WILLIS TOWERS WATSON PLC annual report, FY2011

Vollständiges Dokument

Business context and reporting period

Willis Group Holdings plc’s Form 10-K covers the fiscal year ended December 31, 2011; it is an annual report, not a standalone fourth-quarter filing. The company is an Ireland-incorporated global insurance and reinsurance broker and risk adviser, operating through Global, North America and International segments. The filing predates the company’s later Willis Towers Watson name.

Financial performance and liquidity

Unless otherwise stated, amounts are in U.S. dollars. The company reported FY2011 total revenue of $3.447 billion, up 3% from $3.332 billion in 2010. Commissions and fees rose 4% to $3.414 billion, while investment income fell 18% to $31 million. Organic commissions and fees growth was 2%.

  • Profit: Operating income was $566 million, down from $753 million; GAAP operating margin fell to 16.4% from 22.6%. Income from continuing operations attributable to Willis shareholders was $203 million, versus $455 million. Diluted continuing-operations EPS was $1.15, versus $2.66.
  • Adjusted results: Adjusted operating income was $775 million and adjusted operating margin was 22.5%, compared with $767 million and 23.0% in 2010. Adjusted net income was $482 million versus $470 million; adjusted diluted EPS was $2.74 versus $2.75. These are non-GAAP measures.
  • Cash flow and investment: Net cash provided by operating activities was $439 million, down from $489 million. Capital expenditures were $111 million, up from $83 million. Cash and cash equivalents ended the year at $436 million, compared with $316 million.
  • Debt and liquidity: Total debt was $2.369 billion, up from $2.267 billion; interest expense was $156 million. The company had $520 million available under revolving credit facilities, but stated that only about $100 million of its cash was available for general corporate purposes. Management said liquidity was sufficient for at least 12 months.
  • Other balance-sheet measures: Total assets were $15.728 billion and total equity was $2.517 billion. Goodwill was $3.295 billion. Fiduciary assets and liabilities were each $9.338 billion; fiduciary funds are held for third parties and are not available for corporate purposes.
  • Shareholder returns: The declared dividend was $1.04 per share for 2011; a February 2012 dividend increased the quarterly rate to $0.27. No shares were repurchased in 2011; the company announced plans to buy back up to $100 million in 2012.

Material changes versus the prior comparable period

  • Global revenue increased 9%, with 7% organic growth; International revenue increased 10%, with 5% organic growth. North America revenue declined 4%, including a 4% decline in organic commissions and fees. Loan Protector reduced North America revenue by $27 million.
  • Expenses increased $302 million to $2.881 billion. Key contributors included the $180 million 2011 Operational Review, higher cash-retention award amortization, reinstated U.S. 401(k) matching, an $11 million U.K. Financial Services Authority (FSA) settlement, and a $22 million write-off of an uncollectible receivable.
  • The company recorded $171 million of make-whole and debt-issuance-cost charges associated with refinancing and retiring $500 million of 12.875% senior notes. Interest expense nevertheless declined by $10 million year over year, reflecting lower-cost replacement debt and other factors.
  • Cash from operating activities decreased by $50 million, principally reflecting slower U.S. receivable collections, about $120 million of cash outflows related to the Operational Review, and higher retention-award payments.
  • In December, the company refinanced its bank facilities with a five-year $300 million term loan and a five-year $500 million revolving facility. It also issued $800 million of senior notes in March and used proceeds in part to retire the higher-coupon notes.
  • The U.S. pension liability increased, and the U.K. pension asset declined. The company reported a $172 million pension funding adjustment in other comprehensive loss; pension assumptions and market movements affected funded status.

Outlook, commentary, risks and unusual items

  • Outlook: No formal revenue or earnings guidance is provided. Management expected approximately $135 million of annualized savings from the 2011 Operational Review beginning in 2012, including about $55 million of incremental savings versus 2011. Management described early-2012 firming in some reinsurance and specialty lines, but did not expect a broad market-rate turn absent a significant catastrophe loss or industry capital impairment.
  • Operational Review: The $180 million charge included severance related to approximately 1,200 positions and other compensation, property, systems and sourcing costs. The company reported about $80 million of savings realized in 2011.
  • Revenue correction and investigation: In early 2012, the company identified an approximately $28 million uncollectible receivable associated with apparent fraudulent commission and fee overstatements from 2005–2011 in a stand-alone unit. It recorded a $22 million write-off, reversed $6 million of 2011 commissions and fees, and reversed $2 million of accrued production bonuses. Management said prior-period statements were not materially affected and reported enhanced controls and an ongoing investigation.
  • Regulatory matters: The U.K. FSA imposed a £7 million ($11 million) fine for shortcomings in controls and documentation relating to payments to overseas third parties. The company continued an internal review of payments from 2005–2009 and cooperation with U.S. regulators; outcomes remained uncertain.
  • Litigation and contingencies: The company disclosed errors-and-omissions claims, Stanford Financial Group litigation, and other legal matters. It said outcomes were unpredictable, though it did not expect known claims to have a material adverse effect overall. The Stanford claims include demands for substantial damages.
  • Key business risks: A soft insurance market, weak economic conditions and Eurozone instability; competition and pressure on commissions; reliance on key brokers and client retention; debt covenants and refinancing access; pension funding needs; foreign-exchange exposure; regulatory and litigation exposure; and possible goodwill impairment. North America goodwill fair value exceeded carrying value by about 14% at the annual test, but deterioration in assumptions could result in future impairment.
  • Compensation policy: Willis planned to accept all forms of compensation from Employee Benefits providers starting April 1, 2012, while continuing to refuse contingent commissions in other retail brokerage areas unless external conditions made that position untenable.

Important facts for investors to verify

  1. Reconcile the reported decline in GAAP earnings with the $180 million Operational Review charge, $171 million debt-retirement-related charge, receivable write-off and other items; assess the relevance of management’s non-GAAP adjustments.
  2. Track the results of the investigation into the apparent historical revenue overstatement, the final amount of any adjustments, and whether enhanced controls operate effectively.
  3. Test whether the projected $135 million of annualized Operational Review savings are achieved and whether they offset ongoing compensation and investment costs.
  4. Monitor North America organic growth, Loan Protector performance, client retention and the goodwill valuation cushion.
  5. Assess cash available for corporate use separately from fiduciary funds, and compare operating cash flow and receivable collections with debt service, dividends and expected 2012 pension contributions of about $142 million.
  6. Follow the U.S. regulatory discussions, Stanford litigation and other contingencies, as well as the effect of the revised Employee Benefits compensation policy.

The financial statements received an unqualified audit opinion, and the auditor also reported an unqualified opinion on internal control over financial reporting as of December 31, 2011.