Business context and reporting period
Willis Group Holdings plc (the registrant named in this filing; not identified here as Willis Towers Watson plc) filed this unaudited Form 10-Q for the three months ended March 31, 2015. Willis provides insurance and reinsurance broking, risk management, and consulting services worldwide. Beginning in 2015, it reported four segments: Willis GB, Willis Capital, Wholesale and Reinsurance (CWR), Willis North America, and Willis International; prior-period segment comparatives were reclassified.
Financial performance and position
Unless otherwise stated, amounts are in U.S. dollars. Income statement and cash flow comparisons are with the first quarter of 2014; balance sheet comparisons are with December 31, 2014.
- Revenue: $1.087 billion, down 0.9% reported. Commissions and fees were $1.081 billion, also down 0.9%. Management cited $69 million of adverse foreign-exchange impact, offset by $25 million net from acquisitions and disposals and $34 million organic growth. Organic commissions and fees increased 3.4%.
- Profit and margins: Operating income was $293 million, down from $326 million; GAAP operating margin fell to 26.9% from 29.7%. Net income attributable to Willis was $210 million versus $246 million; diluted EPS was $1.15 versus $1.35. Excluding specified items and rebasing prior-year foreign exchange, underlying operating income rose 5.9% to $324 million and underlying margin was 29.8%; organic operating margin increased to 30.7% from 29.5%.
- Cash flow: Operating activities used $64 million, compared with $5 million generated a year earlier. Management attributed the first-quarter cash use in part to $306 million of prior-year incentive payments, $44 million of pension contributions, and receivables collection timing. Investing activities used $8 million and financing activities used $39 million. Cash and cash equivalents ended the quarter at $503 million, down from $635 million at year-end.
- Debt and liquidity: Total debt was $2.305 billion ($168 million current and $2.137 billion long-term), versus $2.309 billion at year-end. Stockholders’ equity was $2.298 billion; the reported capitalization ratio was 50.1%. No revolving credit facilities were drawn; the company reported $800 million of general revolving capacity, in addition to facilities restricted to specified regulatory uses. The $148 million of 5.625% senior notes due in 2015 and scheduled term-loan payments are near-term debt obligations.
- Other balance-sheet items: Total assets were $16.105 billion and total liabilities were $13.733 billion. Fiduciary assets and matching liabilities were each $9.444 billion; these funds are generally unavailable for corporate purposes. The pension benefits asset increased to $606 million from $314 million, including the accounting effect of a UK pension plan change.
- Shareholder returns: The company declared a quarterly dividend of $0.31 per share, compared with $0.30 a year earlier. It repurchased approximately $15 million of shares in the quarter and announced an intention to repurchase up to $175 million during 2015.
Material changes versus the prior comparable period
- Reported revenue declined modestly, principally because of foreign exchange; organic commissions and fees grew 3.4%.
- GAAP operating income and net income fell, with $31 million of Operational Improvement Program restructuring costs in the quarter and $6 million of net other expense, including foreign-exchange effects. Excluding specified items, underlying and organic operating income increased.
- Operating cash flow swung to a $64 million use from $5 million provided, with incentive payments, pension funding, and working-capital timing among the cited factors.
- Segment performance varied: organic commissions and fees grew 4.7% in North America and 5.3% in International, while CWR grew 1.3% and GB grew 1.1%. Segment operating margins declined in CWR, North America, and International; GB’s margin improved.
Outlook, management commentary, risks and unusual items
- Market and strategy: Management reported easing primary and reinsurance rates across most lines, with uneven conditions and potential quarterly volatility. Its stated priorities include organic growth, targeted acquisitions, analytics, and operational improvement. The filing does not provide formal full-year revenue or EPS guidance.
- Operational Improvement Program: The multi-year program is expected to finish by the end of 2017. Management estimated at least $420 million of cumulative savings through 2017 and approximately $300 million of annual savings beginning in 2018, before potential reinvestment. Estimated cumulative program spend is approximately $410 million through 2017, including approximately $130 million expected in 2015. First-quarter costs were $31 million; cumulative costs were $67 million, with approximately $10 million of first-quarter savings and $21 million cumulative savings reported.
- Acquisitions: The proposed Miller Insurance Services acquisition was expected to close around mid-2015, subject to customary conditions and approvals. On April 22, 2015, after quarter-end, Willis made a firm offer for the remaining 70% of Gras Savoye for approximately €550 million (about $592 million), including estimated third-party debt repayment; completion was subject to regulatory approval and employee consultation. Management expected to use debt capital markets to finance the Gras Savoye transaction.
- Pensions and taxes: A UK pension salary-freeze change was estimated to reduce the projected benefit obligation by approximately $215 million and generated a prior-service gain recorded in other comprehensive income. The company expected approximately $93 million of 2015 contributions to the UK defined-benefit plan, plus contributions to other plans. The U.S. deferred-tax valuation allowance was $163 million; management said a partial release might be possible in 2015, dependent on profitability, but timing and amount were uncertain.
- Contingencies and risks: Willis described multiple Stanford Financial Group-related lawsuits, including claims seeking substantial damages. It disputed the allegations and intended to defend itself; outcomes could not be predicted. The company said it did not expect known claims to have a material adverse effect on financial condition, results, or liquidity, while acknowledging a possible material effect on particular periods. Other key risks include softening insurance markets, foreign exchange, acquisition execution and approvals, cost-program delivery, pension funding, debt management, litigation and errors-and-omissions exposure. Management reported no material change to the risk factors in its 2014 Form 10-K.
Important facts for investors to verify
- Confirm the issuer and reporting entity: this filing is for Willis Group Holdings plc, for the quarter ended March 31, 2015.
- Track organic growth and segment margins alongside reported results, including the impact of foreign exchange and the company’s non-GAAP adjustments.
- Assess operating cash conversion after seasonal incentive payments, pension funding, and receivables movements; distinguish corporate cash from fiduciary funds.
- Monitor repayment or refinancing of the $148 million notes due in 2015 and financing for the proposed Gras Savoye acquisition.
- Compare Operational Improvement Program savings and spending with management’s estimates, and assess execution and reinvestment needs.
- Follow the status, cost, regulatory approvals, and financing of the Miller and Gras Savoye transactions, as well as developments in the Stanford-related litigation and any potential U.S. tax valuation-allowance release.