Aon plc — Form 10-Q summary
Reporting period: Quarter and nine months ended September 30, 2018. Aon is a global professional services firm providing risk, retirement, and health solutions. Amounts are in U.S. dollars; financial figures are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $2,349 | $2,340 | $8,000 | $7,089 |
| Operating income | $262 | $256 | $1,045 | $464 |
| Net income from continuing operations | $155 | $196 | $816 | $418 |
| Net income attributable to Aon shareholders | $147 | $185 | $789 | $1,245 |
| Diluted continuing-operations EPS | $0.61 | $0.73 | $3.17 | $1.48 |
| Reported operating margin | 11.2% | 10.9% | 13.1% | 6.5% |
- Revenue growth: Reported revenue was nearly flat in Q3 and rose 13% year to date. Organic revenue growth was 6% in Q3 and 4% year to date. Q3 organic growth was led by Commercial Risk, Reinsurance, and Health Solutions, each at 8%; year-to-date growth was strongest in Reinsurance at 7% and Commercial Risk at 6%.
- Adjusted measures: Management reported adjusted operating margins of 18.5% in Q3 and 24.8% year to date, versus 20.0% and 21.3%. Adjusted diluted EPS was $1.31 in Q3 and $6.01 year to date, versus $1.29 and $4.19. These are non-GAAP measures.
- Cash flow: Continuing operating cash flow was $975 for the first nine months, up from $289. Capital expenditures were $179, producing reported free cash flow of $796 versus $164. The prior-year period included $686 of cash taxes related to the business divestiture.
- Debt and liquidity: Total debt was approximately $6.4 billion, up $440 from year-end 2017; $740 of commercial paper was outstanding. Cash and short-term investments totaled $651, down from $1,285. Aon had $1.3 billion of committed credit facilities, with no borrowings under either facility, and reported covenant compliance. Fiduciary assets and matching liabilities were each $9.3 billion and are not available for general corporate use.
- Other metrics: Nine-month dividends paid were $285; share repurchases totaled $1.25 billion. Aon repurchased 8.8 million shares during the nine-month period.
Material changes and comparability
- Aon adopted ASC 606 prospectively in 2018; prior periods were not restated. The change shifted the timing of revenue recognition, particularly in Reinsurance Solutions. It reduced Q3 continuing-operations net income by $84, or $0.34 per share, but increased nine-month net income by $175, or $0.71 per share. The adoption did not affect operating cash flow.
- Q3 reported continuing-operations net income fell 21%, and diluted continuing-operations EPS declined from $0.73 to $0.61. Management attributed $0.34 per share of the Q3 decline to ASC 606; adjusted diluted EPS increased to $1.31 from $1.29.
- Year-to-date 2017 results included $857 of discontinued-operations income, principally an $803 after-tax gain on the 2017 sale of Aon’s benefits administration and business process outsourcing business. This makes total net income and EPS comparisons less representative of continuing performance.
- Year-to-date operating results included a second-quarter non-cash impairment charge of approximately $176 related to assets and liabilities held for sale, as well as accelerated intangible amortization and restructuring costs.
Outlook, commentary, risks, and unusual items
- Management said operating cash flow, available cash, credit facilities, and capital markets should meet foreseeable liquidity needs. It expects 2018 operating cash flow to support debt service, capital expenditure, repurchases, and dividends.
- The restructuring plan is expected to continue through 2019, eliminate 4,200 to 4,800 roles, and cost approximately $1.025 billion in total. Aon had eliminated 3,798 positions and incurred $863 in charges by September 30, with $162 of estimated remaining costs. Management estimates annualized savings of approximately $450 by the end of 2019; actual costs and savings may differ.
- Aon expects to adopt the lease standard on January 1, 2019 and anticipates significant right-of-use assets and lease liabilities, but did not provide a quantitative estimate. It does not expect a significant income-statement or cash-flow effect.
- The nine-month effective tax rate was 1.1%, affected by geographic income mix, restructuring, litigation, asset impairment, tax reform, and discrete tax items. Aon revised its provisional Tax Reform Act charge upward by $24 in Q3 and expected to finalize its accounting in Q4.
- Legal matters include claims associated with insurance-brokerage services and pension advice, as well as competition investigations. The company estimated a reasonably possible range of loss, above amounts accrued, of $0 to $200 for matters where loss was estimable, exclusive of insurance. It could not estimate the ultimate impact of the aviation and aerospace broking investigations and related litigation.
- Other disclosed exposures include guarantees for the divested business’s leases with maximum potential payments of $89 and client performance guarantees of $194; estimated fair values were $19 and $1, respectively. Aon also cited foreign-exchange, interest-rate, pension-funding, debt-rating, regulatory, litigation, cybersecurity, and restructuring-execution risks.
Important facts for investors to verify
- Assess the underlying revenue and earnings trend separately from ASC 606 timing effects and the prior-year divestiture gain; review the filing’s non-GAAP reconciliations.
- Track whether the restructuring plan reaches its stated cost, role-elimination, and savings targets, and whether savings translate into sustainable margin improvement.
- Monitor commercial paper, near-term debt maturities, cash available for corporate purposes, and the effect of repurchases and dividends on leverage and liquidity.
- Follow the Q4 completion of Tax Reform Act accounting and the 2019 lease-standard adoption, including the eventual quantified lease liabilities.
- Review developments in significant litigation and competition investigations, especially where Aon says potential outcomes cannot currently be estimated.