WILLIS TOWERS WATSON PUBLIC LIMITED COMPANY 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 theSEC . 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 underU.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
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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.
We have transferred ownership of our Russian subsidiaries to our local
management team on the agreed-upon terms. The Russian entities 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 ofUkraine , 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
OnJanuary 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 toJanuary 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 Health, Wealth & Career segment includes businesses previously aligned under the Human Capital and Benefits segment, the Benefits Delivery and Administration segment, and the Investment business, which was previously under the Investment, Risk and Reinsurance segment.
•
The Risk & Broking segment includes businesses previously aligned under the
Corporate Risk and Broking segment, as well as the
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.
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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
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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 theU.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 theU.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 theU.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
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.
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--------------------------------------------------------------------------------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.
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 (includingGreat 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, includingLondon ,Bermuda ,Singapore ,Hong Kong andShanghai , 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.
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.
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--------------------------------------------------------------------------------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 in excess of$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:
•
Real estate rationalization - includes costs to align the real estate footprint to the new ways of working (hybrid work) and includes breakage fees and the impairment of right-of-use assets and other related leasehold assets.
•
Technology modernization - these charges are incurred in moving to common platforms and technologies, including migrating certain platforms and applications to the cloud. This category will include the impairment of technology assets that are duplicative or no longer revenue-producing, as well as costs for technology investments that do not qualify for capitalization.
•
Process optimization - these costs will be incurred in the right-shoring strategy and automation of our operations, which will include optimizing resource deployment and appropriate colleague alignment. These costs will include process and organizational design costs, severance and separation-related costs and temporary retention costs.
•
Other - other costs not included above including fees for professional services, other contract terminations not related to the above categories and supplier migration costs. 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 and six months endedJune 30, 2022 , restructuring charges under our Transformation program totaled$56 million and$62 million , respectively. Other costs incurred under the Transformation program are included in transaction and transformation, net and were$26 million and$31 million for the three and six months endedJune 30, 2022 , respectively. From the actions taken through the second quarter of 2022, we have identified an additional$35 million of annualized run-rate savings during the quarter due to newly realized opportunities and incremental sources of value, and$71 million of cumulative annualized run-rate savings identified to date since the inception of the program, which savings overall are primarily attributable to the reduction of real estate and technology costs, as well as process optimization. The benefits from the program began to be recognized during 2022.
For a discussion of some of the risks associated with the Transformation
program, see Part I, Item 1A 'Risk Factors' in our Annual Report on Form 10-K,
filed with the
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--------------------------------------------------------------------------------Financial Statement Overview
For all prior-year period financial information presented herein, the operating
results of Willis Re have been reclassified as discontinued operations (see Note
3 - Acquisitions and Divestitures within Part I, Item 1 'Financial Statements'
in this Form 10-Q for additional information).
The table below sets forth our summarized condensed consolidated statements of
comprehensive income and data as a percentage of revenue for the periods
indicated.
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
($ in millions, except per share data)
Revenue $ 2,031 100 % $ 2,091 100 % $ 4,191 100 % $ 4,319 100 %
Costs of providing services
Salaries and benefits 1,259 62 % 1,317 63 % 2,577 61 % 2,736 63 %
Other operating expenses 393 19 % 384 18 % 879 21 % 784 18 %
Depreciation 65 3 % 72 3 % 131 3 % 143 3 %
Amortization 83 4 % 97 5 % 168 4 % 200 5 %
Restructuring costs 56 3 % - - % 62 1 % - - %
Transaction and transformation,
net 38 2 % 51 2 % 58 1 % 75 2 %
Total costs of providing
services 1,894 1,921 3,875 3,938
Income from operations 137 7 % 170 8 % 316 8 % 381 9 %
Interest expense (51 ) (3 )% (52 ) (2 )% (100 ) (2 )% (111 ) (3 )%
Other income, net 93 5 % 74 4 % 120 3 % 512 12 %
INCOME FROM CONTINUING
OPERATIONS
BEFORE INCOME TAXES 179 9 % 192 9 % 336 8 % 782 18 %
Provision for income taxes (19 ) (1 )% (75 ) (4 )% (62 ) (1 )% (119 ) (3 )%
INCOME FROM CONTINUING
OPERATIONS 160 8 % 117 6 % 274 7 % 663 15 %
(LOSS)/INCOME FROM DISCONTINUED
OPERATIONS, NET OF TAX (46 ) (2 )% 69 3 % (35 ) (1 )% 259 6 %
Income attributable to
non-controlling interests (5 ) - % (2 ) - % (8 ) - % (5 ) - %
NET INCOME ATTRIBUTABLE TO WTW $ 109 5 % $ 184 9 % $ 231 6 % $ 917 21 %
Diluted earnings per share from
continuing operations $ 1.38 $ 0.88 $ 2.31 $ 5.05 Consolidated Revenue (Continuing Operations)
Revenue was$2.0 billion for the three months endedJune 30, 2022 , compared to$2.1 billion for the three months endedJune 30, 2021 , a decrease of$60 million , or 3%, on an as-reported basis. Adjusting for the impacts of foreign currency and acquisitions and disposals, our organic revenue growth was 3% for the three months endedJune 30, 2022 . Revenue for the six months endedJune 30, 2022 was$4.2 billion , compared to$4.3 billion for the six months endedJune 30, 2021 , a decrease of$128 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 six months endedJune 30, 2022 . The increases in organic revenue were driven by both segments. 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 endedJune 30, 2022 , currency translation decreased our consolidated revenue by$85 million . For the six months endedJune 30, 2022 , currency translation decreased our consolidated revenue by$139 million . The primary currencies driving these changes were the Euro and Pound sterling.
The following table details our top five markets based on the percentage of
consolidated revenue (in
Geographic Region % of RevenueUnited States 50 %United Kingdom 19 %France 5 %Germany 3 %Canada 3 % 36
-------------------------------------------------------------------------------- The table below details the approximate percentage of our revenue and expenses from continuing operations by transactional currency for the six months endedJune 30, 2022 . Transactional Currency Revenue Expenses (i) U.S. dollars 56 % 53 % Pounds sterling 12 % 17 % Euro 17 % 13 % Other currencies 15 % 17 % (i) These percentages exclude certain expenses for significant items which will not be settled in cash, or which we believe to be items that are not core to our current or future operations. These items include amortization of intangible assets and transaction and transformation, net. The following tables set forth the total revenue for the three and six months endedJune 30, 2022 and 2021 and the components of the changes in total revenue for the three and six months endedJune 30, 2022 , as compared to the prior year periods. The components of the revenue change may not add due to rounding.
Components of Revenue Change
As Less: Constant Less:
Three Months Ended June 30, Reported Currency Currency Acquisitions/ Organic
2022 2021 Change Impact Change Divestitures Change
($ in millions)
Revenue $ 2,031 $ 2,091 (3)% (4)% 1% (1)% 3%
Components of Revenue Change
As Less: Constant Less:
Six Months Ended June 30, Reported Currency Currency Acquisitions/ Organic
2022 2021 Change Impact Change Divestitures Change
($ in millions)
Revenue $ 4,191 $ 4,319 (3)% (3)% -% (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.
HWC Revenue
The following table sets forth HWC segment revenue for the three months endedJune 30, 2022 and 2021 and the components of the change in revenue for the three months endedJune 30, 2022 from the three months endedJune 30, 2021 .
Components of Revenue Change
As Less: Constant Less:
Three Months Ended June 30, Reported Currency Currency Acquisitions/ Organic
2022 2021 Change Impact Change Divestitures Change
($ in millions)
Segment revenue $ 1,159 $ 1,179 (2)% (4)% 2% -% 2%
HWC segment revenue for both the three months ended June 30, 2022 and 2021 was
$1.2 billion . Organic growth was led by the Health business, primarily due to
gains recorded in connection with book-of-business settlements. Excluding these
settlements, Health's revenue increased from additional consulting work in North
America as well as continued expansion of our local portfolios and global
benefits management appointments outside of North America . Benefits Delivery &
Outsourcing revenue also increased, led by Individual Marketplace with growth in
Medicare Advantage sales. Career also contributed strong growth, driven by
increased
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--------------------------------------------------------------------------------project activity. Organic growth was partially offset by a decline in Wealth revenue, principally due to headwinds from performance fees received in the prior year.
The following table sets forth HWC segment revenue for the six months ended
Components of Revenue Change
As Less: Constant Less:
Six Months Ended June 30, Reported Currency Currency Acquisitions/ Organic
2022 2021 Change Impact Change Divestitures Change
($ in millions)
Segment revenue $ 2,403 $ 2,412 -% (3)% 2% -% 2%
HWC segment revenue for both the six months ended June 30, 2022 and 2021 was
$2.4 billion . Organic growth was led by the Health business primarily due to an
increase in consulting assignments in North America and expansion of our local
portfolios and global benefits management appointments outside of North America .
The Health business' revenue also benefited from gains recorded in connection
with book-of-business settlements. Career also contributed strong growth, driven
by demand for reward-based advisory services and compensation benchmarking
products alongside increased project activity. Benefits Delivery & Outsourcing
revenue also increased, led by its expanded client base. Organic growth was
partially offset by a decline in Wealth revenue, principally due to headwinds
from outsized performance fees earned in the prior year.
R&B Revenue
The following table sets forth R&B segment revenue for the three months endedJune 30, 2022 and 2021 and the components of the change in revenue for the three months endedJune 30, 2022 from the three months endedJune 30, 2021 .
Components of Revenue Change
As Less: Constant Less:
Three Months Ended June 30, Reported Currency Currency Acquisitions/ Organic
2022 2021 Change Impact Change Divestitures Change
($ in millions)
Segment revenue $ 852 $ 885 (4)% (5)% 1% (3)% 3%
R&B segment revenue for the three months ended June 30, 2022 and 2021 was $852
million and $885 million , respectively. On an organic basis, ICT grew primarily
as a result of new software sales as well as increased advisory work. CRB
generated revenue growth across all regions, primarily driven by our global
lines of business, principally from new business, most notably in Aerospace,
Natural Resources and FINEX . Book-of-business settlement activity was largely in
line with prior year and did not materially affect CRB's organic growth rate.
The following table sets forth R&B segment revenue for the six months ended
Components of Revenue Change
As Less: Constant Less:
Six Months Ended June 30, Reported Currency Currency Acquisitions/ Organic
2022 2021 Change Impact Change Divestitures Change
($ in millions)
Segment revenue $ 1,743 $ 1,809 (4)% (4)% -% (1)% 2%
R&B segment revenue for the six months ended June 30, 2022 and 2021 was $1.7
billion and $1.8 billion , respectively. On an organic basis, ICT grew from both
increased advisory work and software sales. CRB also contributed to R&B's
revenue growth. Excluding headwinds from book-of-business sales and settlements
recorded in the comparable period, revenue increased across all regions,
primarily from new business in FINEX , M&A, and Aerospace lines.
38
--------------------------------------------------------------------------------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 endedJune 30, 2022 and 2021 were$1.9 billion , a decrease of$27 million , or 1%. Total costs of providing services for both the six months endedJune 30, 2022 and 2021 were$3.9 billion , a decrease of$63 million , or 2%. See the following discussion for further details. Salaries and Benefits Salaries and benefits for both the three months endedJune 30, 2022 and 2021 were$1.3 billion , a decrease of$58 million , or 4%. The decrease in the current year is primarily due to lower incentive and benefit costs for the period. Salaries and benefits, as a percentage of revenue, represented 62% and 63% for the three months endedJune 30, 2022 and 2021, respectively. Salaries and benefits for the six months endedJune 30, 2022 were$2.6 billion , compared to$2.7 billion for the six months endedJune 30, 2021 , a decrease of$159 million , or 6%. The decrease in the current year is primarily due to lower incentive and benefit costs for the period. Salaries and benefits, as a percentage of revenue, represented 61% and 63% for the six months endedJune 30, 2022 and 2021, respectively. Other Operating Expenses Other operating expenses for the three months endedJune 30, 2022 were$393 million , compared to$384 million for the three months endedJune 30, 2021 , an increase of$9 million , or 2%. The increase was primarily due to higher travel and entertainment costs, local office expenses and bad debt expense, partially offset by decreases in non-income-related tax expense and occupancy costs. Other operating expenses for the six months endedJune 30, 2022 were$879 million , compared to$784 million for the six months endedJune 30, 2021 , an increase of$95 million , or 12%. The increase was primarily due to asset impairments, mostly accounts receivables, related to Russian insurance contracts placed byU.K. brokers in theLondon market (see Note 3 - Acquisitions and Divestitures within Part I, Item 1 'Financial Statements' in this Form 10-Q for additional information), higher travel and entertainment costs and business insurance costs, partially offset by lower non-income-related tax expense for the current year as compared to the prior year.
Depreciation
Depreciation for the three months endedJune 30, 2022 was$65 million , compared to$72 million for the three months endedJune 30, 2021 , a decrease of$7 million , or 10%. Depreciation for the six months endedJune 30, 2022 was$131 million , compared to$143 million for the six months endedJune 30, 2021 , a decrease of$12 million , or 8%. The quarter-over-quarter and year-over-year decreases were 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 endedJune 30, 2022 was$83 million , compared to$97 million for the three months endedJune 30, 2021 , a decrease of$14 million , or 14%. Amortization for the six months endedJune 30, 2022 was$168 million , compared to$200 million for the six months endedJune 30, 2021 , a decrease of$32 million , or 16%. 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 and six months endedJune 30, 2022 were$56 million and$62 million , respectively. Restructuring costs primarily relate to the real estate rationalization and technology modernization components of the Transformation program (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 costs for the three months endedJune 30, 2022 were$38 million , compared to$51 million for the three months endedJune 30, 2021 . Transaction and transformation, net costs for the six months endedJune 30, 2022 were$58 million , compared to$75 million for the six months endedJune 30, 2021 . Transaction and transformation expenses for the current year were comprised of compensation costs and 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 costs for the prior-year period were comprised primarily of legal fees and other professional fees related to our then-proposed combination with Aon. 39 --------------------------------------------------------------------------------
Income from Operations
Income from operations for the three months endedJune 30, 2022 was$137 million , compared to$170 million for the three months endedJune 30, 2021 , a decrease of$33 million . This decrease resulted primarily from lower revenue and current period restructuring costs, partially offset by lower incentive compensation accruals in the current quarter. Income from operations for the six months endedJune 30, 2022 was$316 million , compared to$381 million for the six months endedJune 30, 2021 , a decrease of$65 million . This decrease resulted primarily from the asset impairment expense discussed above, lower revenue and second-quarter restructuring costs, partially offset by lower incentive compensation accruals in the current-year period.
The lower revenue for both the three and six months ending
Interest Expense
Interest expense for the three months endedJune 30, 2022 was$51 million , compared to$52 million for the three months endedJune 30, 2021 , a decrease of$1 million , or 2%. Interest expense for the six months endedJune 30, 2022 was$100 million as compared to$111 million for the six months endedJune 30, 2021 , a decrease of$11 million , or 10%. These decreases were primarily the result of lower average levels of indebtedness in the current year.
Other Income, Net
Other income, net for the three months ended
Other income, net for the six months endedJune 30, 2022 was$120 million , compared to$512 million for the six months endedJune 30, 2021 . 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), which primarily accounted for the decrease in other income, net, in the current year.
Provision for Income Taxes
Provision for income taxes for the three months endedJune 30, 2022 was$19 million , compared to$75 million for the three months endedJune 30, 2021 , a decrease of$56 million . The effective tax rate was 10.5% for the three months endedJune 30, 2022 , and 38.9% for the three months endedJune 30, 2021 . Provision for income taxes for the six months endedJune 30, 2022 was$62 million , compared to$119 million for the six months endedJune 30, 2021 , a decrease of$57 million . The effective tax rate was 18.4% for the six months endedJune 30, 2022 and 15.2% for the six months endedJune 30, 2021 . These effective tax rates are calculated using extended values from the Company's condensed consolidated statements of comprehensive income and are therefore more precise tax rates than can be calculated from rounded values. The prior-year quarter effective tax rate was higher due to the discrete tax effect of theU.K. tax-rate increase enacted in the second quarter of 2021. Accordingly, the Company remeasured itsU.K. deferred tax assets and liabilities, resulting in a$40 million deferred tax expense in the prior-year period. Additionally, the current quarter effective tax rate includes certain discrete tax benefits primarily related to return-to-provision true ups.
(Loss)/Income from Discontinued Operations, Net of Tax
Loss from discontinued operations, net of tax for the three months endedJune 30, 2022 was$46 million , compared to income from discontinued operations, net of tax of$69 million for the three months endedJune 30, 2021 , a decrease of$115 million . Loss from discontinued operations, net of tax for the six months endedJune 30, 2022 was$35 million , compared to income from discontinued operations, net of tax of$259 million for the six months endedJune 30, 2021 , a decrease of$294 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). Losses from discontinued operations in the current year are primarily attributable to the reduction to the gain on disposal resulting from of an updated estimate of working capital which decreased the preliminary purchase price by$60 million . This loss was offset by 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 endedJune 30, 2022 was$109 million , compared to$184 million for the three months endedJune 30, 2021 , a decrease of$75 million , or 41%. This decrease was primarily due to lower net income from the discontinued operations of our Willis Re business, the current quarter's restructuring costs and lower revenue, partially offset by lower incentive compensation accruals this quarter. 40 -------------------------------------------------------------------------------- Net income attributable to WTW for the six months endedJune 30, 2022 was$231 million , compared to$917 million for the six months endedJune 30, 2021 , a decrease of$686 million , or 75%. 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, lower revenue and the current year's restructuring costs, partially offset by lower incentive compensation accruals in the current-year period.
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 subsequently 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 second quarter of 2022, we completed an offering of$750 million aggregate principal amount of 4.650% senior notes due 2027, using the proceeds in part to repay in full our €540 million ($582 million on the date of repayment) aggregate principal amount of 2.125% Senior Notes due 2022 ($594 million including accrued interest), which were to mature during the second quarter of 2022. Additionally, during the second quarter of 2022, our board of directors approved a$1.0 billion increase to the existing share repurchase program, and during the six months endedJune 30, 2022 we repurchased$2.7 billion of shares, with remaining authorization to repurchase an additional$2.1 billion . 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 theTSA . Costs incurred to service theTSA are expected to be reduced as part of the Company's Transformation program as quickly as possible when the services are no longer required byGallagher . 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.
The Company continues to have certain subsidiaries for which the earnings have not been deemed permanently reinvested and for which it has been accruing estimates of the tax effects of such repatriation. Excluding these certain subsidiaries, the Company continues to assert that the historical cumulative earnings for the remainder of its subsidiaries have been reinvested indefinitely, and therefore does 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 toU.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 obtained through the settlement of intercompany loans or return of capital distributions in a tax-efficient manner. 41 --------------------------------------------------------------------------------
Cash and Cash Equivalents
Our cash and cash equivalents atJune 30, 2022 totaled$1.9 billion , compared to$4.5 billion atDecember 31, 2021 . The decrease in cash fromDecember 31, 2021 toJune 30, 2022 was due primarily to$2.7 billion of share repurchases. Additionally, we had all of the borrowing capacity available to draw against our$1.5 billion revolving credit facility at bothJune 30, 2022 andDecember 31, 2021 . Included within cash and cash equivalents atJune 30, 2022 andDecember 31, 2021 are amounts held for regulatory capital adequacy requirements, including$116 million and$120 million , respectively, held within our regulatedU.K. entities.
Summarized Condensed Consolidated Cash Flows
The following table presents the summarized condensed consolidated cash flow
information for the six months ended
Six Months Ended June 30,
2022 2021
(in millions)
Net cash from/(used in):
Operating activities $ 258 $ 366
Investing activities 19 374
Financing activities (2,690 ) (1,067 ) DECREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH (i)
(2,413 ) (327 )
Effect of exchange rate changes on cash, cash
equivalents and restricted cash (170 ) (50 )
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD (i)
7,691 6,301
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD (i)$ 5,108 $ 5,924 (i) The amounts of cash, cash equivalents and restricted cash, their respective classification on the condensed consolidated balance sheets, as well as their respective portions of the increase or decrease in cash, cash equivalents and restricted cash for each of the periods presented have been included in Note 19 - Supplemental Disclosures of Cash Flow Information within Part I, Item I 'Financial Statements' within this Quarterly Report on Form 10-Q.
Cash Flows From Operating Activities
Cash flows from operating activities were$258 million for the six months endedJune 30, 2022 , compared to$366 million for the six months endedJune 30, 2021 . The$258 million of net cash from operating activities for the six months endedJune 30, 2022 included net income of$239 million and$510 million of favorable non-cash adjustments, partially offset by unfavorable changes in operating assets and liabilities of$491 million . This decrease in cash flows from operations as compared to the prior year was due primarily to cash disbursements and the elimination of cash generation resulting from the Willis Re divestiture, as well as additional tax payments resulting from both the Willis Re sale and the income receipt related to the termination of the then-proposed Aon transaction. The$366 million of net cash from operating activities for the six months endedJune 30, 2021 included net income of$922 million and$79 million of favorable non-cash adjustments, partially offset by unfavorable changes in operating assets and liabilities of$635 million .
Cash Flows From Investing Activities
Cash flows from investing activities for the six months endedJune 30, 2022 were$19 million as compared to$374 million for the six months endedJune 30, 2021 . The cash flows from investing activities for the six months endedJune 30, 2022 primarily include sales of investments of$200 million , partially offset by capital expenditures and capitalized software additions of$93 million and acquisitions of$76 million made during the first half 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$106 million .
Cash Flows Used In Financing Activities
Cash flows used in financing activities for the six months endedJune 30, 2022 were$2.7 billion . The significant financing activities included share repurchases of$2.7 billion and dividend payments of$189 million , partially offset by$162 million of net proceeds from issuance of debt and$85 million of net proceeds from fiduciary funds held for clients. Cash flows used in financing activities for the six months endedJune 30, 2021 were$1.1 billion . The significant financing activities included debt repayments of$515 million ,$246 million of net payments from fiduciary funds held for clients and dividend payments of$269 million . 42 --------------------------------------------------------------------------------
Indebtedness
Total debt, total equity, and the capitalization ratios at
June 30, December 31,
2022 2021
($ in millions)
Long-term debt $ 4,720 $ 3,974
Current debt - 613
Total debt $ 4,720 $ 4,587 Total WTW shareholders' equity
Capitalization ratio 31.3 % 25.7 %
The capitalization ratio increased from
At
At
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
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.
OnJuly 26, 2021 , the board of directors approved a$1.0 billion increase to the existing share repurchase program, which was previously at$500 million . Additionally, onSeptember 16, 2021 , the board of directors approved a$4.0 billion increase to the existing share repurchase program, and onMay 25, 2022 , approved a$1.0 billion increase to the existing share repurchase program. These increases brought the total approved authorization to$6.5 billion . AtJune 30, 2022 , approximately$2.1 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 onJune 30, 2022 of$197.39 was 10,902,395.
During the three and six months ended
Three
Months
Ended
June 30, Six Months Ended
2022 June 30, 2022
Shares repurchased 2,143,914 12,004,328
Average price per share $219.52 $226.64
Aggregate repurchase cost (excluding broker costs) $471
million $2.7 billion
43--------------------------------------------------------------------------------
Capital Commitments
Capital expenditures for fixed assets and software for internal use were$60 million during the six months endedJune 30, 2022 . The Company estimates that there will be additional such expenditures, which includes those incurred under its Transformation program, in the range of$130 million to$180 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 sinceDecember 31, 2021 .
Dividends
Total cash dividends of$189 million were paid during the six months endedJune 30, 2022 . InMay 2022 , the board of directors approved a quarterly cash dividend of$0.82 per share ($3.28 per share annualized rate), which was paid onJuly 15, 2022 to shareholders of record as ofJune 30, 2022 .
Supplemental Guarantor Financial Information
As of
a)
Willis North America Inc. ('Willis North America ') has approximately$3.7 billion senior notes outstanding, of which$650 million were issued onMay 16, 2017 ,$1.0 billion were issued onSeptember 10, 2018 ,$1.0 billion were issued onSeptember 10, 2019 ,$275 million were issued onMay 29, 2020 , and$750 million were issued onMay 19, 2022 ; and
b)
Trinity Acquisition plc has approximately$1.1 billion senior notes outstanding, of which$525 million were issued onAugust 15, 2013 and$550 million were issued onMarch 22, 2016 , and a$1.5 billion revolving credit facility, on which no balance was outstanding atJune 30, 2022 . 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 ofJune 30, 2022 . These subsidiaries are all consolidated byWillis Towers Watson plc (the 'parent company') and together with the parent company comprise the 'Obligor group'. Trinity Willis North Acquisition America Inc. Entity plc Notes 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
Guarantor Guarantor
The notes issued by
•
rank equally with all of the issuer's existing and future unsubordinated and unsecured debt;
•
rank equally with the issuer's guarantee of all of the existing senior debt of the Company and the other guarantors, including any debt under the Revolving Credit Facility;
•
are senior in right of payment to all of the issuer's future subordinated debt; and
•
are effectively subordinated to all of the issuer's secured debt to the extent of the value of the assets securing such debt.
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 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 endedJune 30, 2022 andDecember 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. 44 -------------------------------------------------------------------------------- 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. AtJune 30, 2022 andDecember 31, 2021 , the intercompany balances of the Obligor group with non-guarantor subsidiaries were net receivables of$600 million and$700 million , respectively, and net payables of$10.9 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
` June 30, 2022 December 31, 2021
(in millions)
Total current assets $ 156 $ 243
Total non-current assets 787 862
Total current liabilities 8,299 7,747
Total non-current liabilities 7,628 5,298
Six months ended
June 30, 2022
(in millions)
Revenue $ 266
Loss from operations (73 )
Loss from operations before income taxes (i) (315 )
Net loss (197 )
Net loss attributable to WTW (197 )
(i)
Includes intercompany expense, net of the Obligor group from non-guarantor
subsidiaries of
45
--------------------------------------------------------------------------------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 comparableU.S. GAAP measure:
Most Directly Comparable
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 Adjusted income before taxes before income taxes Provision for income taxes/U.S. GAAP Adjusted income taxes/tax rate 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:
•
Income from discontinued operations, net of tax - Adjustment to remove the after-tax income from discontinued operations and the after-tax gain attributable to the divestiture of our Willis Re business.
•
Restructuring costs and transaction and transformation, net - Management believes it is appropriate to adjust for restructuring costs and transaction and transformation, net when they relate to a specific significant program with a defined set of activities and costs that are not expected to continue beyond a defined period of time, or significant acquisition-related transaction expenses. We believe the adjustment is necessary to present how the Company is performing, both now and in the future when the incurrence of these costs will have concluded.
•
Impairment - Adjustment to remove the impairment related to the net assets of our Russian business that are held outside of our Russian entities.
•
Gains and losses on disposals of operations - Adjustment to remove the gains or losses resulting from disposed operations that have not been classified as discontinued operations.
•
Pension settlement and curtailment gains and losses - Adjustment to remove significant pension settlement and curtailment gains and losses to better present how the Company is performing.
•
Provisions for significant litigation - We will include provisions for litigation matters which we believe are not representative of our core business operations. These amounts are presented net of insurance and other recovery receivables.
•
Tax effect of the Coronavirus Aid, Relief, and Economic Security ('CARES') Act -
Relates to the incremental tax expense impact, primarily from the Base Erosion
and Anti-Abuse Tax ('BEAT'), generated from electing certain income tax
provisions of the CARES Act.
•
Tax effects of internal reorganizations - Relates to theU.S. income tax expense resulting from the completion of internal reorganizations of the ownership of certain businesses that reduced the investments held by ourU.S. -controlled subsidiaries. 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. 46 --------------------------------------------------------------------------------
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.
•
Constant currency change - Represents the year-over-year change in revenue excluding the impact of foreign currency fluctuations. To calculate this impact, the prior year local currency results are first translated using the current year monthly average exchange rates. The change is calculated by comparing the prior year revenue, translated at the current year monthly average exchange rates, to the current year as reported revenue, for the same period. We believe constant currency measures provide useful information to investors because they provide transparency to performance by excluding the effects that foreign currency exchange rate fluctuations have on period-over-period comparability given volatility in foreign currency exchange markets.
•
Organic change - Excludes the impact of fluctuations in foreign currency exchange rates as described above and the period-over-period impact of acquisitions and divestitures on current-year revenue. We believe that excluding transaction-related items from ourU.S. GAAP financial measures provides useful supplemental information to our investors, and it is important in illustrating what our core operating results would have been had we not included these transaction-related items, since the nature, size and number of these transaction-related items can vary from period to period. 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. Reconciliations of the reported changes to the constant currency and organic changes for the three and six months endedJune 30, 2022 from the three and six months endedJune 30, 2021 are as follows. The components of revenue change may not add due to rounding. Components of Revenue Change As Less: Constant Less: Three Months Ended June 30, Reported Currency Currency Acquisitions/ Organic 2022 2021 Change Impact Change Divestitures Change ($ in millions) Revenue$ 2,031 $ 2,091 (3)% (4)% 1% (1)% 3%
Components of Revenue Change
As Less: Constant Less:
Six Months Ended June 30, Reported Currency Currency Acquisitions/ Organic
2022 2021 Change Impact Change Divestitures Change
($ in millions)
Revenue $ 4,191 $ 4,319 (3)% (3)% -% (2)% 2%
Adjusting for the impacts of foreign currency and acquisitions and disposals in
the calculation of our organic activity, our revenue growth was 3% for the three
months ended June 30, 2022 and 2% for the six months ended June 30, 2022 . These
increases in organic revenue were driven by both segments.
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.
47
--------------------------------------------------------------------------------
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 and six months ended
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
($ in millions)
Income from operations $ 137 $ 170 $ 316 $ 381
Adjusted for certain items:
Impairment - - 81 -
Amortization 83 97 168 200
Restructuring costs 56 - 62 -
Transaction and transformation, net 38 51 58 75
Adjusted operating income $ 314 $ 318 $ 685 $ 656
Income from operations margin 6.7 % 8.1 % 7.5 % 8.8 %
Adjusted operating income margin 15.5 % 15.2 % 16.3 % 15.2 %
Adjusted operating income decreased for the three months ended June 30, 2022 to
$314 million , from $318 million for the three months ended June 30, 2021 and
increased for the six months ended June 30, 2022 to $685 million from $656
million for the six months ended June 30, 2021 . This decrease in adjusted
operating income for the quarter was primarily due to lower revenue from
unfavorable foreign exchange, recent business disposals and increased operating
expenses, led by travel and entertainment expense, partially offset by lower
compensation accruals. The increase in adjusted operating income for the first
half of the year was driven by reductions in compensation costs, which more than
offset the reduction to revenue resulting from unfavorable foreign exchange and
recent business disposals.
Adjusted EBITDA/Margin
We consider adjusted EBITDA/margin to be important financial measures, which are
used internally to evaluate and assess our core operations, to benchmark our
operating results against our competitors and to evaluate and measure our
performance-based compensation plans.
Adjusted EBITDA is defined as net income adjusted for income from discontinued
operations, net of tax, provision for income taxes, interest expense,
impairment, depreciation and amortization, restructuring costs, transaction and
transformation, net, gains and losses on disposals of operations and
non-recurring items that, in management's judgment, significantly affect the
period-over-period assessment of operating results. Adjusted EBITDA margin is
calculated by dividing adjusted EBITDA by revenue.
Reconciliations of net income to adjusted EBITDA for the three and six months
ended
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
($ in millions)
NET INCOME $ 114 $ 186 $ 239 $ 922
Loss/(income) from discontinued
operations, net of tax 46 (69 ) 35 (259 )
Provision for income taxes 19 75 62 119
Interest expense 51 52 100 111
Impairment - - 81 -
Depreciation 65 72 131 143
Amortization 83 97 168 200
Restructuring costs 56 - 62 -
Transaction and transformation, net 38 51 58 75
(Gain)/loss on disposal of operations (22 ) 2 32 (357 )
Adjusted EBITDA $ 450 $ 466 $ 968 $ 954
Net income margin 5.6 % 8.9 % 5.7 % 21.3 %
Adjusted EBITDA margin 22.2 % 22.3 % 23.1 % 22.1 %
48-------------------------------------------------------------------------------- Adjusted EBITDA for the three months endedJune 30, 2022 was$450 million , compared to$466 million for the three months endedJune 30, 2021 , and was$968 million for the six months endedJune 30, 2022 , compared to$954 million for the six months endedJune 30, 2021 . This decrease in adjusted EBITDA for the quarter was primarily due to lower revenue from unfavorable foreign exchange, recent business disposals and increased operating expenses, led by travel and entertainment expense, partially offset by lower compensation accruals. The increase in adjusted EBITDA for the first half of the year was driven by reductions in compensation costs, which more than offset the reduction to revenue resulting from unfavorable foreign exchange and recent business disposals.
Adjusted Net Income and Adjusted Diluted Earnings Per Share
Adjusted net income is defined as net income attributable to WTW adjusted for income from discontinued operations, net of tax, impairment, amortization, restructuring costs, transaction and transformation, net, gains and losses on disposals of operations and non-recurring items that, in management's judgment, significantly affect the period-over-period assessment of operating results and the related tax effect of those adjustments and the tax effects of internal reorganizations. This measure is used solely for the purpose of calculating adjusted diluted earnings per share. Adjusted diluted earnings per share is defined as adjusted net income divided by the weighted-average number of shares of common stock, diluted. Adjusted diluted earnings per share is used to internally evaluate and assess our core operations and to benchmark our operating results against our competitors.
Reconciliations of net income attributable to WTW to adjusted diluted earnings
per share for the three and six months ended
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
($ inmillions)
NET INCOME ATTRIBUTABLE TO WTW $ 109 $ 184$ 231 $ 917 Adjusted for certain items: Loss/(income) from discontinued operations, net of tax 46 (69 ) 35 (259 ) Impairment - - 81 - Amortization 83 97 168 200 Restructuring costs 56 - 62 - Transaction and transformation, net 38 51 58 75 (Gain)/loss on disposal of operations (22 ) 2 32 (357 ) Tax effect on certain items listed above (i) (50 ) (28 ) (92 ) (55 ) Tax effect on statutory rate change - 40 - 40 Adjusted net income $ 260 $ 277
Weighted-average shares of common stock - diluted 112 130 115 130 Diluted earnings per share$ 0.97 $ 1.41 $ 2.01 $ 7.04 Adjusted for certain items (ii) : Loss/(income) from discontinued operations, net of tax 0.41 (0.53 ) 0.30 (1.99 ) Impairment - - 0.70 - Amortization 0.74 0.74 1.46 1.53 Restructuring costs 0.50 - 0.54 - Transaction and transformation, net 0.34 0.39 0.50 0.58 (Gain)/loss on disposal of operations (0.20 ) 0.02 0.28 (2.74 ) Tax effect on certain items listed above (i) (0.45 ) (0.21 ) (0.80 ) (0.42 ) Tax effect on statutory rate change - 0.31 - 0.31 Adjusted diluted earnings per share (ii)$ 2.32 $ 2.12 $ 4.99 $ 4.31 (i)
The tax effect was calculated using an effective tax rate for each item.
(ii)
Per share values and totals may differ due to rounding.
Our adjusted diluted earnings per share increased for both the three and six months endedJune 30, 2022 as compared to the prior year due in part to a lower weighted-average outstanding share count attributable to our share repurchase activity in the current year. The decrease to adjusted net income for the quarter was primarily due to lower revenue from unfavorable foreign exchange, recent business disposals and increased operating expenses, led by travel and entertainment expense, partially offset by lower compensation accruals. The increase in adjusted net income for the first half of the year was driven by reductions in compensation costs, which more than offset the reduction to revenue resulting from unfavorable foreign exchange and recent business disposals. 49 --------------------------------------------------------------------------------
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. 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 and six months endedJune 30, 2022 and 2021 are as follows: Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 ($ in millions) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES $ 179 $ 192 $ 336$ 782 Adjusted for certain items: Impairment - - 81 - Amortization 83 97 168 200 Restructuring costs 56 - 62 - Transaction and transformation, net 38 51 58 75 (Gain)/loss on disposal of operations (22 ) 2 32 (357 ) Adjusted income before taxes $ 334 $ 342 $ 737$ 700 Provision for income taxes $ 19 $ 75 $ 62$ 119 Tax effect on certain items listed above (i) 50 28 92 55 Tax effect of statutory rate change - (40 ) - (40 ) Adjusted income taxes $ 69 $ 63 $ 154$ 134 U.S. GAAP tax rate 10.5 % 38.9 % 18.4 % 15.2 % Adjusted income tax rate 20.5 % 18.3 % 20.8 % 19.0 % (i)
The tax effect was calculated using an effective tax rate for each item.
OurU.S. GAAP tax rates were 10.5% and 38.9% for the three months endedJune 30, 2022 and 2021, respectively, and 18.4% and 15.2% for the six months endedJune 30, 2022 and 2021, respectively. The prior-year quarter effective tax rate was higher due to the discrete tax effect of theU.K. tax rate increase enacted in the second quarter of 2021. Accordingly, the Company remeasured itsU.K. deferred tax assets and liabilities, resulting in a$40 million deferred tax expense. Additionally, the current quarter effective tax rate includes certain discrete tax benefits primarily related to return-to-provision true ups. Our adjusted income tax rates were 20.5% and 18.3% for the three months endedJune 30, 2022 and 2021, respectively, and 20.8% and 19.0% for the six months endedJune 30, 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.
50
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Reconciliations of cash flows from operating activities to free cash flow for
the six months ended
Six Months Ended June 30,
2022 2021
(in millions)
Cash flows from operating activities $ 258 $ 366
Less: Additions to fixed assets and software for
internal use (60 ) (79 )
Free cash flow $ 198 $ 287
The unfavorable movement in free cash flows in the first half of 2022 was due
primarily to cash disbursements and the elimination of cash generation resulting
from the Willis Re divestiture, as well as additional tax payments resulting
from both the Willis Re sale and the income receipt related to the termination
of the then-proposed Aon transaction.
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 endedDecember 31, 2021 , filed with theSEC onFebruary 24, 2022 . 51
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