Willis Group Holdings plc — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; unaudited, with comparisons to Q1 2011. Willis provides insurance and reinsurance brokerage, risk management, and consulting services through Global, North America, and International segments. Amounts are in U.S. dollars; financial figures are in millions unless stated otherwise.
Financial performance and position
| Metric | Q1 2012 | Q1 2011 / comparison |
|---|---|---|
| Total revenue | $1,013 | $1,007; up 1% |
| Commissions and fees | $1,005 | $999; organic growth 2%, or 3% excluding Loan Protector |
| Operating income / margin | $317 / 31.3% | $239 / 23.7% |
| Adjusted operating income / margin | $330 / 32.6% | $332 / 33.0% |
| Net income attributable to Willis shareholders | $225 | $34; continuing-operations diluted EPS was $1.28 versus $0.20 |
| Adjusted net income / diluted EPS from continuing operations | $233 / $1.32 | $224 / $1.29 |
| Cash from continuing operating activities | $62 | $7 |
| Cash and cash equivalents at period end | $464 | $436 at Dec. 31, 2011 |
| Total debt | $2,452 | $2,369 at Dec. 31, 2011 |
| Total equity / capitalization ratio | $2,704 / 47.8% | $2,517 / 48.8% at Dec. 31, 2011 |
Investing activities used $37 million, including $36 million of fixed-asset additions. Operating cash less investing outflows was positive $25 million, compared with negative $17 million in Q1 2011. Financing cash flow was approximately zero: an $85 million revolving-facility draw and $11 million of share-issuance proceeds were offset by dividends, repurchases, debt repayments, and purchases of noncontrolling interests.
Fiduciary assets and matching liabilities were each $10.368 billion at March 31; fiduciary funds are held for third parties and are not available for corporate debt service or other general purposes. The company reported $415 million of remaining availability under its revolving facilities, in addition to cash. Its stated current ratio would therefore be distorted by fiduciary balances.
Material changes and operating drivers
- Revenue growth was modest: organic commissions and fees rose 2%, with a 1% adverse foreign-currency effect. Global organic growth was 5% and International 4%; North America declined 2%, but grew 1% excluding Loan Protector.
- Loan Protector continued to weaken amid client attrition and consolidation, industry commission pressure, and slower U.S. foreclosures. Management said it did not consider this business representative of operations.
- Reported operating income improved substantially, principally because Q1 2011 included $97 million of 2011 Operational Review costs and a $171 million debt make-whole and debt-cost write-off. Q1 2012 included a $13 million receivable write-off and related legal costs. Adjusted operating income was slightly lower year over year and adjusted margin declined 0.4 percentage points.
- Q1 2012 salaries and benefits fell $77 million year over year, mainly because the prior-year operational-review costs did not recur; higher amortization of cash retention awards partly offset the decrease. Interest expense declined to $32 million from $40 million, primarily reflecting lower-cost debt and hedging gains.
- Segment operating margins were 48.1% Global (48.9% prior year), 23.5% North America (23.7%), and 27.7% International (29.8%). International’s lower margin reflected UK retail weakness, higher incentive costs, currency effects, and growth investment.
Outlook, risks, contingencies, and unusual items
- Outlook and management commentary: No specific full-year revenue, earnings, or margin guidance is provided in the supplied filing text. Management described firming rates in catastrophe-exposed property and reinsurance and some business lines, but said a broad market-rate turn was unlikely without significant catastrophe losses or industry capital impairment. It believed liquidity was sufficient for at least the next 12 months.
- Debt and capital: Debt included $2.05 billion of fixed-rate senior notes, a $298 million term loan, and $85 million drawn on the $500 million revolving facility. Management cited ongoing debt repayment and shareholder returns as objectives. The company announced a 2012 buyback plan of up to $100 million; it repurchased 600,000 shares for about $19 million in Q1 and reported one million shares repurchased for approximately $35 million by May 4. The April-declared quarterly dividend was $0.27 per share.
- Pensions: The revised UK pension funding schedule calls for approximately $81 million of 2012 contributions, excluding salary-sacrifice amounts, including $58 million toward the deficit. Additional contributions may depend on EBITDA above $900 million and exceptional shareholder returns; specified deficit and profit-share contributions are capped at £312 million ($499 million) over six years. Expected 2012 contributions were approximately $40 million for the U.S. plans and $12 million for international plans.
- Revenue overstatement and controls: An internal investigation found fraudulent commission overstatements totaling $40 million, covering 2004–2011, in a stand-alone business unit. Management concluded prior issued statements were not materially affected; it recorded an additional $13 million Q1 2012 charge, including legal costs, and said the investigation was complete, implicated employees were terminated, and controls were enhanced. Management said it found no evidence of misappropriated client or carrier funds or effects on other business units.
- Legal and regulatory matters: The contingent-compensation class settlement received court approval on March 30, 2012; the company’s payment was described as immaterial and previously reserved. Stanford-related investor litigation remained unresolved, including claims seeking damages exceeding $1 billion in one action; the Fifth Circuit reversed and remanded related dismissals, and rehearing petitions were denied. Willis disputed the allegations and said outcomes could not be predicted. The filing said ordinary-course claims could adversely affect particular periods, although management did not expect known claims to materially harm overall financial condition, results, or liquidity.
- Other regulatory and market risks: Willis had previously settled a U.K. FSA investigation with a £7 million fine and was conducting a further internal review of payments from 2005–2009; it could not assure that future compliance issues would not affect business in certain jurisdictions. Risks also include insurance-market softness, premium and foreign-exchange changes, client and employee retention, significant indebtedness, pension obligations, litigation, and information-system disruption.
- Other unusual items: The Q1 2012 effective tax rate was 24%, versus 4% in Q1 2011, when debt-redemption expense and its related tax credit materially affected the rate. Q1 2012 acquisitions and disposals involving Gras Savoye Re and the Peru retail operation had an immaterial net impact on quarterly results.
Important facts for investors to verify
- Reconcile reported earnings growth with the prior-year operational-review and debt-refinancing charges; assess adjusted results and the small decline in adjusted operating margin.
- Track organic growth by segment, especially North America’s performance excluding Loan Protector and the continuing Loan Protector decline.
- Monitor cash conversion, capital expenditure, revolving-credit usage, debt maturities, and the distinction between unrestricted cash and fiduciary funds.
- Confirm actual pension contributions and any additional UK-plan payments linked to profits or shareholder distributions.
- Follow the receivable-fraud control remediation and any subsequent developments in Stanford litigation or the compliance review.
- Assess the sustainability of buybacks and dividends against debt-reduction objectives, liquidity, and pension funding needs.