Willis Towers Watson plc — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2018. Amounts are U.S. dollars; financial statements are unaudited. WTW is a global advisory, broking and solutions provider operating across Human Capital and Benefits, Corporate Risk and Broking, Investment, Risk and Reinsurance, and Benefits Delivery and Administration.
Financial performance and liquidity
| Metric | Three months ended Sept. 30, 2018 | Three months ended Sept. 30, 2017 | Nine months ended Sept. 30, 2018 | Nine months ended Sept. 30, 2017 |
|---|---|---|---|---|
| Revenue | $1,859 million | $1,852 million | $6,141 million | $6,124 million |
| Income/(loss) from operations | $17 million | $(26) million | $339 million | $436 million |
| Net income/(loss) attributable to WTW | $44 million | $(54) million | $317 million | $323 million |
| Diluted EPS | $0.33 | $(0.40) | $2.39 | $2.36 |
| Operating cash flow | Not presented for the quarter | Not presented for the quarter | $716 million | $515 million |
Reported operating margin was approximately 0.9% for the quarter and 5.5% year to date; attributable net margin was approximately 2.4% and 5.2%, respectively (calculated from reported figures). Nine-month free cash flow, a company-defined non-GAAP measure, was $507 million, versus $317 million in 2017.
At September 30, cash and cash equivalents were $931 million, total debt was $4.684 billion, and shareholders’ equity was $10.049 billion. Approximately $1.0 billion remained available under the $1.25 billion revolving credit facility. The company reported compliance with its financial covenants and said it expected available liquidity to meet needs over the next 12 months. The $13.146 billion of fiduciary assets is matched by fiduciary liabilities and is not available for corporate use. The current portion of debt included $186 million of 7.000% senior notes due in 2019.
Changes versus the prior comparable period
- Reported revenue was nearly flat year over year for both the quarter and nine-month period. WTW reported organic revenue growth of 5% for the quarter and 4% year to date, excluding currency, acquisitions and divestitures, and the ASC 606 adoption effect.
- ASC 606 was adopted January 1, 2018 using the modified retrospective method; 2017 comparisons were not restated. The standard reduced 2018 revenue by $42 million for the quarter and $333 million year to date compared with results without adoption. It reduced operating income by $49 million and $358 million, respectively. On the company’s without-ASC-606 presentation, nine-month operating income was $697 million versus $436 million in 2017.
- Quarterly reported operating income improved from a loss, while year-to-date reported operating income declined. Lower restructuring and transaction/integration costs and lower amortization supported results; higher salaries and benefits and interest expense were offsets. WTW attributed growth in adjusted results to organic growth across segments.
- Operating cash flow increased $201 million year over year, which management primarily attributed to customer cash collections. Cash declined from $1.030 billion at year-end, mainly due to share repurchases, dividends and capital spending.
Outlook, commentary and notable items
- The filing gives no specific full-year revenue or earnings guidance. Management noted that revenue is typically highest in the first and fourth quarters because of broking activity; ASC 606 also shifts a significant portion of Medicare broking revenue into the fourth quarter.
- WTW issued $1.0 billion of senior notes in September 2018: $600 million of 4.500% notes due 2028 and $400 million of 5.050% notes due 2048. Net proceeds were used to repay the term loan and reduce revolver borrowings. The board approved a quarterly dividend of $0.60 per share, paid October 15, 2018. The company repurchased shares for $401 million during the first nine months and had approximately $599 million remaining under its authorization.
- Capital spending on fixed assets and internal-use software was $209 million year to date; management estimated another $70–$80 million for the rest of 2018. In October, WTW agreed to acquire London specialty (re)insurance broker Alston Gayler and expected the transaction to close in the fourth quarter.
- Key contingencies include the Stanford-related litigation settlement of $120 million. Payment is contingent on final resolution of appeals concerning settlement approval and bar orders; the company said it would not pay until appeals were resolved in its favor and no further appeal remained. Oral argument was scheduled for December 3, 2018, and the ultimate outcome was uncertain. WTW also reported $494 million in provisions for claims, lawsuits and other proceedings overall.
- The $40 million settlement with the City of Houston was paid in April 2018; the $9.75 million CalPERS-related class settlement was paid in June 2018. A European Commission competition investigation into aviation and aerospace broking and a U.K. Competition & Markets Authority investment-consulting investigation remained ongoing; WTW could not estimate potential losses. The FCA said it would not take enforcement action over related broking regulatory matters.
- Other risks highlighted include Brexit-related operational and regulatory changes, possible sanctions affecting Russia and other markets, litigation and regulatory exposure, currency movements, competition, integration and execution risks, and pension funding. The company’s accounting for U.S. Tax Reform remained incomplete, although it said estimated GILTI expense was not expected to be material. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Assess underlying growth and profitability using ASC 606-adjusted and organic measures alongside GAAP results; the adoption materially changed revenue timing and period comparability.
- Track fourth-quarter Medicare broking revenue and the effect of the accounting-related seasonal shift.
- Monitor the Stanford settlement appeals, any associated payment, and the status of competition investigations and other significant legal matters.
- Verify debt repayment and refinancing needs, including the $186 million of notes due in 2019, liquidity availability, and planned capital spending and shareholder returns.
- Follow completion and integration of the Alston Gayler acquisition, Brexit preparations, and any material updates to tax estimates or pension obligations.