filings.toolsWillis Towers Watson 10-Q 2024-09-30
Filed 2024-10-31. 8 sections, 249K characters. Original on sec.gov · Markdown · JSON
Cover and table of contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2024
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to ___________
Commission File Number: 001-16503
WILLIS TOWERS WATSON PUBLIC LIMITED COMPANY
(Exact name of registrant as specified in its charter)
| Ireland (Jurisdiction of incorporation or organization) | 98-0352587 (I.R.S. Employer Identification No.) | |
| c/o Willis Group Limited 51 Lime Street**,** London EC3M 7DQ**,** England (Address of principal executive offices) | (011) 44-20-3124-6000 (Registrant’s telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| Ordinary Shares, nominal value $0.000304635 per share | WTW | NASDAQ Global Select Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of ‘large accelerated filer’, ‘accelerated filer’, ‘smaller reporting company’, and ‘emerging growth company’ in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | | Accelerated filer | | Non-accelerated filer | | Smaller reporting company | ☐ |
| Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
As of October 28, 2024, there were outstanding 100,725,472 ordinary shares, nominal value $0.000304635 per share, of the registrant.
WILLIS TOWERS WATSON PUBLIC LIMITED COMPANY
INDEX TO FORM 10-Q
For the Three and Nine Months Ended September 30, 2024
Certain De****finitions
The following definitions apply throughout this quarterly report unless the context requires otherwise:
| ‘We’, ‘Us’, ‘Company’, ‘Willis Towers Watson’, ‘Our’, ‘Willis Towers Watson plc’ or ‘WTW’ | Willis Towers Watson Public Limited Company, a company organized under the laws of Ireland, and its subsidiaries | |
| ‘shares’ | The ordinary shares of Willis Towers Watson Public Limited Company, nominal value $0.000304635 per share | |
| ‘TRANZACT’ | TZ Holdings, Inc. and its subsidiaries, doing business as TRANZACT | |
| ‘U.S.’ | United States | |
| ‘U.K.’ | United Kingdom | |
| ‘E.U.’ | European Union or European Union 27 (the number of member countries following the United Kingdom’s exit) | |
| ‘U.S. GAAP’ | United States Generally Accepted Accounting Principles | |
| ‘FASB’ | Financial Accounting Standards Board | |
| ‘ASC’ | Accounting Standards Codification | |
| ‘ASU’ | Accounting Standards Update | |
| ‘SEC’ | United States Securities and Exchange Commission | |
| ‘EBITDA’ | Earnings before Interest, Taxes, Depreciation and Amortization |
Disclaimer Regarding For****ward-looking Statements
We have included in this document ‘forward-looking statements’ within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934, which are intended to be covered by the safe harbors created by those laws. These forward-looking statements include information about possible or assumed future results of our operations. All statements, other than statements of historical facts, that address activities, events or developments that we expect or anticipate may occur in the future, including such things as: our outlook; plans and references to future performance, including our future financial and operating results (including our revenue, costs, or margins), short-term and long-term financial goals, plans, objectives, expectations and intentions, including with respect to organic revenue growth, free cash flow generation, adjusted net revenue, adjusted operating margin and adjusted earnings per share; future share repurchases; demand for our services and competitive strengths; strategic goals; existing and evolving business strategies including those related to acquisition and disposition activity; the benefits of new initiatives; the growth of our business and operations; the sustained health of our product, service, transaction, client, and talent assessment and management pipelines; our ability to successfully manage ongoing leadership, organizational, and technology changes, including investments in improving systems and processes; our ability to implement and realize anticipated benefits of any cost-savings initiatives including our multi-year operational transformation program; the potential impact of natural or man-made disasters like health pandemics and other world health crises; future capital expenditures; ongoing working capital efforts; the impact of changes to tax laws on our financial results; and our recognition of future impairment charges or write-off of receivables, are forward-looking statements. Also, when we use words such as ‘may’, ‘will’, ‘would’, ‘anticipate’, ‘believe’, ‘estimate’, ‘expect’, ‘intend’, ‘plan’, ‘continues’, ‘seek’, ‘target’, ‘goal’, ‘focus’, ‘probably’, or similar expressions, we are making forward-looking statements. Such statements are based upon the current beliefs and expectations of our management and are subject to significant risks and uncertainties. Actual results may differ from those set forth in the forward-looking statements. All forward-looking disclosure is speculative by its nature.
There are important risks, uncertainties, events and factors that could cause our actual results or performance to differ materially from those in the forward-looking statements contained in this document, including the following:
our ability to successfully establish, execute and achieve our global business strategy as it evolves;
our ability to fully realize the anticipated benefits of our growth strategy, including inorganic growth through acquisitions;
our ability to make divestitures, including the pending sale of our TRANZACT business (inclusive of all the legal entities that comprise such business), or acquisitions, including our ability to integrate or manage acquired businesses or de-integrate businesses to be disposed, as well as our ability to identify and successfully execute on opportunities for strategic collaboration;
our ability to consummate the pending sale of TRANZACT, and related incremental risks associated therewith including our ability to obtain approval (or for applicable waiting periods to expire) under the U.S. Hart-Scot-Rodino Antitrust Improvements Act of 1976;
our ability to successfully manage ongoing organizational changes, including as part of our multi-year operational transformation program, investments in improving systems and processes, and in connection with our acquisition and divestiture activities, including the pending sale of TRANZACT, and related to changes in leadership in any of our businesses;
risks relating to changes in our management structures and in senior leadership;
our ability to achieve our short-term and long-term financial goals, such as with respect to our cash flow generation, and the timing with respect to such achievement;
the risks related to changes in general economic conditions, business and political conditions, changes in the financial markets, inflation, credit availability, increased interest rates and changes in trade policies;
the risks to our short-term and long-term financial goals from any of the risks or uncertainties set forth herein;
the risks relating to the adverse impacts of macroeconomic trends, including inflation, changes in interest rates and trade policies, as well as political events, war, such as the Russia-Ukraine and Middle East conflicts, and other international disputes, terrorism, natural disasters, public health issues and other business interruptions on the global economy and capital markets, which could have a material adverse effect on our business, financial condition, results of operations and long-term goals;
our ability to successfully hedge against fluctuations in foreign currency rates;
the risks relating to the adverse impacts of natural or man-made disasters such as health pandemics and other world health crises on the demand for our products and services, our cash flows and our business operations;
material interruptions to or loss of our information processing capabilities, or failure to effectively maintain and upgrade our information technology resources and systems and related risks of cybersecurity breaches or incidents;
our ability to comply with complex and evolving regulations related to data privacy, cybersecurity and artificial intelligence;
the risks relating to the transitional arrangements in effect subsequent to our previously-completed sale of Willis Re to Arthur J. Gallagher & Co. (‘Gallagher’);
significant competition that we face and the potential for loss of market share and/or profitability;
the impact of seasonality and differences in timing of renewals and non-recurring revenue increases from disposals and book-of-business sales;
the insufficiency of client data protection, potential breaches of information systems or insufficient safeguards against cybersecurity breaches or incidents;
the risk of increased liability or new legal claims arising from our new and existing products and services, and expectations, intentions and outcomes relating to outstanding litigation;
the risk of substantial negative outcomes on existing litigation or investigation matters;
changes in the regulatory environment in which we operate, including, among other risks, the impacts of pending competition law and regulatory investigations;
various claims, government inquiries or investigations or the potential for regulatory action;
our ability to integrate direct-to-consumer sales and marketing solutions with our existing offerings and solutions;
disasters or business continuity problems;
our ability to successfully enhance our billing, collection and other working capital efforts, and thereby increase our free cash flow;
our ability to properly identify and manage conflicts of interest;
reputational damage, including from association with third parties;
reliance on third-party service providers and suppliers;
the loss of key employees or a large number of employees and rehiring rates;
our ability to maintain our corporate culture;
doing business internationally, including the impact of foreign currency exchange rates;
compliance with extensive government regulation;
the risk of sanctions imposed by governments, or changes to associated sanction regulations (such as sanctions imposed on Russia) and related counter-sanctions;
our ability to effectively apply technology, data and analytics changes for internal operations, maintaining industry standards and meeting client preferences;
changes and developments in the insurance industry or the U.S. healthcare system, including those related to Medicare, any legislative actions from the current U.S. Congress, the recent Final Rule from the Centers for Medicare & Medicaid Services (‘CMS’) for contract year 2025 and any judicial claims, rulings and appeals related thereto, and any other changes and developments in legal, regulatory, economic, business or operational conditions that could impact our Medicare benefits businesses such as TRANZACT;
the inability to protect our intellectual property rights, or the potential infringement upon the intellectual property rights of others;
fluctuations in our pension assets and liabilities and related changes in pension income, including as a result of, related to, or derived from movements in the interest rate environment, investment returns, inflation, or changes in other assumptions that are used to estimate our benefit obligations and their effect on adjusted earnings per share;
our capital structure, including indebtedness amounts, the limitations imposed by the covenants in the documents governing such indebtedness and the maintenance of the financial and disclosure controls and procedures of each;
our ability to obtain financing on favorable terms or at all;
adverse changes in our credit ratings;
the impact of recent or potential changes to U.S. or foreign laws, and the enactment of additional, or the revision of existing, state, federal, and/or foreign laws and regulations, recent judicial decisions and development of case law, other regulations and any policy changes and legislative actions, including those that may impose additional excise taxes or impact our effective tax rate;
U.S. federal income tax consequences to U.S. persons owning at least 10% of our shares;
changes in accounting principles, estimates or assumptions;
our recognition of non-cash pre-tax losses and related impairment charges in connection with our pending sale of TRANZACT and other future impairment charges or write-offs of receivables;
risks relating to or arising from environmental, social and governance (‘ESG’) practices;
fluctuation in revenue against our relatively fixed or higher-than-expected expenses;
the risk that investment levels, including cash spending to achieve additional expected savings under our multi-year operational transformation program and beyond and cash spending to make investments in new initiatives to improve growth, increase;
the laws of Ireland being different from the laws of the U.S. and potentially affording less protections to the holders of our securities; and
our holding company structure potentially preventing us from being able to receive dividends or other distributions in needed amounts from our subsidiaries.
The foregoing list of factors is not exhaustive and new factors may emerge from time to time that could also affect actual performance and results. For more information, please see Part I, Item 1A in our Annual Report on Form 10-K, and our subsequent filings with the SEC. Copies are available online at http://www.sec.gov or www.wtwco.com.
Although we believe that the assumptions underlying our forward-looking statements are reasonable, any of these assumptions, and therefore also the forward-looking statements based on these assumptions, could themselves prove to be inaccurate. Given the significant uncertainties inherent in the forward-looking statements included in this Quarterly Report on Form 10-Q, our inclusion of this information is not a representation or guarantee by us that our objectives and plans will be achieved.
Our forward-looking statements speak only as of the date made and we will not update these forward-looking statements unless the securities laws require us to do so. With regard to these risks, uncertainties and assumptions, the forward-looking events discussed in this document may not occur, and we caution you against unduly relying on these forward-looking statements.
PART I. FINANCI****AL INFORMATION
Item 1. FINANCIAL STATEMENTS (UNAUDITED)
WILLIS TOWE****RS WATSON PUBLIC LIMITED COMPANY
Condensed Consolidated Statem****ents of Comprehensive Income
(In millions of U.S. dollars, except per share data)
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Revenue | $ | 2,289 | $ | 2,166 | $ | 6,895 | $ | 6,569 | ||||||||
| Costs of providing services | ||||||||||||||||
| Salaries and benefits | 1,396 | 1,359 | 4,135 | 4,019 | ||||||||||||
| Other operating expenses | 419 | 396 | 1,315 | 1,282 | ||||||||||||
| Impairment | 1,042 | — | 1,042 | — | ||||||||||||
| Depreciation | 60 | 60 | 176 | 184 | ||||||||||||
| Amortization | 56 | 62 | 176 | 203 | ||||||||||||
| Restructuring costs | 8 | 17 | 29 | 30 | ||||||||||||
| Transaction and transformation | 74 | 113 | 296 | 265 | ||||||||||||
| Total costs of providing services | 3,055 | 2,007 | 7,169 | 5,983 | ||||||||||||
| (Loss)/income from operations | (766 | ) | 159 | (274 | ) | 586 | ||||||||||
| Interest expense | (65 | ) | (61 | ) | (197 | ) | (172 | ) | ||||||||
| Other (loss)/income, net | (1,163 | ) | 66 | (1,113 | ) | 126 | ||||||||||
| (LOSS)/INCOME FROM OPERATIONS BEFORE INCOME TAXES | (1,994 | ) | 164 | (1,584 | ) | 540 | ||||||||||
| Benefit from/(provision for) income taxes | 322 | (25 | ) | 248 | (99 | ) | ||||||||||
| NET (LOSS)/INCOME | (1,672 | ) | 139 | (1,336 | ) | 441 | ||||||||||
| Income attributable to non-controlling interests | (3 | ) | (3 | ) | (8 | ) | (8 | ) | ||||||||
| NET (LOSS)/INCOME ATTRIBUTABLE TO WTW | $ | (1,675 | ) | $ | 136 | $ | (1,344 | ) | $ | 433 | ||||||
| (LOSS)/EARNINGS PER SHARE | ||||||||||||||||
| Basic (loss)/earnings per share | $ | (16.44 | ) | $ | 1.30 | $ | (13.11 | ) | $ | 4.08 | ||||||
| Diluted (loss)/earnings per share | $ | (16.44 | ) | $ | 1.29 | $ | (13.11 | ) | $ | 4.06 | ||||||
| Comprehensive (loss)/income before non-controlling interests | $ | (1,561 | ) | $ | 61 | $ | (1,290 | ) | $ | 444 | ||||||
| Comprehensive income attributable to non-controlling interests | (3 | ) | (5 | ) | (8 | ) | (10 | ) | ||||||||
| Comprehensive (loss)/income attributable to WTW | $ | (1,564 | ) | $ | 56 | $ | (1,298 | ) | $ | 434 |
See accompanying notes to the condensed consolidated financial statements
WILLIS TOWERS WATSON PUBLIC LIMITED COMPANY
Condensed Consolida****ted Balance Sheets
(In millions of U.S. dollars, except share data)
(Unaudited)
| September 30, 2024 | December 31, 2023 | |||||||
| ASSETS | ||||||||
| Cash and cash equivalents | $ | 1,372 | $ | 1,424 | ||||
| Fiduciary assets | 9,176 | 9,073 | ||||||
| Accounts receivable, net | 2,118 | 2,572 | ||||||
| Prepaid and other current assets | 558 | 364 | ||||||
| Current assets held for sale | 1,089 | — | ||||||
| Total current assets | 14,313 | 13,433 | ||||||
| Fixed assets, net | 710 | 720 | ||||||
| Goodwill | 8,882 | 10,195 | ||||||
| Other intangible assets, net | 1,360 | 2,016 | ||||||
| Right-of-use assets | 539 | 565 | ||||||
| Pension benefits assets | 632 | 588 | ||||||
| Other non-current assets | 732 | 1,573 | ||||||
| Total non-current assets | 12,855 | 15,657 | ||||||
| TOTAL ASSETS | $ | 27,168 | $ | 29,090 | ||||
| LIABILITIES AND EQUITY | ||||||||
| Fiduciary liabilities | $ | 9,176 | $ | 9,073 | ||||
| Deferred revenue and accrued expenses | 2,027 | 2,104 | ||||||
| Current debt | — | 650 | ||||||
| Current lease liabilities | 122 | 125 | ||||||
| Other current liabilities | 735 | 678 | ||||||
| Current liabilities held for sale | 475 | — | ||||||
| Total current liabilities | 12,535 | 12,630 | ||||||
| Long-term debt | 5,308 | 4,567 | ||||||
| Liability for pension benefits | 487 | 563 | ||||||
| Deferred tax liabilities | 94 | 542 | ||||||
| Provision for liabilities | 416 | 365 | ||||||
| Long-term lease liabilities | 556 | 592 | ||||||
| Other non-current liabilities | 202 | 238 | ||||||
| Total non-current liabilities | 7,063 | 6,867 | ||||||
| TOTAL LIABILITIES | 19,598 | 19,497 | ||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| EQUITY (i) | ||||||||
| Additional paid-in capital | 10,957 | 10,910 | ||||||
| (Accumulated deficit)/retained earnings | (650 | ) | 1,466 | |||||
| Accumulated other comprehensive loss, net of tax | (2,810 | ) | (2,856 | ) | ||||
| Treasury shares, at cost, 15,574 shares in 2024 | (5 | ) | — | |||||
| Total WTW shareholders’ equity | 7,492 | 9,520 | ||||||
| Non-controlling interests | 78 | 73 | ||||||
| Total equity | 7,570 | 9,593 | ||||||
| TOTAL LIABILITIES AND EQUITY | $ | 27,168 | $ | 29,090 |
(i)
Equity includes (a) Ordinary shares $0.000304635 nominal value; Authorized 1,510,003,775; Issued 100,887,015 (2024) and 102,538,072 (2023); Outstanding 100,871,441 (2024) and 102,538,072 (2023) and (b) Preference shares, $0.000115 nominal value; Authorized 1,000,000,000 and Issued none in 2024 and 2023.
See accompanying notes to the condensed consolidated financial statements
WILLIS TOWERS WATSON PUBLIC LIMITED COMPANY
Condensed Consolidated S****tatements of Cash Flows
(In millions of U.S. dollars)
(Unaudited)
| Nine Months Ended September 30, | ||||||||
| 2024 | 2023 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| NET (LOSS)/INCOME | $ | (1,336 | ) | $ | 441 | |||
| Adjustments to reconcile net income to total net cash from operating activities: | ||||||||
| Depreciation | 176 | 184 | ||||||
| Amortization | 176 | 203 | ||||||
| Impairment | 1,042 | — | ||||||
| Non-cash restructuring charges | 17 | 19 | ||||||
| Non-cash lease expense | 76 | 83 | ||||||
| Net periodic benefit of defined benefit pension plans | (15 | ) | (20 | ) | ||||
| Provision for doubtful receivables from clients | 13 | 8 | ||||||
| Benefit from deferred income taxes | (379 | ) | (58 | ) | ||||
| Share-based compensation | 85 | 87 | ||||||
| Net loss/(gain) on disposal of operations | 1,190 | (44 | ) | |||||
| Non-cash foreign exchange (gain)/loss | (25 | ) | 1 | |||||
| Other, net | 32 | 21 | ||||||
| Changes in operating assets and liabilities, net of effects from purchase of subsidiaries: | ||||||||
| Accounts receivable | 271 | 261 | ||||||
| Other assets | (299 | ) | (175 | ) | ||||
| Other liabilities | (159 | ) | (191 | ) | ||||
| Provisions | 48 | 3 | ||||||
| Net cash from operating activities |
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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 stabilizing to softening 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 company 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 this trend may continue.
Risks and Uncertainties of the Economic Environment
U.S. and global markets are continuing to experience volatility and disruption as a result of the ongoing Russia-Ukraine and Middle East conflicts. Although the length and impact of these situations are highly unpredictable, the conflicts have contributed to negative impacts on and volatility of the global economy and capital markets, resulting in significant inflation and fluctuating interest rates in many of the markets in which we operate, and could continue to lead to further market disruptions. This impacts not only the cost of and access to liquidity, but also other costs to run and invest in our business.
Other global economic events, such as accommodative monetary and fiscal policy, supply chain disruptions and geopolitical tensions beyond the aforementioned ongoing wars, contributed to significant inflation across the globe. In particular, inflation in the United States, Europe and other geographies has risen to levels not experienced in recent decades, and while this has eased somewhat in the last year, we are seeing its impact on various aspects of our business. Moreover, U.S. and global economic conditions have created market uncertainty and volatility. Such general economic conditions, including inflation, stagflation, political volatility, costs of labor, cost of capital, interest rates, bank stability, credit availability and tax rates, affect our cost of doing business, including our operating and general and administrative expenses, and we have no control or limited ability to control such factors. These general economic conditions impact revenue, including revenue from customers as well as income from funds we hold on behalf of customers and pension-related income.
If our costs grow significantly in excess of our ability to raise revenue, whether as a result of the foregoing global economic factors or otherwise, 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.
See Part I, Item 1A ‘Risk Factors’ in our Annual Report on Form 10-K, filed with the SEC on February 22, 2024, for a discussion of risks that may affect, among other things, our growth relative to expectation and our ability to achieve our objectives.
Transformation Program
In the fourth quarter of 2021, the Company initiated a three-year ‘Transformation program’ designed to enhance operations, optimize technology and align its real estate footprint to its new ways of working. During the fourth quarter of 2023, we revised the expected costs and savings under the program and we currently expect the program to generate annual cost savings in excess of $450 million by the end of 2024. The program is expected to incur cumulative costs of approximately $1.045 billion and capital expenditures of approximately $130 million, for a total investment of approximately $1.175 billion. The main categories of charges have been in the following four areas:
Real estate rationalization — includes costs to align the real estate footprint to our 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 includes 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 are incurred in the right-shoring stra
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have considered changes in our exposure to market risks during the nine months ended September 30, 2024 and have determined that there have been no material changes to our exposure to market risks from those described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on February 22, 2024. However, we have provided the following information to supplement or update our disclosures on our Form 10-K.
The Company has a global investment policy which is designed to ensure that we maintain diversification of our cash investments throughout the world in order to minimize the risk of loss due to a counterparty failure.
Interest Income on Fiduciary Funds
As described in our Annual Report on Form 10-K, we are exposed to interest rate risk. Specifically, as a result of our operating activities, we receive cash for premiums and claims which we deposit in high-quality bank term deposit and money market funds, on which we earn interest, where permitted. We also hold funds for clients of our benefits accounts businesses. For the benefit funds not invested, cash and cash equivalents are held, on which we earn interest, until the funds are directed by plan participants to either be invested in mutual funds or paid out on their behalf. This interest earned is included in our condensed consolidated financial statements as interest income. These funds are regulated in terms of access and the instruments in which they may be invested, most of which are short-term in maturity. As a result of measures taken by central banks around the world, rates offered on these investments have increased, in some cases significantly, over the course of the last year. This has resulted in the Company recognizing higher interest income over the same period in the prior year. Interest income in the future will be a function of the short-term rates we are able to obtain by currency and the cash balances available to invest in these instruments. Interest income was $43 million and $130 million for the three and nine months ended September 30, 2024, respectively, and $39 million and $106 million for the three and nine months ended September 30, 2023, respectively. At September 30, 2024, we held $2.9 billion of fiduciary funds invested in interest-bearing accounts. If short-term interest rates increased or decreased by 25 basis points, interest earned on these invested fiduciary funds, and therefore our interest income recognized, would increase or decrease by approximately $7 million on an annualized basis.
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of September 30, 2024, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (‘CEO’) and the Chief Financial Officer (‘CFO’), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the ‘Exchange Act’). Based upon that evaluation, our management, including the CEO and CFO, concluded that the our disclosure controls and procedures are effective in providing reasonable assurance that the information required to be included in the periodic reports we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (2) accumulated and communicated to our management, including the CEO and the CFO, as appropriate, to allow for timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, identified in connection with the evaluation required by Rules 13a-15(d) or 15d-15(d) under the Exchange Act during the quarter ended September 30, 2024 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on the Effectiveness of Controls
Management, including the CEO and CFO, does not expect that our disclosure controls and procedures will necessarily prevent all errors and all fraud. However, management does expect that the control system provides reasonable assurance that its objectives will be met. A control system, no matter how well designed and operated, cannot provide absolute assurance that the control system’s objectives will be met. In addition, the design of such internal controls must take into account the costs of designing and maintaining such a control system. Certain inherent limitations exist in control systems to make absolute assurances difficult, including the realities that judgments in decision-making can be faulty, that breakdowns can occur because of a simple error or mistake, and that individuals can circumvent controls. The design of any control system is based in part upon existing business conditions and risk assessments. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in business conditions or deterioration in the degree of compliance with policies or procedures. As a result, they may require change or revision. Because of the inherent limitations in a control system, misstatements due to error or fraud may occur and may not be detected. Nevertheless, the disclosure controls and procedures are designed to provide reasonable assurance of achieving their stated objectives, and the CEO and CFO have concluded that the disclosure controls and procedures are effective at a reasonable assurance level.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we are a party to various lawsuits, arbitrations or mediations that arise in the ordinary course of business. The disclosure called for by Part II, Item 1 regarding our legal proceedings is incorporated by reference herein from Part I, Item 1 Note 14 — Commitments and Contingencies - Legal Proceedings of the notes to the condensed consolidated financial statements in this Form 10-Q for the quarter ended September 30, 2024.
Item 1A. RISK FACTORS
Except as described below, there are no material changes from risk factors as previously disclosed in our Annual Report on Form 10-K, filed with the SEC on February 22, 2024. We urge you to read the risk factors contained therein.
The consummation of our pending sale of TRANZACT is subject to certain risks. The pending transaction also creates certain incremental risks for the Company that may negatively affect our operations, financial results or reputation.
Our ability to consummate the pending sale of TRANZACT pursuant to our equity purchase agreement, dated as of September 30, 2024, is subject to important risks, including, but not limited to: the risk that we may not obtain the required regulatory approvals, including under the U.S. Hart-Scott-Rodino Antitrust Improvements Act of 1976, or satisfy other customary closing conditions required to complete the transaction on its agreed-upon terms and the anticipated schedule, if at all. Other risks of the pending sale of TRANZACT to our operations, financial results or reputation include, but are not limited to: the risk of additional loss upon consummation of the pending transaction as a result of reclassifying TRANZACT’s assets and liabilities as ‘held-for-sale’, which accounting treatment requires us to continue to adjust the net book value of TRANZACT to fair value (less estimated costs to dispose of the business) until the transaction’s closing date; the risk that management’s attention is diverted from other matters during the pendency of the transaction and in the post-closing period; the impact of the announcement and/or the potential impact of the consummation of the pending transaction on relationships, including with employees, suppliers, carriers, clients and competitors; the risk of disruptions from the pending transaction that impact our business; the risk that the pending transaction does not yield the intended outcomes for our strategy, operations and/or financial results; the risk that there may be litigation associated with (or required to compel) consummation of the transaction; and other risks described in our other SEC filings. Failure to consummate the sale of TRANZACT may materially affect our business, financial condition or results of operations.
Our business will be negatively affected if we are not able to anticipate and keep pace with rapid changes in government laws or regulations, or if government laws or regulations decrease the need for our services, increase our costs or limit our compensation.
A material portion of our revenue is affected by statutory or regulatory changes. Some examples of statutory or regulatory changes that could materially impact us are any changes to the U.S. Patient Protection and Affordable Care Act (‘PPACA’), the Healthcare and Education Reconciliation Act of 2010 (‘HCERA’), which we refer to collectively as ‘Healthcare Reform’, or to the Medicare laws and regulations. While the U.S. Congress has not passed legislation replacing or fundamentally amending Healthcare Reform (other than changes to the individual mandate), such legislation, or another version of Healthcare Reform, could be implemented in the future. In addition, some U.S. political candidates and representatives elected to office have expressed a desire to amend all or a portion of Healthcare Reform or otherwise establish alternatives to employer-sponsored health insurance or replace it with government-sponsored health insurance, often referred to as ‘Medicare for All’. If we are unable to adapt our services to potential new laws and regulations, or judicial modifications, with respect to Healthcare Reform or otherwise, our ability to provide effective services in these areas may be impacted. In addition, more restrictive marketing rules or interpretations of the Centers for Medicare and Medicaid Services, or judicial decisions that restrict or otherwise change existing provisions of U.S. healthcare regulation, could have an adverse impact on our healthcare-related businesses.
Furthermore, in the context of our direct-to-consumer sales and marketing solutions, we are subject to various federal and state laws and regulations that prescribe when and how we may market to consumers (including, without limitation, the Telephone Consumer Protection Act and other telemarketing laws and the Medicare Communications and Marketing Guidelines issued by the Centers for Medicare & Medicaid Services (‘CMS’) of the U.S. Department of Health and Human Service). Federal and state legislators and/or regulators recently have expressed concerns about certain existing methods of marketing individual health policies, particularly Medicare Advantage and Medicare Supplement policies, and have held hearings and sought information from us and from competitors. In addition, CMS has recently expanded its regulation and oversight of the marketing of Medicare Advantage policies. Changes to these laws and/or regulations, or increased scrutiny or enforcement by regulators, could negatively affect our ability to market directly to consumers and/or increase our costs or liabilities. In particular, CMS issued a proposed rule for Contract Year 2025 for the Medicare Advantage and Medicare Prescription Drug programs that modifies agent, broker, and other third-party requirements. On April 4, 2024, CMS issued its Contract Year 2025 Medicare Advantage and Part D Final Rule (the ‘CMS 2025 Final Rule’). Among other things, the CMS 2025 Final Rule restructures the compensation that Medicare Advantage and Part D organizations may pay to independent agents and brokers by increasing the amounts paid to them as ‘compensation’ and eliminating administrative
payments related to enrollment. Uncertainty exists regarding the interpretation and implementation of the CMS 2025 Final Rule, particularly in light of the recent federal court decision which stayed portions of the CMS 2025 Final Rule relating to the proposed ‘fixed fee’ compensation increase and certain contract-terms restrictions. Depending on how and whether the rule is implemented, the CMS 2025 Final Rule may require changes to the way we are compensated for some of the services that we provide and has the potential to negatively impact the revenue that our Medicare Advantage and Part D insurance businesses may receive if we are unable to adjust our business to account for such changes. This could in turn impact the value of and impairment of goodwill or receivables associated with the business. In addition, in the event that we and insurance carriers interpret the rules in ways deemed incorrect, that may increase the potential for litigation, claims, fines, or other penalties which could have an adverse impact on our Medicare insurance businesses’ financial results. Further, periodic CMS rule changes, including those contained in the CMS 2025 Final Rule, may impact the profitability of Medicare Advantage and Part D plans to the Plan Sponsors, which in turn may impact the amount of compensation paid to agents and brokers for distributing such plans.
In addition, on April 23, 2024, the United States Department of Labor (‘DOL’) released a final rule (the ‘Retirement Security Rule’) that, among other things, expands the definition of an investment advice fiduciary under the Employee Retirement Income Security Act (‘ERISA’) and broadens the scope of advice that must meet fiduciary standards. As we continue to review the Retirement Security Rule, uncertainty exists regarding the Retirement Security Rule’s impact on one or more of our businesses, the conduct of which may become subject to fiduciary standards. Industry trade groups brought legal challenges to the Retirement Security Rule and, in late July 2024, two federal district courts issued stays halting the implementation of the entirety of the Retirement Security Rule until further notice. The DOL has appealed these decisions to the United States Court of Appeals for the Fifth Circuit.
Many other areas in which we provide services are the subject of government regulation, which is constantly evolving. For example, our activities in connection with insurance brokerage services are subject to regulation and supervision by national, state or other authorities. Insurance laws in the markets in which we operate are often complex and generally grant broad discretion to supervisory authorities in adopting regulations and supervising regulated activities. That supervision generally includes the licensing of insurance brokers and agents and the regulation of the handling and investment of client funds held in a fiduciary capacity. Our continuing ability to provide insurance brokerage in the markets in which we currently operate is dependent upon our compliance with the rules and regulations promulgated from time to time by the regulatory authorities in each of these locations.
Changes in government and accounting regulations in the U.S. and the U.K., two of our principal geographic markets, affecting the value, use or delivery of benefits and human capital programs, may materially adversely affect the demand for, or the profitability of, our various services. In addition, we have significant operations throughout the world, which further subject us to applicable laws and regulations of countries outside the U.S. and the U.K. Changes in legislation or regulations and actions by regulators in particular countries, including changes in administration and enforcement policies, could require operational improvements or modifications, which may result in higher costs or hinder our ability to operate our business in those countries.
ITEM 2. UNREGISTERED SALES OF EQUI****TY SECURITIES AND USE OF PROCEEDS
During the nine months ended September 30, 2024, no shares were issued by the Company without registration under the Securities Act of 1933, as amended.
(c) Issuer Purchases of Equity Securities
The Company is authorized to repurchase shares, by way of redemption or otherwise, and will consider whether to do so from time to time, based on many factors, including market conditions. There are no expiration dates for these repurchase plans or programs.
On September 20, 2023, the board of directors approved a $1.0 billion increase to the existing share repurchase program. This increase brought the total approved authorization, since the announcement of the program on April 20, 2016, to $9.2 billion.
The following table presents specified information about the Company’s repurchases of its shares in the third quarter of 2024 and the Company’s remaining repurchase authority.
| Period | Total number of shares purchased | Average price paid per share | Total number of shares purchased as part of publicly announced plans or programs | Maximum number of shares that may yet be purchased under the plans or programs | ||||||||||||
| July 1, 2024 through July 31, 2024 | 32,799 | $ | 282.24 | 32,799 | 3,525,541 | |||||||||||
| August 1, 2024 through August 31, 2024 | 363,252 | $ | 281.41 | 363,252 | 3,162,289 | |||||||||||
| September 1, 2024 through September 30, 2024 | 320,965 | $ | 291.05 | 320,965 | 2,841,324 | |||||||||||
| 717,016 | $ | 285.76 | 717,016 |
At September 30, 2024 the maximum number of shares that may yet be purchased under the existing share repurchase plan is 2,841,324, with approximately $837 million remaining on the current open-ended repurchase authority granted by the board. An estimate of the maximum number of shares under the existing authorities was determined using the closing price of our ordinary shares on September 30, 2024 of $294.53.
ITEM 3. DEFAULTS UPO****N SENIOR SECURITIES
None.
ITEM 4. MINE SAF****ETY DISCLOSURES
Not applicable.
Item 5. OTHER INFORMATION
(a) None.
(b) None.
(c) Insider Trading Arrangements.
For the quarter ended September 30, 2024, none of the Company’s directors and officers adopted, modified, or terminated any contract, instruction or written plan for the purchase or sale of Company securities intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any ‘non-Rule 10b5-1 trading arrangement’ as defined under Item 408(c) of Regulation S-K.
Item 6. EXHIBITS
EXHIBIT INDEX
** Furnished herewith. Any exhibits furnished herewith (including the certification furnished in Exhibit 32.1) are deemed to accompany this Quarterly Report on Form 10-Q and will not be deemed ‘filed’ for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the ‘Exchange Act’), or otherwise subject to the liability of that section. Such information shall not be incorporated by reference into any registration statement or other document pursuant to the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.
† Management contract or compensatory plan or arrangement.
SIGNAT****URES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Willis Towers Watson Public Limited Company | ||||
| (Registrant) | ||||
| /s/ Carl A. Hess | October 31, 2024 | |||
| Name: | Carl A. Hess | Date | ||
| Title: | Chief Executive Officer | |||
| /s/ Andrew J. Krasner | October 31, 2024 | |||
| Name: | Andrew J. Krasner | Date | ||
| Title: | Chief Financial Officer | |||
| /s/ Joseph S. Kurpis | October 31, 2024 | |||
| Name: | Joseph S. Kurpis | Date | ||
| Title: | Principal Accounting Officer and Controller |