Aon plc — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited, prepared under U.S. GAAP. Aon is a global professional services firm providing risk, health, and wealth solutions. Comparisons below are with Q1 2022 unless otherwise noted.
Financial and operating performance
| Metric | Q1 2023 | Prior period / change |
|---|---|---|
| Revenue | $3.871 billion | $3.670 billion; up 5% reported and 7% organically |
| Operating income / margin | $1.473 billion / 38.1% | $1.367 billion / 37.2% |
| Adjusted operating margin (non-GAAP) | 38.7% | 38.0% |
| Net income attributable to Aon shareholders | $1.050 billion | $1.023 billion |
| Diluted EPS | $5.07 | $4.73; adjusted non-GAAP EPS was $5.17 versus $4.83 |
| Operating cash flow / free cash flow | $443 million / $367 million | $463 million / $440 million |
| Cash and short-term investments | $1.291 billion | $1.142 billion at December 31, 2022 |
| Total debt | $11.4 billion | Up $0.6 billion from December 31, 2022 |
Reported revenue growth included a 7% organic increase and a 1% favorable fiduciary investment-income impact, partly offset by a 3% unfavorable foreign-currency impact. Organic growth by solution line was 6% in Commercial Risk, 9% in Reinsurance, 8% in Health, and 6% in Wealth. Operating expenses rose 4% to $2.398 billion. Interest expense increased $20 million to $111 million, reflecting higher debt and interest rates. The effective tax rate was 19.6%.
Q1 operating cash flow declined 4%, mainly due to higher cash tax payments. Free cash flow, defined by Aon as operating cash flow less capital expenditures, fell $73 million; capital expenditures were $76 million versus $23 million. Cash and short-term investments exclude fiduciary funds, which are held for clients and unavailable for general corporate use.
Material changes and notable items
- Revenue increased $201 million year over year; diluted EPS rose while diluted weighted-average shares declined to 207.1 million from 216.4 million.
- Other expense was $25 million, compared with $25 million of other income in Q1 2022. The current-period expense primarily reflected foreign-currency remeasurement and non-cash pension cost; the prior period included a $25 million business-sale gain.
- Aon issued $750 million of 5.35% senior notes due 2033 in February 2023. Commercial paper outstanding was $420 million at quarter-end, down from $592 million at year-end.
- Aon repurchased 1.8 million shares for $550 million, paid $115 million in shareholder dividends, and declared dividends of $0.56 per share versus $0.51 in Q1 2022.
- Total shareholders’ equity was $58 million, including a $70 million deficit attributable to Aon shareholders; total equity was a $429 million deficit at December 31, 2022.
Liquidity, outlook, and risks
Management said its balance sheet and cash generation provide adequate liquidity and expects operating cash flows, available cash, credit facilities, and capital-market access to meet obligations. Aon expects 2023 operating cash flow to be sufficient to service debt and contractual obligations, fund capital expenditures, and continue dividends. It reported approximately $1.8 billion of available committed credit facilities, no borrowings under those facilities, and compliance with their covenants. This is management’s liquidity outlook, not quantified earnings guidance.
Aon expects approximately $38 million of additional pension contributions during the remainder of 2023; total expected contributions for the year were approximately $61 million, assuming no additional amounts are required or agreed. The company had $10.577 billion of long-term debt and $775 million of short-term debt and current maturities at March 31.
Key disclosed risks include foreign-exchange, interest-rate and market movements; debt levels and refinancing costs; economic and geopolitical uncertainty; regulatory and tax changes; talent retention; cyber and operational disruption; and acquisition and integration risks. Aon uses derivatives to manage currency and interest-rate exposures and states it does not use them for speculation. Management reported no current legal matter for which it believed a material loss was probable or reasonably possible, but noted uncertainty around proceedings, including the Lowe’s 401(k) appeal and litigation related to the 2016 aircraft crash; unfavorable outcomes could affect results or cash flows in a particular period. Aon also disclosed that insurance coverage has been exhausted or materially depleted for some claims, leaving it partly self-insured.
Disclosure controls were judged effective as of March 31, 2023, and the company reported no material change in internal control over financial reporting during the quarter. Management cautioned that quarterly results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether 7% organic revenue growth and adjusted-margin expansion are sustained, given currency headwinds and increased technology and growth investment.
- Cash conversion and free-cash-flow trends, including the effects of working-capital timing, cash taxes, and elevated capital expenditures.
- Debt maturity and refinancing requirements, interest costs, credit ratings, and continued compliance with facility covenants.
- Share repurchase and dividend spending relative to free cash flow and investment needs.
- Developments in significant litigation, insurance coverage, and other contingencies, as well as changes in foreign-exchange, interest-rate, regulatory, and cyber risks.