Aon plc — Form 10-Q summary
Reporting period: Quarter and nine months ended September 30, 2016. Figures are in U.S. dollars; financial amounts are in millions unless stated otherwise. Aon provides Risk Solutions brokerage and risk advisory services, and HR Solutions consulting and outsourcing services.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $2,746 | $2,742 | $8,304 | $8,394 |
| Operating income | $422 | $413 | $1,277 | $1,131 |
| Operating margin | 15.4% | 15.1% | 15.4% | 13.5% |
| Net income attributable to Aon shareholders | $307 | $295 | $894 | $801 |
| Diluted earnings per share | $1.14 | $1.04 | $3.30 | $2.80 |
| Cash provided by operating activities | Not separately stated | Not separately stated | $1,475 | $1,295 |
- Q3 organic revenue growth was 4%; nine-month growth was 3%. Reported revenue was nearly flat for the quarter and down 1% year to date, reflecting unfavorable currency effects and net divestitures.
- Q3 Risk Solutions revenue was $1,715 and HR Solutions revenue was $1,041. Year-to-date segment revenue was $5,434 and $2,902, respectively. Risk Solutions grew organically; HR Solutions’ reported revenue declined, largely due to divestitures and currency.
- Nine-month free cash flow, defined by Aon as operating cash flow less capital expenditures, was $1,322, up 24% from $1,070. Capital expenditures were $153 versus $225.
- At September 30, cash and cash equivalents were $483 and short-term investments were $463. Total debt was $6,160, up $460 from year-end 2015; the reported debt-to-EBITDA ratio was 2.4, compared with 2.6 a year earlier. Fiduciary assets and matching liabilities were $8,710 and are not available for general corporate use.
- Working capital was $1,105, up $455 from December 31, 2015. Aon reported total committed credit facilities of $1.3 billion, fully available, and compliance with facility covenants.
- Cash dividends paid were $258 year to date; the quarterly dividend was $0.33 per share, versus $0.30 a year earlier. Aon repurchased 10.4 million shares for approximately $1.1 billion year to date.
Material changes and management commentary
- Nine-month operating margin improved to 15.4% from 13.5%; management cited organic growth, investment returns and lower expenses, including lower prior-year litigation-related costs. The year-to-date comparison also included $62 of 2016 pension settlement expense and $176 of prior-year legacy litigation expense.
- Q3 operating expenses were broadly flat year over year. Currency and divestitures reduced expenses, while growth-related costs, higher errors-and-omissions expense, compensation timing and $7 of legacy IT contract costs partly offset those savings.
- Management cited fragile global economic conditions, a soft insurance pricing market and continued pressure in reinsurance. Risk Solutions reported 3% organic growth in Q3; HR Solutions reported 4% organic growth.
- Management said operating cash flow, cash reserves, credit facilities and capital-market access should be sufficient for foreseeable liquidity needs. It expected 2016 operating cash to support debt service, capital spending, pension contributions, repurchases and dividends. No specific earnings or revenue forecast was provided in the filing.
Outlook, risks and unusual items
- After quarter-end, Aon announced an agreement to acquire Stroz Friedberg; it expected approximately $6 of related transaction costs in Q4 2016.
- Aon recorded a $61 non-cash UK pension settlement charge in Q2. A voluntary U.S. pension lump-sum offer remained open at quarter-end, and a settlement charge was expected in Q4. Expected remaining 2016 pension contributions were approximately $59.
- Management estimated the reasonably possible range of legal losses in identified matters, above amounts accrued, at $0 to $200, excluding insurance. Aon noted that some claims may be self-insured or materially self-insured. The Philips matter was agreed for settlement in October 2016, with no material impact expected; other significant matters included Opry Mills, IRU, Gleeds and Lyttelton Port Company claims.
- Key stated risks include economic and insurance-market conditions, foreign exchange and interest-rate movements, pension funding, debt ratings and leverage, litigation and E&O claims, regulation, cybersecurity and service interruptions, and the ability to integrate acquisitions and retain qualified staff.
- Aon early adopted deferred-tax balance-sheet presentation guidance in 2016. It expected share-based compensation accounting changes effective in 2017 could significantly affect reported tax expense and cash-flow presentation; other new accounting standards were still under evaluation.
Important facts for investors to verify
- Whether organic growth and margin improvement persist, particularly in Risk Solutions reinsurance and HR Solutions outsourcing.
- How much of year-to-date earnings and margin improvement reflects recurring operations versus prior-year litigation costs, pension items, currency and divestitures.
- Debt maturity and refinancing plans, including the $400 million credit facility expiring in March 2017; the filing said Aon was evaluating alternatives.
- The final terms and financial effects of the Stroz Friedberg acquisition and the expected Q4 transaction costs.
- Updates on pension settlement costs, contributions and funding status, and developments in material legal claims and insurance coverage.
- Effects of future currency movements, soft insurance pricing and upcoming accounting changes on earnings, liquidity and reported cash flows.