Aon Reports Fourth Quarter and Full Year 2017 Results

LONDON, Feb. 2, 2018 /PRNewswire/ --

Fourth Quarter Key Metrics From Continuing Operations and Highlights

• Reported revenue increased 10% to $2.9 billion with organic revenue growth of 6%
• Operating margin decreased to 16.8%, and operating margin, adjusted for certain items, increased to 27.5%
• EPS decreased to $0.04, and EPS, adjusted for certain items, increased to $2.35
• Repurchased 3.5 million Class A Ordinary Shares for approximately $500 million
• The Company closed its acquisition of the Townsend Group, a leading global real estate and investment management firm, bringing greater depth of expertise in real estate assets to Aon's distribution scale and increasing Aon's ability to provide alternative private market assets
• The Company closed its acquisition of Unirobe Meeùs Groep, strengthening Aon's position as a top leading insurance broker and risk advisor in all business-to-business market segments in the Netherlands

Full Year Key Metrics From Continuing Operations and Highlights

• Reported revenue increased 6% to $10.0 billion with organic revenue growth of 4%
• Operating margin decreased to 9.8%, and operating margin, adjusted for certain items, increased to 23.4%
• EPS decreased to $1.53, and EPS, adjusted for certain items, increased to $6.52
• Cash flow from operations was $669 million and free cash flow was $486 million
• Closed more than $1.0 billion of mergers and acquisitions in high-growth, high-margin areas across the portfolio
• Repurchased 18.0 million Class A Ordinary Shares for approximately $2.4 billion

Aon plc (NYSE: AON) today reported results for the three and twelve months ended December 31, 2017.

Net income from continuing operations attributable to Aon shareholders in the fourth quarter was $10 million, or $0.04 per share, compared to $377 million, or $1.40 per share, in the prior year period. Net income per share from continuing operations, adjusted for certain items, increased 18% to $2.35, including $19 million, or  $0.06, of other expenses primarily related to a loss on the sale of certain businesses and an unfavorable impact of exchange rates on the remeasurement of assets and liabilities in non-functional currencies, compared to $2.00 in the prior year period. Certain items that impacted fourth quarter results and comparisons with the prior year period are detailed in the "Reconciliation of Non-GAAP Measures - Operating Income and Diluted Earnings Per Share from Continuing Operations" on page 11 of this press release.

"Our fourth quarter results reflect a strong finish to a solid year, highlighted by 6% organic growth, substantial operational improvement driven by our Aon United operating model initiative, and effective capital management, highlighted by the return of a record amount of capital to shareholders in 2017," said Greg Case, President and Chief Executive Officer.  "The long-term growth profile of our firm is increasing, driven by an unmatched level of investment and an industry-leading portfolio focused around our highest value solutions and our clients' greatest needs. Combined with core operational performance and savings from the Aon United operating model, we believe we are on track to exceed $7.97 of adjusted earnings per share in 2018, and deliver double-digit free cash flow growth over the long-term."

FOURTH QUARTER 2017 FINANCIAL SUMMARY
The fourth quarter financial results discussed herein represent performance from continuing operations.

Total revenue in the fourth quarter increased 10% to $2.9 billion compared to the prior year period driven primarily by 6% organic revenue growth, a 2% increase related to acquisitions, net of divestitures, and a 2% favorable impact if the company were to hold foreign currency exchange rates constant, translating prior year period results at current period foreign exchange rates ("foreign currency translation").

Total operating expenses in the fourth quarter increased 11% to $2.4 billion compared to the prior year period driven primarily by $96 million of restructuring costs, a $75 million  increase in expenses related to acquisitions, net of divestitures, $54 million of accelerated amortization related to tradenames, a $42 million unfavorable impact from foreign currency translation, and an increase in expense associated with  6% organic revenue growth, partially offset by $56 million of savings related to restructuring and other operational improvement initiatives, a $30 million decrease in expenses related to certain pension settlements, a $14 million decrease in expected costs related to regulatory and compliance matters, and approximately a $12 million decrease in transaction related costs.

Restructuring expenses were $96 million in the fourth quarter, primarily driven by workforce reductions and other general initiatives. Upon evaluating the current progress of the restructuring program and further opportunities to improve our Aon United operating model, the Company has increased its estimated investment from $900 million to $1,175 million in total cash over a three-year period, in addition to incurring $50 million of non-cash charges. This includes an estimated investment of $975 million of cash restructuring charges and $200 million of incremental capital expenditures. To date, the Company has incurred $497 million, or 48% of the total estimated restructuring charges. An analysis of restructuring and related costs by type is detailed on page 14 of this press release.

Restructuring savings in the fourth quarter related to restructuring and other operational improvement initiatives were $56 million, before any potential reinvestment. Before any potential reinvestment of savings, restructuring and other operational improvement initiatives are now expected to deliver run-rate savings of $450 million annually in 2019, an increase of $50 million from the original estimated savings of $400 million. To date, the Company has achieved $165 million, or 37%, of the total estimated annualized savings.

Foreign currency exchange rates in the fourth quarter had a $0.06 per share, or $16 million, favorable impact on U.S. GAAP net income, and a $0.06 per share, or $17 million, favorable impact 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 95.8%, including $345 million of additional tax expense as a result of the provisional estimate of the impact of U.S. tax reform based on Aon's initial analysis of the Tax Cuts and Jobs Act, compared to the prior year quarter of 5.2%. After adjusting to exclude the provisional estimate of the impact of U.S. tax reform based on Aon's initial analysis of the Tax Cuts and Jobs Act, as well as the applicable tax impact associated with estimated restructuring expenses, accelerated tradename amortization, impairment charges, regulatory and compliance provisions, and non-cash pension expenses, the adjusted effective tax rate for the fourth quarter of 2017 was 15.5% compared to 12.0% in the prior year quarter. Both periods benefited from a net favorable impact of certain discrete items. These adjustments are discussed in the "Reconciliation of Non-GAAP Measures - Operating Income and Diluted Earnings Per Share from Continuing Operations" on page 11 of this press release.

Additionally, as a result of the initial analysis of the Tax Cuts and Jobs Act, the Company expects that U.S. tax reform will have modest upward pressure on its effective tax rate.  Based on initial interpretation of changes in legislation, current assumptions of geographic mix of income and the potential impact of discrete items, we believe the best estimate of our full-year non-GAAP global effective tax rate to be approximately 19%.

Weighted average diluted shares outstanding decreased to 254.5 million in the fourth quarter compared to 268.3 million in the prior year period.  The Company repurchased 3.5 million Class A Ordinary Shares for approximately $500 million in the fourth quarter. As of December 31, 2017, the Company had $5.4 billion of remaining authorization under its share repurchase program.

FOURTH QUARTER 2017 CASH FLOW SUMMARY
Cash flow from operations for 2017 decreased 63%, or $1,160 million, to $669 million compared to the prior year period, primarily reflecting an estimated $940 million of cash tax payments associated with the divestiture of our outsourcing businesses in the second quarter ("divested business"), $280 million of cash restructuring charges, and $45 million of transaction costs related to the divested business, partially offset by operational improvement.

Free cash flow, defined as cash flow from operations less capital expenditures, decreased 71%, or $1,187 million, to $486 million compared to the prior year period, reflecting a decline in cash flow from operations and a $27 million increase in capital expenditures, including investments in our operating model.  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 10 of this press release.

FOURTH QUARTER 2017 REVENUE REVIEW
The fourth 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.

Total organic revenue increased 6% compared to prior year period, reflecting organic growth of 5% or greater in four of the five revenue lines, highlighted by double-digit growth in Data & Analytic Services.

Commercial Risk Solutions organic revenue increased 5% compared to the prior year period driven primarily by strong growth in U.S. retail and solid growth internationally led by the Asia and Pacific regions, as well as new client wins in the captive management business.

Reinsurance Solutions organic revenue increased 8% compared to the prior year period driven by strong growth across all major product lines, highlighted by particular strength in treaty placements, reflecting net new business generation and growth in both facultative placements and capital markets transactions.

Retirement Solutions organic revenue increased 4% compared to the prior year period driven by growth across every major business and geography, with particular strength in our Talent, Rewards, and Performance practice primarily in Rewards, assessment services, and in investment consulting, primarily for delegated investment management.

Health Solutions organic revenue increased 6% compared to the prior year period driven by strong growth globally in health & benefits brokerage, reflecting continued strength both in the U.S. and internationally. The prior year period benefited from certain project-related work in the retiree exchange business

Data & Analytic Services organic revenue increased 12% compared to the prior year period driven by continued strength across U.S. Affinity, as well as increased claims activity in the flood business following certain catastrophic events earlier in the year.

FOURTH QUARTER 2017 EXPENSE REVIEW

Compensation and benefits expense increased 6%, or $106 million, compared to the prior year period due primarily to a $44 million increase in expenses related to acquisitions, net of divestitures, $42 million of restructuring costs, a $33 million unfavorable impact from foreign currency translation, and an increase in expense associated with  6% organic revenue growth, partially offset by $42 million of savings related to restructuring and other operational improvement initiatives and a $30 million decrease in expenses related to certain pension settlements.

Information technology expense increased 18%, or $19 million, compared to the prior year period due primarily to $11 million of restructuring costs, a $4 million increase in expenses associated with acquisitions, net of divestitures, as well as investments in future growth, partially offset by $8 million of savings related to restructuring and other operational improvement initiatives.

Premises expense increased 3%, or $3 million, compared to the prior year period due primarily to a $3 million unfavorable impact from foreign currency translation and a $2 million increase in expenses related to acquisitions, net of divestitures, partially offset by $1 million of savings related to restructuring and other operational improvement initiatives.

Depreciation of fixed assets expense decreased 11%, or $5 million, compared to the prior year period primarily due to $1 million of savings related to restructuring and other operational improvement initiatives, as well as a decrease in overall expense as we continue to optimize our real estate and IT portfolio.

Amortization and impairment of intangible assets expense increased 150%, or $60 million, compared to the prior year period primarily due to $54 million of accelerated amortization related to tradenames and an increase from acquisitions, net of divestitures.

Other general expenses increased 19%, or $50 million, compared to the prior year period primarily due to $43 million of restructuring costs, a $22 million increase in expenses associated with acquisitions, net of divestitures, and an increase in expense associated with 6% organic revenue growth, partially offset by a $14 million decrease in expected costs related to regulatory and compliance matters and a $12 million net decrease in transaction related costs.

FOURTH QUARTER 2017 INCOME SUMMARY
Certain noteworthy items impacted operating income and operating margins in the fourth quarters of 2017 and 2016.  The fourth quarter information provided below includes supplemental information related to adjusted operating income and adjusted operating margin, which are non-GAAP measures that are described in detail in "Reconciliation of Non-GAAP Measures - Operating Income and Diluted Earnings Per Share from Continuing Operations" on page 11 of this press release.

Operating income increased 6%, or $26 million, compared to the prior year period. Adjusting for certain items detailed on page 11 of this press release, operating income increased 18%, or $123 million, and operating margin increased 200 basis points to 27.5%, each compared to the prior year period.  The increase in adjusted operating margin was driven primarily by strong organic revenue growth of 6%, core operational improvement, and $56 million of savings from restructuring and other operational improvement initiatives, partially offset by $3 million, or -10 basis points, of transaction costs related to recent acquisitions.

Interest income increased $4 million to $7 million compared to the prior year period primarily due to additional income earned on the remaining proceeds from the sale of the divested business. Interest expense was similar to the prior year period. Other expense was $19 million and primarily included a loss on the sale of certain businesses and losses due to the unfavorable impact of exchange rates on the remeasurement of assets and liabilities in non-functional currencies. The prior year period primarily includes net gains due to the favorable impact of exchange rates on the remeasurement of assets and liabilities in non-functional currencies.

DISCONTINUED OPERATIONS
Net loss from discontinued operations was $(29) million, or $(0.11) per share, compared to net income of $75 million, or $0.28 per share, in the prior year period. Net loss from discontinued operations, adjusted for certain items, was $(4) million, or $(0.01) per share, compared to net income of $100 million, or $0.37 in the prior year period. Certain items that impacted fourth quarter results and comparisons with the prior year period are detailed in "Reconciliation of Non-GAAP Measures - Operating Income and Diluted Earnings Per Share from Continuing Operations" on page 11 on this press release.

2017 FULL YEAR SUMMARY
Total revenue for 2017 increased 6% to $10.0 billion compared to the prior year period driven by 4% organic revenue growth and a 2% increase related to acquisitions, net of divestitures.

Net income from continuing operations was $435 million, or $1.53 per share, compared to $1.3 billion, or $4.51 per share, in the prior year. Net income per share from continuing operations, adjusted for certain items, increased 17% to $6.52, compared to $5.58 in 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 from Continuing Operations" on page 11 of this press release.

During 2017, the Company repurchased approximately 18.0 million Class A Ordinary Shares for a record $2.4 billion at an average price of $133.67 per share.

PRO FORMA HISTORICAL FINANCIALS
In the first quarter of 2018, Aon will adopt new accounting guidance related to the treatment of revenue from contracts with customers that will be applied prospectively on its U.S. GAAP financial statements and therefore comparable periods will not be restated.  In the same quarter, Aon will adopt new accounting guidance related to the presentation of costs associated with pensions and other postretirement benefits that will be applied retrospectively for its U.S. GAAP financial statements and therefore comparable periods will be restated.  On pages 15 through 21 of this press release, the Company has included unaudited pro forma consolidated results that present the retrospective impact of each of these standards on fiscal years 2016 and 2017.

Conference Call, Presentation Slides and Webcast Details

The Company will host a conference call on Friday, February 2, 2018 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 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 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 for the year ended December 31, 2016 and its Quarterly Reports on Form 10-Q for the quarters ended March 31, 2017, June 30, 2017, and September 30, 2017 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, fiduciary investment income, and reimbursable expenses.  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 the provisional estimate of U.S. tax reform based on Aon's initial analysis of the Tax Cuts and Jobs Act and 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.

SOURCE Aon plc