Aon plc — 2012 Form 10-K Summary
Business context and reporting period
Fiscal year ended December 31, 2012; the filing also reports fourth-quarter results. Aon is a global risk brokerage and consulting and human-resources services provider, operating in more than 120 countries through Risk Solutions and HR Solutions. On April 2, 2012, Aon completed its redomestication from Delaware to England and Wales and moved its headquarters to London.
Financial results and liquidity
| Metric | 2012 | 2011 |
|---|---|---|
| Total revenue | $11.514 billion | $11.287 billion |
| Operating income | $1.596 billion | $1.596 billion |
| GAAP operating margin | 13.9% | 14.1% |
| Income from continuing operations attributable to Aon shareholders | $994 million | $975 million |
| Diluted continuing-operations EPS | $2.99 | $2.86 |
| Cash from operating activities | $1.419 billion | $1.018 billion |
| Free cash flow (non-GAAP) | $1.150 billion | $777 million |
| Total debt | $4.165 billion | $4.492 billion |
Revenue rose 2%, with 4% organic growth partly offset by a 2% unfavorable currency impact. Adjusted operating margin (non-GAAP) was 18.6%, versus 19.0%; adjusted diluted EPS was $4.21, up 4%. Capital expenditures were $269 million. Year-end cash and short-term investments totaled $637 million, down $420 million; working capital was $1.0 billion. Aon had approximately $1.26 billion of committed credit facilities available and no borrowings under them. Fiduciary funds are segregated and unavailable for general corporate use.
| Segment | Revenue | Operating income | GAAP margin |
|---|---|---|---|
| Risk Solutions | $7.632 billion, up 1% | $1.493 billion, up 6% | 19.6%, versus 18.7% |
| HR Solutions | $3.925 billion, up 4% | $289 million, down 14% | 7.4%, versus 8.9% |
Fourth-quarter 2012 revenue was $3.115 billion versus $2.994 billion; continuing-operations income was $307 million versus $280 million, and diluted continuing-operations EPS was $0.93 versus $0.82.
Material changes versus the prior comparable period
- Organic revenue growth improved to 4% from 2%. Risk Solutions benefited from renewal-book management, emerging-market and treaty growth; HR Solutions grew in consulting and outsourcing, partly offset by a modest decline in benefits administration.
- GAAP operating income was unchanged despite higher revenue. Costs included $61 million of additional intangible amortization and higher headquarters-relocation costs; restructuring savings and lower Hewitt integration costs partly offset these increases.
- Risk Solutions margin improved, while HR Solutions margin declined amid growth investments, higher amortization and restructuring costs, and benefits-administration pricing pressure.
- Operating cash flow increased 28% and free cash flow increased 48%. Share repurchases totaled $1.1 billion; debt declined by $327 million.
Outlook, management commentary, risks and unusual items
- Management expected insurance-market pricing stabilization and gradual improvement to continue into 2013, while describing conditions as still a soft market. Headwinds included weak continental European activity, low short-term interest rates, HR benefits-administration price compression and competition.
- Aon expected approximately $355 million of annual cost savings in 2013, including $280 million from the Aon Hewitt restructuring plan. The plan’s estimated cumulative cost was $325 million; $255 million had been recognized by year-end, with more than 1,900 of approximately 2,000 planned positions eliminated.
- Expected 2013 pension contributions were approximately $548 million, and restructuring cash payments were expected to be $94 million. Management estimated an underlying 2013 tax rate of approximately 26%; this is not earnings guidance.
- The company cited substantial pension obligations and sensitivity to discount rates, investment returns, currencies and mortality assumptions. Lower discount rates increased reported pension obligations; 2012 pension contributions were $638 million.
- Redomestication benefits and tax treatment remain uncertain. Aon warned that U.S. authorities could challenge its non-U.S. tax status, and U.K. tax interpretation or legislative changes could affect liabilities and anticipated tax benefits. Headquarters-relocation costs were $26 million in 2012, with a further $4 million expected through 2013.
- Other risks include economic and insurance-market cycles, competition, foreign exchange, regulation, cybersecurity and privacy, client-fund handling, integration and restructuring execution, and litigation/E&O claims. Disclosed matters include claims involving Northrop Grumman and Opry Mills with outcomes not estimable, and a $125 million claim by Mazeikiu Nafta; management said the ultimate outcomes of matters generally could not be ascertained.
- A U.K. subsidiary continued to hold approximately $600,000 in reinsurance claim funds connected to Mahan Air; Aon reported no 2012 revenue or net income from the matter. Superstorm Sandy disrupted the company’s lower Manhattan office, which reopened January 7, 2013; management said continuity measures supported critical operations.
The auditor issued an unqualified opinion on the financial statements and internal controls; management also concluded disclosure controls and internal control over financial reporting were effective as of year-end.
Important facts for investors to verify
- Reconcile non-GAAP organic growth, adjusted margins, adjusted EPS and free cash flow to GAAP measures and assess the exclusions.
- Track whether the expected $355 million of 2013 savings are achieved and whether the restructuring’s remaining costs and cash payments stay within estimates.
- Monitor the expected reversal in 2013 of approximately $350 million of elevated unbilled and accounts receivable associated with the HR financial-systems upgrade.
- Review pension funding needs, assumptions and discount-rate sensitivity, alongside the planned $548 million 2013 contribution.
- Assess redomestication-related tax exposure and the progress and possible financial impact of material litigation and E&O claims.