Aon plc — Q2 2022 Form 10-Q Summary
Business context and reporting period
Aon is a global professional services firm providing risk, health, and wealth solutions. This unaudited report covers the three and six months ended June 30, 2022; comparisons are with the corresponding 2021 periods. Aon reports as one operating segment, with revenue presented across four solution lines.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $2.983 billion | $2.886 billion | $6.653 billion | $6.411 billion |
| Operating income | $700 million | $672 million | $2.067 billion | $1.917 billion |
| Operating margin | 23.5% | 23.3% | 31.1% | 29.9% |
| Net income attributable to Aon shareholders | $501 million | $379 million | $1.524 billion | $1.292 billion |
| Diluted EPS | $2.33 | $1.66 | $7.07 | $5.66 |
Q2 revenue rose 3%; organic revenue growth was 8%, offset in part by a 4% adverse currency effect and a 1% adverse impact from acquisitions, divestitures, and other. First-half revenue rose 4%, also with 8% organic growth. Q2 adjusted operating margin, a non-GAAP measure, was 26.2% versus 25.8%; adjusted diluted EPS was $2.63 versus $2.29. First-half adjusted operating margin was 32.7% versus 32.2%, and adjusted diluted EPS was $7.47 versus $6.57.
Q2 revenue by solution line: Commercial Risk Solutions $1.692 billion, up 3% reported and 7% organically; Reinsurance Solutions $537 million, up 7% reported and 9% organically; Health Solutions $414 million, up 6% reported and 11% organically; Wealth Solutions $343 million, down 4% reported but up 3% organically. Wealth’s reported decline reflected currency and other effects, while delegated investment management revenue based on assets under management declined.
Cash flow, balance sheet, and capital
- First-half cash provided by operations was $1.131 billion, down $214 million (16%) year over year. Free cash flow, a non-GAAP measure, was $1.063 billion, down $212 million; capital expenditures were $68 million.
- At June 30, cash and cash equivalents were $740 million and short-term investments were $243 million. These exclude $6.451 billion of fiduciary cash and equivalents, which is held for clients and unavailable for general corporate use.
- Total debt was approximately $10.4 billion, up $1.0 billion from December 31, 2021. Long-term debt was $9.666 billion; short-term debt and current maturities were $739 million. Q2 interest expense rose 31% to $102 million, primarily due to higher term debt.
- Aon issued $1.5 billion of senior notes in February 2022: $600 million at 2.85% due 2027 and $900 million at 3.90% due 2052. It had approximately $1.8 billion of committed credit facilities available, with no borrowings against them and covenant compliance at quarter-end. Commercial paper outstanding was $240 million.
- Share repurchases totaled $1.328 billion in the first half, including $500 million in Q2. Aon paid $229 million of shareholder dividends in the first half. The quarterly dividend was $0.56 per share; $7.9 billion remained authorized for repurchases at June 30.
- Total shareholders’ equity fell to $788 million from $1.158 billion at year-end, substantially reflecting foreign currency translation losses. First-half other comprehensive loss was $390 million, including $443 million of adverse currency translation adjustments.
Changes, management commentary, and outlook
Q2 operating expenses increased $69 million to $2.283 billion. The increase included a $58 million charge related to legal settlements, higher costs associated with organic growth and investment in long-term growth; favorable currency translation and lower prior-year transaction costs partly offset those items. Reported Q2 net income also benefited from a lower effective tax rate, 18.8% versus 34.1% in 2021, with share-based payment items among the principal drivers. Q2 other income included gains on business sales; first-half gains from dispositions were $47 million.
Management cited strong client retention and net new business generation as drivers of organic growth. It said COVID-19 effects on results had lessened and noted overall strength across the firm, while continuing to monitor the pandemic. Management stated that the company’s cash flows, cash reserves, credit facilities, and access to capital markets should be sufficient to meet liquidity needs, including debt service, investment, pensions, and working capital. The filing provides no specific full-year revenue or earnings guidance.
Risks, contingencies, and unusual items
- Management identified foreign exchange, interest rates, inflation, equity markets, debt and borrowing costs, pension funding, global economic and political conditions, regulation, competition, talent, technology, cybersecurity, and execution of cost-saving and acquisition plans as risks. Aon said the Russia-Ukraine conflict had not materially affected global operations as of June 30, 2022.
- Aon is involved in ordinary-course claims, including errors-and-omissions matters. For described matters where loss is estimable, the reasonably possible loss above amounts accrued was estimated at $0 to $0.1 billion, excluding insurance coverage. Management said the ultimate outcome was not expected to materially adversely affect consolidated financial position, but adverse outcomes could materially affect results or cash flows in a particular period.
- Notable matters include the Christchurch City Council claim of approximately NZD 320 million plus interest and costs; litigation related to the 2016 plane crash; and the Lowe’s 401(k) appeal. In the Blue Cross and Blue Shield Association matter, Aon reported settlement discussions and an agreement in principle regarding remaining claims. The European Commission closed its aviation-broking investigation, while other antitrust agencies continued investigations; Aon said it could not estimate their ultimate impact.
- Aon recorded the $58 million legal settlement charge in Q2. The Pilkington matter was settled without admission of liability and claims against Aon were dismissed in July 2022.
Important facts for investors to verify
- Whether 8% organic growth and margin improvement persist after currency effects and the Q2 legal charge are considered.
- Drivers of the year-over-year decline in operating cash flow and free cash flow, including receivables and incentive compensation payments.
- Debt levels, interest expense, upcoming maturities, and continued compliance with credit-facility covenants.
- Developments in material litigation, the Blue Cross settlement, and continuing antitrust investigations, including potential insurance recoveries.
- Effects of foreign exchange, market conditions, and share repurchases on reported results, liquidity, and per-share performance.