Willis Towers Watson plc — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. Although the request identifies 2020 Q4, this filing reports full-year results; the supplied text does not provide clear standalone fourth-quarter financial results. WTW is a global advisory, broking and solutions company operating in more than 140 countries, with four reporting segments: Human Capital and Benefits (HCB), Corporate Risk and Broking (CRB), Investment, Risk and Reinsurance (IRR), and Benefits Delivery and Administration (BDA). Financial figures below are in U.S. dollars.
Key financial results
| Metric | FY2020 | FY2019 | Change / context |
|---|---|---|---|
| Revenue | $9.352 billion | $9.039 billion | Up 3% reported; up 2% organically |
| Income from operations | $1.183 billion | $1.329 billion | Down $146 million; GAAP operating margin 12.6%, versus 14.7% |
| Net income attributable to WTW | $996 million | $1.044 billion | Down 5%; diluted EPS $7.65 versus $8.02 |
| Adjusted operating income | $1.879 billion | $1.831 billion | Adjusted margin 20.1% versus 20.3% |
| Adjusted EBITDA | $2.470 billion | $2.300 billion | Adjusted margin 26.4% versus 25.4% |
| Adjusted diluted EPS | $11.70 | $10.96 | Non-GAAP measure |
| Operating cash flow | $1.774 billion | $1.081 billion | Improved primarily with working capital and spending management |
| Free cash flow | $1.551 billion | $835 million | Operating cash flow less fixed-asset and internal-software additions |
| Interest expense | $244 million | $234 million | Higher debt-related interest costs |
| Effective tax rate | 23.8% | 18.8% | 2020 included $61 million of CARES Act-related tax expense |
Segments and revenue drivers
- HCB: Segment revenue $3.278 billion, down 1% reported and flat organically. COVID-related softness in discretionary Talent and Rewards work offset growth in Health and Benefits and modest growth in Retirement and administration solutions.
- CRB: Segment revenue $2.977 billion, up 1% reported and 1% organically. New business and renewals supported growth; COVID affected construction and marine lines. Certain remuneration-model and internal book transfers reduced reported revenue but were described as operating-income neutral.
- IRR: Segment revenue $1.651 billion, up 1% reported and 4% organically, including growth in reinsurance, insurance technology and investments. The segment sold Max Matthiessen in September 2020.
- BDA: Segment revenue $1.359 billion, up 31% reported and 10% organically, driven mainly by TRANZACT and growth in Benefits Outsourcing. TRANZACT revenue was $557 million in 2020 versus $245 million in 2019; 2019 included it only from its July 30 acquisition date.
Cash, debt and liquidity
- Cash and cash equivalents were $2.089 billion at year-end, compared with $887 million in 2019. The company also had the full $1.25 billion revolving credit facility available and undrawn.
- Total debt was $5.635 billion, compared with $5.617 billion; long-term debt was $4.664 billion and current debt $971 million. The capitalization ratio declined to 34.2% from 35.4%. Interest expense was $244 million.
- WTW reported compliance with all financial covenants at December 31, 2020. Management said available liquidity was sufficient for the next 12 months, including scheduled debt payments and dividends.
- Debt maturities in 2021 included $500 million of 5.750% notes, $450 million of 3.500% notes and $22 million on the TRANZACT collateralized facility. Management anticipated repaying the $500 million notes and interest from cash; the filing also states the two note obligations were expected to be repaid in full in early 2021.
- Operating cash flow benefited from improved working capital and controlled discretionary spending. Investing cash outflow was $160 million, versus $1.614 billion in 2019, when the TRANZACT acquisition was the major driver. Financing cash outflow was $434 million, including $346 million of dividends.
- Fiduciary funds of $4.3 billion are held for third parties and are not available for corporate purposes. The balance sheet also reports matching fiduciary assets and liabilities of $15.160 billion.
Material changes and unusual items
- Revenue increased, but GAAP operating income and attributable net income declined. Adjusted operating income, adjusted EBITDA and adjusted EPS increased; these non-GAAP measures exclude specified items and should be considered alongside GAAP results.
- Transaction and integration expenses rose to $110 million, primarily reflecting legal costs for the proposed Aon combination and TRANZACT integration. WTW also recorded $24 million of restructuring costs, $35 million of accelerated depreciation for abandoned software, and $65 million of merger-related litigation provision, net of insurance and other recoveries.
- Other income, net rose to $399 million from $227 million, primarily due to disposal gains and pension income. The Max Matthiessen sale generated an $86 million tax-exempt gain; WTW also reported $304 million of net periodic pension and post-retirement benefit credits.
- Cash and free cash flow rose substantially year over year, primarily reflecting improved working capital and reduced discretionary spending—not solely higher earnings.
- WTW agreed to sell Miller for consideration of £591 million (reported as approximately $808 million at year-end exchange rates), subject to adjustments and closing conditions; the filing expected the sale to close in Q1 2021.
- In early 2021, WTW paid $120 million to settle Stanford-related litigation and expected to pay $90 million under settlements of merger-related securities litigation. The latter settlement remained subject to final court approval. The filing recorded a $210 million litigation settlement liability at year-end.
Outlook, commentary and risks
- WTW expected COVID-19 to continue negatively affecting revenue and operating results in 2021, particularly discretionary consulting and project work, with management expecting the impact to persist through much of the year. No quantified 2021 revenue or earnings guidance is provided in the supplied text.
- Management said insurance pricing showed a modest but definite improvement. Brokerage commissions remain exposed to premium-rate cycles, while client demand, collections and discretionary work remain sensitive to economic conditions.
- The proposed Aon acquisition remained pending at the filing date, subject to antitrust and other regulatory approvals and closing conditions. The agreed consideration was 1.08 Aon ordinary shares per WTW share; the parties expected closing in the first half of 2021. The transaction imposed restrictions on WTW’s actions before closing, including share repurchases.
- Major disclosed risks include deal delay or failure and possible regulatory remedies; prolonged pandemic effects; cybersecurity and data-protection incidents; professional-liability claims, including pandemic-related coverage disputes; competition and insurance-market changes; foreign exchange and Brexit-related uncertainty; pension obligations; and debt, refinancing and liquidity risks.
- WTW reported material pension obligations and sensitivity to discount rates and investment assumptions. It also identified ongoing regulatory investigations, including a Brazilian competition investigation concerning aviation and aerospace broking; the filing did not provide a clear estimate of any potential loss.
- The independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting. The audit identified the errors-and-omissions reserve, including incurred-but-not-reported claims, as a critical audit matter; this was not a modified audit opinion.
Most important facts for investors to verify
- Progress and final outcome of the Aon transaction, including regulatory approvals, timing, any remedies, and implications if the deal does not close.
- Whether the 2021 debt maturities were repaid as anticipated and how the company’s cash balance, revolving credit availability and leverage changed afterward.
- How COVID-19 affected 2021 client demand, receivable collections, discretionary revenue and professional-liability exposure.
- Final court approval and payment/distribution status of the merger-related litigation settlement, and any further exposure from other claims or investigations.
- Closing and proceeds from the Miller divestiture, alongside the ongoing contribution of the businesses retained after the Max Matthiessen sale.
- Reconciliation of GAAP and adjusted performance, especially the effects of divestiture gains, pension income, litigation costs, transaction expenses and the CARES Act tax impact.