Aon plc — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Aon is a global professional services firm focused on risk, retirement and health. Unless noted, financial amounts are in U.S. dollars; financial statement amounts are in millions.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $3,525 | $3,219 | +10%; organic growth 6% |
| Operating income | $1,245 | $1,033 | +21% |
| Operating margin | 35.3% | 32.1% | +3.2 percentage points |
| Adjusted operating margin (non-GAAP) | 37.4% | 35.7% | +1.7 percentage points |
| Net income attributable to Aon shareholders | $913 | $772 | +18% |
| Diluted EPS | $4.00 | $3.29 | +22% |
| Adjusted diluted EPS (non-GAAP) | $4.28 | $3.68 | +16% |
| Cash provided by operating activities | $561 | $338 | +$223 |
| Free cash flow (non-GAAP) | $532 | $279 | +91% |
Revenue growth reflected 6% organic growth and a 4% favorable foreign-exchange impact. By service line, revenue rose 12% in Commercial Risk Solutions, 9% in Reinsurance Solutions, 9% in Retirement Solutions, 7% in Health Solutions and 6% in Data & Analytic Services. Organic growth in Data & Analytic Services was negative 2%, primarily due to weakness in travel and events.
Operating margin improved with organic growth and expense discipline. Reported operating expenses rose 4% to $2,280; higher compensation, currency effects and $17 million of additional WTW transaction costs were partly offset by lower travel and entertainment costs and a $55 million year-over-year decrease in accelerated tradename amortization. Adjusted measures exclude specified amortization and transaction costs and are non-GAAP.
Cash, debt and liquidity
- Cash and cash equivalents were $822 at March 31, 2021, down from $884 at year-end 2020. Cash plus short-term investments totaled $993, including $102 of restricted funds.
- Total debt was approximately $7.3 billion, down about $0.4 billion from December 31, 2020. Aon redeemed $400 million of 2.80% notes in February; it had no commercial paper outstanding at quarter-end.
- Aon reported $1.65 billion of available committed credit facilities, with no borrowings under them and compliance with covenants. Management said it expects operating cash flow, available liquidity and capital-market access to meet needs over the next 12 months and beyond.
- Financing activities used $709 million, including $650 million of debt repayments, $104 million of dividends and $50 million of share repurchases. The quarterly dividend was $0.46 per share.
Material developments, outlook and risks
- WTW combination: The proposed all-stock combination remained subject to regulatory approvals and customary closing conditions. Shareholders of both companies had approved it; U.S. and European regulatory reviews were ongoing. Aon was working toward a first-half 2021 closing, subject to those conditions.
- COVID-19: Management reported that core revenues had not significantly declined in Q1, while discretionary business varied with the pace of reopening and economic recovery. The full pandemic impact remained unquantifiable; a reversal in economic growth could also affect core services. Aon said it was monitoring liquidity and operating conditions.
- Pensions: Q1 pension contributions were $50 million. Management expected approximately $50 million of further contributions during the remainder of 2021, subject to currency movements and other changes; U.S. contribution expectations were revised following the American Rescue Plan Act.
- Contingencies: For specified legal matters, Aon estimated reasonably possible losses in excess of accrued amounts at $0–$0.8 billion, excluding insurance. Notable claims include the Christchurch City Council arbitration (about NZD 528 million claimed), litigation relating to the 2016 plane crash, and a lawsuit alleging losses in Allianz Structured Alpha funds exceeding $2 billion. Aon said it believed it had meritorious defenses; outcomes could nevertheless affect future results or cash flows.
- Other exposures: Guarantees tied to a previously divested business had maximum potential payments of $51 million for leases and $91 million for performance obligations. Client premium-payment guarantees were approximately $67 million.
- Tax and currency: The effective tax rate was 20.1%, versus 19.3%. Proposed U.K. legislation to raise the corporate tax rate from 19% to 25% from April 2023 could require remeasurement of U.K. deferred tax balances; Aon was evaluating the impact. Foreign-exchange movements contributed favorably to reported comparisons.
- Executive transition: A transition and separation agreement effective April 27, 2021 provided for a $6 million cash payment to John Bruno, payable in installments, subject to conditions; his separation date was set for December 31, 2021.
Management noted that Q1 results are not necessarily indicative of full-year results. Forward-looking statements are subject to risks including regulatory approval and integration of the WTW combination, economic and pandemic conditions, currency and interest-rate changes, debt and rating developments, litigation, regulation, cybersecurity and talent retention.
Key facts for investors to verify
- Whether and when the WTW combination received required regulatory approvals and closed, and how its terms or expected benefits changed.
- Whether organic growth and adjusted margin improvement continued, especially in discretionary service lines and Data & Analytic Services; compare non-GAAP measures with GAAP results.
- Cash conversion, working-capital movements, debt repayment and liquidity after the quarter, including pension contributions and capital allocation.
- Developments in significant legal matters and any changes to accruals, insurance coverage or the disclosed $0–$0.8 billion reasonably possible loss range.
- The financial effect of U.K. tax-rate changes and continuing COVID-19 or foreign-exchange impacts.