Aon plc 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.
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.