Business context and reporting period
The filing is Willis Group Holdings Public Limited Company’s Form 10-K for the fiscal year ended December 31, 2012, with comparative results for 2011 and 2010. The business provides insurance and reinsurance brokerage, risk management and consulting services. The supplied company metadata says “WILLIS TOWERS WATSON PLC,” but the filing identifies the registrant as Willis Group Holdings plc; verify the issuer identity. This is an annual filing, not a standalone fourth-quarter report.
Financial performance and position
| Metric | 2012 | 2011 |
|---|---|---|
| Total revenue | $3.480 billion | $3.447 billion |
| Operating income (loss) | $(209) million | $566 million |
| Net income (loss) attributable to Willis shareholders | $(446) million | $204 million |
| Diluted continuing-operations EPS | $(2.58) | $1.15 |
| Operating cash flow | $525 million | $441 million |
| Cash and cash equivalents at year-end | $500 million | $436 million |
| Total debt | $2.353 billion | $2.369 billion |
| Stockholders’ equity | $1.699 billion | $2.486 billion |
Revenue comprised $3.458 billion of commissions and fees, $18 million of investment income and $4 million of other income. Organic commissions and fees grew 3%; foreign exchange reduced reported commissions and fees by 2%. GAAP operating margin was (6.0)%, versus 16.4% in 2011. Management’s non-GAAP adjusted operating income was $752 million, with a 21.6% adjusted margin, down from $775 million and 22.5%; adjusted net income was $454 million and adjusted diluted EPS was $2.58, compared with $482 million and $2.74.
Operating cash flow increased by $84 million. Investing activities used $172 million, including $135 million of capital expenditures; financing activities used $291 million, including $100 million of share repurchases and $185 million of dividends. The company reported $522 million of available revolving credit capacity, but said only about $150 million of its $500 million cash balance was available for general corporate purposes. Fiduciary funds are restricted and unavailable for corporate use. Interest expense was $128 million, down from $156 million.
Segment results: Global revenue was $1.129 billion and operating margin 32.9% (up from 32.5%); North America revenue was $1.313 billion and margin 18.3% (down from 20.5%); International revenue was $1.038 billion and margin 17.6% (down from 21.2%).
Material changes versus the prior comparable period
- Revenue increased 1%, but attributable earnings swung to a $446 million loss from $204 million of income. The deterioration principally reflects large compensation-related charges, goodwill impairment and a $113 million income-statement charge for a U.S. deferred-tax valuation allowance.
- A $492 million non-cash goodwill impairment was recorded for North America. The company cited weaker projected growth and profitability, including pressure from Loan Protector, the U.S. economy, Construction and Human Capital, and client retention.
- Compensation policy changes produced a $200 million non-cash write-off of unamortized cash retention awards and a $252 million accrual for 2012 bonuses payable in 2013. Excluding specified items, total operating expenses declined $136 million, or 5%.
- North America organic commissions and fees declined 1%; International reported flat commissions and fees despite 5% organic growth, due to a 5% adverse currency effect. Global commissions and fees grew 5%, including 6% organic growth.
- Attributable stockholders’ equity fell by $787 million to $1.699 billion; the reported capitalization ratio rose to 58.1% from 48.8%.
- Fourth-quarter revenue was $871 million versus $819 million in 2011, while the quarter recorded an $805 million attributable loss and diluted EPS of $(4.65), reflecting significant charges.
Outlook, commentary, risks and unusual items
- Management described the outlook as challenging: insurance markets remained soft across many lines and regions, with firmer rates concentrated in catastrophe-exposed areas. It did not provide a specific revenue or earnings forecast.
- The company expected to eliminate about 200 positions in 2013, with a first-quarter pre-tax charge of $35 million to $45 million; projected savings were $20 million to $25 million in 2013 and $25 million to $30 million annualized.
- Estimated 2013 pension contributions were approximately $142 million, excluding salary-sacrifice contributions. The UK funding arrangement may require additional payments tied to EBITDA and exceptional shareholder returns.
- Key exposures include economic and Eurozone weakness, premium-rate and commission pressure, competition, foreign exchange, significant debt and covenant compliance, pension funding, tax valuation allowances, goodwill impairment, regulatory requirements, cyber/operational disruptions and errors-and-omissions claims.
- Stanford Financial Group investor litigation remained pending; the filing says outcomes and potential losses could not be predicted. The company also continued an internal review of certain high-risk UK subsidiary payments made from 2005–2009 following a prior FSA settlement. It reported no material adverse expectation for claims overall, while acknowledging an adverse outcome could materially affect particular periods.
- A Chicago investigation identified approximately $40 million of historical commission overstatement from 2005–2011. The company said prior statements were not materially affected, recorded write-offs and related charges, received a $10 million insurance recovery in 2012, and enhanced controls. Management and Deloitte reported effective internal controls at year-end; the financial-statement audit opinion was unqualified.
Most important facts an investor should verify
- Confirm the registrant and security being analyzed: the filing is for Willis Group Holdings plc, not an issuer named Willis Towers Watson plc.
- Review the full reconciliation and cash effects of the $492 million goodwill impairment, $200 million award write-off, $252 million bonus accrual and deferred-tax valuation allowance.
- Assess underlying North America performance, especially Loan Protector, client retention, and the drivers of lower segment margins.
- Reconcile reported cash with cash available for corporate use, revolving-credit availability, debt maturities, covenants and expected pension contributions.
- Track the Stanford litigation, the UK high-risk-payments review, and the adequacy of provisions and insurance recoveries for claims.
- Distinguish annual results from the unusually loss-making fourth quarter and assess whether management’s planned 2013 cost savings are realized.