Aon plc — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Aon provides global risk, retirement and health services. Following the planned sale of its benefits administration and business process outsourcing business, Aon reported continuing operations as one segment; comparative results were recast accordingly.
Financial results
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue from continuing operations | $2.381 billion | $2.276 billion |
| Operating income | $343 million | $420 million |
| Operating margin | 14.4% | 18.5% |
| Income from continuing operations | $265 million | $312 million |
| Diluted EPS, continuing operations | $0.94 | $1.10 |
| Net income attributable to Aon shareholders | $291 million | $325 million |
| Diluted EPS, total | $1.09 | $1.19 |
| Cash from continuing operating activities | $182 million | $144 million |
| Free cash flow, continuing operations (non-GAAP) | $148 million | $107 million |
- Revenue rose 5%, reflecting 4% organic growth and a 3% acquisition contribution, partly offset by a 2% foreign-exchange impact. Organic growth was strongest in Health Solutions (14%); Commercial Risk, Reinsurance, Retirement and Data & Analytic Services grew 2%, 2%, 3% and 5%, respectively.
- GAAP operating margin declined 4.1 percentage points, primarily reflecting $144 million of restructuring and related separation costs. Adjusted operating margin, which excludes restructuring and intangible amortization, increased to 22.3% from 20.1%; adjusted diluted EPS from continuing operations rose to $1.45 from $1.21. Both are non-GAAP measures.
- Continuing-operations pretax income fell 29%. The comparison also reflects other income of $18 million in Q1 2016, including $35 million of business-disposal gains, versus $10 million of other expense in Q1 2017.
- Cash provided by operations across continuing and discontinued operations was $240 million, down from $273 million. Continuing-operations cash flow improved, while discontinued-operations cash flow fell to $58 million from $129 million.
Balance sheet, debt and liquidity
- At March 31, cash and cash equivalents were $433 million and short-term investments were $200 million; combined, $633 million, of which $86 million was restricted. Cash-flow ending cash was $451 million, including $18 million classified as discontinued operations.
- Total debt was approximately $6.277 billion, including $384 million of commercial paper; the rolling 12-month debt-to-EBITDA ratio was 2.7. Aon reported compliance with its debt covenants and had no borrowings under its $900 million committed credit facility, available through February 2021.
- Management said operating cash flow, available facilities and capital-market access should meet foreseeable liquidity needs. It expected approximately $154 million of pension contributions for the remainder of 2017.
- Cash dividends were $0.33 per share. Aon repurchased 1.1 million shares for approximately $125 million during the quarter.
Material developments, outlook and risks
- Business sale: The sale of the benefits administration and BPO business closed May 1, 2017, after quarter-end. The stated consideration was $4.3 billion cash, subject to customary adjustments, plus up to $500 million in deferred consideration and assumption of certain liabilities. Cash proceeds before taxes and after adjustments were $4.2 billion. Aon expected a second-quarter gain of approximately $500 million, net of taxes, and a non-cash $400 million impairment of the associated tradename. The divested business represented 19% of Aon’s 2016 gross revenue; realization of the deferred consideration and successful separation are not assured.
- Restructuring: Aon estimated cumulative costs of approximately $750 million through 2019, including $144 million incurred by March 31, and annualized savings of approximately $400 million by the end of 2019. The plan included 1,600–1,900 role eliminations; 1,065 had occurred by quarter-end. Costs and savings may differ from estimates.
- Brand transition: Beginning May 1, Aon planned a three-year transition to a unified brand, with additional tradename amortization estimated at $137 million in 2017, $206 million in each of 2018 and 2019, and $68 million in 2020.
- Tax and unusual items: The continuing-operations effective tax rate was 0.1%, versus 15.9%, reflecting geographic income mix, restructuring and tradename impacts, and a $29 million tax benefit from adoption of share-based compensation guidance. The filing says adoption had no effect on total results, but changed tax presentation.
- Contingencies: Management estimated reasonably possible losses on specified legal matters, beyond amounts accrued, at $0–$200 million, exclusive of insurance. Matters include significant brokerage and pension-related claims. A UK FCA investigation into suspected competition-law breaches in aviation and aerospace broking was disclosed; Aon could not estimate its impact and cannot assure the outcome will not materially affect results or liquidity.
- Other outlook items: A non-cash settlement charge was expected in Q4 2017 from a voluntary lump-sum option for certain UK pension participants. Management cautioned that quarterly results are not necessarily indicative of full-year results. Key risks include foreign exchange and interest rates, pension funding, litigation and regulation, execution of the restructuring and sale separation, and retaining clients and staff.
Most important facts for investors to verify
- Whether the sale’s final adjustments and up-to-$500 million deferred consideration are realized, and whether the expected gain and tradename impairment match subsequent reported amounts.
- Whether Aon delivers the restructuring’s estimated $400 million annualized savings by 2019 without materially exceeding the $750 million estimated cost.
- Underlying organic growth and margin trends, particularly whether adjusted performance translates into sustained GAAP earnings and cash flow.
- Debt, liquidity and pension funding after the sale proceeds, capital returns and planned contributions; fiduciary assets are not available for general corporate use.
- Developments in the disclosed litigation and FCA investigation, including any changes to loss estimates, insurance coverage or potential penalties.