Highlights from the WLTW earnings release and analyst call
Before the market opened this morning, Willis Towers Watson (NASDAQ: WLTW) reported fourth quarter 2020 net income of $476 million, a decrease of 13% from the $544 million reported for 4Q19. Fourth quarter 2020 adjusted diluted earnings per share of $5.23 were up ~7% from the $4.90 adjusted diluted earnings per share reported for 4Q19. WLTW’s $5.23 4Q20 EPS beat consensus estimates of $5.03 per share.
Full-year 2020 net income of $966 million decreased 5% from the $1.04 billion reported for full-year 2019. Full-year 2020 adjusted diluted Earnings Per Share (EPS) of $11.70 were up ~7% over the $10.96 per share recorded for all of 2019. Diluted net income per share of $7.65 per share (down 5% from the $8.02 per share recorded for the full-year 2019) included $110 million of transaction, litigation and integration expenses related to WLTW’s pending business combination with Aon plc.
Total revenue for the fourth quarter was $2.76 billion, a 3% increase (2% organic growth and 1% currency adjustments) compared to $2.69 billion for the same period in 2019. WLTW reported full-year 2020 revenue of $9.35 billion, an increase of 3% over full-year 2019 revenue of $9.04 billion, comprised of 2% organic growth and 4% currency adjustments.
Adjusted 4Q20 operating income of $820 million (a 29.7% operating margin) decreased by approximately 40 basis points over the prior year. For the full-year 2020, adjusted operating income was $1.9 billion (a 20.1% operating margin), down 20 basis points compared to the prior year.
Free cash flow for the year was $1.8 billion, up 64% compared to 2019’s $1.1 billion, primarily driven by improvements in working capital and cost containment efforts during 2020.
Segment results for each of WLTW’s business units follow.
- Human Capital & Benefits. 4Q20 revenue within the Human Capital & Benefits (HCB) segment was $865 million, flat compared to 4Q19, as organic growth decreased 1% and current adjustments decreased 2%. Fourth quarter operating margins in the HCB segment of 31.3% increased by 120 basis points over the 30.1% operating margins posted in 4Q19. Organic growth was negatively affected by the Talent and Rewards division due to a reduction in global demand resulting from COVID-19 as well as from timing differences. Health and Benefits revenue declined nominally in North America offset by expansion outside of North America. Finally, revenue attributable to Technology and Administrative Solutions increased during the quarter due to softer comparisons a year earlier.
- Corporate Risk & Broking. The Corporate Risk & Broking (CRB) segment’s 4Q20 revenues of $888 million increased 1% over 4Q19’s revenues of $877 million (1% decrease in organic and 1% decrease in currency adjustments). North America positively contributed to organic growth as strong renewals were complemented by new business generation, partially offset by COVID-19 related impacts in Western Europe. Separately, revenue declines in the U.K. resulted from a change in reporting methodology. Overall, operating margins for 4Q20 increased 200 basis points to 32.3% from 30.3% in 4Q19 due to cost containment efforts.
- Investment, Risk & Reinsurance. Within the Investment, Risk & Reinsurance (IRR) segment that includes wholesale and reinsurance brokerage, 4Q20 revenue was $292 million, a 7% decrease vs. $314 million reported in the fourth quarter of 2019 (9% currency adjustment and 1% organic growth). However, IRR’s operating margin of 11.0% increased 190 basis points over the 9.1% operating margin produced in 4Q19. Overall, segment revenue was impacted by COVID-19 disruptions. More specifically, reinsurance revenue positively impacted the IRR segment, while wholesale revenue (down 17%) mostly offset these positive results.
- Business Delivery & Administration. The Business Delivery & Administration (BDA) segment reported fourth quarter revenues of $693 million, a 16% increase over 4Q19 revenue of $595 million. (Organic growth increased 16% and currency adjustments were up 16%.) This growth is predominantly attributable to TRANZACT, which generated revenue of $279 million in the fourth quarter. Benefits Outsourcing also increased revenue as this division expanded its client base. Fourth quarter 2020 operating margin was 50.7%, down 170 basis points from the 52.4% for the same period in 2019.
Other takeaways from management’s earnings call include:
- WLTW continues to manage its expenses and build cash in response to the ongoing pandemic.
- Management indicated it intends to repay note obligations maturing in March 2021 with existing cash on its balance sheet.
- Employee turnover in 2020 was slightly less than historical periods.
- Management stated that the Aon plc/WLTW merger is still on track to be completed during the first half of 2021.
As we keep our eye firmly focused on the industry and actions within it, we are taking a pulse on what firms are paying their sales, service, support and management personnel.
Take a quick 10-minute MarshBerry Pulse survey to help us gauge how salaries, commissions, bonuses and employee benefit levels in independent firms have changed over the last year. Survey closes 2/12.
This earnings summary has been prepared by Marsh, Berry & Co., Inc. and is not intended to provide investment recommendations on any company. It is not a research report, as such term is defined by applicable laws and regulations, and it does not contain sufficient information upon which to make an investment decision. It is not to be construed as an offer to buy or sell or a solicitation of an offer to buy or sell any securities, financial instruments or to participate in any particular trading strategy. These materials are based solely on information contained in publicly available documents and Marsh, Berry & Co., Inc. has not independently attempted to investigate or to verify such information.
Investment banking services offered through MarshBerry Capital, Inc., Member FINRA Member SIPC and an affiliate of Marsh, Berry & Company, Inc. 28601 Chagrin Boulevard, Suite 400, Woodmere, Ohio 44122 (440.354.3230)