Willis Towers Watson plc — FY2015 Form 10-K
Business context and reporting period
Fiscal year ended December 31, 2015. The filing’s audited results are principally for Legacy Willis; the Willis–Towers Watson merger closed January 4, 2016, after year-end, so Towers Watson’s historical results are not included in FY2015 consolidated results. Legacy Willis was a global insurance broker and advisory and consulting firm. The combined company reported approximately 39,000 employees across more than 120 countries at filing.
Financial performance and liquidity
| Metric | FY2015 | FY2014 |
|---|---|---|
| Total revenue | $3.829bn | $3.802bn |
| Operating income | $427m | $647m |
| GAAP operating margin | 11.2% | 17.0% |
| Net income attributable to WTW | $373m | $362m |
| Diluted EPS | $5.41 | $5.32 |
| Cash from operating activities | $243m | $477m |
- Commissions and fees were $3.809bn, up 1.1% reported; organic commissions and fees grew 3.3%. A $228m adverse currency impact partly offset organic growth and acquisitions.
- Management’s non-GAAP measures showed underlying operating income of $707m, up 7.6%, and organic operating margin of 19.5%, up from 18.0%. These measures exclude specified items and should not be treated as GAAP results.
- Reported expenses rose 7.8% to $3.402bn, including $126m of restructuring costs, $84m of merger and acquisition transaction costs, and a $70m Stanford litigation provision. The filing attributes the lower GAAP margin chiefly to higher restructuring and transaction costs, litigation provision, and acquisition-related expenses.
- Cash and equivalents were $532m at year-end, versus $635m; total Legacy Willis debt was approximately $3.266bn, versus $2.297bn, and interest expense was $142m. The current portion of debt was $988m. The company cited $755m available under revolving facilities at year-end; a separate $400m merger-related term-loan tranche was drawn January 4, 2016.
- Net working-capital outflows, including incentive payments and higher receivables, contributed to the 49% decline in operating cash flow. Capital expenditures were $146m and dividends paid were $277m.
- Fiduciary assets and liabilities were each $10.458bn; those client and insurer funds are not available for corporate use. Thus reported current assets and liabilities are materially affected by matched fiduciary balances.
Changes, outlook, risks, and unusual items
- Revenue growth was modest on a reported basis, while organic commissions and fees advanced. International led organic growth at 7.6%; Willis CWR’s reported growth was acquisition-driven, while its operating margin fell sharply to 19.4% from 29.2%.
- Gras Savoye became fully consolidated on December 29, 2015, following acquisition of the remaining interest; Miller Insurance Services was acquired in May 2015. Acquisitions contributed to increases in goodwill and intangible assets.
- The operational improvement program, expected to conclude by end-2017, was projected to deliver annual savings of $325m by end-2017 and cumulative savings exceeding $490m through program completion, excluding merger-related savings. Estimated remaining restructuring charges were up to approximately $440m through 2017. These are management estimates, not guaranteed results.
- Management said it was considering a 2016 debt restructuring, including raising $1.5bn–$2.0bn of market financing, subject to market conditions. It stated that liquidity was expected to be sufficient for the next 12 months, including scheduled debt service and contemplated dividends. Approximately $988m of debt was due in 2016 at year-end.
- Unaudited merger pro forma results showed 2015 revenue of $7.486bn and net income attributable to WTW of $633m. These illustrative figures exclude expected synergies, integration costs, and the Gras Savoye acquisition; they are not forecasts.
- Other unusual items included a $59m gain from remeasurement of the prior Gras Savoye investment and a $30m Venezuelan currency devaluation loss. The reported 2015 tax benefit included a partial release of the U.S. deferred-tax valuation allowance; adjusted tax rate was 22%.
- Material risks include execution and integration of the merger and acquisitions, soft insurance pricing and competition, currency movements, debt refinancing and covenant constraints, pension funding, data-security incidents, and claims arising from advisory and brokerage work. The company recorded $70m for Stanford-related litigation but could not estimate the reasonably possible maximum loss or range. It also reported significant unresolved litigation matters, including the City of Houston and Meriter claims.
Important facts for investors to verify
- How combined-company results compare with the Legacy Willis FY2015 base, and whether merger integration delivers expected cost savings without disrupting clients or retaining key staff.
- Progress and terms of 2016 refinancing, maturity repayment, borrowing costs, and compliance with debt covenants.
- Cash conversion and working-capital trends, including incentive-payment timing and collections, alongside cash available after excluding fiduciary funds.
- Actual restructuring charges and realized savings against management’s program estimates, separately from merger-related synergies and costs.
- Developments in Stanford and other litigation, including whether provisions or insurance recoveries change and whether additional losses can be estimated.
- Effects of currency movements, pension assumptions and contributions, and the tax-valuation-allowance release on future reported earnings.