01—Abstract
Summary
Summary of the 10-K filed February 20, 2018. Cited figures are marked; the original filing is the authoritative source.
Aon plc's FY2017 10-K shows a company in transition after selling its Benefits Administration and HR BPO business (the "Divested Business") to Blackstone's Tempo Acquisition on May 1, 2017 for $4.3 billion in cash plus up to $500 milliona of deferred consideration.
Continuing-operations revenue rose 6% to $9.998 billionb, driven by 4% organic growth and 2% from acquisitions net of divestitures, with particular strength in Reinsurance Solutions (+6% organic), Health Solutions (+7%) and Data & Analytic Services (+6%). Reported profitability was sharply lower, however: operating margin fell to 9.8% from 17.4%, income from continuing operations dropped 65% to $435 million, and diluted EPS from continuing operations was $1.53. The decline was driven by $497 million of restructuring charges, a $380 million non-cash tradename impairment tied to the sale, $704 million of total amortization and impairment of intangibles (including accelerated tradename amortization), and roughly $940 million of cash taxes associated with the divestiture.
Management's adjusted metrics tell a more favorable story: adjusted operating margin rose to 23.4% from 21.6%, and adjusted diluted EPS from continuing operations increased 17% to $6.52c. Cash generation was weak in 2017. Operating cash flow from continuing operations fell 63% to $669 million, and free cash flow fell 71% to $486 million, reflecting tax payments, restructuring cash costs and the one-time nature of divestiture-related outflows.
Despite this, Aon returned substantial capital: it repurchased $2.4 billiond of shares (18.0 million shares) and paid $364 million in dividends ($1.41 per share, up from $1.29). Total debt was $6.0 billion, and the company retains $1.3 billion of committed credit facilities, undrawn at year-end. Credit ratings were stable (S&P A-, Moody's Baa2, Fitch BBB+).
Net assets declined to $4.6 billion from $5.5 billion, largely because of buybacks and dividends. Looking forward, the Restructuring Plan targets 4,200 to 4,800 role eliminations, roughly $1.025 billion of cumulative costs through 2019 (of which about $528 million remained to be incurred), and about $450 million of annualized savings by the end of 2019.
Key risks disclosed include the U.K. CMA and FCA market investigations, the EU antitrust investigation into aviation broking, the Opry Mills and Lyttelton Port litigation, the GDPR effective date in May 2018, the U.S. Tax Reform Act's effect on the effective tax rate (which reached 36.5% in 2017 including a $264 million transition tax provision), and the upcoming adoption of ASC 606 revenue recognition in Q1 2018, which management estimates will add $400 to 600 million to retained earnings as of January 1, 2018 and shift interim revenue timing, especially in Reinsurance Solutions.
02—Key points
Key Highlights
- Revenue from continuing operations grew 6% to $9.998 billion, with 4% organic growth led by Reinsurance Solutions (+6%), Health Solutions (+7%), and Data & Analytic Services (+6%).
- GAAP operating margin fell to 9.8% from 17.4% and income from continuing operations declined 65% to $435 million, largely due to $497 million of restructuring costs, a $380 million tradename impairment, and $704 million of total intangible amortization and impairment.
- Management's adjusted operating margin expanded to 23.4% (from 21.6%) and adjusted diluted EPS from continuing operations rose 17% to $6.52, excluding restructuring, amortization, pension settlement and other one-time items.
- Operating cash flow from continuing operations fell 63% to $669 million and free cash flow fell 71% to $486 million, reflecting roughly $940 million of cash taxes tied to the Divested Business sale.
- Aon returned about $2.8 billion to shareholders in 2017 through $2.4 billion of share repurchases and $364 million of dividends ($1.41 per share, up 9%), with $5.4 billion of repurchase authorization remaining.
- The $1.025 billion Restructuring Plan targets 4,200 to 4,800 role eliminations and about $450 million of annualized savings by the end of 2019; 2,630 positions had been eliminated through year-end 2017.
- Upcoming ASC 606 adoption on January 1, 2018 is estimated to increase retained earnings by $400 to 600 million and will accelerate revenue recognition for certain brokerage services, shifting interim revenue timing particularly in Reinsurance Solutions.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2017filed February 20, 2018Financial Statements
FY2017 against FY2016
| Line item | FY2017FY2016 | Change |
|---|---|---|
| Revenue | $10.00B$9.41B | +6.3% |
| Operating Expenses | $8.93B$7.60B | +17.6% |
| Operating Income | $1.06B$1.81B | −41.2% |
| Interest Expense | $282.00M$282.00M | 0.0% |
| Net Income | $1.23B$1.40B | −12.2% |
| EPS (Basic) | $4.74$5.21 | −9.0% |
| EPS (Diluted) | $4.70$5.16 | −8.9% |
| Shares Outstanding (Basic) | 258.50M268.10M | −3.6% |
| Shares Outstanding (Diluted) | 260.70M270.30M | −3.6% |
05—Questions
Frequently Asked Questions
Why did Aon's reported net income and operating margin fall so sharply in 2017 if revenue grew?
The decline reflects several one-time or non-cash items in continuing operations: $497 million of restructuring costs, a $380 million non-cash impairment of tradenames tied to the Divested Business, $143 million of accelerated tradename amortization, and a $128 million pension settlement charge. Operating income fell to $979 million from $1.638 billion, and the effective tax rate rose to 36.5% (from 10.6%) largely due to a $264 million transition tax provision and $86 million of deferred tax remeasurement under U.S. tax reform. Management's adjusted metrics exclude these items and show improved underlying performance.
Is Aon's dividend and share buyback program sustainable given weaker 2017 cash flow?
The dividend ($364 million in 2017) is covered by operating cash flow from continuing operations ($669 million) but with limited headroom, while the $2.4 billion of buybacks was funded largely by the $4.2 billion of net divestiture proceeds rather than recurring cash flow. Aon has $1.2 billion of distributable reserves and $1.3 billion of undrawn credit facilities. Going forward, sustainability depends on normalizing cash taxes after the divestiture, realizing the planned $450 million of restructuring savings, and maintaining the investment-grade ratings (A-, Baa2, BBB+) that the 10-K flags as important for funding access.
What is the main risk from the Divested Business sale that investors should watch?
Aon may not receive the full $500 million of deferred consideration, and it faces separation execution risk, including transition services agreement dependencies, legacy IT systems and ongoing commercial arrangements with the Buyer. The Divested Business represented 19% of 2016 gross revenue, so overhead must be reduced to match the smaller scale; otherwise the transaction may not be accretive to adjusted EPS as planned.
What regulatory and legal matters could materially affect Aon's results?
The U.K. Competition and Markets Authority is investigating investment consulting and fiduciary management, and the FCA is studying wholesale insurance broking competition; both are at early stages and cannot yet be quantified. The European Commission and other antitrust agencies are investigating aviation and aerospace broking. Major litigation includes the Opry Mills flood coverage case (the Tennessee Court of Appeals on January 26, 2018 limited coverage to $50 million, reducing exposure), the Lyttelton Port claim (about NZD $184 million) and the Christchurch City Council arbitration (about NZD $528 million). Management believes it has meritorious defenses and states the outcomes are not expected to have a material adverse effect, but reasonably possible losses above accruals could reach $0.3 billion.
How will the new revenue recognition standard change Aon's reported results?
Under ASC 606, starting January 1, 2018 certain brokerage revenue currently recognized over time will be recognized at policy effective date, which accelerates revenue into earlier periods. Aon expects a significant shift in interim revenue timing, mainly in Reinsurance Solutions, and a one-time cumulative increase to retained earnings of approximately $400 to 600 million. Full-year economics are not expected to change materially, but quarterly comparisons will be affected in 2018 and investors should expect some noise in reported interim growth rates.
06—Continue