Willis Group Holdings plc — Q1 2011 Form 10-Q
Business context and reporting period. The filing is for the three months ended March 31, 2011. The registrant was Willis Group Holdings Public Limited Company, an Ireland-incorporated insurance brokerage, risk management and consulting group; it is not filed under the later Willis Towers Watson name. Financial statements are unaudited and prepared under U.S. GAAP. Amounts below are U.S. dollars.
Financial performance
| Metric | Q1 2011 | Q1 2010 | Change / context |
|---|---|---|---|
| Total revenue | $1,008 million | $972 million | Up 4% |
| Commissions and fees | $1,000 million | $963 million | Up 4%; organic growth was 4% |
| Operating income | $238 million | $301 million | Down $63 million |
| Operating margin | 24% | 31% | Down 7 percentage points |
| Net income attributable to Willis | $34 million | $204 million | Down $170 million |
| Diluted EPS | $0.20 | $1.20 | Down $1.00 |
| Cash from operating activities | $7 million | $69 million | Down $62 million |
| Cash from investing activities | $(24) million | $(41) million | Lower investing outflow |
| Cash from financing activities | $127 million | $(17) million | Primarily reflects debt issuance and repayment activity |
Revenue growth was supported by 5% net new business growth, partly offset by a 1% negative impact from declining premiums and other market factors. Reported revenue also reflected a 1% foreign-exchange benefit, offset by lower legacy HRH contingent commissions. Investment income was $8 million, versus $9 million.
Segment organic revenue growth was 8% in Global, 6% in International and negative 1% in North America. Segment operating margins were 48% (46% prior year), 30% (32%) and 24% (25%), respectively. Global reported commissions included a $6 million benefit from an accounting-methodology change.
Balance sheet, debt and liquidity
- At March 31, cash and cash equivalents were $432 million, compared with $316 million at December 31, 2010. Accounts receivable was $992 million; total assets were $17.238 billion.
- Total debt was $2.577 billion, up from $2.267 billion at year-end; total equity was $2.669 billion. The capitalization ratio was 49%, compared with 47%.
- In March, the company issued $800 million of notes: $300 million at 4.125% due 2016 and $500 million at 5.750% due 2021. Proceeds funded repurchase of $465 million of 12.875% notes due 2016, with the remaining $35 million redeemed on April 18, 2011.
- At quarter-end, $100 million was drawn on the $300 million revolver. Management reported $400 million of remaining availability under its group revolving facilities, excluding a separate $20 million UK facility. Management believed liquidity was sufficient for at least 12 months.
- Fiduciary assets and liabilities were each $10.484 billion. These funds are held for clients and insurers, are generally restricted, and are not available for corporate debt service or other company purposes.
Material changes and unusual items
- The $97 million pre-tax 2011 Operational Review charge included $48 million of severance, $34 million of other employee-related costs and $15 million of other operating costs. About 450 positions were eliminated or being eliminated. The review reduced Q1 net income by an estimated $69 million after tax, or $0.39 per diluted share.
- A separate $171 million pre-tax debt-refinancing charge comprised $158 million of make-whole payments and $13 million of unamortized debt-cost write-offs. Management estimated its after-tax effect at $124 million, or $0.71 per diluted share.
- The two unusual charges largely explain the year-over-year net income and EPS decline; revenue increased, but operating income and margin fell. The 2010 comparison also included a $12 million Venezuelan currency devaluation charge.
- Operating cash flow declined to $7 million, which management attributed primarily to lower operating income, incentive-award cash payments and approximately $35 million of Q1 cash payments related to the operational review.
Outlook, management commentary and risks
- Management reiterated its goals of modest adjusted operating-margin expansion and adjusted diluted EPS growth in 2011, followed by significantly accelerated adjusted margin and adjusted EPS growth in 2012 and beyond. These are forward-looking, non-GAAP objectives, not guarantees.
- The operational review was expected to cost approximately $130 million for 2011. Management projected $65 million–$75 million of related savings in 2011 and annualized savings of $95 million–$105 million beginning in 2012. It also expected full-year 2011 salaries and benefits expense to rise about $100 million versus 2010 and planned continued investment in technology, analytics, products and talent.
- Management expected 2011 investment income to be closer to $30 million, versus $38 million in 2010; quarterly interest expense for the rest of 2011 of about $35 million; and full-year intangible amortization of about $68 million. These estimates depend on conditions and execution.
- Management cited continuing soft insurance pricing and difficult economic conditions, particularly in North America and reinsurance. Other identified risks include significant indebtedness, interest and foreign-exchange movements, client and employee retention, regulatory and legal matters, pension funding, and insurance-market volatility.
- Claims and proceedings include insurance-brokerage errors-and-omissions matters and Stanford-related investor litigation. A March 2011 memorandum of understanding contemplated an immaterial company settlement in a consolidated broker class action, subject to a formal agreement and court approval. The company said it could not predict outcomes of the Stanford actions; it intended to defend them. Management did not expect known claims to materially affect financial condition, results or liquidity, while acknowledging adverse outcomes could affect particular periods.
- The company expected approximately $92 million of 2011 contributions to its UK defined-benefit plan, $30 million to its U.S. plan and $7 million to international plans. A further UK funding contribution may be required in 2012 depending on funding targets.
Important facts for investors to verify
- Whether operational-review costs, projected savings and the stated 2011–2012 adjusted performance goals are tracking to plan, and how “adjusted” measures reconcile to GAAP results.
- Whether organic growth persists across segments, particularly the recovery of North America, and whether the Global segment’s $6 million accounting benefit affects comparability.
- Debt levels, leverage covenant headroom (reported at 2.7:1 against a 2.75:1 restricted-payment threshold), refinancing costs and access to revolving facilities.
- Underlying cash generation, working-capital movements and the distinction between corporate cash and restricted fiduciary funds.
- Developments and potential costs in Stanford-related litigation and other claims, as well as court approval and completion of the contemplated class-action settlement.
- UK pension funding requirements and the effect of interest rates, currency movements and insurance premium trends on earnings and liquidity.