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Aon (AON) Q3 Earnings Beat on Organic Revenue Growth
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Aon plc’s (AON - Free Report) third-quarter 2016 adjusted operating earnings of $1.29 per share surpassed the Zacks Consensus Estimate of $1.28. Earnings also increased 4% from the year-ago quarter on the back of solid revenue growth across both Risk and HR Solutions.
Aon’s total revenue of $2.7 billion missed the Zacks Consensus Estimate of $2.8 billion. Revenues remained flat year over year. This was because a 4% year-over-year increase in organic revenues in commissions and fees was fully offset by a 2% unfavorable impact from foreign currency translation and a 2% decrease in commissions and fees related to divestitures, net of acquisitions.
Operating expenses also remained flat year over year at $2.3 billion. In the reported quarter, Aon witnessed a favorable impact from foreign currency translation, a decrease in expenses related to divestitures (net of acquisitions), and a decrease in intangible asset amortization. However, the positives were fully offset by an increase in expense to support organic revenue growth, the unfavorable impact of the timing of certain compensation expenses, an increase in errors and omissions expenses, and certain amount of legacy information technology contract costs.
Segmental Update
HR Solutions:
Total revenue of $1 billion decreased 2% year over year due to a 4% decrease in commissions and fees associated with net divestitures and a 2% unfavorable impact from foreign currency translation. Nonetheless, organic growth in commissions and fees of 4% partially mitigated the downside.
On a year-over-year basis, organic revenues in Consulting increased 3% to $459 million due to growth in retirement consulting for delegated investment consulting services and improvement in communications consulting. On the other hand, organic revenues in outsourcing were up 5% to $593 million on the back of robust growth in HR BPO and project-related work in health care exchanges, partially offset by an anticipated modest decline in benefits administration.
Compensation and benefits were down 5% year over year owing to a $31 million decrease in expenses related to net divestitures and a $10 million favorable impact from foreign currency translation. This was partially offset by an increase in expense to support 4% organic revenue growth. Other general expenses rose by $7 million over the year-ago quarter due to an increase of $7 million of certain legacy information technology contract costs, partially offset by a $9 million decrease in expenses related to net divestitures, a $7 million decrease in intangible asset amortization from previous acquisitions, and a $6 million favorable impact from foreign currency translation.
Adjusted operating income decreased 4% year over year to $178 million. The adjusted operating margin contracted 30 basis points (bps) to 17.1% during the quarter. This downside was primarily driven by a 70 bps unfavorable impact from certain legacy information technology contract costs, a 70 bps unfavorable impact related to previous portfolio repositioning activity and a 20 bps unfavorable impact from foreign currency translation, partially offset by solid organic revenue growth of 4%.
Risk Solutions:
Total revenue of $1.7 billion grew 2% over the year-ago quarter owing to 3% organic growth in commissions and fees and a 1% increase in commissions and fees related to acquisitions, net of divestitures, partially offset by a 2% unfavorable impact from foreign currency translation, all on year-over-year basis.
Retail organic revenues of $1.4 billion rose 4% over the prior-year quarter due to organic revenue growth in both the Americas and International businesses. Reinsurance organic revenue of $332 million reflected 1% year-over-year growth on the back of new business generation in treaty and growth in facultative placements, partially offset by an unfavorable market impact globally.
Compensation and benefits dropped 1% year over year mainly because of a $20 million favorable impact from foreign currency translation, partially offset by an unfavorable impact from the timing of certain compensation expenses. Other general expenses also 6% owing to an increase in expense to support 3% organic revenue growth in the quarter and a $9 million increase in errors and omissions expenses, though $14 million favorable impact from foreign currency translation was a partial offset.
Adjusted operating income increased 2% to $358 million, and operating margin increased 10 bps to 20.9%. This upside was mainly driven by solid organic revenue growth of 3% and an 80 bps favorable impact from foreign currency translation. However, it was partially offset by an unfavorable impact from the timing of certain compensation expenses and a 50 bps unfavorable impact from higher errors and omissions expenses.
Financial Position
As of Sep 30, 2016, cash and cash equivalents of Aon were $483 million, up 25.8% from year-end 2015. However, total assets were $25.2 billion, down 6.7% from $26.9 billion at the end of 2015.
Long-term debt was $5.9 billion as of Sep 30, 2016, up 15.7% from $5.1 billion on Dec 31, 2015. However, total liabilities plunged 5.3% year over year to $19.7 billion.
Cash flow from operations for the first nine months of 2016 rose 14% to $1.5 billion year over year, mainly due to lower pension contributions, an increase in net income, underlying working capital improvements, and lower cash tax payments.
Free cash flow for the first nine months was $1.3 billion after a 24% year-over-year increase caused by a growth in cash flow from operations and a drop in capital expenditures.
Dividend and Share Repurchase Update
During the first nine months of 2016, Aon paid $258 million of cash dividend to its common stockholders.
Aon bought back 2.7 million Class A Ordinary Shares for approximately $300 million in the reported quarter. As of Sep 30, 2016, it had $3 billion of remaining authorization under its share repurchase program.
Among the other insurers that have reported their third-quarter earnings so far, the bottom line at Progressive Corp.(PGR - Free Report) and The Travelers Companies Inc. (TRV - Free Report) beat their respective Zacks Consensus Estimate, while RLI Corp. (RLI - Free Report) missed the same.
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Aon (AON) Q3 Earnings Beat on Organic Revenue Growth
Aon plc’s (AON - Free Report) third-quarter 2016 adjusted operating earnings of $1.29 per share surpassed the Zacks Consensus Estimate of $1.28. Earnings also increased 4% from the year-ago quarter on the back of solid revenue growth across both Risk and HR Solutions.
Aon’s total revenue of $2.7 billion missed the Zacks Consensus Estimate of $2.8 billion. Revenues remained flat year over year. This was because a 4% year-over-year increase in organic revenues in commissions and fees was fully offset by a 2% unfavorable impact from foreign currency translation and a 2% decrease in commissions and fees related to divestitures, net of acquisitions.
Operating expenses also remained flat year over year at $2.3 billion. In the reported quarter, Aon witnessed a favorable impact from foreign currency translation, a decrease in expenses related to divestitures (net of acquisitions), and a decrease in intangible asset amortization. However, the positives were fully offset by an increase in expense to support organic revenue growth, the unfavorable impact of the timing of certain compensation expenses, an increase in errors and omissions expenses, and certain amount of legacy information technology contract costs.
Segmental Update
HR Solutions:
Total revenue of $1 billion decreased 2% year over year due to a 4% decrease in commissions and fees associated with net divestitures and a 2% unfavorable impact from foreign currency translation. Nonetheless, organic growth in commissions and fees of 4% partially mitigated the downside.
On a year-over-year basis, organic revenues in Consulting increased 3% to $459 million due to growth in retirement consulting for delegated investment consulting services and improvement in communications consulting. On the other hand, organic revenues in outsourcing were up 5% to $593 million on the back of robust growth in HR BPO and project-related work in health care exchanges, partially offset by an anticipated modest decline in benefits administration.
Compensation and benefits were down 5% year over year owing to a $31 million decrease in expenses related to net divestitures and a $10 million favorable impact from foreign currency translation. This was partially offset by an increase in expense to support 4% organic revenue growth. Other general expenses rose by $7 million over the year-ago quarter due to an increase of $7 million of certain legacy information technology contract costs, partially offset by a $9 million decrease in expenses related to net divestitures, a $7 million decrease in intangible asset amortization from previous acquisitions, and a $6 million favorable impact from foreign currency translation.
Adjusted operating income decreased 4% year over year to $178 million. The adjusted operating margin contracted 30 basis points (bps) to 17.1% during the quarter. This downside was primarily driven by a 70 bps unfavorable impact from certain legacy information technology contract costs, a 70 bps unfavorable impact related to previous portfolio repositioning activity and a 20 bps unfavorable impact from foreign currency translation, partially offset by solid organic revenue growth of 4%.
Risk Solutions:
Total revenue of $1.7 billion grew 2% over the year-ago quarter owing to 3% organic growth in commissions and fees and a 1% increase in commissions and fees related to acquisitions, net of divestitures, partially offset by a 2% unfavorable impact from foreign currency translation, all on year-over-year basis.
Retail organic revenues of $1.4 billion rose 4% over the prior-year quarter due to organic revenue growth in both the Americas and International businesses. Reinsurance organic revenue of $332 million reflected 1% year-over-year growth on the back of new business generation in treaty and growth in facultative placements, partially offset by an unfavorable market impact globally.
Compensation and benefits dropped 1% year over year mainly because of a $20 million favorable impact from foreign currency translation, partially offset by an unfavorable impact from the timing of certain compensation expenses. Other general expenses also 6% owing to an increase in expense to support 3% organic revenue growth in the quarter and a $9 million increase in errors and omissions expenses, though $14 million favorable impact from foreign currency translation was a partial offset.
Adjusted operating income increased 2% to $358 million, and operating margin increased 10 bps to 20.9%. This upside was mainly driven by solid organic revenue growth of 3% and an 80 bps favorable impact from foreign currency translation. However, it was partially offset by an unfavorable impact from the timing of certain compensation expenses and a 50 bps unfavorable impact from higher errors and omissions expenses.
Financial Position
As of Sep 30, 2016, cash and cash equivalents of Aon were $483 million, up 25.8% from year-end 2015. However, total assets were $25.2 billion, down 6.7% from $26.9 billion at the end of 2015.
Long-term debt was $5.9 billion as of Sep 30, 2016, up 15.7% from $5.1 billion on Dec 31, 2015. However, total liabilities plunged 5.3% year over year to $19.7 billion.
Cash flow from operations for the first nine months of 2016 rose 14% to $1.5 billion year over year, mainly due to lower pension contributions, an increase in net income, underlying working capital improvements, and lower cash tax payments.
Free cash flow for the first nine months was $1.3 billion after a 24% year-over-year increase caused by a growth in cash flow from operations and a drop in capital expenditures.
Dividend and Share Repurchase Update
During the first nine months of 2016, Aon paid $258 million of cash dividend to its common stockholders.
Aon bought back 2.7 million Class A Ordinary Shares for approximately $300 million in the reported quarter. As of Sep 30, 2016, it had $3 billion of remaining authorization under its share repurchase program.
AON PLC Price, Consensus and EPS Surprise
AON PLC Price, Consensus and EPS Surprise | AON PLC Quote
Zacks Rank and Stocks to Consider
Aon presently carries Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Among the other insurers that have reported their third-quarter earnings so far, the bottom line at Progressive Corp.(PGR - Free Report) and The Travelers Companies Inc. (TRV - Free Report) beat their respective Zacks Consensus Estimate, while RLI Corp. (RLI - Free Report) missed the same.
Confidential from Zacks
Beyond this Analyst Blog, would you like to see Zacks' best recommendations that are not available to the public? Our Executive VP, Steve Reitmeister, knows when key trades are about to be triggered and which of our experts has the hottest hand. Click to see them now>>