Willis Group Holdings plc — Form 10-Q Summary
Filing identity: The supplied filing is for Willis Group Holdings plc, for the quarter ended September 30, 2013. The company name in the request metadata, Willis Towers Watson plc, does not match the registrant named in this 2013 filing.
Business context and reporting period
Willis provides insurance and reinsurance brokerage, risk management, and consulting services worldwide. It reports three segments: Global, North America, and International. This unaudited filing covers the three and nine months ended September 30, 2013, with comparisons to the same 2012 periods.
Financial performance and position
| Metric | Third quarter 2013 | Nine months 2013 |
|---|---|---|
| Total revenue | $795 million, up 5.4% | $2.736 billion, up 4.9% |
| Organic commissions and fees growth | 5.7% | 5.3% |
| Operating income / margin | $75 million / 9.4% | $533 million / 19.5% |
| Net income attributable to Willis | Loss of $27 million | $297 million |
| Diluted EPS from continuing operations | Loss of $0.15 | $1.67 |
| Adjusted operating margin | 9.6% | 21.2% |
| Adjusted net income / diluted EPS | $34 million / $0.19 | $396 million / $2.22 |
Adjusted measures are non-GAAP. For the first nine months, adjusted net income was up 5.6% and adjusted diluted EPS up 4.2% year over year, while reported continuing-operations net income attributable to shareholders and diluted EPS declined 17.0% and 17.7%, respectively.
For the third quarter, Global, North America, and International organic commissions and fees growth was 6.4%, 3.9%, and 7.8%, respectively. International reported an operating loss of $9 million for the quarter; its nine-month operating income fell to $104 million from $112 million.
Nine-month operating cash flow was $366 million, versus $310 million in 2012; investing cash outflow was $105 million and financing cash outflow was $132 million. Cash and equivalents were $623 million at September 30, including $509 million available for corporate purposes and $114 million held in regulated UK entities. Fiduciary assets and liabilities were each $9.197 billion; fiduciary funds are generally unavailable for corporate use.
Total debt was $2.332 billion, compared with $2.353 billion at December 31, 2012. Stockholders’ equity was $2.024 billion, up from $1.699 billion; the reported capitalization ratio declined to 53.5% from 58.1%. Current assets and liabilities include large, substantially matched fiduciary balances, so headline current-asset totals do not represent freely available liquidity.
Material changes versus the prior comparable period
- Third-quarter revenue rose 5.4%, but total expenses rose 5.3%. Salaries and benefits increased 7.8%, with management citing headcount, annual pay reviews, remuneration-policy changes, and higher incentive expense.
- Third-quarter results included a $60 million GAAP loss on extinguishment of debt (the MD&A describes $61 million including fees). This drove a swing from $26 million of net income in the 2012 quarter to a $27 million loss in 2013. Excluding specified items, adjusted quarterly net income was $34 million versus $38 million.
- Nine-month operating income declined to $533 million from $566 million, and reported operating margin fell to 19.5% from 21.7%. Management attributed expense growth in part to the $46 million Expense Reduction Initiative charge and other specified items.
- Debt refinancing issued $250 million of 4.625% notes due 2023 and $275 million of 6.125% notes due 2043; proceeds funded tenders for certain 2015, 2017, and 2019 notes. The company also extended its $800 million revolving credit facility to 2018 and extended the maturity of its term loan to 2018. The new revolving facility was undrawn at quarter-end; $2 million was outstanding under revolving facilities overall.
- Nine-month operating cash flow increased, while financing outflow was lower than in 2012. The company paid $144 million of dividends and $125 million in defined-benefit pension contributions; it also received $105 million from share issuance.
Outlook, commentary, risks, and unusual items
- Management said liquidity was sufficient for expected cash needs over the next 12 months. It stated a goal of investing for growth, pursuing tuck-in acquisitions, increasing dividends over time, maintaining an investment-grade rating, and considering share repurchases; no overall revenue or earnings guidance was provided.
- The 2013 Expense Reduction Initiative eliminated 207 positions and generated a $46 million charge. Management said it expected no further charge from the review and anticipated prospective annualized savings of approximately $25 million to $30 million.
- Management described market conditions as challenging, citing softening or variable insurance pricing, increased reinsurance capital and complexity, and economic weakness in parts of Europe. It highlighted exposure to insurance-market conditions, client retention, foreign exchange, interest rates, debt, pensions, regulatory matters, and litigation.
- For 2013, management expected approximately $88 million of UK defined-benefit plan contributions, $40 million to the US plan, and $11 million to international and US non-qualified plans. It estimated associate results would be a $1 million to $3 million loss for full-year 2013, versus a $5 million profit in 2012.
- The company faced 13 Stanford-related lawsuits and disclosed a new October 2013 action seeking more than $1 billion in actual damages, plus punitive damages and costs. Willis disputed the allegations; outcomes were not predictable. The Supreme Court had heard argument in a related case, with a ruling expected in late 2013 or early 2014.
- The filing also discusses a European Commission coinsurance-market inquiry and a further internal review following a 2011 UK regulatory settlement. Management did not expect the latter review to result in material fines or sanctions but gave no assurance about the outcome.
- In October 2013, after quarter-end, the company completed the sale of its UK small-commercial-client book, CBT. The filing says there were no material changes to the risk factors previously disclosed in the 2012 Form 10-K.
Important facts for investors to verify
- Confirm that Willis Group Holdings plc, rather than the metadata-named Willis Towers Watson plc, is the intended issuer for this filing.
- Reconcile GAAP results with management’s non-GAAP adjusted results, especially the debt-extinguishment charge and the $46 million restructuring-related charge.
- Review debt maturities, refinancing terms, covenant headroom, and the effect of the tender premium on cash and earnings.
- Assess the sustainability of organic growth and margins by segment, particularly International’s quarterly operating loss and Global’s margin decline.
- Track whether projected expense savings are realized and whether pension contributions, incentive payments, and dividends remain supported by cash generation.
- Monitor Stanford litigation and regulatory matters, including possible effects on earnings, cash flows, or reputation; the filing does not quantify a clear potential loss for these matters.