Willis Towers Watson plc — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual report, not a standalone Q4 filing; selected fourth-quarter results are included below. Amounts are U.S. dollars unless noted.
Business context
WTW is a global advisory, insurance broking and solutions company with more than 43,000 employees operating in over 140 countries. Its four segments are Human Capital and Benefits (HCB), Corporate Risk and Broking (CRB), Investment, Risk and Reinsurance (IRR), and Benefits Delivery and Administration (BDA). Revenue is primarily commissions and fees; the company does not underwrite insurance risk. The U.S. generated 47% of 2018 revenue and the U.K. 23%.
Key financial metrics
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $8.513 billion | $8.202 billion |
| Income from operations | $809 million | $516 million |
| Net income attributable to WTW | $695 million | $568 million |
| Diluted EPS | $5.27 | $4.18 |
| Cash from operating activities | $1.288 billion | $862 million |
| Free cash flow (company-defined) | $1.020 billion | $562 million |
| Interest expense | $208 million | $188 million |
- Reported revenue grew 4%; management reported 5% organic growth, with a 1% currency benefit and approximately 1% reductions each from ASC 606 adoption and acquisitions/divestitures.
- Reported operating margin was approximately 9.5%, versus 6.3% in 2017. The company says 2018 operating income was reduced by $98 million under ASC 606; without that accounting change, it would have been $907 million. Net income attributable to WTW would have been $775 million and diluted EPS $5.87 without ASC 606.
- Management’s non-GAAP adjusted operating income was $1.545 billion as reported, or $1.643 billion without ASC 606, versus $1.509 billion in 2017. Adjusted EBITDA was $2.036 billion as reported, or $2.161 billion without ASC 606, versus $1.901 billion in 2017.
- Q4 2018: Revenue was $2.372 billion versus $2.078 billion in Q4 2017; operating income was $470 million versus $80 million; net income attributable to WTW was $378 million versus $245 million; diluted EPS was $2.89 versus $1.84. Revenue and earnings are seasonal, with broking activity typically supporting the first and fourth quarters.
- At year-end, cash and cash equivalents were $1.033 billion, total debt $4.575 billion, and shareholders’ equity $9.852 billion. Debt was up from $4.535 billion; the capitalization ratio rose to 31.7% from 30.9%. The company reported $1.1 billion available under its $1.25 billion revolving facility and compliance with debt covenants.
- 2018 capital expenditures were $268 million. Share repurchases totaled $602 million and dividends paid totaled $306 million. The board approved a quarterly dividend of $0.65 per share in February 2019.
- Fiduciary assets and liabilities were each $12.604 billion; fiduciary funds are held for third parties and are not available for corporate debt or general purposes.
Material changes versus the prior period
- All segments grew organically in 2018. Reported segment revenue was HCB $3.233 billion, CRB $2.852 billion, IRR $1.556 billion and BDA $758 million. CRB’s reported revenue rose 5%, IRR’s 6%, BDA’s 3%; HCB rose 2% as reported, with 3% organic growth.
- Operating cash flow increased $426 million, primarily from higher customer collections and working-capital improvements. Free cash flow also increased, while financing cash outflows included buybacks and dividends.
- Transaction and integration expenses declined to $202 million from $269 million; restructuring costs were zero, following completion of the principal restructuring programs by the end of 2017. Amortization declined to $534 million from $581 million.
- ASC 606 was adopted January 1, 2018 using the modified retrospective method. The reported 2017 comparative figures were not restated, limiting direct comparison. Adoption reduced 2018 revenue by $100 million and WTW-attributable net income by $80 million; opening retained earnings increased by $317 million.
Outlook, risks and unusual items
- Management said liquidity should be sufficient for the next 12 months, including planned business investment, scheduled debt repayments, dividends and contemplated buybacks. Expected 2019 capital expenditures were approximately $250 million; projected 2019 contributions to qualified pension plans were $158 million, with a further $60 million of direct benefit payments expected.
- Management expected slower growth in the exchange market to continue during 2019. No specific consolidated revenue or earnings guidance is provided in the supplied filing text.
- Brexit was a significant uncertainty: approximately 23% of revenue was generated in the U.K., while 13% of revenue and 21% of expenses were denominated in pounds sterling. The company was preparing for a possible hard Brexit, including business and operational changes.
- Key risks include economic and insurance-market cycles, softening premiums and commission pressure, competition, regulatory changes, cyber and data-privacy incidents, client claims and litigation, foreign-exchange movements, pension funding needs, and execution of integration and technology initiatives.
- WTW reported $4.6 billion of consolidated debt and $208 million of interest expense. It issued $1.0 billion of senior notes in 2018, using proceeds in part to repay term-loan and revolving-credit borrowings. A $186 million payment on 7.000% notes was scheduled for 2019.
- The company recorded a £31 million ($40 million) U.K. pension settlement expense in 2018; it also reported $24 million of pension settlement/curtailment items in its adjusted-measure reconciliation. Net periodic benefit credits were $280 million and materially affected other income.
- ASC 842 lease accounting, adopted January 1, 2019, was expected to add approximately $1.2 billion of operating lease liabilities and $1.0 billion of right-of-use assets to the balance sheet.
- Material litigation and regulatory matters include the $120 million Stanford settlement, which remained contingent on appeals and had not been paid as of the filing; the company said it could not estimate a reasonably possible loss for that matter or the aviation-broking investigations. The Houston settlement of $40 million and CalPERS settlement of $9.75 million had been paid.
- No goodwill or intangible-asset impairment was recorded in 2018. The auditor issued an unqualified opinion on the financial statements and internal controls; management also concluded disclosure controls were effective.
Important facts for investors to verify
- Compare reported and ASC 606-adjusted results, particularly because the 2017 comparatives were not restated.
- Review organic growth by segment and the sustainability of the 2018 improvement in operating cash flow and margins.
- Track debt maturities, refinancing costs, covenant headroom and the use of cash for buybacks, dividends and investment.
- Follow Brexit-related implementation costs, currency exposures and any resulting client or operating disruption.
- Monitor outcomes and potential financial exposure from the Stanford appeal, aviation-broking investigations and other litigation.
- Assess pension assumptions, required contributions and the effect of the 2019 lease-accounting transition on reported leverage and balance-sheet measures.