes

 

48

 

122

 

Pension and other post employment liabilities

 

(200

)

(146

)

Other assets and liabilities

 

(73

)

(131

)

CASH PROVIDED BY OPERATING ACTIVITIES

 

269

 

419

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

Sales of long-term investments

 

51

 

96

 

Purchases of long-term investments

 

(7

)

(20

)

Net sales of short-term investments - non-fiduciary

 

259

 

290

 

Acquisition of businesses, net of cash acquired

 

(82

)

(95

)

Proceeds from sale of businesses

 

1

 

8

 

Capital expenditures

 

(129

)

(99

)

CASH PROVIDED BY INVESTING ACTIVITIES

 

93

 

180

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

Share repurchase

 

(350

)

(653

)

Issuance of shares for employee benefit plans

 

64

 

162

 

Issuance of debt

 

332

 

1,469

 

Repayment of debt

 

(305

)

(1,504

)

Cash dividends to shareholders

 

(102

)

(100

)

Purchase of shares from noncontrolling interests

 

1

 

 

Dividends paid to noncontrolling interests

 

(6

)

(6

)

CASH USED FOR FINANCING ACTIVITIES

 

(366

)

(632

)

 

 

 

 

 

 

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS

 

18

 

(13

)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

14

 

(46

)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

 

272

 

346

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

$

286

 

$

300

 

 

 

 

 

 

 

Supplemental disclosures:

 

 

 

 

 

Interest paid

 

$

132

 

$

150

 

Income taxes paid, net of refunds

 

$

99

 

$

14

 

 

See accompanying notes to the Condensed Consolidated Financial Statements (unaudited).

 

6



 

Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

1.  Basis of Presentation

 

The accompanying unaudited Condensed Consolidated Financial Statements and Notes thereto have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”).  The Condensed Consolidated Financial Statements include the accounts of Aon plc and all controlled subsidiaries (“Aon” or the “Company”).  All material intercompany accounts and transactions have been eliminated.  The Condensed Consolidated Financial Statements include, in the opinion of management, all adjustments (consisting of normal recurring adjustments and reclassifications) necessary to present fairly the Company’s consolidated financial position, results of operations and cash flows for all periods presented.

 

Certain information and footnote disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted.  These Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.  The results for the three and six months ended June 30, 2012 are not necessarily indicative of operating results that may be expected for the full year ending December 31, 2012.

 

Company Redomestication

 

On April 2, 2012, the Company completed the reorganization of the corporate structure of the group of companies controlled by its predecessor, Aon Corporation, as holding company of the Aon group, pursuant to which Aon Corporation merged with one of its indirect, wholly-owned subsidiaries and Aon plc became the publicly-held parent company of the Aon group.  This transaction is referred to as the Redomestication.  In the Redomestication, each issued and outstanding share of Aon Corporation common stock held by stockholders of Aon Corporation was converted into the right to receive one Class A Ordinary Share, nominal value $0.01 per share, of Aon plc.  Likewise, equity incentive and compensation plans were assumed by Aon plc and amended to provide that those plans will now provide for the award and issuance of Class A Ordinary Shares instead of shares of common stock of Aon Corporation on a one-for-one basis.  Shares of treasury stock of Aon Corporation were cancelled in the Redomestication.  Any references to “Aon”, “the Company”, “us”, or “we,” or any similar references relating to periods before the Redomestication shall be construed as references to Aon Corporation, being the previous parent company of the Aon group.

 

Reclassification

 

Certain amounts in prior year’s Condensed Consolidated Financial Statements and related notes have been reclassified to conform to the 2012 presentation. In prior periods, remeasurement gains and losses from foreign currency transactions and related derivative instruments were recognized in Other general expenses in the Condensed Consolidated Statements of Income. These gains and losses are now included in Other income (expense) in the Condensed Consolidated Statements of Income and disclosed in Note 4 to these Condensed Consolidated Financial Statements. The Company believes this provides greater clarity into the income generated from operations.

 

Use of Estimates

 

The preparation of the accompanying unaudited Condensed Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of reserves and expenses. These estimates and assumptions are based on management’s best estimates and judgments.  Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances.  Aon adjusts such estimates and assumptions when facts and circumstances dictate.  Illiquid credit markets, volatile equity markets, and foreign currency movements have combined to increase the uncertainty inherent in such estimates and assumptions.  As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates.  Changes in estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods.

 

7



 

2.  Accounting Principles and Practices

 

Changes in Accounting Principles

 

Goodwill Impairment

 

In September 2011, the Financial Accounting Standards Board (“FASB”) issued final guidance on goodwill impairment that gives an entity the option to perform a qualitative assessment that may eliminate the requirement to perform the annual two-step test.  The two-step test requires an entity to assess goodwill for impairment by quantitatively comparing the fair value of a reporting unit with its carrying amount, including goodwill (Step 1).  If the reporting unit’s fair value is less than its carrying amount, Step 2 of the test must be performed to measure the amount of goodwill impairment, if any.  The recently issued guidance gives an entity the option to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount.  If an entity concludes that this is the case, it must perform the two-step test.  Otherwise, the two-step test is not required.  The Company early adopted this guidance in the fourth quarter 2011.  The adoption of this guidance did not have a material impact on the Company’s Consolidated Financial Statements.

 

Comprehensive Income

 

In June 2011, the FASB issued guidance that updates principles related to the presentation of comprehensive income.  The revised guidance requires companies to present the components of net income and other comprehensive income either as one continuous statement or as two consecutive statements and eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity.  The guidance, which must be applied retroactively, was effective for Aon beginning in the first quarter of 2012.  The adoption of this guidance affects only the presentation of these Condensed Consolidated Financial Statements, and had no effect on the financial condition, results of operations or cash flows of the Company.

 

Fair Value Measurement

 

In May 2011, the FASB issued guidance that clarifies the application of existing fair value measurements and disclosures, and changes certain principles or requirements for fair value measurements and disclosures. The additional required disclosures include quantitative information, sensitivity discussion, and description of the valuation process, as well as increased disclosure of unobservable inputs that are significant to the fair value measurement and transfers between Level 1 and Level 2.  The guidance is effective for Aon beginning in the first quarter 2012.  The adoption of this guidance did not have a material impact on the Company’s financial statements.

 

3.  Cash and Cash Equivalents

 

Cash and cash equivalents include cash balances and all highly liquid investments with initial maturities of three months or less.  Short-term investments include certificates of deposit, money market funds and highly liquid debt instruments purchased with initial maturities in excess of three months but less than one year and are carried at amortized cost, which approximates fair value.

 

The Company is required to hold £77 million of operating funds in the U.K., which were included in Short-term investments.  These operating funds, when translated to U.S. dollars, were $120 million at June 30, 2012 and December 31, 2011, respectively.  Cash and cash equivalents included restricted balances of $70 million and $71 million at June 30, 2012 and December 31, 2011 respectively.

 

8



 

4.  Other Income (Expense)

 

Other income (expense) consists of the following (in millions):

 

 

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Equity earnings (losses)

 

$

3

 

$

(2

)

$

8

 

$

4

 

Realized (loss) gain on sale of investments

 

(8

)

(1

)

2

 

9

 

Foreign currency remeasurement gains (losses)

 

18

 

(4

)

 

(6

)

Hedging losses

 

(2

)

(2

)

 

(2

)

Loss on extinguishment of debt

 

 

(19

)

 

(19

)

Other

 

1

 

(1

)

2

 

 

 

 

$

12

 

$

(29

)

$

12

 

$

(14

)

 

5.  Acquisitions and Dispositions

 

Acquisitions

 

During the six months ended June 30, 2012, the Company completed the acquisition of two businesses in the HR Solutions segment and three businesses in the Risk Solutions segment.  During the six months ended June 30, 2011, the Company completed the acquisition of two businesses in the Risk Solutions segment.

 

The following table includes the aggregate consideration transferred and the preliminary value of intangible assets recorded as a result of the Company’s acquisitions.

 

 

 

Six months ended June 30,

 

(millions)

 

2012

 

2011

 

Consideration

 

$

96

 

$

92

 

 

 

 

 

 

 

Intangible assets:

 

 

 

 

 

Goodwill

 

$

57

 

$

59

 

Other intangible assets

 

42

 

28

 

 

 

$

99

 

$

87

 

 

The results of operations of these acquisitions are included in the Condensed Consolidated Financial Statements as of the acquisition date.  The results of operations of the Company would not have been materially different if these acquisitions had been reported from the beginning of the period.

 

Dispositions — Continuing Operations

 

During the six months ended June 30, 2012, the Company completed the sale of one business in the Risk Solutions segment and one business in the HR Solutions segment.  A pretax gain of $2 million was recognized on these sales, which is included in Other income (expense) in the Condensed Consolidated Statements of Income. During the six months ended June 30, 2011, the Company completed the sale of one business in the HR Solutions segment.  A pretax loss of $1 million was recognized on this sale, which is included in Other income (expense) in the Condensed Consolidated Statements of Income.

 

9



 

6.  Goodwill and Other Intangible Assets

 

The change in the net carrying amount of goodwill by operating segment for the six months ended June 30, 2012 is as follows (in millions):

 

 

 

Risk
Solutions

 

HR
Solutions

 

Total

 

Balance as of December 31, 2011

 

$

5,557

 

$

3,213

 

$

8,770

 

Goodwill related to current year acquisitions

 

52

 

5

 

57

 

Goodwill related to other prior year acquisitions

 

(6

)

 

(6

)

Transfer related to Health and Benefits Consulting (1)

 

313

 

(313

)

 

Foreign currency translation

 

(101

)

(7

)

(108

)

Balance as of June 30, 2012

 

$

5,815

 

$

2,898

 

$

8,713

 

 


(1)          Effective January 1, 2012, the Health and Benefits Consulting business was transferred from the HR Solutions segment to the Risk Solutions segment.

 

Other intangible assets by asset class are as follows (in millions):

 

 

 

June 30, 2012

 

December 31, 2011

 

 

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net Carrying
Amount

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net
Carrying
Amount

 

Intangible assets with indefinite lives:

 

 

 

 

 

 

 

 

 

 

 

 

 

Trademarks

 

$

1,024

 

$

 

$

1,024

 

$

1,024

 

$

 

$

1,024

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Intangible assets with finite lives:

 

 

 

 

 

 

 

 

 

 

 

 

 

Trademarks

 

4

 

2

 

2

 

4

 

1

 

3

 

Customer Related and Contract Based

 

2,642

 

789

 

1,853

 

2,608

 

615

 

1,993

 

Marketing, Technology and Other

 

599

 

372

 

227

 

606

 

350

 

256

 

 

 

$

4,269

 

$

1,163

 

$

3,106

 

$

4,242

 

$

966

 

$

3,276

 

 

Amortization expense on finite lived intangible assets was $104 million and $208 million for the three and six months ended June 30, 2012, respectively.  Amortization expense on finite lived intangible assets was $91 million and $182 million for the three and six months ended June 30, 2011, respectively.

 

The estimated future amortization for intangible assets as of June 30, 2012 is as follows (in millions):

 

 

 

HR Solutions

 

Risk Solutions

 

Total

 

Remainder of 2012

 

$

146

 

$

67

 

$

213

 

2013

 

275

 

108

 

383

 

2014

 

238

 

93

 

331

 

2015

 

208

 

78

 

286

 

2016

 

174

 

68

 

242

 

Thereafter

 

475

 

152

 

627

 

 

 

$

1,516

 

$

566

 

$

2,082

 

 

10



 

7.  Restructuring

 

Aon Hewitt Restructuring Plan

 

On October 14, 2010, Aon announced a global restructuring plan (“Aon Hewitt Plan”) in connection with the acquisition of Hewitt Associates, Inc.  The Aon Hewitt Plan is intended to streamline operations across the combined Aon Hewitt organization and includes an estimated 1,500 to 1,800 job eliminations. The Company expects these restructuring activities and related expenses to affect continuing operations into 2013.  The Aon Hewitt Plan is expected to result in cumulative costs of approximately $325 million through the end of the plan, consisting of approximately $180 million in employee termination costs and approximately $145 million in real estate rationalization across the Company.

 

From the inception of the Aon Hewitt Plan through June 30, 2012, approximately 1,540 jobs have been eliminated and total expenses of $182 million have been incurred.  The Company recorded $13 million and $25 million of restructuring and related charges in the three and six months ended June 30, 2012, respectively.  The Company recorded $31 million and $54 million of restructuring and related charges in the three and six months ended June 30, 2011, respectively.  Charges related to the restructuring are included in Compensation and benefits and Other general expenses in the accompanying Condensed Consolidated Statements of Income.

 

The following summarizes restructuring and related costs by type that have been incurred and are estimated to be incurred through the end of the restructuring initiative related to the Aon Hewitt Plan (in millions):

 

 

 

2010

 

2011

 

Second
Quarter 2012

 

Six Months
2012

 

Total
Inception to
Date

 

Estimated
Total Cost for
Restructuring
Plan (1)

 

Workforce reduction

 

$

49

 

$

64

 

$

12

 

$

19

 

$

132

 

$

180

 

Lease consolidation

 

3

 

32

 

1

 

5

 

40

 

95

 

Asset impairments

 

 

7

 

 

1

 

8

 

47

 

Other costs associated with restructuring (2)

 

 

2

 

 

 

2

 

3

 

Total restructuring and related expenses

 

$

52

 

$

105

 

$

13

 

$

25

 

$

182

 

$

325

 

 


(1)         Actual costs, when incurred, will vary due to changes in the assumptions built into this plan.  Significant assumptions likely to change when plans are finalized and implemented include, but are not limited to, changes in severance calculations, changes in the assumptions underlying sublease loss calculations due to changing market conditions, and changes in the overall analysis that might cause the Company to add or cancel component initiatives.

 

(2)         Other costs associated with restructuring initiatives, including moving costs and consulting and legal fees, are recognized when incurred.

 

Effective January 1, 2012, the Health and Benefits Consulting business was transferred from the HR Solutions segment to the Risk Solutions segment.  Restructuring costs associated with the Health and Benefits Consulting business are reflected in the Risk Solutions segment, including $41 million that was reclassified from the HR Solutions segment to the Risk Solutions segment for 2011.  During the second quarter 2011, $31 million in restructuring expenses were recorded, $10 million of which related to the Health and Benefits Consulting business.  The following summarizes the restructuring and related expenses, by segment, that have been incurred and are estimated to be incurred through the end of the restructuring initiative related to the Aon Hewitt Plan (in millions):

 

 

 

2010

 

2011

 

Second
Quarter 2012

 

Six Months
2012

 

Total
Inception to
Date

 

Estimated
Total Cost for
Restructuring
Plan

 

HR Solutions

 

$

52

 

$

49

 

$

11

 

$

20

 

$

121

 

$

255

 

Risk Solutions

 

 

56

 

2

 

5

 

61

 

70

 

Total restructuring and related expenses

 

$

52

 

$

105

 

$

13

 

$

25

 

$

182

 

$

325

 

 

11



 

Aon Benfield Restructuring Plan

 

The Company announced a global restructuring plan (“Aon Benfield Plan”) in conjunction with its acquisition of Benfield in 2008.  The Aon Benfield Plan was intended to integrate and streamline operations across the combined Aon Benfield organization.  The Aon Benfield Plan included 810 job eliminations. Additionally, duplicate space and assets were abandoned. The Company incurred all remaining costs for the Aon Benfield Plan and the plan was closed in the first quarter 2012.

 

The Company recorded $8 million of restructuring and related charges in the six months ended June 30, 2012.  The Company recorded a net restructuring benefit of $12 million and $5 million in the three and six months ended June 30, 2011, respectively. All costs associated with the Aon Benfield Plan are included in the Risk Solutions segment. Charges related to the restructuring are included in Compensation and benefits and Other general expenses in the accompanying Condensed Consolidated Statements of Income.

 

The following summarizes the restructuring and related costs by type that have been incurred through the end of the restructuring initiative related to the Aon Benfield Plan (in millions):

 

 

 

Purchase
Price
Allocation

 

2009

 

2010

 

2011

 

Second
Quarter 2012

 

Six Months
2012

 

Inception to
Date

 

Total Cost for
Restructuring
Plan

 

Workforce reduction

 

$

32

 

$

38

 

$

15

 

$

33

 

$

 

$

8

 

$

126

 

$

126

 

Lease consolidation

 

20

 

14

 

7

 

(15

)

 

 

26

 

26

 

Asset impairments

 

 

2

 

2

 

 

 

 

4

 

4

 

Other costs associated with restructuring

 

1

 

1

 

2

 

1

 

 

 

5

 

5

 

Total restructuring and related expenses

 

$

53

 

$

55

 

$

26

 

$

19

 

$

 

$

8

 

$

161

 

$

161

 

 

As of June 30, 2012, the Company’s liabilities for its restructuring plans are as follows (in millions):

 

 

 

Aon Hewitt

 

Aon Benfield

 

 

 

 

 

 

 

 

 

Plan

 

Plan

 

2007 Plan

 

Other

 

Total

 

Balance at December 31, 2011

 

$

95

 

$

20

 

$

50

 

$

8

 

$

173

 

Expensed

 

24

 

8

 

 

 

32

 

Cash payments

 

(39

)

(19

)

(10

)

(2

)

(70

)

Foreign exchange translation and other

 

 

1

 

(2

)

 

(1

)

Balance at June 30, 2012

 

$

80

 

$

10

 

$

38

 

$

6

 

$

134

 

 

12



 

8.  Investments

 

The Company earns income on cash balances and investments, as well as on premium trust balances that the Company maintains for premiums collected from insureds but not yet remitted to insurance companies, and funds held under the terms of certain outsourcing agreements to pay certain obligations on behalf of clients.  Premium trust balances and a corresponding liability are included in Fiduciary assets and Fiduciary liabilities in the accompanying Condensed Consolidated Statements of Financial Position.

 

The Company’s interest-bearing assets and other investments are included in the following categories in the Condensed Consolidated Statements of Financial Position (in millions):

 

 

 

June 30,

 

December 31,

 

 

 

2012

 

2011

 

Cash and cash equivalents

 

$

286

 

$

272

 

Short-term investments

 

516

 

785

 

Fiduciary assets (1)

 

4,676

 

4,190

 

Investments

 

200

 

239

 

 

 

$

5,678

 

$

5,486

 

 


(1)  Fiduciary assets include funds held on behalf of clients but does not include fiduciary receivables.

 

The Company’s investments are as follows (in millions):

 

 

 

June 30,

 

December 31,

 

 

 

2012

 

2011

 

Equity method investments (2)

 

$

129

 

$

164

 

Other investments, at cost

 

53

 

60

 

Fixed-maturity securities

 

18

 

15

 

 

 

$

200

 

$

239

 

 


(2)  The reduction in equity method investments is primarily due to redemptions.

 

9.  Debt

 

The Company uses the proceeds from the commercial paper market from time to time in order to meet short-term working capital needs.  At June 30, 2012, the Company had $107 million of commercial paper outstanding as compared to the $50 million of commercial paper outstanding at December 31, 2011.  The weighted average commercial paper outstanding for the three and six months ended June 30, 2012 was $88 million and $55 million, respectively.  The weighted average interest rate of the commercial paper outstanding for the three and six months ended June 30, 2012 was 0.51% and 0.50%, respectively.

 

On March 20, 2012, the Company entered into a $400 million five year credit agreement (“Revolving Credit Agreement”).  Borrowings under the Revolving Credit Agreement will bear interest, at the Company’s option, at a rate equal to either (a) the rate for eurodollar deposits as reflected on the applicable Reuters LIBOR01 page for the interest period relevant to such borrowing (“Eurodollar Rate”), plus the applicable margin or (b) the highest of (i) the rate of interest publicly announced by Citibank as its prime rate, (ii) the federal funds effective rate from time to time plus 0.5% and (iii) the one month Eurodollar rate plus 1.0%, in each case plus the applicable margin.  The applicable margin for borrowings under the Revolving Credit Agreement may change depending on achievement of certain public debt ratings.  The Revolving Credit Agreement has a maturity date of March 20, 2017 and contains covenants with respect to the ratio of consolidated funded debt to consolidated adjusted EBITDA (which may not be more than the lower of (a) 3.25 to 1.00 or (b) the greater of (i) 3.00 to 1.00 or (ii) the lowest ratio of consolidated funded debt to consolidated adjusted EBITDA then set forth in certain of Aon’s other credit facilities), as well as other customary covenants, undertakings and events of default.  In conjunction with the Company entering into the Revolving Credit Agreement, the prior revolving credit agreement dated December 4, 2009 was terminated.  There were no borrowings on the Revolving Credit Agreement at June 30, 2012.  On April 2, 2012, in connection with the Redomestication, Aon plc became party to the Revolving Credit Agreement and guaranteed the obligations of Aon Corporation thereunder.  The Company was in compliance with all debt covenants as of June 30, 2012.

 

13



 

10.  Shareholders’ Equity

 

Redomestication

 

Prior to the Redomestication, the Company accounted for purchases of its outstanding common stock using the treasury stock method included in U.S. GAAP. Under this method, the Company recorded purchases of its own outstanding common stock as a reduction to Additional paid-in capital based on the cost of the shares acquired. Under U.K. law, when the Company repurchases its outstanding shares, those shares are treated as cancelled. In April 2012, the Company constructively cancelled 60 million shares of treasury stock related to the Redomestication. The impact of the cancellation of all outstanding treasury shares was a decrease in Ordinary shares and Retained earnings of $60 million and $2.4 billion, respectively. The balance of Treasury stock at cost of $2.5 billion was also eliminated as part of the cancellation. Additionally, effective upon the completion of the Redomestication, the par value of Aon’s outstanding equity shares decreased from $1.00 to $0.01. The impact of this change was a decrease in Ordinary shares of $323 million, and an increase in Additional paid-in capital of $323 million.

 

As a U.K. incorporated company, Aon plc must have “distributable reserves” to make share repurchases or pay dividends to shareholders. Distributable reserves may be created through the earnings of the U.K. parent company and, amongst other methods, through a reduction in share capital approved by the English Companies Court. Distributable reserves are not linked to a U.S. GAAP reported amount. On April 4, 2012, the Company received approval from the English Companies Court to reduce its share premium and in connection with that approval, recognized distributable reserves in the amount of $8 billion.

 

Ordinary Shares

 

In January 2010, the Company’s Board of Directors authorized a share repurchase program under which up to $2.0 billion of common stock may be repurchased (“2010 Share Repurchase Program”).  Shares could be repurchased through the open market or in privately negotiated transactions, including structured repurchase programs, from time to time, based on prevailing market conditions, and were to be funded from available capital.  Any repurchased shares were to be available for employee stock plans and for other corporate purposes.

 

During the three months ended March 31, 2012, the Company repurchased 2.1 million shares at an average price per share of $48.32 for a total cost of $100 million.  Since the inception of the 2010 Share Repurchase Program, the Company has repurchased a total of 18.2 million shares for an aggregate cost of $913 million as of March 31, 2012.

 

The 2010 Share Repurchase Program, which related to common stock of Aon Corporation and preceded the Redomestication, did not extend to shares of Aon plc. In April 2012, the Company’s Board of Directors therefore authorized a share repurchase program under which up to $5.0 billion of Class A ordinary shares may be repurchased (“2012 Share Repurchase Program”). Under this program, shares may be repurchased through the open market or in privately negotiated transactions, from time to time, based on prevailing market conditions, and will be funded from available capital.

 

During the three months ended June 30, 2012, the Company repurchased 5.3 million shares at an average price per share of $47.40 for a total cost of $250 million. The remaining authorized amount for share repurchase under the 2012 Share Repurchase Program is $4.7 billion.

 

14



 

Participating Securities

 

Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid, are participating securities, as defined, and therefore, should be included in computing basic and diluted earnings per share using the two class method.  Certain of the Company’s restricted share awards allow the holder to receive a non-forfeitable dividend equivalent.

 

Income from continuing operations, income (loss) from discontinued operations and net income, attributable to participating securities, were as follows (in millions):

 

 

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Income from continuing operations

 

$

3

 

$

4

 

$

6

 

$

8

 

Income from discontinued operations

 

 

 

 

 

Net income

 

$

3

 

$

4

 

$

6

 

$

8

 

 

Weighted average shares outstanding are as follows (in millions):

 

 

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Shares for basic earnings per share (1) 

 

332.0

 

337.7

 

332.2

 

338.7

 

Ordinary share equivalents

 

3.6

 

5.0

 

3.9

 

5.3

 

Shares for diluted earnings per share

 

335.6

 

342.7

 

336.1

 

344.0

 

 


(1)  Includes 4.8 million and 5.6 million of participating securities for the three months ended June 30, 2012 and 2011, respectively, and 4.8 million and 5.7 million of participating securities for the six months ended June 30, 2012 and 2011, respectively.

 

Certain ordinary share equivalents, primarily related to options, were not included in the computation of diluted net income per share because their inclusion would have been antidilutive.  The number of shares excluded from the calculation was 1.1 million and 0.1 million for the three months ended June 30, 2012 and 2011, respectively, and 0.6 million and 0.1 million for the six months ended June 30, 2012 and 2011, respectively.

 

Accumulated Other Comprehensive Loss

 

The components of Accumulated other comprehensive loss, net of related tax, are as follows (in millions):

 

 

 

June 30, 2012

 

December 31, 2011

 

Net derivative losses

 

$

(47

)

$

(37

)

Net foreign exchange translation adjustments

 

33

 

124

 

Net postretirement benefit obligations

 

(2,418

)

(2,457

)

Accumulated other comprehensive loss, net of tax

 

$

(2,432

)

$

(2,370

)

 

15



 

11.   Employee Benefits

 

The following table provides the components of the net periodic benefit cost for Aon’s U.S. pension plans, along with its most significant international plans, which are located in the U.K., the Netherlands, and Canada (in millions):

 

 

 

Three months ended June 30,

 

 

 

U.S.

 

International

 

 

 

2012

 

2011

 

2012

 

2011

 

Service cost

 

$

 

$

 

$

4

 

$

5

 

Interest cost

 

30

 

31

 

66

 

68

 

Expected return on plan assets

 

(32

)

(30

)

(81

)

(73

)

Amortization of net actuarial loss

 

11

 

7

 

15

 

14

 

Net periodic benefit cost

 

$

9

 

$

8

 

$

4

 

$

14

 

 

 

 

Six months ended June 30,

 

 

 

U.S.

 

International

 

 

 

2012

 

2011

 

2012

 

2011

 

Service cost

 

$

 

$

 

$

8

 

$

10

 

Interest cost

 

60

 

61

 

132

 

134

 

Expected return on plan assets

 

(64

)

(60

)

(161

)

(144

)

Amortization of net actuarial loss

 

22

 

15

 

29

 

27

 

Net periodic benefit cost

 

$

18

 

$

16

 

$

8

 

$

27

 

 

Based on current assumptions, in 2012, Aon plans to contribute $237 million and $304 million to its U.S. and most significant international defined benefit pension plans, respectively.  During the six months ended June 30, 2012, contributions of $52 million have been made to the Company’s U.S. pension plans and $175 million have been made to its most significant international pension plans.

 

16



 

12.  Share-Based Compensation Plans

 

The following table summarizes share-based compensation expense recognized in the Condensed Consolidated Statements of Income in Compensation and benefits (in millions):

 

 

 

Three months ended

 

Six months ended

 

 

 

June 30,

 

June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Restricted share units (“RSUs”)

 

$

34

 

$

33

 

$

83

 

$

78

 

Performance share awards (“PSAs”)

 

13

 

10

 

15

 

35

 

Share options

 

1

 

2

 

3

 

5

 

Employee share purchase plans

 

2

 

2

 

4

 

3

 

Total share-based compensation expense

 

$

50

 

$

47

 

$

105

 

$

121

 

 

Share Awards

 

A summary of the status of the Company’s RSUs is as follows (shares in thousands):

 

 

 

Six months ended June 30,

 

 

 

2012

 

2011

 

 

 

Shares

 

Fair
Value (1)

 

Shares

 

Fair
Value (1)

 

Non-vested at beginning of period

 

9,916

 

$

42

 

10,674

 

$

38

 

Granted

 

4,706

 

45

 

3,124

 

52

 

Vested

 

(2,986

)

42

 

(4,550

)

39

 

Forfeited

 

(356

)

44

 

(283

)

40

 

Non-vested at end of period

 

11,280

 

44

 

8,965

 

42

 

 


(1) Represents per share weighted average fair value of award at date of grant

 

Information as of June 30, 2012 regarding the Company’s PSAs granted during the six months ended June 30, 2012 and the years ended December 31, 2011 and 2010, respectively, is as follows (shares in thousands, dollars in millions, except fair value):

 

 

 

As of June 30,

 

As of December 31,

 

As of December 31,

 

 

 

2012

 

2011

 

2010

 

Target PSAs granted

 

1,369

 

1,715

 

1,390

 

Fair value (1)

 

$

47

 

$

50

 

$

39

 

Number of shares that would be issued based on current performance levels

 

1,367

 

1,131

 

$

1,245

 

Unamortized expense, based on current performance levels

 

$

58

 

$

30

 

$

8

 

 


(1) Represents per share weighted average fair value of award at date of grant.

 

Share Options

 

In connection with its incentive compensation plans, the Company did not grant any share options in the six months ended June 30, 2012.  The Company did not grant any share options in the three months ended June 30, 2011. During the six months ended June 30, 2011, the Company granted 80,000 share options at a weighted average exercise price of $53 per share.  The weighted average volatility, expected dividend yield and risk-free rate assumed related to those options were 26.1%, 1.3% and 2.2%, respectively.  The weighted average expected life was 5.5 years, and the weighted average estimated fair value per share was $10.92.

 

17



 

 

A summary of the status of the Company’s share options and related information is as follows (shares in thousands):

 

 

 

Six months ended June 30,

 

 

 

2012

 

2011

 

 

 

Shares

 

Weighted- Average
Exercise Price

 

Shares

 

Weighted- Average
Exercise Price

 

Beginning outstanding

 

9,116

 

$

32

 

13,919

 

$

32

 

Granted

 

 

 

80

 

53

 

Exercised

 

(1,584

)

33

 

(3,554

)

32

 

Forfeited and expired

 

(51

)

37

 

(216

)

37

 

Outstanding at end of period

 

7,481

 

32

 

10,229

 

32

 

Exercisable at end of period

 

6,931

 

31

 

8,804

 

30

 

 

The weighted average remaining contractual life, in years, of outstanding options was 2.4 years and 3.8 years at June 30, 2012 and 2011, respectively.

 

The aggregate intrinsic value represents the total pretax intrinsic value, based on options with an exercise price less than the Company’s closing stock price of $46.78 as of June 30, 2012, which would have been received by the option holders had those option holders exercised their options as of that date.  At June 30, 2012, the aggregate intrinsic value of options outstanding was $114 million, of which $111 million was exercisable.

 

Other information related to the Company’s share options is as follows (in millions):

 

 

 

Three months ended

 

Six months ended

 

 

 

June 30,

 

June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Aggregate intrinsic value of share options exercised

 

$

11

 

$

24

 

$

24

 

$

65

 

Cash received from the exercise of share options

 

14

 

39

 

51

 

121

 

Tax benefit realized from the exercise of share options

 

1

 

5

 

2

 

12

 

 

Unamortized deferred compensation expense, which includes both options and awards, amounted to $362 million as of June 30, 2012, with a remaining weighted-average amortization period of approximately 2.1 years.

 

18



 

13.  Derivatives and Hedging

 

The Company is exposed to market risks, including changes in foreign currency exchange rates and interest rates.  To manage the risk related to these exposures, the Company enters into various derivative instruments that reduce these market risks by creating offsetting exposures.  The Company does not enter into derivative transactions for trading or speculative purposes.

 

Foreign Exchange Risk Management

 

The Company is exposed to foreign exchange risk when it receives revenues, pays expenses, or enters into intercompany loans denominated in a currency that differs from its functional currency.  The Company uses foreign exchange derivatives, typically forward contracts, options and cross currency swaps, to reduce its overall exposure to the effects of currency fluctuations on cash flows.  These exposures are hedged, on average, for less than two years; however, in limited instances, the Company has hedged certain exposures up to five years in the future.

 

The Company also uses foreign exchange derivatives, typically forward contracts and options, to hedge its net investments in foreign operations for up to two years in the future.

 

The Company also uses foreign exchange derivatives, typically forward contracts and options, to manage the currency exposure of the Company’s global liquidity profile for one year in the future. These derivatives are not accounted for as hedges, and changes in fair value are recorded each period in Other income (expense) in the Condensed Consolidated Statements of Income.

 

Interest Rate Risk Management

 

The Company holds variable-rate short-term brokerage and other operating deposits. The Company uses interest rate derivatives, typically swaps, to reduce its exposure to the effects of interest rate fluctuations on the forecasted interest receipts from these deposits for up to two years in the future.

 

Certain derivatives also give rise to credit risks from the possible non-performance by counterparties.  The credit risk is generally limited to the fair value of those contracts that are favorable to the Company.  The Company has limited its credit risk by using International Swaps and Derivatives Association (“ISDA”) master agreements, collateral and credit support arrangements, entering into non-exchange-traded derivatives with highly-rated major financial institutions and by using exchange-traded instruments.  The Company monitors the credit worthiness of, and exposure to, its counterparties.  As of June 30, 2012, all net derivative positions were free of credit risk contingent features.  In addition, the Company has received collateral of $6 million from counterparties for derivatives subject to collateral support arrangement as of June 30, 2012. The Company has not pledged any collateral as of June 30, 2012.

 

The notional and fair values of derivative instruments are as follows (in millions):

 

 

 

Notional Amount

 

Derivative Assets (1)

 

Derivative Liabilities (2)

 

 

 

June 30,
2012

 

December 31,
2011

 

June 30,
2012

 

December 31,
2011

 

June 30,
2012

 

December 31,
2011

 

Derivatives accounted for as hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

$

361

 

$

702

 

$

18

 

$

16

 

$

 

$

 

Foreign exchange contracts

 

1,377

 

1,297

 

216

 

140

 

257

 

188

 

Total

 

1,738

 

1,999

 

234

 

156

 

257

 

188

 

Derivatives not accounted for as hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

272

 

246

 

3

 

1

 

1

 

1

 

Total

 

$

2,010

 

$

2,245

 

$

237

 

$

157

 

$

258

 

$

189

 

 


(1) Included within Other current assets or Other non-current assets

(2) Included within Other current liabilities or Other non-current liabilities

 

19



 

The amounts of derivative gains (losses) recognized in the Condensed Consolidated Financial Statements for the three and six months ended June 30, 2012 and 2011 are as follows (in millions):

 

Gain (Loss) recognized in Accumulated

 

Three months ended June 30,

 

Six months ended June 30,

 

Other Comprehensive Loss:

 

2012

 

2011

 

2012

 

2011

 

Cash Flow Hedges:

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

$

 

$

 

$

 

$

(2

)

Foreign exchange contracts

 

(32

)

(22

)

(30

)

(21

)

Total

 

(32

)

(22

)

(30

)

(23

)

 

 

 

 

 

 

 

 

 

 

Foreign Net Investment Hedges:

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

$

11

 

$

(4

)

$

1

 

$

(17

)

 

Gain (Loss) reclassified from Accumulated
Other Comprehensive Loss into Income
(Effective Portion):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash Flow Hedges:

 

 

 

 

 

 

 

 

 

Interest rate contracts (1)

 

$

 

 

$

 

$

 

$

 

Foreign exchange contracts (2)

 

(8

)

(18

)

(16

)

(15

)

Total

 

(8

)

(18

)

(16

)

(15

)

 

 

 

 

 

 

 

 

 

 

Foreign Net Investment Hedges:

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

$

 

$

 

$

 

$

 

 


(1) Included within Fiduciary investment income and Interest expense

(2) Included within Other income (expense) and Interest expense

 

 

 

Three months ended June 30,

 

Six months ended June 30,

 

 

 

Amount of Gain (Loss)
Recognized in Income on
Derivative (1)

 

Amount of Gain (Loss)
Recognized in Income on Related
Hedge Item (2)

 

Amount of Gain (Loss)
Recognized in Income on
Derivative (1)

 

Amount of Gain (Loss)
Recognized in Income on
Related Hedge Item (2)

 

 

 

2012

 

2011

 

2012

 

2011

 

2012

 

2011

 

2012

 

2011

 

Fair value hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

1

 

5

 

(1

)

(4

)

3

 

(2

)

(3

)

4

 

 


(1) Relates to fixed rate debt

(2) Included in Interest expense

 

It is estimated that approximately $31 million of pretax losses currently included within Accumulated other comprehensive loss will be reclassified into earnings in the next twelve months.

 

The amount of gain (loss) recognized in income on the ineffective portion of derivatives for the three and six months ended June 30, 2012 and 2011 was not material.

 

During the three and six months ended June 30, 2012, the Company recorded a gain of $1 million and $7 million, respectively, in Other income (expense) for foreign exchange derivatives not designated or qualifying as hedges.  During the three and six months ended June 30, 2011, the Company recorded a gain of $1 million and no gain (loss), respectively, in Other income (expense) for foreign exchange derivatives not designated or qualifying as hedges.

 

20



 

14.  Fair Value and Financial Instruments

 

Accounting standards establish a three tier fair value hierarchy that prioritizes the inputs used in measuring fair values as follows:

 

·                  Level 1 — observable inputs such as quoted prices for identical assets in active markets;

·                  Level 2 — inputs other than quoted prices for identical assets in active markets, that are observable either directly or indirectly; and

·                  Level 3 — unobservable inputs in which there is little or no market data which requires the use of valuation techniques and the development of assumptions.

 

The following methods and assumptions are used to estimate the fair values of the Company’s financial instruments:

 

Money market funds and highly liquid debt securities are carried at cost and amortized cost, respectively, as an approximation of fair value. Based on market convention, the Company considers cost a practical and expedient measure of fair value.

 

Cash, cash equivalents, and highly liquid debt instruments consist of cash and institutional short-term investment funds. The Company independently reviews the short-term investment funds to obtain reasonable assurance the fund net asset value is $1 per share.

 

Equity investments consist of domestic and international equity securities and exchange traded equity derivatives valued using the closing stock price on a national securities exchange. Over the counter equity derivatives are valued using observable inputs such as underlying prices of the equity security and volatility. The Company independently reviews the listing of Level 1 equity securities in the portfolio and agrees the closing stock prices to a national securities exchange, and on a sample basis, independently verifies the observable inputs for Level 2 equity derivatives and securities.

 

Fixed income investments consist of certain categories of bonds and derivatives. Corporate, government, and agency bonds are valued by pricing vendors who estimate fair value using recently executed transactions and proprietary models based on observable inputs, such as interest rate spreads, yield curves and credit risk. Asset-backed securities are valued by pricing vendors who estimate fair value using discounted cash flow models utilizing observable inputs based on trade and quote activity of securities with similar features. Fixed income derivatives are valued by pricing vendors using observable inputs such as interest rates and yield curves. The Company obtains a detailed understanding of the models, inputs, and assumptions used in developing prices provided by its vendors. This understanding includes discussions with valuation resources at the vendor. During these discussions, the Company uses a fair value measurement questionnaire, which is part of the Company’s internal controls over financial reporting, to obtain the information necessary to assert the model, inputs and assumptions used comply with U.S. GAAP, including disclosure requirements. The Company also obtains observable inputs from the pricing vendor and independently verifies the observable inputs, as well as assesses assumptions used for reasonableness based on relevant market conditions and internal Company guidelines. If an assumption is deemed unreasonable, based on the Company’s guidelines, it is then reviewed by a member of management and the fair value estimate provided by the vendor is adjusted, if deemed appropriate. These adjustments do not occur frequently and have not historically been material to the fair value estimates used in the Condensed Consolidated Financial Statements.

 

Pooled funds