Aon plc — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Unaudited consolidated statements prepared under U.S. GAAP. Aon operates in Risk Solutions, its insurance and reinsurance brokerage and advisory business, and HR Solutions, its benefits, consulting and outsourcing business.
Financial results and liquidity
- Revenue: $2.947 billion, up 1% from $2.915 billion. Organic revenue growth was 2%. Risk Solutions revenue was $1.994 billion; HR Solutions revenue was $965 million.
- Profitability: Operating income was $469 million versus $410 million; GAAP operating margin was 15.9% versus 14.1%. Net income attributable to Aon shareholders was $325 million versus $261 million. Diluted EPS was $1.06 versus $0.82. Adjusted diluted EPS, a non-GAAP measure, was $1.28 versus $1.11.
- Segment performance: Risk Solutions operating income rose to $445 million from $403 million, with margin of 22.3% versus 20.4%. HR Solutions operating income rose to $67 million from $51 million, with margin of 6.9% versus 5.3%. Adjusted HR Solutions margin declined to 13.3% from 14.3%.
- Cash flow: Operating activities used $11 million, compared with $54 million provided in Q1 2013. Capital expenditures were $55 million; free cash flow, a non-GAAP measure, was negative $66 million versus negative $6 million.
- Cash and liquidity: Cash and cash equivalents were $338 million and short-term investments were $340 million at quarter-end. Of the combined $678 million, $253 million was restricted. Aon reported approximately $1.3 billion of committed credit facilities, all available at March 31. Fiduciary assets are matched by fiduciary liabilities and are not available for corporate use.
- Debt: Total debt was approximately $4.7 billion, up $357 million from year-end, principally reflecting $374 million of commercial paper outstanding. Debt was 37.4% of total capital attributable to Aon shareholders, versus 35.0% at year-end. Aon reported compliance with credit-facility covenants.
- Other metrics: The effective tax rate was 18.9% versus 26.1%; the 2014 rate benefited from the geographic distribution of income. Quarterly cash dividends were $0.18 per share versus $0.16.
Changes versus the prior comparable period
- Revenue increased 1%, with 2% organic growth partly offset by foreign-exchange effects and lower fiduciary investment income. Management cited solid retail brokerage growth and growth in reinsurance, consulting and outsourcing, with some HR Solutions results affected by revenue timing.
- Operating expenses declined $27 million to $2.478 billion. Savings, lower restructuring costs, favorable foreign exchange and lower amortization were partly offset by costs supporting growth in the healthcare exchange business and organic growth.
- Operating margin improved 180 basis points. The 2014 quarter had no charges under the Aon Hewitt restructuring plan, compared with $26 million of restructuring expense in Q1 2013.
- Shareholder net income increased 25%. The lower tax rate and fewer weighted-average shares contributed to higher reported EPS.
- Comprehensive income attributable to Aon shareholders was $379 million, compared with $96 million, primarily reflecting the absence of the prior-year $174 million foreign-currency translation loss.
- Operating cash flow deteriorated by $65 million, driven in part by payment timing for incentives and interest and working-capital movements. Aon repurchased $600 million of shares, versus $300 million in Q1 2013.
Outlook, commentary and risks
- Management said it expected 2014 operating cash generation to cover debt service, contractual obligations, restructuring, capital expenditures, share repurchases and dividends, with credit facilities available for timing needs. It also expected cash flows and available facilities to meet liquidity needs for the foreseeable future. The filing provides no specific full-year revenue or EPS guidance.
- Management expected approximately $257 million of additional pension contributions for the remainder of 2014. Total planned 2014 contributions to specified U.K., U.S. and other significant international plans were $385 million; $117 million had been contributed in Q1.
- Management cautioned that potential unfavorable discrete tax adjustments in later quarters could make the full-year effective tax rate higher than Q1’s rate.
- Business headwinds included weak continental European economies, a soft insurance market with flat average pricing, negative market effects in reinsurance, HR benefits-administration price compression and pressure on demand. Aon also cited foreign-exchange, interest-rate, pension-funding, credit-rating, competitive, regulatory, cybersecurity and talent-retention risks.
- Moody’s changed its outlook on Aon to stable from positive in April 2014. Aon warned that a ratings downgrade could raise borrowing costs, constrain market access and reduce financial flexibility.
- Legal contingencies include multiple errors-and-omissions and advisory claims. Notable disclosed matters include Opry Mills, which seeks full insurance coverage and alleges Aon could be liable for the $150 million coverage difference, and a $125 million claim by Mazeikiu Nafta. Aon said outcomes and potential losses could not be estimated; management did not expect the matters, based on available information, to materially affect consolidated financial position, while acknowledging an unfavorable resolution could materially affect a particular period’s results or cash flows.
- Other notable items: derivative losses partly offset foreign-currency remeasurement gains in other income; Aon repurchased 7.2 million shares for $600 million, with approximately $2.3 billion remaining under its authorization. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Key facts for investors to verify
- Whether organic growth and margin improvements persist amid soft insurance pricing, economic weakness and HR Solutions pricing pressure.
- Whether operating cash flow improves after the Q1 timing and working-capital effects, and how cash generation compares with substantial planned pension contributions and capital returns.
- Debt levels, commercial-paper usage, credit ratings, covenant headroom and access to committed facilities.
- The assumptions behind the favorable Q1 tax rate and potential full-year tax-rate changes.
- Developments, insurance coverage and possible financial exposure in material legal and errors-and-omissions matters.
- Reconciliations and definitions of adjusted EPS, adjusted margins, organic growth and free cash flow, all of which are non-GAAP measures.