Aon plc — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2018. Aon is a global professional services firm providing risk, retirement, and health solutions. Figures are in U.S. dollars; financial statements are unaudited.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $2.561bn | $2.368bn | $5.651bn | $4.749bn |
| Operating income (loss) | $(16)m | $(127)m | $783m | $208m |
| Reported operating margin | (0.6)% | (5.4)% | 13.9% | 4.4% |
| Adjusted operating margin | 22.0% | 22.0% | 27.4% | 22.0% |
| Net income from continuing operations | $57m | $(43)m | $661m | $222m |
| Diluted EPS, continuing operations | $0.19 | $(0.20) | $2.55 | $0.75 |
| Adjusted diluted EPS, continuing operations | $1.71 | $1.45 | $4.69 | $2.90 |
Q2 revenue rose 8%, reflecting 5% organic growth, 3% from acquisitions net of divestitures, and 2% favorable currency effects. Six-month revenue increased 19%; management attributed growth to 4% organic growth, 8% from the new revenue standard, 4% favorable currency, and 3% acquisitions net of divestitures. Q2 organic growth was strongest in Reinsurance (8%), Health (7%), and Commercial Risk (6%); Data & Analytic Services declined 4%.
Q2 reported operating loss included a $176m non-cash impairment related to businesses held for sale and higher legacy litigation and restructuring costs. Adjusted operating margin was flat year over year in Q2; the six-month increase reflected restructuring savings and core performance. Aon-shareholder net income was $48m in Q2 versus $769m in the prior-year quarter, which included a $798m after-tax gain on the sale of the benefits administration and outsourcing business. For the first half, shareholder net income was $642m versus $1.060bn.
Adoption of ASC 606 makes reported year-over-year comparisons less comparable: prior periods were not restated. The standard materially shifted revenue timing, particularly in Reinsurance Solutions. It increased six-month reported revenue by $410m and continuing-operations net income by $259m ($1.05 per share), but reduced Q2 continuing-operations net income by $6m ($0.02 per share). Management’s organic growth measure excludes this accounting effect.
Cash flow, balance sheet, and capital
- Cash flow: First-half operating cash flow from continuing operations was $413m, down $23m from 2017. Capital spending was $111m; free cash flow, a company-defined non-GAAP measure, was $302m, down $52m (15%). Restructuring cash payments contributed to the operating cash flow decline.
- Liquidity: Cash and cash equivalents were $487m and short-term investments $173m at June 30, 2018, totaling $660m versus $1.285bn at year-end 2017. Aon also had $1.3bn of committed, undrawn credit facilities. Management said operating cash flow, credit access, and capital markets should meet foreseeable liquidity needs.
- Debt: Total debt was approximately $6.5bn, up $492m from year-end; balance-sheet debt comprised $799m short-term and $5.659bn long-term. Commercial paper outstanding was $798m. Aon reported compliance with credit-facility covenants.
- Fiduciary funds: $10.476bn of fiduciary assets were matched by fiduciary liabilities and are not available for general corporate use. These include client funds and uncollected premiums.
- Capital returns: First-half share repurchases totaled $955m and shareholder dividends $187m. Aon paid $0.40 per share in Q2 and had $4.5bn remaining under its repurchase authorization.
Material changes, outlook, and risks
- The 2017 sale of the benefits administration and business process outsourcing business explains most of the sharp year-over-year drop in discontinued-operations income; the prior-year period included the sale gain.
- A global restructuring plan is expected to continue through 2019, eliminate an estimated 4,200–4,800 roles, and cost approximately $1.025bn in total. Through June 30, Aon had eliminated 3,337 positions and incurred $766m of costs; $259m of estimated costs remained. Management expects approximately $450m in annualized savings by the end of 2019, subject to execution and cost-estimate changes.
- Aon expects about $173m in pension contributions in the remainder of 2018, including an accelerated approximately $100m U.S. contribution in Q3. Additional non-cash U.K. pension settlement charges were expected in 2018.
- No specific full-year earnings or revenue guidance is provided. Management stated that 2018 operating cash flow should be sufficient for debt service, capital spending, repurchases, and dividends.
- Tax results were unusually variable: the first-half continuing-operations tax benefit was $30m despite $631m of pretax income, producing a (4.8)% effective rate. Aon said geographic income mix, restructuring and litigation, the held-for-sale impairment, and discrete tax items affected the rate; it expected to finalize provisional Tax Reform accounting by year-end.
- Legal exposure includes errors-and-omissions claims and regulatory matters. The estimated reasonably possible loss range, above amounts accrued, was $0–$100m, excluding insurance, for matters where loss was estimable. Aon described several substantial claims and stated it could not estimate potential impact from aviation/aerospace broking competition investigations or related litigation. Management believes the ultimate outcome of the described matters will not materially harm consolidated financial position, but adverse outcomes could materially affect a particular period’s results or cash flows.
- Other contingencies include guarantees tied to the divested business: maximum undiscounted potential payments of $93m for leases and $200m for performance obligations. Aon also cited competition reviews in the U.K. investment consulting/fiduciary management and wholesale insurance broking markets.
- Foreign exchange, interest rates, pension funding, regulatory and litigation outcomes, cyber and operational disruption, and the ability to realize restructuring savings are among the stated risks. Aon reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Separate underlying operating trends from ASC 606 timing effects, acquisition/currency contributions, and the prior-year divestiture gain when comparing revenue and earnings.
- Track whether Aon achieves the restructuring plan’s remaining savings and cost targets, and whether further impairments or charges arise.
- Monitor operating cash conversion, free cash flow, commercial-paper balances, liquidity, and debt levels alongside planned buybacks, dividends, and pension contributions.
- Follow developments in legacy litigation, aviation/aerospace investigations, U.K. competition reviews, and the divested-business guarantees; several potential exposures remain uncertain or not estimable.
- Review the final Tax Reform accounting and the effect of the anticipated U.S. pension contribution and other discrete items on the effective tax rate.