Willis Towers Watson plc — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; the filing also reports fourth-quarter results. Amounts are in U.S. dollars unless noted. WTW is a global advisory, insurance broking and solutions company with four segments: Human Capital and Benefits (HCB), Corporate Risk and Broking (CRB), Investment, Risk and Reinsurance (IRR), and Benefits Delivery and Administration (BDA). The January 2016 merger affects comparisons with 2015.
Financial performance
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Total revenue | $8.202 billion | $7.887 billion |
| Income from operations | $738 million | $551 million |
| Operating margin, GAAP | 9.0% | 7.0% |
| Net income attributable to WTW | $568 million | $420 million |
| Diluted EPS | $4.18 | $3.04 |
| Adjusted EBITDA | $1.901 billion | $1.771 billion |
| Adjusted diluted EPS | $8.51 | $7.96 |
| Operating cash flow | $862 million | $933 million |
| Free cash flow | $562 million | $715 million |
- Revenue increased 4% as reported and 5% organically; currency translation reduced reported revenue by $27 million. Management cited growth across all segments.
- Segment revenue: HCB $3.192 billion, CRB $2.648 billion, IRR $1.535 billion, and BDA $729 million. BDA grew 12% organically; HCB, CRB and IRR commissions and fees grew 3%, 4% and 4% organically, respectively.
- GAAP operating costs included $581 million of amortization, $132 million of restructuring costs, $269 million of transaction and integration expenses, and $11 million for significant litigation provisions. Adjusted measures exclude specified items and are not GAAP measures.
- Fourth-quarter revenue was $2.078 billion versus $1.927 billion in Q4 2016. Income from operations was $110 million versus $88 million; net income attributable to WTW was $245 million versus $142 million; diluted EPS was $1.84 versus $1.03.
Balance sheet, liquidity and capital
- At year-end, cash and cash equivalents were $1.030 billion; total debt was $4.535 billion, including $4.450 billion long-term debt and $85 million current debt. Debt increased from $3.865 billion in 2016; the capitalization ratio rose to 30.9% from 27.7%.
- WTW reported $362 million available under its $1.25 billion revolving credit facility. Management said available liquidity, including undrawn facilities, should cover expected needs for the next 12 months. The company was in compliance with financial covenants.
- Fiduciary assets and liabilities were each $12.155 billion. These funds are held for clients and insurers and are not available for corporate use. Cash included $90 million held by regulated U.K. entities.
- Capital expenditure was $300 million, with approximately $285 million expected in 2018. The company paid $277 million in dividends and repurchased $532 million of shares in 2017. The board later approved a $0.60 quarterly dividend and an additional $400 million repurchase authorization.
Changes, outlook and notable items
- Income from operations increased 34%; adjusted EBITDA rose 7%. Operating cash flow and free cash flow declined, primarily due to working-capital movements, higher incentive-compensation payments and increased capital spending.
- The Operational Improvement Program concluded in 2017. WTW reported cumulative program restructuring charges of $441 million and expects $325 million of annual cost savings beginning in 2018. Integration and operational-improvement work continued during the year.
- U.S. tax reform produced a provisional net tax benefit of $204 million in 2017, contributing materially to reported earnings. This included a $208 million benefit from remeasuring deferred taxes, partly offset by transition-tax and other charges. The company said its tax accounting remained incomplete and estimates could change.
- WTW adopted the new revenue-recognition standard on January 1, 2018. It expected a pre-tax retained-earnings increase of $375 million to $475 million, chiefly from accelerated recognition for Individual Marketplace and proportional treaty broking commissions and changes to deferred costs. This is an accounting transition adjustment, not a forecast of comparable operating growth.
- Management identified soft insurance-market conditions, competition, merger-integration execution, currency movements and Brexit uncertainty as relevant business risks. GDPR was due to take effect in May 2018, and the company also cited cybersecurity, privacy and regulatory-compliance risks.
Contingencies and unusual items
- The Stanford-related litigation settlement of $120 million remained subject to appeals and required court approval of bar orders; WTW said it would not pay until appeals were resolved in its favor and no further appeal remained.
- A $40 million settlement in principle with the City of Houston over pension actuarial advice remained subject to final documentation and City Council approval; $11 million was accrued. The filing described other significant litigation and regulatory investigations, including European Commission proceedings concerning aviation and aerospace broking and U.K. competition inquiries; possible losses were not estimable for those investigations.
- WTW settled merger-related appraisal demands for approximately $211 million and canceled the related shares. It also recorded a $36 million U.K. pension settlement expense.
- Five businesses were sold during the second half of 2017. Their pre-sale 2017 results included $54 million of revenue and $13 million of operating income; the company recognized a $13 million gain on disposals.
Important facts for investors to verify
- Whether the expected $325 million annual cost savings materialize and integration expenses decline after the program’s completion.
- How 2018 organic revenue and margins develop by segment, particularly after applying the new revenue-recognition standard.
- The final tax effects of U.S. tax reform, including transition-tax estimates and the still-undetermined GILTI treatment.
- Available liquidity and debt servicing capacity, taking account of facility drawings, scheduled repayments, pension funding and shareholder distributions.
- Developments and potential financial exposure in the Stanford appeals, Houston settlement approval, merger-related securities cases and regulatory investigations.