Business context and reporting period
Willis Towers Watson plc (WTW) is a global advisory, broking and solutions company operating in Health, Wealth & Career (HWC) and Risk & Broking (R&B). This unaudited Form 10-Q covers the three months ended March 31, 2024; comparisons are with the first quarter of 2023 unless noted. Revenue is seasonal and typically higher in the first and fourth quarters.
Financial performance
| Metric | Q1 2024 | Q1 2023 |
|---|---|---|
| Revenue | $2.341 billion | $2.244 billion |
| Operating income; margin | $280 million; 12.0% | $285 million; 12.7% |
| Income before taxes | $242 million | $256 million |
| Net income attributable to WTW | $190 million | $203 million |
| Diluted EPS | $1.83 | $1.88 |
| Operating cash flow | $24 million | $134 million |
| Free cash flow (company-defined) | $(9) million | $92 million |
Revenue increased 4% as reported and 5% organically; organic growth was 4% excluding the contribution from interest income. Segment revenue was $1.336 billion for HWC, up 4%, and $978 million for R&B, up 8%. R&B growth reflected client retention and new business; HWC growth included benefits, wealth and career offerings.
Adjusted operating income, a non-GAAP measure, rose to $483 million from $418 million, and adjusted operating margin increased to 20.6% from 18.6%. Adjusted EBITDA was $568 million versus $503 million; adjusted diluted EPS was $3.29 versus $2.84. These measures exclude specified costs, including restructuring and transaction and transformation costs; they are not substitutes for GAAP results.
Financial position, liquidity and capital allocation
At March 31, 2024, cash and cash equivalents were $1.893 billion, versus $1.424 billion at year-end 2023. This excludes fiduciary assets: fiduciary assets and matching liabilities were each $9.940 billion. Fiduciary funds are generally unavailable for corporate purposes. Total debt was $5.957 billion, up from $5.217 billion at year-end; shareholders’ equity was $9.489 billion. The company reported an undrawn $1.5 billion revolving credit facility and compliance with financial covenants.
WTW issued $750 million of 5.900% senior notes due 2054 in March, receiving approximately $739 million net. Proceeds were intended primarily to repay $650 million of 3.600% notes due in the second quarter of 2024, with the balance for general corporate purposes. The filing reports $64 million of quarterly interest expense, up from $54 million.
Operating cash flow fell to $24 million, principally reflecting transformation-related cash outflows and discretionary compensation payments; changes in operating assets and liabilities were a net $353 million use of cash. Investing activities used $74 million, including fixed-asset and software spending. Financing activities provided $1.556 billion, including $1.011 billion of net fiduciary-fund proceeds and the debt issuance. WTW repurchased $101 million of shares and paid $86 million of dividends in the quarter. The board approved a $0.88-per-share quarterly dividend, paid April 15, 2024, and approximately $1.2 billion remained under the repurchase authorization.
Material changes and management commentary
Revenue growth did not translate into higher GAAP operating or net income. Transaction and transformation costs rose to $125 million from $59 million, restructuring costs to $18 million from $3 million, and interest expense increased. Management attributed the higher transformation costs mainly to increased consulting and compensation costs. Salaries and benefits were $1.342 billion, up $29 million, while salaries and benefits declined to 57% of revenue from 59%.
The multi-year Transformation program targets annual cost savings in excess of $425 million by year-end 2024, against expected cumulative program costs of approximately $995 million and capital expenditures of approximately $130 million. WTW reported $370 million of cumulative identified annualized run-rate savings since program inception, including $33 million of additional savings identified in Q1 2024. Program costs and savings remain dependent on execution.
Outlook, risks and contingencies
- Management stated it believes available cash, operating cash flow and the undrawn revolving facility are sufficient for the next 12 months, including business investment, debt repayment, buybacks and dividends. It estimated $140–$165 million of additional fixed-asset and internal-software expenditures for the remainder of 2024.
- WTW described broking markets as stabilizing overall. It cautioned that insurance pricing cycles, economic conditions, inflation, interest rates, geopolitical conflicts and currency movements can affect revenue, costs, margins and liquidity. The filing provides no specific consolidated revenue or earnings guidance for future periods.
- The filing discusses regulatory uncertainty for Medicare-related business. CMS issued its Contract Year 2025 Medicare Advantage and Part D Final Rule on April 4, 2024; changes to broker compensation could affect revenue or create compliance and litigation exposure. A Department of Labor fiduciary rule issued April 23, 2024 may also affect certain businesses. Both events occurred after quarter-end.
- WTW reported $377 million of provisions for liabilities, including $313 million for claims, lawsuits and other proceedings. Management did not expect known legal matters to have a material adverse effect overall on financial condition, results or liquidity, but noted an adverse outcome could materially affect a particular period.
- Other cited risks include cybersecurity and data privacy, competition, regulatory change, execution of the Transformation program, foreign exchange exposure and the ongoing transition-services arrangements following the Willis Re sale. The Willis Re transition-services agreement was scheduled to run through May 31, 2024, subject to possible extension.
Important facts for investors to verify
- Whether reported Transformation savings are realized, and whether the program meets its savings, cost and timing expectations.
- Whether operating cash flow and free cash flow recover from Q1 levels, including the effects of working capital and transformation spending.
- Completion and terms of repayment of the $650 million notes due in Q2 2024, and subsequent debt, interest and liquidity levels.
- The financial and operational impact of the CMS 2025 Final Rule and the Department of Labor Retirement Security Rule on Medicare and other affected businesses.
- How much cash is available for corporate use after separating it from fiduciary funds, and the continued capacity for dividends and share repurchases.