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Aon Reports First Quarter 2018 Results

LONDON, May 4, 2018 /PRNewswire/ -- 

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

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

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

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

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

Net income from continuing operations attributable to Aon shareholders on a reported basis was $588 million, or $2.35 per share, compared to $251 million, or $0.94 per share, in the prior year period. This includes $239 million, or $0.90 per share, of favorable impact from adoption of the new revenue recognition standard. Net income per share from continuing operations on a comparable basis, adjusted for certain items and the impact of adoption of the new revenue recognition standard, increased 26% to $2.97, compared to $2.35 in the prior year period. Certain items that impacted first quarter results and comparisons with the prior year period are detailed in the "Reconciliation of Non-GAAP Measures Adjusted for Changes in Accounting Guidance - Operating Income from Continuing Operations and Diluted Earnings Per Share" on page 11 of this press release.

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

FIRST QUARTER 2018 FINANCIAL SUMMARY
The first quarter 2018 financial results discussed herein represent performance from continuing operations unless otherwise noted. Adoption of the FASB's new revenue recognition standard on January 1, 2018 is not reflected in reported 2017 financials. A comparable year-over-year view of reported 2018 results to unaudited pro forma 2017 results incorporating the impact of adoption of the new revenue recognition standard is provided in detail on pages 11-15 of this press release.

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

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

Restructuring expenses were $74 million in the first quarter, primarily driven by workforce reductions and other general initiatives. As previously announced, the Company expects to invest $1,175 million in total cash over a three-year period and incur $50 million of non-cash charges in driving one operating model across the firm. This includes an estimated investment of $975 million of cash restructuring charges and $200 million of capital expenditures. To date, the Company has incurred $571 million, or 56%, of the total estimated restructuring charges. An analysis of restructuring and related costs by type is detailed on page 18 of this press release.

Restructuring savings in the first quarter related to restructuring and other operational improvement initiatives are estimated at $63 million before any reinvestment. Before any potential reinvestment of savings, restructuring and other operational improvement initiatives are expected to deliver run-rate savings of $450 million annually in 2019.  To date, the Company has achieved $228 million, or 51%, of the total estimated annualized savings.

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

Effective tax rate reflected in the reported financial statements in the first quarter was 15.9%, compared to the prior year period of 0.1%. After adjusting for the impact from adoption of the new revenue recognition standard and to exclude the applicable tax impact associated with certain non-GAAP adjustments, the adjusted effective tax rate on a comparable basis for the first quarter of 2018 was 16.5% compared to 13.3% in the prior year quarter. The increase was primarily driven by changes in geographical distribution of income and the various impacts of U.S. Tax Reform. The adjusted effective tax rate in both periods includes a net favorable impact from certain discrete items. Certain items that impacted first quarter results and comparisons with the prior year period are detailed in the "Reconciliation of Non-GAAP Measures Adjusted for Changes in Accounting Guidance - Operating Income from Continuing Operations and Diluted Earnings Per Share" on page 11 of this press release.

Weighted average diluted shares outstanding decreased to 250.2 million in the first quarter compared to 267.0 million in the prior year period. The Company repurchased 3.9 million Class A Ordinary Shares for approximately $550 million in the quarter.  As of March 31, 2018, the Company had $4.9 billion of remaining authorization under its share repurchase program.

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

Free cash flow, defined as cash flow from operations less capital expenditures, decreased 36%, or $53 million, to $95 million for the first three months of 2018 compared to the prior year quarter, reflecting a decline in cash flow from operations and an $11 million increase in capital expenditures, including investments in our operating model.

Adjusted free cash flow, defined as free cash flow excluding certain near-term impacts resulting from the divestiture of the outsourcing businesses, including restructuring initiatives, increased $28 million, or 16%, to $208 million compared to the prior year period. A reconciliation of free cash flow and adjusted free cash flow to cash flow from operations can be found in "Reconciliation of Non-GAAP Measures - Organic Revenue and Free Cash Flow" on page 10 of this press release.

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



Three Months Ended













(millions)


Mar 31,
2018


Mar 31,
2017


%
Change


Revenue
Recognition (1)


Less:
Currency
Impact (2)


Less:
Fiduciary
Investment
Income (3)


Less:
Acquisitions,
Divestitures
& Other


Organic
Revenue
Growth (4)

Revenue

















Commercial Risk Solutions


$

1,184


$

984


20%


—%


6%


—%


10%


4%

Reinsurance Solutions


742


371


100


89


4



1


6

Retirement Solutions


424


386


10



6



4


Health Solutions


451


372


21


16


4



1


Data & Analytic Services


294


268


10


2


4



3


1

Elimination


(5)



N/A


N/A


N/A


N/A


N/A


N/A

   Total revenue


$

3,090


$

2,381


30%


17%


5%


—%


5%


3%

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

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

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

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

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

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

FIRST QUARTER 2018 EXPENSE REVIEW



Three Months Ended





(millions)


Mar 31, 2018


Mar 31, 2017


$
Change


%
Change

Expenses









Compensation and benefits


$

1,616


$

1,469


$

147


10%

Information technology


115


88


27


31

Premises


93


84


9


11

Depreciation of fixed assets


39


54


(15)


(28)

Amortization and impairment of intangible assets


110


43


67


156

Other general expenses


318


308


10


3

Total operating expenses


$

2,291


$

2,046


$

245


12%

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

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

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

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

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

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

FIRST QUARTER 2018 INCOME SUMMARY
The first quarter 2018 financial results discussed herein represent performance from continuing operations unless otherwise noted. Adoption of the FASB's new revenue recognition standard on January 1, 2018 is not reflected in reported 2017 financials. A comparable year-over-year view of reported 2018 results to unaudited pro forma 2017 results incorporating the impact of adoption of the new revenue recognition standard is provided in detail on pages 11-15 of this press release. In addition, certain noteworthy items impacted adjusted operating income and adjusted operating margins in the first quarters of 2018 and 2017, which are also described in detail in "Reconciliation of Non-GAAP Measures Adjusted for Changes in Accounting Guidance - Operating Income from Continuing Operations and Diluted Earnings Per Share" on page 11 of this press release.

AS REPORTED



Three Months Ended



(millions)


Mar 31,
2018


Mar 31,
2017


%
 Change

Revenue


$

3,090


$

2,381


30%

Expenses


2,291


2,046


12

Operating income - as reported


$

799


$

335


139%

Operating margin - as reported


25.9%


14.1%



Operating income increased $464 million, or 139%, on a reported basis compared to the prior year period, including an increase of $287 million, or 86%, related to adoption of the new revenue recognition standard. Operating margin increased 1,180 basis points on a reported basis compared to the prior year period, including 860 basis points related to adoption of the new revenue recognition standard.

AS COMPARABLE TO 2017 UNAUDITED PRO FORMA FINANCIALS



Three Months Ended







(Pro Forma)



(millions)


Mar 31,
2018


Mar 31,
2017


%
Change

Revenue


$

3,090


$

2,746


13%

Expenses


2,291


2,124


8

Operating income - as reported


$

799


$

622


28%

Operating margin - as reported


25.9%


22.7%



Operating income - as adjusted


$

983


$

809


22%

Operating margin - as adjusted


31.8%


29.5%



Adjusting for certain items and the impact of adoption of the new revenue recognition standard detailed on page 11 of this press release, adjusted operating income on a comparable basis increased $174 million, or 22%, and adjusted operating margin on a comparable basis increased 230 basis points to 31.8%, each compared to the prior year period. The increase in adjusted operating margin on a comparable basis was primarily driven by $52 million, or 160 basis points, of incremental 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 a 20 basis points net unfavorable impact from foreign currency translation and certain hedging programs.

Interest income increased $2 million to $4 million compared to the prior year period primarily due to modestly higher cash balances compared to the prior year period. Interest expense was flat at $70 million compared to the prior year period. Other pension income decreased $6 million to $2 million compared to the prior year period, including $9 million of pension income, partially offset by $7 million of non-cash expenses related to pension settlements. Excluding the non-cash expenses related to pension settlements, pension income of $9 million compares to $8 million in the prior year period. Other expense was $17 million, including $10 million of net losses due to the unfavorable impact of exchange rates on the remeasurement of assets and liabilities in non-functional currencies and $7 million of losses primarily related to certain long-term investments. The prior year period included $10 million of losses related to the unfavorable impact of exchange rates on the remeasurement of assets and liabilities in non-functional currencies.

DISCONTINUED OPERATIONS
Net income from discontinued operations on a reported basis was $6 million, or $0.02 per share, compared to net income of $40 million, or $0.15 per share, in the prior year period.

Conference Call, Presentation Slides and Webcast Details
The Company will host a conference call on Friday, May 4, 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) 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 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, 2017 and its Quarterly Report on Form 10-Q for the quarters ended March 31, 2018 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 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, and fiduciary investment income.  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. Adjusted free cash flow is free cash flow excluding certain near-term impacts resulting from the divestiture of the outsourcing businesses, including restructuring initiatives. 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.

(1) For additional information refer to pages 11-15 of this press release

#

Investor Contact:


Media Contact:

Investor Relations


Donna Mirandola

312-381-3310


Vice President, Global External Communications

[email protected]


312-381-1532

 

Aon plc

Condensed Consolidated Statements of Income (Unaudited)




Three Months Ended



(millions, except per share data)


Mar 31,
2018


Mar 31,
2017


%
Change

Revenue







Total revenue


$

3,090


$

2,381


30%

Expenses







Compensation and benefits


1,616


1,469


10%

Information technology


115


88


31%

Premises


93


84


11%

Depreciation of fixed assets


39


54


(28)%

Amortization and impairment of intangible assets


110


43


156%

Other general expenses


318


308


3%

Total operating expenses


2,291


2,046


12%

Operating income


799


335


139%

Interest income


4


2


100%

Interest expense


(70)


(70)


—%

Other income (expense)


(15)


(2)


650%

Income from continuing operations before income taxes


718


265


171%

Income taxes (1)


114



100%

Net income from continuing operations


604


265


128%

Income from discontinued operations, net of tax


6


40


(85)%

Net income


610


305


100%

Less: Net income attributable to noncontrolling interests


16


14


14%

Net income attributable to Aon shareholders


$

594


$

291


104%








Basic net income per share attributable to Aon shareholders







Continuing operations


$

2.37


$

0.95


149%

Discontinued operations


0.02


0.15


(87)%

Net income


$

2.39


$

1.10


117%

Diluted net income per share attributable to Aon shareholders







Continuing operations


$

2.35


$

0.94


150%

Discontinued operations (2)


0.02


0.15


(87)%

Net income


$

2.37


$

1.09


117%

Weighted average ordinary shares outstanding - basic


248.5


264.8


(6)%

Weighted average ordinary shares outstanding - diluted


250.2


267.0


(6)%



(1)

The effective tax rate was 15.9% and 0.1% for the three months ended March 31, 2018 and 2017.

(2)

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 March 31, 2018.  Included within total operating expenses for the three months ended March 31, 2017 was $8 million of depreciation of fixed assets and $11 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)


Mar 31,
2018


Mar 31,
2017


%
Change


Revenue
Recognition (1)


Less:
Currency
Impact (2)


Less:
Fiduciary
Investment
Income (3)


Less:
Acquisitions,
Divestitures
& Other


Organic
Revenue
Growth (4)

Revenue

















Commercial Risk Solutions


$

1,184


$

984


20%


—%


6%


—%


10%


4%

Reinsurance Solutions


742


371


100


89


4



1


6

Retirement Solutions


424


386


10



6



4


Health Solutions


451


372


21


16


4



1


Data & Analytic Services


294


268


10


2


4



3


1

Elimination


(5)



N/A


N/A


N/A


N/A


N/A


N/A

   Total revenue


$

3,090


$

2,381


30%


17%


5%


—%


5%


3%



(1)

Revenue Recognition represents the impact of Aon's adoption of new revenue recognition standard, effective for Aon in the first quarter of 2018.

(2)

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

(3)

Fiduciary Investment Income for the three months ended March 31, 2018 and 2017 was $10 million and $6 million, respectively,.

(4)

Organic revenue growth includes the impact of intercompany activity and excludes the impact of the adoption of the new revenue recognition standard, changes in foreign exchange rates, acquisitions, divestitures, transfers between business units, and fiduciary investment income.

 

Free Cash Flow from Continuing Operations (Unaudited)




Three Months Ended



(millions)


Mar 31, 2018


Mar 31, 2017


Percent
Change

Cash Provided by Continuing Operating Activities


$

140


$

182


(23)%

Capital Expenditures Used for Continuing Operations


(45)


(34)


32

   Free Cash Flow Provided by Continuing Operations (1)


$

95


$

148


(36)%








Adjustments:







Restructuring Plan Initiatives (2)


113


32


253

   Free Cash Flow Provided by Continuing Operations - as adjusted (3)


$

208


$

180


16%



(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. 

(2)

Restructuring plan cash payments include cash used to settle restructuring liabilities as well as payments made on capital expenditures under the program.

(3)

Certain noteworthy items impacting free cash flow from operating activities in 2018 and 2017 are described in this schedule. 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 Adjusted for Changes in Accounting Guidance - Operating Income from Continuing Operations and Diluted Earnings Per Share (Unaudited) (1)




Three Months Ended



(millions, except percentages)


Mar 31,
2018


Mar 31,
2017 (2)


Percent
Change

Revenue from continuing operations


$

3,090


$

2,746


13%








Operating income from continuing operations


$

799


$

622


28%

Amortization and impairment of intangible assets


110


43



Restructuring


74


144



Operating income from continuing operations - as adjusted


$

983


$

809


22%

Operating margin from continuing operations


25.9%


22.7%



Operating margin from continuing operations - as adjusted


31.8%


29.5%






Three Months Ended



(millions, except percentages)


Mar 31,
2018


Mar 31,
2017 (2)


Percent
Change

Operating income from continuing operations - as adjusted


$

983


$

809


22%

Interest income


4


2


100%

Interest expense


(70)


(70)


—%

Other income (expense):







Other income (expense) - pensions - as adjusted (3)


9


8


13%

Other income (expense) - other


(17)


(10)


70%

Total Other income (expense) - as adjusted (3)


(8)


(2)


300%

Income before income taxes from continuing operations - as adjusted


909


739


23%

Income taxes (2)


150


98


53%

Net income from continuing operations - as adjusted


759


641


18%

Less: Net income attributable to noncontrolling interests


16


14


14%

Net income attributable to Aon shareholders from continuing operations - as adjusted


743


627


19%

Adjusted income (loss) from discontinued operations, net of tax (4)


(2)


48


(104)%

Net income attributable to Aon shareholders - as adjusted


$

741


$

675


10%

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







Continuing operations - as adjusted


$

2.97


$

2.35


26%

Discontinued operations - as adjusted


(0.01)


0.18


(106)%

Net income - as adjusted


$

2.96


$

2.53


17%

Weighted average ordinary shares outstanding - diluted


250.2


267.0


(6)%

Effective Tax Rates (4)







Continuing Operations - U.S. GAAP


15.9%


0.1%



Continuing Operations - Non-GAAP


16.5%


13.3%



Discontinued Operations - U.S. GAAP


17.2%


29.8%



Discontinued Operations - Non-GAAP (5)


46.5%


29.4%





(1)

Certain noteworthy items impacting operating income in 2018 and 2017 are described in this schedule. The items shown with the caption "as adjusted" are non-GAAP measures. In the first quarter of 2018, Aon adopted new accounting guidance related to the treatment of revenue from contracts with customers that was applied prospectively on its U.S. GAAP financial statements in accordance with FASB standards, and therefore comparable prior periods were not restated. On pages 11 through 15 of this press release, the Company has included unaudited pro forma consolidated results that present the retrospective impact of the new standard as if it were in effect for the comparable period ended March 31, 2017. We use this supplemental information to help us and our investors evaluate business growth from core operations. Please see the U.S. GAAP financial statements included as Exhibit 99.2 to the Company's Form 8-K filed on May 4, 2018 for a reconciliation according to FASB standards.

(2)

The historical period presented above has been adjusted retrospectively to reflect changes in accounting guidance related to revenue recognition, effective for Aon in the first quarter of 2018.

(3)

Adjusted Other income (expense) excludes Pension settlement charges of $7 million for three months ended March 31, 2018.

(4)

Adjusted items are generally taxed at the estimated annual effective tax rate, except for the applicable tax impact associated with estimated Restructuring Plan expenses, accelerated tradename amortization, and non-cash pension settlement charges, which are adjusted at the related jurisdictional rate.  In addition, tax expense excludes adjustments to the provisional estimates of the impact of US Tax Reform recorded pursuant to SAB 118.

(5)

Adjusted income from discontinued operations, net of tax, excludes the gain on sale of discontinued operations of $8 million for the three months ended March 31, 2018 and $11 million of intangible asset amortization for the three months ended March 31, 2017. The effective tax rate was further adjusted for the applicable tax impact associated with the gain on sale and intangible asset amortization, as applicable. 

 

Aon plc

Pro Forma Historical Reconciliation of Reported Non-GAAP Measures to Non-GAAP Measures Adjusted for Changes in Accounting Guidance (Unaudited)(1)(2)




Three Months Ended March 31



2017

(millions, except per share data)


As Reported(1)

Revenue
Recognition

Pro
Forma

Revenue





Commercial Risk Solutions


$

984

$

5

$

989

Reinsurance Solutions


371

300

671

Retirement Solutions


386

(1)

385

Health Solutions


372

56

428

Data & Analytic Services


268

5

273

Elimination


Total revenue


$

2,381

$

365

$

2,746

Expenses





Compensation and benefits


1,469

79

1,548

Information technology


88

88

Premises


84

84

Depreciation of fixed assets


54

54

Amortization and impairment of intangible assets


43

43

Other general expenses


308

(1)

307

Total operating expenses


2,046

78

2,124

Operating income


335

287

622

Amortization and impairment of intangible assets


43

43

Restructuring


144

144

Operating income - as adjusted


522

287

809

Operating margin from continuing operations - as adjusted


21.9%


29.5%

Interest income


2

2

Interest expense


(70)

(70)

Other income (expense):





Other income (expense) - pensions


8

8

Other income (expense) - other (4)


(10)

(10)

Total Other income (expense)


(2)

(2)

Income before income taxes from continuing operations - as adjusted


452

287

739

Income taxes - as adjusted (5)


50

48

98

Income from continuing operations - as adjusted


402

239

641

Less: Net income attributable to noncontrolling interests


14

14

Net income from continuing operations attributable to Aon shareholders - as adjusted


$

388

$

239

$

627

Diluted earnings per share from continuing operations - as adjusted


$

1.45

$

0.90

$

2.35

Weighted average ordinary shares outstanding - diluted


267.0

267.0

267.0


Notes



(1)

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

(2)

The historical period presented above have been adjusted retrospectively to reflect Aon's adoption of new revenue recognition standard in the first quarter of 2018.  

(3)

Reported results above reflect the retrospective adoption of the new pension accounting guidance effective for Aon in the first quarter of 2018.

(4)

For illustrative purposes, the impact of the total foreign currency related to the new revenue accounting guidance is excluded from the Pro Forma financial statements.  Had the Company included it, Other income (expense) in the Revenue Recognition column would have been $(2) million, respectively, for the three months ended 2017.

(5)

The non-GAAP effective tax rate reported was 11.1% for the three months ended March 31, 2017.  Adjusted items are generally taxed at the estimated annual effective tax rate, except for the applicable tax impact associated with restructuring, anticipated non-cash pension settlements in the fourth quarter, and amortization, which are adjusted at the related jurisdictional rate.  The non-GAAP effective tax rate for continuing operations, adjusted for the change in accounting guidance was 13.3% for the three months ended March 31, 2017.

 

Aon plc

Pro Forma Historical Reconciliation of Non-GAAP Measures - Operating Income and Diluted Earnings Per Share from Continuing Operations as Adjusted for Changes in Accounting Guidance (Unaudited) (1)(2)




Pro Forma Periods


Reported Period



Three Months Ended (5)




Three Months Ended (6)




Three Months Ended (7)

(millions, except per share data)


Mar 31,
2016


Jun 30,
2016


Sep 30,
2016


Dec 31,
2016


Full Year
2016 (5)


Mar 31,
2017


Jun 30,
2017


Sep 30,
2017


Dec 31,
2017


Full
Year
2017 (6)


Mar 31,
2018

Revenue























Commercial Risk Solutions


$

969


$

990


$

884


$

1,088


$

3,931


$

989


$

1,041


$

915


$

1,218


$

4,163


$

1,184

Reinsurance Solutions


667


335


234


131


1,367


671


345


257


153


1,426


742

Retirement Solutions


396


405


465


441


1,707


385


388


492


489


1,754


424

Health Solutions


338


253


245


522


1,358


428


281


277


526


1,512


451

Data & Analytic Services


263


271


260


256


1,050


273


281


287


299


1,140


294

Elimination


(2)


(1)


(3)


(2)


(8)



(4)


(5)


(1)


(10)


(5)

   Total revenue


$

2,631


$

2,253


$

2,085


$

2,436


$

9,405


$

2,746


$

2,332


$

2,223


$

2,684


$

9,985


$

3,090

Expenses























Compensation and benefits


1,444


1,372


1,293


1,417


5,526


1,548


1,471


1,420


1,568


6,007


1,616

Information technology


83


99


99


105


386


88


98


109


124


419


115

Premises


82


89


86


86


343


84


86


89


89


348


93

Depreciation of fixed assets


38


41


39


44


162


54


54


40


39


187


39

Amortization of intangible assets


37


38


42


40


157


43


460


101


100


704


110

Other general expenses


270


230


257


279


1,036


307


330


307


328


1,272


318

   Total operating expenses


1,954


1,869


1,816


1,971


7,610


2,124


2,499


2,066


2,248


8,937


2,291

Operating income


677


384


269


465


1,795


622


(167)


157


436


1,048


799

Amortization of intangible assets


37


38


42


40


157


43


460


101


100


704


110

Restructuring







144


155


102


96


497


74

Regulatory and compliance matters








34


8


(14)


28


Transaction costs





15


15








Operating income - as adjusted


714


422


311


520


1,967


809


482


368


618


2,277


983

Operating margin from continuing operations - as adjusted


27.1%


18.7%


14.9%


21.3%


20.9%


29.5%


20.7%


16.6%


23.0%


22.8%


31.8%

Interest income


2


3


1


3


9


2


8


10


7


27


4

Interest expense


(69)


(73)


(70)


(70)


(282)


(70)


(71)


(70)


(71)


(282)


(70)

Other income (expense):























Other income (expense) - pensions - as adjusted (3)


11


11


12


13


47


8


9


9


16


42


9

Other income (expense) - other - as adjusted (4)


18


(1)


10


9


36


(10)


(5)


(5)


(19)


(39)


(17)

   Total Other income (expense) - as adjusted (3)(4)


29


10


22


22


83


(2)


4


4


(3)


3


(8)

Income before income taxes from continuing operations - as adjusted


676


362


264


475


1,777


739


423


312


551


2,025


909

Income taxes


107


53


35


49


244


98


68


54


81


301


150

Income from continuing operations - as adjusted


569


309


229


426


1,533


641


355


258


470


1,724


759

Less: Net income attributable to noncontrolling interests


12


8


7


7


34


14


9


7


7


37


16

Net income attributable to Aon shareholders from continuing operations - as adjusted


$

557


$

301


$

222


$

419


$

1,499


$

627


$

346


$

251


$

463


$

1,687


$

743

Diluted earnings per share from continuing operations - as adjusted


$

2.04


$

1.12


$

0.82


$

1.56


$

5.55


$

2.35


$

1.31


$

0.98


$

1.82


$

6.47


$

2.97

Weighted average ordinary shares outstanding - diluted


273.7


269.8


269.6


268.3


270.3


267.0


264.3


257.3


254.5


260.7


250.2


Notes

(1)

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

(2)

The historical period presented above have been adjusted retrospectively to reflect Aon's adoption of new revenue recognition standard in the first quarter of 2018.  For a complete reconciliation of prior period reported balances to the pro forma adjusted balances above, please refer to our press release issued on February 2, 2018.

(3)

Adjusted Other income (expense) excludes pension settlement charges taken within each respective period.  Pension settlement charges were $62 million for the three months ended June 30, 2016, and $158 million and $220 million for the three and twelve months ended December 31, 2016.  Pension settlement charges were $128 million for the three and twelve months ended December 31, 2017.  Pension settlement chargers were $7 million for the three months ended March 31, 2018.

(4)

For illustrative purposes, the impact of the total foreign currency related to the new revenue accounting guidance is excluded from the Pro Forma financial statements.  The impact on Other income (expense) of foreign currency due to this new guidance was $(3) million, $5 million, $1 million, and $4 million, respectively, for the three months ended March 31, 2016, June 30, 2016, September 30, 2016, and December 31, 2016 and $7 million for the twelve months ended December 31, 2016.  The impact on Other income (expense) of foreign currency due to this new guidance was $(2) million, $(4) million, $(6) million, and $1 million, respectively, for the three months ended March 31, 2017, June 30, 2017, September 30, 2017, and December 31, 2017, and $(11) million for the twelve months ended December 31, 2017.

(5)

The non-GAAP effective tax rates reported were 15.7%, 14.9%, 14.2%, and 12.0%, respectively, for the three months ended March 31, 2016, June 30, 2016, September 30, 2016, and December 31, 2016 and 13.9% for the twelve months ended December 31, 2016.  Adjusted items are generally taxed at the estimated annual effective tax rate, except for the applicable tax impact associated with non-cash pension settlements and transaction costs which are adjusted at the related jurisdictional rate.  The non-GAAP effective tax rates for continuing operations, adjusted for the change in accounting guidance were 15.8%, 14.6%, 13.3%, and 10.3% for the three months ended March 31, 2016, June 30, 2016, September 30, 2016, and December 31, 2016, and 13.7% for the twelve months ended December 31, 2016.

(6)

The non-GAAP effective tax rates reported were 11.1%, 15.6%, 17.5%, and 15.5%, respectively, for the three months ended March 31, 2017, June 30, 2017, September 30, 2017, and December 31, 2017, and 14.9% for the twelve months ended December 31, 2017.  Adjusted items are generally taxed at the estimated annual effective tax rate, except for the applicable tax impact associated with non-cash pension settlements and transaction costs which are adjusted at the related jurisdictional rate.  The non-GAAP effective tax rates for continuing operations, adjusted for the change in accounting guidance were 13.3%, 16.1%, 17.3%, and 14.7% for the three months ended March 31, 2017, June 30, 2017, September 30, 2017, and December 31, 2017, and 14.9% for the twelve months ended December 31, 2017.

(7)

The non-GAAP effective tax rates reported were 16.5%, for the three months ended March 31, 2018.  Adjusted items are generally taxed at the estimated annual effective tax rate, except for the applicable tax impact associated with non-cash pension settlements and transaction costs which are adjusted at the related jurisdictional rate.

 

Aon plc

Condensed Consolidated Statements of Financial Position (Unaudited)




As of

(millions)


March 31,
2018


December 31,
2017

ASSETS





CURRENT ASSETS





Cash and cash equivalents


$

597


$

756

Short-term investments


118


529

Receivables, net


3,053


2,478

Fiduciary assets (1)


10,738


9,625

Other current assets


609


289

Current assets



Total Current Assets


15,115


13,677

Goodwill


8,550


8,358

Intangible assets, net


1,662


1,733

Fixed assets, net


578


564

Deferred tax assets


296


389

Prepaid pension


1,207


1,060

Other non-current assets


439


307

Non-current assets



TOTAL ASSETS


$

27,847


$

26,088






LIABILITIES AND EQUITY





LIABILITIES





CURRENT LIABILITIES





Accounts payable and accrued liabilities


$

1,545


$

1,961

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


403


299

Fiduciary liabilities


10,738


9,625

Other current liabilities


972


870

Current liabilities



Total Current Liabilities


13,658


12,755

Long-term debt


5,697


5,667

Deferred tax liabilities


243


127

Pension, other postretirement, and postemployment liabilities


1,759


1,789

Other non-current liabilities


1,105


1,102

Non-current liabilities



TOTAL LIABILITIES


22,462


21,440






EQUITY





Ordinary shares - $0.01 nominal value


2


2

Additional paid-in capital


5,743


5,775

Retained earnings


2,747


2,302

Accumulated other comprehensive loss


(3,191)


(3,496)

TOTAL AON SHAREHOLDERS' EQUITY


5,301


4,583

Noncontrolling interests


84


65

TOTAL EQUITY


5,385


4,648

TOTAL LIABILITIES AND EQUITY


$

27,847


$

26,088



(1)

Includes cash and short-term investments of $4,064 million and $3,743 million for the periods ended March 31, 2018 and December 31, 2017, respectively.

 

Aon plc

Condensed Consolidated Statements of Cash Flows (Unaudited)




Three Months Ended

(millions)


March 31, 2018


March 31, 2017

CASH FLOWS FROM OPERATING ACTIVITIES





Net income


$

610


$

305

Less: Income from discontinued operations, net of income taxes


6


40

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





Loss from sales of businesses, net


1


2

Depreciation of fixed assets


39


54

Amortization and impairment of intangible assets


110


43

Share-based compensation expense


77


78

Deferred income taxes


26


(2)

Change in assets and liabilities:





Fiduciary receivables


(605)


337

Short-term investments — funds held on behalf of clients


(195)


(330)

Fiduciary liabilities


800


(7)

Receivables, net


(269)


38

Accounts payable and accrued liabilities


(439)


(390)

Restructuring reserves


(24)


99

Current income taxes


30


(56)

Pension, other postretirement and other postemployment liabilities


(53)


(41)

Other assets and liabilities


38


92

Net cash provided by operating activities - continuing operations


140


182

Net cash provided by operating activities - discontinued operations



58

CASH PROVIDED BY OPERATING ACTIVITIES


140


240







CASH FLOWS FROM INVESTING ACTIVITIES





Proceeds from investments


17


25

Payments for investments


(11)


(9)

Net sale of short-term investments — non-fiduciary


415


94

Acquisition of businesses, net of cash acquired


(29)


(46)

Sale of businesses, net of cash sold


(1)


(2)

Capital expenditures


(45)


(34)

Net cash provided by investing activities - continuing operations


346


28

Net cash used for investing activities - discontinued operations



(15)

CASH PROVIDED BY INVESTING ACTIVITIES


346


13






CASH FLOWS FROM FINANCING ACTIVITIES





Share repurchase


(569)


(126)

Issuance of shares for employee benefit plans


(109)


(85)

Issuance of debt


808


992

Repayment of debt


(704)


(950)

Cash dividends to shareholders


(89)


(87)

Noncontrolling interests and other financing activities



(2)

Net cash provided by financing activities - continuing operations


(663)


(258)

Net cash provided by financing activities - discontinued operations



CASH USED FOR FINANCING ACTIVITIES


(663)


(258)






EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS


18


25

NET INCREASE IN CASH AND CASH EQUIVALENTS


(159)


20

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD


756


431

CASH AND CASH EQUIVALENTS AT END OF PERIOD (1)


$

597


$

451



(1)

Includes $3 million of discontinued operations March 31, 2017.

 

Aon plc

Restructuring Plan (Unaudited) (1)




Three months
ended March 31,
2018


Inception to Date


Estimated
Remaining Costs


Estimated Total
Cost (2)

Workforce reduction


$

33


$

332


$

118


$

450

Technology rationalization


10


43


87


130

Lease consolidation


3


11


74


85

Asset impairments


1


27


23


50

Other costs associated with restructuring and separation (3)


27


158


152


310

Total restructuring and related expenses


$

74


571


$

454


$

1,025



(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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