Aon Reports First Quarter 2016 Results

Net income attributable to Aon shareholders was $315 million, or $1.15 per share, compared to $328 million, or $1.14 per share, for the prior year quarter.  Net income per share attributable to Aon shareholders, adjusted for certain items, decreased 1% to $1.35, compared to $1.37 in the prior year quarter, including a $0.05 per share unfavorable impact on adjusted net income from continuing operations if the Company were to translate prior year quarter results at current quarter foreign exchange rates ("foreign currency translation") and a $0.05 per share loss due to the unfavorable impact of foreign exchange rates on the remeasurement of monetary assets and liabilities in non-functional currencies.  The prior year quarter included other income of $42 million pre-tax, or $0.12 per share after tax.  Certain items that impacted first quarter results and comparisons with the prior year quarter are detailed in the "Reconciliation of Non-GAAP Measures - Operating Income and Diluted Earnings per Share" on page 12 of this press release. 

"Our first quarter results reflect a solid start to the year as retail brokerage organic revenue increased four percent and adjusted operating margin expanded 100 basis points in Risk Solutions.  In addition, return on invested capital improved through the disposition of a business in HR Solutions, and we effectively allocated capital highlighted by the repurchase of $750 million of Class A Ordinary shares," said Greg Case, President and Chief Executive Officer.  "Investments in our industry-leading platform of client serving capabilities across risk, retirement, and health continues to position the firm for long-term revenue growth, further margin expansion, and strong free cash flow generation towards our near-term goal of $2.4 billion for the full year 2017."

FIRST QUARTER FINANCIAL SUMMARY

Total revenue decreased 2% to $2.8 billion compared to the prior year quarter driven primarily by a 3% unfavorable impact from foreign currency translation and a 2% decrease in commissions and fees related to net divestitures, partially offset by 3% organic revenue growth.

Total operating expenses for the first quarter decreased 3% to $2.3 billion compared to the prior year quarter due primarily to an $82 million favorable impact from foreign currency translation, a $41 million decrease in expenses related to net divestitures, and a $13 million decrease in intangible asset amortization, partially offset by an increase in expense to support 3% organic revenue growth and $20 million of transaction and portfolio repositioning related costs in HR Solutions associated with the sale of businesses.

Depreciation expense remained flat at $56 million compared to the prior year period.

Intangible asset amortization expense decreased 16%, or $13 million, to $67 million compared to the prior year quarter, consisting of a $9 million decrease in HR Solutions and a $4 million decrease in Risk Solutions.

Foreign currency exchange rates in the first quarter had a $0.05 per share, or $16 million pretax, unfavorable impact (-$13 million in Risk Solutions and -$3 million in HR Solutions) on adjusted net income, if the Company were to translate prior year quarter results at current quarter foreign exchange rates.  In addition, the Company had a $0.05 per share, or $16 million pretax, unfavorable impact from foreign exchange rates on the remeasurement of monetary assets and liabilities, primarily in Venezuela.

Effective tax rate in the first quarter was 18.4%, compared to the prior year quarter of 19.1%, driven by changes in the Company's geographic distribution of income and certain favorable discrete tax adjustments.

Average diluted shares outstanding decreased to 273.7 million in the first quarter compared to 287.1 million in the prior year quarter.  The Company repurchased 7.7 million Class A Ordinary Shares for approximately $750 million in the first quarter.  As of March 31, 2016, the Company had $3.3 billion of remaining authorization under its share repurchase program.

Cash flow from operations for the first three months of 2016 decreased 8%, or $25 million, to $273 million.  The decrease was primarily driven by unfavorable timing of certain tax related items impacting the first three months that we expect will favorably impact the first six months of 2016, partially offset by working capital improvements and a decline in cash paid for pension contributions and restructuring.

Free cash flow, defined as cash flow from operations less capital expenditures, for the first three months of 2016 decreased 6%, or $15 million, to $221 million driven by a decrease in cash flow from operations, partially offset by a $10 million decrease in capital expenditures.  A reconciliation of free cash flow to cash flow from operations can be found on the "Reconciliation of Non-GAAP Measures - Organic Revenue and Free Cash Flow" on page 11 of this press release.

FIRST QUARTER SEGMENT REVIEW

Certain noteworthy items impacted operating income and operating margins in the first quarters of 2016 and 2015.  The first quarter segment reviews provided below include supplemental information related to organic revenue, adjusted operating income and operating margin, which is described in detail on the "Reconciliation of Non-GAAP Measures - Organic Revenue and Free Cash Flow" on page 11 and "Reconciliation of Non-GAAP Measures - Operating Income and Diluted Earnings per Share" on page 12 of this press release.

Risk Solutions total revenue decreased 1% compared to the prior year quarter due to a 4% unfavorable impact from foreign currency translation, partially offset by 3% organic growth in commissions and fees.

Retail organic revenue increased 4% reflecting organic revenue growth in both the Americas and International businesses.  Americas organic revenue increased 4% driven by record new business generation in US Retail, solid growth in Affinity, and strong management of the renewal book portfolio in Latin America.  International organic revenue increased 4% reflecting continued growth across Asia and in New Zealand, as well as solid growth in continental Europe driven by both new business generation and management of the renewal book portfolio. 

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

Compensation and benefits for the first quarter decreased 1%, or $9 million, compared to the prior year quarter due primarily to a $41 million favorable impact from foreign currency translation and a $6 million decrease in expenses related to net divestitures, partially offset by an increase in expense to support 3% organic growth.

Other general expenses for the first quarter decreased 7%, or $31 million, compared to the prior year quarter due primarily to a $24 million favorable impact from foreign currency translation, a $4 million decrease in intangible asset amortization, a $2 million decrease in expenses related to net divestitures, and expense discipline, partially offset by an increase in expense to support 3% organic growth.

First quarter operating income increased 4% to $429 million compared to the prior year quarter.  Adjusting for certain items detailed on page 12 of this press release, operating income increased 3% to $453 million, and operating margin increased 100 basis points to 24.2%, each compared to the prior year quarter.  Excluding the impact of foreign currency translation, adjusted operating income increased 6% and adjusted operating margin increased 70 basis points versus the prior year quarter. The increase in adjusted operating margin was driven primarily by solid organic revenue growth of 3% and return on investments in data and analytics across the portfolio.

HR Solutions total revenue decreased 4% to $930 million compared to the prior year quarter driven by a 4% decrease in commissions and fees resulting from net divestitures and a 2% unfavorable impact from foreign currency translation, partially offset by 2% organic growth in commissions and fees.

Organic revenue in Consulting Services increased 3% driven primarily by continued growth in investment consulting, as well as growth in core pension solutions and communications consulting. Organic revenue in Outsourcing increased 1% due primarily to continued growth in HR BPO for cloud-based solutions. The prior year quarter was favorably impacted by the timing of certain follow-on enrollments on the retiree health care exchange.

Compensation and benefits for the first quarter decreased 5%, or $30 million, compared to the prior year quarter due primarily to a $28 million decrease in expenses related to net divestitures, a $12 million favorable impact from foreign currency translation, and expense discipline, partially offset by $20 million of transaction and portfolio repositioning costs associated with the sale of a certain business.  The gain on the sale of the business was recorded in other income.

Other general expenses for the first quarter decreased $1 million compared to the prior year quarter due primarily to a $9 million decrease in intangible asset amortization, a $5 million favorable impact from foreign currency translation, and a $5 million decrease in expenses related to net divestitures, partially offset by an increase in expense to support 2% organic growth.

First quarter operating income decreased 12% to $67 million compared to the prior year quarter.  Adjusting for certain items detailed on page 12 of this press release, operating income decreased 14% to $110 million, and operating margin decreased 140 basis points to 11.8%, each compared to the prior year quarter.  The decrease in adjusted operating margin was primarily driven by $20 million, or -220 basis points, of transaction and portfolio repositioning related costs primarily associated with the sale of a business in the quarter, partially offset by organic revenue growth of 2% and expense discipline.

Unallocated expenses for the first quarter decreased $1 million to $46 million compared to the prior year quarter.  Interest income decreased $1 million to $2 million compared to the prior year quarter.  Interest expense increased $4 million to $69 million compared to the prior year quarter due primarily to an increase in total debt outstanding.  Other income of $18 million primarily includes net gains on the sale of certain businesses, partially offset by net losses due to the unfavorable impact of exchange rates on the remeasurement of monetary assets and liabilities in non-functional currencies. In the prior year quarter, other income of $42 million primarily includes net gains due to the favorable impact of exchange rates on the remeasurement of monetary assets and liabilities in non-functional currencies and net gains on the sale of certain businesses.

About Aon
Aon plc (NYSE:AON) is a leading global provider of risk management, insurance brokerage and reinsurance brokerage, and human resources solutions and outsourcing services. Through its more than 72,000 colleagues worldwide, Aon unites to empower results for clients in over 120 countries via innovative risk and people solutions.