filings.toolsItem 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion includes forward-looking statements. See ‘Disclaimer Regarding Forward-looking Statements’ for certain cautionary information regarding forward-looking statements and a list of factors that could cause actual results to differ materially from those predicted in those statements.
This discussion includes references to non-GAAP financial measures as defined in the rules of the SEC. We present such non-GAAP financial measures, specifically, adjusted, constant currency and organic non-GAAP financial measures, as we believe such information is of interest to the investment community because it provides additional meaningful methods of evaluating certain aspects of the Company’s operating performance from period to period on a basis that may not be otherwise apparent under U.S. GAAP, and these provide a measure against which our businesses may be assessed in the future.
See ‘Non-GAAP Financial Measures’ below for further discussion of our adjusted, constant currency and organic non-GAAP financial measures.
Executive Overview
Market Conditions
Typically, our business benefits from regulatory change, political risk or economic uncertainty. Insurance broking generally tracks the economy, but demand for both insurance broking and consulting services usually remains steady during times of uncertainty. We have some businesses, such as our health and benefits and administration businesses, which can be counter cyclical during the early period of a significant economic change.
Within our insurance and brokerage business, due to the cyclical nature of the insurance market and the impact of other market conditions on insurance premiums, commission revenue may vary widely between accounting periods. A period of low or declining premium rates, generally known as a ‘soft’ or ‘softening’ market, generally leads to downward pressure on commission revenue and can have a material adverse impact on our revenue and operating margin. A ‘hard’ or ‘firming’ market, during which premium rates rise, generally has a favorable impact on our revenue and operating margin. Rates, however, vary by geography, industry and client segment. As a result, and due to the global and diverse nature of our business, we view rates in the aggregate. Overall, we are currently seeing a modest but definite increase in pricing in the market.
Market conditions in the broking industry in which we operate are generally defined by factors such as the strength of the economies in the various geographic regions in which we serve around the world, insurance rate movements, and insurance and reinsurance buying patterns of our clients.
The markets for our consulting, technology and solutions, and marketplace services are affected by economic, regulatory and legislative changes, technological developments, and increased competition from established and new competitors. We believe that the primary factors in selecting a human resources or risk management consulting firm include reputation, the ability to provide measurable increases to shareholder value and return on investment, global scale, quality of service and the ability to tailor services to clients’ unique needs. In that regard, we are focused on developing and implementing technology, data and analytic solutions for both internal operations and for maintaining industry standards and meeting client preferences. We have made such investments from time to time and may decide, based on perceived business needs, to make investments in the future that may be different from past practice or what we currently anticipate.
With regard to the market for exchanges, we believe that clients base their decisions on a variety of factors that include the ability of the provider to deliver measurable cost savings for clients, a strong reputation for efficient execution and an innovative service delivery model and platform. Part of the employer-sponsored insurance market has matured and become more fragmented while other segments remain in the entry phase. As these market segments continue to evolve, we may experience growth in intervals, with periods of accelerated expansion balanced by periods of modest growth. In recent years, growth in the market for exchanges has slowed, and we expect this trend may continue.
From time to time, including but not limited to the period after the announcement of the proposed Aon combination through the period that has followed the termination of the proposed combination, we have lost (and may in the future continue to lose) colleagues who manage substantial client relationships or possess substantial experience or expertise; when we lose colleagues such as those, it often results in such colleagues competing against us. Further, the full impact of this competition may be delayed due to the timing of restrictive covenants or client renewals. We believe that this dynamic, which was most pronounced in our Risk & Broking segment during 2021, has caused the segment’s recent near-term and expected growth rates for the remainder of 2022 to be meaningfully slower than other competitors. This dynamic may be difficult to predict, given that the adverse impact in future periods is more significant than in the periods in which employees departed. Growth has been and will be adversely affected by the fact that 2021 performance in a number of businesses, particularly commercial risk broking and health & benefits broking, benefited from revenue
from book sales, which is non-repeatable revenue. It is possible that growth could be different than expected and our results of operations could be significantly and adversely impacted. See Part I, Item 1A ‘Risk Factors’ in our Annual Report on Form 10-K, filed with the SEC on February 24, 2022, for a discussion of risks that may affect our ability to compete.
We have transferred ownership of our Russian subsidiaries to our local management team on the agreed-upon terms. The Russian entities comprised approximately 1% of consolidated WTW revenue for 2021, primarily within our Risk & Broking segment. The lost profits from our Russia operations will, overall, create a modest margin headwind for the Company in 2022 and beyond. However, with the goal of offsetting this, we have taken action to deploy near-term cost-mitigation measures and to identify longer-term offsets. See ‘Disclaimer Regarding Forward-looking Statements’ and Part II, Item 1A ‘Risk Factors’ of this Quarterly Report on Form 10-Q for a discussion of the risks associated with expense actions.
Risks and Uncertainties of the Economic Environment Caused by the Pandemic
The COVID-19 pandemic has had an adverse impact on global commercial activity, particularly on the global supply chain and workforce availability, and has contributed to significant volatility in the global financial markets including, among other effects, occasional declines in the equity markets, changes in interest rates and reduced liquidity on a global basis.
Supply and labor market disruptions caused by COVID-19 as well as other factors, such as accommodative monetary and fiscal policy and the Russian invasion of Ukraine, have contributed to significant inflation in many of the markets in which we operate. This impacts not only the costs to attract and retain employees but also other costs to run and invest in our business. If our costs grow significantly in excess of our ability to raise revenue, our margins and results of operations may be materially and adversely impacted, and we may not be able to achieve our strategic and financial objectives.
Although we believe we have adapted to the unique challenges posed by the pandemic surrounding how and where we do our work, we are also impacted by the negative effect on workforce availability, which could hamper our ability to grow our capacity on pace with increasing demand for our services. We expect the market for talent to remain highly competitive for at least the next several months. We will continue to monitor the situation and assess any implications to our business and our stakeholders.
Segment Reorganization
On January 1, 2022, WTW realigned to provide its comprehensive offering of services and solutions to clients across two business segments: Health, Wealth & Career and Risk & Broking. These changes were made in conjunction with changes in the WTW leadership team, including the appointment of a new chief executive officer who succeeded the prior CEO as the chief operating decision maker on that date. Prior to January 1, 2022, we operated across four segments: Human Capital and Benefits; Corporate Risk and Broking; Investment, Risk and Reinsurance; and Benefits Delivery and Administration. Following the realignment, the two new segments consist of the following businesses:
The Health, Wealth & Career segment includes businesses previously aligned under the Human Capital and Benefits segment, the Benefits Delivery and Administration segment, and the Investment business, which was previously under the Investment, Risk and Reinsurance segment.
The Risk & Broking segment includes businesses previously aligned under the Corporate Risk and Broking segment, as well as the Insurance Consulting and Technology business, which was previously under the Investment, Risk and Reinsurance segment.
The following presents descriptions of our reorganized segments:
Health, Wealth & Career
The Health, Wealth & Career (‘HWC’) segment provides an array of advice, broking, solutions and technology for employee benefit plans, institutional investors, compensation and career programs, and the employee experience overall. Our portfolio of services support the interrelated challenges that the management teams of our clients face across human resources (‘HR’) and finance.
HWC is the larger of the two segments of the Company. Addressing four key areas, Health, Wealth, Career and Benefits Delivery & Outsourcing, the segment is focused on addressing our clients’ people and risk needs to help them succeed in a global marketplace.
Health
The Health & Benefits (‘H&B’) business provides strategy and design consulting, plan management service and support, broking and administration across the full spectrum of health, wellbeing and other group benefit programs, including medical, dental, disability, life, voluntary benefits and other coverage. Our reach extends from small/mid-market clients to large-market and multinational clients, across the full geographic footprint of the Company, and to most industries. We can address our clients’ needs in more than 140 countries.
Our consultants help clients make strategic decisions on topics such as optimizing program spend; evaluating emerging vendors, point solutions and coverage options (including publicly-subsidized health insurance exchanges and private exchanges in the U.S.); and dealing with above-inflation-rate increases in healthcare costs. We also assist clients in selecting the appropriate insurance carriers to cover benefit risks and administer the programs. In addition to our consulting and broking services, we manage a number of collective purchasing initiatives, such as pharmacy and stop-loss, that allow employers to realize greater value from third-party service providers than they can achieve on their own.
With Global Benefits Management, our suite of global services supporting medical, dental and risk (e.g., life, disability) programs, we have a tailored offering for multinationals. This offering includes a flexible set of ready-made solutions, proven technology and an integrated approach to service delivery that translates to a globally consistent, high-quality experience for our clients.
A meaningful portion of revenue in this business is from recurring work, though contracts may be annual or multi-year. Given the balance of revenue across consulting, broking and solutions, our revenue is somewhat weighted to the first quarter.
Wealth
Our wealth-related businesses include Retirement and Investment.
The Retirement business provides actuarial support, plan design, and administrative services for all forms of pension and retirement savings plans. Our colleagues help our clients assess the costs and risks of retirement plans on cash flow, earnings and the balance sheet, the effects of changing workforce demographics on their retirement plans, and retiree benefit adequacy and security. We offer clients a full range of integrated retirement consulting services and solutions to meet the needs of all types of employers, including those that continue to offer defined benefit plans and those that are reexamining their retirement benefit strategies. We help multinationals coordinate plan design and actuarial services across their complex global plans. We bring in-depth data analysis and perspective to their decision process, because we have tracked the retirement designs and financing strategies of companies around the world over many decades.
For clients that want to outsource some or all of their pension plan management, we offer broking services, as well as integrated solutions that can combine investment discretionary management, pension administration, core actuarial services, and communication and change management assistance.
Retirement relationships are generally long-term in nature, and client retention rates for this business are high. A significant portion of the revenue in this business is from recurring work, with multi-year contracts that are driven by the heavily regulated nature of pension plans and our clients’ annual needs for these services. Revenue for the Retirement business in some geographies is somewhat seasonal, as much of our work pertains to calendar-year plan administration, financing, reporting and compliance; thus, revenue is typically more weighted to the first and fourth quarters of the fiscal year.
Our Investment business provides advice and discretionary investment management solutions to defined benefit and defined contribution pension plans as well as to a range of other client types including insurers, endowments and foundations, and private wealth investors. We provide a solution to a significant business problem faced by our clients, namely sustaining the resources and skills required to deliver a financial services product in highly competitive capital markets. We offer a flexible approach that adapts to a wide range of client needs and circumstances, with the objective of higher returns, lower risk and lower costs within each client’s unique situation.
Our solutions range from single asset class activity, through complete management of entire pension plan assets including sophisticated liability hedging programs.
We bring together a broad array of specialist investment knowledge and skills across all asset classes, a high-quality execution platform, a cost advantage through our scale, and expert advisors with experience across all client types from the largest plans in the world to small corporate pension plans.
We have long-term relationships with our Investment clients, with the majority of our revenue driven by retainer contracts.
Career
Our career-related offerings include advice, data, software and products to address clients’ total rewards and talent issues across the globe delivered through our Work & Rewards and Employee Experience businesses.
Within our Work & Rewards business, we help clients determine the best ways to get work done, the skills needed for jobs, and how to reward it. We address executive compensation and broad-based rewards. We advise our clients’ management and boards of directors on all aspects of executive pay programs, including base pay, annual bonuses, long-term incentives, perquisites and other
benefits. Our focus is on aligning pay plans with an organization’s business strategy and driving desired performance. Our solutions incorporate proprietary market benchmarking data and software to support compensation administration.
Our Employee Experience business focuses on the provision of solutions including employee insight and listening tools, talent assessment tools and services, communication and change management services.
Revenue for our career-related businesses is partly seasonal in nature, with heightened activity in the second half of the calendar year during the annual compensation, benefits, and survey cycles. While these businesses enjoy long-term relationships with many clients, work in several practices is often project-based and can be sensitive to economic changes. The businesses benefit from regulatory changes affecting our clients that require strategic advice, program changes and communication, as well as the focus on ESG as a component of executive and board pay, the redefinition of jobs, work location and career paths as technology disaggregates work, and the recalibration of pay and the employee experience amidst shifting labor markets.
Benefits Delivery & Outsourcing
Our Benefits Delivery & Outsourcing businesses include Benefits Delivery & Administration (‘BDA’) and Technology and Administration Solutions (‘TAS’).
The BDA business provides primary medical and ancillary benefit exchange and outsourcing services to active employees and retirees across both the group and individual markets, primarily in the U.S.
A significant portion of the revenue in this business is recurring in nature, driven by either the commissions from the policies we sell, or from long-term service contracts with our clients that typically range from three to five years. Revenue across this business is seasonal and is generally higher in the fourth quarter as it is driven when typical annual enrollment activity occurs.
BDA provides services via two related offerings:
Benefits Outsourcing is focused on serving active employee groups for clients across the U.S. Working closely with other HWC businesses, we use our proprietary technology to provide a suite of health and welfare and pension administration outsourcing services, including tools to enable benefit modeling, decision support, enrollment and benefit choice. Drawing on expertise in H&B and Retirement to create high-performing benefit plan designs, we believe we are well-positioned to help clients of all sizes simplify their benefits delivery, while lowering the total costs of benefits and related administration.
Individual Marketplace offers decision support processes and tools to connect consumers with insurance carriers in private individual and Medicare markets. Individual Marketplace serves both employer-based and direct-to-consumer populations through its end-to-end consumer acquisition and engagement platforms, which tightly integrate call routing technology, an efficient quoting and enrollment engine, a customer relations management system and deep links with insurance carriers. By leveraging its multiple distribution channels and diverse product portfolio, Individual Marketplace offers solutions to a broad consumer base, helping individuals compare, purchase and use health insurance products, tools and information for life.
Our TAS business provides pension outsourcing services to hundreds of clients across multiple industries. Our TAS team focuses on clients outside of the U.S. where our services are supported by high quality administration teams using robust technology platforms. Given the nature of the work, our revenue is distributed generally evenly across the year.
With ongoing servicing requirements and multi-year contracts in place, we have high client retention rates. We are the leading administrator among the 200 largest pension plans in the U.K., as well as a leader in Germany.
For both our defined benefit and defined contribution administration services, we use highly-automated processes and technology to enable benefit plan members to access and manage their records, perform self-service functions and improve their understanding of their benefits. Our technology also provides trustees and HR teams with timely management information to monitor activity and service levels and reduce administration costs.
Risk & Broking
The Risk & Broking (‘R&B’) segment provides a broad range of risk advice, insurance brokerage and consulting services to clients worldwide ranging from small businesses to multinational corporations.
The segment comprises two primary businesses:
Corporate Risk & Broking (‘CRB’)
The *‘*CRB’ business places more than $25 billion of premiums into the insurance markets on an annual basis, and delivers integrated global solutions tailored to client needs, underpinned by data and analytics through a balanced matrix of global lines of business across all of the Company’s three geographical areas: North America, Europe (including Great Britain) and International.
The global lines of business include:
Property and Casualty — Property and Casualty provides property and liability insurance brokerage services across a wide range of industries and segments including real estate, healthcare and retail. We also arrange insurance products and services for our affinity client partners to offer to their customers, employees, or members alongside, or in addition to, their principal business offerings.
Aerospace — Aerospace provides specialist expertise to the aerospace and space industries. Our aerospace business provides insurance broking, risk management services, contractual and technical advisory expertise to aerospace clients worldwide, including the world’s leading airlines, aircraft manufacturers, air cargo handlers and other airport and general aviation companies. The specialist InSpace team is also prominent in providing insurance and risk management services to the space industry.
Construction — Our Construction business provides services that include insurance broking, claims, loss control and specialized risk advice for a wide range of construction projects and activities. Clients include contractors, project owners, public entities, project managers, consultants and financiers, among others.
Global Markets Direct & Facultative — Operating in the major wholesale reinsurance hubs across the world, including London, Bermuda, Singapore, Hong Kong and Shanghai, solutions are delivered both directly to clients for the most complex property and casualty risks and as facultative reinsurance placements where we serve as an intermediary for insurance companies. Facultative solutions are provided across various classes of risk for our insurer clients, some of which may also be direct clients of WTW. The aim is to deliver optimum results for our clients by getting the right risk to the right market by the right broker, be it local, wholesale or facultative every time.
Financial, Executive and Professional Risks (‘FINEX’) — FINEX encompasses all financial and executive risks, delivering client solutions that range from management and professional liability, employment practices liability, crime, cyber and M&A-related insurances to risk consulting and advisory services. Specialist teams provide risk consulting and risk transfer solutions to a broad spectrum of clients across a multitude of industries, as well as the financial and professional service sectors.
Financial Solutions — Financial Solutions provides insurance broking services and specialized risk advice related to credit and political risk and crisis management, including terrorism, kidnap and ransom and contingency risk. Clients include international banks, leasing companies, commodity traders, export credit agencies, multinational corporations and sporting institutions.
Surety — The Global Surety team provides expertise in placing bonds across all industries and around the world. A surety bond is a financial instrument that guarantees contractual performance, statutory compliance, and financial assurance for domestic and international companies.
Marine — Marine provides specialist expertise to the maritime and logistics industries. Our Marine business provides insurance broking services related to hull and machinery, cargo, protection and indemnity, fine art and general marine liabilities, among others. Our Marine clients include, but are not limited to, ship owners and operators, shipbuilders, logistics operations, port authorities, traders, shippers, exhibitors and secure transport companies.
Natural Resources — Our Natural Resources practice encompasses the oil, gas and chemicals, mining and metals, power and utilities and renewable energy sectors. It provides sector-specific risk transfer solutions and insights, which include insurance broking, risk engineering, contractual reviews, wording analysis and claims management.
Insurance Consulting and Technology (‘ICT’)
ICT is a global business that provides advice and technology solutions to the insurance industry. We leverage our industry experience, strategic perspective and analytical skills to help clients measure and manage risk and capital, improve business performance and create a sustainable competitive advantage. Our services include software and technology, risk and capital management, products and product pricing, financial and regulatory reporting, financial and capital modeling, M&A, outsourcing and business management.
Transformation Program
In the fourth quarter of 2021, we initiated a three-year ‘Transformation program’ designed to enhance operations, optimize technology and align our real estate footprint to our new ways of working. We expect the program to generate annual cost savings in excess of $300 million by the end of 2024. The program is expected to include cumulative costs of approximately $490 million and capital expenditures of approximately $260 million, for a total investment of $750 million. The main categories of charges will be
in the following four areas:
Real estate rationalization — includes costs to align the real estate footprint to the new ways of working (hybrid work) and includes breakage fees and the impairment of right-of-use assets and other related leasehold assets.
Technology modernization — these charges are incurred in moving to common platforms and technologies, including migrating certain platforms and applications to the cloud. This category will include the impairment of technology assets that are duplicative or no longer revenue-producing, as well as costs for technology investments that do not qualify for capitalization.
Process optimization — these costs will be incurred in the right-shoring strategy and automation of our operations, which will include optimizing resource deployment and appropriate colleague alignment. These costs will include process and organizational design costs, severance and separation-related costs and temporary retention costs.
Other — other costs not included above including fees for professional services, other contract terminations not related to the above categories and supplier migration costs.
Certain costs under the Transformation program are accounted for under ASC 420, Exit or Disposal Cost Obligation, and are included as restructuring costs in the condensed consolidated statements of comprehensive income. For the three and six months ended June 30, 2022, restructuring charges under our Transformation program totaled $56 million and $62 million, respectively. Other costs incurred under the Transformation program are included in transaction and transformation, net and were $26 million and $31 million for the three and six months ended June 30, 2022, respectively. From the actions taken through the second quarter of 2022, we have identified an additional $35 million of annualized run-rate savings during the quarter due to newly realized opportunities and incremental sources of value, and $71 million of cumulative annualized run-rate savings identified to date since the inception of the program, which savings overall are primarily attributable to the reduction of real estate and technology costs, as well as process optimization. The benefits from the program began to be recognized during 2022.
For a discussion of some of the risks associated with the Transformation program, see Part I, Item 1A ‘Risk Factors’ in our Annual Report on Form 10-K, filed with the SEC on February 24, 2022.
Financial Statement Overview
For all prior-year period financial information presented herein, the operating results of Willis Re have been reclassified as discontinued operations (see Note 3 — Acquisitions and Divestitures within Part I, Item 1 ‘Financial Statements’ in this Form 10-Q for additional information).
The table below sets forth our summarized condensed consolidated statements of comprehensive income and data as a percentage of revenue for the periods indicated.
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||
| ($ in millions, except per share data) | ||||||||||||||||||||||||||||||||
| Revenue | $ | 2,031 | 100 | % | $ | 2,091 | 100 | % | $ | 4,191 | 100 | % | $ | 4,319 | 100 | % | ||||||||||||||||
| Costs of providing services | ||||||||||||||||||||||||||||||||
| Salaries and benefits | 1,259 | 62 | % | 1,317 | 63 | % | 2,577 | 61 | % | 2,736 | 63 | % | ||||||||||||||||||||
| Other operating expenses | 393 | 19 | % | 384 | 18 | % | 879 | 21 | % | 784 | 18 | % | ||||||||||||||||||||
| Depreciation | 65 | 3 | % | 72 | 3 | % | 131 | 3 | % | 143 | 3 | % | ||||||||||||||||||||
| Amortization | 83 | 4 | % | 97 | 5 | % | 168 | 4 | % | 200 | 5 | % | ||||||||||||||||||||
| Restructuring costs | 56 | 3 | % | — | — | % | 62 | 1 | % | — | — | % | ||||||||||||||||||||
| Transaction and transformation, net | 38 | 2 | % | 51 | 2 | % | 58 | 1 | % | 75 | 2 | % | ||||||||||||||||||||
| Total costs of providing services | 1,894 | 1,921 | 3,875 | 3,938 | ||||||||||||||||||||||||||||
| Income from operations | 137 | 7 | % | 170 | 8 | % | 316 | 8 | % | 381 | 9 | % | ||||||||||||||||||||
| Interest expense | (51 | ) | (3 | )% | (52 | ) | (2 | )% | (100 | ) | (2 | )% | (111 | ) | (3 | )% | ||||||||||||||||
| Other income, net | 93 | 5 | % | 74 | 4 | % | 120 | 3 | % | 512 | 12 | % | ||||||||||||||||||||
| INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES | 179 | 9 | % | 192 | 9 | % | 336 | 8 | % | 782 | 18 | % | ||||||||||||||||||||
| Provision for income taxes | (19 | ) | (1 | )% | (75 | ) | (4 | )% | (62 | ) | (1 | )% | (119 | ) | (3 | )% | ||||||||||||||||
| INCOME FROM CONTINUING OPERATIONS | 160 | 8 | % | 117 | 6 | % | 274 | 7 | % | 663 | 15 | % | ||||||||||||||||||||
| (LOSS)/INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX | (46 | ) | (2 | )% | 69 | 3 | % | (35 | ) | (1 | )% | 259 | 6 | % | ||||||||||||||||||
| Income attributable to non-controlling interests | (5 | ) | — | % | (2 | ) | — | % | (8 | ) | — | % | (5 | ) | — | % | ||||||||||||||||
| NET INCOME ATTRIBUTABLE TO WTW | $ | 109 | 5 | % | $ | 184 | 9 | % | $ | 231 | 6 | % | $ | 917 | 21 | % | ||||||||||||||||
| Diluted earnings per share from continuing operations | $ | 1.38 | $ | 0.88 | $ | 2.31 | $ | 5.05 |
Consolidated Revenue (Continuing Operations)
Revenue was $2.0 billion for the three months ended June 30, 2022, compared to $2.1 billion for the three months ended June 30, 2021, a decrease of $60 million, or 3%, on an as-reported basis. Adjusting for the impacts of foreign currency and acquisitions and disposals, our organic revenue growth was 3% for the three months ended June 30, 2022. Revenue for the six months ended June 30, 2022 was $4.2 billion, compared to $4.3 billion for the six months ended June 30, 2021, a decrease of $128 million, or 3%, on an as-reported basis. Adjusting for the impacts of foreign currency and acquisitions and disposals, our organic revenue growth was 2% for the six months ended June 30, 2022. The increases in organic revenue were driven by both segments.
Our revenue can be materially impacted by changes in currency conversions, which can fluctuate significantly over the course of a calendar year. For the three months ended June 30, 2022, currency translation decreased our consolidated revenue by $85 million. For the six months ended June 30, 2022, currency translation decreased our consolidated revenue by $139 million. The primary currencies driving these changes were the Euro and Pound sterling.
The following table details our top five markets based on the percentage of consolidated revenue (in U.S. dollars) from the countries where work was performed for the six months ended June 30, 2022. These figures do not represent the currency of the related revenue, which is presented in the next table.
| Geographic Region | % of Revenue | |||
| United States | 50 | % | ||
| United Kingdom | 19 | % | ||
| France | 5 | % | ||
| Germany | 3 | % | ||
| Canada | 3 | % |
The table below details the approximate percentage of our revenue and expenses from continuing operations by transactional currency for the six months ended June 30, 2022.
| Transactional Currency | Revenue | Expenses (i) | ||||||
| U.S. dollars | 56 | % | 53 | % | ||||
| Pounds sterling | 12 | % | 17 | % | ||||
| Euro | 17 | % | 13 | % | ||||
| Other currencies | 15 | % | 17 | % |
(i)
These percentages exclude certain expenses for significant items which will not be settled in cash, or which we believe to be items that are not core to our current or future operations. These items include amortization of intangible assets and transaction and transformation, net.
The following tables set forth the total revenue for the three and six months ended June 30, 2022 and 2021 and the components of the changes in total revenue for the three and six months ended June 30, 2022, as compared to the prior year periods. The components of the revenue change may not add due to rounding.
| Components of Revenue Change | ||||||||||||||||||
| As | Less: | Constant | Less: | |||||||||||||||
| Three Months Ended June 30, | Reported | Currency | Currency | Acquisitions/ | Organic | |||||||||||||
| 2022 | 2021 | Change | Impact | Change | Divestitures | Change | ||||||||||||
| ($ in millions) | ||||||||||||||||||
| Revenue | $ | 2,031 | $ | 2,091 | (3)% | (4)% | 1% | (1)% | 3% |
| Components of Revenue Change | ||||||||||||||||||
| As | Less: | Constant | Less: | |||||||||||||||
| Six Months Ended June 30, | Reported | Currency | Currency | Acquisitions/ | Organic | |||||||||||||
| 2022 | 2021 | Change | Impact | Change | Divestitures | Change | ||||||||||||
| ($ in millions) | ||||||||||||||||||
| Revenue | $ | 4,191 | $ | 4,319 | (3)% | (3)% | —% | (2)% | 2% |
Definitions of Constant Currency Change and Organic Change are included under the section entitled ‘Non-GAAP Financial Measures’ elsewhere within Item 2 of this Form 10-Q.
Segment Revenue
For further information on our segment reorganization and a full description of our businesses, please see ‘Segment Reorganization’ elsewhere within Part I, Item 2 of this Quarterly Report on Form 10-Q.
Segment revenue excludes amounts that were directly incurred on behalf of our clients and reimbursed by them (reimbursed expenses); however, these amounts are included in consolidated revenue.
The Company experiences seasonal fluctuations in its revenue. Revenue is typically higher during the Company’s first and fourth quarters due primarily to the timing of broking-related activities.
Within the tables presented below, the components of revenue change provided may not add due to rounding. The prior-year segment information has been conformed to the current-year presentation.
HWC Revenue
The following table sets forth HWC segment revenue for the three months ended June 30, 2022 and 2021 and the components of the change in revenue for the three months ended June 30, 2022 from the three months ended June 30, 2021.
| Components of Revenue Change | ||||||||||||||||||
| As | Less: | Constant | Less: | |||||||||||||||
| Three Months Ended June 30, | Reported | Currency | Currency | Acquisitions/ | Organic | |||||||||||||
| 2022 | 2021 | Change | Impact | Change | Divestitures | Change | ||||||||||||
| ($ in millions) | ||||||||||||||||||
| Segment revenue | $ | 1,159 | $ | 1,179 | (2)% | (4)% | 2% | —% | 2% |
HWC segment revenue for both the three months ended June 30, 2022 and 2021 was $1.2 billion. Organic growth was led by the Health business, primarily due to gains recorded in connection with book-of-business settlements. Excluding these settlements, Health’s revenue increased from additional consulting work in North America as well as continued expansion of our local portfolios and global benefits management appointments outside of North America. Benefits Delivery & Outsourcing revenue also increased, led by Individual Marketplace with growth in Medicare Advantage sales. Career also contributed strong growth, driven by increased
project activity. Organic growth was partially offset by a decline in Wealth revenue, principally due to headwinds from performance fees received in the prior year.
The following table sets forth HWC segment revenue for the six months ended June 30, 2022 and 2021, and the components of the change in revenue for the six months ended June 30, 2022 from the six months ended June 30, 2021.
| Components of Revenue Change | ||||||||||||||||||
| As | Less: | Constant | Less: | |||||||||||||||
| Six Months Ended June 30, | Reported | Currency | Currency | Acquisitions/ | Organic | |||||||||||||
| 2022 | 2021 | Change | Impact | Change | Divestitures | Change | ||||||||||||
| ($ in millions) | ||||||||||||||||||
| Segment revenue | $ | 2,403 | $ | 2,412 | —% | (3)% | 2% | —% | 2% |
HWC segment revenue for both the six months ended June 30, 2022 and 2021 was $2.4 billion. Organic growth was led by the Health business primarily due to an increase in consulting assignments in North America and expansion of our local portfolios and global benefits management appointments outside of North America. The Health business’ revenue also benefited from gains recorded in connection with book-of-business settlements. Career also contributed strong growth, driven by demand for reward-based advisory services and compensation benchmarking products alongside increased project activity. Benefits Delivery & Outsourcing revenue also increased, led by its expanded client base. Organic growth was partially offset by a decline in Wealth revenue, principally due to headwinds from outsized performance fees earned in the prior year.
R&B Revenue
The following table sets forth R&B segment revenue for the three months ended June 30, 2022 and 2021 and the components of the change in revenue for the three months ended June 30, 2022 from the three months ended June 30, 2021.
| Components of Revenue Change | ||||||||||||||||||
| As | Less: | Constant | Less: | |||||||||||||||
| Three Months Ended June 30, | Reported | Currency | Currency | Acquisitions/ | Organic | |||||||||||||
| 2022 | 2021 | Change | Impact | Change | Divestitures | Change | ||||||||||||
| ($ in millions) | ||||||||||||||||||
| Segment revenue | $ | 852 | $ | 885 | (4)% | (5)% | 1% | (3)% | 3% |
R&B segment revenue for the three months ended June 30, 2022 and 2021 was $852 million and $885 million, respectively. On an organic basis, ICT grew primarily as a result of new software sales as well as increased advisory work. CRB generated revenue growth across all regions, primarily driven by our global lines of business, principally from new business, most notably in Aerospace, Natural Resources and FINEX. Book-of-business settlement activity was largely in line with prior year and did not materially affect CRB's organic growth rate.
The following table sets forth R&B segment revenue for the six months ended June 30, 2022 and 2021, and the components of the change in revenue for the six months ended June 30, 2022 from the six months ended June 30, 2021.
| Components of Revenue Change | ||||||||||||||||||
| As | Less: | Constant | Less: | |||||||||||||||
| Six Months Ended June 30, | Reported | Currency | Currency | Acquisitions/ | Organic | |||||||||||||
| 2022 | 2021 | Change | Impact | Change | Divestitures | Change | ||||||||||||
| ($ in millions) | ||||||||||||||||||
| Segment revenue | $ | 1,743 | $ | 1,809 | (4)% | (4)% | —% | (1)% | 2% |
R&B segment revenue for the six months ended June 30, 2022 and 2021 was $1.7 billion and $1.8 billion, respectively. On an organic basis, ICT grew from both increased advisory work and software sales. CRB also contributed to R&B’s revenue growth. Excluding headwinds from book-of-business sales and settlements recorded in the comparable period, revenue increased across all regions, primarily from new business in FINEX, M&A, and Aerospace lines.
Costs of Providing Services (Continuing Operations)
For all prior-year period financial information presented herein, the operating results of Willis Re have been reclassified as discontinued operations (see Note 3 — Acquisitions and Divestitures within Part I, Item 1 ‘Financial Statements’ in this Form 10-Q for additional information).
Total costs of providing services for both the three months ended June 30, 2022 and 2021 were $1.9 billion, a decrease of $27 million, or 1%. Total costs of providing services for both the six months ended June 30, 2022 and 2021 were $3.9 billion, a decrease of $63 million, or 2%. See the following discussion for further details.
Salaries and Benefits
Salaries and benefits for both the three months ended June 30, 2022 and 2021 were $1.3 billion, a decrease of $58 million, or 4%. The decrease in the current year is primarily due to lower incentive and benefit costs for the period. Salaries and benefits, as a percentage of revenue, represented 62% and 63% for the three months ended June 30, 2022 and 2021, respectively.
Salaries and benefits for the six months ended June 30, 2022 were $2.6 billion, compared to $2.7 billion for the six months ended June 30, 2021, a decrease of $159 million, or 6%. The decrease in the current year is primarily due to lower incentive and benefit costs for the period. Salaries and benefits, as a percentage of revenue, represented 61% and 63% for the six months ended June 30, 2022 and 2021, respectively.
Other Operating Expenses
Other operating expenses for the three months ended June 30, 2022 were $393 million, compared to $384 million for the three months ended June 30, 2021, an increase of $9 million, or 2%. The increase was primarily due to higher travel and entertainment costs, local office expenses and bad debt expense, partially offset by decreases in non-income-related tax expense and occupancy costs. Other operating expenses for the six months ended June 30, 2022 were $879 million, compared to $784 million for the six months ended June 30, 2021, an increase of $95 million, or 12%. The increase was primarily due to asset impairments, mostly accounts receivables, related to Russian insurance contracts placed by U.K. brokers in the London market (see Note 3 — Acquisitions and Divestitures within Part I, Item 1 ‘Financial Statements’ in this Form 10-Q for additional information), higher travel and entertainment costs and business insurance costs, partially offset by lower non-income-related tax expense for the current year as compared to the prior year.
Depreciation
Depreciation for the three months ended June 30, 2022 was $65 million, compared to $72 million for the three months ended June 30, 2021, a decrease of $7 million, or 10%. Depreciation for the six months ended June 30, 2022 was $131 million, compared to $143 million for the six months ended June 30, 2021, a decrease of $12 million, or 8%. The quarter-over-quarter and year-over-year decreases were primarily due to a lower depreciable base of assets resulting from business disposals over the last two years and a lower dollar value of assets placed in service during 2021.
Amortization
Amortization for the three months ended June 30, 2022 was $83 million, compared to $97 million for the three months ended June 30, 2021, a decrease of $14 million, or 14%. Amortization for the six months ended June 30, 2022 was $168 million, compared to $200 million for the six months ended June 30, 2021, a decrease of $32 million, or 16%. Our intangible amortization is generally more heavily weighted to the initial years of the useful lives of the related intangibles, and therefore amortization related to intangible assets will continue to decrease over time.
Restructuring Costs
Restructuring costs for the three and six months ended June 30, 2022 were $56 million and $62 million, respectively. Restructuring costs primarily relate to the real estate rationalization and technology modernization components of the Transformation program (see ‘Transformation Program’ within this Part I, Item 2 and Note 6 — Restructuring Costs within Part I, Item 1 ‘Financial Statements’ of this Quarterly Report on Form 10-Q).
Transaction and Transformation, Net
Transaction and transformation, net costs for the three months ended June 30, 2022 were $38 million, compared to $51 million for the three months ended June 30, 2021. Transaction and transformation, net costs for the six months ended June 30, 2022 were $58 million, compared to $75 million for the six months ended June 30, 2021. Transaction and transformation expenses for the current year were comprised of compensation costs and consulting fees related to the Transformation program (see ‘Transformation Program’ within this Part I, Item 2), as well as legal fees and other transaction costs. Transaction and transformation, net costs for the prior-year period were comprised primarily of legal fees and other professional fees related to our then-proposed combination with Aon.
Income from Operations
Income from operations for the three months ended June 30, 2022 was $137 million, compared to $170 million for the three months ended June 30, 2021, a decrease of $33 million. This decrease resulted primarily from lower revenue and current period restructuring costs, partially offset by lower incentive compensation accruals in the current quarter.
Income from operations for the six months ended June 30, 2022 was $316 million, compared to $381 million for the six months ended June 30, 2021, a decrease of $65 million. This decrease resulted primarily from the asset impairment expense discussed above, lower revenue and second-quarter restructuring costs, partially offset by lower incentive compensation accruals in the current-year period.
The lower revenue for both the three and six months ending June 30, 2022 resulted from unfavorable foreign exchange and recent dispositions.
Interest Expense
Interest expense for the three months ended June 30, 2022 was $51 million, compared to $52 million for the three months ended June 30, 2021, a decrease of $1 million, or 2%. Interest expense for the six months ended June 30, 2022 was $100 million as compared to $111 million for the six months ended June 30, 2021, a decrease of $11 million, or 10%. These decreases were primarily the result of lower average levels of indebtedness in the current year.
Other Income, Net
Other income, net for the three months ended June 30, 2022 was $93 million, compared to $74 million for the three months ended June 30, 2021, an increase of $19 million, or 26%, mostly related to a revaluation gain on an acquisition completed in stages in the current quarter.
Other income, net for the six months ended June 30, 2022 was $120 million, compared to $512 million for the six months ended June 30, 2021. Other income, net in the prior-year period consisted primarily of the net gain on disposal of our Miller business (see Note 3 – Acquisitions and Divestitures in Part I, Item 1 ‘Financial Statements’ in this Form 10-Q), which primarily accounted for the decrease in other income, net, in the current year.
Provision for Income Taxes
Provision for income taxes for the three months ended June 30, 2022 was $19 million, compared to $75 million for the three months ended June 30, 2021, a decrease of $56 million. The effective tax rate was 10.5% for the three months ended June 30, 2022, and 38.9% for the three months ended June 30, 2021. Provision for income taxes for the six months ended June 30, 2022 was $62 million, compared to $119 million for the six months ended June 30, 2021, a decrease of $57 million. The effective tax rate was 18.4% for the six months ended June 30, 2022 and 15.2% for the six months ended June 30, 2021. These effective tax rates are calculated using extended values from the Company’s condensed consolidated statements of comprehensive income and are therefore more precise tax rates than can be calculated from rounded values. The prior-year quarter effective tax rate was higher due to the discrete tax effect of the U.K. tax-rate increase enacted in the second quarter of 2021. Accordingly, the Company remeasured its U.K. deferred tax assets and liabilities, resulting in a $40 million deferred tax expense in the prior-year period. Additionally, the current quarter effective tax rate includes certain discrete tax benefits primarily related to return-to-provision true ups.
(Loss)/Income from Discontinued Operations, Net of Tax
Loss from discontinued operations, net of tax for the three months ended June 30, 2022 was $46 million, compared to income from discontinued operations, net of tax of $69 million for the three months ended June 30, 2021, a decrease of $115 million. Loss from discontinued operations, net of tax for the six months ended June 30, 2022 was $35 million, compared to income from discontinued operations, net of tax of $259 million for the six months ended June 30, 2021, a decrease of $294 million. The operations of our Willis Re business were reclassified to discontinued operations upon our entering into an agreement to sell the business during the third quarter of 2021 (see Note 3 – Acquisitions and Divestitures in Part I, Item 1 ‘Financial Statements’ in this Form 10-Q). Losses from discontinued operations in the current year are primarily attributable to the reduction to the gain on disposal resulting from of an updated estimate of working capital which decreased the preliminary purchase price by $60 million. This loss was offset by the operations of the deferred closing entities and run-off activity associated with the divestiture.
Net Income Attributable to WTW
Net income attributable to WTW for the three months ended June 30, 2022 was $109 million, compared to $184 million for the three months ended June 30, 2021, a decrease of $75 million, or 41%. This decrease was primarily due to lower net income from the discontinued operations of our Willis Re business, the current quarter’s restructuring costs and lower revenue, partially offset by lower incentive compensation accruals this quarter.
Net income attributable to WTW for the six months ended June 30, 2022 was $231 million, compared to $917 million for the six months ended June 30, 2021, a decrease of $686 million, or 75%. This decrease was primarily due to the prior-year gain on the sale of the Miller business, lower net income from the discontinued operations of our Willis Re business, the asset impairment expense discussed above, lower revenue and the current year’s restructuring costs, partially offset by lower incentive compensation accruals in the current-year period.
Liquidity and Capital Resources
Executive Summary
Our principal sources of liquidity are funds generated by operating activities, available cash and cash equivalents and amounts available under our revolving credit facilities and any new debt offerings.
The COVID-19 pandemic has contributed to significant volatility in financial markets, including occasional declines in equity markets, inflation and changes in interest rates and reduced liquidity on a global basis. Specific to WTW, over the past two years, the COVID-19 pandemic had an initial negative impact on discretionary work we perform for our clients, but we subsequently saw increased demand for these services begin to return in the second quarter of 2021 which continues into 2022. We continue to have decreased spending on travel and associated expenses and third-party contractors, and we have the ability to contain spending on discretionary projects and certain capital expenditures.
Based on our current balance sheet and cash flows, current market conditions and information available to us at this time, we believe that WTW has access to sufficient liquidity, which includes all of the borrowing capacity available to draw against our $1.5 billion revolving credit facility, to meet our cash needs for the next twelve months, including investments in the business for growth, scheduled debt repayments, share repurchases and dividend payments. During the second quarter of 2022, we completed an offering of $750 million aggregate principal amount of 4.650% senior notes due 2027, using the proceeds in part to repay in full our €540 million ($582 million on the date of repayment) aggregate principal amount of 2.125% Senior Notes due 2022 ($594 million including accrued interest), which were to mature during the second quarter of 2022. Additionally, during the second quarter of 2022, our board of directors approved a $1.0 billion increase to the existing share repurchase program, and during the six months ended June 30, 2022 we repurchased $2.7 billion of shares, with remaining authorization to repurchase an additional $2.1 billion.
From time to time, we will consider whether to repurchase shares based on many factors, including market and economic conditions, applicable legal requirements and other business considerations. The share repurchase program has no termination date and may be suspended or discontinued at any time.
During the prior year, the operating results and balance sheets of Willis Re were reclassified to discontinued operations. Willis Re’s operating cash flows approximate its pre-tax income and any adjustments for working capital movements (see Note 3 — Acquisitions and Divestitures in Part I, Item 1 ‘Financial Statements’ within this Quarterly Report on Form 10-Q). Certain costs historically allocated to the Willis Re business are included in continuing operations and were retained following the disposal, but are expected to be partially offset by reimbursements through the TSA. Costs incurred to service the TSA are expected to be reduced as part of the Company’s Transformation program as quickly as possible when the services are no longer required by Gallagher.
Events that could change the historical cash flow dynamics discussed above include significant changes in operating results, potential future acquisitions or divestitures, material changes in geographic sources of cash, unexpected adverse impacts from litigation or regulatory matters, or future pension funding during periods of severe downturn in the capital markets.
Undistributed Earnings of Foreign Subsidiaries
The Company recognizes deferred tax balances related to the undistributed earnings of subsidiaries when it expects that it will recover those undistributed earnings in a taxable manner, such as through receipt of dividends or sale of the investments.
The Company continues to have certain subsidiaries for which the earnings have not been deemed permanently reinvested and for which it has been accruing estimates of the tax effects of such repatriation. Excluding these certain subsidiaries, the Company continues to assert that the historical cumulative earnings for the remainder of its subsidiaries have been reinvested indefinitely, and therefore does not provide deferred taxes on these amounts. If future events, including material changes in estimates of cash, working capital, long-term investment requirements or additional legislation relating to U.S. Tax Reform, necessitate that these earnings be distributed, an additional provision for income and foreign withholding taxes, net of credits, may be necessary. Other potential sources of cash may be obtained through the settlement of intercompany loans or return of capital distributions in a tax-efficient manner.
Cash and Cash Equivalents
Our cash and cash equivalents at June 30, 2022 totaled $1.9 billion, compared to $4.5 billion at December 31, 2021. The decrease in cash from December 31, 2021 to June 30, 2022 was due primarily to $2.7 billion of share repurchases.
Additionally, we had all of the borrowing capacity available to draw against our $1.5 billion revolving credit facility at both June 30, 2022 and December 31, 2021.
Included within cash and cash equivalents at June 30, 2022 and December 31, 2021 are amounts held for regulatory capital adequacy requirements, including $116 million and $120 million, respectively, held within our regulated U.K. entities.
Summarized Condensed Consolidated Cash Flows
The following table presents the summarized condensed consolidated cash flow information for the six months ended June 30, 2022 and 2021:
| Six Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| (in millions) | ||||||||
| Net cash from/(used in): | ||||||||
| Operating activities | $ | 258 | $ | 366 | ||||
| Investing activities | 19 | 374 | ||||||
| Financing activities | (2,690 | ) | (1,067 | ) | ||||
| DECREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH (i) | (2,413 | ) | (327 | ) | ||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | (170 | ) | (50 | ) | ||||
| CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD (i) | 7,691 | 6,301 | ||||||
| CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD (i) | $ | 5,108 | $ | 5,924 |
(i)
The amounts of cash, cash equivalents and restricted cash, their respective classification on the condensed consolidated balance sheets, as well as their respective portions of the increase or decrease in cash, cash equivalents and restricted cash for each of the periods presented have been included in Note 19 — Supplemental Disclosures of Cash Flow Information within Part I, Item I ‘Financial Statements’ within this Quarterly Report on Form 10-Q.
Cash Flows From Operating Activities
Cash flows from operating activities were $258 million for the six months ended June 30, 2022, compared to $366 million for the six months ended June 30, 2021. The $258 million of net cash from operating activities for the six months ended June 30, 2022 included net income of $239 million and $510 million of favorable non-cash adjustments, partially offset by unfavorable changes in operating assets and liabilities of $491 million. This decrease in cash flows from operations as compared to the prior year was due primarily to cash disbursements and the elimination of cash generation resulting from the Willis Re divestiture, as well as additional tax payments resulting from both the Willis Re sale and the income receipt related to the termination of the then-proposed Aon transaction.
The $366 million of net cash from operating activities for the six months ended June 30, 2021 included net income of $922 million and $79 million of favorable non-cash adjustments, partially offset by unfavorable changes in operating assets and liabilities of $635 million.
Cash Flows From Investing Activities
Cash flows from investing activities for the six months ended June 30, 2022 were $19 million as compared to $374 million for the six months ended June 30, 2021. The cash flows from investing activities for the six months ended June 30, 2022 primarily include sales of investments of $200 million, partially offset by capital expenditures and capitalized software additions of $93 million and acquisitions of $76 million made during the first half of 2022. The cash flows from investing activities in the prior year period primarily included the net proceeds from the sale of Miller of $696 million, partially offset by cash and fiduciary funds transferred on disposal of $216 million and capital expenditures and capitalized software additions of $106 million.
Cash Flows Used In Financing Activities
Cash flows used in financing activities for the six months ended June 30, 2022 were $2.7 billion. The significant financing activities included share repurchases of $2.7 billion and dividend payments of $189 million, partially offset by $162 million of net proceeds from issuance of debt and $85 million of net proceeds from fiduciary funds held for clients.
Cash flows used in financing activities for the six months ended June 30, 2021 were $1.1 billion. The significant financing activities included debt repayments of $515 million, $246 million of net payments from fiduciary funds held for clients and dividend payments of $269 million.
Indebtedness
Total debt, total equity, and the capitalization ratios at June 30, 2022 and December 31, 2021 were as follows:
| June 30, 2022 | December 31, 2021 | |||||||
| ($ in millions) | ||||||||
| Long-term debt | $ | 4,720 | $ | 3,974 | ||||
| Current debt | — | 613 | ||||||
| Total debt | $ | 4,720 | $ | 4,587 | ||||
| Total WTW shareholders’ equity | $ | 10,337 | $ | 13,260 | ||||
| Capitalization ratio | 31.3 | % | 25.7 | % |
The capitalization ratio increased from December 31, 2021 primarily due to $2.7 billion of share repurchases during the six months ended June 30, 2022.
At June 30, 2022, the Company does not have any mandatory debt repayment due within the next twelve months.
At June 30, 2022 and December 31, 2021, we were in compliance with all financial covenants.
Fiduciary Funds
As an intermediary, we hold funds, generally in a fiduciary capacity, for the account of third parties, typically as the result of premiums received from clients that are in transit to insurers and claims due to clients that are in transit from insurers. We also hold funds for clients of our benefits account businesses. These fiduciary funds are included in fiduciary assets on our condensed consolidated balance sheets. We present the equal and corresponding fiduciary liabilities related to these fiduciary funds representing amounts or claims due to our clients or premiums due on their behalf to insurers on our condensed consolidated balance sheets.
Fiduciary funds are generally required to be kept in regulated bank accounts subject to guidelines which emphasize capital preservation and liquidity; such funds are not available to service the Company’s debt or for other corporate purposes. Notwithstanding the legal relationships with clients and insurers, the Company is entitled to retain investment income earned on certain of these fiduciary funds in accordance with industry custom and practice and, in some cases, as supported by agreements with insureds.
At June 30, 2022 and December 31, 2021, we had fiduciary funds of $3.3 billion and $3.4 billion, respectively, of which $788 million and $719 million, respectively, are attributable to our Willis Re business.
Share Repurchase Program
The Company is authorized to repurchase shares, by way of redemption or otherwise, and will consider whether to do so from time to time, based on many factors, including market conditions. There are no expiration dates for our repurchase plans or programs.
On July 26, 2021, the board of directors approved a $1.0 billion increase to the existing share repurchase program, which was previously at $500 million. Additionally, on September 16, 2021, the board of directors approved a $4.0 billion increase to the existing share repurchase program, and on May 25, 2022, approved a $1.0 billion increase to the existing share repurchase program. These increases brought the total approved authorization to $6.5 billion.
At June 30, 2022, approximately $2.1 billion remained on the current repurchase authority. The maximum number of shares that could be repurchased based on the closing price of our ordinary shares on June 30, 2022 of $197.39 was 10,902,395.
During the three and six months ended June 30, 2022, the Company had the following share repurchase activity:
| Three Months Ended June 30, 2022 | Six Months Ended June 30, 2022 | |||||
| Shares repurchased | 2,143,914 | 12,004,328 | ||||
| Average price per share | $219.52 | $226.64 | ||||
| Aggregate repurchase cost (excluding broker costs) | $471 million | $2.7 billion |
Capital Commitments
Capital expenditures for fixed assets and software for internal use were $60 million during the six months ended June 30, 2022. The Company estimates that there will be additional such expenditures, which includes those incurred under its Transformation program, in the range of $130 million to $180 million during the remainder of 2022. We currently expect cash from operations to adequately provide for these cash needs. There have been no material changes to our capital commitments since December 31, 2021.
Dividends
Total cash dividends of $189 million were paid during the six months ended June 30, 2022. In May 2022, the board of directors approved a quarterly cash dividend of $0.82 per share ($3.28 per share annualized rate), which was paid on July 15, 2022 to shareholders of record as of June 30, 2022.
Supplemental Guarantor Financial Information
As of June 30, 2022, WTW has issued the following debt securities (the ‘notes’):
a)
Willis North America Inc. (‘Willis North America’) has approximately $3.7 billion senior notes outstanding, of which $650 million were issued on May 16, 2017, $1.0 billion were issued on September 10, 2018, $1.0 billion were issued on September 10, 2019, $275 million were issued on May 29, 2020, and $750 million were issued on May 19, 2022; and
b)
Trinity Acquisition plc has approximately $1.1 billion senior notes outstanding, of which $525 million were issued on August 15, 2013 and $550 million were issued on March 22, 2016, and a $1.5 billion revolving credit facility, on which no balance was outstanding at June 30, 2022.
The following table presents a summary of the entities that issue each note and those wholly-owned subsidiaries of the Company that guarantee each respective note on a joint and several basis as of June 30, 2022. These subsidiaries are all consolidated by Willis Towers Watson plc (the ‘parent company’) and together with the parent company comprise the ‘Obligor group’.
| Entity | Trinity Acquisition plc Notes | Willis North America Inc. Notes | ||
| Willis Towers Watson plc | Guarantor | Guarantor | ||
| Trinity Acquisition plc | Issuer | Guarantor | ||
| Willis North America Inc. | Guarantor | Issuer | ||
| Willis Netherlands Holdings B.V. | Guarantor | Guarantor | ||
| Willis Investment UK Holdings Limited | Guarantor | Guarantor | ||
| TA I Limited | Guarantor | Guarantor | ||
| Willis Group Limited | Guarantor | Guarantor | ||
| Willis Towers Watson Sub Holdings Unlimited Company | Guarantor | Guarantor | ||
| Willis Towers Watson UK Holdings Limited | Guarantor | Guarantor |
The notes issued by Willis North America and Trinity Acquisition plc:
rank equally with all of the issuer’s existing and future unsubordinated and unsecured debt;
rank equally with the issuer’s guarantee of all of the existing senior debt of the Company and the other guarantors, including any debt under the Revolving Credit Facility;
are senior in right of payment to all of the issuer’s future subordinated debt; and
are effectively subordinated to all of the issuer’s secured debt to the extent of the value of the assets securing such debt.
All other subsidiaries of the parent company are non-guarantor subsidiaries (‘the non-guarantor subsidiaries’).
Each member of the Obligor group has only a stockholder’s claim on the assets of the non-guarantor subsidiaries. This stockholder’s claim is junior to the claims that creditors have against those non-guarantor subsidiaries. Holders of the notes will only be creditors of the Obligor group and not creditors of the non-guarantor subsidiaries. As a result, all of the existing and future liabilities of the non-guarantor subsidiaries, including any claims of trade creditors and preferred stockholders, will be structurally senior to the notes. As of and for the periods ended June 30, 2022 and December 31, 2021, the non-guarantor subsidiaries represented substantially all of the total assets and accounted for substantially all of the total revenue of the Company prior to consolidating adjustments. The non-guarantor subsidiaries have other liabilities, including contingent liabilities that may be significant. Each indenture does not contain any limitations on the amount of additional debt that the Obligor group and the non-guarantor subsidiaries may incur. The amounts of this debt could be substantial, and this debt may be debt of the non-guarantor subsidiaries, in which case this debt would be effectively senior in right of payment to the notes.
The notes are obligations exclusively of the Obligor group. Substantially all of the Obligor group’s operations are conducted through its non-guarantor subsidiaries. Therefore, the Obligor group’s ability to service its debt, including the notes, is dependent upon the net cash flows of its non-guarantor subsidiaries and their ability to distribute those net cash flows as dividends, loans or other payments to the Obligor group. Certain laws restrict the ability of these non-guarantor subsidiaries to pay dividends and make loans and advances to the Obligor group. In addition, such non-guarantor subsidiaries may enter into contractual arrangements that limit their ability to pay dividends and make loans and advances to the Obligor group.
Intercompany balances and transactions between members of the Obligor group have been eliminated. All intercompany balances and transactions between the Obligor group and the non-guarantor subsidiaries have been presented in the disclosures below on a net presentation basis, rather than a gross basis, as this better reflects the nature of the intercompany positions and presents the funding or funded position that is to be received or owed. The intercompany balances and transactions between the Obligor group and non-guarantor subsidiaries, presented below, relate to a number of items including loan funding for acquisitions and other purposes, transfers of surplus cash between subsidiary companies, funding provided for working capital purposes, settlement of expense accounts, transactions related to share-based payment arrangements and share issuances, intercompany royalty arrangements, intercompany dividends and intercompany interest. At June 30, 2022 and December 31, 2021, the intercompany balances of the Obligor group with non-guarantor subsidiaries were net receivables of $600 million and $700 million, respectively, and net payables of $10.9 billion and $8.1 billion, respectively.
No balances or transactions of non-guarantor subsidiaries are presented in the disclosures other than the intercompany items noted above.
Presented below is certain summarized financial information for the Obligor group.
| ` | As of June 30, 2022 | As of December 31, 2021 | ||||||
| (in millions) | ||||||||
| Total current assets | $ | 156 | $ | 243 | ||||
| Total non-current assets | 787 | 862 | ||||||
| Total current liabilities | 8,299 | 7,747 | ||||||
| Total non-current liabilities | 7,628 | 5,298 |
| Six months ended June 30, 2022 | ||||
| (in millions) | ||||
| Revenue | $ | 266 | ||
| Loss from operations | (73 | ) | ||
| Loss from operations before income taxes (i) | (315 | ) | ||
| Net loss | (197 | ) | ||
| Net loss attributable to WTW | (197 | ) |
(i)
Includes intercompany expense, net of the Obligor group from non-guarantor subsidiaries of $81 million for the six months ended June 30, 2022.
Non-GAAP Financial Measures
In order to assist readers of our condensed consolidated financial statements in understanding the core operating results that WTW’s management uses to evaluate the business and for financial planning purposes, we present the following non-GAAP measures and their most directly comparable U.S. GAAP measure:
| Most Directly Comparable U.S. GAAP Measure | Non-GAAP Measure | |
| As reported change | Constant currency change | |
| As reported change | Organic change | |
| Income from operations/margin | Adjusted operating income/margin | |
| Net income/margin | Adjusted EBITDA/margin | |
| Net income attributable to WTW | Adjusted net income | |
| Diluted earnings per share | Adjusted diluted earnings per share | |
| Income from continuing operations before income taxes | Adjusted income before taxes | |
| Provision for income taxes/U.S. GAAP tax rate | Adjusted income taxes/tax rate | |
| Net cash from operating activities | Free cash flow |
The Company believes that these measures are relevant and provide pertinent information widely used by analysts, investors and other interested parties in our industry to provide a baseline for evaluating and comparing our operating performance, and in the case of free cash flow, our liquidity results.
Within the measures referred to as ‘adjusted’, we adjust for significant items which will not be settled in cash, or which we believe to be items that are not core to our current or future operations. Some of these items may not be applicable for the current quarter, however they may be part of our full-year results. These items include the following:
Income from discontinued operations, net of tax – Adjustment to remove the after-tax income from discontinued operations and the after-tax gain attributable to the divestiture of our Willis Re business.
Restructuring costs and transaction and transformation, net – Management believes it is appropriate to adjust for restructuring costs and transaction and transformation, net when they relate to a specific significant program with a defined set of activities and costs that are not expected to continue beyond a defined period of time, or significant acquisition-related transaction expenses. We believe the adjustment is necessary to present how the Company is performing, both now and in the future when the incurrence of these costs will have concluded.
Impairment – Adjustment to remove the impairment related to the net assets of our Russian business that are held outside of our Russian entities.
Gains and losses on disposals of operations – Adjustment to remove the gains or losses resulting from disposed operations that have not been classified as discontinued operations.
Pension settlement and curtailment gains and losses – Adjustment to remove significant pension settlement and curtailment gains and losses to better present how the Company is performing.
Provisions for significant litigation – We will include provisions for litigation matters which we believe are not representative of our core business operations. These amounts are presented net of insurance and other recovery receivables.
Tax effect of the Coronavirus Aid, Relief, and Economic Security (‘CARES’) Act – Relates to the incremental tax expense impact, primarily from the Base Erosion and Anti-Abuse Tax (‘BEAT’), generated from electing certain income tax provisions of the CARES Act.
Tax effects of internal reorganizations – Relates to the U.S. income tax expense resulting from the completion of internal reorganizations of the ownership of certain businesses that reduced the investments held by our U.S.-controlled subsidiaries.
These non-GAAP measures are not defined in the same manner by all companies and may not be comparable to other similarly titled measures of other companies. Non-GAAP measures should be considered in addition to, and not as a substitute for, the information contained within our condensed consolidated financial statements.
For all prior-year period financial information presented herein (with the exception of Free Cash Flow), the operating results of Willis Re have been reclassified as discontinued operations (see Note 3 — Acquisitions and Divestitures within Part I, Item 1 ‘Financial Statements’ in this Form 10-Q for additional information).
Constant Currency Change and Organic Change
We evaluate our revenue on an as reported (U.S. GAAP), constant currency and organic basis. We believe presenting constant currency and organic information provides valuable supplemental information regarding our comparable results, consistent with how we evaluate our performance internally.
Constant currency change - Represents the year-over-year change in revenue excluding the impact of foreign currency fluctuations. To calculate this impact, the prior year local currency results are first translated using the current year monthly average exchange rates. The change is calculated by comparing the prior year revenue, translated at the current year monthly average exchange rates, to the current year as reported revenue, for the same period. We believe constant currency measures provide useful information to investors because they provide transparency to performance by excluding the effects that foreign currency exchange rate fluctuations have on period-over-period comparability given volatility in foreign currency exchange markets.
Organic change - Excludes the impact of fluctuations in foreign currency exchange rates as described above and the period-over-period impact of acquisitions and divestitures on current-year revenue. We believe that excluding transaction-related items from our U.S. GAAP financial measures provides useful supplemental information to our investors, and it is important in illustrating what our core operating results would have been had we not included these transaction-related items, since the nature, size and number of these transaction-related items can vary from period to period.
The constant currency and organic change results, and a reconciliation from the reported results for consolidated revenue are included in the ‘Consolidated Revenue (Continuing Operations)’ section within this Form 10-Q. These measures are also reported by segment in the ‘Segment Revenue’ section within this Form 10-Q.
Reconciliations of the reported changes to the constant currency and organic changes for the three and six months ended June 30, 2022 from the three and six months ended June 30, 2021 are as follows. The components of revenue change may not add due to rounding.
| Components of Revenue Change | ||||||||||||||||||
| As | Less: | Constant | Less: | |||||||||||||||
| Three Months Ended June 30, | Reported | Currency | Currency | Acquisitions/ | Organic | |||||||||||||
| 2022 | 2021 | Change | Impact | Change | Divestitures | Change | ||||||||||||
| ($ in millions) | ||||||||||||||||||
| Revenue | $ | 2,031 | $ | 2,091 | (3)% | (4)% | 1% | (1)% | 3% |
| Components of Revenue Change | ||||||||||||||||||
| As | Less: | Constant | Less: | |||||||||||||||
| Six Months Ended June 30, | Reported | Currency | Currency | Acquisitions/ | Organic | |||||||||||||
| 2022 | 2021 | Change | Impact | Change | Divestitures | Change | ||||||||||||
| ($ in millions) | ||||||||||||||||||
| Revenue | $ | 4,191 | $ | 4,319 | (3)% | (3)% | —% | (2)% | 2% |
Adjusting for the impacts of foreign currency and acquisitions and disposals in the calculation of our organic activity, our revenue growth was 3% for the three months ended June 30, 2022 and 2% for the six months ended June 30, 2022. These increases in organic revenue were driven by both segments.
Adjusted Operating Income/Margin
We consider adjusted operating income/margin to be important financial measures, which are used internally to evaluate and assess our core operations and to benchmark our operating results against our competitors.
Adjusted operating income is defined as income from operations adjusted for impairment, amortization, restructuring costs, transaction and transformation, net and non-recurring items that, in management’s judgment, significantly affect the period-over-period assessment of operating results. Adjusted operating income margin is calculated by dividing adjusted operating income by revenue.
Reconciliations of income from operations to adjusted operating income for the three and six months ended June 30, 2022 and 2021 are as follows:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||
| ($ in millions) | |||||||||||||||
| Income from operations | $ | 137 | $ | 170 | $ | 316 | $ | 381 | |||||||
| Adjusted for certain items: | |||||||||||||||
| Impairment | — | — | 81 | — | |||||||||||
| Amortization | 83 | 97 | 168 | 200 | |||||||||||
| Restructuring costs | 56 | — | 62 | — | |||||||||||
| Transaction and transformation, net | 38 | 51 | 58 | 75 | |||||||||||
| Adjusted operating income | $ | 314 | $ | 318 | $ | 685 | $ | 656 | |||||||
| Income from operations margin | 6.7 | % | 8.1 | % | 7.5 | % | 8.8 | % | |||||||
| Adjusted operating income margin | 15.5 | % | 15.2 | % | 16.3 | % | 15.2 | % |
Adjusted operating income decreased for the three months ended June 30, 2022 to $314 million, from $318 million for the three months ended June 30, 2021 and increased for the six months ended June 30, 2022 to $685 million from $656 million for the six months ended June 30, 2021. This decrease in adjusted operating income for the quarter was primarily due to lower revenue from unfavorable foreign exchange, recent business disposals and increased operating expenses, led by travel and entertainment expense, partially offset by lower compensation accruals. The increase in adjusted operating income for the first half of the year was driven by reductions in compensation costs, which more than offset the reduction to revenue resulting from unfavorable foreign exchange and recent business disposals.
Adjusted EBITDA/Margin
We consider adjusted EBITDA/margin to be important financial measures, which are used internally to evaluate and assess our core operations, to benchmark our operating results against our competitors and to evaluate and measure our performance-based compensation plans.
Adjusted EBITDA is defined as net income adjusted for income from discontinued operations, net of tax, provision for income taxes, interest expense, impairment, depreciation and amortization, restructuring costs, transaction and transformation, net, gains and losses on disposals of operations and non-recurring items that, in management’s judgment, significantly affect the period-over-period assessment of operating results. Adjusted EBITDA margin is calculated by dividing adjusted EBITDA by revenue.
Reconciliations of net income to adjusted EBITDA for the three and six months ended June 30, 2022 and 2021 are as follows:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| ($ in millions) | ||||||||||||||||
| NET INCOME | $ | 114 | $ | 186 | $ | 239 | $ | 922 | ||||||||
| Loss/(income) from discontinued operations, net of tax | 46 | (69 | ) | 35 | (259 | ) | ||||||||||
| Provision for income taxes | 19 | 75 | 62 | 119 | ||||||||||||
| Interest expense | 51 | 52 | 100 | 111 | ||||||||||||
| Impairment | — | — | 81 | — | ||||||||||||
| Depreciation | 65 | 72 | 131 | 143 | ||||||||||||
| Amortization | 83 | 97 | 168 | 200 | ||||||||||||
| Restructuring costs | 56 | — | 62 | — | ||||||||||||
| Transaction and transformation, net | 38 | 51 | 58 | 75 | ||||||||||||
| (Gain)/loss on disposal of operations | (22 | ) | 2 | 32 | (357 | ) | ||||||||||
| Adjusted EBITDA | $ | 450 | $ | 466 | $ | 968 | $ | 954 | ||||||||
| Net income margin | 5.6 | % | 8.9 | % | 5.7 | % | 21.3 | % | ||||||||
| Adjusted EBITDA margin | 22.2 | % | 22.3 | % | 23.1 | % | 22.1 | % |
Adjusted EBITDA for the three months ended June 30, 2022 was $450 million, compared to $466 million for the three months ended June 30, 2021, and was $968 million for the six months ended June 30, 2022, compared to $954 million for the six months ended June 30, 2021. This decrease in adjusted EBITDA for the quarter was primarily due to lower revenue from unfavorable foreign exchange, recent business disposals and increased operating expenses, led by travel and entertainment expense, partially offset by lower compensation accruals. The increase in adjusted EBITDA for the first half of the year was driven by reductions in compensation costs, which more than offset the reduction to revenue resulting from unfavorable foreign exchange and recent business disposals.
Adjusted Net Income and Adjusted Diluted Earnings Per Share
Adjusted net income is defined as net income attributable to WTW adjusted for income from discontinued operations, net of tax, impairment, amortization, restructuring costs, transaction and transformation, net, gains and losses on disposals of operations and non-recurring items that, in management’s judgment, significantly affect the period-over-period assessment of operating results and the related tax effect of those adjustments and the tax effects of internal reorganizations. This measure is used solely for the purpose of calculating adjusted diluted earnings per share.
Adjusted diluted earnings per share is defined as adjusted net income divided by the weighted-average number of shares of common stock, diluted. Adjusted diluted earnings per share is used to internally evaluate and assess our core operations and to benchmark our operating results against our competitors.
Reconciliations of net income attributable to WTW to adjusted diluted earnings per share for the three and six months ended June 30, 2022 and 2021 are as follows:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| ($ in millions) | ||||||||||||||||
| NET INCOME ATTRIBUTABLE TO WTW | $ | 109 | $ | 184 | $ | 231 | $ | 917 | ||||||||
| Adjusted for certain items: | ||||||||||||||||
| Loss/(income) from discontinued operations, net of tax | 46 | (69 | ) | 35 | (259 | ) | ||||||||||
| Impairment | — | — | 81 | — | ||||||||||||
| Amortization | 83 | 97 | 168 | 200 | ||||||||||||
| Restructuring costs | 56 | — | 62 | — | ||||||||||||
| Transaction and transformation, net | 38 | 51 | 58 | 75 | ||||||||||||
| (Gain)/loss on disposal of operations | (22 | ) | 2 | 32 | (357 | ) | ||||||||||
| Tax effect on certain items listed above (i) | (50 | ) | (28 | ) | (92 | ) | (55 | ) | ||||||||
| Tax effect on statutory rate change | — | 40 | — | 40 | ||||||||||||
| Adjusted net income | $ | 260 | $ | 277 | $ | 575 | $ | 561 | ||||||||
| Weighted-average shares of common stock — diluted | 112 | 130 | 115 | 130 | ||||||||||||
| Diluted earnings per share | $ | 0.97 | $ | 1.41 | $ | 2.01 | $ | 7.04 | ||||||||
| Adjusted for certain items (ii) : | ||||||||||||||||
| Loss/(income) from discontinued operations, net of tax | 0.41 | (0.53 | ) | 0.30 | (1.99 | ) | ||||||||||
| Impairment | — | — | 0.70 | — | ||||||||||||
| Amortization | 0.74 | 0.74 | 1.46 | 1.53 | ||||||||||||
| Restructuring costs | 0.50 | — | 0.54 | — | ||||||||||||
| Transaction and transformation, net | 0.34 | 0.39 | 0.50 | 0.58 | ||||||||||||
| (Gain)/loss on disposal of operations | (0.20 | ) | 0.02 | 0.28 | (2.74 | ) | ||||||||||
| Tax effect on certain items listed above (i) | (0.45 | ) | (0.21 | ) | (0.80 | ) | (0.42 | ) | ||||||||
| Tax effect on statutory rate change | — | 0.31 | — | 0.31 | ||||||||||||
| Adjusted diluted earnings per share (ii) | $ | 2.32 | $ | 2.12 | $ | 4.99 | $ | 4.31 |
(i)
The tax effect was calculated using an effective tax rate for each item.
(ii)
Per share values and totals may differ due to rounding.
Our adjusted diluted earnings per share increased for both the three and six months ended June 30, 2022 as compared to the prior year due in part to a lower weighted-average outstanding share count attributable to our share repurchase activity in the current year. The decrease to adjusted net income for the quarter was primarily due to lower revenue from unfavorable foreign exchange, recent business disposals and increased operating expenses, led by travel and entertainment expense, partially offset by lower compensation accruals. The increase in adjusted net income for the first half of the year was driven by reductions in compensation costs, which more than offset the reduction to revenue resulting from unfavorable foreign exchange and recent business disposals.
Adjusted Income Before Taxes and Adjusted Income Taxes/Tax Rate
Adjusted income before taxes is defined as income from operations before income taxes adjusted for impairment, amortization, restructuring costs, transaction and transformation, net, gains and losses on disposals of operations and non-recurring items that, in management’s judgment, significantly affect the period-over-period assessment of operating results. Adjusted income before taxes is used solely for the purpose of calculating the adjusted income tax rate.
Adjusted income taxes/tax rate is defined as the provision for income taxes adjusted for taxes on certain items of impairment, amortization, restructuring costs, transaction and transformation, net, gains and losses on disposals of operations, the tax effects of internal reorganizations and non-recurring items that, in management’s judgment, significantly affect the period-over-period assessment of operating results, divided by adjusted income before taxes. Adjusted income taxes is used solely for the purpose of calculating the adjusted income tax rate.
Management believes that the adjusted income tax rate presents a rate that is more closely aligned to the rate that we would incur if not for the reduction of pre-tax income for the adjusted items and the tax effects of internal reorganizations, which are not core to our current and future operations.
Reconciliations of income from operations before income taxes to adjusted income before taxes and provision for income taxes to adjusted income taxes for the three and six months ended June 30, 2022 and 2021 are as follows:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| ($ in millions) | ||||||||||||||||
| INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES | $ | 179 | $ | 192 | $ | 336 | $ | 782 | ||||||||
| Adjusted for certain items: | ||||||||||||||||
| Impairment | — | — | 81 | — | ||||||||||||
| Amortization | 83 | 97 | 168 | 200 | ||||||||||||
| Restructuring costs | 56 | — | 62 | — | ||||||||||||
| Transaction and transformation, net | 38 | 51 | 58 | 75 | ||||||||||||
| (Gain)/loss on disposal of operations | (22 | ) | 2 | 32 | (357 | ) | ||||||||||
| Adjusted income before taxes | $ | 334 | $ | 342 | $ | 737 | $ | 700 | ||||||||
| Provision for income taxes | $ | 19 | $ | 75 | $ | 62 | $ | 119 | ||||||||
| Tax effect on certain items listed above (i) | 50 | 28 | 92 | 55 | ||||||||||||
| Tax effect of statutory rate change | — | (40 | ) | — | (40 | ) | ||||||||||
| Adjusted income taxes | $ | 69 | $ | 63 | $ | 154 | $ | 134 | ||||||||
| U.S. GAAP tax rate | 10.5 | % | 38.9 | % | 18.4 | % | 15.2 | % | ||||||||
| Adjusted income tax rate | 20.5 | % | 18.3 | % | 20.8 | % | 19.0 | % |
(i)
The tax effect was calculated using an effective tax rate for each item.
Our U.S. GAAP tax rates were 10.5% and 38.9% for the three months ended June 30, 2022 and 2021, respectively, and 18.4% and 15.2% for the six months ended June 30, 2022 and 2021, respectively. The prior-year quarter effective tax rate was higher due to the discrete tax effect of the U.K. tax rate increase enacted in the second quarter of 2021. Accordingly, the Company remeasured its U.K. deferred tax assets and liabilities, resulting in a $40 million deferred tax expense. Additionally, the current quarter effective tax rate includes certain discrete tax benefits primarily related to return-to-provision true ups.
Our adjusted income tax rates were 20.5% and 18.3% for the three months ended June 30, 2022 and 2021, respectively, and 20.8% and 19.0% for the six months ended June 30, 2022 and 2021, respectively. The current quarter adjusted tax rate is higher due to the distribution of geographical income.
Free Cash Flow
Free cash flow is defined as cash flows from operating activities less cash used to purchase fixed assets and software for internal use. Free cash flow is a liquidity measure and is not meant to represent residual cash flow available for discretionary expenditures.
Management believes that free cash flow presents the core operating performance and cash generating capabilities of our business operations.
Reconciliations of cash flows from operating activities to free cash flow for the six months ended June 30, 2022 and 2021 are as follows:
| Six Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| (in millions) | ||||||||
| Cash flows from operating activities | $ | 258 | $ | 366 | ||||
| Less: Additions to fixed assets and software for internal use | (60 | ) | (79 | ) | ||||
| Free cash flow | $ | 198 | $ | 287 |
The unfavorable movement in free cash flows in the first half of 2022 was due primarily to cash disbursements and the elimination of cash generation resulting from the Willis Re divestiture, as well as additional tax payments resulting from both the Willis Re sale and the income receipt related to the termination of the then-proposed Aon transaction.
Additionally, the free cash flow for the prior year period presented includes the operating cash flows of Willis Re. Willis Re’s operating cash flows approximate its pre-tax income and any adjustments for working capital movements (see Note 3 — Acquisitions and Divestitures within Part I, Item 1 ‘Financial Statements’ in this Form 10-Q for additional information), the absence of which is expected to be partially made up by reimbursements through the TSA.
Critical Accounting Estimates
There were no material changes from the Critical Accounting Estimates disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 24, 2022.
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