Towers Watson Reports Strong Second Quarter Earnings *Revenue increased 8% over prior year (8% constant currency) *Diluted EPS of $1.15, an increase of 25% over prior year *Adjusted Diluted EPS of $1.48, an increase of 10% over prior year Business Wire NEW YORK -- February 7, 2013 Towers Watson (NYSE, NASDAQ: TW), a leading global professional services company, today announced financial results for the second quarter of fiscal year 2013, which ended December 31, 2012. Total revenues were $946 million for the quarter, an increase of 8% (8% constant currency) from $880 million for the second quarter of fiscal 2012. On an organic basis, which excludes the impact of changes in foreign currency exchange rates, acquisitions and divestitures, revenues increased 6% from the prior-year second quarter. The ERP deployment related receivables and reserve issues normalized this quarter for all Segments and accounted for about one percentage point of total company revenue growth. Adjusted EBITDA for the second quarter of fiscal 2013 was $178 million, or 18.9% of revenues, versus $172 million, or 19.5% of revenues, for the prior-year second quarter. Adjusted EBITDA excludes transaction and integration expenses and non-cash stock-based compensation arising from merger and acquisition activity. Net income attributable to controlling interests for the second quarter of fiscal 2013 was $82 million, an increase from $67 million for the prior-year second quarter. For the quarter, diluted earnings per share were $1.15 and adjusted diluted earnings per share were $1.48. Adjusted diluted earnings per share exclude transaction and integration costs, non-cash stock-based compensation arising from merger and acquisition activity, amortization of merger and acquisition accounting intangible assets and non-recurring other income. The tax rate for the quarter was 31%. “I’m very pleased with the second quarter results. We normalized the receivable and reserve issues, completed a very successful enrollment season in Exchange Solutions and saw strong growth in many of our lines of business. I’m particularly excited about the growth we saw in the Benefits segment,” said John Haley, chief executive officer. “Not only are we well positioned to achieve our long-term growth objectives in our consulting and services businesses, but I’m also very excited about the future of Exchange Solutions. It’s been an exciting week for Exchange Solutions. We launched OneExchange, the industry’s first health benefits solution that leverages both private and public health insurance exchanges to help employers transform how they deliver health coverage for their active workers and retirees. We also announced a strategic alliance with Fidelity to provide retiring participants who are coming off company sponsored health plan coverage access to resources and support to get quality coverage. We are thrilled to be working with Fidelity, one of the world’s largest providers of financial services.” Second Quarter Company Highlights Benefits For the quarter, the Benefits segment had revenues of $519 million, an increase of 9% (10% increase constant currency) from $476 million in the prior-year second quarter. Retirement, Technology and Administration Solutions and International all had double digit constant currency revenue growth this quarter. In the Americas region, Retirement had constant currency revenue growth in the teens, driven by “Bulk Lump Sum” projects, the work on payouts that relate to client pension de-risking efforts. Health and Group Benefits had high-single digit constant currency revenue growth this quarter. The Benefits segment had a Net Operating Income (“NOI”) margin of 36% in the second quarter of fiscal 2013. Risk and Financial Services For the quarter, the Risk and Financial Services segment had revenues of $208 million, an increase of 1% (1% increase constant currency) from $205 million in the prior-year second quarter. Investment Consulting had low-double digit constant currency revenue growth in all regions. Risk Consulting and Software and Brokerage both had single digit percentage constant currency revenue declines. The Risk and Financial Services segment had an NOI margin of 22% in the second quarter of fiscal 2013. Talent and Rewards For the quarter, the Talent and Rewards segment had revenues of $176 million, an increase of 4% (5% increase constant currency) from $169 million in the prior-year second quarter. Executive Compensation led the segment with constant currency revenue growth in the mid-teens, driven by regulation and governance activity in EMEA. Rewards, Talent and Communication constant currency revenues increased by mid-single digits. Data, Surveys and Technology constant currency revenues declined by low-single digits. The Talent and Rewards segment had an NOI margin of 34% in the second quarter of fiscal 2013. The first half of the year typically has stronger margins due to the seasonality of the business. Exchange Solutions Exchange Solutions’ economic model drives very different seasonality of financial results than our general consulting and brokerage business and impacts year over year comparisons. The Exchange Solutions business incurs significant costs in the first half of the fiscal year to enroll new members, while commission revenues are recognized over the annual policy period. Most policies have an effective date of January 1. Exchange Solutions decreased the company’s diluted earnings per share by $0.18 and adjusted diluted earnings per share by $0.12, including the interest charges associated with financing the Extend Health acquisition. For the quarter, the Exchange Solutions segment had revenues of $16 million, net of deferral revenue required by purchase accounting rules. For the quarter, on a proforma basis, excluding the impact of the $5 million deferred revenue write-off from the acquired balance sheet required by purchase accounting rules, revenues grew by 33%. The Exchange Solutions segment had a net operating loss of $10 million and an NOI margin of (64%) for the quarter. The second half of the fiscal year is seasonally stronger due to the timing of enrollments. Outlook for Fiscal 2013 For fiscal 2013, the company expects to report revenues in the range of $3.60 billion to $3.65 billion, reflecting constant currency revenue growth in the range of 6% to 7%, and adjusted diluted earnings per share in the range of $5.28 to $5.38. This guidance assumes an average exchange rate of 1.60 U.S. dollars to the British Pound and 1.30 U.S. dollars to the Euro for fiscal 2013. For the third quarter of fiscal 2013, the company expects to report revenues in the range of $940 million to $960 million, reflecting constant currency revenue growth in the range of 4% to 6%, and adjusted diluted earnings per share in the range of $1.46 to $1.51. Conference Call The company will host a live webcast and conference call to discuss the financial results for the second quarter of fiscal 2013. It will be held on Thursday, February 7, 2013, beginning at 9:00 a.m. Eastern Time, and can be accessed via the Internet at www.towerswatson.com. The replay of the call will be available shortly after the live call for a period of three months. A telephonic replay will also be available for two weeks after the call by dialing 617-801-6888 and using confirmation number 30322967. About Towers Watson Towers Watson (NYSE, NASDAQ: TW) is a leading global professional services company that helps organizations improve performance through effective people, risk and financial management. The company offers solutions in the areas of benefits, talent management, rewards, and risk and capital management. Towers Watson has 14,000 associates around the world and is located on the web at www.towerswatson.com. Use of Non-GAAP Measures In order to assist readers of our financial statements in understanding the company’s core operating results, we present (1) Adjusted EBITDA, (2) Adjusted Net Income Attributable to Controlling Interests, and (3) Adjusted Diluted Earnings Per Share (which are all non-U.S. GAAP measures), to eliminate the effect of acquisition-related expenses from the financial results of our operations. The company’s management uses these measures to evaluate the performance of the business and for financial planning. The company defines Adjusted EBITDA as net income before non-controlling interests adjusted for provision for income taxes, interest, depreciation and amortization, transaction and integration expenses, merger related stock-based compensation and other non-operating income. We use Adjusted Net Income Attributable to Controlling Interests (the numerator) for the purpose of calculating Adjusted Diluted Earnings Per Share. The company believes that Adjusted EBITDA and Adjusted Diluted Earnings Per Share are relevant and useful measures widely used by analysts, investors and other interested parties in our industry to provide a baseline for evaluating and comparing our operating results. Since the merger in January 2010, we have incurred significant acquisition-related expenses related to the transaction and integration activities necessary to combine Watson Wyatt and Towers Perrin. These acquisition-related expenses include transaction and integration costs, severance costs, non-cash charges for amortization of intangible assets, and stock-based compensation costs from the issuance of merger-related restricted shares. Adjusted EBITDA and Adjusted Diluted Earnings Per Share are important in illustrating what our operating results would have been had we not incurred these acquisition-related expenses. We consider Adjusted EBITDA and Adjusted Diluted Earnings Per Share to be important financial measures, which we use to internally evaluate and assess our core operations, and benchmark our operating results against our competitors. We use Adjusted EBITDA to evaluate and measure performance under our performance-based compensation plans. Reconciliations of net income before non-controlling interests to Adjusted EBITDA and Diluted Earnings Per Share to Adjusted Diluted Earnings Per Share are included in the accompanying tables to today’s press release. Each of these non-U.S. GAAP measures is not defined in the same manner by all companies, and may not be comparable to other similarly titled measures of other companies. Non-U.S. GAAP measures should be considered in addition to, and not as a substitute for, the information contained within our financial statements. Forward-Looking Statements This document contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.You can identify these statements and other forward-looking statements in this document by words such as “may”, “will”, “would”, “expect”, “anticipate”, “believe”, “estimate”, “plan”, “intend”, “continue”, or similar words, expressions or the negative of such terms or other comparable terminology. Such statements are based upon the current beliefs and expectations of Towers Watson's management and are subject to significant risks and uncertainties.Actual results may differ from those set forth in the forward-looking statements. The following factors, among others, could cause actual results to differ from those set forth in the forward-looking statements: the risk that anticipated cost savings and any other synergies from the merger of Towers Perrin and Watson Wyatt may not be fully realized or may take longer to realize than expected; the ability to successfully make and integrate profitable acquisitions; the risk that the acquisition of Extend Health is not profitable or is not otherwise successfully integrated; the ability to successfully address issues surrounding the number of company shares that will become freely tradable on January 1, 2014; the risk that potential changes in federal and state health care regulations, or future interpretation of existing regulations, may have a material adverse impact on our business; the risk that our newly-acquired Extend Health business fails to maintain good relationships with insurance carriers, becomes dependent upon a limited number of insurance carriers or fails to develop new insurance carrier relationships; the risk that changes and developments in the health insurance system in the United States could harm our business; our ability to respond to rapid technological changes; the ability to recruit and retain qualified employees; and to retain client relationships, particularly in the executive compensation business, given recent Securities and Exchange Commission (SEC) and other regulatory actions; and the risk that a significant or prolonged economic downturn could have a material adverse effect on Towers Watson's business, financial condition and results of operations.Additional risks and factors are identified under “Risk Factors” in Towers Watson’s most recent Annual Report on Form 10-K filed with the SEC. You should not rely upon forward-looking statements as predictions of future events because these statements are based on assumptions that may not come true and are speculative by their nature.Towers Watson does not undertake an obligation to update any of the forward-looking information included in this document, whether as a result of new information, future events, changed expectations or otherwise. TOWERS WATSON & CO. Supplemental Segment Information (Thousands of U.S. Dollars) (Unaudited) Segment Revenue Revenue for the Three Months Ended Dec. 31 % Change Currency Acquisitions/ % Change 2012 2011 GAAP Impact Divestitures Organic Benefits $ 519,418 $ 475,519 9 % -1 % 0 % 10 % Risk & Financial 207,629 205,011 1 % 0 % 0 % 1 % Services Talent & 176,185 169,192 4 % -1 % 0 % 5 % Rewards Exchange 15,720 - N/A N/A N/A N/A Solutions Reportable $ 918,952 $ 849,722 Segments Revenue for the Six Months Ended Dec. 31 % Change Currency Acquisitions/ % Change 2012 2011 GAAP Impact Divestitures Organic Benefits $ 976,546 $ 930,025 5 % -1 % 0 % 6 % Risk & Financial 400,036 399,149 0 % -1 % 0 % 1 % Services Talent & 316,420 308,983 2 % -2 % 0 % 4 % Rewards Exchange 29,638 - N/A N/A N/A N/A Solutions Reportable $ 1,722,640 $ 1,638,157 Segments Reconciliation of Reportable Segment Revenues to Consolidated Revenues Three Months Ended Dec. 31 Six Months Ended Dec. 31 2012 2011 2012 2011 Reportable $ 918,952 $ 849,722 $ 1,722,640 $ 1,638,157 Segments Reimbursable Expenses and 27,293 29,988 57,854 51,904 Other Consolidated $ 946,245 $ 879,710 $ 1,780,494 $ 1,690,061 Revenues Segment Net Operating Income Three Months Ended Dec. 31 Six Months Ended Dec. 31 2012 2011 2012 2011 Benefits $ 185,817 $ 162,264 $ 321,671 $ 306,544 Risk & Financial 45,551 53,956 82,128 103,468 Services Talent & 60,078 55,760 85,869 80,974 Rewards Exchange (10,128 ) - (15,893 ) - Solutions Reportable $ 281,318 $ 271,980 $ 473,775 $ 490,986 Segments Reconciliation of Reportable Segment Net Operating Income to Income from Operations Three Months Ended Dec. 31 Six Months Ended Dec. 31 2012 2011 2012 2011 Reportable $ 281,318 $ 271,980 $ 473,775 $ 490,986 Segments Differences in Allocation (4,663 ) (5,378 ) 12,416 9,245 Methods Amortization of Intangible (20,239 ) (17,352 ) (39,842 ) (30,665 ) Assets Transaction and (9,152 ) (22,903 ) (18,425 ) (43,810 ) Integration Expenses Stock-Based Compensation (10,672 ) (18,118 ) (18,764 ) (31,843 ) Discretionary Compensation (102,364 ) (93,985 ) (178,746 ) (184,718 ) Payroll Tax on (5,595 ) (5,365 ) (10,095 ) (10,846 ) Discretionary Compensation Other, net (11,072 ) (9,745 ) (12,931 ) (4,206 ) Income from $ 117,561 $ 99,134 $ 207,388 $ 194,143 Operations TOWERS WATSON & CO. Reconciliation of Non-GAAP Measures (Thousands of U.S. Dollars, Except Per Share Data) (Unaudited) Three Months Six Months Ended Dec. 31, Ended Dec. 31, 2012 2012 Diluted EPS per GAAP $ 1.15 $ 1.96 Amortization of 0.18 0.36 intangible assets Transaction and integration expenses 0.09 0.17 including severance Stock-based 0.06 0.12 compensation Adjusted Diluted EPS $ 1.48 $ 2.61 Three Months Ended Dec. 31, 2012 Dec. 31, 2011 Net Income Before Non-Controlling $ 80,607 $ 65,411 Interests Provision for Income 36,856 36,922 Taxes Interest, net 2,794 2,979 Depreciation and 45,665 38,648 Amortization Transaction and 9,152 22,903 Integration Costs Stock-Based 6,016 11,018 Compensation Other Non-Operating (2,696 ) (6,178 ) Income (a) Adjusted EBITDA and $ 178,394 18.9 % $ 171,703 19.5 % EBITDA Margin Six Months Ended Dec. 31, 2012 Dec. 31, 2011 Net Income Before Non-Controlling $ 138,393 $ 125,697 Interests Provision for Income 68,932 72,423 Taxes Interest, net 5,055 4,337 Depreciation and 89,272 73,155 Amortization Transaction and 18,425 43,810 Integration Costs Stock-Based 12,856 22,152 Compensation Other Non-Operating (4,992 ) (8,314 ) Income (a) Adjusted EBITDA and $ 327,941 18.4 % $ 333,260 19.7 % EBITDA Margin (a) Other non-operating income includes income from affiliates and other non-operating income TOWERS WATSON & CO. Condensed Consolidated Statements of Operations (Thousands of U.S. Dollars, Except Per Share Data) (Unaudited) Three months ended Six months ended December 31, December 31, 2012 2011 2012 2011 Revenue $ 946,245 $ 879,710 $ 1,780,494 $ 1,690,061 Costs of providing services: Salaries and employee 579,569 535,303 1,093,438 1,032,776 benefits Professional and 71,621 78,749 127,696 143,021 subcontracted services Occupancy 35,684 32,689 74,585 68,060 General and administrative 86,993 72,284 169,690 135,096 expenses Depreciation and 45,665 38,648 89,272 73,155 amortization Transaction and integration 9,152 22,903 18,425 43,810 expenses 828,684 780,576 1,573,106 1,495,918 Income from 117,561 99,134 207,388 194,143 operations (Loss)/income - (124 ) (56 ) 168 from affiliates Interest income 811 842 1,505 2,158 Interest expense (3,605 ) (3,821 ) (6,560 ) (6,495 ) Other non-operating 2,696 6,302 5,048 8,146 income Income before 117,463 102,333 207,325 198,120 income taxes Provision for 36,856 36,922 68,932 72,423 income taxes Net income before non-controlling 80,607 65,411 138,393 125,697 interests Less: Net loss attributable to (1,683 ) (1,528 ) (2,624 ) (946 ) non-controlling interests Net income attributable to $ 82,290 $ 66,939 $ 141,017 $ 126,643 controlling interests Earnings per share: Net income attributable to controlling $ 1.15 $ 0.92 $ 1.98 $ 1.74 interests - basic Net income attributable to controlling $ 1.15 $ 0.92 $ 1.96 $ 1.73 interests - diluted Weighted average shares of common stock, basic (000) 71,257 72,417 71,376 72,753 Weighted average shares of common stock, diluted (000) 71,847 72,769 71,920 73,011 TOWERS WATSON & CO. Condensed Consolidated Balance Sheets (Thousands of U.S. Dollars, Except Share Data) (Unaudited) December 31, June 30, 2012 2012 Assets Cash and cash equivalents $ 420,786 $ 478,179 Restricted cash 120,726 171,406 Short-term investments 34,912 40,436 Receivables from clients: Billed, net of allowances of 570,165 564,111 $19,491 and $20,871 Unbilled, at estimated net 337,379 320,240 realizable value 907,544 884,351 Other current assets 189,211 185,025 Total current assets 1,673,179 1,759,397 Fixed assets, net 353,874 315,000 Deferred income taxes 154,862 157,491 Goodwill 2,294,205 2,252,555 Intangible assets, net 735,940 768,848 Other assets 125,140 103,687 Total Assets $ 5,337,200 $ 5,356,978 Liabilities Accounts payable, accrued liabilities $ 356,247 $ 333,443 and deferred income Employee-related liabilities 422,967 558,222 Fiduciary liabilities 120,726 171,406 Term loan - current 12,500 - Other current liabilities 50,505 39,911 Total current liabilities 962,945 1,102,982 Revolving credit facility 275,000 208,000 Term loan 237,500 250,000 Accrued retirement benefits and other 828,995 880,877 employee-related liabilities Professional liability claims 260,085 266,619 reserve Other noncurrent liabilities 205,339 191,183 Total Liabilities 2,769,864 2,899,661 Commitments and contingencies Stockholders' Equity Class A Common Stock - $0.01 par value: 300,000,000 shares authorized; 63,490,364 and 63,521,654 issued and 635 635 60,001,661 and 60,666,474 outstanding Class B Common Stock - $0.01 par value: 93,500,000 shares authorized; 11,035,878 and 11,035,878 issued and 110 110 11,035,878 and 11,035,878 outstanding Additional paid-in capital 1,851,968 1,833,799 Treasury stock, at cost - 3,488,703 (203,716 ) (168,901 ) and 2,855,180 shares Retained earnings 1,216,051 1,117,622 Accumulated other comprehensive loss (320,753 ) (350,745 ) Total Stockholders' Equity 2,544,295 2,432,520 Non-controlling interest 23,041 24,797 Total Equity 2,567,336 2,457,317 Total Liabilities and Total Equity $ 5,337,200 $ 5,356,978 TOWERS WATSON & CO. Condensed Consolidated Statements of Cash Flows (Thousands of U.S. Dollars) (Unaudited) Six Months ended December 31, 2012 2011 Cash flows from/(used in) operating activities: Net income before non-controlling $ 138,393 $ 125,697 interests Adjustments to reconcile net income to net cash from/(used in) operating activities: Provision for doubtful receivables from 7,824 7,461 clients Depreciation 49,380 42,491 Amortization of intangible assets 39,892 30,665 Provision for deferred income taxes 27,936 29,880 Equity from affiliates - 212 Stock-based compensation 23,260 36,401 Other, net (2,651 ) (916 ) Changes in operating assets and liabilities (net of business acquisitions) Receivables from clients (19,819 ) (81,445 ) Restricted cash 53,063 18,900 Other current assets (18,865 ) (4,900 ) Other noncurrent assets 589 (29,654 ) Accounts payable, accrued liabilities and 22,717 (6,488 ) deferred income Employee-related liabilities (144,650 ) (148,842 ) Fiduciary liabilities (53,063 ) (13,257 ) Accrued retirement benefits and other (111,077 ) (30,580 ) employee-related liabilities Professional liability claims reserves (8,996 ) (38,842 ) Other current liabilities 1,559 1,572 Other noncurrent liabilities 9,099 (1,237 ) Income tax related accounts 6,780 9,423 Cash flows from/(used in) operating $ 21,371 $ (53,459 ) activities Cash flows used in investing activities: Cash paid for business acquisitions (185 ) (3,012 ) Cash acquired from business acquisitions - 2,101 Fixed assets and software for internal use (54,493 ) (65,464 ) Capitalized software costs (29,007 ) (9,145 ) Purchases of available-for-sale securities (18,083 ) - Redemptions of available-for-sale 27,670 45,919 securities Proceeds from divestitures 3,682 - Cash flows used in investing activities $ (70,416 ) $ (29,601 ) Cash flows used in financing activities: Borrowings under credit facility 376,600 75,000 Repayments under credit facility (309,600 ) (10,000 ) Dividends paid (48,715 ) (11,921 ) Repurchases of common stock (36,531 ) (90,966 ) Payroll tax payments on vested shares (1,750 ) (6,046 ) Issuances of common stock and excess tax - 1,856 benefit Cash flows used in financing activities $ (19,996 ) $ (42,077 ) Effect of exchange rates on cash $ 11,648 $ (17,699 ) Decrease in cash and cash equivalents (57,393 ) (142,836 ) Cash and cash equivalents at beginning of 478,179 528,923 period Cash and cash equivalents at end of period $ 420,786 $ 386,087 Contact: Towers Watson Investor Contact Aida Sukys, 703-258-8033 Aida.Sukys@towerswatson.com
Towers Watson Reports Strong Second Quarter Earnings
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