01—Abstract
Summary
Summary of the 10-K filed February 23, 2017. Cited figures are marked; the original filing is the authoritative source.
Aon plc's 2016 Form 10-K shows a steady, cash-generative professional services franchise that is in the middle of a major portfolio repositioning.
Revenue was roughly flat at $11.6 billiona (down $55 million, or under 1%), with 3% organic growth in both Risk Solutions and HR Solutions offset by a 2% currency headwind and net divestitures. Operating margin rose to 16.4% from 15.8%, and adjusted operating margin reached 20.8%. Diluted GAAP EPS increased 6% to $5.16, and adjusted diluted EPS rose 7% to $6.59.
Free cash flow grew 22% to $2.1 billionb, supported by record operating cash flow of $2.3 billion. The defining event is the February 9, 2017 agreement to sell the Benefits Administration and HR BPO business to Blackstone affiliate Tempo Acquisition for $4.3 billion in cash at closing, plus up to $500 million of deferred consideration. The unit accounted for about 19% of 2016 gross revenue, so the sale materially shrinks the HR Solutions segment.
Aon plans to use much of the proceeds for share repurchases and has authorized an additional $5 billionc under its buyback program. Investors should weigh the accretion and capital return benefits against the lost revenue, a cost reduction program that will create a future charge, and closing risk. The deal is expected to close by the end of Q2 2017, with a $215 million termination fee payable to Aon if the buyer walks away under certain circumstances.
Balance sheet and capital structure are solid but carry notable items. Total debt was $6.2 billiond, with a debt-to-EBITDA ratio of 2.5x and senior ratings of A- (S&P), Baa2 (Moody's), and BBB+ (Fitch). Shareholders received $1.29 per share in dividends, and the company repurchased $1.3 billion of stock during 2016.
Key risks include soft commercial insurance pricing, currency exposure, pension funding sensitivity, E&O litigation (including the Opry Mills matter and the Lyttelton Port claim), and the U.K. Redomestication tax position.
02—Key points
Key Highlights
- Revenue of $11.6 billion (-0.5%), with 3% organic growth in both Risk Solutions and HR Solutions, offset by a 2% FX headwind and net divestitures.
- Operating margin expanded to 16.4% from 15.8%; adjusted operating margin reached 20.8%, with Risk Solutions at 24.5% and HR Solutions at 18.4%.
- Diluted EPS rose 6% to $5.16 (GAAP) and 7% to $6.59 (adjusted). Free cash flow increased 22% to $2.1 billion.
- Pending $4.3 billion sale of the Benefits Administration and HR BPO business to Tempo Acquisition (Blackstone affiliate), plus up to $500 million of deferred consideration; expected to close by end of Q2 2017, with a $215 million termination fee.
- Board authorized an additional $5 billion buyback in February 2017; $1.3 billion was repurchased in 2016 and $2.8 billion remained authorized at year-end 2016 before that increase.
- Total debt of $6.2 billion (2.5x debt-to-EBITDA), with credit ratings of A-/Baa2/BBB+ and stable outlooks; $1.3 billion of committed credit facilities, undrawn at year-end.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2016filed February 23, 2017Financial Statements
FY2016 against FY2015
| Line item | FY2016FY2015 | Change |
|---|---|---|
| Revenue | $9.41B$9.48B | −0.7% |
| Operating Expenses | $7.60B$7.89B | −3.7% |
| Operating Income | $1.81B$1.59B | +14.1% |
| Interest Expense | $282.00M$273.00M | +3.3% |
| Net Income | $1.40B$1.39B | +0.8% |
| EPS (Basic) | $5.21$4.93 | +5.7% |
| EPS (Diluted) | $5.16$4.88 | +5.7% |
| Shares Outstanding (Basic) | 268.10M280.80M | −4.5% |
| Shares Outstanding (Diluted) | 270.30M283.80M | −4.8% |
05—Questions
Frequently Asked Questions
Why is Aon selling its Benefits Administration and HR BPO business, and how will the proceeds be used?
Aon is focusing its portfolio on higher-margin, capital-light professional services with recurring revenue and strong cash flow, and allocates capital based on return on invested capital. The business is being sold to Tempo Acquisition, LLC for $4.3 billion in cash plus up to $500 million of deferred consideration. Aon intends to direct part of the proceeds to increase share repurchases, and the Board has authorized an additional $5 billion under its buyback program.
How much of Aon's revenue does the divested business represent, and what is the impact on the HR Solutions segment?
The Divested Business represented about 19% of Aon's 2016 gross revenues. Because it sits within HR Solutions, which generated roughly 36% of 2016 consolidated revenue, the sale will substantially reduce that segment's scale. Aon expects to implement a cost reduction program to offset stranded costs and has said it aims for the deal to be accretive to analysts' consensus 2018 EPS of $7.97.
What could prevent or delay the closing of the transaction?
Closing is subject to customary conditions, including expiration or termination of the Hart-Scott-Rodino waiting period and receipt of required approvals in relevant foreign jurisdictions. Aon cannot assure the deal will close on schedule or at all. Either party may terminate if closing has not occurred by August 9, 2017. If the buyer fails to close under certain circumstances, it owes Aon a $215 million termination fee, guaranteed by an affiliate of the Blackstone sponsor.
How strong is Aon's balance sheet and debt profile?
At December 31, 2016, total debt was $6.2 billion, up $505 million from 2015, with a debt-to-EBITDA ratio of 2.5x. Senior long-term ratings are A- (S&P), Baa2 (Moody's), and BBB+ (Fitch), all with stable outlooks. Aon had $721 million of operating cash, two committed credit facilities totaling $1.3 billion that were undrawn, and $2.3 billion of operating cash flow in 2016. Debt maturities are modest near term: $336 million in 2017 and $278 million in 2018.
What are the main risks investors should monitor?
Key risks include soft commercial insurance pricing, which pressures brokerage commissions; foreign currency exposure, especially to the British pound and euro; pension funding sensitivity, with 2017 contributions expected around $185 million; and E&O and other litigation, including the Opry Mills coverage case, the IRU Swiss claim, and the Lyttelton Port claim in New Zealand. The company also faces potential changes in U.K. and U.S. tax law that could affect its non-U.S. domicile and global tax rate, which was 14.3% in 2016.
06—Continue