Willis Towers Watson plc — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. WTW is a global advisory, broking and solutions company. Results are unaudited. Revenue is seasonal, typically higher in the first and fourth quarters.
Financial performance
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $2.292 billion | $2.319 billion |
| Operating income | $259 million | $401 million |
| Net income attributable to WTW | $215 million | $344 million |
| Diluted EPS | $1.61 | $2.50 |
| Operating cash flow | $18 million | $95 million |
| Free cash flow | $(47) million | $33 million |
GAAP operating margin was approximately 11.3%, versus 17.3% a year earlier. The comparison is materially affected by adoption of ASC 606: WTW reported that the new standard reduced Q1 2018 revenue by $259 million, operating income by $279 million, net income by $226 million and diluted EPS by $1.70 versus the prior accounting method. Without ASC 606, revenue would have been $2.551 billion, operating income $538 million, net income attributable to WTW $441 million and diluted EPS $3.31. WTW reported 6% organic revenue growth, excluding currency, acquisitions/divestitures and ASC 606 effects.
Reported segment revenue was HCB $832 million, CRB $740 million, IRR $574 million and BDA $122 million. Organic revenue growth was 4%, 6%, 5% and 8%, respectively. Segment operating income was $193 million for HCB, $125 million for CRB, $261 million for IRR and a $32 million loss for BDA.
Cash, debt and liquidity
- Cash and equivalents were $954 million at March 31, down from $1.030 billion at year-end 2017. Operating cash flow fell year over year, primarily due to higher discretionary compensation payments for the 2017 cycle.
- Total debt was $4.592 billion, including $85 million current debt; long-term debt was $4.507 billion. The capitalization ratio was 30.1%, compared with 30.9% at year-end. WTW reported compliance with financial covenants.
- $301 million remained available under the $1.25 billion revolving credit facility. Management said cash, operating cash flow and available borrowing capacity should meet needs for the next 12 months, including investment, debt repayments, dividends and contemplated repurchases.
- Fiduciary assets and corresponding liabilities were each $13.613 billion. Fiduciary funds are generally restricted and unavailable for corporate purposes.
- Q1 capital spending on fixed assets and internal-use software was $65 million; WTW estimated approximately $185 million of additional spending for the remainder of 2018. The quarterly dividend was $0.60 per share; no shares were repurchased in Q1.
Changes, outlook and notable items
- ASC 606 was adopted January 1, 2018 using the modified retrospective method. Prior-year comparatives were not restated. The standard shifted revenue timing across businesses, including Medicare broking and certain health and benefits arrangements, and makes reported year-over-year results less directly comparable.
- Revenue increased 6% organically, while reported revenue declined 1%. Currency translation added $123 million to Q1 revenue. Management cited strong organic performance across all segments; CRB benefited from broad regional growth, while ASC 606 timing reduced reported HCB and BDA revenue.
- Adjusted operating income was $443 million as reported and $722 million without ASC 606, versus $619 million in Q1 2017. Adjusted diluted EPS was $2.71 as reported and $4.41 without ASC 606, versus $3.71 in Q1 2017. These are non-GAAP measures and should be considered alongside GAAP results.
- WTW had no formal numerical full-year guidance in the provided filing text. It expected full-year 2018 revenue to include approximately 23% generated in the U.K.; approximately 12% of revenue and 21% of expenses were expected to be denominated in pounds sterling. The company described its hedging strategy as intended to mitigate significant currency fluctuations.
- U.S. Tax Reform accounting remained provisional. WTW reduced its estimated federal transition-tax liability by $64 million after IRS guidance, leaving a $6 million liability payable over eight years. The company said GILTI was not expected to be material, but noted estimates and tax treatment could change.
- WTW recorded $43 million of transaction and integration expenses, up from $40 million; restructuring costs were nil versus $27 million. Management cited continued integration work and higher salary, medical-benefit and professional-services costs.
- The $120 million Stanford litigation settlement remained conditional on appeals and final effectiveness of court-approved bar orders; WTW said it would not pay until appeals were decided in its favor and no further appeal remained. The company also disclosed merger-related securities litigation and unresolved competition and market investigations for which it could not estimate reasonably possible losses.
- A City of Houston matter settled for $40 million, paid in April 2018; WTW said its share had been accrued before 2018. The CalPERS long-term-care class settlement was finally approved, with payment of $9.75 million expected by June 8, 2018.
- Additional risks include Brexit-related operating and regulatory changes, potential sanctions affecting Russia, competition, litigation, data security, integration, and changes in insurance and consulting markets. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Assess underlying growth and profitability using both reported results and the ASC 606 reconciliation; confirm how the new revenue timing affects later quarters and annual comparisons.
- Monitor operating cash conversion, compensation payments, capital spending, revolving-facility availability and debt maturities.
- Track the outcome and potential cash impact of the Stanford settlement appeals, the settled Houston and CalPERS matters, and the unresolved securities and regulatory proceedings.
- Review subsequent tax disclosures for final U.S. Tax Reform calculations and any changes to effective tax rates or tax liabilities.
- Check later filings for formal guidance, segment trends, repurchases, dividend decisions and developments in Brexit, sanctions and competition investigations.