UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to ___________
Commission File Number:
WILLIS TOWERS WATSON PUBLIC LIMITED COMPANY
(Exact name of registrant as specified in its charter)
(Jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
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(Address of principal executive offices) |
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( (Registrant’s telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
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Trading Symbol(s) |
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Name of each exchange on which registered |
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of ‘large accelerated filer’, ‘accelerated filer’, ‘smaller reporting company’, and ‘emerging growth company’ in Rule 12b-2 of the Exchange Act.
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Accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
As of April 25, 2022, there were outstanding
WILLIS TOWERS WATSON PUBLIC LIMITED COMPANY
INDEX TO FORM 10-Q
For the Three Months Ended March 31, 2022
2
Certain Definitions
The following definitions apply throughout this quarterly report unless the context requires otherwise:
‘We’, ‘Us’, ‘Company’, ‘Willis Towers Watson’, ‘Our’, ‘Willis Towers Watson plc’ or ‘WTW’ |
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Willis Towers Watson Public Limited Company, a company organized under the laws of Ireland, and its subsidiaries |
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‘shares’ |
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The ordinary shares of Willis Towers Watson Public Limited Company, nominal value $0.000304635 per share |
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‘Willis’ |
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Willis Group Holdings Public Limited Company and its subsidiaries, predecessor to WTW, prior to the Merger |
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‘Towers Watson’ |
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Towers Watson & Co. and its subsidiaries |
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‘Merger’ |
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Merger of Willis Group Holdings Public Limited Company and Towers Watson & Co. pursuant to the Agreement and Plan of Merger, dated June 29, 2015, as amended on November 19, 2015, and completed on January 4, 2016 |
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‘Miller’ |
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Miller Insurance Services LLP and its subsidiaries |
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‘TRANZACT’ |
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CD&R TZ Holdings, Inc. and its subsidiaries, doing business as TRANZACT |
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‘U.S.’ |
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United States |
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‘U.K.’ |
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United Kingdom |
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‘Brexit’ |
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The United Kingdom’s exit from the European Union, which occurred on January 31, 2020. |
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‘E.U.’ |
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European Union or European Union 27 (the number of member countries following the United Kingdom’s exit) |
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‘U.S. GAAP’ |
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United States Generally Accepted Accounting Principles |
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‘FASB’ |
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Financial Accounting Standards Board |
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‘ASC’ |
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Accounting Standards Codification |
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‘ASU’ |
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Accounting Standards Update |
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‘SEC’ |
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United States Securities and Exchange Commission |
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3
Disclaimer Regarding Forward-looking Statements
We have included in this document ‘forward-looking statements’ within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934, which are intended to be covered by the safe harbors created by those laws. These forward-looking statements include information about possible or assumed future results of our operations. All statements, other than statements of historical facts, that address activities, events or developments that we expect or anticipate may occur in the future, including such things as our outlook, the impact of the global pandemic on our business, future capital expenditures, ongoing working capital efforts, future share repurchases, financial results (including our revenue, costs or margins), the impact of changes to tax laws on our financial results, existing and evolving business strategies and acquisitions and dispositions, including the sale of Willis Re to Arthur J. Gallagher & Co. (‘Gallagher’), demand for our services and competitive strengths, goals, the benefits of new initiatives, growth of our business and operations, our ability to successfully manage ongoing leadership, organizational and technology changes, including investments in improving systems and processes, our ability to implement and realize anticipated benefits of any cost-savings initiatives including the multi-year operational Transformation program, and plans and references to future successes, including our future financial and operating results, plans, objectives, expectations and intentions are forward-looking statements. Also, when we use words such as ‘may,’ ‘will,’ ‘would,’ ‘anticipate,’ ‘believe,’ ‘estimate,’ ‘expect,’ ‘intend,’ ‘plan,’ ‘continues,’ ‘seek,’ ‘target,’ ‘focus,’ ‘probably,’ or similar expressions, we are making forward-looking statements. Such statements are based upon the current beliefs and expectations of the Company’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 in this document, including the following:
4
The foregoing list of factors is not exhaustive and new factors may emerge from time to time that could also affect actual performance and results. For more information, please see Part I, Item 1A in our Annual Report on Form 10-K, and our subsequent filings with the SEC. Copies are available online at http://www.sec.gov or www.wtwco.com.
5
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. Given the significant uncertainties inherent in the forward-looking statements included in this Quarterly Report on Form 10-Q, 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. With regard to these risks, uncertainties and assumptions, the forward-looking events discussed in this document may not occur, and we caution you against unduly relying on these forward-looking statements.
6
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
WILLIS TOWERS WATSON PUBLIC LIMITED COMPANY
Condensed Consolidated Statements of Comprehensive Income
(In millions of U.S. dollars, except per share data)
(Unaudited)
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Three Months Ended |
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2022 |
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2021 |
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Revenue |
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$ |
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$ |
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Costs of providing services |
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Salaries and benefits |
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Other operating expenses |
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Depreciation |
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Amortization |
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Restructuring costs |
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Transaction and transformation, net |
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Total costs of providing services |
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Income from operations |
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Interest expense |
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( |
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Other income, net |
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INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES |
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Provision for income taxes |
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( |
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( |
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INCOME FROM CONTINUING OPERATIONS |
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INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX |
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NET INCOME |
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Income attributable to non-controlling interests |
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NET INCOME ATTRIBUTABLE TO WTW |
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$ |
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$ |
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EARNINGS PER SHARE |
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Basic earnings per share: |
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Income from continuing operations per share |
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$ |
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$ |
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Income from discontinued operations per share |
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Basic earnings per share |
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$ |
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$ |
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Diluted earnings per share: |
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Income from continuing operations per share |
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$ |
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$ |
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Income from discontinued operations per share |
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Diluted earnings per share |
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$ |
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$ |
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Comprehensive income before non-controlling interests |
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$ |
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$ |
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Comprehensive income attributable to non-controlling interests |
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( |
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( |
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Comprehensive income attributable to WTW |
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$ |
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$ |
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See accompanying notes to the condensed consolidated financial statements
7
WILLIS TOWERS WATSON PUBLIC LIMITED COMPANY
Condensed Consolidated Balance Sheets
(In millions of U.S. dollars, except share data)
(Unaudited)
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March 31, |
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December 31, |
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ASSETS |
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Cash and cash equivalents |
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$ |
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$ |
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Fiduciary assets |
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Accounts receivable, net |
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Prepaid and other current assets |
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Current assets held for sale |
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Total current assets |
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Fixed assets, net |
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Goodwill |
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Other intangible assets, net |
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Right-of-use assets |
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Pension benefits assets |
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Other non-current assets |
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Total non-current assets |
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TOTAL ASSETS |
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$ |
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$ |
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LIABILITIES AND EQUITY |
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Fiduciary liabilities |
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$ |
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$ |
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Deferred revenue and accrued expenses |
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Current debt |
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Current lease liabilities |
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Other current liabilities |
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Current liabilities held for sale |
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Total current liabilities |
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Long-term debt |
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Liability for pension benefits |
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Deferred tax liabilities |
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Provision for liabilities |
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Long-term lease liabilities |
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Other non-current liabilities |
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Total non-current liabilities |
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TOTAL LIABILITIES |
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EQUITY (i) |
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Additional paid-in capital |
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Retained earnings |
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Accumulated other comprehensive loss, net of tax |
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( |
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Treasury shares, at cost, |
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( |
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( |
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Total WTW shareholders’ equity |
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Non-controlling interests |
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Total equity |
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TOTAL LIABILITIES AND EQUITY |
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$ |
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$ |
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See accompanying notes to the condensed consolidated financial statements
8
WILLIS TOWERS WATSON PUBLIC LIMITED COMPANY
Condensed Consolidated Statements of Cash Flows
(In millions of U.S. dollars)
(Unaudited)
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Three Months Ended March 31, |
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2022 |
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2021 |
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CASH FLOWS FROM/(USED IN) OPERATING ACTIVITIES |
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NET INCOME |
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$ |
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$ |
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Adjustments to reconcile net income to total net cash from operating activities: |
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Depreciation |
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Amortization |
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Impairment |
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Non-cash lease expense |
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Net periodic benefit of defined benefit pension plans |
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( |
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( |
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Provision for doubtful receivables from clients |
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(Benefit from)/provision for deferred income taxes |
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( |
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Share-based compensation |
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Net loss/(gain) on disposal of operations |
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( |
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Non-cash foreign exchange gain |
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( |
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( |
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Other, net |
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( |
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( |
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Changes in operating assets and liabilities, net of effects from purchase of |
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Accounts receivable |
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( |
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Other assets |
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( |
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( |
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Other liabilities |
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( |
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( |
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Provisions |
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( |
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Net cash from/(used in) operating activities |
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( |
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CASH FLOWS FROM INVESTING ACTIVITIES |
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Additions to fixed assets and software for internal use |
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( |
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( |
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Capitalized software costs |
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( |
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( |
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Acquisitions of operations, net of cash acquired |
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( |
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Proceeds from sale of operations |
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Cash and fiduciary funds transferred in sale of operations |
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( |
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( |
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Sale of investments |
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Net cash from investing activities |
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CASH FLOWS USED IN FINANCING ACTIVITIES |
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Repayments of debt |
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( |
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( |
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Repurchase of shares |
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( |
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Proceeds from issuance of shares |
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Net payments from fiduciary funds held for clients |
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( |
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( |
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Payments of deferred and contingent consideration related to acquisitions |
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( |
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( |
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Cash paid for employee taxes on withholding shares |
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( |
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Dividends paid |
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( |
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( |
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Acquisitions of and dividends paid to non-controlling interests |
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( |
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Net cash used in financing activities |
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( |
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( |
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DECREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH (i) |
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( |
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( |
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Effect of exchange rate changes on cash, cash equivalents and restricted cash |
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( |
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( |
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CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD (i) |
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CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD (i) |
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$ |
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$ |
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See accompanying notes to the condensed consolidated financial statements
9
WILLIS TOWERS WATSON PUBLIC LIMITED COMPANY
Condensed Consolidated Statements of Changes in Equity
(In millions of U.S. dollars and number of shares in thousands)
(Unaudited)
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Shares outstanding |
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Additional paid-in capital |
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Retained earnings |
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Treasury shares |
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AOCL (i) |
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Total WTW shareholders’ equity |
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Non-controlling interests |
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Total equity |
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Balance as of December 31, 2020 |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
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$ |
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$ |
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$ |
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Net income |
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— |
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— |
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— |
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— |
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Dividends declared ($ |
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— |
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— |
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( |
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— |
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— |
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( |
) |
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— |
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( |
) |
Dividends attributable to non-controlling interests |
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— |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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( |
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Other comprehensive income |
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— |
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— |
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— |
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— |
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Issuance of shares under employee stock |
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— |
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— |
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— |
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— |
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Share-based compensation and net settlements |
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— |
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— |
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— |
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— |
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— |
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Reduction of non-controlling interests (ii) |
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— |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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( |
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Foreign currency translation |
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— |
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— |
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— |
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— |
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— |
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Balance as of March 31, 2021 |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
) |
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$ |
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$ |
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$ |
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Balance as of December 31, 2021 |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
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$ |
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$ |
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$ |
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Shares repurchased |
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( |
) |
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— |
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( |
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— |
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— |
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( |
) |
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— |
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( |
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Net income |
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— |
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— |
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— |
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— |
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Dividends declared ($ |
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— |
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— |
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( |
) |
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— |
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— |
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( |
) |
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— |
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( |
) |
Dividends attributable to non-controlling interests |
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— |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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( |
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Other comprehensive loss |
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— |
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— |
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— |
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— |
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( |
) |
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( |
) |
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— |
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( |
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Issuance of shares under employee stock |
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|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||||
Share-based compensation and net settlements |
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
|||
Acquisition of non-controlling interests |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
Foreign currency translation |
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
|||
Balance as of March 31, 2022 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
|
||||||
See accompanying notes to the condensed consolidated financial statements
10
WILLIS TOWERS WATSON PUBLIC LIMITED COMPANY
Notes to the Condensed Consolidated Financial Statements
(Tabular amounts in millions of U.S. dollars, except per share data)
(Unaudited)
Note 1 — Nature of Operations
Willis Towers Watson public limited company is a leading global advisory, broking and solutions company that provides data-driven, insight-led solutions in the areas of people, risk and capital. The Company has more than
We design and deliver solutions that manage risk, optimize benefits, cultivate talent, and expand the power of capital to protect and strengthen institutions and individuals.
Our risk management services include strategic risk consulting (including providing actuarial analysis), a variety of due diligence services, the provision of practical on-site risk control services (such as health and safety and property loss control consulting), advisory services, leading-edge technology solutions, and unparalleled analytical and modeling capabilities (such as hazard modeling). We also assist our clients with planning for addressing incidents or crises when they occur. These services include contingency planning, security audits and product tampering plans.
We help our clients enhance business performance by delivering consulting services, technology and solutions that effectively deliver valuable benefits and create an engaging employee experience. Our services and solutions encompass such areas as employee benefits, total rewards, talent, wellbeing and benefits outsourcing. In addition, we provide investment advice to help our clients develop disciplined and efficient strategies to meet their investment goals and expand the power of capital.
As an insurance broker, we act as an intermediary between our clients and insurance carriers by advising on their risk management requirements, helping them to determine the best means of managing risk and negotiating and placing insurance with insurance carriers through our unrestricted access to the global insurance market.
We operate a private Medicare marketplace in the U.S. through which, along with our active employee marketplace, we help our clients move to a more sustainable economic model by capping and controlling the costs associated with healthcare benefits. We also provide direct-to-consumer sales of Medicare coverage.
We are not an insurance company, and therefore we do not underwrite insurable risks for our own account. We help sharpen strategies, enhance organizational resilience, motivate workforces and maximize performance to uncover opportunities for sustainable success.
Segment Reorganization
On January 1, 2022, WTW realigned to provide its comprehensive offering of services and solutions to clients across two business segments: Health, Wealth & Career (‘HWC’), and Risk & Broking (‘R&B’). These changes were made in conjunction with changes in the WTW leadership team, including the appointment of a new chief executive officer who succeeded the prior CEO as the chief operating decision maker on that date. Prior to January 1, 2022, we operated across four segments: Human Capital and Benefits; Corporate Risk and Broking; Investment, Risk and Reinsurance; and Benefits Delivery and Administration. Following the realignment, the two new segments consist of the following businesses:
In addition, effective January 1, 2022, the Company manages its businesses across three geographical areas: North America, Europe (including Great Britain) and International.
Certain Investment, Risk and Reinsurance businesses that were part of the results from continuing operations in the prior-year period presented were divested during 2021. The revenue and income from operations for these businesses have been included as ‘divested businesses’ in the reconciliations between the total segment results and the consolidated results of the Company. However, the results of the divested Willis Re treaty-reinsurance business is presented as discontinued operations and is therefore excluded from the divested businesses presented in the segment reconciliations.
11
Segment results herein are presented on a retrospective basis to reflect the reorganization. See Note 4 — Revenue, Note 5 — Segment Information, Note 6 — Restructuring Costs and Note 8 — Goodwill and Other Intangible Assets for the Company's segment-based presentations.
Note 2 — Basis of Presentation and Recent Accounting Pronouncements
Basis of Presentation
The accompanying unaudited quarterly condensed consolidated financial statements of WTW and our subsidiaries are presented in accordance with the rules and regulations of the SEC for quarterly reports on Form 10-Q and therefore certain footnote disclosures have been condensed or omitted from these financial statements as they are not required for interim reporting under U.S. GAAP. We have reclassified certain prior period amounts to conform to the current period presentation due to the recognition of discontinued operations and assets and liabilities as held-for-sale (see below for further discussion). Additionally, certain amounts on the condensed consolidated statements of cash flows have been revised from their prior period classifications. See Note 19 - Supplemental Disclosures of Cash Flow Information for more information as to the nature of the revision and the amounts. In the opinion of management, these condensed consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, which are necessary for a fair presentation of the condensed consolidated financial statements and results for the interim periods. All intercompany accounts and transactions have been eliminated in consolidation. The condensed consolidated financial statements should be read together with the Company’s Annual Report on Form 10-K, filed with the SEC on February 24, 2022, and may be accessed via EDGAR on the SEC’s web site at www.sec.gov.
The results of operations for the three months ended March 31, 2022 are not necessarily indicative of the results that can be expected for the entire year. The Company experiences seasonal fluctuations of its revenue. Revenue is typically higher during the Company’s first and fourth quarters due primarily to the timing of broking-related activities. The results reflect certain estimates and assumptions made by management, including those estimates used in calculating acquisition consideration and fair value of tangible and intangible assets and liabilities, professional liability claims, estimated bonuses, valuation of billed and unbilled receivables, and anticipated tax liabilities that affect the amounts reported in the condensed consolidated financial statements and related notes.
Risks and Uncertainties of the Economic Environment Caused by the Pandemic
The COVID-19 pandemic has had an adverse impact on global commercial activity, particularly on the global supply chain and workforce availability, and has contributed to significant volatility in the global financial markets including, among other effects, occasional declines in the equity markets, changes in interest rates and reduced liquidity on a global basis.
Supply and labor market disruptions caused by COVID-19 as well as other factors, such as accommodative monetary and fiscal policy and the Russian invasion of Ukraine, have contributed to significant inflation in many of the markets in which we operate. This impacts not only the costs to attract and retain employees but also other costs to run and invest in our business. If our costs grow significantly in excess of our ability to raise revenue, our margins and results of operations may be materially and adversely impacted and we may not be able to achieve our strategic and financial objectives.
Although we believe we have adapted to the unique challenges posed by the pandemic surrounding how and where we do our work, we are also impacted by the negative effect on workforce availability, which could hamper our ability to grow our capacity on pace with increasing demand for our services. We expect the market for talent to remain highly competitive for at least the next several months. We will continue to monitor the situation and assess any implications to our business and our stakeholders.
Note 3 — Acquisitions and Divestitures
Acquisitions
The Company completed an acquisition during the three months ended March 31, 2022 for a cash payment of $
Divestment of Russian Business
During the first quarter of 2022, WTW announced its intention to transfer ownership of its Russian subsidiary to local management who will operate independently in the Russian market. Due to the sanctions and prohibitions on certain types of business and activities, WTW deconsolidated its Russian entities on March 14, 2022. The completion of the transfer is pending but the deconsolidation resulted in a loss of $
12
months ended March 31, 2022. This impairment charge was recorded in other operating expenses on our condensed consolidated statement of comprehensive income.
Willis Re Divestiture
On August 13, 2021, the Company entered into a definitive agreement to sell its treaty-reinsurance business (‘Willis Re’) to Arthur J. Gallagher & Co. (‘Gallagher’), a leading global provider of insurance, risk management and consulting services, for total upfront cash consideration of $
In connection with the transaction, the Company reclassified the results of its Willis Re operations as discontinued operations on its condensed consolidated statements of comprehensive income and reclassified Willis Re assets and liabilities as held for sale on its condensed consolidated balance sheets. The condensed consolidated cash flow statements were not adjusted for the divestiture. Willis Re was previously included in the Company's former Investment, Risk and Reinsurance segment. The assets and liabilities of the Willis Re businesses that will be transferred at Deferred Closing continue to be presented as held for sale on the condensed consolidated balance sheets at March 31, 2022 and December 31, 2021, and the results of these businesses following the Principal Closing have been included in income from discontinued operations on the condensed consolidated statements of comprehensive income.
The Company will account for the earnout as a gain contingency and therefore did not record any receivables upon close. Rather, the earnout will be recognized in the Company’s condensed consolidated financial statements, if it is received, in 2025.
A number of services are continuing under a cost reimbursement Transition Services Agreement (‘TSA’) in which WTW is providing Gallagher support including real estate leases, information technology, payroll, human resources and accounting. These services are expected to be provided for a period not to exceed
The following selected financial information relates to the operations of Willis Re for the periods presented:
|
|
Three Months Ended |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Revenue from discontinued operations |
|
$ |
|
|
$ |
|
||
Costs of providing services |
|
|
|
|
|
|
||
Salaries and benefits |
|
|
|
|
|
|
||
Other operating expenses |
|
|
|
|
|
|
||
Total costs of providing services |
|
|
|
|
|
|
||
Other income, net |
|
|
|
|
|
|
||
Income from discontinued operations before income taxes |
|
|
|
|
|
|
||
Adjustment to gain on disposal of Willis Re |
|
|
( |
) |
|
|
|
|
Provision for income taxes |
|
|
( |
) |
|
|
( |
) |
Net income payable to Gallagher on Deferred Closing |
|
|
( |
) |
|
|
|
|
Income from discontinued operations, net of tax |
|
$ |
|
|
$ |
|
||
The expense amounts reflected above represent only the direct costs attributable to the Willis Re business and exclude allocations of corporate costs that will be retained following the sale. Neither the discontinued operations presented above, nor the unallocated corporate costs, reflect the impact of any cost reimbursement that will be received under the TSA.
Assets and liabilities classified as held for sale within our condensed consolidated balance sheets at both March 31, 2022 and December 31, 2021 are related to entities that are part of the Deferred Closing. Certain amounts included in the condensed consolidated balance sheets have been excluded from the held-for-sale balances disclosed since the assets are not transferring under the terms of the sale agreement, and instead will be settled by the Company. At March 31, 2022 and December 31, 2021, the amounts
13
of significant assets and liabilities related to the Willis Re businesses which were not transferred in the sale and are therefore not classified as held for sale on the condensed consolidated balance sheets are $
Miller Divestiture
On March 1, 2021, the Company completed the transaction to sell its U.K.-based, majority-owned wholesale subsidiary Miller for final total consideration of GBP
Note 4 — Revenue
The prior-year period presented has been recast to exclude the revenue of Willis Re, which has been reclassified as discontinued operations on the Company’s condensed consolidated financial statements (see Note 3 – Acquisitions and Divestitures).
Disaggregation of Revenue
The Company reports revenue by segment in Note 5 — Segment Information.
|
|
Three Months Ended March 31, |
|
|||||||||||||||||||||||||||||||||||||
|
|
HWC |
|
|
R&B |
|
|
Divested Businesses |
|
|
Corporate (i) |
|
|
Total |
|
|||||||||||||||||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||||||||
Broking |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||||||
Consulting |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Outsourced administration |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Total revenue by service offering |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Reimbursable expenses and other (i) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Total revenue from customer contracts |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||||||
Interest and other income (ii) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Total revenue |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||||||
The following table presents revenue by the geography where our work is performed for the three months ended March 31, 2022 and 2021. The reconciliation to total revenue on our condensed consolidated statement of comprehensive income and to segment revenue is shown in the table above. The prior year geographic information has been retrospectively adjusted to conform to the current year presentation.
|
|
Three Months Ended March 31, |
|
|||||||||||||||||||||||||||||||||||||
|
|
HWC |
|
|
R&B |
|
|
Divested Businesses |
|
|
Corporate |
|
|
Total |
|
|||||||||||||||||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||||||||
North America |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||||||
Europe |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
International |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Total revenue by geography |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||||||
14
Contract Balances
The Company reports accounts receivable, net on the condensed consolidated balance sheet, which includes billed and unbilled receivables and current contract assets. In addition to accounts receivable, net, the Company had the following non-current contract assets and deferred revenue balances at March 31, 2022 and December 31, 2021:
|
|
March 31, 2022 |
|
|
December 31, 2021 |
|
||
Billed receivables, net of allowance for doubtful accounts of $ |
|
$ |
|
|
$ |
|
||
Unbilled receivables |
|
|
|
|
|
|
||
Current contract assets |
|
|
|
|
|
|
||
Accounts receivable, net |
|
$ |
|
|
$ |
|
||
Non-current accounts receivable, net |
|
$ |
|
|
$ |
|
||
Non-current contract assets |
|
$ |
|
|
$ |
|
||
Deferred revenue |
|
$ |
|
|
$ |
|
||
During the three months ended March 31, 2022, revenue of approximately $
During the three months ended March 31, 2022, the Company recognized revenue of approximately $
Performance Obligations
The Company has contracts for which performance obligations have not been satisfied as of March 31, 2022 or have been partially satisfied as of this date. The following table shows the expected timing for the satisfaction of the remaining performance obligations. This table does not include contract renewals or variable consideration, which was excluded from the transaction prices in accordance with the guidance on constraining estimates of variable consideration.
In addition, in accordance with ASC 606, Revenue From Contracts With Customers (‘ASC 606’), the Company has elected not to disclose the remaining performance obligations when one or both of the following circumstances apply:
|
|
Remainder of 2022 |
|
|
2023 |
|
|
2024 onward |
|
|
Total |
|
||||
Revenue expected to be recognized on contracts as of March 31, 2022 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Since most of the Company’s contracts are cancellable with less than one year’s notice, and have no substantive penalty for cancellation, the majority of the Company’s remaining performance obligations as of March 31, 2022 have been excluded from the table above.
Note 5 — Segment Information
WTW has
WTW’s chief operating decision maker is its chief executive officer. We determined that the operational data used by the chief operating decision maker is at the segment level. Management bases strategic goals and decisions on these segments and the data presented below is used to assess the adequacy of strategic decisions and the methods of achieving these strategies and related financial results. Management evaluates the performance of its segments and allocates resources to them based on net operating income on a pre-tax basis.
15
The Company experiences seasonal fluctuations of its revenue. Revenue is typically higher during the Company’s first and fourth quarters due primarily to the timing of broking-related activities.
For the disclosures below, the prior-year period presented has been recast to exclude the results of Willis Re, which has been reclassified as discontinued operations on the Company’s condensed consolidated financial statements (see Note 3 – Acquisitions and Divestitures).
The following table presents segment revenue and segment operating income for our reportable segments for the three months ended March 31, 2022 and 2021. The prior year information has been retrospectively adjusted to conform to the current year presentation.
|
|
Three Months Ended March 31, |
|
|||||||||||||||||||||
|
|
HWC |
|
|
R&B |
|
|
Total |
|
|||||||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||||
Segment revenue |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Segment operating income |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||
The following table presents a reconciliation of the information reported by segment to the Company’s condensed consolidated statement of comprehensive income amounts reported for the three months ended March 31, 2022 and 2021.
|
|
Three Months Ended |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Revenue: |
|
|
|
|
|
|
||
Total segment revenue |
|
$ |
|
|
$ |
|
||
Divested businesses |
|
|
|
|
|
|
||
Reimbursable expenses and other |
|
|
|
|
|
|
||
Revenue |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Total segment operating income |
|
$ |
|
|
$ |
|
||
Divested businesses |
|
|
|
|
|
( |
) |
|
Impairment (i) |
|
|
( |
) |
|
|
|
|
Amortization |
|
|
( |
) |
|
|
( |
) |
Restructuring costs |
|
|
( |
) |
|
|
|
|
Transaction and transformation, net (ii) |
|
|
( |
) |
|
|
( |
) |
Unallocated, net (iii) |
|
|
( |
) |
|
|
( |
) |
Income from operations |
|
|
|
|
|
|
||
Interest expense |
|
|
( |
) |
|
|
( |
) |
Other income, net |
|
|
|
|
|
|
||
Income from continuing operations before income taxes |
|
$ |
|
|
$ |
|
||
The Company does not currently provide asset information by reportable segment as it does not routinely evaluate the total asset position by segment.
Note 6 — Restructuring Costs
In the fourth quarter of 2021,
16
Certain costs under the Transformation program are accounted for under ASC 420, Exit or Disposal Cost Obligation, and are included as restructuring costs in the condensed consolidated statements of comprehensive income. Other costs incurred under the Transformation program are included in transaction and transformation, net and were $
|
|
HWC |
|
|
R&B |
|
|
Corporate |
|
|
Total |
|
||||
2021 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Real estate rationalization |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
$ |
|
||
Technology modernization |
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Process optimization |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Other |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
2022 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Real estate rationalization |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
Technology modernization |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Process optimization |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Other |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Real estate rationalization |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
Technology modernization |
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Process optimization |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Other |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
A rollforward of the liability associated with cash-based charges related to restructuring costs associated with the Transformation program is as follows:
|
|
Real estate rationalization |
|
|
Technology modernization |
|
|
Process optimization |
|
|
Other |
|
|
Total |
|
|||||
Balance at October 1, 2021 |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
$ |
|
||
Charges incurred |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
Cash payments |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Balance at December 31, 2021 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
Charges incurred |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Cash payments |
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Balance at March 31, 2022 |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
$ |
|
||
Note 7 — Income Taxes
Provision for income taxes for the three months ended March 31, 2022 was $
The Company recognizes deferred tax balances related to the undistributed earnings of subsidiaries when it expects that it will recover those undistributed earnings in a taxable manner, such as through receipt of dividends or sale of the investments. Historically, we have
17
not provided taxes on cumulative earnings of our subsidiaries that have been reinvested indefinitely. As a result of our plans to restructure or distribute accumulated earnings of certain foreign operations, we have recorded an estimate of foreign withholding and state income taxes. However, we assert that the historical cumulative earnings of our other subsidiaries are reinvested indefinitely, and therefore do not provide deferred tax liabilities on these amounts.
The Company records valuation allowances against net deferred tax assets based on whether it is more likely than not that the deferred tax assets will be realized. We have liabilities for uncertain tax positions under ASC 740 of $
Note 8 — Goodwill and Other Intangible Assets
The components of goodwill are outlined below for the three months ended March 31, 2022. The prior year segment information has been retrospectively adjusted to conform to the current year presentation.
|
|
HWC |
|
|
R&B |
|
|
Total |
|
|||
Balance at December 31, 2021: |
|
|
|
|
|
|
|
|
|
|||
Goodwill, gross |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Accumulated impairment losses |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Goodwill, net - December 31, 2021 |
|
|
|
|
|
|
|
|
|
|||
Goodwill acquired |
|
|
|
|
|
|
|
|
|
|||
Goodwill disposals |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Acquisition accounting adjustments |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Foreign exchange |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Balance at March 31, 2022: |
|
|
|
|
|
|
|
|
|
|||
Goodwill, gross |
|
|
|
|
|
|
|
|
|
|||
Accumulated impairment losses |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Goodwill, net - March 31, 2022 |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Other Intangible Assets
The following table reflects changes in the net carrying amounts of the components of finite-lived intangible assets for the three months ended March 31, 2022:
|
|
Client relationships |
|
|
Software |
|
|
Trademark and trade name |
|
|
Other |
|
|
Total |
|
|||||
Balance at December 31, 2021: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Intangible assets, gross |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
Accumulated amortization |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Intangible assets, net - December 31, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Intangible assets acquired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Intangible asset disposals |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|||
Amortization |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Foreign exchange |
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
||
Balance at March 31, 2022: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Intangible assets, gross |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Accumulated amortization |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Intangible assets, net - March 31, 2022 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
The weighted-average remaining life of amortizable intangible assets at March 31, 2022 was
18
The table below reflects the future estimated amortization expense for amortizable intangible assets for the remainder of 2022 and for subsequent years:
|
|
Amortization |
|
|
Remainder of 2022 |
|
$ |
|
|
2023 |
|
|
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
Thereafter |
|
|
|
|
Total |
|
$ |
|
|
Note 9 — Derivative Financial Instruments
We are exposed to certain foreign currency risks. Where possible, we identify exposures in our business that can be offset internally. Where no natural offset is identified, we may choose to enter into various derivative transactions. These instruments have the effect of reducing our exposure to unfavorable changes in foreign currency rates. The Company’s board of directors reviews and approves policies for managing this risk as summarized below. Additional information regarding our derivative financial instruments can be found in Note 11 — Fair Value Measurements and Note 17 — Accumulated Other Comprehensive Loss.
Foreign Currency Risk
Certain non-U.S. subsidiaries receive revenue and incur expenses in currencies other than their functional currency, and as a result, the foreign subsidiary’s functional currency revenue and/or expenses will fluctuate as the currency rates change. Additionally, the forecast Pounds sterling expenses of our London brokerage market operations may exceed their Pounds sterling revenue, and the entity with such operations may also hold significant foreign currency asset or liability positions in the condensed consolidated balance sheet. To reduce such variability, we use foreign exchange contracts to hedge against this currency risk.
These derivatives were designated as hedging instruments and at March 31, 2022 and December 31, 2021 had total notional amounts of $
At March 31, 2022, the Company estimates, based on current exchange rates, there will be $
Three Months Ended March 31, |
|
(Loss)/gain recognized in OCI (effective element) |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Forward exchange contracts |
|
$ |
( |
) |
|
$ |
|
|
Location of (loss)/gain reclassified from Accumulated OCL into income (effective element) |
|
(Loss)/gain reclassified from Accumulated OCL into income (effective element) |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Revenue |
|
$ |
|
|
$ |
( |
) |
|
Salaries and benefits |
|
|
|
|
|
|
||
Discontinued operations |
|
|
|
|
|
|
||
|
|
$ |
|
|
$ |
|
||
We also enter into foreign currency transactions, primarily to hedge certain intercompany loans and other balance sheet exposures in currencies other than the functional currency of a given entity. These derivatives are not generally designated as hedging instruments, and at March 31, 2022 and December 31, 2021, we had notional amounts of $
19
The effects of derivatives that have not been designated as hedging instruments on the condensed consolidated statements of comprehensive income for the three months ended March 31, 2022 and 2021 are as follows:
|
|
|
|
Loss recognized in income |
|
|||||
|
|
|
|
Three Months Ended |
|
|||||
Derivatives not designated as hedging instruments: |
|
Location of loss |
|
2022 |
|
|
2021 |
|
||
Forward exchange contracts |
|
Other income, net |
|
$ |
( |
) |
|
$ |
( |
) |
Note 10 — Debt
Current debt consists of the following:
|
|
March 31, |
|
|
December 31, |
|
||
|
$ |
|
|
$ |
|
|||
|
|
$ |
|
|
$ |
|
||
Long-term debt consists of the following:
|
|
March 31, |
|
|
December 31, |
|
||
Revolving $ |
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|||
|
|
|
|
|
|
|||
|
|
|
|
|
|
|||
|
|
|
|
|
|
|||
|
|
|
|
|
|
|||
|
|
|
|
|
|
|||
|
|
|
|
|
|
|||
|
|
$ |
|
|
$ |
|
||
At March 31, 2022 and December 31, 2021, we were in compliance with all financial covenants.
Note 11 — Fair Value Measurements
The Company has categorized its assets and liabilities that are measured at fair value on a recurring and non-recurring basis into a three-level fair value hierarchy, based on the reliability of the inputs used to determine fair value as follows:
The following methods and assumptions were used by the Company in estimating its fair value disclosure for financial instruments:
20
The following tables present our assets and liabilities measured at fair value on a recurring basis at March 31, 2022 and December 31, 2021:
|
|
|
|
Fair Value Measurements on a Recurring Basis at |
|
|||||||||||||
|
|
Balance Sheet Location |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Mutual funds / exchange traded funds |
|
Prepaid and other current assets and other non-current assets |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
Fiduciary assets |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Derivative financial instruments (i) |
|
Prepaid and other current assets and other non-current assets |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Contingent consideration: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Contingent consideration (ii) |
|
Other current liabilities and other non-current liabilities |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Derivative financial instruments (i) |
|
Other current liabilities and other non-current liabilities |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
Fair Value Measurements on a Recurring Basis at |
|
|||||||||||||
|
|
Balance Sheet Location |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Mutual funds / exchange traded funds |
|
Prepaid and other current assets and other non-current assets |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
Fiduciary assets |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Certificates of deposit/term deposits |
|
Prepaid and other current assets and other non-current assets |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Derivative financial instruments (i) |
|
Prepaid and other current assets and other non-current assets |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Contingent consideration: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Contingent consideration (ii) |
|
Other current liabilities and other non-current liabilities |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Derivative financial instruments (i) |
|
Other current liabilities and other non-current liabilities |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
The following table summarizes the change in fair value of the Level 3 liabilities:
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
|
March 31, 2022 |
|
|
Balance at December 31, 2021 |
|
$ |
|
|
Obligations assumed |
|
|
|
|
Payments |
|
|
( |
) |
Realized and unrealized losses (i) |
|
|
|
|
Foreign exchange |
|
|
|
|
Balance at March 31, 2022 |
|
$ |
|
|
There were
21
Fair value information about financial instruments not measured at fair value
The following tables present our liabilities not measured at fair value on a recurring basis at March 31, 2022 and December 31, 2021:
|
|
March 31, 2022 |
|
|
December 31, 2021 |
|
||||||||||
|
|
Carrying Value |
|
|
Fair Value |
|
|
Carrying Value |
|
|
Fair Value |
|
||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Long-term note receivable |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Current debt |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Long-term debt |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
The carrying value of our revolving credit facility approximates its fair value. The fair values above, which exclude accrued interest, are not necessarily indicative of the amounts that the Company would realize upon disposition, nor do they indicate the Company’s intent or ability to dispose of the financial instruments. The fair values of our respective senior notes and long-term note receivable are considered Level 2 financial instruments as they are corroborated by observable market data.
Note 12 — Retirement Benefits
Defined Benefit Plans and Post-retirement Welfare Plans
WTW sponsors both qualified and non-qualified defined benefit pension plans and other post-retirement welfare (‘PRW’) plans throughout the world. The majority of our plan assets and obligations are in the U.S. and the U.K. We have also included disclosures related to defined benefit plans in certain other countries, including Canada, France, Germany, Switzerland and Ireland. Together, these disclosed funded and unfunded plans represent
Components of Net Periodic Benefit (Income)/Cost for Defined Benefit Pension and Post-retirement Welfare Plans
The following table sets forth the components of net periodic benefit (income)/cost for the Company’s defined benefit pension and PRW plans for the three months ended March 31, 2022 and 2021:
|
|
Three Months Ended March 31, |
|
|||||||||||||||||||||||||||||
|
|
2022 |
|
|
2021 |
|
||||||||||||||||||||||||||
|
|
U.S. |
|
|
U.K. |
|
|
Other |
|
|
PRW |
|
|
U.S. |
|
|
U.K. |
|
|
Other |
|
|
PRW |
|
||||||||
Service cost |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||||
Interest cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Expected return on plan assets |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
||
Settlement |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Amortization of net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Amortization of prior service credit |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
||||
Net periodic benefit (income)/cost |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|||
Employer Contributions to Defined Benefit Pension Plans
The Company did
Defined Contribution Plans
The Company made contributions to its defined contribution plans of $
22
Note 13 — Leases
The following table presents lease costs recorded on our condensed consolidated statements of comprehensive income for the three months ended March 31, 2022 and 2021:
|
|
Three Months Ended March 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Finance lease cost: |
|
|
|
|
|
|
||
Interest on lease liabilities |
|
$ |
|
|
$ |
|
||
Operating lease cost |
|
|
|
|
|
|
||
Variable lease cost |
|
|
|
|
|
|
||
Sublease income |
|
|
( |
) |
|
|
( |
) |
Total lease cost, net |
|
$ |
|
|
$ |
|
||
Note 14 — Commitments and Contingencies
Indemnification Agreements
WTW has various agreements which provide that it may be obligated to indemnify the other party to the agreement with respect to certain matters. Generally, these indemnification provisions are included in contracts arising in the normal course of business and in connection with the purchase and sale of certain businesses, including the disposal of Willis Re. It is not possible to predict the maximum potential amount of future payments that may become due under these indemnification agreements because of the conditional nature of the Company’s obligations and the unique facts of each particular agreement. However, we do not believe that any potential liability that may arise from such indemnity provisions is probable or material.
Legal Proceedings
In the ordinary course of business, the Company is subject to various actual and potential claims, lawsuits and other proceedings. Some of the claims, lawsuits and other proceedings seek damages in amounts which could, if assessed, be significant. We expect the impact of claims or demands not described below to be immaterial to the Company’s condensed consolidated financial statements. The Company also receives subpoenas in the ordinary course of business and, from time to time, receives requests for information in connection with governmental investigations.
Errors and omissions claims, lawsuits, and other proceedings arising in the ordinary course of business are covered in part by professional indemnity or other appropriate insurance. The terms of this insurance vary by policy year. Regarding self-insured risks, the Company has established provisions which are believed to be adequate in light of current information and legal advice, or, in certain cases, where a range of loss exists, the Company accrues the minimum amount in the range if no amount within the range is a better estimate than any other amount. The Company adjusts such provisions from time to time according to developments. See Note 15 — Supplementary Information for Certain Balance Sheet Accounts for the amounts accrued at March 31, 2022 and December 31, 2021 in the condensed consolidated balance sheets.
On the basis of current information, the Company does not expect that the actual claims, lawsuits and other proceedings to which it is subject, or potential claims, lawsuits, and other proceedings relating to matters of which it is aware, will ultimately have a material adverse effect on its financial condition, results of operations or liquidity. Nonetheless, given the large or indeterminate amounts sought in certain of these actions, and the inherent unpredictability of litigation and disputes with insurance companies, it is possible that an adverse outcome or settlement in certain matters could, from time to time, have a material adverse effect on the Company’s results of operations or cash flows in particular quarterly or annual periods. In addition, given the early stages of some litigation or regulatory proceedings described below, it may not be possible to predict their outcomes or resolutions, and it is possible that any one or more of these events may have a material adverse effect on the Company.
The Company provides for contingent liabilities based on ASC 450, Contingencies, when it is determined that a liability, inclusive of defense costs, is probable and reasonably estimable. The contingent liabilities recorded are primarily developed actuarially. Litigation is subject to many factors which are difficult to predict so there can be no assurance that in the event of a material unfavorable result in one or more claims, we will not incur material costs.
23
Note 15 — Supplementary Information for Certain Balance Sheet Accounts
Additional details of specific balance sheet accounts are detailed below.
Prepaid and other current assets consist of the following:
|
|
March 31, |
|
|
December 31, |
|
||
Prepayments and accrued income |
|
$ |
|
|
$ |
|
||
Short-term investments |
|
|
|
|
|
|
||
Deferred contract costs |
|
|
|
|
|
|
||
Derivatives and investments |
|
|
|
|
|
|
||
Deferred compensation plan assets |
|
|
|
|
|
|
||
Corporate income and other taxes |
|
|
|
|
|
|
||
Acquired renewal commissions receivable |
|
|
|
|
|
|
||
Other current assets |
|
|
|
|
|
|
||
Total prepaid and other current assets |
|
$ |
|
|
$ |
|
||
Deferred revenue and accrued expenses consist of the following:
|
|
March 31, |
|
|
December 31, |
|
||
Accounts payable, accrued liabilities and deferred income |
|
$ |
|
|
$ |
|
||
Accrued discretionary and incentive compensation |
|
|
|
|
|
|
||
Accrued vacation |
|
|
|
|
|
|
||
Other employee-related liabilities |
|
|
|
|
|
|
||
Total deferred revenue and accrued expenses |
|
$ |
|
|
$ |
|
||
Other current liabilities consist of the following:
|
|
March 31, |
|
|
December 31, |
|
||
Dividends payable |
|
$ |
|
|
$ |
|
||
Income and other taxes payable |
|
|
|
|
|
|
||
Interest payable |
|
|
|
|
|
|
||
Deferred compensation plan liabilities |
|
|
|
|
|
|
||
Contingent and deferred consideration on acquisitions |
|
|
|
|
|
|
||
Accrued retirement benefits |
|
|
|
|
|
|
||
Payroll and other benefits-related liabilities |
|
|
|
|
|
|
||
Third-party commissions |
|
|
|
|
|
|
||
Other current liabilities |
|
|
|
|
|
|
||
Total other non-current liabilities |
|
$ |
|
|
$ |
|
||
Provision for liabilities consists of the following:
|
|
March 31, |
|
|
December 31, |
|
||
Claims, lawsuits and other proceedings |
|
$ |
|
|
$ |
|
||
Other provisions |
|
|
|
|
|
|
||
Total provision for liabilities |
|
$ |
|
|
$ |
|
||
24
Note 16 — Other Income, Net
Other income, net consists of the following:
|
|
Three Months Ended |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
(Loss)/gain on disposal of operations |
|
$ |
( |
) |
|
$ |
|
|
Net periodic pension and postretirement benefit credits |
|
|
|
|
|
|
||
Interest in earnings of associates and other investments |
|
|
|
|
|
|
||
Foreign exchange gain |
|
|
|
|
|
|
||
Other |
|
|
|
|
|
|
||
Other income, net |
|
$ |
|
|
$ |
|
||
Certain prior-year period amounts within the table above have been reclassified to discontinued operations within the condensed consolidated statements of income.
Note 17 — Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive loss, net of non-controlling interests, and net of tax are provided in the following tables for the three months ended March 31, 2022 and 2021. These tables exclude amounts attributable to non-controlling interests, which are not material for further disclosure.
|
|
Foreign currency |
|
|
Derivative |
|
|
Defined pension and |
|
|
Total |
|
||||||||||||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||||||
Balance at December 31, 2021 and 2020, respectively |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
||
Other comprehensive (loss)/income before |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|||
Gain/(loss) reclassified from accumulated other |
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Net current-period other comprehensive (loss)/income |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||||
Balance at March 31, 2022 and 2021, respectively |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
||
Note 18 — Earnings Per Share
Basic and diluted earnings per share from continuing operations attributable to WTW and discontinued operations, net of tax are calculated by dividing net income from continuing operations attributable to WTW and discontinued operations, net of tax, respectively, by the average number of ordinary shares outstanding during each period. The computation of diluted earnings per share reflects the potential dilution that could occur if dilutive securities and other contracts to issue shares were exercised or converted into shares or resulted in the issuance of shares that then shared in the net income of the Company.
At March 31, 2022 and 2021, there were
25
Basic and diluted earnings per share are as follows:
|
|
Three Months Ended March 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Income from continuing operations |
|
$ |
|
|
$ |
|
||
Less: income attributable to non-controllable interests |
|
|
( |
) |
|
|
( |
) |
Income from continuing operations attributable to WTW |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Income from discontinued operations, net of tax |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Basic average number of shares outstanding |
|
|
|
|
|
|
||
Dilutive effect of potentially issuable shares |
|
|
|
|
|
|
||
Diluted average number of shares outstanding |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Basic earnings per share from continuing operations attributable to WTW |
|
$ |
|
|
$ |
|
||
Dilutive effect of potentially issuable shares |
|
|
|
|
|
( |
) |
|
Diluted earnings per share from continuing operations attributable to WTW |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Basic earnings per share from discontinued operations, net of tax |
|
$ |
|
|
$ |
|
||
Dilutive effect of potentially issuable shares |
|
|
|
|
|
|
||
Diluted earnings per share from discontinued operations, net of tax |
|
$ |
|
|
$ |
|
||
For the three months ended March 31, 2022 and 2021,
Note 19 — Supplemental Disclosures of Cash Flow Information
Supplemental disclosures regarding cash flow information are as follows:
|
|
Three months ended March 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
||
Cash and cash equivalents |
|
$ |
|
|
$ |
|
||
Fiduciary funds (included in fiduciary assets) |
|
|
|
|
|
|
||
Cash and cash equivalents and fiduciary funds (included in current assets held |
|
|
|
|
|
|
||
Other restricted cash (included in prepaids and other current assets) |
|
|
|
|
|
|
||
Total cash, cash equivalents and restricted cash |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Decrease in cash, cash equivalents and other restricted cash |
|
$ |
( |
) |
|
$ |
( |
) |
Decrease in fiduciary funds |
|
|
( |
) |
|
|
( |
) |
Total |
|
$ |
( |
) |
|
$ |
( |
) |
Revision of previously issued financial statements - During the three months ended March 31, 2022, to reflect the guidance on restricted cash presentation in FASB ASC 230, Statement of Cash Flows, WTW corrected the classification of its fiduciary funds balances, in the amounts shown in the table above, on our condensed consolidated statements of cash flows, by including these amounts in the total cash, cash equivalents and restricted cash amounts held at each balance sheet date. As a result, cash, cash equivalents and restricted cash balances of $
Prior to this correction, the changes in fiduciary funds were presented in fiduciary assets and liabilities on a gross basis in the cash flows from operating activities, where the amounts fully offset each period. In the current presentation, an additional line item, net (payments)/proceeds from fiduciary funds held for clients, has been included within cash flows from financing activities to represent the change in fiduciary funds balances during the periods. The remaining fiduciary assets and fiduciary liabilities, in equal and offsetting amounts, are no longer presented in the cash flows from operating activities. There was no impact to the total cash flows from operating activities as a result of these changes.
26
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion includes forward-looking statements. See ‘Disclaimer Regarding Forward-looking Statements’ for certain cautionary information regarding forward-looking statements and a list of factors that could cause actual results to differ materially from those predicted in those statements.
This discussion includes references to non-GAAP financial measures as defined in the rules of the SEC. We present such non-GAAP financial measures, specifically, adjusted, constant currency and organic non-GAAP financial measures, as we believe such information is of interest to the investment community because it provides additional meaningful methods of evaluating certain aspects of the Company’s operating performance from period to period on a basis that may not be otherwise apparent under U.S. GAAP, and these provide a measure against which our businesses may be assessed in the future.
See ‘Non-GAAP Financial Measures’ below for further discussion of our adjusted, constant currency and organic non-GAAP financial measures.
Executive Overview
Market Conditions
Typically, our business benefits from regulatory change, political risk or economic uncertainty. Insurance broking generally tracks the economy, but demand for both insurance broking and consulting services usually remains steady during times of uncertainty. We have some businesses, such as our health and benefits and administration businesses, which can be counter cyclical during the early period of a significant economic change.
Within our insurance and brokerage business, due to the cyclical nature of the insurance market and the impact of other market conditions on insurance premiums, commission revenue may vary widely between accounting periods. A period of low or declining premium rates, generally known as a ‘soft’ or ‘softening’ market, generally leads to downward pressure on commission revenue and can have a material adverse impact on our revenue and operating margin. A ‘hard’ or ‘firming’ market, during which premium rates rise, generally has a favorable impact on our revenue and operating margin. Rates, however, vary by geography, industry and client segment. As a result, and due to the global and diverse nature of our business, we view rates in the aggregate. Overall, we are currently seeing a modest but definite increase in pricing in the market.
Market conditions in the broking industry in which we operate are generally defined by factors such as the strength of the economies in the various geographic regions in which we serve around the world, insurance rate movements, and insurance and reinsurance buying patterns of our clients.
The markets for our consulting, technology and solutions, and marketplace services are affected by economic, regulatory and legislative changes, technological developments, and increased competition from established and new competitors. We believe that the primary factors in selecting a human resources or risk management consulting firm include reputation, the ability to provide measurable increases to shareholder value and return on investment, global scale, quality of service and the ability to tailor services to clients’ unique needs. In that regard, we are focused on developing and implementing technology, data and analytic solutions for both internal operations and for maintaining industry standards and meeting client preferences. We have made such investments from time to time and may decide, based on perceived business needs, to make investments in the future that may be different from past practice or what we currently anticipate.
With regard to the market for exchanges, we believe that clients base their decisions on a variety of factors that include the ability of the provider to deliver measurable cost savings for clients, a strong reputation for efficient execution and an innovative service delivery model and platform. Part of the employer-sponsored insurance market has matured and become more fragmented while other segments remain in the entry phase. As these market segments continue to evolve, we may experience growth in intervals, with periods of accelerated expansion balanced by periods of modest growth. In recent years, growth in the market for exchanges has slowed, and we expect this trend may continue.
From time to time, including but not limited to the period after the announcement of the proposed Aon combination through the period that has followed the termination of the proposed combination, we have lost (and may in the future continue to lose) colleagues who manage substantial client relationships or possess substantial experience or expertise; when we lose colleagues such as those, it often results in such colleagues competing against us. Further, the full impact of this competition may be delayed due to the timing of restrictive covenants or client renewals. We believe that this dynamic, which was most pronounced in our Risk & Broking segment during 2021, has caused the segment’s recent near-term and expected growth rates for the remainder of 2022 to be meaningfully slower than other competitors. This dynamic may be difficult to predict, given that the adverse impact in future periods is more significant than in the periods in which employees departed. Growth has been and will be adversely affected by the fact that 2021 performance in a number of businesses, particularly commercial risk broking and health & benefits broking, benefited from revenue
27
from book sales, which is non-repeatable revenue. It is possible that growth could be different than expected and our results of operations could be significantly and adversely impacted. See Part I, Item 1A ‘Risk Factors’ in our Annual Report on Form 10-K, filed with the SEC on February 24, 2022, for a discussion of risks that may affect our ability to compete.
As we previously reported, we intend to transfer ownership of our Russian subsidiary to our local management team. The Russian entity comprised approximately 1% of consolidated WTW revenue for 2021, primarily within our Risk & Broking segment. The lost profits from our Russia operations will, overall, create a modest margin headwind for the Company in 2022 and beyond. However, with the goal of offsetting this, we have taken action to deploy near-term cost-mitigation measures and to identify longer-term offsets. See ‘Disclaimer Regarding Forward-looking Statements’ and Part II, Item 1A ‘Risk Factors’ of this Quarterly Report on Form 10-Q for a discussion of the risks associated with expense actions.
Risks and Uncertainties of the Economic Environment Caused by the Pandemic
The COVID-19 pandemic has had an adverse impact on global commercial activity, particularly on the global supply chain and workforce availability, and has contributed to significant volatility in the global financial markets including, among other effects, occasional declines in the equity markets, changes in interest rates and reduced liquidity on a global basis.
Supply and labor market disruptions caused by COVID-19 as well as other factors, such as accommodative monetary and fiscal policy and the Russian invasion of Ukraine, have contributed to significant inflation in many of the markets in which we operate. This impacts not only the costs to attract and retain employees but also other costs to run and invest in our business. If our costs grow significantly in excess of our ability to raise revenue, our margins and results of operations may be materially and adversely impacted, and we may not be able to achieve our strategic and financial objectives.
Although we believe we have adapted to the unique challenges posed by the pandemic surrounding how and where we do our work, we are also impacted by the negative effect on workforce availability, which could hamper our ability to grow our capacity on pace with increasing demand for our services. We expect the market for talent to remain highly competitive for at least the next several months. We will continue to monitor the situation and assess any implications to our business and our stakeholders.
Segment Reorganization
On January 1, 2022, WTW realigned to provide its comprehensive offering of services and solutions to clients across two business segments: Health, Wealth & Career and Risk & Broking. These changes were made in conjunction with changes in the WTW leadership team, including the appointment of a new chief executive officer who succeeded the prior CEO as the chief operating decision maker on that date. Prior to January 1, 2022, we operated across four segments: Human Capital and Benefits; Corporate Risk and Broking; Investment, Risk and Reinsurance; and Benefits Delivery and Administration. Following the realignment, the two new segments consist of the following businesses:
The following presents descriptions of our reorganized segments:
Health, Wealth & Career
The Health, Wealth & Career (‘HWC’) segment provides an array of advice, broking, solutions and technology for employee benefit plans, institutional investors, compensation and career programs, and the employee experience overall. Our portfolio of services support the interrelated challenges that the management teams of our clients face across human resources (‘HR’) and finance.
HWC is the larger of the two segments of the Company. Addressing four key areas, Health, Wealth, Career and Benefits Delivery & Outsourcing, the segment is focused on addressing our clients’ people and risk needs to help them succeed in a global marketplace.
Health
The Health & Benefits (‘H&B’) business provides strategy and design consulting, plan management service and support, broking and administration across the full spectrum of health, wellbeing and other group benefit programs, including medical, dental, disability, life, voluntary benefits and other coverage. Our reach extends from small/mid-market clients to large-market and multinational clients, across the full geographic footprint of the Company, and to most industries. We can address our clients’ needs in more than 140 countries.
28
Our consultants help clients make strategic decisions on topics such as optimizing program spend; evaluating emerging vendors, point solutions and coverage options (including publicly-subsidized health insurance exchanges and private exchanges in the U.S.); and dealing with above-inflation-rate increases in healthcare costs. We also assist clients in selecting the appropriate insurance carriers to cover benefit risks and administer the programs. In addition to our consulting and broking services, we manage a number of collective purchasing initiatives, such as pharmacy and stop-loss, that allow employers to realize greater value from third-party service providers than they can achieve on their own.
With Global Benefits Management, our suite of global services supporting medical, dental and risk (e.g., life, disability) programs, we have a tailored offering for multinationals. This offering includes a flexible set of ready-made solutions, proven technology and an integrated approach to service delivery that translates to a globally consistent, high-quality experience for our clients.
A meaningful portion of revenue in this business is from recurring work, though contracts may be annual or multi-year. Given the balance of revenue across consulting, broking and solutions, our revenue is somewhat weighted to the first quarter.
Wealth
Our wealth-related businesses include Retirement and Investment.
The Retirement business provides actuarial support, plan design, and administrative services for all forms of pension and retirement savings plans. Our colleagues help our clients assess the costs and risks of retirement plans on cash flow, earnings and the balance sheet, the effects of changing workforce demographics on their retirement plans, and retiree benefit adequacy and security. We offer clients a full range of integrated retirement consulting services and solutions to meet the needs of all types of employers, including those that continue to offer defined benefit plans and those that are reexamining their retirement benefit strategies. We help multinationals coordinate plan design and actuarial services across their complex global plans. We bring in-depth data analysis and perspective to their decision process, because we have tracked the retirement designs and financing strategies of companies around the world over many decades.
For clients that want to outsource some or all of their pension plan management, we offer broking services, as well as integrated solutions that can combine investment discretionary management, pension administration, core actuarial services, and communication and change management assistance.
Retirement relationships are generally long-term in nature, and client retention rates for this business are high. A significant portion of the revenue in this business is from recurring work, with multi-year contracts that are driven by the heavily regulated nature of pension plans and our clients’ annual needs for these services. Revenue for the Retirement business in some geographies is somewhat seasonal, as much of our work pertains to calendar-year plan administration, financing, reporting and compliance; thus, revenue is typically more weighted to the first and fourth quarters of the fiscal year.
Our Investment business provides advice and discretionary investment management solutions to defined benefit and defined contribution pension plans as well as to a range of other client types including insurers, endowments and foundations, and private wealth investors. We provide a solution to a significant business problem faced by our clients, namely sustaining the resources and skills required to deliver a financial services product in highly competitive capital markets. We offer a flexible approach that adapts to a wide range of client needs and circumstances, with the objective of higher returns, lower risk and lower costs within each client’s unique situation.
Our solutions range from single asset class activity, through complete management of entire pension plan assets including sophisticated liability hedging programs.
We bring together a broad array of specialist investment knowledge and skills across all asset classes, a high-quality execution platform, a cost advantage through our scale, and expert advisors with experience across all client types from the largest plans in the world to small corporate pension plans.
We have long-term relationships with our Investment clients, with the majority of our revenue driven by retainer contracts.
Career
Our career-related offerings include advice, data, software and products to address clients’ total rewards and talent issues across the globe delivered through our Work & Rewards and Employee Experience businesses.
Within our Work & Rewards business, we help clients determine the best ways to get work done, the skills needed for jobs, and how to reward it. We address executive compensation and broad-based rewards. We advise our clients’ management and boards of directors on all aspects of executive pay programs, including base pay, annual bonuses, long-term incentives, perquisites and other
29
benefits. Our focus is on aligning pay plans with an organization’s business strategy and driving desired performance. Our solutions incorporate proprietary market benchmarking data and software to support compensation administration.
Our Employee Experience business focuses on the provision of solutions including employee insight and listening tools, talent assessment tools and services, communication and change management services.
Revenue for our career-related businesses is partly seasonal in nature, with heightened activity in the second half of the calendar year during the annual compensation, benefits, and survey cycles. While these businesses enjoy long-term relationships with many clients, work in several practices is often project-based and can be sensitive to economic changes. The businesses benefit from regulatory changes affecting our clients that require strategic advice, program changes and communication, as well as the focus on ESG as a component of executive and board pay, the redefinition of jobs, work location and career paths as technology disaggregates work, and the recalibration of pay and the employee experience amidst shifting labor markets.
Benefits Delivery & Outsourcing
Our Benefits Delivery & Outsourcing businesses include Benefits Delivery & Administration (‘BDA’) and Technology and Administration Solutions (‘TAS’).
The BDA business provides primary medical and ancillary benefit exchange and outsourcing services to active employees and retirees across both the group and individual markets, primarily in the U.S.
A significant portion of the revenue in this business is recurring in nature, driven by either the commissions from the policies we sell, or from long-term service contracts with our clients that typically range from three to five years. Revenue across this business is seasonal and is generally higher in the fourth quarter as it is driven when typical annual enrollment activity occurs.
BDA provides services via two related offerings:
Benefits Outsourcing is focused on serving active employee groups for clients across the U.S. Working closely with other HWC businesses, we use our proprietary technology to provide a suite of health and welfare and pension administration outsourcing services, including tools to enable benefit modeling, decision support, enrollment and benefit choice. Drawing on expertise in H&B and Retirement to create high-performing benefit plan designs, we believe we are well-positioned to help clients of all sizes simplify their benefits delivery, while lowering the total costs of benefits and related administration.
Individual Marketplace offers decision support processes and tools to connect consumers with insurance carriers in private individual and Medicare markets. Individual Marketplace serves both employer-based and direct-to-consumer populations through its end-to-end consumer acquisition and engagement platforms, which tightly integrate call routing technology, an efficient quoting and enrollment engine, a customer relations management system and deep links with insurance carriers. By leveraging its multiple distribution channels and diverse product portfolio, Individual Marketplace offers solutions to a broad consumer base, helping individuals compare, purchase and use health insurance products, tools and information for life.
Our TAS business provides pension outsourcing services to hundreds of clients across multiple industries. Our TAS team focuses on clients outside of the U.S. where our services are supported by high quality administration teams using robust technology platforms. Given the nature of the work, our revenue is distributed generally evenly across the year.
With ongoing servicing requirements and multi-year contracts in place, we have high client retention rates. We are the leading administrator among the 200 largest pension plans in the U.K., as well as a leader in Germany.
For both our defined benefit and defined contribution administration services, we use highly-automated processes and technology to enable benefit plan members to access and manage their records, perform self-service functions and improve their understanding of their benefits. Our technology also provides trustees and HR teams with timely management information to monitor activity and service levels and reduce administration costs.
Risk & Broking
The Risk & Broking (‘R&B’) segment provides a broad range of risk advice, insurance brokerage and consulting services to clients worldwide ranging from small businesses to multinational corporations.
30
The segment comprises two primary businesses:
Corporate Risk & Broking (‘CRB’)
The ‘CRB’ business places more than $25 billion of premiums into the insurance markets on an annual basis, and delivers integrated global solutions tailored to client needs, underpinned by data and analytics through a balanced matrix of global lines of business across all of the Company’s three geographical areas: North America, Europe (including Great Britain) and International.
The global lines of business include:
Property and Casualty — Property and Casualty provides property and liability insurance brokerage services across a wide range of industries and segments including real estate, healthcare and retail. We also arrange insurance products and services for our affinity client partners to offer to their customers, employees, or members alongside, or in addition to, their principal business offerings.
Aerospace — Aerospace provides specialist expertise to the aerospace and space industries. Our aerospace business provides insurance broking, risk management services, contractual and technical advisory expertise to aerospace clients worldwide, including the world’s leading airlines, aircraft manufacturers, air cargo handlers and other airport and general aviation companies. The specialist InSpace team is also prominent in providing insurance and risk management services to the space industry.
Construction — Our Construction business provides services that include insurance broking, claims, loss control and specialized risk advice for a wide range of construction projects and activities. Clients include contractors, project owners, public entities, project managers, consultants and financiers, among others.
Global Markets Direct & Facultative — Operating in the major wholesale reinsurance hubs across the world, including London, Bermuda, Singapore, Hong Kong and Shanghai, solutions are delivered both directly to clients for the most complex property and casualty risks and as facultative reinsurance placements where we serve as an intermediary for insurance companies. Facultative solutions are provided across various classes of risk for our insurer clients, some of which may also be direct clients of WTW. The aim is to deliver optimum results for our clients by getting the right risk to the right market by the right broker, be it local, wholesale or facultative every time.
Financial, Executive and Professional Risks (‘FINEX’) — FINEX encompasses all financial and executive risks, delivering client solutions that range from management and professional liability, employment practices liability, crime, cyber and M&A-related insurances to risk consulting and advisory services. Specialist teams provide risk consulting and risk transfer solutions to a broad spectrum of clients across a multitude of industries, as well as the financial and professional service sectors.
Financial Solutions — Financial Solutions provides insurance broking services and specialized risk advice related to credit and political risk and crisis management, including terrorism, kidnap and ransom and contingency risk. Clients include international banks, leasing companies, commodity traders, export credit agencies, multinational corporations and sporting institutions.
Surety — The Global Surety team provides expertise in placing bonds across all industries and around the world. A surety bond is a financial instrument that guarantees contractual performance, statutory compliance, and financial assurance for domestic and international companies.
Marine — Marine provides specialist expertise to the maritime and logistics industries. Our Marine business provides insurance broking services related to hull and machinery, cargo, protection and indemnity, fine art and general marine liabilities, among others. Our Marine clients include, but are not limited to, ship owners and operators, shipbuilders, logistics operations, port authorities, traders, shippers, exhibitors and secure transport companies.
Natural Resources — Our Natural Resources practice encompasses the oil, gas and chemicals, mining and metals, power and utilities and renewable energy sectors. It provides sector-specific risk transfer solutions and insights, which include insurance broking, risk engineering, contractual reviews, wording analysis and claims management.
Insurance Consulting and Technology (‘ICT’)
ICT is a global business that provides advice and technology solutions to the insurance industry. We leverage our industry experience, strategic perspective and analytical skills to help clients measure and manage risk and capital, improve business performance and create a sustainable competitive advantage. Our services include software and technology, risk and capital management, products and product pricing, financial and regulatory reporting, financial and capital modeling, M&A, outsourcing and business management.
Transformation Program
In the fourth quarter of 2021, we initiated a three-year ‘Transformation program’ designed to enhance operations, optimize technology and align our real estate footprint to our new ways of working. We expect the program to generate annual cost savings of
31
approximately $300 million by the end of 2024. The program is expected to include cumulative costs of approximately $490 million and capital expenditures of approximately $260 million, for a total investment of $750 million. The main categories of charges will be
in the following four areas:
Certain costs under the Transformation program are accounted for under ASC 420, Exit or Disposal Cost Obligation, and are included as restructuring costs in the condensed consolidated statements of comprehensive income. For the three months ended March 31, 2022, restructuring charges under our Transformation program totaled $6 million. Other costs incurred under the Transformation program are included in transaction and transformation, net and were $5 million for the three months ended March 31, 2022. From the actions taken through the first quarter of 2022, we have identified an additional $16 million of annualized run-rate savings in the quarter, and $36 million of cumulative annualized run-rate savings identified to date since the inception of the program. Savings are primarily attributable to the reduction of real estate and technology costs and the benefits from the program have begun to be recognized during 2022.
For a discussion of some of the risks associated with the Transformation program, see Part I, Item 1A ‘Risk Factors’ in our Annual Report on Form 10-K, filed with the SEC on February 24, 2022.
Financial Statement Overview
For all prior-year period financial information presented herein, the operating results of Willis Re have been reclassified as discontinued operations (see Note 3 — Acquisitions and Divestitures within Part I, Item 1 ‘Financial Statements’ in this Form 10-Q for additional information).
The table below sets forth our summarized condensed consolidated statements of comprehensive income and data as a percentage of revenue for the periods indicated.
|
|
Three Months Ended March 31, |
|
|||||||||||||
|
|
2022 |
|
|
2021 |
|
||||||||||
|
|
($ in millions, except per share data) |
|
|||||||||||||
Revenue |
|
$ |
2,160 |
|
|
|
100 |
% |
|
$ |
2,228 |
|
|
|
100 |
% |
Costs of providing services |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Salaries and benefits |
|
|
1,318 |
|
|
|
61 |
% |
|
|
1,419 |
|
|
|
64 |
% |
Other operating expenses |
|
|
486 |
|
|
|
23 |
% |
|
|
400 |
|
|
|
18 |
% |
Depreciation |
|
|
66 |
|
|
|
3 |
% |
|
|
71 |
|
|
|
3 |
% |
Amortization |
|
|
85 |
|
|
|
4 |
% |
|
|
103 |
|
|
|
5 |
% |
Restructuring costs |
|
|
6 |
|
|
|
— |
% |
|
|
— |
|
|
|
— |
% |
Transaction and transformation, net |
|
|
20 |
|
|
|
1 |
% |
|
|
24 |
|
|
|
1 |
% |
Total costs of providing services |
|
|
1,981 |
|
|
|
|
|
|
2,017 |
|
|
|
|
||
Income from operations |
|
|
179 |
|
|
|
8 |
% |
|
|
211 |
|
|
|
9 |
% |
Interest expense |
|
|
(49 |
) |
|
|
(2 |
)% |
|
|
(59 |
) |
|
|
(3 |
)% |
Other income, net |
|
|
27 |
|
|
|
1 |
% |
|
|
438 |
|
|
|
20 |
% |
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES |
|
|
157 |
|
|
|
7 |
% |
|
|
590 |
|
|
|
26 |
% |
Provision for income taxes |
|
|
(43 |
) |
|
|
(2 |
)% |
|
|
(44 |
) |
|
|
(2 |
)% |
INCOME FROM CONTINUING OPERATIONS |
|
|
114 |
|
|
|
5 |
% |
|
|
546 |
|
|
|
25 |
% |
INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX |
|
|
11 |
|
|
|
1 |
% |
|
|
190 |
|
|
|
9 |
% |
Income attributable to non-controlling interests |
|
|
(3 |
) |
|
|
— |
% |
|
|
(3 |
) |
|
|
— |
% |
NET INCOME ATTRIBUTABLE TO WTW |
|
$ |
122 |
|
|
|
6 |
% |
|
$ |
733 |
|
|
|
33 |
% |
Diluted earnings per share from continuing operations |
|
$ |
0.94 |
|
|
|
|
|
$ |
4.17 |
|
|
|
|
||
32
Consolidated Revenue (Continuing Operations)
Revenue for both the three months ended March 31, 2022 and 2021 was $2.2 billion, a decrease of $68 million, or 3%, on an as-reported basis. Adjusting for the impacts of foreign currency and acquisitions and disposals, our organic revenue growth was 2% for the three months ended March 31, 2022. The increase in organic revenue was driven by our HWC segment.
Our revenue can be materially impacted by changes in currency conversions, which can fluctuate significantly over the course of a calendar year. For the three months ended March 31, 2022, currency translation decreased our consolidated revenue by $54 million. The primary currencies driving this change were the Euro and Pound sterling.
The following table details our top five markets based on the percentage of consolidated revenue (in U.S. dollars) from the countries where work was performed for the three months ended March 31, 2022. These figures do not represent the currency of the related revenue, which is presented in the next table.
Geographic Region |
|
% of Revenue |
|
|
United States |
|
|
46 |
% |
United Kingdom |
|
|
19 |
% |
France |
|
|
7 |
% |
Germany |
|
|
4 |
% |
Canada |
|
|
3 |
% |
The table below details the approximate percentage of our revenue and expenses from continuing operations by transactional currency for the three months ended March 31, 2022.
Transactional Currency |
|
Revenue |
|
|
Expenses (i) |
|
||
U.S. dollars |
|
|
52 |
% |
|
|
53 |
% |
Pounds sterling |
|
|
12 |
% |
|
|
17 |
% |
Euro |
|
|
21 |
% |
|
|
14 |
% |
Other currencies |
|
|
15 |
% |
|
|
16 |
% |
The following table sets forth the total revenue for the three months ended March 31, 2022 and 2021 and the components of the change in total revenue for the three months ended March 31, 2022, as compared to the prior year period. The components of the revenue change may not add due to rounding.
|
|
|
|
|
|
|
|
|
|
Components of Revenue Change |
||||||||
|
|
|
|
|
|
|
|
As |
|
Less: |
|
Constant |
|
Less: |
|
|
||
|
|
Three Months Ended March 31, |
|
|
Reported |
|
Currency |
|
Currency |
|
Acquisitions/ |
|
Organic |
|||||
|
|
2022 |
|
|
2021 |
|
|
Change |
|
Impact |
|
Change |
|
Divestitures |
|
Change |
||
|
|
($ in millions) |
|
|
|
|
|
|
|
|
|
|
|
|||||
Revenue |
|
$ |
2,160 |
|
|
$ |
2,228 |
|
|
(3)% |
|
(2)% |
|
(1)% |
|
(2)% |
|
2% |
Definitions of Constant Currency Change and Organic Change are included under the section entitled ‘Non-GAAP Financial Measures’ elsewhere within Item 2 of this Form 10-Q.
Segment Revenue
For further information on our segment reorganization and a full description of our businesses, please see ‘Segment Reorganization’ elsewhere within Part I, Item 2 of this Quarterly Report on Form 10-Q.
Segment revenue excludes amounts that were directly incurred on behalf of our clients and reimbursed by them (reimbursed expenses); however, these amounts are included in consolidated revenue.
The Company experiences seasonal fluctuations in its revenue. Revenue is typically higher during the Company’s first and fourth quarters due primarily to the timing of broking-related activities.
Within the tables presented below, the components of revenue change provided may not add due to rounding. The prior-year segment information has been conformed to the current-year presentation.
33
HWC Revenue
The following table sets forth HWC revenue for the three months ended March 31, 2022 and 2021 and the components of the change in revenue for the three months ended March 31, 2022 from the three months ended March 31, 2021.
|
|
|
|
|
|
|
|
|
|
Components of Revenue Change |
||||||||
|
|
|
|
|
|
|
|
As |
|
Less: |
|
Constant |
|
Less: |
|
|
||
|
|
Three Months Ended March 31, |
|
|
Reported |
|
Currency |
|
Currency |
|
Acquisitions/ |
|
Organic |
|||||
|
|
2022 |
|
|
2021 |
|
|
Change |
|
Impact |
|
Change |
|
Divestitures |
|
Change |
||
|
|
($ in millions) |
|
|
|
|
|
|
|
|
|
|
|
|||||
Segment revenue |
|
$ |
1,244 |
|
|
$ |
1,233 |
|
|
1% |
|
(2)% |
|
3% |
|
—% |
|
2% |
HWC segment revenue for both the three months ended March 31, 2022 and 2021 was $1.2 billion. Organic growth was led by the Health business, primarily due to an increase in consulting assignments in North America. Career also contributed strong growth, driven by market demand for reward-based advisory services and compensation benchmarking products as new work models become increasingly prevalent. Wealth revenue increased, with growth in the Investment business from its expanded client base. Benefits Delivery & Outsourcing revenue declined as a result of a shift in the timing of revenue, which we expect to normalize on a full-year basis, coupled with lower growth in Medicare Advantage revenue.
R&B Revenue
The following table sets forth R&B revenue for the three months ended March 31, 2022 and 2021 and the components of the change in revenue for the three months ended March 31, 2022 from the three months ended March 31, 2021.
|
|
|
|
|
|
|
|
|
|
Components of Revenue Change |
||||||||
|
|
|
|
|
|
|
|
As |
|
Less: |
|
Constant |
|
Less: |
|
|
||
|
|
Three Months Ended March 31, |
|
|
Reported |
|
Currency |
|
Currency |
|
Acquisitions/ |
|
Organic |
|||||
|
|
2022 |
|
|
2021 |
|
|
Change |
|
Impact |
|
Change |
|
Divestitures |
|
Change |
||
|
|
($ in millions) |
|
|
|
|
|
|
|
|
|
|
|
|||||
Segment revenue |
|
$ |
891 |
|
|
$ |
924 |
|
|
(4)% |
|
(4)% |
|
—% |
|
—% |
|
—% |
R&B segment revenue for the three months ended March 31, 2022 and 2021 was $891 million and $924 million, respectively. On an organic basis, Insurance Consulting and Technology grew from both increased advisory work and software sales. The growth was largely offset by a decline in revenue in Corporate Risk & Broking due to headwinds from book-of-business sales recorded in the comparable period last year. Excluding $15 million of book-of-business sales activity, revenue increased modestly, primarily from new business in North America in the FINEX and M&A lines. The year-over-year decline in Russia-related revenue was $14 million.
Costs of Providing Services (Continuing Operations)
For all prior-year period financial information presented herein, the operating results of Willis Re have been reclassified as discontinued operations (see Note 3 — Acquisitions and Divestitures within Part I, Item 1 ‘Financial Statements’ in this Form 10-Q for additional information).
Total costs of providing services for both the three months ended March 31, 2022 and 2021 were $2.0 billion, a decrease of $36 million, or 2%. See the following discussion for further details.
Salaries and Benefits
Salaries and benefits for the three months ended March 31, 2022 were $1.3 billion, compared to $1.4 billion for the three months ended March 31, 2021, a decrease of $101 million, or 7%. The decrease in the current year is mostly due to lower incentive and benefit accruals for the period. Salaries and benefits, as a percentage of revenue, represented 61% and 64% for the three months ended March 31, 2022 and 2021, respectively.
Other Operating Expenses
Other operating expenses for the three months ended March 31, 2022 were $486 million, compared to $400 million for the three months ended March 31, 2021, an increase of $86 million, or 22%. The increase was primarily due to asset impairments, mostly accounts receivables, related to Russian insurance contracts placed by U.K. brokers in the London market (see Note 3 — Acquisitions and Divestitures within Part I, Item 1 ‘Financial Statements’ in this Form 10-Q for additional information) and higher business insurance costs for the current year as compared to the prior year.
34
Depreciation
Depreciation for the three months ended March 31, 2022 was $66 million, compared to $71 million for the three months ended March 31, 2021, a decrease of $5 million, or 7%. The year-over-year decrease was primarily due to a lower depreciable base of assets resulting from business disposals over the last two years and a lower dollar value of assets placed in service during 2021.
Amortization
Amortization for the three months ended March 31, 2022 was $85 million, compared to $103 million for the three months ended March 31, 2021, a decrease of $18 million, or 17%. Our intangible amortization is generally more heavily weighted to the initial years of the useful lives of the related intangibles, and therefore amortization related to intangible assets will continue to decrease over time.
Restructuring Costs
Restructuring costs for the three months ended March 31, 2022 were $6 million primarily related to the real estate rationalization component of the Transformation program commenced by the Company during the fourth quarter of 2021 (see ‘Transformation Program’ within this Part I, Item 2 and Note 6 — Restructuring Costs within Part I, Item 1 ‘Financial Statements’ of this Quarterly Report on Form 10-Q).
Transaction and Transformation, Net
Transaction and transformation, net for the three months ended March 31, 2022 were $20 million, compared to $24 million for the three months ended March 31, 2021. Transaction and transformation expenses for the current year were comprised of consulting fees related to the Transformation program (see ‘Transformation Program’ within this Part I, Item 2), as well as legal fees and other transaction costs. Transaction and transformation, net for the prior-year period were comprised primarily of legal fees related to our then-proposed combination with Aon.
Income from Operations
Income from operations for the three months ended March 31, 2022 was $179 million, compared to $211 million for the three months ended March 31, 2021, a decrease of $32 million. This decrease resulted primarily from the asset impairment expense discussed above and lower revenue, partially offset by lower incentive compensation accruals in the current quarter.
Interest Expense
Interest expense for the three months ended March 31, 2022 was $49 million, compared to $59 million for the three months ended March 31, 2021, a decrease of $10 million, or 17%. This decrease was primarily the result of lower levels of indebtedness in the current year.
Other Income, Net
Other income, net for the three months ended March 31, 2022 was $27 million, compared to $438 million for the three months ended March 31, 2021. Other income for the current year primarily consisted of pension income partially offset by the loss on the Russian deconsolidation. Other income, net in the prior-year period consisted primarily of the net gain on disposal of our Miller business (see Note 3 – Acquisitions and Divestitures in Part I, Item 1 ‘Financial Statements’ in this Form 10-Q).
Provision for Income Taxes
Provision for income taxes for the three months ended March 31, 2022 was $43 million, compared to $44 million for the three months ended March 31, 2021, a decrease of $1 million. The effective tax rate was 27.5% for the three months ended March 31, 2022, and 7.4% for the three months ended March 31, 2021. These effective tax rates are calculated using extended values from our condensed consolidated statements of comprehensive income and are therefore more precise tax rates than can be calculated from rounded values. The prior quarter effective tax rate was lower due to the tax-exempt disposal of our Miller business. Additionally, the current quarter effective tax rate includes the tax effect of the divestment of our Russia business.
Income from Discontinued Operations, Net of Tax
Income from discontinued operations, net of tax for the three months ended March 31, 2022 was $11 million, compared to $190 million for the three months ended March 31, 2021, a decrease of $179 million. The operations of our Willis Re business were reclassified to discontinued operations upon our entering into an agreement to sell the business during the third quarter of 2021 (see Note 3 – Acquisitions and Divestitures in Part I, Item 1 ‘Financial Statements’ in this Form 10-Q). Income from discontinued
35
operations in the current year is attributable to the operations of the deferred closing entities and run-off activity associated with the divestiture.
Net Income Attributable to WTW
Net income attributable to WTW for the three months ended March 31, 2022 was $122 million, compared to $733 million for the three months ended March 31, 2021, a decrease of $611 million, or 83%. This decrease was primarily due to the prior-year gain on the sale of the Miller business, lower net income from the discontinued operations of our Willis Re business, the asset impairment expense discussed above and lower revenue, partially offset by lower incentive compensation accruals in the current quarter.
Liquidity and Capital Resources
Executive Summary
Our principal sources of liquidity are funds generated by operating activities, available cash and cash equivalents and amounts available under our revolving credit facilities and any new debt offerings.
The COVID-19 pandemic has contributed to significant volatility in financial markets, including occasional declines in equity markets, inflation and changes in interest rates and reduced liquidity on a global basis. Specific to WTW, over the past two years, the COVID-19 pandemic had an initial negative impact on discretionary work we perform for our clients, but we later saw increased demand for these services begin to return in the second quarter of 2021 which continues into 2022. We continue to have decreased spending on travel and associated expenses and third-party contractors, and we have the ability to contain spending on discretionary projects and certain capital expenditures.
Based on our current balance sheet and cash flows, current market conditions and information available to us at this time, we believe that WTW has access to sufficient liquidity, which includes all of the borrowing capacity available to draw against our $1.5 billion revolving credit facility, to meet our cash needs for the next twelve months, including investments in the business for growth, scheduled debt repayments, share repurchases and dividend payments. During the three months ended March 31, 2022, we repurchased $2.3 billion of shares, and have authorization to repurchase an additional $1.6 billion. Additionally, we intend to refinance our €540 million ($609 million) of 2.125% senior notes, which mature during the second quarter 2022. The timing, tenor, currency and size of such a refinancing will be determined based on market conditions.
From time to time, we will consider whether to repurchase shares based on many factors, including market and economic conditions, applicable legal requirements and other business considerations. The share repurchase program has no termination date and may be suspended or discontinued at any time.
During the prior year, the operating results and balance sheets of Willis Re were reclassified to discontinued operations. Willis Re’s operating cash flows approximate its pre-tax income and any adjustments for working capital movements (see Note 3 — Acquisitions and Divestitures in Part I, Item 1 ‘Financial Statements’ within this Quarterly Report on Form 10-Q). Certain costs historically allocated to the Willis Re business are included in continuing operations and were retained following the disposal, but are expected to be partially offset by reimbursements through the TSA. Costs incurred to service the TSA are expected to be reduced as part of the Company’s Transformation program as quickly as possible when the services are no longer required by Gallagher.
Events that could change the historical cash flow dynamics discussed above include significant changes in operating results, potential future acquisitions or divestitures, material changes in geographic sources of cash, unexpected adverse impacts from litigation or regulatory matters, or future pension funding during periods of severe downturn in the capital markets.
Undistributed Earnings of Foreign Subsidiaries
The Company recognizes deferred tax balances related to the undistributed earnings of subsidiaries when it expects that it will recover those undistributed earnings in a taxable manner, such as through receipt of dividends or sale of the investments.
We continue to have certain subsidiaries whose earnings have not been deemed permanently reinvested, for which we have been accruing estimates of the tax effects of such repatriation. Excluding these certain subsidiaries, we continue to assert that the historical cumulative earnings for the remainder of our subsidiaries have been reinvested indefinitely, and therefore do not provide deferred taxes on these amounts. If future events, including material changes in estimates of cash, working capital, long-term investment requirements or additional legislation relating to U.S. Tax Reform, necessitate that these earnings be distributed, an additional provision for income and foreign withholding taxes, net of credits, may be necessary. Other potential sources of cash may be through the settlement of intercompany loans or return of capital distributions in a tax-efficient manner.
36
Cash and Cash Equivalents
Our cash and cash equivalents at March 31, 2022 totaled $2.2 billion, compared to $4.5 billion at December 31, 2021. The decrease in cash from December 31, 2021 to March 31, 2022 was due primarily to $2.3 billion of share repurchases.
Additionally, we had all of the borrowing capacity available to draw against our $1.5 billion revolving credit facility at both March 31, 2022 and December 31, 2021.
Included within cash and cash equivalents at March 31, 2022 and December 31, 2021 are amounts held for regulatory capital adequacy requirements, including $119 million and $120 million, respectively, held within our regulated U.K. entities.
Summarized Condensed Consolidated Cash Flows
The following table presents the summarized condensed consolidated cash flow information for the three months ended March 31, 2022 and 2021:
|
|
Three Months Ended March 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
|
|
(in millions) |
|
|||||
Net cash from/(used in): |
|
|
|
|
|
|
||
Operating activities |
|
$ |
21 |
|
|
$ |
(128 |
) |
Investing activities |
|
|
74 |
|
|
|
429 |
|
Financing activities |
|
|
(2,580 |
) |
|
|
(832 |
) |
DECREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH (i) |
|
|
(2,485 |
) |
|
|
(531 |
) |
Effect of exchange rate changes on cash, cash equivalents and restricted cash |
|
|
(34 |
) |
|
|
(60 |
) |
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD (i) |
|
|
7,691 |
|
|
|
6,301 |
|
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD (i) |
|
$ |
5,172 |
|
|
$ |
5,710 |
|
Cash Flows From/(Used In) Operating Activities
Cash flows from operating activities were $21 million for the three months ended March 31, 2022, compared to cash flows used in operating activities of $128 million for the three months ended March 31, 2021. The $21 million of net cash used in operating activities for the three months ended March 31, 2022 included net income of $125 million and $281 million of favorable non-cash adjustments, partially offset by unfavorable changes in operating assets and liabilities of $385 million. This increase in cash flows from operations as compared to the prior year was primarily due to the absence of the net legal settlement payments of $185 million made last year, partially offset by higher bonus payments and lower reinsurance-related cash collections in the current quarter.
The $128 million of net cash used in operating activities for the three months ended March 31, 2021 included net income of $736 million, offset by $171 million of unfavorable non-cash adjustments and by unfavorable changes in operating assets and liabilities of $693 million.
Cash Flows From Investing Activities
Cash flows from investing activities for the three months ended March 31, 2022 were $74 million as compared to $429 million for the three months ended March 31, 2021. The cash flows from investing activities for the three months ended March 31, 2022 primarily include sales of investments of $200 million, partially offset by capital expenditures and capitalized software additions of $46 million and an acquisition of $68 million made during the first quarter of 2022. The cash flows from investing activities in the prior year period primarily included the net proceeds from the sale of Miller of $696 million, partially offset by cash and fiduciary funds transferred on disposal of $216 million and capital expenditures and capitalized software additions of $51 million.
Cash Flows Used In Financing Activities
Cash flows used in financing activities for the three months ended March 31, 2022 were $2.6 billion. The significant financing activities included share repurchases of $2.3 billion, $211 million of net payments from fiduciary funds held for clients and dividend payments of $98 million.
Cash flows used in financing activities for the three months ended March 31, 2021 were $832 million. The significant financing activities included the full payment of our $500 million of 5.750% senior notes, $199 million of net payments from fiduciary funds held for clients and dividend payments of $92 million.
37
Indebtedness
Total debt, total equity, and the capitalization ratios at March 31, 2022 and December 31, 2021 were as follows:
|
|
March 31, |
|
|
December 31, |
|
||
|
|
($ in millions) |
|
|||||
Long-term debt |
|
$ |
3,975 |
|
|
$ |
3,974 |
|
Current debt |
|
|
599 |
|
|
|
613 |
|
Total debt |
|
$ |
4,574 |
|
|
$ |
4,587 |
|
|
|
|
|
|
|
|
||
Total WTW shareholders’ equity |
|
$ |
11,004 |
|
|
$ |
13,260 |
|
|
|
|
|
|
|
|
||
Capitalization ratio |
|
|
29.4 |
% |
|
|
25.7 |
% |
The capitalization ratio increased from December 31, 2021 primarily due to $2.3 billion of share repurchases during the three months ended March 31, 2022.
At March 31, 2022, our mandatory debt repayment over the next twelve months includes $599 million outstanding on our Euro-denominated 2.125% senior notes due 2022.
At March 31, 2022 and December 31, 2021, we were in compliance with all financial covenants.
Fiduciary Funds
As an intermediary, we hold funds, generally in a fiduciary capacity, for the account of third parties, typically as the result of premiums received from clients that are in transit to insurers and claims due to clients that are in transit from insurers. We also hold funds for clients of our benefits account businesses. These fiduciary funds are included in fiduciary assets on our condensed consolidated balance sheets. We present the equal and corresponding fiduciary liabilities related to these fiduciary funds representing amounts or claims due to our clients or premiums due on their behalf to insurers on our condensed consolidated balance sheets.
Fiduciary funds are generally required to be kept in regulated bank accounts subject to guidelines which emphasize capital preservation and liquidity; such funds are not available to service the Company’s debt or for other corporate purposes. Notwithstanding the legal relationships with clients and insurers, the Company is entitled to retain investment income earned on certain of these fiduciary funds in accordance with industry custom and practice and, in some cases, as supported by agreements with insureds.
At March 31, 2022 and December 31, 2021, we had fiduciary funds of $3.1 billion and $3.4 billion, respectively, of which $616 million and $719 million, respectively, are attributable to our Willis Re business.
Share Repurchase Program
The Company is authorized to repurchase shares, by way of redemption or otherwise, and will consider whether to do so from time to time, based on many factors, including market conditions. There are no expiration dates for our repurchase plans or programs.
On February 26, 2020, the board of directors approved a $251 million increase to the existing share repurchase program. On July 26, 2021, the board of directors approved a $1.0 billion increase to the existing share repurchase program, and on September 16, 2021, approved a $4.0 billion increase to the existing share repurchase program. These three increases brought the total approved authorization to $5.5 billion.
At March 31, 2022, approximately $1.6 billion remained on the current repurchase authority. The maximum number of shares that could be repurchased based on the closing price of our ordinary shares on March 31, 2022 of $236.22 was 6,869,233.
38
During the three months ended March 31, 2022, the Company had the following share repurchase activity:
|
|
|
Three Months Ended |
|
|
Shares repurchased |
|
|
|
9,860,414 |
|
Average price per share |
|
|
$228.19 |
|
|
Aggregate repurchase cost (excluding broker costs) |
|
|
$2.3 billion |
|
|
Capital Commitments
Capital expenditures for fixed assets and software for internal use were $31 million during the three months ended March 31, 2022. The Company estimates that there will be additional such expenditures, which includes those incurred under its Transformation program, in the range of $160 million - $210 million during the remainder of 2022. We currently expect cash from operations to adequately provide for these cash needs. There have been no material changes to our capital commitments since December 31, 2021.
Dividends
Total cash dividends of $98 million were paid during the three months ended March 31, 2022. In February 2022, the board of directors approved a quarterly cash dividend of $0.82 per share ($3.28 per share annualized rate), which was paid on April 15, 2022 to shareholders of record as of March 31, 2022.
Supplemental Guarantor Financial Information
As of March 31, 2022, WTW has issued the following debt securities (the ‘notes’):
The following table presents a summary of the entities that issue each note and those wholly-owned subsidiaries of the Company that guarantee each respective note on a joint and several basis as of March 31, 2022. These subsidiaries are all consolidated by Willis Towers Watson plc (the ‘parent company’) and together with the parent company comprise the ‘Obligor group’.
Entity |
|
Trinity Acquisition plc Notes |
|
Willis North America Inc. Notes |
Willis Towers Watson plc |
|
Guarantor |
|
Guarantor |
Trinity Acquisition plc |
|
Issuer |
|
Guarantor |
Willis North America Inc. |
|
Guarantor |
|
Issuer |
Willis Netherlands Holdings B.V. |
|
Guarantor |
|
Guarantor |
Willis Investment UK Holdings Limited |
|
Guarantor |
|
Guarantor |
TA I Limited |
|
Guarantor |
|
Guarantor |
Willis Group Limited |
|
Guarantor |
|
Guarantor |
Willis Towers Watson Sub Holdings Unlimited Company |
|
Guarantor |
|
Guarantor |
Willis Towers Watson UK Holdings Limited |
|
Guarantor |
|
Guarantor |
The notes issued by Willis North America and Trinity Acquisition plc:
All other subsidiaries of the parent company are non-guarantor subsidiaries (‘the non-guarantor subsidiaries’).
Each member of the Obligor group has only a stockholder’s claim on the assets of the non-guarantor subsidiaries. This stockholder’s claim is junior to the claims that creditors have against those non-guarantor subsidiaries. Holders of the notes will only be creditors of
39
the Obligor group and not creditors of the non-guarantor subsidiaries. As a result, all of the existing and future liabilities of the non-guarantor subsidiaries, including any claims of trade creditors and preferred stockholders, will be structurally senior to the notes. As of and for the periods ended March 31, 2022 and December 31, 2021, the non-guarantor subsidiaries represented substantially all of the total assets and accounted for substantially all of the total revenue of the Company prior to consolidating adjustments. The non-guarantor subsidiaries have other liabilities, including contingent liabilities that may be significant. Each indenture does not contain any limitations on the amount of additional debt that the Obligor group and the non-guarantor subsidiaries may incur. The amounts of this debt could be substantial, and this debt may be debt of the non-guarantor subsidiaries, in which case this debt would be effectively senior in right of payment to the notes.
The notes are obligations exclusively of the Obligor group. Substantially all of the Obligor group’s operations are conducted through its non-guarantor subsidiaries. Therefore, the Obligor group’s ability to service its debt, including the notes, is dependent upon the net cash flows of its non-guarantor subsidiaries and their ability to distribute those net cash flows as dividends, loans or other payments to the Obligor group. Certain laws restrict the ability of these non-guarantor subsidiaries to pay dividends and make loans and advances to the Obligor group. In addition, such non-guarantor subsidiaries may enter into contractual arrangements that limit their ability to pay dividends and make loans and advances to the Obligor group.
Intercompany balances and transactions between members of the Obligor group have been eliminated. All intercompany balances and transactions between the Obligor group and the non-guarantor subsidiaries have been presented in the disclosures below on a net presentation basis, rather than a gross basis, as this better reflects the nature of the intercompany positions and presents the funding or funded position that is to be received or owed. The intercompany balances and transactions between the Obligor group and non-guarantor subsidiaries, presented below, relate to a number of items including loan funding for acquisitions and other purposes, transfers of surplus cash between subsidiary companies, funding provided for working capital purposes, settlement of expense accounts, transactions related to share-based payment arrangements and share issuances, intercompany royalty arrangements, intercompany dividends and intercompany interest. At March 31, 2022 and December 31, 2021, the intercompany balances of the Obligor group with non-guarantor subsidiaries were net receivables of $700 million at both balance sheet dates presented and net payables of $10.6 billion and $8.1 billion, respectively.
No balances or transactions of non-guarantor subsidiaries are presented in the disclosures other than the intercompany items noted above.
Presented below is certain summarized financial information for the Obligor group.
` |
|
As of |
|
|
As of |
|
||
|
|
(in millions) |
|
|||||
Total current assets |
|
$ |
152 |
|
|
$ |
243 |
|
Total non-current assets |
|
|
833 |
|
|
|
862 |
|
Total current liabilities |
|
|
9,216 |
|
|
|
7,747 |
|
Total non-current liabilities |
|
|
6,289 |
|
|
|
5,298 |
|
|
|
Three months ended |
|
|
|
|
(in millions) |
|
|
Revenue |
|
$ |
42 |
|
Loss from operations |
|
|
(23 |
) |
Loss from operations before income taxes (i) |
|
|
(132 |
) |
Net loss |
|
|
(117 |
) |
Net loss attributable to WTW |
|
|
(117 |
) |
40
Non-GAAP Financial Measures
In order to assist readers of our condensed consolidated financial statements in understanding the core operating results that WTW’s management uses to evaluate the business and for financial planning purposes, we present the following non-GAAP measures and their most directly comparable U.S. GAAP measure:
Most Directly Comparable U.S. GAAP Measure |
|
Non-GAAP Measure |
As reported change |
|
Constant currency change |
As reported change |
|
Organic change |
Income from operations/margin |
|
Adjusted operating income/margin |
Net income/margin |
|
Adjusted EBITDA/margin |
Net income attributable to WTW |
|
Adjusted net income |
Diluted earnings per share |
|
Adjusted diluted earnings per share |
Income from continuing operations before income taxes |
|
Adjusted income before taxes |
Provision for income taxes/U.S. GAAP tax rate |
|
Adjusted income taxes/tax rate |
Net cash from operating activities |
|
Free cash flow |
The Company believes that these measures are relevant and provide pertinent 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.
Within the 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 may be part of our full-year results. These items include the following:
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 condensed consolidated financial statements.
41
For all prior-year period financial information presented herein (with the exception of Free Cash Flow), the operating results of Willis Re have been reclassified as discontinued operations (see Note 3 — Acquisitions and Divestitures within Part I, Item 1 ‘Financial Statements’ in this Form 10-Q for additional information).
Constant Currency Change and Organic Change
We evaluate our revenue 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.
The constant currency and organic change results, and a reconciliation from the reported results for consolidated revenue are included in the ‘Consolidated Revenue (Continuing Operations)’ section within this Form 10-Q. These measures are also reported by segment in the ‘Segment Revenue’ section within this Form 10-Q.
A reconciliation of the reported changes to the constant currency and organic changes for the three months ended March 31, 2022 from the three months ended March 31, 2021 is as follows. Note: the components of revenue change may not add due to rounding.
|
|
|
|
|
|
|
|
|
|
Components of Revenue Change |
||||||||
|
|
|
|
|
|
|
|
As |
|
Less: |
|
Constant |
|
Less: |
|
|
||
|
|
Three Months Ended March 31, |
|
|
Reported |
|
Currency |
|
Currency |
|
Acquisitions/ |
|
Organic |
|||||
|
|
2022 |
|
|
2021 |
|
|
Change |
|
Impact |
|
Change |
|
Divestitures |
|
Change |
||
|
|
($ in millions) |
|
|
|
|
|
|
|
|
|
|
|
|||||
Revenue |
|
$ |
2,160 |
|
|
$ |
2,228 |
|
|
(3)% |
|
(2)% |
|
(1)% |
|
(2)% |
|
2% |
Adjusting for the impacts of foreign currency and acquisitions and disposals in the calculation of our organic activity, our revenue grew by 2% for the three months ended March 31, 2022. The increase in organic revenue was driven by our HWC segment.
Adjusted Operating Income/Margin
We consider adjusted operating income/margin to be important financial measures, which are used internally to evaluate and assess our core operations and to benchmark our operating results against our competitors.
42
Adjusted operating income is defined as income from operations adjusted for impairment, amortization, restructuring costs, transaction and transformation, net and non-recurring items that, in management’s judgment, significantly affect the period-over-period assessment of operating results. Adjusted operating income margin is calculated by dividing adjusted operating income by revenue.
Reconciliations of income from operations to adjusted operating income for the three months ended March 31, 2022 and 2021 are as follows:
|
Three Months Ended March 31, |
|
|||||
|
2022 |
|
|
2021 |
|
||
|
(in millions) |
|
|||||
Income from operations |
$ |
179 |
|
|
$ |
211 |
|
Adjusted for certain items: |
|
|
|
|
|
||
Impairment |
|
81 |
|
|
|
— |
|
Amortization |
|
85 |
|
|
|
103 |
|
Restructuring costs |
|
6 |
|
|
|
— |
|
Transaction and transformation, net |
|
20 |
|
|
|
24 |
|
Adjusted operating income |
$ |
371 |
|
|
$ |
338 |
|
|
|
|
|
|
|
||
Income from operations margin |
|
8.3 |
% |
|
|
9.5 |
% |
Adjusted operating income margin |
|
17.2 |
% |
|
|
15.2 |
% |
Adjusted operating income increased for the three months ended March 31, 2022 to $371 million, from $338 million for the three months ended March 31, 2021. This increase was primarily due to lower salary and benefits costs in the current quarter, partially offset by lower revenue.
Adjusted EBITDA/Margin
We consider adjusted EBITDA/margin to be important financial measures, which are used internally to evaluate and assess our core operations, to benchmark our operating results against our competitors and to evaluate and measure our performance-based compensation plans.
Adjusted EBITDA is defined as net income adjusted for income from discontinued operations, net of tax, provision for income taxes, interest expense, impairment, depreciation and amortization, restructuring costs, transaction and transformation, net, gains and losses on disposals of operations and non-recurring items that, in management’s judgment, significantly affect the period-over-period assessment of operating results. Adjusted EBITDA margin is calculated by dividing adjusted EBITDA by revenue.
Reconciliations of net income to adjusted EBITDA for the three months ended March 31, 2022 and 2021 are as follows:
|
|
Three Months Ended March 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
|
|
(in millions) |
|
|||||
NET INCOME |
|
$ |
125 |
|
|
$ |
736 |
|
Income from discontinued operations, net of tax |
|
|
(11 |
) |
|
|
(190 |
) |
Provision for income taxes |
|
|
43 |
|
|
|
44 |
|
Interest expense |
|
|
49 |
|
|
|
59 |
|
Impairment |
|
|
81 |
|
|
|
— |
|
Depreciation |
|
|
66 |
|
|
|
71 |
|
Amortization |
|
|
85 |
|
|
|
103 |
|
Restructuring costs |
|
|
6 |
|
|
|
— |
|
Transaction and transformation, net |
|
|
20 |
|
|
|
24 |
|
Loss/(gain) on disposal of operations |
|
|
54 |
|
|
|
(359 |
) |
Adjusted EBITDA |
|
$ |
518 |
|
|
$ |
488 |
|
|
|
|
|
|
|
|
||
Net income margin |
|
|
5.8 |
% |
|
|
33.0 |
% |
Adjusted EBITDA margin |
|
|
24.0 |
% |
|
|
21.9 |
% |
Adjusted EBITDA for the three months ended March 31, 2022 was $518 million, compared to $488 million for the three months ended March 31, 2021. This increase was primarily due to lower salary and benefits costs in the current quarter, partially offset by lower revenue.
43
Adjusted Net Income and Adjusted Diluted Earnings Per Share
Adjusted net income is defined as net income attributable to WTW adjusted for income from discontinued operations, net of tax, impairment, amortization, restructuring costs, transaction and transformation, net, gains and losses on disposals of operations and non-recurring items that, in management’s judgment, significantly affect the period-over-period assessment of operating results and the related tax effect of those adjustments and the tax effects of internal reorganizations. This measure is used solely for the purpose of calculating adjusted diluted earnings per share.
Adjusted diluted earnings per share is defined as adjusted net income divided by the weighted-average number of shares of common stock, diluted. Adjusted diluted earnings per share is used to internally evaluate and assess our core operations and to benchmark our operating results against our competitors.
Reconciliations of net income attributable to WTW to adjusted diluted earnings per share for the three months ended March 31, 2022 and 2021 are as follows:
|
|
Three Months Ended March 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
|
|
($ in millions) |
|
|||||
NET INCOME ATTRIBUTABLE TO WTW |
|
$ |
122 |
|
|
$ |
733 |
|
Adjusted for certain items: |
|
|
|
|
|
|
||
Income from discontinued operations, net of tax |
|
|
(11 |
) |
|
|
(190 |
) |
Impairment |
|
|
81 |
|
|
|
— |
|
Amortization |
|
|
85 |
|
|
|
103 |
|
Restructuring costs |
|
|
6 |
|
|
|
— |
|
Transaction and transformation, net |
|
|
20 |
|
|
|
24 |
|
Loss/(gain) on disposal of operations |
|
|
54 |
|
|
|
(359 |
) |
Tax effect on certain items listed above (i) |
|
|
(42 |
) |
|
|
(27 |
) |
Adjusted net income |
|
$ |
315 |
|
|
$ |
284 |
|
|
|
|
|
|
|
|
||
Weighted-average shares of common stock — diluted |
|
|
118 |
|
|
|
130 |
|
|
|
|
|
|
|
|
||
Diluted earnings per share |
|
$ |
1.03 |
|
|
$ |
5.63 |
|
Adjusted for certain items (ii) : |
|
|
|
|
|
|
||
Income from discontinued operations, net of tax |
|
|
(0.09 |
) |
|
|
(1.46 |
) |
Impairment |
|
|
0.68 |
|
|
|
— |
|
Amortization |
|
|
0.72 |
|
|
|
0.79 |
|
Restructuring costs |
|
|
0.05 |
|
|
|
— |
|
Transaction and transformation, net |
|
|
0.17 |
|
|
|
0.18 |
|
Loss/(gain) on disposal of operations |
|
|
0.46 |
|
|
|
(2.76 |
) |
Tax effect on certain items listed above (i) |
|
|
(0.36 |
) |
|
|
(0.21 |
) |
Adjusted diluted earnings per share |
|
$ |
2.66 |
|
|
$ |
2.18 |
|
Our adjusted diluted earnings per share increased for the three months ended March 31, 2022 as compared to the prior year primarily due to lower salary and benefits costs in the current quarter and a lower weighted-average outstanding share count due to our share repurchase activity in the current year.
Adjusted Income Before Taxes and Adjusted Income Taxes/Tax Rate
Adjusted income before taxes is defined as income from operations before income taxes adjusted for impairment, amortization, restructuring costs, transaction and transformation, net, gains and losses on disposals 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/tax rate is defined as the provision for income taxes adjusted for taxes on certain items of impairment, amortization, restructuring costs, transaction and transformation, net, gains and losses on disposals of operations, the tax effects of internal reorganizations and non-recurring items that, in management’s judgment, significantly affect the period-over-period assessment of operating results, divided by adjusted income before taxes. Adjusted income taxes is used solely for the purpose of calculating the adjusted income tax rate.
44
Management believes that the adjusted income tax rate presents a rate that is more closely aligned to the rate that we would incur if not for the reduction of pre-tax income for the adjusted items and the tax effects of internal reorganizations, which are not core to our current and future operations.
Reconciliations of income from operations before income taxes to adjusted income before taxes and provision for income taxes to adjusted income taxes for the three months ended March 31, 2022 and 2021 are as follows:
|
|
Three Months Ended March 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
|
|
($ in millions) |
|
|||||
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES |
|
$ |
157 |
|
|
$ |
590 |
|
Adjusted for certain items: |
|
|
|
|
|
|
||
Impairment |
|
|
81 |
|
|
|
— |
|
Amortization |
|
|
85 |
|
|
|
103 |
|
Restructuring costs |
|
|
6 |
|
|
|
— |
|
Transaction and transformation, net |
|
|
20 |
|
|
|
24 |
|
Loss/(gain) on disposal of operations |
|
|
54 |
|
|
|
(359 |
) |
Adjusted income before taxes |
|
$ |
403 |
|
|
$ |
358 |
|
|
|
|
|
|
|
|
||
Provision for income taxes |
|
$ |
43 |
|
|
$ |
44 |
|
Tax effect on certain items listed above (i) |
|
|
42 |
|
|
|
27 |
|
Adjusted income taxes |
|
$ |
85 |
|
|
$ |
71 |
|
|
|
|
|
|
|
|
||
U.S. GAAP tax rate |
|
|
27.5 |
% |
|
|
7.4 |
% |
Adjusted income tax rate |
|
|
21.1 |
% |
|
|
19.7 |
% |
Our U.S. GAAP tax rates were 27.5% and 7.4% for the three months ended March 31, 2022 and 2021, respectively. The prior quarter effective tax rate was lower due to the tax-exempt disposal of our Miller business. Additionally, the current quarter effective tax rate includes the tax effect of the divestment of our Russia business.
Our adjusted income tax rates were 21.1% and 19.7% for the three months ended March 31, 2022 and 2021, respectively. The current quarter adjusted tax rate is higher due to the distribution of geographical income.
Free Cash Flow
Free cash flow is defined as 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.
Management believes that free cash flow presents the core operating performance and cash generating capabilities of our business operations.
Reconciliations of cash flows (used in)/from operating activities to free cash flow for the three months ended March 31, 2022 and 2021 are as follows:
|
|
Three Months Ended March 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
|
|
(in millions) |
|
|||||
Cash flows from/(used in) operating activities |
|
$ |
21 |
|
|
$ |
(128 |
) |
Less: Additions to fixed assets and software for internal use |
|
|
(31 |
) |
|
|
(37 |
) |
Free cash flow |
|
$ |
(10 |
) |
|
$ |
(165 |
) |
The favorable movement in free cash flows in the first quarter of 2022 was due to the absence of the net legal settlement payments of $185 million made last year, partially offset by higher bonus payments and lower reinsurance-related cash collections in the current quarter.
45
Additionally, the free cash flow for the prior year period presented includes the operating cash flows of Willis Re. Willis Re’s operating cash flows approximate its pre-tax income and any adjustments for working capital movements (see Note 3 — Acquisitions and Divestitures within Part I, Item 1 ‘Financial Statements’ in this Form 10-Q for additional information), the absence of which is expected to be partially made up by reimbursements through the TSA.
Critical Accounting Estimates
There were no material changes from the Critical Accounting Estimates disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 24, 2022.
46
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have considered changes in our exposure to market risks during the three months ended March 31, 2022 and have determined that there have been no material changes to our exposure to market risks from those described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 24, 2022. However, we have provided the following information to supplement or update our disclosures on our Form 10-K.
Interest Income on Fiduciary Funds
As described in our Form 10-K, we are exposed to interest rate risk. Specifically, as a result of our operating activities, we receive cash for premiums and claims which we deposit in short-term investments denominated in U.S. dollars and other currencies. We earn interest on these funds, which is included in our condensed consolidated financial statements as interest income. These funds are regulated in terms of access and the instruments in which they may be invested, most of which are short-term in maturity. At March 31, 2022, we held $1.6 billion of fiduciary funds invested in interest-bearing accounts. If short-term interest rates increased or decreased by 25 basis points, interest earned on these invested fiduciary funds, and therefore our interest income recognized, would increase or decrease by approximately $4 million on an annualized basis.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of March 31, 2022, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (‘CEO’) and the Chief Financial Officer (‘CFO’), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as defined by Exchange Act Rule 13a-15(e). Based upon that evaluation, the CEO and the CFO concluded that the Company’s disclosure controls and procedures are effective in ensuring that the information required to be included in the Company’s periodic SEC filings is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and that such information is accumulated and communicated to management, including the CEO and the CFO, as appropriate, to allow for timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting during the quarter ended March 31, 2022 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Most of our employees who are involved in our financial reporting processes and controls continue to work remotely following the onset of the COVID-19 pandemic and are expected to do so for the foreseeable future. COVID-19 has not had any specific impact to the design or operating effectiveness of our internal controls over financial reporting.
Limitations on the Effectiveness of Controls
Management, including the CEO and CFO, does not expect that our disclosure controls and procedures will necessarily prevent all errors and all fraud. However, management does expect that the control system provides reasonable assurance that its objectives will be met. A control system, no matter how well designed and operated, cannot provide absolute assurance that the control system’s objectives will be met. In addition, the design of such internal controls must take into account the costs of designing and maintaining such a control system. Certain inherent limitations exist in control systems to make absolute assurances difficult, including the realities that judgments in decision-making can be faulty, that breakdowns can occur because of a simple error or mistake, and that individuals can circumvent controls. The design of any control system is based in part upon existing business conditions and risk assessments. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in business conditions or deterioration in the degree of compliance with policies or procedures. As a result, they may require change or revision. Because of the inherent limitations in a control system, misstatements due to error or fraud may occur and may not be detected. Nevertheless, the disclosure controls and procedures are designed to provide reasonable assurance of achieving their stated objectives, and the CEO and CFO have concluded that the disclosure controls and procedures are effective at a reasonable assurance level.
47
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we are a party to various lawsuits, arbitrations or mediations that arise in the ordinary course of business. The disclosure called for by Part II, Item 1 regarding our legal proceedings is incorporated by reference herein from Part I, Item 1 Note 14 — Commitments and Contingencies - Legal Proceedings of the notes to the condensed consolidated financial statements in this Form 10-Q for the quarter ended March 31, 2022.
ITEM 1A. RISK FACTORS
Except as described below, there are no material changes from risk factors as previously disclosed in our Annual Report on Form 10-K, filed with the SEC on February 24, 2022. We urge you to read the risk factors contained therein.
Our business, financial condition and results of operations may be materially adversely affected by any negative impact on the global economy and capital markets resulting from the conflict in Ukraine or any other geopolitical tensions.
U.S. and global markets are experiencing volatility and disruption following the escalation of geopolitical tensions and the crisis in Ukraine. Although the length and impact of the ongoing situation is highly unpredictable, the crisis in Ukraine could lead to further market disruptions.
Additionally, as we announced on March 13, 2022, we intend to transfer ownership of our Russian subsidiary to local management who will operate independently in the Russian market. In 2021, this business constituted approximately 1% of our consolidated revenue. The transfer is in the process of being documented and implemented, subject to any required regulatory approvals and conditions. We are continuing to monitor the situation in Ukraine and globally and assessing its potential impact on our business.
Sanctions imposed by the U.S., the E.U., the U.K. and other countries, as well as Russian counter-sanctions, are extensive. Additional sanctions and penalties have also been enacted, proposed and/or threatened. Russian actions and the resulting sanctions could adversely affect the global economy and financial markets and lead to instability and lack of liquidity in capital markets. The ramifications of the hostilities and sanctions, however, may not be limited to Russia and Russian companies but may spill over to and negatively impact other regional and global economic markets (including Europe and the United States), companies in other countries (particularly those that have done business with Russia) and various sectors, industries and markets for securities and commodities globally, such as oil and natural gas. Accordingly, the actions discussed above and the potential for a wider conflict could increase financial market volatility, cause severe negative effects on regional and global economic markets, industries, and companies. In addition, Russia may take retaliatory actions and other countermeasures, including cyberattacks and espionage against other countries and companies around the world, which may negatively impact such countries and companies. The extent and duration of the Russian actions or future escalation of such hostilities, the extent and impact of existing and future sanctions, market disruptions and volatility, and the result of any diplomatic negotiations cannot be predicted.
Any of the above-mentioned factors could adversely affect our business, prospects, financial condition and operating results. The extent and duration of the crisis, sanctions and resulting market disruptions are impossible to predict, but could be substantial.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the three months ended March 31, 2022, no shares were issued by the Company without registration under the Securities Act of 1933, as amended.
(c) Issuer Purchases of Equity Securities
The Company is authorized to repurchase shares, by way of redemption or otherwise, and will consider whether to do so from time to time, based on many factors, including market conditions. There are no expiration dates for these repurchase plans or programs.
On February 26, 2020, the board of directors approved a $251 million increase to the existing share repurchase program. On July 26, 2021, the board of directors approved a $1.0 billion increase to the existing share repurchase program, and on September 16, 2021, approved a $4.0 billion increase to the existing share repurchase program. These three increases brought the total approved authorization to $5.5 billion.
48
The following table presents specified information about the Company’s repurchases of its ordinary shares in the first quarter of 2022 and the Company’s remaining repurchase authority.
Period |
|
Total number of shares purchased |
|
|
Average price |
|
|
Total number of shares purchased as part of publicly announced plans or programs |
|
|
Maximum number of shares that may yet be purchased under the plans or programs |
|
||||
January 1, 2022 through January 31, 2022 |
|
|
3,244,661 |
|
|
$ |
230.87 |
|
|
|
3,244,661 |
|
|
|
13,484,986 |
|
February 1, 2022 through February 28, 2022 |
|
|
3,305,686 |
|
|
$ |
227.16 |
|
|
|
3,305,686 |
|
|
|
10,179,300 |
|
March 1, 2022 through March 31, 2022 |
|
|
3,310,067 |
|
|
$ |
226.58 |
|
|
|
3,310,067 |
|
|
|
6,869,233 |
|
|
|
|
9,860,414 |
|
|
$ |
228.19 |
|
|
|
9,860,414 |
|
|
|
|
|
At March 31, 2022 the maximum number of shares that may yet be purchased under the existing stock repurchase plan is 6,869,233, with approximately $1.6 billion remaining on the current open-ended repurchase authority granted by the board. An estimate of the maximum number of shares under the existing authorities was determined using the closing price of our ordinary shares on March 31, 2022 of $236.22.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
49
ITEM 6. EXHIBITS
EXHIBIT INDEX
Exhibit Number |
|
Description of Exhibit |
10.1 |
|
|
10.2 |
|
|
10.3 |
|
|
10.4 |
|
|
22.1 |
|
|
31.1 |
|
|
31.2 |
|
|
32.1 |
|
|
101.INS |
|
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document. |
101.SCH |
|
Inline XBRL Taxonomy Extension Schema Document* |
101.CAL |
|
Inline XBRL Taxonomy Extension Calculation Linkbase Document* |
101.DEF |
|
Inline XBRL Taxonomy Extension Definition Linkbase Document* |
101.LAB |
|
Inline XBRL Taxonomy Extension Label Linkbase Document* |
101.PRE |
|
Inline XBRL Taxonomy Extension Presentation Linkbase Document* |
104 |
|
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)* |
* Filed or furnished herewith.
† Management contract or compensatory plan or arrangement.
50
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Willis Towers Watson Public Limited Company |
|
|
||
(Registrant) |
|
|
||
|
|
|
||
/s/ Carl A. Hess |
|
April 28, 2022 |
||
Name: |
|
Carl A. Hess |
|
Date |
Title: |
|
Chief Executive Officer |
|
|
|
|
|
|
|
/s/ Andrew J. Krasner |
|
April 28, 2022 |
||
Name: |
|
Andrew J. Krasner |
|
Date |
Title: |
|
Chief Financial Officer |
|
|
|
|
|
|
|
/s/ Joseph S. Kurpis |
|
April 28, 2022 |
||
Name: |
|
Joseph S. Kurpis |
|
Date |
Title: |
|
Principal Accounting Officer and Controller |
|
|
51
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO
SECURITIES EXCHANGE ACT RULES 13a-14 AND 15d-14
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Carl A. Hess, certify that:
|
|
Date: April 28, 2022 |
|
|
|
/s/ Carl A. Hess |
|
Carl A. Hess |
|
Chief Executive Officer |
|
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO
SECURITIES EXCHANGE ACT RULES 13a-14 AND 15d-14
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Andrew J. Krasner, certify that:
|
|
Date: April 28, 2022 |
|
|
|
/s/ Andrew J. Krasner |
|
Andrew J. Krasner |
|
Chief Financial Officer |
|
Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
AND CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Each of the undersigned hereby certifies, in his capacity as an officer of Willis Towers Watson Public Limited Company (the “Company”), for purposes of 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of his knowledge:
|
|
Date: April 28, 2022 |
|
|
|
/s/ Carl A. Hess |
|
Carl A. Hess |
|
Chief Executive Officer |
|
|
|
/s/ Andrew J. Krasner |
|
Andrew J. Krasner |
|
Chief Financial Officer |
|
A signed original of this written statement required by Section 906 has been provided to Willis Towers Watson Public Limited Company and will be retained by Willis Towers Watson Public Limited Company and furnished to the Securities and Exchange Commission or its staff upon request.