01—Abstract
Summary
Summary of the 10-K filed February 29, 2012. Cited figures are marked; the original filing is the authoritative source.
Willis Group Holdings plc (now Willis Towers Watson) reported total revenues of $3.447 billiona for 2011, up $115 million, or 3%, from $3.332 billion in 2010.
Organic growth in commissions and fees was 2%, with Global up 7% and International up 5%, while North America declined 4% on organic commissions and fees, driven by a decline in Loan Protector revenues. Operating income fell to $566 millionb from $753 million, and operating margin dropped to 16% from 23%. The decline reflects the $180 million 2011 Operational Review charge, a $171 million make-whole and debt write-off charge tied to refinancing $500 million of 12.875% senior notes, and an $11 million UK FSA regulatory settlement.
Net income attributable to Willis Group Holdings was $204 millionc, or $1.15 diluted EPS from continuing operations, versus $2.66 in 2010. Adjusted diluted EPS from continuing operations was $2.74 versus $2.75 in 2010, per the company's non-GAAP reconciliation. The filing also discloses a previously unreported fraud-related overstatement of commissions and fees from 2005 to 2011, identified in the first quarter of 2012.
The company wrote off a $22 milliond uncollectible receivable and reversed $6 million of 2011 commissions and fees, and states that the prior-period financial statements were not materially affected. The company is conducting an internal investigation. Total debt was about $2.4 billion at year-end, and cash and cash equivalents were $436 million.
The company declared a quarterly dividend of $0.27 per share in February 2012 and announced up to $100 million of share buybacks for 2012. Pending litigation includes Stanford Financial Group-related suits, with plaintiffs seeking damages in excess of $1 billion in one action, and the company states it does not expect these to have a material adverse effect.
The company also stated it would begin accepting all forms of compensation from Employee Benefits providers effective April 1, 2012, while continuing to refuse contingent commissions in its other retail brokerage businesses. Management expects annualized savings from the Operational Review of approximately $135 million beginning in 2012.
02—Key points
Key Highlights
- Total revenues rose 3% to $3,447 million; organic commissions and fees growth was 2%, with Global up 7%, International up 5%, and North America down 4%.
- Operating income fell to $566 million from $753 million, and operating margin declined to 16% from 23%, largely due to the $180 million 2011 Operational Review charge.
- Net income attributable to Willis Group Holdings was $204 million, or $1.15 per diluted share from continuing operations, compared with $2.66 in 2010; adjusted diluted EPS from continuing operations was $2.74 versus $2.75.
- A $171 million make-whole and debt write-off charge followed the March 2011 issuance of $800 million in new senior notes used to redeem $500 million of 12.875% notes.
- The company disclosed a fraud-related overstatement of commissions and fees for 2005 to 2011 in a stand-alone business unit, resulting in a $22 million write-off and a $6 million reversal in 2011; management concluded prior periods were not materially affected.
- Total debt was approximately $2.4 billion at December 31, 2011, with $436 million of cash and cash equivalents; the company expects to pay approximately $142 million in pension contributions in 2012.
- Dividends of $1.04 per share were paid in 2011, and a $0.27 quarterly dividend was declared in February 2012; up to $100 million of share repurchases were announced for 2012.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2011filed February 29, 2012Financial Statements
FY2011 against FY2010
| Line item | FY2011FY2010 | Change |
|---|---|---|
| Revenue | $3.45B$3.33B | +3.5% |
| Operating Expenses | $2.88B$2.58B | +11.7% |
| Operating Income | $566.00M$753.00M | −24.8% |
| Interest Expense | $156.00M$166.00M | −6.0% |
| Net Income | $204.00M$455.00M | −55.2% |
| EPS (Basic) | $1.18$2.68 | −56.0% |
| EPS (Diluted) | $1.16$2.66 | −56.4% |
| Shares Outstanding (Basic) | 173.00M170.00M | +1.8% |
| Shares Outstanding (Diluted) | 176.00M171.00M | +2.9% |
05—Questions
Frequently Asked Questions
Why did operating income decline sharply in 2011 despite revenue growth?
Total expenses rose $302 million to $2,881 million. The main drivers were the $180 million 2011 Operational Review charge, including $98 million of severance for about 1,200 positions, a $22 million write-off of an uncollectible receivable tied to prior-period overstatements, an $11 million UK FSA regulatory settlement, and higher salaries and benefits from cash retention award amortization and reinstated salary reviews. Cost savings from the review partly offset these increases.
What was the North America segment's performance in 2011?
North America commissions and fees fell 4% to $1,314 million, with organic commissions and fees down 4%. The decline was driven primarily by Loan Protector revenues, which fell $27 million, along with soft market conditions and the weak US economy. Segment operating margin fell to 20% from 23%.
What is the company's exposure to the Stanford Financial Group litigation?
Willis is a defendant in six lawsuits related to the collapse of The Stanford Financial Group, in which Willis of Colorado acted as broker of record on certain insurance lines. One action seeks damages in excess of $1 billion. In October 2011 the court dismissed the class claims in Troice, and the appeal was argued before the Fifth Circuit on February 7, 2012, with a ruling expected later in 2012. The company disputes the allegations and says it cannot predict the outcome.
What does the company's change in its approach to contingent compensation mean for investors?
Effective April 1, 2012, Willis will accept all forms of compensation from Employee Benefits providers, because it concluded it could not stay competitive while refusing these legal forms of compensation. It will continue to refuse contingent commissions in non-Employee Benefit retail brokerage. The company acknowledges that regulatory or other scrutiny may follow, since contingent compensation has previously been the subject of regulatory action and civil litigation.
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