AON PLC EXECUTIVE SUMMARY OF 2022 FINANCIAL RESULTS
Aon plc is a leading global professional services firm providing a broad range of risk, health, and wealth solutions. Through our experience, global reach, and comprehensive analytics, we are better able to help clients meet rapidly changing, increasingly complex, and interconnected challenges. We are committed to accelerating innovation to address unmet and evolving client needs, so that our clients are better informed, better advised, and able to make better decisions to protect and grow their business. Management is focused on strengtheningAon and uniting the firm with one portfolio of capability enabled by data and analytics and one operating model to deliver additional insight, connectivity, and efficiency.
Financial Results
The following is a summary of our 2022 financial results:
•Revenue increased$286 million , or 2%, to$12.5 billion in 2022 compared to 2021, reflecting 6% organic revenue growth and a 1% favorable impact from fiduciary investment income, partially offset by a 4% unfavorable impact from foreign currency translation a 1% unfavorable impact from acquisitions, divestitures and other. •Operating expenses decreased$1.3 billion , or 13%, to$8.8 billion in 2022 compared to 2021 due primarily to the$1.0 billion payment made in connection with terminating the combination with WTW (the "Termination Fee") and certain transaction costs incurred related to the termination in the prior year (together, the "Transaction Costs") and a$373 million favorable impact from foreign currency translation, partially offset by an increase in expense associated with 6% organic revenue growth, investments in long-term growth, and a$58 million charge related to certain legal settlements reached.
•Operating margin increased to 29.4% in 2022 from 17.1% in 2021. The increase was driven by a decrease in operating expenses as listed above and organic revenue growth of 6%.
•Due to the factors set forth above, Net income was
•Diluted earnings per share increased 119% to
•Cash flows provided by operating activities was$3.2 billion in 2022, an increase of$1.0 billion , or 48%, from$2.2 billion in 2021, primarily due to the Transaction Costs paid in the prior year period, and strong operating income growth, partially offset by higher incentive compensation payments made in the current year following strong performance in 2021. We focus on four key metrics not presented in accordance withU.S. GAAP that we communicate to shareholders: organic revenue growth, adjusted operating margin, adjusted diluted earnings per share, and free cash flow. These non-GAAP metrics should be viewed in addition to, not instead of, our Consolidated Financial Statements. The following is our measure of performance against these four metrics for 2022: •Organic revenue growth, a non-GAAP measure defined under the caption "Review of Consolidated Results - Organic Revenue Growth," was 6% in 2022, compared to 9% organic growth in the prior year. •Adjusted operating margin, a non-GAAP measure defined under the caption "Review of Consolidated Results - Adjusted Operating Margin," was 30.8% in 2022, compared to 30.1% in the prior year. The increase in adjusted operating margin primarily reflects 6% organic revenue growth and a higher fiduciary investment income, partially offset by increased expenses and investments in long-term growth. •Adjusted diluted earnings per share, a non-GAAP measure defined under the caption "Review of Consolidated Results - Adjusted Diluted Earnings per Share," was$13.39 per share in 2022, an increase of$1.39 per share, or 12%, from$12.00 per share in 2021. The increase in adjusted diluted earnings per share primarily reflects strong operational performance and effective capital management, highlighted by$3.2 billion of share repurchase during 2022, partially offset by an unfavorable impact from foreign currency translation. •Free cash flow, a non-GAAP measure defined under the caption "Review of Consolidated Results - Free Cash Flow," was$3.0 billion in 2022, an increase of$978 million , or 48%, from$2.0 billion in 2021, reflecting an increase in Cash flows from operations, partially offset by a$59 million increase in capital expenditures. 30 --------------------------------------------------------------------------------
ENVIRONMENTAL, SOCIAL, AND GOVERNANCE
For many companies, the management of ESG risks and opportunities has become increasingly important, and ESG-related challenges, such as extreme weather events, supply chain disruptions, cyber events, regulatory changes, ongoing public health impacts, and the increased focus on workforce resilience in highly varied work environments continue to create volatility and uncertainty for our clients.Aon offers a wide range of risk assessment, consulting and advisory solutions, many of which are significant parts of our core business offerings, designed to address and manage ESG issues for clients, and to enable our clients to create more sustainable value. We view ESG risks as presenting an important opportunity forAon to work together as one firm to address client needs and improve our impact on ESG matters.
REVIEW OF CONSOLIDATED RESULTS
Summary of Results
Our consolidated results are as follow (in millions, except per share data):
Years Ended December 31
2022 2021 2020
Revenue
Total revenue $ 12,479 $ 12,193 $ 11,066
Expenses
Compensation and benefits 6,477 6,738 5,905
Information technology 509 477 444
Premises 289 327 291
Depreciation of fixed assets 151 179 167
Amortization and impairment of intangible assets 113 147 246
Other general expense 1,271 2,235 1,232
Total operating expenses 8,810 10,103 8,285
Operating income 3,669 2,090 2,781
Interest income 18 11 6
Interest expense (406) (322) (334)
Other income (expense) (125) 152 13
Income before income taxes 3,156 1,931 2,466
Income tax expense 510 623 448
Net income 2,646 1,308 2,018
Less: Net income attributable to noncontrolling
interests 57 53 49
Net income attributable to Aon shareholders $ 2,589 Diluted net income per share attributable toAon shareholders$ 12.14 $ 5.55 $ 8.45 Weighted average ordinary shares outstanding - diluted 213.2 226.1 233.1 31
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Consolidated Results for 2022 Compared to 2021
Revenue
Total revenue increased$286 million , or 2%, to$12.5 billion in 2022, compared to$12.2 billion in 2021. The increase was driven by 6% organic revenue growth and a 1% favorable impact from fiduciary investment income, partially offset by a 4% unfavorable impact from foreign currency translation and a 1% unfavorable impact from acquisitions, divestitures, and other.Commercial Risk Solutions revenue increased$80 million , or 1%, to$6.7 billion in 2022, compared to$6.6 billion in 2021. Organic revenue growth was 6% in 2022, reflecting growth across every major geography, including double-digit growth inLatin America ,Asia , and the Pacific, driven by strong net new business generation, retention, and management of the renewal book portfolio.U.S. retail brokerage was pressured primarily by Transaction Solutions, which declined due to lower external deal volume. Results also reflect strong growth globally in the affinity business across both consumer and business solutions, including growth in the travel and events practice and Digital Client Solutions. On average globally, exposures and pricing were modestly positive, resulting in modestly positive market impact. Reinsurance Solutions revenue increased$193 million , or 10%, to$2.2 billion in 2022, compared to$2.0 billion in 2021. Organic revenue growth was 8% in 2022 driven by strong net new business generation in treaty, as well as solid growth in facultative placements and theStrategy and Technology Group . In addition, market impact was modestly positive on results.Health Solutions revenue increased$70 million , or 3%, to$2.2 billion in 2022, compared to$2.2 billion in 2021. Organic revenue growth was 8% in 2022, reflecting growth globally in core health and benefits brokerage, driven by strong retention, net new business generation and management of the renewal book portfolio. Strength in health and benefits included growth in advisory work related to wellbeing and resilience. Results also reflect double-digit growth in Human Capital, driven by data and advisory solutions, and modest growth in Consumer Benefits Solutions. Wealth Solutions revenue decreased$59 million , or 4%, to$1.4 billion in 2022, compared to$1.4 billion in 2021. The decrease was primarily driven by a 5% unfavorable impact from foreign currency translation and a 2% unfavorable impact from acquisitions, divestitures, and other. This decrease was offset by organic revenue growth of 3% in 2022 driven by high demand and project related work related to pension risk transfer and ongoing impacts of regulatory changes. In Investments, a decrease in AUM-based delegated investment management revenue due to equity market and interest rate movements was partially offset by higher advisory demand and project-related work.
Compensation and Benefits
Compensation and benefits decreased$261 million , or 4%, in 2022 compared to 2021. The decrease was primarily driven by a$293 million favorable impact from foreign currency translation and a$245 million decrease in Transaction Costs, partially offset by an increase in expense associated with 6% organic revenue growth. Information Technology Information technology, which represents costs associated with supporting and maintaining our infrastructure, increased$32 million , or 7%, in 2022 compared to 2021. The increase was primarily driven by ongoing investments inAon Business Services-enabled technology platforms and technology to drive long-term growth, partially offset by a$17 million decrease in Transaction Costs.
Premises
Premises, which represents the cost of occupying offices in various locations throughout the world, decreased$38 million , or 12%, in 2022 compared to 2021. The decrease was primarily driven by a$22 million decrease in Transaction Costs and a$19 million favorable impact from foreign currency translation.
Depreciation of Fixed Assets
Depreciation of fixed assets primarily relates to software, leasehold improvements, furniture, fixtures and equipment, computer equipment, buildings, and automobiles. Depreciation of fixed assets decreased$28 million , or 16%, in 2022 compared to 2021. The decrease was primarily driven by a$16 million decrease in Transaction Costs.
Amortization and Impairment of Intangible Assets
Amortization and impairment of intangibles primarily relates to finite-lived customer-related and contract-based, technology, and tradename assets. Amortization and impairment of intangibles decreased$34 million , or 23%, in 2022 compared to 2021. 32 --------------------------------------------------------------------------------
Other General Expenses
Other general expenses decreased$964 million , or 43%, in 2022 compared to 2021. The decrease was primarily driven by a$1.1 billion decrease in Transaction Costs, partially offset by an increase in expense associated with 6% organic revenue growth, including travel and entertainment expense, and a$58 million charge from certain legal settlements reach in 2022.
Interest Income
Interest income represents income earned on operating cash balances and other income-producing investments. It does not include interest earned on Funds held on behalf of clients. Interest income was$18 million in 2022, an increase of$7 million , or 64%, from 2021. Interest Expense Interest expense, which represents the cost of our debt obligations, was$406 million in 2022, an increase of$84 million , or 26%, from 2021. The increase primarily reflects an increase in total debt.
Other Income (Expense)
Other expense was
Income before Income Taxes
Income before income taxes was
Income Taxes
The effective tax rate on net income was 16.2% in 2022 and 32.3% in 2021. The 2022 tax rate was primarily driven by the geographical distribution of income and certain discrete items, primarily the favorable impacts of share-based payments. The 2021 tax rate was primarily driven by the impact of the Termination Fee, theU.K. statutory tax rate increase, and the tax benefit of share-based payments. TheU.K. enacted legislation in the second quarter of 2021 which increases the corporate income tax rate from 19% to 25% with effect fromApril 1, 2023 and the Company remeasured itsU.K. deferred tax assets and liabilities accordingly.
Net Income Attributable to
Net income attributable to
Consolidated Results for 2021 Compared to 2020
We have elected not to include a discussion of our consolidated results for 2021 compared to 2020 in this report in reliance upon Instruction 1 to Item 303(b) of Regulation S-K. This discussion can be found in our Annual Report on Form 10-K for the year endedDecember 31, 2021 , which was filed with theSEC onFebruary 18, 2022 . Non-GAAP Metrics In our discussion of consolidated results, we sometimes refer to certain non-GAAP supplemental information derived from consolidated financial information specifically related to organic revenue growth, adjusted operating margin, adjusted diluted earnings per share, adjusted net income attributable toAon shareholders, adjusted net income per share, other income (expense), as adjusted, adjusted effective tax rate, free cash flow, and the impact of foreign exchange rate fluctuations on operating results. Management believes that these measures are important to make meaningful period-to-period comparisons and that this supplemental information is helpful to investors. Management also uses these measures to assess operating performance and performance for compensation. This non-GAAP supplemental information should be viewed in addition to, not instead of, our Consolidated Financial Statements. 33 --------------------------------------------------------------------------------
Organic Revenue Growth
We use supplemental information related to organic revenue growth to help us and our investors evaluate business growth from existing operations. Organic revenue growth is a non-GAAP measure that includes the impact of certain intercompany activity and excludes the impact of changes in foreign exchange rates, fiduciary investment income, acquisitions, divestitures, transfers between revenue lines, and gains or losses on derivatives accounted for as hedges. This supplemental information related to organic revenue growth represents a measure not in accordance withU.S. GAAP and should be viewed in addition to, not instead of, our Consolidated Financial Statements. Industry peers provide similar supplemental information about their revenue performance, although they may not make identical adjustments. A reconciliation of this non-GAAP measure to the reported Total revenue is as follows (in millions, except percentages): Years Ended Less: Fiduciary Organic Less: Currency Investment Income Less: Acquisitions, Revenue Growth Dec 31, 2022 Dec 31, 2021 % Change Impact (1) (2) Divestitures & Other (3) Commercial Risk Solutions$ 6,715 $ 6,635 1 % (4) % 1 % (2) % 6 % Reinsurance Solutions 2,190 1,997 10 (3) 1 4 8 Health Solutions 2,224 2,154 3 (3) - (2) 8 Wealth Solutions 1,367 1,426 (4) (5) - (2) 3 Elimination (17) (19) N/A N/A N/A N/A N/A Total revenue$ 12,479 $ 12,193 2 % (4) % 1 % (1) % 6 % Years Ended Less: Fiduciary Organic Less: Currency Investment Income Less: Acquisitions, Revenue Growth Dec 31, 2021 Dec 31, 2020 % Change Impact (1) (2) Divestitures & Other (3) Commercial Risk Solutions$ 6,635 $ 5,861 13 % 2 % - % - % 11 % Reinsurance Solutions 1,997 1,814 10 2 - - 8 Health Solutions 2,154 2,067 4 2 - (8) 10 Wealth Solutions 1,426 1,341 6 3 - 1 2 Elimination (19) (17) NA NA NA NA NA Total revenue$ 12,193 $ 11,066 10 % 2 % - % (1) % 9 % (1)Currency impact is determined by translating last year's revenue at this year's foreign exchange rates. (2)Fiduciary investment income for the years ended December 31, 2022 2021, and 2020 was$76 million ,$8 million , and$27 million , respectively. (3)Organic revenue growth includes the impact of certain intercompany activity, changes in foreign exchange rates, fiduciary investment income, acquisitions, divestitures, transfers between revenue lines, and gains or losses on derivatives accounted for as hedges. 34 --------------------------------------------------------------------------------
Adjusted Operating Margin
We use adjusted operating margin as a non-GAAP measure of core operating performance of the Company. Adjusted operating margin excludes the impact of certain items, as listed below, because management does not believe these expenses reflect our core operating performance. This supplemental information related to adjusted operating margin represents a measure not in accordance withU.S. GAAP, and should be viewed in addition to, not instead of, our Consolidated Financial Statements.
A reconciliation of this non-GAAP measure to reported operating margins is as follows (in millions, except percentages):
Years Ended
2022 2021
Revenue $ 12,479 $ 12,193
Operating income - as reported $ 3,669 $ 2,090
Amortization and impairment of intangible assets 113 147
Transaction costs and other charges related to the combination and resulting termination (1)
- 1,436
Legal settlements (2) $ 58 $ -
Operating income - as adjusted 3,840 3,673
Operating margin - as reported 29.4 % 17.1 %
Operating margin - as adjusted 30.8 % 30.1 %
(1)As part of the terminated combination with WTW, certain transaction costs
were incurred by the Company through the third quarter of 2021. These costs
included advisory, legal, accounting, valuation, and other professional or
consulting fees related to the combination, including planned divestitures, some
of which were terminated, as well as certain compensation expenses and expenses
related to further steps on our Aon United operating model as a result of the
termination. Additionally, this includes the $1 billion Termination Fee paid in
connection with the termination of the combination.
(2)In connection with certain legal settlements reached, a $58 million charge
was recognized in the second quarter of 2022.
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--------------------------------------------------------------------------------Adjusted Diluted Earnings per Share
We use adjusted diluted earnings per share as a non-GAAP measure of our core operating performance. Adjusted diluted earnings per share excludes the impact of certain items, as listed below, because management does not believe these expenses are the best indicators of our core operating performance. This supplemental information related to adjusted diluted earnings per share represents a measure not in accordance withU.S. GAAP and should be viewed in addition to, not instead of, our Consolidated Financial Statements.
A reconciliation of this non-GAAP measure to reported diluted earnings per share is as follows (in millions, except per share data and percentages):
Year Ended
U.S. GAAP Adjustments Non-GAAP Adjusted
Operating income $ 3,669 $ 171 $ 3,840
Interest income 18 - 18
Interest expense (406) - (406)
Other income (expense) (1) (125) 170 45
Income before income taxes 3,156 341 3,497
Income tax expense (2) 510 75 585
Net income 2,646 266 2,912
Less: Net income attributable to noncontrolling
interests 57 - 57
Net income attributable to Aon shareholders $ 2,589 $ 266 $ 2,855
Diluted net income per share attributable to Aon
shareholders $ 12.14 $ 1.25 $ 13.39
Weighted average ordinary shares outstanding - diluted 213.2 - 213.2
Effective tax rates (2) 16.2 % 16.7 %
Year Ended December 31, 2021
U.S. GAAP Adjustments Non-GAAP Adjusted
Operating income $ 2,090 $ 1,583 $ 3,673
Interest income 11 - 11
Interest expense (322) - (322)
Other income (expense) (3) 152 (124) 28
Income before income taxes 1,931 1,459 3,390
Income tax expense (2) 623 - 623
Net income 1,308 1,459 2,767
Less: Net income attributable to noncontrolling
interests 53 - 53
Net income attributable to Aon shareholders $ 1,255 $ 1,459 $ 2,714
Diluted net income per share attributable to Aon
shareholders $ 5.55 $ 6.45 $ 12.00
Weighted average ordinary shares outstanding - diluted 226.1 - 226.1
Effective tax rates (2) 32.3 % 18.4 %
(1)To further its pension de-risking strategy the Company purchased an annuity
for portions of its U.S. pension plans that will settle certain obligations. A
non-cash settlement charge totaling $170 million was recognized in the fourth
quarter of 2022 which is excluded from Adjusted Other income (expense).
(2)Adjusted items are generally taxed at the estimated annual effective tax
rate, except for the applicable tax impact associated with certain transaction
costs and other charges related to the combination and resulting termination, as
well as certain legal and pension settlements, which are adjusted at the related
jurisdictional rate. In addition, income tax expense for the year ended December
30, 2021 excludes the impact of remeasuring the net deferred tax liabilities in
the U.K. as a result of the corporate income tax rate increase enacted in the
second quarter of 2021.
(3)Adjusted Other income (expense) excludes gains from dispositions of $124
million , for the year ended December 31, 2021 .
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--------------------------------------------------------------------------------Free Cash Flow
We use free cash flow, defined as cash flow provided by operations minus capital expenditures, as a non-GAAP measure of our core operating performance and cash generating capabilities of our business operations. This supplemental information related to free cash flow represents a measure not in accordance withU.S. GAAP and should be viewed in addition to, not instead of, the Consolidated Financial Statements. The use of this non-GAAP measure does not imply or represent the residual cash flow for discretionary expenditures. A reconciliation of this non-GAAP measure to cash flow provided by operations is as follows (in millions): Years Ended December 31 2022 2021 Cash provided by operating activities$ 3,219 $ 2,182 Capital expenditures (196) (137) Free cash flow$ 3,023 $ 2,045
Impact of Foreign Currency Exchange Rate Fluctuations
Because we conduct business in more than 120 countries and sovereignties, foreign currency exchange rate fluctuations have a significant impact on our business. Foreign currency exchange rate movements may be significant and may distort true period-to-period comparisons of changes in revenue or pretax income. Therefore, to give financial statement users meaningful information about our operations, we have provided an illustration of the impact of foreign currency exchange rate fluctuations on our financial results. The methodology used to calculate this impact isolates the impact of the change in currencies between periods by translating the prior year's revenue, expenses, and net income using the current year's foreign currency exchange rates. Currency fluctuations had an unfavorable impact of$0.33 on earnings per diluted share during the year endedDecember 31, 2022 if prior year period results were translated at current period foreign exchange rates. Currency fluctuations had a favorable impact of$0.17 on earnings per diluted share during the year endedDecember 31, 2021 , if 2020 results were translated at 2021 rates. Currency fluctuations had an unfavorable impact of$0.44 on adjusted earnings per diluted share during the year endedDecember 31, 2022 if prior year period results were translated at current period foreign exchange rates. Currency fluctuations had a favorable impact of$0.23 on adjusted earnings per diluted share during the year endedDecember 31, 2021 , if 2020 results were translated at 2021 rates. These translations are performed for comparative and illustrative purposes only and do not impact the accounting policies or practices for amounts included in our Financial Statements.
LIQUIDITY AND FINANCIAL CONDITION
Liquidity
Executive Summary
We believe that our balance sheet and strong cash flow provide us with adequate
liquidity. Our primary sources of liquidity in the near-term include cash flows
provided by operations and available cash reserves; primary sources of liquidity
in the long-term include cash flows provided by operations, debt capacity
available under our credit facilities, and capital markets. Our primary uses of
liquidity are operating expenses and investments, capital expenditures,
acquisitions, share repurchases, pension obligations, and shareholder dividends.
We believe that cash flows from operations, available credit facilities,
available cash reserves, and the capital markets will be sufficient to meet our
liquidity needs, including principal and interest payments on debt obligations,
capital expenditures, pension contributions, and anticipated working capital
requirements in the next twelve months and over the long-term.
Cash on our balance sheet includes funds available for general corporate
purposes, as well as amounts restricted as to their use. Funds held on behalf of
clients in a fiduciary capacity are segregated and shown together with
uncollected insurance premiums and claims in Fiduciary assets in the
Consolidated Statements of Financial Position, with a corresponding amount in
Fiduciary liabilities.
In our capacity as an insurance broker or agent, we collect premiums from
insureds and, after deducting our commission, remit the premiums to the
respective insurance underwriters. We also collect claims or refunds from
underwriters on behalf of insureds, which are then returned to the insureds.
Unremitted insurance premiums and claims are held by us in a fiduciary capacity.
The levels of funds held on behalf of clients and liabilities can fluctuate
significantly depending on when we collect the premiums, claims, and refunds,
make payments to underwriters and insureds, and collect funds from clients and
make
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payments on their behalf, and upon the impact of foreign currency movements.
Funds held on behalf of clients, because of their nature, are generally invested
in very liquid securities with highly rated, credit-worthy financial
institutions. Fiduciary assets include funds held on behalf of clients comprised
of cash and cash equivalents of $6.4 billion and $6.1 billion at December 31,
2022 and 2021, and fiduciary receivables of $9.5 billion and $8.3 billion at
December 31, 2022 and 2021, respectively. While we earn investment income on the
funds held in cash and money market funds, the funds cannot be used for general
corporate purposes.
We maintain multi-currency cash pools with third-party banks in which various
Aon entities participate. Individual Aon entities are permitted to overdraw on
their individual accounts provided the overall global balance does not fall
below zero. At December 31, 2022 , non-U.S. cash balances of one or more entities
may have been negative; however, the overall balance was positive.
The following table summarizes our Cash and cash equivalents, Short-term
investments, and Fiduciary assets as of
Statement of Financial Position Classification
Cash and cash Short-term Fiduciary
Asset Type equivalents investments assets Total
Certificates of deposit, bank deposits, or time
deposits $ 690
$ -
- 452 2,871 3,323
Cash, Short-term investments, and funds held on
behalf of clients 690 452 6,386 7,528
Fiduciary receivables - - 9,514 9,514
Total $ 690 $ 452 $ 15,900 $ 17,042
Cash and cash equivalents and funds held on behalf of clients increased $431
million in 2022 compared to 2021. A summary of our cash flows provided by and
used for operating, investing, and financing activities is as follows (in
millions):
Years Ended December 31
2022 2021
Cash provided by operating activities $ 3,219 $ 2,182
Cash provided by (used for) investing activities $ (449) $ 49
Cash used for financing activities $
(1,790)
Effect of exchange rates on cash and cash equivalents and funds held on behalf of clients
$ (549) $ (235) Operating Activities Net cash provided by operating activities during the year endedDecember 31, 2022 increased$1,037 million , or 48%, from the prior year to$3,219 million . This amount represents Net income reported, generally adjusted for the following primary drivers including gains from sales of businesses, losses from sales of businesses, share-based compensation expense, depreciation expense, amortization and impairments, and other non-cash income and expenses, including pension settlement charges. Adjustments also include changes in working capital that relate primarily to the timing of payments of accounts payable and accrued liabilities and collection of receivables.
Pension Contributions
Pension contributions were$59 million for the year endedDecember 31, 2022 , as compared to$87 million for the year endedDecember 31, 2021 . In 2023, we expect to contribute approximately$61 million in cash to our pension plans, including contributions to non-U.S. pension plans, which are subject to changes in foreign exchange rates. Investing Activities Cash flows used for investing activities during the year endedDecember 31, 2022 were$449 million , a decrease of$498 million compared to prior year. Generally, the primary drivers of cash flows used for investing activities are acquisition of businesses, purchases of short-term investments, capital expenditures, and payments for investments. Generally, the primary drivers of cash flows provided by investing activities are sales of businesses, sales of short-term investments, and proceeds from investments. The gains and losses corresponding to cash flows provided by proceeds from investments and used for payments for investments are primarily recognized in Other income (expense) in the Consolidated Statements of Income. 38 --------------------------------------------------------------------------------
Short-term Investments
Short-term investments increased$160 million atDecember 31, 2022 as compared toDecember 31, 2021 . As disclosed in Note 14 "Fair Value Measurements and Financial Instruments" of the Notes to Consolidated Financial Statements contained in Part II, Item 8 of this report, the majority of our investments carried at fair value are money market funds. These money market funds are held throughout the world with various financial institutions. We are not aware of any market liquidity issues that would materially impact the fair value of these investments.
Acquisitions and Dispositions of Businesses
During 2022, the Company completed the acquisition of five businesses for consideration of$162 million , net of cash and funds held on behalf of clients, and the disposition of three businesses for a$81 million cash inflow, net of cash and funds held on behalf of clients. During 2021, the Company completed the acquisition of two businesses for consideration of$14 million , net of cash and funds held on behalf of clients, and the disposition of six business for a$218 million cash inflow, net of cash and funds held on behalf of clients.
Capital Expenditures
The Company's additions to fixed assets, including capitalized software, which amounted to$196 million in 2022 and$137 million in 2021, primarily related to refurbishing and modernizing of office facilities, software development costs, and computer equipment purchases.
Financing Activities
Cash flows used for financing activities during the year endedDecember 31, 2022 was$1,790 million , a decrease of$134 million compared to prior year. Generally, the primary drivers of cash flow used for financing activities are repayments of debt, share repurchases, dividends paid to shareholders, cash paid for employee taxes on withholding shares, transactions with noncontrolling interests, and other financing activities, such as collection of or payments for deferred consideration in connection with prior year business acquisitions and divestitures. Generally, the primary drivers of cash flow provided by financing activities are issuances of debt, changes in net fiduciary liabilities, and proceeds from issuance of shares.
Share Repurchase Program
We have a share repurchase program authorized by our Board of Directors. The Repurchase Program was established inApril 2012 with$5.0 billion in authorized repurchases, and was increased by$5.0 billion in authorized repurchases in each ofNovember 2014 ,June 2017 , andNovember 2020 , and by$7.5 billion inFebruary 2022 for a total of$27.5 billion in repurchase authorizations.
The following table summarizes the Company's Share Repurchase activity (in millions, except per share data):
Years Ended December 31
2022 2021
Shares repurchased 11.1 12.4
Average price per share $ 289.76 $ 286.82 Repurchase costs recorded to accumulated deficit
AtDecember 31, 2022 , the remaining authorized amount for share repurchase under the Repurchase Program was approximately$6.0 billion . Under the Repurchase Program, we have repurchased a total of 160.7 million shares for an aggregate cost of approximately$21.5 billion .
Borrowings
Total debt at
In
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In November 2022 , Aon Corporation's $500 million 2.20% Senior Notes matured and
were repaid in full. In November 2021 , the Company's $500 million 2.20% Senior
Notes due November 2022 were classified as Short-term debt and current portion
of long-term debt in the Consolidated Statements of Financial Position as the
date of maturity is in less than one year as of December 31, 2021 .
On September 12, 2022 , Aon Corporation , a Delaware corporation, and Aon Global
Holdings plc , a public limited company formed under the laws of England and
Wales , both wholly owned subsidiaries of the Company, co-issued $500 million of
5.00% Senior Notes due September 2032 . The Company intends to use the net
proceeds from the offering for general corporate purposes.
On February 28, 2022 , Aon Corporation and Aon Global Holdings plc co-issued
$600 million of 2.85% Senior Notes due May 2027 and $900 million of 3.90% Senior
Notes due February 2052 . The Company intends to use the net proceeds from the
offering for general corporate purposes.
On December 2, 2021 , Aon Corporation and Aon Global Holdings plc co-issued $500
million aggregate principal amount of 2.60% Senior Notes due December 2031 . We
intend to use the net proceeds of the offering for general corporate purposes.
On August 23, 2021 , Aon Corporation and Aon Global Holdings plc co-issued $400
million of 2.05% Senior Notes due August 2031 and $600 million of 2.90% Senior
Notes due August 2051 . We intend to use the net proceeds from the offering for
general corporate purposes.
On
Aon Corporation has established aU.S. commercial paper program (the "U.S. Program") andAon Global Holdings plc has established a European multi-currency commercial paper program (the "European Program" and, together with theU.S. Program, the "Commercial Paper Programs"). Commercial paper may be issued in aggregate principal amounts of up to$1 billion under theU.S. Program and €625 million under the European Program, not to exceed the amount of our committed credit facilities, which was approximately$1.8 billion atDecember 31, 2022 . The aggregate capacity of the Commercial Paper Program remains fully backed by our committed credit facilities. Commercial paper activity during the years endedDecember 31, 2022 and 2021 is as follows (in millions): Years Ended December 31 2022 2021 (2) Total issuances (1)$ 12,301 $ 4,478 Total repayments (12,366) (3,807) Net issuances (repayments) $ (65)$ 671 (1) The proceeds of the commercial paper issuances were used primarily for short-term working capital needs. (2) Proceeds from commercial paper issued byAon Corporation under theU.S. Program, where the aggregate principal was raised onJuly 26, 2021 , were used to pay approximately$400 million of the Termination Fee onJuly 27, 2021 .
Other Liquidity Matters
Distributable Profits
We are required under Irish law to have available "distributable profits" to make share repurchases or pay dividends to shareholders. Distributable profits are created through the earnings of the Irish parent company and, among other methods, through intercompany dividends or a reduction in share capital approved by theHigh Court of Ireland . Distributable profits are not linked to aU.S. GAAP reported amount (e.g. Accumulated deficit). As ofDecember 31, 2022 andDecember 31, 2021 , we had distributable profits in excess of$29.0 billion and$32.7 billion , respectively. We believe that we will have sufficient distributable profits for the foreseeable future.
Credit Facilities
We expect cash generated by operations for 2022 to be sufficient to service our
debt and contractual obligations, finance capital expenditures, and continue to
pay dividends to our shareholders. Although cash from operations is expected to
be sufficient to service these activities, we have the ability to access the
commercial paper markets or borrow under our credit facilities to accommodate
any timing differences in cash flows. Additionally, under current market
conditions, we believe that we could access capital markets to obtain debt
financing for longer-term funding, if needed.
40
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As of December 31, 2022 , we had two primary committed credit facilities
outstanding: our $1.0 billion multi-currency U.S. credit facility expiring in
September 2026 and our $750 million multi-currency U.S. credit facility expiring
in October 2024 . In aggregate, these two facilities provide approximately $1.8
billion in available credit.
Each of these primary committed credit facilities includes customary
representations, warranties, and covenants, including financial covenants that
require us to maintain specified ratios of adjusted consolidated EBITDA to
consolidated interest expense and consolidated debt to consolidated adjusted
EBITDA, tested quarterly. At December 31, 2022 , we did not have borrowings under
either facility, and we were in compliance with the financial covenants and all
other covenants contained therein during the rolling year ended December 31,
2022 .
Shelf Registration Statement
On May 12, 2020 , we filed a shelf registration statement with the SEC ,
registering the offer and sale from time to time of an indeterminate amount of,
among other securities, debt securities, preference shares, class A ordinary
shares and convertible securities. Our ability to access the market as a source
of liquidity is dependent on investor demand, market conditions, and other
factors.
Rating Agency Ratings
The major rating agencies' ratings of our debt atFebruary 17, 2023 appear in the table below. Ratings Senior Long-term Debt Commercial Paper Outlook Standard & Poor's A- A-2 StableMoody's Investor Services Baa2 P-2 Stable Fitch, Inc. BBB+ F-2 Stable
Letters of Credit and Other Guarantees
We have entered into a number of arrangements whereby our performance on certain obligations is guaranteed by a third party through the issuance of a LOC. We had total LOCs outstanding of approximately$74 million atDecember 31, 2022 , compared to$75 million atDecember 31, 2021 . These LOCs cover the beneficiaries related to certain of ourU.S. and Canadian non-qualified pension plan schemes and secure deductible retentions for our own workers' compensation program. We also have obtained LOCs to cover contingent payments for taxes and other business obligations to third parties, and other guarantees for miscellaneous purposes at our international subsidiaries. We have certain contractual contingent guarantees for premium payments owed by clients to certain insurance companies. The maximum exposure with respect to such contractual contingent guarantees was approximately$173 million atDecember 31, 2022 , compared to$153 million atDecember 31, 2021 .
Contractual Obligations
Our contractual obligations and commitments as of
Operating leases are primarily comprised of leased office space throughout the world. As leases expire, we do not anticipate difficulty in negotiating renewals or finding other satisfactory space if the premise becomes unavailable. In certain circumstances, we may have unused space and may seek to sublet such space to third parties, depending upon the demands for office space in the locations involved. Refer to Note 8 "Lease Commitments" of the Notes to Consolidated Financial Statements contained in Part II, Item 8 of this report for further information. Pension and other postretirement benefit plan obligations include estimates of our minimum funding requirements pursuant to the ERISA and other regulations, as well as minimum funding requirements agreed with the trustees of ourU.K. pension plans. Additional amounts may be agreed to with, or required by, theU.K. pension plan trustees. Nonqualified pension and other postretirement benefit obligations are based on estimated future benefit payments. We may make additional discretionary contributions. Refer to Note 11 "Employee Benefits" of the Notes to Consolidated Financial Statements contained in Part II, Item 8 of this report for further information. Purchase obligations are defined as agreements to purchase goods and services that are enforceable and legally binding on us, and that specifies all significant terms, including the goods to be purchased or services to be rendered, the price at which the goods or services are to be rendered, and the timing of the transactions. Most of our purchase obligations are related to purchases of information technology services or other service contracts. 41 -------------------------------------------------------------------------------- We had no other cash requirements from known contractual obligations and commitments that have, or are reasonably likely to have, a current or future material effect on the Company's financial condition, results of operations, or liquidity.
Guarantee of
In connection with the Ireland Reorganization,Aon plc andAon Global Holdings plc , a company incorporated under the laws ofEngland andWales , entered into various agreements pursuant to which they agreed to guarantee the obligations ofAon Corporation arising under issued and outstanding debt securities, which were previously guaranteed solely byAon Global Limited and the obligations ofAon Global Limited arising under issued and outstanding debt securities, which were previously guaranteed solely byAon Corporation . Those agreements include: (1) Second Amended and Restated Indenture, datedApril 1, 2020 , amongAon Corporation ,Aon Global Limited ,Aon plc , andAon Global Holdings plc andThe Bank of New York Mellon Trust Company, N.A. , as trustee (the "Trustee") (amending and restating the Amended and Restated Indenture, datedApril 2, 2012 , amongAon Corporation ,Aon Global Limited and the Trustee); (2) Amended and Restated Indenture, datedApril 1, 2020 , amongAon Corporation ,Aon Global Limited ,Aon plc ,Aon Global Holdings plc and the Trustee (amending and restating the Indenture, datedDecember 12, 2012 , amongAon Corporation ,Aon Global Limited plc and the Trustee); (3) Second Amended and Restated Indenture, datedApril 1, 2020 , amongAon Corporation ,Aon Global Limited ,Aon plc ,Aon Global Holdings plc and the Trustee (amending and restating the Amended and Restated Indenture, datedMay 20, 2015 , amongAon Corporation ,Aon Global Limited and the Trustee); (4) Amended and Restated Indenture, datedApril 1, 2020 , amongAon Corporation ,Aon Global Limited ,Aon plc ,Aon Global Holdings plc and the Trustee (amending and restating the Indenture, datedNovember 13, 2015 , amongAon Corporation ,Aon Global Limited and the Trustee); and (5) Amended and Restated Indenture, datedApril 1, 2020 , amongAon Corporation ,Aon Global Limited ,Aon plc ,Aon Global Holdings plc and the Trustee (amending and restating the Indenture, datedDecember 3, 2018 , amongAon Corporation ,Aon Global Limited and the Trustee). After the Ireland Reorganization, newly issued and outstanding debt securities byAon Corporation are guaranteed byAon Global Limited ,Aon plc , andAon Global Holdings plc , and include the following (collectively, the "Aon Corporation Notes"):Aon Corporation Notes 8.205% Junior Subordinated Notes dueJanuary 2027 4.50% Senior Notes dueDecember 2028 3.75% Senior Notes dueMay 2029 2.80% Senior Notes dueMay 2030 6.25% Senior Notes dueSeptember 2040 All guarantees ofAon plc ,Aon Global Limited , andAon Global Holdings plc of theAon Corporation Notes are joint and several as well as full and unconditional. Senior Notes rank pari passu in right of payment with all other present and future unsecured debt which is not expressed to be subordinate or junior in rank to any other unsecured debt of the company. There are no subsidiaries other than those listed above that guarantee theAon Corporation Notes. After the Ireland Reorganization, newly issued and outstanding debt securities byAon Global Limited are guaranteed byAon plc ,Aon Global Holdings plc , andAon Corporation , and include the following (collectively, the "Aon Global Limited Notes"):Aon Global Limited Notes 4.00% Senior Notes dueNovember 2023 3.50% Senior Notes dueJune 2024 3.875% Senior Notes dueDecember 2025 2.875% Senior Notes dueMay 2026 4.25% Senior Notes dueDecember 2042 4.45% Senior Notes dueMay 2043 4.60% Senior Notes dueJune 2044 4.75% Senior Notes dueMay 2045 All guarantees ofAon plc ,Aon Global Holdings plc , andAon Corporation of the Aon Global Limited Notes are joint and several as well as full and unconditional. Senior Notes rank pari passu in right of payment with all other present and future 42 -------------------------------------------------------------------------------- unsecured debt which is not expressed to be subordinate or junior in rank to any other unsecured debt of the company. There are no subsidiaries other than those listed above that guarantee theAon Global Limited Notes.
Newly co-issued and outstanding debt securities by
Co-Issued Notes -Aon Corporation andAon Global Holdings plc 2.85% Senior Notes dueMay 2027 2.05% Senior Notes dueAugust 2031 2.60% Senior Notes dueDecember 2031 5.00% Senior Notes dueSeptember 2032 2.90% Senior Notes dueAugust 2051 3.90% Senior Notes dueFebruary 2052 All guarantees ofAon plc andAon Global Limited of the Co-Issued Notes are joint and several as well as full and unconditional. Senior Notes rank pari passu in right of payment with all other present and future unsecured debt which is not expressed to be subordinate or junior in rank to any other unsecured debt of the Co-Issuers. There are no subsidiaries other than those listed above that guarantee the Co-Issued Notes.Aon Corporation ,Aon Global Limited , andAon Global Holdings plc are indirect wholly owned subsidiaries ofAon plc .Aon plc ,Aon Global Limited ,Aon Global Holdings plc , andAon Corporation together comprise the "Obligor group". The following tables set forth summarized financial information for the Obligor group. Adjustments are made to the tables to eliminate intercompany balances and transactions between the Obligor group. Intercompany balances and transactions between the Obligor group and non-guarantor subsidiaries are presented as separate line items within the summarized financial information. These balances are presented on a net presentation basis, rather than a gross basis, as this better reflects the nature of the intercompany positions and presents the funding or funded position that is to be received or owed. No balances or transactions of non-guarantor subsidiaries are presented in the summarized financial information, including investments of the Obligor group in non-guarantor subsidiaries. Summarized Statement of Income information for the Obligor group is as follows (in millions): Obligor Group Summarized Statement of Income Information Year Ended December 31, 2022 Revenue $ - Operating loss $ (102) Expense from non-guarantor subsidiaries before income taxes $ (656) Net loss $ (1,069) Net loss attributable to Aon shareholders $ (1,069) 43 -------------------------------------------------------------------------------- Summarized Statement of Financial Position information for the Obligor group is as follows (in millions): Obligor Group Summarized Statement of Financial Position Information As of December 31, 2022 Receivables due from non-guarantor subsidiaries $ 1,300 Other current assets 317 Total current assets $ 1,617 Non-current receivables due from non-guarantor subsidiaries $ 483 Other non-current assets 1,060 Total non-current assets $ 1,543 Payables to non-guarantor subsidiaries $ 16,172 Other current liabilities 5,880 Total current liabilities $ 22,052 Non-current payables to non-guarantor subsidiaries $ 2,343 Other non-current liabilities 11,226 Total non-current liabilities $ 13,569
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Consolidated Financial Statements have been prepared in accordance withU.S. GAAP. To prepare these financial statements, we make estimates, assumptions, and judgments that affect what we report as our assets and liabilities, what we disclose as contingent assets and liabilities at the date of the Consolidated Financial Statements, and the reported amounts of revenues and expenses during the periods presented. In accordance with our policies, we regularly evaluate our estimates, assumptions, and judgments, including, but not limited to, those concerning revenue recognition, pensions, goodwill and other intangible assets, contingencies, share-based payments, and income taxes, and base our estimates, assumptions, and judgments on our historical experience and on factors we believe reasonable under the circumstances. The results involve judgments about the carrying values of assets and liabilities not readily apparent from other sources. If our assumptions or conditions change, the actual results we report may differ from these estimates. We believe the following critical accounting policies affect the more significant estimates, assumptions, and judgments we use to prepare these Consolidated Financial Statements.
Revenue Recognition
The Company recognizes revenue when control of the promised services is transferred to the customer in the amount that best reflects the consideration to which the Company expects to be entitled in exchange for those services. For arrangements where control is transferred over time, an input or output method is applied that represents a faithful depiction of the progress towards completion of the performance obligation. For arrangements that include variable consideration, the Company assesses whether any amounts should be constrained. For arrangements that include multiple performance obligations, the Company allocates consideration based on their relative fair values. Costs incurred by the Company in obtaining a contract are capitalized and amortized on a systematic basis that is consistent with the transfer of control of the services to which the asset relates, considering anticipated renewals when applicable. Certain contract related costs, including pre-placement brokerage costs, are capitalized as a cost to fulfill and are amortized on a systematic basis consistent with the transfer of control of the services to which the asset relates, which is generally less than one year.Commercial Risk Solutions includes retail brokerage, specialty solutions, global risk consulting and captives management, and Affinity programs. Revenue primarily includes insurance commissions and fees for services rendered. Revenue is predominantly recognized at a point in time upon the effective date of the underlying policy (or policies), or for a limited number of arrangements, over the term of the arrangement using output measures to depict the transfer of control of the services 44 -------------------------------------------------------------------------------- to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those services. For arrangements recognized over time, various output measures, including units delivered and time elapsed, are utilized to provide a faithful depiction of the progress towards completion of the performance obligation. Revenue is recorded net of allowances for estimated policy cancellations, which are determined based on an evaluation of historical and current cancellation data. Reimbursements received for out-of-pocket expenses are generally recorded as a component of revenue. Commissions and fees for brokerage services may be invoiced near the effective date of the underlying policy or over the term of the arrangement in installments during the policy period. Reinsurance Solutions includes treaty reinsurance, facultative reinsurance,Strategy and Technology Group , and capital markets. Revenue primarily includes reinsurance commissions and fees for services rendered. Revenue is predominantly recognized at a point in time upon the effective date of the underlying policy (or policies), or for a limited number of arrangements, over the term of the arrangement using output measures to depict the transfer of control of the services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those services. For arrangements recognized over time, various output measures, including units delivered and time elapsed, are utilized to provide a faithful depiction of the progress towards completion of the performance obligation. Commissions and fees for brokerage services may be invoiced at the inception of the reinsurance period for certain reinsurance brokerage, or more commonly for treaty reinsurance arrangements, over the term of the arrangement in installments based on deposit or minimum premiums.Health Solutions includes consulting and brokerage, Human Capital, and Consumer Benefits Solutions. Revenue primarily includes insurance commissions and fees for services rendered. For brokerage commissions, revenue is predominantly recognized at the effective date of the underlying policy (or policies), or for a limited number of arrangements, over the term of the arrangement to depict the transfer of control of the services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those services using input or output measures, including units delivered or time elapsed, to provide a faithful depiction of the progress towards completion of the performance obligation. For Human Capital, revenue is recognized over time or at a point in time upon completion of the services. For arrangements recognized over time, revenue is based on a measure of progress that depicts the transfer of control of the services to the customer utilizing an appropriate input or output measure to provide a faithful depiction of the progress towards completion of the performance obligation, including units delivered or time elapsed. Input and output measures utilized vary based on the arrangement but typically include reports provided or days elapsed. Revenue from Consumer Benefits Solutions arrangements are typically recognized upon successful enrollment of participants. Commissions and fees for brokerage services may be invoiced at the effective date of the underlying policy or over the term of the arrangement in installments during the policy period. Payment terms for other services vary but are typically over the contract term in installments. Wealth Solutions includes retirement consulting, pension administration and investments. Revenue recognized for these arrangements is predominantly recognized over the term of the arrangement using input or output measures to depict the transfer of control of the services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those services. For consulting arrangements recognized over time, revenue will be recognized based on a measure of progress that depicts the transfer of control of the services to the customer, utilizing an appropriate input or output measure to provide a reasonable assessment of the progress towards completion of the performance obligation including units delivered or time elapsed. Fees paid by customers for consulting services are typically charged on an hourly, project or fixed-fee basis, and revenue for these arrangements is typically recognized based on time incurred, days elapsed, or reports delivered. Revenue from time-and-materials or cost-plus arrangements are recognized as services are performed using input or output measures to provide a reasonable assessment of the progress towards completion of the performance obligation including hours worked, and revenue for these arrangements is typically recognized based on time and materials incurred. Revenue generated from our delegated investment business is generally earned as an agreed percentage based on AUM and, to a lesser extent, based on performance fees. Reimbursements received for out-of-pocket expenses are generally recorded as a component of revenue. Payment terms vary but are typically over the contract term in installments. Pensions
We sponsor defined benefit pension plans throughout the world. Our most
significant plans are located in the
The service cost component of net periodic benefit cost is reported in
Compensation and benefits and all other components are reported in Other income
(expense). We used a full-yield curve approach in the estimation of the service
and interest cost components of net periodic pension and postretirement benefit
cost for our major pension and other postretirement benefit plans; this was
obtained by applying the specific spot rates along the yield curve used in the
determination of the benefit obligation to the relevant projected cash flows.
45
--------------------------------------------------------------------------------Recognition of Gains and Losses and Prior Service
Certain changes in the value of the obligation and in the value of plan assets, which may occur due to various factors such as changes in the discount rate and actuarial assumptions, actual demographic experience, and/or plan asset performance are not immediately recognized in net income. Such changes are recognized in Other comprehensive income and are amortized into net income as part of the net periodic benefit cost. Unrecognized gains and losses that have been deferred in Other comprehensive income, as previously described, are amortized into expense as a component of periodic pension expense based on the average life expectancy of theU.S. ,U.K. ,Netherlands , andCanada plan members. We amortize any prior service expense or credits that arise as a result of plan changes over a period consistent with the amortization of gains and losses. As ofDecember 31, 2022 , our pension plans have deferred losses that have not yet been recognized through income in the Consolidated Financial Statements. We amortize unrecognized actuarial losses outside of a corridor, which is defined as 10% of the greater of market-related value of plan assets or PBO. To the extent not offset by future gains, incremental amortization as calculated above will continue to affect future pension expense similarly until fully amortized.
The following table discloses our accumulated other comprehensive loss, the number of years over which we are amortizing the loss, and the estimated 2023 amortization of loss by country (in millions, except amortization period):
U.K. U.S.
Other
Accumulated other comprehensive loss
$ 437 Amortization period 7 to 25 years 6 to 23 years 11 to 34 years Estimated 2023 amortization of loss $ 74 $ 34 $ 13
The
For theU.S. pension plans, we use a market-related valuation of assets approach to determine the expected return on assets, which is a component of net periodic benefit cost recognized in the Consolidated Statements of Income. This approach recognizes 20% of any gains or losses in the current year's value of market-related assets, with the remaining 80% spread over the next four years. As this approach recognizes gains or losses over a five-year period, the future value of assets and therefore, our net periodic benefit cost will be impacted as previously deferred gains or losses are recorded. As ofDecember 31, 2022 , the market-related value of assets was$1.8 billion . We do not use the market-related valuation approach to determine the funded status of theU.S. plans recorded in the Consolidated Statements of Financial Position. Instead, we record and present the funded status in the Consolidated Statements of Financial Position based on the fair value of the plan assets. As ofDecember 31, 2022 , the fair value of plan assets was$1.5 billion . Our non-U.S. plans use fair value to determine expected return on assets.
Rate of Return on Plan Assets and Asset Allocation
The following table summarizes the expected long-term rate of return on plan
assets for future pension expense as of
U.K. U.S. Other
Expected return on plan assets, net of administration expenses
5.34% 6.82% 4.20 - 4.85%
In determining the expected rate of return for the plan assets, we analyze
investment community forecasts and current market conditions to develop expected
returns for each of the asset classes used by the plans. In particular, we
surveyed multiple third-party financial institutions and consultants to obtain
long-term expected returns on each asset class, considered historical
performance data by asset class over long periods, and weighted the expected
returns for each asset class by target asset allocations of the plans.
The
46
--------------------------------------------------------------------------------Impact of Changing Economic Assumptions
Changes in the discount rate and expected return on assets can have a material impact on pension obligations and pension expense.
Holding all other assumptions constant, the following table reflects what a 25
BPS increase and decrease in our discount rate would have on our PBO at
25 BPS Change in Discount Rate
Increase (decrease) in projected benefit obligation (1) Increase Decrease
U.K. plans $ (95) $ (98)
U.S. plans $ (53) $ 56
Other plans $ (39) $ 41 (1)Increases to the PBO reflect increases to our pension obligations, while decreases in the PBO are recoveries toward fully-funded status. A change in the discount rate has an inverse relationship to the PBO.
Holding all other assumptions constant, the following table reflects what a 25
BPS increase and decrease in our discount rate would have on our estimated 2023
pension expense (in millions):
25 BPS Change in Discount Rate
Increase (decrease) in expense Increase Decrease
U.K. plans $ (3) $ 3
U.S. plans $ - $ -
Other plans $ - $ -
Holding all other assumptions constant, the following table reflects what a 25
BPS increase and decrease in our long-term rate of return on plan assets would
have on our estimated 2023 pension expense (in millions):
25 BPS Change in Long-Term Rate of
Return on Plan Assets
Increase (decrease) in expense Increase Decrease
U.K. plans $ (9) $ 9
U.S. plans $ (4) $ 4
Other plans $ (3) $ 3
Estimated Future Contributions
We estimate cash contributions of approximately
Goodwill represents the excess of purchase price over the fair market value of the net assets acquired. We classify our intangible assets acquired as either customer-related and contract-based, technology, tradenames or other intangibles.Goodwill is not amortized, but rather tested for impairment at least annually in the fourth quarter. We test more frequently if there are indicators of impairment or whenever business circumstances suggest that the carrying value of goodwill may not be recoverable. These indicators may include a sustained significant decline in our share price and market capitalization, a significant decline in our expected future cash flows, or a significant adverse change in legal factors or in the business climate, among others. We perform impairment reviews at the reporting unit level. A reporting unit is an operating segment or one level below an operating segment (referred to as a "component"). A component of an operating segment is a reporting unit if the component constitutes a business for which discrete financial information is available and segment management regularly reviews the operating results of that component. An operating segment shall be deemed to be a reporting unit if all of its components are similar, if none of its components are a reporting unit, or if the segment comprises only a single component. We aggregate components of any operating segments that have similar economic characteristics into a single reporting unit. 47 -------------------------------------------------------------------------------- When evaluating these assets for impairment, we may first perform a qualitative assessment to determine whether it is more likely than not that a reporting unit is impaired. If we do not perform a qualitative assessment, or if we determine that it is not more likely than not that the fair value of the reporting unit exceeds its carrying amount, then the goodwill impairment test becomes a quantitative analysis. If the fair value of a reporting unit is determined to be greater than the carrying value of the reporting unit, goodwill is deemed not to be impaired and no further testing is necessary. If the fair value of a reporting unit is less than the carrying value, a goodwill impairment loss is recognized for the amount that the carrying amount of a reporting unit, including goodwill, exceeds its fair value limited to the total amount of the goodwill allocated to the reporting unit. When determining the fair value of our reporting units, we use a DCF model based on our most current forecasts. We discount the related cash flow forecasts using the weighted average cost of capital method at the date of evaluation. Preparation of forecasts and selection of the discount rate for use in the DCF model involve significant judgments, and changes in these estimates could affect the estimated fair value of one or more of our reporting units and could result in a goodwill impairment charge in a future period. We also use market multiples which are obtained from quoted prices of comparable companies to corroborate our DCF model results. The combined estimated fair value of our reporting units from our DCF model often results in a premium over our market capitalization, commonly referred to as a control premium. We believe the implied control premium determined by our impairment analysis is reasonable based upon historic data of premiums paid on actual transactions within our industry. We review intangible assets that are being amortized for impairment whenever events or changes in circumstance indicate that an asset group's carrying value may not be recoverable. If we are required to record impairment charges in the future, they could materially impact our results of operations.
Contingencies
We define a contingency as an existing condition that involves a degree of uncertainty as to a possible gain or loss that will ultimately be resolved when one or more future events occur or fail to occur. UnderU.S. GAAP, we are required to establish reserves for loss contingencies when the loss is probable and we can reasonably estimate its financial impact. We are required to assess the likelihood of material adverse judgments or outcomes, as well as potential ranges or probability of losses. We determine the amount of reserves required, if any, for contingencies after carefully analyzing each individual item. The required reserves may change due to new developments in each issue. We do not recognize gain contingencies until all contingencies are resolved.
Share-Based Payments
Share-based compensation expense is measured based on the grant date fair value and recognized over the requisite service period for awards that we ultimately expect to vest. For purposes of measuring share-based compensation expense, we consider whether an adjustment to the observable market price is necessary to reflect material nonpublic information that is known to us at the time the award is granted. No adjustments were necessary for the years endedDecember 31, 2022 , 2021, or 2020. We also estimate forfeitures at the time of grant based on our actual experience to date and revise our estimates, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
Restricted Share Units
RSUs are service-based awards for which we recognize the associated compensation cost on a straight-line basis over the requisite service period. We estimate the fair value of the awards based on the market price of the underlying share on the date of grant, reduced by the present value of estimated dividends foregone during the vesting period where applicable.
Performance Share Awards
PSAs are performance-based awards for which vesting is dependent on the achievement of certain objectives. Such objectives may be made on a personal, group or company level. We estimate the fair value of the awards based on the market price of the underlying share on the date of grant, reduced by the present value of estimated dividends foregone during the vesting period. Compensation expense is recognized over the performance period. The number of shares issued on the vesting date will vary depending on the actual performance objectives achieved, which are based on a fixed number of potential outcomes. We make assessments of future performance using subjective estimates, such as long-term plans. As a result, changes in the underlying assumptions could have a material impact on the compensation expense recognized. The largest plan is the LPP, which has a three-year performance period. As the percent of expected performance increases or decreases, the potential change in expense can go from 0% to 200% of the targeted total expense. The 2020 to 2022 performance period ended onDecember 31, 2022 , the 2019 to 2021 performance period ended onDecember 31, 2021 , and the 2018 to 2020 performance period ended onDecember 31, 2020 . The LPP currently has two open performance periods: 2021 to 48 -------------------------------------------------------------------------------- 2023 and 2022 to 2024. A 10% upward adjustment in our estimated performance achievement percentage for both open performance periods would have increased our 2022 expense by approximately$2.6 million , while a 10% downward adjustment would have decreased our expense by approximately$7.7 million .
Income Taxes
We earn income in numerous countries and this income is subject to the laws of taxing jurisdictions within those countries.
The carrying values of deferred income tax assets and liabilities reflect the application of our income tax accounting policies and are based on management's assumptions and estimates about future operating results and levels of taxable income, and judgments regarding the interpretation of the provisions of current accounting principles. Deferred tax assets are reduced by valuation allowances if, based on the consideration of all available evidence, it is more likely than not that some portion of the deferred tax asset will not be realized. Considerations with respect to the realizability of deferred tax assets include the period of expiration of the deferred tax asset, historical earnings and projected future taxable income by jurisdiction as well as tax liabilities for the tax jurisdiction to which the tax asset relates. Significant management judgment is required in determining the assumptions and estimates related to the amount and timing of future taxable income. Valuation allowances are evaluated periodically and will be subject to change in each future reporting period as a result of changes in various factors.
We assess carryforwards and tax credits for realization as a reduction of future taxable income by using a "more likely than not" determination.
We base the carrying values of liabilities and assets for income taxes currently payable and receivable on management's interpretation of applicable tax laws and incorporate management's assumptions and judgments about using tax planning strategies in various taxing jurisdictions. Using different estimates, assumptions, and judgments in accounting for income taxes, especially those that deploy tax planning strategies, may result in materially different carrying values of income tax assets and liabilities and changes in our results of operations.
NEW ACCOUNTING PRONOUNCEMENTS
Note 2 "Summary of Significant Accounting Principles and Practices" of the Notes to Consolidated Financial Statements in Part II, Item 8 of this report contains a summary of our significant accounting policies, including a discussion of recently issued accounting pronouncements and their impact or future potential impact on our financial results, if determinable.
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