Aon plc — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2013; comparisons are with the third quarter and nine months ended September 30, 2012. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted. Aon provides Risk Solutions brokerage and advisory services and HR Solutions consulting and outsourcing.
Financial performance
- Revenue: Third-quarter revenue rose 2% to $2.794 billion; nine-month revenue rose 2% to $8.606 billion. Organic growth was 3% in both periods. Q3 Risk Solutions organic growth was 4%, while HR Solutions was flat; nine-month growth was 4% and 1%, respectively.
- Profit and EPS: Q3 operating income was $364 million versus $339 million, and net income attributable to Aon shareholders was $256 million versus $204 million. Diluted EPS was $0.82 versus $0.62. For nine months, operating income was $1.156 billion versus $1.135 billion; attributable net income was $758 million versus $689 million, and diluted EPS was $2.39 versus $2.06.
- Margins: GAAP operating margin was 13.0% in Q3 versus 12.4%; nine-month margin was 13.4% versus 13.5%. Adjusted operating margin, a non-GAAP measure, was 17.6% in Q3 versus 17.5%, and 18.2% for nine months versus 18.3%.
- Segments: Q3 Risk Solutions revenue was $1.821 billion and operating income $333 million; its margin improved to 18.3% from 17.4%. HR Solutions revenue was $981 million and operating income $75 million; its margin declined to 7.6% from 8.2%. Nine-month HR operating income fell 23% to $162 million, with margin declining to 5.6% from 7.4%.
- Cash flow: Nine-month operating cash flow increased 13% to $984 million. Capital expenditures were $174 million, producing reported free cash flow of $810 million versus $666 million (company-defined, non-GAAP). Q3 operating cash flow was $597 million, essentially unchanged year over year.
- Debt and liquidity: Total debt was approximately $4.6 billion, up $393 million from year-end 2012; debt-to-total-capital attributable to Aon shareholders increased to 37.7% from 34.9%. Cash and short-term investments totaled $726 million, including $212 million restricted. Aon reported $1.3 billion of committed credit facilities available and no borrowings under its U.S. and Euro revolving facilities. Fiduciary assets are matched by fiduciary liabilities and are not available for corporate use.
- Shareholder returns: Aon repurchased 15.8 million shares for $1.0 billion in the first nine months, including $500 million in Q3, and paid $159 million in dividends year to date. The quarterly dividend per share was $0.18, up from $0.16.
Changes, outlook and management commentary
- Management cited economic weakness in continental Europe and lower investment income in Risk Solutions, and price compression in benefits administration plus weaker discretionary consulting demand in HR Solutions.
- Q3 other income included $37 million of investment gains and $6 million of equity earnings; nine-month other income included $36 million of investment gains and $15 million of foreign-currency remeasurement gains. The nine-month cash flow benefited by $43.5 million from settlement of a one-time legal matter.
- The Aon Hewitt restructuring plan is expected to cost about $411 million in total. Through September 30, $364 million had been incurred and approximately 2,660 of about 2,900 planned job eliminations completed. Management expected the plan to deliver approximately $325 million of annual savings in 2013 and cumulative savings of approximately $378 million by the end of 2014; actual costs and savings may vary.
- Management expected 2013 operating cash generation to be sufficient for debt service, restructuring, capital expenditures, acquisitions, repurchases and dividends, and believed cash flows and available facilities would meet foreseeable liquidity needs. It planned approximately $147 million of additional pension contributions for the remainder of 2013. No specific full-year earnings or revenue guidance is provided in the filing text.
Risks, contingencies and unusual items
- Management identified soft insurance markets, economic weakness, foreign-exchange and interest-rate movements, pension funding needs, competition, client retention and demand, and execution of restructuring and Hewitt integration as risks. Lower short-term rates can reduce fiduciary investment income.
- Aon disclosed several substantial professional-liability disputes, including claims associated with Northrop, Opry Mills, Philips UK pension advice and a $125 million claim by Mazeikiu Nafta. Outcomes and potential payments were not estimable. Management said the matters were not expected to materially affect consolidated financial position based on available information, but unfavorable outcomes could materially affect results or cash flows in a particular period.
- Other disclosed exposures included $71 million of letters of credit, up to $35 million of limited-partnership funding commitments, and approximately $81 million of contingent client premium-payment guarantees. Aon noted that some historical errors-and-omissions insurance coverage had been exhausted or materially depleted.
- Q3 pretax income growth was also affected by investment gains and the comparison with prior-year foreign-currency losses. The nine-month operating margin decline reflected restructuring costs, investments for long-term growth and an unfavorable HR Solutions revenue mix.
Important facts for investors to verify
- Whether Risk Solutions’ organic growth and margin improvement can offset flat or weak HR Solutions growth and margin pressure.
- Whether restructuring spending concludes on schedule and expected savings are achieved without impairing service or growth.
- How debt maturities, commercial-paper reliance, share repurchases and the increased current portion of debt affect liquidity and leverage.
- Whether investment gains and the one-time legal settlement materially flatter reported comparisons, and how recurring earnings and cash flow develop.
- Developments in the disclosed litigation, pension contributions, insurance pricing, interest rates and foreign-exchange exposures.