Aon Reports Fourth Quarter and Full Year 2016 Results

LONDON, Feb. 10, 2017 /PRNewswire/ --

Fourth Quarter Key Metrics and Highlights¹

• Total revenue was $3.3 billion with organic revenue growth of 3%
• Operating margin decreased 290 basis points to 18.9%, and operating margin, adjusted for certain items, increased 210 basis points to 26.2%
• EPS decreased 11% to $1.87, and EPS, adjusted for certain items, increased 13% to $2.56
• The Company closed its acquisition of Stroz Friedberg, strengthening its ability to serve clients as the global leader in cyber risk mitigation
• The Company closed its acquisition of Admix, a leading health and benefits brokerage firm in Brazil
• Repurchased 1.8 million Class A Ordinary Shares for approximately $200 million

Full Year Key Metrics and Highlights

• Total revenue was $11.6 billion with organic revenue growth of 3%
• Operating margin increased 60 basis points to 16.4%, and operating margin, adjusted for certain items, increased 80 basis points to 20.8%
• EPS increased 6% to $5.16, and EPS, adjusted for certain items, increased 7% to $6.59
• Cash flow from operations increased 16% to a record $2.3 billion, and free cash flow increased 22% to a record $2.1 billion
• Repurchased 12.2 million Class A Ordinary Shares for approximately $1.3 billion
• Subsequent to the close of the fourth quarter, the Company signed a definitive agreement to sell the Benefits Administration and HR Business Process Outsourcing businesses for gross cash proceeds up to $4.8 billion, including $4.3 billion in gross cash at closing and additional consideration up to $500 million based on future performance.  Total after-tax cash proceeds are expected to be approximately $3.0 billion.

Aon plc (NYSE: AON) today reported results for the three and twelve months ended December 31, 2016.

Net income attributable to Aon shareholders was $502 million, or $1.87 per share, compared to $584 million, or $2.09 per share, for the prior year quarter.  Net income per share attributable to Aon shareholders, adjusted for certain items, increased 13% to $2.56, compared to $2.27 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.

"We ended 2016 in a strong position, driving positive performance across each of our key metrics for both the fourth quarter and the full year, highlighted by growth across every major business and record operating margin in Risk Solutions," said Greg Case, President and Chief Executive Officer.  "Substantial investments in high-growth areas of our industry-leading platform, improved operational performance, and record free cash flow generation of more than $2.1 billion, continue to position the firm for increased shareholder value creation over the long-term."

¹Refer to "Revision of Previously Issued Financial Statements" as disclosed in the schedules on pages 16 and 17.

FOURTH QUARTER FINANCIAL SUMMARY

Total revenue in the fourth quarter increased 1% to $3.3 billion compared to the prior year quarter driven primarily by 3% organic revenue growth, partially offset by a 2% unfavorable impact from foreign currency translation.

Total operating expenses for the fourth quarter increased 5% to $2.7 billion compared to the prior year quarter due primarily to $158 million of non-cash expenses related to certain pension settlements, $15 million of transaction costs related to the pending sale of certain assets, $6 million of transaction costs related to acquisitions, and an increase in expense to support 3% organic revenue growth, partially offset by a $67 million favorable impact from foreign currency translation, a $10 million decrease in the core expense base related to divested businesses, net of acquisitions, and a $7 million decrease in intangible asset amortization.

Depreciation expense increased 2%, or $1 million, in the fourth quarter to $61 million compared to the prior year quarter.

Intangible asset amortization expense decreased 9%, or $7 million, in the fourth quarter to $70 million compared to the prior year quarter, consisting of a $9 million decrease in HR Solutions and a $2 million increase in Risk Solutions.

Foreign currency exchange rates in the fourth quarter had a $0.04 per share, or $13 million pretax, favorable impact (+$13 million in Risk Solutions, -$6 million in HR Solutions, and +$6 million Unallocated) on GAAP net income and a $0.03 per share, or $10 million pretax, favorable impact (+$12 million in Risk Solutions, -$8 million in HR Solutions, and +$6 million Unallocated) on adjusted net income if the Company were to translate prior year quarter results at current quarter foreign exchange rates.

Effective tax rate used in the U.S. GAAP financial statements for the fourth quarter was 10.9%, compared to the prior year quarter of 15.8%.  After adjusting to exclude the applicable tax impact associated with certain non-cash pension expenses, the adjusted effective tax rate for the fourth quarter of 2016 was 14.9% compared to 17.9% in the prior year quarter, due primarily to changes in the geographic distribution of income and certain favorable discrete tax adjustments. The prior year quarter adjusted effective tax rate excludes the applicable tax impact associated with expenses related to certain legacy litigation.  These adjustments are discussed in the "Reconciliation of Non-GAAP Measures - Operating Income and Diluted Earnings per Share" on page 13 of this press release.

Average diluted shares outstanding decreased 4% to 268.3 million in the fourth quarter compared to 279.3 million in the prior year quarter.  The Company repurchased 1.8 million Class A Ordinary Shares for approximately $200 million in the fourth quarter.  As of December 31, 2016, the Company had $2.8 billion of remaining authorization under its share repurchase program.  Subsequent to the close of the fourth quarter, the Board of Directors authorized a $5.0 billion increase to the existing remaining authorization under its share repurchase program.  As of February 10, 2017, the Company has approximately $7.7 billion of remaining authorization under its share repurchase program.

Cash flow from operations for 2016 increased 16%, or $317 million, compared to the prior year to a record $2.3 billion driven by an increase in underlying net income after adjusting for certain non-cash pension expenses, lower cash pension contributions, and lower cash tax payments.

Free cash flow, defined as cash flow from operations less capital expenditures, increased 22%, or $385 million, compared to the prior year to a record $2.1 billion for 2016, driven by an increase in cash flow from operations and a $68 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 REVIEW¹

Certain noteworthy items impacted operating income and operating margins in the fourth quarters of 2016 and 2015.  The fourth quarter segment information provided below includes supplemental information related to organic revenue, adjusted operating income and adjusted 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 for the fourth quarter increased 2% compared to the prior year quarter driven by 3% organic growth in commissions and fees, partially offset by a 1% unfavorable impact from foreign currency translation.  The Company has identified certain immaterial legacy errors related to the quarterly timing of revenue recognition within the Americas Retail brokerage business in Risk Solutions that affected quarterly revenue amounts previously reported as discussed in the "Revision of Previously Issued Financial Statements" on pages 16 and 17 of this press release.  The impact of the errors on the Company's annual revenue and organic growth is immaterial.

Retail organic revenue for the fourth quarter increased 3% reflecting revenue growth in both the Americas and International businesses.  Americas organic revenue increased 3% reflecting strong growth in Affinity and in Latin America as well as continued record new business generation in US Retail.  International organic revenue increased 2% driven by growth across every major region, highlighted by double-digit growth in Health and Benefits brokerage across Asia and EMEA, and overall strength across the Pacific driven by strong new business generation.

Reinsurance organic revenue for the fourth quarter increased 2% compared to the prior year quarter driven by new business generation in treaty and growth in facultative placements, partially offset by a decline in capital markets transactions and advisory business, as well as a modest unfavorable market impact globally.

¹Refer to "Revision of Previously Issued Financial Statements" as disclosed in the schedules on pages 16 and 17.

Compensation and benefits for the fourth quarter increased 5%, or $60 million, compared to the prior year quarter due primarily to $83 million of non-cash expenses related to certain pension settlements and a $20 million increase in the core expense base related to acquired businesses, net of divestitures, partially offset by a $26 million favorable impact from foreign currency translation, and expense discipline.

Other general expenses for the fourth quarter increased 5%, or $18 million, compared to the prior year quarter due primarily to an increase in expense to support 3% organic revenue growth, a $12 million increase in the core expense base related to acquired businesses, net of divestitures, $6 million of transaction costs related to acquisitions, and a $2 million increase in intangible asset amortization, partially offset by a $15 million favorable impact from foreign currency translation.

Fourth quarter operating income decreased 7% to $455 million compared to the prior year quarter.  Adjusting for certain items detailed on page 13 of this press release, operating income increased 9%, or $49 million, and operating margin increased 190 basis points to 27.6%, each compared to the prior year quarter.  The increase in adjusted operating margin was driven primarily by organic revenue growth of 3%, return on investments in data and analytics across the portfolio, and a 100 basis point favorable impact from foreign currency translation, partially offset by $6 million, or -30 basis points, of transaction costs related to acquisitions.

 HR SOLUTIONS

HR Solutions total revenue for the fourth quarter decreased 1% to $1.3 billion compared to the prior year quarter driven by a 4% decrease in commissions and fees related to net divestitures and a 2% unfavorable impact from foreign currency translation, partially offset by 5% organic growth in commissions and fees.

Organic revenue in Consulting Services was flat as continued growth in retirement solutions, particularly for investment consulting was offset by a decline in project-related work from the prior year quarter and a modest decline in talent and compensation consulting. Organic revenue in Outsourcing increased 8% compared to the prior year quarter due primarily to strong double-digit growth in health care exchanges and continued strength in HR BPO for cloud-based solutions, partially offset by an anticipated modest decline in benefits administration.

Compensation and benefits for the fourth quarter decreased $4 million compared to the prior year quarter due primarily to a $34 million decrease in the core expense base related to divested businesses, net of acquisitions, and a $12 million favorable impact from currency translation, partially offset by an increase in expense associated with 5% organic revenue growth and $25 million of non-cash expenses related to certain pension settlements.

Other general expenses for the fourth quarter increased $1 million compared to the prior year quarter due primarily to an increase in expense to support 5% organic growth and $15 million of transaction costs related to the pending sale of certain assets, partially offset by a $9 million decrease in intangible asset amortization, an $8 million decrease in the core expense base related to divested businesses, net of acquisitions, a $7 million favorable impact from foreign currency translation, and expense discipline.

Fourth quarter operating income decreased 2% to $281 million compared to the prior year quarter.  Adjusting for certain items detailed on page 13 of this press release, operating income increased 7%, or $25 million, and operating margin increased 210 basis points to 28.3%, each compared to the prior year quarter.  The increase in adjusted operating margin was primarily driven by solid organic revenue growth of 5% and expense discipline, partially offset by an $8 million, or -10 basis point, unfavorable impact from foreign currency translation.

INCOME BEFORE INCOME TAXES¹ 

Unallocated expense for the fourth quarter increased $46 million to $107 million compared to the prior year quarter primarily due to $50 million of non-cash expenses related to certain pension settlements.  Interest income decreased $1 million to $3 million compared to the prior year quarter.  Interest expense increased $2 million to $70 million compared to the prior year quarter due primarily to an increase in total debt outstanding.  Other income of $9 million primarily includes net gains due to the favorable impact of exchange rates on the remeasurement of monetary assets and liabilities in non-functional currencies. The prior year quarter primarily includes net gains on the sale of a certain business, partially offset by the unfavorable impact of exchange rates on the remeasurement of monetary assets and liabilities in non-functional currencies.

2016 FULL YEAR SUMMARY

Total revenue for 2016 was $11.6 billion due to a 2% decrease in commissions and fees related to divestitures, net of acquisitions, and a 2% unfavorable impact from foreign currency translation, each compared to the prior year, partially offset by 3% organic growth in commissions and fees. Risk Solutions total revenue increased 1% to $7.5 billion and HR Solutions total revenue decreased 3% to $4.2 billion.

Net income attributable to Aon shareholders for 2016 increased 1% to $1.4 billion compared to the prior year.  Net income attributable to Aon shareholders, adjusted for certain items, increased 2% to $1.8 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 2016 increased 6% to $5.16 per share compared to $4.88 per share for the prior year.  Net income attributable to Aon shareholders, adjusted for certain items, increased 7% to $6.59 per share compared to $6.18 per share for the prior year. The prior year included $100 million of other income, primarily reflecting the sale of certain businesses and foreign currency gains, which was a $64 million, or $0.19 per share, net benefit when comparing to $36 million of other income in 2016. 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.

During 2016, the Company repurchased approximately 12.2 million Class A Ordinary Shares for $1.3 billion at an average price of $102.66 per share.

¹ Refer to "Revision of Previously Issued Financial Statements" as disclosed in the schedules on pages 16 and 17.

Conference Call, Presentation Slides and Webcast Details

The Company will host a conference call on Friday, February 10, 2017 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 a leading global provider of risk management, insurance brokerage and reinsurance brokerage, and human resources solutions and outsourcing services. Through its more than 72,000 colleagues worldwide, Aon unites to empower results for clients in over 120 countries via innovative risk and people solutions. For further information on our capabilities and to learn how we empower results for clients, please visit: http://aon.mediaroom.com.

Safe Harbor Statement

This communication contain 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. Forward-looking statements relate to expectations or forecasts of future events. They use words such as "anticipate," "believe," "estimate," "expect," "forecast," "project," "intend," "plan," "probably," "potential," "looking forward" and other similar terms, and future or conditional tense verbs like "could," "may," "might," "should," "will" and "would." You can also identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. For example, we may use forward-looking statements when addressing topics such as: market and industry conditions, including competitive and pricing trends; changes in our business strategies and methods of generating revenue; the development and performance of our services and products; changes in the composition or level of our revenues; our cost structure and the outcome of cost-saving or restructuring initiatives; the outcome of contingencies; dividend policy; the expected impact of acquisitions and dispositions; pension obligations; cash flow and liquidity; expected effective tax rate; future actions by regulators; and the impact of changes in accounting rules. 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.

The following factors, among others, could cause actual results to differ from those set forth in the forward looking statements:  general economic and political conditions in different countries in which Aon does business around the world; changes in the competitive environment; fluctuations in exchange and interest rates that could influence revenue and expense; 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; the level of Aon's debt limiting financial flexibility; rating agency actions that could affect Aon's ability to borrow funds; the effect of the change in global headquarters and jurisdiction of incorporation, including differences in the anticipated benefits; changes in estimates or assumptions on our financial statements; limits on Aon's subsidiaries to make dividend and other payments to Aon; the impact of lawsuits and other contingent liabilities and loss contingencies arising from errors and omissions and other claims against Aon; 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 impact of any investigations brought by regulatory authorities in the U.S., U.K. and other countries; the impact of 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; failure to protect intellectual property rights or allegations that we infringe on the intellectual property rights of others; the effects of English law on our operating flexibility and the enforcement of judgments against Aon; the failure to retain and attract qualified personnel; international risks associated with Aon's global operations; the effect or natural or man-made disasters; the potential of a system or network breach or disruption resulting in operational interruption or improper disclosure of personal data; Aon's ability to develop and implement new technology; the damage to our reputation among clients, markets or third parties; the actions taken by third parties that preform aspects of our business operations and client services;  the extent to which Aon manages certain risks created in connection with the various services, including fiduciary and investments and other 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 grow, develop and integrate companies that it acquires or new lines of business; changes in commercial property and casualty markets, commercial premium rates or methods of compensation; changes in the health care system or our relationships with insurance carriers; and Aon's ability to implement initiatives intended to yield cost savings, and the ability to achieve those cost savings.

Any or all of Aon's forward-looking statements may turn out to be inaccurate, and there are no guarantees about Aon's performance.  The factors identified above are not exhaustive.  Aon and its subsidiaries operate in a dynamic business environment in which new risks may emerge frequently.  Further information concerning Aon and its businesses, 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. These factors may be revised or supplemented in subsequent reports.  Aon is under no obligation, and expressly disclaims any obligation, to update or alter any forward-looking statement that it may make from time to time, whether as a result of new information, future events or otherwise.

Explanation of Non-GAAP Measures

This communication includes supplemental information related to organic revenue, free cash flow, adjusted operating margin, adjusted earnings per share, and adjusted effective tax rate that exclude the effects of intangible asset amortization, capital expenditures, transaction 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. The effective tax rate, as adjusted, excludes the applicable tax impact associated with expenses for legacy litigation. 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.

Aon plc

Revision of Previously Issued Financial Statements (in millions, except per share data)

During the fourth quarter of 2016, the Company identified legacy immaterial errors related to the quarterly timing of revenue recognition for certain brokerage fee agreements in our Americas Retail Brokerage business in Risk Solutions, primarily impacting US Retail. Historically, revenue for these arrangements was typically recognized upon signing an agreement with a customer; however, in some cases, a portion of the arrangement's revenue should have been recognized in subsequent quarters upon the placement of effective policies.  This historical practice resulted in over-recognizing revenue in the fourth quarter and under-recognizing revenue in the first, second, and third quarters of each year. The revised quarterly revenue disclosures included in the schedules of this press release align with the appropriate practice and will be used going forward as reported amounts for the corresponding period.

The impact to the Consolidated Statements of Financial Position was a decrease of $170 million to Net receivables, an increase of $66 million to Non-current deferred tax assets, and a decrease of $104 million to Retained earnings in all periods presented.  The impact to full year Organic Revenue, Consolidated Statements of Income and Cash Flows was immaterial and therefore remain unchanged.

SOURCE Aon plc