Business context and reporting period
Willis Towers Watson plc (WTW) is a global advisory, broking and solutions company serving clients in people, risk and capital. This unaudited Form 10-Q covers the three and nine months ended September 30, 2022; amounts are in U.S. dollars unless stated otherwise. WTW reports two segments: Health, Wealth & Career (HWC) and Risk & Broking (R&B). Revenue is typically seasonally higher in the first and fourth quarters.
Financial performance
| Metric | Three months ended Sept. 30, 2022 | Three months ended Sept. 30, 2021 | Nine months ended Sept. 30, 2022 | Nine months ended Sept. 30, 2021 |
|---|---|---|---|---|
| Revenue | $1,953 million | $1,973 million | $6,144 million | $6,292 million |
| Income from operations | $154 million | $1,131 million | $470 million | $1,512 million |
| Adjusted operating income (non-GAAP) | $284 million | $264 million | $969 million | $920 million |
| Adjusted operating margin (non-GAAP) | 14.5% | 13.4% | 15.8% | 14.6% |
| Net income attributable to WTW | $190 million | $903 million | $421 million | $1,820 million |
| Diluted EPS | $1.72 | $6.99 | $3.71 | $14.00 |
| Adjusted diluted EPS (non-GAAP) | $2.20 | $1.73 | $7.20 | $6.04 |
| Operating cash flow | Not presented quarterly | $437 million | $1,877 million | |
| Free cash flow (non-GAAP) | Not presented quarterly | $337 million | $1,768 million |
Reported revenue declined 1% in the quarter and 2% year to date; organic revenue growth was 6% and 3%, respectively. Foreign exchange reduced revenue by $100 million in the quarter and $239 million year to date. Segment revenue was $1,162 million for HWC and $765 million for R&B in the quarter; nine-month segment revenue was $3,565 million and $2,508 million, respectively.
GAAP operating income and net income comparisons are heavily affected by the prior-year $1 billion receipt related to termination of the proposed Aon combination. The nine-month comparison also reflects the prior-year $356 million gain on the Miller sale and higher Willis Re discontinued-operations earnings. Adjusted operating income rose, mainly due to lower incentive and compensation costs, partly offset by lower revenue. Adjusted EBITDA was $408 million versus $415 million in the quarter and $1,376 million versus $1,369 million for nine months; adjusted EBITDA margin was 20.9% versus 21.0% and 22.4% versus 21.8%, respectively.
Balance sheet, debt and liquidity
At September 30, 2022, cash and cash equivalents were $1.496 billion, down from $4.486 billion at December 31, 2021. Total debt was $4.720 billion ($250 million current and $4.470 billion long-term), compared with $4.587 billion at year-end. Shareholders’ equity was $9.838 billion, down from $13.260 billion; the capitalization ratio increased to 32.4% from 25.7%, principally reflecting share repurchases. The $1.5 billion revolving credit facility was undrawn, and WTW reported compliance with financial covenants. $250 million of senior notes is due in 2023.
Nine-month financing cash outflow was $3.109 billion, including $3.090 billion of share repurchases and $280 million of dividends; WTW issued $750 million of 4.65% notes due 2027 and repaid 2022 notes. Management stated that available liquidity, including the revolver, should cover anticipated needs for the next 12 months. Fiduciary funds are held for clients and are not available for general corporate use: the $4.671 billion cash, cash equivalents and restricted-cash total includes fiduciary funds, while balance-sheet cash and cash equivalents were $1.496 billion.
Outlook, management commentary and notable matters
- Transformation: WTW expects annual cost savings exceeding $360 million by the end of 2024, against approximately $630 million of cumulative costs and $270 million of capital expenditures (total investment of $900 million). By September 30, it had identified $100 million of annualized run-rate savings, including $29 million identified during the quarter. These are expectations, not guaranteed outcomes.
- Russia: WTW completed the transfer of its Russian subsidiaries to local management in July 2022 and does not expect to resume operations there in the foreseeable future. Management estimates an annualized revenue impact of approximately $120 million; the business had operating margins more than twice the enterprise average. The exit included a $57 million disposal loss and $81 million of impairment charges.
- Willis Re: The treaty-reinsurance sale to Gallagher closed principally in December 2021, with deferred closings largely completed in 2022. Final purchase-price and indemnity amounts were remitted in October 2022. A potential earnout of up to $750 million is payable in 2025, subject to adjustments, and was not recorded as a receivable.
- Conditions and risks: Management cited inflation, rising interest rates, possible recession, geopolitical uncertainty, currency movements and competition for talent as potential pressures on costs, demand, margins, collections and liquidity. It noted modest overall insurance-market price increases, but broking revenue remains sensitive to market rates and client activity. Prior-year book-of-business sales and departures of key colleagues may also weigh on growth, particularly in R&B.
- Legal and other contingencies: Provisions for claims, lawsuits and other proceedings were $365 million at September 30. Management does not expect known matters to have a material adverse effect overall, but cautions that particular outcomes could materially affect results or cash flows in a period.
- Other items: The quarterly effective tax rate was 0.7%, including discrete tax benefits; the nine-month rate was 12.1%. Rising short-term rates improved interest income on fiduciary funds. No numerical full-year revenue or earnings guidance is provided in the supplied filing text.
Most important facts for investors to verify
- Whether organic growth, segment performance and reported results remain resilient after currency effects and disposals, especially the Russia exit and Willis Re sale.
- Whether the Transformation program delivers its targeted savings on schedule and within the stated $900 million total investment.
- Cash conversion and liquidity trends: nine-month operating cash flow fell to $437 million, while share repurchases materially reduced cash and equity.
- Debt maturities, refinancing costs and the effect of higher interest rates; distinguish corporate cash from fiduciary funds that are unavailable for general use.
- The assumptions behind adjusted/non-GAAP measures, the tax benefits affecting reported rates, and the timing and amount of any Gallagher earnout or remaining sale adjustments.
- Developments in litigation, regulatory matters, sanctions, inflation, talent retention and other risks that could affect margins, client demand or cash flows.