Aon plc — FY 2013 Form 10-K Summary
Business context and reporting period
For the fiscal year ended December 31, 2013; amounts are in U.S. dollars unless noted. Aon is a global risk, insurance and reinsurance brokerage and human-resources consulting and outsourcing firm, operating in more than 120 countries. Risk Solutions generated about 66% of 2013 revenue and HR Solutions about 34%. The filing is an annual report, with fourth-quarter results also disclosed.
Financial performance and liquidity
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Total revenue | $11.815 billion | $11.514 billion |
| Operating income / margin | $1.671 billion / 14.1% | $1.596 billion / 13.9% |
| Net income attributable to Aon shareholders | $1.113 billion | $993 million |
| Diluted GAAP earnings per share | $3.53 | $2.99 |
| Cash from operating activities | $1.633 billion | $1.419 billion |
| Free cash flow (non-GAAP) | $1.404 billion | $1.150 billion |
- Organic revenue growth was 3% in each segment. Risk Solutions revenue was $7.789 billion, with a 19.8% reported operating margin; HR Solutions revenue was $4.057 billion, with a 7.8% reported operating margin.
- Adjusted diluted EPS, a non-GAAP measure, was $4.89, up 16%; adjusted operating margin was 19.0%, compared with 18.6% in 2012. These adjusted measures exclude specified costs and unusual items.
- Fourth-quarter revenue was $3.209 billion versus $3.115 billion in Q4 2012; operating income was $515 million versus $461 million; net income attributable to Aon shareholders was $355 million versus $305 million; diluted EPS was $1.14 versus $0.93.
- Cash and short-term investments totaled $1.0 billion at year-end, of which $214 million was restricted. Working capital was $919 million. Fiduciary assets of $11.871 billion had matching liabilities and are not available for general corporate use.
- Total debt was $4.389 billion, including $703 million classified as short-term/current and $3.686 billion long-term. Debt was 35.0% of total capital attributable to Aon shareholders. The $400 million U.S. and €650 million Euro credit facilities were undrawn; Aon reported covenant compliance.
- Share repurchases totaled $1.1 billion and dividends paid were $212 million in 2013. The dividend paid per share rose to $0.68 from $0.62.
Material changes versus the prior comparable period
- Revenue rose 3%, driven by 3% organic growth in both segments; acquisitions net of divestitures contributed about 1%, while currency translation reduced reported growth by about 1%.
- Reported operating margin increased 0.2 percentage points. Risk Solutions margin rose from 19.6% to 19.8%, and HR Solutions from 7.4% to 7.8%.
- Operating cash flow increased 15%, supported by higher earnings, working-capital performance and lower pension contributions; free cash flow rose 22%, including lower capital expenditure.
- Fiduciary investment income fell to $28 million from $38 million, reflecting low short-term interest rates. Interest expense declined to $210 million from $228 million.
- Year-end cash and short-term investments increased by $363 million to $1.0 billion. Total debt increased by $224 million to $4.389 billion.
Outlook, management commentary, risks and unusual items
- Management expected $402 million in annual savings in 2014 from the Hewitt-related restructuring plan, including $99 million in Risk Solutions and $303 million in HR Solutions; realization was not assured. The plan closed in December 2013 after cumulative costs of approximately $429 million and about 2,960 job eliminations.
- Aon expected approximately $385 million in pension contributions and $92 million in restructuring cash payments in 2014. It stated operating cash flow and available credit facilities should meet foreseeable liquidity needs. No specific revenue or EPS guidance was provided.
- Results faced weak continental European economic conditions, a still-soft insurance market, lower fiduciary investment income, HR benefits-administration price compression and competitive pressure. Management cited growth in Latin America, Asia, emerging markets, U.S. retail and healthcare exchanges.
- Operating expenses included $174 million of restructuring charges and $20 million of legacy claims-handling charges. A $43.5 million one-time legal settlement favorably affected expenses and operating cash flow. Other income of $68 million included investment gains, equity earnings, foreign-exchange gains and business-disposal gains, partly offset by derivative losses.
- Key risks include economic and premium-rate weakness, competition and pricing, foreign exchange and interest-rate movements, pension funding, regulatory and tax changes, cybersecurity and data privacy, fiduciary handling of client funds, and errors-and-omissions claims. Aon disclosed several significant pending claims, including claims with stated demands of $200 million and $125 million; outcomes and potential losses could not be estimated. Management said the matters were not expected to materially affect consolidated financial position based on information then available, but acknowledged an adverse resolution could affect a particular period’s results or cash flows.
- The IRS entered a closing agreement in 2013 confirming that the 2012 Redomestication did not make Aon a U.S. domestic corporation for federal tax purposes under then-current law; future legislative or regulatory changes could still affect tax treatment.
Important facts for investors to verify
- Reconcile adjusted EPS, adjusted margins and free cash flow to GAAP results, and assess the contribution of repurchases and the $43.5 million settlement to reported growth.
- Track whether the expected 2014 restructuring savings were achieved and whether further costs or reinvestment offset them.
- Review the debt maturity schedule, refinancing needs and liquidity available after restricted cash, pension funding and shareholder distributions.
- Monitor pension assumptions, funded status and contributions, as well as the sensitivity of obligations to discount rates and asset returns.
- Follow the status and reserve treatment of disclosed legal claims, tax exposures and regulatory matters; the filing does not provide clear estimable outcomes for several claims.
The auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective at year-end.