Willis Towers Watson plc — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Unaudited results; comparison is with the three months ended March 31, 2020. WTW is a global advisory, broking and solutions company. Amounts are in U.S. dollars.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change or context |
|---|---|---|---|
| Revenue | $2.590 billion | $2.466 billion | Up 5% reported; organic growth was 4% |
| Income from operations | $452 million | $360 million | Operating margin 17.5%, versus 14.6% |
| Adjusted operating income | $579 million | $525 million | Adjusted operating margin 22.4%, versus 21.3% |
| Net income attributable to WTW | $733 million | $305 million | Includes a substantial gain on the Miller divestiture |
| Diluted EPS | $5.63 | $2.34 | Adjusted diluted EPS was $3.64, versus $3.34 |
| Cash from operating activities | $(128) million | $23 million | Free cash flow was $(165) million, versus $(43) million |
| Cash and cash equivalents | $1.960 billion | $2.089 billion at Dec. 31, 2020 | Quarter-end balance |
| Total debt | $5.103 billion | $5.635 billion at Dec. 31, 2020 | Capitalization ratio fell to 30.7% from 34.2% |
Other income, net was $439 million, compared with $92 million a year earlier. It included a $359 million gain on disposal of operations; the Miller sale generated a reported net tax-exempt gain of $356 million. The 11.5% effective tax rate, down from 20.0%, was primarily affected by the tax-exempt Miller disposal. Consequently, reported net income and EPS are not a direct measure of recurring operating performance.
Segments and material changes
- Human Capital and Benefits: Revenue of $875 million, up 3% reported but flat organically. Retirement and Health and Benefits were broadly flat organically; Talent and Rewards declined nominally.
- Corporate Risk and Broking: Revenue of $810 million, up 10% reported and 5% organically, led by growth in Great Britain, international markets and North America.
- Investment, Risk and Reinsurance: Revenue of $605 million, down 2% reported but up 4% organically. Divestitures reduced reported revenue; organic growth included reinsurance and advisory activity.
- Benefits Delivery and Administration: Revenue of $287 million, up 24% reported and 23% organically, led by Individual Marketplace, including TRANZACT, and Benefits Outsourcing.
Consolidated revenue growth included an $86 million currency-translation benefit. Salaries and benefits rose 9% to $1.523 billion, while other operating expenses fell 14% to $417 million, mainly reflecting lower travel, bad debt and professional fees. Transaction and integration expenses were $24 million, primarily related to the proposed Aon combination.
Cash, debt and liquidity
Operating cash flow was negative despite net income of $736 million; WTW attributed the decline versus the prior year mainly to $185 million of net legal settlement payments and higher bonus payments and benefit-related items. Investing cash flow was $645 million, primarily reflecting $696 million of net proceeds from the Miller sale. Financing cash outflow was $633 million, including repayment of $500 million of senior notes and $92 million of dividends.
WTW reported $1.25 billion of available capacity under its revolving credit facility and said it expected sufficient liquidity for the next 12 months. A $450 million note and $21 million collateralized-facility balance were due within the next 12 months; the revolver expires March 7, 2022. The company said it was in compliance with financial covenants. Fiduciary assets and corresponding liabilities were each $15.911 billion; fiduciary funds are generally unavailable for corporate purposes.
Outlook, risks and unusual items
- Management expected COVID-19 to continue negatively affecting revenue and operating results in fiscal 2021, particularly discretionary consulting and project work. It cited potential client-payment delays, reduced demand, and increased professional-liability exposure from coverage disputes.
- The proposed Aon acquisition remained subject to regulatory approvals and other closing conditions. Shareholders of both companies had approved it; the parties expected closing by the end of the first half of 2021, subject to conditions. The stated exchange ratio was 1.08 Aon shares per WTW share.
- WTW described insurance pricing as showing a “modest but definite improvement.” It did not provide a quantified full-year revenue or earnings forecast in the supplied filing text.
- The company completed the sale of Miller on March 1, 2021, for final total consideration of £623 million (about $818 million), including amounts paid to the minority shareholder. Net proceeds reported in investing cash flow were $696 million.
- A $90 million aggregate settlement of merger-related shareholder litigation had been placed in escrow; final court approval was pending. WTW also disclosed ongoing competition proceedings in Brazil, while noting that it did not expect any liability, if any, to be material. Management cautioned that adverse litigation outcomes could affect results or cash flows in particular periods.
- Other noted exposures include seasonality, foreign exchange, cybersecurity and data privacy, competition, key-employee departures, pension obligations and the LIBOR transition. Management said no material changes to previously disclosed risk factors or market-risk exposures occurred during the quarter.
Most important facts for investors to verify
- Whether the Aon transaction received required regulatory approvals and closed on the expected timeline and terms.
- Underlying earnings and margins excluding the Miller gain, and whether organic growth persists across segments.
- Cash conversion, receivables collection and working-capital trends following the negative first-quarter operating cash flow.
- Funding of upcoming debt maturities and the timing and terms of the revolving-credit-facility renewal.
- COVID-19 effects on discretionary demand, client payments and professional-liability exposure, along with outcomes of the litigation and regulatory matters disclosed.