Willis Towers Watson plc — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Unaudited results are presented under U.S. GAAP. WTW is a global advisory, broking and solutions company, with Health, Wealth & Career (HWC) and Risk & Broking (R&B) as its reportable segments. Revenue is seasonal, typically higher in the first and fourth quarters.
Financial results and key metrics
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $2.159B | $2.031B | $4.403B | $4.191B |
| Organic revenue growth | 7% | Not stated | 8% | Not stated |
| Income from operations | $142M | $137M | $427M | $316M |
| Operating margin, GAAP | 6.6% | 6.7% | 9.7% | 7.5% |
| Adjusted operating income / margin | $315M / 14.6% | $314M / 15.5% | $733M / 16.6% | $685M / 16.3% |
| Net income attributable to WTW | $94M | $109M | $297M | $231M |
| Diluted EPS from continuing operations | $0.88 | $1.38 | $2.77 | $2.31 |
| Adjusted diluted EPS | $2.05 | $2.32 | $4.89 | $4.99 |
| Adjusted EBITDA / margin | $411M / 19.0% | $450M / 22.2% | $914M / 20.8% | $968M / 23.1% |
| Operating cash flow | Not separately stated | Not separately stated | $430M | $258M |
| Free cash flow | Not separately stated | Not separately stated | $350M | $198M |
- Segment performance: Q2 HWC revenue was $1.215B, up 5%, and segment operating income was $222M versus $217M. R&B revenue was $900M, up 6%, while segment operating income fell to $145M from $168M. For the first half, segment revenue grew 4% at HWC and 3% at R&B as reported; organic growth was 6% and 8%, respectively. Segment operating income was $531M at HWC and $325M at R&B.
- Balance sheet at June 30: Cash and cash equivalents were $1.602B; current and long-term debt totaled $5.464B; shareholders’ equity was $9.799B. The company reported $8.608B of fiduciary assets, matched by fiduciary liabilities; fiduciary funds are held for clients and generally are not available for corporate purposes.
- Cash flow: First-half capital additions to fixed assets and internal-use software were $80M, and capitalized software costs were $41M. The $1.035B investing cash outflow included $916M transferred in connection with the Willis Re arrangements. Financing included $454M of share repurchases and $177M of dividends.
Material changes versus prior comparable periods
- Revenue increased 6% in Q2 and 5% in the first half as reported; organic growth was 7% and 8%, respectively. Management attributed growth to both segments and higher interest income.
- Q2 GAAP operating income edged higher, but operating margin declined. Adjusted operating income was nearly unchanged and adjusted margin fell 0.9 percentage points. Adjusted EPS and adjusted EBITDA declined in both the quarter and first half, despite higher revenue.
- First-half GAAP operating income and net income improved year over year, reflecting higher revenue, the absence of the prior-year $81M Russian-business-related impairment, and lower restructuring costs. These benefits were partly offset by higher transformation-related expense, compensation and other operating costs.
- Other income, net decreased to $35M from $93M in Q2 and to $60M from $120M in the first half, primarily due to lower pension income. Q2 2022 also included a discontinued-operations loss of $46M related to Willis Re; there was no such loss in Q2 2023.
- Debt increased from $4.721B at year-end 2022 to $5.464B at June 30, 2023. WTW issued $750M of 5.350% notes due 2033, with approximately $742M net proceeds; stated uses included repayment of $250M of notes maturing in Q3 2023 and general corporate purposes.
Outlook, management commentary, risks and unusual items
- Transformation program: WTW now expects annual cost savings in excess of $380M by the end of 2024, against estimated cumulative costs of approximately $630M and capital expenditures of approximately $270M. The company reported $277M of cumulative annualized run-rate savings identified since program inception, including $53M in additional annualized savings identified during Q2. Q2 and first-half transaction and transformation costs were $93M and $152M, respectively.
- Liquidity and capital allocation: Management said available cash, operating cash flow and the undrawn $1.5B revolving credit facility are expected to cover needs for the next 12 months, including debt repayments, investment, repurchases and dividends. The revolver was undrawn and WTW reported compliance with financial covenants. Approximately $889M remained under the share repurchase authorization at June 30. The company estimated $110M–$140M of additional fixed-asset and internal-use software expenditures for the rest of 2023.
- Market conditions and risks: Management described modest but definite insurance-market pricing increases, while warning that inflation, labor and financing costs, interest rates, economic weakness or recession, geopolitical tensions, currency movements, cybersecurity and regulatory matters could affect demand, costs, margins and liquidity. Broking revenue is sensitive to insurance pricing and client buying patterns.
- Willis Re divestiture: All Willis Re businesses had transferred to Gallagher by 2022; a June 2023 side letter ended co-broking agreements and transferred $4.5B of fiduciary assets and liabilities, including $868M of fiduciary cash. The remaining non-fiduciary amounts were to be finalized in Q3 2023. A potential earnout of up to $750M is payable in 2025 subject to adjustments; WTW recorded no receivable and will recognize it if received.
- Legal and regulatory matters: WTW said ordinary-course claims and proceedings are not expected to have a material adverse effect overall based on current information, but adverse outcomes could materially affect results or cash flows in a particular period. The filing also reports a $1,296.73 payment attributable to Iranian carriers in a 2009 reinsurance pool, arising from a 2021 claims payment. A WTW affiliate made a voluntary self-disclosure to OFAC and said it intends to cooperate.
- Other: WTW disclosed no material change in market-risk exposure and no material change in internal control over financial reporting during the quarter. The filing provides no specific full-year revenue or EPS guidance.
Important facts for investors to verify
- Whether transformation savings are realized on schedule and offset the program’s remaining costs and investment.
- Whether R&B segment operating income and consolidated adjusted margins recover, given Q2 declines despite revenue growth.
- How WTW will fund or refinance the $250M 2023 and $650M 2024 note maturities, and how debt and interest expense evolve.
- Final settlement of the Willis Re non-fiduciary transfer in Q3 2023, ongoing transition-service obligations, and the conditions for any 2025 earnout.
- Whether first-half working-capital-driven cash flow and free cash flow are sustained; fiduciary balances should not be treated as freely available corporate liquidity.
- Developments in the OFAC matter, litigation and regulatory investigations, and the impact of inflation, interest rates, currency and insurance-market pricing.