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Aon Corporation (AON - Analyst Report) reported second quarter 2012 earnings of $1.02 per share, beating the Zacks Consensus Estimate by a penny. Also, it slightly fell from its prior-quarter earnings by a cent. Earnings of $341 million in the reported quarter decreased by 3.7% from $354 million recorded in the second quarter of 2011.

The company incurred restructuring charges of $13 million, intangible asset amortization of $104 million and headquarter relocation costs of $14 million during the reported quarter. Adjusting for these one-time charges, Aon Corp. reported a net income of $246 million or 73 cents per share compared with net income of $258 million or 75 cents per share.

Operational Update                    

During the quarter under review, total revenue amounted to $2.82 billion, flat year-on-year but a tad below the Zacks Consensus Estimate of $2.89 billion. Increase in organic revenue and higher commissions and fees resulting from acquisitions were offset by unfavorable foreign currency translation and lower investment income.

Total operating expenses amounted to $56 million in the second quarter, increasing 2% from the prior-year quarter primarily due to a 4% increase in organic revenue, incremental investments in talent and capabilities, $14 million of headquarter relocation costs and a $13 million increase in intangible asset amortization expense, neutralized by a $93 million favorable impact from foreign currency translation and a $16 million decline in lease termination costs.

The effective tax rate for the current quarter increased 280 basis points to 27.5%.

Segment Details

The Risk Solutions Segment reported total revenue of $1.9 billion decreasing marginally by 1% over the prior-year quarter. The improvement was driven by 4% organic improvement in commissions and fees, partially offset by an adverse impact of 4% from foreign currency and a decline of 33% in investment income.

Adjusted operating income improved 3% year over year to $416 million. Operating margin expanded 80 basis points year over year to 21.9%, stemming from increase in organic revenue, an 80 basis point favorable benefit from lower lease termination costs and savings related to the restructuring programs. However, these positives were dwarfed by significant investments in GRIP related services and key talent across Asia and Latin America.

Reported Operating income came in at $384 million increasing 2% against the prior-year quarter.

The HR Solutions Segment reported total revenue of $931million, exhibiting an improvement of 3% over the prior-year quarter. The boost in revenue was primarily due to organic increase in commissions and fees and favorable impact of acquisitions and divestitures, partially offset by an unfavorable impact of 2% from foreign currency volatility.

Adjusted operating income decreased 20% year-on-year to $143 million. Operating margin contracted 440 basis points to 15.4%, attributable to unfavorable impact for investment spend in new growth opportunities, an unfavorable revenue mix shift, and increase in deferred costs, partially offset by benefits related to the Aon Hewitt restructuring program.

Reported operating income plunged 39% to $58 million during the second quarter.

Financial Position

Cash and cash equivalents of Aon Corp. as of June 30, 2012 increased 5.1% over 2011-end to $286 million. Total assets with the company were valued at $30.8 billion, increasing 4.2% from $29.6 billion as on December 31, 2011.

Long term debt was $4.1 billion, declined 9.9% over 2011 end level.

Share Buyback & Dividend

On April 19, 2012, the Board of Aon Corp. authorized a $5 billion share repurchase program as a replacement to its previous 2010-authoriztion.  Concurrently, the Board also approved a 5% dividend hike.

During the quarter, Aon Corp. repurchased 5.3 million Class A ordinary shares for nearly $250 million. Presently, the company has $4.7 billion of shares remaining under its authorization.

On July 12, 2012, the Board declared a regular dividend of 15.75 cents per share, which will be paid on August 15, 2012, to shareholders of record as on August 1, 2012.

Peer Take

The company competes closely with Marsh & McLennan Companies, Inc. (MMC - Analyst Report), which is scheduled to release its second quarter earnings on August 7 and Willis Group Holdings Public Limited Company (WSH - Analyst Report) on August 1. The Zacks Consensus Estimates for Marsh& McLennan and Willis Group are pegged at 58 cents per share and 59 cents per share, respectively.

Zacks Rank

Aon Corp. carries a Zacks #4 Rank, implying a short-term Sell rating.

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