Aon Reports First Quarter 2012 Results

CHICAGO, May 4, 2012 /PRNewswire/ -- Aon plc (NYSE: AON) today reported results for the first quarter ended March 31, 2012. 

Net income attributable to Aon stockholders from continuing operations was $238 million, or $0.71 per share, compared to $246 million, or $0.71 per share, for the prior year quarter.  Net income per share attributable to Aon stockholders from continuing operations, adjusted for certain items, was $0.98, compared to $0.99 in the prior year quarter, including an unfavorable impact from foreign currency movement of $0.04 per share on remeasurement of assets and liabilities in non-functional reporting currencies and a $0.02 per share unfavorable impact if the Company were to translate prior year results at current quarter foreign exchange rates.  Certain items that impacted first 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 12 of this press release. 

"Our first quarter results reflect the strongest rate of organic revenue growth since the second quarter of 2007 despite overall results that were unfavorably impacted by foreign currency movement and investments to strengthen our client-serving capabilities," said Greg Case, president and chief executive officer .  "We have taken significant steps to position the firm for long-term growth, strong free cash flow generation and increased financial flexibility as highlighted by the completed redomestication to London, the authorization of a five billion dollar share repurchase program and a five percent increase in our dividend."

FIRST QUARTER FINANCIAL SUMMARY

Total revenue increased 3% to $2.8 billion from the prior year quarter driven by a 4% increase in organic revenue, partially offset by a 1% decrease from unfavorable foreign currency translation.

Total operating expenses increased 3%, or $78 million, to $2.4 billion due primarily to a 4% increase in organic revenue, the inclusion of $25 million of expenses from acquisitions, primarily Glenrand M∙I∙B, net of divestitures, and a $13 million increase in intangible asset amortization expense, partially offset by a $29 million favorable impact from foreign currency translation, benefits related to the formal restructuring programs and a $15 million decline in Hewitt related costs.

Depreciation expense increased 4%, or $2 million, to $55 million compared to the prior year quarter.

Intangible asset amortization expense increased 14%, or $13 million, to $104 million compared to the prior year quarter due primarily to a $14 million increase relating to assets associated with the merger with Hewitt.

Restructuring expenses were $20 million compared to $30 million in the prior year quarter.  In the first quarter, the Company incurred $12 million of costs under the Aon Hewitt restructuring program and $8 million of costs under the Aon Benfield restructuring program.  The Company has closed and completed all restructuring activities and incurred 100% of the total costs for the Aon Benfield restructuring program.  An analysis of restructuring-related costs by type and segment are detailed on page 13 of this release.

Restructuring savings in the first quarter related to the Aon Hewitt restructuring program are estimated at $48 million compared to $24 million in the prior year quarter.  Of the estimated savings in the first quarter, approximately $8 million were related to the Risk Solutions segment.  The Company expects to deliver cumulative expense savings of $355 million in 2013 related to the Aon Hewitt restructuring program, including $280 million related to the restructuring program and $75 million in additional synergy savings from areas such as information technology, procurement and public company costs. 

Associated with the transfer of the Health and Benefits business effective January 1, 2012, approximately $46 million of the estimated savings under the Aon Hewitt restructuring program will be achieved in Risk Solutions.  As of the first quarter, an estimated $18 million of cumulative savings have been achieved in Risk Solutions.

Restructuring savings in the first quarter related to the Aon Benfield restructuring program are estimated at $34 million compared to $29 million in the prior year quarter.  Before any potential reinvestment of savings, the Benfield restructuring program is expected to deliver cumulative expense savings of $146 million in 2012 related to the Risk Solutions segment.

Foreign currency exchange rates in the first quarter had an $8 million pretax ($8 million in Risk Solutions), or $0.02 per share, unfavorable impact on adjusted net income from continuing operations if the Company were to translate prior year quarter results at current quarter foreign exchange rates.  Further, in the first quarter, the Company recognized an $18 million pretax, or $0.04 per share, loss in other income due to the unfavorable impact of exchange rates on remeasurement of assets and liabilities in non-functional currencies.

Effective tax rate on net income from continuing operations declined to 28.0% in the first quarter compared to 29.0% in the prior year quarter due primarily to changes in the geographical distribution of income and certain deferred tax adjustments.  The Company anticipates an effective tax rate on net income from continuing operations of approximately 28.0% in 2012.

Average diluted shares outstanding decreased to 336.6 million in the first quarter compared to 345.4 million in the prior year quarter due primarily to the Company's share repurchase program in 2011.  The Company repurchased 2.1 million shares of common stock for approximately $100 million in the first quarter.  Subsequent to the close of the first quarter, as part of the change in corporate domicile, Aon plc's Board of Directors authorized a $5 billion share repurchase program that replaces and cancels the $2 billion share repurchase program previously authorized by Aon Corporation's Board of Directors in January 2010, which had approximately $1.1 billion of remaining authorization.

FIRST QUARTER SEGMENT REVIEW

Certain noteworthy items impacted operating income and operating margins in the first quarter of 2012 and 2011.  The first 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" on page 11 and "Reconciliation of Non-GAAP Measures - Operating Income and Diluted Earnings per Share" on page 12 of this press release.

RISK SOLUTIONS

Risk Solutions total revenue increased 3% to $1.9 billion compared to the prior year quarter due to 4% organic growth in commissions and fees and a 1% favorable impact from acquisitions, net of divestitures, partially offset by a 2% unfavorable impact from foreign currency.

Retail Brokerage organic revenue increased 4% reflecting revenue growth in both the Americas and International businesses.  Americas organic revenue increased 4% primarily as a result of strong management of the renewal book portfolio across all regions and solid new business growth in Latin America.  International organic revenue increased 4% driven by strong growth in Asia, New Zealand and emerging markets, and improved management of the renewal book portfolio across continental Europe, despite continued macro-economic pressures.  Reinsurance organic revenue increased 5% due primarily to strong new business growth in treaty placements globally and a modest favorable impact from pricing internationally, partially offset by higher cedent retentions.

Compensation and benefits for the first quarter increased 6%, or $60 million, compared to the prior year quarter due primarily to 4% organic revenue growth, investments in key talent, the inclusion of $14 million of expenses from acquisitions, primarily Glenrand M-I-B, net of divestitures and $4 million of project-related costs in Australia, partially offset by a $12 million favorable impact from foreign currency translation, an $8 million decline in formal restructuring costs and benefits related to the formal restructuring programs.

Other expenses for the first quarter decreased 5%, or $25 million, primarily due to an $18 million decline in lease termination costs, a $9 million favorable impact from foreign currency translation and benefits related to the formal restructuring programs, partially offset by the inclusion of $11 million of expenses from acquisitions, primarily Glenrand M-I-B, net of divestitures, 4% organic revenue growth and $5 million of integration costs related to the acquisition of Glenrand M-I-B.

First quarter operating income increased 5% to $366 million.  Adjusting for certain items detailed on page 12 of this press release, operating income increased 2% or $8 million compared to the prior year quarter, and operating margin decreased 20 basis points to 21.4% due primarily to a 60 basis point unfavorable impact from integration and project-related costs, investments in key talent and a 10 basis point unfavorable impact from foreign currency translation, partially offset by organic revenue growth, a decrease in lease termination costs and savings related to the restructuring programs.

HR SOLUTIONS

HR Solutions total revenue increased 3% to $945 million compared to the prior year quarter due to 3% organic growth in commissions and fees and a 1% favorable impact from acquisitions, net of divestitures, partially offset by a 1% unfavorable impact from foreign currency.

Organic revenue in Consulting Services increased 1% driven primarily by strong growth across businesses in Asia, compensation consulting and investment consulting, partially offset by a decline in discretionary demand in retirement consulting.  Organic revenue in Outsourcing increased 3% due primarily to new client wins in HR business process outsourcing and healthcare exchanges, partially offset by anticipated price compression and client losses in benefits administration.

Compensation and benefits for the first quarter increased 1% or $6 million compared to the prior year quarter, due primarily to 3% organic revenue growth and investments in key talent, primarily offset by benefits related to the Aon Hewitt restructuring program and a $5 million favorable impact from foreign currency translation. 

Other expenses increased 13%, or $34 million, from the prior year quarter due primarily to a $14 million increase in intangible asset amortization expense, a $13 million increase in deferred costs related to new client implementations, 3% organic revenue growth and investments in the business, partially offset by a $15 million decline in Hewitt related costs.

First quarter operating income decreased 12% to $73 million.  Adjusting for certain items detailed on page 12 of this press release, operating income decreased 7%, or $11 million to $156 million, and operating margin decreased 180 basis points to 16.5% versus the prior year quarter due primarily to a $20 million, or 210 basis point, unfavorable impact for investment spend in new growth opportunities, primarily in healthcare exchanges and HR business process outsourcing, an unfavorable revenue mix shift, and a $13 million increase in deferred costs, partially offset by benefits related to the formal restructuring program.

INCOME FROM CONTINUING OPERATIONS

Unallocated expenses increased $5 million to $37 million including $3 million of costs for project-related work.   Interest income decreased $3 million to $3 million due to lower average interest rates and lower average cash balances.  Interest expense decreased $4 million to $59 million due primarily to a decline in the average rate on total debt outstanding.  Other income included an $18 million loss due to the unfavorable impact of exchange rates on remeasurement of assets and liabilities in non-functional currencies, offset by a gain on certain Company owned life insurance plans and distributions from certain private equity securities.  The prior year quarter primarily included gains from the sale of certain investments and distributions from certain private equity securities.

Conference Call, Presentation Slides and Webcast Details

The Company will host a conference call on Friday, May 4, 2012 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 61,000 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. Potential factors that could impact results include: the change in global headquarters and jurisdiction of incorporation may affect our operations and financial results, including the reaction of clients, employees and other constituents, compliance with U.K. regulatory regimes or the failure to realize some of the anticipated benefits; changes in circumstances beyond Aon's control, including changes in foreign or domestic laws, regulatory actions, orders or rulings by foreign or domestic governmental entities, the possibility that the expected efficiencies and cost savings from the merger with Hewitt Associates Inc. ("Hewitt") will not be realized, or will not be realized within the expected time period; the risk that the Aon and Hewitt businesses will not be integrated successfully; general economic conditions in different countries in which Aon does business around the world; changes in global equity and fixed income markets that could affect the return on invested assets; fluctuations in exchange and interest rates that could influence revenue and expense; rating agency actions that could affect Aon's ability to borrow funds; funding of Aon's various pension plans; our ability to implement restructuring initiatives and other initiatives intended to yield cost savings, and the ability to achieve those cost savings; changes in the competitive environment; changes in commercial property and casualty markets and commercial premium rates that could impact revenues; continued compliance with settlement agreements related to compliance with the U.S. Foreign Corrupt Practices Act and non-U.S. anti-corruption laws; the impact of investigations brought by U.S. state attorneys general, U.S. state insurance regulators, U.S. federal prosecutors, U.S. federal regulators, and regulatory authorities in the U.K. and other countries; the impact of class actions and individual lawsuits including client class actions, securities class actions, derivative actions and ERISA class actions; the cost of resolution of other contingent liabilities and loss contingencies, including potential liabilities arising from error and omissions claims against Aon; the extent to which Aon retains existing clients and attracts new businesses; the extent to which Aon manages certain risks created in connection with the various services, including fiduciary and advisory services, among others, that Aon currently provides, or will provide in the future, to clients; the extent to which Aon retains existing employees and attracts new personnel, including potential difficulties in executive succession planning related to our need to attract talent to London; Aon's ability to maintain the security and privacy of confidential information belonging to its clients or their personnel; Aon's ability to innovate and keep pace with rapid and continuing changes in technology, industry standards and client preferences; 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; changes in costs or assumptions associated with our outsourcing and consulting engagements that affect the profitability of these engagements; and the implementation of changes to the methods in which Aon internally process and monitors transactions. 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 Annual Report to Stockholders for the fiscal year ended December 31, 2011 and other public filings with the SEC for a further discussion of these and other risks and uncertainties applicable to our 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 and several additional measures including expenses, margins and income per share, that exclude the effects of restructuring charges, 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.  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.