Aon plc — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; comparisons are with the corresponding 2018 periods unless noted. Aon is a global professional services firm providing risk, retirement, and health solutions. It reports as one operating segment, Aon United. Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data.
Financial results and key metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $2,606 | $2,561 | $5,749 | $5,651 |
| Operating income (loss) | $413 | $(16) | $1,285 | $783 |
| Reported operating margin | 15.8% | (0.6)% | 22.4% | 13.9% |
| Adjusted operating margin (non-GAAP) | 24.4% | 22.0% | 29.5% | 27.4% |
| Net income from continuing operations | $287 | $57 | $963 | $661 |
| Net income attributable to Aon shareholders | $277 | $48 | $936 | $642 |
| Diluted continuing-operations EPS | $1.14 | $0.19 | $3.85 | $2.55 |
| Adjusted diluted EPS (non-GAAP) | $1.87 | $1.71 | $5.19 | $4.69 |
- Reported revenue rose 2% in both periods. Organic revenue growth was 6% in Q2, accelerating from 5%, and 6% for the half, versus 4%. Foreign exchange reduced reported revenue growth by 3 percentage points in Q2 and 4 points for the half.
- Q2 service-line organic growth: Commercial Risk 6%, Reinsurance 12%, Retirement 1%, Health 6%, and Data & Analytic Services 4%. Reinsurance was the strongest contributor; Retirement remained comparatively subdued.
- Interest expense was $77 million in Q2 and $149 million for the half, up $8 million and $10 million, respectively, mainly due to higher debt. Effective tax rates on continuing operations were 16.3% for Q2 and 15.9% for the half; prior-year rates were distorted by discrete items and unusual charges.
- Six-month cash flow from operations was $361 million, down $52 million (13%). Capital expenditures were $106 million; free cash flow, a non-GAAP measure, was $255 million, down $47 million (16%). Cash and cash equivalents ended at $581 million, down $75 million from year-end.
- At June 30, total debt was approximately $7.6 billion: $844 million short-term/current debt and $6.740 billion long-term debt. Commercial paper outstanding was $843 million. Debt increased approximately $1.3 billion from December 31, 2018. Aon issued $750 million of 3.75% senior notes due 2029 in May.
- Cash and short-term investments totaled $816 million, including $99 million restricted. Fiduciary assets of $12.071 billion were matched by fiduciary liabilities and are not available for general corporate purposes. Aon had no borrowings under its $1.3 billion committed revolving facilities and reported covenant compliance.
Material changes and management commentary
- Profit and margins improved substantially from Q2 2018, when reported operating income included a $176 million non-cash impairment charge related to assets and liabilities classified as held for sale. Lower legacy litigation expense, reduced restructuring charges, foreign exchange effects, organic growth, and restructuring/operational savings also contributed. The prior-year comparison included $103 million of legacy litigation expense in Q2.
- For the first half, compensation and benefits fell 1% and total operating expenses declined $404 million. Management attributed expense reductions to the prior-year impairment, lower legacy litigation and restructuring charges, currency, and operational savings; growth-related expenses partly offset these benefits.
- Management said operating cash flow included approximately $85 million of net cash payments for legacy litigation in Q1. It cited strong operational improvement and lower restructuring cash outlays as partial offsets to the year-over-year cash-flow decline.
- No specific full-year revenue, earnings, or margin guidance is stated in the supplied filing text. Management expects operating cash flows, cash reserves, credit facilities, and capital-market access to meet foreseeable liquidity needs, including debt service, capital expenditures, pension contributions, dividends, and planned share repurchases.
Outlook, risks, contingencies, and unusual items
- The global restructuring plan is expected to continue through Q4 2019, with cumulative charges estimated at approximately $1.35 billion. Aon had eliminated 5,091 positions and incurred $1.20 billion of charges through June 30; estimated remaining costs were $150 million. The plan was expanded in Q2, adding an estimated $125 million of 2019 charges. Management cautioned that actual costs may vary.
- Six-month share repurchases were $1.157 billion, including 6.4 million shares at an average $181.07 per share. Remaining authorization at June 30 was $2.8 billion. Dividends paid in the half were $203 million.
- Management identifies foreign exchange and interest-rate movements, debt and ratings, pension funding, tax-rate variability, regulatory and legal matters, and the ability to realize restructuring savings as risks. It also cites Brexit-related uncertainty, cyber and data-security risks, talent retention, and acquisition integration among forward-looking risk factors.
- Legal matters include a U.K. pension-related claim seeking approximately £70 million plus interest and costs; a New Zealand earthquake-related claim seeking NZD 528 million plus interest and costs; and a U.S. client claim involving requested damages of $45 million to $85 million. Aon says it intends to defend these matters. The filing estimates the reasonably possible loss range for specified matters, in excess of accruals, at $0 to $0.1 billion, exclusive of insurance; aviation/aerospace competition investigations remain unestimable, and an adverse outcome could materially affect results, financial position, or liquidity.
- Guarantees related to the divested business had maximum undiscounted potential payments of $77 million for leases and $170 million for performance obligations; estimated fair values were $15 million and $1 million, respectively. No payments were made in the first half. Aon settled the Lyttelton Port Company case in April 2019 without admission of liability; the settlement did not significantly affect results or financial condition.
- Aon adopted the new lease standard on January 1, 2019, initially recognizing $1.1 billion of right-of-use assets and $1.3 billion of lease liabilities. At June 30, total lease liabilities were $1.225 billion. The adoption had no material income-statement impact, according to the filing.
Important facts for investors to verify
- Separate underlying growth and adjusted performance from reported results: reconcile 6% organic revenue growth and adjusted EPS/margins to GAAP, including the effects of foreign exchange and the unusually weak Q2 2018 comparison.
- Track restructuring execution, remaining costs, realized savings, role eliminations, and whether the added 2019 charges or estimated total change.
- Assess debt growth, commercial-paper dependence, refinancing needs, interest expense, ratings, and cash available for corporate use apart from fiduciary and restricted balances.
- Monitor operating cash flow and free cash flow, including litigation payments, working-capital timing, capital spending, shareholder distributions, and pension contributions.
- Follow the outcomes and potential exposure from the disclosed lawsuits and competition investigations; some outcomes are not estimable and could affect a particular reporting period materially.