WILLIS TOWERS WATSON PLC annual report, FY2019

Willis Towers Watson plc — 2019 Form 10-K

Reporting period: Fiscal year ended December 31, 2019. The filing also presents unaudited quarterly results; it is an annual report, not a standalone Q4 filing. Financial amounts are U.S. dollars unless stated otherwise.

Business context

WTW is a global advisory, insurance broking and solutions company with more than 45,000 employees and clients in over 140 countries. It operates through Human Capital and Benefits (HCB), Corporate Risk and Broking (CRB), Investment, Risk and Reinsurance (IRR), and Benefits Delivery and Administration (BDA). WTW does not underwrite insurance risk. Commissions and consulting and administration fees are key revenue sources.

Financial performance

Metric	2019	2018
Revenue	$9.039 billion	$8.513 billion
Income from operations	$1.329 billion	$809 million
Net income attributable to WTW	$1.044 billion	$695 million
Diluted EPS	$8.02	$5.27
Cash from operating activities	$1.081 billion	$1.288 billion
Free cash flow	$835 million	$1.020 billion

• Revenue increased 6% as reported and 5% organically; currency translation reduced revenue by $192 million. Management attributed organic growth to strong results across all segments.
• GAAP operating margin was 14.7%, versus 9.5%; adjusted operating margin was 20.3%, versus 18.1%. Adjusted EBITDA was $2.300 billion, versus $2.036 billion, and adjusted diluted EPS was $10.96, versus $9.73. These are non-GAAP measures.
• Income from operations benefited from revenue growth and $189 million less transaction and integration expense than in 2018. 2019 included $13 million of transaction costs; 2018 included $202 million of integration costs.
• Cash from operations and free cash flow declined, principally due to unfavorable working-capital movements, especially receivables, and TRANZACT’s cash flows. Capital expenditures and internal-use software additions were $246 million.
• Interest expense was $234 million, up from $208 million. The effective GAAP tax rate was 18.8%, compared with 16.0%; 2018 benefited from a state deferred-tax valuation allowance release.
• At year-end, cash and cash equivalents were $887 million, total debt was $5.617 billion, and shareholders’ equity was $10.249 billion. The company reported $1.2 billion available under its $1.25 billion revolver and compliance with debt covenants. The reported capitalization ratio rose to 35.4% from 31.7%.
• Fiduciary funds of $3.4 billion are held for clients and insurers and are not available for corporate purposes. They should not be treated as operating liquidity.

Quarterly results and segment trends

• Q4 2019 revenue was $2.690 billion, operating income $687 million, net income attributable to WTW $544 million, and diluted EPS $4.18. Q4 2018 figures were $2.372 billion, $470 million, $378 million, and $2.89, respectively.
• 2019 segment revenue: HCB $3.298 billion (organic growth 4%); CRB $2.946 billion (6%); IRR $1.637 billion (7%); and BDA $1.035 billion (4%). Segment revenue excludes certain reimbursed expenses and differs from consolidated revenue.
• BDA’s reported growth reflected the July 2019 TRANZACT acquisition, which contributed $245 million of revenue from acquisition through year-end. BDA’s organic growth was 4%.
• CRB reported growth across geographies; IRR grew across all business lines. HCB results included flat Retirement revenue, as increased de-risking work was offset by lower project work and off-year valuation cycles.

Capital, outlook, risks and unusual items

• WTW acquired TRANZACT for approximately $1.3 billion in cash on July 30, 2019, funded initially in part with a $1.1 billion one-year term loan. It issued $1.0 billion of senior notes in September and used net proceeds of about $988 million to repay part of the term loan and revolver borrowings. The remaining term loan was $295 million at year-end, with $24 million due on the acquired collateralized facility.
• Management said liquidity was sufficient for expected needs over the next 12 months. Planned 2020 capital expenditures were approximately $250 million; projected 2020 qualified pension contributions were $163 million, with another $43 million expected in direct benefit payments. The filing does not provide quantified 2020 revenue or earnings guidance.
• Management described insurance-market pricing as showing a “modest but definite improvement.” It expected slower exchange-market growth could continue during 2020. Revenue is seasonal, commonly higher in the first and fourth quarters.
• The board declared a quarterly dividend of $0.68 per share in February 2020 and increased the remaining share-repurchase authorization to $500 million. WTW repurchased $150 million of shares in 2019 and paid $329 million in dividends.
• Significant risks include economic and insurance-premium cycles, competitive and pricing pressure, cybersecurity and privacy exposure, execution and integration of acquisitions, regulatory and healthcare-policy changes, foreign-exchange movements, pension assumptions, and Brexit-related uncertainty. The filing also identified the coronavirus outbreak as a potential risk to global demand and operations.
• WTW disclosed ongoing aviation and aerospace broking competition investigations by the European Commission and Brazil’s CADE; it could not estimate a reasonably possible loss. The Korea investigation examination was concluded subject to possible reopening. The Stanford-related litigation remains subject to a $120 million settlement, but payment was contingent on final resolution of appeals; the filing states it could not estimate loss for certain merger-related litigation.
• The TRANZACT acquisition involved significant valuation estimates, including customer relationships and renewal commissions receivable. TRANZACT represented about 5% of year-end assets and 3% of 2019 revenue; its internal controls were excluded from management’s year-end control assessment while integration continued.
• The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. WTW adopted lease accounting standard ASC 842 in 2019, recognizing $1.2 billion of lease liabilities and $1.0 billion of right-of-use assets at transition; this affects balance-sheet comparisons.

Most important facts for investors to verify

• Whether the 5% organic revenue growth and improved adjusted margins persist, and how much future results depend on TRANZACT.
• Cash conversion, receivables and working capital, including whether free cash flow recovers after its 2019 decline.
• Debt repayment and refinancing needs, interest costs, covenant headroom, and the impact of acquisition-related leverage.
• The final outcome and payment timing of the Stanford settlement, and potential exposure from competition and merger-related proceedings.
• TRANZACT integration, renewal-commission estimates, and the completion of integration into WTW’s internal-control framework.
• Exposure to Brexit, currency movements, insurance pricing, healthcare regulation, cybersecurity events, and pension funding requirements.