Aon plc — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparisons are with Q1 2014 unless noted. Aon operates through Risk Solutions (insurance and reinsurance brokerage and advisory services) and HR Solutions (benefits, retirement, talent and related services). Amounts are in U.S. dollars.
Financial results and liquidity
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Total revenue | $2.847 billion | $2.947 billion |
| Operating income / margin | $441 million / 15.5% | $469 million / 15.9% |
| Income before taxes | $421 million | $414 million |
| Net income attributable to Aon shareholders | $328 million | $325 million |
| Diluted EPS | $1.14 | $1.06 |
| Adjusted diluted EPS (non-GAAP) | $1.37 | $1.28 |
| Cash from operating activities | $136 million | $(11) million |
| Free cash flow (non-GAAP) | $74 million | $(66) million |
- Revenue fell 3%, primarily reflecting a 7% unfavorable currency impact, partly offset by 3% organic growth and 1% contribution from acquisitions. Reported operating expenses declined 3% to $2.406 billion.
- Reported operating margin fell 0.4 percentage points. Adjusted operating margin was 18.3%, versus 18.8%. Segment margins: Risk Solutions 21.7% (22.3% prior year); HR Solutions 7.8% (6.9%).
- Risk Solutions revenue was $1.895 billion, down 5%; organic growth was 3%. Retail brokerage grew organically 4%, while reinsurance organic revenue declined 1%. HR Solutions revenue was $970 million, up 1%, with 4% organic growth.
- At March 31, cash and cash equivalents plus short-term investments were $721 million, including $127 million restricted. Total debt was approximately $5.7 billion, up $94 million from year-end; commercial paper outstanding was $355 million. Working capital was $883 million.
- Committed credit facilities totaled approximately $1.3 billion and were fully available; Aon reported covenant compliance and no facility borrowings. Total equity was $6.431 billion, down $200 million from December 31, 2014.
Material changes and unusual items
- Operating cash flow improved by $147 million year over year, attributed principally to lower pension contributions, working-capital improvements and lower cash restructuring payments. Capital expenditures were $62 million.
- Other income was $42 million, versus $1 million, including a $24 million foreign-currency remeasurement gain and $19 million net gain on business disposals. Interest expense increased $7 million to $65 million, primarily due to higher debt outstanding.
- Foreign-currency translation reduced other comprehensive income by $322 million and contributed to the increase in accumulated other comprehensive loss. Management estimated currency movements reduced adjusted diluted EPS by $0.15 on a comparative translation basis.
- Aon repurchased 2.5 million shares for $250 million at an average $100.15 per share, versus $600 million of repurchases in Q1 2014. Quarterly dividends paid were $71 million; cash dividends per share were $0.25, compared with $0.18.
- On February 2, 2015, Aon replaced its expiring European credit facility with a $900 million multi-currency facility due in 2020.
Outlook, commentary and risks
- Aon provided no specific full-year earnings or revenue guidance in this filing. Management said operating cash flow and available credit facilities should meet foreseeable liquidity needs, and expected 2015 operating cash generation to support debt service, capital expenditures, restructuring, repurchases and dividends.
- Management expected approximately $163 million of pension contributions for the remainder of 2015. Total anticipated 2015 contributions were approximately $220 million across U.K., U.S. and other significant international plans.
- Management cited foreign-exchange headwinds, economic weakness in continental Europe, a soft insurance pricing environment and adverse reinsurance market conditions. HR Solutions also faced price compression in benefits administration. Management noted spending to support future growth.
- Legal matters include Northrop Grumman claims seeking approximately $340 million plus potentially multiple punitive damages; Philips claims of approximately £189 million; and AXA arbitration claims of approximately €183 million. Aon stated it intended to defend these matters. Across the described matters, reasonably possible losses above accrued amounts were estimated at $0 to $0.6 billion, excluding insurance; actual outcomes could materially affect a particular period.
- Uncertain tax-position liabilities were $186 million, including interest and penalties and net of tax attributes; $133 million would affect the effective tax rate if recognized. Aon reported a 19.1% effective tax rate, slightly above 18.9% a year earlier.
- Other stated risks include currency and interest-rate movements, pension funding, debt ratings and refinancing access, regulatory requirements, litigation and errors-and-omissions claims, cybersecurity and technology risks, and the ability to attract and retain staff.
Important facts for investors to verify
- Whether organic growth can offset currency effects and weakness in reinsurance and European markets, and whether margin performance improves.
- How much of the earnings increase reflects operating performance versus the $42 million of other income, including disposal and remeasurement gains.
- Debt maturity and commercial-paper exposure, available liquidity after restricted cash, and the effect of share repurchases and dividends on leverage.
- Developments, insurance coverage and accruals for the disclosed litigation matters, particularly the stated potential loss range and significant individual claims.
- Progress against expected pension contributions and the exposure of pension liabilities and results to market and currency changes.