Aon plc — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparative period is Q1 2018. Aon is a global professional services firm providing risk, retirement, and health solutions. Unless stated otherwise, amounts are in U.S. dollars.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $3.143 billion | $3.090 billion | Up 2% reported; organic growth was 6% |
| Operating income | $872 million | $799 million | Up 9% |
| Operating margin | 27.7% | 25.9% | Up 1.8 percentage points |
| Adjusted operating margin (non-GAAP) | 33.7% | 31.8% | Up 1.9 percentage points |
| Continuing-operations net income | $676 million | $604 million | Up 12% |
| Net income attributable to Aon shareholders | $659 million | $594 million | Up 11% |
| Diluted EPS from continuing operations | $2.70 | $2.35 | Up 15% |
| Adjusted diluted EPS (non-GAAP) | $3.31 | $2.97 | Up 11% |
| Cash from operating activities | $74 million | $140 million | Down $66 million |
| Free cash flow (non-GAAP) | $17 million | $95 million | Down $78 million |
Operating expenses were $2.271 billion, down $20 million. The effective tax rate was 15.7%, versus 15.9%. Revenue growth included a 4% unfavorable foreign-currency translation impact. By service line, organic growth was 9% in Reinsurance, 6% in Commercial Risk, 5% in Health, 5% in Data & Analytic Services, and 2% in Retirement.
Balance sheet, debt and liquidity
- At March 31, 2019, cash and cash equivalents were $600 million and short-term investments were $134 million. Of their combined $734 million, $140 million was restricted; client fiduciary assets are separately reported and unavailable for general corporate use.
- Total debt was approximately $6.4 billion: $426 million short-term/current and $5.990 billion long-term. Debt increased $172 million from year-end 2018; commercial paper outstanding was $423 million.
- Aon had $1.3 billion of committed revolving credit facilities, with no borrowings outstanding at quarter-end, and reported compliance with facility covenants. Management said operating cash flow, available facilities and capital markets should be sufficient for foreseeable liquidity needs.
- Current assets and liabilities included matching fiduciary balances of $11.412 billion each. These client-related balances should not be treated as ordinary working-capital liquidity.
- Adoption of the lease accounting standard in January added operating lease right-of-use assets and liabilities. At March 31, operating lease liabilities were $1.192 billion, and total lease liabilities including finance leases were $1.269 billion. Adoption had no cash-flow impact and an insignificant income-statement impact.
Material changes and management commentary
- Management attributed improved reported operating margin to organic growth and operational improvements. Q1 included $91 million of restructuring and related charges; adjusted metrics exclude specified items and are non-GAAP.
- Cash from operations fell despite operational and payable-related improvements, principally because of approximately $85 million in net cash payments for legacy litigation and $15 million of incremental cash restructuring charges. Capital expenditures rose to $57 million from $45 million.
- Free cash flow was $17 million, calculated by Aon as operating cash flow less capital expenditures. It is a non-GAAP measure and does not represent cash necessarily available for discretionary spending.
- Aon repurchased 0.6 million shares for $100 million and paid $96 million in dividends; the quarterly dividend was $0.40 per share, compared with $0.36 a year earlier.
Outlook, risks and unusual items
- No specific full-year revenue, earnings or margin guidance was provided in the supplied filing text. Management stated that it expected 2019 operating cash generation to support debt service, capital expenditures, pension contributions, share repurchases and dividends.
- The global restructuring plan is expected to continue through Q4 2019, with 4,800–5,400 planned role eliminations and estimated cumulative costs of about $1.225 billion. By March 31, 4,491 positions had been eliminated and $1.073 billion of costs incurred; approximately $152 million remained estimated. Actual costs may vary.
- Aon disclosed ordinary-course claims, including errors-and-omissions matters. For described matters where loss could be estimated, the reasonably possible loss in excess of accrued amounts was estimated at $0–$100 million, excluding insurance. Aon cautioned that unfavorable outcomes could affect a future period materially.
- Aon settled the Lyttelton Port Company claim in April 2019, after quarter-end, without admission of liability; the settlement did not significantly affect results or financial condition. Other disclosed litigation includes the Gleeds pension matter, Christchurch City Council arbitration, and the Pilkington claim.
- Competition investigations involving aviation and aerospace broking remained ongoing. Aon said it could not estimate their ultimate impact or any related private litigation, damages, penalties or fines; a material adverse effect cannot be ruled out.
- Other stated risks include foreign-exchange and interest-rate movements, pension funding, debt and credit-rating changes, regulatory requirements, litigation, cyber or systems disruption, and the ability to realize restructuring savings. Currency translation reduced Q1 diluted EPS by an estimated $0.12.
Important facts for investors to verify
- Whether organic growth and margin improvement continue, particularly after separating currency effects and restructuring charges.
- Whether operating cash flow recovers and how working-capital timing, litigation payments and restructuring cash costs affect full-year free cash flow.
- Actual remaining restructuring costs, role eliminations and realized savings versus the plan’s estimates.
- Debt maturities, commercial-paper usage, access to committed facilities, and the treatment of restricted cash and fiduciary assets when assessing liquidity.
- Developments, accruals and potential insurance recoveries relating to litigation and competition investigations, including matters whose ultimate exposure Aon could not estimate.