Aon plc 2014 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2014; amounts are U.S. dollars. Aon is a global risk, insurance and reinsurance brokerage, and human resources consulting and outsourcing provider, operating in more than 120 countries with approximately 69,000 employees. Risk Solutions contributed about 65% of revenue and HR Solutions about 35%.
Financial performance and liquidity
| Metric | 2014 | 2013 |
|---|---|---|
| Total revenue | $12.045 billion | $11.815 billion |
| Operating income / margin | $1.966 billion / 16.3% | $1.671 billion / 14.1% |
| Net income attributable to Aon shareholders | $1.397 billion | $1.113 billion |
| Diluted EPS | $4.66 | $3.53 |
| Adjusted diluted EPS (non-GAAP) | $5.71 | $4.89 |
| Cash from operating activities | $1.642 billion | $1.633 billion |
| Free cash flow (non-GAAP) | $1.386 billion | $1.404 billion |
| Cash and short-term investments | $768 million | $1.0 billion |
| Total debt | $5.582 billion | $4.389 billion |
| Total equity | $6.631 billion | $8.195 billion |
Organic revenue growth was 3% overall: 2% in Risk Solutions and 5% in HR Solutions. Adjusted operating margin (non-GAAP) was 19.5% overall, 22.9% in Risk Solutions and 17.1% in HR Solutions. Working capital was $809 million, down from $919 million. Operating cash excludes fiduciary funds; the $11.638 billion of fiduciary assets is matched by fiduciary liabilities and is not available for general corporate use.
Fourth-quarter 2014 revenue was $3.299 billion, operating income $635 million, net income attributable to Aon shareholders $459 million, and diluted EPS $1.56.
Material changes versus 2013
- Revenue rose 2%; operating income increased 18%, and shareholder net income increased 26%. Diluted EPS rose 32%, supported in part by fewer weighted-average shares after repurchases.
- Reported operating margin expanded to 16.3% from 14.1%; management attributed improvement to organic growth, lower intangible amortization, investment returns and restructuring benefits. Adjusted margin increased to 19.5% from 19.0%.
- Risk Solutions revenue increased 1% as reported, with 2% organic growth; Reinsurance revenue declined 2%, including an unfavorable market impact. HR Solutions revenue grew 5%, led by consulting, health care exchanges and HR outsourcing.
- Effective tax rate fell to 18.9% from 25.4%, reflecting geographic earnings mix, global funding structures and discrete tax adjustments.
- Debt rose $1.2 billion, while cash and short-term investments fell $232 million. Equity declined $1.6 billion, primarily due to $2.3 billion of repurchases, $273 million of dividends and $760 million of other comprehensive loss.
- 2014 operating cash flow increased only 1%; free cash flow decreased 1%, with capital expenditures up 12% to $256 million.
Outlook, commentary, risks and unusual items
- Management described continued headwinds from foreign exchange, weak continental European economies, a soft insurance market, adverse Reinsurance market conditions and price compression in benefits administration. It cited strong new business and renewal management in Risk Solutions and growth in HR consulting and outsourcing.
- Management expected approximately $220 million of pension contributions, $270 million of capital expenditures and $31 million of restructuring cash payments in 2015. It stated that operating cash and available credit were expected to cover anticipated needs; these are expectations, not guarantees.
- Aon repurchased 25.8 million shares for $2.3 billion in 2014 and paid $273 million in dividends. Approximately $5.6 billion remained authorized for repurchases at year-end.
- Debt was $5.6 billion; debt to Aon-attributable total capital was 45.9%, versus 35.0% a year earlier. The company reported investment-grade ratings and covenant compliance. On February 2, 2015, it replaced its €650 million facility with a $900 million multi-currency facility maturing in 2020.
- Legal matters include significant E&O and pension-advice claims. The company estimated reasonably possible losses above accrued amounts in the described matters at $0 to $600 million, before insurance, and warned unfavorable outcomes could materially affect a period. A 2014 $125 million claim by Mazeikiu Nafta settled for $5 million without admission of liability; an IRU judgment was partially settled in January 2015, with certain appeal rights retained.
- Other key risks include currency and interest-rate movements, pension funding and assumptions, competition and commission pressure, regulation and tax uncertainty, cyber and data-security incidents, client-fund handling, and integration or profitability of acquisitions and outsourcing contracts.
- There was no goodwill or tradename impairment identified in 2014. The 2010 Hewitt-related restructuring plan was closed in 2013; $76 million of restructuring liabilities remained at year-end 2014. Aon recorded $35 million of legacy litigation expense in 2014.
Most important facts for investors to verify
- Whether organic growth and margin improvements persist, particularly in Reinsurance, continental Europe and benefits administration.
- How much of EPS growth reflects sustainable operations versus the lower tax rate and share repurchases; reconcile GAAP results with management’s non-GAAP adjustments.
- Debt maturities, refinancing costs, interest expense and the effect of continued repurchases on leverage and liquidity.
- Pension plan funded status, discount-rate sensitivity, future contributions and the impact of actuarial losses on earnings and equity.
- Developments, insurance recoveries and potential cash exposure from the disclosed legal claims and contingencies.
- 2015 delivery against pension contribution, capital expenditure and restructuring estimates, and the terms and availability of credit facilities.
The financial statements received an unqualified audit opinion, and the auditor reported effective internal control over financial reporting as of December 31, 2014.