Aon plc — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013. Comparisons are with Q1 2012 unless otherwise noted. Amounts are in U.S. dollars; financial figures are in millions except per-share data. Aon provides Risk Solutions brokerage/advisory services and HR Solutions consulting and outsourcing services.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Total revenue | $2,915 | $2,841 | Up 3% |
| Operating income | $410 | $402 | Up 2% |
| Operating margin | 14.1% | 14.1% | Flat |
| Income before taxes | $368 | $346 | Up 6% |
| Net income attributable to Aon shareholders | $261 | $238 | Up 10% |
| Diluted EPS | $0.82 | $0.71 | Up 15% |
| Adjusted diluted EPS (non-GAAP) | $1.11 | $0.98 | Up 13% |
| Cash from operations | $54 | $(15) | Improved $69 |
| Free cash flow (non-GAAP) | $(6) | $(86) | Improved $80 |
Commissions, fees and other revenue rose 3% to $2,908; fiduciary investment income fell to $7 from $12, reflecting lower average interest rates. The effective tax rate was 26.1%, versus 28.0%. Adjusted measures exclude specified restructuring, intangible amortization and headquarters-relocation items and are not GAAP measures.
Segments and margins
- Risk Solutions: Revenue $1,971, up 3%; organic growth 3%. Operating income increased to $403 from $366, and GAAP operating margin improved to 20.4% from 19.2%. Management cited growth in the Americas, Asia, New Zealand and emerging markets, plus renewal-book performance.
- HR Solutions: Revenue $954, up 1%; organic growth 1%. Operating income fell to $51 from $73, and GAAP operating margin declined to 5.3% from 7.7%. Management cited legacy litigation costs, expense timing, unfavorable revenue mix and investment in long-term growth.
Adjusted operating margin was 18.5% for Aon overall (18.6% prior year), 22.5% for Risk Solutions (21.4%), and 14.3% for HR Solutions (16.5%).
Financial position and liquidity
- At March 31, cash and cash equivalents were $408 and short-term investments were $352, totaling $760, up $123 from year-end. Of this balance, $270 was restricted, including $117 of required U.K. operating funds and $153 held as collateral. Client fiduciary assets are matched by fiduciary liabilities and are not available for corporate use.
- Total debt was approximately $4.6 billion, up $407 from December 31; short-term debt and current maturities were $802 and long-term debt was $3,770. Debt to total capital attributable to Aon shareholders was 37.6%, versus 34.9% at year-end. Commercial paper outstanding was $383 at quarter-end.
- Working capital was approximately $1.0 billion, down $36 from year-end. Total equity was $7,633, down $172; the decline reflected foreign-currency translation losses, repurchases and dividends, partly offset by net income.
- Operating cash flow included $196 of pension contributions. Capital expenditures were $60. Aon repurchased 5.0 million shares for $300 and paid $50 in dividends.
- Aon reported approximately $1.2 billion of committed credit facilities, with all but $30 available at quarter-end, and stated it was in compliance with facility covenants. Management believed operating cash flow and available facilities would meet liquidity needs.
Material changes, outlook and management commentary
- Revenue growth was 3%, including 2% organic growth and a 1% contribution from acquisitions net of divestitures. Organic growth slowed from 4% in Q1 2012. Foreign exchange had a favorable impact of about $0.02 on adjusted diluted EPS.
- Management said economic weakness in continental Europe, a soft insurance market, price compression in benefits administration and reduced discretionary demand for international retirement consulting remained headwinds. Pricing showed signs of stabilization and improvement in retail brokerage.
- For 2013, management estimated an approximately 26% tax rate; expected debt to remain near historical/current levels and commercial-paper usage to continue at a level similar to Q1; and expected operating cash flow to be sufficient for debt service, restructuring, capital expenditures, repurchases and dividends.
- The Hewitt restructuring plan had eliminated approximately 2,180 jobs and incurred $281 of costs through March 31, against estimated total costs of $325. Management expected approximately $280 of annual savings from the plan in 2013 and approximately $355 of annual savings including other integration initiatives; savings and costs could vary. Approximately $69 of restructuring savings were realized in Q1.
- Management expected to contribute about $348 to pension plans during the remainder of 2013. It also anticipated $1 of additional 2013 headquarters-relocation costs.
Risks, contingencies and unusual items
- Aon disclosed significant unresolved professional-liability matters, including claims associated with Northrop Grumman, Opry Mills, Philips UK pension advice and a $125 claim by Mazeikiu Nafta. Outcomes and potential losses could not be estimated. Management did not expect the matters, based on information then available, to materially affect consolidated financial position, but said an unfavorable resolution could materially affect a particular period’s results or cash flows.
- Other exposures included up to $71 of contingent client premium-payment guarantees, $45 of potential limited-partnership funding commitments and $71 of letters of credit. Aon noted some historical claims are self-insured or materially self-insured because certain insurance coverage has been exhausted or depleted.
- Foreign-currency movements reduced other comprehensive income by $174 in Q1; total other comprehensive loss was $165. Other income of $9 included a $24 currency remeasurement gain and an $18 derivative loss.
- Aon reported a U.K. subsidiary’s handling of approximately $20,000 in returned premium and commission related to an Iranian Offshore Oil Company risk, under an OFAC wind-down license, and said approximately $30,000 of an unpaid balance was believed related to that risk. The filing identifies this as a reportable matter under the Iran Threat Reduction and Syria Human Rights Act.
- Other risks identified include economic and market conditions, foreign exchange and interest-rate changes, pension funding, credit-rating downgrades, litigation and regulatory inquiries, client and talent retention, integration and restructuring execution, and operational or data-security disruption.
Important facts for investors to verify
- Whether organic growth and the improving Risk Solutions margin can offset weak HR Solutions profitability and the disclosed pricing and demand pressures.
- Whether 2013 restructuring and integration savings, estimated at about $355 annually, are achieved and at what cost and timing.
- Cash generation after pension contributions, capital spending, repurchases and dividends; note Q1 free cash flow remained negative at $6.
- Debt, commercial-paper usage, refinancing access, covenant headroom and credit ratings, particularly as debt rose to approximately $4.6 billion.
- Developments in the disclosed litigation, self-insured exposures, pension obligations and the reportable Iran-related transaction.