Aon Reports Third Quarter 2019 Results

LONDON, Oct. 25, 2019 /PRNewswire/ --

Third Quarter Key Metrics From Continuing Operations

• Total revenue increased 1% to $2.4 billion, with organic revenue growth of 5%
• Operating margin increased from 11.2% to 15.1%, and operating margin, adjusted for certain items, increased 350 basis points to 22.0%
• EPS increased from $0.61 to $0.93, and EPS, adjusted for certain items, increased 11% to $1.45
• For the first nine months of 2019, cash flow from operations increased 19% to $1,163 million, and free cash flow increased 25% to $996 million

Third Quarter Highlights

• Repurchased 1.8 million Class A Ordinary Shares for approximately $350 million
• Recently announced two key actions to accelerate our Aon United growth strategy which we believe will further accelerate organic growth and support sustainable margin expansion. Delivering Aon United program expands globally to further improve sales effectiveness, strengthen segmentation strategy and increase collaboration across solution lines to create more value for clients. Aon Business Services will establish client service hubs that use technology platforms and new capabilities to deliver more consistent client service and improve operational leverage for the firm
• Received an Innovation Award from Business Insurance, recognizing our unique intellectual property insurance liability offering that was developed through the use of proprietary data and analytics to address an area of growing client demand

Aon plc AON today reported results for the three months ended September 30, 2019.

Net income from continuing operations attributable to Aon shareholders was $223 million, or $0.93 per share, compared to $149 million, or $0.61 per share, in the prior year period. Net income per share from continuing operations attributable to Aon shareholders, adjusted for certain items, increased 11% to $1.45, including an unfavorable impact of $0.02 per share if the company were to translate prior year period results at current period foreign exchange rates ("foreign currency translation"), compared to $1.31 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 10 of this press release.

"Our third quarter results reflect continued progress resulting from our Aon United initiatives, highlighted by strong organic revenue growth of 5% and substantial operating margin improvement of 350 basis points. We are building momentum year-to-date as reflected in a 200 basis point acceleration of organic revenue growth to 6%, translating into double-digit free cash flow growth," said Greg Case, Chief Executive Officer. "We continue to strategically invest in content and capability while taking progressive steps to consistently deliver the best of our global firm to clients, strengthening our ability to deliver innovation and improved financial performance that we believe will unlock significant shareholder value creation. Looking ahead, we expect strong performance in the fourth quarter to close out the year with continued progress against our goal of mid-single digit organic revenue growth or greater over the long-term."

THIRD QUARTER 2019 FINANCIAL SUMMARY
The third quarter 2019 financial results discussed herein represent performance from continuing operations unless otherwise noted.

Total revenue in the third quarter increased 1% to $2.4 billion compared to the prior year period driven by 5% organic revenue growth, partially offset by a 2% unfavorable impact from foreign currency translation and a 2% unfavorable impact from divestitures, net of acquisitions.

Total operating expenses in the third quarter decreased 3% to $2.0 billion compared to the prior year period due primarily to a $44 million favorable impact from foreign currency translation, a $34 million decrease in restructuring charges, $32 million of incremental savings related to restructuring and other operational improvement initiatives, and a $27 million decrease in expenses related to divestitures, net of acquisitions, partially offset by a $25 million non-recurring legacy litigation benefit recorded in the prior year period and an increase in expense associated with 5% organic revenue growth.

Restructuring expenses were $63 million in the third quarter, primarily driven by other costs associated with restructuring and separation initiatives and technology rationalization. As previously announced, the Company expects the total estimated costs of the program to be approximately $1,525 million. Restructuring charges are expected to be $1,350 million, including $1,250 million of cash charges and $100 million of non-cash charges. All remaining charges associated with the program will be completed by the fourth quarter of 2019. To date, the Company has incurred $1,263 million, or 94%, of the total estimated restructuring charges and $1,027 million, or 82% of the total estimated cash spend. In addition to the $1,350 million of total restructuring charges, the Company estimates $175 million of incremental capital expenditures associated with the three-year program, of which $137 million, or 78%, has been incurred to date. 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 estimated to be $137 million, before any potential reinvestment, an increase of $32 million compared to the prior year period. Before any potential reinvestment of savings, restructuring and other operational improvement initiatives are expected to deliver run-rate savings of $510 million annually in 2019 and run-rate savings of $535 million annually in 2020. To date, the Company has achieved $475 million, or 93%, of the total estimated annualized savings expected in 2019, before any potential reinvestment.

Foreign currency exchange rates in the third quarter had a $2 million, or $0.01 per share, unfavorable impact on U.S. GAAP net income, and a $4 million, or $0.02 per share, unfavorable impact on adjusted net income if the Company were to translate prior year quarter results at current quarter foreign exchange rates. If currency were to remain stable at today's rates, we would expect an unfavorable impact of approximately $0.04 per share, or approximately $12 million reduction of operating income, in the fourth quarter of 2019.

Effective tax rate used in our U.S. GAAP financial statements in the third quarter was 19.6%, compared to 20.1% in the prior year period. After adjusting to exclude the applicable tax impact associated with certain non-GAAP adjustments, the adjusted effective tax rate for the third quarter of 2019 increased to 21.4% compared to 12.8% in the prior year quarter, primarily driven by changes in the geographical distribution of income and a net unfavorable impact from discrete items. The adjusted effective tax rate in the prior year period included a net favorable impact from discrete items. 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 10 of this press release.

Weighted average diluted shares outstanding decreased to 239.1 million in the third quarter compared to 245.6 million in the prior year period. The Company repurchased 1.8 million Class A Ordinary Shares for approximately $350 million in the quarter. As of September 30, 2019, the Company had $2.5 billion of remaining authorization under its share repurchase program.

YEAR TO DATE 2019 CASH FLOW SUMMARY
Cash flow provided by operations for the first nine months of 2019 increased 19%, or $188 million, to $1,163 million compared to the prior year period, primarily reflecting strong operational improvement. The current year period includes approximately $85 million of net cash payments in the first quarter related to legacy litigation. The prior year comparable period included an $80 million accelerated pension contribution.

Free cash flow, defined as cash flow from operations less capital expenditures, increased 25%, or $200 million, to $996 million for the first nine months of 2019 compared to the prior year period, reflecting an increase in cash flow from operations and a $12 million decrease in capital expenditures.

THIRD QUARTER 2019 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 9 of this press release.

Total revenue increased $30 million, or 1%, to $2,379 million, compared to the prior year period, including organic revenue growth of 5%, primarily driven by strong management of the renewal book globally in Commercial Risk Solutions and solid new business generation across the portfolio, partially offset by the unfavorable impact of certain non-recurring revenue that benefited the prior year period in Health Solutions and Data & Analytic Services.

Commercial Risk Solutions organic revenue growth of 7% was driven by strong growth across every major geography, including double-digit growth in the U.S., Canada, and Latin America, primarily driven by strong retention and management of the renewal book portfolio. On average globally, exposures and pricing were both modestly positive, resulting in a modestly positive market impact overall.

Reinsurance Solutions organic revenue growth of 5% was driven by double-digit growth globally in facultative placements and continued net new business generation globally in treaty, partially offset by a modest decline in capital markets transactions. Market impact was modestly positive to results in the third quarter.

Retirement Solutions organic revenue growth of 3% was driven by solid growth across every major business, with particular strength in core retirement driven by an increase in demand for retirement consulting in the U.S. and increased volume of actuarial services in the EMEA region.

Health Solutions organic revenue growth of 2% was driven by solid growth globally in health and benefits brokerage, highlighted by particular strength internationally. Results in the quarter were partially offset by an unfavorable impact of certain non-recurring revenue in the health care exchange business that benefited the prior year quarter, as well as the unfavorable timing of certain revenue that shifted to the fourth quarter.

Data & Analytic Services organic revenue growth of 3% was driven by growth globally across our Affinity business, as well as solid growth in Aon Client Treaty. Results in the quarter were unfavorably impacted by certain non-recurring revenue that benefited the prior year quarter.

THIRD QUARTER 2019 EXPENSE REVIEW

Compensation and benefits expense decreased $24 million, or 2%, compared to the prior year period due primarily to $55 million of incremental savings related to restructuring and other operational improvement initiatives, a $32 million favorable impact from foreign currency translation, and an $18 million decrease in expenses related to divestitures, net of acquisitions, partially offset by an increase in expense associated with 5% organic revenue growth.

Information technology expense decreased $5 million, or 4%, compared to the prior year period due primarily to a reduction of costs as we continue to optimize our IT portfolio, including favorable contract renewals and productivity credits related to data center optimization.

Premises expense decreased $18 million, or 19%, compared to the prior year period due primarily to an $8 million decrease in restructuring charges and a reduction of costs as we continue to optimize our global real estate footprint.

Depreciation of fixed assets increased $4 million, or 10%, compared to the prior year period due primarily to a $3 million increase in restructuring charges.

Amortization and impairment of intangible assets increased $1 million, or 1%, compared to the prior year period.

Other general expenses decreased $26 million, or 8%, compared to the prior year period due primarily to a $22 million decrease in restructuring charges, a $6 million favorable impact from foreign currency translation, a $6 million decrease in expenses related to divestitures, net of acquisitions, and expense discipline, partially offset by a $25 million non-recurring legacy litigation benefit recorded in the prior year period and a $19 million decrease in savings related to restructuring and other operational improvement initiatives.

THIRD QUARTER 2019 INCOME SUMMARY
The third quarter 2019 financial results discussed herein represent performance from continuing operations unless otherwise noted. In addition, certain noteworthy items impacted adjusted operating income and adjusted operating margins in the third quarters of 2019 and 2018, which are also described in detail in "Reconciliation of Non-GAAP Measures - Operating Income from Continuing Operations and Diluted Earnings Per Share" on page 10 of this press release.

Operating income increased from $262 million to $360 million, compared to the prior year period. Adjusting for certain items detailed on page 10 of this press release, operating income increased $90 million, or 21%, and operating margin increased +350 basis points to 22.0%, each compared to the prior year period. Adjusted operating income and margin primarily reflects strong organic revenue growth of 5%, increased operating leverage across the portfolio, and incremental savings from restructuring and other operational improvements of $32 million, or +140 basis points, partially offset by an unfavorable impact from foreign currency translation of $6 million. Operating income growth and operating margin expansion compared to the prior year period also reflect the absorption of near-term reinvestment of restructuring savings to support long-term Aon United growth initiatives.

Interest income increased $1 million to $1 million compared to the prior year period. Interest expense increased $9 million to $78 million compared to the prior year period reflecting higher outstanding debt. Other pension income decreased $6 million to $3 million. Other expense of $1 million primarily reflects losses related to certain company-owned life insurance plans, partially offset by net gains due to the favorable impact of exchange rates on the remeasurement of assets and liabilities in non-functional currencies.

DISCONTINUED OPERATIONS
Net loss from discontinued operations was $1 million compared to $2 million in the prior year period.

Conference Call, Presentation Slides and Webcast Details

The Company will host a conference call on Friday, October 25, 2019 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 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, including the U.K.'s expected withdrawal from the European Union; 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 or increasing borrowing costs; rating agency actions that could affect Aon's ability to borrow funds; volatility in our tax rate due to a variety of different factors, including U.S. tax reform; 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; the damage to our reputation among clients, markets or third parties; the actions taken by third parties that perform 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 continue, and the costs and the costs and risks associated with, growing, developing and integrating 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; 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 divested 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, 2018 and its Quarterly Reports on Form 10-Q for the quarters ended March 31, 2019, June 30, 2019, and September 30, 2019 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 growth, free cash flow, adjusted operating margin, and adjusted earnings per share for continuing operations that exclude the effects of intangible asset amortization, restructuring, capital expenditures, and certain other noteworthy items that affected results for the comparable periods. Organic revenue growth includes the impact of intercompany activity and excludes foreign exchange rate changes, acquisitions, divestitures, transfers between revenue lines, fiduciary investment income, and gains or losses on derivatives accounted for as hedges. 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 to the closest U.S. GAAP measure for each non-GAAP measure presented in this press release are provided in the attached appendices. Supplemental organic revenue growth information and additional measures that exclude the effects of certain items noted above 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 intangible asset amortization, restructuring, and certain other noteworthy items. 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 Condensed Consolidated Financial Statements. Industry peers provide similar supplemental information regarding their performance, although they may not make identical adjustments.