Willis Towers Watson plc — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. WTW is a global advisory, broking and solutions company operating through Health, Wealth & Career (HWC) and Risk & Broking (R&B). Amounts are in U.S. dollars unless noted.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $2.166bn | $1.953bn | $6.569bn | $6.144bn |
| Organic revenue growth | 9% | — | 8% | — |
| Income from operations | $159m | $154m | $586m | $470m |
| Operating margin | 7.3% | 7.9% | 8.9% | 7.6% |
| Adjusted operating income | $351m | $284m | $1.084bn | $969m |
| Adjusted operating margin | 16.2% | 14.5% | 16.5% | 15.8% |
| Net income attributable to WTW | $136m | $190m | $433m | $421m |
| Diluted EPS from continuing operations | $1.29 | $1.65 | $4.06 | $3.95 |
| Adjusted diluted EPS | $2.24 | $2.20 | $7.13 | $7.20 |
| Adjusted EBITDA | $436m | $408m | $1.350bn | $1.376bn |
- Q3 reported revenue rose 11%; currency contributed 2 percentage points, with organic growth of 9%. Nine-month revenue rose 7% reported and 8% organically; currency reduced reported growth by 1 percentage point.
- Q3 segment revenue increased 10% at HWC to $1.282bn and 12% at R&B to $855m. Nine-month segment revenue increased 6% at HWC to $3.784bn and 6% at R&B to $2.659bn; R&B organic growth was 9%, despite prior-period book-of-business settlement revenue.
- Q3 net income attributable to WTW fell 28%, while nine-month net income increased 3%. Q3 diluted continuing-operations EPS declined from $1.65 to $1.29; the prior-year total diluted EPS also included discontinued operations.
- For the first nine months, operating cash flow was $823m versus $437m and free cash flow was $707m versus $337m. Free cash flow is a company-defined non-GAAP measure.
Liquidity, debt and capital allocation
- At September 30, 2023, cash and cash equivalents were $1.247bn. Total debt was $5.214bn, comprising $649m current and $4.565bn long-term debt; total debt was $4.721bn at year-end 2022. The capitalization ratio increased to 35.7% from 32.0%.
- The $1.5bn revolving credit facility was undrawn, and WTW reported compliance with financial covenants. Management stated it believes liquidity is sufficient for the next 12 months.
- $650m of 3.6% senior notes is due in 2024. WTW issued $750m of 5.35% notes due 2033 in May 2023; proceeds partly funded repayment of 2023 notes, with remaining proceeds for general corporate purposes.
- WTW repurchased $804m of shares in the first nine months and had approximately $1.5bn of authorization remaining. It paid $265m in dividends during the period; the quarterly dividend was $0.84 per share.
- Fiduciary assets and matching liabilities were each $8.039bn. Fiduciary funds are held for clients and generally are not available for corporate purposes.
Material changes, outlook and risks
- Operating income increased year over year, but reported operating margin declined in Q3. Management attributed higher costs to salary, incentive and benefit expenses and increased transaction and transformation spending. Transaction and transformation costs were $113m in Q3 and $265m for the first nine months, versus $50m and $108m, respectively, in 2022.
- The Transformation program is expected to deliver annual cost savings in excess of $380m by the end of 2024, against approximately $630m cumulative costs and $270m capital expenditures. WTW reported $300m of cumulative annualized run-rate savings identified since inception and an additional $23m identified during Q3. These are management estimates, not guaranteed outcomes.
- The filing provides no specific consolidated revenue or EPS guidance. Management described broking markets as stabilizing and noted that revenue is typically higher in the first and fourth quarters due to broking seasonality.
- The Willis Re divestiture’s remaining fiduciary and related balances were transferred to Gallagher in 2023; the transition services agreement was extended to May 31, 2024, with possible further extension. The transfer resulted in a $922m cash and fiduciary-funds outflow in investing activities. The company recorded a $5m increase to the disposal gain following final settlement.
- Key risks include inflation, labor and financing costs, interest rates, potential recession and geopolitical disruption; competition and insurance-market conditions; foreign exchange exposure; cybersecurity, data privacy and technology risks; and litigation, regulatory matters and claims. WTW said adverse outcomes could affect results or cash flows in a particular period, although it did not expect known legal matters to have a material adverse effect overall.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing notes that controls provide reasonable, not absolute, assurance.
Important facts for investors to verify
- Whether organic growth and segment momentum persist, particularly given seasonality and the prior-year comparison for R&B book-of-business settlements.
- Whether the Transformation program achieves its stated savings and cost targets, and how much further spending is required.
- Plans and funding for the $650m 2024 debt maturity, refinancing costs, and the impact of higher interest expense.
- Cash conversion and working-capital trends; distinguish corporate cash from fiduciary funds and consider the large Willis Re-related cash transfer.
- Potential effects of litigation, regulatory investigations, macroeconomic conditions, foreign exchange movements and the Gallagher transition arrangements.