Aon plc — Form 10-Q Summary
Business context and reporting period
Quarterly report for the period ended September 30, 2014; filed October 31, 2014. Aon operates through Risk Solutions, an insurance and reinsurance brokerage and advisory business, and HR Solutions, which provides benefits, consulting and outsourcing services. Financial results are unaudited and presented under U.S. GAAP.
Financial performance
| Metric | Q3 2014 | Q3 2013 | First 9 months 2014 | First 9 months 2013 |
|---|---|---|---|---|
| Total revenue | $2.880bn | $2.794bn | $8.746bn | $8.606bn |
| Operating income | $417m | $364m | $1.331bn | $1.156bn |
| Operating margin | 14.5% | 13.0% | 15.2% | 13.4% |
| Income before tax | $390m | $353m | $1.184bn | $1.063bn |
| Net income attributable to Aon shareholders | $309m | $256m | $938m | $758m |
| Diluted EPS | $1.04 | $0.82 | $3.11 | $2.39 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $883m | $984m |
| Free cash flow (non-GAAP) | Not stated for quarter | Not stated for quarter | $704m | $810m |
Q3 revenue rose 3%; nine-month revenue rose 2%. Organic revenue growth, a non-GAAP measure, was 3% in Q3 and 2% year to date, versus 3% in each comparable 2013 period. The effective tax rate declined to 19.1% from 25.1% in Q3 and to 18.5% from 25.9% year to date; management attributed the lower 2014 rates principally to the geographic distribution of income, partly offset by discrete items.
By segment, Q3 revenue was $1.836bn for Risk Solutions and $1.057bn for HR Solutions. Their Q3 operating margins were 18.7% and 10.7%, respectively, compared with 18.3% and 7.6% a year earlier. Nine-month segment margins were 20.9% for Risk Solutions and 8.3% for HR Solutions, versus 19.6% and 5.6%. HR Solutions growth reflected consulting and benefits administration; Risk Solutions retail brokerage gains were partly offset by weaker reinsurance revenue.
Balance sheet, cash flow and capital
At September 30, 2014, cash and cash equivalents were $382m and short-term investments were $217m. Of the combined $599m, $144m was restricted. Working capital was $899m, down $20m from year-end 2013. Total assets were $28.827bn, total liabilities $21.555bn and total equity $7.272bn, compared with $30.251bn, $22.056bn and $8.195bn, respectively, at December 31, 2013.
Total debt was approximately $5.5bn, up about $1.1bn from year-end; debt represented 43.3% of total capital attributable to Aon shareholders, versus 35.0%. Long-term debt carrying value was $4.840bn, with a disclosed fair value of $5.190bn. The company had $50m of commercial paper outstanding and $660m of short-term debt and current maturities, including $600m of notes due September 2015. It had approximately $1.2bn of committed credit facilities available and no borrowings under the facilities; management reported compliance with debt covenants.
Nine-month cash used in investing was $262m, including $464m for acquisitions and $179m in capital expenditures. Cash used in financing was $703m, including $1.750bn of share repurchases and $201m of shareholder dividends, partly offset by net debt issuance of approximately $1.182bn. Cash declined $95m during the period. Aon repurchased 20.4m shares for $1.8bn in the first nine months; $1.1bn remained authorized. Dividends paid per share increased to $0.68 from $0.51 for the comparable period.
Material changes, outlook and risks
- Operating margin and earnings improved year over year, supported by organic growth, expense discipline, restructuring savings and lower intangible amortization. Q3 adjusted diluted EPS, a non-GAAP measure, was $1.29 versus $1.13; year-to-date adjusted diluted EPS was $3.82 versus $3.35.
- Management cited foreign-exchange headwinds, economic weakness in continental Europe, a negative market impact in reinsurance, and price compression in benefits administration. It also noted costs to support future growth in the healthcare exchange business. Aon described global property and casualty pricing as a soft market.
- Management expected 2014 operating cash generation to be sufficient to service debt and contractual obligations, fund capital expenditures and restructuring, continue share repurchases and pay dividends. It expected approximately $105m of pension contributions for the remainder of 2014. No specific earnings or revenue guidance was provided; management cautioned that interim results are not necessarily indicative of full-year results.
- Foreign-currency translation reduced Q3 other comprehensive income by $318m and nine-month results by $228m. Management estimated currency movements reduced adjusted diluted EPS by $0.01 in Q3 and $0.05 year to date on its illustrative comparison basis.
- Other income included a $25m pretax gain on business disposals in Q3 and year to date. The effective tax-rate decline and share-count reduction from buybacks also contributed to higher EPS. Nine-month restructuring expense was lower by $109m versus 2013; the Aon Hewitt restructuring plan was closed in 2013.
- Legal proceedings include substantial errors-and-omissions and advisory claims. The company estimated reasonably possible loss, in excess of accrued amounts and excluding insurance, in a range of $0 to $0.7bn. Management believed the ultimate outcomes would not materially adversely affect consolidated financial position, while warning that unfavorable resolutions could materially affect results or cash flows in a particular period. Aon reported that the Mazeikiu Nafta case settled on October 27, 2014, for $5m with no admission of liability.
- Other principal risks include economic and market conditions, competition and pricing, foreign-exchange and interest-rate movements, pension funding, credit ratings and borrowing access, litigation and regulatory matters, client retention, key-personnel retention, cybersecurity, and execution of restructuring and acquisitions. A downgrade in credit ratings could increase borrowing costs or limit market access.
Important facts for investors to verify
- Confirm that reported and organic revenue growth, as well as adjusted margin and EPS, are distinguished; the adjusted measures are non-GAAP.
- Assess whether the improvement in margins and earnings can persist as restructuring benefits fade and investment in healthcare exchanges continues.
- Monitor debt growth, the $600m 2015 maturity, interest expense, leverage and continued capital returns; reconcile buybacks and dividends with liquidity needs.
- Review operating cash-flow trends, pension contributions and the availability and terms of credit facilities; fiduciary assets are not available for general corporate use.
- Track foreign-currency effects, reinsurance market conditions, European economic weakness and benefits-administration pricing pressure.
- Review developments in the disclosed legal matters and potential loss range, particularly because some insurance coverage has been exhausted or materially depleted.