Aon plc — FY2016 Form 10-K
Reporting period: Year ended December 31, 2016. Aon is a global risk brokerage and consulting and human-resources services provider operating in more than 120 countries. Risk Solutions contributed about 64% of 2016 revenue and HR Solutions about 36%.
Financial performance
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Total revenue | $11.627 billion | $11.682 billion | Down $55 million |
| Operating income | $1.906 billion | $1.848 billion | Up 3% |
| Operating margin | 16.4% | 15.8% | Up 0.6 percentage points |
| Net income attributable to Aon shareholders | $1.396 billion | $1.385 billion | Up 1% |
| Diluted EPS | $5.16 | $4.88 | Up 6% |
| Adjusted diluted EPS | $6.59 | $6.18 | Up 7% |
| Cash from operating activities | $2.326 billion | $2.009 billion | Up 16% |
| Free cash flow | $2.104 billion | $1.719 billion | Up 22% |
Revenue was pressured by a 2% unfavorable foreign-exchange effect and a 2% decrease from acquisitions, net of divestitures; organic growth was 3% in each segment. Adjusted operating margin was 20.8%, versus 20.0% in 2015. Adjusted measures are non-GAAP and exclude specified items.
Segments
- Risk Solutions: Revenue $7.485 billion, up from $7.426 billion; operating income $1.587 billion, versus $1.506 billion; reported margin 21.2%, versus 20.3%. Organic revenue growth was 3%. Management cited strength in retail brokerage, partly offset by soft insurance pricing and weakness in reinsurance markets.
- HR Solutions: Revenue $4.183 billion, down from $4.303 billion; operating income $557 million, versus $536 million; reported margin 13.3%, versus 12.5%. Organic growth was 3%, offset in reported revenue by currency and net divestitures. Healthcare exchanges and cloud-based HR BPO contributed to growth; benefits administration declined modestly.
Liquidity, debt and capital allocation
- Cash and short-term investments were $721 million, down $19 million. Working capital was $651 million, up $171 million. Aon reported approximately $1.3 billion of committed credit facilities, undrawn at year-end; fiduciary funds are segregated and unavailable for general corporate use.
- Total debt was $6.205 billion, up from $5.700 billion; debt-to-EBITDA was 2.5x, versus 2.3x. Aon issued $750 million of 3.875% senior notes due 2025 and repaid $500 million of notes that matured. Debt ratings had stable outlooks.
- Capital returned included $1.3 billion of share repurchases and $345 million of dividends. Dividends paid per share were $1.29, compared with $1.15 in 2015.
- Net assets/equity were $5.532 billion, down from $6.059 billion, mainly reflecting repurchases, dividends and foreign-currency translation losses.
Material developments, outlook and risks
- On February 9, 2017, Aon agreed to sell its Benefits Administration and BPO business for $4.3 billion cash at closing, subject to customary adjustments, plus up to $500 million in contingent consideration. Closing was expected by the end of Q2 2017, subject to conditions. The business represented 19% of 2016 gross revenue.
- Aon expected a cost-reduction program related to the sale, with a future charge. Management said the program was intended to reduce stranded costs and support the objective of being accretive to analysts’ consensus adjusted EPS of $7.97 in 2018; this is not presented as formal company EPS guidance. The Board authorized an additional $5 billion for repurchases in February 2017.
- Significant unusual expense included $220 million of non-cash pension-settlement charges. Other income fell to $36 million from $100 million, including lower gains on business disposals. Cash pension contributions were $123 million in 2016; Aon expected approximately $185 million in 2017.
- Key exposures include soft insurance pricing and premium-driven commissions, economic weakness, foreign-exchange and interest-rate movements, pension funding needs, leverage and refinancing, regulatory and tax changes, cyber and data-security incidents, and professional-liability claims. Aon estimated reasonably possible legal losses beyond recorded accruals of $0 to $200 million, excluding insurance coverage; outcomes remain uncertain.
- Aon identified errors in revenue recognition for certain brokerage fee arrangements and revised historical financial statements. It concluded the errors were immaterial to prior annual periods; the annual 2016 cash flow was unchanged. The revisions shifted quarterly results, including a $61 million reduction to Q4 2016 revenue and a $50 million reduction to Q4 net income. Management and the auditor reported effective internal control over financial reporting; the financial-statement audit opinion was unqualified.
Important facts for investors to verify
- Whether the HR administration/BPO sale closed on expected terms and timing, the realized proceeds, and any contingent payment eligibility.
- The costs, timing and actual savings from the related restructuring, including effects of stranded costs and post-sale earnings.
- Whether organic growth and margins persist amid soft insurance markets, currency pressure and HR pricing competition.
- Debt maturities, covenant headroom, credit ratings and the capacity to sustain repurchases and dividends while funding pension obligations.
- Any developments in the disclosed legal matters, particularly the stated loss range and claims for which Aon has depleted or limited insurance coverage.
- The effects of the brokerage-fee accounting revisions and adoption of the new revenue-recognition standard on reported revenue timing and comparability.