Watson Wyatt Worldwide Reports Third Quarter EPS of $0.95 Thursday, May 07, 2009 6:00:00 AM ET Watson Wyatt Worldwide, Inc. (NYSE, NASDAQ: WW), a leading international human capital and financial management consulting firm, today announced financial results for the third quarter of fiscal year 2009, which ended March 31, 2009. Revenues were $417.0 million for the quarter, a decrease of 9% (an increase of 3% on a constant currency basis) from third quarter of fiscal 2008 revenues of $457.5 million. Net income for the third quarter of fiscal 2009 was $40.6 million, or $0.95 per diluted share, a decrease from $42.5 million or $0.96 per diluted share in the prior-year third quarter. When compared to the prior-year third quarter, exchange rates had a negative impact of $0.14 on diluted net income per share. "We had a good quarter in light of economic conditions, with positive constant currency growth and solid profitability," said John Haley, president and chief executive officer. "But there are two forces at play here. Practices like our large Benefits segment where projects are more directly tied to helping clients manage costs, mitigate risks or meet regulatory requirements are doing quite well. However, practice areas that rely on shorter-term, more discretionary engagements have been more negatively affected by the downturn." Operating Highlights -- Benefits Group revenues (representing 59% of third-quarter revenues) were $248 million for the third quarter of fiscal 2009, a decrease of 7% (increase of 3% constant currency) from $268 million in the prior-year third quarter. The reported decrease in revenues was due primarily to the strengthening of the U.S. dollar against the British pound and the Euro. The constant currency increase in revenues was largely due to increased demand for retirement consulting services. -- Technology and Administration Solutions Group revenues (representing 11% of third-quarter revenues) were $45 million for the third quarter of fiscal 2009, a decrease of 1% (increase of 13% constant currency) from $45 million in the prior-year third quarter. The reported decrease in revenues was due to the strengthening of the U.S. dollar against the British pound. Constant currency revenues increased in both North America and Europe. In North America, revenues increased due to an increase in projects in on-going service delivery. In Europe, revenues increased due to new clients. -- Human Capital Group revenues (representing 9% of third-quarter revenues) were $37 million for the third quarter of fiscal 2009, a decrease of 25% (decrease of 18% constant currency) from $49 million in the prior-year third quarter. The decrease in revenues was due to the strengthening of the U.S. dollar and to a decrease in demand in all geographic regions. The significant decrease in demand reflects the cyclicality of the segment. -- Insurance & Financial Services Group revenues (representing 8% of third-quarter revenues) were $31 million for the third quarter of fiscal 2009, an increase of 2% (23% constant currency) from $31 million in the prior-year third quarter. On a constant currency basis, revenues increased in all geographic regions primarily due to additional project work. -- Investment Consulting Group revenues (representing 9% of third-quarter revenues) were $39 million for the third quarter of fiscal 2009, a decrease of 10% (increase of 12% constant currency) from $43 million in the prior-year third quarter. The reported decrease in revenues was due primarily to the strengthening of the U.S. dollar against the British pound and the Euro. The constant currency increase in revenues was largely due to increased demand for implemented consulting services and investment strategy advice. Outlook for Fiscal Year 2009 After consideration of the current economic environment, the company is reducing its outlook and expects fiscal 2009 revenues in the range of $1.65 billion to $1.67 billion and earnings per diluted share in the range of $3.35 to $3.40. This guidance includes up to $0.35 of foreign currency translation losses from the strengthening of the U.S. dollar. This guidance also anticipates that in the fourth quarter of fiscal 2009 GBP 1.00 maintains a minimum average value of approximately $1.40 and EUR 1.00 maintains a minimum average value of approximately $1.30. For the fourth quarter of fiscal 2009, the company expects to report revenues in the range of $370 million to $390 million and earnings per diluted share in the range of $0.65 to $0.70. This guidance includes up to $0.10 of foreign currency translation losses from the strengthening of the U.S. dollar. As noted above, this guidance anticipates that in the fourth quarter of fiscal 2009 GBP 1.00 maintains a minimum average value of approximately $1.40 and EUR 1.00 maintains a minimum average value of approximately $1.30. Conference Call The company will host a live webcast and conference call to discuss the financial results for the third quarter of fiscal 2009. It will be held on Thursday, May 7, 2009, beginning at 9:00 a.m. Eastern Time, and can be accessed via the Internet by going to the Investor Relations section of www.watsonwyatt.com. The replay of the webcast will be available two hours after the live call for a period of three months. The replay also will be available for one week after the call by dialing 617-801-6888 and using confirmation number 13854491. Forward-Looking Statements Statements in this press release regarding projections and expectations of future earnings, revenues, operations, business trends and other such items are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on management’s beliefs, as well as assumptions made by, and information currently available to management. Because such statements are based on expectations and are not statements of fact, actual events and results may differ materially from those projected. A number of risks and uncertainties exist which could cause actual results to differ materially from the results reflected in these forward-looking statements. Such factors include but are not limited to foreign currency exchange and interest rate fluctuations; general economic and business conditions that adversely affect us or our clients; a significant decrease in the demand for the consulting, actuarial and other services we offer as a result of changing economic conditions or other factors; the company’s ability to integrate the operations of acquired businesses into our own business, processes and systems, and achieve the anticipated results; our continued ability to recruit and retain qualified associates; the success of our marketing, client development and sales programs; our ability to maintain client relationships and to attract new clients; declines in demand for our services; outcomes of pending or future litigation and the availability and capacity of professional liability insurance to fund pending or future judgments or settlements; the ability of the company to obtain professional liability insurance; actions by competitors offering human resources consulting services, including public accounting and consulting firms, technology consulting firms and internet/intranet development firms; our continued ability to achieve cost reductions; exposure to liabilities of acquired businesses that have not been expressly assumed; the level of capital resources required for future acquisitions and business opportunities; regulatory developments abroad and domestically that impact our business practices; legislative and technological developments that may affect the demand for or costs of our services; and other factors discussed under "Risk Factors" in the company’s Annual Report on Form 10-K for the year ended June 30, 2008 and filed on August 15, 2008, with the Securities and Exchange Commission. These statements are based on assumptions that may not come true. All forward-looking disclosure is speculative by its nature. The company undertakes no obligation to update any of the forward-looking information included in this report, whether as a result of new information, future events, changed expectations or otherwise. About Watson Wyatt Worldwide Watson Wyatt (NYSE, NASDAQ: WW) is the trusted business partner to the world’s leading organizations on people and financial issues. The firm’s global services include: managing the cost and effectiveness of employee benefit programs; developing attraction, retention and reward strategies; advising pension plan sponsors and other institutions on optimal investment strategies; providing strategic and financial advice to insurance and financial services companies; and delivering related technology, outsourcing and data services. Watson Wyatt has 7,700 associates in 33 countries and is located on the Web at www.watsonwyatt.com. WATSON WYATT WORLDWIDE, INC. Condensed Consolidated Statements of Operations (Thousands of U.S. Dollars, Except Per Share Data) (Unaudited) Three months ended March 31, Nine months ended March 31, 2009 2008 2009 2008 Revenue $ 416,994 $ 457,525 $ 1,279,509 $ 1,306,244 Costs of providing services: Salaries and employee benefits 237,208 254,147 719,735 722,583 Professional and subcontracted services 23,835 20,334 75,714 75,154 Occupancy, communications and other 40,941 54,955 137,254 148,187 General and administrative expenses 45,689 45,390 132,782 131,486 Depreciation and amortization 17,531 18,265 55,265 53,225 365,204 393,091 1,120,750 1,130,635 Income from operations 51,790 64,434 158,759 175,609 Income (Loss) from affiliates 3,201 (29 ) 5,966 (603 ) Interest expense (553 ) (1,353 ) (2,181 ) (5,580 ) Interest income 294 1,585 1,647 4,356 Other non-operating income 1,786 179 3,466 454 Income before income taxes 56,518 64,816 167,657 174,236 Provision for income taxes 15,927 22,270 52,355 60,465 Net income $ 40,591 $ 42,546 $ 115,302 $ 113,771 Earnings per share: Net income - Basic $ 0.95 $ 1.01 $ 2.70 $ 2.69 Net income - Diluted $ 0.95 $ 0.96 $ 2.69 $ 2.56 Weighted average shares of common stock, basic (000) 42,609 42,064 42,705 42,230 Weighted average shares of common stock, diluted (000) 42,773 44,333 42,869 44,515 WATSON WYATT WORLDWIDE, INC. Supplemental Segment Data (Thousands of U.S. Dollars) Three Months Ended March 31, Nine Months Ended March 31, 2009 2008 2009 2008 (Unaudited) (Unaudited) Revenue (net of reimbursable expenses) Benefits Group $ 248,051 $ 267,940 $ 725,848 $ 738,605 Technology and Administration Solutions Group 44,602 45,008 143,503 135,055 Human Capital Group 36,844 49,058 137,900 145,222 Insurance & Financial Services Group 31,442 30,799 93,735 89,131 Investment Consulting Group 39,214 43,457 118,813 125,763 Total segment revenue 400,153 436,262 1,219,799 1,233,776 Other, including reimbursable expenses 16,841 21,263 59,710 72,468 Consolidated revenue $ 416,994 $ 457,525 $ 1,279,509 $ 1,306,244 Net operating income Benefits Group $ 81,693 $ 89,135 $ 216,489 $ 210,068 Technology and Administration Solutions Group 9,112 10,180 36,392 34,990 Human Capital Group (630 ) 9,460 16,321 27,585 Insurance & Financial Services Group 8,991 1,411 19,890 2,565 Investment Consulting Group 10,648 15,947 31,597 44,681 Total segment net operating income 109,814 126,133 320,689 319,889 Discretionary compensation (45,779 ) (50,483 ) (144,452 ) (144,363 ) Other income (expense), net (7,517 ) (10,834 ) (8,580 ) (1,290 ) Income before income taxes $ 56,518 $ 64,816 $ 167,657 $ 174,236 March 31, 2009 2008 (Unaudited) Associates (full-time equivalents) Benefits Group 3,370 3,190 Technology and Administration Solutions Group 895 820 Human Capital Group 865 830 Insurance & Financial Services Group 415 425 Investment Consulting Group 560 440 Other (including Communication) 460 430 Business Services (includes Corporate and Field Support) 1,120 1,055 Total 7,685 7,190 WATSON WYATT WORLDWIDE, INC. Condensed Consolidated Balance Sheets (Thousands of U.S. Dollars, Except Share Data) (Unaudited) March 31, June 30, 2009 2008 Assets Cash and cash equivalents $ 118,292 $ 124,632 Receivables from clients: Billed, net of allowances of $7,045 and $8,544 210,699 239,593 Unbilled, at estimated net realizable value 116,097 126,163 326,796 365,756 Deferred income taxes 21,113 18,576 Other current assets 55,870 48,523 Total current assets 522,071 557,487 Investment in affiliates 20,488 8,526 Fixed assets, net 173,646 184,684 Deferred income taxes 62,589 72,572 Goodwill 490,618 634,176 Intangible assets, net 169,195 236,767 Other assets 14,972 21,764 Total Assets $ 1,453,579 $ 1,715,976 Liabilities Accounts payable and accrued liabilities, including discretionary $ 307,028 $ 381,784 compensation Income taxes payable and deferred 929 3,462 Total current liabilities 307,957 385,246 Revolving credit facility 40,223 - Accrued retirement benefits 168,379 209,168 Deferred rent and accrued lease losses 28,769 29,239 Deferred income taxes and other long term tax liabilities 11,158 13,430 Other noncurrent liabilities 74,672 94,498 Total Liabilities 631,158 731,581 Commitments and contingencies Stockholders’ Equity Preferred Stock - No par value: 1,000,000 shares authorized; none issued and outstanding - - Class A Common Stock - $.01 par value: 99,000,000 shares authorized; 43,813,451 and 43,813,451 issued and 438 438 42,621,505 and 43,578,268 outstanding Additional paid-in capital 452,887 456,681 Treasury stock, at cost - 1,191,946 and 235,183 shares (65,266 ) (13,222 ) Retained earnings 580,677 474,961 Accumulated other comprehensive (loss)/income (146,315 ) 65,537 Total Stockholders’ Equity 822,421 984,395 Total Liabilities and Stockholders’ Equity $ 1,453,579 $ 1,715,976 WATSON WYATT WORLDWIDE, INC. Condensed Consolidated Statements of Cash Flows (Thousands of U.S. Dollars) (Unaudited) Nine months ended March 31, 2009 2008 Cash flows from operating activities: Net income $ 115,302 $ 113,771 Adjustments to reconcile net income to net cash (used in)/from operating activities: Provision for doubtful receivables from clients (7,110 ) 11,295 Depreciation 44,598 40,943 Amortization of intangible assets 10,668 12,282 Provision for (benefit from) deferred income taxes 7,446 9,453 (Income)/loss from affiliates (5,966 ) 603 Other, net 710 6,729 Changes in operating assets and liabilities, net of business acquisitions Receivables from clients 46,070 (43,785 ) Other current assets (7,348 ) (19,818 ) Other assets 3,603 (3,689 ) Accounts payable and accrued liabilities (58,119 ) 27,242 Income taxes payable (2,397 ) (478 ) Accrued retirement benefits (40,789 ) (8,118 ) Deferred rent and accrued lease losses (470 ) (3,379 ) Other noncurrent liabilities (22,531 ) (5,244 ) Cash flows from operating activities: 83,667 137,807 Cash flows used in investing activities: Business acquisitions and contingent consideration payments (518 ) (134,934 ) Purchases of fixed assets (29,772 ) (24,698 ) Capitalized software costs (14,503 ) (16,903 ) Investment in affiliates (2,007 ) (3,316 ) Distribution from affiliates 227 - Increase in restricted cash - (2,265 ) Contingent proceeds from divestitures 3,466 454 Cash flows used in investing activities: (43,107 ) (181,662 ) Cash flows used in financing activities: Borrowings under credit facility 40,223 5,500 Dividends paid (9,586 ) (9,498 ) Repurchases of common stock (77,443 ) (53,980 ) Issuances of common stock and excess tax benefit 4,949 9,445 Cash flows used in financing activities: (41,857 ) (48,533 ) Effect of exchange rates on cash (5,043 ) 2,018 Decrease in cash and cash equivalents (6,340 ) (90,370 ) Cash and cash equivalents at beginning of period 124,632 248,186 Cash and cash equivalents at end of period $ 118,292 $ 157,816 Supplemental disclosures: Cash paid for interest $ 2,091 $ 5,498 Cash paid for income taxes, net of refunds $ 46,889 $ 55,191 SOURCE: Watson Wyatt Worldwide, Inc. Watson Wyatt Worldwide, Inc. Mary Malone Investor Relation
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