Aon Reports Fourth Quarter and Full Year 2013 Results

LONDON, Jan. 31, 2014 /PRNewswire/ -- Aon plc (NYSE: AON) today reported results for the three months and twelve months ended December 31, 2013.

Net income attributable to Aon shareholders was $355 million, or $1.14 per share, compared to $305 million, or $0.93 per share, for the prior year quarter.  Net income per share attributable to Aon shareholders, adjusted for certain items, increased 21% to $1.54, when compared to $1.27 in the prior year quarter.  Certain items that impacted fourth quarter results and comparisons with the prior year quarter are detailed in the "Reconciliation of Non-GAAP Measures - Operating Income and Diluted Earnings per Share" on page 13 of this press release. 

"Our results reflect a strong finish to the year with improvement across each key financial metric for both the quarter and full year," said Greg Case, president and chief executive officer.  "In 2013, we made significant strategic investments across the firm, delivered record cash flow from operations of $1.6 billion and created significant value for shareholders through the repurchase of more than $1.1 billion of ordinary shares. As we look ahead to 2014, our industry-leading platform is positioned for continued long-term growth, improved operational performance, strong free cash flow generation and significantly increased financial flexibility."

FOURTH QUARTER FINANCIAL SUMMARY

Total revenue increased 3% to $3.2 billion when compared to the prior year quarter primarily driven by a 4% increase in organic revenue, partially offset by a 1% unfavorable impact from foreign currency translation.

Total operating expenses for the fourth quarter increased 2% to $2.7 billion when compared to the prior year quarter due primarily to an increase in expense associated with 4% organic revenue growth and a $29 million increase in formal restructuring costs, partially offset by savings related to the restructuring programs, an $18 million favorable impact from foreign currency translation, a $12 million decrease in expenses related to acquisitions, net of divestitures, and an $11 million decrease in intangible asset amortization.

Depreciation expense decreased 2%, or $1 million, to $63 million when compared to the prior year quarter.

Intangible asset amortization expense decreased 10%, or $11 million, to $99 million when compared to the prior year quarter due to a $6 million decrease in Risk Solutions and a $5 million decrease in HR Solutions.

Restructuring expenses increased $29 million to $65 million when compared to $36 million in the prior year quarter.  The Company has closed and completed all restructuring activities and incurred 100% of the total costs for the Aon Hewitt restructuring program.  An analysis of restructuring-related costs by type and segment are detailed on page 14 of this press release.

Restructuring savings in the fourth quarter related to the Aon Hewitt restructuring program are estimated at $94 million compared to $67 million in the prior year quarter.  Of the estimated savings in the fourth quarter, approximately $73 million were related to the HR Solutions segment compared to $55 million in the prior year quarter, and approximately $21 million were related to the Risk Solutions segment compared to $12 million in the prior year quarter. 

In HR Solutions, approximately $260 million of the $303 million in total cumulative savings have been achieved under the program, with the remaining $43 million of savings to be achieved by the end of 2014.  In Risk Solutions, approximately $69 million of the $99 million in total cumulative savings have been achieved under the program, with the remaining $30 million of savings to be achieved by the end of 2014.

Foreign currency exchange rates in the fourth quarter had a $0.03 per share, or $13 million pretax, net unfavorable impact on adjusted net income if the Company were to translate prior year quarter results at current quarter foreign exchange rates.  An unfavorable impact in operating income for Risk Solutions of $16 million was partially offset by a $3 million favorable impact in HR Solutions.

Effective tax rate on net income in the fourth quarter was 24.2% compared to 25.2% in the prior year quarter.  The effective tax rate in the fourth quarter of 2013 was favorably impacted by certain discrete tax adjustments and favorably impacted by changes in the geographic distribution of income.

Average diluted shares outstanding decreased to 311.4 million in the fourth quarter compared to 327.5 million in the prior year quarter.  The Company repurchased 965,487 Class A Ordinary Shares for approximately $77 million in the fourth quarter.  The Company has $2.87 billion of remaining authorization under its share repurchase program.

Cash flow from operations increased 18%, or $97 million, to $649 million in the fourth quarter due primarily to growth in net income and a decrease in pension contributions.  Free cash flow, as defined by cash flow from operations less capital expenditures, increased 23%, or $110 million, to $594 million in the fourth quarter driven by strong cash flow from operations and a $13 million decrease in capital expenditures.  A reconciliation of free cash flow to cash flow from operations can be found on the "Reconciliation of Non-GAAP Measures - Organic Revenue and Free Cash Flow" on page 12 of this press release.

FOURTH QUARTER SEGMENT REVIEW

Certain noteworthy items impacted operating income and operating margins in the fourth quarters of 2013 and 2012.  The fourth quarter segment reviews provided below include supplemental information related to organic revenue, adjusted operating income and operating margin, which is described in detail on the "Reconciliation of Non-GAAP Measures - Organic Revenue and Free Cash Flow" on page 12 and "Reconciliation of Non-GAAP Measures - Operating Income and Diluted Earnings per Share" on page 13 of this press release.

RISK SOLUTIONS

Risk Solutions total revenue was flat at $2.1 billion when compared to the prior year quarter due to 3% organic growth in commissions and fees, offset by a 2% decrease in commissions and fees resulting from acquisitions, net of divestitures, and a 1% unfavorable impact from foreign currency translation.

Retail Brokerage organic revenue increased 3% reflecting revenue growth in both the Americas and International businesses.  Americas organic revenue increased 4% reflecting strong growth in Latin America and record new business in US Retail.  International organic revenue increased 2% driven by strong growth across emerging markets, New Zealand and Asia, partially offset by a decline in Ireland.  Reinsurance organic revenue was flat compared to the prior year quarter due primarily to growth in capital markets transactions and advisory business, as well as net new business growth in treaty placements, offset by an anticipated unfavorable impact from timing in the quarter.

Compensation and benefits for the fourth quarter increased 2%, or $18 million, when compared to the prior year quarter due primarily to an increase in expense associated with 3% organic revenue growth and an $8 million increase in restructuring costs related to the Aon Hewitt restructuring program, partially offset by a $10 million decrease in expenses related to acquisitions, net of divestitures, savings related to the restructuring programs and a $7 million favorable impact from foreign currency translation.

Other general expenses for the fourth quarter increased 1%, or $6 million, when compared to the prior year quarter due primarily to a $28 million increase in restructuring costs related to the Aon Hewitt restructuring program, partially offset by a $7 million decrease in expenses related to acquisitions, net of divestitures, a $6 million decrease in intangible asset amortization and a $4 million favorable impact from foreign currency translation.

Fourth quarter operating income decreased 5% to $413 million when compared to the prior year quarter.  Adjusting for certain items detailed on page 13 of this press release, operating income increased 2%, or $9 million, and operating margin increased 40 basis points to 23.6% when compared to the prior year quarter.  Adjusted operating margin was driven by solid organic revenue growth and savings related to the restructuring programs, partially offset by a $16 million, or 40 basis point, unfavorable impact from foreign currency translation.

HR SOLUTIONS

HR Solutions total revenue increased 8% to $1.2 billion when compared to the prior year quarter driven by 8% organic growth in commissions and fees.

Organic revenue in Consulting Services increased 1% driven primarily by growth in investment and compensation consulting, partially offset by a decline in actuarial services in retirement consulting. Organic revenue in Outsourcing increased 11% compared to the prior year quarter due primarily to strong growth in health care exchanges and modest growth in benefits administration and HR BPO.

Compensation and benefits for the fourth quarter increased 4%, or $23 million, when compared to the prior year quarter due primarily to an increase in expense associated with 8% organic revenue growth, partially offset by savings related to the Aon Hewitt restructuring program, a $5 million favorable impact from foreign currency translation and a $3 million decrease in restructuring costs related to the Aon Hewitt restructuring program.

Other general expenses for the fourth quarter decreased 4%, or $13 million, when compared to the prior year quarter due primarily to savings related to the Aon Hewitt restructuring program, a $5 million decrease in intangible asset amortization and a $4 million decrease in restructuring costs related to the Aon Hewitt restructuring program.

Fourth quarter operating income increased 100% to $156 million when compared to the prior year quarter.  Adjusting for certain items detailed on page 13 of this press release, operating income increased 36%, or $66 million, and operating margin increased 440 basis points to 21.4% when compared to the prior year quarter.  Adjusted operating margin was driven by strong organic revenue growth and savings related to the Aon Hewitt restructuring program, partially offset by continued investment in long-term growth opportunities.

INCOME BEFORE INCOME TAXES

Unallocated expenses increased $3 million to $54 million due primarily to an increase related to certain long-term employee incentive compensation programs.  Interest income decreased $1 million to $3 million due to lower average interest rates and lower average cash balances.  Interest expense increased $2 million to $57 million due primarily to an increase in costs related to certain derivative hedging programs.  Other income of $14 million primarily includes gains on sale of businesses and certain long-term investments.

2013 FULL YEAR SUMMARY

Total revenue for 2013 increased 3% to $11.8 billion due to 3% organic growth in commissions and fees and a 1% increase in commissions and fees resulting from acquisitions, net of divestitures, partially offset by a 1% unfavorable impact from foreign currency translation. Risk Solutions total revenue increased 2% to $7.8 billion and HR Solutions total revenue increased 3% to $4.1 billion.

Net income attributable to Aon shareholders for 2013 increased 12% to $1.1 billion compared to $993 million for the prior year.  Net income attributable to Aon shareholders, adjusted for certain items, increased 10% to $1.5 billion.  Certain items that impacted full year results and comparisons against the prior year are detailed in the "Reconciliation of Non-GAAP Measures - Operating Income and Diluted Earnings per Share" on page 13 of this press release.

Net income per share attributable to Aon shareholders for 2013 increased 18% to $3.53 per share compared to $2.99 per share for the prior year.  Net income attributable to Aon shareholders, adjusted for certain items, increased 16% to $4.89 per share compared to $4.21 per share for the prior year.  Certain items that impacted full year results and comparisons against the prior year are detailed in the "Reconciliation of Non-GAAP Measures - Operating Income and Diluted Earnings per Share" on page 13 of this press release.

Cash flow from operations increased 15% to $1.6 billion in 2013 due primarily to growth in net income, strong working capital performance and a decrease in pension contributions.  Free cash flow increased 22% to $1.4 billion for 2013 driven by strong cash flow from operations and a 15%, or $40 million decrease in capital expenditures. A reconciliation of free cash flow to cash flow from operations can be found on the "Reconciliation of Non-GAAP Measures - Organic Revenue and Free Cash Flow" on page 12 of this press release.

During 2013, the Company repurchased approximately 16.8 million Class A ordinary shares for $1.1 billion at an average price of $65.65 per share.

Conference Call, Presentation Slides and Webcast Details

The Company will host a conference call on Friday, January 31, 2014 at 7:30 a.m. central time.  Interested parties can listen to the conference call via a live audio webcast and view the presentation slides at www.aon.com.

About Aon

Aon plc (NYSE:AON) is the leading global provider of risk management, insurance and reinsurance brokerage, and human resources solutions and outsourcing services. Through its more than 65,000 colleagues worldwide, Aon unites to empower results for clients in over 120 countries via innovative and effective risk and people solutions and through industry-leading global resources and technical expertise. Aon has been named repeatedly as the world's best broker, best insurance intermediary, reinsurance intermediary, captives manager and best employee benefits consulting firm by multiple industry sources. Visit www.aon.com for more information on Aon and www.aon.com/manchesterunited to learn about Aon's global partnership and shirt sponsorship with Manchester United.

Safe Harbor Statement

This communication contains certain statements related to future results, or states our intentions, beliefs and expectations or predictions for the future which are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from either historical or anticipated results depending on a variety of factors. These forward-looking statements include information about possible or assumed future results of our operations. All statements, other than statements of historical facts that address activities, events or developments that we expect or anticipate may occur in the future, including such things as our outlook, future capital expenditures, growth in commissions and fees, changes to the composition or level of our revenues, cash flow and liquidity, expected tax rates, business strategies, competitive strengths, goals, the benefits of new initiatives, growth of our business and operations, plans and references to future successes, are forward-looking statements. Also, when we use the words such as 'anticipate', 'believe', 'estimate', 'expect', 'intend', 'plan', 'probably', or similar expressions, we are making forward-looking statements.

The following factors, among others, could cause actual results to differ from those set forth in the forward looking statements:  general economic conditions in different countries in which Aon does business around the world; changes in the competitive environment; changes in global equity and fixed income markets that could affect the return on invested assets; changes in the funding status of Aon's various defined benefit pension plans and the impact of any increased pension funding resulting from those changes; rating agency actions that could affect Aon's ability to borrow funds; fluctuations in exchange and interest rates that could influence revenue and expense; the impact of class actions and individual lawsuits including client class actions, securities class actions, derivative actions and ERISA class actions; the impact of any investigations brought by regulatory authorities in the U.S., U.K. and other countries;  the cost of resolution of other contingent liabilities and loss contingencies, including potential liabilities arising from error and omissions claims against Aon; the failure to retain and attract qualified personnel;  the impact of, and potential challenges in complying with, legislation and regulation in the jurisdictions in which Aon operates, particularly given the global scope of Aon's  businesses and the possibility of conflicting regulatory requirements across jurisdictions in which Aon does business; the effect of the change in global headquarters and jurisdiction of incorporation, including differences in the anticipated benefits; the extent to which Aon retains existing clients and attracts new businesses and Aon's ability to incentivize and retain key employees; the extent to which Aon manages certain risks created in connection with the various services, including fiduciary and advisory services and business process outsourcing services, among others, that Aon currently provides, or will provide in the future, to clients;  Aon's ability to implement restructuring initiatives and other initiatives intended to yield cost savings, and the ability to achieve those cost savings;  the potential of a system or network disruption resulting in operational interruption or improper disclosure of personal data; any inquiries relating to compliance with the U.S. Foreign Corrupt Practices Act and non-U.S. anti-corruption laws and with U.S. and non-U.S. trade sanctions regimes; and Aon's ability to grow, develop and integrate companies that it acquires or new lines of business.

Further information concerning Aon and its business, including factors that potentially could materially affect Aon's financial results, is contained in Aon's filings with the SEC. See Aon's Annual Report on Form 10-K and its Quarterly Reports on Form 10-Q for a further discussion of these and other risks and uncertainties applicable to Aon's businesses. Aon does not undertake, and expressly disclaims, any duty to update any forward-looking statement whether as a result of new information, future events or changes in their respective expectations, except as required by law.

Explanation of Non-GAAP Measures

This communication includes supplemental information related to organic revenue, free cash flow and several additional measures including expenses, margins and income per share, that exclude the effects of restructuring charges, intangible asset amortization, capital expenditures, transaction and integration costs and certain other noteworthy items that affected results for the comparable periods.  Organic revenue excludes from reported revenues the impact of foreign exchange, acquisitions, divestitures, transfers between business units, reimbursable expenses and unusual items.  The impact of foreign exchange is determined by translating last year's revenue, expense or net income at this year's foreign exchange rates.  Reconciliations are provided in the attached schedules.  Supplemental organic revenue information and additional measures that exclude the effects of the restructuring charges and certain other items do not affect net income or any other GAAP reported amounts.  Free cash flow is cash flow from operating activity less capital expenditures.  Management believes that these measures are important to make meaningful period-to-period comparisons and that this supplemental information is helpful to investors.  They should be viewed in addition to, not in lieu of, the Company's Consolidated Financial Statements.  Industry peers provide similar supplemental information regarding their performance, although they may not make identical adjustments.

SOURCE Aon plc