Aon plc 2015 Form 10-K Summary
Business context and reporting period
For the fiscal year ended December 31, 2015, Aon was a global professional services firm focused on risk and human capital solutions, operating in more than 120 countries with approximately 68,790 employees. Risk Solutions provides insurance and reinsurance brokerage and risk consulting; HR Solutions provides human capital consulting and outsourcing. Risk Solutions represented about 64% of segment revenue and HR Solutions about 37%, before intersegment eliminations.
Financial performance and liquidity
| Metric | 2015 | 2014 |
|---|---|---|
| Total revenue | $11.682 billion | $12.045 billion |
| Operating income / margin | $1.848 billion / 15.8% | $1.966 billion / 16.3% |
| Net income attributable to Aon shareholders | $1.385 billion | $1.397 billion |
| Diluted GAAP EPS | $4.88 | $4.66 |
| Operating cash flow | $2.009 billion | $1.812 billion |
| Free cash flow (non-GAAP) | $1.719 billion | $1.556 billion |
| Cash and short-term investments | $740 million | $768 million |
| Total debt | $5.737 billion | $5.582 billion |
| Total debt / EBITDA | 2.3x | 2.1x |
- Organic revenue growth was 3% overall: 3% in Risk Solutions and 4% in HR Solutions. Reported revenue declined 3%, primarily reflecting a 6% unfavorable foreign-exchange impact.
- Risk Solutions revenue was $7.426 billion and operating margin was 20.3%, down from 21.0%. HR Solutions revenue was $4.303 billion and operating margin was 12.5%, up from 11.4%.
- Adjusted operating margin, a non-GAAP measure, was 20.0% versus 19.5%; adjusted diluted EPS was $6.18 versus $5.71. Adjusted results exclude specified items, including amortization and legacy litigation.
- Operating cash flow increased 11%; management attributed the increase to lower pension contributions, restructuring payments and cash taxes, and working-capital improvements, partly offset by litigation payments.
- Cash and short-term investments exclude fiduciary funds, which are not available for corporate use. The company also had $1.3 billion of committed credit facilities, with no borrowings at year-end. Working capital was $886 million, up from $809 million.
Material changes versus the prior year
- Foreign exchange and weak economic conditions in continental Europe weighed on reported revenue; the Risk Solutions reinsurance business also faced an unfavorable market impact. Global insurance pricing was described as modestly negative, with the market still considered soft.
- GAAP operating margin fell 0.5 percentage point. Legacy litigation expense rose to $176 million from $35 million, a significant contributor to the decline; currency effects also pressured results.
- Risk Solutions operating income declined 9% to $1.506 billion, while HR Solutions operating income increased 11% to $536 million.
- Shareholders’ equity declined to $6.163 billion from $6.631 billion, principally reflecting $1.6 billion of share repurchases, $323 million of dividends and a $289 million increase in accumulated other comprehensive loss.
- Aon repurchased 16.0 million shares for $1.6 billion, compared with 25.8 million shares for $2.3 billion in 2014. Dividends paid per share increased to $1.15 from $0.92.
Outlook, commentary, risks and unusual items
- No specific revenue or earnings guidance for 2016 is provided in the supplied filing text. Management said operating cash flow and available debt financing should meet foreseeable liquidity needs and planned uses.
- Aon expected to contribute approximately $150 million to pension plans in 2016, versus $194 million contributed to major plans in 2015. It estimated 2016 pension and post-retirement benefit cost for major plans would increase by $15 million to a benefit of approximately $54 million.
- Other income included $82 million of net gains on business disposals. The 2015 tax rate was 15.8%, compared with 18.9% in 2014; management cited geographic earnings mix and discrete items. The adjusted full-year tax rate was 17.9% after excluding the effect of second-quarter legacy litigation expenses.
- Notable litigation included a $150 million payment to settle Huntington Ingalls litigation in the second quarter. Aon disclosed a reasonably possible loss range of $0 to $0.3 billion, beyond amounts accrued and exclusive of insurance, for specified matters. Major claims include Philips pension-related allegations and Opry Mills litigation; Aon stated it intends to defend itself in ongoing matters.
- Principal risks include foreign-exchange movements, soft insurance markets and competitive pricing, pension funding and investment assumptions, debt and credit-rating exposure, extensive regulation, E&O claims, data security and privacy, and execution of outsourcing and technology investments. Aon noted past cybersecurity incidents but said they had not materially affected the business.
- At year-end, senior debt ratings were A- (S&P), BBB+ (Fitch) and Baa2 (Moody’s), each with a stable outlook. Aon reported compliance with credit-facility covenants and effective disclosure controls and internal control over financial reporting; the independent auditor issued unqualified opinions.
Important facts for investors to verify
- How much of future reported growth and earnings may remain exposed to currency movements, weak European conditions and soft insurance pricing.
- The nature, timing and potential financial impact of outstanding legal claims, including whether losses exceed amounts accrued or available insurance.
- Debt maturities, refinancing capacity and leverage trends, particularly as debt-to-EBITDA increased to 2.3x.
- Pension plan funded status, assumptions and actual contributions compared with the 2016 estimate.
- The quality and sustainability of cash generation and adjusted results, including the effects of litigation, disposal gains, share repurchases and other excluded items.