Aon plc — Q3 2022 Form 10-Q
Business context and period. Aon is a global professional services firm providing risk, health and wealth solutions through Commercial Risk, Reinsurance, Health and Wealth Solutions. This unaudited report covers the quarter and nine months ended September 30, 2022; financial amounts are in U.S. dollars unless noted.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $2.696bn | $2.702bn | $9.349bn | $9.113bn |
| Operating income (loss) | $590m | ($801m) | $2.657bn | $1.116bn |
| Net income (loss) attributable to Aon shareholders | $408m | ($900m) | $1.932bn | $392m |
| Diluted EPS | $1.92 | ($3.99) | $9.00 | $1.72 |
| Reported operating margin | 21.9% | (29.6)% | 28.4% | 12.2% |
| Adjusted operating margin (non-GAAP) | 23.1% | 22.1% | 30.0% | 29.2% |
- Q3 reported revenue was flat year over year. Organic revenue growth was 5%, offset principally by a 5% unfavorable currency impact; fiduciary investment income added 1% and acquisitions, divestitures and other factors reduced revenue by 1%. Nine-month revenue increased 3%, including 7% organic growth and a 4% unfavorable currency impact.
- Q3 adjusted diluted EPS was $2.02 versus $1.74; nine-month adjusted diluted EPS was $9.51 versus $8.31. These are non-GAAP measures.
- Q3 revenue by solution line: Commercial Risk $1.482bn (organic growth 5%); Reinsurance $396m (7%); Health $494m (5%); Wealth $326m (2%). Wealth’s reported revenue declined 7%, including lower AUM-based delegated investment management revenue.
- Interest expense was $103m in Q3 and $296m for nine months, up 29% and 25%, respectively, primarily reflecting increased debt. The nine-month effective tax rate was 19.1%, versus 51.4% in 2021.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $2.177bn, up $926m year over year. Capital expenditures were $126m; free cash flow, a non-GAAP measure defined as operating cash flow less capital expenditures, was $2.051bn versus $1.149bn.
- Cash and cash equivalents were $692m and short-term investments $251m at September 30. These balances include $144m restricted from use. Separately, $6.503bn of cash and cash equivalents held for clients is fiduciary and unavailable for general corporate purposes.
- Total debt was approximately $10.8bn, up $1.4bn from December 31, 2021. Long-term debt was $10.116bn; short-term debt and current portion of long-term debt were $711m. Aon issued $500m of 5.00% notes due 2032 in September and issued $1.5bn of notes in February.
- Aon reported approximately $1.8bn available under committed credit facilities, with no facility borrowings at quarter-end, and compliance with facility covenants. A $750m facility’s expiration was extended to October 2024 after quarter-end.
- Nine-month financing included $2.528bn of share repurchases and $347m of shareholder dividends. Aon had about $6.7bn remaining under its repurchase authorization. Total shareholders’ equity was a deficit of $670m, including accumulated other comprehensive loss of $4.919bn.
Material changes and unusual items
- The comparison with Q3 2021 is heavily affected by the prior-year $1bn payment to terminate the proposed WTW combination and related transaction costs. Those items contributed to the prior-year operating loss; they did not recur in Q3 2022. Accordingly, the sharp increase in reported profit is not a like-for-like measure of underlying operating improvement. Adjusted operating margin rose 1.0 percentage point in Q3.
- Nine-month 2022 results include a $58m charge for legal settlements, excluded from adjusted operating income. Other income includes $53m of gains on business dispositions for the nine-month period.
- Foreign currency translation reduced shareholders’ equity by $1.119bn in the first nine months and contributed to the increase in accumulated other comprehensive loss. Goodwill also declined, largely due to currency translation.
- Aon repurchased 8.7m shares for $2.528bn in the first nine months, compared with 5.7m shares for $1.543bn in the prior-year period.
Outlook, risks and contingencies
- Management said organic growth reflected strong client retention and new business generation. It expects operating cash flow, cash reserves, credit facilities and capital-market access to be sufficient for liquidity needs, including debt service, capital spending, pensions and working capital. The filing does not provide specific revenue or earnings guidance.
- Management reported that COVID-19 impacts had lessened and that the war in Ukraine had not materially affected global operations as of September 30, 2022; both remain monitored uncertainties. Other identified risks include foreign exchange, interest and inflation rates, debt costs and ratings, market conditions, regulation, litigation, cybersecurity, talent and execution of growth and cost initiatives.
- Aon faces E&O, fiduciary, aviation-related and competition-law matters. The company estimates reasonably possible losses in excess of accruals for specified matters at $0–$100m, excluding insurance coverage; it cautions that estimates are uncertain. Aon believes the ultimate outcome of the matters will not materially adversely affect its consolidated financial position, but unfavorable outcomes could affect results or cash flows in a particular period.
- Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Investor verification points
- Review the reconciliation of reported results to non-GAAP adjusted operating margin, adjusted EPS and free cash flow, particularly the effect of the 2021 WTW termination costs and the 2022 legal-settlement charge.
- Assess debt maturities, borrowing costs and liquidity, separating corporate cash from fiduciary client funds and restricted cash.
- Track organic growth and currency effects by solution line, especially the reported weakness in Wealth and lower transaction-solutions activity.
- Monitor the status and potential financial exposure of the disclosed legal and regulatory matters, including the stated loss range and insurance coverage.
- Evaluate the pace and price of share repurchases against debt levels, cash generation and the reported shareholders’ equity deficit.