Willis Towers Watson plc — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; filed May 3, 2019. Unaudited results. WTW is a global advisory, broking and solutions company operating in more than 140 countries. Amounts below are in U.S. dollars unless noted.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $2.312 billion | $2.292 billion | Up 1% reported; 5% organic |
| Income from operations | $359 million | $259 million | Up $100 million |
| Operating margin | 15.5% | 11.3% | Up 4.2 percentage points |
| Net income attributable to WTW | $287 million | $215 million | Up 33% |
| Diluted EPS | $2.20 | $1.61 | Up 37% |
| Adjusted operating income | $492 million | $443 million | Up 11% |
| Adjusted EBITDA | $601 million | $557 million | Up 8% |
| Adjusted diluted EPS | $2.98 | $2.71 | Up 10% |
Foreign currency translation reduced reported revenue by $84 million. Management attributed organic growth to strong performance across all segments. Reported operating income benefited from lower costs, particularly the absence of $43 million of prior-year merger integration expenses; Q1 2019 included $6 million of TRANZACT transaction costs. Salaries and benefits declined to 58% of revenue from 60%.
Cash flow, liquidity and debt
- Operating cash flow was negative $47 million, versus positive $18 million a year earlier; free cash flow was negative $104 million versus negative $47 million. Management cited the timing of tax payments and pension contributions and higher bonus payments.
- Investing cash outflow was $75 million; financing cash inflow was $82 million, including $138 million of net revolving-facility borrowings and $77 million of dividends paid. Cash and cash equivalents ended the quarter at $992 million, down from $1.033 billion at year-end.
- Total debt was $4.705 billion ($187 million current and $4.518 billion long-term), up from $4.575 billion at December 31, 2018. The company reported compliance with all financial covenants.
- WTW had $977 million available under its $1.25 billion revolving credit facility. It stated that available liquidity was sufficient for expected needs over the next 12 months.
- Fiduciary assets and liabilities were each $15.129 billion; these funds are held for third parties and are not available for corporate purposes. Cash also includes amounts subject to regulatory capital requirements.
Material changes and business developments
- Revenue growth varied by segment: HCB was $829 million, down slightly reported but up 3% organically; CRB was $728 million, down 2% reported and up 4% organically; IRR was $589 million, up 3% reported and 5% organically; BDA was $135 million, up 10% reported and organically.
- On January 1, 2019, WTW adopted the new lease standard, recognizing $1.2 billion of lease liabilities and $1.0 billion of right-of-use assets at adoption. At March 31, reported right-of-use assets were $946 million and lease liabilities were $1.119 billion for operating leases, plus $14 million of finance-lease assets and $28 million of finance-lease liabilities.
- The board approved a quarterly dividend of $0.65 per share, paid April 15, 2019. No shares were repurchased in the quarter; approximately $399 million remained under the repurchase authorization.
Outlook, risks and contingencies
- WTW described insurance pricing as modestly higher across most lines and said demand for broking and consulting services generally remains steady during uncertainty. Management noted that exchange-market growth had slowed and might continue to do so in 2019. The filing does not provide a specific consolidated revenue or earnings forecast.
- The pending TRANZACT acquisition, announced March 30, is expected to close in Q3 2019, subject to conditions. Consideration is $1.2 billion at closing, including $100 million payable at WTW’s option in cash or shares, plus a potential earn-out of up to $200 million in 2021. WTW secured up to $1.1 billion in one-year unsecured term-loan financing. The company identified integration, regulatory, competitive and execution risks.
- The $120 million Stanford-related litigation settlement remains contingent on appellate outcomes and final effectiveness of court-approved bar orders. WTW said it will not pay until appeals are decided in its favor and no further appeal is available. The filing identifies possible legal and regulatory exposures, including aviation-broking competition investigations in the EU, Korea and Brazil; it provides no reasonably possible loss estimate for those investigations.
- The company cited Brexit uncertainty, foreign-exchange movements, litigation and regulatory matters, cybersecurity and data privacy, competition, acquisitions, pension funding and debt-related risks. It said its disclosure controls were effective and that there were no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the TRANZACT acquisition closes on the expected schedule and on the disclosed terms, and how its financing affects debt and future earnings.
- How much Q1 earnings growth reflects recurring operating improvement versus lower integration costs and other adjustments; compare GAAP results with management’s non-GAAP measures.
- Whether operating cash flow improves after the timing-related tax, pension and bonus outflows, and how seasonal working-capital movements affect annual cash generation.
- Developments in the Stanford settlement appeals and competition investigations, including any change in potential liability or cash requirements.
- The effects of foreign exchange, Brexit and the new lease accounting standard on future reported results, liquidity and comparability.