NEWS

Aon Reports First Quarter 2018 Results

Aon Reports First Quarter 2018 Results

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

  • Total revenue increased 30% to $3.1 billion, including an increase of $365 million, or 17%, related to FASB’s new revenue recognition standard
  • Operating margin increased 1,180 basis points to 25.9%, including 860 basis points related to FASB’s new revenue recognition standard
  • EPS increased 150% to $2.35, including $0.90, or 96%, related to FASB’s new revenue recognition standard

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

  • Total revenue increased 13% to $3.1 billion, including 3% organic revenue growth
  • Operating margin increased to 25.9%, and operating margin, adjusted for certain items, increased 230 basis points to 31.8%
  • EPS increased to $2.35, and EPS, adjusted for certain items, increased 26% to $2.97
  • For the first three months of 2018, cash flow from operations decreased to $140 million, and adjusted free cash flow increased 16% to $208 million, when excluding certain near-term impacts related to the divestiture of the outsourcing businesses
  • Repurchased 3.9 million Class A Ordinary Shares for approximately $550 million
  • Subsequent to the close of the first quarter, Aon announced an 11% increase to its quarterly cash dividend
  • Aon Securities, as part of Reinsurance Solutions, launched an unprecedented $1.4 billion catastrophe bond on behalf of the World Bank, a transaction that brings emergency funding and disaster support to certain Latin American countries if and when an earthquake occurs

Aon plc (NYSE: AON) today reported results for the three months ended March 31, 2018.

Net incomefrom continuing operations attributable to Aon shareholders on a reported basis was $588 million, or $2.35 per share, compared to $251 million, or $0.94 per share, in the prior year period. This includes $239 million, or $0.90 per share, of favorable 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 26% to $2.97, compared to $2.35 in the prior year period. Certain items that impacted first 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.

“Our first quarter results reflect a strong start to the year with positive performance across each of our key metrics, highlighted by strong organic revenue growth in Reinsurance and Commercial Risk Solutions, substantial operational improvement, 26% growth in earnings per share and double-digit adjusted free cash flow growth,” said Greg Case, President and Chief Executive Officer. “An unmatched level of investment in client-serving capabilities, combined with improved operational performance through our Aon United operating model and effective capital management, we believe place us on track to exceed $7.97 of earnings per share in 2018 and unlock significant shareholder value through double-digit free cash flow growth over the long-term.”

FIRST QUARTER 2018 FINANCIAL SUMMARY
The first 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 11-15 of this press release.

Total revenue in the first quarter increased 30% to $3.1 billion on a reported basis compared to the prior year period, including an increase of $365 million, or 17%, related to adoption of the new revenue recognition standard. Excluding this impact, comparable revenue increased $344 million, or 13%, compared to the prior year period driven by a 5% increase related to acquisitions, net of divestitures, a 5% favorable impact from foreign currency translation, and 3% organic revenue growth.

Total operating expenses in the first quarter increased 12% to $2.3 billion on a reported basis compared to the prior year period, including an increase of $78 million, or 4%, related to adoption of the new revenue recognition standard. Excluding this impact, comparable expenses increased $167 million, or 8%, compared to the prior year period due primarily to a $99 million unfavorable impact from foreign currency translation, a $66 million increase in operating expenses related to acquisitions, net of divestitures, $54 million of accelerated amortization related to tradenames, a $12 million increase in expense related to certain hedging programs, and an increase in expense associated with 3% organic revenue growth, partially offset by a $70 million decrease in restructuring charges and $52 million of incremental savings related to restructuring and other operational improvement initiatives.

Restructuring expenses were $74 million in the first quarter, primarily driven by workforce reductions and other general initiatives. 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. To date, the Company has incurred $571 million, or 56%, 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 first quarter related to restructuring and other operational improvement initiatives are estimated at $63 million before any reinvestment. 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.  To date, the Company has achieved $228 million, or 51%, of the total estimated annualized savings.

Foreign currency exchange rates in the first quarter had a $33 million, or $0.11 per share, favorable 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, net income adjusted for certain items and the impact of adoption of the new revenue recognition standard includes a $57 million, or $0.19 per share, favorable impact from foreign currency translation. The Company also incurred $10 million, or $0.03 per share, of net losses due to the unfavorable impact of exchange rates on the remeasurement of assets and liabilities in non-functional currencies recorded in other expense. In addition, the prior year quarter benefited by a $12 million, or $0.04 per share, reduction in expense related to certain hedging programs.

Effective tax rate reflected in the reported financial statements in the first quarter was 15.9%, compared to the prior year period of 0.1%. After adjusting for the impact from 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 first quarter of 2018 was 16.5% compared to 13.3% in the prior year quarter. The increase was primarily driven by changes in geographical distribution of income and the various impacts of U.S. Tax Reform. The adjusted effective tax rate in both periods includes a net favorable impact from certain discrete items. Certain items that impacted first 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 250.2 million in the first quarter compared to 267.0 million in the prior year period. The Company repurchased 3.9 million Class A Ordinary Shares for approximately $550 million in the quarter.  As of March 31, 2018, the Company had $4.9 billion of remaining authorization under its share repurchase program.

FIRST QUARTER 2018 CASH FLOW SUMMARY
Cash flow from operations for the first three months of 2018 decreased 23%, or $42 million, to $140 million compared to the prior year period, primarily reflecting $98 million of cash restructuring charges, partially offset by operational improvement.

Free cash flow, defined as cash flow from operations less capital expenditures, decreased 36%, or $53 million, to $95 million for the first three months of 2018 compared to the prior year quarter, reflecting a decline in cash flow from operations and an $11 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 businesses, including restructuring initiatives, increased $28 million, or 16%, to $208 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 and Free Cash Flow” on page 10 of this press release.

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

Three Months Ended
(millions)Mar 31,
2018
Mar 31,
2017
%
Change
Revenue
Recognition (1)
Less:
Currency
Impact (2)
Less:
Fiduciary
Investment
Income (3)
Less:
Acquisitions,
Divestitures
& Other
Organic
Revenue
Growth (4)
Revenue
Commercial Risk Solutions$1,184$98420%—%6%—%10%4%
Reinsurance Solutions74237110089416
Retirement Solutions4243861064
Health Solutions451372211641
Data & Analytic Services294268102431
Elimination(5)N/AN/AN/AN/AN/AN/A
   Total revenue$3,090$2,38130%17%5%—%5%3%

Total revenue increased 30%, or $709 million, on a reported basis, including an increase of $365 million, or 17%, related to adoption of the new revenue recognition standard. Excluding this impact, revenue on a comparable basis increased $344 million, or 13%, compared to the prior year period, including organic revenue of 3% primarily driven by strong growth in Reinsurance and Commercial Risk Solutions.

Commercial Risk Solutions organic revenue increased 4% compared to the prior year period driven by strong growth globally across most geographies, highlighted by particular strength in the Americas and EMEA regions, driven by double-digit new business generation and strong management of the renewal book portfolio.

Reinsurance Solutions organic revenue increased 6% compared to the prior year period driven by strong growth across every major product line, including particular strength in treaty placements driven by net new business generation and a modest favorable market impact, as well as growth in both facultative placements and capital markets transactions.

Retirement Solutions organic revenue was flat compared to the prior year period driven by growth in investment consulting, primarily for delegated investment management, and in the talent practice for assessment services, offset by a modest decline in project-related work and an unfavorable impact from the timing of certain revenue.

Health Solutions organic revenue was flat compared to the prior year period driven by solid growth in health and benefits brokerage, highlighted by strong growth across Asia and the EMEA region, offset by a decline in project-related work that benefited the prior year period in the health care exchange business.

Data & Analytic Services organic revenue increased 1% compared to the prior year period driven by continued solid growth across core Affinity, with particular strength in the U.S., offset by unfavorable impacts from certain client contracts that were anticipated.

FIRST QUARTER 2018 EXPENSE REVIEW

Three Months Ended
(millions)Mar 31, 2018Mar 31, 2017$
Change
%
Change
Expenses
Compensation and benefits$1,616$1,469$14710%
Information technology115882731
Premises9384911
Depreciation of fixed assets3954(15)(28)
Amortization and impairment of intangible assets1104367156
Other general expenses318308103
Total operating expenses$2,291$2,046$24512%

Compensation and benefits expense increased $147 million, or 10%, on a reported basis, including $79 million, or 5%, related to adoption of the new revenue recognition standard. Excluding this impact, compensation and benefits expense on a comparable basis increased $68 million, or 5%, compared to the prior year period due primarily to a $78 million unfavorable impact from foreign currency translation, a $51 million increase in expenses related to acquisitions, net of divestitures, a $12 million increase in expense related to certain hedging programs, and an increase in expense associated with 3% organic revenue growth, partially offset by a $70 million decrease in restructuring costs and $50 million of incremental savings related to restructuring and other operational improvement initiatives.

Information technology expense increased $27 million, or 31%, compared to the prior year period due primarily to a $7 million increase in restructuring costs, a $5 million increase in expenses related to acquisitions, net of divestitures, a $3 million unfavorable impact from foreign currency translation, as well as investments in growth.

Premises expense increased $9 million, or 11%, compared to the prior year period due primarily to a $5 million unfavorable impact from foreign currency translation and a $3 million increase related to acquisitions, net of divestitures, partially offset by $2 million of incremental savings related to restructuring and other operational improvement initiatives.

Depreciation of fixed assets decreased $15 million, or 28%, compared to the prior year period primarily due to a $12 million decrease in restructuring costs related to fixed asset write-offs.

Amortization and impairment of intangible assets increased $67 million, or 156%, compared to the prior year period primarily due to $54 million of accelerated amortization related to trade names and an increase in intangible asset amortization from previous acquisitions.

Other general expenses increased $10 million, or 3% on a reported basis, including a $1 million decrease related to adoption of the new revenue recognition standard. Excluding this impact, other general expenses on a comparable basis increased $11 million, or 3%, compared to the prior year period due primarily to a $9 million unfavorable impact from foreign currency translation, a $5 million increase in operating expenses related to acquisitions, net of divestitures, and a $5 million increase in restructuring costs, partially offset by expense discipline.

FIRST QUARTER 2018 INCOME SUMMARY
The first 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 11-15 of this press release. In addition, certain noteworthy items impacted adjusted operating income and adjusted operating margins in the first 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

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