Aon Reports Third Quarter 2018 Results

LONDON, Oct. 26, 2018 /PRNewswire/ --

Third Quarter Key Metrics as Reported under U.S. GAAP ⁽¹⁾

• Total revenue was flat at $2.3 billion, including a decrease of $117 million, or 6%, related to the FASB's new revenue recognition standard
• Operating margin increased 30 basis points to 11.2%, including a decrease of 380 basis points related to the FASB's new revenue recognition standard
• EPS decreased 16% to $0.61, including a decrease of $0.31 related to the FASB's new revenue recognition standard

Third Quarter Key Metrics as Comparable to Pro Forma Financials and Highlights⁽¹⁾

• Total revenue increased 6% to $2.3 billion, including 6% organic revenue growth
• Operating margin increased to 11.2%, and operating margin, adjusted for certain items, increased 190 basis points to 18.5%
• EPS decreased to $0.61, and EPS, adjusted for certain items, increased 34% to $1.31
• For the first nine months of 2018, cash flow from operations increased 237% to $975 million, and adjusted free cash flow increased 5% to $1,163 million, when excluding certain near-term impacts related to the divestiture of the outsourcing business
• Repurchased 2.1 million Class A Ordinary Shares for approximately $300 million
• Launched a silent cyber solution, driven by analytics and backed by a reinsurance solution, to help carriers respond to expanding cyber risk and regulations

Aon plc (NYSE: AON) today reported results for the three months ended September 30, 2018.

Net income (loss) from continuing operations attributable to Aon shareholders on a reported basis was $149 million, or $0.61 per share, compared to $189 million, or $0.73 per share, in the prior year period, which includes $(81) million, or $(0.31) per share, of unfavorable impact from adoption of the new revenue recognition standard. Net income per share from continuing operations on a comparable basis, adjusted for certain items and the impact of adoption of the new revenue recognition standard, increased 34% to $1.31, including an unfavorable impact of $0.05 per share related to foreign currency translation, compared to $0.98 in the prior year period. Certain items that impacted third quarter results and comparisons with the prior year period are detailed in the "Reconciliation of Non-GAAP Measures Adjusted for Changes in Accounting Guidance - Operating Income from Continuing Operations and Diluted Earnings Per Share" on page 11 of this press release.

"In the third quarter, we delivered positive performance across each of our key financial metrics; highlighted by strong organic revenue growth of 6% overall, with four of our five revenue lines delivering organic revenue growth of 5% or greater, and 18% operating income growth, of which 9% was driven by core operational improvement. Results year-to-date reflect accelerating revenue growth and continued momentum toward achieving our near-term target of exceeding $7.97 adjusted earnings per share for the full year 2018," said Greg Case, Chief Executive Officer.  "While we are increasing our long-term growth profile through significant investments in client-facing colleagues and capabilities that deliver Aon United, we are also driving substantial free cash flow generation that is expected to enable tremendous capital allocation opportunities and unlock significant shareholder value creation over the long-term."

THIRD QUARTER 2018 FINANCIAL SUMMARY
The third quarter 2018 financial results discussed herein represent performance from continuing operations unless otherwise noted. Adoption of the FASB's new revenue recognition standard on January 1, 2018 is not reflected in reported 2017 financials. A comparable year-over-year view of reported 2018 results to unaudited pro forma 2017 results incorporating the impact of adoption of the new revenue recognition standard is provided in detail on pages 10-15 of this press release.

Total revenue in the third quarter was flat at $2.3 billion on a reported basis compared to the prior year period, including a decrease of $117 million, or 6%, related to adoption of the new revenue recognition standard. Excluding this impact, comparable revenue increased $126 million, or 6%, compared to the prior year period driven by 6% organic revenue growth and a 2% increase related to acquisitions, net of divestitures, partially offset by a 2% unfavorable impact from foreign currency translation.

Total operating expenses in the third quarter were flat at $2.1 billion on a reported basis compared to the prior year period, including a decrease of $18 million related to adoption of the new revenue recognition standard. Excluding this impact, comparable expenses increased $21 million compared to the prior year period due primarily to an increase in expenses associated with 6% organic revenue growth, a $38 million increase in operating expenses related to acquisitions, net of divestitures, a $4 million increase in errors and omissions expense, and investments across the portfolio to support long-term growth initiatives, partially offset by $50 million of incremental savings related to restructuring and other operational improvement initiatives, a $34 million favorable impact from foreign currency translation, a $25 million decrease related to reduced legacy litigation expense, a $10 million decrease in transaction related costs associated with acquisitions, an $8 million decrease in costs related to regulatory and compliance matters, and a $5 million decrease in restructuring charges.

Restructuring expenses were $97 million in the third quarter, primarily driven by costs associated with restructuring and separation initiatives and workforce reductions. As previously announced, the Company expects to invest $1,175 million in total cash over a three-year period and incur $50 million of non-cash charges in driving one operating model across the firm. This includes an estimated investment of $975 million of cash restructuring charges and $200 million of capital expenditures. The Company has incurred $863 million, or 84%, of the total estimated restructuring charges. An analysis of restructuring and related costs by type is detailed on page 18 of this press release.

Restructuring savings in the third quarter related to restructuring and other operational improvement initiatives are estimated at $105 million before any reinvestment, an increase of $50 million compared to the prior year period. Before any potential reinvestment of savings, restructuring and other operational improvement initiatives are expected to deliver run-rate savings of $450 million annually in 2019. The Company has achieved $308 million, or 68%, of the total estimated annualized savings, before any potential reinvestment.

Foreign currency exchange rates in the third quarter had a $5 million, or $0.02 per share, unfavorable impact on reported net income if the Company were to translate prior year quarter results at current quarter foreign exchange rates. On a comparable basis, there was a $13 million, or $0.05 per share, unfavorable impact from foreign currency translation on net income adjusted for certain items and the impact of adoption of the new revenue recognition standard. If currency were to remain stable at today's rates, with the U.S. Dollar strengthening further against Latin American currencies, we would expect an unfavorable impact of approximately $0.06 per share in the fourth quarter of 2018, which translates into approximately $18 million of unfavorable impact to operating income.

Effective tax rate reflected in the reported financial statements in the third quarter was 20.1%, compared to 2.0% in the prior year period. After adjusting for the impact of adoption of the new revenue recognition standard and to exclude the applicable tax impact associated with certain non-GAAP adjustments, the adjusted effective tax rate on a comparable basis for the third quarter of 2018 decreased to 12.8% compared to 17.3% in the prior year quarter, primarily driven by a net favorable impact from certain discrete tax items and changes in the geographical distribution of income. As a result of the favorable discrete tax items in the third quarter, the non-GAAP full year global effective tax rate is expected to be lower than the previous guidance of 18%. Certain items that impacted third quarter results and comparisons with the prior year period are detailed in the "Reconciliation of Non-GAAP Measures Adjusted for Changes in Accounting Guidance - Operating Income from Continuing Operations and Diluted Earnings Per Share" on page 11 of this press release.

Weighted average diluted shares outstanding decreased to 245.6 million in the third quarter compared to 257.3 million in the prior year period. The Company repurchased 2.1 million Class A Ordinary Shares for approximately $300 million in the quarter.  As of September 30, 2018, the Company had $4.2 billion of remaining authorization under its share repurchase program.

THIRD QUARTER 2018 CASH FLOW SUMMARY
Cash flow from operations for the first nine months of 2018 increased $686 million, or 237%, to $975 million compared to the prior year period. The prior year period included $686 million of cash tax payments related to the divestiture of the outsourcing business. Strong operational improvement contributed to year-over-year growth, partially offset by $123 million of incremental cash restructuring charges and $80 million of accelerated pension contributions.

Free cash flow, defined as cash flow from operations less capital expenditures, increased $632 million, or 385%,  to $796 million for the first nine months of 2018 compared to the prior year quarter reflecting an increase in cash flow from operations, partially offset by a $54 million increase in capital expenditures, including investments in our operating model.

Adjusted free cash flow, defined as free cash flow excluding certain near-term impacts resulting from the divestiture of the outsourcing business, including restructuring initiatives, increased $57 million, or 5%, to $1,163 million compared to the prior year period. A reconciliation of free cash flow and adjusted free cash flow to cash flow from operations can be found in "Reconciliation of Non-GAAP Measures - Organic Revenue Growth and Free Cash Flow" on page 10 of this press release.

THIRD QUARTER 2018 REVENUE REVIEW
The third quarter revenue reviews provided below include supplemental information related to organic revenue growth, which is a non-GAAP measure that is described in detail in "Reconciliation of Non-GAAP Measures - Organic Revenue Growth and Free Cash Flow" on page 10 of this press release.   

Total revenue increased $9 million on a reported basis, including a decrease of $117 million, or 6%, related to adoption of the new revenue recognition standard. Excluding this impact, revenue on a comparable basis increased $126 million, or 6%, compared to the prior year period, including organic revenue growth of 6% primarily driven by strong new business generation and retention globally across our core portfolio, as well as double-digit growth in specific areas of continued investment; including cyber solutions, delegated investment management, transaction liability, and voluntary benefits.

Commercial Risk Solutions organic revenue growth of 8% compared to the prior year period was driven by growth across every major geography, reflecting strong global new business generation and management of the renewal book portfolio, highlighted by double-digit growth in the U.S. and Latin America. Results include double-digit growth in both cyber solutions and transaction liability, two specific areas of investment to support increasing client demand.

Reinsurance Solutions organic revenue growth of 8% compared to the prior year period was driven by strong growth in facultative placements and continued net new business generation globally in treaty. In addition, market impact was modestly favorable on results in the third quarter, primarily in the U.S.

Retirement Solutions organic revenue growth of 2% compared to the prior year period was driven by solid growth in investment consulting, including double-digit growth in delegated investment management, as well as solid growth in our talent practice for assessment services and in our rewards practice for compensation benchmarking.

Health Solutions organic revenue growth of 8% compared to the prior year period was driven by solid growth internationally, highlighted by particular strength in new business generation in the EMEA region and another quarter of strong growth in voluntary benefits in the U.S. Results also reflect strong growth across healthcare exchanges primarily driven by new client wins on the active exchange and expanded service offerings on the retiree exchange.

Data & Analytic Services organic revenue growth of 5% compared to the prior year period was driven by growth globally across our Affinity business, with particular strength in the U.S., as well as solid growth in Aon Client Treaty.

 THIRD QUARTER 2018 EXPENSE REVIEW

Compensation and benefits expense decreased $36 million, or 3%, on a reported basis, including an $8 million decrease related to adoption of the new revenue recognition standard. Excluding this impact, compensation and benefits expense on a comparable basis decreased $28 million, or 2%, compared to the prior year period due primarily to $42 million of incremental savings related to restructuring and other operational improvement initiatives, a $34 million decrease in restructuring costs, a $25 million favorable impact from foreign currency translation, and a $2 million decrease in transaction related costs associated with acquisitions, partially offset by an increase in expense associated with 6% organic revenue growth, a $28 million increase in expenses related to acquisitions, net of divestitures, and investments in Aon United growth initiatives.

Information technology expense increased $16 million, or 15%, compared to the prior year period due primarily to investments to support Aon United growth initiatives, including $8 million of investment in application development, and a $5 million increase in expenses related to acquisitions, net of divestitures, partially offset by $4 million of incremental savings related to restructuring and other operational improvement initiatives.

Premises expense increased $5 million, or 6%, compared to the prior year period due primarily to a $7 million increase in restructuring costs and a $3 million increase in expenses related to acquisitions, net of divestitures, partially offset by $6 million of incremental savings related to restructuring and other operational improvement initiatives.

Depreciation of fixed assets was flat compared to the prior year period.

Amortization and impairment of intangible assets decreased $1 million, or 1%, compared to the prior year period.

Other general expenses increased $19 million, or 6%, on a reported basis, including a $10 million decrease related to adoption of the new revenue recognition standard. Excluding this impact, other general expenses on a comparable basis increased $29 million, or 9%, compared to the prior year period due primarily to an increase in expense associated with 6% organic revenue growth, a $22 million increase in restructuring costs, a $4 million increase in errors and omissions expense, and investments to support long-term growth initiatives, partially offset by a $25 million decrease related to reduced legacy litigation expense, an $8 million decrease in costs related to regulatory and compliance matters, and an $8 million decrease in transaction related costs associated with acquisitions.

THIRD QUARTER 2018 INCOME SUMMARY
The third quarter 2018 financial results discussed herein represent performance from continuing operations unless otherwise noted. Adoption of the FASB's new revenue recognition standard on January 1, 2018 is not reflected in reported 2017 financials. A comparable year-over-year view of reported 2018 results to unaudited pro forma 2017 results incorporating the impact of adoption of the new revenue recognition standard is provided in detail on pages 10-15 of this press release. In addition, certain noteworthy items impacted adjusted operating income and adjusted operating margins in the third quarters of 2018 and 2017, which are also described in detail in "Reconciliation of Non-GAAP Measures Adjusted for Changes in Accounting Guidance - Operating Income from Continuing Operations and Diluted Earnings Per Share" on page 11 of this press release.

AS REPORTED

Operating income increased $6 million, or 2%, on a reported basis compared to the prior year period, including a decrease of $99 million, or 39%, related to adoption of the new revenue recognition standard. Operating margin increased 30 basis points on a reported basis compared to the prior year period, including a decrease of 380 basis points related to adoption of the new revenue recognition standard.

AS COMPARABLE TO 2017 UNAUDITED PRO FORMA FINANCIALS

Adjusting for certain items and the impact of adoption of the new revenue recognition standard detailed on page 11 of this press release, adjusted operating income on a comparable basis increased $66 million, or 18%, and adjusted operating margin on a comparable basis increased 190 basis points to 18.5%, each compared to the prior year period. The increase in adjusted operating margin on a comparable basis was primarily driven by accelerating organic revenue growth, including strong growth in areas of continued investment across the portfolio, and $50 million, or 210 basis points, of incremental savings from restructuring and other operational initiatives, partially offset by a $4 million, or -20 basis points, headwind from the timing of increased errors and omissions expense and a $13 million, or -20 basis points, unfavorable impact from foreign currency translation. Core operational improvement of $33 million, or 9% of operating income growth, and +20 basis points of operating margin expansion compared to the prior year period also reflects the absorption of near-term investment in client-facing colleagues and capabilities to support long-term Aon United growth initiatives.

Interest income decreased $10 million as the prior year period included additional income earned on the proceeds of the sale of the outsourcing business. Interest expense decreased $1 million to $69 million compared to the prior year period reflecting lower outstanding term debt, partially offset by an increase in commercial paper borrowings. Other pension income (expense) included $9 million of pension income, offset by $9 million of non-cash expenses related to pension settlements. Excluding the non-cash expenses related to pension settlements, pension income of $9 million is similar to the prior year period. Other income was $1 million, primarily reflecting gains on certain company owned life insurance plans, partially offset by net losses due to the unfavorable impact of exchange rates on the remeasurement of assets and liabilities in non-functional currencies and losses on the disposal of certain assets. The prior year period included $15 million of net losses due to the unfavorable impact of exchange rates on the remeasurement of assets and liabilities in non-functional currencies, partially offset by $10 million of gains primarily related to certain long-term investments.

DISCONTINUED OPERATIONS
Net loss from discontinued operations on a reported basis was $2 million, or $(0.01) per share, compared to net loss of $4 million, or $(0.01) per share, in the prior year period.

Conference Call, Presentation Slides and Webcast Details
The Company will host a conference call on Friday, 10/26/2018 at 7:30 a.m., central time.  The Company will provide management's prepared conference call remarks in the investor presentation prior to the beginning of the conference call in order to provide more time for discussion with the investment community.  Interested parties can listen to the conference call via a live audio webcast, read management's prepared remarks, and view the presentation slides at www.aon.com.

About Aon
Aon plc (NYSE:AON) Aon is a leading global professional services firm providing a broad range of risk, retirement and health solutions. Our 50,000 colleagues in 120 countries empower results for clients by using proprietary data and analytics to deliver insights that reduce volatility and improve performance.

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", "potential", "looking forward", 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 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 for the year ended December 31, 2017 and its Quarterly Reports on Form 10-Q for the quarters ended March 31, 2018, June 30, 2018, and September 30, 2018 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 growth, free cash flow, adjusted free cash flow, adjusted operating margin, and adjusted earnings per share for continuing operations that exclude the effects of intangible asset amortization, restructuring, capital expenditures, and certain other noteworthy items that affected results for the comparable periods.   Organic revenue growth includes the impact of intercompany activity and excludes the impact of the adoption of the new revenue recognition standard, foreign exchange rate changes, acquisitions, divestitures, transfers between revenue lines, and fiduciary investment income.  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 appendices.  Supplemental organic revenue growth information and additional measures that exclude the effects of certain items noted above do not affect net income or any other U.S. GAAP reported amounts.  Free cash flow is cash flow from operating activity less capital expenditures. Adjusted free cash flow is free cash flow excluding certain near-term impacts resulting from the divestiture of the outsourcing businesses, including restructuring initiatives. The effective tax rate, as adjusted, excludes the applicable tax impact associated with expenses for estimated intangible asset amortization, restructuring, and certain other noteworthy items. 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