Willis Disappoints in Q4 - Analyst Blog


Willis Group Holdings plc ( WSH ) reported fourth-quarter 2011 adjusted net income from continuing operations of 46 cents per share, a penny lower than the Zacks Consensus Estimate. Results were 19.3% below 57 cents earned in the year-ago quarter. Adjusted net income from continuing operations was $81 million, down 17.3% from $98 million in the prior-year quarter.

The lower numbers resulted from lower commissions and fees and investment income coupled with higher expenses.

Adjusting for an operational review charge of $36 million or 20 cents and write-off of unamortized debt issuance costs of $6 million or 4 cents per share, the company reported earnings of $39 million or 22 cents per share, compared with $98 million or 57 cents in the prior-year quarter.

Full-year adjusted net income from continuing operations came in at $2.75 per share, comfortably surpassing the Zacks Consensus Estimate by 2 cents and in line with the prior-year earnings. Adjusted net income from continuing operations increased 3% over 2010 to $484 million in 2011.

Adjusting for net gain on disposal of operations of $4 million or 2 cents per share, 2011 operational review charge of $128 million or 73 cents per share, FSA regulatory settlement of $11 million or 6 cents and senior notes and write-off of unamortized debt issuance costs of $131 million or 74 cents per share, the company reported net income of $218 million or $1.24 per share in 2011, comparing unfavorably with $455 million or $2.66 per share in 2010.

Operational Performance

Total revenue at Willis in the quarter was $825 million, down 1% year over year. The decline was due to lower commissions and fees and investment income. Revenue also lagged the Zacks Consensus Estimate of $847 million.

Full-year total revenue improved 3.6% year over year to gross $3.45 billion but fell short of the Zacks Consensus Estimate of $3.48 billion.

Commissions and fees decreased 0.9% year over year in the quarter largely due to lower Commissions and fees at the North America segment. Full-year commissions and fees increased 3.9% over 2010.

Investment income of Willis in the fourth quarter declined 11% from the year-ago quarter to $8 million while full-year investment income declined 18% over 2010.

Total expense increased 9.6% year over year to $719 million. An increase in salaries and benefits coupled with an increase in operating expense resulted in the overall rise. Full-year total expense escalated 11% over 2010.

In the quarter under review, adjusted operating income was $156 million, down 12% year over year. Operating margin contracted 230 basis points largely because of lower organic commissions and fees, continued investment in business to support growth; and higher amortization of retention awards. Full-year adjusted operating income increased 1% over 2010 to $778 million, with operating margin contracting 50 basis points over 2010.

Segment Update

Global : Organic growth in commissions and fees was 6% in the quarter under review while reported growth was 5%.

Operating margin was 16.3%, expanding 160 basis points year over year on growth in organic commissions and fees.

North America : Organic as well as reported decline in commissions and fees were 7% in the quarter under review.

Operating margin in the quarter contracted 480 basis points due to the decline in organic growth in commissions and fees.

International : Commissions and fees increased 22% year over year both on a reported and organic basis. Eastern Europe grew in double digits while Asia reported high single-digit growth. Latin America and Continental Europe both grew in mid single digits. However, Willis' UK and Ireland retail business suffered a double-digit decline.

Operating margin contracted 600 basis points as primarily due to continued investments to support future growth in International and the decline in organic commissions and fees at the UK and Ireland retail business.

Financial Update    

The cash and cash equivalent balance of Willis at 2011 end was $436 million, up approximately 38% from $316 million at the end of 2010.

Long-term debt increased 9.1% to $2.35 billion from 2010 end.

Dividends and Share Buybacks

The board of directors authorized a 3.8% hike in its quarterly dividend. The increased dividend of 27 cents ($1.08 on an annualized basis) will be paid on April 13, 2012 to shareholders of record at March 31, 2012.

Willis also expects to repurchase up to $100 million in shares in 2012.

Update on Operational Review

Willis Group completed its operational review in 2011. The company incurred a pre-tax charge of $50 million or 20 cents per share in the fourth quarter and $180 million or 73 cents per share in 2011.

The operational review also resulted in cost savings of $80 million in 2011.

Looking Forward

Willis expects the operational review to result in incremental cost savings of approximately $55 million in 2012, reaching annualized savings of approximately $135 million, up from the prior expectation of $115 million to $125 million.

Peer Comparison

Marsh & McLennan Companies Inc. ( MMC ), which competes with Willis Group , reported fourth quarter operating earnings of 44 cents per share, a penny lower than the Zacks Consensus Estimate, but above 34 cents reported in the year-ago quarter.

With the steady recovery in the economic environment, Marsh & McLennan posted improved results on account of top-line growth in all lines of businesses that also drove the operating margin. Even lower tax expenses and nominal expense growth supported the bottom line.

Full-year operating net income rose to $1.73 per share against $1.00 in 2010. Earnings per share were, however, a couple of cents lower than the Zacks Consensus Estimate for 2011.

Zacks Rank

We retain our "Underperform" recommendation on Willis over the long term. The quantitative Zacks #4 Rank (short-term Sell rating) for the company indicates downward pressure on the stock over the near term.

MARSH &MCLENNAN ( MMC ): Free Stock Analysis Report
WILLIS GP HLDGS ( WSH ): Free Stock Analysis Report

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Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Business , Stocks

Referenced Stocks: MMC , WSH



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