Willis Towers Watson plc — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Amounts are in U.S. dollars. WTW is a global advisory, broking and solutions company operating in Health, Wealth & Career (HWC) and Risk & Broking (R&B). It reorganized its reporting segments in January 2022; prior-period segment results were recast. Prior-year consolidated comparisons exclude Willis Re, reported as discontinued operations.
Key financial results
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $2.031bn | $2.091bn | $4.191bn | $4.319bn |
| Income from operations | $137m | $170m | $316m | $381m |
| Income from continuing operations | $160m | $117m | $274m | $663m |
| Net income attributable to WTW | $109m | $184m | $231m | $917m |
| Diluted EPS | $0.97 | $1.41 | $2.01 | $7.04 |
| Operating margin | 6.7% | 8.1% | 7.5% | 8.8% |
| Adjusted operating margin (non-GAAP) | 15.5% | 15.2% | 16.3% | 15.2% |
Reported revenue declined 3% in both periods. On an organic basis, revenue grew 3% in Q2 and 2% in the first half; foreign currency reduced revenue by $85m and $139m, respectively. Q2 segment revenue was $1.159bn for HWC and $852m for R&B. Organic growth was 2% in HWC and 3% in R&B for the quarter. For the first half, adjusted diluted EPS was $4.99 versus $4.31; adjusted operating income was $685m versus $656m. These are non-GAAP measures.
Q2 adjusted EBITDA was $450m versus $466m, with adjusted EBITDA margin of 22.2% versus 22.3%. First-half adjusted EBITDA was $968m versus $954m. The large year-over-year decline in first-half GAAP net income and EPS reflects, among other factors, the prior-year $356m gain on the Miller sale and lower current-year results from discontinued operations.
Cash flow, debt and liquidity
- First-half operating cash flow was $258m, down from $366m; free cash flow was $198m versus $287m. Management attributed the reduction mainly to the Willis Re divestiture and related cash-flow changes, as well as tax payments related to the Willis Re sale and the terminated Aon transaction.
- Cash and cash equivalents were $1.920bn at June 30, 2022, compared with $4.486bn at year-end 2021. The balance includes cash subject to regulatory capital requirements. Fiduciary funds are held for clients and are not available for corporate use.
- Total debt was $4.720bn, versus $4.587bn at year-end; the capitalization ratio rose to 31.3% from 25.7%, primarily due to share repurchases. WTW issued $750m of 4.65% notes due 2027 and used part of the proceeds to repay its €540m notes due 2022. No mandatory debt repayment was due within the next 12 months; the company reported covenant compliance.
- The $1.5bn revolving credit facility was fully available. Management said available liquidity was sufficient for expected needs over the next 12 months.
- WTW repurchased $2.7bn of shares in the first half and had approximately $2.1bn of authorization remaining at June 30. It paid $189m in dividends during the half; the quarterly dividend was raised to $0.82 per share.
Material changes, outlook and risks
- Transformation program: The three-year program targets annual savings of approximately $300m by the end of 2024, with expected cumulative costs of approximately $490m and capital expenditures of approximately $260m. WTW reported $71m of cumulative annualized run-rate savings identified to date. First-half restructuring charges were $62m, with additional program costs included in transaction and transformation expense.
- Russia: WTW deconsolidated its Russian entities in March and transferred ownership to local management in July 2022. The deconsolidation generated a $57m loss; $81m of related net assets, including receivables, were impaired. Management expects lost Russia profits to create a modest margin headwind.
- Willis Re sale: Most operations were sold to Gallagher in December 2021, with deferred closings continuing into Q2 2022. WTW reduced its preliminary sale gain by $60m in Q2 for an updated working-capital estimate; final purchase-price settlement remained pending. An earnout of up to $750m may be payable in 2025, but no receivable was recorded.
- Management commentary: WTW reported modest but definite insurance-market price increases and organic growth in both segments. It cited prior-year book-of-business sales and employee departures as headwinds, particularly for R&B. Inflation and tight labor markets are increasing costs; management warned that costs rising faster than revenue could pressure margins. No specific full-year revenue or earnings guidance is provided in the supplied filing text.
- Other risks and unusual items: Key risks include foreign-exchange movements, inflation and talent availability, geopolitical disruption and sanctions, competition and client/employee retention, cybersecurity and data privacy, regulatory matters, and litigation. The company said it did not expect known legal proceedings to materially affect financial condition, results or liquidity overall, but acknowledged that an adverse outcome could affect particular periods. Other income included a $24m non-cash acquisition revaluation gain. WTW also revised the cash-flow presentation for fiduciary funds; the revision did not affect total operating cash flow.
Important facts for investors to verify
- How much of organic growth and segment performance reflects recurring business versus book-of-business settlements, prior-year comparisons and currency effects.
- Whether the Willis Re working-capital settlement changes the sale gain further, and the conditions and potential value of the 2025 earnout.
- Whether Transformation savings are realized as planned relative to the remaining expected costs and capital investment.
- The impact of share repurchases on liquidity, leverage and future earnings per share, alongside the timing of the remaining authorization.
- Developments in Russia-related impairments and sanctions exposure, and any material changes in litigation, regulatory or geopolitical risks.