Willis Group Holdings plc — Q2 2010 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2010. The filing is for Willis Group Holdings plc, now associated with the Willis Towers Watson name. The company provides insurance and reinsurance broking, risk management and consulting services globally. Financial statements are unaudited and prepared under U.S. GAAP; first-half results may not indicate full-year performance. Amounts below are in U.S. dollars.
Financial performance
- Q2 revenue: $799 million, up 2% from $784 million. Commissions and fees were $789 million, up 2%; organic commissions and fees growth was 4%. Investment income declined to $10 million from $12 million.
- Q2 earnings: Operating income was $169 million versus $165 million; operating margin was 21% in both periods. Net income attributable to Willis was $89 million versus $87 million. Diluted EPS from continuing operations was $0.52, unchanged.
- First-half revenue: $1.771 billion, up 3% from $1.714 billion; organic commissions and fees growth was 4%. First-half operating income rose to $470 million from $439 million, and operating margin improved to 27% from 26%.
- First-half earnings: Net income attributable to Willis was $293 million versus $280 million; diluted EPS from continuing operations was $1.71 versus $1.66. Interest in earnings of associates fell to $18 million from $26 million, largely following the reduction in Willis’s Gras Savoye ownership.
- Cash flow: First-half operating cash flow was $156 million, down from $208 million. Investing activities used $57 million, compared with $15 million; financing activities used $137 million, compared with $270 million. Cash decreased by $52 million from year-end to $139 million.
- Debt and liquidity: Total debt was $2.347 billion at June 30, versus $2.374 billion at year-end; equity was $2.429 billion versus $2.229 billion. The reported capitalization ratio improved to 49% from 52%. The company reported $139 million of cash and $270 million of availability under its $300 million revolving facility. Restricted fiduciary funds of $1.977 billion are held for third parties and generally are not available for corporate purposes.
- Other metrics: The quarterly dividend remained $0.26 per share. First-half cash dividends paid were $89 million. The company paid $185 million in cash retention awards during the half; $217 million of unamortized awards remained in other assets at June 30.
Changes versus comparable periods
- Q2 organic growth was strongest in International (8%) and Global (7%); North America recorded negative 1% organic growth. First-half organic growth was 7% in Global, 6% in International and flat in North America.
- Q2 consolidated margin was unchanged year over year despite organic growth and cost controls, reflecting higher incentive and pension expenses and investment in growth. First-half margin improved one percentage point, with cost control and organic growth partly offset by lower legacy HRH contingent commissions, higher incentive and share-based compensation costs, and the Venezuela charge.
- First-half operating cash flow declined, with the filing identifying incentive payments—including higher cash retention awards—and working-capital movements as relevant factors.
- Total debt declined modestly. The company made $70 million of first-half debt repayments, including mandatory term-loan amortization, and repaid the remaining $83 million of 5.125% senior notes due July 2010 after quarter-end.
Outlook, commentary and risks
- Management said market conditions remained difficult and expected them to remain challenging through the rest of 2010. Priorities were revenue growth, execution of Shaping Our Future and Funding for Growth initiatives, and strengthening the balance sheet and reducing debt relative to EBITDA. The filing provides no numerical earnings or revenue guidance.
- Management believed available liquidity was sufficient for at least the next 12 months, based on then-current conditions. It identified scheduled term-loan repayments totaling $110 million over the 12 months following June 30, in addition to the July note repayment already made.
- Insurance premium levels and soft-market conditions can affect commissions and margins; North America was particularly affected by weak economic conditions, lower insured activity and declining rates. Foreign-exchange movements, interest rates, client and employee retention, pension funding, competition, regulation and the ability to realize cost-saving and growth initiatives are also cited risks.
- Unusual items: A $12 million first-half charge followed Venezuela’s currency devaluation and hyperinflationary designation. Severance costs were $11 million for the first half, relating to about 320 positions eliminated or planned for elimination. The filing also reports higher retention-award amortization and share-based compensation versus the prior year.
- Contingencies: Willis disclosed errors-and-omissions, employment, regulatory and other litigation. It said it did not expect known matters to have a material adverse effect on financial condition, results or liquidity, but cautioned that adverse outcomes could materially affect results or cash flows in particular periods. Stanford-related investor suits allege substantial damages, including claims exceeding $1 billion; outcomes could not be predicted. In the St. Jude matter, potential claims against Willis relate to up to $50 million plus interest and costs if the insurer is not found liable. Prior ARIC and CNA reinsurance disputes were settled; the ARIC settlement was funded by E&O insurance, and Willis said it believed CNA settlement costs would be fully recovered from insurers.
- The company stated that disclosure controls were effective and that no material change in internal control over financial reporting occurred during the quarter. It reported no material changes to the risk factors in its 2009 Form 10-K.
Important facts for investors to verify
- Track organic growth, rate impacts and retention by segment, particularly continued weakness in North America and the variability of WCMA transaction revenues.
- Assess debt reduction, upcoming maturities, revolver availability and the effect of incentive payments on cash generation; distinguish corporate cash from restricted fiduciary funds.
- Monitor cash retention awards, pension contributions and expenses, and whether reported margin gains persist after these costs.
- Follow litigation and insurance recoveries, including Stanford-related claims and the St. Jude matter; the filing does not quantify a clear ultimate exposure for these unresolved proceedings.
- Evaluate the $12 million Venezuela charge and currency exposure, as well as the sensitivity of revenue and expenses to insurance pricing, interest rates and foreign exchange.