Excluding the Revenue Standard Impact
- Reported Revenues were
$2.6 billion an increase of 10% - Organic Revenues increased 6%
- Net Income increased 27% to
$447 million or 17.5% of revenues - Adjusted EBITDA increased 18.8% to
$841 million or 33.0% of revenues - Diluted Earnings per Share increased 32.4% to
$3.31 - Adjusted Diluted Earnings per Share increased 19% to
$4.41
Including the Revenue Standard Impact
- Reported Revenues were
$2.3 billion - Net Income was
$221 million - Adjusted EBITDA was
$557 million or 24.3% of revenues - Diluted Earnings per Share were
$1.61 - Adjusted Diluted Earnings per Share were
$2.71
As of
As required by ASC 606, under the modified retrospective method of adoption, the Company has provided the impact to the affected line items within the condensed consolidated financial statements for 2018. The 2017 comparative financial line items have not been restated in accordance with the new standard. In an effort to allow the reader to better understand the impact this guidance had on our reported results, we have also included our 2018 results, without the adoption effects of ASC 606, as supplemental information. A more comprehensive explanation of the changes in accounting methodology can be found in the supplemental slides to this press release which have been posted to www.willistowerswatson.com.
The Company also adopted ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost which became effective
Excluding the Revenue Standard
Without the impact of ASC 606, Revenues were
Net income attributable to
Net income for the first quarter of 2018 was
Including the Revenue Standard
With the impact of ASC 606, Revenues were
Net income attributable to
Net income for the first quarter of 2018 was
As anticipated for the first quarter, Free Cash Outflow was
“I’m extremely pleased with the first quarter results,” said
First Quarter Company Highlights
Segment Highlights
Beginning in 2018, we made certain changes that affect our segment results. These changes include the realignment of certain businesses within our segments, as well as changes to certain allocation methodologies to better reflect the ongoing nature of our businesses. The prior period comparatives have been retrospectively adjusted to reflect our current segment presentation. These changes were unrelated to ASC 606.
Excluding the Revenue Standard
Excluding the impact of ASC 606, for the quarter, the
Including the Revenue Standard
The HCB segment had revenues of
Corporate Risk & Broking
Excluding the Revenue Standard
Excluding the impact of ASC 606, for the quarter, the Corporate Risk & Broking (CRB) segment had revenues of
Including the Revenue Standard
For the quarter, the CRB segment had revenues of
Investment, Risk & Reinsurance
Excluding the Revenue Standard
Excluding the impact of ASC 606, for the quarter, the Investment, Risk & Reinsurance (IRR) segment had revenues of
Including the Revenue Standard
For the quarter, the IRR segment had revenues of
Benefits Delivery and Administration
Excluding the Revenue Standard
Excluding the impact of ASC 606, for the quarter, the Benefits Delivery and Administration (BDA) segment had revenues of
Including the Revenue Standard
The BDA segment had revenues of
Reconciliation of Segment Operating Income to Income from Operations before Income Taxes
For the first quarters of 2018 and 2017, the Company recorded expenses that are excluded from our segment operating income. The following table reconciles the difference.
| Excluding Revenue Standard |
Excluding Revenue Standard |
Including Revenue Standard |
|||||||||
| Three Months ended March 31, | |||||||||||
| 2018 | 2017 | 2018 | |||||||||
| Segment Operating Income | $ | 813 | $ | 714 | $ | 547 | |||||
| Amortization | (141 | ) | (151 | ) | (141 | ) | |||||
| Restructuring costs | — | (27 | ) | — | |||||||
| Transaction and integration expenses | (43 | ) | (40 | ) | (43 | ) | |||||
| Unallocated, net | (91 | ) | (95 | ) | (104 | ) | |||||
| Income from Operations | 538 | 401 | 259 | ||||||||
| Interest expense | 51 | 46 | 51 | ||||||||
| Other income, net | (56 | ) | (43 | ) | (56 | ) | |||||
| Income from operations before income taxes | $ | 543 | $ | 398 | $ | 264 | |||||
Outlook for 2018
Without the impact of ASC 606, for 2018, the Company continues to expect constant currency revenue growth of around 3%, and 4% on an organic basis and Adjusted Diluted Earnings per Share in the range of
Conference Call
The Company will host a live webcast and conference call to discuss the financial results for the first quarter of 2018. It will be held on
About
Select Questions and Answers
| Q1: | The new accounting standard (ASC 606) will impact your 2018 earnings by approximately $0.40 of EPS. Is this a one-time adoption issue, and what is the driver behind the impact? |
| The impact of the new accounting standard is a one-time impact to revenue and expenses. The main driver of the annual revenue loss in 2018 is how the new accounting standard applies to health care brokerage policies. We adopted the open contracts method as defined in ASC 606, which resulted in the Company not having a retained earnings adjustment upon implementation of the standard for this offering. In the past, we recognized the revenue at the time we sold the policy. Under the new accounting standard, we must pro-rate the revenue over the 12 month period. Approximately 40% of the healthcare policies are sold after January 1st. Thus, we expect that approximately $50 million dollars that would have been recognized in 2018 under the old accounting standard, will now be recognized in 2019. |
|
| Q2: | What is the right way to think about EPS in 2019? |
| The 2019 EPS should reflect the addition of the $50 million of the 2018 pro-rated revenues, much of which will be recognized in Q1 2019. The 2019 financials will actually reflect a full year of revenues as the “new standard” only impacts 2018, the adoption period. All things being equal, the 2019 EPS models created under the old accounting standard should not change. For example, if under the old accounting standard the Adjusted EPS was $11.00, it should remain at $11.00 under the new accounting standard (ASC 606). |
|
| Q3: | What is the impact of the new accounting standard (ASC 606) on the segments? |
| Posted to our website are supplemental ASC 606 slides with details of the impacts to the segments for the first quarter of 2018. | |
| Q4: | The 2017 segment results are different from what was reported. Why is this? |
| As part of the continued review of our portfolio, we moved some business groups from one segment to another. There was no material restructuring related to these moves, but we felt it was important to align the teams to the proper segments to take full advantage of integrated opportunities. Included in our supplemental slides, that have been posted to our website, we have an updated unaudited 2017 pro forma schedule for ASC 606 which includes the 2017 recast segment details. | |
| Q5: | The original tax guidance for 2018 indicated a tax rate of approximately 24%. After just one quarter, the guidance was updated to a range of 23% to 24%. Is there a possibility the tax guidance will be reduced again? Is the tax guidance based on the old accounting or new accounting standard? |
| We continue to gain a better understanding of the impact of U.S. Tax Reform on our 2018 outlook. We will continue to analyze the impact of U.S. Tax Reform as additional guidance is announced and update guidance as needed. The 2018 tax guidance is appropriate for both old and new accounting standards. |
|
| Q6: | Free Cash Flow was negative in the first quarter. How does this impact the overall goal of achieving $1.1 to $1.3 billion in 2018? |
| Annual bonuses are paid in the first quarter. Given the strong performance in 2017, the annual bonuses were much higher than in the previous year. We anticipated having a cash outflow in the first quarter. Our cash flow builds throughout the year and we are maintaining our overall goal of having Free Cash Flow of $1.1 to $1.3 billion in 2018. | |
| Q7: | What is the long-term Free Cash Flow goal beyond 2018? |
| As we look at the longer-term, past 2018, Free Cash Flows are expected to approximate 75% to 80% of Adjusted EBIDTA. | |
| Q8: | Given the renewals that transpired in the first quarter, what is your view of the pricing environment? |
| For a comprehensive look at overall market pricing in the primary and reinsurance markets, please view the “Marketplace Realities: Spring 2018 Update”, and the Willis Re: Reinsurance Market Report April 2018: Results for 2017” which can both be found on the Willis Towers Watson website. We believe that pricing in primary insurance was neutral to slightly up depending on product class and that reinsurance pricing was neutral to our results. |
|
| Q9: | How much did Forensic work help the first quarter growth rate? |
| It was less than 1% of the CRB growth rate. | |
| Q10: | What was the impact of foreign currency movement for the first quarter? |
| Revenue included $123 million of positive currency movement in the first quarter. The impact of currency fluctuations on adjusted earnings per share was positive $0.24 in the first quarter. | |
| Q11: | The dollar has had a big move, so how should we be thinking about the benefit for 2018? |
| The US dollar has weakened in the first quarter of 2018. If the dollar doesn’t move going forward, foreign exchange could help us in 2018. If the dollar moves directionally against our top three currencies that we have over the remainder of the year; the Pound, Euro, Canadian dollar, a 5% change would lower our operating earnings approximately -$1 million, net of tax, or -$0.01 AEPS on operating earnings. | |
| Q12: | In the reconciliation of Segment Operating Income to Income from operations before income taxes what is the difference of the ‘unallocated, net’ and the ‘other income, net’? |
| The ‘unallocated, net’ includes certain costs, primarily those related to corporate functions which are not directly related to the segments and certain differences between budgeted expenses determined at the beginning of the year and actual expenses that we report for U.S. GAAP purposes. The ‘other income, net’ primarily includes the impact of foreign currency, gains and losses on dispositions, and a credit related to pension. As a result of the adoption of ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, the non-service cost component of pension credit is now included in ‘other income, net’ whereas prior to the adoption was part of ‘unallocated, net’. |
Willis Towers Watson Non-GAAP Measures
In order to assist readers of our condensed consolidated financial statements in understanding the core operating results that Willis Towers Watson’s management uses to evaluate the business and for financial planning, we present the following non-GAAP measures: (1) Constant Currency Change, (2) Organic Change, (3) Adjusted Operating Income, (4) Adjusted EBITDA, (5) Adjusted Net Income, (6) Adjusted Diluted Earnings Per Share, (7) Adjusted Income Before Taxes, (8) Adjusted Income Taxes/Rate and (9) Free Cash Flow.
The Company believes that these measures are relevant and provide useful information widely used by analysts, investors and other interested parties in our industry to provide a baseline for evaluating and comparing our operating performance, and in the case of free cash flow, our liquidity results.
Additionally, in 2018, we adopted ASC 606, which had a material impact on the amount, timing and classification of certain revenues and costs included in our condensed consolidated financial statements. Since the Company adopted the guidance using the modified retrospective method, it has provided the impact to the affected financial statement line items within the condensed consolidated financial statements for 2018; the 2017 comparative financial statement line items have not been restated in accordance with the new standard. In an effort to help the reader better understand the impact that this guidance had on our non-GAAP measures, we have presented these measures as reported, as well as without the adoption of ASC 606.
Further, because we have linked significant executive compensation performance targets for 2018 to the results of our non-GAAP measures calculated without the adoption of ASC 606, we believe it is necessary to disclose the calculations of these compensation metrics for calendar year 2018.
Within these measures referred to as “adjusted”, we adjust for significant items which will not be settled in cash, or which we believe to be items that are not core to our current or future operations. Some of these items may not be applicable for the current quarter, however they are expected to be part of our full-year results. These items include the following:
- Restructuring costs and transaction and integration expenses - Management believes it is appropriate to adjust for restructuring costs and transaction and integration expenses when they relate to a specific significant program with a defined set of activities and costs that are not expected to continue beyond a defined period of time, or one-time Merger-related transaction expenses. We believe the adjustment is necessary to present how the Company is performing, both now and in the future when these programs will have concluded.
- Gains and losses on disposals of operations - Adjustment to remove the gain or loss resulting from disposed operations.
- Pension settlement and curtailment gains and losses - Adjustment to remove significant pension settlement and curtailment gains and losses to better present how the Company is performing.
- Provisions for significant litigation - We will include provisions for litigation matters which we believe are not representative of our core business operations.
- Venezuelan currency devaluation - Foreign exchange losses incurred as a consequence of the Venezuelan government’s enforced changes to exchange rate mechanisms.
- Tax effects of internal reorganization - Relates to the U.S. income tax expense resulting from the completion of internal reorganizations of the ownership of certain businesses that reduced the investments held by our U.S.-controlled subsidiaries.
- Tax effect of U.S. Tax Reform - Relates to the (1) U.S. income tax adjustment of deferred taxes upon the change in the federal corporate tax rate, (2) the impact of the one-time transition tax on accumulated foreign earnings net of foreign tax credits, and (3) the re-measurement of our net deferred tax liabilities associated with the U.S. tax on certain foreign earnings offset with a write-off of deferred tax assets that will no longer be realizable under U.S. Tax Reform.
We evaluate our revenues on an as reported (U.S. GAAP), constant currency and organic basis. We believe presenting constant currency and organic information provides valuable supplemental information regarding our comparable results, consistent with how we evaluate our performance internally.
Constant Currency Change – represents the year over year change in revenues excluding the impact of foreign currency fluctuations. To calculate this impact, the prior year local currency results are first translated using the current year monthly average exchange rates. The change is calculated by comparing the prior year revenues, translated at the current year monthly average exchange rates, to the current year as reported revenues, for the same period. We believe constant currency measures provide useful information to investors because they provide transparency to performance by excluding the effects that foreign currency exchange rate fluctuations have on period-over-period comparability given volatility in foreign currency exchange markets.
Organic Change – excludes the impact of fluctuations in foreign currency exchange rates, as described above, the period-over-period impact of acquisitions and divestitures, and the impact to 2018 revenues of adopting ASC 606. We believe that excluding transaction-related items from our U.S. GAAP financial measures provides useful supplemental information to our investors, and it is important in illustrating what our core operating results would have been had we not included these transaction-related items, since the nature, size and number of these translation-related items can vary from period to period.
Adjusted Operating Income – Income from Operations adjusted for amortization, restructuring costs, transaction and integration expenses, and non-recurring items that, in management’s judgment, significantly affect the period-over-period assessment of operating results.
Adjusted EBITDA – Net Income adjusted for provision for/(benefit from) income taxes, interest expense, depreciation and amortization, restructuring costs, transaction and integration expenses, (gain)/loss on disposal of operations and non-recurring items that, in management’s judgment, significantly affect the period-over-period assessment of operating results.
Adjusted Net Income – Net Income Attributable to
Adjusted Diluted Earnings Per Share – Adjusted Net Income divided by the weighted average number of shares of common stock, diluted.
Adjusted Income Before Taxes – Income from operations before income taxes adjusted for amortization, restructuring costs, transaction and integration expenses, (gain)/loss on disposal of operations and non-recurring items that, in management’s judgment, significantly affect the period-over-period assessment of operating results. Adjusted income before taxes is used solely for the purpose of calculating the adjusted income tax rate.
Adjusted Income Taxes/Rate – Provision for/(benefit from) income taxes adjusted for taxes on certain items of amortization, restructuring costs, transaction and integration expenses, (gain)/loss on disposal of operations, the tax effects of internal reorganizations and U.S. Tax Reform, and non-recurring items that, in management’s judgment, significantly affect the period-over-period assessment of operating results. Adjusted income taxes is used solely for the purpose of calculating the Adjusted Income Tax Rate which is calculated by dividing Adjusted Income Taxes by Adjusted Income Before Taxes.
Free Cash Flow – Cash Flows from Operating Activities less cash used to purchase fixed assets and software for internal use. Free Cash Flow is a liquidity measure and is not meant to represent residual cash flow available for discretionary expenditures.
These non-GAAP measures are not defined in the same manner by all companies and may not be comparable to other similarly titled measures of other companies. Non-GAAP measures should be considered in addition to, and not as a substitute for, the information contained within our consolidated financial statements.
Reconciliations of these measures are included in the accompanying tables with the following exception.
The Company does not reconcile its forward looking non-GAAP financial measures to the corresponding U.S. GAAP measures (including the information under “Outlook for 2018” above), due to variability and difficulty in making accurate forecasts and projections and/or certain information not being ascertainable or accessible; and because not all of the information, such as foreign currency impacts necessary for a quantitative reconciliation of these forward-looking non-GAAP financial measures to the most directly comparable U.S. GAAP financial measure is available to the Company without unreasonable efforts. For the same reasons, the Company is unable to address the probable significance of the unavailable information. The Company provides non-GAAP financial measures that it believes will be achieved, however it cannot accurately predict all of the components of the adjusted calculations and the U.S. GAAP measures may be materially different than the non-GAAP measures.
Willis Towers Watson Forward-Looking Statements
This document contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. You can identify these statements and other forward-looking statements in this document by words such as “may”, “will”, “would”, “expect”, “anticipate”, “believe”, “estimate”, “plan”, “intend”, “continue”, or similar words, expressions or the negative of such terms or other comparable terminology. These statements include, but are not limited to, the benefits of the business combination transaction involving Towers Watson and Willis, including the combined company’s future financial and operating results, plans, objectives, expectations and intentions, the impact of changes to tax laws on our financial results and other statements that are not historical facts. Such statements are based upon the current beliefs and expectations of Willis Towers Watson’s management and are subject to significant risks and uncertainties. Actual results may differ from those set forth in the forward-looking statements. All forward-looking disclosure is speculative by its nature.
There are important risks, uncertainties, events and factors that could cause our actual results or performance to differ materially from those in the forward-looking statements contained herein, including the following: the ability of the company to successfully establish, execute and achieve its global business strategy; changes in demand for our services, including any decline in defined benefit pension plans or the purchasing of insurance; changes in general economic, business and political conditions, including changes in the financial markets; significant competition that the company faces and the potential for loss of market share and/or profitability; the impact of seasonality and differences in timing of renewals; the risk of increased liability or new legal claims arising from our new and existing products and services, and expectations, intentions and outcomes relating to outstanding litigation; the risk the
Although we believe that the assumptions underlying our forward-looking statements are reasonable, any of these assumptions, and therefore also the forward-looking statements based on these assumptions, could themselves prove to be inaccurate. In light of the significant uncertainties inherent in the forward-looking statements included in this document, our inclusion of this information is not a representation or guarantee by us that our objectives and plans will be achieved.
Our forward-looking statements speak only as of the date made and we will not update these forward-looking statements unless the securities laws require us to do so. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this document may not occur, and we caution you against relying on these forward-looking statements.
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INVESTORS
Supplemental Segment Information
(In millions of U.S. dollars)
(Unaudited)
The Company adopted ASC 606, Revenue from Contracts with Customers, as of
In an effort to better understand the impact the ASC 606 guidance had on our reported results, we have included the results as reported, as well as, without the adoption of ASC 606, as supplemental information.
| SEGMENT REVENUE | Excluding Revenue Standard | |||||||||||||||||||
| Components of Revenue Change(i) | ||||||||||||||||||||
| Three Months ended March 31, | As Reported | Currency | Constant Currency | Acquisitions | Organic | |||||||||||||||
| 2018 | 2017 | % Change |
Impact | Change | Divestitures | Change | ||||||||||||||
| Human Capital & Benefits | $ | 1,022 | $ | 949 | 8 | % | 5 | % | 3 | % | (1 | )% | 4 | % | ||||||
| Corporate Risk & Broking | 758 | 672 | 13 | % | 7 | % | 5.5 | % | 0 | % | 6 | % | ||||||||
| Investment, Risk & Reinsurance | 539 | 491 | 10 | % | 7 | % | 3 | % | (2 | )% | 5 | % | ||||||||
| Benefits Delivery & Administration | 195 | 181 | 8 | % | 0 | % | 8 | % | 0 | % | 8 | % | ||||||||
| SEGMENT REVENUE | $ | 2,514 | $ | 2,293 | 10 | % | 6 | % | 4 | % | (1 | )% | 5 | % | ||||||
| (i) Components of revenue change may not add due to rounding | ||||||||||||||||||||
| SEGMENT REVENUE | Including Revenue Standard | |||||||||||||||||||
| Components of Revenue Change(i) | ||||||||||||||||||||
| Three Months ended March 31, | As Reported | Currency | Acquisitions | ASC 606 | Organic | |||||||||||||||
| 2018 | 2017 | % Change |
Impact | Divestitures | Impact | Change | ||||||||||||||
| Human Capital & Benefits | $ | 832 | $ | 949 | (12 | )% | 4 | % | (1 | )% | (19 | )% | 4 | % | ||||||
| Corporate Risk & Broking | 740 | 672 | 10 | % | 7 | % | 0 | % | (3 | )% | 6 | % | ||||||||
| Investment, Risk & Reinsurance | 574 | 491 | 17 | % | 7 | % | (2 | )% | 7 | % | 5 | % | ||||||||
| Benefits Delivery & Administration | 122 | 181 | (32 | )% | 0 | % | 0 | % | (40 | )% | 8 | % | ||||||||
| SEGMENT REVENUE | $ | 2,268 | $ | 2,293 | (1 | )% | 5 | % | (1 | )% | (10 | )% | 5 | % | ||||||
| (i) Components of revenue change may not add due to rounding | ||||||||||||||||||||
| Reconciliation of Segment Revenue to Revenue | ||||||||||||||||||||
| Excluding Revenue Standard | Including Revenue Standard |
Excluding Revenue Standard |
||||||||||||||||||
| Three Months ended March 31, | ||||||||||||||||||||
| 2018 | 2018 | 2017 | ||||||||||||||||||
| Segment Revenue | $ | 2,514 | $ | 2,268 | $ | 2,293 | ||||||||||||||
| Reimbursable expenses and other | 37 | 24 | 26 | |||||||||||||||||
| Revenue | $ | 2,551 | $ | 2,292 | $ | 2,319 | ||||||||||||||
| The components of the change in Revenue generated for the three months ended March 31, 2018 and 2017 are as follows: | ||||||||||||||||||||
| Excluding Revenue Standard | ||||||||||||||||||||
| Components of Revenue Change(i) | ||||||||||||||||||||
| Three Months ended March 31, | As Reported | Currency | Constant Currency | Acquisitions | Organic | |||||||||||||||
| 2018 | 2017 | % Change |
Impact | Change | Divestitures | Change | ||||||||||||||
| Revenue | $ | 2,551 | $ | 2,319 | 10 | % | 6 | % | 4 | % | (1 | )% | 6 | % | ||||||
| (i) Components of revenue change may not add due to rounding | ||||||||||||||||||||
| Including Revenue Standard | ||||||||||||||||||||
| Components of Revenue Change(i) | ||||||||||||||||||||
| Three Months ended March 31, | As Reported | Currency | Acquisitions | ASC 606 | Organic | |||||||||||||||
| 2018 | 2017 | % Change |
Impact | Divestitures | Impact | Change | ||||||||||||||
| Revenue | $ | 2,292 | $ | 2,319 | (1 | )% | 5 | % | (1 | )% | (10 | )% | 6 | % | ||||||
| (i) Components of revenue change may not add due to rounding | ||||||||||||||||||||
| SEGMENT OPERATING INCOME(i) | ||||||||||||||||||||
| Excluding Revenue Standard | Including Revenue Standard |
Excluding Revenue Standard |
||||||||||||||||||
| Three Months ended March 31, | ||||||||||||||||||||
| 2018 | 2018 | 2017 | ||||||||||||||||||
| Human Capital & Benefits | $ | 384 | $ | 193 | $ | 345 | ||||||||||||||
| Corporate Risk & Broking | 146 | 125 | 117 | |||||||||||||||||
| Investment, Risk & Reinsurance | 241 | 261 | 214 | |||||||||||||||||
| Benefits Delivery & Administration | 42 | (32 | ) | 38 | ||||||||||||||||
| Segment Operating Income | $ | 813 | $ | 547 | $ | 714 | ||||||||||||||
| (i)Segment operating income excludes certain costs, including amortization of intangibles, restructuring costs, integration expenses, certain litigation provisions, and to the extent that the actual expense based upon which allocations are made differs from the forecast/budget amount, a reconciling item will be created between internally allocated expenses and the actual expenses reported for US GAAP purposes. | ||||||||||||||||||||
| Reconciliation of Segment Operating Income to Income from operations before income taxes | ||||||||||||||||||||
| Excluding Revenue Standard |
Including Revenue Standard |
Excluding Revenue Standard |
||||||||||||||||||
| Three Months ended March 31, | ||||||||||||||||||||
| 2018 | 2018 | 2017 | ||||||||||||||||||
| Segment Operating Income | $ | 813 | $ | 547 | $ | 714 | ||||||||||||||
| Amortization | (141 | ) | (141 | ) | (151 | ) | ||||||||||||||
| Restructuring costs | — | — | (27 | ) | ||||||||||||||||
| Transaction and integration expenses | (43 | ) | (43 | ) | (40 | ) | ||||||||||||||
| Unallocated, net(i) | (91 | ) | (104 | ) | (95 | ) | ||||||||||||||
| Income from Operations | 538 | 259 | 401 | |||||||||||||||||
| Interest expense | 51 | 51 | 46 | |||||||||||||||||
| Other income, net | (56 | ) | (56 | ) | (43 | ) | ||||||||||||||
| Income from operations before income taxes | $ | 543 | $ | 264 | $ | 398 | ||||||||||||||
| (i)Includes certain costs, primarily those related to corporate functions which are not directly related to the segments, and certain differences between budgeted expenses determined at the beginning of the year and actual expenses that we report for U.S. GAAP purposes. | ||||||||||||||||||||
Reconciliation of Non-GAAP Measures
(In millions of U.S. dollars, except per share data)
(Unaudited)
The Company adopted ASC 606, Revenue from Contracts with Customers, as of
| RECONCILIATION OF NET INCOME ATTRIBUTABLE TO WILLIS TOWERS WATSON TO ADJUSTED DILUTED EARNINGS PER SHARE | |||||||||||||||
| Excluding Revenue Standard |
Including Revenue Standard |
Excluding Revenue Standard |
|||||||||||||
| Three Months Ended March 31, | |||||||||||||||
| 2018 | 2018 | 2017 | |||||||||||||
| Net Income attributable to Willis Towers Watson | $ | 441 | $ | 215 | $ | 344 | |||||||||
| Adjusted for certain items: | |||||||||||||||
| Amortization | 141 | 141 | 151 | ||||||||||||
| Restructuring costs | — | — | 27 | ||||||||||||
| Transaction and integration expenses | 43 | 43 | 40 | ||||||||||||
| Loss on disposal of operations | 9 | 9 | — | ||||||||||||
| Tax effect on certain items listed above(i) | (47 | ) | (47 | ) | (69 | ) | |||||||||
| Tax effects of internal reorganization | — | — | 19 | ||||||||||||
| Adjusted Net Income | $ | 587 | $ | 361 | $ | 512 | |||||||||
| Weighted average shares of common stock, diluted | 133 | 133 | 138 | ||||||||||||
| Diluted Earnings Per Share | $ | 3.31 | $ | 1.61 | $ | 2.50 | |||||||||
| Adjusted for certain items: | |||||||||||||||
| Amortization | 1.06 | 1.06 | 1.09 | ||||||||||||
| Restructuring costs | — | — | 0.19 | ||||||||||||
| Transaction and integration expenses | 0.32 | 0.32 | 0.29 | ||||||||||||
| Loss on disposal of operations | 0.07 | 0.07 | — | ||||||||||||
| Tax effect on certain items listed above(i) | (0.35 | ) | (0.35 | ) | (0.50 | ) | |||||||||
| Tax effects of internal reorganization | — | — | 0.14 | ||||||||||||
| Adjusted Diluted Earnings Per Share | $ | 4.41 | $ | 2.71 | $ | 3.71 | |||||||||
| (i)The tax effect was calculated using an effective tax rate for each item. | |||||||||||||||
| RECONCILIATION OF NET INCOME TO ADJUSTED EBITDA | |||||||||||||||
| Excluding Revenue Standard |
Including Revenue Standard |
Excluding Revenue Standard |
|||||||||||||
| Three Months Ended March 31, | |||||||||||||||
| 2018 | 2018 | 2017 | |||||||||||||
| Net Income | $ | 447 | 17.5 | % | $ | 221 | 9.6 | % | $ | 352 | 15.2 | % | |||
| Provision for income taxes | 96 | 43 | 46 | ||||||||||||
| Interest expense | 51 | 51 | 46 | ||||||||||||
| Depreciation | 54 | 49 | 46 | ||||||||||||
| Amortization | 141 | 141 | 151 | ||||||||||||
| Restructuring costs | — | — | 27 | ||||||||||||
| Transaction and integration expenses | 43 | 43 | 40 | ||||||||||||
| Loss on disposal of operations | 9 | 9 | — | ||||||||||||
| Adjusted EBITDA and Adjusted EBITDA Margin | $ | 841 | 33.0 | % | $ | 557 | 24.3 | % | $ | 708 | 30.5 | % | |||
| RECONCILIATION OF INCOME FROM OPERATIONS TO ADJUSTED OPERATING INCOME | |||||||||||||||
| Excluding Revenue Standard |
Including Revenue Standard |
Excluding Revenue Standard |
|||||||||||||
| Three Months Ended March 31, | |||||||||||||||
| 2018 | 2018 | 2017 | |||||||||||||
| Income from operations | $ | 538 | 21.1 | % | $ | 259 | 11.3 | % | $ | 401 | 17.3 | % | |||
| Adjusted for certain items: | |||||||||||||||
| Amortization | 141 | 141 | 151 | ||||||||||||
| Restructuring costs | — | — | 27 | ||||||||||||
| Transaction and integration expenses | 43 | 43 | 40 | ||||||||||||
| Adjusted operating income | $ | 722 | 28.3 | % | $ | 443 | 19.3 | % | $ | 619 | 26.7 | % | |||
| RECONCILIATION OF GAAP INCOME TAXES/RATE TO ADJUSTED INCOME TAXES/RATE | |||||||||||||||
| Excluding Revenue Standard |
Including Revenue Standard |
Excluding Revenue Standard |
|||||||||||||
| Three Months Ended March 31, | |||||||||||||||
| 2018 | 2018 | 2017 | |||||||||||||
| Income from operations before income taxes | $ | 543 | $ | 264 | $ | 398 | |||||||||
| Adjusted for certain items: | |||||||||||||||
| Amortization | 141 | 141 | 151 | ||||||||||||
| Restructuring costs | — | — | 27 | ||||||||||||
| Transaction and integration expenses | 43 | 43 | 40 | ||||||||||||
| Loss on disposal of operations | 9 | 9 | - | ||||||||||||
| Adjusted income before taxes | $ | 736 | $ | 457 | $ | 616 | |||||||||
| Provision for income taxes | $ | 96 | $ | 43 | $ | 46 | |||||||||
| Tax effect on certain items listed above(i) | 47 | 47 | 69 | ||||||||||||
| Tax effects of internal reorganization | — | — | (19 | ) | |||||||||||
| Adjusted income taxes | $ | 143 | $ | 90 | $ | 96 | |||||||||
| GAAP tax rate | 17.9 | % | 16.3 | % | 11.6 | % | |||||||||
| Adjusted tax rate | 19.6 | % | 19.7 | % | 15.6 | % | |||||||||
| (i)The tax effect was calculated using an effective tax rate for each item. | |||||||||||||||
| RECONCILIATION OF CASH FLOWS FROM OPERATING ACTIVITIES TO FREE CASH FLOW | |||||||||||||||
| Excluding Revenue Standard |
Including Revenue Standard |
Excluding Revenue Standard |
|||||||||||||
| Three Months Ended March 31, | |||||||||||||||
| 2018 | 2018 | 2017 | |||||||||||||
| Cash flows from operating activities | $ | 28 | $ | 18 | $ | 95 | |||||||||
| Less: Additions to fixed assets and software for internal use | (65 | ) | (65 | ) | (62 | ) | |||||||||
| Free Cash Flow | $ | (37 | ) | $ | (47 | ) | $ | 33 | |||||||
Condensed Consolidated Statements of Income
(In millions of U.S. dollars, except per share data)
(Unaudited)
| With Adoption of ASC 606 |
Without Adoption of ASC 606 |
||||||
| Three Months Ended March 31, | |||||||
| 2018 | 2017 | ||||||
| Revenue | $ | 2,292 | $ | 2,319 | |||
| Costs of providing services | |||||||
| Salaries and benefits | 1,377 | 1,253 | |||||
| Other operating expenses | 423 | 401 | |||||
| Depreciation | 49 | 46 | |||||
| Amortization | 141 | 151 | |||||
| Restructuring costs | — | 27 | |||||
| Transaction and integration expenses | 43 | 40 | |||||
| Total costs of providing services | 2,033 | 1,918 | |||||
| Income from operations | 259 | 401 | |||||
| Interest expense | 51 | 46 | |||||
| Other income, net | (56 | ) | (43 | ) | |||
| INCOME FROM OPERATIONS BEFORE INCOME TAXES | 264 | 398 | |||||
| Provision for income taxes | 43 | 46 | |||||
| NET INCOME | 221 | 352 | |||||
| Income attributable to non-controlling interests | (6 | ) | (8 | ) | |||
| NET INCOME ATTRIBUTABLE TO WILLIS TOWERS WATSON | $ | 215 | $ | 344 | |||
| Earnings per share | |||||||
| Basic earnings per share | $ | 1.62 | $ | 2.51 | |||
| Diluted earnings per share | $ | 1.61 | $ | 2.50 | |||
| Weighted average shares of common stock, basic | 133 | 137 | |||||
| Weighted average shares of common stock, diluted | 133 | 138 | |||||
| Cash dividends declared per share | $ | 0.60 | $ | 0.53 | |||
| The prior year quarter has been updated for the adoption of ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost which became effective January 1, 2018 and has been applied retrospectively. | |||||||
Condensed Consolidated Balance Sheets
(In millions of U.S. dollars, except share data)
(Unaudited)
| March 31, | December 31, | ||||||||
| 2018 | 2017 | ||||||||
| ASSETS | |||||||||
| Cash and cash equivalents | $ | 954 | $ | 1,030 | |||||
| Fiduciary assets | 13,613 | 12,155 | |||||||
| Accounts receivable, net | 2,600 | 2,246 | |||||||
| Prepaid and other current assets | 439 | 430 | |||||||
| Total current assets | 17,606 | 15,861 | |||||||
| Fixed assets, net | 926 | 985 | |||||||
| Goodwill | 10,555 | 10,519 | |||||||
| Other intangible assets, net | 3,761 | 3,882 | |||||||
| Pension benefits assets | 832 | 764 | |||||||
| Other non-current assets | 532 | 447 | |||||||
| Total non-current assets | 16,606 | 16,597 | |||||||
| TOTAL ASSETS | $ | 34,212 | $ | 32,458 | |||||
| LIABILITIES AND EQUITY | |||||||||
| Fiduciary liabilities | $ | 13,613 | $ | 12,155 | |||||
| Deferred revenue and accrued expenses | 1,239 | 1,711 | |||||||
| Short-term debt and current portion of long-term debt | 85 | 85 | |||||||
| Other current liabilities | 867 | 804 | |||||||
| Total current liabilities | 15,804 | 14,755 | |||||||
| Long-term debt | 4,507 | 4,450 | |||||||
| Liability for pension benefits | 1,230 | 1,259 | |||||||
| Deferred tax liabilities | 711 | 615 | |||||||
| Provision for liabilities | 624 | 558 | |||||||
| Other non-current liabilities | 506 | 544 | |||||||
| Total non-current liabilities | 7,578 | 7,426 | |||||||
| TOTAL LIABILITIES | 23,382 | 22,181 | |||||||
| COMMITMENTS AND CONTINGENCIES | |||||||||
| REDEEMABLE NON-CONTROLLING INTEREST | 28 | 28 | |||||||
| EQUITY(i) | |||||||||
| Additional paid-in capital | 10,548 | 10,538 | |||||||
| Retained earnings | 1,557 | 1,104 | |||||||
| Accumulated other comprehensive loss, net of tax | (1,430 | ) | (1,513 | ) | |||||
| Treasury shares, at cost, 17,519 shares in 2018 and 2017, and 40,000 shares, €1 nominal value, in 2018 and 2017 | (3 | ) | (3 | ) | |||||
| Total Willis Towers Watson shareholders' equity | 10,672 | 10,126 | |||||||
| Non-controlling interests | 130 | 123 | |||||||
| Total Equity | 10,802 | 10,249 | |||||||
| TOTAL LIABILITIES AND EQUITY | $ | 34,212 | $ | 32,458 | |||||
| (i)Equity includes (a) Ordinary shares $0.000304635 nominal value; Authorized 1,510,003,775; Issued 132,417,453 (2018) and 132,139,581 (2017); Outstanding 132,417,453 (2018) and 132,139,581 (2017); (b) Ordinary shares, €1 nominal value; Authorized and Issued 40,000 shares in 2018 and 2017; and (c) Preference shares, $0.000115 nominal value; Authorized 1,000,000,000 and Issued none in 2018 and 2017. | |||||||||
Condensed Consolidated Statements of Cash Flows
(In millions of U.S. dollars)
(Unaudited)
| With Adoption of ASC 606 |
Without Adoption of ASC 606 |
||||||
| Three Months Ended March 31, | |||||||
| 2018 | 2017 | ||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | |||||||
| NET INCOME | $ | 221 | $ | 352 | |||
| Adjustments to reconcile net income to total net cash from operating activities: | |||||||
| Depreciation | 51 | 52 | |||||
| Amortization | 141 | 151 | |||||
| Amortization of non-current deferred fulfillment costs | 5 | — | |||||
| Net periodic benefit of defined benefit pension plans | (61 | ) | (31 | ) | |||
| Provision for doubtful receivables from clients | 7 | 9 | |||||
| Benefit from deferred income taxes | (26 | ) | (74 | ) | |||
| Share-based compensation | 3 | 14 | |||||
| Net loss on disposal of operations | 9 | — | |||||
| Non-cash foreign exchange loss/(gain) | 17 | (11 | ) | ||||
| Other, net | (8 | ) | 9 | ||||
| Changes in operating assets and liabilities, net of effects from purchase of subsidiaries: | |||||||
| Accounts receivable | (43 | ) | (253 | ) | |||
| Fiduciary assets | (1,326 | ) | (1,657 | ) | |||
| Fiduciary liabilities | 1,326 | 1,657 | |||||
| Other assets | 46 | (62 | ) | ||||
| Other liabilities | (393 | ) | (109 | ) | |||
| Provisions | 49 | 48 | |||||
| Net cash from operating activities | 18 | 95 | |||||
| CASH FLOWS USED IN INVESTING ACTIVITIES | |||||||
| Additions to fixed assets and software for internal use | (65 | ) | (62 | ) | |||
| Capitalized software costs | (13 | ) | (15 | ) | |||
| Acquisitions of operations, net of cash acquired | (5 | ) | (12 | ) | |||
| Net proceeds from sale of operations | 4 | — | |||||
| Other, net | — | 7 | |||||
| Net cash used in investing activities | (79 | ) | (82 | ) | |||
| CASH FLOWS (USED IN)/FROM FINANCING ACTIVITIES | |||||||
| Net borrowings on revolving credit facility | 61 | 826 | |||||
| Proceeds from issuance of other debt | — | 32 | |||||
| Debt issuance costs | — | (3 | ) | ||||
| Repayments of debt | (21 | ) | (636 | ) | |||
| Repurchase of shares | — | (156 | ) | ||||
| Proceeds from issuance of shares | 11 | 20 | |||||
| Cash paid for employee taxes on withholding shares | (7 | ) | (3 | ) | |||
| Dividends paid | (68 | ) | (65 | ) | |||
| Acquisitions of and dividends paid to non-controlling interests | — | (1 | ) | ||||
| Net cash (used in)/from financing activities | (24 | ) | 14 | ||||
| (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS | (85 | ) | 27 | ||||
| Effect of exchange rate changes on cash and cash equivalents | 9 | 4 | |||||
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | 1,030 | 870 | |||||
| CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 954 | $ | 901 | |||
Supplemental Information
(unaudited)
In accordance with the modified retrospective adoption requirements of ASC 606, the following represents the impact of adoption on our condensed consolidated statement of income, balance sheet and statement of cash flows.
| Three Months Ended March 31, 2018 | |||||||||||
| Statement of Income | As Reported | Balances Without Adoption of ASC 606 | Effect of Change | ||||||||
| Revenue | $ | 2,292 | $ | 2,551 | $ | (259 | ) | ||||
| Costs of providing services | |||||||||||
| Salaries and benefits | 1,377 | 1,352 | 25 | ||||||||
| Depreciation | 49 | 54 | (5 | ) | |||||||
| Income from operations | 259 | 538 | (279 | ) | |||||||
| INCOME FROM OPERATIONS BEFORE INCOME TAXES | 264 | 543 | (279 | ) | |||||||
| Provision for income taxes | 43 | 96 | (53 | ) | |||||||
| NET INCOME | 221 | 447 | (226 | ) | |||||||
| NET INCOME ATTRIBUTABLE TO WILLIS TOWERS WATSON | 215 | 441 | (226 | ) | |||||||
| EARNINGS PER SHARE | |||||||||||
| Basic earnings per share | $ | 1.62 | $ | 3.33 | $ | (1.71 | ) | ||||
| Diluted earnings per share | $ | 1.61 | $ | 3.31 | $ | (1.70 | ) | ||||
| As of March 31, 2018 | |||||||||||
| Balance Sheet | As Reported | Balances Without Adoption of ASC 606 | Effect of Change | ||||||||
| ASSETS | |||||||||||
| Accounts receivable, net | $ | 2,600 | $ | 2,584 | $ | 16 | |||||
| Prepaid and other current assets | 439 | 370 | 69 | ||||||||
| Fixed assets, net | 926 | 1,015 | (89 | ) | |||||||
| Other non-current assets | 532 | 488 | 44 | ||||||||
| LIABILITIES | |||||||||||
| Deferred revenue and accrued expenses | 1,239 | 1,348 | (109 | ) | |||||||
| Other current liabilities | 867 | 919 | (52 | ) | |||||||
| Deferred tax liabilities | 711 | 612 | 99 | ||||||||
| Provision for liabilities | 624 | 612 | 12 | ||||||||
| EQUITY | |||||||||||
| Retained earnings | 1,557 | 1,466 | 91 | ||||||||
| Three Months Ended March 31, 2018 | |||||||||||
| Statement of Cash Flows | As Reported | Balances Without Adoption of ASC 606 | Effect of Change | ||||||||
| Net cash from operating activities | $ | 18 | $ | 28 | $ | (10 | ) | ||||
| Capitalized software costs | (13 | ) | (23 | ) | 10 | ||||||
| This change is a result of moving a portion of capitalized software related to client system implementations from Investing activities to Operating activities within the Statement of Cash Flows. | |||||||||||
Source: Willis Towers Watson Public Limited Company