Aon plc — Third-Quarter 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Amounts are in U.S. dollars; financial statement figures are in millions unless stated otherwise. Aon is a global professional services firm focused on risk, retirement, and health. The results are unaudited and management cautions that they may not indicate full-year results, particularly given COVID-19.
Financial performance
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Revenue | $2,385 | $2,379 | $8,101 | $8,128 |
| Operating income | $441 | $360 | $2,068 | $1,645 |
| Operating margin, reported | 18.5% | 15.1% | 25.5% | 20.2% |
| Operating margin, adjusted | 22.4% | 22.0% | 29.0% | 27.3% |
| Net income from continuing operations | $281 | $229 | $1,483 | $1,192 |
| Diluted EPS from continuing operations | $1.18 | $0.93 | $6.18 | $4.79 |
| Adjusted diluted EPS | $1.53 | $1.45 | $7.19 | $6.64 |
- Q3 revenue was essentially flat year over year; nine-month revenue declined $27 million, also approximately flat. Organic revenue growth was flat in Q3 and 1% for the first nine months.
- Operating expenses fell $75 million in Q3 and $450 million for the nine-month period. Reported earnings benefited from lower restructuring charges and reduced amortization after certain tradenames were fully amortized; adjusted results exclude amortization, restructuring, and combination transaction costs.
- Cash provided by operating activities was $2,023 million for the first nine months, up $860 million year over year. Free cash flow, a non-GAAP measure, was $1,904 million, up $908 million; capital expenditures were $119 million.
- Interest expense was $80 million in Q3 and $252 million for nine months, versus $78 million and $227 million in the comparable periods. Effective tax rates were 22.6% for Q3 and 19.4% for nine months, compared with 19.6% and 16.6%.
Business trends and changes versus prior periods
- Q3 organic growth was strongest in Reinsurance Solutions, up 13%, and Commercial Risk Solutions, up 2%. Retirement Solutions declined 5%; Data & Analytic Services declined 7%; Health Solutions grew 1%.
- For the first nine months, Reinsurance Solutions grew 10% organically and Commercial Risk Solutions 2%. Retirement Solutions declined 2%, Health Solutions 3%, and Data & Analytic Services 5%.
- Management attributed pressure in discretionary services to COVID-19, including project-related work, travel and events, and lower employment levels affecting parts of Health. Core services were more resilient. CoverWallet platform premium volume increased threefold year to date.
- Expense comparisons benefited from the completion of Aon’s restructuring plan: no restructuring charges were recorded in 2020, versus $63 million in Q3 2019 and $281 million in the first nine months of 2019. Q3 included $43 million of costs related to the pending Willis Towers Watson combination; nine-month costs were $79 million.
Balance sheet, liquidity, and capital
- At September 30, 2020, cash and cash equivalents were $821 million and short-term investments were $448 million. Combined cash and short-term investments were $1,269 million, including $100 million restricted for use.
- Total debt was approximately $7.7 billion: $472 million of short-term and current debt and $7,251 million of long-term debt. Debt increased about $0.4 billion from December 31, 2019. Aon issued $1 billion of 2.80% notes due 2030 and used part of the proceeds to redeem $600 million of 5.00% notes, recognizing a $7 million extinguishment loss.
- Aon had $1.65 billion of committed credit facilities available and no borrowings under them; it reported compliance with facility covenants. Commercial paper outstanding was $25 million. Management said operating cash flow, cash, credit facilities, and capital-market access should meet foreseeable liquidity needs.
- Fiduciary assets and matching fiduciary liabilities were each $13,549 million. These client funds are not available for general corporate purposes.
- Share repurchases totaled $963 million for the first nine months, including $500 million in Q3 after the program resumed. Dividends paid were $307 million for the nine-month period; quarterly dividends were $0.44 per share.
- Six acquisitions were completed during the first nine months, with $368 million of net cash consideration. Acquisition accounting included $315 million of goodwill. Goodwill was $8,462 million at period-end.
Outlook, transaction, and risks
- Aon provided no specific full-year earnings or revenue guidance in the supplied filing text. Management said COVID-19’s duration and economic effects were uncertain and could adversely affect revenue, earnings, and cash flow. It continued remote-work and phased office-reopening measures and emphasized liquidity management.
- Aon and Willis Towers Watson agreed to combine, with WTW shareholders to receive 1.08 Aon shares per WTW share. Completion was expected in the first half of 2021, subject to closing conditions. Shareholders of both companies approved the transaction, and CFIUS concluded its review without unresolved national-security concerns. Integration, approval, cost, and benefit-realization risks remain.
- At October 29, 2020, S&P rated senior debt A- with a stable outlook, Moody’s rated it Baa2 with a stable outlook, and Fitch rated it BBB+ with a negative outlook. Aon warned a downgrade could raise borrowing costs or limit access to capital.
- Management disclosed a reasonably possible range of loss of $0 to $0.7 billion, above recorded accruals and excluding insurance, for certain legal matters. Notable matters include a Christchurch City Council claim of approximately NZD 528 million, claims arising from a fatal aircraft crash, a client lawsuit alleging more than $2 billion in investment losses, and ongoing competition-law investigations whose effects could not be estimated.
- Guarantees related to the divested business had maximum potential payments of $58 million for leases and $116 million for performance obligations. These amounts are contingent exposures, not stated expected payments.
- Other unusual items included a $16 million Health Solutions revenue adjustment identified during implementation of a new system, and write-off of $1.0 billion of fully amortized tradenames with no remaining expected economic benefit.
Most important facts for investors to verify
- Whether COVID-19’s effects on discretionary revenue, employment-related services, and client demand persist or deepen.
- How much of reported earnings and cash-flow improvement reflects sustainable operations versus restructuring comparisons, reduced discretionary spending, and working-capital timing.
- Progress, costs, financing implications, and closing conditions for the proposed Willis Towers Watson combination.
- Debt maturities, refinancing needs, rating-agency actions, covenant headroom, and the availability of liquidity beyond fiduciary funds.
- Developments in the disclosed litigation and investigations, including whether potential losses become estimable or exceed existing accruals and insurance coverage.
- The nature and implications of the $16 million Health Solutions revenue adjustment and the effect of ongoing acquisitions on goodwill and future performance.