Aon plc — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; this is an annual report, not a standalone fourth-quarter report. Aon is a global risk, retirement, health, and analytics professional-services firm operating as one segment, Aon United. It completed its reorganization to an Irish-incorporated parent on April 1, 2020.
Financial results and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $11.066 billion | $11.013 billion |
| Organic revenue growth | 1% | 6% |
| Operating income / margin | $2.781 billion / 25.1% | $2.169 billion / 19.7% |
| Adjusted operating margin (non-GAAP) | 28.5% | 27.5% |
| Net income from continuing operations | $2.017 billion | $1.574 billion |
| Diluted continuing-operations EPS | $8.45 | $6.37 |
| Adjusted diluted EPS (non-GAAP) | $9.81 | $9.17 |
| Cash from operating activities | $2.783 billion | $1.835 billion |
| Free cash flow (non-GAAP) | $2.642 billion | $1.610 billion |
Revenue was nearly flat year over year: 1% organic growth was offset by a 1% unfavorable effect from divestitures, net of acquisitions. Reinsurance Solutions grew 10% organically and Commercial Risk Solutions 3%; Retirement Solutions declined 2%, Health Solutions 1%, and Data & Analytic Services 5%. Operating expenses fell 6% to $8.285 billion. Gross debt was $7.729 billion at year-end, up about $0.4 billion; cash and short-term investments for corporate use totaled $1.192 billion, including $102 million restricted. Aon had $1.65 billion of committed credit facilities, with no facility borrowings and covenant compliance at year-end. Fiduciary assets of $13.798 billion are matched by fiduciary liabilities and are not available for general corporate use.
Changes, management commentary, and outlook
- Operating margin improved primarily because expenses declined, including lower restructuring and amortization charges and reduced discretionary spending. No restructuring-plan charges were recorded in 2020; the plan had closed in 2019.
- Reported results included $123 million of costs related to the pending Willis Towers Watson (WTW) combination. Health Solutions revenue also included a one-time $16 million adjustment relating to prior-year revenue identified during a systems implementation.
- Operating cash flow rose 52%, reflecting working-capital improvements, liquidity management, lower restructuring cash outlays, and operational performance. Capital expenditures declined to $141 million from $225 million.
- Aon repurchased 8.5 million shares for $1.761 billion and paid $412 million in shareholder dividends. Repurchases were paused during the first half amid COVID-19 uncertainty and resumed in the third quarter.
- Management said core revenues held up in Q4, while more discretionary, project-related revenue was affected by the pandemic. The full COVID-19 impact remained unquantifiable; management expected results could be adversely affected depending on the downturn’s duration and severity. It cited liquidity, cash-flow discipline, and continued operations as priorities.
- Aon expected to contribute approximately $122 million to pension plans in 2021. It stated that cash flows, cash reserves, credit facilities, and capital-market access were expected to meet liquidity needs, including over the next 12 months and beyond.
Transaction, risks, and contingencies
Aon and WTW agreed to combine in an all-stock transaction under which WTW shareholders would receive 1.08 Aon shares per WTW share. Shareholders approved the transaction in August 2020; Aon expected completion in the first half of 2021, subject to regulatory approvals and other conditions. At the filing date, the U.S. Department of Justice had issued a Second Request and the European Commission had opened a Phase II review. If the deal failed to close under specified circumstances related to antitrust clearances, Aon could owe WTW a $1 billion termination fee. Integration costs, delays, divestiture requirements, employee and client uncertainty, and failure to realize anticipated benefits are material risks.
Other key exposures include COVID-19 and economic weakness; insurance-market pricing and commission pressures; currency, interest-rate, pension, tax, and credit risks; competition for talent; cybersecurity and privacy; and regulatory oversight. Aon disclosed E&O and other litigation, including claims involving Christchurch City Council, Lowe’s plan participants, Pilkington, an aviation accident, and Blue Cross and Blue Shield Association-related investment losses. Management said it believed it had meritorious defenses. For disclosed matters where loss estimates were possible, the reasonably possible loss range above amounts accrued was $0 to $0.8 billion, exclusive of insurance; outcomes remain uncertain. The company also reported $55 million maximum potential lease-guarantee payments and $104 million under performance guarantees tied to its divested business. Financial statements received an unqualified audit opinion; the auditor identified realizability of $462 million in net deferred tax assets as a critical audit matter. Internal control over financial reporting was reported effective.
Important facts for investors to verify
- Progress and final terms of the WTW combination, including antitrust outcomes, potential remedies, timing, costs, and any termination exposure.
- Whether organic growth and margins can be sustained as pandemic-related effects, discretionary demand, and cost reductions evolve.
- Debt maturities, refinancing needs, ratings, and liquidity after the $400 million 2.8% notes due March 2021 were repaid in February 2021.
- Developments in material litigation and contingencies, including insurance coverage, accruals, and the stated $0–$0.8 billion reasonably possible loss range.
- Key non-GAAP reconciliations and the assumptions supporting pension obligations, tax assets, and expected 2021 pension contributions.