Aon plc — 2018 Form 10-K Summary
Business context and reporting period
For the fiscal year ended December 31, 2018, Aon reported as a global professional-services firm focused on risk, retirement and health. It operates as one segment, Aon United, across Commercial Risk, Reinsurance, Retirement, Health, and Data & Analytic Services. Amounts below are in U.S. dollars; financial figures are generally in millions unless stated otherwise.
Financial performance
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $10,770 | $9,998 |
| Operating income | $1,544 | $1,065 |
| Operating margin, reported | 14.3% | 10.7% |
| Operating margin, adjusted non-GAAP | 25.0% | 22.9% |
| Income from continuing operations | $1,100 | $435 |
| Diluted EPS from continuing operations | $4.29 | $1.53 |
| Net income attributable to Aon shareholders | $1,134 | $1,226 |
| Adjusted diluted EPS, continuing operations, non-GAAP | $8.16 | $6.47 |
| Cash flow from continuing operating activities | $1,686 | $669 |
| Free cash flow, non-GAAP | $1,446 | $486 |
- Revenue rose 8%: 5% organic growth, 2% from acquisitions net of divestitures, and 1% favorable foreign-currency translation. Growth was broad-based; organic growth was strongest in Reinsurance (7%), Commercial Risk (6%) and Health (5%). Data & Analytic Services revenue declined 3% reported but grew 3% organically.
- Reported operating income improved, while expenses included $485 million of restructuring costs, $75 million of legacy litigation expense and $71 million of accelerated tradename amortization. Adjusted results exclude specified items and are non-GAAP.
- Continuing-operations earnings increased substantially, but shareholder net income declined because 2017 included a much larger discontinued-operations gain from the divested business. 2018 discontinued-operations income was $74 million, including an $82 million after-tax sale-related gain.
- Operating cash flow increased by $1,017 million year over year. The 2017 comparison included $940 million of cash tax payments related to the divestiture; 2018 cash flow also benefited from operational and working-capital improvements.
Fourth-quarter performance
In Q4 2018, revenue was $2,770 million versus $2,909 million in Q4 2017. Operating income was $499 million versus $601 million. Net income from continuing operations was $284 million versus $17 million, while net income attributable to Aon shareholders was $345 million versus a loss of $19 million. Comparisons are affected by the divestiture and accounting items; the filing does not provide a clear Q4 organic-growth figure in the presented quarterly data.
Debt, liquidity and capital allocation
- Total debt was $6.244 billion at year-end, up from $5.966 billion; long-term debt was $5.993 billion. Interest expense was $278 million, compared with $282 million in 2017.
- Cash and short-term investments available for corporate use totaled $828 million, of which $91 million was restricted. Separately, $3.9 billion of fiduciary cash and short-term investments was held for clients and insurers and was not available for general corporate purposes.
- Aon reported $1.3 billion of committed revolving credit facilities, with no facility borrowings at year-end, and said it was in compliance with covenants. Management stated that operating cash flow, credit facilities and capital-markets access should meet foreseeable liquidity needs.
- Aon repurchased 10.0 million shares for $1.447 billion in 2018 and paid $382 million in dividends. Year-end shares outstanding were 240.1 million, down from 247.6 million.
- 2018 pension contributions were $252 million. Management estimated approximately $145 million of contributions in 2019.
Material changes, outlook and unusual items
- Aon adopted ASC 606 revenue recognition prospectively in 2018, without restating prior periods. The standard accelerated recognition for certain brokerage services and changed the timing of revenue and costs. Management estimated a favorable $78 million impact on 2018 continuing-operations net income, or $0.32 per share; adoption had no impact on total operating cash flow.
- The restructuring plan, expanded in Q4 2018, is expected to cost approximately $1.225 billion cumulatively, with $982 million incurred through year-end. Aon expects 4,800–5,400 role eliminations, completion in Q4 2019, and approximately $500 million of annualized savings by the end of 2019. These are targets, not guaranteed outcomes.
- The continuing-operations effective tax rate was 11.7%, versus 36.5% in 2017, reflecting geographic earnings mix, discrete items and tax-reform accounting. Aon completed its accounting for the 2017 U.S. Tax Reform Act in Q4 2018; the company noted that future tax rates may remain volatile.
- Goodwill impairment testing identified no goodwill impairment in 2018. A separate $176 million non-cash impairment was recorded in Q2 for assets and liabilities previously held for sale.
- The CMA issued a final report on U.K. investment consulting and fiduciary management in December 2018; detailed remedies were expected in Q1 2019. Aon did not anticipate a significant consolidated impact. The FCA’s U.K. wholesale insurance-broker market study remained ongoing, and Aon could not estimate its impact.
- Management identified Brexit uncertainty, economic and market conditions, currency movements, competition, regulation and data privacy, cyber and service-provider risks, pension funding, debt and refinancing, personnel retention, and execution of restructuring as significant risks.
Contingencies and other risks
Aon disclosed pending professional-liability matters, including claims connected with U.K. pension advice and New Zealand earthquake insurance placements, as well as competition investigations in aviation and aerospace broking. The company estimated the reasonably possible loss range, above amounts accrued, for described matters at $0–$0.2 billion, excluding insurance coverage, while noting material uncertainty. Aon said the ultimate outcomes could adversely affect results or cash flows in a particular period. It also reported divestiture-related guarantees with maximum potential payments of $85 million for leases and $188 million for client-contract performance, plus $103 million of contingent guarantees for client premium payments.
Important facts for investors to verify
- How much of reported earnings and margin improvement reflects recurring operations versus ASC 606 timing effects, restructuring adjustments, litigation, amortization and other excluded items.
- Whether the targeted $500 million annualized restructuring savings are achieved by end-2019, and whether remaining costs stay within the $1.225 billion estimate.
- Whether the 2018 operating-cash-flow increase is sustainable after the unusual 2017 divestiture-related tax payments and working-capital movements.
- Debt maturity and refinancing capacity, covenant headroom, and the availability of parent-company cash given subsidiary and regulatory constraints.
- Developments and potential financial exposure from the disclosed lawsuits, antitrust investigations, regulatory reviews, and divestiture guarantees.
- How Brexit, tax-law changes, currency movements, pension assumptions, and forthcoming lease accounting affect future earnings, balance-sheet leverage and liquidity.