Aon plc — Q1 2020 Form 10-Q
Business context and reporting period. The filing covers the three months ended March 31, 2020, compared with Q1 2019. Aon is a global professional services firm providing risk, retirement and health solutions. Its five revenue lines are reported as one operating segment. On April 1, 2020, after quarter-end, the parent company completed its reorganization from the U.K. to Ireland; the reported quarter relates to the former U.K. parent.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $3.219 billion | $3.143 billion | +2%; organic growth 5% |
| Operating income | $1.033 billion | $872 million | +18% |
| Operating margin | 32.1% | 27.7% | +4.4 percentage points |
| Adjusted operating margin (non-GAAP) | 35.7% | 33.7% | +2.0 percentage points |
| Net income from continuing operations | $792 million | $676 million | +17% |
| Net income attributable to Aon shareholders | $772 million | $659 million | +17% |
| Diluted EPS from continuing operations | $3.29 | $2.70 | Adjusted EPS: $3.68 vs. $3.31 |
| Cash provided by operating activities | $338 million | $74 million | +$264 million |
| Free cash flow (non-GAAP) | $279 million | $17 million | +$262 million |
Revenue growth was led by Reinsurance Solutions (organic +9%), Commercial Risk Solutions (+4%) and Health Solutions (+5%). Retirement Solutions and Data & Analytic Services each reported 0% and 1% organic growth, respectively. Reported revenue included a 2% unfavorable currency effect and a 1% unfavorable effect from divestitures, net of acquisitions.
Operating expenses declined 4% to $2.186 billion. The decrease reflected lower restructuring charges, currency effects and discretionary expense controls, partly offset by growth-related spending and $18 million of costs related to the proposed Willis Towers Watson combination. Interest expense rose to $83 million from $72 million. The 19.3% effective tax rate compared with 15.7% a year earlier.
Balance sheet, debt and liquidity
- At March 31, cash and cash equivalents were $690 million and short-term investments were $170 million. Client fiduciary assets of $12.401 billion are matched by fiduciary liabilities and are not available for general corporate purposes.
- Total debt was approximately $8.1 billion, up about $0.8 billion from December 31, 2019. Short-term debt and current maturities were $1.884 billion; long-term debt was $6.227 billion. Commercial paper outstanding was $833 million, versus $112 million at year-end.
- Aon had $1.65 billion of committed revolving credit capacity, with no borrowings under those facilities at quarter-end, and reported compliance with covenants. The company said it believed liquidity was adequate and expected operating cash flow, cash, credit facilities and capital markets access to meet foreseeable needs.
- Financing cash flow was $82 million, reflecting $2.060 billion of debt issuance and $1.341 billion of repayments, as well as $463 million of share repurchases and $102 million of dividends. Investing cash outflow was $438 million, including $334 million net cash for acquisitions.
Material changes, outlook and risks
- COVID-19: The company said the pandemic’s full impact could not be quantified and expected adverse effects on revenue, earnings and cash flows depending on the downturn’s duration and severity. It had seen modest pressure in discretionary services in Q1, including declines in some areas in the final two weeks of March, and expected that trend to continue and potentially worsen in Q2 and beyond. Core recurring services were viewed as more resilient, although a severe downturn could affect them too.
- Management response: Aon described remote-work and business-continuity measures and liquidity actions, including discretionary spending reductions, extending payable days, delayed hiring, temporary pay reductions and suspension of share repurchases. Executive and non-executive director cash compensation was temporarily reduced 50% from May 1 through year-end; broader colleague salary reductions of up to 20% were announced. Management stated a commitment to avoid COVID-related layoffs.
- WTW combination: Aon and Willis Towers Watson agreed to combine on March 9, 2020. WTW shareholders would receive 1.08 Aon Ireland shares per WTW share. Completion was expected in the first half of 2021, subject to shareholder, regulatory and other conditions. The transaction entails execution, integration, cost and approval risks; a specified failure to obtain antitrust clearances could trigger a $1 billion termination fee. The filing gave no quantified synergy or earnings guidance.
- Other unusual items: Q1 included $25 million of gains on business disposals and $42 million of favorable foreign-currency remeasurement, partly offset by $44 million of losses on financial instruments. Aon completed five acquisitions, including CoverWallet, for aggregate consideration of $386 million; net acquisition cash outflow was $334 million. The global restructuring plan was closed in Q4 2019, so Q1 2020 had no related charges versus $91 million in Q1 2019.
- Contingencies: Aon estimated reasonably possible losses on described legal matters, above accrued amounts and excluding insurance, in a range of $0 to $100 million. Notable matters include a New Zealand client claim of approximately NZD 528 million plus interest and costs, a U.S. property-related claim seeking $45 million to $85 million, and aviation/aerospace broking antitrust investigations whose impact could not be estimated. Management said outcomes could adversely affect a particular period even though it did not expect a material adverse effect on consolidated financial position.
- Credit and market risks: Fitch changed its outlook to Negative/Rating Watch Negative following the WTW announcement; S&P and Moody’s outlooks were Stable. Aon cited risks from COVID-19, foreign exchange and interest rates, debt and ratings, pensions, litigation, regulation, cybersecurity and transaction execution.
Key facts for investors to verify
- How COVID-19 affected Q2 and subsequent organic revenue, discretionary services, collections and cash flow; the filing cautions Q1 results are not indicative of full-year performance.
- Whether reported cash generation and liquidity actions were sustainable, including the impact of higher commercial paper borrowings, debt maturities and any further financing needs.
- Progress, approvals, costs and financing implications of the WTW combination, including rating-agency responses and any potential termination obligations.
- Whether Q1 earnings growth persists excluding restructuring comparisons, currency and disposal gains, and how adjusted non-GAAP results reconcile to GAAP results.
- Developments in the disclosed legal and antitrust matters, including potential losses and whether insurance coverage is available or depleted.
- Effects of the Ireland reorganization on distributable profits, dividends, repurchases and guarantees; Aon reported $120 million of distributable profits as of May 1, 2020.