Aon plc 2017 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2017. The filing also provides unaudited fourth-quarter results. Financial amounts are in U.S. dollars unless stated otherwise.
Business context and reporting period
Aon is a global professional services firm focused on risk, retirement, and health, operating in more than 120 countries. In 2017, it reorganized continuing operations as one reportable segment, Aon United, comprising Commercial Risk, Reinsurance, Retirement, Health, and Data & Analytic Services.
On May 1, 2017, Aon completed the sale of its benefits administration and business process outsourcing business to a Blackstone-affiliated buyer. The business is presented as discontinued operations, with prior periods retrospectively recast.
Key financial metrics
| Metric | 2017 | 2016 |
|---|---|---|
| Continuing revenue | $9.998 billion | $9.409 billion |
| Organic revenue growth | 4% | 4% |
| Operating income / reported margin | $979 million / 9.8% | $1.638 billion / 17.4% |
| Adjusted operating margin | 23.4% | 21.6% |
| Continuing income | $435 million | $1.253 billion |
| Net income attributable to Aon shareholders | $1.226 billion | $1.396 billion |
| Diluted EPS from continuing operations | $1.53 | $4.51 |
| Adjusted diluted EPS from continuing operations | $6.52 | $5.58 |
| Continuing operating cash flow / free cash flow | $669 million / $486 million | $1.829 billion / $1.673 billion |
Revenue increased 6%, reflecting 4% organic growth and a 2% contribution from acquisitions net of divestitures. Organic growth by revenue line was: Commercial Risk 2%, Reinsurance 6%, Retirement 3%, Health 7%, and Data & Analytic Services 6%. Reported operating income and continuing income fell substantially, while adjusted margin and adjusted continuing EPS improved.
Fourth-quarter 2017 revenue was $2.909 billion and operating income was $489 million. Continuing income was $17 million; net income attributable to Aon shareholders was a loss of $19 million, including discontinued-operations results.
At year-end, cash and short-term investments were $1.285 billion, working capital was $922 million, and total debt was approximately $5.966 billion ($5.667 billion long-term and $299 million current). Aon had $1.3 billion of committed credit facilities, with no borrowings under them. Fiduciary assets of $9.625 billion, including $3.7 billion of fiduciary cash and investments, are matched by fiduciary liabilities and are not available for general corporate use.
Material changes and unusual items
- The divestiture generated $4.246 billion of cash proceeds after customary adjustments and before taxes. Deferred consideration of up to $500 million is contingent. Aon recorded a $779 million after-tax gain on sale; discontinued operations contributed $828 million of net income for 2017.
- Operating expenses included $497 million of restructuring and related separation costs, a $380 million non-cash tradename impairment associated with the divested business, and $143 million of accelerated tradename amortization following Aon’s three-year transition to a unified brand.
- The effective tax rate on continuing operations was 36.5%, versus 10.6% in 2016. The 2017 tax provision includes provisional Tax Cuts and Jobs Act estimates, including $264 million for the transition tax and $86 million for remeasurement of U.S. deferred taxes; the filing says these estimates could change.
- Share repurchases totaled $2.4 billion, versus $1.3 billion in 2016. Dividends paid were $364 million, or $1.41 per share. Year-end shares outstanding were 247.6 million, down from 262.0 million.
- Cash from continuing operations declined 63%, principally reflecting approximately $940 million of cash tax payments associated with the divestiture and $280 million of restructuring cash payments. Pension contributions were $146 million.
Outlook, management commentary, risks, and contingencies
Management expects the restructuring plan to continue through 2019, with estimated total costs of approximately $1.025 billion, 4,200 to 4,800 role eliminations, and annualized savings of approximately $450 million by the end of 2019. By year-end 2017, 2,630 positions had been eliminated and $497 million of costs incurred. Actual costs, savings, and timing may differ from estimates. Management said operating cash flow, cash reserves, credit facilities, and capital-market access should meet foreseeable liquidity needs.
- Risks include economic and insurance-market cycles, competition and pricing pressure, foreign exchange exposure, debt and rating changes, pension funding and investment assumptions, regulatory changes, data privacy and cybersecurity, and the ability to realize restructuring savings.
- The filing identifies U.K. competition and FCA market reviews, plus an aviation and aerospace broking antitrust investigation involving European and other authorities. Aon could not estimate their ultimate impact.
- Legal matters include significant professional-liability claims. The estimated reasonably possible loss range for disclosed matters, in excess of accrued amounts and before insurance, was $0 to $300 million. Aon stated that unfavorable outcomes could materially affect results or cash flows in a particular period.
- Sale-related guarantees include up to $100 million of lease payments and $212 million of performance obligations on an undiscounted basis. Estimated fair values were $23 million and $1 million, respectively.
- Management identified GDPR, effective May 2018, and Brexit-related uncertainty as potential sources of compliance cost and operational risk. The sale also involves transition services and legacy systems, creating separation and execution risks.
Important facts for investors to verify
- Progress toward the $450 million annualized savings target, remaining restructuring charges, and the timing of those savings.
- Whether Aon receives any of the deferred sale consideration, and how effectively it manages transition services and separation obligations.
- Underlying continuing-operations performance: organic growth, adjusted margins and EPS, and cash conversion, distinguished from sale gains and other excluded items.
- Final Tax Reform Act accounting and cash-tax consequences, including the provisional transition-tax and deferred-tax estimates.
- Developments in material litigation, regulatory investigations, pension funding, and sale-related guarantees.
- Debt maturities, credit ratings, and the availability of cash for corporate use; fiduciary funds are restricted to client-related purposes.
The auditor issued an unqualified opinion on the financial statements and internal controls; management also concluded disclosure controls were effective at December 31, 2017.