Willis Towers Watson plc — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Unaudited results; filed August 4, 2021. WTW is a global advisory, broking and solutions company operating across Human Capital and Benefits (HCB), Corporate Risk and Broking (CRB), Investment, Risk and Reinsurance (IRR), and Benefits Delivery and Administration (BDA).
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $2.286bn | $2.113bn | $4.876bn | $4.579bn |
| Organic revenue growth | 8% | Not stated | 6% | Not stated |
| Income from operations | $260m | $163m | $712m | $523m |
| Operating margin | 11.4% | 7.7% | 14.6% | 11.4% |
| Net income attributable to WTW | $184m | $94m | $917m | $399m |
| Diluted EPS | $1.41 | $0.72 | $7.04 | $3.07 |
| Adjusted operating income | $409m | $296m | $988m | $821m |
| Adjusted operating margin | 17.9% | 14.0% | 20.3% | 17.9% |
| Adjusted diluted EPS | $2.66 | $1.80 | $6.30 | $5.14 |
| Operating cash flow | Not stated | Not stated | $366m | $685m |
| Free cash flow | Not stated | Not stated | $287m | $550m |
Quarterly revenue increased 8% as reported and 8% organically; first-half revenue rose 6% as reported and 6% organically. Currency translation added $87m to Q2 revenue and $173m to first-half revenue. Q2 operating income improved mainly on higher revenue; transaction and integration expenses rose to $51m from $14m. First-half net income and EPS benefited substantially from the Miller divestiture gain.
- Q2 segment operating income: HCB $192m (prior-year $160m); CRB $181m ($135m); IRR $133m ($119m); BDA loss $10m (loss of $9m). Segment revenue was respectively $836m, $788m, $400m and $242m.
- First-half segment operating income: HCB $412m, CRB $343m, IRR $423m and BDA loss $3m, compared with $373m, $262m, $396m and loss of $20m, respectively, in 2020.
- Other income: $513m in the first half versus $168m, including a $356m net tax-exempt gain on the Miller sale (reported as a $357m gain on disposal in the income statement reconciliation). The gain materially boosts reported first-half earnings; adjusted EPS excludes the disposal gain.
Cash, debt and liquidity
- Cash and cash equivalents were $2.217bn at June 30, 2021, versus $2.089bn at year-end 2020. Current and long-term debt totaled $5.105bn, down from $5.635bn. The capitalization ratio declined to 30.4% from 34.2%.
- Cash from operations was $366m for the first half, down from $685m; free cash flow was $287m versus $550m. Management attributed the reduction principally to $185m of net legal settlement payments and $249m of higher bonus and benefit-related payments.
- Investing activities generated $590m, including $696m net proceeds from Miller; financing activities used $821m, including $515m of debt repayments and $269m of dividends.
- The $1.25bn revolving credit facility was undrawn. Management said available liquidity was sufficient for expected needs over the next 12 months. Fiduciary assets of $15.379bn are matched by fiduciary liabilities and are generally unavailable for corporate use.
- Debt maturities included $450m of 3.5% notes due in Q3 2021, $640m of 2.125% notes due in 2022, and $20m under the collateralized facility. The revolver expires March 2022. WTW reported compliance with financial covenants.
Material changes, outlook and risks
- Aon transaction terminated after quarter-end: On July 26, 2021, WTW and Aon terminated their proposed combination; Aon paid WTW a $1bn termination fee on July 27. This post-quarter receipt is not included in June 30 cash or Q2 earnings. The related proposed Gallagher divestiture agreement also terminated.
- Miller divestiture: Completed March 1, 2021 for final consideration of £623m (about $818m); WTW recorded the large gain noted above.
- COVID-19: Management said the pandemic had not materially harmed overall results in 2020 or the first half of 2021, but had weighed on discretionary-service growth through Q1. Demand improved in Q2. WTW nevertheless expected COVID-19 to negatively affect fiscal 2021 revenue and operating results, with outcomes dependent on further disruptions, workforce availability, vaccination rates and restrictions. Management also cited potential client payment delays and professional-liability exposure from coverage disputes.
- Market and operating risks: Management reported modest improvement in insurance pricing, while warning that softer premiums can pressure broking revenue and margins. Other disclosed exposures include competition and staff departures, cybersecurity and privacy, regulatory matters, litigation, foreign exchange, pension obligations, and LIBOR transition. WTW said it planned to renegotiate or repay LIBOR-linked facilities as needed.
- Legal matters: The DOJ case challenging the Aon combination was dismissed following termination. Separate merger-related securities settlements totaling $90m were approved and paid into escrow; cash-flow discussion reports $185m of net settlement payments in the first half, including Stanford-related matters. WTW said it did not expect known claims and proceedings to have a material overall adverse effect, but noted adverse outcomes could materially affect results or cash flows in particular periods.
- Capital returns: The board raised the quarterly dividend from $0.71 to $0.80 per share in July 2021. Also in July, it increased share-repurchase authorization by $1bn to $1.5bn; no repurchases occurred in the first half.
Important facts for investors to verify
- Reconcile first-half reported earnings and EPS with the Miller disposal gain, and distinguish GAAP results from management’s adjusted, non-GAAP measures.
- Confirm receipt and accounting treatment of the $1bn Aon termination fee, which was received after June 30 and is not reflected in this quarter’s financial statements.
- Track cash conversion and working capital: first-half operating cash flow and free cash flow fell substantially year over year, with legal settlements and compensation payments cited as drivers.
- Review near-term debt repayment and refinancing plans, particularly the 2021 and 2022 maturities and the March 2022 revolver expiry.
- Assess whether post-Q2 demand improvement offsets the expected continuing COVID-19 impact, and monitor the stated risks around client collections, staff retention, litigation and regulatory matters.