Business context and reporting period
Willis Group Holdings plc’s unaudited Form 10-Q covers the quarter and nine months ended September 30, 2014. The company provides global insurance and reinsurance broking, risk management and consulting services. The filing is under Willis Group Holdings plc, not a registrant named Willis Towers Watson plc.
Key financial results
Amounts are in millions of dollars, except per-share data and percentages. Comparisons are with the corresponding 2013 period.
| Metric | Third quarter 2014 | Third quarter 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $812 | $795 | $2,844 | $2,736 |
| Operating income | $34 | $70 | $508 | $518 |
| Operating margin | 4.2% | 8.8% | 17.9% | 18.9% |
| Net income (loss) attributable to Willis | $(7) | $(27) | $286 | $297 |
| Diluted EPS | $(0.04) | $(0.15) | $1.57 | $1.67 |
| Operating cash flow | Not presented for the quarter | $281 | $366 |
Third-quarter organic commissions and fees grew 2.5%; nine-month organic growth was 3.8%. Nine-month operating cash flow less capital expenditures of $81 million was approximately $200 million. Underlying results are non-GAAP measures: third-quarter underlying operating income was $51 million, with a 6.3% margin, and underlying diluted EPS was $0.14; nine-month underlying operating income was $528 million, with an 18.6% margin, and underlying diluted EPS was $2.02.
At September 30, cash and cash equivalents were $656 million, down from $796 million at December 31, 2013. Total debt was $2.313 billion, including $165 million current debt, versus $2.326 billion total debt at year-end 2013. The $800 million principal revolving facility and the $400 million securities-underwriting facility were undrawn; the latter is restricted to regulatory purposes. Cash includes regulated balances, and fiduciary funds are not available for corporate use. Nine-month investing and financing cash flows were $(117) million and $(283) million, respectively. Interest expense was $101 million for the nine months. The quarterly dividend declared was $0.30 per share.
Material changes versus the prior period
- Third-quarter revenue rose 2.1%, but GAAP operating income fell by $36 million and operating margin declined 4.6 percentage points. Higher salaries and benefits, other operating costs, and $17 million of restructuring charges contributed; corporate and other costs also increased.
- Nine-month revenue increased 3.9%, while operating income declined 1.9% and attributable net income declined 3.7%. Expenses grew faster than revenue; the reported tax rate increased to 31% from 23%, including a $21 million increase in the U.S. deferred-tax valuation allowance.
- Cash from operations fell $85 million year over year, attributed mainly to the nonrecurrence of prior-year derivative cash receipts and higher cash incentive payments. The company spent $200 million on share repurchases during the nine months; cash also reflected dividends, pension contributions and acquisitions.
- Segment results were mixed: nine-month organic commissions and fees grew 4.4% in North America and 6.5% in International, while Global grew 1.9%. Global’s third-quarter operating margin declined to 9.6% from 16.2%.
Outlook, commentary, risks and unusual items
- Management described market conditions as challenging and noted continued softening in reinsurance pricing. Brokerage commissions are linked to insurance premiums, so declining rates may pressure revenue and margins. Management’s strategy emphasizes selective growth investment, cross-selling, analytics and coordinated segment offerings.
- The multiyear Operational Improvement Program is expected to run through 2017. Management maintained estimated savings of $135 million in 2016 and $235 million in 2017; it updated expected savings for 2014 and 2015 to at least $8 million and $60 million, respectively. Actions taken in 2014–2015 are expected to produce about $120 million of annualized savings by program completion. Expected program spend is about $40 million in 2014, $130 million in 2015 and $240 million in 2016–2017. Earlier estimates called for approximately $420 million cumulative savings through 2017, $300 million annualized savings from 2018 and approximately $410 million cumulative charges; estimates and timing remain subject to execution and other changes.
- Management estimated full-year 2014 earnings from associates of $10–$15 million, versus nil in 2013, while cautioning that results are outside its control. Expected full-year 2014 contributions included about $81 million to the UK defined-benefit plan, $25 million to the U.S. plan and $10 million to other plans, in addition to UK salary-sacrifice contributions.
- After quarter-end, Willis completed the acquisition of approximately 75% of Swedish adviser Max Matthiessen for about $198 million. It also completed the sale of selected U.S. retail offices on October 31 for $69 million. Other announced or proposed transactions remained subject to approvals or completion.
- The company disclosed Stanford-related litigation, including claims seeking damages exceeding $1 billion in certain actions. Willis disputes the allegations and intends to defend itself; it does not expect known claims to materially affect overall financial condition, results or liquidity, but acknowledges an adverse outcome could materially affect particular periods. Other risks include errors-and-omissions claims, foreign exchange exposure, debt management, pensions and regulatory scrutiny of market-derived income.
- Foreign currency remeasurement, including a $14 million Venezuelan currency impact in the nine-month period, weighed on other income. The 2013 comparative includes a $60 million debt-extinguishment loss. The company also reclassified certain foreign-exchange and disposal gains or losses below operating income and changed segment reporting from January 2014; prior comparisons were recast. Separate 2013 consolidating information was restated for presentation matters.
Important facts for investors to verify
- Reconcile reported GAAP results with management’s underlying non-GAAP measures and review the exclusions used in those calculations.
- Track delivery of the restructuring program’s savings against its substantial projected costs, schedule and workforce and real-estate targets.
- Assess operating cash generation, the 2015 debt maturity, liquidity available for general corporate use, and planned dividends, buybacks and pension funding.
- Monitor insurance and reinsurance pricing, segment growth and margins, foreign-exchange effects, and the higher tax charge and U.S. valuation allowance.
- Follow the Stanford litigation and regulatory risks, and confirm the post-quarter acquisition and disposal terms and integration outcomes.