Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________________
FORM 10-Q
(Mark One)
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2018
OR
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¨ | 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: 001-16503
___________________________________________________
WILLIS TOWERS WATSON PUBLIC LIMITED COMPANY
(Exact name of registrant as specified in its charter)
___________________________________________________
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Ireland (Jurisdiction of incorporation or organization) | | 98-0352587 (I.R.S. Employer Identification No.) |
c/o Willis Group Limited 51 Lime Street, London EC3M 7DQ, England (Address of principal executive offices) | | (011) 44-20-3124-6000 (Registrant’s telephone number, including area code) |
___________________________________________________
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. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted 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). Yes þ No ¨
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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Large accelerated filer þ | | Accelerated filer ¨ | | Non-accelerated filer ¨ | | Smaller reporting company ¨ |
Emerging growth company ¨ | | | | | | |
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 ¨ No þ
As of August 1, 2018, there were outstanding 130,769,522 ordinary shares, nominal value $0.000304635 per share, of the registrant.
WILLIS TOWERS WATSON
INDEX TO FORM 10-Q
For the Three and Six Months Ended June 30, 2018
Certain Definitions
The following definitions apply throughout this quarterly report unless the context requires otherwise:
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‘We’, ‘Us’, ‘Company’, ‘Willis Towers Watson’, ‘Our’, ‘Willis Towers Watson plc’ or ‘WTW’ | | Willis Towers Watson Public Limited Company, a company organized under the laws of Ireland, and its subsidiaries |
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‘shares’ | | The ordinary shares of Willis Towers Watson Public Limited Company, nominal value $0.000304635 per share |
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‘Legacy Willis’ or ‘Willis’ | | Willis Group Holdings Public Limited Company and its subsidiaries, predecessor to Willis Towers Watson, prior to the Merger |
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‘Legacy Towers Watson’ or ‘Towers Watson’ | | Towers Watson & Co. and its subsidiaries |
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‘Merger’ | | 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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‘Gras Savoye’ | | GS & Cie Groupe SAS |
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‘U.S.’ | | United States |
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‘U.K.’ | | United Kingdom |
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‘Brexit’ | | The United Kingdom’s exit from the European Union on March 29, 2019 |
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‘E.U.’ or ‘E.U. 27’ | | European Union or European Union 27 (the number of member countries following the United Kingdom’s exit) |
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, future capital expenditures, future share repurchases, growth in commissions and fees, the impact of changes to tax laws on our financial results, business strategies and planned acquisitions, competitive strengths, goals, the benefits of new initiatives, growth of our business and operations, plans and references to future successes, and the benefits of the Merger, 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,’ ‘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:
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• | our ability to successfully establish, execute and achieve our global business strategy; |
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• | changes in demand for our services, including any decline in defined benefit pension plans or the purchasing of insurance; |
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• | general economic, business and political conditions, including changes in the financial markets; |
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• | significant competition that we face and the potential for loss of market share and/or profitability; |
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• | consolidation in or conditions affecting the industries in which we operate; |
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• | the impact of seasonality and differences in timing of renewals; |
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• | the risk of increased liability or new legal claims arising from our new and existing products and services, and expectations, intentions and outcomes relating to outstanding litigation; |
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• | the risk that the Stanford litigation settlement approval will be overturned on appeal, the risk that the bar order may be challenged in other jurisdictions, and the deductibility of the charge relating to the settlement; |
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• | the risk of material adverse outcomes on existing litigation or investigation matters; |
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• | any changes in the regulatory environment in which the Company operates, including, among other risks, the impact of pending competition law and regulatory investigations; |
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• | various claims, government inquiries or investigations or the potential for regulatory action; |
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• | our ability to properly identify and manage conflicts of interest; |
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• | reliance on third-party services; |
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• | our ability to successfully integrate the Towers Watson, Gras Savoye and Willis businesses, operations and employees, and realize anticipated growth, synergies and cost savings; |
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• | the potential impact of the Merger on relationships, including with employees, suppliers, clients and competitors; |
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• | the possibility that the anticipated benefits from the Merger cannot be fully realized or may take longer to realize than expected; |
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• | the diversion of time and attention of our management team while the Merger and other acquisitions are being integrated; |
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• | our ability to retain and hire key personnel; |
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• | our ability to successfully manage ongoing organizational changes; |
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• | failure to protect client data or breaches of information systems; |
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• | disasters or business continuity problems; |
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• | doing business internationally, including the impact of exchange rates; |
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• | compliance with extensive government regulation; |
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• | the risk of sanctions being imposed on us by governments, or changes to associated sanction regulations; |
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• | the potential impact of the U.K.’s withdrawal from membership in the E.U., referred to as Brexit; |
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• | changes and developments in the insurance industry or the U.S. healthcare system; |
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• | our ability to make divestitures or acquisitions and our ability to integrate or manage such acquired businesses; |
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• | the risk that we may not be able to repurchase our intended number of outstanding shares due to M&A activity or investment opportunities, market or business conditions, or other factors; |
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• | the inability to protect the Company’s intellectual property rights, or the potential infringement upon the intellectual property rights of others; |
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• | our capital structure, including indebtedness amounts, the limitations imposed by the covenants in the documents governing such indebtedness and the maintenance of the financial and disclosure controls and procedures of each; |
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• | our ability to obtain financing on favorable terms or at all; |
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• | adverse changes in our credit ratings; |
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• | the federal income tax consequences of the Merger, the impact of recent changes to U.S. tax laws, including on our effective tax rate, and the enactment of additional, or the revision of existing, state, federal, and/or foreign tax laws and regulations; |
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• | changes in accounting principles, estimates and assumptions, including the impact of the adoption of the new revenue recognition and pension accounting standards; |
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• | U.S. federal income tax consequences to U.S. persons owning at least 10% of our shares; |
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• | fluctuations in our pension liabilities; |
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• | fluctuation in revenue against our relatively fixed expenses; and |
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• | our holding company structure could prevent us from being able to receive dividends or other distributions in needed amounts from our subsidiaries. |
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 Item 1A. Risk Factors in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K, and our subsequent filings with the Securities and Exchange Commission. Copies are available online at http://www.sec.gov or www.willistowerswatson.com.
Although we believe that the assumptions underlying our forward-looking statements are reasonable, any of these assumptions, and therefore also the forward-looking statements based on these assumptions, could themselves prove to be inaccurate. In light of the significant uncertainties inherent in the forward-looking statements included in this document, our inclusion of this information is not a representation or guarantee by us that our objectives and plans will be achieved.
Our forward-looking statements speak only as of the date made, and we will not update these forward-looking statements unless the securities laws require us to do so. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this document may not occur, and we caution you against relying on these forward-looking statements.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
WILLIS TOWERS WATSON
Condensed Consolidated Statements of Comprehensive Income
(In millions of U.S. dollars, except per share data)
(Unaudited)
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| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2018 |
| 2017 | | 2018 | | 2017 |
Revenue | | $ | 1,990 |
| | $ | 1,953 |
| | $ | 4,282 |
| | $ | 4,272 |
|
Costs of providing services | | | | | | | | |
Salaries and benefits | | 1,275 |
| | 1,211 |
| | 2,652 |
| | 2,464 |
|
Other operating expenses | | 406 |
| | 391 |
| | 829 |
| | 792 |
|
Depreciation | | 51 |
| | 51 |
| | 100 |
| | 97 |
|
Amortization | | 140 |
| | 149 |
| | 281 |
| | 300 |
|
Restructuring costs | | — |
| | 27 |
| | — |
| | 54 |
|
Transaction and integration expenses | | 55 |
| | 63 |
| | 98 |
| | 103 |
|
Total costs of providing services | | 1,927 |
| | 1,892 |
| | 3,960 |
| | 3,810 |
|
Income from operations | | 63 |
| | 61 |
| | 322 |
| | 462 |
|
Interest expense | | (52 | ) | | (46 | ) | | (103 | ) | | (92 | ) |
Other income, net | | 63 |
| | 34 |
| | 119 |
| | 77 |
|
INCOME FROM OPERATIONS BEFORE INCOME TAXES | | 74 |
| | 49 |
| | 338 |
| | 447 |
|
Provision for income taxes | | (9 | ) |
| (8 | ) | | (52 | ) | | (54 | ) |
NET INCOME | | 65 |
| | 41 |
| | 286 |
| | 393 |
|
Income attributable to non-controlling interests | | (7 | ) | | (8 | ) | | (13 | ) | | (16 | ) |
NET INCOME ATTRIBUTABLE TO WILLIS TOWERS WATSON | | $ | 58 |
| | $ | 33 |
| | $ | 273 |
| | $ | 377 |
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| | | | | | | | |
EARNINGS PER SHARE | | | | | | | | |
Basic earnings per share | | $ | 0.44 |
| | $ | 0.24 |
| | $ | 2.06 |
| | $ | 2.77 |
|
Diluted earnings per share | | $ | 0.44 |
| | $ | 0.24 |
| | $ | 2.05 |
| | $ | 2.75 |
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| | | | | | | | |
Cash dividends declared per share | | $ | 0.60 |
| | $ | 0.53 |
| | $ | 1.20 |
| | $ | 1.06 |
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| | | | | | | | |
Comprehensive (loss)/income before non-controlling interests | | $ | (111 | ) | | $ | 181 |
| | $ | 194 |
| | $ | 512 |
|
Comprehensive income attributable to non-controlling interests | | (6 | ) | | (16 | ) | | (13 | ) | | (27 | ) |
Comprehensive (loss)/income attributable to Willis Towers Watson | | $ | (117 | ) | | $ | 165 |
| | $ | 181 |
| | $ | 485 |
|
See accompanying notes to the condensed consolidated financial statements
WILLIS TOWERS WATSON
Condensed Consolidated Balance Sheets
(In millions of U.S. dollars, except share data)
(Unaudited) |
| | | | | | | | |
| | June 30, 2018 | | December 31, 2017 |
ASSETS | | | | |
Cash and cash equivalents | | $ | 911 |
| | $ | 1,030 |
|
Fiduciary assets | | 14,126 |
| | 12,155 |
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Accounts receivable, net | | 2,394 |
| | 2,246 |
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Prepaid and other current assets | | 458 |
| | 430 |
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Total current assets | | 17,889 |
| | 15,861 |
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Fixed assets, net | | 924 |
| | 985 |
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Goodwill | | 10,468 |
| | 10,519 |
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Other intangible assets, net | | 3,562 |
| | 3,882 |
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Pension benefits assets | | 902 |
| | 764 |
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Other non-current assets | | 468 |
| | 447 |
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Total non-current assets | | 16,324 |
| | 16,597 |
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TOTAL ASSETS | | $ | 34,213 |
| | $ | 32,458 |
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LIABILITIES AND EQUITY | | | | |
Fiduciary liabilities | | $ | 14,126 |
| | $ | 12,155 |
|
Deferred revenue and accrued expenses | | 1,357 |
| | 1,711 |
|
Short-term debt and current portion of long-term debt | | 85 |
| | 85 |
|
Other current liabilities | | 814 |
| | 804 |
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Total current liabilities | | 16,382 |
| | 14,755 |
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Long-term debt | | 4,589 |
| | 4,450 |
|
Liability for pension benefits | | 1,185 |
| | 1,259 |
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Deferred tax liabilities | | 691 |
| | 615 |
|
Provision for liabilities | | 546 |
| | 558 |
|
Other non-current liabilities | | 446 |
| | 544 |
|
Total non-current liabilities | | 7,457 |
| | 7,426 |
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TOTAL LIABILITIES | | 23,839 |
| | 22,181 |
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COMMITMENTS AND CONTINGENCIES | |
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REDEEMABLE NON-CONTROLLING INTEREST | | 27 |
| | 28 |
|
EQUITY (i) | | | | |
Additional paid-in capital | | 10,566 |
| | 10,538 |
|
Retained earnings | | 1,270 |
| | 1,104 |
|
Accumulated other comprehensive loss, net of tax | | (1,605 | ) | | (1,513 | ) |
Treasury shares, at cost, 17,519 shares in 2018 and 2017, and 40,000 shares, €1 nominal value, in 2018 and 2017 | | (3 | ) | | (3 | ) |
Total Willis Towers Watson shareholders’ equity | | 10,228 |
| | 10,126 |
|
Non-controlling interests | | 119 |
| | 123 |
|
Total equity | | 10,347 |
| | 10,249 |
|
TOTAL LIABILITIES AND EQUITY | | $ | 34,213 |
| | $ | 32,458 |
|
________________________
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(i) | Equity includes (a) Ordinary shares $0.000304635 nominal value; Authorized 1,510,003,775; Issued 130,729,558 (2018) and 132,139,581 (2017); Outstanding 130,729,558 (2018) and 132,139,581 (2017); (b) Ordinary shares, €1 nominal value; Authorized and Issued 40,000 shares in 2018 and 2017; and (c) Preference shares, $0.000115 nominal value; Authorized 1,000,000,000 and Issued none in 2018 and 2017. |
See accompanying notes to the condensed consolidated financial statements
WILLIS TOWERS WATSON
Condensed Consolidated Statements of Cash Flows
(In millions of U.S. dollars)
(Unaudited)
|
| | | | | | | | |
| | Six Months Ended June 30, |
| | 2018 | | 2017 |
CASH FLOWS FROM OPERATING ACTIVITIES | | | | |
NET INCOME | | $ | 286 |
| | $ | 393 |
|
Adjustments to reconcile net income to total net cash from operating activities: | | | | |
Depreciation | | 104 |
| | 112 |
|
Amortization | | 281 |
| | 300 |
|
Net periodic benefit of defined benefit pension plans | | (78 | ) | | (65 | ) |
Provision for doubtful receivables from clients | | 10 |
| | 11 |
|
Benefit from deferred income taxes | | (48 | ) | | (74 | ) |
Share-based compensation | | 4 |
| | 33 |
|
Net loss on disposal of operations | | 9 |
| | — |
|
Non-cash foreign exchange loss/(gain) | | 15 |
| | (13 | ) |
Other, net | | 3 |
| | 33 |
|
Changes in operating assets and liabilities, net of effects from purchase of subsidiaries: | | | | |
Accounts receivable | | 81 |
| | (174 | ) |
Fiduciary assets | | (2,193 | ) | | (1,934 | ) |
Fiduciary liabilities | | 2,193 |
| | 1,934 |
|
Other assets | | 70 |
| | (216 | ) |
Other liabilities | | (325 | ) | | (73 | ) |
Provisions | | (17 | ) | | 52 |
|
Net cash from operating activities | | 395 |
| | 319 |
|
CASH FLOWS USED IN INVESTING ACTIVITIES | | | | |
Additions to fixed assets and software for internal use | | (141 | ) | | (119 | ) |
Capitalized software costs | | (25 | ) | | (32 | ) |
Acquisitions of operations, net of cash acquired | | (8 | ) | | (13 | ) |
Net proceeds from sale of operations | | 4 |
| | — |
|
Other, net | | 17 |
| | 9 |
|
Net cash used in investing activities | | (153 | ) | | (155 | ) |
CASH FLOWS USED IN FINANCING ACTIVITIES | | | | |
Net borrowings on revolving credit facility | | 197 |
| | 283 |
|
Senior notes issued | | — |
| | 650 |
|
Proceeds from issuance of other debt | | — |
| | 32 |
|
Debt issuance costs | | — |
| | (9 | ) |
Repayments of debt | | (43 | ) | | (695 | ) |
Repurchase of shares | | (269 | ) | | (296 | ) |
Proceeds from issuance of shares | | 18 |
| | 37 |
|
Payments of deferred and contingent consideration related to acquisitions | | (41 | ) | | (44 | ) |
Cash paid for employee taxes on withholding shares | | (30 | ) | | (3 | ) |
Dividends paid | | (149 | ) | | (137 | ) |
Acquisitions of and dividends paid to non-controlling interests | | (18 | ) | | (14 | ) |
Net cash used in financing activities | | (335 | ) | | (196 | ) |
DECREASE IN CASH AND CASH EQUIVALENTS | | (93 | ) | | (32 | ) |
Effect of exchange rate changes on cash and cash equivalents | | (26 | ) | | 14 |
|
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | | 1,030 |
| | 870 |
|
CASH AND CASH EQUIVALENTS, END OF PERIOD | | $ | 911 |
| | $ | 852 |
|
See accompanying notes to the condensed consolidated financial statements
WILLIS TOWERS WATSON
Condensed Consolidated Statements of Changes in Equity
(In millions of U.S. dollars and number of shares in thousands)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shares outstanding | | Additional paid-in capital | | Retained earnings | | Treasury shares | | AOCL (i) | | Total WTW shareholders’ equity | | Non-controlling interests | | Total equity | | | | Redeemable non-controlling interest (ii) | | Total |
Balance as of December 31, 2016 | 136,297 |
| | $ | 10,596 |
| | $ | 1,452 |
| | $ | (99 | ) | | $ | (1,884 | ) | | $ | 10,065 |
| | $ | 118 |
| | $ | 10,183 |
| | | | $ | 51 |
| | |
Adoption of ASU 2016-16 | — |
| | — |
| | (3 | ) | | — |
| | — |
| | (3 | ) | | — |
| | (3 | ) | | | | — |
| | |
Shares repurchased | (2,238 | ) | | — |
| | (278 | ) | | (18 | ) | | — |
| | (296 | ) | | — |
| | (296 | ) | | | | — |
| | |
Shares canceled | — |
| | — |
| | — |
| | 96 |
| | — |
| | 96 |
| | — |
| | 96 |
| | | | — |
| | |
Net income | — |
| | — |
| | 377 |
| | — |
| | — |
| | 377 |
| | 11 |
| | 388 |
| | | | 5 |
| | $ | 393 |
|
Dividends | — |
| | — |
| | (146 | ) | | — |
| | — |
| | (146 | ) | | (12 | ) | | (158 | ) | | | | (3 | ) | | |
Other comprehensive income | — |
| | — |
| | — |
| | — |
| | 108 |
| | 108 |
| | 7 |
| | 115 |
| | | | 4 |
| | $ | 119 |
|
Issuance of shares under employee stock compensation plans | 554 |
| | 38 |
| | — |
| | — |
| | — |
| | 38 |
| | — |
| | 38 |
| | | | — |
| | |
Share-based compensation | — |
| | 33 |
| | — |
| | — |
| | — |
| | 33 |
| | — |
| | 33 |
| | | | — |
| | |
Additional non-controlling interests | — |
| | (1 | ) | | — |
| | — |
| | — |
| | (1 | ) | | — |
| | (1 | ) | | | | — |
| | |
Foreign currency translation | — |
| | (8 | ) | | — |
| | — |
| | — |
| | (8 | ) | | — |
| | (8 | ) | | | | — |
| | |
Balance as of June 30, 2017 | 134,613 |
| | $ | 10,658 |
| | $ | 1,402 |
| | $ | (21 | ) | | $ | (1,776 | ) | | $ | 10,263 |
| | $ | 124 |
| | $ | 10,387 |
| | | | $ | 57 |
| | |
| | | | | | | | | | | | | | | | | | | | | |
Balance as of December 31, 2017 | 132,140 |
| | $ | 10,538 |
| | $ | 1,104 |
| | $ | (3 | ) | | $ | (1,513 | ) | | $ | 10,126 |
| | $ | 123 |
| | $ | 10,249 |
| | | | $ | 28 |
| | |
Adoption of ASC 606 | — |
| | — |
| | 317 |
| | — |
| | — |
| | 317 |
| | — |
| | 317 |
| | | | — |
| | |
Shares repurchased | (1,768 | ) | | — |
| | (269 | ) | | — |
| | — |
| | (269 | ) | | — |
| | (269 | ) | | | | — |
| | |
Net income | — |
| | — |
| | 273 |
| | — |
| | — |
| | 273 |
| | 11 |
| | 284 |
| | | | 2 |
| | $ | 286 |
|
Dividends | — |
| | — |
| | (155 | ) | | — |
| | — |
| | (155 | ) | | (16 | ) | | (171 | ) | | | | (2 | ) | | |
Other comprehensive (loss)/income | — |
| | — |
| | — |
| | — |
| | (92 | ) | | (92 | ) | | 1 |
| | (91 | ) | | | | (1 | ) | | $ | (92 | ) |
Issuance of shares under employee stock compensation plans | 358 |
| | 18 |
| | — |
| | — |
| | — |
| | 18 |
| | — |
| | 18 |
| | | | — |
| | |
Share-based compensation | — |
| | 4 |
| | — |
| | — |
| | — |
| | 4 |
| | — |
| | 4 |
| | | | — |
| | |
Foreign currency translation | — |
| | 6 |
| | — |
| | — |
| | — |
| | 6 |
| | — |
| | 6 |
| | | | — |
| | |
Balance as of June 30, 2018 | 130,730 |
| | $ | 10,566 |
| | $ | 1,270 |
| | $ | (3 | ) | | $ | (1,605 | ) | | $ | 10,228 |
| | $ | 119 |
| | $ | 10,347 |
| | | | $ | 27 |
| | |
_____________________________________________
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(i) | Accumulated other comprehensive loss, net of tax (‘AOCL’). |
| |
(ii) | The non-controlling interest is related to Max Matthiessen Holding AB. |
See accompanying notes to the condensed consolidated financial statements
WILLIS TOWERS WATSON
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 plc is a leading global advisory, broking and solutions company that helps clients around the world turn risk into a path for growth. The Company has over 43,000 employees servicing more than 140 countries.
We offer our clients a broad range of services to help them identify and control their risks, and to enhance business performance by improving their ability to attract, retain and engage a talented workforce. Our risk control services range from strategic risk consulting (including providing actuarial analysis), to a variety of due diligence services, to the provision of practical on-site risk control services (such as health and safety or property loss control consulting), as well as analytical and advisory services (such as hazard modeling and reinsurance optimization studies). We assist clients in planning how to manage incidents or crises when they occur. These services include contingency planning, security audits and product tampering plans. We help our clients enhance their business performance by delivering consulting services, technology and solutions that help them anticipate, identify and capitalize on emerging opportunities in human capital management, including areas such as employee benefits, total rewards, talent and benefits outsourcing. In addition, we provide investment advice to help clients develop disciplined and efficient strategies to meet their investment goals.
As an insurance broker, we act as an intermediary between our clients and insurance carriers by advising our clients on their risk management requirements, helping them determine the best means of managing risk and negotiating and placing insurance with insurance carriers through our global distribution network. We operate the largest private Medicare exchange in the U.S. Through this exchange and those for active employees, we help our clients move to a more sustainable economic model by capping and controlling the costs associated with healthcare benefits. We are not an insurance company, and therefore we do not underwrite insurable risks for our own account.
We believe our broad perspective allows us to see the critical intersections between talent, assets and ideas - the dynamic formula that drives business performance.
Note 2 — Basis of Presentation and Recent Accounting Pronouncements
Basis of Presentation
The accompanying unaudited quarterly condensed consolidated financial statements of Willis Towers Watson and our subsidiaries are presented in accordance with the rules and regulations of the Securities and Exchange Commission (‘SEC’) for quarterly reports on Form 10-Q and therefore do not include all of the information and footnotes required by U.S. generally accepted accounting principles (‘GAAP’). We have reclassified certain prior period amounts to conform to current period presentation due to the adoption of certain updated accounting standards (see below for further discussion). 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 28, 2018, and may be accessed via EDGAR on the SEC’s web site at www.sec.gov.
The results of operations for the three and six months ended June 30, 2018 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 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.
Recent Accounting Pronouncements
Not Yet Adopted
In February 2016, the Financial Accounting Standards Board (‘FASB’) issued Accounting Standard Update (‘ASU’) No. 2016-02, Leases, which requires a lessee to recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. Additional ASUs have since been issued which provide amended and additional guidance for the implementation of ASU No. 2016-02. All
related guidance has been codified into, and is now known as, Accounting Standards Codification (‘ASC’) 842 (‘ASC 842’). ASC 842 becomes effective for the Company at the beginning of its 2019 calendar year, at which time the Company will adopt it, although early adoption is permitted. The Company is still in the process of finalizing its complete inventory of lease agreements to determine the full impact the standard will have, however the majority of its leases are currently considered operating leases and will be capitalized as a lease asset on its balance sheet with a related lease liability for the obligated lease payments. While the Company is still evaluating which practical expedients afforded by ASC 842 it will select, the Company has provisionally determined the following:
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• | The Company will adopt the standard using the modified retrospective approach whereby it will recognize a transition adjustment at the effective date of ASC 842, January 1, 2019, rather than at the beginning of the earliest comparative period presented. |
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• | Additionally, to prepare for the additional required disclosures and new accounting treatment, the Company is currently implementing additional tools to its lease accounting and data collection processes, which will be in place and effective on January 1, 2019. |
In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment, which simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, current U.S. GAAP requires the performance of procedures to determine the fair value at the impairment testing date of assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, the amendments under this ASU require the goodwill impairment test to be performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge would be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The ASU becomes effective for the Company on January 1, 2020. The amendments in this ASU should be applied on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017, and the Company is still evaluating when to adopt this ASU. The Company does not expect an immediate impact to its condensed consolidated financial statements upon adopting this ASU since the most recent Step 1 goodwill impairment test resulted in fair values in excess of carrying values for all reporting units at October 1, 2017.
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities, which provides amendments under six specific objectives to better align risk management activities and financial reporting, and to simplify disclosure, presentation, hedging and the testing and measurement of ineffectiveness. The ASU becomes effective for the Company on January 1, 2019. Early adoption is permitted, and any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The Company is currently assessing when it will adopt this standard, and the impact that this standard will have on its condensed consolidated financial statements.
In February 2018, the FASB issued ASU No. 2018-02, Income Statement - Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows for a reclassification from accumulated other comprehensive income to retained earnings for ‘stranded’ tax effects (those tax effects of items within accumulated other comprehensive income resulting from the historical corporate income tax rate reduction) resulting from the Tax Cuts and Jobs Act. The amendments within this ASU also require certain disclosures about stranded tax effects. The ASU becomes effective for the Company on January 1, 2019. Early adoption is permitted, and any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The Company will adopt this standard on January 1, 2019, and is evaluating the impact that this standard will have on its condensed consolidated financial statements.
Adopted
In May 2014, the FASB issued ASU No. 2014-09, Revenue From Contracts With Customers. The new standard supersedes most current revenue recognition guidance and eliminates most industry-specific guidance. The ASU is based on the principle that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to fulfill a contract. Entities have the option of using either a full retrospective or a modified retrospective approach for the adoption of the new standard. Additional ASUs have since been issued which provide further guidance, examples and technical corrections for the implementation of ASU No. 2014-09. All related guidance has been codified into, and is now known as, Accounting Standards Codification 606, Revenue From Contracts With Customers (‘ASC 606’). The guidance was effective for, and was adopted by, the Company as of January 1, 2018 using the modified retrospective method, and has a material impact on the
condensed consolidated financial statements and their accompanying notes containing our 2018 information. A full description of each impact, as well as the new disclosures required by ASC 606, is discussed below and in Note 3 — Revenue.
In March 2017, the FASB issued ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which requires entities to (1) disaggregate the current service-cost component from the other components of net benefit cost (the ‘other components’) and present it in the income statement with other current compensation costs for related employees and (2) present the other components elsewhere in the income statement and outside of income from operations if that subtotal is presented. In addition, the ASU requires entities to disclose the income statement lines that contain the other components if they are not presented or included in appropriately described separate lines. The ASU became effective for the Company on January 1, 2018 and it has applied the standard retrospectively in this Quarterly Report on Form 10-Q. As a result of adopting this ASU, the Company classified or reclassified net periodic pension and postretirement benefit credits totaling $61 million and $140 million for the three and six months ended June 30, 2018, respectively, and $63 million and $125 million for the three and six months ended June 30, 2017, respectively, from salaries and benefits expense to other income, net, in the condensed consolidated statements of comprehensive income.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments, which amends guidance on presentation and classification of eight specific cash flow issues with the objective of reducing diversity in practice. The ASU became effective for the Company on January 1, 2018 on a prospective basis. While there was no impact to the condensed consolidated statement of cash flows for the six months ended June 30, 2018, the Company will reflect the new guidance prospectively as applicable transactions occur.
In May 2017, the FASB issued ASU No. 2017-09, Stock Compensation - Scope of Modification Accounting, which provides guidance on which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The ASU requires that an entity should account for the effects of a modification unless the fair value (or calculated value or intrinsic value, if used), vesting conditions and classification (as equity or liability) of the modified award are all the same as for the original award immediately before the modification. The ASU became effective for the Company on January 1, 2018 and will be applied prospectively to any award modified on or after this date. There is no immediate impact to the accompanying condensed consolidated financial statements, until such time as an award may be modified in 2018 or forward.
Changes to Accounting Policies
As a result of the adoption of ASC 606 on January 1, 2018, we have updated our accounting policies for each revenue stream. These policies relate to the accounting for revenue and certain related costs for our 2018 results, consistent with the modified retrospective adoption guidance we have elected to apply. Our revenue recognition policies for 2017 and prior reporting periods are reflected in the notes to our annual consolidated financial statements as filed on February 28, 2018, and amended on June 6, 2018, in our Annual Report on Form 10-K. We have also included an accounting policy resulting from U.S. Tax Reform.
Accounting for income taxes on Global Intangible Low-Taxed Income (‘GILTI’)
We recognize the tax on GILTI as a period expense in the period the tax is incurred. Under this policy, we have not provided deferred taxes related to temporary differences, that upon their reversal, will affect the amount of income subject to GILTI in the period.
Revenue Recognition
We recognize revenue from a variety of services, with broking, consulting and outsourced administration representing our most significant offerings. All other revenue streams, which can be recognized at either point in time or over time, are individually less significant and are grouped in Other in our revenue disaggregation disclosures in Note 3 — Revenue. These Other revenue streams represent approximately 5% of customer contract revenue for the three and six months ended June 30, 2018.
Broking — Representing approximately 46% and 48% of customer contract revenue for the three and six months ended June 30, 2018, respectively, in our broking arrangements, we earn revenue by acting as an intermediary in the placement of effective insurance policies. Generally, we act as an agent and view our clients to be the party looking to obtain insurance coverage for various risks, or employers or sponsoring organizations looking to obtain insurance coverage for their employees or members. Also, we act as an agent in reinsurance broking arrangements where our client is the party looking to cede risks to the reinsurance markets. Our primary performance obligation under the majority of these arrangements is to place an effective insurance or reinsurance policy, but there can also be significant post-placement obligations in certain contracts to which we need to allocate revenue. The most common of these is for claims handling or call center support. The revenue recognition method for these, after the relative fair value allocation, is described further as part of the ‘Outsourced Administration’ description below.
Due to the nature of the majority of our broking arrangements, no single document constitutes the contract for ASC 606 purposes. Our services may be governed by a mixture of different types of contractual arrangements depending on the jurisdiction or type of coverage, including terms of business agreements, broker-of-record letters, statements of work or local custom and practice. This is then confirmed by the client’s acceptance of the underlying insurance contract. Prior to the policy inception date, the client has not accepted nor formally committed to perform under the arrangement (i.e. pay for the insurance coverage in place). Therefore in the majority of broking arrangements, the contract date is the date the insurance policy incepts. However, in certain instances such as Medicare broking or Affinity arrangements, where the employer or sponsoring organization is our customer, client acceptance of underlying individual policy placements is not required, and therefore the date at which we have a contract with a customer is not dependent upon placement.
As noted, our primary performance obligations typically consist of only the placement of an effective insurance policy which precedes the inception date of the policy. Therefore, most of our fulfillment costs are incurred before we can recognize revenue, and are thus deferred during the pre-placement process. Where we have material post-placement services obligations, we estimate the relative fair value of the post-placement services using either the expected cost-plus-margin or the market assessment approach.
Fees for our broking services consist of commissions or fees negotiated in lieu of commissions. At times, we may receive additional income for performing these services from the insurance and reinsurance carriers market, which is collectively referred to as ‘market derived income’. In situations in which our fees are not fixed but are variable, we must estimate the likely commission per policy, taking into account the likelihood of cancellation before the end of the policy. For Medicare broking, Affinity arrangements and proportional treaty reinsurance broking, the commissions to which we will be entitled can vary based on the underlying individual insurance policies that are placed. For proportional treaty reinsurance broking in particular, we base the estimate of transaction prices on supportable evidence from an analysis of past transactions, and only include amounts that are probable of being received or not refunded (referred to as applying ‘constraint’ under ASC 606). This results in us estimating a transaction price that may be significantly lower than the ultimate amount of commissions we may collect. The transaction price is then adjusted over time as we receive confirmation of our remuneration through receipt of treaty statements.
We recognize revenue for most broking arrangements as of a point in time at the later of the policy inception date or when the policy placement is complete, because this is viewed as the date when control is transferred to the client. For Medicare broking, we recognize revenue over time, as we stand ready under our agreements to place retiree Medicare coverage. For this type of broking arrangement, we recognize the majority of our placement revenue in the fourth quarter of the calendar year when the majority of the placement or renewal activity occurs.
Consulting — We earn revenue for advisory and consulting work that may be structured as different types of service offerings, including annual recurring projects, projects of a short duration or stand-ready obligations. Collectively, our consulting arrangements represent approximately 39% and 37% of customer contract revenue for the three and six months ended June 30, 2018, respectively.
We have engagement letters with our clients that specify the terms and conditions upon which the engagements are based. These terms and conditions can only be changed upon agreement by both parties.
In assessing our performance obligations, our consulting work is typically highly integrated, with the various promised services representing inputs of the combined overall output. We view these arrangements to represent a single performance obligation. To the extent we do not integrate our services, as is the case with unrelated services that may be sourced from different areas of our business, we consider these separate performance obligations.
Fee terms can be in the form of fixed-fees (including fixed-fees offset by commissions), time-and-expense fees, commissions, per-participant fees, or fees based on assets under management. Payment is typically due on a monthly basis as we perform under the contract, and we are entitled to be reimbursed for work performed to date in the event of termination.
The majority of our revenue from these consulting engagements is recognized over time, either because our clients are simultaneously receiving and consuming the benefits of our services, or because we have an enforceable right to payment for performance rendered to date. Additionally, from time to time, we may be entitled to an additional fee based on achieving certain performance criteria. To the extent that we cannot estimate with reasonable assurance the likelihood that we will achieve the performance target, we will ‘constrain’ this portion of the transaction price and recognize it when or as the uncertainty is resolved.
We use different performance measures to determine our revenue depending on the nature of the engagement:
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• | Annual recurring projects and projects of short duration. These projects are typically straightforward and highly predictable in nature with either time and expense or fixed fee terms. Time-and-expense fees are recognized as hours or expenses are incurred using the ‘right to invoice’ practical expedient allowed under ASC 606. For fixed-fee arrangements, to the extent estimates can be made of the remaining work required under the arrangement, revenues are based upon the proportional performance method, using the value of labor hours compared to the estimated total value of labor hours. We believe that cost represents a faithful depiction of transfer of value because the completion of these performance obligations is based upon the professional services of employees of differing experience levels and thereby costs. It is appropriate that satisfaction of these performance obligations considers both the number of hours incurred by each employee and the value of each labor hour worked (as opposed to simply the hours worked). |
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• | Stand-ready obligations. These projects consist of repetitive monthly or quarterly services performed consistently each period. As none of the activities provided under these services are performed at specified times and quantities, but at the discretion of each customer, our obligation is to stand-ready to perform these services on an as-needed basis. These arrangements represent a ‘series’ performance obligation in accordance with ASC 606. Each time increment (i.e. each month or quarter) of standing ready to provide the overall services is distinct and the customer obtains value from each period of service independent of the other periods of service. |
Where we recognize revenue on a proportional performance basis, the amount we recognize is affected by a number of factors that can change the estimated amount of work required to complete the project such as the staffing on the engagement and/or the level of client participation. Our periodic engagement evaluations require us to make judgments and estimates regarding the overall profitability and stage of project completion that, in turn, affect how we recognize revenue. We recognize a loss on an engagement when estimated revenues to be received for that engagement are less than the total estimated costs associated with the engagement. Losses are recognized in the period in which the loss becomes probable and the amount of the loss is reasonably estimable.
Outsourced Administration — We provide customized benefits outsourcing and co-sourcing solutions services in relation to the administration of defined benefit, defined contribution, and health and welfare plans. These plans are sponsored by our clients to provide benefits to their active or retired employees. Additionally, these services include operating call centers, and may include providing access to, and managing a variety of consumer-directed savings accounts. The operation of call centers and consumer-directed accounts can be provisioned as part of an ongoing administration or solutions service, or separately as part of a broking arrangement. The products and services available to all clients are the same, but the selections by the client can vary and portray customized products and services based on the customer’s specific needs. Our services often include the use of proprietary systems that are configured for each of our clients’ needs. In total, our outsourced administration services represent approximately 10% of customer contract revenue for the three and six months ended June 30, 2018.
These contracts typically consist of an implementation phase and an ongoing administration phase:
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• | Implementation phase. Work performed during the implementation phase is considered a set-up activity because it does not transfer a service to the customer, and therefore costs are deferred during this phase of the arrangement. Since these arrangements are longer term in nature and subject to more changes in scope as the project progresses, our contracts generally provide that if the client terminates a contract, we are entitled to an additional payment for services performed through the termination date designed to recover our up-front costs of implementation. |
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• | Ongoing administration phase. The ongoing administration phase includes a variety of plan administration services, system hosting and support services. More specifically, these services include data management, calculations, reporting, fulfillment/communications, compliance services, call center support, and in our health and welfare arrangements, annual onboarding and enrollment support. While there are a variety of activities performed, the overall nature of the obligation is to provide an integrated outsourcing solution to the customer. The arrangement represents a stand-ready obligation to perform these activities on an as-needed basis. The customer obtains value from each period of service, and each time increment (i.e., each month, or each benefits cycle in our health and welfare arrangements) is distinct and substantially the same. Accordingly, the ongoing administration services represent a ‘series’ in accordance with ASC 606 and are deemed one performance obligation. |
We have engagement letters with our clients that specify the terms and conditions upon which the engagements are based. These terms and conditions can only be changed upon agreement by both parties. Fees for these arrangements can be fixed, per- participant-per-month, or in the case of call center services provided in conjunction with our broking services, an allocation based on commissions. Our fees are not typically payable until the commencement of the ongoing administration phase. However, in our health and welfare arrangements, we begin transferring services to our customers approximately four months prior to payments being due as part of our annual onboarding and enrollment work. Although our per-participant-per-month and commission-based fees are considered variable, they are typically predictable in nature, and therefore we generally do not ‘constrain’ any portion of our transaction price estimates. Once fees become payable, payment is typically due on a monthly
basis as we perform under the contract, and are entitled to be reimbursed for work performed to date in the event of termination.
Revenue is recognized over time as the services are performed because our clients are simultaneously receiving and consuming the benefits of our services. For our health and welfare arrangements where each benefits cycle represents a time increment under the series guidance, revenue is recognized based on proportional performance. We use an input measure (value of labor hours worked) as the measure of progress. Given that the service is stand-ready in nature, it can be difficult to predict the remaining obligation under the benefits cycle. Therefore, the input measure is based on the historical effort expended each month, which is measured as labor cost. This results in slightly more revenue being recognized during periods of annual onboarding since we are performing both our normal monthly services and our annual services during this portion of the benefits cycle.
For all other outsourced administration arrangements where a month represents our time increment under the series guidance, we allocate transaction price to the month we are performing our services. Therefore, the amount recognized each month is the variable consideration related to that month plus the fixed monthly or annual fee. The fixed annual or monthly fee is recognized on a straight-line basis. Revenue recognition for these types of arrangements is therefore more consistent throughout the year.
Reimbursed expenses — Client reimbursable expenses, including those relating to travel, other out-of-pocket expenses and any third-party costs, are included in revenue, and an equivalent amount of reimbursable expenses is included in other operating expenses as a cost of revenue as incurred. Reimbursed expenses represented approximately 1% of customer contract revenue for the three and six months ended June 30, 2018. Taxes collected from customers and remitted to government authorities are recorded net and are excluded from revenue.
Cost to obtain or fulfill contracts
Costs to obtain customers include commissions for brokers under specific agreements that would not be incurred without a contract being signed and executed. The Company has elected to apply the ASC 606 ‘practical expedient’ which allows us to expense these costs as incurred if the amortization period related to the resulting asset would be one year or less. The Company has no significant instances of contracts that would be amortized for a period greater than a year, and therefore has no contract costs capitalized for these arrangements.
Costs to fulfill include costs incurred by the Company that are expected to be recovered within the expected contract period. The costs associated with our system implementation activities and consulting contracts are recorded through time entry.
For our broking business, the Company must estimate the fulfillment costs incurred during the pre-placement of the broking contracts. These judgments include:
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• | which activities in the pre-placement process should be eligible for capitalization; |
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• | the amount of time and effort expended on those pre-placement activities; |
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• | the amount of payroll and related costs eligible for capitalization; and, |
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• | the monthly or quarterly timing of underlying insurance and reinsurance policy inception dates. |
We amortize costs to fulfill over the period we receive the related benefits. For broking pre-placement costs, this is typically less than a year. In our system implementation and consulting arrangements, we include the likelihood of contract renewals in our estimate of the amortization period, resulting in most costs being amortized for a greater length of time than the initial contract term.
Note 3 — Revenue
As of January 1, 2018, the Company adopted ASC 606. The adoption of this new guidance had a material impact to the amounts and classification of certain balances within our condensed consolidated financial statements and disclosures in the accompanying notes.
We adopted ASC 606 using the modified retrospective approach, and elected to apply the following ‘practical expedients’ during adoption:
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• | We elected to apply the new standard only to contracts that are not completed as of the transition date. This had the net effect of reducing revenue recognized under ASC 606 due to the change in method in our Health and Benefits broking business. See a further discussion and quantification for the quarterly results below. |
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• | We elected to reflect the aggregate effect of all modifications made to contracts prior to the transition date, January 1, 2018, rather than retrospectively restating the contracts for each of these modifications. |
We recognized the cumulative effect of initially applying ASC 606 as an adjustment to the opening balance of retained earnings. The comparative periods included within this Quarterly Report on Form 10-Q have not been restated and continue to be reported under the accounting standards in effect for those periods.
The cumulative effect of the changes made to our consolidated January 1, 2018 balance sheet for the adoption of ASC 606 were as follows:
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Balance Sheet | Balance at December 31, 2017 | | Adjustments due to ASC 606 | | Balance at January 1, 2018 |
ASSETS | | | | | |
Accounts receivable, net | $ | 2,246 |
| | $ | 309 |
| a | $ | 2,555 |
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Prepaid and other current assets | 430 |
| | 89 |
| b | 519 |
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Fixed assets, net | 985 |
| | (83 | ) | c | 902 |
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Other non-current assets | 447 |
| | 39 |
| c | 486 |
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LIABILITIES | | | | | |
Deferred revenue and accrued expenses | 1,711 |
| | (74 | ) | d | 1,637 |
|
Deferred tax liabilities | 615 |
| | 99 |
| e | 714 |
|
Provision for liabilities | 558 |
| | 12 |
| f | 570 |
|
EQUITY | | | | | |
Retained earnings | 1,104 |
| | 317 |
| g | 1,421 |
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In accordance with the modified retrospective adoption requirements of ASC 606, the following disclosures represent the impact of adoption on our condensed consolidated statement of comprehensive income, balance sheet and statement of cash flows:
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| Three Months Ended June 30, 2018 |
Statement of Comprehensive Income | As Reported | | Balances Without Adoption of ASC 606 | | Effect of Change |
| | | | | | |
Revenue | $ | 1,990 |
| | $ | 2,022 |
| | $ | (32 | ) | h |
Costs of providing services | | | | | | |
Salaries and benefits | 1,275 |
| | 1,272 |
| | 3 |
| i |
Depreciation | 51 |
| | 56 |
| | (5 | ) | i |
Income from operations | 63 |
| | 93 |
| | (30 | ) | |
INCOME FROM OPERATIONS BEFORE INCOME TAXES | 74 |
| | 104 |
| | (30 | ) | |
Provision for income taxes | (9 | ) | | (15 | ) | | 6 |
| j |
NET INCOME | 65 |
| | 89 |
| | (24 | ) | |
NET INCOME ATTRIBUTABLE TO WILLIS TOWERS WATSON | 58 |
| | 82 |
| | (24 | ) | |
| | | | | | |
EARNINGS PER SHARE | | | | | | |
Basic earnings per share | $ | 0.44 |
| | $ | 0.62 |
| | $ | (0.18 | ) | |
Diluted earnings per share | $ | 0.44 |
| | $ | 0.62 |
| | $ | (0.18 | ) | |
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| Six Months Ended June 30, 2018 |
Statement of Comprehensive Income | As Reported | | Balances Without Adoption of ASC 606 | | Effect of Change |
| | | | | | |
Revenue | $ | 4,282 |
| | $ | 4,573 |
| | $ | (291 | ) | h |
Costs of providing services | | | | | | |
Salaries and benefits | 2,652 |
| | 2,624 |
| | 28 |
| i |
Depreciation | 100 |
| | 110 |
| | (10 | ) | i |
Income from operations | 322 |
| | 631 |
| | (309 | ) | |
INCOME FROM OPERATIONS BEFORE INCOME TAXES | 338 |
| | 647 |
| | (309 | ) | |
Provision for income taxes | (52 | ) | | (111 | ) | | 59 |
| j |
NET INCOME | 286 |
| | 536 |
| | (250 | ) | |
NET INCOME ATTRIBUTABLE TO WILLIS TOWERS WATSON | 273 |
| | 523 |
| | (250 | ) | |
| | | | | | |
EARNINGS PER SHARE | | | | | | |
Basic earnings per share | $ | 2.06 |
| | $ | 3.95 |
| | $ | (1.89 | ) | |
Diluted earnings per share | $ | 2.05 |
| | $ | 3.94 |
| | $ | (1.89 | ) | |
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| As of June 30, 2018 |
Balance Sheet | As Reported | | Balances Without Adoption of ASC 606 | | Effect of Change |
ASSETS | | | | | | |
Accounts receivable, net | $ | 2,394 |
| | $ | 2,406 |
| | $ | (12 | ) | a |
Prepaid and other current assets | 458 |
| | 389 |
| | 69 |
| b |
Fixed assets, net | 924 |
| | 1,022 |
| | (98 | ) | c |
Other non-current assets | 468 |
| | 415 |
| | 53 |
| c |
LIABILITIES | | | | | | |
Deferred revenue and accrued expenses | 1,357 |
| | 1,464 |
| | (107 | ) | d |
Other current liabilities | 814 |
| | 873 |
| | (59 | ) | e |
Deferred tax liabilities | 691 |
| | 592 |
| | 99 |
| e |
Provision for liabilities | 546 |
| | 534 |
| | 12 |
| f |
EQUITY | | | | | | |
Retained earnings | 1,270 |
| | 1,203 |
| | 67 |
| g |
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| Six Months Ended June 30, 2018 |
Statement of Cash Flows | As Reported | | Balances Without Adoption of ASC 606 | | Effect of Change |
Net cash from operating activities | $ | 395 |
| | $ | 419 |
| | $ | (24 | ) | k |
Capitalized software costs | (25 | ) | | (49 | ) | | 24 |
| k |
Explanation of Changes
The adoption of ASC 606 had the following impacts to our balance sheets at January 1, 2018 and June 30, 2018:
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a. | Accounts receivable, net, now includes receivables that have been billed, not yet billed and short-term contract assets. This adjustment is the result of the cumulative adjustments to revenue that have not yet been collected from our customers, but are expected to be collected within the next twelve months. The most significant increases to this balance result from revenue acceleration under ASC 606 for Medicare and proportional treaty broking commissions. |
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b. | Prepaid and other current assets include the impact of costs deferred in connection with our broking pre-placement activities. These costs are being deferred while the related pre-placement work is performed, and amortized as the |
related revenue is recognized, typically upon policy inception. Since the amortization period associated with these fulfillment costs is less than one year, these deferred costs have been classified as a current asset.
| |
c. | Prior to the adoption of ASC 606, costs that we deferred related to certain system implementation activities had been included in fixed assets, net. These costs, adjusted based on the guidance in ASC 606, have now been included in other non-current assets. Additionally we have included less significant impacts of adjustments to deferred tax assets and have classified non-current contract assets within non-current assets. |
| |
d. | Deferred revenue has been adjusted primarily to reflect revenue acceleration in our Medicare broking business. Additional adjustments were included to accelerate the license component of certain software arrangements and to net deferred revenue with contract assets. |
| |
e. | Other current liabilities, which includes current taxes payable, and deferred tax liabilities, have been adjusted for the tax effects of the individual changes resulting from the adoption of ASC 606. The income tax expense was calculated based on the U.S. and foreign statutory rates applicable to adjustments made. Where applicable, a U.S. statutory rate of 21% was used. |
| |
f. | Provision for liabilities has been adjusted for additional reserves for long-term post-placement obligations in our broking business. |
| |
g. | Retained earnings has been adjusted for the net impact of the adoption of ASC 606. See the discussion of the significant pre-tax changes by revenue stream in the following section. |
The following changes are now reflected in our condensed consolidated statements of comprehensive income for the three and six months ended June 30, 2018. Each description also includes a discussion of the impact to retained earnings as of the adoption date.
|
| | | | | | | | | | | |
| Retained Earnings Increase/(Decrease) at January 1, 2018 | | Increase/(Decrease) for the Three Months Ended June 30, 2018 | | Increase/(Decrease) for the Six Months Ended June 30, 2018 |
Revenue adjustments | | | | | |
Medicare broking | $ | 311 |
| | $ | (78 | ) | | $ | (151 | ) |
Proportional treaty reinsurance broking | 50 |
| | 5 |
| | 29 |
|
Health and benefits broking | — |
| | 35 |
| | (155 | ) |
Other adjustments | 28 |
| | 6 |
| | (14 | ) |
Total adjustments related to revenue | 389 |
| | (32 | ) | | (291 | ) |
| | | | | |
Cost adjustments | | | | | |
System implementation activities | (46 | ) | | 2 |
| | 4 |
|
Other cost adjustments | 75 |
| | (4 | ) | | 14 |
|
Total adjustments related to costs | 29 |
| | (2 | ) | | 18 |
|
| | | | | |
Tax effect | (101 | ) | | (6 | ) | | (59 | ) |
Total net adjustments | $ | 317 |
| | $ | (24 | ) | | $ | (250 | ) |
| |
h. | Revenue was adjusted for the following significant changes: |
| |
• | Medicare broking — The majority of revenue recognition for this offering, within our Individual Marketplace business, has moved from monthly ratable recognition over the policy period, to recognition upon placement of the policy. Consequently, the Company will now recognize approximately two-thirds of one calendar year of expected commissions during its fourth quarter of the preceding calendar year. The remainder of the revenue is recognized consistently with methods used prior to the adoption of ASC 606. Therefore, at the adoption date, we have reflected a $271 million pre-tax increase to retained earnings for the portion of the revenue that would otherwise have been recognized during our 2018 calendar year since our earnings process was largely completed during the fourth quarter of 2017. Additionally, we have reflected a $40 million pretax adjustment to increase retained earnings related to previously deferred contingent revenue from placements made prior to 2018 because the earnings process was complete under ASC 606. During the three and six months ended June 30, 2018, the |
accounting for this revenue stream under ASC 606 represented a reduction of revenue from ASC 605, Revenue Recognition (‘ASC 605’) accounting methods of $78 million and $151 million, respectively.
| |
• | Proportional treaty reinsurance broking — The revenue recognition for proportional treaty reinsurance broking commissions, within our Investment, Risk and Reinsurance segment, has moved from recognition upon the receipt of the monthly or quarterly treaty statements from the ceding insurance carriers, to the recognition of an estimate of expected commissions upon the policy effective date. Since the majority of revenue recognized historically based on these monthly or quarterly statements was received over a two-year period, we reflected a $50 million pretax increase to retained earnings at the adoption date for the portion of revenue that would otherwise have been recognized during our 2018 calendar year related to policies effective in 2017 or prior years. For the three and six months ended June 30, 2018, ASC 606 revenue was higher than ASC 605 revenue by approximately $5 million and $29 million, respectively, related to this adjustment. |
| |
• | Health and benefits broking — Revenue for certain Health and Benefits broking arrangements, in our Human Capital and Benefits segment, will now be recognized evenly over the year to reflect the nature of the ongoing obligations to our customers as well as receipt of the monthly commissions. These contracts are monthly or annual in nature, and are considered complete as of the transition date. Therefore, no retained earnings adjustment is required. The total changes to revenue as a result of this accounting change for the three and six months ended June 30, 2018 was an increase of $35 million and a decrease of $155 million, respectively. |
| |
• | Other adjustments — Certain other revenue changes with individually less significant adjustments were made to retained earnings as of the adoption date totaling a net $28 million. The cumulative changes to revenue for the three and six months ended June 30, 2018 for other revenue streams not discussed above resulting from the ASC 606 adoption was an increase of $6 million and a decrease of $14 million, respectively. |
| |
i. | Salaries and benefits and depreciation expense have been impacted by the guidance for deferred costs. Our accounting for these deferred costs has changed for certain revenue streams with system implementation activities, and other types of arrangements with associated costs, that now meet the criteria for cost deferral under ASC 606: |
| |
• | System implementation activities — For those portions of the business that previously deferred costs, the length of time over which we amortize those costs will extend to a longer estimated contract term. For 2017 and prior years, these costs were amortized over a typical period of 3-5 years in accordance with the initial stated terms of the customer agreements. Additionally, the composition of deferred costs has been adjusted to reflect the guidance in ASC 606. A reduction adjustment to retained earnings of $46 million was recorded on the adoption date to reflect these changes. Further, the amortization of the costs are no longer classified as depreciation expense, but rather included in salaries and benefits. These adjustments resulted in an increase in expenses of $2 million and $4 million for the three and six months ended June 30, 2018, respectively. |
| |
• | Other cost adjustments — This guidance now applies to our broking arrangements and certain consulting engagements. While the costs deferred for our broking arrangements will typically be amortized within one year, costs now deferred related to certain consulting arrangements will be amortized over a longer term. We have increased pre-tax retained earnings by $75 million primarily to reflect the total changes to contract costs as of the adoption date. For the three and six months ended June 30, 2018, these changes resulted in expenses decreasing by $4 million and increasing by $14 million, respectively. |
| |
j. | The provision for income taxes for the three and six months ended June 30, 2018 was $6 million and $59 million, respectively, lower than our provision on an ASC 605 basis. The income tax expense was calculated based on the U.S. and foreign statutory rates applicable to adjustments made. Where applicable, a U.S. statutory rate of 21% was used. There was a $101 million net tax reduction to retained earnings upon adoption of ASC 606. |
The following changes are now reflected in our condensed consolidated statement of cash flows for the six months ended June 30, 2018.
| |
k. | As part of the changes in accounting for deferred costs, amounts capitalized relating to system implementation activities are now classified as operating cash outflows. Prior to 2018, those costs capitalized under previous guidance were included in the Capitalized software costs as an investing cash outflow. |
Disaggregation of Revenue
The Company reports revenue by segment in Note 4 — Segment Information. The following tables present revenue by service offering and segment, as well as a reconciliation to total revenue for the three and six months ended June 30, 2018. Along with reimbursable expenses and other, total revenue by service offering represents our revenue from customer contracts. See Note 4 — Segment Information for further information.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, 2018 |
| HCB | | CRB | | IRR | | BDA | | Corporate (i) | | Total |
Broking | $ | 61 |
| | $ | 610 |
| | $ | 224 |
| | $ | 4 |
| | $ | — |
| | $ | 899 |
|
Consulting | 602 |
| | 39 |
| | 107 |
| | — |
| | 3 |
| | 751 |
|
Outsourced administration | 68 |
| | 16 |
| | — |
| | 115 |
| | — |
| | 199 |
|
Other | 44 |
| | 2 |
| | 45 |
| | — |
| | 2 |
| | 93 |
|
Total revenues by service offering | 775 |
| | 667 |
| | 376 |
| | 119 |
| | 5 |
| | 1,942 |
|
Reimbursable expenses and other (i) | 17 |
| | — |
| | 1 |
| | 2 |
| | 4 |
| | 24 |
|
Total revenue from customer contracts | $ | 792 |
| | $ | 667 |
| | $ | 377 |
| | $ | 121 |
| | $ | 9 |
| | $ | 1,966 |
|
Interest and other income (ii) | 5 |
| | 7 |
| | 9 |
| | — |
| | 3 |
| | 24 |
|
Total revenue | $ | 797 |
| | $ | 674 |
| | $ | 386 |
| | $ | 121 |
| | $ | 12 |
| | $ | 1,990 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Six months ended June 30, 2018 |
| HCB | | CRB | | IRR | | BDA | | Corporate (i) | | Total |
Broking | $ | 137 |
| | $ | 1,274 |
| | $ | 615 |
| | $ | 8 |
| | $ | — |
| | $ | 2,034 |
|
Consulting | 1,233 |
| | 83 |
| | 224 |
| | — |
| | 6 |
| | 1,546 |
|
Outsourced administration | 142 |
| | 39 |
| | — |
| | 233 |
| | — |
| | 414 |
|
Other | 91 |
| | 5 |
| | 104 |
| | — |
| | 3 |
| | 203 |
|
Total revenues by service offering | 1,603 |
| | 1,401 |
| | 943 |
| | 241 |
| | 9 |
| | 4,197 |
|
Reimbursable expenses and other (i) | 31 |
| | — |
| | 3 |
| | 4 |
| | 5 |
| | 43 |
|
Total revenue from customer contracts | $ | 1,634 |
| | $ | 1,401 |
| | $ | 946 |
| | $ | 245 |
| | $ | 14 |
| | $ | 4,240 |
|
Interest and other income (ii) | 9 |
| | 13 |
| | 16 |
| | — |
| | 4 |
| | 42 |
|
Total revenue | $ | 1,643 |
| | $ | 1,414 |
| | $ | 962 |
| | $ | 245 |
| | $ | 18 |
| | $ | 4,282 |
|
____________________
| |
(i) | Reimbursable expenses and other, as well as Corporate revenue, are excluded from segment revenue, but included in total revenue on the condensed consolidated statements of comprehensive income. |
| |
(ii) | Interest and other income is included in segment revenue and total revenue, however it has been presented separately in the above tables because it does not arise directly from contracts with customers. |
Individual revenue streams aggregating to less than 5% of total revenue have been included within the Other line in the tables above.
The following tables present revenue by the geography where our work is performed for the three and six months ended June 30, 2018. The reconciliation to total revenue on our condensed consolidated statements of comprehensive income and to segment revenue is shown in the tables above.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, 2018 |
| HCB | | CRB | | IRR | | BDA | | Corporate | | Total |
North America | $ | 467 |
| | $ | 259 |
| | $ | 105 |
| | $ | 119 |
| | $ | 5 |
| | $ | 955 |
|
Great Britain | 120 |
| | 170 |
| | 182 |
| | — |
| | — |
| | 472 |
|
Western Europe | 124 |
| | 121 |
| | 51 |
| | — |
| | — |
| | 296 |
|
International | 64 |
| | 117 |
| | 38 |
| | — |
| | — |
| | 219 |
|
Total revenue by geography | $ | 775 |
| | $ | 667 |
| | $ | 376 |
| | $ | 119 |
| | $ | 5 |
| | $ | 1,942 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Six months ended June 30, 2018 |
| HCB | | CRB | | IRR | | BDA | | Corporate | | Total |
North America | $ | 929 |
| | $ | 474 |
| | $ | 258 |
| | $ | 241 |
| | $ | 9 |
| | $ | 1,911 |
|
Great Britain | 249 |
| | 318 |
| | 477 |
| | — |
| | — |
| | 1,044 |
|
Western Europe | 278 |
| | 360 |
| | 122 |
| | — |
| | — |
| | 760 |
|
International | 147 |
| | 249 |
| | 86 |
| | — |
| | — |
| | 482 |
|
Total revenue by geography | $ | 1,603 |
| | $ | 1,401 |
| | $ | 943 |
| | $ | 241 |
| | $ | 9 |
| | $ | 4,197 |
|
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 June 30, 2018 and January 1, 2018:
|
| | | | | | | |
| June 30, 2018 | | January 1, 2018 |
Billed receivables, net of allowance for doubtful debts of $49 million and $45 million | $ | 1,827 |
| | $ | 1,933 |
|
Unbilled receivables | 371 |
| | 276 |
|
Current contract assets | 196 |
| | 346 |
|
Accounts receivable, net | $ | 2,394 |
| | $ | 2,555 |
|
Non-current contract assets | $ | 5 |
| | $ | 5 |
|
Deferred revenue | $ | 484 |
| | $ | 463 |
|
The Company receives payments from customers based on billing schedules or terms as written in our contracts. Those balances denoted as contract assets relate to situations where we have completed some or all performance under the contract, however our right to consideration is conditional. Contract assets result most materially in our Medicare broking and proportional treaty broking businesses. Billed and unbilled receivables are recorded when the right to consideration becomes unconditional. Deferred revenue relates to payments received in advance of performance under the contract, and is recognized as revenue as (or when) we perform under the contract.
During the three and six months ended June 30, 2018, revenue of approximately $52 million and $136 million, respectively, was recognized that was reflected as deferred revenue at January 1, 2018. During the three months ended June 30, 2018, revenue of approximately $66 million was recognized that was reflected as deferred revenue at March 31, 2018. The primary driver for the changes in contract assets and liabilities from January 1, 2018 to June 30, 2018 was the collection of cash, which either reduced the contract assets, or added additional deferred revenue.
During the three and six months ended June 30, 2018, the Company recognized no material revenue related to performance obligations satisfied in a prior period.
Performance Obligations
The Company has contracts for which performance obligations have not been satisfied as of June 30, 2018 or have been partially satisfied as of June 30, 2018. The following table shows the expected timing for the satisfaction of the remaining performance obligations. This table does not include contract renewals nor variable consideration, which was excluded from the transaction prices in accordance with the guidance on constraining estimates of variable consideration.
In addition, the Company has elected not to disclose the remaining performance obligations when one or both of the following circumstances apply:
| |
• | Performance obligations which are part of a contract that has an original expected duration of less than one year, and |
| |
• | Performance obligations satisfied in accordance with ASC 606-10-55-18 (‘right to invoice’). |
|
| | | | | | | | | | | | | | | |
| Remainder of 2018 | | 2019 | | 2020 onward | | Total |
Revenue expected to be recognized on contracts as of June 30, 2018 | $ | 220 |
| | $ | 390 |
| | $ | 638 |
| | $ | 1,248 |
|
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 June 30, 2018 has been excluded from the table above.
Costs to obtain or fulfill a contract
The Company incurs costs to obtain or fulfill contracts which it would not incur if a contract with a customer was not executed.
The following table shows the categories of costs that are capitalized and deferred over the expected life of a contract.
|
| | | |
| Costs to fulfill |
Balance at January 1, 2018 | $ | 126 |
|
New capitalized costs | 222 |
|
Amortization | (228 | ) |
Impairments | — |
|
Foreign currency translation | (2 | ) |
Balance at June 30, 2018 | $ | 118 |
|
Note 4 — Segment Information
Willis Towers Watson has four reportable operating segments or business areas:
| |
• | Human Capital and Benefits (‘HCB’) |
| |
• | Corporate Risk and Broking (‘CRB’) |
| |
• | Investment, Risk and Reinsurance (‘IRR’) |
| |
• | Benefits Delivery and Administration (‘BDA’) |
Willis Towers Watson’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, the method 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-bonus, pre-tax basis.
The Company experiences seasonal fluctuations of its revenue. Revenue is typically higher during the Company’s first and fourth quarters due to timing of broking-related activities, and although the mix of quarterly income will change as a result of the adoption of ASC 606, our first and fourth quarters will continue to be the highest.
Beginning in 2018, we made certain changes that affect our segment results that are not material. These changes include the following:
| |
• | To better align our business within our segments, we (1) moved portions of our Insurance, Consulting and Technology business from IRR to CRB; (2) moved certain resources that support our outsourced administration offerings from HCB to BDA; and (3) moved our CEEMEA-based strategy study business from our Health and Benefits business in HCB to CRB. |
| |
• | As part of the continued integration of our businesses, we have applied our 2018 corporate expense allocation methodology to our 2017 segment results in order to standardize our methodologies and allocate those expenses for period over period comparatives. Such methodology updates include (1) an increased allocation for Gras Savoye as it no longer benefits as a new acquisition; (2) adjustments relating to changes in segment and total headcount; and (3) the addition of certain allocable direct expenses, which lowers the corporate expense allocation. |
In connection with our segment realignment, we reassigned a proportional amount of the carrying value of goodwill between the CRB and IRR segments. See Note 7 — Goodwill and Other Intangible Assets for further information.
The prior period comparatives reflected in the tables below have been retrospectively adjusted to reflect our current segment presentation.
The following table presents segment revenue and segment operating income for our reportable segments for the three months ended June 30, 2018 and 2017. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, |
| HCB | | CRB | | IRR | | BDA | | Total |
| 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 |
Segment revenue | $ | 780 |
| | $ | 726 |
| | $ | 674 |
| | $ | 644 |
| | $ | 385 |
| | $ | 374 |
| | $ | 119 |
| | $ | 178 |
| | $ | 1,958 |
| | $ | 1,922 |
|
| | | | | | | | | | | | | | | | | | | |
Segment operating income/(loss) | $ | 149 |
| | $ | 122 |
| | $ | 97 |
| | $ | 104 |
| | $ | 89 |
| | $ | 89 |
| | $ | (31 | ) | | $ | 35 |
| | $ | 304 |
| | $ | 350 |
|
The following table presents segment revenue and segment operating income for our reportable segments for the six months ended June 30, 2018 and 2017. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, |
| HCB | | CRB | | IRR | | BDA | | Total |
| 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 |
Segment revenue | $ | 1,612 |
| | $ | 1,675 |
| | $ | 1,414 |
| | $ | 1,316 |
| | $ | 959 |
| | $ | 865 |
| | $ | 241 |
| | $ | 359 |
| | $ | 4,226 |
| | $ | 4,215 |
|
| | | | | | | | | | | | | | | | | | | |
Segment operating income/(loss) | $ | 342 |
| | $ | 467 |
| | $ | 222 |
| | $ | 221 |
| | $ | 350 |
| | $ | 303 |
| | $ | (63 | ) | | $ | 73 |
| | $ | 851 |
| | $ | 1,064 |
|
The following table presents reconciliations of the information reported by segment to the Company’s consolidated amounts reported for the three and six months ended June 30, 2018 and 2017. |
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Revenue: | | | | | | | |
Total segment revenue | $ | 1,958 |
| | $ | 1,922 |
| | $ | 4,226 |
| | $ | 4,215 |
|
Reimbursable expenses and other | 32 |
| | 31 |
| | 56 |
| | 57 |
|
Revenue | $ | 1,990 |
| | $ | 1,953 |
| | $ | 4,282 |
| | $ | 4,272 |
|
| | | | | | | |
Total segment operating income | $ | 304 |
| | $ | 350 |
| | $ | 851 |
| | $ | 1,064 |
|
Amortization | (140 | ) | | (149 | ) | | (281 | ) | | (300 | ) |
Restructuring costs | — |
| | (27 | ) | | — |
| | (54 | ) |
Transaction and integration expenses | (55 | ) | | (63 | ) | | (98 | ) | | (103 | ) |
Unallocated, net (i) | (46 | ) | | (50 | ) | | (150 | ) | | (145 | ) |
Income from operations | 63 |
| | 61 |
| | 322 |
| | 462 |
|
Interest expense | (52 | ) | | (46 | ) | | (103 | ) | | (92 | ) |
Other income, net | 63 |
| | 34 |
| | 119 |
| | 77 |
|
Income from operations before income taxes | $ | 74 |
| | $ | 49 |
| | $ | 338 |
| | $ | 447 |
|
________________________
| |
(i) | Includes certain costs, primarily related to corporate functions which are not directly related to the segments, and certain differences between budgeted expenses determined at the beginning of the year and actual expenses that we report for U.S. GAAP purposes. |
The Company does not currently provide asset information by reportable segment as it does not routinely evaluate the total asset position by segment.
Note 5 — Restructuring Costs
The Company had two major elements of the restructuring costs included in its condensed consolidated financial statements, which were the Operational Improvement Program and the Business Restructure Program. Costs for each program were fully accrued and completed by the end of 2017 and 2016, respectively. No additional costs for either program have been incurred during 2018.
Operational Improvement Program - In April 2014, Legacy Willis announced a multi-year operational improvement program designed to strengthen its client service capabilities and to deliver future cost savings. The main elements of the program included: moving more than 3,500 support roles from higher cost locations to facilities in lower cost locations; net workforce reductions in support positions; lease consolidation in real estate; and information technology systems simplification and rationalization.
The Company recognized restructuring costs of $27 million and $54 million for the three and six months ended June 30, 2017, respectively, related to the Operational Improvement Program. The Company spent a cumulative amount of $441 million on restructuring charges for this program.
Business Restructure Program - In the second quarter of 2016, we began planning targeted staffing reductions in certain portions of the business due to a reduction in business demand or change in business focus (hereinafter referred to as the Business Restructure Program). The main element of the program included workforce reductions and was completed in 2016, however, cash payments pertaining to the program were made primarily in 2017.
An analysis of total restructuring costs recognized in the condensed consolidated statements of comprehensive income for the three and six months ended June 30, 2017 by segment is as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2017 |
| HCB | | CRB | | IRR | | BDA | | Corporate | | Total |
Termination benefits | $ | — |
| | $ | 5 |
| | $ | 1 |
| | $ | — |
| | $ | 1 |
| | $ | 7 |
|
Professional services and other | — |
| | 15 |
| | 1 |
| | — |
| | 4 |