Willis Towers Watson plc — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data. WTW is a global advisory, broking and solutions company. Results are seasonal, with revenue typically higher in the first and fourth quarters.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $2,466 | $2,312 | +7% reported; +4% organic |
| Income from operations | $360 | $359 | +0.3% |
| Operating margin | 14.6% | 15.5% | Down 0.9 percentage points |
| Net income attributable to WTW | $305 | $287 | +6% |
| Diluted EPS | $2.34 | $2.20 | +6% |
| Adjusted operating income | $525 | $492 | Adjusted margin: 21.3% in both periods |
| Adjusted EBITDA | $680 | $601 | Adjusted margin: 27.6% vs. 26.0% |
| Operating cash flow | $23 | $(47) | Improved by $70 |
| Free cash flow | $(43) | $(104) | Improved by $61 |
Organic revenue grew across all segments. Reported revenue included $95 million from TRANZACT; foreign currency translation reduced revenue by $34 million. Segment revenue was HCB $850 million, CRB $739 million, IRR $615 million and BDA $231 million. BDA’s reported growth primarily reflects the TRANZACT acquisition; BDA organic growth was 1%.
Operating income was essentially flat despite revenue growth. Costs rose 8% to $2,106 million, including $35 million of accelerated depreciation after WTW abandoned internally developed software before it was placed in service. Other income, net increased to $92 million from $55 million, primarily on favorable foreign exchange activity and higher pension income. Interest expense rose to $61 million from $54 million. The effective tax rate was 20.0%, versus 18.8%.
Balance sheet, debt and liquidity
- At March 31, 2020, cash and cash equivalents were $898 million. Total debt was $5,874 million: $697 million current and $5,177 million long-term, compared with $5,617 million at year-end 2019. The capitalization ratio was 36.4%, versus 35.4%.
- WTW had $850 million available on its $1.25 billion revolving credit facility and reported compliance with financial covenants. Management said available liquidity was sufficient for anticipated cash needs over the next 12 months.
- Current debt included $499 million of 5.750% senior notes due 2021 and $174 million of term-loan debt due 2020. WTW cited $500 million of senior notes, $175 million of term-loan debt and $24 million of collateralized-facility debt as mandatory repayments over the next 12 months.
- Operating cash flow improved year over year, but free cash flow remained negative after $66 million of fixed-asset and internal-use software spending. Investing cash outflow was $162 million, including acquisitions; financing cash inflow was $186 million, supported by net revolving-facility borrowings.
- Fiduciary assets and matching liabilities were each $15,589 million. These client-related funds are generally restricted and are not available for corporate debt service or other purposes.
Outlook, material developments and risks
- COVID-19: WTW said the pandemic had not materially adversely affected Q1 financial results, but expected economic effects could reduce revenue and operating results for the remainder of 2020. Management flagged possible delayed client payments, lower demand for discretionary consulting, and potential effects on insurance demand and coverage. No quantified full-year guidance was provided.
- Aon transaction: WTW and Aon announced a recommended combination on March 9, 2020. WTW shareholders would receive 1.08 Aon ordinary shares per WTW share. Closing was expected in the first half of 2021, subject to shareholder, regulatory and other approvals. The agreement restricts certain activities; WTW did not expect share repurchases during the remainder of 2020.
- Tax item: U.S. tax regulations issued April 7, 2020 are expected to require an adjustment in Q2 2020. WTW estimated a potential adjustment of $50 million to $82 million; the filing does not state a final amount.
- Contingencies: The $120 million Stanford litigation settlement remained subject to further appeal, and WTW said it would not pay until appeals were exhausted. WTW could not estimate reasonably possible losses for ongoing aviation-broking competition investigations in the E.U. and Brazil. Management did not expect other claims to have a material effect overall, but noted that an adverse outcome could materially affect particular periods.
- Other unusual items: The $35 million software abandonment charge contributed to higher depreciation. The filing also reports a $9 million provision for doubtful client receivables, compared with $8 million a year earlier, and says delayed collections may increase.
- Management described insurance pricing as showing a modest but definite improvement. It also noted that discretionary project work, client liquidity, market conditions and the duration of the pandemic make demand and recovery uncertain.
Most important facts for investors to verify
- Whether COVID-19 materially affects client demand, receivable collection, cash flow and full-year results beyond Q1.
- Progress, approvals, restrictions and expected timing for the proposed Aon combination.
- The final amount and timing of the estimated $50 million–$82 million tax adjustment.
- Cash generation and liquidity after considering negative free cash flow, upcoming debt maturities and the availability of revolving credit.
- Developments in the Stanford settlement appeals and aviation-broking competition investigations, including any change in potential exposure.
- Whether reported and adjusted profitability trends persist after excluding acquisition contributions and the software abandonment charge.