Third Quarter Highlights
Aon plc has reported results for the three months ended September 30, 2020.
Net income from continuing operations attributable to Aon shareholders was $274 million, or $1.18 per share, compared to $223 million, or $0.93 per share, in the prior year period. Net income per share from continuing operations attributable to Aon shareholders, adjusted for certain items, increased 6% to $1.53, including an unfavorable impact of $0.01 per share if the Company were to translate prior year period results at current period foreign exchange rates ("foreign currency translation"), compared to $1.45 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 demonstrate the resiliency of our firm and our colleagues. Year-to-date, we delivered strong operational performance with 170 basis points of operating margin expansion and free cash flow of $1.9 billion, up $908 million from last year," said Greg Case, Chief Executive Officer. "Over the past decade, we have evolved to better address client need by making their voice core to our Aon United growth strategy. Taking a complete client view – instead of a traditional product view – is fundamental to delivering the next generation of solutions they have told us they need. In an increasingly volatile world, our pending combination with Willis Towers Watson will accelerate this proven strategy and establish the combined firm as a preeminent partner to help clients navigate today's most pressing issues and the long-tail risks we will face in the future."
THIRD QUARTER 2020 FINANCIAL SUMMARY
The third quarter 2020 financial results discussed herein represent performance from continuing operations unless otherwise noted. The third quarter 2020 financial results are not necessarily indicative of results that may be expected for the full year or any future period, particularly in light of the continuing effect of and uncertainty in connection with the COVID-19 pandemic.
Total revenue in the third quarter was flat at $2.4 billion compared to the prior year period reflecting a 1% favorable impact from acquisitions, net of divestitures, offset by a 1% unfavorable impact from fiduciary investment income.
Total operating expenses in the third quarter decreased 4% to $1.9 billion compared to the prior year period due primarily to a $63 million decrease in restructuring charges, a $54 million decrease from accelerated amortization related to certain tradenames that were fully amortized in the second quarter, and expense discipline, including lower travel and entertainment expense, partially offset by $43 million of transaction costs related to the pending combination with Willis Towers Watson, a $12 million increase in expense related to acquisitions, net of divestitures, a $13 million unfavorable impact from foreign currency translation, and an increase in discretionary expenses.
Foreign currency exchange rates in the third quarter had a $3 million, or $0.01 per share, unfavorable impact on both U.S. GAAP net income and adjusted net income if the Company were to translate prior year period results at current quarter foreign exchange rates. If currency were to remain stable at today's rates, the Company would expect an unfavorable impact of approximately $0.02 per share in the fourth quarter of 2020.
Effective tax rate used in the Company's U.S. GAAP financial statements in the third quarter was 22.6%, compared to 19.6% 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 2020 decreased to 20.2% compared to 21.4% in the prior year period, primarily driven by changes in the geographical distribution of income and a net favorable impact from discrete items. The adjusted effective tax rate in the prior year period included a net unfavorable impact from discrete items.
Weighted average diluted shares outstanding decreased to 233.5 million in the third quarter compared to 239.1 million in the prior year period. The Company repurchased 2.4 million Class A Ordinary Shares for approximately $500 million in the quarter. As of September 30, 2020, the Company had $1.1 billion of remaining authorization under its share repurchase program.
YEAR TO DATE 2020 CASH FLOW SUMMARY
Cash flows provided by operations for the first nine months of 2020 increased $860 million, or 74%, to $2,023 million compared to the prior year period, primarily due to working capital improvements, of which a portion is related to short-term actions taken to proactively manage liquidity, a $210 million decrease in restructuring cash outlays, and strong operational improvement. The prior year period included approximately $85 million of net cash payments related to legacy litigation.
Free cash flow, defined as cash flows from operations less capital expenditures, increased 91%, to $1,904 million for the first nine months of 2020 compared to the prior year period, reflecting an increase in cash flows from operations and a $48 million decrease in capital expenditures.
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