Aon plc 2019 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2019. The filing also reports fourth-quarter results. Aon is a global professional services firm focused on risk, retirement and health, operating as one segment across five solution lines. Figures are in U.S. dollars unless noted.
Financial performance
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Revenue | $11.013 billion | $10.770 billion |
| Organic revenue growth (non-GAAP) | 6% | 5% |
| Operating income | $2.169 billion | $1.544 billion |
| Operating margin | 19.7% | 14.3% |
| Adjusted operating margin (non-GAAP) | 27.5% | 25.0% |
| Net income from continuing operations | $1.574 billion | $1.100 billion |
| Diluted EPS from continuing operations | $6.37 | $4.29 |
| Adjusted diluted EPS (non-GAAP) | $9.17 | $8.16 |
| Cash from continuing operating activities | $1.835 billion | $1.686 billion |
| Free cash flow (non-GAAP) | $1.610 billion | $1.446 billion |
Revenue increased 2% as 6% organic growth was partly offset by a 3% adverse foreign-exchange effect and a 1% adverse net divestiture/acquisition effect. Organic growth was strongest in Reinsurance Solutions (10%) and Commercial Risk Solutions (7%); Retirement Solutions grew 2%, Health Solutions 5%, and Data & Analytic Services 4%. Management attributed improved operating margin to organic growth and operational improvements.
Fourth quarter: Revenue was $2.885 billion versus $2.770 billion in Q4 2018; operating income was $524 million versus $499 million; net income attributable to Aon shareholders was $374 million versus $345 million; diluted EPS was $1.58 versus $1.41.
Financial position, cash flow and capital allocation
- At year-end, cash and cash equivalents were $790 million and short-term investments were $138 million. Aon reported $928 million of operating funds; client fiduciary funds are segregated and unavailable for general corporate use.
- Total debt was $7.339 billion, including $712 million classified as short-term/current and $6.627 billion long-term. Interest expense rose 10% to $307 million. Aon had $1.3 billion of committed credit facilities, with no facility borrowings and covenant compliance at year-end.
- Total assets were $29.405 billion and total equity was $3.449 billion. Fiduciary assets and matching liabilities were each $11.834 billion.
- Operating cash flow rose 9% to $1.835 billion; it included approximately $130 million of net litigation-settlement payments. Capital expenditures were $225 million. Free cash flow increased 11%.
- Aon repurchased 10.5 million shares for $1.960 billion including associated costs, and paid $410 million in dividends. Dividends per share were $1.72, up from $1.56. Year-end shares outstanding declined to 232.1 million from 240.1 million.
- Pension contributions were $135 million in 2019; management estimated approximately $123 million for 2020. The filing reports significant pension obligations and sensitivity to discount rates and asset returns.
Changes, outlook and notable items
- Operating expenses fell 4% to $8.844 billion. Contributing factors included foreign exchange, lower prior-year impairment and litigation expenses, and restructuring savings; higher organic activity and growth investments partly offset reductions.
- The three-year restructuring plan closed in Q4 2019. Cumulative charges were $1.433 billion and 5,832 positions were eliminated. The plan generated estimated annualized savings of $529 million in 2019; Aon estimated approximately $580 million of annualized savings in 2020, before any reinvestment. Achievement and timing are not assured. Approximately $180 million of remaining restructuring liabilities were expected to be paid in 2020.
- The effective tax rate was 15.9%, compared with 11.7% in 2018. Management cited geographic earnings mix and favorable discrete items; tax-law changes, audits and tax estimates remain sources of potential volatility.
- Shareholders approved the proposed move of the parent company’s incorporation from the U.K. to Ireland on February 4, 2020, subject to English court approval. Completion was anticipated on March 31, 2020, but was not assured. Aon said it expected no material change to operations, SEC reporting, NYSE listing or dividend policy.
- There is no clear formal revenue or EPS guidance in the filing. Management stated it expected operating cash flow, credit facilities and capital-market access to meet foreseeable liquidity needs.
- Legal matters include a Christchurch City Council arbitration claim of approximately NZD 528 million (about $352 million at year-end exchange rates), a U.S. client claim seeking $45 million to $85 million, and competition investigations involving aviation and aerospace broking. Aon said it intends to defend the claims; outcomes and potential investigation costs are uncertain. The filing estimated reasonably possible losses above recorded accruals for described matters at $0 to $0.1 billion, excluding insurance.
- Other key risks include economic and insurance-market cycles, competition, foreign exchange, debt and refinancing, pension funding, regulation and data privacy, cybersecurity, professional-liability claims, talent retention, and Brexit-related uncertainty. Aon noted cybersecurity incidents had occurred but had not materially affected the business to date.
Most important facts for investors to verify
- Whether Aon realizes the stated 2020 restructuring savings and how much is offset by reinvestment or remaining restructuring payments.
- Revenue growth and margins by solution line, especially whether organic growth persists after foreign-exchange and portfolio effects.
- Debt levels, refinancing needs, interest expense and the company’s capacity to sustain buybacks and dividends.
- Cash-flow quality, including working-capital movements, litigation payments and the distinction between corporate cash and fiduciary funds.
- Developments in the disclosed legal claims and regulatory investigations, and any resulting financial or reputational exposure.
- Completion and terms of the proposed Irish reorganization, including any changes to capital management or shareholder rights.