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Aon Reports Third Quarter 2015 Results

Aon plc (NYSE: AON) reported results for the three months ended September 30, 2015.

Net income attributable to Aon shareholders was $295 million, or $1.04 per share, compared to $309 million, or $1.04 per share, for the prior year quarter.  Net income per share attributable to Aon shareholders, adjusted for certain items, decreased 4% to $1.24, compared to $1.29 in the prior year quarter, including a $0.09 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").  The prior year quarter included a $25 million pre-tax, or $0.07 per share after tax, gain related to the sale of a business.  Certain items that impacted third 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. 

"In our seasonally weakest quarter, our results reflect organic revenue growth and operating margin expansion across both segments, effective capital management and significant free cash flow generation, despite the impact of unfavorable foreign currency translation and macroeconomic challenges," said Greg Case, president and chief executive officer.  "Driven by our industry-leading portfolio and investments across data and analytics, we expect a strong fourth quarter and finish to the year across each of our key metrics, further positioning the firm for free cash flow generation and shareholder value creation."

THIRD QUARTER FINANCIAL SUMMARY

Total revenue decreased 5% to $2.7 billion compared to the prior year quarter driven primarily by a 7% unfavorable impact from foreign currency translation, partially offset by 2% organic revenue growth.

Total operating expenses for the third quarter decreased 5% to $2.3 billion compared to the prior year quarter due primarily to a $162 million favorable impact from foreign currency translation and a $12 million decrease in intangible asset amortization, partially offset by an increase in expense to support 2% organic revenue growth.

Depreciation expense decreased 8%, or $5 million, to $56 million compared to the prior year period.

Intangible asset amortization expense decreased 13%, or $12 million, to $78 million compared to the prior year quarter, consisting of a $10 million decrease in HR Solutions and a $2 million decrease in Risk Solutions.

Foreign currency exchange rates in the third quarter had a $0.09 per share, or $30 million pretax, unfavorable impact (-$25 million in Risk Solutions and -$5 million in HR Solutions) on adjusted net income from continuing operations, 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 in the third quarter was 14.0%, compared to the prior year quarter of 19.1%.  After adjusting to exclude the applicable tax impact associated with expenses for legacy litigation incurred in the second quarter, the adjusted effective tax rate for the third quarter of 2015 declined to 16.0% compared to 19.1% in the prior year quarter, due primarily to certain favorable discrete items. 

Average diluted shares outstanding decreased to 283.8 million in the third quarter compared to 296.1 million in the prior year quarter.  The Company repurchased 6.3 million Class A Ordinary Shares for approximately $600 million in the third quarter.  As ofSeptember 30, 2015, the Company had $4.5 billion of remaining authorization under its share repurchase program.

Cash flow from operations for the first nine months of 2015 increased 22%, or $192 million, to $1.1 billion driven by working capital improvements and a decline in cash paid for pension contributions, taxes, and restructuring.

Free cash flow, defined as cash flow from operations less capital expenditures, for the first nine months of 2015 increased 21%, or $146 million, to $850 million driven by an increase in cash flow from operations, partially offset by a $46 million increase in capital expenditures primarily due to real estate related projects.  

THIRD QUARTER SEGMENT REVIEW

Certain noteworthy items impacted operating income and operating margins in the third quarters of 2015 and 2014.  The third quarter segment reviews provided below include supplemental information related to organic revenue, adjusted operating income and operating margin.

Risk Solutions total revenue decreased 8% to $1.7 billion compared to the prior year quarter due to an 8% unfavorable impact from foreign currency translation and a 1% decrease in commissions and fees related to acquisitions, net of divestitures, partially offset by 1% organic growth in commissions and fees.

Retail organic revenue increased 2% reflecting revenue growth in both the Americas and International businesses.  Americas organic revenue increased 4% driven by growth across all region and product lines, including strong new business generation in US Retail andCanada and effective management of the renewal book portfolio in Latin America.  International organic revenue increased 1% driven by growth in New Zealand and across Asia. 

Reinsurance organic revenue decreased 4% compared to the prior year quarter due primarily to an unfavorable market impact globally, a modest decline in facultative placements, and unfavorable timing, partially offset by record new business growth in treaty placements.

   

Three Months Ended

   

(millions)

 

Sep 30,
 2015

 

Sep 30,
 2014

 

%

 Change

Revenue

 

$

1,689

 

$

1,836

 

(8)%

Expenses

           

Compensation and benefits

 

979

 

1,055

 

(7)

Other general expenses

 

386

 

438

 

(12)

Total operating expenses

 

1,365

 

1,493

 

(9)

Operating income

 

$

324

 

$

343

 

(6)%

Operating margin

 

19.2%

 

18.7%

   

Operating income - adjusted

 

$

351

 

$

372

 

(6)%

Operating margin - adjusted

 

20.8%

 

20.3%

   

Compensation and benefits for the third quarter decreased 7%, or $76 million, compared to the prior year quarter due primarily to an $84 million favorable impact from foreign currency translation and a $9 million decrease in expenses related to acquisitions, net of divestitures, partially offset by an increase in expense to support 1% organic growth.

Other general expenses for the third quarter decreased 12%, or $52 million, compared to the prior year quarter due primarily to a $46 million favorable impact from foreign currency translation.

Third quarter operating income decreased 6% to $324 million compared to the prior year quarter. 

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