The fixed assets owned by us represented approximately 3% of total assets as of December 31, 2017 and consisted primarily of furniture and equipment, leasehold improvements, computer software, internally developed software and land and buildings.
Willis Towers Watson is a global advisory, broking and solutions company that helps clients around the world turn risk into a path for growth. With roots dating to 1828, Willis Towers Watson has more than 43,000 employees and services clients in more than 140 countries and territories. We design and deliver solutions that manage risk, optimize benefits, cultivate talent, and expand the power of capital to protect and strengthen institutions and individuals. We believe our unique perspective allows us to see the critical intersections between talent, assets and ideas - the dynamic formula that drives business performance.
Due to the cyclical nature of the insurance market and the impact of other market conditions on insurance premiums, commission revenues 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 revenues and can have a material adverse impact on our commission revenues and operating margin. A ‘hard’ or ‘firming’ market, during which premium rates rise, generally has a favorable impact on our commission revenues and operating margin. Rates, however, vary by geography,
The markets for our consulting, technology and solutions, and marketplace services are subject to changes as a result of economic, regulatory and legislative changes, technological developments, and increased competition from established and new competitors. We believe 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. 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.
Immediately following the Merger, Willis effected (i) a consolidation (i.e., a reverse stock split under Irish law) of Willis ordinary shares whereby every 2.6490 Willis ordinary shares were consolidated into one Willis ordinary share ($0.000304635 nominal value per share) and (ii) an amendment to its constitution and other organizational documents to change its name from Willis Group Holdings Public Limited Company to Willis Towers Watson Public Limited Company.
The table below sets forth our summarized consolidated statements of comprehensive income and data as a percentage of revenues for the years ended December 31, 2017, 2016, and 2015.
The following table details our top five markets based on percentage of consolidated revenues (in U.S. dollars) from the countries where work is performed for the year ended December 31, 2017. These figures do not represent the currency of the related revenue, which is presented in the table below.
Our revenues can be materially impacted by changes in currency conversions, which can fluctuate significantly over the course of a calendar year. For the year ended December 31, 2017, currency translation decreased our consolidated revenues by $27 million. The decrease was driven primarily by a weaker Pound sterling during the first half of the year, partially offset by increases in the Pound sterling, Euro, the Brazilian real and Canadian dollar in the second half of the year.
Total revenues for the year ended December 31, 2016 were $7.9 billion, compared to $3.8 billion for the year ended December 31, 2015, an increase of $4.1 billion, or 106%. This growth in revenues was driven by our merger with Towers Watson and our acquisition of Gras Savoye.
For the year ended December 31, 2016, the foreign currency impact resulted from the strengthening of the U.S. dollar against a number of currencies, most significantly the Euro and the Pound sterling.
HCB is the largest segment of the Company, generating approximately 39% of our segment revenues for the year ended December 31, 2017. HCB is focused on addressing our clients’ people and risk needs to help them take on the challenges of operating in a global marketplace. HCB is further strengthened with teams of international consultants that provide support through each of our business units to the global headquarters of multinational clients and their foreign subsidiaries.
CRB commissions and fees, and total segment revenues for the year ended December 31, 2017 were $2.6 billion, compared to $2.5 billion for the year ended December 31, 2016. All regions contributed to the strong revenue growth led by International followed by Western Europe, North America and Great Britain. International’s growth was fueled by excellent client retention and strong new business. Western Europe, North America and Great Britain experienced good client retention and solid new business growth.
The IRR segment uses a sophisticated approach to risk, which helps clients free up capital and manage investment complexity. The segment works closely with investors, reinsurers and insurers to manage the equation between risk and return. Blending advanced analytics with deep institutional knowledge, IRR identifies new opportunities to maximize performance. IRR provides investment consulting services and insurance specific services and solutions through reserves opinions, software, ratemaking, usage-based insurance, risk underwriting and reinsurance broking.
Portfolio and Underwriting Services - Portfolio and Underwriting Services acts on behalf of our insurance carrier partners and self-insured entities in product marketing and distribution, risk underwriting and selection, claims management and other general administrative responsibilities.
The table below presents segment commissions and fees, and segment interest and other income for IRR for the years ended December 31, 2017 and 2016.
IRR commissions and fees and total segment revenues for both years ended December 31, 2017 and 2016 were $1.5 billion. Total segment revenues for the year ended December 31, 2016 included £28 million ($41 million) received for a settlement related to the Fine Arts, Jewellery and Specie Team. Wholesale Insurance Broking, Investment, Insurance Consulting and Technology, Max Matthiessen and Willis Re all posted commissions and fees revenue growth, primarily as a result of strong sales and increased performance fees. Willis Towers Watson Securities growth was flat. The reduction in Portfolio and Underwriting Services commissions and fees was driven by a loss of profit commissions following the Atlantic hurricanes, the cancellation of a key contract, and the divestiture of small programs in the portfolio.
IRR total segment revenues for the year ended December 31, 2016 were $1.5 billion, compared to $896 million for the year ended December 31, 2015, an increase of $638 million or 71%. This growth in revenues was driven by the Merger and a full year of revenues from Miller, following our acquisition in May 2015. See the ‘Supplementary Pro Forma Segment Revenues’ section below for additional discussion of our 2016 results.
BDA generated approximately 9% of our segment revenues for the year ended December 31, 2017. BDA provides services across four integrated or related offerings to customers primarily in the U.S. through four business units:
Individual Marketplace (formerly Retiree & Access Exchanges) - This business provides solutions through a proprietary technology platform, OneExchange Retiree, which enables our employer clients to transition their retirees to individual, defined contribution health plans that provide individuals with a tax-free allowance or contribution to spend on healthcare services at an annual cost that the employer controls, as opposed to group-based, defined benefit health plans that provide groups of individuals with healthcare benefits at uncertain annual costs.
The table below presents segment commissions and fees, and segment interest and other income for BDA for the years ended December 31, 2017 and 2016.
See the ‘Supplementary Pro Forma Segment Revenues’ section below for additional discussion of our 2016 results.
Amortization includes amortization of acquired intangible assets, including acquired internally developed software. Amortization for the years ended December 31, 2017 and December 31, 2016 was $581 million and $591 million, respectively, a decrease of $10 million. Our intangible amortization is more heavily weighted to the initial years of the useful lives of the related intangibles, and therefore amortization expense will decrease over time. Amortization for the years ended December 31, 2016 and December 31, 2015 was $591 million and $76 million, respectively, an increase of $515 million. The primary driver of the increase in amortization was our acquisition of approximately $4.0 billion in intangible assets in our Merger with Towers Watson and our acquisition of $231 million and $440 million of intangible assets related to our acquisitions of Miller and Gras Savoye, respectively.
Transaction and integration expenses for the year ended December 31, 2017 were $269 million, which consists of costs associated with our information technology and finance initiatives and rationalization, property consolidation, benefits harmonization and costs associated with the settlement of the Merger-related appraisal demand lawsuit (see Note 13 - Commitments and Contingencies within Item 8 of this Annual Report on Form 10-K). Transaction and integration expenses for the year ended December 31, 2016 were $177 million. Approximately $162 million of these expenses were related to the Merger and $15 million were related to the acquisition of Gras Savoye. Transaction and integration expenses for the year ended December 31, 2015 were $84 million. Approximately $58 million of these expenses were related to the Merger, $15 million were related to the acquisition of Gras Savoye and $11 million were related to our acquisition of Miller.
Income from operations for the year ended December 31, 2017 was $738 million compared to $551 million for the year ended December 31, 2016, an increase of $187 million, or 34%. This increase resulted primarily from additional revenue of $315 million driven by growth across all segments, partially offset by additional costs resulting primarily from our integration activities and additional salary and benefits costs. Income from operations for the year ended December 31, 2016 was $551 million compared to $427 million for the year ended December 31, 2015, an increase of $124 million or 29%. The growth in income from operations compared to that of 2015 was primarily driven by the Merger and our acquisition of Gras Savoye.
Other expense/(income), net, includes other gains and losses, including gains and losses on foreign currency transactions. Other expense/(income), net for the years ended December 31, 2017 and 2016 was expense of $61 million and $27 million, respectively, which were primarily foreign currency transaction losses. Other expense/(income), net for the year ended
Net income attributable to Willis Towers Watson for the year ended December 31, 2017 was $568 million, an increase of $148 million compared to $420 million for the year ended December 31, 2016. The increase was primarily driven by an improvement of $187 million in income from operations partially offset by a $34 million increase to expense in other expense/(income), net. Net income attributable to Willis Towers Watson for the year ended December 31, 2016 was $420 million, an increase of $47 million compared to $373 million for the year ended December 31, 2015. The growth was primarily driven by an improvement of $124 million in income from operations and an increase of $63 million in the benefit from income taxes, partially offset by a $42 million increase in interest expense and an $82 million increase to expense in other expense/(income), net.
The pro forma financial information for the year ended December 31, 2015 combines: (i) the historical consolidated statement of operations of Willis Towers Watson for the year ended December 31, 2015 and (ii) the historical consolidated statement of operations of Towers Watson for the fiscal year ended June 30, 2015 less the historical consolidated statement of operations of Towers Watson for the six months ended December 31, 2014, plus the historical consolidated statement of operations of Towers Watson for the six months ended December 31, 2015.
After taking into account the impact of the reverse stock split on January 4, 2016.
Definitions of Constant Currency Change and Organic Change are included in the section entitled ‘Non-GAAP Financial Measures’ in this Form 10-K.
Salaries and benefits were $4.6 billion for the year ended December 31, 2016, an increase of $215 million, or 5%, compared to $4.4 billion for the pro forma year ended December 31, 2015. The increase was primarily related to our acquisitions of Gras Savoye and Miller, which contributed approximately $291 million of the increase, partially offset by increased net periodic benefit credits from the adoption of the granular approach to calculating service and interest costs of $51 million.
Depreciation represents the expense incurred over the useful life of our tangible fixed assets and internally developed software. Depreciation was $178 million for the year ended December 31, 2016, an increase of $19 million, or 12%, compared to $159 million for the pro forma year ended December 31, 2015. The increase was primarily related to our acquisitions of Gras Savoye and Miller and our normal capital expenditures.
expenses were related to the Merger and $15 million were related to the integration of Gras Savoye. For the pro forma year ended December 31, 2015, transaction expenses related to the Merger of $151 million have been eliminated as part of the pro forma adjustments. Of the remaining $30 million of transaction and integration expenses, approximately $15 million were related to Gras Savoye, $11 million were related to Miller, and $4 million were related to other miscellaneous M&A activity.
Income from operations for the year ended December 31, 2016 was $551 million, compared to $765 million for the pro forma year ended December 31, 2015, a decrease of $214 million. The decrease was primarily due to increases in transaction and integration expenses of $147 million and restructuring costs of $67 million.
Other expense/(income), net, includes other gains and losses, including gains and losses on foreign currency transactions. Other expense/(income), net, for the year ended December 31, 2016 was $27 million of net expense, which was primarily foreign currency transaction losses. Other expense/(income), net for the pro forma year ended December 31, 2015 was $112 million of net income, which was primarily due to $80 million of gains on disposals of operations and $59 million in the gain on the re-measurement of equity interests, partially offset by $30 million in foreign currency transaction losses in 2015.
Net income attributable to Willis Towers Watson for the year ended December 31, 2016 was $420 million, a decrease of $220 million compared to $640 million for the pro forma year ended December 31, 2015. The decrease was primarily driven by increased transaction and integration expenses of $147 million and restructuring costs of $67 million in 2016 and gains on disposals of $80 million and re-measurement of equity interests of $59 million in 2015, partially offset by a decrease in income tax expense of $166 million.
The following table sets out the components of HCB revenues for the year ended December 31, 2016 and pro forma revenues for the year ended December 31, 2015, and the components of the change in commissions and fees for the year ended December 31, 2016 as compared to the pro forma prior year.
HCB total segment revenues for the year ended December 31, 2016 and pro forma for the year ended December 31, 2015 were $3.1 billion; commissions and fees for the year ended December 31, 2016 were $3.1 billion, compared with pro forma $3.0 billion for the year ended December 31, 2015, representing an increase of $63 million to total segment revenues and an increase of $62 million to commissions and fees. Pro forma and constant currency revenue growth were driven by the acquisition of Gras Savoye, which occurred on December 29, 2015. In an effort to align resources and market demand, a significant restructuring across all lines of business took place during the second half of 2016, which caused disruption in our billable hours. Across the segment, performance was mixed, resulting in flat organic growth. Retirement revenues declined slightly as a result of reduced actuarial consulting, primarily in the fourth quarter. The Health and Benefits North America consulting business continued to see demand for plan design projects and increased product revenue. The Talent and Rewards advisory business was down period-over-period as the M&A market softened. The Technology and Administration Solutions Great Britain business had strong performance, led by increased project and administration activity along with new clients. Internationally, Global Wealth Solutions has been negatively impacted by adverse conditions in the Greater China market.
The following table sets out the components of CRB revenues for the year ended December 31, 2016 and pro forma revenues for the year ended December 31, 2015, and the components of the change in commissions and fees for the year ended December 31, 2016 as compared to the pro forma prior year.
CRB total segment and commissions and fees revenues for the year ended December 31, 2016 were $2.5 billion, compared to pro forma $2.3 billion for the year ended December 31, 2015. The growth for the year ended December 31, 2016 was due to the acquisition of Gras Savoye, which occurred on December 29, 2015. International organic revenue declined as a result of lower revenues in Asia and Australasia, partially offset by better performance in Latin America and CEEMEA. Offsetting the International decline was Great Britain’s organic growth as a result of solid revenue increases across all lines of business. Western Europe contributed to organic growth with strong revenue gains in Iberia, partially offset by softness in Italy. North America was flat with strong retention offset by lower new business.
The following table sets out the components of IRR revenues for the year ended December 31, 2016 and pro forma revenues for the year ended December 31, 2015, and the components of the change in commissions and fees for the year ended December 31, 2016 as compared to the pro forma prior year.
IRR total segment revenues for the year ended December 31, 2016 and pro forma for the year ended December 31, 2015 were $1.5 billion. Included in total segment revenues for the year ended December 31, 2016 is a previously disclosed settlement with JLT of £28 million ($41 million) related to the Fine Art, Jewellery and Specie team. Commissions and fees for the year ended December 31, 2016 and pro forma for the year ended December 31, 2015 were $1.5 billion, representing a decrease of $7 million. The organic decline was primarily related to the following factors: soft market conditions and renewal factors impacting our Willis Re and Portfolio and Underwriting Services businesses, particularly in North America; a decline in overall insurance industry M&A activity impacting our Willis Towers Watson Securities business after a record year in 2015; and a decline arising from lower demand in risk consulting projects.
The following table sets out the components of BDA revenues for the year ended December 31, 2016 and pro forma revenues for the year ended December 31, 2015, and the components of the change in commissions and fees for the year ended December 31, 2016 as compared to the pro forma prior year.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation, commonly referred to as U.S. Tax Reform. U.S. Tax Reform makes broad and complex changes to the U.S. tax code, including, but not limited to: (1) requiring a one-time transition tax on certain unremitted earnings of foreign subsidiaries that may be payable over eight years; (2) bonus depreciation that will allow for a full expensing of qualified property; (3) reduction of the federal corporate tax rate from 35% to 21%; (4) a new provision designed to tax global intangible low-taxed income (‘GILTI’), which allows for the possibility of using foreign tax credits (‘FTCs’) and a deduction of up to 50% to offset the income tax liability (subject to some limitations); (5) a new limitation on deductible interest expense; (6) limitations on the deductibility of certain executive compensation; (7) limitations on the use of FTCs to reduce the U.S. income tax liability; (8) the creation of the base erosion anti-abuse tax (‘BEAT’), a new minimum tax; and (9) a general elimination of U.S. federal income taxes on dividends from foreign subsidiaries.
Also on December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (‘SAB 118’), which provides guidance on accounting for the tax effects of the U.S. Tax Reform. SAB 118 provides for a measurement period that should not extend beyond one year from the U.S. Tax Reform enactment date for companies to complete the accounting under Accounting Standards Codification (‘ASC’) 740, Income Taxes (‘ASC 740’). In accordance with SAB 118, a company must reflect the income tax effects of those aspects of U.S. Tax Reform for which the accounting under ASC 740 is complete. Adjustments to incomplete and unknown amounts will be recorded and disclosed prospectively during the measurement period. To the extent that a company’s accounting for certain income tax effects of U.S. Tax Reform is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of U.S. Tax Reform.
One-time transition tax - The one-time transition tax is based on the Company’s total post-1986 earnings and profits (‘E&P’) that it previously deferred from U.S. income taxes. The Company recorded a provisional amount for the one-
Executive compensation - Starting with compensation paid in 2018, Section 162(m) will limit the Company from deducting compensation, including performance-based compensation, in excess of $1 million paid to anyone who, starting in 2018, serves as the Chief Executive Officer or Chief Financial Officer, or who is among the three most highly compensated executive officers. The only exception to this rule is for compensation that is paid pursuant to a binding contract in effect on November 2, 2017 that would have otherwise been deductible under the prior Section 162(m) rules. Accordingly, any compensation paid in the future pursuant to new compensation arrangements entered into after November 2, 2017, even if performance-based, will count towards the $1 million deduction limit if paid to a covered executive. The Company recorded a provisional income tax expense of $8 million relating to our compensation plans not qualifying for the binding contract exception. We are in the process of obtaining additional information needed to complete our analysis of the binding contract requirement on the various compensation plans to determine the full impact of the law change. In addition, guidance may be released which could also impact our estimates.
GILTI - U.S. Tax Reform creates a new requirement that certain income (i.e., GILTI) earned by controlled foreign corporations (‘CFCs’) must be included currently in the gross income of the CFCs’ U.S. shareholder. GILTI is the excess of the shareholder’s ‘net CFC tested income’ over the net deemed tangible income return, which is currently defined as the excess of (1) 10 percent of the aggregate of the U.S. shareholder’s pro rata share of the qualified business asset investment of each CFC with respect to which it is a U.S. shareholder over (2) the amount of certain interest expense taken into account in the determination of net CFC-tested income. Because of the complexity of the new GILTI tax rules, the Company is continuing to evaluate this provision of U.S. Tax Reform and the application of ASC 740. Under U.S. GAAP, the Company is allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the ‘period cost method’) or (2) factoring such amounts into a company’s measurement of its deferred taxes (the ‘deferred method’). The Company’s selection of an accounting policy with respect to the new GILTI tax rules will depend, in part, on analyzing its global income of its CFCs to determine whether it expects to have future U.S. inclusions in taxable income related to GILTI and, if so, what the impact is expected to be. Because whether the Company expects to have future U.S. inclusions in taxable income related to GILTI depends on not only its current structure and estimated future results of global operations but also its intent and ability to modify its structure and/or its business, the Company is not yet able to reasonably estimate the effect of this provision of U.S. Tax Reform. Therefore, it has not made any adjustments related to potential GILTI tax in its consolidated financial statements and has not made a policy decision.
In April 2014, Legacy Willis announced a multi-year operational improvement program designed to strengthen its client service capabilities and deliver future cost savings. The main elements of the program, which was completed during 2017, included: moving more than 3,500 support roles from higher cost locations to facilities in lower cost locations; net workforce reductions in support positions; lease consolidation in real estate; and information technology systems simplification and rationalization.
The Company is expecting to deliver $325 million of annual cost savings beginning in 2018. To achieve these savings, it has incurred cumulative restructuring charges of $441 million for the program since it began in the second quarter of 2014.
An analysis of cumulative restructuring costs recognized for the Operational Improvement Program from its commencement through the year ended December 31, 2017 by segment is as follows:
In the second quarter of 2016, we began planning targeted staffing reductions in certain portions of the business due to a reduction in business demand or change in business focus (hereinafter referred to as the Business Restructure Program). The main element of the program included workforce reductions, and was completed in 2016.
Our principal sources of liquidity are funds generated by operating activities, available cash and cash equivalents and amounts available under our revolving credit facilities or new debt offerings.
Based on our balance sheets, combined cash flows, current market conditions and information available to us at this time, we believe that Willis Towers Watson has sufficient liquidity, which includes our undrawn revolving credit facilities, to meet our cash needs for the next twelve months, including investing in the business for growth, creating value through the integration of Willis, Towers Watson and Gras Savoye, scheduled debt repayments, dividend payments, and contemplated share repurchases, subject to market conditions and other factors.
Our cash and cash equivalents at December 31, 2017 totaled $1.0 billion, compared to $870 million at December 31, 2016. The increase in cash from December 31, 2016 to December 31, 2017 was primarily due to the strengthening of various currencies against the U.S. dollar, particularly the Pound sterling and Euro and less net debt payments made in the current year.
Additionally, at December 31, 2017, $362 million was available to draw against our $1.25 billion revolving credit facility as compared to $557 million, which was available to draw against our previous $800 million revolving credit facility at December 31, 2016.
Cash flows from operating activities were $862 million for 2017, compared to cash flows from operating activities of $933 million for 2016. The $862 million net cash from operating activities for 2017 included net income of $592 million, adjusted for $548 million of non-cash adjustments, partially offset by changes in operating assets and liabilities of $278 million. The $548 million non-cash adjustments primarily include depreciation, amortization, and the benefit from deferred income taxes. The $71 million decrease in cash from operations in 2017 compared to 2016 primarily resulted from changes in working capital and higher discretionary compensation payments made in 2017 for the 2016 compensation cycle. These discretionary compensation payments were lower in 2016 because they included only a partial payment to Legacy Towers Watson colleagues due to the timing of the Merger.
Net cash used in financing activities in 2016 was $775 million. The primary drivers during the period were debt issuance of $2.0 billion, debt repayments of $1.9 billion, net payments on the revolving credit facility of $237 million, dividend payments of $199 million, and share repurchases of $396 million. The debt issuance of $2.0 billion was primarily the issuance of $450 million of senior notes due 2021, $550 million of senior notes due 2026, €540 million ($609 million) of senior notes due 2022 and a $400 million drawdown on the 1-year term loan facility. The debt repayments of $1.9 billion were primarily $300 million repayment of senior notes due 2016, $400 million repayment of Legacy Towers Watson debt and repayments of $592 million and $400 million on the 1-year term loan facility.
Net cash from financing activities in 2015 was $640 million, primarily due to $469 million net drawings on the revolving credit facility, a $592 million term loan draw down to fund the acquisition of Gras Savoye, and the issuance of shares of $131 million, partially offset by dividends paid of $277 million and repurchase of shares of $82 million.
Total debt, total equity, and the capitalization ratio at December 31, 2017 and December 31, 2016 were as follows:
At December 31, 2017, our material mandatory debt repayments over the next twelve months consist of scheduled repayments of $85 million on our term loan maturing in 2019.
On November 10, 2016, the Company announced the board of directors approved an increase to the existing share repurchase program of $1 billion. The $1 billion increase was in addition to the remaining authority on the Legacy Willis program discussed in the preceding paragraph. At December 31, 2017, approximately $601 million 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 December 31, 2017 of $150.69 was 3,986,473.
On February 23, 2018, the board of directors approved an increase to the existing share repurchase program of $400 million. The $400 million increase is in addition to the remaining authority of $601 million as of December 31, 2017.
In addition to the shares reported in the table above, the Company canceled 1,415,199 Towers Watson common shares at issue in the settlement of the Merger-related appraisal demand lawsuit (see Note 13 - Commitments and Contingencies located within Item 8 in this Annual Report on Form 10-K for additional information) and an equivalent number of ordinary shares represented in the Company’s issued and outstanding share count up until the settlement date. As a result, the litigation settlement and related share cancellation had a similar impact to a share repurchase in that it reduced the number of outstanding shares of the Company. However, it did not impact the remaining authority under the share repurchase program.
Apart from commitments, guarantees and contingencies, as disclosed herein and Note 13 - Commitments and Contingencies located within Item 8 of this Annual Report on Form 10-K and incorporated herein by reference, as of December 31, 2017, the Company had no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on the Company’s financial condition, results of operations or liquidity.
Debt obligations and facilities - The Company’s material debt and related interest obligations at December 31, 2017 are shown in the above table. Mandatory repayments of debt over the next 12 months include the scheduled repayment of the current portion of the Company’s 2019 term loan. The Company also has the right, at its option, to prepay indebtedness under the credit facility without further penalty and to redeem the senior notes by paying a ‘make-whole’ premium as provided under the applicable debt instrument.
Operating Leases - We lease office space and furniture under operating lease agreements with terms typically ranging from three to twenty years. We have determined that there is not a large concentration of leases that will expire in any one fiscal year. Consequently, management anticipates that any increase in future rent expense on leases will be mainly market-driven. We also lease cars and selected computer equipment under operating lease agreements. For acquired operating leases, intangible assets or liabilities have been recognized for the difference between the contractual cash obligations and the estimated market rates at the time of acquisition. These intangibles are amortized to rent expense but do not affect our contractual cash obligations. See further discussion in Item 8, Note 13 - Commitments and Contingencies in this Annual Report on Form 10-K.
Transition Tax - The table above excludes a $72 million provisional transition tax payable resulting from U.S. Tax Reform. The Company can and will elect to pay this one-time tax liability over an eight-year period without interest. The one-time transition tax cannot be reasonably estimated because the Company has a significant number of foreign subsidiaries and therefore has not yet completed its calculation of the total post-1986 E&P as well as non-U.S. income taxes paid for these foreign subsidiaries. The Company expects to revise its estimates throughout 2018 when actual results become available. Future guidance may be released which could also impact these estimates.
Guarantees, Acquisition Liabilities and Other Contractual Obligations - Information regarding guarantees and other contractual obligations and their impact on the financial statements is set forth in Item 8, Note 13 - Commitments and Contingencies in this Annual Report on Form 10-K.
Claims, Lawsuits and Other Proceedings, including Stanford Financial Group Litigation - Information regarding claims, lawsuits and other proceedings, including the Stanford Financial Group litigation, and their impact on the consolidated financial statements is set forth in Item 8, Note 13 - Commitments and Contingencies in this Annual Report on Form 10-K.
In order to assist readers of our consolidated financial statements in understanding the core operating results that Willis Towers Watson’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:
Tax effect of U.S.Tax Reform - Relates to the (1) U.S. income tax adjustment of deferred taxes upon the change in the federal corporate tax rate, (2) the impact of the one-time transition tax on accumulated foreign earnings net of foreign tax credits, and (3) the re-measurement of our net deferred tax liabilities associated with the U.S. tax on certain foreign earnings offset with a write-off of deferred tax assets that will no longer be realizable under U.S. Tax Reform.
Gain on re-measurement of equity interests - The Company recognized a gain as a result of re-measuring its prior equity interest in Gras Savoye held before the business combination in 2015.
We consider adjusted revenues to be an important financial measure, which is used to internally evaluate and assess our core operations and to benchmark our operating results against our competitors.
Adjusted revenues is defined as total revenues adjusted for the fair value adjustment for deferred revenues that would otherwise have been recognized but for the purchase accounting treatment of these transactions. U.S. GAAP accounting requires the elimination of this revenue.
We have included the reconciliation of total revenues to adjusted revenues in the table below, together with our reconciliation of the pro forma revenues change to the constant currency and organic changes.
Constant Currency Change - Represents the year over year change in revenues 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 revenues, translated at the current year monthly average exchange rates, to the current year as reported revenues, for the same period. We believe constant currency measures provide useful information to investors because they provide transparency to performance by excluding the effect that foreign currency exchange rate fluctuations have on period-over-period comparability given volatility in foreign currency exchange markets.
Organic Change - Excludes both the impact of fluctuations in foreign currency exchange rates, as described above, as well as the period-over-period impact of acquisitions and divestitures. 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 incurred these transaction-related items, since the nature, size and number of these transaction-related items can vary from period to period.
A reconciliation of total revenues to adjusted revenues for the years ended December 31, 2017 and 2016, and a reconciliation of the reported change to the constant currency and organic changes for the year ended December 31, 2017 from the prior year is as follows:
We consider adjusted operating income to be an important financial measure, which is used to internally evaluate and assess our core operations and to benchmark our operating results against our competitors.
Includes pro forma adjustments made in the Supplementary Pro Forma Financial Information section in this Form 10-K.
Adjusted operating income for the year ended December 31, 2016 was $1.6 billion, compared to pro forma $1.5 billion for the year ended December 31, 2015, an increase of $109 million. The increase in adjusted operating income for the year ended December 31, 2016 was primarily driven by our acquisition of Gras Savoye, the settlement with JLT of £28 million ($41 million) related to the Fine Art, Jewellery and Specie team, and the performance of our Benefits Delivery and Administration segment.
Adjusted EBITDA is defined as net income/(loss) adjusted for provision for/(benefit from) income taxes, interest expense, depreciation and amortization, restructuring costs, transaction and integration expenses, significant litigation settlements, significant pension settlement and curtailment activity, the fair value adjustment for deferred revenue, loss/(gain) on disposal of operations and non-recurring items that, in management’s judgment, significantly affect the period-over-period assessment of operating results.
A reconciliation of net income to adjusted EBITDA for the years ended December 31, 2017 and 2016 is as follows:
Adjusted EBITDA for the year ended December 31, 2017 was $1.9 billion, compared to $1.8 billion for the year ended December 31, 2016, an increase of $130 million, or 7%. The increase in Adjusted EBITDA for the year ended December 31, 2017 was largely due to revenue growth across all segments partially offset by higher salary and benefits costs. The prior year also included settlement income of £28 million ($41 million) related to the Fine Arts, Jewellery and Specie team.
Adjusted EBITDA for the year ended December 31, 2016 was $1.8 billion, compared to pro forma $1.7 billion for the year ended December 31, 2015, an increase of $89 million. The increase in Adjusted EBITDA for the year ended December 31, 2016 was primarily driven by our acquisition of Gras Savoye, the settlement with JLT of £28 million ($41 million) related to the Fine Art, Jewellery and Specie team, and the performance of our Benefits Delivery and Administration segment.
Adjusted net income is defined as net income attributable to Willis Towers Watson adjusted for amortization, restructuring costs, transaction and integration expenses, significant litigation settlements, significant pension settlement and curtailment activity, the fair value adjustment of deferred revenue, loss/(gain) on disposal 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, the tax effects of internal reorganizations and U.S. Tax Reform. 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.
Our adjusted diluted earnings per share increased for the year ended December 31, 2017 as compared to the prior year primarily due to revenue growth across all segments partially offset by higher salary and benefits costs. The prior year also included settlement income of £28 million ($41 million) related to the Fine Arts, Jewellery and Specie team.
A reconciliation of net income attributable to Willis Towers Watson to adjusted diluted earnings per share for the years ended December 31, 2016 and 2015 is as follows:
The tax effect was calculated using the statutory tax rate applicable to the item being adjusted for in the jurisdiction from which each adjustment arises.
Adjusted income before taxes is defined as income from operations before income taxes and interest in earnings of associates adjusted for amortization, restructuring costs, transaction and integration expenses, significant litigation settlements, significant pension settlement and curtailment activity, the fair value adjustment of deferred revenue, (gain)/loss on disposal 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/(benefit from) income taxes adjusted for taxes on certain items of amortization, restructuring costs, transaction and integration expenses, significant litigation settlements, significant pension
settlement and curtailment activity, the fair value adjustment for deferred revenue, loss/(gain) on disposal of operations, tax effects of internal reorganizations and U.S. Tax Reform, 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.
Reconciliations of income from operations before income taxes and interest in earnings of associates to adjusted income before taxes and provision for/(benefit from) income taxes to adjusted income taxes for the years ended December 31, 2017 and 2016 are as follows:
(ii) We have not presented this measure on a comparative basis with 2015 because it is not practical to present the 2015 adjusted income tax rate on a pro forma basis, as making tax-effected non-GAAP adjustments on a proforma basis would be highly speculative in nature.
Free cash flow is defined as cash flows from operating activities less cash used to purchase fixed assets and software for internal use and is used to evaluate our liquidity.
As a result of the adoption of ASU 2016-09, cash flows from operating activities for the years ended December 31, 2016 and 2015 increased by $13 million and $1 million, respectively, increasing free cash flow by the same amount. See Item 8, Note 2 - Basis of Presentation and Significant Accounting Policies of this Form 10-K report for a further discussion of this change.
The Company recognizes deferred tax assets and liabilities for the estimated future tax consequences of events attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating and capital loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted rates in effect for the year in which the differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of changes in tax rates is recognized in the statement of comprehensive income in the period in which the change is enacted. Deferred tax assets are reduced through the establishment of a valuation allowance at such time as, based on available evidence, it is more likely than not that the deferred tax assets will not be realized. The Company adjusts valuation allowances
to measure deferred tax assets at the amount considered realizable in future periods if the Company’s facts and assumptions change. In making such determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and the results of recent financial operations. We place more reliance on evidence that is objectively verifiable.
Descriptions of our U.S. and U.K. plans, which comprise 91% of our projected benefit obligations and 93% of our plan assets, are below:
Willis Towers Watson Plan - Substantially all U.S. employees are eligible to participate in this plan. Benefits are provided under a stable value pension plan design. The original stable value design came into effect on January 1, 2012. As of July 1, 2017, existing plan participants earn benefits without having to make employee contributions, and all newly eligible employees are required to contribute 2% of pay to participate in the plan.
Willis Towers Watson considers several factors prior to the start of each fiscal year when determining the appropriate annual assumptions, including economic forecasts, relevant benchmarks, historical trends, portfolio composition and peer company comparisons. These assumptions, used to determine our pension liabilities and pension expense are reviewed annually by senior
We recorded a combined $113 million net periodic benefit income for our U.S. and U.K. plans for the year ended December 31, 2017. For the U.S. and U.K. plans, the following table presents our estimated net periodic benefit income for 2018 and the impact to both plans of a 0.25% increase and decrease to both the expected return on assets (‘EROA’) and the discount rate assumptions, and the projected benefit obligations as of December 31, 2017 and the impact of a 0.25% increase and decrease to the discount rates:
In applying the acquisition method of accounting for business combinations, amounts assigned to identifiable assets and liabilities acquired were based on estimated fair values as of the date of acquisition, with the remainder recorded as goodwill. Intangible assets are initially valued at fair value using generally accepted valuation methods appropriate for the type of intangible asset. Intangible assets with definite lives are amortized over their estimated useful lives and are reviewed for impairment if indicators of impairment arise. Intangible assets with indefinite lives are tested for impairment annually as of October 1, and whenever indicators of impairment arise. The fair value of the intangible assets is compared with their carrying value and an impairment loss would be recognized for the amount by which the carrying amount exceeds the fair value. Goodwill is tested for impairment annually as of October 1, and whenever indicators of impairment arise.
Goodwill is tested at the reporting unit level, and the Company had nine reporting units as of October 1, 2017.
Our accounting for deferred costs will change. First, for those portions of the business that previously deferred costs (related to system implementation activities), the length of time over which we amortize those costs will extend to a longer estimated contract term. For 2017 calendar year and prior, these costs were amortized over a typical period of 3-5 years in accordance with the initial stated terms of the customer agreements. Second, other types of arrangements with associated costs now meet the criteria for cost deferral under ASC 606, Revenue from Contracts with Customers. This guidance will now apply to our broking arrangements and certain consulting engagements. We have calculated a retained earnings adjustment to reflect this cumulative change for contracts not complete as of the transition date.
The majority of our leases are currently considered operating leases and will be capitalized as a lease asset on our balance sheets with a related lease liability for the obligated lease payments when the ASU is adopted. The ASU becomes effective for the Company at the beginning of the 2019 fiscal year; early adoption is permitted.
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2017
We were not engaged to audit, review or apply any procedures to the adjustments to retrospectively apply the changes in accounting discussed in Note 2 or to the retrospective adjustments to the disclosures for a change in the composition of reportable segments discussed in Note 4 to the consolidated financial statements and, accordingly, we do not express an opinion or any other form of assurance about whether such retrospective adjustments are appropriate and have been properly applied. Those retrospective adjustments were audited by other auditors.
Basic and diluted earnings per share and cash dividends declared per share, for the year ended December 31, 2015 have been retroactively adjusted to reflect the reverse stock split on January 4, 2016. See Note 3 - Merger, Acquisitions and Divestitures for further details.
The nominal value of the ordinary shares and the number of ordinary shares issued in the year ended December 31, 2015 have been retroactively adjusted to reflect the reverse stock split on January 4, 2016. See Note 3 -Merger, Acquisitions and Divestitures for further details.
Willis Towers Watson plc is a leading global advisory, broking and solutions company that helps clients around the world turn risk into a path for growth. Willis Towers Watson has more than 43,000 employees and services clients in more than 140 countries and territories. We design and deliver solutions that manage risk, optimize benefits, cultivate talent, and expand the power of capital to protect and strengthen institutions and individuals. We believe our broad perspective allows us to see the critical intersections between talent, assets and ideas - the dynamic formula that drives business performance.
We offer our clients a broad range of services to help them identify and control their risks, and to enhance business performance by improving their ability to attract, retain and engage a talented workforce. Our risk control services range from strategic risk consulting (including providing actuarial analysis), to a variety of due diligence services, to the provision of practical on-site risk control services (such as health and safety or property loss control consulting), as well as analytical and advisory services (such as hazard modeling and reinsurance optimization studies). We assist clients in planning how to manage incidents or crises when they occur. These services include contingency planning, security audits and product tampering plans. We help our clients enhance their business performance by delivering consulting services, technology and solutions that help them anticipate, identify and capitalize on emerging opportunities in human capital management as well as investment advice to help our clients develop disciplined and efficient strategies to meet their investment goals.
The Merger with Towers Watson that closed on January 4, 2016 affects the comparability between 2015 and the later periods presented. See Note 3 - Merger, Acquisitions and Divestitures for additional information.
Use of Estimates - These consolidated financial statements conform to accounting principles generally accepted in the United States of America (‘U.S. GAAP’), which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Our estimates, judgments and assumptions are continually evaluated based on available information and experience. Because of the use of estimates inherent in the financial reporting process, actual results could differ from those estimates. Estimates are used when accounting for revenue recognition, the selection of useful lives of fixed and intangible assets, impairment testing, valuation of billed and unbilled receivables from
clients, discretionary compensation, income taxes, pension assumptions, incurred but not reported claims, legal reserves and goodwill and intangible assets.
Common Shares Split - On January 4, 2016, the Company effected a 1 to 2.6490 reverse share split to shareholders of record as of January 4, 2016. All share and per share information has been retroactively adjusted to reflect the reverse share split and show the new number of shares. See Note 3 - Merger, Acquisitions and Divestitures for additional information about our Merger and reverse share split.
Fiduciary Assets and Liabilities - Fiduciary funds represent unremitted premiums received from insureds and unremitted claims or refunds received from insurers. Fiduciary funds are generally required to be kept in certain 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 insureds and insurers, the Company is entitled to retain investment income earned on fiduciary funds in accordance with industry custom and practice and, in some cases, as supported by agreements with insureds. The period for which the Company holds such funds is dependent upon the date the insured remits the payment of the premium to the Company, or the date the Company receives refunds from the insurers, and the date the Company is required to forward such payment to the insurer, or insured, respectively. In certain instances, the Company advances premiums, refunds or claims to insurance underwriters or insureds prior to collection. Such advances are made from fiduciary funds and are reflected in the consolidated balance sheets as fiduciary assets. Fiduciary liabilities represent the obligations to remit fiduciary funds and fiduciary receivables to insurers or insureds. Certain of our health and welfare benefits administration outsourcing agreements require us to hold funds on behalf of clients to pay obligations on their behalf. These amounts are included in fiduciary assets and fiduciary liabilities on the consolidated balance sheets.
Upon consolidation, the results of operations of subsidiaries and associates whose functional currency is other than the U.S. dollar are translated into U.S. dollars at the average exchange rates and assets and liabilities are translated at year-end exchange rates. Translation adjustments are presented as a separate component of other comprehensive income in the financial statements and are included in net income only upon sale or liquidation of the underlying foreign subsidiary or associated company.
Derivatives - The Company uses derivative financial instruments for other than trading purposes to alter the risk profile of an existing underlying exposure. Interest rate swaps have been used to manage interest risk exposures. Forward foreign currency exchange contracts are used to manage currency exposures arising from future income and expenses. The fair values of derivative contracts are recorded in other assets and other liabilities. The effective portions of changes in the fair value of derivatives that qualify for hedge accounting as cash flow hedges are recorded in other comprehensive income. Amounts are reclassified from other comprehensive income into earnings when the hedged exposure affects earnings. If the derivative is designated and qualifies as an effective fair value hedge, the changes in the fair value of the derivative and of the hedged item associated with the hedged risk are both recognized in earnings. The amount of hedge ineffectiveness recognized in earnings is based on the extent to which an offset between the fair value of the derivative and hedged item is not achieved. Changes in fair value of derivatives that do not qualify for hedge accounting, together with any hedge ineffectiveness on those that do qualify, are recorded in other operating expenses or interest expense as appropriate.
The Company evaluates whether its contracts include clauses or conditions which would be required to be separately accounted for at fair value as embedded derivatives. See Note 9 - Derivative Financial Instruments for additional information about the Company’s derivatives.
Share-Based Compensation - The Company has equity-based compensation plans that provide for grants of restricted stock units and stock options to employees and non-employee directors of the Company.
The Company expenses equity-based compensation, which is included in Salaries and benefits in the consolidated statements of comprehensive income, primarily on a straight-line basis over the requisite service period. The significant assumptions underlying our expense calculations include the fair value of the award on the date of grant, the estimated achievement of any performance targets and estimated forfeiture rates. The awards under equity-based compensation are classified as equity and included as a component of equity on the Company’s consolidated balance sheets, as the ultimate payment of such awards will not be achieved through use of the Company’s cash or other assets. See Note 17 - Share-based Compensation for additional information about the Company’s share-based compensation.
Depreciation on internally developed software is amortized over the estimated useful life of the asset ranging from 3 to 10 years. Buildings include assets held under capital leases and are depreciated over the lesser of 50 years, the asset lives or the lease terms. Depreciation on leasehold improvements is calculated over the lesser of the useful lives of the assets or the remaining lease terms. Depreciation on furniture and equipment is calculated based on a range of 3 to 10 years. Land is not depreciated.
Long-lived assets are tested for recoverability whenever events or changes in circumstance indicate that their carrying amounts may not be recoverable. An impairment loss is recognized if the carrying amount of a long-lived asset is not recoverable and exceeds its fair value. Recoverability is determined based on the undiscounted cash flows expected to result from the use and eventual disposition of the asset or asset group. Long-lived assets and certain identifiable intangible assets to be disposed of are reported at the lower of carrying amount or fair value less cost to sell. See Note 7 - Fixed Assets for additional information about our fixed assets.
Operating Leases -Rentals payable on operating leases are charged on a straight-line basis to Other operating expenses in the consolidated statements of comprehensive income over the lease term. See Note 13 - Commitments and Contingencies for additional information about our operating leases.
Revenue recognized in excess of billings is recorded as unbilled accounts receivable. Cash collections in excess of revenue recognized are recorded as deferred revenue until the revenue recognition criteria are met. Client reimbursable expenses, including those relating to travel, other out-of-pocket expenses and any third-party costs, are included in revenue, and an equivalent amount of reimbursable expenses is included in other operating expenses as a cost of revenue. Taxes collected from customers and remitted to government authorities are recorded net and are excluded from revenue.
Consulting revenue. The majority of our consulting revenues consists of fees earned from providing consulting services. We recognize revenues from these consulting engagements when hours are worked, either on a time-and-expense basis or on a fixed-fee basis, depending on the terms and conditions defined at the inception of an engagement with a client. We have engagement letters with our clients that specify the terms and conditions upon which the engagements are based. These terms and conditions can only be changed upon agreement by both parties. Individual billing rates are principally based on a multiple of salary and compensation costs.
Revenues for fixed-fee arrangements are based upon the proportional performance method to the extent estimates can be made of the remaining work required under the arrangement. If we do not have sufficient information to estimate proportional performance, we recognize the fees straight-line over the contract period. We typically have four types of fixed-fee arrangements: annual recurring projects, projects of a short duration, stand-ready obligations and non-recurring system projects.
Non-recurring system projects. These projects are longer in duration and subject to more changes in scope as the project progresses. Certain software or outsourced administration contracts generally provide that if the client
terminates a contract, we are entitled to an additional payment for services performed through termination designed to recover our up-front cost of implementation.
Hosted software. We have developed various software programs and technologies that we provide to clients in connection with consulting services. In most instances, such software is hosted and maintained by us and ownership of the technology and rights to the related code remain with us. We defer costs for software developed to be utilized in providing services to a client, but for which the client does not have the contractual right to take possession, during the implementation stage. We recognize these deferred costs from the go live date, signaling the end of the implementation stage, until the end of the initial term of the contract with the client. We determined that the system implementation and customized ongoing administrative services are one combined service. Revenue is recognized over the service period, after the go live date, on a straight-line basis. As a result, we do not recognize revenue during the implementation phase of an engagement.
In May 2014, the Financial Accounting Standards Board (‘FASB’) issued Accounting Standard Update (‘ASU’) No. 2014-09, Revenue From Contracts With Customers. The new standard supersedes most current revenue recognition guidance and eliminates most industry-specific guidance. The ASU is based on the principle that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to fulfill a contract. Entities have the option of using either a full retrospective or a modified retrospective approach for the adoption of the new standard. Additional ASUs have since been issued which provide further guidance, examples and technical corrections for the implementation of ASU No. 2014-09. All related guidance has been codified into, and is now known as, Accounting Standards Codification (‘ASC’) 606. The guidance was effective for the Company at the beginning of its 2018 fiscal year, with early adoption permitted.
As a result of analyzing our various revenue streams to determine the full impact this standard will have on our revenue recognition, cost deferral, systems and processes, the Company has determined the following:
The Company has adopted the standard using the modified retrospective approach on January 1, 2018, and has applied the new standard only to contracts that are not completed as of the transition date.
Additionally, the revenue recognition for proportional treaty broking commissions has moved from recognition upon the receipt of the monthly or quarterly statements, to the recognition of an estimate of expected commissions upon the policy effective date. Since the majority of revenue recognized historically based on these monthly or quarterly statements was received over a two-year period, we will reflect an adjustment to retained earnings at the adoption date for the portion of revenue that would otherwise have been recognized during our 2018 calendar year related to policies effective in 2017 or prior.
Our accounting for deferred costs will change. First, for those portions of the business that previously deferred costs (related to system implementation activities), the length of time over which we amortize those costs will extend to a longer estimated contract term. For 2017 calendar year and prior, these costs were amortized over a typical period of 3-5 years in accordance with the initial stated terms of the customer agreements. Second, other types of arrangements with associated costs now meet the criteria for cost deferral under ASC 606. This guidance will now apply to our broking arrangements and certain consulting engagements. We have calculated a retained earnings adjustment to reflect this cumulative change for contracts not complete as of the transition date.
Although we are still finalizing the impact to retained earnings as of January 1, 2018, we expect the total range of adjustment, before the effect of taxes, to be an increase to retained earnings of $375 million to $475 million.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments, which amends guidance on presentation and classification of eight specific cash flow issues with the objective of reducing diversity in practice. The ASU became effective for the Company at the beginning of its 2018 calendar year, at which time the Company adopted it. Consistent with the transition guidance, the Company will reflect the new guidance as of the beginning of 2018 in our first quarter Form 10-Q. The Company is still assessing the impact of this ASU, but it believes the impact on its financial statements will be immaterial.
In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation, which simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The ASU became effective for the Company on January 1, 2017. In accordance with the prospective adoption of the recognition of excess tax benefits and deficiencies in the consolidated statements of comprehensive income, we recognized a $7 million tax benefit in provision for income taxes during the year ended December 31, 2017. In addition, we elected to prospectively adopt the amendment to present excess tax benefits on share-based compensation as an operating activity, resulting in the recognition of a $7 million excess tax benefit as an operating activity in the consolidated statement of cash flows for the year ended December 31, 2017. We elected to continue to estimate expected forfeitures. We also retrospectively adopted the amendment to present cash payments to tax authorities in connection with shares withheld to meet statutory tax withholding requirements as a financing activity. As a result, these $13 million and $1 million uses of cash were reclassified from net cash from operating activities to net cash used in financing activities in the consolidated statement of cash flows for the years ended December 31, 2016, and December 31, 2015, respectively.
asset transfers. Current U.S. GAAP prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. The ASU states that an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The amendments in this ASU should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company elected to early adopt this standard on January 1, 2017, and recorded a cumulative reduction to retained earnings of $3 million.
The Merger was accounted for using the acquisition method of accounting, with Willis considered the accounting acquirer of Towers Watson.
Represents individual in-process research and development (‘IPR&D’) software components not placed into service as of the acquisition date. These assets were subsequently placed into service during the three months ended March 31, 2017, were reclassified into finite-lived software intangible assets, and are being amortized in line with underlying cash flows or on a straight-line basis.
Stock Options. The outstanding unvested employee stock options were converted into 592,486 Willis Towers Watson stock options using the conversion ratios stated in the Merger agreement for the number of options. The fair value of the stock options was calculated using the Black-Scholes model with a volatility and risk-free interest rate over the expected term of each group of options and Willis Towers Watson’s closing share price on the date of acquisition. We determined the fair value of the portion of the outstanding options related to pre-acquisition employee service using the straight-line expense methodology from the date of grant to the acquisition date to be $7 million, which was added to the transaction consideration. The fair value of the
The union combines the Company’s global insurance broking footprint with Gras Savoye’s particularly strong presence in France, Central and Eastern Europe, and across Africa. Gras Savoye’s expertise in high-growth markets and industry sectors complements the Company’s global strengths, creating value for clients.
Deferred consideration is payable on the first and second anniversary of the acquisition. In December 2017, the Company made final consideration payments of $3 million. The discounted fair value of the deferred consideration at December 31, 2016 was $4 million. None of the goodwill recognized on the transaction is tax deductible.
On May 31, 2015, Legacy Willis completed the transaction to acquire an 85 percent interest in Miller, a leading London wholesale specialist insurance broking firm, for total consideration of $401 million, including cash consideration of $232 million.
Cumulative Divestiture Impact - Including the divestiture of Global Wealth Solutions, we sold five businesses during the second half of 2017. For the year ended December, 31, 2017, the total gain recognized related to business disposals was $13 million, which was recorded in Other expense/(income), net on the accompanying consolidated statements of comprehensive income. Results from these disposals prior to the sales represented $54 million of revenue and $13 million of operating income for the year ended December 31, 2017.
Willis Towers Watson has four reportable operating segments or business areas:
Benefits Delivery and Administration (‘BDA’) - formerly known as Exchange Solutions (i)
Beginning in 2017, we made certain changes that affect our segment results. These changes, which are detailed in the Form 8-K filed with the SEC on April 7, 2017, include the following:
First, to better align our business within our segments, we moved Max Matthiessen, which specializes in pension investment advice, to Investment, Risk and Reinsurance from Human Capital and Benefits; and moved Fine Art, Jewellery and Specie, which is a specialty broker, to Corporate Risk and Broking from Investment, Risk and Reinsurance.
The Company experiences seasonal fluctuations of its commissions and fees revenue. Revenue is typically higher during the Company’s first and fourth quarters due to the timing of broking-related activities.
Below are our revenues and long-lived assets for Ireland, our country of domicile, countries with significant concentrations, and all other foreign countries for each of the years ended December 31, 2017, 2016 and 2015:
Operational Improvement Program - In April 2014, Legacy Willis announced a multi-year operational improvement program designed to strengthen its client service capabilities and to deliver future cost savings. The main elements of the program, which were completed by the end of 2017, included: moving more than 3,500 support roles from higher cost locations to facilities in lower cost locations; net workforce reductions in support positions; lease consolidation in real estate; and information technology systems simplification and rationalization.
The Company recognized restructuring costs of $134 million, $145 million, and $126 million for the years ended December 31, 2017, 2016, and 2015, respectively, related to the Operational Improvement Program. The Company has spent a cumulative amount of $441 million on restructuring charges for this program.
An analysis of the total cumulative restructuring costs recognized for the Operational Improvement Program from its commencement to December 31, 2017 by segment is as follows:
The changes in the Company’s liability under the Operational Improvement Program from its commencement to December 31, 2017, are as follows:
The changes in the Company’s liability under the Business Restructure Program from its commencement to December 31, 2017, are as follows:
The Company's accounting for the following law changes of U.S. Tax Reform is incomplete, and it is not yet able to make reasonable estimates of the effects. Therefore, no provisional adjustment was recorded.
the Company is continuing to evaluate this provision of U.S. Tax Reform and the application of ASC 740. Under U.S. GAAP, the Company is allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the ‘period cost method’) or (2) factoring such amounts into a company’s measurement of its deferred taxes (the ‘deferred method’). The Company’s selection of an accounting policy with respect to the new GILTI tax rules will depend, in part, on analyzing its global income of its CFCs to determine whether it expects to have future U.S. inclusions in taxable income related to GILTI and, if so, what the impact is expected to be. Because whether the Company expects to have future U.S. inclusions in taxable income related to GILTI depends on not only its current structure and estimated future results of global operations but also its intent and ability to modify its structure and/or its business, the Company is not yet able to reasonably estimate the effect of this provision of U.S. Tax Reform. Therefore, it has not made any adjustments related to potential GILTI tax in its consolidated financial statements and has not made a policy decision.
Valuation allowances - The Company must assess whether valuation allowances assessments are affected by various aspects of U.S. Tax Reform (e.g., limitation on net interest expense in excess of 30% of adjusted taxable income). As of December 31, 2017, no changes to valuation allowances have been recorded as a result of U.S. Tax Reform.
The components of the income tax provision for/(benefit from) income from operations include:
The U.S. federal current tax expense includes the impact of a one-time transition tax expense of $70 million related to U.S. Tax Reform which the Company intends to elect to pay over an eight year period without interest. The Company currently estimates that $6 million of this transition tax liability will be paid within the next twelve months.
The reported income tax provision for /(benefit from) operations differs from the amounts that would have resulted had the reported income before income taxes been taxed at the U.S. federal statutory rate. The principal reasons for the differences between the amounts provided and those that would have resulted from the application of the U.S. federal statutory tax rate are as follows:
During December 2017, the Company re-measured its U.S. deferred tax assets and liabilities as a result of U.S. Tax Reform to the newly enacted federal tax rate, which is 21%. The net deferred income tax assets are included in other non-current assets and the net deferred tax liabilities are included in deferred tax liabilities in our consolidated balance sheets.
At December 31, 2017, we had U.S. federal and non-U.S. net operating loss carryforwards amounting to $289 million of which $237 million can be indefinitely carried forward under local statutes. The remaining $52 million of net operating loss carryforwards will expire, if unused, in varying amounts from 2018 through 2037. In addition, we had U.S. state net operating loss carryforwards of $1.5 billion, which will expire in varying amounts from 2018 to 2037.
Management believes, based on the evaluation of positive and negative evidence, including the future reversal of existing taxable temporary differences, it is more likely than not that the Company will realize the benefits of net deferred tax assets of $592 million, net of the valuation allowance. During 2017 the Company increased its valuation allowance by $28 million primarily due to state net operating losses as it is more likely than not that such losses will not be realized in the foreseeable future. During 2016 the Company released a U.S. valuation allowance of $69 million relating to accrued interest not deductible as a result of deferred tax liabilities recorded for the Merger. The future reversal of the deferred tax liabilities serve as a source of income to recognize the deferred tax asset for accrued interest not deductible. During 2015 the Company released a U.S. valuation allowance of $91 million due to an increase in actual and forecast U.S. earnings.
At December 31, 2017 and 2016, the Company had valuation allowances of $162 million and $134 million, respectively, to reduce its deferred tax assets to estimated realizable value. The valuation allowance at December 31, 2017 relates to deferred tax assets for U.K. capital loss carryforwards of $28 million, which have an unlimited carryforward period but can only be utilized against capital gains and U.S. and non-U.S. net operating losses of $80 million and $34 million, respectively. The valuation allowance at December 31, 2016 relates to deferred tax assets for U.K. capital loss carryforwards of $28 million, which have an unlimited carryforward period and U.S. and non-U.S. net operating losses of $78 million and $28 million, respectively.
The cumulative earnings related to amounts reinvested indefinitely as of December 31, 2017 were approximately $6.8 billion. If future events, including material changes in estimates of cash, working capital, long-term investment requirements or additional guidance 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.
At December 31, 2017, the amount of unrecognized tax benefits associated with uncertain tax positions, determined in accordance with ASC 740-10, excluding interest and penalties, was $59 million. A reconciliation of the beginning and ending balances of the liability for unrecognized tax benefits is as follows:
The liability for unrecognized tax benefits for the years ended December 31, 2017, 2016 and 2015 can be reduced by $3 million, $4 million and nil, respectively, of offsetting deferred tax benefits associated with timing differences, foreign tax credits and the federal tax benefit of state income taxes. If these offsetting deferred tax benefits were recognized, there would have been a favorable impact on our effective tax rate. There are no material balances that would result in adjustments to other tax accounts.
Depreciation related to capital leases was $2 million for each of the years ended December 31, 2017, 2016 and 2015.
Goodwill represents the excess of the cost of businesses acquired over the fair market value of identifiable net assets at the dates of acquisition. Goodwill is not amortized but is subject to impairment testing annually and whenever facts or circumstances indicate that the carrying amounts may not be recoverable. Goodwill is allocated to our reporting units primarily based on the original purchase price allocation for acquisitions within the reporting units, or relative fair value when an acquisition covers multiple reporting units. When a business entity is sold, goodwill is allocated to the disposed entity based on the relative fair value of that entity compared with the fair value of the reporting unit in which it was included.
The following table reflects changes in the net carrying amount of the components of finite-lived intangible assets for the year ended December 31, 2017:
All in-process research and development intangible assets acquired as part of the Merger on January 4, 2016 of $39 million ($36 million at the date placed into service due to changes in foreign currency exchange rates) have been placed into service during the year ended December 31, 2017 and have been included as intangible assets acquired in this presentation.
The following table reflects changes in the net carrying amount of the components of finite-lived intangible assets for the year ended December 31, 2016:
As a result of the Company’s operating activities, the Company holds fiduciary funds. The Company earns interest on these funds, which is included in the Company’s consolidated financial statements in interest and other income. These funds are regulated in terms of access as are the instruments in which they may be invested, most of which are short-term in nature.
During 2015, in order to manage interest rate risk arising from these financial assets, the Company entered into interest rate swaps to receive a fixed rate of interest and pay a variable rate of interest. These derivatives, with total notional amounts of $300 million, were designated as hedging instruments at December 31, 2017 and December 31, 2016 and had net fair value liabilities of $1 million and nil, respectively.
Certain non-U.S. subsidiaries receive revenues and incur expenses in currencies other than their functional currency, and as a result, the foreign subsidiary’s functional currency revenues will fluctuate as the currency rates change. Additionally, the forecast Pounds sterling expenses of our London brokerage market operations may exceed their Pounds sterling revenues, and they may also hold a significant net Pounds sterling asset or liability position in the consolidated balance sheet. To reduce such variability, we use foreign exchange contracts to hedge against this currency risk.
These derivatives were designated as hedging instruments and at December 31, 2017 and December 31, 2016 had total notional amounts of $937 million and $945 million, respectively, and net fair value liabilities of $21 million and $110 million, respectively.
All direct obligations under the 6.200% (repaid during 2017), 7.000% and 3.600% senior notes are issued by Willis North America Inc. and guaranteed by Willis Towers Watson, Willis Netherlands Holdings B.V., Willis Investment U.K. Holdings Limited, TA I Limited, Trinity Acquisition plc, Willis Group Limited, Willis Towers Watson Sub Holdings Unlimited Company and Willis Towers Watson UK Holdings Limited. See Note 21 - Financial Information for Parent Guarantor, Other Guarantor Subsidiaries and Non-Guarantor Subsidiaries.
Willis Securities Inc. (‘WSI’) maintained a $400 million revolving credit facility. The WSI revolving credit facility expired on April 28, 2017. As of December 31, 2017 and 2016, there were no borrowings outstanding under the WSI revolving credit facility.
On May 26, 2016, Trinity Acquisition plc issued €540 million ($609 million) of 2.125% senior notes due 2022 (‘2022 senior notes’). The 2022 senior notes are fully and unconditionally guaranteed by Willis Towers Watson. The effective interest rate of these senior notes is 2.154%, which includes the impact of the discount upon issuance. The 2022 senior notes will mature on May 26, 2022. Interest accrues on the notes from May 26, 2016 and will be paid in cash on May 26 of each year. The net proceeds from this offering, after deducting underwriter discounts and commissions and estimated offering expenses, were €535 million ($600 million). We used the net proceeds of this offering to repay Tranche A of the previous 1-year term loan facility, which matured in 2016, and related accrued interest.
4.625% senior notes due 2023 and 6.125% senior notes due 2043
On January 4, 2016, we acquired a $340 million term loan in connection with the Merger. On November 20, 2015, Towers Watson Delaware Inc. entered into a four-year amortizing term loan agreement for up to $340 million with a consortium of banks to help fund the pre-Merger special dividend. On December 28, 2015, Towers Watson Delaware Inc. borrowed the full $340 million.
Additional Information Regarding Fully Repaid Term Loan Facility and Senior Notes
On November 20, 2015, Legacy Willis entered into a 1-year term loan facility. The 1-year term loan had two tranches: Tranche A was for €550 million, of which €544 million ($592 million) was drawn on December 19, 2015 and used to finance the acquisition of Gras Savoye. Tranche B was for $400 million and was drawn on January 4, 2016 and used to re-finance debt held by Legacy Towers Watson which became due on acquisition. Tranche A was repaid in its entirety on May 26, 2016 from the proceeds from the issuance of our 2022 senior notes discussed above. Tranche B was repaid in its entirety on March 22, 2016 from a portion of the proceeds from the issuance of our senior notes discussed above. The amount outstanding as of December 31, 2015 was $592 million, gross of $5 million in debt fees related to the 1-year term loan facility.
The following tables present our assets and liabilities measured at fair value on a recurring basis at December 31, 2017 and December 31, 2016:
See Note 9 - Derivative Financial Instruments for further information on our derivative instruments.
Probability weightings are based on our knowledge of the past and planned performance of the acquired entity to which the contingent consideration applies. The weighted-average discount rate used on our material contingent consideration calculations was 9.64% and 10.76% at December 31, 2017 and December 31, 2016, respectively. Using different probability weightings and discount rates could result in an increase or decrease of the contingent consideration payable.
The carrying values of our revolving lines of credit and term loans approximate their fair values. The fair values above are not necessarily indicative of the amounts that the Company would realize upon disposition nor do they indicate the Company’s intent or ability to dispose of the financial instrument. The fair value of our respective senior notes are considered level 2 financial instruments as they are corroborated by observable market data.
As part of these obligations, in the United States, the United Kingdom and Canada, we have non-qualified plans that provide for the additional pension benefits that would be covered under the qualified plan in the respective country were it not for statutory maximums. The non-qualified plans are unfunded.
Legacy Willis - This plan was frozen in 2009. Approximately one-quarter of the Legacy Willis employees in the United States have a frozen accrued benefit under this plan.
Legacy Miller - The plan provides retirement benefits based on members’ salaries at the point at which they ceased to accrue benefits under the scheme.
France (Legacy Gras Savoye) - The mandatory retirement indemnity plan is a termination benefit which provides lump sum benefits at retirement. There is no vesting before the retirement date and the benefit formula is determined through the collective bargaining agreement and the labor code. All employees with permanent employment contracts are eligible.
Germany (Legacy Willis) - The defined benefit plan population consists of retirees receiving annuities and three participants with deferred vested benefits. Other employees and former employees participate in defined contribution arrangements.
Ireland (Legacy Willis) - The defined benefit plans provide pension benefits for approximately one third of legacy Willis employees in Ireland. The defined benefit plans are now closed to new entrants.
Amounts recognized in accumulated other comprehensive loss as of December 31, 2017 and 2016 consist of:
The components of the net periodic benefit income and other amounts recognized in other comprehensive (income)/loss for the years ended December 31, 2017, 2016 and 2015 for the defined benefit pension and PRW plans are as follows:
During the year ended December 31, 2017, as a result of past changes in UK legislation and the low interest rate environment, the amount of transfer payments from the Legacy Willis UK pension plan exceeded the plan’s service and interest cost. This triggers settlement accounting which requires immediate recognition of a portion of the obligations associated with the plan transfers. Consequently, the Company recognized a non-cash expense of $36 million.
During fiscal year 2016, we adopted the granular approach to calculating service and interest cost. This was treated as a change in accounting estimate, and resulted in a credit of $51 million included in our total net periodic benefit income reflected above.
The assumptions used to determine net periodic benefit cost for the fiscal years ended December 31, 2017, 2016, and 2015 were as follows:
The following tables present the assumptions used in the valuation to determine the projected benefit obligation for the fiscal years ended December 31, 2017 and 2016:
Other Fixed Income: Foreign and municipal bonds are valued at the closing price reported in the active market in which the bond is traded.
Derivative investments: Valued at the closing level of the relevant index or security and interest accrual through the valuation date.
Certain of Willis Towers Watson’s subsidiaries have given the landlords of some leasehold properties occupied by the Company in the United Kingdom and the United States guarantees in respect of the performance of the lease obligations of the subsidiary holding the lease. The operating lease obligations subject to such guarantees amounted to $669 million and $558 million at December 31, 2017 and 2016, respectively. The capital lease obligations subject to such guarantees amounted to $8 million and $9 million as of December 31, 2017 and 2016, respectively.
The Company has deferred and contingent consideration due to be paid on existing acquisitions until 2019 totaling $96 million at December 31, 2017. Most notably, our liability for the acquisition of Miller Insurance Services LLP in May 2015, for which deferred and contingent consideration, including interest, was $78 million at December 31, 2017. Total deferred and contingent consideration paid during the year ended December 31, 2017 was $65 million.
In July 2010, the Company made a capital commitment of $25 million to Trident V Parallel Fund, LP, an investment fund managed by Stone Point Capital. This replaced a capital commitment of $25 million that had been made to Trident V, LP in December 2009. As of December 31, 2017 there have been approximately $24 million of capital contributions.
Other contractual obligations at December 31, 2017 and 2016, include certain capital lease obligations totaling $48 million and $54 million, respectively, primarily in respect of the Company’s Nashville property.
Errors and omissions claims, lawsuits, and other proceedings arising in the ordinary course of business are covered in part by professional indemnity or other appropriate insurance. See Note 14 for the amounts accrued at December 31, 2017 and 2016 in the consolidated balance sheets. The terms of this insurance vary by policy year. Regarding self-insured risks, the Company has established provisions which are believed to be adequate in the light of current information and legal advice, or, in certain cases, where a range of loss exists, the Company accrues the minimum amount in the range if no amount within the range is a better estimate than any other amount. The Company adjusts such provisions from time to time according to developments.
On February 27, 2018, another purported former stockholder of Legacy Towers Watson filed a putative class action complaint on behalf of a putative class of Legacy Towers Watson stockholders against the former members of the Legacy Towers Watson board of directors, Legacy Towers Watson, Legacy Willis and ValueAct, in the Delaware Court of Chancery, captioned City of Fort Myers General Employees’ Pension Fund v. Towers Watson & Co., et al., C.A. No. 2018-0132. Based on similar allegations, the complaint asserts claims against the former directors of Legacy Towers Watson for breach of fiduciary duty and against Legacy Willis and ValueAct for aiding and abetting breach of fiduciary duty. The defendants have not yet responded to the complaint.
The Company disputes the allegations in these actions and intends to defend the lawsuits vigorously. Given the stage of the proceedings, the Company is unable to provide an estimate of the reasonably possible loss or range of loss in respect of the complaints.
On June 19, 2015, Willis Group Holdings plc filed a motion to dismiss the complaint for lack of personal jurisdiction. On November 17, 2015, Willis Group Holdings plc withdrew the motion.
Rupert, et al. v. Winter, et al., Case No. 2009C115137, was filed on September 14, 2009 on behalf of 97 Stanford investors against Willis Group Holdings plc, Willis of Colorado, Inc. and the same Willis associate, among others, in Texas state court (Bexar County). The complaint alleges claims under the Securities Act of 1933, Texas and Colorado statutory law and Texas common law and seeks special, consequential and treble damages of more than $300 million, attorneys’ fees and costs. On October 20, 2009, certain defendants, including Willis of Colorado, Inc., (i) removed Rupert to the U.S. District Court for the Western District of Texas, (ii) notified the JPML of the pendency of this related action and (iii) moved to stay the action pending a determination by the JPML as to whether it should be transferred to the Northern District of Texas for consolidation or coordination with the other Stanford-related actions. On April 1, 2010, the JPML issued a final transfer order for the transfer of Rupert to the Northern District of Texas. On January 24, 2012, the court remanded Rupert to Texas state court (Bexar County), but stayed the action until further order of the court. On August 13, 2012, the plaintiffs filed a motion to lift the stay, which motion was denied by the court on September 16, 2014. On October 10, 2014, the plaintiffs appealed the court’s denial of their motion to lift the stay to the U.S. Court of Appeals for the Fifth Circuit. On January 5, 2015, the Fifth Circuit consolidated the appeal with the appeal in the Rishmague, et ano. v. Winter, et al. action discussed below, and the consolidated appeal, was fully briefed as of March 24, 2015. Oral argument on the consolidated appeal was held on September 2, 2015. On September 16, 2015, the Fifth Circuit affirmed. The defendants have not yet responded to the complaint in Rupert.
Rishmague, et ano. v. Winter, et al., Case No. 2011CI2585, was filed on March 11, 2011 on behalf of two Stanford investors, individually and as representatives of certain trusts, against Willis Group Holdings plc, Willis of Colorado,
Inc., Willis of Texas, Inc. and the same Willis associate, among others, in Texas state court (Bexar County). The complaint alleges claims under Texas and Colorado statutory law and Texas common law and seeks special, consequential and treble damages of more than $37 million and attorneys’ fees and costs. On April 11, 2011, certain defendants, including Willis of Colorado, Inc., (i) removed Rishmague to the Western District of Texas, (ii) notified the JPML of the pendency of this related action and (iii) moved to stay the action pending a determination by the JPML as to whether it should be transferred to the Northern District of Texas for consolidation or coordination with the other Stanford-related actions. On August 8, 2011, the JPML issued a final transfer order for the transfer of Rishmague to the Northern District of Texas, where it is currently pending. On August 13, 2012, the plaintiffs joined with the plaintiffs in the Rupert action in their motion to lift the court’s stay of the Rupert action. On September 9, 2014, the court remanded Rishmague to Texas state court (Bexar County), but stayed the action until further order of the court and denied the plaintiffs’ motion to lift the stay. On October 10, 2014, the plaintiffs appealed the court’s denial of their motion to lift the stay to the Fifth Circuit. On January 5, 2015, the Fifth Circuit consolidated the appeal with the appeal in the Rupert action, and the consolidated appeal was fully briefed as of March 24, 2015. Oral argument on the consolidated appeal was held on September 2, 2015. On September 16, 2015, the Fifth Circuit affirmed. The defendants have not yet responded to the complaint in Rishmague.
On November 15, 2013, plaintiffs in Janvey filed the operative First Amended Complaint, which added certain defendants unaffiliated with Willis. On February 28, 2014, the defendants filed motions to dismiss the First Amended Complaint, which motions, other than with respect to Willis Group Holding plc’s motion to dismiss for lack of personal jurisdiction, were granted in part and denied in part by the court on December 5, 2014. On December 22, 2014, Willis filed a motion to amend the court’s December 5 order to certify an interlocutory appeal to the Fifth Circuit, and, on December 23, 2014, Willis filed a motion to amend and, to the extent necessary, reconsider the court’s December 5 order. On January 16, 2015, the defendants answered the First Amended Complaint. On January 28, 2015, the court denied Willis’s motion to amend the court’s December 5 order to certify an interlocutory appeal to the Fifth Circuit. On February 4, 2015, the court granted Willis’s motion to amend and, to the extent necessary, reconsider the December 5 order.
On March 31, 2016, the parties in the Troice and Janvey actions entered into a settlement in principle that is described in more detail below.
Martin v. Willis of Colorado, Inc., et al., Case No. 201652115, was filed on August 5, 2016, on behalf of one Stanford investor against Willis Group Holdings plc, Willis Limited, Willis of Colorado, Inc. and the same Willis associate in Texas state court (Harris County). The complaint alleges claims under Texas statutory and common law and seeks actual damages of less than $100,000, exemplary damages, attorneys’ fees and costs. On September 12, 2016, the plaintiff filed an amended complaint, which added five more Stanford investors as plaintiffs and seeks damages in excess of $1 million. The defendants have not yet responded to the amended complaint in Martin.
The Settlement Agreement also provides the parties’ agreement to seek the Court’s entry of bar orders prohibiting any continued or future litigation against the Defendants and their related parties of claims relating to Stanford, whether asserted to date or not. The terms of the bar orders therefore would prohibit all Stanford-related litigation described above, and not just the Actions, but including any pending matters and any actions that may be brought in the future. Final Court approval of these bar orders is a condition of the settlement.
In the amended complaint, plaintiff alleges various deficiencies in pension actuarial work-product and advice stated to have been provided by Legacy Towers Watson’s predecessor firm, Towers Perrin, in its capacity as principal actuary to the Houston Firefighters’ Relief and Retirement Fund (the ‘Fund’). Towers Perrin is stated to have acted in this capacity between “the early 1980s until 2003.”
In particular, the amended complaint alleges “misrepresentations and miscalculations” in valuation reports allegedly issued by Towers Perrin from 2000 through 2002 upon which plaintiff claims to have relied. Plaintiff asserts that Towers Perrin assigned a new team of actuaries to the Fund in 2002 “to correct Towers’ own earlier mistakes” and that the new team “altered” certain calculations which “increased the actuarial accrued liability by $163 million.” Plaintiff claims that the reports indicated that the City’s minimum contribution percentages to the Fund would remain in place through at least 2019 and that existing benefits under the Fund could be increased, and new benefits could be added, without increasing plaintiff’s financial burden, and without increasing plaintiff’s rate of annual contributions to the Fund. The amended complaint alleges that plaintiff relied on these reports when supporting a new benefits package for the Fund. These reports, and other advice, are alleged, among other things, to have been negligent, to have misrepresented the present and future financial condition of the Fund and the contributions required to be made by plaintiff to support those benefits. Plaintiff asserts that, but for Towers Perrin’s alleged negligence and misrepresentations, plaintiff would not have supported the benefits increase, and that such increased benefits would not and could not have been approved or enacted. It is further asserted that Towers Perrin’s alleged “negligence and misrepresentations damaged the City to the tune of tens of millions of dollars in annual contributions.” The amended complaint seeks the award of punitive damages, actual damages, exemplary damages, special damages, attorney’s fees and expenses, costs of suit, pre- and post- judgment interest at the maximum legal rate, and other unspecified legal and equitable relief.
On May 8, 2017, Legacy Towers Watson received the City’s expert’s damages report, which asserted the City has incurred actual damages of approximately $430 million through July 1, 2017, and will incur future damages that have a present value of approximately $400 million as of July 1, 2017 if the Fund pension benefits remain unchanged. On June 30, 2017, Legacy Towers Watson served its expert reports in rebuttal to the City’s expert reports. Legacy Towers Watson’s experts concluded that Legacy Towers Watson’s work was reasonable and conformed with the actuarial standards of practice, and that Legacy Towers Watson did not cause any damages to the City. Legacy Towers Watson’s experts also concluded that the City’s damages model is flawed.
Plaintiffs principally allege that CalPERS mismanaged the LTC Program and its investment assets in multiple respects and breached its contractual and fiduciary duties to plaintiffs and other class members by impermissibly imposing the 85% Increase to make up for investment losses. Plaintiffs also allege that Towers Perrin recommended inadequate initial premium rates at the outset of the LTC Program and used unspecified inappropriate assumptions in its annual valuations for CalPERS. Plaintiffs claim that Towers Perrin’s allegedly negligent acts and omissions, prior to the end of its retainer in 2004, contributed to the need for the 85% Increase.
In May 2016, the case was reassigned to a different judge. The court agreed that Towers Perrin may file a motion for summary judgment which was initially scheduled to be heard on February 3, 2017. The motion was then fully briefed, and the hearing date was thereafter moved to March 8, 2017.
On March 1, 2017, Towers Perrin and Plaintiffs participated in a mediation and reached a settlement in principle. Pursuant to the settlement in principle, in exchange for a dismissal of the claims of all class members and a release of Towers Perrin by all class members, Towers Perrin would pay a total of $9.75 million into an interest-bearing settlement fund, to be used to reimburse class counsel's costs, and for later distribution to class members as approved by the Court. This proposed settlement amount was accrued during the three months ended March 31, 2017. A formal settlement agreement was submitted to the Court for its preliminary approval on May 18, 2017. On October 25, 2017, the Court preliminarily approved the settlement and granted the Company’s unopposed motion for a good faith settlement determination. At the hearing on final approval held on January 26, 2018, the Court granted final approval of the settlement. Class members who properly objected to the settlement have standing to appeal within sixty days of the date notice of entry of judgment is made.
Based on the stage of the proceedings, in the event the final approval of the settlement were to be reversed on appeal, the Company is unable to provide an estimate of the reasonably possible loss or range of loss in respect of the plaintiffs’ complaint.
In October 2017, the European Commission (‘Commission’) disclosed to us that it has initiated civil investigation proceedings in respect of a suspected infringement of E.U. competition rules involving several broking firms, including our principal U.K. broking subsidiary and one of its parent entities. In particular, the Commission has stated that the civil proceedings concern the exchange of commercially sensitive information between competitors in relation to aviation and aerospace insurance and reinsurance broking products and services in the European Economic Area, as well as possible coordination between competitors. The initiation of proceedings does not mean there has been a finding of infringement, merely that the Commission will investigate the case.
Given the status of the investigation, the Company is currently unable to assess the terms on which this investigation, or any other regulatory matter or civil claims emanating from the conduct being investigated, will be resolved, and thus is unable to provide an estimate of the reasonably possible loss or range of loss.
In September 2017, the FCA announced that it would make a market investigation referral with respect to the investment consulting industry to the U.K. Competition & Markets Authority (the ‘CMA’). The CMA then commenced a market investigation, and the Company is currently cooperating with the investigation.
Accounts receivable are stated at estimated net realizable values. The provisions, shown below as of the end of each period, are recorded as the amounts considered by management to be sufficient to meet probable future losses related to uncollectible accounts.
Prior to the acquisition date, the Company accounted for its 30% interest in Gras Savoye as an equity-method investment. The acquisition-date fair value of the previously held equity interest was $158 million and is included in the measurement of the consideration transferred. The Company recognized a gain of $59 million as a result of remeasuring its prior equity interest in Gras Savoye held before the business combination.
On December 31, 2015 the Company began using the SIMADI rate for the Venezuelan bolivar (approximately Venezuelan bolivars 198.7 = U.S. dollar 1) instead of the SICAD I auction rate (approximately Venezuelan bolivars 13.5 = U.S. dollar 1) to translate on Venezuelan retail operations. In March 2016, the DICOM mechanism replaced the SIMADI mechanism. At December 31, 2017, the DICOM rate was approximately Venezuelan bolivars 3,345 = U.S. dollar 1. The Company does not expect the additional devaluation which occurred in January 2018 to be material.
This plan, which was established on April 25, 2012, provides for the granting of incentive stock options, time-based or performance-based non-statutory stock options, share appreciation rights, restricted shares, time-based or performance-based RSUs, performance-based awards and other share-based grants or any combination thereof (collectively referred to as ‘Awards’) to employees, officers, non-employee directors and consultants (‘Eligible Individuals’) of the Company. The board of directors also adopted a sub-plan under the 2012 plan to provide an employee sharesave scheme in the United Kingdom.
In January 2016, in connection with the Merger, we assumed the Towers Watson & Co. 2009 Long-Term Incentive Plan (‘LTIP’) and converted the outstanding unvested restricted stock units and options into Willis Towers Watson RSUs and options using a conversion ratio stated in the Merger Agreement. We determined the fair value of the portion of the outstanding RSUs and options related to pre-acquisition employee service using the straight-line methodology from date of grant to the
The fair value of each option is estimated on the date of grant using the Black-Scholes option pricing model that uses the assumptions noted in the following table. Expected volatility is based on historical volatility of the Company’s shares. The Company uses the simplified method set out in ASC 718 - Compensation - Stock Compensation to derive the expected term of options granted as it does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term. The risk-free rate for periods within the expected life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The assumptions noted in the table below represent the weighted-average of each assumption for each grant during the year.
Classification of options as time-based or performance-based is dependent on the original terms of the award. Performance conditions on the majority of options have been met. A summary of option activity under the plans at December 31, 2017, and changes during the year then ended is presented below:
Certain options are exercisable in Pounds sterling and are converted to dollars using the exchange rate at December 31, 2017.
A summary of time-based and performance-based RSU activity under the plans at December 31, 2017, and changes during the year then ended, is presented below:
The total number of performance-based RSUs that vested during the year ended December 31, 2017 was 318,714 shares at an average share price of $140.32. The total number of performance-based RSUs that vested during the year ended December 31, 2016 was 258,536 shares at an average share price of $119.75. The total number of performance-based RSUs that vested during the year ended December 31, 2015 was 63,180 shares at an average share price of $117.88. At December 31, 2017 there was $28 million of total unrecognized compensation cost related to nonvested performance-based share-based compensation arrangements under the plan; that cost is expected to be recognized over a weighted-average period of 1.5 years.
At December 31, 2017 and 2016, there were 0.8 million and 1.2 million time-based share options; 0.7 million and 0.9 million performance-based options; 0.1 million and 0.4 million restricted time-based stock units; and 0.9 million and 1.2 million restricted performance-based stock units outstanding, respectively.
During the fourth quarter of 2016, management corrected an error by recording a $103 million benefit from income taxes related to the release of a portion of our U.S. deferred tax valuation allowance. A portion of the correction should have been recorded in each of the three fiscal year 2016 Quarterly Reports on Form 10-Q. Management determined that the error was immaterial to the previously filed 2016 quarterly financial statements and had no impact on prior year financial statements.
All direct obligations under the senior notes are jointly and severally, irrevocably and fully and unconditionally guaranteed by Willis Netherlands Holdings B.V., Willis Investment U.K. Holdings Limited, TA I Limited, Trinity Acquisition plc, Willis Group Limited, Willis Towers Watson Sub Holdings Unlimited Company and Willis Towers Watson UK Holdings Limited, collectively the ‘Other Guarantors’, and with Willis Towers Watson, the ‘Guarantor Companies’.
On March 17, 2011, the Company issued senior notes totaling $800 million in a registered public offering. On March 15, 2016, $300 million of these senior notes was repaid, leaving $500 million outstanding. These debt securities were issued by Willis Towers Watson (‘WTW Debt Securities’) and are guaranteed by certain of the Company’s subsidiaries. Therefore, the Company is providing the condensed consolidating financial information below. The following wholly owned subsidiaries (directly or indirectly) fully and unconditionally guarantee the WTW Debt Securities on a joint and several basis: Willis Netherlands Holdings B.V., Willis Investment U.K. Holdings Limited, TA I Limited, Trinity Acquisition plc, Willis Group Limited, Willis North America Inc., Willis Towers Watson Sub Holdings Unlimited Company and Willis Towers Watson UK Holdings Limited (the ‘Guarantors’).
The guarantor structure described above differs from the guarantor structure associated with the senior notes issued by Willis North America described in Note 21 and the guarantor structure associated with the senior notes and revolving credit facility issued by Trinity Acquisition plc described in Note 23.
Note 23 - Financial Information for Issuer, Parent Guarantor, Other Guarantor Subsidiaries and Non-Guarantor Subsidiaries
All direct obligations under the senior notes are jointly and severally, irrevocably and fully and unconditionally guaranteed by Willis Netherlands Holdings B.V., Willis Investment U.K. Holdings Limited, TA I Limited, Willis Group Limited, Willis North America Inc., Willis Towers Watson Sub Holdings Unlimited Company and Willis Towers Watson UK Holdings Limited, collectively the ‘Other Guarantors’, and with Willis Towers Watson, the ‘Guarantor Companies’.
The equity method has been used for investments in subsidiaries in the condensed consolidating balance sheets of Willis Towers Watson, the Other Guarantors and the Issuer.