Willis Group Holdings plc — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; financial statements are unaudited and prepared under U.S. GAAP. The filing is for Willis Group Holdings plc, not a company identified as Willis Towers Watson.
Financial performance and position
Unless otherwise noted, amounts are U.S. dollars in millions.
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Revenue | $1,051 | $1,013 |
| Commissions and fees | $1,046 | $1,005 |
| Operating income | $287 | $317 |
| GAAP operating margin | 27.3% | 31.3% |
| Adjusted operating income / margin | $333 / 31.7% | $330 / 32.6% |
| Net income attributable to shareholders | $219 | $225 |
| Diluted EPS | $1.24 | $1.28 |
| Adjusted net income / diluted EPS | $257 / $1.46 | $233 / $1.32 |
| Cash from operating activities | $39 | $62 |
- Commissions and fees grew 4% organically, with 4% organic growth in each of Global, North America, and International. Total revenue rose 4%.
- Expenses increased 10% to $764 million. Salaries and benefits rose 12% to $568 million; the expense-reduction charge and compensation costs contributed to the increase.
- GAAP operating income fell 9% and shareholder net income fell 3%. Adjusted net income increased 10%; adjusted operating margin declined 90 basis points.
- Cash and equivalents were $531 million at March 31, including $425 million available for general corporate purposes and $106 million held for UK regulatory capital requirements. Fiduciary assets and liabilities were each $9.811 billion and are not available for corporate use.
- Total debt was $2.402 billion, up from $2.353 billion at year-end; long-term debt was $2.387 billion. The company had drawn $55 million on its $500 million revolving facility and said it expected to repay that draw during 2013. Capitalization ratio was 56.3%, versus 58.1% at year-end.
- Cash used in investing activities was $21 million; financing activities provided $18 million. Cash dividends paid were $47 million. The declared quarterly dividend was $0.28 per share.
Changes versus the prior comparable period
- Organic commissions and fees growth improved from 4% overall in the reported quarter’s comparison context; North America shifted from a 2% organic decline in Q1 2012 to 4% growth in Q1 2013. Global organic growth was 4% versus 5%; International remained at 4%.
- Operating income decreased by $30 million, while the $46 million expense-reduction charge was excluded in the company’s adjusted comparison. Q1 2012 included a $13 million Chicago receivable write-off that was excluded from adjusted results.
- Operating cash flow decreased by $23 million, partly reflecting $196 million of cash incentive awards, $44 million of pension contributions, and a $128 million increase in receivables.
- Cash increased by $31 million from December 31, 2012. Debt rose by $49 million, primarily reflecting the revolving-credit draw.
Outlook, commentary, risks, and unusual items
- Expense reduction: The company recorded a $46 million pre-tax charge, including $29 million of severance and related costs for 207 positions and $17 million of other operating and depreciation costs. It expected no further charge from the review, approximately $20 million of savings in 2013 beginning in Q2, and annualized savings of $25–30 million.
- Markets: Management described the reinsurance market as flat and expected benign conditions to continue. It said broad insurance-rate increases were unlikely without significant catastrophe losses or industry capital impairment. Soft markets and weak European economies, including Eurozone risks, could pressure commissions and results.
- Associates: Q1 earnings from associates were $15 million, unchanged year over year. Management estimated a full-year 2013 associate loss of $1–3 million, versus a $5 million profit in 2012, while noting it did not control those businesses.
- Liquidity and pensions: Management believed liquidity was sufficient for the next 12 months and said credit-facility covenants remained within requirements despite a negative quarterly impact on covenant ratios. Expected 2013 pension contributions included $91 million to the UK plan, $40 million to the U.S. plan, and approximately $11 million to international and U.S. non-qualified plans.
- Contingencies: The company faced multiple lawsuits relating to Stanford Financial Group, including claims seeking substantial damages; outcomes could not be predicted. Management did not expect known claims to have a material adverse effect overall, but acknowledged a particular outcome could materially affect results or cash flows in a period. A further internal review of certain UK payments was not expected to result in material fines or sanctions, though no assurance was given.
- Other items: An April 2013 agreement extended the Gras Savoye call-option exercise date to June 2016. The company also agreed to acquire Prime Professions, subject to regulatory approval. No broad full-year earnings or revenue guidance was provided in the supplied filing text.
Most important facts for investors to verify
- Confirm the intended issuer: this filing is for Willis Group Holdings plc, not Willis Towers Watson.
- Track whether the stated expense savings materialize and whether the $46 million restructuring charge is truly final.
- Assess operating cash conversion, incentive payments, receivables seasonality, and repayment of the $55 million revolver draw.
- Review debt maturities, covenant headroom, pension funding commitments, and the portion of cash restricted for regulatory purposes.
- Monitor Stanford-related litigation and the UK payment review for developments that could affect results or cash flows.