Aon plc — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Aon is a global professional services firm offering risk and human-capital solutions across Commercial Risk, Reinsurance, Health, and Wealth. Dollar amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $2,953 | $2,696 | $10,001 | $9,349 |
| Operating income | $691 | $590 | $3,006 | $2,657 |
| Operating margin, reported | 23.4% | 21.9% | 30.1% | 28.4% |
| Net income | $467 | $418 | $2,121 | $1,980 |
| Net income attributable to Aon shareholders | $456 | $408 | $2,066 | $1,932 |
| Diluted earnings per share | $2.23 | $1.92 | $10.03 | $9.00 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $2,174 | $2,177 |
| Free cash flow (non-GAAP) | Not stated for quarter | Not stated for quarter | $1,971 | $2,051 |
Q3 revenue rose 10%, including 6% organic growth, a 2% favorable fiduciary investment income impact, and a 2% favorable currency impact. Nine-month revenue rose 7%; organic growth was 7%, with fiduciary investment income contributing 2%, while currency and acquisitions, divestitures and other each reduced growth by 1%. Q3 adjusted operating margin was 24.3% versus 23.1%; adjusted diluted EPS was $2.32 versus $2.02. These adjusted measures are non-GAAP.
All four solution lines grew organically in Q3: Commercial Risk 4%, Reinsurance 11%, Health 10%, and Wealth 4%. Reinsurance and Health showed the strongest organic growth. Management cited retention, renewal-book management, and new business generation as growth drivers.
Cash, debt, and liquidity
- Operating cash flow for the first nine months was nearly unchanged year over year at $2,174. Free cash flow declined $80 to $1,971, reflecting lower operating cash flow and capital expenditures up $77 to $203.
- Management attributed cash-flow pressure in part to higher cash taxes and working-capital effects from temporary invoicing delays during implementation of a new system.
- At September 30, cash and cash equivalents were $808 and short-term investments were $175. Total debt was $11.3 billion, up $481 from year-end 2022; balance-sheet short-term and current debt was $1,282 and long-term debt was $9,969. Q3 interest expense increased to $119 from $103.
- Fiduciary assets and liabilities were each $15,965. Client funds are held in a fiduciary capacity and are not available for general corporate use.
- Aon reported approximately $1.8 billion of available committed credit at quarter-end, with no borrowings under its primary facilities and covenant compliance. Amendments effective October 19, 2023 increased total facility availability to $2.0 billion and extended maturities.
Material changes and unusual items
- In Q3, Aon began a three-year Accelerating Aon United restructuring program to streamline technology, optimize leadership and resources, and reduce real estate. Expected cumulative costs are approximately $1.0 billion ($900 million cash and $100 million non-cash); only $6 million of cash charges had been incurred through September 30. Management estimates annualized savings of approximately $350 million by the end of 2026, with savings from 2023 actions expected to begin in 2024. Timing, cost, and savings estimates may change.
- Other expense was $21 in Q3 versus other income of $16 a year earlier. For the first nine months, other expense was $105 versus other income of $71, reflecting higher pension costs, a $27 non-cash pension settlement charge, unfavorable currency remeasurement, and prior-year business-sale gains that did not recur.
- Effective tax rates declined to 16.6% for Q3 and 17.1% year to date, from 18.0% and 19.1%, respectively. The 2023 rates included discrete tax benefits, including releases of valuation allowances. Aon was evaluating the potential effect of OECD Pillar Two minimum-tax implementation beginning in 2024.
- Aon repurchased $1,950 of shares during the first nine months and paid $366 in shareholder dividends. Weighted-average diluted shares fell to 206.0 million from 214.6 million.
- Assets and liabilities held for sale at quarter-end were $277 and $40, respectively. The filing does not provide a clear expected sale date or proceeds.
Outlook, risks, and contingencies
Aon stated that operating cash flow, cash reserves, credit facilities, and capital-market access should be sufficient to meet liquidity needs, debt service, capital expenditures, pensions, and working-capital requirements. No specific full-year revenue or EPS guidance is provided in the filing text. Management noted that results for the nine-month period are not necessarily indicative of full-year results.
Material exposures include litigation and regulatory risk relating to allegations that fraudulent letters of credit were used in certain reinsurance transactions involving Vesttoo. Aon says it has meritorious defenses and intends to defend claims; regulators may also investigate. The filing notes that some E&O insurance coverage has been exhausted or materially depleted and that certain claims are self-insured or materially self-insured. Potential losses for some matters cannot be reasonably estimated. Aon also faces claims arising from a 2016 aircraft crash; it reports continuing defenses. Separately, an appellate judgment in Aon’s favor in the Lowe’s 401(k) case became final on October 16, 2023.
Other stated risks include foreign-exchange, interest-rate and inflation volatility; debt and borrowing costs; pension funding; tax-law changes; cyber and technology disruption; competition and pricing; personnel retention; geopolitical conflict; and execution of the restructuring program. Management said disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Progress against the $1.0 billion restructuring cost estimate and $350 million annualized savings target, including cash charges and realization timing.
- Whether the invoicing-system delays are resolved and working capital and free cash flow recover.
- Debt maturities, interest costs, and the effect of the amended credit facilities on liquidity and covenant headroom.
- Developments, potential exposure, insurance coverage, and regulatory activity in the Vesttoo-related matters and other significant litigation.
- The sustainability of organic growth by solution line and the extent to which fiduciary investment income, currency, and discrete tax benefits affect reported results.