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Aon Reports Third Quarter 2016 Results
Third Quarter Key Metrics
-- Reported revenue was flat at $2.7 billion, with organic revenue growth of 4%
-- Operating margin increased 30 basis points to 15.4%, and operating margin, adjusted for certain items, increased 10 basis points to 18.0%
-- EPS increased 10% to $1.14, and EPS, adjusted for certain items, increased 4% to $1.29
-- For the first nine months of 2016, cash flow from operations increased 14% to $1,475 million, and free cash flow increased 24% to $1,322 million
Third Quarter Highlights
-- Repurchased 2.7 million Class A Ordinary Shares for approximately $300 million
-- Subsequent to the close of the quarter, the Company announced its acquisition of Stroz Friedberg, strengthening Aon Risk Solutions' ability to serve clients as the global leader in cyber risk mitigation

LONDON, Oct. 28, 2016 /PRNewswire/ -- Aon plc (NYSE: AON) today reported results for the three and nine months ended September 30, 2016.

Net income attributable to Aon shareholders was $307 million, or $1.14 per share, compared to $295 million, or $1.04 per share, for the prior year quarter.  Net income per share attributable to Aon shareholders, adjusted for certain items, increased 4% to $1.29, compared to $1.24 in the prior year quarter.  If the Company were to hold foreign currency exchange rates constant, translating prior year quarter results at current quarter foreign exchange rates ("foreign currency translation"), there would be a $0.02 per share favorable impact on GAAP net income from continuing operations and a $0.01 per share favorable impact on adjusted net income from continuing operations. Certain items that impacted third 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. 

"Overall, our performance reflects solid organic revenue growth across both Risk and HR Solutions, effective capital management, and strong double-digit growth in free cash flow," said Greg Case, President and Chief Executive Officer.  "Looking forward, we expect a strong finish to the year as we head into our seasonally strongest quarter, resulting in improved operating performance for the full year.  Our industry-leading platform and significant level of strategic investments continue to position the firm for long-term growth, increased operating leverage and significant free cash flow generation towards our near-term goal of $2.4 billion for the full year 2017."

THIRD QUARTER FINANCIAL SUMMARY

Total revenue was $2.7 billion, similar to the prior year quarter driven primarily by 4% organic revenue growth in commissions and fees, offset by a 2% unfavorable impact from foreign currency translation and a 2% decrease in commissions and fees related to divestitures, net of acquisitions.

Total operating expenses were $2.3 billion, similar to the prior year quarter due primarily to a $50 million favorable impact from foreign currency translation, a $41 million decrease in expenses related to divestitures, net of acquisitions, and a $6 million decrease in intangible asset amortization from previous acquisitions, offset by an increase in expense to support 4% organic revenue growth, an unfavorable impact from the timing of certain compensation expenses, an increase in errors and omissions expenses, and $7 million of certain legacy information technology contract costs.

Depreciation expense increased $1 million to $57 million compared to the prior year quarter.

Intangible asset amortization expense decreased 8%, or $6 million, to $72 million compared to the prior year quarter, consisting of a $7 million decrease in HR Solutions and a $1 million increase in Risk Solutions.

Foreign currency exchange rates in the third quarter had a $0.02 per share, or $6 million pretax, favorable impact (+$9 million in Risk Solutions, -$4 million in HR Solutions, and +$1 million Unallocated) on GAAP net income and a $0.01 per share, or $3 million pretax, favorable impact (+$8 million in Risk Solutions, -$6 million in HR Solutions, and +$1 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 in the third quarter was 13.2%, compared to the prior year quarter of 14.0%.  After adjusting to exclude the applicable tax impact associated with expenses for certain non-cash pension expenses, the adjusted effective tax rate for the third quarter of 2016 was 18.2% compared to 16.0% in the prior year quarter, driven primarily by 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 12 of this press release.

Average diluted shares outstanding decreased to 269.6 million in the third quarter compared to 283.8 million in the prior year quarter. The Company repurchased 2.7 million Class A Ordinary Shares for approximately $300 million in the quarter.  As of September 30, 2016, the Company had $3.0 billion of remaining authorization under its share repurchase program.

Cash flow from operations for the first nine months of 2016 increased 14%, or $180 million, to $1,475 million compared to the prior year period, primarily driven by lower pension contributions, an increase in net income, underlying working capital improvements, and lower cash tax payments.

Free cash flow, defined as cash flow from operations less capital expenditures, increased 24%, or $252 million, to $1,322 million for the first nine months of 2016 compared to the prior year period, driven by an increase in cash flow from operations and a $72 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 11 of this press release.

THIRD QUARTER SEGMENT REVIEW

Certain noteworthy items impacted operating income and operating margins in the third quarters of 2016 and 2015.  The third 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 and Free Cash Flow" 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

                   

Less:

   

(millions)

 

Three Months Ended

     

Less:

 

Acquisitions,

   

Commissions,

Fees and Other

 

Sep 30,

 2016

 

Sep 30,

 2015

 

%

Change

 

Currency

Impact

 

Divestitures,

Other

 

Organic

Revenue

Retail

 

$

1,377

   

$

1,352

   

2%

   

(2)%

   

—%

   

4%

 

Reinsurance

 

332

   

331

   

   

(1)

   

   

1

 

Subtotal

 

$

1,709

   

$

1,683

   

2%

   

(2)%

   

1%

   

3%

 

Fiduciary Investment Income

 

6

   

6

   

             

Total Revenue

 

$

1,715

   

$

1,689

   

2%

             

 

Risk Solutions total revenue increased 2% compared to the prior year quarter driven by 3% organic growth in commissions and fees and a 1% increase in commissions and fees related to acquisitions, net of divestitures, partially offset by a 2% unfavorable impact from foreign currency translation.

Retail organic revenue increased 4% compared to the prior year quarter, reflecting organic revenue growth in both the Americas and International businesses.  Americas organic revenue increased 5% driven by growth across all regions, highlighted by strong growth in Affinity and record new business generation and retention in US Retail.  International organic revenue increased 2% driven by effective management of the renewal book portfolio in continental Europe and solid growth in New Zealand and across Asia. 

Reinsurance organic revenue increased 1% compared to the prior year quarter due primarily to growth in net new business generation in treaty and growth in facultative placements, partially offset by an unfavorable market impact globally.

   

Three Months Ended

   

(millions)

 

Sep 30,

 2016

 

Sep 30,

 2015

 

%

 Change

Revenue

 

$

1,715

   

$

1,689

   

2%

 

Expenses

           

Compensation and benefits

 

974

   

979

   

(1)

 

Other general expenses

 

411

   

386

   

6

 

Total operating expenses

 

1,385

   

1,365

   

1

 

Operating income

 

$

330

   

$

324

   

2%

 

Operating margin

 

19.2%

   

19.2%

     

Operating income - adjusted

 

$

358

   

$

351

   

2%

 

Operating margin - adjusted

 

20.9%

   

20.8%

     

 

Compensation and benefits for the third quarter decreased 1%, or $5 million, compared to the prior year quarter due primarily to a $20 million favorable impact from foreign currency translation, partially offset by an unfavorable impact from the timing of certain compensation expenses.

Other general expenses for the third quarter increased 6%, or $25 million, compared to the prior year quarter due primarily to an increase in expense to support 3% organic revenue growth in the quarter and a $9 million increase in errors and omissions expense, partially offset by a $14 million favorable impact from foreign currency translation.

Third quarter operating income increased 2% to $330 million compared to the prior year quarter.  Adjusting for certain items detailed on page 12 of this press release, operating income increased 2% to $358 million, and operating margin increased 10 basis points to 20.9%, each compared to the prior year quarter.  The increase in adjusted operating margin was driven primarily by solid organic revenue growth of 3% and an 80 basis point favorable impact from foreign currency translation, partially offset by an unfavorable impact from the timing of certain compensation expenses and a 50 basis point unfavorable impact from higher errors and omissions expense.

HR SOLUTIONS

(millions)

 

Three Months Ended

     

Less:

 

Less:

Acquisitions,

   

Commissions,

Fees and Other

 

Sep 30,

 2016

 

Sep 30,

 2015

 

%

Change

 

Currency

Impact

 

Divestitures,

Other

 

Organic

Revenue

Consulting Services

 

$

459

   

$

460

   

—%

   

(3)%

   

—%

   

3%

 

Outsourcing

 

593

   

616

   

(4)

   

(1)

   

(8)

   

5

 

Intersegment

 

(11)

   

(12)

   

N/A

   

N/A

   

N/A

   

N/A

 

Subtotal

 

$

1,041

   

$

1,064

   

(2)%

   

(2)%

   

(4)%

   

4%

 

Fiduciary Investment Income

 

   

   

N/A

                   

Total Revenue

 

$

1,041

   

$

1,064

   

(2)%

                   

 

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

Organic revenue in Consulting increased 3% compared to the prior year quarter, driven by growth in retirement consulting for delegated investment consulting services and growth in communications consulting. Organic revenue in Outsourcing increased 5% compared to the prior year quarter, due primarily to strong growth in HR BPO for cloud-based solutions and for off-cycle enrollments and project-related work in health care exchanges, partially offset by an anticipated modest decline in benefits administration.

   

Three Months Ended

   

(millions)

 

Sep 30,

 2016

 

Sep 30,

 2015

 

%

Change

Revenue

 

$

1,041

   

$

1,064

   

(2)%

 

Expenses

           

Compensation and benefits

 

610

   

640

   

(5)

 

Other general expenses

 

297

   

290

   

2

 

Total operating expenses

 

907

   

930

   

(2)

 

Operating income

 

$

134

   

$

134

   

—%

 

Operating margin

 

12.9%

   

12.6%

     

Operating income - adjusted

 

$

178

   

$

185

   

(4)%

 

Operating margin - adjusted

 

17.1%

   

17.4%

     

 

Compensation and benefits for the third quarter decreased 5%, or $30 million, compared to the prior year quarter due primarily to a $31 million decrease in expenses related to net divestitures and a $10 million favorable impact from foreign currency translation, partially offset by an increase in expense to support 4% organic revenue growth.

Other general expenses for the third quarter increased $7 million compared to the prior year quarter due primarily to an increase in expense to support 4% organic revenue growth and $7 million of certain legacy information technology contract costs, partially offset by a $9 million decrease in expenses related to net divestitures, a $7 million decrease in intangible asset amortization from previous acquisitions, and a $6 million favorable impact from foreign currency translation.

Third quarter operating income was $134 million, similar to the prior year quarter.  Adjusting for certain items detailed on page 12 of this press release, operating income decreased 4% to $178 million, and operating margin decreased 30 basis points to 17.1%, each compared to the prior year quarter.  The decrease in adjusted operating margin was primarily driven by a 70 basis point unfavorable impact from certain legacy information technology contract costs, a 70 basis point unfavorable impact related to previous portfolio repositioning activity and a 20 basis point unfavorable impact from foreign currency translation, partially offset by solid organic revenue growth of 4%.

INCOME BEFORE INCOME TAXES

   

Three Months Ended

   

(millions)

 

Sep 30,

 2016

 

Sep 30,

 2015

 

%

Change

Risk Solutions

 

$

330

   

$

324

   

2%

 

HR Solutions

 

134

   

134

   

 

Unallocated expenses

 

(42)

   

(45)

   

(7)

 

Operating income

 

$

422

   

$

413

   

2%

 

Interest income

 

1

   

3

   

(67)

 

Interest expense

 

(70)

   

(72)

   

(3)

 

Other income

 

9

   

8

   

13

 

Income before income taxes

 

$

362

   

$

352

   

3%

 

Unallocated expenses for the third quarter decreased $3 million to $42 million compared to the prior year quarter.  Interest income decreased $2 million to $1 million compared to the prior year quarter.  Interest expense decreased $2 million to $70 million compared to the prior year quarter primarily due to a decline in costs related to certain derivative hedging programs which have expired. Other income in both the current and prior year quarter primarily includes gains on certain long term investments.

Conference Call, Presentation Slides and Webcast Details

The Company will host a conference call on Friday, October 28, 2016 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 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, including negative yields in some jurisdictions, 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 of 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; 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 risks associated with the various services, including fiduciary and investments and other advisory services and business process outsourcing services, among others, that Aon provides or will provide to clients; Aon's ability to grow, develop and integrate companies or new lines of business that it acquires; 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, 2015 and its Quarterly Reports on Form 10-Q for the quarters ended March 31, 2016 and June 30, 2016 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, and adjusted earnings per share that exclude the effects of intangible asset amortization, capital expenditures, and certain other noteworthy items that affected results for the comparable periods.   Organic revenue includes the impact of intersegment and intrasegment activity and excludes the impact of foreign exchange rate changes, 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 appendices.  Supplemental organic revenue information and additional measures that exclude the effects of certain items noted above that do not affect net income or any other GAAP reported amounts.  Free cash flow is cash flow from operating activity less capital expenditures. 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.

Investor Contact:

 

Media Contact:

Scott Malchow

 

Donna Mirandola

Senior Vice President, Investor Relations

 

Senior Director, External Communications - Americas

+44 (0) 20 7086 0100

 

312-381-1532

 

Aon plc

Condensed Consolidated Statements of Income (Unaudited)

 
   

Three Months Ended

 

Nine Months Ended

(millions, except per share data)

 

Sep 30,

 2016

 

Sep 30,

 2015

 

Percent

Change

 

Sep 30,

 2016

 

Sep 30,

 2015

 

Percent

Change

Revenue

                       

Commissions, fees and other

 

$

2,740

 

$

2,736

 

—%

 

$

8,288

 

$

8,378

 

(1)%

Fiduciary investment income

 

6

 

6

 

 

16

 

16

 

Total revenue

 

2,746

 

2,742

 

 

8,304

 

8,394

 

(1)

Expenses

                       

Compensation and benefits

 

1,611

 

1,644

 

(2)

 

4,948

 

4,980

 

(1)

Other general expenses

 

713

 

685

 

4

 

2,079

 

2,283

 

(9)

Total operating expenses

 

2,324

 

2,329

 

 

7,027

 

7,263

 

(3)

Operating income

 

422

 

413

 

2

 

1,277

 

1,131

 

13

Interest income

 

1

 

3

 

(67)

 

6

 

10

 

(40)

Interest expense

 

(70)

 

(72)

 

(3)

 

(212)

 

(205)

 

3

Other income

 

9

 

8

 

13

 

27

 

51

 

(47)

Income before income taxes

 

362

 

352

 

3

 

1,098

 

987

 

11

Income taxes (1)

 

48

 

49

 

(2)

 

177

 

155

 

14

Net income

 

314

 

303

 

4

 

921

 

832

 

11

Less: Net income attributable to noncontrolling interests

 

7

 

8

 

(13)

 

27

 

31

 

(13)

Net income attributable to Aon shareholders

 

$

307

 

$

295

 

4%

 

$

894

 

$

801

 

12%

                         

Basic net income per share attributable to Aon shareholders

 

$

1.15

 

$

1.05

 

10%

 

$

3.32

 

$

2.83

 

17%

Diluted net income per share attributable to Aon shareholders

 

$

1.14

 

$

1.04

 

10

 

$

3.30

 

$

2.80

 

18

Weighted average ordinary shares outstanding - diluted

 

269.6

 

283.8

 

(5)%

 

271.0

 

285.9

 

(5)%

   

(1)

The effective tax rate was 13.2% and 14.0% for the three months ended September 30, 2016 and 2015, respectively, and 16.1% and 15.8% for the nine months ended September 30, 2016 and 2015 , respectively.

 

Aon plc

Revenue (Unaudited)

 
   

Three Months Ended

 

Nine Months Ended

(millions)

 

Sep 30,

 2016

 

Sep 30,

 2015

 

Percent

Change

 

Organic

Revenue

Growth (1)

 

Sep 30,

 2016

 

Sep 30,

 2015

 

Percent

Change

 

Organic

Revenue

Growth (1)

Commissions, Fees and Other

                               

Risk Solutions

 

$

1,709

 

$

1,683

 

2%

 

3%

 

$

5,418

 

$

5,401

 

—%

 

3%

HR Solutions

 

1,041

 

1,064

 

(2)

 

4

 

2,902

 

3,013

 

(4)

 

3

Total Operating Segments

 

$

2,750

 

$

2,747

 

—%

 

4%

 

$

8,320

 

$

8,414

 

(1)%

 

3%

Fiduciary Investment Income

                               

Risk Solutions

 

$

6

 

$

6

 

—%

     

$

16

 

$

16

 

—%

   

HR Solutions

 

 

 

N/A

     

 

 

N/A

   

Total Operating Segments

 

$

6

 

$

6

 

—%

     

$

16

 

$

16

 

—%

   

Total Revenue

                               

Risk Solutions

 

$

1,715

 

$

1,689

 

2%

     

$

5,434

 

$

5,417

 

—%

   

HR Solutions

 

1,041

 

1,064

 

(2)

     

2,902

 

3,013

 

(4)

   

Intersegment

 

(10)

 

(11)

 

(9)

     

(32)

 

(36)

 

(11)

   

Total

 

$

2,746

 

$

2,742

 

—%

     

$

8,304

 

$

8,394

 

(1)%

   
   

(1)

Organic revenue includes the impact of intersegment and intrasegment activity and excludes the impact of foreign exchange rate changes, acquisitions, divestitures, transfers between business units, fiduciary investment income, and reimbursable expenses. Change in organic revenue, a non-GAAP measure, is reconciled to the corresponding U.S. GAAP percent change in revenue on page 11 of this release.

 

Aon plc

Segments (Unaudited)

 

Risk Solutions

 
   

Three Months Ended

 

Nine Months Ended

(millions)

 

Sep 30,

 2016

 

Sep 30,

 2015

 

Percent
Change

 

Sep 30,

 2016

 

Sep 30,

 2015

 

Percent
Change

Revenue

                       

Commissions, fees and other

 

$

1,709

 

$

1,683

 

2%

 

$

5,418

 

$

5,401

 

—%

Fiduciary investment income

 

6

 

6

 

 

16

 

16

 

Total revenue

 

1,715

 

1,689

 

2

 

5,434

 

5,417

 

Expenses

                       

Compensation and benefits

 

974

 

979

 

(1)

 

3,115

 

3,050

 

2

Other general expenses

 

411

 

386

 

6

 

1,187

 

1,352

 

(12)

Total operating expenses

 

1,385

 

1,365

 

1

 

4,302

 

4,402

 

(2)

Operating income

 

$

330

 

$

324

 

2%

 

$

1,132

 

$

1,015

 

12%

                         

Operating margin

 

19.2%

 

19.2%

     

20.8%

 

18.7%

   

 

HR Solutions

 
   

Three Months Ended

 

Nine Months Ended

(millions)

 

Sep 30,

 2016

 

Sep 30,

 2015

 

Percent
Change

 

Sep 30,

 2016

 

Sep 30,

 2015

 

Percent
Change

Revenue

                       

Commissions, fees and other

 

$

1,041

 

$

1,064

 

(2)%

 

$

2,902

 

$

3,013

 

(4)%

Fiduciary investment income

 

 

 

N/A

 

 

 

N/A

Total revenue

 

1,041

 

1,064

 

(2)

 

2,902

 

3,013

 

(4)

Expenses

                       

Compensation and benefits

 

610

 

640

 

(5)

 

1,754

 

1,860

 

(6)

Other general expenses

 

297

 

290

 

2

 

872

 

904

 

(4)

Total operating expenses

 

907

 

930

 

(2)

 

2,626

 

2,764

 

(5)

Operating income

 

$

134

 

$

134

 

—%

 

$

276

 

$

249

 

11%

                         

Operating margin

 

12.9%

 

12.6%

     

9.5%

 

8.3%

   

 

Total Operating Income (Loss)

 
   

Three Months Ended

 

Nine Months Ended

(millions)

 

Sep 30,

 2016

 

Sep 30,

 2015

 

Percent
Change

 

Sep 30,

 2016

 

Sep 30,

 2015

 

Percent
Change

Risk Solutions

 

$

330

 

$

324

 

2%

 

$

1,132

 

$

1,015

 

12%

HR Solutions

 

134

 

134

 

 

276

 

249

 

11

Unallocated

 

(42)

 

(45)

 

(7)

 

(131)

 

(133)

 

(2)

Total operating income

 

$

422

 

$

413

 

2%

 

$

1,277

 

$

1,131

 

13%

                         

Total operating margin

 

15.4%

 

15.1%

     

15.4%

 

13.5%

   

 

 

Aon plc

Reconciliation of Non-GAAP Measures - Organic Revenue and Free Cash Flow (Unaudited)

 

Organic Revenue (Unaudited)

 
   

Three Months Ended

(millions)

 

Sep 30,

 2016

 

Sep 30,

 2015

 

Percent

Change

 

Less:

Currency

Impact (1)

 

Less: Acquisitions,

Divestitures &
Other

 

Organic

Revenue

Growth (2)

Commissions, Fees and Other

                       

Risk Solutions Segment:

                       

Retail brokerage

                       

Americas

 

$

814

 

$

779

 

4%

 

(2)%

 

1%

 

5%

International

 

563

 

573

 

(2)

 

(2)

 

(2)

 

2

Total Retail brokerage

 

1,377

 

1,352

 

2

 

(2)

 

 

4

Reinsurance brokerage

 

332

 

331

 

 

(1)

 

 

1

Total Risk Solutions

 

1,709

 

1,683

 

2

 

(2)

 

1

 

3

HR Solutions Segment:

                       

Consulting services

 

459

 

460

 

 

(3)

 

 

3

Outsourcing

 

593

 

616

 

(4)

 

(1)

 

(8)

 

5

Intrasegment

 

(11)

 

(12)

 

N/A

 

N/A

 

N/A

 

N/A

Total HR Solutions

 

1,041

 

1,064

 

(2)

 

(2)

 

(4)

 

4

Total Operating Segments

 

$

2,750

 

$

2,747

 

—%

 

(2)%

 

(2)%

 

4%

                         
   

Nine Months Ended

(millions)

 

Sep 30,

 2016

 

Sep 30,

 2015

 

Percent

Change

 

Less:

Currency

Impact (1)

 

Less: Acquisitions,

Divestitures &
Other

 

Organic

Revenue

Growth (2)

Commissions, Fees and Other

                       

Risk Solutions Segment:

                       

Retail brokerage

                       

Americas

 

$

2,352

 

$

2,329

 

1%

 

(3)%

 

—%

 

4%

International

 

2,028

 

2,034

 

 

(3)

 

(1)

 

4

Total Retail brokerage

 

4,380

 

4,363

 

 

(3)

 

(1)

 

4

Reinsurance brokerage

 

1,038

 

1,038

 

 

(1)

 

 

1

Total Risk Solutions

 

5,418

 

5,401

 

 

(3)

 

 

3

HR Solutions Segment:

                       

Consulting services

 

1,216

 

1,222

 

 

(3)

 

1

 

2

Outsourcing

 

1,703

 

1,819

 

(6)

 

(1)

 

(7)

 

2

Intrasegment

 

(17)

 

(28)

 

N/A

 

N/A

 

N/A

 

N/A

Total HR Solutions

 

2,902

 

3,013

 

(4)

 

(2)

 

(5)

 

3

Total Operating Segments

 

$

8,320

 

$

8,414

 

(1)%

 

(2)%

 

(2)%

 

3%

 

Free Cash Flow (Unaudited)

 
   

Nine Months Ended

(millions)

 

Sep 30,

 2016

 

Sep 30,

 2015

 

Percent Change

Cash Provided By Operating Activities

 

$

1,475

 

$

1,295

 

14%

Less: Capital Expenditures

 

(153)

 

(225)

 

(32)

Free Cash Flow (3)

 

$

1,322

 

$

1,070

 

24%

   

(1)

Currency impact is determined by translating last year's revenue at this year's foreign exchange rates.

(2)

Organic revenue includes the impact of intersegment and intrasegment activity and excludes the impact of foreign exchange rate changes, acquisitions, divestitures, transfers between business units, fiduciary investment income, and reimbursable expenses.

(3)

Free cash flow is defined as cash flow from operations less capital expenditures. This non-GAAP measure does not imply or represent a precise calculation of residual cash flow available for discretionary expenditures.

 

 

Aon plc

Reconciliation of Non-GAAP Measures - Operating Income and Diluted Earnings Per Share (Unaudited) (1)

 
   

Three Months Ended September 30, 2016

 

Nine Months Ended September 30, 2016

(millions)

 

Risk

Solutions

 

HR

Solutions

 

Unallocated

Income &

Expense

 

Total

 

Risk

Solutions

 

HR

Solutions

 

Unallocated

Income &

Expense

 

Total

Revenue

 

$

1,715

 

$

1,041

 

$

(10)

 

$

2,746

 

$

5,434

 

$

2,902

 

$

(32)

 

$

8,304

                                 

Operating income (loss) - as reported

 

$

330

 

$

134

 

$

(42)

 

$

422

 

$

1,132

 

$

276

 

$

(131)

 

$

1,277

Intangible asset amortization

 

28

 

44

 

 

72

 

77

 

130

 

 

207

Pension Settlement

 

 

 

 

 

61

 

1

 

 

62

Operating income (loss) - as adjusted

 

$

358

 

$

178

 

$

(42)

 

$

494

 

$

1,270

 

$

407

 

$

(131)

 

$

1,546

                                 

Operating margins - as adjusted

 

20.9%

 

17.1%

 

N/A

 

18.0%

 

23.4%

 

14.0%

 

N/A

 

18.6%

 

   

Three Months Ended September 30, 2015

 

Nine Months Ended September 30, 2015

(millions)

 

Risk

Solutions

 

HR

Solutions

 

Unallocated

Income &

Expense

 

Total

 

Risk

Solutions

 

HR

Solutions

 

Unallocated

Income &

Expense

 

Total

Revenue

 

$

1,689

 

$

1,064

 

$

(11)

 

$

2,742

 

$

5,417

 

$

3,013

 

$

(36)

 

$

8,394

                                 

Operating income (loss) - as reported

 

$

324

 

$

134

 

$

(45)

 

$

413

 

$

1,015

 

$

249

 

$

(133)

 

$

1,131

Intangible asset amortization

 

27

 

51

 

 

78

 

83

 

154

 

 

237

Legacy Litigation

 

 

 

 

 

137

 

39

 

 

176

Operating income (loss) - as adjusted

 

$

351

 

$

185

 

$

(45)

 

$

491

 

$

1,235

 

$

442

 

$

(133)

 

$

1,544

                                 

Operating margins - as adjusted

 

20.8%

 

17.4%

 

N/A

 

17.9%

 

22.8%

 

14.7%

 

N/A

 

18.4%

 

 

   

Three Months Ended September 30,

 

Nine Months Ended September 30,

(millions except per share data)

 

2016

 

2015

 

2016

 

2015

Operating income - as adjusted

 

$

494

 

$

491

 

$

1,546

 

$

1,544

Interest income

 

1

 

3

 

6

 

10

Interest expense

 

(70)

 

(72)

 

(212)

 

(205)

Other income

 

9

 

8

 

27

 

51

                 

Income before income taxes - as adjusted

 

434

 

430

 

1,367

 

1,400

Income taxes (2)

 

79

 

69

 

246

 

249

Net income - as adjusted

 

355

 

361

 

1,121

 

1,151

Less: Net income attributable to noncontrolling interests

 

7

 

8

 

27

 

31

Net income attributable to Aon shareholders - as adjusted

 

$

348

 

$

353

 

$

1,094

 

$

1,120

                 

Diluted earnings per share - as adjusted

 

$

1.29

 

$

1.24

 

$

4.04

 

$

3.92

                 

Weighted average ordinary shares outstanding - diluted

 

269.6

 

283.8

 

271.0

 

285.9

 

 

 

(1)

Certain noteworthy items impacting operating income in 2016 and 2015 are described in this schedule. The items shown with the caption "as adjusted" are non-GAAP measures.

(2)

The effective tax rates used in the U.S. GAAP financial statements were 13.2% and 14.0% for the three months ended September 30, 2016 and 2015, respectively, and 16.1% and 15.8%, for the nine months ended September 30, 2016 and September 30, 2015, respectively.  Reconciling items are generally taxed at the effective tax rate. However, after adjusting to exclude the applicable tax impact associated with non-cash pension expenses, the adjusted effective tax rates for the third quarter and first nine months of 2016 were 18.2% and 18.0%, respectively. After adjusting to exclude the applicable tax impact associated with expenses for legacy litigation, the adjusted effective tax rates for the third quarter and first nine months of 2015 were 16.0% and 17.8%, respectively.

 

 

Aon plc

Condensed Consolidated Statements of Financial Position (Unaudited)

 
   

As of

(millions)

 

Sep 30,

 2016

 

Dec 31,

 2015

   

(Unaudited)

   

ASSETS

       

Current Assets

       

Cash and cash equivalents

 

$

483

 

$

384

Short-term investments

 

463

 

356

Receivables, net

 

2,391

 

2,734

Fiduciary assets (1)

 

8,710

 

9,932

Other current assets

 

424

 

329

Total Current Assets

 

12,471

 

13,735

Goodwill

 

8,452

 

8,448

Intangible assets, net

 

2,038

 

2,180

Fixed assets, net

 

738

 

765

Non-current deferred tax assets

 

278

 

234

Prepaid pension

 

711

 

1,033

Other non-current assets

 

564

 

592

Total Assets

 

$

25,252

 

$

26,987

         

LIABILITIES AND EQUITY

       

Current Liabilities

       

Accounts payable and accrued liabilities

 

$

1,477

 

$

1,772

Short-term debt and current portion of long-term debt

 

250

 

562

Fiduciary liabilities

 

8,710

 

9,932

Other current liabilities

 

929

 

819

Total Current Liabilities

 

11,366

 

13,085

Long-term debt

 

5,910

 

5,138

Non-current deferred tax liabilities

 

36

 

37

Pension, other post-retirement and post-employment liabilities

 

1,687

 

1,795

Other non-current liabilities

 

759

 

769

Total Liabilities

 

$

19,758

 

$

20,824

         

EQUITY

       

Shareholders' Equity

       

Ordinary shares ($0.01 nominal value)

 

3

 

3

Additional paid-in capital

 

5,522

 

5,409

Retained earnings

 

3,702

 

4,117

Accumulated other comprehensive loss

 

(3,793)

 

(3,423)

Total Aon Shareholders' Equity

 

5,434

 

6,106

Noncontrolling interests

 

60

 

57

Total Equity

 

5,494

 

6,163

Total Liabilities and Equity

 

$

25,252

 

$

26,987

   

(1)

Includes cash and short-term investments:  2016 - $3,780 million, 2015 - $3,394 million

 

Aon plc

Condensed Consolidated Statements of Cash Flows (Unaudited)

 
   

Nine Months Ended

(millions)

 

Sep 30,
2016

 

Sep 30,
2015

CASH FLOWS FROM OPERATING ACTIVITIES

       

Net income

 

$

921

 

$

832

Adjustments to reconcile net income to cash provided by operating activities:

       

Gain from sales of businesses and investments, net

 

(41)

 

(29)

Depreciation of fixed assets

 

171

 

169

Amortization of intangible assets

 

207

 

237

Share-based compensation expense

 

228

 

239

Deferred income taxes

 

(7)

 

(83)

Change in assets and liabilities:

       

Fiduciary receivables

 

1,538

 

795

Short-term investments — funds held on behalf of clients

 

(438)

 

200

Fiduciary liabilities

 

(1,100)

 

(995)

Receivables, net

 

289

 

232

Accounts payable and accrued liabilities

 

(277)

 

(312)

Current income taxes

 

(29)

 

(69)

Pension, other post-retirement and other post-employment liabilities

 

(70)

 

(191)

Other assets and liabilities

 

83

 

270

CASH PROVIDED BY OPERATING ACTIVITIES

 

1,475

 

1,295

         

CASH FLOWS FROM INVESTING ACTIVITIES

       

Proceeds from investments

 

31

 

23

Purchases of investments

 

(47)

 

(3)

Net purchases of short-term investments — non-fiduciary

 

(108)

 

(9)

Acquisition of businesses, net of cash acquired

 

(198)

 

(26)

Proceeds from sale of businesses

 

104

 

54

Capital expenditures

 

(153)

 

(225)

CASH USED FOR INVESTING ACTIVITIES

 

(371)

 

(186)

         

CASH FLOWS FROM FINANCING ACTIVITIES

       

Share repurchase

 

(1,037)

 

(1,150)

Issuance of shares for employee benefit plans

 

(70)

 

(148)

Issuance of debt

 

2,729

 

3,494

Repayment of debt

 

(2,308)

 

(2,860)

Cash dividends to shareholders

 

(258)

 

(240)

Noncontrolling interests and other financing activities

 

(71)

 

(26)

CASH USED FOR FINANCING ACTIVITIES

 

(1,015)

 

(930)

         

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS

 

10

 

(155)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

99

 

24

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

 

384

 

374

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

$

483

 

$

398

 

SOURCE Aon plc



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