Willis Towers Watson plc — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019; filed November 1, 2019. WTW is a global advisory, broking and solutions company. Results include TRANZACT from its July 30, 2019 acquisition date. Amounts are U.S. dollars; figures are in millions except per-share data.
Financial results and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $1,989 | $1,859 | $6,349 | $6,141 |
| Income from operations | $107 | $17 | $642 | $339 |
| Net income attributable to WTW | $75 | $44 | $500 | $317 |
| Diluted EPS | $0.58 | $0.33 | $3.84 | $2.39 |
| Operating margin | 5.4% | 0.9% | 10.1% | 5.5% |
Organic revenue growth, a non-GAAP measure excluding currency and acquisitions or disposals, was 6% in Q3 and 5% for the nine-month period. GAAP revenue increased 7% and 3%, respectively; currency translation reduced revenue by $36 million and $171 million.
- Cash flow: Nine-month operating cash flow was $620 million versus $716 million; capital expenditure and internal-use software additions were $175 million, resulting in reported free cash flow of $445 million versus $507 million. Management attributed lower cash generation chiefly to tax-payment timing, higher first-quarter bonus payments and unfavorable working-capital changes.
- Liquidity: Cash and cash equivalents were $867 million at September 30, down from $1,033 million at year-end 2018. The company reported $1.2 billion available under its $1.25 billion revolving facility. It stated that liquidity was sufficient for expected needs over the next 12 months. Fiduciary assets of $13.8 billion are matched by fiduciary liabilities and are generally unavailable for corporate use.
- Debt: Total debt was $5,865 million, up from $4,575 million at year-end; cash less total debt implies net debt of approximately $5.0 billion. The capitalization ratio rose to 37.2% from 31.7%. Approximately $467 million of term-loan debt and $21 million of collateralized-facility debt were due within 12 months. WTW reported compliance with financial covenants.
- Other balance-sheet items: Total assets were $35,703 million and equity was $10,001 million. WTW adopted lease accounting in 2019, recognizing lease liabilities and right-of-use assets; September 30 lease liabilities totaled $1,134 million.
Material changes and business drivers
- Q3 operating income rose $90 million, with higher revenue and the absence of $50 million of prior-year integration costs among the main factors. Nine-month operating income increased $303 million; the prior-year period included $148 million of transaction and integration costs. Higher interest expense and taxes partly offset improvement in earnings.
- Q3 segment revenue was HCB $807 million, CRB $651 million, IRR $325 million and BDA $179 million. Management cited broad growth across segments. BDA’s reported growth included TRANZACT; TRANZACT contributed $51 million of revenue after acquisition and BDA recorded a $21 million segment operating loss for the quarter.
- WTW acquired TRANZACT for $1.3 billion in cash, with potential additional earn-out consideration of up to $17 million. The acquisition added $785 million of goodwill and $646 million of identifiable intangible assets on a preliminary basis. Acquisition financing and subsequent debt issuance increased indebtedness.
Outlook, management commentary and risks
- No specific full-year revenue, earnings or EPS guidance is stated in the supplied filing text. Management described a goal of significantly increasing free cash flow for the year, but said achieving it depended meaningfully on billing, collection and working-capital initiatives.
- Management reported modest but definite improvement in insurance-market pricing and cited growth across segments. It cautioned that revenue is seasonal, typically higher in the first and fourth quarters, and that marketplace growth had slowed.
- TRANZACT’s direct-to-consumer Medicare revenue includes estimated renewal commissions that may extend for up to 25 years. The estimate uses an actuarial model and involves significant judgment; actual policy renewal experience may differ.
- The $120 million Stanford litigation settlement remained subject to further appeal; WTW said it would not pay until appeals ended. The filing identifies risks that settlement approval or bar orders could be overturned or challenged, and that the related charge may not be tax deductible.
- WTW disclosed ongoing competition investigations involving aviation broking in the EU, Korea and Brazil; it could not estimate reasonably possible losses. The company also identified merger-related litigation, regulatory and legal matters, Brexit uncertainty, cyber and data-privacy risks, acquisition-integration risks, and LIBOR transition exposure.
- Management said disclosure controls were effective, but excluded TRANZACT controls from the quarter’s evaluation while integration proceeds. Management also warned that the interim results are not necessarily indicative of full-year results.
Most important facts for investors to verify
- Whether working-capital and collection improvements support management’s free-cash-flow objective, given nine-month free cash flow declined to $445 million.
- TRANZACT’s integration progress, contribution to BDA results, and the reliability of estimated lifetime renewal commissions.
- Debt repayment and refinancing needs, including the term loan due in 2020, and continued covenant compliance.
- The outcome and potential financial impact of Stanford litigation appeals and the aviation-broking investigations.
- The full-year implications of seasonality, currency movements, tax rates and the lack of quantified guidance in this filing.