Aon plc’s AON second-quarter 2015 operating earnings of $1.31 per share exceeded the Zacks Consensus Estimate by a penny, marking the ninth straight quarter of positive earnings surprises. The results also increased 4.8% from the year-ago quarter.
Aon’s second-quarter earnings improved year over year on organic revenue growth across its segments, underlying operational improvement and efficient capital deployment.
Including extraordinary items worth 69 cents, Aon’s net income per share came in at 62 cents compared with $1.01 per share in the year-ago quarter.
The company’s total revenue decreased 4% year over year to $2.8 billion due to the unfavorable impact of foreign currency translation. This was partially offset by a 2% increase in organic revenues and 1% growth in commissions and fees. Revenues also missed the Zacks Consensus Estimate of $3 billion.
Total operating expenses of the company were $2.5 billion, up 2% year over year. Legacy litigation costs incurred for events that took place more than ten years ago, high costs to assist organic revenue growth, and higher acquisition expenses led to the deterioration.
Segment Update
Risk Solutions: Total revenue came in at $1.8 billion, down 6% year over year. Unfavorable impact of foreign currency translation led to the deterioration in revenues.
Adjusted operating earnings increased 0.2% year over year to $444 million, while adjusted operating margin increased 150 basis points to 24.2% during the quarter. The improvement was largely owing to an increase in organic revenues, return on investments in data and analytics, and a favorable impact from foreign currency translation.
Organic revenues from the Retail business increased 3% year over year. Growth came on the back of higher organic revenues from the Americas business (up 4%) and the International business (up 2%). While growth in the Americas business was led mainly by better business in Latin America and the Affinity business, and increased retentions at the U.S. Retail, the International organic revenue growth was largely attributable to improvement in Asia and New Zealand.
Organic revenues from the Reinsurance business were down 1% mainly due to an unfavorable global market scenario, and decrease in capital market transactions.
HR Solutions: Total revenue of $979 million reflected a 0.3% year-over-year decline owing to a 3% unfavorable impact of foreign currency translation. Adjusted operating earnings were $129 million, down 1%. Adjusted operating margin was 13.2%, in line with the year-ago quarter. Higher expenses to support future growth had offset the increase in organic revenues and favorable impact of foreign currency translation.
Organic revenues from Consulting Services increased 3% year over year. This was primarily attributable to an improvement in retirement solutions and compensation and communications consulting.
Organic revenues from the Outsourcing business appreciated 3%, driven by growth in HR Business Process Outsourcing for cloud-based solutions and benefits administration for discretionary services.
Financial Position
As of Jun 30, 2015, cash and cash equivalents of Aon were $367 million, down from $374 million, as of Dec 31, 2014. Total assets of Aon as of Jun 30, 2015, were $29.2 million, down from $29.8 billion, at year-end 2014.
Operating cash inflow was $365 million in the first six months of 2015, up 10% year over year. The improvement came from a decrease in pension contribution, and a decrease in cash paid for taxes and restructuring. Capital expenditures in the first six months of 2015 increased 23% year over year to $142 million. Free cash flow was $223 million as against $218 million in the comparable quarter last year. The improvement was attributable to an increase in cash flow, partially mitigated by high capital expenditures.
Long-term debt increased slightly to $4.82 billion as of Jun 30, 2015, from $4.78 billion as of Dec 31, 2014. Debt-to-capital ratio of Aon rose 270 bps from the end of 2014 to 48.4% as of Jun 30, 2015.
Share Repurchase Update
Aon bought back 3.0 million Class A Ordinary shares during the quarter for nearly $300 million.
Dividend Update
On Apr 10, 2015, Aon approved a 20% increase in its quarterly cash dividend. The dividend hike translates into a quarterly cash dividend of 30 cents per share, up from 25 cents paid on Feb 2.
Additionally, on Jul 10, 2015, Aon declared a quarterly dividend of 30 cents per share. The dividend will be paid on Aug 17, to shareholders on record as of Aug 3, 2015.
Our Take
Aon’s earnings surpassed the Zacks Consensus Estimate by a whisker and improved year over year despite the unfavorable impact of foreign currency translation. The improvement was backed primarily by organic revenue growth and capital management initiatives. The company’s inorganic growth strategies and incessant efforts to deliver enhanced services to its customers are paying off well in terms of revenues.
Additionally, the company’s ability to generate and increase free cash flow makes us optimistic about future capital deployments including share buybacks and dividend payouts. While increased buy backs should lower share count and hence, boost earnings per share, dividend hikes call for bolstering investor confidence and thus, helping in stock price appreciation.
Currently, Aon carries a Zacks Rank #4 (Sell).
Performance of Other Insurance Brokers
The bottom lines at Brown & Brown Inc. BRO and Marsh & McLennan Companies, Inc. MMC were in line with their respective Zacks Consensus Estimates, while eHealth, Inc. EHTH surpassed the Zacks Consensus Estimate in the second quarter.
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