filings.toolsItem 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
EXECUTIVE SUMMARY OF 2017 FINANCIAL RESULTS
Aon plc is a leading global professional services firm that provides advice and solutions to clients focused on risk, retirement, and health, delivering distinctive client value via innovative and effective risk management and workforce productivity solutions. Management is leading a set of initiatives designed to strengthen Aon and unite the firm with one portfolio of capability enabled by proprietary data and analytics and one operating model to deliver additional insight, connectivity, and efficiency. The divestiture of the benefits administration and business process outsourcing in the second quarter of 2017 represents the next step of our strategy, reinforces our focus to provide advice and solutions, and further aligns our portfolio around our clients’ highest priorities. Further, it reinforces our ROIC decision-making process and emphasis on operating cash flow.
Discontinued Operations
On February 9, 2017, the Company entered into a Purchase Agreement with Tempo Acquisition, LLC to sell the Divested Business to the Buyer, an entity formed and controlled by affiliates of The Blackstone Group L.P., and certain designated purchasers that are direct or indirect subsidiaries of the Buyer.
On May 1, 2017, the Buyer purchased all of the outstanding equity interests in each of the Divested Business’ subsidiaries, plus certain related assets and liabilities, for a purchase price of $4.3 billion in cash paid at closing, subject to customary adjustments set forth in the Purchase Agreement, and deferred consideration of up to $500 million. Cash proceeds after customary adjustments and before taxes due were $4.2 billion.
Aon and the Buyer entered into certain transaction related agreements at the closing, including two commercial agreements, a transition services agreement, certain intellectual property license agreements, sub-leases and other customary agreements. Aon expects to continue to be a significant client of the Divested Business and the Divested Business has agreed to use Aon for its broking and other services for a specified period of time.
In the twelve months ended December 31, 2017, the Company recorded a gain on sale, net of taxes, of $779 million and a non-cash impairment charge to its tradenames associated with the Divested Business of $380 million as these assets were not sold to the Buyer. Additionally, effective May 1, 2017, consistent with operating as one segment, the Company has implemented a three-year strategy to transition to a unified Aon brand. As a result, Aon commenced amortization of all indefinite lived tradenames and prospectively accelerated amortization of its finite lived tradenames over the three-year period. The accelerated amortization and impairment charge are included in Amortization and impairment of intangible assets on the Consolidated Statement of Income.
Financial Results
The following is a summary of our 2017 financial results from continuing operations:
| • | Revenue increased 6%, or $589 million, to $10.0 billion in 2017 compared to 2016, reflecting 4% organic revenue growth and a 2% increase related to acquisitions, net of divestitures. Organic revenue growth for the year was driven by growth across every major revenue line, with particular strength in Reinsurance Solutions, Health Solutions, and Data & Analytic Services |
| • | Operating expenses increased $1.2 billion, or 16%, to $9.0 billion in 2017 compared to 2016 due primarily to $497 million of restructuring costs, a $380 million non-cash impairment charge to the indefinite lived tradenames associated with the sale of the Divested Business, a $258 million increase in expenses related to acquisitions, net of divestitures, $143 million of accelerated amortization related to tradenames, and an increase in expense associated with 4% organic revenue growth, partially offset by $165 million of savings related to restructuring and other operational improvement initiatives and a $92 million decrease in expenses related to certain pension settlements. |
| • | Operating margin decreased to 9.8% in 2017 from 17.4% in 2016. The decrease in operating margin from the prior year is primarily driven by an increase in operating expenses, described above, partially offset by organic revenue growth of 4% and core operational improvement. |
| • | Due to the factors set forth above, income from continuing operations was $435 million in 2017, a decrease of $818 million, or 65%, from 2016. |
| • | Cash flow provided by operating activities was $669 million in 2017, a decrease of $1.2 billion, or 63%, from $1.8 billion in 2016, due primarily to cash tax payments of approximately $940 million associated with the Divested Business, $280 million of cash payments for restructuring charges, and $45 million of transaction costs related to the Divested Business, partially offset by operational improvement. |
We focus on four key non-GAAP metrics that we communicate to shareholders: organic revenue growth, adjusted operating margins, adjusted diluted earnings per share, and free cash flow. These non-GAAP metrics should be viewed in addition to, not instead of, our Consolidated Financial Statements and Notes thereto. The following is our measure of performance against these four metrics from continuing operations for 2017:
| • | Organic revenue growth, a non-GAAP measure defined under the caption “Review of Consolidated Results — Organic Revenue Growth,” was 4% in 2017, comparable to 4% organic growth in the prior year. Organic revenue growth was driven by growth across every major revenue line, with particular strength in Reinsurance Solutions, Health Solutions, and Data & Analytic Services. |
| • | Adjusted operating margin, a non-GAAP measure defined under the caption “Review of Consolidated Results — Adjusted Operating Margin,” was 23.4% in 2017, compared to 21.6% in the prior year. The increase in adjusted operating margin primarily reflects organic revenue growth of 4%, core operational improvement, and $165 million of savings related to restructuring and other operational improvement initiatives. |
| • | Adjusted diluted earnings per share from continuing operations, a non-GAAP measure defined under the caption “Review of Consolidated Results — Adjusted Diluted Earnings per Share,” was $6.52 per share in 2017, an increase of $0.94 per share, or 17%, from $5.58 per share in 2016. The increase demonstrates solid operational performance and effective capital management, highlighted by a record $2.4 billion of share repurchase during 2017, partially offset by a higher effective tax rate and losses recognized in other expense. |
| • | Free cash flow, a non-GAAP measure defined under the caption “Review of Consolidated Results — Free Cash Flow,” was $486 million in 2017, a decrease of $1.2 billion, or 71%, from $1.7 billion in 2016. The decrease in free cash flow from the prior year was driven by a decrease in cash flow from operations of $1.2 billion and a 17%, or $27 million, increase in capital expenditures. |
REVIEW OF CONSOLIDATED RESULTS
Summary of Results
Our consolidated results are as follow:
| Years ended December 31 | ||||||||||||
| (millions) | 2017 | 2016 | 2015 | |||||||||
| Revenue | ||||||||||||
| Total revenue | $ | 9,998 | $ | 9,409 | $ | 9,480 | ||||||
| Expenses | ||||||||||||
| Compensation and benefits | 6,089 | 5,687 | 5,605 | |||||||||
| Information technology | 419 | 386 | 389 | |||||||||
| Premises | 348 | 343 | 362 | |||||||||
| Depreciation of fixed assets | 187 | 162 | 164 | |||||||||
| Amortization and impairment of intangible assets | 704 | 157 | 173 | |||||||||
| Other general expenses | 1,272 | 1,036 | 1,200 | |||||||||
| Total operating expenses | 9,019 | 7,771 | 7,893 | |||||||||
| Operating income | 979 | 1,638 | 1,587 | |||||||||
| Interest income | 27 | 9 | 14 | |||||||||
| Interest expense | (282 | ) | (282 | ) | (273 | ) | ||||||
| Other income (expense) | (39 | ) | 36 | 100 | ||||||||
| Income from continuing operations before income taxes | 685 | 1,401 | 1,428 | |||||||||
| Income taxes | 250 | 148 | 175 | |||||||||
| Net income from continuing operations | 435 | 1,253 | 1,253 | |||||||||
| Income from discontinued operations, net of tax | 828 | 177 | 169 | |||||||||
| Net income | 1,263 | 1,430 | 1,422 | |||||||||
| Less: Net income attributable to noncontrolling interests | 37 | 34 | 37 | |||||||||
| Net income attributable to Aon shareholders | $ | 1,226 | $ | 1,396 | $ | 1,385 |
Consolidated Results for 2017 Compared to 2016
Revenue
Total revenue increased by 6%, or $589 million, to $10.0 billion in 2017, compared to $9.4 billion in 2016. The increase was driven by 4% organic revenue growth and a 2% increase related to acquisitions, net of divestitures. Organic revenue growth for the year was driven by growth across every major revenue line, with particular strength in Reinsurance Solutions, Health Solutions, and Data & Analytic Services.
Commercial Risk Solutions organic revenue growth was 2% in 2017 driven by growth across nearly every geography, with particular strength in U.S. Retail driven by record new business generation and strong management of the renewal book portfolio.
Reinsurance Solutions organic revenue growth was 6% in 2017 driven by growth across all major product lines, highlighted by continued net new business generation in the treaty portfolio, growth in facultative placements, and strong growth in capital markets.
Retirement Solutions organic revenue growth was 3% in 2017 driven by double-digit growth in investment consulting, primarily for delegated investment management, as well as solid growth in the Talent, Rewards, and Performance practice.
Health Solutions organic revenue growth was 7% in 2017 driven primarily by strong growth in health & benefits brokerage, in both the Americas and internationally.
Data & Analytic Services organic revenue growth was 6% in 2017 driven by strong growth across Affinity, with particular strength in the U.S.
Compensation and Benefits
Compensation and benefits increased $402 million in 2017, or 7%, compared to 2016. The increase was primarily driven by $299 million of restructuring charges, a $154 million increase in expenses related to acquisitions, net of divestitures, and an increase in expense associated with 4% organic revenue growth, partially offset by $104 million of savings related to restructuring and other operational improvement initiatives and a $92 million decrease in expenses related to certain pension settlements.
Information Technology
Information technology, which represents costs associated with supporting and maintaining our infrastructure, increased $33 million 2017, or 9%, compared to 2016. The increase was primarily driven by $33 million of restructuring costs, a $7 million increase in expenses related to acquisitions, net of divestitures, as well as investments in growth, partially offset by $37 million of savings related to restructuring and other operational improvement initiatives.
Premises
Premises, which represents the cost of occupying offices in various locations throughout the world, increased $5 million in 2017, or 1%, compared to 2016. The increase was primarily driven by an $11 million increase in expenses related to acquisitions, net of divestitures, and $8 million of restructuring costs, partially offset by $3 million of savings related to restructuring and other operational improvement initiatives.
Depreciation of Fixed Assets
Depreciation of fixed assets primarily relates to software, leasehold improvements, furniture, fixtures and equipment, computer equipment, buildings, and automobiles. Depreciation of fixed assets increased $25 million in 2017, or 15%, compared to 2016. The increase was primarily driven by $26 million of restructuring costs and a $14 million increase in expenses associated with acquisitions, net of divestitures, partially offset by $1 million of savings related to restructuring and other operational improvement initiatives as well as a decrease as we continue to optimize our real estate and information technology portfolio.
Amortization and Impairment of Intangible Assets
Amortization and impairment of intangibles primarily relates to finite-lived tradenames and customer-related, contract-based, and technology assets. Amortization and impairment of intangibles increased $547 million for the year, or 348%, compared to 2016. The increase was primarily driven by a $380 million non-cash impairment charge to the indefinite lived tradenames associated with the Divested Business, $143 million of accelerated amortization related to tradenames, and an increase associated with recent acquisitions, net of divestitures.
Other General Expenses
Other general expenses increased $236 million in 2017, or 23%, compared to 2016. The increase was primarily driven by $131 million of restructuring costs, a $71 million increase in expenses associated with acquisitions, net of divestitures, $28 million of costs related to regulatory and compliance matters, and an increase in expense associated with 4% organic revenue growth, partially offset by $20 million of savings related to restructuring and other operational improvement initiatives and a $15 million decrease in expenses related to the sale of the Divested Business in the prior year period.
Interest Income
Interest income represents income earned on operating cash balances and other income-producing investments. It does not include interest earned on funds held on behalf of clients. Interest income was $27 million in 2017, an increase of $18 million, or 200%, from 2016, due primarily to additional income earned on the balance of cash proceeds from the Divested Business.
Interest Expense
Interest expense, which represents the cost of our debt obligations, was $282 million in 2017, similar to the prior year period.
Other Income (Expense)
Other income (expense) decreased $75 million from $36 million in 2016 to $(39) million in 2017. Other expense in 2017 includes, among other things, a $37 million unfavorable impact of exchange rates on the remeasurement of assets and liabilities in non-functional currencies and $16 million in net losses on the disposition of businesses, partially offset by $12 million of equity earnings and $2 million of gains on certain financial instruments. Other income in 2016 includes $39 million in net gains on the disposition of businesses and $13 million in equity earnings, partially offset by a $2 million unfavorable impact of exchange rates on the remeasurement of assets and liabilities in non-functional currencies and $14 million of losses on certain financial instruments.
Income From Continuing Operations before Income Taxes
Due to factors discussed above, income from continuing operations before income taxes was $685 million in 2017, a 51% decrease from $1.4 billion in 2016.
Income Taxes From Continuing Operations
The effective tax rate on net income from continuing operations was 36.5% in 2017 and 10.6% in 2016. The 2017 rate reflects changes in the geographical distribution of income, the impact of share-based payments, and the provisional estimate of the impact of U.S. tax reform based on Aon's initial analysis of the Tax Cuts and Jobs Act. The 2016 rate reflects changes in the geographical distribution of income and the impact from certain pension settlements in the second and fourth quarters.
Income from Discontinued Operations, Net of Tax
On February 9, 2017, the Company entered into a Purchase Agreement with the Buyer to sell the Divested Business. The Company has retrospectively classified the results of the Divested Business as discontinued operations in the Company’s Consolidated Statements of Income for all periods presented. Income from discontinued operations, net of tax, increased $651 million to $828 million compared to 2016. This increase was primarily driven by the gain on sale of the Divested Business.
Net Income Attributable to Aon Shareholders
Net income attributable to Aon shareholders decreased to $1.2 billion, or $4.70 per diluted share, in 2017, compared to $1.4 billion, or $5.16 per diluted share, in 2016.
Consolidated Results for 2016 Compared to 2015
Revenue
Total revenue decreased by 1%, or $71 million, to $9.4 billion in 2016, compared to $9.5 billion in 2015. The decrease was driven by a 3% unfavorable impact from foreign currency translation and a 2% decrease related to acquisitions, net of divestitures, partially offset by organic revenue growth of 4%.
Commercial Risk Solutions organic revenue growth was 2% in 2016 driven by record business generation in U.S. retail and strong growth in Latin America, Asia, and Pacific regions, despite economic weakness in certain countries.
Reinsurance Solutions organic revenue growth was 1% in 2016 driven by net new business growth in treaty placements globally and modest growth in facultative placements, partially offset by an unfavorable market impact in treaty and a decline in capital markets transactions and advisory business.
Retirement Solutions organic revenue growth was 2% in 2016 driven by growth in investment consulting, primarily for delegated investment management.
Health Solutions organic revenue growth was 13% in 2016 driven by solid growth in health & benefits brokerage, highlighted by double-digit growth across Asia and EMEA, and double-digit growth in healthcare exchanges.
Data & Analytic Services organic revenue growth was 6% in 2016 driven by strong growth in Affinity, particularly in the U.S.
Compensation and Benefits
Compensation and benefits increased $82 million, or 1%, in 2016 compared to 2015. The increase was primarily driven by a $220 million increase in non-cash expense related to certain pension settlements and an increase in expense associated with 4% organic revenue growth, partially offset by a $169 million favorable impact from foreign currency translation and a $97 million decrease in expenses related to acquisitions, net of divestitures.
Information Technology
Information technology decreased $3 million, or 1%, in 2016 compared to 2015. This decrease was primarily driven by a $12 million favorable impact from foreign currency translation and a $7 million decrease in the core expense base resulting from acquisitions, net of divestitures, partially offset by an increase in expense associated with 4% organic revenue growth.
Premises
Premises decreased $19 million, or 5%, in 2016 compared to 2015. This decrease was primarily driven by a $13 million favorable impact from foreign currency translation.
Depreciation of Fixed Assets
Depreciation of fixed assets decreased $2 million, or 1%, in 2016 compared to 2015. This decrease was primarily driven by a $4 million favorable impact from foreign currency translation and a $4 million decrease in the core expenses associated with acquisitions, net of divestitures, partially offset by an increase in expense associated with 4% organic revenue growth.
Amortization and Impairment of Intangible Assets
Amortization and impairment of intangibles decreased $16 million, or 9%, in 2016 compared to 2015. This decrease was primarily driven by an $8 million favorable impact from foreign currency translation.
Other General Expenses
Other general expenses decreased $164 million, or 14%, in 2016 compared to 2015. This decrease was primarily driven by a $176 million decrease in expense related to legacy litigation incurred in 2015, a $43 million favorable impact from currency translation, and a $39 million decrease in the core expense base resulting from acquisitions, net of divestitures, partially offset by an increase in expense to support 4% organic revenue growth, and $15 million of transaction costs related to the Divested Business.
Interest Income
Interest income was $9 million in 2016, a decrease of $5 million, or 36%, from 2015, due to marginally lower average interest rates globally.
Interest Expense
Interest expense was $282 million in 2016, an increase of $9 million, or 3%, from 2015. The increase in interest expense primarily reflects an increase in total debt outstanding.
Other Income (Expense)
Other income decreased $64 million from $100 million in 2015 to $36 million in 2016. Other income in 2016 includes $39 million in net gains on disposition of businesses and equity earnings of $13 million, partially offset by a $14 million net loss on certain financial instruments and foreign exchange losses of $2 million. Other income in 2015 includes, among other things, $82 million in net gains on disposition of businesses, foreign exchange gains of $30 million, and equity earnings of $13 million, partially offset by a $24 million net loss on certain financial instruments.
Income From Continuing Operations before Income Taxes
Due to the factors discussed above, income from continuing operations before income taxes was $1,401 million in 2016, a 2% decrease from $1,428 million in 2015.
Income Taxes From Continuing Operations
The effective tax rate on net income from continuing operations was 10.6% in 2016 and 12.3% in 2015. The 2016 and 2015 tax rates reflect changes in the geographical distribution of income, the impact from certain pension settlements in the second and fourth quarters of 2016, a reduction in U.S. income resulting from the settlement of legacy litigation in the second quarter of 2015, and the impact of certain discrete items.
Income from Discontinued Operations, Net of Tax
On February 9, 2017, the Company entered into a Purchase Agreement with the Buyer to sell the Divested Business. The Company has retrospectively classified the results of the Divested Business as discontinued operations in the Company’s Consolidated Statements of Income for all periods presented. Income from discontinued operations, net of tax, increased $8 million in 2016, compared to $169 million in 2015, driven by increased operating income growth.
Net Income Attributable to Aon Shareholders
Net income attributable to Aon Shareholders increased to $1,396 million, or $5.16 per diluted share in 2016, compared to $1,385 million, or $4.88 diluted net income per share, in 2015.
Non-GAAP Metrics
In our discussion of consolidated results, we sometimes refer to certain non-GAAP supplemental information derived from consolidated financial information specifically related to organic revenue growth, adjusted operating margin, adjusted diluted earnings per share, free cash flow, and the impact of foreign exchange rate fluctuations on operating results. This non-GAAP supplemental information should be viewed in addition to, not instead of, our Consolidated Financial Statements and Notes thereto.
Organic Revenue Growth
We use supplemental information related to organic revenue growth to help us and our investors evaluate business growth from existing operations. Organic revenue growth is a non-GAAP measure that includes the impact of intercompany activity and excludes the impact of changes in foreign exchange rate, acquisitions, divestitures, transfers between subsidiaries, fiduciary investment income, and reimburseable expenses. This supplemental information related to organic revenue growth represents a measure not in accordance with U.S. GAAP and should be viewed in addition to, not instead of, our Consolidated Financial Statements and Notes thereto. Industry peers provide similar supplemental information about their revenue performance, although they may not make identical adjustments. A reconciliation of this non-GAAP measure to the reported Total revenue is as follows (in millions, except percentages):
| Twelve Months Ended | |||||||||||||||||||||||
| Dec 31, 2017 | Dec 31, 2016 | % Change | Less: Currency Impact (1) | Less: Fiduciary Investment Income (2) | Less: Acquisitions, Divestitures & Other | Organic Revenue Growth (3) | |||||||||||||||||
| Commercial Risk Solutions | $ | 4,169 | $ | 3,929 | 6 | % | — | % | — | % | 4 | % | 2 | % | |||||||||
| Reinsurance Solutions | 1,429 | 1,361 | 5 | — | — | (1 | ) | 6 | |||||||||||||||
| Retirement Solutions | 1,755 | 1,707 | 3 | (1 | ) | — | 1 | 3 | |||||||||||||||
| Health Solutions | 1,515 | 1,370 | 11 | — | — | 4 | 7 | ||||||||||||||||
| Data & Analytic Services | 1,140 | 1,050 | 9 | — | — | 3 | 6 | ||||||||||||||||
| Elimination | (10 | ) | (8 | ) | NA | NA | NA | NA | NA | ||||||||||||||
| Total revenue | $ | 9,998 | $ | 9,409 | 6 | % | — | % | — | % | 2 | % | 4 | % |
| Twelve Months Ended | |||||||||||||||||||||||
| Dec 31, 2016 | Dec 31, 2015 | % Change | Less: Currency Impact (1) | Less: Fiduciary Investment Income (2) | Less: Acquisitions, Divestitures & Other | Organic Revenue Growth (3) | |||||||||||||||||
| Commercial Risk Solutions | $ | 3,929 | $ | 4,029 | (2 | )% | (3 | )% | — | % | (1 | )% | 2 | % | |||||||||
| Reinsurance Solutions | 1,361 | 1,358 | — | (1 | ) | — | — | 1 | |||||||||||||||
| Retirement Solutions | 1,707 | 1,916 | (11 | ) | (4 | ) | — | (9 | ) | 2 | |||||||||||||
| Health Solutions | 1,370 | 1,167 | 17 | (3 | ) | — | 7 | 13 | |||||||||||||||
| Data & Analytic Services | 1,050 | 1,021 | 3 | (2 | ) | — | (1 | ) | 6 | ||||||||||||||
| Elimination | (8 | ) | (11 | ) | NA | NA | NA | NA | NA | ||||||||||||||
| Total revenue | $ | 9,409 | $ | 9,480 | (1 | )% | (3 | )% | — | % | (2 | )% | 4 | % |
| (1) | Currency impact is determined by translating prior period's revenue at this period's foreign exchange rates. |
| (2) | Fiduciary investment income for the years ended December 31, 2017, 2016, and 2015 respectively, was $32 million, $22 million, and $21 million. |
| (3) | Organic revenue growth includes the impact of intercompany activity and excludes the impact of changes in foreign exchange rates, acquisitions, divestitures, transfers between business units, and fiduciary investment income. |
Adjusted Operating Margin
We use adjusted operating margin as a non-GAAP measure of core operating performance of the Company. Adjusted operating margin excludes the impact of certain items, as listed below, because management does not believe these expenses reflect our core operating performance. This supplemental information related to adjusted operating margin represents a measure not in accordance with U.S. GAAP, and should be viewed in addition to, not instead of, our Consolidated Financial Statements and Notes thereto.
A reconciliation of this non-GAAP measure to reported operating margins is as follows (in millions, except percentage data):
| Years ended December 31 | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Revenue | $ | 9,998 | $ | 9,409 | $ | 9,480 | ||||||
| Operating income - as reported | $ | 979 | $ | 1,638 | $ | 1,587 | ||||||
| Amortization and impairment of intangible assets | 704 | 157 | 173 | |||||||||
| Restructuring | 497 | — | — | |||||||||
| Regulatory and compliance matters | 28 | — | — | |||||||||
| Pension settlement | 128 | 220 | — | |||||||||
| Transaction costs | — | 15 | — | |||||||||
| Legacy litigation | — | — | 176 | |||||||||
| Operating income - as adjusted | $ | 2,336 | $ | 2,030 | $ | 1,936 | ||||||
| Operating margin - as reported | 9.8 | % | 17.4 | % | 16.7 | % | ||||||
| Operating margin - as adjusted | 23.4 | % | 21.6 | % | 20.4 | % |
Adjusted Diluted Earnings per Share
We also use adjusted diluted earnings per share as a non-GAAP measure of our core operating performance. Adjusted diluted earnings per share excludes the items identified above, plus related income taxes because management does not believe these expenses are representative of our core earnings. This supplemental information related to adjusted diluted earnings per share represents a measure not in accordance with U.S. GAAP and should be viewed in addition to, not instead of, our Consolidated Financial Statements and Notes thereto.
A reconciliation of this non-GAAP measure to reported Diluted earnings per share is as follows:
| Year Ended December 31, 2017 | ||||||||||||
| (millions, except per share data) | U.S. GAAP | Adjustments | As Adjusted | |||||||||
| Operating income from continuing operations | $ | 979 | $ | 1,357 | $ | 2,336 | ||||||
| Interest income | 27 | — | 27 | |||||||||
| Interest expense | (282 | ) | — | (282 | ) | |||||||
| Other income (expense) | (39 | ) | — | (39 | ) | |||||||
| Income before income taxes from continuing operations | 685 | 1,357 | 2,042 | |||||||||
| Income taxes (1) | 250 | 55 | 305 | |||||||||
| Net income from continuing operations | 435 | 1,302 | 1,737 | |||||||||
| Income from discontinued operations, net of tax (2) | 828 | (772 | ) | 56 | ||||||||
| Net income | 1,263 | 530 | 1,793 | |||||||||
| Less: Net income attributable to noncontrolling interests | 37 | — | 37 | |||||||||
| Net income attributable to Aon shareholders | $ | 1,226 | $ | 530 | $ | 1,756 | ||||||
| Diluted net income per share attributable to Aon shareholders | ||||||||||||
| Continuing operations | $ | 1.53 | $ | 4.99 | $ | 6.52 | ||||||
| Discontinued operations | 3.17 | (2.95 | ) | 0.22 | ||||||||
| Net income | $ | 4.70 | $ | 2.04 | $ | 6.74 | ||||||
| Weighted average ordinary shares outstanding — diluted | 260.7 | — | 260.7 |
| Year Ended December 31, 2016 | ||||||||||||
| (millions, except per share data) | U.S. GAAP | Adjustments | As Adjusted | |||||||||
| Operating income from continuing operations | $ | 1,638 | $ | 392 | $ | 2,030 | ||||||
| Interest income | 9 | — | 9 | |||||||||
| Interest expense | (282 | ) | — | (282 | ) | |||||||
| Other income (expense) | 36 | — | 36 | |||||||||
| Income before income taxes from continuing operations | 1,401 | 392 | 1,793 | |||||||||
| Income taxes (1) | 148 | 102 | 250 | |||||||||
| Net income from continuing operations | 1,253 | 290 | 1,543 | |||||||||
| Income from discontinued operations, net of tax (2) | 177 | 94 | 271 | |||||||||
| Net income | 1,430 | 384 | 1,814 | |||||||||
| Less: Net income attributable to noncontrolling interests | 34 | — | 34 | |||||||||
| Net income attributable to Aon shareholders | $ | 1,396 | $ | 384 | $ | 1,780 | ||||||
| Diluted net income per share attributable to Aon shareholders | ||||||||||||
| Continuing operations | $ | 4.51 | $ | 1.07 | $ | 5.58 | ||||||
| Discontinued operations | 0.65 | 0.36 | 1.01 | |||||||||
| Net income | $ | 5.16 | $ | 1.43 | $ | 6.59 | ||||||
| Weighted average ordinary shares outstanding — diluted | 270.3 | — | 270.3 |
| Year Ended December 31, 2015 | ||||||||||||
| (millions, except per share data) | U.S. GAAP | Adjustments | As Adjusted | |||||||||
| Operating income from continuing operations | $ | 1,587 | $ | 349 | $ | 1,936 | ||||||
| Interest income | 14 | — | 14 | |||||||||
| Interest expense | (273 | ) | — | (273 | ) | |||||||
| Other income (expense) | 100 | — | 100 | |||||||||
| Income before income taxes from continuing operations | 1,428 | 349 | 1,777 | |||||||||
| Income taxes (1) | 175 | 89 | 264 | |||||||||
| Net income from continuing operations | 1,253 | 260 | 1,513 | |||||||||
| Income from discontinued operations, net of tax (2) | 169 | 108 | 277 | |||||||||
| Net income | 1,422 | 368 | 1,790 | |||||||||
| Less: Net income attributable to noncontrolling interests | 37 | — | 37 | |||||||||
| Net income attributable to Aon shareholders | $ | 1,385 | $ | 368 | $ | 1,753 | ||||||
| Diluted net income per share attributable to Aon shareholders | ||||||||||||
| Continuing operations | $ | 4.28 | $ | 0.92 | $ | 5.20 | ||||||
| Discontinued operations | 0.60 | 0.38 | 0.98 | |||||||||
| Net income | $ | 4.88 | $ | 1.30 | $ | 6.18 | ||||||
| Weighted average ordinary shares outstanding — diluted | 283.8 | — | 283.8 |
| (1) | The effective tax rate used in the U.S. GAAP financial statements for continuing operations were 36.5%, 10.6%, and 12.3%, respectively, for the years ended December 31, 2017, 2016, and 2015. Tax expense was adjusted to exclude the estimated impact of the Tax Cuts and Jobs Act, including the impact of the transition tax imposed on our accumulated foreign earnings and the re-measurement of the carrying value of our U.S. net deferred tax assets due to the lower corporate tax rate. The provisional estimate of the impact of U.S. Tax Reform is based on Aon’s initial analysis of the Tax Cuts and Jobs Act and may be adjusted in future periods due to, among other things, additional analysis performed by Aon and additional guidance that may be issued by the U.S. Department of Treasury (see Note 10 in these notes to the consolidated financial statements for additional information). Further, adjusted items are generally taxed at the estimated annual effective |
tax rate, except for the applicable tax impact associated with estimated restructuring expenses, accelerated tradename amortization, impairment charges, regulatory and compliance provisions, and non-cash pension settlement charges, which are adjusted at the related jurisdictional rate. After adjusting to exclude the applicable tax impact, the adjusted effective tax rates for continuing operations were 14.9%, 13.9%, and 14.9%, respectively, for the years ended December 31, 2017, 2016, and 2015.
| (2) | Adjusted income from discontinued operations, net of tax, excludes gain on sale and intangible asset amortization on discontinued operations of $1,964 million and $11 million for the year ended December 31, 2017. Adjusted income from discontinued operations, net of tax, excludes intangible asset amortization on discontinued operations of $120 million and $141 million, respectively, for the years ended December 31, 2016 and 2015. The effective tax rates used in the U.S. GAAP financial statements for discontinued operations were 58.9%, 34.0%, and 35.2%, respectively, for the years ended December 31, 2017, 2016, and 2015. After adjusting to exclude the applicable tax impact associated with the gain on sale and intangible asset amortization, the adjusted effective tax rates for discontinued operations were 11.7%, 30.2%, and 31.1% for the years ended December 31, 2017, 2016, and 2015. |
Free Cash Flow
We use free cash flow, defined as cash flow provided by operations minus capital expenditures, as a non-GAAP measure of our core operating performance. This supplemental information related to free cash flow represents a measure not in accordance with U.S. GAAP and should be viewed in addition to, not instead of, our Consolidated Financial Statements and Notes thereto. The use of this non-GAAP measure does not imply or represent the residual cash flow for discretionary expenditures.
A reconciliation of this non-GAAP measure to cash flow provided by operations is as follows (in millions):
| Years Ended December 31 | 2017 | 2016 | 2015 | |||||||||
| Cash Provided by Continuing Operating Activities | $ | 669 | $ | 1,829 | $ | 1,502 | ||||||
| Capital Expenditures Used for Continuing Operations | (183 | ) | (156 | ) | (200 | ) | ||||||
| Free Cash Flow Provided By Continuing Operations | $ | 486 | $ | 1,673 | $ | 1,302 |
Impact of Foreign Currency Exchange Rate Fluctuations
We conduct business in more than 120 countries and, because of this, foreign currency exchange rate fluctuations have a significant impact on our business. Foreign currency exchange rate movements may be significant and may distort true period-to-period comparisons of changes in revenue or pretax income. Therefore, to give financial statement users meaningful information about our operations, we have provided an illustration of the impact of foreign currency exchange rate fluctuations on our financial results. The methodology used to calculate this impact isolates the impact of the change in currencies between periods by translating the last year’s revenue, expenses, and net income using the current year’s foreign currency exchange rates.
Translating prior year results at current year foreign currency exchange rates, currency fluctuations had an $0.12 favorable impact on net income per diluted share during the year ended December 31, 2017. Currency fluctuations had no impact on net income per diluted share during the year ended December 31, 2016, when 2015 results were translated at 2016 rates. Currency fluctuations had a $0.43 unfavorable impact on net income per diluted share during the year ended December 31, 2015, when 2014 results were translated at 2015 rates.
Translating prior year results at current year foreign currency exchange rates, currency fluctuations had a $0.08 favorable impact on adjusted net income per diluted share during the year ended December 31, 2017. Currency fluctuations had a $0.04 unfavorable impact on adjusted net income per diluted share during the year ended December 31, 2016, when 2015 results were translated at 2016 rates. Currency fluctuations had a $0.44 unfavorable impact on net income per diluted share during the year ended December 31, 2015, when 2014 results were translated at 2015 rates. These translations are performed for comparative purposes only and do not impact the accounting policies or practices for amounts included in the Consolidated Financial Statements and Notes thereto.
Restructuring Plan
In 2017, we initiated a global restructuring plan (the “Restructuring Plan”) in connection with the sale of the Divested Business. The Restructuring Plan is intended to streamline operations across the organization and deliver greater efficiency, insight and connectivity. We expect these restructuring activities and related expenses to affect continuing operations through 2019, including an estimated 4,200 to 4,800 role eliminations. We expect to result in cumulative costs of approximately $1,025 million through the end of the plan, consisting of approximately $450 million in employee termination costs, $130 million in technology rationalization costs, $85 million in real estate consolidation costs, $50 million in non-cash asset impairments, such as expense taken on software no longer in use, and $310 million in other costs including certain separation costs associated with the sale of the Divested Business. We estimate that our annualized savings from the Restructuring Plan and other operational improvement initiatives will be approximately $450 million by the end of 2019.
From the inception of the Restructuring Plan through December 31, 2017, the Company has eliminated 2,630 positions and incurred total expenses of $497 million for restructuring and related separation costs. These charges are included in Compensation and benefits, Information technology, Premises, Depreciation of fixed assets, and Other general expenses in the accompanying Consolidated Statements of Income.
The following table summarizes restructuring and separation costs by type that have been incurred through December 31, 2017 and are estimated to be incurred through the end of the Restructuring Plan (in millions). Estimated remaining costs may be revised in future periods as these assumptions are updated:
| Year Ended December 31, 2017 | Estimated Remaining Costs | Estimated Total Cost (1) | ||||||||||
| Workforce reduction | $ | 299 | $ | 151 | $ | 450 | ||||||
| Technology rationalization (2) | 33 | 97 | 130 | |||||||||
| Lease consolidation (2) | 8 | 77 | 85 | |||||||||
| Asset impairments | 26 | 24 | 50 | |||||||||
| Other costs associated with restructuring and separation (2) (3) | 131 | 179 | 310 | |||||||||
| Total restructuring and related expenses | $ | 497 | $ | 528 | $ | 1,025 |
| (1) | Actual costs, when incurred, may vary due to changes in the assumptions built into this plan. Significant assumptions that may change when plans are finalized and implemented include, but are not limited to, changes in severance calculations, changes in the assumptions underlying sublease loss calculations due to changing market conditions, and changes in the overall analysis that might cause the Company to add or cancel component initiatives. |
| (2) | Contract termination costs included within Technology rationalization for the year ended December 31, 2017 were $1 million. Contract termination costs included within Lease consolidations for the year ended December 31, 2017 were $8 million. Contact termination costs included within Other costs associated with restructuring and separation were $3 million. Total estimated contract termination costs to be incurred under the Restructuring Plan associated with Technology rationalizations, Lease consolidations, and Other costs associated with restructuring and separation, respectively, are $10 million, $80 million, and $10 million. |
| (3) | Other costs associated with the Restructuring Plan include those to separate the Divested Business, as well as moving costs and consulting and legal fees. These costs are generally recognized when incurred. |
As of December 31, 2017, our liabilities for the Restructuring Plan were as follows (in millions):
| Restructuring Plan | ||||
| Balance at December 31, 2016 | $ | — | ||
| Expensed | 452 | |||
| Cash payments | (280 | ) | ||
| Foreign currency translation and other | 14 | |||
| Balance at December 31, 2017 | $ | 186 |
Competition and Markets Authority
The U.K.’s competition regulator, the Competition and Markets Authority (the “CMA”), is conducting a market investigation into the supply and acquisition of investment consulting and fiduciary management services, including those offered by Aon and its competitors in the U.K. The CMA has indicated that it will assess whether any feature or combination of features in the target market prevents, restricts, or distorts competition. The CMA can impose a wide range of remedies to address uncompetitive markets. The investigation is in its early stages. Thus, we are not presently in a position to estimate the impact, if any, of this investigation on Aon’s UK investment business.
Financial Conduct Authority
The FCA is conducting a market study to assess how effectively competition is working in the wholesale insurance broker sector in the UK in which Aon, through its subsidiaries, participates. The FCA has indicated that the purpose of a market study is to assess the extent to which the market is working well in the interests of customers and to identify features of the market that may impact competition. Depending on the study’s findings, the FCA may require remedies in order to correct any features found to be preventing, restricting or distorting competition. The study is in its very early stages and we are unable to estimate the impact, if any, on Aon’s business at this time.
LIQUIDITY AND FINANCIAL CONDITION
Liquidity
Executive Summary
We believe that our balance sheet and strong cash flow provide us with adequate liquidity. Our primary sources of liquidity are cash flow from operations, available cash reserves, and debt capacity available under our credit facilities. Our primary uses of liquidity are operating expenses, capital expenditures, acquisitions, share repurchases, pension obligations, and shareholder dividends. We believe that cash flows from operations, available credit facilities and the capital markets will be sufficient to meet our liquidity needs, including principal and interest payments on debt obligations, capital expenditures, pension contributions, and anticipated working capital requirements, for the foreseeable future.
Cash on our balance sheet includes funds available for general corporate purposes, as well as amounts restricted as to their use. Funds held on behalf of clients in a fiduciary capacity are segregated and shown together with uncollected insurance premiums in Fiduciary assets in the Consolidated Statement of Financial Position, with a corresponding amount in Fiduciary liabilities. Fiduciary funds generally cannot be used for general corporate purposes and are not a source of liquidity for us.
Cash and cash equivalents and Short-term investments increased $569 million to $1,285 million in 2017 as compared to 2016. During 2017, sources of funds in 2017 included proceeds from the sale of businesses of $4,246 million. During 2017, cash flow from operating activities decreased $1,160 million to $669 million. Additional primary uses of funds in 2017 included share repurchases of $2.4 billion, acquisitions of businesses of $1,029 million, dividends to shareholders of $364 million, repayments of debt, net of issuances of $345 million, and purchases of short-term investments of $232 million.
To manage unforeseen situations, we have committed credit lines of approximately $1.3 billion and we endeavor to manage our obligations to ensure we maintain our current investment grade ratings. At December 31, 2017, we had no borrowings on these credit lines.
Cash Flows from Operating Activities
Net cash provided by operating activities during 2017 decreased $1,592 million, or 68%, to $734 million compared to 2016. Net cash provided by operating activities for continuing operations during 2017 decreased $1,160 million, or 63%, from the prior year, to $669 million. Net cash provided by operating activities for discontinued operations during 2017 decreased $432 million, or 87%, from the prior year, to $65 million. These amounts represent net income reported, as adjusted for gains or losses on sales of businesses, financial instruments, and foreign exchange, and our non-cash expenses, which include share-based compensation,
depreciation, amortization, and impairments, as well as changes in working capital that relate primarily to the timing of payments of accounts payable and accrued liabilities and the collection of receivables. The total decrease in operating cash from the prior year was primarily driven by higher cash tax charges, largely related to the sale of the Divested Business, and an increase in pension contributions.
Pension cash contributions were $146 million during 2017, as compared to $123 million during 2016. In 2018, we expect to contribute approximately $177 million to our pension plans, with the majority attributable to non-U.S. pension plans, which are subject to changes in foreign exchange rates. On July 1, 2017, the Company made non-cash contributions of approximately $80 million to its U.S. pension plan.
We expect cash generated by operations for 2017 to be sufficient to service our debt and contractual obligations, finance capital expenditures, repurchase shares under the Repurchase Program, and pay dividends to our shareholders. Although cash from operations is expected to be sufficient to service these activities, we have the ability to access commercial paper markets or borrow under our credit facilities to accommodate any timing differences in cash flows. We have committed credit facilities of approximately $1.3 billion, all of which was available at December 31, 2017, and can access these facilities on a same-day or next-day basis. Additionally, under current market conditions, we believe that we could access capital markets to obtain debt financing for longer-term funding, if needed.
Cash Flows from Investing Activities
Net cash flow provided by investing activities in 2017 was $2,787 million. The primary drivers of cash flow provided by investing activities were $4,246 million of sale of businesses and $4 million of net purchases of long-term investments, partially offset by $1,029 million for acquisitions of businesses, net of cash acquired, $232 million of net purchases of short-term investments, $183 million for capital expenditures from continuing operations and $19 million for capital expenditures from discontinued operations.
Net cash flow used for investing activities in 2016 was $954 million. The primary drivers of cash flow used for investing activities were $879 million for acquisitions of businesses, net of cash acquired, $156 million for capital expenditures from continuing operations, $66 million for capital expenditures from discontinued operations, and $21 million of net purchases of long-term investments, partially offset by $107 million of sale of businesses and $61 million of net sales of short-term investments.
Net cash flow used for investing activities in 2015 was $138 million. The primary drivers of cash flow used for investing activities were $200 million for capital expenditures from continuing operations, $90 million for capital expenditures from discontinued operations, $46 million of net purchases of long-term investments, and $16 million for acquisitions of businesses, net of cash acquired, partially offset by sales of businesses of $205 million and net sales of short-term investments of $9 million.
Cash Flows from Financing Activities
Net cash flow used for financing activities during 2017 was $3.3 billion. The primary drivers of cash used for financing activities were share repurchases of $2.4 billion, dividends paid to shareholders of $364 million, repayments of debt, net of issuances, of $345 million, and net cash payments of $121 million related to issuance of shares for employee benefit programs.
Net cash flow used for financing activities during 2016 was $1.3 billion. The primary drivers of cash flow used for financing activities were share repurchases of $1.3 billion, dividends paid to shareholders of $345 million, and net cash payments of $129 million related to issuance of shares for employee benefit programs, partially offset by issuances of debt, net of repayments, of $522 million.
Net cash flow used for financing activities during 2015 was $1.7 billion. The primary drivers of cash flow used for financing activities were $1.6 billion, dividends paid to shareholders of $323 million, and net cash payments of $30 million related to issuance of shares for employee benefit programs, partially offset by issuances of debt, net of repayments, of $253 million.
Cash and Cash Equivalents and Short-Term Investments
At December 31, 2017, our Cash and cash equivalents and Short-term investments were $1,285 million, an increase of $569 million from December 31, 2016, primarily related to proceeds from the sale of businesses of $4,246 million and $669 million in net cash provided by operating activities from continuing operations, partially offset by share repurchases of $2,399 million, payments for the acquisition of businesses of $1,029 million, cash dividends of $364 million, the repayments of debt, net of issuances, of $345 million, and purchase of short-term investments of $232 million. Of the total balance as of December 31, 2017, $96 million was restricted as to its use, which was comprised of $57 million of operating funds in the U.K., as required by the FCA, and $39 million held as collateral for various business purposes. At December 31, 2017, $3.0 billion of cash and cash equivalents and short-term investments were held in the U.S. and overdrawn cash and cash equivalents and short-term investments of $1.7 billion were held in other countries. We maintain multi-currency cash pools with third-party banks in which various Aon entities participate. Individual Aon entities are permitted to overdraw on their individual accounts provided the overall balance
does not fall below zero. At December 31, 2017 and 2016, non-U.S. cash balances of one or more entities were negative; however, the overall balance was positive.
At December 31, 2016, our Cash and cash equivalents and Short-term investments were $716 million, a decrease of $22 million from December 31, 2015, primarily related to share repurchases of $1,257 million, payments for the acquisition of businesses of $879 million, dividends to shareholders of $345 million, and capital expenditures from continuing operations of $156 million, partially offset by $1,829 million in net cash provided by operating activities from continuing operations, the net issuances of debt of $522 million, and proceeds for the sale of businesses of $107 million. Of the total balance as of December 31, 2016, $82 million was restricted as to its use, which was comprised of $53 million of operating funds in the U.K., as required by the FCA, and $29 million held as collateral for various business purposes. At December 31, 2016, $1.9 billion of Cash and cash equivalents and Short-term investments were held in the U.S. and overdrawn Cash and cash equivalents and Short-term investments of $1.2 billion were held in other countries. Due to differences in tax rates, the repatriation of funds from certain countries into the U.S. could have an unfavorable tax impact.
In our capacity as an insurance broker or agent, we collect premiums from insureds and, after deducting our commission, remit the premiums to the respective insurance underwriters. We also collect claims or refunds from underwriters on behalf of insureds, which are then returned to the insureds. Unremitted insurance premiums and claims are held by us in a fiduciary capacity. In addition, some of our outsourcing agreements require us to hold funds on behalf of clients to pay obligations on their behalf. The levels of fiduciary assets and liabilities can fluctuate significantly depending on when we collect the premiums, claims, and refunds, make payments to underwriters and insureds, and collect funds from clients and make payments on their behalf, and upon the impact of foreign currency movements. Fiduciary assets, because of their nature, are generally invested in very liquid securities with highly-rated, credit-worthy financial institutions. In our Consolidated Statements of Financial Position, the amount we report for Fiduciary assets and Fiduciary liabilities are equal. Our Fiduciary assets included cash and short-term investments of $3.7 billion and $3.3 billion at December 31, 2017 and December 31, 2016, respectively, and fiduciary receivables of $5.9 billion and $5.7 billion at December 31, 2017 and 2016, respectively. While we earn investment income on the fiduciary assets held in cash and investments, the cash and investments cannot be used for general corporate purposes.
As disclosed in Note 15 “Fair Value Measurements and Financial Instruments” of the Notes to Consolidated Financial Statements, the majority of our investments carried at fair value are money market funds. These money market funds are held throughout the world with various financial institutions. We are not aware of any market liquidity issues that would materially impact the fair value of these investments.
As of December 31, 2017, our investments in money market funds had a fair value of $1.8 billion and are reported as Short-term investments or Fiduciary assets in the Consolidated Statements of Financial Position depending on their nature.
The following table summarizes our Fiduciary assets, non-fiduciary Cash and cash equivalents, and Short-term investments as of December 31, 2017 (in millions):
| Statement of Financial Position Classification | |||||||||||||||
| Asset Type | Cash and Cash Equivalents | Short-term Investments | Fiduciary Assets | Total | |||||||||||
| Certificates of deposit, bank deposits or time deposits | $ | 756 | $ | — | $ | 2,425 | $ | 3,181 | |||||||
| Money market funds | — | 529 | 1,318 | 1,847 | |||||||||||
| Cash and short-term investments | 756 | 529 | 3,743 | 5,028 | |||||||||||
| Fiduciary receivables | — | — | 5,882 | 5,882 | |||||||||||
| Total | $ | 756 | $ | 529 | $ | 9,625 | $ | 10,910 |
Share Repurchase Program
The Repurchase Program was established in April 2012 with up to $5.0 billion in authorized repurchases, and was increased by $5.0 billion in authorized repurchases in each of November 2014 and February 2017 for a total of $15.0 billion in repurchase authorizations.
Under the Repurchase Program, Class A Ordinary Shares may be repurchased through the open market or in privately negotiated transactions based on prevailing market conditions, and will be funded from available capital.
During 2017, the Company repurchased 18.0 million shares at an average price per share of $133.67, for a total cost of $2.4 billion and recorded an additional $12.0 million of costs associated with the repurchases to retained earnings. Included in the 18.0 million shares were 118 thousand shares that did not settle until January 2018. These shares were settled at an average price per share of $134.41 and total cost of $15.9 million. During 2016, the Company repurchased 12.2 million shares at an average price
per share of $102.66 for a total cost of $1.3 billion and recorded an additional $6.0 million of costs associated with the repurchases to retained earnings. At December 31, 2017, the remaining authorized amount for share repurchase under the Repurchase Program was $5.4 billion. Under the Repurchase Program, the Company has repurchased a total of 108.2 million shares for an aggregate cost of approximately $9.6 billion.
For information regarding share repurchases made during the fourth quarter of 2017, see Item 5, “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities,” as previously described.
Dividends
During 2017, 2016, and 2015, we paid dividends of $364 million, $345 million, and $323 million, respectively, to holders of our Class A Ordinary Shares. Dividends paid per Class A Ordinary Share were $1.41, $1.29, and $1.15 for the years ended December 31, 2017, 2016, and 2015, respectively.
Distributable Reserves
As a company incorporated in England and Wales, we are required under U.K. law to have available “distributable reserves” to make share repurchases or pay dividends to shareholders. Distributable reserves may be created through the earnings of the U.K. parent company. Distributable reserves are not linked to a U.S. GAAP reported amount (e.g., retained earnings). As of December 31, 2017 and 2016, we had distributable reserves in excess of $1.2 billion and $1.6 billion, respectively. We believe that we will have sufficient distributable reserves to fund shareholder dividends, if and to the extent declared, for the foreseeable future.
Borrowings
Total debt at December 31, 2017 was $6.0 billion, a decrease of $239 million compared to December 31, 2016. Commercial paper activity during the years ended December 31, 2017 and 2016 is as follows:
| Years ended December 31 | 2017 | 2016 | |||||
| Total Issuances | $ | 1,648 | $ | 2,710 | |||
| Total Repayments | $ | (1,997 | ) | $ | (2,424 | ) |
The proceeds of the commercial paper issuances were used primarily for short-term working capital needs.
On May 27, 2016, $500 million of 3.125% Senior Notes due May 2016 issued by Aon Corporation matured and were repaid in full.
On March 1, 2016, Aon plc issued $750 million of 3.875% Senior Notes due December 2025. The Company used the proceeds of the issuance for general corporate purposes.
Credit Facilities
As of December 31, 2017, we had two committed credit facilities outstanding: its $900 million multi-currency U.S. credit facility expiring in February 2021 (the “2021 Facility”) and a $400 million multi-currency U.S. credit facility expiring in October 2022 (the “2022 Facility”). The 2022 Facility was entered into on October 19, 2017. Each of these facilities is intended to support our commercial paper obligations and our general working capital needs. In addition, each of these facilities includes customary representations, warranties, and covenants, including financial covenants that require us to maintain specified ratios of adjusted consolidated EBITDA to consolidated interest expense and consolidated debt to consolidated adjusted EBITDA, tested quarterly. At December 31, 2017, we did not have borrowings under either the 2021 or the 2022 Facility, and we were in compliance with the financial covenants and all other covenants contained therein during the twelve months ended December 31, 2017.
Shelf Registration Statement
On September 3, 2015, we filed a shelf registration statement with the SEC, registering the offer and sale from time to time of an indeterminate amount of, among other securities, debt securities, preference shares, Class A Ordinary Shares, and convertible securities. Our ability to access the market as a source of liquidity is dependent on investor demand, market conditions and other factors.
Rating Agency Ratings
The major rating agencies’ ratings of our debt at February 20, 2018 appear in the table below.
| Senior Long-term Debt | Commercial Paper | Outlook | |||
| Standard & Poor’s | A- | A-2 | Stable | ||
| Moody’s Investor Services | Baa2 | P-2 | Stable | ||
| Fitch, Inc. | BBB+ | F-2 | Stable |
A downgrade in the credit ratings of our senior debt and commercial paper could increase our borrowing costs, reduce or eliminate our access to debt capital, reduce our financial flexibility, increase our commercial paper interest rates, or restrict our access to the commercial paper market altogether, and/or impact future pension contribution requirements.
Guarantees and Indemnifications
Sale of the Divested Business
In connection with the sale of the Divested Business, we guaranteed future operating lease commitments related to certain facilities assumed by the Buyer. We are obligated to perform under the guarantees if the Divested Business defaults on the leases at any time during the remainder of the lease agreements, which expire on various dates through 2024. As of December 31, 2017, the undiscounted maximum potential future payments under the lease guarantee were $100 million, with an estimated fair value of $23 million.
Additionally, we are subject to performance guarantee requirements under certain client arrangements that were assumed by the Buyer. Should the Divested Business fail to perform as required by the terms of the arrangements, we would be required to fulfill the remaining contract terms, which expire on various dates through 2023. As of December 31, 2017, the undiscounted maximum potential future payments under the performance guarantees were $212 million, which an estimated fair value of $1 million.
Letters of Credit and Other Guarantees
We have entered into a number of arrangements whereby our performance on certain obligations is guaranteed by a third party through the issuance of a letter of credit (“LOCs”). We had total LOCs outstanding of approximately $96 million at December 31, 2017, compared to $90 million at December 31, 2016. These LOCs cover the beneficiaries related to certain of our U.S. and Canadian non-qualified pension plan schemes and secure deductible retentions for our own workers compensation program. We also have obtained LOCs to cover contingent payments for taxes and other business obligations to third parties, and other guarantees for miscellaneous purposes at our international subsidiaries.
We have certain contractual contingent guarantees for premium payments owed by clients to certain insurance companies. The maximum exposure with respect to such contractual contingent guarantees was approximately $95 million at December 31, 2017, which is unchanged as compared to December 31, 2016.
Other Liquidity Matters
We do not have material exposure related to off balance sheet arrangements. Our cash flows from operations, borrowing availability, and overall liquidity are subject to risks and uncertainties. See Item 1, “Information Concerning Forward-Looking Statements,” and Item 1A, “Risk Factors.”
Contractual Obligations
Summarized in the table below are our contractual obligations and commitments as of December 31, 2017. Payments by year due are estimated as follows (in millions):
| Payments due in | |||||||||||||||||||
| 2018 | 2019-2020 | 2021-2022 | 2023 and beyond | Total | |||||||||||||||
| Principal payments on debt | $ | 299 | $ | 600 | $ | 400 | $ | 4,770 | $ | 6,069 | |||||||||
| Interest payments on debt | 267 | 526 | 442 | 2,362 | 3,597 | ||||||||||||||
| Operating leases | 277 | 463 | 363 | 613 | 1,716 | ||||||||||||||
| Pension and other postretirement benefit plans | 181 | 388 | 281 | 757 | 1,607 | ||||||||||||||
| Purchase obligations | 191 | 192 | 30 | 33 | 446 | ||||||||||||||
| Total | $ | 1,215 | $ | 2,169 | $ | 1,516 | $ | 8,535 | $ | 13,435 |
Pension and other postretirement benefit plan obligations include estimates of our minimum funding requirements pursuant to the Employee Retirement Income Security Act (“ERISA”) and other regulations, as well as minimum funding requirements agreed with the trustees of our U.K. pension plans. Additional amounts may be agreed to with, or required by, the U.K. pension plan trustees. Nonqualified pension and other postretirement benefit obligations are based on estimated future benefit payments. We may make additional discretionary contributions.
In 2017, our principal U.K. subsidiary agreed with the trustees of one of the U.K. plans to contribute £44 million ($59 million at December 31, 2017 exchange rates) through 2019 which is estimated to bring the plan to 100% funded basis. Contributions were based on the 2016 valuation and no further contributions are forecasted after 2019. The trustees of the plan have certain rights to request that our U.K. subsidiary advance an amount equal to an actuarially determined winding-up deficit. As of December 31, 2017, the estimated winding-up deficit was £122 million ($163 million at December 31, 2017 exchange rates). The trustees of the plan have accepted in practice the agreed-upon schedule of contributions detailed above and have not requested the winding-up deficit be paid.
Purchase obligations are defined as agreements to purchase goods and services that are enforceable and legally binding on us, and that specifies all significant terms, including the goods to be purchased or services to be rendered, the price at which the goods or services are to be rendered, and the timing of the transactions. Most of our purchase obligations are related to purchases of information technology services or other service contracts. Purchase obligations exclude $280 million of liabilities for uncertain tax positions due to our inability to reasonably estimate the period(s) when potential cash settlements will be made.
Financial Condition
At December 31, 2017, our net assets, representing total assets minus total liabilities, were $4.6 billion, a decrease from $5.5 billion at December 31, 2016. The decrease was due primarily to share repurchases of $2.4 billion, and dividends to shareholders of $364 million, partially offset by Net income of $1.3 billion for the year ended December 31, 2017, and a decrease in Accumulated other comprehensive loss of $416 million related primarily to foreign currency translation. Working capital increased by $271 million from $651 million at December 31, 2016 to $922 million at December 31, 2017.
Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss decreased $416 million to $3,496 million at December 31, 2017 as compared to $3,912 million at December 31, 2016, which was primarily driven by the following:
| • | positive net foreign currency translation adjustments of $385 million, which are attributable to the weakening of the U.S. dollar against certain foreign currencies; |
| • | a decrease of $19 million due to the amortization of net actuarial losses related to pension obligations; and |
| • | net financial instrument gains of $12 million. |
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our Consolidated Financial Statements and Notes thereto have been prepared in accordance with U.S. GAAP. To prepare these financial statements, we make estimates, assumptions, and judgments that affect what we report as our assets and liabilities, what we disclose as contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the periods presented.
In accordance with our policies, we regularly evaluate our estimates, assumptions, and judgments, including, but not limited to, those concerning restructuring, revenue recognition, pensions, goodwill and other intangible assets, contingencies, share-based payments, and income taxes, and base our estimates, assumptions, and judgments on our historical experience and on factors we believe reasonable under the circumstances. The results involve judgments about the carrying values of assets and liabilities not readily apparent from other sources. If our assumptions or conditions change, the actual results we report may differ from these estimates. We believe the following critical accounting policies affect the more significant estimates, assumptions, and judgments we use to prepare these Consolidated Financial Statements.
Restructuring
Workforce reduction costs
The method used to account for workforce reduction costs depends on whether the costs result from an ongoing severance plan or are one-time costs. We account for relevant expenses as severance costs when we have an established severance policy, statutory requirements dictate the severance amounts, or we have an established pattern of paying by a specific formula. We recognize these costs when the likelihood of future settlement is probable and the amount of the related benefit is reasonably estimable, or on a straight-line basis over the remaining service period, if applicable.
We estimate our one-time workforce reduction costs related to exit and disposal activities not resulting from an ongoing severance plan based on the benefits available to the employees being terminated. We recognize these costs when we identify the specific classification (or functions) and locations of the employees being terminated, notify the employees who might be included in the termination, and expect to terminate employees within the legally required notification period. When employees are receiving incentives to stay beyond the legally required notification period, we record the cost of their severance over the remaining service period.
Lease consolidation costs
Where we have provided notice of cancellation pursuant to a lease agreement or abandoned space and have no intention of reoccupying it, we recognize a loss. The loss reflects our best estimate of the net present value of the future cash flows associated with the lease at the date we provide notice of cancellation in accordance with contractual terms, vacate the property, or sign a sublease arrangement. To determine the loss, we estimate sublease income based on current market quotes for similar properties. When we finalize definitive agreements with the sublessee, we adjust our sublease losses for actual outcomes.
Fair value concepts of one-time workforce reduction costs and lease losses
Accounting guidance requires that our exit and disposal accruals reflect the fair value of the liability. Where material, we discount the lease loss calculations to arrive at their net present value. Most workforce reductions happen over a short span of time, so no discounting is necessary.
For the remaining lease term, we decrease the liability for payments and increase the liability for accretion of the discount, if material. The discount reflects our incremental borrowing rate, which matches the lifetime of the liability. Significant changes in the discount rate selected or the estimations of sublease income in the case of leases could impact the amounts recorded.
Asset impairments
Asset impairments are accounted for in the period when they become known. Furthermore, we record impairments by reducing the book value to the net present value of future cash flows (in situations where the asset had an identifiable cash flow stream) or accelerating the depreciation to reflect the revised useful life. Asset impairments are included in Depreciation of fixed assets in the Consolidated Statements of Income.
Other associated costs of exit and disposal activities
We recognize other costs associated with exit and disposal activities as they are incurred, including separation costs, moving costs and consulting and legal fees.
Revenue Recognition
Revenues are recognized when they are earned and realized or realizable. The Company considers revenues to be earned and realized or realizable when all of the following four conditions are met: (1) persuasive evidence of an arrangement exists, (2) the arrangement fee is fixed or determinable, (3) delivery or performance has occurred, and (4) collectability is reasonably assured.
For brokerage commissions, revenue is typically recognized at the completion of the placement process or over a period of time based on the transfer of value to customers or as the remuneration becomes determinable, assuming all four criteria required to recognize revenue have been met. The placement process is typically considered complete on the effective date of the related policy. Commission revenues are recorded net of allowances for estimated policy cancellations, which are determined based on an evaluation of historical and current cancellation data.
Fees paid by clients for consulting or other non-brokerage services are typically charged on an hourly, project, or fixed-fee basis. Revenues from time-and-materials or cost-plus arrangements are recognized as services are performed, assuming all four criteria to recognize revenue have been met. Revenues from fixed-fee contracts are recognized as services are provided using a proportional-performance model or at the completion of a project based on facts and circumstances of the client arrangement. Revenues from investment income on funds held on behalf of clients are recognized as services are performed, assuming all four criteria to recognize revenue have been met. Reimbursements received for out-of-pocket expenses are recorded as a component of revenues.
Revenues from health care exchange arrangements are typically recognized upon successful enrollment of participants, net of a reserve for estimated cancellations, assuming all four criteria to recognize revenue have been met.
Pensions
We sponsor defined benefit pension plans throughout the world. Our most significant plans are located in the U.S., the U.K., the Netherlands, and Canada, which are closed to new entrants. We have ceased crediting future benefits relating to salary and services for our U.S., U.K., Netherlands, and Canadian plans to the extent statutorily permitted.
In 2016 and 2017, we used a full-yield curve approach in the estimation of the service and interest cost components of net periodic pension and postretirement benefit cost for our major pension and other postretirement benefit plans; this was obtained by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to the relevant projected cash flows. In 2015 and prior years, we had estimated these components of net periodic pension and postretirement benefit cost by applying a single weighted-average discount rate, derived from the yield curve and used to measure the benefit obligation at the beginning of the period.
Recognition of gains and losses and prior service
Certain changes in the value of the obligation and in the value of plan assets, which may occur due to various factors such as changes in the discount rate and actuarial assumptions, actual demographic experience, and/or plan asset performance are not immediately recognized in net income. Such changes are recognized in Other comprehensive income and are amortized into net income as part of the net periodic benefit cost.
Unrecognized gains and losses that have been deferred in Other comprehensive income, as previously described, are amortized into Compensation and benefits expense as a component of periodic pension expense based on the average life expectancy of the U.S., the Netherlands, Canada, and U.K. plan members. We amortize any prior service expense or credits that arise as a result of plan changes over a period consistent with the amortization of gains and losses.
As of December 31, 2017, our pension plans have deferred losses that have not yet been recognized through income in the Consolidated Financial Statements. We amortize unrecognized actuarial losses outside of a corridor, which is defined as 10% of the greater of market-related value of plan assets or projected benefit obligation. To the extent not offset by future gains, incremental amortization as calculated above will continue to affect future pension expense similarly until fully amortized.
The following table discloses our unrecognized actuarial gains and losses, the number of years over which we are amortizing the experience loss, and the estimated 2018 amortization of loss by country (millions, except amortization period):
| U.K. | U.S. | Other | |||||||||
| Unrecognized actuarial gains and losses | $ | 1,236 | $ | 1,706 | $ | 452 | |||||
| Amortization period | 9 - 29 | 6 - 24 | 13 - 40 | ||||||||
| Estimated 2018 amortization of loss | $ | 30 | $ | 61 | $ | 12 |
The unrecognized prior service cost (credit) at December 31, 2017 was $5 million, $19 million, and $(7) million for the U.S., U.K. and other plans, respectively.
For the U.S. pension plans, we use a market-related valuation of assets approach to determine the expected return on assets, which is a component of net periodic benefit cost recognized in the Consolidated Statements of Income. This approach recognizes 20% of any gains or losses in the current year’s value of market-related assets, with the remaining 80% spread over the next four years. As this approach recognizes gains or losses over a five-year period, the future value of assets and therefore, our net periodic benefit cost will be impacted as previously deferred gains or losses are recorded. As of December 31, 2017, the market-related value of assets was $1.9 billion. We do not use the market-related valuation approach to determine the funded status of the U.S. plans recorded in the Consolidated Statements of Financial Position. Instead, we record and present the funded status in the Consolidated Statements of Financial Position based on the fair value of the plan assets. As of December 31, 2017, the fair value of plan assets was $2.0 billion.
Our non-U.S. plans use fair value to determine expected return on assets.
Rate of return on plan assets and asset allocation
The following table summarizes the expected long-term rate of return on plan assets for future pension expense as of December 31, 2017:
| U.K. | U.S. | Other | |||
| Expected return | 3.34% | 7.71% | 1.70 - 4.85% |
In determining the expected rate of return for the plan assets, we analyze investment-community forecasts and current market conditions to develop expected returns for each of the asset classes used by the plans. In particular, we surveyed multiple third-party financial institutions and consultants to obtain long-term expected returns on each asset class, considered historical performance data by asset class over long periods, and weighted the expected returns for each asset class by target asset allocations of the plans.
The U.S. pension plan asset allocation is based on approved allocations following adopted investment guidelines. The investment policy for U.K. and other non-U.S. pension plans is generally determined by the plans’ trustees. Because there are several pension plans maintained in the U.K. and other non-U.S. categories, our target allocation presents a range of the target allocation of each plan. Target allocations are subject to change.
Impact of changing economic assumptions
Changes in the discount rate and expected return on assets can have a material impact on pension obligations and pension expense.
Holding all other assumptions constant, the following table reflects what a 25 basis point increase and decrease in our estimated discount rate would have on our projected benefit obligation at December 31, 2017 (in millions):
| Estimated liability discount rate Increase (decrease) in projected benefit obligation of December 31, 2017 (1) | 25 bps Change in Discount Rate | ||||||
| Increase | Decrease | ||||||
| U.K. plans | $ | (209 | ) | $ | 223 | ||
| U.S. plans | (95 | ) | 100 | ||||
| Other plans | (58 | ) | 67 |
| (1) | Increases to the projected benefit obligation reflect increases to our pension obligations, while decreases in the projected benefit obligation are recoveries toward fully-funded status. A change in the discount rate has an inverse relationship to the projected benefit obligation. |
Holding all other assumptions constant, the following table reflects what a 25 basis point increase and decrease in our estimated discount rate would have on our estimated 2018 pension expense (in millions):
| 25 bps Change in Discount Rate | |||||||
| Increase (decrease) in expense | Increase | Decrease | |||||
| U.K. plans | $ | (2 | ) | $ | 1 | ||
| U.S. plans | 1 | (1 | ) | ||||
| Other plans | — | — |
Holding other assumptions constant, the following table reflects what a 25 basis point increase and decrease in our estimated long-term rate of return on plan assets would have on our estimated 2018 pension expense (in millions):
| 25 bps Change in Long-Term Rate of Return on Plan Assets | |||||||
| Increase (decrease) in expense | Increase | Decrease | |||||
| U.K. plans | $ | (15 | ) | $ | 15 | ||
| U.S. plans | (5 | ) | 5 | ||||
| Other plans | (3 | ) | 3 |
Estimated future contributions
We estimate cash contributions of approximately $177 million to our pension plans in 2018 as compared with cash contributions of $146 million in 2017.
Goodwill and Other Intangible Assets
Goodwill represents the excess of cost over the fair market value of the net assets acquired. We classify our intangible assets acquired as either tradenames, customer-related and contract-based, or technology and other.
Goodwill is not amortized, but rather tested for impairment at least annually in the fourth quarter. In the fourth quarter, we also test the acquired tradenames for impairment. We test more frequently if there are indicators of impairment or whenever business circumstances suggest that the carrying value of goodwill or trademarks may not be recoverable. These indicators may include a sustained significant decline in our share price and market capitalization, a decline in our expected future cash flows, or a significant adverse change in legal factors or in the business climate, among others. No events occurred during 2017 that indicate the existence of an impairment with respect to our reported goodwill or tradenames.
We perform impairment reviews at the reporting unit level. A reporting unit is an operating segment or one level below an operating segment (referred to as a “component”). A component of an operating segment is a reporting unit if the component constitutes a business for which discrete financial information is available and segment management regularly reviews the operating results of that component. An operating segment shall be deemed to be a reporting unit if all of its components are similar, if none of its components is a reporting unit, or if the segment comprises only a single component.
The goodwill impairment test is initially a qualitative analysis to determine if it is “more likely than not” that the fair value of each reporting unit exceeds the carrying value, including goodwill, of the corresponding reporting unit. If the “more likely than not” threshold is not met, then the goodwill impairment test becomes a two-step analysis. Step 1 requires the fair value of each reporting unit to be compared to its book value. Management must apply judgment in determining the estimated fair value of the reporting units. If the fair value of a reporting unit is determined to be greater than the carrying value of the reporting unit, goodwill and trademarks are deemed not to be impaired and no further testing is necessary. If the fair value of a reporting unit is less than the carrying value, we perform Step 2. Step 2 uses the calculated fair value of the reporting unit to perform a hypothetical purchase price allocation to the fair value of the assets and liabilities of the reporting unit. The difference between the fair value of the reporting unit calculated in Step 1 and the fair value of the underlying assets and liabilities of the reporting unit is the implied fair value of the reporting unit’s goodwill. A charge is recorded in the financial statements if the carrying value of the reporting unit’s goodwill is greater than its implied fair value.
In determining the fair value of our reporting units, we use a discounted cash flow (“DCF”) model based on our most current forecasts. We discount the related cash flow forecasts using the weighted-average cost of capital method at the date of evaluation. Preparation of forecasts and selection of the discount rate for use in the DCF model involve significant judgments, and changes in these estimates could affect the estimated fair value of one or more of our reporting units and could result in a goodwill impairment charge in a future period. We also use market multiples which are obtained from quoted prices of comparable companies to corroborate our DCF model results. The combined estimated fair value of our reporting units from our DCF model often results in a premium over our market capitalization, commonly referred to as a control premium. We believe the implied control premium determined by our impairment analysis is reasonable based upon historic data of premiums paid on actual transactions within our industry. Based on tests performed in both 2017 and 2016, there was no indication of goodwill impairment, and no further testing was required.
We review intangible assets that are being amortized for impairment whenever events or changes in circumstance indicate that their carrying amount may not be recoverable. There were no indications that the carrying values of amortizable intangible assets were impaired as of December 31, 2017. If we are required to record impairment charges in the future, they could materially impact our results of operations.
Contingencies
We define a contingency as an existing condition that involves a degree of uncertainty as to a possible gain or loss that will ultimately be resolved when one or more future events occur or fail to occur. Under U.S. GAAP, we are required to establish reserves for loss contingencies when the loss is probable and we can reasonably estimate its financial impact. We are required to assess the likelihood of material adverse judgments or outcomes, as well as potential ranges or probability of losses. We determine the amount of reserves required, if any, for contingencies after carefully analyzing each individual item. The required reserves may change due to new developments in each issue. We do not recognize gain contingencies until the contingency is resolved and amounts due are probable of collection.
Share-Based Payments
Share-based compensation expense is measured based on the estimated grant date fair value and recognized over the requisite service period for awards that we ultimately expect to vest. We estimate forfeitures at the time of grant based on our actual experience to date and revise our estimates, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
Restricted Share Units
Restricted share units (“RSUs”) are service-based awards for which we recognize the associated compensation cost on a straight-line basis over the requisite service period. We estimate the fair value of the awards based on the market price of the underlying share on the date of grant, reduced by the present value of estimated dividends foregone during the vesting period where applicable.
Performance Share Awards
Performance share awards (“PSAs”) are performance-based awards for which vesting is dependent on the achievement of certain objectives. Such objectives may be made on a personal, group or company level. We estimate the fair value of the awards based on the market price of the underlying stock on the date of grant, reduced by the present value of estimated dividends foregone during the vesting period.
Compensation cost is recognized over the performance period. The number of shares issued on the vesting date will vary depending on the actual performance objectives achieved. We make assessments of future performance using subjective estimates, such as long-term plans. As a result, changes in the underlying assumptions could have a material impact on the compensation expense recognized.
The largest performance-based share-based payment award plan is the Leadership Performance Plan (“LPP”), which has a three-year performance period. The 2015 to 2017 performance period ended on December 31, 2017, the 2014 to 2016 performance period ended on December 31, 2016 and the 2013 to 2015 performance period ended on December 31, 2015. The LPP currently has two open performance periods: 2016 to 2018 and 2017 to 2019. A 10% upward adjustment in our estimated performance achievement percentage for both open performance periods would have increased our 2017 expense by approximately $5.9 million, while a 10% downward adjustment would have decreased our expense by approximately $5.9 million. As the percent of expected performance increases or decreases, the potential change in expense can go from 0% to 200% of the targeted total expense.
Income Taxes
We earn income in numerous countries and this income is subject to the laws of taxing jurisdictions within those countries.
The carrying values of deferred income tax assets and liabilities reflect the application of our income tax accounting policies, and are based on management’s assumptions and estimates about future operating results and levels of taxable income, and judgments regarding the interpretation of the provisions of current accounting principles.
Deferred tax assets are reduced by valuation allowances if, based on the consideration of all available evidence, it is more likely than not that some portion of the deferred tax asset will not be realized. In this assessment, significant weight is given to evidence that can be objectively verified.
We assess carryforwards and tax credits for realization as a reduction of future taxable income by using a “more likely than not” determination.
We base the carrying values of liabilities and assets for income taxes currently payable and receivable on management’s interpretation of applicable tax laws, and incorporate management’s assumptions and judgments about using tax planning strategies in various taxing jurisdictions. Using different estimates, assumptions, and judgments in accounting for income taxes, especially those that deploy tax planning strategies, may result in materially different carrying values of income tax assets and liabilities and changes in our results of operations.
Income Tax Accounting Implications of the Tax Cuts and Jobs Act
On December 22, 2017, the 2017 Tax Cuts and Jobs Act (the “Tax Reform Act”) was enacted into law and the new legislation contains several key tax provisions that impact the Company, including a reduction of the corporate income tax rate to 21% effective for tax years beginning after December 31, 2017 and a one-time mandatory transition tax on accumulated foreign earnings (the “Transition Tax”), among others. The Company is required to recognize the effect of the tax law changes in the period of enactment, including the determination of the transition tax and re-measuring of our U.S. deferred tax assets and liabilities. In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”), which allows registrants to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. Since the Tax Reform Act was passed late in the fourth quarter of 2017 and ongoing guidance and accounting
interpretation is expected over the next 12 months, we consider the accounting for certain items to be provisional due to the forthcoming guidance and our ongoing analysis of final year-end data and tax positions. The Company expects to complete its analysis within the measurement period in accordance with SAB 118. See Note 10 in these notes to the consolidated financial statements for additional information and a detailed description of the items for which the accounting is provisional.
NEW ACCOUNTING PRONOUNCEMENTS
Note 2 “Summary of Significant Accounting Principles and Practices” of the Notes to Consolidated Financial Statements contains a summary of our significant accounting policies, including a discussion of recently issued accounting pronouncements and their impact or future potential impact on our financial results, if determinable.
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