Aon plc — Q2 2017 Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2017. Aon is a global professional services firm focused on risk, retirement and health. Following the May 1 sale of its benefits administration and business process outsourcing business, Aon reported continuing operations as one segment across five revenue lines.
Financial performance and position
| Metric | Q2 2017 | Six months 2017 |
|---|---|---|
| Continuing-operations revenue | $2.368 billion, up 4% year over year; organic growth 3% | $4.749 billion, up 4%; organic growth 4% |
| Operating income (loss), GAAP | $(118) million; operating margin (5.0%), versus $387 million and 17.0% | $225 million; operating margin 4.7%, versus $807 million and 17.7% |
| Adjusted operating margin (non-GAAP) | 22.4%, versus 21.3% | 22.3%, versus 20.7% |
| Continuing-operations net income (loss) | $(43) million, versus $273 million | $222 million, versus $585 million |
| Net income attributable to Aon shareholders | $769 million; diluted EPS $2.93, including $821 million from discontinued operations | $1.060 billion; diluted EPS $3.99, including $861 million from discontinued operations |
| Adjusted diluted EPS from continuing operations (non-GAAP) | $1.45, versus $1.28 | $2.90, versus $2.50 |
- Revenue growth reflected organic growth and acquisitions, partly offset by currency. Q2 organic growth by line: Commercial Risk 2%, Reinsurance 6%, Retirement 1%, Health 5%, and Data & Analytic Services 4%.
- GAAP operating results were significantly affected by a $380 million non-cash impairment of divested-business tradenames, $155 million of restructuring costs, $35 million of accelerated tradename amortization, and $34 million of regulatory and compliance costs in Q2. Adjusted measures exclude specified items and are non-GAAP.
- The divested business generated $171 million of Q2 revenue before the May 1 closing, versus $518 million in the prior-year quarter; its results are presented as discontinued operations for all periods shown.
- Six-month cash provided by operating activities was $500 million, including $436 million from continuing operations; continuing-operations free cash flow (non-GAAP) was $354 million, down 28% from $489 million. Consolidated operating cash flow was $764 million in the prior-year period.
- At June 30, cash and cash equivalents were $684 million and short-term investments were $2.746 billion. Total debt was approximately $5.923 billion, down $282 million from year-end; debt-to-EBITDA was 2.6x versus 2.9x. The $900 million committed credit facility was undrawn, and Aon reported covenant compliance.
- Total assets were $27.189 billion and total equity was $5.553 billion. Reported working capital was $2.227 billion; fiduciary assets and liabilities were each $9.582 billion and are not available for general corporate use.
- Aon repurchased approximately $1.2 billion of shares and paid $182 million of dividends in the first half. Cash dividends per share were $0.36 in Q2, versus $0.33 a year earlier.
Material changes, outlook and risks
- Divestiture: Aon sold the business to a Blackstone-affiliated buyer for $4.3 billion cash at closing, subject to customary adjustments, plus up to $500 million of deferred consideration and assumption of certain liabilities. Net cash proceeds before taxes were $4.2 billion. Aon recorded an after-tax gain of $798 million. The additional consideration is not assured.
- Restructuring: The plan is expected to run through 2019, eliminate an estimated 2,400–2,850 roles and cost approximately $750 million cumulatively. Aon had eliminated 1,785 positions and incurred $299 million of related costs through June 30. Management estimates annualized savings of about $400 million by the end of 2019; actual costs, timing and savings may differ.
- Cash flow and liquidity outlook: Management stated that expected operating cash flow, available credit and capital-market access should be sufficient for foreseeable liquidity needs, and expected 2017 operating cash generation to support debt service, capital expenditures, repurchases and dividends. The filing does not provide specific full-year revenue or EPS guidance.
- Tax and accounting items: Continuing-operations tax benefits were $143 million in both Q2 and the first half, producing unusual effective tax rates of 76.9% and (181.0%), respectively. The filing attributes the impact principally to the tradename impairment and the new share-based compensation accounting guidance; the latter contributed $19 million of Q2 and $48 million of first-half tax benefit.
- Contingencies: Aon disclosed litigation and regulatory matters, including an FCA competition investigation in aviation and aerospace broking and ongoing FCA interactions concerning Aon UK systems and controls. For described legal matters with estimable exposure, reasonably possible losses above accrued amounts were estimated at $0–$300 million, excluding insurance. Aon cautioned that unfavorable outcomes could materially affect a particular period.
- Other exposures: Guarantees associated with the divested business included maximum undiscounted potential payments of $108 million for leases and $401 million for client performance arrangements. The company also identified pension funding, foreign-exchange, interest-rate, regulatory, litigation, restructuring-execution and transaction-separation risks.
Important facts for investors to verify
- Whether the divestiture’s up-to-$500 million deferred consideration is earned and how continuing commercial and transition arrangements perform.
- Whether restructuring costs remain near the estimated $750 million and whether the targeted $400 million annualized savings materialize by 2019.
- Underlying operating trends and cash generation, distinguishing continuing operations and non-GAAP adjusted results from GAAP results and discontinued-operation sale gains.
- Developments in the FCA matters, material litigation and the potential range of unaccrued losses.
- Debt, liquidity and capital returns after the sale proceeds, share repurchases, pension funding and ongoing operating requirements.