Aon Plc quarterly report, Q3 FY2019

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Aon plc — Q3 2019 Form 10-Q

Reporting period: Three and nine months ended September 30, 2019. Aon is a global professional services firm providing risk, retirement, and health solutions. Amounts below are U.S. dollars unless noted.

Financial performance

  • Revenue: Q3 revenue was $2.379 billion, up 1% year over year; organic growth was 5%. For the first nine months, revenue was $8.128 billion, up 2%, with 6% organic growth. Foreign exchange and divestitures, net of acquisitions, reduced reported growth in both periods.
  • Service lines: Q3 organic growth was 7% in Commercial Risk, 5% in Reinsurance, 3% in Retirement, 2% in Health, and 3% in Data & Analytic Services. Commercial Risk and Reinsurance were particularly strong; Health and Data & Analytic Services faced prior-period or timing effects.
  • Profit: Q3 operating income was $360 million versus $262 million; operating margin was 15.1% versus 11.2%. Net income from continuing operations was $229 million versus $155 million. Net income attributable to Aon shareholders was $222 million, or $0.93 diluted EPS, versus $147 million, or $0.60. For nine months, operating income was $1.645 billion versus $1.045 billion; continuing-operations net income was $1.192 billion versus $816 million; diluted EPS from continuing operations was $4.79 versus $3.17.
  • Adjusted measures (non-GAAP): Q3 adjusted operating margin was 22.0% versus 18.5%; adjusted diluted EPS was $1.45 versus $1.31. Nine-month adjusted margin was 27.3% versus 24.8%, and adjusted diluted EPS was $6.64 versus $6.01.
  • Cash flow: Nine-month operating cash flow was $1.163 billion, up from $975 million. Free cash flow, defined by Aon as operating cash flow less capital expenditures, was $996 million versus $796 million. Capital expenditures were $167 million. Cash and cash equivalents were $602 million at quarter-end, down $54 million since year-end.
  • Debt and liquidity: Total debt was approximately $7.3 billion, up about $1.0 billion since December 31, 2018; this includes $546 million of commercial paper and $600 million of notes due September 2020 classified as current. Aon had no borrowings under its $1.3 billion committed credit facilities and reported covenant compliance. Cash plus short-term investments was $779 million, including $96 million restricted. Fiduciary assets are matched by fiduciary liabilities and are not available for general corporate use.
  • Shareholder returns: Aon repurchased 8.2 million shares for approximately $1.507 billion during the first nine months and paid $307 million in dividends. The remaining repurchase authorization was approximately $2.5 billion.

Changes versus comparable periods

  • Q3 reported operating margin improved 3.9 percentage points, while adjusted operating margin improved 3.5 points. Management cited organic growth, expense discipline, and restructuring and operational-improvement savings.
  • Nine-month reported operating income increased 57%; the comparison benefited from a $176 million non-cash impairment charge recorded in 2018 and lower restructuring and legacy-litigation costs in 2019. Nine-month 2019 effective tax rate was 16.6%, compared with 1.1% in 2018, making the reported earnings comparison sensitive to tax items.
  • Nine-month interest expense increased to $227 million from $208 million, primarily due to higher outstanding debt. The weighted-average commercial-paper interest rate was lower than the prior-year period.
  • Foreign-currency translation reduced nine-month diluted EPS by an estimated $0.16, according to management.

Outlook, commentary, and material risks

  • Management said operating cash flow, available cash, credit facilities, and capital-market access should be sufficient for foreseeable liquidity needs, including debt service, capital spending, pension contributions, repurchases, and dividends. It expected 2019 operating cash flow to cover debt and contractual obligations; no specific full-year earnings or revenue guidance was provided in the filing.
  • The global restructuring plan is expected to affect continuing operations through Q4 2019, with cumulative charges estimated at approximately $1.35 billion. Aon had recorded $1.263 billion and eliminated 5,353 positions through September 30, with approximately $87 million of estimated remaining charges. Actual costs may differ from estimates.
  • Q3 results included $63 million of restructuring and related charges. Other notable factors included favorable currency remeasurement gains offset by losses on financial instruments; the prior-year Q3 comparison included a $25 million legacy-litigation benefit.
  • Legal matters include a U.K. pension-related claim seeking about £70 million, a New Zealand arbitration claim seeking approximately NZD 528 million, and a U.S. client claim seeking $45 million to $85 million. Aon said it intends to defend these matters. For described estimable matters, reasonably possible losses above amounts accrued were estimated at $0 to $100 million, before insurance. The antitrust investigations’ ultimate impact could not be estimated.
  • Aon guarantees certain obligations related to its divested business, including maximum undiscounted potential payments of $74 million for leases and $160 million for performance guarantees; estimated fair values were $14 million and $1 million, respectively. The filing also identifies foreign exchange, interest-rate, pension, debt-rating, regulatory, litigation, cybersecurity, and restructuring-execution risks.

Key investor verification points

  • Review the composition and sustainability of organic growth, particularly strength in Commercial Risk and Reinsurance and the timing effects in Health.
  • Assess adjusted results alongside GAAP results, including restructuring charges, the 2018 impairment, litigation-related items, and tax-rate differences.
  • Track debt maturities, commercial-paper balances, interest expense, and whether operating cash flow supports planned repurchases and dividends.
  • Monitor remaining restructuring costs, delivery of expected savings, and the accuracy of the plan’s cost estimates.
  • Follow developments in the disclosed legal and regulatory matters, including claims whose outcomes or potential losses Aon said could not be estimated.