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Aon Reports Third Quarter 2017 Results

LONDON, Oct. 27, 2017 /PRNewswire/ --

Third Quarter Key Metrics From Continuing Operations

  • Reported revenue increased 6% to $2.3 billion, with organic revenue growth of 2%
  • Operating margin was 11.3%, and operating margin, adjusted for certain items, increased 170 basis points to 20.3%
  • EPS was $0.73, and EPS, adjusted for certain items, increased 18% to $1.29
  • For the first nine months of 2017, cash flow from operations was $289 million, and free cash flow was $164 million

Third Quarter Highlights

  • Repurchased 5.4 million Class A Ordinary Shares for approximately $750 million
  • Entered into an agreement to acquire 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 more attractive alternative private market assets to clients
  • Entered into an agreement to acquire Unirobe Meeùs Groep in the Netherlands, solidifying Aon's position as the leading insurance broker and risk advisor in all business-to-business market segments in the Netherlands

Aon plc (NYSE: AON) today reported results for the three months ended September 30, 2017.

Net income attributable to Aon shareholders was $185 million, or $0.72 per share, compared to $319 million or $1.18 per share, in the prior year period. Net income per share attributable to Aon shareholders, adjusted for certain items, decreased 6% to $1.25, compared to $1.33 in the prior year period. Net income from continuing operations attributable to Aon shareholders was $189 million, or $0.73 per share, compared to $277 million, or $1.03 per share, in the prior year period. Net income per share from continuing operations, adjusted for certain items, increased 18% to $1.29, compared to $1.09 in the prior year period. Certain items that impacted third quarter results and comparisons with the prior year period are detailed in the "Reconciliation of Non-GAAP Measures - Operating Income from Continuing Operations and Diluted Earnings per Share" on page 11 of this press release.

"Our results for the quarter reflect strong organic revenue growth in our reinsurance business, 170 basis points of adjusted operating margin improvement, and 18% adjusted earnings per share growth, highlighting increased operating leverage in our Aon United operating model and effective capital management with the repurchase of $750 million of shares in the quarter." 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. With continued momentum amplified by significant capital deployment towards our industry-leading platform and share repurchase, we believe we are on track to exceed $7.97 adjusted earnings per share in 2018 and deliver double-digit free cash flow growth over the long-term."

THIRD QUARTER 2017 FINANCIAL SUMMARY
The third quarter 2017 financial results discussed herein represent performance from continuing operations unless otherwise noted.

Total revenue in the third quarter increased 6% to $2.3 billion compared to the prior year period driven primarily by a 3% increase related to acquisitions, net of divestitures, 2% organic revenue growth, and a 1% favorable impact from foreign currency translation.

Total operating expenses in the third quarter increased 13% to $2.1 billion compared to the prior year period due primarily to $102 million of restructuring costs, a $62 million increase in operating expenses related to acquisitions, net of divestitures, $54 million of accelerated amortization related to tradenames, a $16 million unfavorable impact from foreign currency translation, $10 million of transaction related costs associated with recent acquisitions, and an increase in expense associated with 2% organic revenue growth, partially offset by $55 million of savings related to restructuring and other operational improvement initiatives.

Restructuring expenses were $102 million in the third quarter, primarily driven by workforce reductions, IT rationalization, and other separation costs. As previously announced, the Company expects to invest $900 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 $700 million of cash restructuring charges and $200 million of capital expenditures. To date, the Company has incurred $401 million, or 53%, of the total estimated restructuring charges. An analysis of restructuring and related costs by type is detailed on page 15 of this press release.

Restructuring savings in the third quarter related to restructuring and other operational improvement initiatives are $55 million before any reinvestment. Before any potential reinvestment of savings, restructuring and other operational improvement initiatives are expected to deliver run-rate savings of $400 million annually in 2019.  To date, the Company has achieved $109 million, or 27%, of the total estimated annualized savings.

Foreign currency exchange rates in the third quarter had a $0.01 per share, or $3 million, favorable impact on U.S. GAAP net income and adjusted net income if the Company were to translate prior year quarter results at current quarter foreign exchange rates.

Effective tax rate reflected in the U.S. GAAP financial statements in the third quarter was 2.0%, compared to the prior year period of 8.1%.  After adjusting to exclude the applicable tax impact associated with estimated restructuring expenses, accelerated tradename amortization, impairment charges, regulatory and compliance provisions, and non-cash pension settlement charges anticipated in Q4 2017, the adjusted effective tax rate for the third quarter of 2017 was 17.5% compared to 14.2% in the prior year quarter. The net impact of discrete items in the current year quarter was not material; however, the tax rate in the prior year quarter was favorably impacted by discrete items. These adjustments are discussed in "Reconciliation of Non-GAAP Measures - Operating Income from Continuing Operations and Diluted Earnings per Share" on page 11 of this press release.

Weighted average diluted shares outstanding decreased to 257.3 million in the third quarter compared to 269.6 million in the prior year period. The Company repurchased 5.4 million Class A Ordinary Shares for approximately $750 million in the quarter.  As of September 30, 2017, the Company had $5.9 billion of remaining authorization under its share repurchase program.

THIRD QUARTER 2017 CASH FLOW SUMMARY
Cash flow from operations for the first nine months of 2017 decreased 75%, or $863 million, to $289 million compared to the prior year period, primarily reflecting cash tax payments associated with the divestiture of our outsourcing businesses in the second quarter ("divested business"), $199 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 84%, or $881 million, to $164 million for the first nine months of 2017 compared to the prior year period, reflecting a decline in cash flow from operations and a $18 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 in "Reconciliation of Non-GAAP Measures - Organic Revenue and Free Cash Flow" on page 10 of this press release.

THIRD QUARTER 2017 REVENUE REVIEW
The third 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)


Sep 30,
2017


Sep 30,
2016


%
Change


Less:
Currency
Impact


Less: Fiduciary
Investment
Income


Less:
Acquisitions,
Divestitures &
Other


Organic
Revenue
Growth

Revenue

















 Commercial Risk Solutions


$

917


$

884


4%


1%


—%


4%


(1)%

Reinsurance Solutions


355


329


8


1




7

Retirement Solutions


491


466


5


1



(1)


5

Health Solutions


293


265


11


1



8


2

Data & Analytic Services


289


260


11


1



7


3

Elimination


(5)


(3)


N/A


N/A


N/A


N/A


N/A

  Total revenue


$

2,340


$

2,201


6%


1%


—%


3%


2%

Total organic revenue increased 2% compared to the prior year period highlighted by strong growth in Reinsurance Solutions and Retirement Solutions.

Commercial Risk Solutions organic revenue decreased 1% compared to the prior year period driven by a modest decline across the Americas, particularly in U.S. retail and Latin America due to certain unfavorable timing, partially offset by solid growth across the EMEA and Pacific regions.

Reinsurance Solutions organic revenue increased 7% compared to the prior year period driven by growth across every major product line, with particular strength in treaty placements driven by record new business generation, partially offset by a modest unfavorable market impact in the Americas.

Retirement Solutions organic revenue increased 5% compared to the prior year period driven by strong growth in investment consulting, primarily for delegated investment management, as well as growth in our talent practice for compensation surveys and benchmarking services.

Health Solutions organic revenue increased 2% compared to the prior year period driven by solid growth in health & benefits brokerage, particularly in the U.S. and Latin America, partially offset by a decline in project related work in the healthcare exchange business.

Data & Analytic Services organic revenue increased 3% compared to the prior year period driven by strong growth in the Affinity business, with particular strength in the U.S.

 THIRD QUARTER 2017 EXPENSE REVIEW



Three Months Ended






(millions)


Sep 30, 2017


Sep 30, 2016


$
Change


%
Change

Expenses












 Compensation and benefits


$

1,419


$

1,300


$

119


9%

Information technology


109


99


10


10

Premises


89


86


3


3

Depreciation of fixed assets


40


39


1


3

Amortization and impairment of intangible assets


101


42


59


140

Other general expenses


317


267


50


19

Total operating expenses


$

2,075


$

1,833


$

242


13%

Compensation and benefits expense increased 9%, or $119 million, compared to the prior year period due primarily to $52 million of restructuring costs, a $37 million increase in expenses related to acquisitions, net of divestitures, a $14 million unfavorable impact from foreign currency translation, $2 million of transaction related costs associated with recent acquisitions, and an increase in expense associated with 2% organic revenue growth, partially offset by $32 million of savings related to restructuring and other operational improvement initiatives.

Information technology expense increased 10%, or $10 million, compared to the prior year period due primarily to $12 million of restructuring costs, as well as investments in growth, partially offset by $13 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 $4 million of restructuring costs, partially offset by $1 million of savings related to restructuring and other operational improvement initiatives.

Depreciation of fixed assets increased 3%, or $1 million, compared to the prior year period primarily due to $2 million of restructuring costs related to fixed asset write-offs.

Amortization and impairment of intangible assets increased 140%, or $59 million, compared to the prior year period primarily due to $54 million of accelerated amortization related to tradenames.

Other general expenses increased 19%, or $50 million, compared to the prior year period due primarily to $32 million of restructuring costs, a $17 million increase in operating expenses related to acquisitions, net of divestitures, $8 million of costs related to regulatory and compliance matters, and $8 million of transaction related costs associated with recent acquisitions, partially offset by $9 million of savings related to restructuring and other operational improvement initiatives.

THIRD QUARTER 2017 INCOME SUMMARY
Certain noteworthy items impacted operating income and operating margins in the third quarters of 2017 and 2016.  The third 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 from Continuing Operations and Diluted Earnings per Share" on page 11 of this press release.



Three Months Ended



(millions)


Sep 30,
 2017


Sep 30,
 2016


%

 Change

Revenue


$

2,340


$

2,201


6%

Expenses


2,075


1,833


13

Operating income


$

265


$

368


(28)%

Operating margin


11.3%


16.7%



Operating income - adjusted


$

476


$

410


16%

Operating margin - adjusted


20.3%


18.6%



Operating income decreased $103 million, or 28%, compared to the prior year period. Adjusting for certain items detailed on page 11 of this press release, operating income increased 16%, or $66 million, and operating margin increased 170 basis points to 20.3%, each compared to the prior year period. The increase in adjusted operating margin was primarily driven by $55 million, or +240 basis points, of savings from restructuring and other operational initiatives, as well as underlying operational improvement driven by return on investments and increased operating leverage, partially offset by $10 million, or -40 basis point, unfavorable impact from transaction related costs associated with recent acquisitions and a $5 million, or -20 basis point, unfavorable impact from lower non-cash pension income.



Three Months Ended



(millions)


Sep 30,
 2017


Sep 30,
 2016


%
Change

Operating income


$

265


$

368


(28)%

Interest income


10


1


900

Interest expense


(70)


(70)


Other income (expense)


(5)


10


(150)

Income from continuing operations before income taxes


$

200


$

309


(35)%

Interest income increased $9 million to $10 million compared to the prior year period primarily due to additional income earned on the balance of cash proceeds from the divested business. Interest expense was flat at $70 million compared to the prior year period. Other expense was $5 million and includes $15 million of net losses due to the unfavorable impact of exchange rates on the remeasurement of assets and liabilities in non-functional currencies, partially offset by $10 million of gains primarily related to certain long-term investments. The prior year period included other income of $10 million primarily related to gains on certain long-term investments.

DISCONTINUED OPERATIONS
Net loss from discontinued operations was $(4) million, or $(0.01) per share, compared to net income of $42 million, or $0.15 per share, in the prior year period.  Net income per share from discontinued operations, adjusted for certain items, was $(10) million, or $(0.04) per share, compared to $65 million, or $0.24 per share in the prior year period. Certain items that impacted third quarter results and comparisons with the prior year period are detailed in "Reconciliation of Non-GAAP Measures - Operating Income from Continuing Operations and Diluted Earnings per Share" on page 11 of this press release.

Conference Call, Presentation Slides and Webcast Details
The Company will host a conference call on Friday, October 27, 2017 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) Aon is a leading global professional services firm providing a broad range of risk, retirement and health solutions. Our 50,000 colleagues in 120 countries empower results for clients by using proprietary data and analytics to deliver insights that reduce volatility and improve performance.

Safe Harbor Statement
This communication contains certain statements related to future results, or states our intentions, beliefs and expectations or predictions for the future which are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from either historical or anticipated results depending on a variety of factors. These forward-looking statements include information about possible or assumed future results of our operations. All statements, other than statements of historical facts that address activities, events or developments that we expect or anticipate may occur in the future, including such things as our outlook, future capital expenditures, growth in commissions and fees, changes to the composition or level of our revenues, cash flow and liquidity, expected tax rates, business strategies, competitive strengths, goals, the benefits of new initiatives, growth of our business and operations, plans and references to future successes, are forward-looking statements. Also, when we use the words such as "anticipate", "believe", "estimate", "expect", "intend", "plan", "probably", "potential", "looking forward", or similar expressions, we are making forward-looking statements.

The following factors, among others, could cause actual results to differ from those set forth in the forward looking statements:  general economic and political conditions in different countries in which Aon does business around the world; changes in the competitive environment; fluctuations in exchange and interest rates, 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; Aon's ability to implement initiatives intended to yield cost savings, and the ability to achieve those cost savings; risks and uncertainties in connection with the sale of our benefits administration and business process outsourcing business; and our ability to realize the expected benefits from our restructuring plan.

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, and adjusted earnings per share for continuing operations 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 intercompany 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 U.S. 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 expenses for estimated restructuring expenses, accelerated tradename amortization, impairment charges, regulatory and compliance provisions, and non-cash pension settlement related charges. 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:

Investor Relations


Donna Mirandola

312-381-1801


Senior Director, External Communications - Americas

investor.relations@aon.com


312-381-1532


 

Aon plc


Condensed Consolidated Statements of Income (Unaudited)




Three Months Ended




Nine Months Ended



(millions, except per share data)


Sep 30,
 2017


Sep 30,
 2016


%
Change


Sep 30,
 2017


Sep 30,
 2016


%

Change

Revenue











   Total revenue


$

2,340


$

2,201


6%


$

7,089


$

6,759


5%

Expenses










Compensation and benefits


1,419


1,300


9%


4,337


4,041


7%

Information technology


109


99


10%


295


281


5%

Premises


89


86


3%


259


257


1%

Depreciation of fixed assets


40


39


3%


148


118


25%

Amortization and impairment of intangible assets


101


42


140%


604


117


416%

Other general expenses


317


267


19%


956


770


24%

Total operating expenses


2,075


1,833


13%


6,599


5,584


18%

Operating income


265


368


(28)%


490


1,175


(58)%

Interest income


10


1


900%


20


6


233%

Interest expense


(70)


(70)


—%


(211)


(212)


—%

Other income (expense)


(5)


10


(150)%


(20)


27


(174)%

Income from continuing operations before income taxes


200


309


(35)%


279


996


(72)%

Income taxes (1)


4


25


(84)%


(139)


127


(209)%

Net income from continuing operations


196


284


(31)%


418


869


(52)%

Income from discontinued operations, net of tax (2)


(4)


42


(110)%


857


102


740%

Net income


192


326


(41)%


1,275


971


31%

Less: Net income attributable to noncontrolling interests


7


7


—%


30


27


11%

Net income attributable to Aon shareholders


$

185


$

319


(42)%


$

1,245


$

944


32%











Basic net income (loss) per share attributable to Aon shareholders










Continuing operations


$

0.74


$

1.03


(28)%


$

1.49


$

3.13


(52)%

Discontinued operations (3)


(0.02)


0.16


(113)%


3.28


0.38


763%

Net income


$

0.72


$

1.19


(39)%


$

4.77


$

3.51


36%

Diluted net income (loss) per share attributable to Aon shareholders










Continuing operations


$

0.73


$

1.03


(29)%


$

1.48


$

3.11


(52)%

Discontinued operations (3)


(0.01)


0.15


(107)%


3.26


0.37


781%

Net income


$

0.72


$

1.18


(39)%


$

4.74


$

3.48


36%

Weighted average ordinary shares outstanding - basic


255.6


267.5


(4)%


260.9


269.1


(3)%

Weighted average ordinary shares outstanding - diluted


257.3


269.6


(5)%


262.9


271.0


(3)%



(1)

The effective tax rate was 2.0% and 8.1% for the three months ended September 30, 2017 and 2016, respectively, and (49.8)% and 12.8% for the nine  months ended September 30, 2017 and 2016, respectively.

(2)

Income from discontinued operations, net of tax, includes a $803 million gain on the sale of the Divested Business.

(3)

Upon triggering held for sale criteria in February 2017, Aon ceased depreciating and amortizing all long-lived assets included in discontinued operations.  No depreciation or amortization expense was recognized during the three months ended September 30, 2017.  Included within total operating expenses for the three months ended September 30, 2016 was $18 million of depreciation of fixed assets and $30 million of intangible asset amortization.  Total operating expenses for the nine months ended September 30, 2017 and 2016 include, respectively, $8 million and $53 million of depreciation of fixed assets and $11 million and $90 million of intangible asset amortization.


 

Aon plc


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


Organic Revenue Growth From Continuing Operations (Unaudited)




Three Months Ended











(millions)


Sep 30,
2017


Sep 30,
2016


%
Change


Less:
Currency
Impact (1)


Less: Fiduciary
Investment
Income (2)


Less: Acquisitions,
Divestitures &
Other


Organic
Revenue
Growth (3)

Revenue















 Commercial Risk Solutions


$

917


$

884


4%


1%


—%


4%


(1)%

Reinsurance Solutions


355


329


8


1




7

Retirement Solutions


491


466


5


1



(1)


5

Health Solutions


293


265


11


1



8


2

Data & Analytic Services


289


260


11


1



7


3

Elimination


(5)


(3)


N/A


N/A


N/A


N/A


N/A

  Total revenue


$

2,340


$

2,201


6%


1%


—%


3%


2%


 



Nine Months Ended











(millions)


Sep 30,
2017


Sep 30,
2016


%
Change


Less:
Currency
Impact (1)


Less: Fiduciary
Investment
Income (2)


Less: Acquisitions,
Divestitures &
Other


Organic
Revenue
Growth (3)

Revenue















 Commercial Risk Solutions


$

2,943


$

2,835


4%


(1)%


—%


4%


1%

Reinsurance Solutions


1,070


1,032


4


(1)




5

Retirement Solutions


1,266


1,266



(2)



(1)


3

Health Solutions


977


838


17


(1)



11


7

Data & Analytic Services


842


794


6




2


4

Elimination


(9)


(6)


N/A


N/A


N/A


N/A


N/A

  Total revenue


$

7,089


$

6,759


5%


(1)%


—%


3%


3%



(1)

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



(2)

Fiduciary Investment Income for the three months ended September 30, 2017 and 2016, respectively, was $10 million and $6 million. Fiduciary Investment Income for the nine months ended September 30, 2017 and 2016, respectively, was $23 million and $16 million.



(3)

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

 

Free Cash Flow from Continuing Operations (Unaudited)




Nine Months Ended



(millions)


Sep 30, 2017


Sep 30, 2016


Percent
Change

Cash Provided by Continuing Operating Activities


$

289


$

1,152


(75)%

Capital Expenditures Used for Continuing Operations


(125)


(107)


17

Free Cash Flow Provided by Continuing Operations (1)


$

164


$

1,045


(84)%



(1)

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 from Continuing Operations and Diluted Earnings Per Share (Unaudited) (1)  




Three Months Ended




Nine Months Ended



(millions, except percentages)


Sep 30,
2017


Sep 30,
2016


Percent
Change


Sep 30,
2017


Sep 30,
2016


Percent
Change

Revenue from continuing operations


$

2,340


$

2,201


6%


$

7,089


$

6,759


5%














Operating income from continuing operations - as reported


$

265


$

368


(28)%


$

490


$

1,175


(58)%

Amortization and impairment of intangible assets


101


42




604


117



Restructuring


102





401




Regulatory and compliance matters


8





42




Pension settlement







62



Operating income from continuing operations - as adjusted


$

476


$

410


16%


$

1,537


$

1,354


14%














Operating margin from continuing operations - as reported


11.3%


16.7%




6.9%


17.4%



Operating margin from continuing operations - as adjusted


20.3%


18.6%




21.7%


20.0%



 



Three Months Ended




Nine Months Ended



(millions, except per share data)


Sep 30,
2017


Sep 30,
2016


Percent
Change


Sep 30,
2017


Sep 30,
2016


Percent

Change

Operating income from continuing operations - as adjusted


$

476


$

410


16%


$

1,537


$

1,354


14%

Interest income


10


1


900%


20


6


233%

Interest expense


(70)


(70)


—%


(211)


(212)


—%

Other income (expense)


(5)


10


(150)%


(20)


27


(174)%














Income before income taxes from continuing operations - as adjusted


411


351


17%


1,326


1,175


13%

Income taxes (2)


72


50


44%


194


176


10%

Net income from continuing operations - as adjusted


339


301


13%


1,132


999


13%

Adjusted income (loss) from discontinued operations, net of tax (3)


(10)


65


(115)%


60


171


(65)%

Net income - as adjusted


329


366


(10)%


1,192


1,170


2%

Less: Net income attributable to noncontrolling interests


7


7


—%


30


27


11%

Net income attributable to Aon shareholders - as adjusted


$

322


$

359


(10)%


$

1,162


$

1,143


2%














Diluted net income (loss) per share attributable to Aon shareholders

 













Continuing operations - as adjusted


$

1.29


$

1.09


18%


$

4.19


$

3.59


17%

Discontinued operations - as adjusted


(0.04)


0.24


(117)%


0.23


0.63


(63)%

Net income - as adjusted


$

1.25


$

1.33


(6)%


$

4.42


$

4.22


5%














Weighted average ordinary shares outstanding - diluted


257.3


269.6


(5)%


262.9


271.0


(3)%



(1)

Certain noteworthy items impacting operating income in 2017 and 2016 are described in this schedule. The items shown with the caption "as adjusted" are non-GAAP measures.



(2)

The effective tax rates in the U.S. GAAP financial statements for continuing operations were 2.0%  and (49.8)%, respectively, for the three and nine months ended September 30, 2017.  Adjusted items are generally taxed at the estimated annual effective tax rate, except for the applicable tax impact associated with estimated restructuring expenses, accelerated tradename amortization, impairment charges, regulatory and compliance provisions, and non-cash pension settlement charges anticipated in Q4 2017, which are adjusted at the related jurisdictional rate.  After adjusting to exclude the applicable tax impact, the adjusted effective tax rates for continuing operations were 17.5% and 14.6%, respectively, for the three and nine months ended September 30, 2017.  The effective tax rates used in the U.S. GAAP financial statements for continuing operations were 8.1% and 12.8%, respectively, for the three and nine months ended 2016. Adjusted items are generally taxed at the estimated annual effective tax rate, except for the applicable tax impact associated with non-cash pension charges settled in Q2 2016, which are adjusted at the related jurisdictional rate.  After adjusting to exclude the applicable tax impact, the adjusted effective tax rates for continuing operations were 14.2% and 15.0%, respectively, for the three and nine months ended 2016.



(3)

Adjusted income from discontinued operations, net of tax, excludes the gain on sale and intangible asset amortization on discontinued operations of $11 million and $0 million, respectively, for the three months ended September 30, 2017 and $1,983 million and $11 million for the nine months ended September 30, 2017.  The effective tax rates used in the U.S. GAAP financial statements for discontinued operation were 35.1% and 21.8%, respectively, for the three months and nine months ended September 30, 2017.  After adjusting to exclude the applicable tax impact associated with the gain on sale and intangible asset amortization, the adjusted effective tax rates for discontinued operations were 35.2% and 24.2%, respectively, for the three months and nine months ended September 30, 2017.  Adjusted income from discontinued operations, net of tax, excludes intangible asset amortization on discontinued operations of $30 million and $90 million, respectively, for the three months and nine months ended September 30, 2016.  The effective tax rates used in the U.S. GAAP financial statements for discontinued operation were 37.3% and 37.4% for the three and nine months ended 2016, respectively. After adjusting to exclude the applicable tax impact associated with amortization, the adjusted effective tax rates for discontinued operations were 32.8% and 32.4% for the three and nine months ended 2016, respectively.

 


Aon plc


Condensed Consolidated Statements of Financial Position (Unaudited)




As of

(millions)


September 30,
 2017


December 31,
 2016

ASSETS





CURRENT ASSETS





Cash and cash equivalents


$

749


$

426

Short-term investments


1,640


290

Receivables, net


2,068


2,106

Fiduciary assets (1)


9,292


8,959

Other current assets


518


247

Current assets of discontinued operations



1,118

Total Current Assets


14,267


13,146

Goodwill


7,888


7,410

Intangible assets, net


1,341


1,890

Fixed assets, net


545


550

Deferred tax assets


565


325

Prepaid pension


1,020


858

Other non-current assets


298


360

Non-current assets of discontinued operations



2,076

TOTAL ASSETS


$

25,924


$

26,615






LIABILITIES AND EQUITY





LIABILITIES





CURRENT LIABILITIES





Accounts payable and accrued liabilities


$

1,588


$

1,604

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


305


336

Fiduciary liabilities


9,292


8,959

Other current liabilities


1,289


656

Current liabilities of discontinued operations



940

Total Current Liabilities


12,474


12,495

Long-term debt


5,662


5,869

Deferred tax liabilities


83


101

Pension, other postretirement and postemployment liabilities


1,612


1,760

Other non-current liabilities


846


719

Non-current liabilities of discontinued operations



139

TOTAL LIABILITIES


20,677


21,083






EQUITY





Ordinary shares - $0.01 nominal value


3


3

Additional paid-in capital


5,670


5,577

Retained earnings


2,914


3,807

Accumulated other comprehensive loss


(3,412)


(3,912)

TOTAL AON SHAREHOLDERS' EQUITY


5,175


5,475

Noncontrolling interests


72


57

TOTAL EQUITY


5,247


5,532

TOTAL LIABILITIES AND EQUITY


$

25,924


$

26,615



(1)

Includes cash and short-term investments of $4,247 million and $3,290 million for the periods ended September 30, 2017 and December 31, 2016, respectively.

 

Aon plc


Condensed Consolidated Statements of Cash Flows (Unaudited)




Nine Months Ended

(millions)


September 30,
2017


September 30,
2016

CASH FLOWS FROM OPERATING ACTIVITIES





 Net income


$

1,275


$

971

Less: Income from discontinued operations, net of income taxes


857


102

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





Loss (gain) from sales of businesses and investments, net


2


(41)

Depreciation of fixed assets


148


118

Amortization and impairment of intangible assets


604


117

Share-based compensation expense


214


210

Deferred income taxes


(208)


(7)

Change in assets and liabilities:





Fiduciary receivables


986


1,538

Short-term investments — funds held on behalf of clients


(701)


(419)

Fiduciary liabilities


(285)


(1,119)

Receivables, net


144


175

Accounts payable and accrued liabilities


(237)


(246)

Restructuring reserves


170


Current income taxes


(785)


(80)

Pension, other postretirement and other postemployment liabilities


(142)


(70)

Other assets and liabilities


(39)


107

Net cash provided by operating activities - continuing operations


289


1,152

Net cash provided by operating activities - discontinued operations


64


323

CASH PROVIDED BY OPERATING ACTIVITIES


353


1,475






CASH FLOWS FROM INVESTING ACTIVITIES





Proceeds from investments


43


31

Payments for investments


(55)


(47)

Net sale (purchases) of short-term investments — non-fiduciary


(1,344)


(108)

Acquisition of businesses, net of cash acquired


(172)


(198)

Sale of businesses, net of cash sold


4,194


104

Capital expenditures


(125)


(107)

Net cash provided by (used for) investing activities - continuing operations


2,541


(325)

Net cash used for investing activities - discontinued operations


(19)


(46)

CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES


2,522


(371)






CASH FLOWS FROM FINANCING ACTIVITIES





Share repurchase


(1,888)


(1,037)

Issuance of shares for employee benefit plans


(118)


(70)

Issuance of debt


1,651


2,729

Repayment of debt


(1,998)


(2,308)

Cash dividends to shareholders


(274)


(258)

Noncontrolling interests and other financing activities


(21)


(71)

Net cash provided by financing activities - continuing operations


(2,648)


(1,015)

Net cash provided by financing activities - discontinued operations



CASH USED FOR FINANCING ACTIVITIES


(2,648)


(1,015)






EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS


91


10

NET INCREASE IN CASH AND CASH EQUIVALENTS


318


99

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD


431


384

CASH AND CASH EQUIVALENTS AT END OF PERIOD (1)


$

749


$

483



(1)

Includes $0 million and $3 million of discontinued operations at September 30, 2017 and September 30, 2016, respectively.

 

Aon plc


Restructuring Plan (Unaudited) (1)




Three months ended
September 30, 2017


Nine months ended
September 30, 2017


Estimated
Remaining Costs


Estimated Total
Cost (2)

Workforce reduction


$

52


$

257


$

46


$

303

Technology rationalization


12


22


124


146

Lease consolidation


4


8


72


80

Asset impairments


2


26


14


40

Other costs associated with restructuring and separation (3)


32


88


93


181

Total restructuring and related expenses


$

102


$

401


$

349


$

750



(1)

In the Condensed Consolidated Statements of Income, workforce reductions are included in "Compensation and benefits," IT rationalization is included in "Information technology," lease consolidations are included in "Premises,"  asset impairments are included in "Depreciation of fixed assets," and other costs associated with restructuring are included in "Other general expenses" depending on the nature of the expense.



(2)

Actual costs, when incurred, may vary due to changes in the assumptions built into this plan.  Significant assumptions that may change when plans are finalized and implemented include, but are not limited to, changes in severance calculations, changes in the assumptions underlying sublease loss calculations due to changing market conditions, and changes in the overall analysis that might cause the Company to add or cancel component initiatives.  Estimated allocations between expense categories may be revised in future periods as these assumptions are updated.



(3)

Other costs associated with the Restructuring Plan include those to separate the Divested Business, as well as moving costs and consulting and legal fees.  These costs are generally recognized when incurred.

 

 

SOURCE Aon plc



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