01—Abstract
Summary
Summary of the 10-K filed February 19, 2019. Cited figures are marked; the original filing is the authoritative source.
Aon plc's FY2018 10-K shows a company that delivered strong operating performance and cash generation while carrying a restructuring program and several large legal exposures.
Reported revenue rose 8% to $10,770 milliona, including 5% organic growth, 2% from acquisitions net of divestitures, and 1% from currency. Reported operating margin improved to 14.3% from 10.7%, and adjusted operating margin (a non-GAAP measure) rose to 25.0% from 22.8%. Diluted EPS from continuing operations was $4.29 versus $1.53, though the 2017 comparison was distorted by a $380 million tradename impairment and a $345 million Tax Reform charge.
Adjusted diluted EPS from continuing operations was $8.16b, up 26%. Cash generation was the standout. Operating cash flow from continuing operations was $1,686 million, up 152%, and free cash flow was $1,446 million.
The prior year was depressed by $940 millionc of cash taxes tied to the Divested Business sale. Aon returned significant capital, repurchasing $1.4 billion of shares and paying $382 million in dividends, with $4.0 billion remaining on its repurchase authorization. Debt rose to about $6.2 billion, and the company remains rated A-/BBB+/Baa2 with stable outlooks.
The reported 11.7% effective tax rate is low and is driven by discrete items, Tax Reform effects, and restructuring; investors should not assume it persists. Key risks include a $1,225 milliond Restructuring Plan (4,800 to 5,400 role eliminations, roughly $500 million of targeted annualized savings by end-2019), Brexit uncertainty for a U.K.-incorporated parent with significant U.K. operations, and material litigation including the Lyttelton Port (NZD 184 million) and Christchurch City Council (NZD 528 million) claims.
Aon has accrued amounts for probable losses but says it cannot predict final outcomes. Management also flags that the reasonably possible loss range beyond accruals is $0 to $0.2 billion before insurance, and that the CMA and FCA reviews of U.K. investment consulting and wholesale broking could bring remedies.
02—Key points
Key Highlights
- Revenue grew 8% to $10.77 billion, driven by 5% organic growth across every major revenue line, with particular strength in Reinsurance Solutions, Commercial Risk Solutions, and Health Solutions.
- Adjusted operating margin expanded to 25.0% from 22.8%, reflecting organic growth and $195 million of restructuring-related savings; reported operating margin rose to 14.3% from 10.7%.
- Adjusted diluted EPS from continuing operations was $8.16, up 26%, versus GAAP diluted EPS from continuing operations of $4.29 (compared with $1.53 in 2017, which was depressed by impairments and Tax Reform charges).
- Free cash flow was $1.45 billion, up 198%, after the prior year's $940 million of cash taxes on the Divested Business sale; operating cash flow was $1.69 billion.
- Aon returned about $1.8 billion to shareholders in 2018 through $1.4 billion of share repurchases and $382 million of dividends ($1.56 per share), with roughly $4.0 billion of repurchase authorization remaining.
- The $1.225 billion Restructuring Plan targets 4,800 to 5,400 role eliminations and about $500 million of annualized savings by end-2019; 4,366 positions had been eliminated through December 31, 2018.
- Material risks include Brexit uncertainty for the U.K.-incorporated parent, large legal claims in New Zealand (Lyttelton Port and Christchurch City Council, together over NZD 700 million plus interest), and an 11.7% effective tax rate that is sensitive to discrete items and U.S. Tax Reform.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2018filed February 19, 2019Financial Statements
FY2018 against FY2017
| Line item | FY2018FY2017 | Change |
|---|---|---|
| Revenue | $10.77B$10.00B | +7.7% |
| Operating Expenses | $9.23B$8.93B | +3.3% |
| Operating Income | $1.54B$1.06B | +45.0% |
| Interest Expense | $278.00M$282.00M | −1.4% |
| Net Income | $1.13B$1.23B | −7.5% |
| EPS (Basic) | $4.62$4.74 | −2.5% |
| EPS (Diluted) | $4.59$4.70 | −2.3% |
| Shares Outstanding (Basic) | 245.20M258.50M | −5.1% |
| Shares Outstanding (Diluted) | 247.00M260.70M | −5.3% |
05—Questions
Frequently Asked Questions
How did Aon perform financially in 2018 compared with 2017?
Revenue rose 8% to $10,770 million, with 5% organic growth. Reported net income attributable to Aon shareholders fell to $1,134 million from $1,226 million, largely because of the discontinued-operations gain in 2017, but net income from continuing operations rose 153% to $1,100 million. Adjusted diluted EPS from continuing operations increased 26% to $8.16.
What drove the large increase in cash flow from operations?
Operating cash flow from continuing operations rose $1,017 million to $1,686 million. The 2017 base included $940 million of cash taxes tied to the Divested Business sale. 2018 benefited from operational improvement and working capital gains in receivables and payables, partly offset by $145 million of incremental cash restructuring charges and $80 million of accelerated pension contributions.
How much debt does Aon carry and how secure is its credit profile?
Total debt was about $6.2 billion at December 31, 2018, up $278 million year over year. Senior debt is rated A- (S&P), BBB+ (Fitch), and Baa2 (Moody's), all with stable outlooks. Aon had no borrowings under its $900 million and $400 million committed credit facilities at year-end. The 10-K notes that a rating downgrade could raise borrowing costs and restrict commercial paper access.
What are the biggest legal and regulatory exposures disclosed?
The largest disclosed matters are claims against Aon New Zealand: Lyttelton Port Company seeks about NZD 184 million, and Christchurch City Council seeks about NZD 528 million through arbitration. A Gleeds pension fund claim seeks about £70 million, and a Pilkington tornado claim seeks $45 million to $85 million. Aon says it has meritorious defenses and has accrued only probable and estimable amounts. The 10-K also notes that the reasonably possible loss range above accruals is $0 to $0.2 billion, and that the U.K. CMA and FCA reviews could lead to remedies.
06—Continue