Willis Towers Watson plc — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. WTW is a global advisory, broking and solutions company. Amounts below are in U.S. dollars; financial statements are unaudited.
Financial performance and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $2.048 billion | $1.990 billion | $4.360 billion | $4.282 billion |
| Income from operations | $176 million | $63 million | $535 million | $322 million |
| Net income attributable to WTW | $138 million | $58 million | $425 million | $273 million |
| Diluted EPS | $1.06 | $0.44 | $3.26 | $2.05 |
| Adjusted operating income | $299 million | $258 million | $791 million | $701 million |
| Adjusted operating margin | 14.6% | 13.0% | 18.1% | 16.4% |
| Adjusted EBITDA | $425 million | $392 million | $1.026 billion | $949 million |
Reported revenue rose 3% in Q2 and 2% year to date. Management reported organic revenue growth of 6% and 5%, respectively; foreign currency translation reduced revenue by $51 million in Q2 and $135 million year to date. GAAP operating margin was 8.6% in Q2 versus 3.2% and 12.3% year to date versus 7.5%.
For the first six months, operating cash flow was $303 million, down from $395 million. Free cash flow, a non-GAAP measure, was $183 million versus $254 million. Investing cash outflow was $148 million and financing cash outflow was $374 million. Management attributed weaker operating cash flow principally to the timing of tax and bonus payments and flat collections despite higher revenue.
At June 30, cash and cash equivalents were $812 million, compared with $1.033 billion at year-end 2018. Total debt was $4.471 billion, down from $4.575 billion; WTW reported compliance with all financial covenants. It had $1.2 billion available under its $1.25 billion revolving facility and a $187 million senior-note repayment due in 2019. Total lease liabilities were $1.122 billion. Fiduciary assets and matching liabilities were each $14.609 billion; fiduciary funds are generally restricted and unavailable for corporate purposes.
Segment trends and changes versus prior period
- Human Capital and Benefits: Q2 revenue was $797 million, up 2% reported and 5% organic; six-month revenue was $1.626 billion, up 1% reported and 4% organic. Growth included health and benefits, talent and rewards, and technology and administration solutions; retirement revenue was softer.
- Corporate Risk and Broking: Q2 revenue was $690 million, up 2% reported and 5% organic; six-month revenue was $1.418 billion, approximately flat reported and 5% organic. Management cited new business and renewal performance across regions.
- Investment, Risk and Reinsurance: Q2 revenue was $409 million, up 6% reported and 8% organic; six-month revenue was $998 million, up 4% reported and 6% organic. Management cited growth across business lines.
- Benefits Delivery and Administration: Q2 revenue was $126 million, up 6%; six-month revenue was $261 million, up 8%. Management cited client-base expansion and project demand.
Profit improvement reflected organic growth and lower expenses, including the absence of prior-year integration costs ($55 million in Q2 2018 and $98 million in the first half of 2018). The effective tax rate increased to 19.7% for Q2 and 19.1% year to date, primarily due to additional taxes on global intangible low-taxed income. Interest expense also rose, which WTW attributed to higher interest rates on additional senior notes issued in 2018.
Outlook, events and risks
- WTW gave no specific forward earnings or revenue guidance in the provided filing text. Management said it was targeting a significant increase in full-year free cash flow, but success depended materially on improving billing, collections and working capital.
- Management described insurance pricing as showing a modest improvement and noted slower growth in parts of the employer-sponsored marketplace. Revenue is seasonal, typically stronger in the first and fourth quarters due largely to broking activity.
- TRANZACT acquisition: completed July 30, 2019, after quarter-end, for $1.3 billion cash at closing. Revised terms included approximately $118 million of upfront non-contingent consideration and a potential earn-out of up to approximately $17 million. Funding included a $1.1 billion one-year term loan, the revolver and free cash flow. WTW expects near-term share repurchases primarily to offset employee share-plan dilution.
- WTW adopted the new lease standard on January 1, 2019, recognizing $1.2 billion of lease liabilities and $1.0 billion of right-of-use assets at transition. This materially changed balance-sheet presentation without an adjustment to retained earnings.
- Legal and regulatory matters include the Stanford litigation settlement and aviation-broking competition investigations in the EU, Korea and Brazil. The Fifth Circuit affirmed approval of the Stanford settlement and bar orders on July 22, 2019; WTW said it would not pay the $120 million settlement until no further appeal is available. The filing says potential losses from the competition investigations could not be estimated.
- Other cited risks include TRANZACT integration and healthcare regulation, Brexit uncertainty, cyber and data-privacy exposure, competition, litigation, foreign exchange, pension obligations and the LIBOR transition. WTW said the CMA’s U.K. investment-consulting remedies were being implemented and were not expected to have a material financial impact.
Important facts for investors to verify
- Whether working-capital initiatives improve collections and deliver the stated full-year free-cash-flow objective.
- Post-acquisition leverage, interest expense, integration progress and realized performance of TRANZACT against its purchase price and earn-out terms.
- Final resolution and payment timing of the Stanford settlement, including any further appeal, and developments in aviation-broking investigations.
- How foreign exchange, Brexit, tax changes and higher GILTI-related taxes affect reported results and cash generation.
- Whether the increase in earnings and adjusted margins is sustained, considering seasonality, prior-year integration costs and the company’s non-GAAP adjustments.