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Towers Watson Reports Strong Second Quarter Earnings

  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
 
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