Aon plc — Q1 2016 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three months ended March 31, 2016, compared with the same period in 2015. Aon operates through Risk Solutions, an insurance and reinsurance brokerage and advisory business, and HR Solutions, which provides benefits, retirement, talent and related services.
Financial performance
| Metric (millions, except per-share data and percentages) | Q1 2016 | Q1 2015 |
|---|---|---|
| Total revenue | $2,792 | $2,847 |
| Operating income | $450 | $441 |
| Operating margin, GAAP | 16.1% | 15.5% |
| Net income attributable to Aon shareholders | $315 | $328 |
| Diluted EPS | $1.15 | $1.14 |
| Operating cash flow | $273 | $298 |
| Free cash flow, non-GAAP | $221 | $236 |
Commissions, fees and other revenue were $2,787 million, down 2%; organic revenue growth was 3%. Compensation and benefits were $1,649 million and other general expenses were $693 million. Adjusted operating margin, a non-GAAP measure, was 18.5% versus 18.3%; adjusted diluted EPS was $1.35 versus $1.37. The effective tax rate was 18.4%, compared with 19.1%.
Risk Solutions revenue was $1,872 million versus $1,895 million, with operating income of $429 million versus $412 million and GAAP operating margin of 22.9% versus 21.7%. HR Solutions revenue was $930 million versus $970 million; operating income was $67 million versus $76 million and margin was 7.2% versus 7.8%.
Liquidity, cash flow and debt
Cash and cash equivalents plus short-term investments totaled $1,052 million at March 31, up from $740 million at December 31, 2015; $95 million was restricted. Fiduciary assets of $9,776 million were matched by fiduciary liabilities and are generally unavailable for corporate use. Reported working capital was $1,248 million.
Total debt was $6,597 million, up $897 million from year-end, primarily reflecting the issuance of $750 million of 3.875% senior notes due December 2025 and increased commercial paper. The rolling 12-month debt-to-EBITDA ratio was 2.7, versus 2.2 a year earlier. Aon reported no borrowings under its $1.3 billion committed credit facilities and compliance with their covenants. Management said operating cash flow, available facilities and capital-market access should meet foreseeable liquidity needs.
Operating cash flow fell $25 million year over year, principally due to the timing of cash tax payments; management expected that timing to benefit Q2. Investing activities used $199 million, while financing activities used $4 million. Aon paid $82 million in dividends and repurchased 7.7 million shares for approximately $750 million during the quarter; $65 million of those purchases settled in April.
Material changes and management commentary
- Revenue declined 2%, mainly from a 3% unfavorable foreign-exchange impact and a 2% decrease in commissions and fees related to net divestitures, partly offset by 3% organic growth.
- Operating expenses fell 3%, reflecting currency effects, divestitures and lower intangible amortization, partly offset by organic-growth spending and $20 million of HR Solutions transaction and portfolio-repositioning costs.
- Management cited currency headwinds, continental European economic weakness, a negative market impact in Reinsurance, and price compression in benefits administration. It also described global insurance pricing as modestly negative and the market as soft.
- Other income was $18 million, versus $42 million, including $35 million in net business-disposal gains and a $17 million foreign-currency remeasurement loss; the prior-year quarter included $19 million in disposal gains and $24 million in currency gains.
- In March, Aon entered an insurance contract covering assets in selected U.K. pension schemes. It reduced prepaid pension assets and increased accumulated other comprehensive loss by $267 million. Total other comprehensive loss was $287 million, largely reflecting post-retirement obligations and currency translation.
Outlook, risks and contingencies
The filing provides no specific full-year revenue or earnings guidance. Aon expected 2016 operating cash generation to support debt service, capital spending, pension contributions, restructuring, share repurchases and dividends. It expected approximately $113 million in additional pension contributions for the remainder of 2016.
Risks discussed include economic and political conditions, competition and soft insurance markets, foreign-exchange and interest-rate movements, pension funding, debt and credit ratings, regulation, technology and cybersecurity, and the ability to retain staff and integrate acquisitions. Aon reported that possible additional losses for described legal matters, above amounts accrued, were estimated at $0 to $300 million, exclusive of insurance. Significant matters include the Opry Mills insurance dispute, the Philips pension-advice claim, the IRU appeal, a potential Gleeds pension-fund claim and the Lyttelton Port claim. Management believed the matters would not materially adversely affect consolidated financial position, while acknowledging that unfavorable outcomes could materially affect results or cash flows in a particular period.
Important facts for investors to verify
- Whether organic growth and margin trends persist, particularly the divergence between Risk Solutions and HR Solutions.
- How much of the cash and investment balance is available for corporate use, given restricted and fiduciary funds, and whether Q2 cash-tax timing reverses as expected.
- Debt growth, the 2.7 debt-to-EBITDA ratio, refinancing needs and continued compliance with credit-facility covenants.
- Share-repurchase pace and funding relative to cash generation, dividends and pension obligations.
- Developments in the disclosed legal matters and whether estimated potential losses or insurance recoveries change.