Aon Reports Fourth Quarter and Full Year 2017 Results

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PR Newswire

LONDON, Feb. 2, 2018

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

Fourth Quarter Key Metrics From Continuing Operations and Highlights

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

Full Year Key Metrics From Continuing Operations and Highlights

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

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

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

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

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

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

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

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

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

Foreign currency exchange rates in the fourth quarter had a $0.06 per share, or $16 million, favorable impact on U.S. GAAP net income, and a $0.06 per share, or $17 million, favorable impact on adjusted net income if the Company were to translate prior year quarter results at current quarter foreign exchange rates.

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

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

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

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

Free cash flow, defined as cash flow from operations less capital expenditures, decreased 71%, or $1,187 million, to $486 million compared to the prior year period, reflecting a decline in cash flow from operations and a $27 million increase in capital expenditures, including investments in our operating model. A reconciliation of free cash flow to cash flow from operations can be found on the "Reconciliation of Non-GAAP Measures - Organic Revenue and Free Cash Flow" on page 10 of this press release.

FOURTH QUARTER 2017 REVENUE REVIEW
The fourth quarter revenue reviews provided below include supplemental information related to organic revenue, which is a non-GAAP measure that is described in detail in "Reconciliation of Non-GAAP Measures - Organic Revenue and Free Cash Flow" on page 10 of this press release.

	Three Months Ended
	Dec 31, 2017		Dec 31, 2016		% Change	Less: Currency Impact	Less: Fiduciary Investment Income	Less: Acquisitions, Divestitures & Other	Organic Revenue Growth
Commercial Risk Solutions	$	1,226	$	1,094	12%	3%	—%	4%	5%
Reinsurance Solutions	359		329		9	1	—	—	8
Retirement Solutions	489		441		11	3	—	4	4
Health Solutions	538		532		1	1	—	(6)	6
Data & Analytic Services	298		256		16	2	—	2	12
Elimination	(1)		(2)		NA	NA	NA	NA	NA
Total revenue	$	2,909	$	2,650	10%	2%	—%	2%	6%

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

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

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

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

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

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

FOURTH QUARTER 2017 EXPENSE REVIEW

Three Months Ended

(millions)

Dec 31, 2017

Dec 31, 2016

$
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