WILLIS GROUP HOLDINGS PLC — Q1 2014 Form 10-Q
Entity and period: The filing is for the three months ended March 31, 2014, and identifies the registrant as Willis Group Holdings Public Limited Company, an Ireland-incorporated insurance broker and risk-management services provider. This differs from the request metadata name, Willis Towers Watson plc.
Financial performance
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Total revenue | $1.097 billion | $1.051 billion |
| Commissions and fees | $1.090 billion | $1.046 billion |
| Operating income | $326 million | $281 million |
| Net income attributable to Willis shareholders | $246 million | $219 million |
| Diluted EPS | $1.35 | $1.24 |
| Operating margin | 29.7% | 26.7% |
| Adjusted operating income and margin | $326 million; 29.7% | $327 million; 31.1% |
| Adjusted net income and diluted EPS | $248 million; $1.36 | $257 million; $1.46 |
| Net cash from operating activities | $5 million | $39 million |
Reported revenue rose 4.4%, with organic commissions-and-fees growth of 4.2%. Reported net income increased 12.3%, but adjusted net income fell 3.5% and adjusted diluted EPS declined 6.8%. The comparison is affected by a $46 million expense-reduction charge in Q1 2013, which did not recur; excluding specified items, adjusted operating income was essentially flat.
Segment organic commissions-and-fees growth was 7.2% in International, 4.7% in North America and 2.0% in Global. Segment operating margins were 29.9%, 25.9% and 40.6%, respectively. International growth included a $6 million China revenue-recognition adjustment; excluding its stated 250-basis-point effect, International organic growth was 4.7%. Global margin declined from 43.7% to 40.6%, while North America and International margins improved.
Cash, debt and liquidity
- Cash and cash equivalents were $734 million at March 31, down $62 million from year-end; management reported $645 million available for corporate purposes and $89 million held in regulated UK entities.
- Operating cash flow was $5 million, versus $39 million a year earlier. Management attributed much of the decline to timing of cash incentive payments. Investing cash outflow was $21 million; financing cash outflow was $49 million. Cash decreased $65 million during the quarter.
- Total debt was $2.322 billion, including $2.307 billion long-term debt and $15 million current debt. The capitalization ratio was 48.7%, compared with 51.2% at December 31, 2013. The reported fair value of long-term debt was $2.467 billion.
- The company reported no amount drawn on its main $800 million revolving facility at quarter-end and said debt covenant ratios remained well within requirements. A separate securities-underwriting facility was increased after quarter-end from $300 million to $400 million, for regulatory capital purposes only.
- Fiduciary assets and matching liabilities were each $9.306 billion. These funds are generally held for clients and insurers and are not available for corporate purposes.
- Quarterly dividend declared was $0.30 per share, versus $0.28 a year earlier. The company repurchased 904,000 shares on a trade-date basis for about $38 million during the quarter and reported further repurchases after quarter-end.
Outlook, commentary and significant items
- Management described market conditions as challenging, citing softening reinsurance rates and economic uncertainty, while noting signs of improvement in some economies. It said premium movements can affect commissions and are outside the company’s control.
- In April 2014, the company announced an operational improvement program expected to run through 2017: approximately $420 million cumulative savings through 2017 and about $300 million annual savings starting in 2018, before potential reinvestment. Expected cumulative charges are approximately $410 million. Management cautioned that costs, savings and timing may vary with execution and scope.
- The company expected 2014 associate earnings of $10 million to $15 million, compared with zero for full-year 2013, but noted that it does not control associates. Gras Savoye was its principal associate.
- Expected 2014 pension contributions included approximately $83 million to the UK defined-benefit plan, $30 million to the US plan and $9 million to other plans, plus about $12 million of UK salary-sacrifice contributions. Additional UK payments could arise from profit-sharing and shareholder-return formulas.
- The company agreed to acquire Charles Monat Limited, subject to regulatory approval, and disposed of two small businesses. No material change to contractual obligations was reported apart from the items described in the filing.
- Contingencies include multiple Stanford Financial Group-related lawsuits. Certain claims seek damages exceeding $1 billion; the company disputes the allegations and intends to defend itself. It stated that outcomes cannot be predicted, and that an adverse result could affect particular quarterly or annual results or cash flows.
- Other disclosed risks include insurance-market and premium weakness, economic and foreign-exchange movements, debt and credit-rating risk, pension obligations, litigation and errors-and-omissions claims, regulatory and tax matters, key-client and employee retention, technology and data-security issues, and potential goodwill impairment. Management reported no material change to the risk factors in its 2013 Form 10-K.
- Presentation changes effective in 2014 reclassified certain foreign-exchange and disposal gains or losses below operating income and changed segment reporting; prior-period information was reclassified. Adoption of tax guidance reduced deferred tax assets and other non-current liabilities by $21 million.
Most important facts for investors to verify
- Whether reported organic growth is sustainable, particularly after removing the China revenue-recognition adjustment, and how softening insurance and reinsurance pricing affects commissions.
- Whether the operational improvement program delivers its stated savings and annual charges on schedule, including the effect of any reinvestment.
- Why operating cash flow was only $5 million and whether cash generation improves as incentive-payment timing normalizes.
- Debt maturities, refinancing access, covenant headroom and the distinction between corporate cash and fiduciary or regulated funds.
- Developments, potential exposure and insurance coverage for the Stanford-related litigation and other claims.
- Actual pension funding requirements, associate earnings and the impact of the company’s share repurchase and dividend plans on liquidity.