Willis Towers Watson plc — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. WTW is a global advisory, broking and solutions company. Unless stated otherwise, amounts are in U.S. dollars. Results exclude Willis Re from continuing operations after its classification as a discontinued operation.
Financial performance
- Revenue: Q3 revenue was $1.973 billion, up 4% year over year as reported and 7% organically. Nine-month revenue was $6.292 billion, up 6% as reported and 6% organically. Currency translation added $27 million in Q3 and $190 million year to date.
- Profit and EPS: Q3 income from continuing operations was $919 million versus $119 million; net income attributable to WTW was $903 million versus $121 million; diluted EPS was $6.99 versus $0.93. Nine-month continuing income was $1.582 billion versus $284 million; attributable net income was $1.820 billion versus $520 million; diluted EPS was $14.00 versus $3.99.
- Underlying measures: Adjusted operating income was $264 million in Q3 and $920 million for nine months, compared with $231 million and $742 million. Adjusted operating margins were 13.4% and 14.6%, versus 12.2% and 12.5%. Adjusted diluted EPS was $1.73 for Q3 and $6.04 year to date, versus $1.31 and $4.52.
- Cash flow: Nine-month operating cash flow was $1.877 billion versus $1.206 billion. Free cash flow, as defined by WTW, was $1.768 billion versus $1.023 billion. Both periods include Willis Re operating cash flows; 2021 also benefited from the Aon termination payment.
- Liquidity and debt: Cash and cash equivalents were $2.162 billion at September 30. Total debt was $4.637 billion, down from $5.635 billion at December 31, 2020; the capitalization ratio fell to 28.9% from 34.2%. WTW reported covenant compliance. A $1.5 billion revolving facility replaced the prior $1.25 billion facility on October 6, 2021 and matures in 2026. Fiduciary cash and assets are generally restricted and unavailable for corporate purposes.
- Capital returns: WTW repurchased $1.0 billion of shares in Q3 and had approximately $4.5 billion of authorization remaining at quarter-end. It paid $275 million of dividends during the first nine months and raised the quarterly dividend to $0.80 per share.
Material changes and unusual items
- WTW and Aon terminated their proposed combination in July 2021 after the U.S. Department of Justice sued to block it. WTW received a $1.0 billion termination payment, recorded as income in transaction and integration, net. This was the principal reason reported operating income and earnings rose sharply. The Q3 tax provision included an estimated $250 million tax expense related to the payment.
- WTW completed the sale of Miller in March 2021 for final consideration of GBP 623 million ($818 million), including minority-holder amounts; the nine-month results included a $356 million net tax-exempt gain. Proceeds from Miller and another smaller sale contributed to investing cash flow.
- WTW agreed to sell Willis Re to Arthur J. Gallagher for $3.25 billion cash plus a potential earnout of up to $750 million, payable in 2025 subject to conditions. Closing required regulatory approvals and other customary conditions and was expected by the end of Q1 2022. Willis Re generated Q3 revenue of $111 million and a $15 million pretax loss; nine-month revenue was $668 million and pretax income was $317 million.
- Q3 segment revenue increased in HCB (7%), CRB (7%) and BDA (7%) year over year, while IRR declined 22%, reflecting divestitures and other mix effects. WTW cited strong HCB talent and rewards demand, CRB new business and renewals, and TRANZACT-led BDA growth. CRB results included book-of-business settlement gains associated with departing colleagues.
Outlook, commentary and risks
- WTW gave no specific numerical full-year earnings or revenue guidance in the provided filing text. It said COVID-19 had weighed on discretionary work earlier in the pandemic, with demand improving in Q2 and Q3 2021, but continued to expect pandemic-related impacts to negatively affect fiscal 2021 revenue and operating results.
- Management cited supply-chain disruption, workforce availability, vaccination rates and public-health restrictions as sources of uncertainty. A highly competitive labor market could constrain capacity as demand rises. Colleague departures, particularly in CRB, could pressure future growth; WTW said near-term CRB growth could trend toward the lower end of the industry-expected range, around mid-single digits.
- Management reported modest improvement in insurance pricing overall, while noting that softer insurance markets could pressure broking commissions and margins. Revenue is seasonal, typically stronger in Q1 and Q4.
- Other risks include the pending Gallagher transaction and required approvals, litigation and regulatory matters, cybersecurity and data privacy, foreign-exchange exposure, changing tax laws, and the transition away from LIBOR. WTW said it had sufficient liquidity for anticipated needs over the next 12 months.
- WTW announced a planned move to two reporting segments in 2022: Health, Wealth and Career, and Risk and Broking. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported for the quarter.
Investor verification priorities
- Separate recurring operating performance from the $1.0 billion Aon termination payment, Miller disposal gain and other transaction or disposal items; review the company’s non-GAAP reconciliations.
- Track regulatory approval, timing, transition costs and final proceeds for the Gallagher/Willis Re sale, including the conditions and uncertainty surrounding the potential 2025 earnout.
- Assess whether organic growth, margins and cash generation persist after adjusting for currency, disposals, settlement gains and the termination payment.
- Monitor CRB client and colleague retention, labor-market constraints, COVID-19 impacts, and the effect of the 2022 segment reorganization.
- Verify debt maturities, refinancing terms, liquidity available under the new revolving facility, and the scale and pace of future share repurchases and dividends.