e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended December 31, 2009
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-34594
TOWERS WATSON & CO.
(Exact name of Registrant as specified in its charter)
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Delaware
(State or other
jurisdiction of
incorporation
or organization)
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27-0676603
(I.R.S. Employer
Identification No.) |
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875 Third Avenue
New York, NY
(Address of principal executive offices)
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10022
(zip code) |
(212) 725-7550
(Registrants telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See definitions of large
accelerated filer and accelerated filer, and smaller reporting company in Rule 12b-2 of the
Exchange Act.
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer þ
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
Yes o No þ
As of February 1, 2010 there were 46,920,133 outstanding shares of Class A Common Stock at a
par value of $0.01 per share; 12,798,117.77 outstanding shares of Class B-1 Common Stock at a par
value of $0.01; 5,561,630.05 outstanding shares of Class B-2 Common Stock at a par value of $0.01;
5,561,630.05 outstanding shares of Class B-3 Common Stock at a par value of $0.01 and 5,561,630.05
outstanding shares of Class B-4 Common Stock at a par value of $0.01.
INTRODUCTION
On January 1, 2010, pursuant to the Agreement and Plan of Merger, as amended by Amendment No. 1
(the Merger Agreement), Watson Wyatt Worldwide, Inc. (Watson Wyatt) and Towers, Perrin, Forster
& Crosby, Inc. (Towers Perrin) combined their businesses through two simultaneous mergers (the
Merger) and became wholly-owned subsidiaries of Jupiter Saturn Holding Company, which changed its
name to Towers Watson & Co. (Towers Watson).
As of and for the three and six months ended December 31, 2009, Towers Watson had not conducted any
activities other than those incident to its formation and the matters contemplated by the Merger
Agreement. The business of Towers Watson after the Merger was consummated on January 1, 2010, is
the combined businesses previously conducted by Towers Perrin and Watson Wyatt. Therefore, this
quarterly report of Towers Watson does not include separate financials for Jupiter Saturn Holding
Company as they do not contain any material information. In select sections of this quarterly
report that contain prospective or forward-looking information, Towers
Watson post-Merger has been disclosed. Although the business combination of Watson Wyatt and
Towers Perrin was a merger of equals, generally accepted accounting principles require that one
of the combining entities be identified as the acquirer by reviewing facts and circumstances as of
the acquisition date. Watson Wyatt was determined to be the accounting acquirer. This conclusion is
primarily supported by the facts that Watson Wyatt shareholders own approximately 56 percent of all
Towers Watson common stock after the redemption of Towers Watson Class R common stock and that
Watson Wyatts Chief Executive Officer became the Chief Executive Officer of Towers Watson. Watson
Wyatt is the accounting predecessor in the Merger and as such, the historical results of Watson
Wyatt have become those of the new registrant, Towers Watson, and are presented in this filing.
Because the Merger was not yet consummated as of December 31, 2009, the results of Towers Perrin
are not included in the Condensed Consolidated Statements of Operations for the three and six
months ended December 31, 2009 or 2008 or Condensed Consolidated Balance Sheets as of December 31,
2009 and June 30, 2009. Towers Watsons condensed consolidated financial statements as of and for
the three and nine months ended March 31, 2010 will include the results of Towers Perrins
operations beginning January 1, 2010.
TOWERS WATSON & CO.
INDEX TO FORM 10-Q
For the Three and Six Months Ended December 31, 2009
TOWERS WATSON & CO.
Condensed Consolidated Statements of Operations
(Thousands of U.S. Dollars, Except Per Share Data)
(Unaudited)
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Three months ended December 31, |
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Six months ended December 31, |
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2009 |
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2008 |
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2009 |
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2008 |
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Revenue |
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$ |
432,614 |
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$ |
436,389 |
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$ |
833,959 |
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$ |
862,515 |
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Costs of providing services: |
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Salaries and employee benefits |
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247,058 |
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246,648 |
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483,139 |
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482,527 |
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Professional and subcontracted services |
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19,184 |
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25,564 |
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35,343 |
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51,879 |
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Occupancy, communications and other |
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42,645 |
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46,316 |
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82,517 |
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96,313 |
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General and administrative expenses |
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42,763 |
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43,206 |
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82,533 |
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87,093 |
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Depreciation and amortization |
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18,251 |
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18,870 |
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36,185 |
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37,734 |
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Transaction and integration expenses |
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16,904 |
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25,292 |
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386,805 |
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380,604 |
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745,009 |
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755,546 |
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Income from operations |
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45,809 |
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55,785 |
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88,950 |
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106,969 |
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(Loss)/Income from affiliates |
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(1,167 |
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1,070 |
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(220 |
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2,765 |
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Interest income |
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189 |
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322 |
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539 |
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1,353 |
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Interest expense |
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(604 |
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(1,059 |
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(1,053 |
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(1,628 |
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Other non-operating income |
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1,758 |
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1,699 |
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2,900 |
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1,680 |
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Income before income taxes |
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45,985 |
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57,817 |
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91,116 |
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111,139 |
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Provision for income taxes |
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22,113 |
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18,266 |
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37,463 |
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36,428 |
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Net income |
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$ |
23,872 |
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$ |
39,551 |
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$ |
53,653 |
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$ |
74,711 |
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Earnings per share: |
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Net income Basic |
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$ |
0.57 |
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$ |
0.93 |
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$ |
1.26 |
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$ |
1.75 |
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Net income Diluted |
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$ |
0.56 |
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$ |
0.93 |
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$ |
1.26 |
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$ |
1.75 |
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Weighted average shares of common stock,
basic (000) |
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42,244 |
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42,571 |
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42,458 |
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42,753 |
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Weighted average shares of common stock,
diluted (000) |
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42,580 |
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42,616 |
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42,734 |
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42,804 |
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See accompanying notes to the
condensed consolidated financial statements
1
TOWERS WATSON & CO.
Condensed Consolidated Balance Sheets
(Thousands of U.S. Dollars, Except Share Data)
(Unaudited)
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December 31, |
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June 30, |
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2009 |
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2009 |
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Assets |
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Cash and cash equivalents |
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$ |
143,948 |
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$ |
209,832 |
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Receivables from clients: |
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Billed, net
of allowances of $4,036 and $4,452 |
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205,135 |
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190,991 |
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Unbilled, at estimated net realizable value |
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112,637 |
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111,419 |
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317,772 |
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302,410 |
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Other current assets |
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56,016 |
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53,358 |
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Total current assets |
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517,736 |
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565,600 |
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Investment in affiliates |
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23,027 |
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23,361 |
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Fixed assets, net |
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163,865 |
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174,857 |
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Deferred income taxes |
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115,012 |
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111,912 |
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Goodwill |
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541,179 |
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542,754 |
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Intangible assets, net |
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177,798 |
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186,233 |
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Other assets |
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25,700 |
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21,602 |
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Total Assets |
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$ |
1,564,317 |
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$ |
1,626,319 |
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Liabilities |
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Accounts payable and accrued liabilities |
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$ |
123,991 |
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$ |
123,073 |
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Accrued salary and discretionary compensation |
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116,980 |
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162,351 |
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Other current liabilities |
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42,312 |
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51,716 |
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Total current liabilities |
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283,283 |
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337,140 |
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Revolving credit facility |
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Accrued retirement benefits |
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278,968 |
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292,555 |
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Deferred rent and accrued lease losses |
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26,521 |
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28,434 |
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Other noncurrent liabilities |
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97,444 |
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113,554 |
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Total Liabilities |
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686,216 |
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771,683 |
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Commitments and contingencies |
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Stockholders Equity |
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Class A Common Stock $.01 par value: |
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99,000,000
shares authorized; 42,201,872 and 43,813,451 issued and 42,201,872 and 42,657,431 outstanding |
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422 |
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438 |
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Additional paid-in capital |
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370,352 |
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452,938 |
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Treasury stock, at cost - 0 and 1,156,020 shares |
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(63,299 |
) |
Retained earnings |
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655,923 |
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608,634 |
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Accumulated other comprehensive loss |
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(149,649 |
) |
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(145,073 |
) |
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Total Stockholders Equity |
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877,048 |
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853,638 |
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Non-controlling interest |
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1,053 |
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|
998 |
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Total Equity |
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878,101 |
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854,636 |
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Total Liabilities and Total Equity |
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$ |
1,564,317 |
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$ |
1,626,319 |
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See accompanying notes to the
condensed consolidated financial statements
2
TOWERS WATSON & CO.
Condensed Consolidated Statements of Cash Flows
(Thousands of U.S. Dollars)
(Unaudited)
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Six months ended December 31, |
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2009 |
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2008 |
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Cash flows (used in)/from operating activities: |
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Net income |
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$ |
53,653 |
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$ |
74,711 |
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Adjustments to reconcile net income to net cash from operating activities: |
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Provision for doubtful receivables from clients |
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1,462 |
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3,481 |
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Depreciation |
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29,367 |
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30,329 |
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Amortization of intangible assets |
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6,818 |
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|
7,405 |
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Provision for (benefit from) deferred income taxes |
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13,601 |
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|
56 |
|
Loss/(Income) from affiliates |
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220 |
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(2,765 |
) |
Distribution from affiliates |
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|
408 |
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|
118 |
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Other, net |
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|
672 |
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|
2,485 |
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Changes in operating assets and liabilities (net of business acquisitions) |
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Receivables from clients |
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(16,824 |
) |
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|
16,247 |
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Other current assets |
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(7,377 |
) |
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|
(11,322 |
) |
Other assets |
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(4,098 |
) |
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|
4,831 |
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Accounts payable and accrued liabilities |
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(48,142 |
) |
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|
(92,291 |
) |
Income taxes payable and deferred |
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|
2,427 |
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|
214 |
|
Accrued retirement benefits |
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(13,587 |
) |
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|
(7,500 |
) |
Deferred rent and accrued lease losses |
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|
(1,913 |
) |
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|
59 |
|
Other noncurrent liabilities |
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|
(24,492 |
) |
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|
(22,238 |
) |
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Cash flows (used in)/from operating activities: |
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|
(7,805 |
) |
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|
3,820 |
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Cash flows used in investing activities: |
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Business acquisitions and contingent consideration payments |
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(518 |
) |
Purchases of fixed assets |
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|
(9,974 |
) |
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(19,045 |
) |
Capitalized software costs |
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(10,304 |
) |
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(10,322 |
) |
Investment in affiliates |
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(2,041 |
) |
Contingent proceeds from divestitures |
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|
2,900 |
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|
1,680 |
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|
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Cash flows used in investing activities: |
|
|
(17,378 |
) |
|
|
(30,246 |
) |
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|
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|
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Cash flows used in financing activities: |
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Borrowings under Credit Facility |
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|
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|
60,641 |
|
Dividends paid |
|
|
(6,364 |
) |
|
|
(6,389 |
) |
Repurchases of common stock |
|
|
(34,922 |
) |
|
|
(77,442 |
) |
Issuances of common stock and excess tax benefit |
|
|
3,238 |
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|
|
3,439 |
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|
Cash flows used in financing activities: |
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(38,048 |
) |
|
|
(19,751 |
) |
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|
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Effect of exchange rates on cash |
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(2,653 |
) |
|
|
(4,577 |
) |
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|
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|
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Decrease in cash and cash equivalents |
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(65,884 |
) |
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(50,754 |
) |
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|
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|
|
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|
Cash and cash equivalents at beginning of period |
|
|
209,832 |
|
|
|
124,632 |
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|
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Cash and cash equivalents at end of period |
|
$ |
143,948 |
|
|
$ |
73,878 |
|
|
|
|
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|
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|
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|
Supplemental disclosures: |
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Cash paid for interest |
|
$ |
1,057 |
|
|
$ |
1,650 |
|
Cash paid for income taxes, net of refunds |
|
$ |
35,800 |
|
|
$ |
31,411 |
|
See accompanying notes to the
condensed consolidated financial statements
3
TOWERS WATSON & CO.
Condensed Consolidated Statement of Changes in Stockholders Equity
(Thousands of U.S. Dollars, Except Share Data)
(Unaudited)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Outstanding |
|
|
Class A |
|
|
Additional |
|
|
Treasury |
|
|
|
|
|
|
Other |
|
|
|
|
|
|
(number of shares, |
|
|
Common |
|
|
Paid-in |
|
|
Stock, |
|
|
Retained |
|
|
Comprehensive |
|
|
|
|
|
|
in thousands) |
|
|
Stock |
|
|
Capital |
|
|
at Cost |
|
|
Earnings |
|
|
Loss |
|
|
Total |
|
Balance at June 30, 2009 |
|
|
42,657 |
|
|
$ |
438 |
|
|
$ |
452,938 |
|
|
$ |
(63,299 |
) |
|
$ |
608,634 |
|
|
$ |
(145,073 |
) |
|
$ |
853,638 |
|
Comprehensive Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53,653 |
|
|
|
|
|
|
|
53,653 |
|
Foreign currency translation adjustment, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,576 |
) |
|
|
(4,576 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49,077 |
|
Cash dividends declared |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,364 |
) |
|
|
|
|
|
|
(6,364 |
) |
Repurchases of common stock |
|
|
(792 |
) |
|
|
|
|
|
|
|
|
|
|
(34,922 |
) |
|
|
|
|
|
|
|
|
|
|
(34,922 |
) |
Issuances of common stock and excess tax benefit |
|
|
337 |
|
|
|
|
|
|
|
(2,021 |
) |
|
|
17,640 |
|
|
|
|
|
|
|
|
|
|
|
15,619 |
|
Retirement of treasury stock |
|
|
|
|
|
|
(16 |
) |
|
|
(80,565 |
) |
|
|
80,581 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009 |
|
|
42,202 |
|
|
$ |
422 |
|
|
$ |
370,352 |
|
|
$ |
|
|
|
$ |
655,923 |
|
|
$ |
(149,649 |
) |
|
$ |
877,048 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the
condensed consolidated financial statements
4
TOWERS WATSON & CO.
Notes to the Condensed Consolidated Financial Statements
(Tabular amounts are in thousands, except per share data)
(Unaudited)
Note 1 Organization and Basis of Presentation.
On January 1, 2010, pursuant to the Agreement and Plan of Merger, as amended by Amendment No. 1
(the Merger Agreement), Watson Wyatt Worldwide, Inc. (Watson Wyatt) and Towers, Perrin, Forster
& Crosby, Inc. (Towers Perrin) combined their businesses through two simultaneous mergers (the
Merger) and became wholly-owned subsidiaries of Jupiter Saturn Holding Company, which changed its
name to Towers Watson & Co. (Towers Watson).
As of and for the three and six months ended December 31, 2009, Towers Watson had not conducted any
activities other than those incident to its formation and the matters contemplated by the Merger
Agreement. The business of Towers Watson after the Merger was consummated on January 1, 2010, is
the combined businesses previously conducted by Towers Perrin and Watson Wyatt. Therefore, the
Jupiter Saturn Holding Company Condensed Consolidated Balance Sheets, Condensed Consolidated
Statements of Operations, the Condensed Consolidated Statements of Cash Flows, and the Condensed
Consolidated Statement of Changes in Stockholders Equity, each for the three and six month periods
ended December 31, 2009, are not presented separately, as they do not contain any material
information. Although the business combination of Watson Wyatt and Towers Perrin was a merger of
equals, generally accepted accounting principles require that one of the combining entities be
identified as the acquirer by reviewing facts and circumstances as of the acquisition date. Watson
Wyatt was determined to be the accounting acquirer. This conclusion is primarily supported by the
facts that Watson Wyatt shareholders own approximately 56 percent of all Towers Watson common stock
after the redemption of Towers Watson Class R common stock and that Watson Wyatts Chief Executive
Officer became the Chief Executive Officer of Towers Watson. Watson Wyatt is the accounting
predecessor in the Merger and as such, the historical results of Watson Wyatt have become those of
the new registrant, Towers Watson, and are presented in this filing. Because the Merger was not yet
consummated as of December 31, 2009, the results of Towers Perrin are not included in the Condensed
Consolidated Statements of Operations for the three and six months ended December 31, 2009 or 2008
or Condensed Consolidated Balance Sheets as of December 31, 2009 and June 30, 2009. Towers Watsons
condensed consolidated financial statements as of and for the three and nine months ended March 31,
2010 will include the results of Towers Perrins operations beginning January 1, 2010.
The accompanying unaudited quarterly condensed consolidated financial statements of Towers Watson &
Co. (Watson Wyatt is Towers Watsons accounting predecessor) and our subsidiaries (collectively
referred to as we, Towers Watson or the Company) are presented in accordance with the rules
and regulations of the Securities Exchange Commission (SEC) for quarterly reports on Form 10-Q
and therefore do not include all of the information and footnotes required by U.S. generally
accepted accounting principles. In the opinion of management, these condensed consolidated
financial statements reflect all adjustments, consisting only of normal recurring adjustments,
which are necessary for a fair presentation of the condensed consolidated financial statements and
results for the interim periods. All intercompany accounts and transactions have been eliminated
in consolidation. The condensed consolidated financial statements should be read together with the
Watson Wyatt audited consolidated financial statements and notes thereto contained in its Annual
Report on Form 10-K for the fiscal year ended June 30, 2009, which is filed under the historical
registrant Watson Wyatt with the SEC and may be accessed via EDGAR on the SECs web site at
www.sec.gov. The year-end balance sheet data was derived from audited financial statements.
Our fiscal year 2010 began July 1, 2009 and ends June 30, 2010.
5
The results of operations for the six months ended December 31, 2009 are not indicative of the
results that can be expected for the entire fiscal year ending June 30, 2010, especially in light
of the Merger. The results reflect certain estimates and assumptions made by management including
estimated bonuses and anticipated tax liabilities that affect the amounts reported in the condensed
consolidated financial statements and related notes.
Note 2 Merger Consideration.
The issuance of Towers Watson Common Stock and Towers Watson Notes in the Merger was registered
under the Securities Act of 1933, as amended, pursuant to the Towers Watsons Registration
Statement on Form S-4/A (Registration No. 333-161705) filed with the SEC, and declared effective on
November 9, 2009. The Towers Watson Class A common stock, par value $0.01 per share (the Class A
Common Stock) is listed on The New York Stock Exchange, LLC and The NASDAQ Stock Market, LLC under
the ticker symbol TW, and began trading on January 4, 2010.
The consummation of the Merger resulted in the following:
Each share of Watson Wyatt Class A common stock, par value $0.01 per share (the Watson Wyatt
Common Stock) issued and outstanding immediately prior to the Merger was converted into the right
to receive one (1) share of Towers Watson Class A Common Stock. In addition, outstanding deferred
rights to receive Watson Wyatt Common Stock were converted into the right to receive an equal
number of shares of Towers Watson Class A Common Stock, and outstanding options to purchase Watson
Wyatt Common Stock were assumed by Towers Watson and converted on a one-for-one basis into
fully-vested options to purchase shares of Towers Watson Class A Common Stock with the same
exercise price as the underlying Watson Wyatt options.
Each share of Towers Perrin common stock, par value $0.50 per share issued and outstanding
immediately prior to the Merger was converted into the right to receive 545.627600377 (the
Exchange Ratio) fully-paid and nonassessable shares of Towers Watson common stock, which ratio
was determined at the time of the Merger in accordance with the Merger Agreement (the Merger
Consideration). Shares of Towers Watson common stock issued to Towers Perrin shareholders (other
than shares issued to Towers Perrin shareholders located in certain countries (as detailed below)
and other than shares issued to Towers Perrin shareholders who have elected to receive a portion of
their Merger Consideration as shares of Towers Watsons Class R common stock, par value $0.01 per
share (Towers Watson Class R Common Stock), which is described below) have been divided among
four series of non-transferable Towers Watson common stock, Classes B-1, B-2, B-3 and B-4, each
with a par value of $0.01 per share (the Towers Watson Class B Common Stock). Outstanding shares
of Towers Watson Class B Common Stock will automatically convert on a one-for-one basis into shares
of freely transferable shares of Towers Watson Class A Common Stock on the following timetable:
Class B-1 Common Stock January 1, 2011
Class B-2 Common Stock January 1, 2012
Class B-3 Common Stock January 1, 2013
Class B-4 Common Stock January 1, 2014
In accordance with the Merger Agreement, to provide immediate liquidity to certain Towers Perrin
shareholders located in countries where the Merger Consideration may be subject to current tax,
such Towers Perrin shareholders received a portion of their Merger Consideration in the form of
unrestricted shares of Towers Watson Class A Common Stock instead of shares of Towers Watson Class
B Common Stock.
6
Certain Towers Perrin shareholders who met defined age and service criteria elected to terminate
their employment no later than January 31, 2010 (except as extended by the Towers Watsons
executive committee) and receive a portion of their Merger Consideration in shares of Towers Watson
Class R Common Stock, which subsequently were automatically redeemed for equal amounts of cash and
subordinated one-year promissory notes (Towers Watson Notes) (such election, a Class R
Election). The amount of cash and principal amount of Towers Watson Notes issued in exchange for
each share of Towers Watson Class R Common Stock was determined based on the Exchange Ratio and the
average closing price per share of Watson Wyatt Common Stock for the 10 trading days ending on
December 28, 2009, the second trading day immediately prior to the closing of the Merger, which was
$46.79. Class R Elections were prorated so that the amount of cash and notes payable on the
automatic conversion of the shares of Towers Watson Class R Common Stock would not exceed $400
million, which amount was agreed to by Towers Perrin and Watson Wyatt prior to the closing of the
Merger. Towers Perrin shareholders who made valid Class R Elections received shares of Towers
Watson Class B-1 Common Stock in exchange for their shares of Towers Perrin Common Stock that were
not exchanged for shares of Towers Watson Class R Common Stock due to proration or because the
Towers Perrin shareholder elected to receive less than 100 percent of his or her Merger
Consideration in the form of Towers Watson Class R Common Stock. As noted above, shares of Towers
Watson Class B-1 Common Stock will automatically convert into freely tradable shares of Towers
Watson Class A Common Stock on January 1, 2011.
Prior to the Merger, Towers Perrin issued awards of restricted stock units to certain Towers
Perrin employees, which were exchanged in the Merger for shares of Towers Watson Class A Common
Stock, generally subject to a three-year contractual vesting schedule and other restrictions.
In summary, as a result of closing of the Merger, all outstanding Towers Perrin and Watson Wyatt
common stock, restricted stock units and derivative securities have been converted into the right
to receive the following forms of consideration:
46,911,275 shares of Towers Watson Class A Common Stock (less a number of shares that have been
withheld for tax purposes in respect of Watson Wyatt deferred stock units and deferred shares),
including 4,248,984 shares of Restricted Towers Watson Class A Common Stock;
29,483,008 shares of Towers Watson Class B Common Stock, including:
12,798,118 shares of Class B-1 Common Stock;
5,561,630 shares of Class B-2 Common Stock;
5,561,630 shares of Class B-3 Common Stock; and
5,561,630 shares of Class B-4 Common Stock;
8,548,835 shares of Towers Watson Class R Common Stock, which subsequently were redeemed
automatically in exchange for the right to receive:
$200 million in cash (subject to applicable tax withholding and gross-up adjustments); and
Towers Watson Notes in an aggregate principal amount of $200 million.
In addition, on January 1, 2010, Towers Watson issued shares of Class F stock, no par value, pro
rata to all holders of Towers Perrin Common Stock, which shares represent only the contingent right
to receive a pro rata portion of a number of shares of Towers Watson Class A Common Stock equal to
the number of shares of restricted Towers Watson Class A Common Stock forfeited by former Towers
Perrin employees plus a number of shares of Towers Watson Class A Common Stock with a value
equivalent to the amount of dividends attributed to such forfeited shares.
7
For a more complete description of the Merger Agreement and amendment to the Merger Agreement,
please see the registration statement on Form S-4/A filed with the SEC (Registration No.
333-161705) and declared effective on November 9, 2009.
As of December 31, 2009, both Towers Perrin and Watson Wyatt each owned a 36.4 percent equity
investment in Professional Consultants Insurance Company (PCIC). PCIC is a captive insurance
company that provides professional liability insurance on a claims-made basis. Watson Wyatt applies
the equity method of accounting for its investment in PCIC. However, beginning on January 1, 2010,
as a result of the Merger, Towers Watson has a majority ownership of PCIC which changed the
allocation of economic risks and rewards of PCIC among the variable interest holders. Towers Watson
will consolidate the results of PCIC into its consolidated financial statements.
Watson Wyatts financial statements as of and for the three and six months ended December 31,
2009, included herein, reflect Watson Wyatts equity method of accounting for PCIC.
Assets acquired and liabilities assumed under the Merger will be recorded at their respective fair
values as of the business combination date, January 1, 2010. The determination of estimated fair
value requires management to make significant estimates and assumptions. As of the date of the
filing of this quarterly report, the initial accounting for this business combination is not yet
complete.
Note 3 Segment Information.
Watson Wyatt has five reportable operating segments or practice areas as follows:
|
|
|
Benefits Group |
|
|
|
|
Human Capital Group |
|
|
|
|
Technology and Administration Solutions Group |
|
|
|
|
Investment Consulting Group |
|
|
|
|
Insurance and Financial Services Group |
Management evaluates the performance of its segments and allocates resources to them based on net
operating income on a pre-bonus, pre-tax basis. The table below presents information about Watson
Wyatts reported segments as of and for the three months ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology and |
|
Investment |
|
Insurance & |
|
|
|
|
|
|
Benefits |
|
Human Capital |
|
Administration |
|
Consulting |
|
Financial Services |
|
|
|
|
|
|
Group |
|
Group |
|
Solutions |
|
Group |
|
Group |
|
Other |
|
Total |
Revenue (net of reimbursable expenses) |
|
$ |
237,910 |
|
|
$ |
43,321 |
|
|
$ |
59,193 |
|
|
$ |
46,549 |
|
|
$ |
24,397 |
|
|
$ |
8,298 |
|
|
$ |
419,668 |
|
Net operating income |
|
|
68,664 |
|
|
|
8,253 |
|
|
|
19,661 |
|
|
|
15,392 |
|
|
|
132 |
|
|
|
(1,466 |
) |
|
|
110,636 |
|
Receivables |
|
|
214,985 |
|
|
|
35,755 |
|
|
|
23,677 |
|
|
|
25,324 |
|
|
|
19,786 |
|
|
|
5,942 |
|
|
|
325,469 |
|
8
The table below presents information about Watson Wyatts reported segments as of and for the
three months ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology and |
|
Investment |
|
Insurance & |
|
|
|
|
|
|
Benefits |
|
Human Capital |
|
Administration |
|
Consulting |
|
Financial Services |
|
|
|
|
|
|
Group |
|
Group |
|
Solutions |
|
Group |
|
Group |
|
Other |
|
Total |
Revenue (net of reimbursable expenses) |
|
$ |
239,984 |
|
|
$ |
51,454 |
|
|
$ |
50,992 |
|
|
$ |
37,492 |
|
|
$ |
34,486 |
|
|
$ |
10,828 |
|
|
$ |
425,236 |
|
Net operating income |
|
|
71,606 |
|
|
|
10,110 |
|
|
|
14,419 |
|
|
|
8,411 |
|
|
|
10,065 |
|
|
|
1,323 |
|
|
|
115,934 |
|
Receivables |
|
|
233,279 |
|
|
|
44,426 |
|
|
|
22,180 |
|
|
|
24,301 |
|
|
|
32,758 |
|
|
|
6,734 |
|
|
|
363,678 |
|
The table below presents information about Watson Wyatts reported segments as of and for the
six months ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology and |
|
Investment |
|
Insurance & |
|
|
|
|
|
|
Benefits |
|
Human Capital |
|
Administration |
|
Consulting |
|
Financial Services |
|
|
|
|
|
|
Group |
|
Group |
|
Solutions |
|
Group |
|
Group |
|
Other |
|
Total |
Revenue (net of reimbursable expenses) |
|
$ |
461,580 |
|
|
$ |
81,001 |
|
|
$ |
114,650 |
|
|
$ |
91,278 |
|
|
$ |
48,579 |
|
|
$ |
18,914 |
|
|
$ |
816,002 |
|
Net operating income |
|
|
132,082 |
|
|
|
10,937 |
|
|
|
36,744 |
|
|
|
30,514 |
|
|
|
424 |
|
|
|
1,163 |
|
|
|
211,864 |
|
Receivables |
|
|
214,985 |
|
|
|
35,755 |
|
|
|
23,677 |
|
|
|
25,324 |
|
|
|
19,786 |
|
|
|
5,942 |
|
|
|
325,469 |
|
The table below presents information about Watson Wyatts reported segments as of and for the
six months ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology and |
|
Investment |
|
Insurance & |
|
|
|
|
|
|
Benefits |
|
Human Capital |
|
Administration |
|
Consulting |
|
Financial Services |
|
|
|
|
|
|
Group |
|
Group |
|
Solutions |
|
Group |
|
Group |
|
Other |
|
Total |
Revenue (net of reimbursable expenses) |
|
$ |
477,797 |
|
|
$ |
101,056 |
|
|
$ |
98,902 |
|
|
$ |
79,599 |
|
|
$ |
62,293 |
|
|
$ |
22,474 |
|
|
$ |
842,121 |
|
Net operating income |
|
|
134,796 |
|
|
|
16,952 |
|
|
|
27,279 |
|
|
|
20,930 |
|
|
|
10,899 |
|
|
|
4,653 |
|
|
|
215,509 |
|
Receivables |
|
|
233,279 |
|
|
|
44,426 |
|
|
|
22,180 |
|
|
|
24,301 |
|
|
|
32,758 |
|
|
|
6,734 |
|
|
|
363,678 |
|
Information about interest income and tax expense is not presented as a segment expense
because such items are not considered a responsibility of the segments operating management.
9
Reconciliations of the information reported by Watson Wyatts segments to the historical
consolidated amounts follow for the three and six month periods ended December 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31, |
|
|
Six Months Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment revenue |
|
$ |
419,668 |
|
|
$ |
425,236 |
|
|
$ |
816,002 |
|
|
$ |
842,121 |
|
Reimbursable expenses and other not included in
total
segment revenue |
|
|
12,946 |
|
|
|
11,153 |
|
|
|
17,957 |
|
|
|
20,394 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
432,614 |
|
|
$ |
436,389 |
|
|
$ |
833,959 |
|
|
$ |
862,515 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Operating Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment net operating income |
|
$ |
110,636 |
|
|
$ |
115,934 |
|
|
$ |
211,864 |
|
|
$ |
215,509 |
|
Income from affiliates |
|
|
(1,167 |
) |
|
|
1,070 |
|
|
|
(220 |
) |
|
|
2,765 |
|
Differences in allocation methods(1) |
|
|
1,637 |
|
|
|
(3,486 |
) |
|
|
1,265 |
|
|
|
(6,446 |
) |
Transaction and integration expenses |
|
|
(16,904 |
) |
|
|
|
|
|
|
(25,292 |
) |
|
|
|
|
Discretionary compensation |
|
|
(46,865 |
) |
|
|
(56,415 |
) |
|
|
(94,828 |
) |
|
|
(98,673 |
) |
Other, net |
|
|
(1,352 |
) |
|
|
714 |
|
|
|
(1,673 |
) |
|
|
(2,016 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes |
|
$ |
45,985 |
|
|
$ |
57,817 |
|
|
$ |
91,116 |
|
|
$ |
111,139 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment receivables billed and unbilled(2) |
|
$ |
325,469 |
|
|
$ |
363,678 |
|
|
$ |
325,469 |
|
|
$ |
363,678 |
|
Net valuation differences |
|
|
(7,697 |
) |
|
|
(17,650 |
) |
|
|
(7,697 |
) |
|
|
(17,650 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total billed and unbilled receivables |
|
|
317,772 |
|
|
|
346,028 |
|
|
|
317,772 |
|
|
|
346,028 |
|
Assets not reported by segment |
|
|
1,246,545 |
|
|
|
1,112,186 |
|
|
|
1,246,545 |
|
|
|
1,112,186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,564,317 |
|
|
$ |
1,458,214 |
|
|
$ |
1,564,317 |
|
|
$ |
1,458,214 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
General and administrative, pension, and medical costs were allocated to Watson Wyatts
segments based on budgeted expenses determined at the beginning of the fiscal year as management
believes that these costs are largely uncontrollable to the segment. To the extent that the actual
expense based upon which allocations are made differs from the forecast/budget amount, a
reconciling item will be created between internally allocated expenses and the actual expense that
Watson Wyatt report for U.S. GAAP purposes. |
|
(2) |
|
Total segment receivables, which reflects the receivable balances used by management to
make business decisions, are included for management reporting purposes net of deferred revenue
cash collections and invoices generated in excess of revenue recognized in the segment revenue. |
10
Note 4 Share-based Compensation.
Watson Wyatt has four share-based compensation plans, which are described below. These
compensation plans include the 2001 Employee Stock Purchase Plan, the 2001 Deferred Stock Unit Plan
for Selected Employees, the Amended Compensation Plan for Outside Directors, and the 2000 Long-Term
Incentive Plan. All four plans have been approved by Watson Wyatts stockholders.
Effective upon consummation of the Merger, on January 1, 2010, Towers Watson assumed the 2001
Employee Stock Purchase Plan and the 2000 Long-Term Incentive Plan.
The assumed options are
exercisable for shares of Towers Watson Class A Common Stock based on the exchange ratio of one
share of Watson Wyatt Class A common stock underlying the options for one share of Towers Watson
Class A Common Stock. All outstanding Watson Wyatt stock options became fully vested at the time of
the Merger with the exercise price as of the original grant date. Towers Watson did not assume the
2001 Deferred Stock Unit Plan for Selected Employees or the Amended Compensation Plan for Outside
Directors.
2001 Employee Stock Purchase Plan
The 2001 Employee Stock Purchase Plan (the Stock Purchase Plan) enables employees to purchase
shares of Watson Wyatts stock at a 5 percent discount. The Stock Purchase Plan is a
non-compensatory plan under generally accepted accounting principles of stock-based compensation.
As a result, no compensation expense is recognized in conjunction with this plan.
2001 Deferred Stock Unit Plan for Selected Employees
Deferred Stock Units The 2001 Deferred Stock Unit Plan for Selected Employees is intended
to provide selected associates with additional incentives by permitting Watson Wyatt to grant them
an equity interest in the form of restricted stock units, in lieu of a portion of their annual
fiscal year end bonus. Shares under this plan are awarded during the first quarter of each fiscal
year. During the first quarter of fiscal year 2010, 219,751 shares of common stock were awarded at
an average market price of $44.08 for a total fair value of $9.7 million. During the first quarter
of fiscal year 2009, 295,775 shares of common stock were awarded at an average market price of
$54.24 for a total fair value of $16.0 million.
SBI Program The Performance Share Bonus Incentive Program (the SBI Program), as
approved by Watson Wyatts Board of Directors pursuant to its 2001 Deferred Stock Unit Plan for
Selected Employees, is a long-term stock bonus arrangement for senior executives. The SBI program
is designed to strengthen incentives and align behaviors to grow the business in a way that is
consistent with its strategic goals.
Incentives under the SBI Program are provided through grants of deferred stock units pursuant to
the 2001 Deferred Stock Unit Plan for Selected Employees. Grants of deferred stock units are based
on either salary or on the value of the cash portion of the eligible participants fiscal year-end
bonus target and a multiplier, which is then converted into a target number of deferred stock units
based upon Watson Wyatts stock price as of the quarter end prior to grant. Participants may vest
between zero and 170 percent of the target number of deferred stock units or between zero and 100
percent based on the extent to which financial and strategic performance metrics are achieved over
a three fiscal year period. The financial and strategic performance metrics are established at the
beginning of each performance period. For the performance periods covering fiscal years 2007
through 2009, 2008 through 2010, and 2009 through 2011, the vesting criteria are based upon growth
specific metrics such as earnings per share, net operating income and revenue.
11
During the first quarter of fiscal year 2010, 94,906 shares vested, of which 66,065 were deferred
and 28,841 were awarded at a market price of $44.07 to certain senior executive officers under the
SBI 2007 plan, which represented vesting at 135 percent of the target number of deferred stock
units. During the first quarter of fiscal year 2009, 164,457 shares vested, of which, 120,396 were
deferred and 44,061 were awarded at a market price of $56.83 to certain senior executive officers
under the SBI 2006 plan, which represented vesting at 170 percent of the target number of deferred
stock units.
Watson Wyatts management periodically reviews the conditions that would affect the vesting of
performance-based awards and adjusts compensation expense, if necessary, based on achievement of
financial performance metrics set by the Compensation Committee of Watson Wyatt. The SBI 2008 and
2009 plan documents state that the Compensation Committee has the discretion to accelerate the
vesting of awards under the SBI Program in connection with a change in control. Based on available
plan performance information, the Compensation Committee concluded that (i) no payout would be made
under the SBI 2008 plan upon the date of the Merger, and (ii) it would settle the SBI 2009 plan at
100 percent of target to take into account that the performance period would only be halfway
completed as of the closing date of the Merger. In addition, during the second quarter of fiscal
2010, Watson Wyatts management evaluated the performance metrics of the SBI 2008 for Select
Associates, and based on an update to the forecast for the remaining performance period, the
accrual of compensation expense recorded was $3.0 million in the three and six months ended
December 31, 2009.
Approximately $3.3 million of compensation expense was recorded relative to the SBI plans during
the second quarter of fiscal year 2010 compared to $0.6 million in the second quarter of fiscal
year 2009.
Amended Compensation Plan for Outside Directors
In November 2001, the Board of Directors of Watson Wyatt approved the Amended Compensation
Plan for Outside Directors (the Outside Directors Plan) which provided for the cash and stock
compensation of outside Directors. Under the Outside Directors Plan, outside Watson Wyatt
Directors were initially paid in shares of Watson Wyatts common stock, or in a combination of cash
and shares, quarterly, at the completed quarter-end share price (which approximates fair value),
for services provided during the preceding quarter. The total number of shares reserved for
issuance under the Outside Directors Plan was 150,000.
Approximately $0.6 million of compensation expense was recorded relative to this plan during the
first six months of fiscal year 2010 compared to $0.5 million in the first six months of fiscal
year 2009.
2000 Long-Term Incentive Plan
In June 2000, Watson Wyatt adopted the Watson Wyatt & Company Holdings 2000 Long-Term Incentive
Plan (the Stock Option Plan), which provides for the granting of non-qualified stock options and
stock appreciation rights to full-time associates and the Board of Directors of Watson Wyatt.
Options under the Stock Option Plan were granted in conjunction with its initial public offering in
fiscal year 2001 and periodically until March 2002.
12
In light of the pending Merger with Towers Perrin, the Compensation Committee determined that it
could not establish performance metrics for senior executives under the SBI Program for fiscal
2010. As a result, the Board of Directors granted nonqualified stock options as incentive
compensation. The option awards have a seven-year term and will vest ratably over each of the three
years following the date of grant. The options became fully vested and exercisable according to the
Stock Option Plan change of control provisions triggered by the Merger on January 1, 2010. Any
unamortized grant date fair value of the options will be expensed in the third quarter of fiscal
2010.
During the three and six months ending December 31, 2009, 0 and 125,648 stock options,
respectively, were granted with an exercise price equal to the grant date market price of Watson
Wyatts common stock of $42.47. Watson Wyatt did not grant stock options during the three and six
months ended December 31, 2008. There were 0 and 520 exercises of stock options during the three
and six months ended December 31, 2008, respectively. During the three and six months ended
December 31, 2008, 1,536 and 3,651 stock options expired, respectively.
The weighted-average fair value of the stock option grants was calculated using the Black-Scholes
formula and are included in the valuation assumptions table below. In addition, a post-vesting
discount was calculated using 1.4 percent, the risk-free interest rate of a three-year bond,
compounded over three-years. The post-vesting discount was used to estimate fair value as there is
a transfer restriction for three years of the stock options underlying shares once vested.
Compensation expense is recorded over a three-year graded vesting term as if one third of the
options granted to a participant are granted over one year, one third over two years and the
remaining one third over three years. There were no exercises or cancellations of stock options
during the three and six months ended December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
December 31, |
|
December 31, |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
Stock option grants: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate |
|
|
|
|
|
|
|
|
|
|
1.4 |
% |
|
|
|
|
Expected lives in years |
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
|
|
Expected volatility |
|
|
|
|
|
|
|
|
|
|
37.0 |
% |
|
|
|
|
Dividend yield |
|
|
|
|
|
|
|
|
|
|
0.7 |
% |
|
|
|
|
Weighted-average grant date fair value of options granted |
|
|
|
|
|
|
|
|
|
$ |
10.21 |
|
|
|
|
|
Number of shares granted |
|
|
|
|
|
|
|
|
|
|
125,648 |
|
|
|
|
|
Note 5 Retirement Benefits.
Defined Benefit Plans
Watson Wyatt sponsors both qualified and non-qualified, non-contributory defined benefit pension
plans in North America and the U.K. that account for approximately 85 percent of the pension
liability. Under the plans in North America, benefits are based on the number of years of service
and the associates compensation during the five highest paid consecutive years of service.
Beginning January 2008, Watson Wyatt made changes to the plan in the U.K. related to years of
service used in calculating benefits for associates. Benefits earned prior to January 2008 are
based on the number of years of service and the associates compensation during the three years
before leaving the plan and benefits earned after January 2008 are based on the number of years of
service and the associates average compensation during the associates term of service since that
date. The non-qualified plan in North America provides for pension benefits that would be covered
under the qualified plan but are limited by the Internal Revenue Code. The non-qualified plan has
no assets and therefore is an unfunded arrangement, the liability for which is
reflected in the balance sheet. Watson Wyatt does not have a non-qualified plan in the U.K. The
measurement date for all plans is June 30.
13
Components of Net Periodic Benefit Cost for Defined Benefit Pension Plans
The following table sets forth the components of net periodic benefit cost for Watson Wyatts
defined benefit pension plan for North America and the U.K. for the three and six month periods
ended December 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
North |
|
|
|
|
|
|
North |
|
|
|
|
|
|
America |
|
|
U.K. |
|
|
America |
|
|
U.K. |
|
Service Cost |
|
$ |
5,884 |
|
|
$ |
1,511 |
|
|
$ |
6,409 |
|
|
$ |
1,851 |
|
Interest Cost |
|
|
12,481 |
|
|
|
5,263 |
|
|
|
12,305 |
|
|
|
6,200 |
|
Expected Return on Plan Assets |
|
|
(11,549 |
) |
|
|
(4,912 |
) |
|
|
(12,822 |
) |
|
|
(6,314 |
) |
Amortization of Net Loss/(Gain) |
|
|
3,759 |
|
|
|
703 |
|
|
|
2,222 |
|
|
|
(100 |
) |
Amortization of Prior Service
(Credit)/Cost |
|
|
(406 |
) |
|
|
11 |
|
|
|
(565 |
) |
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Periodic Benefit Cost |
|
$ |
10,169 |
|
|
$ |
2,576 |
|
|
$ |
7,549 |
|
|
$ |
1,650 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
North |
|
|
|
|
|
|
North |
|
|
|
|
|
|
America |
|
|
U.K. |
|
|
America |
|
|
U.K. |
|
Service Cost |
|
$ |
11,881 |
|
|
$ |
3,022 |
|
|
$ |
13,569 |
|
|
$ |
3,702 |
|
Interest Cost |
|
|
24,791 |
|
|
|
10,527 |
|
|
|
24,371 |
|
|
|
12,400 |
|
Expected Return on Plan Assets |
|
|
(23,116 |
) |
|
|
(9,823 |
) |
|
|
(25,648 |
) |
|
|
(12,628 |
) |
Amortization of Net Loss/(Gain) |
|
|
7,307 |
|
|
|
1406 |
|
|
|
4,089 |
|
|
|
(200 |
) |
Amortization
of Prior Service (Credit)/Cost |
|
|
(812 |
) |
|
|
21 |
|
|
|
(1,129 |
) |
|
|
26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Periodic Benefit Cost |
|
$ |
20,051 |
|
|
$ |
5,153 |
|
|
$ |
15,252 |
|
|
$ |
3,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fiscal year 2010 net periodic benefit cost is based, in part, on the following rate assumptions
as of June 30, 2009 for the North America and U.K. plans:
|
|
|
|
|
|
|
|
|
|
|
North America |
|
U.K. |
Discount rate |
|
|
7.21 |
% |
|
|
6.30 |
% |
Expected long-term rate of return on assets |
|
|
8.61 |
% |
|
|
6.61 |
% |
Rate of increase in compensation levels |
|
|
3.29 |
% |
|
|
5.45 |
% |
Employer Contributions
Watson Wyatt made $31.1 million in contributions to North American plans during the first six
months of fiscal year 2010. We anticipate that $1.1 million will be contributed by the Company to
the North
American pension plans over the remainder of the fiscal year.
14
Watson Wyatt made $9.9 million in contributions to the U.K. plans during the first six months of
fiscal year 2010 and the Company anticipates making $6.6 million in contributions over the
remainder of the fiscal year.
Defined Contribution Plans
In the U.S., Watson Wyatt sponsors a savings plan that provides benefits to substantially all U.S.
associates. Watson Wyatt matches employee contributions at a rate of 50 percent of the first 6
percent up to $60,000 of associates eligible compensation. The Company will also make an annual
profit sharing contribution to the plan in an amount that is dependent upon financial performance
during the fiscal year.
The U.K. pension plan has a money purchase section to which the Company makes core contributions
plus additional contributions matching those of the participating employees up to a maximum rate.
Contribution rates are dependent upon the age of the participant and on whether or not they arise
from salary sacrifice arrangements through which an individual has taken a reduction in salary and
Watson Wyatt has paid an equivalent amount as pension contributions. Core contributions amount to
2-6 percent of pensionable salary with additional matching contributions of a further 2-6 percent.
Health Care Benefits
In the U.S., Watson Wyatt sponsors a contributory health care plan that provides hospitalization,
medical and dental benefits to substantially all U.S. associates. Watson Wyatt accrues a liability
for estimated incurred but unreported claims based on projected use of the plan as well as prior
plan history.
Postretirement Benefits
Watson Wyatt provides certain health care and life insurance benefits for retired associates. The
principal plans cover Watson Wyatt associates in the U.S. and Canada who have met certain
eligibility requirements. Watson Wyatts principal post-retirement benefit plans are unfunded and a
liability is accrued for these benefits.
Components of Net Periodic Benefit Cost for Other Postretirement Plans
The following table sets forth the components of net periodic benefit cost for Watson Wyatts
healthcare and post-retirement plans for the three and six months ended December 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31, |
|
|
Six Months Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Service cost |
|
$ |
295 |
|
|
$ |
324 |
|
|
$ |
594 |
|
|
$ |
653 |
|
Interest cost |
|
|
654 |
|
|
|
687 |
|
|
|
1,309 |
|
|
|
1,411 |
|
Expected return on plan assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net gain |
|
|
(275 |
) |
|
|
(231 |
) |
|
|
(550 |
) |
|
|
(433 |
) |
Amortization of prior service cost |
|
|
(143 |
) |
|
|
(166 |
) |
|
|
(285 |
) |
|
|
(332 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
531 |
|
|
$ |
614 |
|
|
$ |
1,068 |
|
|
$ |
1,299 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employer Contributions
Watson Wyatt made contributions in the form of premiums and medical claim payments to its
healthcare and post-retirement plans of $2.2 million and $2.1 million in the six months ended
December 31, 2009 and 2008, respectively. The Company plans to make additional payments of
approximately $3.1 million through the remainder of the fiscal year.
15
Note 6 Goodwill and Intangible Assets.
The components of goodwill for Watson Wyatt are outlined below for the six months ended December
31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology |
|
|
|
|
|
|
Insurance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and |
|
|
|
|
|
|
and |
|
|
|
|
|
|
|
|
|
|
|
|
|
Human |
|
|
Administration |
|
|
Investment |
|
|
Financial |
|
|
|
|
|
|
|
|
|
Benefits |
|
|
Capital |
|
|
Solutions |
|
|
Consulting |
|
|
Services |
|
|
|
|
|
|
|
|
|
Group |
|
|
Group |
|
|
Group |
|
|
Group |
|
|
Group |
|
|
Other |
|
|
Total |
|
Balance as of June 30, 2009 |
|
$ |
343,158 |
|
|
$ |
30,644 |
|
|
$ |
51,796 |
|
|
$ |
52,308 |
|
|
$ |
63,634 |
|
|
$ |
1,214 |
|
|
$ |
542,754 |
|
Goodwill acquired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustment |
|
|
726 |
|
|
|
153 |
|
|
|
(815 |
) |
|
|
(578 |
) |
|
|
(1,061 |
) |
|
|
|
|
|
|
(1,575 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
December 31, 2009 |
|
$ |
343,884 |
|
|
$ |
30,797 |
|
|
$ |
50,981 |
|
|
$ |
51,730 |
|
|
$ |
62,573 |
|
|
$ |
1,214 |
|
|
$ |
541,179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table reflects changes in the net carrying amount of the components of
intangible assets of Watson Wyatt for the six months ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademark & |
|
|
Customer related |
|
|
Core/developed |
|
|
Non-compete |
|
|
|
|
|
|
trade name |
|
|
intangible |
|
|
technology |
|
|
agreements |
|
|
Total |
|
Balance as of
June 30, 2009 |
|
$ |
100,511 |
|
|
$ |
78,843 |
|
|
$ |
6,757 |
|
|
$ |
122 |
|
|
$ |
186,233 |
|
Intangible assets
acquired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense |
|
|
|
|
|
|
(4,493 |
) |
|
|
(2,214 |
) |
|
|
(111 |
) |
|
|
(6,818 |
) |
Translation adjustment |
|
|
(1,778 |
) |
|
|
186 |
|
|
|
(29 |
) |
|
|
4 |
|
|
|
(1,617 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
December 31, 2009 |
|
$ |
98,733 |
|
|
$ |
74,536 |
|
|
$ |
4,514 |
|
|
$ |
15 |
|
|
$ |
177,798 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
The following table reflects the carrying value of intangible assets of Watson Wyatt at
December 31, 2009 and June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
June 30, 2009 |
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Carrying |
|
|
Accumulated |
|
|
Carrying |
|
|
Accumulated |
|
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
|
Amortization |
|
Intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademark & trade name |
|
$ |
99,135 |
|
|
$ |
402 |
|
|
$ |
100,913 |
|
|
$ |
402 |
|
Customer related intangibles |
|
|
109,007 |
|
|
|
34,471 |
|
|
|
108,821 |
|
|
|
29,978 |
|
Core/developed technology |
|
|
23,496 |
|
|
|
18,982 |
|
|
|
23,525 |
|
|
|
16,768 |
|
Non-compete agreements |
|
|
1,277 |
|
|
|
1,262 |
|
|
|
1,273 |
|
|
|
1,151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets |
|
$ |
232,915 |
|
|
$ |
55,117 |
|
|
$ |
234,532 |
|
|
$ |
48,299 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A component of the change in the gross carrying amount of intangible assets reflects translation
adjustments between June 30, 2009 and December 31, 2009. Goodwill and intangible assets are
largely denominated in the British pound and Euro and are translated into our reporting currency,
the U.S. dollar, based on exchange rates at the balance sheet date.
Certain trademark and trade name intangibles have indefinite useful lives and are not amortized.
The weighted average remaining life of amortizable intangible assets at December 31, 2009, was 8.1
years. Estimated amortization expense for the remainder of fiscal year 2010 and subsequent fiscal
years is as follows:
|
|
|
|
|
Fiscal year ending June 30: |
|
Amount |
|
2010 |
|
$ |
6,591 |
|
2011 |
|
|
10,213 |
|
2012 |
|
|
9,947 |
|
2013 |
|
|
8,887 |
|
2014 |
|
|
8,887 |
|
Thereafter |
|
|
34,540 |
|
|
|
|
|
Total |
|
$ |
79,065 |
|
|
|
|
|
17
Note 7 Earnings Per Share.
Basic earnings per share are calculated on the basis of the weighted average number of common
shares outstanding during the three and six month periods ended December 31, 2009 and 2008.
Diluted earnings per share is calculated by dividing net income by the weighted average number of
common shares outstanding, plus the dilutive effect of stock-based compensation plans and employee
stock purchase plan shares using the treasury stock method over the same measurement period. The
components of basic and diluted earnings per share are as follows (in thousands, except per-share
amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31, |
|
|
Six Months Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Net income |
|
$ |
23,872 |
|
|
$ |
39,551 |
|
|
$ |
53,653 |
|
|
$ |
74,711 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average outstanding shares of
common stock |
|
|
42,244 |
|
|
|
42,571 |
|
|
|
42,458 |
|
|
|
42,753 |
|
Dilutive effect of employee stock plans |
|
|
336 |
|
|
|
45 |
|
|
|
276 |
|
|
|
51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock and stock equivalents |
|
|
42,580 |
|
|
|
42,616 |
|
|
|
42,734 |
|
|
|
42,804 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income-Basic |
|
$ |
0.57 |
|
|
$ |
0.93 |
|
|
$ |
1.26 |
|
|
$ |
1.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income- Diluted |
|
$ |
0.56 |
|
|
$ |
0.93 |
|
|
$ |
1.26 |
|
|
$ |
1.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 8 Investments in Affiliates.
PCIC
Watson Wyatt has an equity investment in PCIC. As defined by ASC 810, PCIC is a variable interest
entity. Based on the legal, financial and operating structure of PCIC, Watson Wyatt concluded that
as of December 31, 2009, it was not the primary beneficiary of PCIC. Accordingly, it did not
consolidate the results of PCIC into its consolidated financial statements. Watson Wyatt applies
the equity method of accounting for its investment in PCIC. However, beginning on January 1, 2010,
as a result of the Merger, Towers Watson has a majority ownership of PCIC which changed the
allocation of economic risks and rewards of PCIC among the variable interest holders. Towers Watson
will consolidate the results of PCIC into its consolidated financial statements.
PCIC was organized in 1987 as a captive insurance company under the laws of the State of Vermont.
PCIC provides professional liability insurance on a claims-made basis to three actuarial and
management consulting firms (Watson Wyatt, Towers Perrin and another party), all of which
participate in the program as both policyholders and stockholders.
Capital contributions to PCIC are required when approved by a majority of its stockholders. From
the time PCIC was organized through December 31, 2009, Watson Wyatt has provided capital
contributions to PCIC through cash contributions totaling $7.3 million and through the issuance of
letters of credit totaling $10.6 million. Watson Wyatts ownership interest in PCIC as of December
31, 2009 and 2008 was 36.43 percent.
18
Management believes that Watson Wyatts maximum financial statement exposure regarding its
investment in PCIC as of December 31, 2009 was limited to the carrying value of its investment in
PCIC of $13.7 million, combined with letters of credit totaling $10.6 million, for a total maximum
exposure of $24.3 million.
The summary operating results for PCIC for the 12 month period ending December 31, 2009 and 2008
are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31 |
|
|
2009 |
|
2008 |
|
|
|
Revenue |
|
$ |
36,158 |
|
|
$ |
45,930 |
|
Operating Expenses |
|
|
30,409 |
|
|
|
13,328 |
|
|
|
|
Income before taxes |
|
|
5,749 |
|
|
|
32,602 |
|
|
|
|
Net income |
|
$ |
3,854 |
|
|
$ |
21,520 |
|
|
|
|
Summarized balance sheet information for PCIC as of its fiscal year end December 31, 2009 and 2008
is as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Current assets |
|
$ |
214,512 |
|
|
$ |
194,620 |
|
Noncurrent assets |
|
|
82,496 |
|
|
|
66,655 |
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
297,008 |
|
|
$ |
261,275 |
|
|
|
|
|
|
|
|
|
Current liabilities |
|
$ |
20,453 |
|
|
$ |
27,984 |
|
Noncurrent liabilities |
|
|
239,910 |
|
|
|
201,458 |
|
Stockholders equity |
|
|
36,645 |
|
|
|
31,833 |
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
297,008 |
|
|
$ |
261,275 |
|
|
|
|
|
|
|
|
Fifth Quadrant
Watson Wyatt acquired a 20 percent investment in Fifth Quadrant Actuaries & Consultants (Pty) Ltd
(Fifth Quadrant) in June 2008. Fifth Quadrant is an independent South African firm of actuaries and
employee benefits consultants established in 1998. Its core business is to provide independent,
high quality advice to institutional clients, which includes retirement funds, medical schemes,
charitable trusts and corporate and public sector clients. Watson Wyatt has a $4.3 million
investment in Fifth Quadrant as of December 31, 2009.
Dubai
Watson Wyatt established a partnership with the Knowledge and Human Development Authority in Dubai
(Dubai) in January 2008. The partnership is aimed at supporting public and private sector
organizations across the Gulf in their pursuit for reaching international standards of excellence
in human capital strategies and programs. As of December 31, 2009, Watson Wyatt has a $1.1 million
investment in Dubai.
19
IFA
Watson Wyatt acquired a 20 percent investment in Gesellschaft fur Finanz-und Aktuarwissenschaften
mbH, or IFA, in the second quarter of fiscal year 2009. IFA is an insurance and financial services
company based in Germany. As of December 31, 2009, Watson Wyatt has a $2.6 million investment in
IFA.
Watson Wyatt applies the equity method of accounting for all of its investments in affiliates.
As a result of adoption of ASC 810, the non-controlling interests in Jakarta and Indonesia were
retrospectively reclassified from other non-current liabilities to non-controlling interest in
total equity. Watson Wyatt owns 60 percent of both subsidiaries and the non-controlling interests
was $1.1 million as of December 31, 2009 and June 30, 2009.
Note 9 Comprehensive Income/(Loss).
Comprehensive income/(loss) includes net income and changes in the cumulative translation
adjustment gain or loss. For the three months ended December 31, 2009, comprehensive income
totaled $23.9 million compared with comprehensive loss of $64.6 million for the three months ended
December 31, 2008. For the six months ended December 31, 2009, comprehensive income totaled $49.1
million, compared with comprehensive loss of $118.8 million for the six months ended December 31,
2008. The fluctuation is primarily attributable to fluctuations in exchange rates.
Note 10 Commitments and Contingent Liabilities.
Watson Wyatt historically has provided guarantees on an infrequent basis to third parties in the
ordinary course of business. The commitment and contingencies described below are currently in
effect and could require it to make payments to third parties under certain circumstances.
Indenture: On December 30, 2009, in connection with the Merger and the Class R Elections as
described in Note 2, Towers Watson entered into an Indenture (the Indenture) with Wilmington
Trust FSB, as Trustee (the Trustee), for the issuance of Towers Watson Notes in the aggregate
principal amount of $200 million. The Towers Watson Notes were issued on January 6, 2010, bearing
interest from January 4, 2010 at a fixed per-annum rate of 2.0 percent, and will mature on January
1, 2011. The Indenture contains limited operating covenants, and obligations under the Towers
Watson Notes are subordinated to the obligations of Towers Watson under the Senior Credit Facility
(as defined below) on the terms set forth in the Indenture.
Towers Watson Credit Facility: On January 1, 2010, in connection with the Merger, Towers Watson and
certain subsidiaries entered into a three-year, $500 million revolving credit facility with a
syndicate of banks (the Senior Credit Facility). Borrowings under the facility will bear interest
at a spread to either LIBOR or the Prime Rate. We are charged a quarterly commitment fee, currently
0.5 percent of the facility, which varies with our financial leverage and is paid on the unused
portion of the credit facility. Obligations under the facility are guaranteed by Towers Watson and
all of its domestic subsidiaries (other than PCIC) and are secured by a pledge of 65 percent of the
voting stock and 100 percent of the non-voting stock of Towers Perrin Luxembourg Holdings S.A.R.L.
20
The Senior Credit Facility contains customary representations and warranties and affirmative and
negative covenants. The Senior Credit Facility requires Towers Watson to maintain certain financial
covenants that include a minimum Consolidated Interest Coverage Ratio and a maximum Consolidated
Leverage Ratio (which terms in each case are defined in the Senior Credit Facility). In addition,
the Senior Credit Facility contains restrictions on the ability of Towers Watson and its
subsidiaries to, among other things, incur additional indebtedness; pay dividends; make
distributions; create liens on assets; make investments, loans or advances; make acquisitions;
dispose of property; engage in sale-leaseback transactions; engage in mergers or consolidations,
liquidations and dissolutions; engage in certain transactions with affiliates; and make changes in
lines of businesses. As of December 31, 2009 and the date of this filing, February 8, 2010, there
was no outstanding balance owed under the Senior Credit Facility.
Watson Wyatt Credit Agreement: Watson Wyatt had a credit facility provided by a syndicate of banks
in an aggregate principal amount of $300 million. Interest rates associated with this facility
varied with LIBOR and/or the Prime Rate and were based on its leverage ratio, as defined by the
credit agreement. Watson Wyatt was charged a quarterly commitment fee, currently 0.125 percent of
the facility, which varies with its financial leverage and was paid on the unused portion of the
credit facility. There were no borrowings under this facility as of December 31, 2009 and June 30,
2009. Credit under the facility was available upon demand, although the credit facility required
Watson Wyatt to observe certain covenants (including requirements relating to its leverage ratio
and fixed coverage charge ratio) and was collateralized with a pledge of stock of material
subsidiaries. Watson Wyatt was in compliance with all covenants under the credit facility as of
December 31, 2009. This facility had been scheduled to mature on June 30, 2010, however, it was
terminated on January 1, 2010 upon completion of the Merger and was replaced by the Towers Watson
Senior Credit Facility.
Letters of Credit: As of December 31, 2009, both Watson Wyatt and Towers Perrin had letters of
credit totaling $10.6 million under their respective existing credit facilities to guarantee
payment to a beneficiary in the event that it fails to meet its financial obligations to the
beneficiary. These letters of credit will remain outstanding as long as Towers Watson retains an
ownership share of the affiliated captive insurance company, PCIC.
Watson Wyatt has also provided a $5.0 million Australian dollar-denominated letter of credit (US
$4.5 million) to an Australian governmental agency as required by the local regulations. The
estimated fair market value of these letters of credit is immaterial because they have never been
used, and the Company believes that future usage is remote.
Indemnification Agreements: Watson Wyatt has various agreements that provide that it may be
obligated to indemnify the other party with respect to certain matters. Generally, these
indemnification clauses are included in contracts arising in the normal course of business and in
connection with the purchase and sale of certain businesses. Although it is not possible to predict
the maximum potential amount of future payments under these indemnification agreements due to the
conditional nature of Watson Wyatts obligations and the unique facts of each particular agreement,
Watson Wyatt does not believe that any potential liability that might arise from such indemnity
provisions is probable or material. There are no provisions for recourse to third parties, nor are
any assets held by any third parties that any guarantor can liquidate to recover amounts paid under
such indemnities.
Legal Proceedings: From time to time, Towers Watson and its subsidiaries, including Watson Wyatt
and Towers Perrin, are parties to various lawsuits, arbitrations or mediations that arise in the
ordinary course of business. The matters reported on below involve the most significant pending or
potential claims against Towers Watson and its subsidiaries. We also have received subpoenas and
requests for information in connection with government investigations.
21
Watson Wyatt and Towers Perrin each carried substantial professional liability insurance with a
self-insured retention of $1 million per occurrence, which provides coverage for professional
liability claims including the cost of defending such claims. These policies remain in force
subsequent to the Merger. We reserve for contingent liabilities based on ASC 450, Contingencies
when it is determined that a liability, inclusive of defense costs, is probable and reasonably
estimable. Management believes, based on currently available information including the existence of
professional liability insurance, that the results of all pending claims against the Company will
not have a material adverse effect on the results of operations, but litigation is subject to many
factors which are difficult to predict so there can be no assurance that in the event of a material
unfavorable result in one or more of such matters, we will not incur material costs. Our
professional liability insurance coverage beyond our self-insured retention amount is written by
PCIC, an affiliated captive insurance company, with reinsurance and excess insurance attaching at
$26 million provided by various other commercial insurance carriers. Post-Merger, Towers Watson has
a 72.86 percent ownership interest in PCIC and as a result, PCICs results will be consolidated in
Towers Watsons operating results. Although the PCIC insurance policies will continue to cover
claims above a $1 million per occurrence self-retention, the consolidation of PCIC will effectively
result in self-insurance for Towers Watson for the first $26 million of loss on each claim. Accordingly, the impacts
of PCICs reserve development also may result in fluctuations in Towers Watsons earnings.
Watson Wyatt v. SBC Holdings, Inc. (Stroh Brewery Company): On July 23, 2004, we received a demand
letter from Strohs counsel alleging that errors in valuations for 2001 and subsequent years
understated the liabilities of its pension plan and overstated the companys net worth. As a
result, Stroh claimed it did not annuitize its defined benefit plan and redeemed its stock at an
inflated price. On April 15, 2005, Watson Wyatt filed a petition in federal court to compel
arbitration of the matter. Subsequently, Stroh filed an answer and counterclaim, alleging damages
in excess of $46 million.
In January, 2008, the Sixth Circuit Court of Appeals held that the entire claim is subject to
arbitration. An arbitration hearing is scheduled to commence in April 2010.
ExxonMobil Superannuation Plan (Australia)
In March 2007, the Trustees of the ExxonMobil (Australia) Superannuation Plan commenced a legal
proceeding in the Supreme Court of Victoria against Towers Perrin; the plan sponsors, Esso
(Australia) and ExxonMobil (Australia), commenced a similar legal proceeding against Towers Perrin
in April 2007 (collectively the 2007 actions). On May 15, 2009, as the time was expiring to add
any additional contributing parties, Towers Perrin filed third-party claims against Watson Wyatt,
the successor actuary and Plan administrator.
The complaints in the 2007 actions allege that while performing administrative and actuarial
services for the Superannuation Plan during the period from mid-1990 to 1995, Towers Perrin failed
to detect drafting errors made by previous plan advisors including attorneys, when they prepared
certain amendments to the Superannuation Plan Deed. These amendments were adopted before Towers
Perrin commenced its engagement. Watson Wyatt succeeded Towers Perrin as the Plan administrator
and Plan actuary in 1996 and continues to serve in those capacities.
Plaintiffs allege that the faulty drafting resulted in the grant of additional, but unintended and
unauthorized benefits, to certain Superannuation Plan participants. Plaintiffs further allege that
because Towers Perrin failed to detect the drafting error, benefits were not properly administered
and the Plan was not properly funded. Towers Perrin administered and valued the Plan benefits
consistent with what the plan sponsors contend was intended. Watson Wyatt continued to administer
and value the benefits in the same manner when it succeeded Towers Perrin in 1996.
The most recent estimate of the value of the allegedly unintended benefits is AU$580 million.
22
The Trustee and plan sponsors have been engaged since 2001 in a separate legal proceeding (the
rectification action) that seeks an interpretation of the relevant portions of the Plan Deed and,
if necessary, modification to conform those portions to reflect the manner in which the benefits
were intended to be, and were, administered during both the Towers Perrin and Watson Wyatt
engagements.
The rectification action is scheduled for trial in April 2010.
Towers Perrin is a defendant in three lawsuits filed by former shareholders
On December 9, 2009, Watson Wyatt was informed by Towers Perrin of a settlement demand from the
plaintiffs in a putative class action lawsuit filed by certain former shareholders of Towers Perrin
(the Dugan Action). Although the complaint in the Dugan Action does not contain a quantification
of the damages sought, plaintiffs settlement demand, which was orally communicated on December 8,
2009 and in writing on December 9, 2009, sought a payment of $800 million to settle the action on
behalf of the proposed class. Plaintiffs requested that Towers Perrin communicate the settlement
demand to Watson Wyatt.
The Dugan Action previously was reported in Amendment No. 3 to the Registration Statement on Form
S-4/A (File No. 333-161705) filed on November 9, 2009 by the Jupiter Saturn Holding Company (the
Registration Statement). As reported in the Registration Statement, the complaint was filed on
November 5, 2009 against Towers Perrin, members of its board of directors, and certain members of
senior management in the United States District Court for the Eastern District of Pennsylvania.
Plaintiffs in this action Alan H. Dugan, Ronald P. Giesinger, Marvin H. Greene, John G. Kneen,
John T. Lynch, Bruce R. Pittenger, J. Russell Southworth, C. Roland Stichweh, Jacobus J. Van de
Graaf and John C. Von Hagen are former members of the Towers Perrins senior management, who
left Towers Perrin at various times between 1995 and 2000. The Dugan plaintiffs seek to represent
a class of former Towers Perrin shareholders who separated from service on or after January 1,
1971, and who also meet certain other specified criteria.
On December 17, 2009, four former Towers Perrin shareholders Dale Allen, Candace Block, Deborah
Dubois, and Elizabeth Scattergood each of whom voluntarily left Towers Perrin in May or June
2005 and all of whom are excluded from the proposed class in the Dugan Action commenced a
separate legal proceeding in the United States District Court for the Eastern District of
Pennsylvania alleging the same claims in substantially the same form as those alleged in the Dugan
Action. These plaintiffs are proceeding in their individual capacities and do not seek to represent
a proposed class.
On January 15, 2010, former Towers Perrin shareholder Alice Pao who separated from service
with Towers Perrin in March 2005 when Towers Perrin and EDS launched a joint venture that led to
the creation of a corporate entity known as ExcellerateHRO (eHRO), commenced a separate legal
proceeding in the United States District Court of the Eastern District of Pennsylvania also
alleging the same claims in substantially the same form as those alleged in the Dugan Action.
Towers Perrin contributed its Towers Perrin Administrative Solutions (TPAS) business to eHRO and
formerly was a minority shareholder (15 percent) of eHRO. Pao seeks to represent a class of former
Towers Perrin shareholders who separated from service in connection with Towers Perrins
contribution to eHRO of its TPAS business and who are excluded from the proposed class in the Dugan
Action.
23
Pursuant to the corporations Bylaws in effect at the time of their separations, the Towers Perrin
shares held by each of these plaintiffs were redeemed by Towers Perrin at book value at the time
these individuals separated from employment. The complaint alleges that there was a promise that
Towers Perrin would remain privately owned in perpetuity and that by agreeing to sell their shares
back to Towers Perrin at book value upon separation, plaintiffs and other members of the putative
classes relied upon this promise, which they allege was violated by the consummation of the Merger
between the Company and Towers Perrin. The complaint asserts claims for breach of contract, breach
of express trust, breach of fiduciary duty, promissory estoppel, quasi-contract/unjust enrichment,
and constructive trust, and seeks equitable relief including an accounting, disgorgement,
rescission and/or restitution, and the imposition of a constructive trust. On January 20, 2010,
the court consolidated the three actions for all purposes.
Towers Watson believes the claims in these lawsuits are without merit and intends to defend against
them vigorously. The cost of defending against the claims could be substantial. The outcome of
these legal proceedings is inherently uncertain and could be unfavorable to Towers Watson.
Note 11 Recent Accounting Pronouncements.
Adopted in fiscal year 2009
In June 2009, the Financial Accounting Standards Board (FASB) issued its final Statement of
Financial Accounting Standards (SFAS) No. 168 The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles a replacement of FASB Statement No. 162. SFAS
No. 168 made the FASB Accounting Standards Codification (the Codification) the single source of
U.S. GAAP used by nongovernmental entities in the preparation of financial statements, except for
rules and interpretive releases of the SEC under authority of federal securities laws, which are
sources of authoritative accounting guidance for SEC registrants. The Codification is meant to
simplify user access to all authoritative accounting guidance by reorganizing U.S. GAAP
pronouncements into roughly 90 accounting topics within a consistent structure; its purpose is not
to create new accounting and reporting guidance. The Codification supersedes all existing non-SEC
accounting and reporting standards and was effective for the Company beginning July 1, 2009.
Following SFAS No. 168, the Board will not issue new standards in the form of Statements, FASB
Staff Positions, or Emerging Issues Task Force Abstracts; instead, it will issue Accounting
Standards Updates.
ASC 805, Business Combinations which is a revision of accounting provisions that changes the
application of the acquisition method in a number of significant aspects. Acquisition costs will
generally be expensed as incurred; noncontrolling interests will be valued at fair value at the
acquisition date; restructuring costs associated with a business combination will generally be
expensed subsequent to the acquisition date; contingent consideration will be recognized at its
fair value on the acquisition date and, for certain arrangements, changes in fair value will be
recognized in earnings until settled, and changes in deferred tax asset valuation allowances and
income tax uncertainties after the acquisition date generally will affect income tax expense. ASC
350-30-35-1, Determination of the Useful Life of Intangible Assets amends the factors that should
be considered in developing renewal or extension assumptions used to determine the useful life of
recognized intangible assets under ASC 350, Goodwill and Other Intangible Assets. ASC
805-20-25-18A, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination
That Arise from Contingencies which amends and clarifies the accounting for acquired contingencies
and is effective upon the adoption of ASC 805, Business Combinations. We adopted these provisions
on July 1, 2009.
24
ASC 810, Noncontrolling Interests in Consolidated Financial Statements an amendment of ARB No.
51 requires the recognition of a noncontrolling interest (minority interest) as equity in the
consolidated financial statements and separate from the parents equity. The amount of net income
attributable to the noncontrolling interest will be included in consolidated net income. It also
amends certain consolidation procedures for consistency with the requirements of ASC 805, Business
Combinations. The provisions also include expanded disclosure requirements regarding the interests
of the parent and its noncontrolling interest. We adopted these provisions on July 1, 2009. As a
result, Watson Wyatts non-controlling interest of $1.0 million as of June 30, 2009, which was
previously included in other non-current liabilities, was reclassified to non-controlling interest
in total equity.
ASC 815-10-50, SFAS 161, Disclosures About Derivative Instruments and Hedging Activities an
Amendment of FASB Statement No. 133 gives financial statement users better information about the
reporting entitys hedges by providing for qualitative disclosures about the objectives and
strategies for using derivatives, quantitative data about the fair value of and gains and losses on
derivative contracts, and details of credit-risk-related contingent features in their hedged
positions. The Company was required to adopt the provisions on January 1, 2009. The Company
expects that in relation to the merger with Watson Wyatt and Towers Perrin, the application of
these provisions will be material to the disclosures of Towers Watsons future filings which will
include the results of Towers Perrin.
ASC 820, Fair Value Measurements defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles and expands disclosures about fair value
measurements. The Company adopted these provisions for financial assets and liabilities on July 1,
2008 and for nonfinancial assets and liabilities on July 1, 2009, these adoptions did not have a
material impact on the Companys financial position or results of operations
Not yet adopted
ASC 715-10-50, Employers Disclosures about Postretirement Benefit Plan Assets provides guidance
on the objectives an employer should consider when providing detailed disclosures about assets of a
defined benefit pension plan or other postretirement plan. These disclosure objectives include
investment policies and strategies, categories of plan assets, significant concentrations of risk
and the inputs and valuation techniques used to measure the fair value of plan assets. These
provisions are effective for our fiscal year ending June 30, 2010. The Company is currently
evaluating the effects that these provisions may have on its financial statements.
ASC 810 Amendments to FASB Interpretation No. 46 (R) which amends the evaluation criteria to
identify the primary beneficiary of a variable interest entity provided by FASB Interpretation
46(R), Consolidation of Variable Interest Entities-An Interpretation of ARB No. 51. Additionally,
the provisions require ongoing assessment of whether an enterprise is the primary beneficiary of
the variable interest entity. We will adopt these provisions on July 1, 2010. The Company is
currently evaluating the effects that these provisions may have on its financial statements.
Note 12 Income Taxes.
At December 31, 2009, Watson Wyatts gross liability for income taxes associated with uncertain tax
positions was $9.4 million. This liability can be reduced by $1.5 million of offsetting deferred
tax benefits associated with foreign tax credits and the federal tax benefit of state income taxes.
The net difference of $7.9 million, if recognized, would have a $7.6 million favorable impact on
the Companys effective tax rate and would increase other comprehensive income by $0.3 million.
The gross tax liability for uncertain tax positions increased by $0.09 million for the six months
ended December 31, 2009.
Interest and penalties related to income tax liabilities are included in income tax expense. At
December 31, 2009, Watson Wyatt had accrued interest of $1.5 million and penalties of $0.4 million,
totaling $1.9 million.
25
The Company believes it is reasonably possible that there will be a $0.1 million decrease in the
gross tax liability for uncertain tax positions within the next 12 months based upon potential
settlements and the expiration of statutes of limitations in various tax jurisdictions.
The Company and its subsidiaries conduct business globally and are subject to income tax in the US
and in many states and foreign jurisdictions. Watson Wyatt is currently under examination in
several tax jurisdictions. A summary of the tax years that remain subject to examination in Watson
Wyatts major tax jurisdictions are:
|
|
|
|
|
|
|
|
Open Tax Years |
|
|
|
(fiscal year ending) |
|
United States Federal |
|
|
2006 and forward |
United States Various States |
|
|
2005 and forward |
Canada Federal |
|
|
2006 and forward |
Germany |
|
|
2003 and forward |
United Kingdom |
|
|
2007 and forward |
Note 13 Subsequent Events.
Towers Watson evaluated events occurring between the end of our most recent fiscal quarter end,
December 31, 2009 and February 8, 2010, the date the financial statements were issued.
On January 1, 2010, pursuant to the Merger Agreement, Watson Wyatt and Towers Perrin, combined
their businesses through two simultaneous mergers and became wholly-owned subsidiaries of Jupiter
Saturn Holding Company, which changed its name to Towers Watson. The details of the Merger is
described in Note 1 Organization and Basis of Presentation, the Merger Consideration issued in
the transaction is described in Note 2 Merger and the Towers Watson Credit Agreement which was
entered into upon completion of the Merger on January 1, 2010 is described in Note 10 Commitments
and Contingent Liabilities. In addition, the Company registered shares on Form S-8 for the Towers
Watson & Co. Employee Stock Purchase Plan and 2009 Long Term Incentive Plan as described below.
Registration of Securities under the Employee Stock Purchase Plan
On January 4, 2010, the Company filed a Registration Statement on Form S-8 relating to 4,696,424
shares of Towers Watsons Class A Common Stock that may be issued pursuant to awards under the
Towers Watson & Co. Employee Stock Purchase Plan (the ESPP). The ESPP is an amendment and
restatement of the Watson Wyatt & Company Holdings 2001 Employee Stock Purchase Plan. Watson Wyatt
originally registered 750,000 shares of its Class A Common Stock on December 19, 2001 and an
additional 1,500,000 shares of its Class A common stock on December 16, 2003 for use under the
ESPP, of which 196,424 shares remained available for issuance immediately prior to the Merger. At
the time of the Merger, the ESPP, as amended and restated, was assumed by Towers Watson, and
4,500,000 additional shares were added to the ESPP. This Registration Statement covered 4,696,424
shares. The ESPP was approved by Watson Wyatt and Towers Perrin, as Towers Watsons stockholders,
on December 30, 2009. For further information, please see the Registration Statement on Form S-8
filed with the SEC (Registration No. 333-164191) on January 4, 2010.
26
Registration of Securities under the 2009 Long Term Incentive Plan
On January 4, 2010, the Company filed a Registration Statement on Form S-8 relating to: (a)
12,500,000 shares of Towers Watsons Class A common stock that may be issued pursuant to awards
under the Towers Watson & Co. 2009 Long Term Incentive Plan (the 2009 Plan), which was adopted by
the Company; and (b) 125,648 shares of Class A Common Stock that may be issued upon exercise of
outstanding stock options (the Assumed Options) previously granted under the Watson Wyatt &
Company Holdings 2000 Long-Term Incentive Plan (the 2000 Plan and, together with the 2009 Plan,
the Plans) that were assumed by the Company at the time of the Merger.
The Company assumed the 2000 Plan for the limited purpose of assuming the Assumed Options; no
further stock options or other awards will be granted under the 2000 Plan subsequent to the Merger.
The Assumed Options are exercisable for shares of Class A Common Stock based on an exchange ratio
of one share of Towers Watson Class A Common Stock for each share of Watson Wyatt Common Stock
underlying the Assumed Options immediately prior to the Merger. Except for the replacement of the
Towers Watson Class A Common Stock for the Watson Wyatt Common Stock as the security to be issued
upon exercise of an Assumed Option and the substitution of Towers Watson & Co. for Watson Wyatt
with respect to administration of the Assumed Options and related matters, the Assumed Options
remain subject to the same terms and conditions set forth in the 2000 Plan and related agreements.
The 2009 Plan was approved by Watson Wyatt shareholders on December 18, 2009. For further
information, please see the Registration Statement on Form S-8 filed with the SEC (Registration No.
333-164192) on January 4, 2010.
27
|
|
|
ITEM 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
Executive Overview
The Merger
On January 1, 2010, pursuant to the Agreement and Plan of Merger, as amended by Amendment No. 1
(the Merger Agreement), Watson Wyatt Worldwide, Inc. (Watson Wyatt) and Towers, Perrin, Forster
& Crosby, Inc. (Towers Perrin) combined their businesses through two simultaneous mergers (the
Merger) and became wholly-owned subsidiaries of Jupiter Saturn Holding Company, which changed its
name to Towers Watson & Co. (Towers Watson).
As of and for the three and six months ended December 31, 2009, Towers Watson had not conducted any
activities other than those incident to its formation and the matters contemplated by the Merger
Agreement. The business of Towers Watson after the Merger was consummated on January 1, 2010, is
the combined businesses previously conducted by Towers Perrin and Watson Wyatt. Therefore, this
quarterly report of Towers Watson does not include separate financials for Jupiter Saturn Holding
Company as they do not contain any material information. In select sections of this quarterly
report that contain prospective or forward-looking information, the combined operations of Towers
Watson post-Merger have been disclosed. Although the business combination of Watson Wyatt and
Towers Perrin was a merger of equals, generally accepted accounting principles require that one
of the combining entities be identified as the acquirer by reviewing facts and circumstances as of
the acquisition date. Watson Wyatt was determined to be the accounting acquirer. This conclusion is
primarily supported by the facts that Watson Wyatt shareholders own approximately 56 percent of all
Towers Watson common stock after the redemption of Towers Watson Class R common stock and that
Watson Wyatts Chief Executive Officer became the Chief Executive Officer of Towers Watson. Watson
Wyatt is the accounting predecessor in the Merger and as such, the historical results of Watson
Wyatt have become those of the new registrant, Towers Watson, and are presented in this filing.
Because the Merger was not yet consummated as of December 31, 2009, the results of Towers Perrin
are not included in the Condensed Consolidated Statements of Operations for the three and six
months ended December 31, 2009 or 2008 or Condensed Consolidated Balance Sheets as of December 31,
2009 and June 30, 2009. Towers Watsons condensed consolidated financial statements as of and for
the three and nine months ended March 31, 2010 will include the results of Towers Perrins
operations beginning January 1, 2010.
General
Towers Watson began material operations January 1, 2010 and is the combined businesses previously
conducted by Towers Perrin and Watson Wyatt. We offer our clients comprehensive services and a
strong talent pool of approximately 14,000 associates across 34 countries. The histories of our
predecessor firms are summarized below.
Watson Wyatt traces its roots back to the actuarial firm R Watson & Sons, founded in 1878 in the
U.K. In 1946, The Wyatt Company was established as an actuarial consulting firm in the U.S. Over
the next few decades, the U.S.-based firm branched out into such other services as health care and
compensation consulting and broadened its global reach, establishing offices throughout Canada,
Europe, Latin America and Asia. In 1995, the two firms formed a global alliance and began operating
as Watson Wyatt Worldwide. In 2000, the U.S.-based arm of the alliance completed a successful
initial public offering and began trading on the New York Stock Exchange under the symbol WW. In
August 2005, the two firms formally combined into one.
28
Towers Perrins predecessor firm, Henry W. Brown & Co., was founded in 1871. Towers, Perrin,
Forster & Crosby, Inc. was incorporated in Philadelphia, Pennsylvania on February 13, 1934. The
firm opened for business with 26 employees and initially operated a Reinsurance Division and Life
Division. The firm eventually began to specialize in pensions and other employee benefit plans.
Over the decades, the firm grew, diversified, globalized and, in 1987, was renamed Towers Perrin.
At Towers Watson, we bring together professionals from around the world experts in their areas of
specialty to deliver the perspectives that give organizations a clear path forward. We do this by
working with clients to develop solutions in the areas of employee benefit programs, risk and
capital management, and talent and reward programs.
We help our clients enhance business performance by improving their ability to attract, retain, and
motivate qualified employees. We focus on delivering consulting services that help our clients
anticipate, identify, and capitalize on emerging opportunities in human capital management. We also
provide independent financial advice regarding all aspects of life assurance and general insurance,
as well as investment advice to assist our clients in developing disciplined and efficient
investment strategies to meet their investment goals.
As leading economies worldwide become more services-oriented, human capital and financial
management has become increasingly important to companies and other organizations. The heightened
competition for skilled employees, unprecedented changes in workforce demographics, regulatory
changes related to compensation and retiree benefits and rising employee-related costs have
increased the importance of effective human capital management. Insurance and investment decisions
become increasingly complex and important in the face of changing economies and dynamic financial
markets. Towers Watson helps its clients address these issues by combining the expertise in human
capital and financial management with consulting and technology, to improve the design and
implementation of various human resources and financial programs, including compensation,
retirement, health care, insurance and investment plans.
The human resources consulting industry, although highly fragmented, is highly competitive and is
comprised of major human capital consulting firms, specialist firms, consulting arms of accounting
firms and information technology consulting firms.
In the short term, Towers Watsons revenue is driven by many factors including the general state of
the global economy and the resulting level of discretionary spending, the continuing regulatory
compliance requirements of its clients, changes in investment markets, the ability of the
consultants to attract new clients or provide additional services to existing clients, and the
impact of new regulations in the legal and accounting fields. In the long term, Towers Watson
expects that its financial results will depend in large part upon how well we succeed in deepening
the existing client relationships through thought leadership and focus on cross-practice solutions,
actively pursuing new clients in the target markets, cross selling and strategic acquisitions.
Towers Watson believes that the highly fragmented industry in which it operates represents
tremendous growth opportunities, because we offer a unique business combination of benefits and
human capital consulting as well as strategic technology solutions.
29
Overview of Watson Wyatt Financial Condition and Results of Operations
Watson Wyatt is a global consulting firm focusing on providing human capital and financial
consulting services. Watson Wyatt provides services in five principal practice areas: Benefits,
Human Capital Consulting, Technology and Administration Solutions, Investment Consulting, and
Insurance and Financial Services operating from 106 offices in 33 countries throughout North
America, Europe, Asia-Pacific and Latin America. Watson Wyatt employed approximately 7,440 and
7,700 associates as of December 31, 2009 and June 30, 2009, respectively, in the following practice
areas:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
June 30, |
|
|
|
2009 |
|
|
2009 |
|
|
|
|
Benefits Group |
|
|
3,255 |
|
|
|
3,325 |
|
Human Capital Group |
|
|
750 |
|
|
|
825 |
|
Technology and Administration Solutions Group |
|
|
1,045 |
|
|
|
1,060 |
|
Investment Consulting Group |
|
|
565 |
|
|
|
565 |
|
Insurance & Financial Services Group |
|
|
380 |
|
|
|
415 |
|
Other (incl. Communication) |
|
|
395 |
|
|
|
450 |
|
Business Services (incl. Corporate and field support) |
|
|
1,050 |
|
|
|
1,060 |
|
|
|
|
Total associates |
|
|
7,440 |
|
|
|
7,700 |
|
|
|
|
Principal Services
Watson Wyatt designs, develops and implements human resource and risk management strategies and
programs through the following closely-interrelated practice areas:
Benefits Group - The Benefits Group, accounting for 55 percent of Watson Wyatts total
revenue for the first six months of fiscal 2010, is the foundation of its business. Approximately
50 percent of Benefits Groups revenue originates from outside of the United States and is thus
subject to translation exposure resulting from foreign exchange rate fluctuations. Retirement, the
core of the Benefits Group business, typically lags reduction in discretionary spending compared to
the other segments, mainly due to the recurring nature of client relationships. Watson Wyatts
corporate client retention rate within its target market has remained very high. Revenue for the
retirement practice is seasonal, with the second and third quarters of each fiscal year being the
busier periods. Major revenue growth drivers in this practice include changes in regulations,
economic uncertainty, leverage from other practices, increased global demand and increased market
share.
30
Services provided through the Benefits Group include the following:
|
|
|
Design and management of benefit programs; |
|
|
|
|
Actuarial services including development of funding and risk management strategies; |
|
|
|
|
Expatriate and international human resource strategies; |
|
|
|
|
Mergers and acquisitions; |
|
|
|
|
Strategic workforce planning; and |
|
|
|
|
Compliance and governance |
Human Capital Group - The Human Capital Group (HCG), accounting for 10 percent of Watson
Wyatts total revenue for the first six months of fiscal 2010, generally encompasses short-term
projects. Approximately 65 percent of HCGs revenue originates from outside of the United States
and is thus subject to translation exposure resulting from foreign exchange rate fluctuations.
Discretionary project work associated with this segment is generally affected by the strength of
the economy. As a result, this segment tends to be more sensitive to cyclical economic fluctuations
than other segments. Services provided through HCG include the following:
|
|
|
Advice concerning compensation plans, including broad-based and executive compensation,
stock and other long-term incentive programs; |
|
|
|
|
Strategies to align workforce performance with business objectives; |
|
|
|
|
Organization effectiveness consulting, including talent management; |
|
|
|
|
Strategies for attracting, retaining and motivating employees; and |
|
|
|
|
Data services |
Technology and Administration Solutions Group - The Technology and Administration Solutions
Group (TAS), accounting for 14 percent of Watson Wyatts total revenue for the first six months of
fiscal 2010, provides information technology services to the clients. Revenue for TAS is
relatively stable, compared to what it had historically experienced in an economic downturn,
because of its long term contracts associated with the administration business. However, TAS
remains partially subject to the impact of the economy on discretionary spending. Income in this
segment is slightly greater in the first half of the fiscal year because of the timing of the
typical enrollment season for benefits. Approximately 45 percent of TASs revenue originates from
outside of the United States and is thus subject to translation exposure resulting from foreign
exchange rate fluctuations. Services provided through the TAS Group include the following:
|
|
|
Web-based applications for health and welfare, pension and compensation administration; |
|
|
|
|
Administration outsourcing solutions for health and welfare and pension benefits; |
|
|
|
|
Call center strategy, design and tools; |
|
|
|
|
Strategic human resource technology and service delivery consulting; |
|
|
|
|
Targeted online compensation and benefits statements, content management and call center
case management solutions; and |
|
|
|
|
Integrated talent management suite |
Investment Consulting Group - The Investment Consulting Group accounts for 11 percent of
Watson Wyatts total revenue for the first six months of fiscal 2010. Approximately 85 percent of
the Investment Consulting Groups revenue originates from outside of the United States and is thus
subject to translation exposure resulting from foreign exchange rate fluctuations. This business,
although relationship based, can be affected by an increasingly complex investment landscape as
well as by volatility in investment returns, particularly as clients look to us for assistance in
managing that volatility.
31
Services provided through the Investment Consulting Group include the following:
|
|
|
Investment consulting services to pension plans and other institutional funds; |
|
|
|
|
Input on governance and regulatory issues; |
|
|
|
|
Analysis of asset allocation and investment strategies; |
|
|
|
|
Investment structure analysis, selection and evaluation of managers and performance
monitoring; and |
|
|
|
|
Implementation/fiduciary services for defined benefit and defined contribution
investment programs via the Advanced Investment Solutions (AIS) services |
Insurance & Financial Services Group - The Insurance & Financial Services Group (I&FS)
accounts for 6 percent of Watson Wyatts total revenue for the first six months of fiscal 2010.
Approximately 90 percent of I&FSs revenue originates from outside of the United States and is thus
subject to translation exposure resulting from foreign exchange rate fluctuations. This business
is largely a project-based business and therefore could be cyclical. Services provided through
I&FS include the following:
|
|
|
Independent actuarial and strategic advice; |
|
|
|
|
Assessment and advice regarding financial condition and risk management; and |
|
|
|
|
Financial modeling software tools for product design and pricing, planning and
projections, reporting, valuations and risk management |
While Watson Wyatt focuses the consulting services in the areas described above, management
believes that one of Watson Wyatts primary strengths is the ability to draw upon consultants from
the different practices to deliver integrated services to meet the needs of its clients. This
capability includes communication and change management implementation support services.
Financial Statement Overview
Historically, Watson Wyatts fiscal year ended on June 30. Towers Watsons fiscal year end will
also be June 30. The financial statements contained in this quarterly report reflect Condensed
Consolidated Balance Sheets as of the end of the second quarter of fiscal year 2010 (December 31,
2009) and as of the end of fiscal year 2009 (June 30, 2009), Condensed Consolidated Statements of
Operations for the three and six month periods ended December 31, 2009 and 2008, Condensed
Consolidated Statements of Cash Flows for the six month periods ended December 31, 2009 and 2008
and a Condensed Consolidated Statement of Changes in Stockholders Equity for the six month period
ended December 31, 2009.
Watson Wyatt derives the majority of its revenue from fees for consulting services, which generally
are billed based on time and materials or on a fixed-fee basis. Clients are typically invoiced on
a monthly basis with revenue generally recognized as services are performed. No single client
accounted for more than one percent of consolidated revenue for any of the most recent three fiscal
years.
32
For the three months ended December 31, 2009 and fiscal years ended June 30, 2009 and 2008, Watson
Wyatts top six markets based on percentage of consolidated revenue were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months |
|
Fiscal Year |
Geographic Region |
|
2010 |
|
2009 |
|
2008 |
United States |
|
|
44 |
% |
|
|
43 |
% |
|
|
41 |
% |
United Kingdom |
|
|
30 |
|
|
|
32 |
|
|
|
32 |
|
Germany |
|
|
5 |
|
|
|
4 |
|
|
|
5 |
|
Canada |
|
|
3 |
|
|
|
4 |
|
|
|
4 |
|
Netherlands |
|
|
3 |
|
|
|
3 |
|
|
|
4 |
|
Greater China |
|
|
2 |
|
|
|
2 |
|
|
|
2 |
|
In delivering consulting services, Watson Wyatts principal direct expenses relate to compensation
of personnel. Salaries and employee benefits are comprised of wages paid to associates, related
taxes, severance, benefit expenses such as pension, medical and insurance costs, and fiscal
year-end incentive bonuses.
Professional and subcontracted services represent fees paid to external service providers for
employment, marketing and other services. For the most recent three fiscal years, approximately 50
to 60 percent of these professional and subcontracted services were directly incurred on behalf of
clients and were reimbursed by them, with such reimbursements being included in revenue. For the
second quarter of fiscal year 2010, approximately 50 percent of professional and subcontracted
services represent these reimbursable services.
Occupancy, communications and other expenses represent expenses for rent, utilities, supplies and
telephone to operate office locations as well as non-client-reimbursed travel by associates,
publications and professional development. This line item also includes miscellaneous expenses,
including gains and losses on foreign currency transactions.
General and administrative expenses include the operational costs, professional fees and insurance
paid by corporate management, general counsel, marketing, human resources, finance, research and
technology support.
Depreciation
and amortization includes the depreciation of fixed assets and
amortization of intangible assets and internally developed software.
Transaction and integration expenses include all fees and charges associated with the Merger.
33
Critical Accounting Policies and Estimates
The preparation of condensed consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires 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 revenue and expenses during the reporting period. 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. The areas that we believe are critical accounting policies include revenue recognition,
valuation of billed and unbilled receivables from clients, discretionary compensation, income
taxes, pension assumptions, incurred but not reported claims, and goodwill and intangible assets.
The critical accounting policies discussed below involve making difficult, subjective or complex
accounting estimates that could have a material effect on the financial condition and results of
operations. These critical accounting policies require us to make assumptions about matters that
are highly uncertain at the time of the estimate or assumption. Different estimates that we could
have used, or changes in estimates that are reasonably likely to occur, may have a material impact
on our financial statements and results of operations.
Revenue Recognition
Revenue includes fees primarily generated from consulting services provided. We recognize revenue
from these consulting engagements when hours are worked, either on a time-and-materials 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 consultants billing rates are principally based on a
multiple of salary and compensation costs.
Revenue for fixed-fee arrangements, which span multiple months, is based upon the percentage of
completion method. The Company typically has three types of fixed-fee arrangements: annual
recurring projects, projects of a short duration, and non-recurring system projects. Annual
recurring projects and the projects of short duration are typically straightforward and highly
predictable in nature. As a result, the project manager and financial staff are able to identify,
as the project status is reviewed and bills are prepared monthly, the occasions when cost overruns
could lead to the recording of a loss accrual.
Watson Wyatt has non-recurring system projects that are typically found in the Technology and
Administration Solutions Group. They tend to be projects that are longer in duration and subject
to more changes in scope as the project progresses than projects undertaken in other segments.
Watson Wyatt evaluates at least quarterly, and more often as needed, project managers
estimates-to-complete to assure that the projects current status is accounted for properly. The
Technology and Administration Solutions Group contracts generally provide that if the client
terminates a contract, the Company is entitled to payment for services performed through
termination.
Revenue recognition for fixed-fee engagements is affected by a number of factors that change the
estimated amount of work required to complete the project such as changes in scope, the staffing on
the engagement and/or the level of client participation. The periodic engagement evaluations
require us to make judgments and estimates regarding the overall profitability and stage of project
completion that, in turn, affect how we recognize revenue. The Company recognizes a loss on an
engagement when estimated revenue to be received for that engagement is less than the total
estimated direct and indirect costs associated with the engagement. Losses are recognized in the
period in which the loss becomes probable and the amount of the loss is reasonably estimable. The
Company has experienced certain costs in excess of estimates from time to time. Management
believes that it is rare, however, for these excess costs to result in overall project losses.
34
The Company has 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
the Company and ownership of the technology and rights to the related code remain with the Company.
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, is capitalized in accordance with generally
accepted accounting principles of capitalized software. Revenue associated with the related
contract, together with amortization of the related capitalized software, is recognized over the
service period. As a result, we do not recognize revenue during the implementation phase of an
engagement.
In connection with the Merger, we acquired the reinsurance intermediary business of Towers Perrin.
Beginning January 1, 2010 in our capacity as a reinsurance intermediary, we collect premiums from
reinsureds and, after deducting our brokerage commissions, we remit the premiums to the respective
reinsurance underwriters on behalf of reinsureds. The net premiums and claims due to or due from
reinsurers and reinsureds are not included in our condensed consolidated balance sheets. In
general, compensation for reinsurance intermediary services is earned on a commission basis.
Commissions are calculated as a percentage of a reinsurance premium as stipulated in the
reinsurance contracts with the Companys clients and reinsurers. The Company recognizes
intermediary services revenue on the later of the inception date or billing date of the contract.
In addition, the Company holds cash needed to settle amounts due reinsurers or reinsureds, net of
any commissions due the Company, pending remittance to the ultimate recipient. The Company is
permitted to invest these funds in high quality liquid instruments.
Revenue recognized in excess of billings is recorded as unbilled accounts receivable. Cash
collections and invoices generated 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 are included in professional and
subcontracted services as a cost of revenue.
Valuation of Billed and Unbilled Receivables from Clients
We maintain allowances for doubtful accounts to reflect estimated losses resulting from the
clients failure to pay for the services after the services have been rendered, including
allowances when customer disputes may exist. The related provision is recorded as a reduction to
revenue. Our allowance policy is based on the aging of the billed and unbilled client receivables
and has been developed based on the write-off history. Facts and circumstances such as the average
length of time the receivables are past due, general market conditions, current economic trends and
our clients ability to pay may cause fluctuations in our valuation of billed and unbilled
receivables.
Discretionary Compensation
Watson Wyatts compensation program includes a discretionary bonus that is determined by management
and has historically been paid once per fiscal year in the form of cash and/or deferred stock units
after its annual operating results are finalized. As a result of the Merger, interim bonuses will
be paid in March 2010 relative to the six-month period ended December 31, 2009.
An estimated annual bonus amount is initially developed at the beginning of each fiscal year in
conjunction with our budgeting process. Quarterly, estimated annual operating performance is
reviewed by the Company and the discretionary annual bonus amount is then adjusted, if necessary,
by management to reflect changes in the forecast of pre-bonus profitability for the year. In those
quarters where the estimated annual bonus level changes, the remaining estimated annual bonus is
accrued over the remaining quarters as a constant percentage of estimated future net income.
35
Income Taxes
The Company accounts for income taxes in accordance with ASC 740, Income Taxes, which prescribes
the use of the asset and liability method whereby deferred tax asset or liability account balances
are calculated at the balance sheet date using current tax laws and rates in effect. Valuation
allowances are established, when necessary, to reduce deferred tax assets when it is more likely
than not that a portion or all of a given deferred tax asset will not be realized. In accordance
with ASC 740, income tax expense includes (i) deferred tax expense, which generally represents the
net change in the deferred tax asset or liability balance during the year plus any change in
valuation allowances and (ii) current tax expense, which represents the amount of tax currently
payable to or receivable from a taxing authority plus amounts accrued for expected tax
contingencies (including both tax and interest). ASC 740 prescribes a recognition threshold of
more-likely-than-not, and a measurement attribute for all tax positions taken or expected to be
taken on a tax return, in order for those positions to be recognized in the financial statements.
The Company continually reviews tax laws, regulations and related guidance in order to properly
record any uncertain tax liabilities. We adjust these reserves in light of changing facts and
circumstances, such as the outcome of tax audits. The provision for income taxes includes the
impact of reserve provisions and changes to reserves that are considered appropriate.
Pension Assumptions
Watson Wyatt sponsors both qualified and non-qualified, non-contributory defined benefit pension
plans in North America and the U.K. that cover approximately 85 percent of the liability. Under
the plans in North America, benefits are based on the number of years of service and the
associates compensation during the five highest paid consecutive years of service. Beginning
January 2008, Watson Wyatt made changes to the plan in the U.K. related to years of service used in
calculating benefits for associates. Benefits earned prior to January 2008 are based on the number
of years of service and the associates compensation during the three years before leaving the plan
and benefits earned after January 2008 are based on the number of years of service and the
associates average compensation during the associates term of service since that date. The
non-qualified plan, included only in North America, provides for pension benefits that would be
covered under the qualified plan but are limited by the Internal Revenue Code. The non-qualified
plan has no assets and therefore is an unfunded arrangement. The benefit liability is reflected on
the balance sheet. The measurement date for each of the plans is June 30.
Determination of the obligations and annual expense under the plans is based on a number of
assumptions that, given the longevity of the plans, are long-term in focus. A change in one or a
combination of these assumptions could have a material impact on the pension benefit obligation and
related expense. For this reason, management employs a long-term view so that assumptions do not
change frequently in response to short-term volatility in the economy. Any difference between
actual and assumed results is amortized into the pension expense over the average remaining service
period of participating employees. We 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 comparisons.
North America
The following assumptions were used in the valuation of Watson Wyatts North American plans at June
30, 2009, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30 |
|
|
2009 |
|
2008 |
|
2007 |
Discount rate |
|
|
7.21 |
% |
|
|
6.91 |
% |
|
|
6.25 |
% |
Expected long-term rate of return on assets |
|
|
8.61 |
% |
|
|
8.75 |
% |
|
|
8.75 |
% |
Rate of increase in compensation levels |
|
|
3.29 |
% |
|
|
4.08 |
% |
|
|
3.84 |
% |
36
The following information illustrates the sensitivity to a change in certain assumptions for the
U.S. pension plans:
|
|
|
|
|
|
|
Effect on FY2010 |
Change in Assumption |
|
Pre-Tax Pension Expense |
25 basis point decrease in discount rate |
|
+$3.0 million |
25 basis point increase in discount rate |
|
-$2.9 million |
25 basis point decrease in expected return on assets |
|
+$1.2 million |
25 basis point increase in expected return on assets |
|
-$1.2 million |
United Kingdom
The following assumptions were used in the valuation of Watson Wyatts U.K. plan at June 30, 2009,
2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30 |
|
|
2009 |
|
2008 |
|
2007 |
Discount rate |
|
|
6.30 |
% |
|
|
6.50 |
% |
|
|
5.80 |
% |
Expected long-term rate of return on assets |
|
|
6.61 |
% |
|
|
6.46 |
% |
|
|
5.69 |
% |
Rate of increase in compensation levels |
|
|
5.45 |
% |
|
|
5.65 |
% |
|
|
4.95 |
% |
The following information illustrates the sensitivity to a change in certain assumptions for the
U.K. pension plans:
|
|
|
|
|
|
|
Effect on FY2010 |
Change in Assumption |
|
Pre-Tax Pension Expense |
25 basis point decrease in discount rate |
|
+$2.4 million |
25 basis point increase in discount rate |
|
-$2.1 million |
25 basis point decrease in expected return on assets |
|
+$0.8 million |
25 basis point increase in expected return on assets |
|
-$0.8 million |
Incurred But Not Reported Claims
Towers Watson uses actuarial assumptions to estimate and record a liability for incurred but not
reported (IBNR) professional liability claims. Our estimated IBNR liability is based on long-term
trends and averages, and considers a number of factors, including changes in claim reporting
patterns, claim settlement patterns, judicial decisions, and legislation and economic decisions,
but excludes the effect of claims data for large cases due to the insufficiency of actual
experience with such cases. Our estimated IBNR liability will fluctuate if claims experience
changes over time.
37
Goodwill and Intangible Assets
In applying the purchase method of accounting for business combinations, amounts assigned to
identifiable assets and liabilities acquired have been based on estimated fair values as of the
date of the acquisitions, with the remainder recorded as goodwill. Intangible assets are initially
valued at fair market value using generally accepted valuation methods appropriate for the type of
intangible asset. Goodwill is tested for impairment annually as of June 30, and whenever indicators
of impairment exist. The evaluation is a two-step process whereby the fair value of the reporting
unit is compared with its carrying amount, including goodwill. As the fair value of our reporting
units exceeds their carrying value, we do not perform step two to determine the impairment loss. In
the event that a reporting units carrying value exceeded its fair value, we would determine the
implied fair value of goodwill and recognize an impairment loss for the excess of carrying value
over implied fair value. 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 June 30. The fair value of the
intangible assets are compared with their carrying value and an impairment loss would be recognized
for the amount by which the carrying amount exceeds the fair value. In the three and six months
ended December 31, 2009 and 2008, Watson Wyatt has not recorded any impairment losses of goodwill
or intangibles.
38
Results of Operations
The table below sets forth Watson Wyatts historical Condensed Consolidated Statements of
Operations data as a percentage of change between periods indicated:
Condensed Consolidated Statements of Operations
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
Six months ended |
|
|
|
|
|
|
|
December 31, |
|
|
Percent |
|
December 31, |
|
|
Percent |
|
|
2009 |
|
|
2008 |
|
|
Change |
|
2009 |
|
|
2008 |
|
|
Change |
Revenue |
|
$ |
432,614 |
|
|
$ |
436,389 |
|
|
|
(1) |
% |
|
$ |
833,959 |
|
|
$ |
862,515 |
|
|
|
(3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of providing services: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits |
|
|
247,058 |
|
|
|
246,648 |
|
|
|
0 |
|
|
|
483,139 |
|
|
|
482,527 |
|
|
|
0 |
|
Professional and subcontracted services |
|
|
19,184 |
|
|
|
25,564 |
|
|
|
(25 |
) |
|
|
35,343 |
|
|
|
51,879 |
|
|
|
(32 |
) |
Occupancy, communications and other |
|
|
42,645 |
|
|
|
46,316 |
|
|
|
(8 |
) |
|
|
82,517 |
|
|
|
96,313 |
|
|
|
(14 |
) |
General and administrative expenses |
|
|
42,763 |
|
|
|
43,206 |
|
|
|
(1 |
) |
|
|
82,533 |
|
|
|
87,093 |
|
|
|
(5 |
) |
Depreciation and amortization |
|
|
18,251 |
|
|
|
18,870 |
|
|
|
(3 |
) |
|
|
36,185 |
|
|
|
37,734 |
|
|
|
(4 |
) |
Transaction and integration expenses |
|
|
16,904 |
|
|
|
|
|
|
|
100 |
|
|
|
25,292 |
|
|
|
|
|
|
|
100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
386,805 |
|
|
|
380,604 |
|
|
|
2 |
|
|
|
745,009 |
|
|
|
755,546 |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
45,809 |
|
|
|
55,785 |
|
|
|
(18 |
) |
|
|
88,950 |
|
|
|
106,969 |
|
|
|
(17 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from affiliates |
|
|
(1,167 |
) |
|
|
1,070 |
|
|
|
(209 |
) |
|
|
(220 |
) |
|
|
2,765 |
|
|
|
(108 |
) |
Interest income |
|
|
189 |
|
|
|
322 |
|
|
|
(41 |
) |
|
|
539 |
|
|
|
1,353 |
|
|
|
(60 |
) |
Interest expense |
|
|
(604 |
) |
|
|
(1,059 |
) |
|
|
(43 |
) |
|
|
(1,053 |
) |
|
|
(1,628 |
) |
|
|
(35 |
) |
Other non-operating income |
|
|
1,758 |
|
|
|
1,699 |
|
|
|
3 |
|
|
|
2,900 |
|
|
|
1,680 |
|
|
|
73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
45,985 |
|
|
|
57,817 |
|
|
|
(20 |
) |
|
|
91,116 |
|
|
|
111,139 |
|
|
|
(18 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
|
22,113 |
|
|
|
18,266 |
|
|
|
21 |
|
|
|
37,463 |
|
|
|
36,428 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
23,872 |
|
|
$ |
39,551 |
|
|
|
(40) |
% |
|
$ |
53,653 |
|
|
$ |
74,711 |
|
|
|
(28 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39
Three and Six Months Ended December 31, 2009 Compared to the Three and Six Months Ended
December 31, 2008
Watson
Wyatt revenue for the second quarter of fiscal year 2010 was $432.6 million, a decrease of
$3.8 million, or less than 1 percent, from $436.4 million in the second quarter of fiscal year 2009. On a
constant currency basis, revenue decreased 3 percent over the second quarter of fiscal year 2009.
The average exchange rate used to translate the revenue earned in British pounds sterling increased
to 1.6253 for the second quarter of fiscal year 2010 from 1.5969 for the second quarter of fiscal
year 2009, and the average exchange rate used to translate the revenue earned in Euros increased to
1.4671 for the second quarter of fiscal year 2010 from 1.3373 for the second quarter of fiscal year
2009.
The fluctuations in the segment revenue for the second quarter of fiscal year 2010 as compared to
the second quarter of fiscal year 2009 are as follows. Constant currency is calculated by
translating prior year revenue at the current year average exchange rate.
|
|
|
Benefits decreased revenue $2.1 million, or less than 1 percent, over the second quarter of fiscal
year 2009. On a constant currency basis, revenue decreased 2 percent over the second
quarter of fiscal year 2009 due primarily to a slight decline in project work. In the
second quarter of fiscal year 2009, there was a higher level of project activity, as plan
sponsors evaluated the impact of current market conditions on the funded status of their
plans. |
|
|
|
|
Technology and Administration Solutions increased revenue $8.2 million, or 16 percent,
over the second quarter of fiscal year 2009. On a constant currency basis, Technology and
Administration Solutions revenue increased 4 percent over the second quarter of fiscal year
2009. The revenue increase is due primarily to an increase in client activity in Europe. |
|
|
|
|
Human Capital Group decreased revenue $8.1 million, or 16 percent, over the second
quarter of fiscal year 2009. On a constant currency basis, revenue decreased 18 percent
over the second quarter of fiscal year 2009 due primarily to declines in project activity. |
|
|
|
|
Investment Consulting increased revenue $9.1 million, or 24 percent, over the second
quarter of fiscal year 2009. On a constant currency basis, revenue increased 19 percent
over the second quarter of fiscal year 2009 due primarily to an increase in implemented
consulting services and related performance fees. |
|
|
|
|
Insurance and Financial Services decreased revenue $10.1 million, or 29 percent, over
the second quarter of fiscal year 2009. On a constant currency basis, revenue decreased 31
percent over the second quarter of fiscal year 2009 due primarily to a decline in project
activity. In addition, there was a significant project in the second quarter of fiscal year
2009 that did not recur in fiscal year 2010. |
Watson Wyatt revenue for the six months ended December 31, 2009 was $834.0 million, a decrease of
$28.6 million, or 3 percent, from $862.5 million in the six months ended December 31, 2008.
The average exchange rate used to translate the revenue earned in British pounds sterling decreased
to 1.6350 for the six months ended December 31, 2009 from 1.7377 for the six months ended December
31, 2008, and the average exchange rate used to translate the revenue earned in Euros increased to
1.4472 for the six months ended December 31, 2009 from 1.4206 for the six months ended December 31,
2008.
40
The increases in the segment revenue for the six months ended December 31, 2009 as compared to the
six months ended December 31, 2008 are as follows. Constant currency is calculated by translating
prior year revenue at the current year average exchange rate.
|
|
|
Benefits decreased revenue $16.2 million, or 3 percent, over the six months ended
December 31, 2008. On a constant currency basis, revenue decreased 1 percent over the six
months ended December 31, 2008. The slight decrease in revenue is due primarily to a
decline in project work in the second quarter of fiscal year 2010. |
|
|
|
|
Technology and Administration Solutions increased revenue $15.7 million, or 16 percent,
over the six months ended December 31, 2008. On a constant currency basis, Technology and
Administration Solutions revenue increased 7 percent over the six months ended December 31,
2008. Revenue increased in both Europe and North America. In Europe, the growth was due
to an increase in revenue from several large clients that were implemented in fiscal year
2009, as well as additional project work at existing clients. In North America, the growth
was primarily due to an increase in ongoing administration work. |
|
|
|
|
Human Capital Group decreased revenue $20.1 million, or 20 percent, over the six months
ended December 31, 2008. On a constant currency basis, revenue also decreased 20 percent
over the six months ended December 31, 2008 due primarily to declines in project work. |
|
|
|
|
Investment Consulting increased revenue $11.7 million, or 15 percent, over the six
months ended December 31, 2008. On a constant currency basis, revenue increased 18 percent
over the six months ended December 31, 2008 due primarily to an increase in implemented
consulting services and related performance fees. |
|
|
|
|
Insurance and Financial Services decreased revenue $13.7 million, or 22 percent, over
the six months ended December 31, 2008. On a constant currency basis, revenue decreased 20
percent over the six months ended December 31, 2008 due primarily to a decline in project
activity. In addition, there was a significant project in the second quarter of fiscal
year 2009 that did not recur in fiscal year 2010. |
Salaries and Employee Benefits.
Salaries and employee benefit expenses for the second quarter of fiscal year 2010 were $247.1
million compared to $246.6 million for the second quarter of
fiscal year 2009, an increase of $0.4
million or less than one percent. On a constant currency basis, salaries and employee benefits
decreased 1.4 percent, principally due to a decrease in discretionary compensation expense,
partially offset by increases pension and stock-based compensation expense. As a percentage of
revenue, salaries and employee benefits remained consistent at 57 percent for the second quarter of
fiscal year 2010 and 2009.
Salaries and employee benefit expenses for the first six months of fiscal year 2010 were $483.1
million compared to $482.5 million for the first six months of fiscal year 2009, an increase of
$0.6 million or less than 1 percent. On a constant currency basis, salaries and employee benefits
increased 2.6 percent, principally due to increases in pension and stock-based compensation
expense, partially offset by decreases in discretionary compensation expense and in other employee
benefit expenses. As a percentage of revenue, salaries and employee benefits increased to 58
percent from 56 percent.
41
Professional and Subcontracted Services.
Professional and subcontracted services expenses for the second quarter of fiscal year 2010 were
$19.2 million compared to $25.6 million for the second quarter of fiscal year 2009, a decrease of
$6.4 million or 25.0 percent. On a constant currency basis, professional and subcontracted services
decreased 27.3 percent, principally due to decreased use of external service providers.
Professional and subcontracted services used in consulting operations for the first six months of
fiscal year 2010 were $35.3 million, compared to $51.9 million for the first six months of fiscal
year 2009, a decrease of $16.6 million or 32.0 percent. On a constant currency basis, professional
and subcontracted services decreased 31 percent, principally due to a decrease in reimbursable
expenses incurred on behalf of clients and external service providers. As a percentage of revenue,
professional and subcontracted services decreased from 6 percent to 4 percent for both the second
quarter and first six months of fiscal year 2010 compared to the same periods in fiscal year 2009.
Occupancy, Communications and Other.
Occupancy, communications and other expenses for the second quarter of fiscal year 2010 were $42.6
million compared to $46.3 million for the second quarter of fiscal year 2009, a decrease of $3.7
million or 8.0 percent. On a constant currency basis, occupancy, communications and other
decreased 10.2 percent, principally due to decreases in travel and professional development
expenses and a lower loss on disposal of assets than in the prior period. These decreases were
partially offset by an increase in rent expense. Occupancy, communications and other expenses for
the first six months of fiscal year 2010 were $82.5 million compared to $96.3 million for the first
six months of fiscal year 2009, a decrease of $13.8 million or 14.3 percent. On a constant
currency basis, occupancy, communications and other decreased 12.5 percent, principally due to
decreases in travel expense, professional development expense, dues and entertainment expense, and
realized foreign exchange losses, offset by an increase in rent expense. As a percentage of
revenue, occupancy, communications and other for both the second quarter and first six months of
fiscal year 2010 decreased from 11 percent to 10 percent compared to the same periods in fiscal
year 2009.
General and Administrative Expenses.
General and administrative expenses for the second quarter of fiscal year 2010 were $42.8 million,
compared to $43.2 million for the second quarter of fiscal year 2009, a decrease of $0.4 million or
1 percent. For the first six months of fiscal year 2010 general and administrative expenses were
$82.5 million, compared to $87.1 million for the first six months of fiscal year 2009, a decrease
of $4.6 million or 5.2 percent. On a constant currency basis, general and administrative expenses
decreased 2.4 percent for the second quarter and 2.6 percent for the six months, principally due to
decreases in salary expense, rent expense, travel expense, and general office expense, partially
offset by an increase in professional and subcontract services. As a percentage of revenue general
and administrative expenses were consistently 10% for the three and six months ended December 31,
2009 and 2008.
Depreciation and Amortization.
Depreciation and amortization expenses for the second quarter of fiscal year 2010 were $18.3
million, compared to $18.9 million for the second quarter of fiscal year 2009, a decrease of $0.6
million or 3.3 percent. For the first six months of fiscal year 2010, depreciation and
amortization expenses were $36.2 million, compared to $37.7 million for the first six months of
fiscal year 2009, a decrease of $1.5 million or 4.1 percent. On a constant currency basis,
depreciation and amortization expenses decreased 4.5 percent for the second quarter and 2.3 percent
for the six months, principally due to a decrease in depreciation of fixed assets partially offset
by an increase in depreciation of internally developed software used to support the Benefits and
Technology and Administration Solutions Groups. As a percentage of revenue, depreciation and
amortization expenses were consistently 4 percent for the three and six months ended December 31,
2009 and 2008.
42
Transaction and Integration Expenses.
Transaction and integration expenses incurred by Watson Wyatt in association with its merger with
Towers Perrin were $16.9 million for the second quarter and $25.3 million for the first six months
of fiscal year 2010. Transaction and integration expenses principally consist of investment banker
fees, legal, accounting, regulatory filing expenses, and integration consultants. As a percentage
of revenue, transaction and integration expenses were 4 percent for the second quarter and 3
percent for the six months of fiscal year 2010. There were no transaction and integration expenses
recorded in the comparable periods of fiscal year 2009.
(Loss) Income From Affiliates.
Loss from affiliates for the second quarter of fiscal year 2010 was $1.2 million compared to income
of $1.1 million for the second quarter of fiscal year 2009, a
decrease of $2.2 million. Affiliate
loss for the first six months of fiscal year 2010 was $0.2 million compared to income of $2.8
million for the first six months of fiscal year 2009. Affiliate loss during the three and six
months ended December 31, 2009 reflects the share of PCICs losses resulting from an increase in
PCICs reserves.
Interest Income.
Interest income for the second quarter of fiscal year 2010 was $0.2 million, compared to $0.3
million for the second quarter of fiscal year 2009. Interest income for the first six months of
fiscal year 2010 was $0.5 million, compared to $1.4 million for the first six months of fiscal year
2009. The decrease is mainly due to a lower average cash balance in the current period compared to
the prior period, combined with lower short-term interest rates in the United States and Europe.
Interest Expense.
Interest expense for the second quarter of fiscal year 2010 was $0.6 million, compared to $1.1
million for the second quarter of fiscal year 2009. Interest expense for the first six months of
fiscal year 2010 was $1.1 million, compared to $1.6 million for the first six months of fiscal year
2009. The decrease in both periods was principally due to a lower average debt balance in the
current period compared to the prior period.
Provision for Income Taxes.
Provision for income taxes for the first six months of fiscal year 2010 was $37.5 million, compared
to $36.4 million for the first six months of fiscal year 2009. The effective tax rate was 41.1
percent for the first six months of fiscal year 2010 and 32.8 percent for the first six months of
fiscal year 2009. The tax rate increase is primarily due to the $5.9 million impact of German tax
law changes on certain German deferred tax assets in relation to the Merger. Watson Wyatt has not
provided U.S. deferred taxes on cumulative earnings of foreign subsidiaries that have been
reinvested indefinitely, which also includes foreign subsidiaries affiliated with the recent
acquisitions, not including the Merger. Watson Wyatt records a tax benefit on foreign net operating
loss carryovers and foreign deferred expenses only if it is more likely than not that a benefit
will be realized.
Watson Wyatt has deferred tax assets which were established for accrued compensation and accrued
transaction costs. As a result of the Merger, a portion of the deferred tax assets will not be
realized. To determine an estimate of the amount of deferred tax assets realizable in accordance
with ASC 740, the Company will need to perform additional analysis post-Merger.
43
Net Income.
Net income for the second quarter of fiscal year 2010 was $23.9 million inclusive of the
transaction and integration expenses, severance (recorded in salaries and employee benefits) and
the negative impact of German tax law changes on certain German deferred tax assets in relation to
the Merger, compared to $39.6 million for the second quarter of fiscal year 2009. Net income for
the first six months of fiscal year 2010 was $53.7 million inclusive of the transaction and
integration expenses, severance (recorded in salaries and employee benefits) and the negative
impact of German tax law changes on certain German deferred tax assets in relation to the Merger,
compared to $74.7 million for the first six months of fiscal year 2009. As a percentage of
revenue, net income decreased from 9 percent to 6 percent for both the second quarter and first six
months of fiscal year 2010 compared to the same periods in fiscal year 2009.
Earnings Per Share.
Diluted earnings per share for the second quarter of fiscal year 2010 was $0.56, compared to $0.93
for the second quarter of fiscal year 2009. Diluted earnings per share for the first six months of
fiscal year 2010 was $1.26, compared to $1.75 for the first six months of fiscal year 2009.
Diluted earnings per share exclusive of the transaction and integration expenses, severance
(recorded in salaries and employee benefits) and the negative impact of German tax law changes on
certain German deferred tax assets in relation to the Merger (adjusted diluted earnings per
share), resulted in adjusted diluted earnings per share for the second quarter of fiscal year 2010
of $0.98, compared to $0.97 for the second quarter of fiscal year 2009. Adjusted diluted earnings
per share for the first six months of fiscal year 2010 was $1.83, compared to $1.79 for the first
six months of fiscal year 2009.
Watson Wyatts management uses adjusted diluted earnings per share to evaluate its performance
internally and separately evaluates its performance of the transaction and integration activities.
Management determined that this information is useful to investors in evaluating its results of
operations and providing a baseline for evaluation of future operating performance.
A reconciliation of net income, as reported under generally accepted accounting principles to
adjusted net income and of diluted earnings per share as reported under generally accepted
accounting principles to adjusted diluted earnings per share is as follows:
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Net income, as reported |
|
$ |
23,872 |
|
|
$ |
39,551 |
|
|
$ |
53,653 |
|
|
$ |
74,711 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted for expenses as a result of the Merger: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction and integration expenses (1) |
|
|
10,957 |
|
|
|
|
|
|
|
16,541 |
|
|
|
|
|
Impact on German deferred tax asset related to
the Merger |
|
|
5,936 |
|
|
|
|
|
|
|
5,936 |
|
|
|
|
|
Severance (1) |
|
|
956 |
|
|
|
1,749 |
|
|
|
2,180 |
|
|
|
1,771 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Net Income |
|
$ |
41,721 |
|
|
$ |
41,300 |
|
|
$ |
78,310 |
|
|
$ |
76,482 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock
Diluted |
|
|
42,580 |
|
|
|
42,616 |
|
|
|
42,734 |
|
|
|
42,804 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share Diluted, as reported |
|
$ |
0.56 |
|
|
$ |
0.93 |
|
|
$ |
1.26 |
|
|
$ |
1.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted for expenses as a result of the Merger: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction and integration expenses |
|
|
0.26 |
|
|
|
|
|
|
|
0.39 |
|
|
|
|
|
Impact on German deferred tax asset related to
the Merger |
|
|
0.14 |
|
|
|
|
|
|
|
0.14 |
|
|
|
|
|
Severance |
|
|
0.02 |
|
|
|
0.04 |
|
|
|
0.04 |
|
|
|
0.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Earnings per Share Diluted |
|
$ |
0.98 |
|
|
$ |
0.97 |
|
|
$ |
1.83 |
|
|
$ |
1.79 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Transaction and integration and severance expenses for the three months ended December 31,
2009 and 2008 and six months ended December 31, 2009 and 2008 are net of tax. In calculating the
net of tax amounts, the effective tax rate for the periods of 48.09%, 31.59%, 41.12% and 32.78% are
decreased by the $5.9 million German tax item which was included in provision for income taxes.
The result is adjusted effective tax rates for the periods of 35.18%, 31.59%, 34.60% and 32.78%,
respectively. |
Liquidity and Capital Resources
Watson Wyatts cash and cash equivalents at December 31, 2009 totaled $143.9 million, compared to
$209.8 million at June 30, 2009. The decrease in cash from June 30, 2009 to December 31, 2009 was
principally attributable to the payment during the first quarter of fiscal year 2010 of $143
million of previously accrued discretionary compensation. Watson Wyatt also paid $35.8 million in
corporate taxes, $10.0 million in capital expenditures and $6.4 million in dividends during the
first six months of fiscal year 2010. These outflows of cash were funded by cash from operations
and from existing cash balances. In addition, subsequent to January 1, 2010, Towers Watson paid
$200 million to holders of Towers Watson Class R shares in accordance with the Merger Agreement
from existing cash balances.
Consistent with the Companys liquidity position, management considers various alternative
strategic uses of cash reserves including acquisitions, dividends and stock buybacks, or any
combination of these options. The Company believes that it has sufficient resources to fund
operations beyond the next twelve months.
The non-U.S. operations are substantially self-sufficient for their working capital needs. At
December 31, 2009, $98.8 million of Watson Wyatts total cash balance of $143.9 million was held
outside of North America, which it has the ability to utilize, if necessary. There are no
significant repatriation restrictions other than local or U.S. taxes associated with repatriation.
45
Under the terms of the business combination of Watson Wyatt LLP, we are required under certain
circumstances to place funds into an insurance trust designed to satisfy potential litigation
settlement related to the former partners. If the assets of the trust are not used by 2017, they
will be returned to the Company. As of December 31, 2009, we maintained $5.5 million of restricted
cash related to this obligation. This restricted cash balance was included in Other Assets on the
consolidated balance sheet.
Assets and liabilities associated with non-U.S. entities have been translated into U.S. dollars as
of December 31, 2009, at appreciated U.S. dollar rates compared to historical periods. As a
result, cash flows derived from changes in the consolidated balance sheets include the impact of
the change in foreign exchange translation rates.
Cash Flows (Used in)/From Operating Activities.
Cash flows used in operating activities for the first six months of fiscal year 2010 was $7.8
million, compared to cash flows from operating activities of $3.8 million for the first six months
of fiscal year 2009. The difference is primarily attributable to lower net income, an increase in
billed and unbilled receivables and the relative size of accruals and payments associated with
discretionary compensation in the periods presented.
The allowance for doubtful accounts decreased $0.4 million from June 30, 2009 to December 31, 2009.
The number of days of accounts receivable increased to 65 at December 31, 2009 compared to 62 at
June 30, 2009.
Cash Flows Used in Investing Activities.
Cash flows used in investing activities for the first six months of fiscal year 2010 was $17.4
million, compared to $30.2 million of cash flows used in investing activities for the first six
months of fiscal year 2009. The difference can be primarily attributed to a decrease in purchases
of fixed assets.
Cash Flows Used in Financing Activities.
Cash flows used in financing activities for the first six months of fiscal year 2010 was $38.0
million, compared to cash flows used in financing activities of $19.8 million for the first six
months of fiscal year 2009. This change is primarily attributable to no borrowings under the
credit facility in the first six months of fiscal year 2010 compared to net borrowings of $60.6
million in the first six months of fiscal year 2009. This is offset by repurchase of $34.9 million
of Watson Wyatts common stock in the first six months of fiscal year 2010, compared to $77.4
million of repurchases of Watson Wyatts common stock during the same period in fiscal year 2009.
Off-Balance Sheet Arrangements and Contractual Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining payments due by fiscal year as of December 31 , 2009 |
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2013 |
|
|
|
|
Contractual Cash |
|
|
|
|
|
Remaining |
|
|
through |
|
|
Through |
|
|
|
|
Obligations (in thousands) |
|
Total |
|
|
2010 |
|
|
2012 |
|
|
2014 |
|
|
Thereafter |
|
Watson Wyatts Lease Commitments |
|
$ |
298,574 |
|
|
|
45,791 |
|
|
|
102,854 |
|
|
|
71,736 |
|
|
|
78,193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
298,574 |
|
|
|
45,791 |
|
|
|
102,854 |
|
|
|
71,736 |
|
|
|
78,193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46
Operating Leases: Watson Wyatt leases office space, furniture and selected computer equipment
under operating lease agreements with terms ranging from one to ten years. It has 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 Watson Wyatt leases will be
mainly market driven. In addition, as a result of the Merger, Towers Watson anticipates that the
exercise of fair valuing the operating lease obligations of Towers Perrin will result in revaluing
the lease obligations based on current market rates.
Indenture: On December 30, 2009, in connection with the Merger and the Class R Elections as
described in Note 2, Towers Watson entered into an Indenture (the Indenture) with Wilmington
Trust FSB, as Trustee (the Trustee), for the issuance of Towers Watson Notes in the aggregate
principal amount of $200 million. The Towers Watson Notes were issued on January 6, 2010, bearing
interest from January 4, 2010 at a fixed per-annum rate of 2.0 percent, and will mature on January
1, 2011. The Indenture contains limited operating covenants, and obligations under the Towers
Watson Notes are subordinated to the obligations of Towers Watson under the Senior Credit Facility
(as defined below) on the terms set forth in the Indenture.
Towers Watson Credit Facility: On January 1, 2010, in connection with the Merger, Towers Watson and
certain subsidiaries entered into a three-year, $500 million revolving credit facility with a
syndicate of banks (the Senior Credit Facility). Borrowings under the facility will bear interest
at a spread to either LIBOR or the Prime Rate. We are charged a quarterly commitment fee, currently
0.5 percent of the facility, which varies with our financial leverage and is paid on the unused
portion of the credit facility. Obligations under the facility are guaranteed by Towers Watson and
all of its domestic subsidiaries (other than PCIC) and are secured by a pledge of 65 percent of the
voting stock and 100 percent of the non-voting stock of Towers Perrin Luxembourg Holdings S.A.R.L.
The Senior Credit Facility contains customary representations and warranties and affirmative and
negative covenants. The Senior Credit Facility requires Towers Watson to maintain certain financial
covenants that include a minimum Consolidated Interest Coverage Ratio and a maximum Consolidated
Leverage Ratio (which terms in each case are defined in the Senior Credit Facility). In addition,
the Senior Credit Facility contains restrictions on the ability of Towers Watson and its
subsidiaries to, among other things, incur additional indebtedness; pay dividends; make
distributions; create liens on assets; make investments, loans or advances; make acquisitions;
dispose of property; engage in sale-leaseback transactions; engage in mergers or consolidations,
liquidations and dissolutions; engage in certain transactions with affiliates; and make changes in
lines of businesses. As of December 31, 2009 and the date of this filing, February 8, 2010, there
was no outstanding balance owed under the Senior Credit Facility.
Watson Wyatt Credit Agreement: Watson Wyatt had a credit facility provided by a syndicate of banks
in an aggregate principal amount of $300 million. Interest rates associated with this facility
varied with LIBOR and/or the Prime Rate and were based on its leverage ratio, as defined by the
credit agreement. Watson Wyatt was charged a quarterly commitment fee, currently 0.125 percent of
the facility, which varies with its financial leverage and was paid on the unused portion of the
credit facility. There were no borrowings under this facility as of December 31, 2009 and June 30,
2009. Credit under the facility was available upon demand, although the credit facility required
Watson Wyatt to observe certain covenants (including requirements relating to its leverage ratio
and fixed coverage charge ratio) and was collateralized with a pledge of stock of material
subsidiaries. Watson Wyatt was in compliance with all covenants under the credit facility as of
December 31, 2009. This facility had been scheduled to mature on June 30, 2010, however, it was
terminated on January 1, 2010 upon completion of the Merger and was replaced by the Towers Watson
Senior Credit Facility.
47
Letters of Credit: As of December 31, 2009, both Watson Wyatt and Towers Perrin had letters of
credit totaling $10.6 million under their respective existing credit facilities to guarantee
payment to a beneficiary in the event that it fails to meet its financial obligations to the
beneficiary. These letters of credit will remain outstanding as long as Towers Watson retains an
ownership share of the affiliated captive insurance company, PCIC.
Watson Wyatt has also provided a $5.0 million Australian dollar-denominated letter of credit (US
$4.5 million) to an Australian governmental agency as required by the local regulations. The
estimated fair market value of these letters of credit is immaterial because they have never been
used, and the Company believes that future usage is remote.
Indemnification Agreements: Watson Wyatt has various agreements that provide that it may be
obligated to indemnify the other party with respect to certain matters. Generally, these
indemnification clauses are included in contracts arising in the normal course of business and in
connection with the purchase and sale of certain businesses. Although it is not possible to predict
the maximum potential amount of future payments under these indemnification agreements due to the
conditional nature of Watson Wyatts obligations and the unique facts of each particular agreement,
Watson Wyatt does not believe that any potential liability that might arise from such indemnity
provisions is probable or material. There are no provisions for recourse to third parties, nor are
any assets held by any third parties that any guarantor can liquidate to recover amounts paid under
such indemnities.
Pension Contributions. Remaining contributions to Watson Wyatts various pension plans for fiscal
year 2010 are projected to be approximately $7.7 million.
Risk Management
As a part of our overall risk management program, we carry customary commercial insurance policies,
including commercial general liability and claims-made professional liability insurance with a
self-insured retention of $1 million per claim, which provides coverage for professional liability
claims of the Company and its subsidiaries, including the cost of defending such claims. Watson
Wyatt and Towers Perrin each carried substantial professional liability insurance with a
self-insured retention of $1 million per occurrence, which provides coverage for professional
liability claims including the cost of defending such claims. These policies remain in force
subsequent to the Merger. Our professional liability insurance coverage beyond our self-insured
retention amount is written by PCIC, an affiliated captive insurance company, with reinsurance and
excess insurance attaching at $26 million provided by various other commercial insurance carriers.
Post-Merger, Towers Watson has a 72.86 percent ownership interest in PCIC, and as a result, PCICs
results will be consolidated in Towers Watsons operating results. Although the PCIC insurance
policies will continue to cover claims above a $1 million per occurrence self-retention, the
consolidation of PCIC will effectively result in self-insurance for Towers Watson for
the first $26 million of loss
on each claim. Accordingly, the impacts of PCICs reserve development also may result in
fluctuations in Towers Watsons earnings.
In formulating its premium structure, PCIC estimates the amount it expects to pay for losses (and
loss expenses) for the member firms as a whole and then allocates that amount to the member firms
based on the individual members expected losses. PCIC bases premium calculations, which are
determined annually based on experience through March of each year, on relative risk of the various
lines of business performed by each of the owner companies, past claim experience of each owner
company, growth of each of those companies, industry risk profiles in general and the overall
insurance markets.
As of July 1, 2008, the captive insurance company carries reinsurance for losses it insures above
$25 million. Since losses incurred by PCIC below this level are not covered by reinsurance, but are
direct expenses of PCIC, pre-Merger reserve adjustments and actual outcomes of specific claims of
any PCIC member firm carried through into Watson Wyatts financial results as income or loss from
affiliates through its 36.43 percent ownership of PCIC.
48
Our agreements with PCIC could require additional payments to PCIC in the event that the Company
decided to exit PCIC and adverse claims significantly exceed prior expectations. If these
circumstances were to occur, the Company would record a liability at the time it becomes probable
and reasonably estimable.
Effective January 1, 2010, the Company will continue to provide for the self-insured retention
where specific estimated losses and loss expenses for known claims which are considered probable
and reasonably estimable. Although the Company maintains professional liability insurance
coverage, this insurance does not cover claims made after expiration of our current insurance
contracts. Generally accepted accounting principles require that we record a liability for
incurred but not reported (IBNR) professional liability claims if they are probable and reasonably
estimable, and for which we have not yet contracted for insurance coverage. The Company uses
actuarial assumptions to estimate and record its IBNR liability and as of December 31, 2009, Watson
Wyatt had a $37.4 million IBNR liability balance.
While no decision has yet been made whether PCIC will continue to be the primary professional
liability insurer beyond the expiration of existing insurance policies on June 30, 2010, in the
event the shareholders of PCIC determine that it should be placed into run-off mode (meaning PCIC
continues to administer and pay existing claims, but does not write new insurance policies), which
determination can be made by the shareholders at any time, Towers Watson will need to obtain
primary insurance coverage in another manner, such as through a single-parent captive insurance
company, from one or more commercial insurance providers or through a combination of these or other
available alternatives. Alternatives to PCIC could result in different coverage terms, higher
premiums and/or higher loss retentions or deductibles, than those Towers Perrin and Watson Wyatt
have been able to obtain with PCIC as the primary insurer.
Insurance market conditions for our industry and the Company have varied in recent years, but the
long-term trend has been increasing premium cost. Trends toward higher self-insured retentions,
constraints on aggregate excess coverage for this class of insurance coverage and financial
difficulties which have over the past two years been faced by several longstanding E&O carriers are
anticipated to continue or to recur periodically, and to be reflected in our future annual
insurance renewals. As a result, we will continue to assess our ability to secure future insurance
coverage and we cannot assure that such coverage will continue to be available indefinitely in the
event of specific adverse claims experience, adverse loss trends, market capacity constraints or
other factors. In anticipation of the possibility of future reductions in risk transfer from PCIC
to re-insurers, as well as the hardening insurance market conditions in recent years, the firms
that own PCIC, including the Company, have increased PCICs capital in the past and we will
continue to re-assess capital requirements on a regular basis.
In light of increasing litigation worldwide, including litigation against professionals, the
Company has a policy that all client relationships be documented by engagement letters containing
specific risk mitigation clauses that were not included in all historical client agreements.
Certain contractual provisions designed to mitigate risk may not be legally enforceable in
litigation involving breaches of fiduciary duty or certain other alleged errors or omissions, or in
certain jurisdictions. We may incur significant legal expenses in defending against litigation.
Nearly 100 percent of the Companys U.S. and U.K. corporate clients have signed engagement letters
including some if not all of our preferred mitigation clauses, and processes to maintain that
protocol in the United States and the United Kingdom and complete it elsewhere are underway.
49
Disclaimer Regarding Forward-looking Statements
This filing contains a number of forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995, including, but not limited to the following: Note 5 -
Retirement Benefits; Note 6 Goodwill and Intangible Assets; Note 10
Commitments and Contingent Liabilities; Note 12 Income Taxes; the Executive Overview; Critical
Accounting Policies and Estimates; the discussion of our capital expenditures; Off-Balance Sheet
Arrangements and Contractual Obligations; Liquidity and Capital Resources; Risk Management; and
Part II, Item 1 Legal Proceedings. You can identify these statements and other forward-looking
statements in this filing by words such as may, will, expect, anticipate, believe,
estimate, plan, intend, continue, or similar words, expressions or the negative of such
terms or other comparable terminology. You should read these statements carefully because they
contain projections of our future results of operations or financial condition, or state other
forward-looking information. 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:
|
|
the Towers Perrin and Watson Wyatt businesses will not be integrated successfully; |
|
|
|
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; |
|
|
|
our ability to reduce our effective tax rate through the restructuring of certain
foreign operations of Towers Perrin; |
|
|
|
our ability to make acquisitions, on which our growth depends; |
|
|
|
our ability to integrate acquired businesses into our own business, processes and
systems, and achieve the anticipated results; |
|
|
|
foreign currency exchange and interest rate fluctuations; |
|
|
general economic and business conditions, including a significant or prolonged
economic downturn, that adversely affect us or our clients; |
|
|
our continued ability to recruit and retain qualified associates; |
|
|
the success of our marketing, client development and sales programs after our
acquisitions; |
|
|
our ability to maintain client relationships and to attract new clients after our
acquisitions; |
|
|
declines in demand for our services; |
|
|
outcomes of pending or future litigation and the availability and capacity of
professional liability insurance to fund the outcome of pending cases or future judgments or
settlements; |
|
|
our ability to obtain professional liability insurance; |
|
|
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; |
|
|
actions by competitors, including public accounting and consulting firms,
technology consulting firms, insurance consulting firms and Internet/intranet development
firms; |
|
|
our ability to achieve cost reductions after acquisitions; |
|
|
exposure to liabilities that have not been expressly assumed in our acquisition
transactions; |
|
|
the level of capital resources required for future acquisitions and business
opportunities; |
|
|
regulatory developments abroad and domestically that impact our business practice; |
|
|
legislative and technological developments that may affect the demand for or costs
of our services; |
and other factors identified under Risk Factors in Towers Watsons Quarterly Report on Form 10-Q
for the period ended September 30, 2009, filed with the SEC on December 23, 2009; and as discussed
under Risk Factors in Watson Wyatts 2009 Annual Report on Form 10-K filed with the SEC on August
14, 2009. 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.
50
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Towers Watson is exposed to market risks in the ordinary course of business. These risks include
interest rate risk, foreign currency exchange and translation risk.
Interest Rate Risk
The primary objective of our investment activities is to preserve principal while at the same time
maximizing yields without significantly increasing risk. To achieve this objective, we maintain our
portfolio in mainly short term securities that are recorded on the balance sheet at fair value.
Foreign Currency Risk
International net revenue result from transactions by our foreign operations and are typically
denominated in the local currency of each country. These operations also incur most of their
expenses in the local currency. Accordingly, our foreign operations use the local currency as their
functional currency and our primary international operations use the British Pound, and to a lesser
extent, the Euro. Our international operations are subject to risks typical of international
operations, including, but not limited to, differing economic conditions, changes in political
climate, differing tax structures, other regulations and restrictions, and foreign exchange rate
volatility. Accordingly, our future results could be adversely impacted by changes in these or
other factors.
Translation Exposure
Foreign exchange rate fluctuations may adversely impact our consolidated financial position as well
as our consolidated results of operations and may adversely impact our financial position as the
assets and liabilities of our foreign operations are translated into U.S. dollars in preparing our
condensed consolidated balance sheet. Additionally, foreign exchange rate fluctuations may
adversely impact our condensed consolidated results of operations as exchange rate fluctuations on
transactions denominated in currencies other than our functional currencies result in gains and
losses that are reflected in our condensed consolidated statement of income. Certain of Towers
Perrins foreign brokerage subsidiaries, primarily in the U.K., receive revenue in currencies
(primarily in U.S. dollars) that differ from their functional currencies. To reduce this
variability, Towers Perrin uses foreign exchange forward contracts and over-the-counter options to
hedge the foreign exchange risk of the forecasted collections for up to a maximum of two years in
the future.
The foreign currency and translation exposure risks have been heightened as a result of the recent
large fluctuations in foreign exchange rates.
We consolidate our international subsidiaries by converting them into U.S. dollars in accordance
with generally acceptable accounting principles of foreign currency translation. The results of
operations and our financial position will fluctuate when there is a change in foreign currency
exchange rates.
ITEM 4. CONTROLS AND PROCEDURES.
As discussed earlier in this report, Towers Watson consummated the Merger of Towers Perrin and
Watson Wyatt on January 1, 2010. Towers Watson has yet to complete any post-merger comprehensive
evaluations to date, and therefore, its analysis is based upon its evaluation of the controls of
Watson Wyatt.
Evaluation of Disclosure Controls and Procedures
An evaluation was performed under the supervision and with the participation of our management,
including the chief executive officer, or CEO, and chief financial officer, or CFO, of the
effectiveness of the design and operation of our disclosure controls and procedures. Based on that
evaluation, our management, including the CEO and CFO, concluded that our disclosure controls and
procedures were effective as of December 31, 2009.
51
Changes in Internal Control Over Financial Reporting
There were no significant changes in our internal control over financial reporting in the quarter
ended December 31, 2009 that materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
Limitations on the Effectiveness of Controls
Our management, including the CEO and CFO, does not expect that our disclosure controls and
procedures will necessarily prevent all error and all fraud. However, our management does expect
that the control system provides reasonable assurance that its objectives will be met. A control
system, no matter how well designed and operated, cannot provide absolute assurance that the
control systems objectives will be met. In addition, the design of such internal controls must
take into account the costs of designing and maintaining such a control system. Certain inherent
limitations exist in control systems to make absolute assurances difficult, including the realities
that judgments in decision-making can be faulty, that breakdowns can occur because of a simple
error or mistake, and that individuals can circumvent controls. The design of any control system
is based in part upon existing business conditions and risk assessments. There can be no assurance
that any design will succeed in achieving its stated goals under all potential future conditions.
Over time, controls may become inadequate because of changes in business conditions or
deterioration in the degree of compliance with policies or procedures. As a result, they may
require change or revision. Because of the inherent limitations in a control system, misstatements
due to error or fraud may occur and may not be detected. Nevertheless, the disclosure controls and
procedures are designed to provide reasonable assurance of achieving their stated objectives, and
the CEO and CFO have concluded that the disclosure controls and procedures are effective at a
reasonable assurance level.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
From time to time, we are a party to various lawsuits, arbitrations or mediations that arise in the
ordinary course of business. The disclosure called for by Part II, Item 1, regarding our legal
proceedings is incorporated by reference herein from Note 10 Commitments and Contingent
Liabilities, of the Notes to the Condensed Consolidated Financial Statements in this Form 10-Q for
the quarter ended December 31, 2009.
ITEM 1A. RISK FACTORS.
Except as described below, there are no material changes from risk factors as previously disclosed
in Watson Wyatts 2009 Annual Report on Form 10-K (File No. 001-16159), filed on August 14, 2009;
and in Towers Watsons Quarterly Report on Form 10-Q for the period ended September 30, 2009 (File
No. 333-161705), filed on December 23, 2009. We urge you to read all of the risk factors contained
in such reports.
|
|
|
On December 16, 2009, the SEC published final rules with respect to issuer
disclosures on compensation consultants. Among other requirements, the rules require
disclosure of fees paid to compensation consultants as well as a description of any
additional services provided to the issuer by the compensation consultant and its
affiliates and the aggregate fees paid for such services. Due in part to this regulation,
some clients of Towers Perrin and Watson Wyatt have decided to terminate their
relationships with the respective company (either with respect to compensation consulting
services or with respect to other consulting services) to avoid perceived or potential
conflicts of interest. Additional clients of Towers Watson may decide to terminate their
relationships with Towers Watson, and as a result, Towers Watsons business, financial
condition and results of operations could be materially adversely impacted. |
52
|
|
|
In addition, due in part to such regulation, some Towers Perrin and Watson Wyatt consultants
have terminated their relationships with the respective company, and some have indicated
that they intend to compete with Towers Watson. Such talent migration, and any future such
talent migration, could have a material adverse effect on Towers Watsons business. |
|
|
|
|
As previously described in Towers Watsons Quarterly Report on Form 10-Q for
the period ended September 30, 2009, a putative class action lawsuit was filed by certain
former shareholders of Towers Perrin against Towers Perrin and certain of its officers and
directors (the Dugan Action). Since that time, two additional lawsuits have been filed
against the same defendants one by four former shareholders who are proceeding in their
individual capacities and one by a former shareholder who seeks to represent a proposed
class of an alleged 50 additional former shareholders who are not included in the proposed
class in the Dugan Action. Plaintiffs in these additional lawsuits allege the same claims
in substantially the same form as those in the Dugan Action. Towers Watson believes that
all of the foregoing claims are without merit and intends to vigorously defend the actions.
However, Towers Watson could incur significant costs defending against these claims. The
outcome of these legal proceedings are inherently uncertain and could be unfavorable to
Towers Watson. |
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
Issuer Purchases of Equity Securities
Watson Wyatt periodically repurchased shares of common stock, one purpose of which is to offset
potential dilution from shares issued in connection with its benefit plans. The table below
presents specified information about Watson Wyatts stock repurchases and repurchase plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased |
|
|
Maximum Number of |
|
|
|
Total Number of |
|
|
|
|
|
|
as Part of Publicly |
|
|
Shares that May Yet |
|
|
|
Shares |
|
|
Average Price |
|
|
Announced Plans |
|
|
Be Purchased Under |
|
Period |
|
Purchased |
|
|
Paid per Share |
|
|
or Programs |
|
|
the Plans or Programs |
|
October 1, 2009 through October 31, 2009 |
|
|
322,830 |
|
|
|
44.39 |
|
|
|
322,830 |
|
|
|
|
|
November 1, 2009 through November 30, 2009 |
|
|
164,597 |
|
|
|
44.06 |
|
|
|
164,597 |
|
|
|
|
|
December 1, 2009 through December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
487,427 |
|
|
|
|
|
|
|
487,427 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No shares remain to be repurchased under board approved plans.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
53
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On December 18, 2009, at a special meeting of the shareholders of Watson Wyatt, the shareholders of
Watson Wyatt approved and adopted the Agreement and Plan of Merger (the Merger Agreement), dated
June 26, 2009, as amended, by and among Watson Wyatt, Towers Perrin, Towers Watson, Jupiter Saturn
Delaware Inc., a Delaware corporation and wholly-owned subsidiary of Towers Watson, and Jupiter
Saturn Pennsylvania Inc., a Pennsylvania corporation and wholly-owned subsidiary of Towers Watson,
pursuant to which Watson Wyatt and Towers Perrin combined their businesses through simultaneous
mergers to become wholly-owned subsidiaries of Towers Watson (the Merger). In addition, Watson
Wyatt shareholders approved the Towers Watson & Co. 2009 Long Term Incentive Plan (the 2009
Plan). The affirmative vote of the holders of a majority of the shares of Watson Wyatts Class A
common stock present and entitled to be cast on November 3, 2009, the record date for the special
meeting, was required to adopt the Merger Agreement and approve the 2009 Plan.
Also on the same date, at a special meeting of the shareholders of Towers Perrin, the shareholders
of Towers Perrin approved and adopted the Merger Agreement, and approved an amendment to Article VI
of Towers Perrins Amended and Restated Bylaws, which article contained transfer and ownership
restrictions on shares of Towers Perrin common stock that was required to be amended in order to
consummate the Merger. The affirmative vote of the holders of at least two-thirds of the issued and
outstanding shares of Towers Perrin common stock as of November 2, 2009, the record date for the
special meeting, was required to adopt the Merger Agreement and approve the amendment to Towers
Perrins Amended and Restated Bylaws.
Approximately 97 percent of the shares of Towers Perrin common stock issued and outstanding as of
November 2, 2009, the record date for Towers Perrins special meeting, were voted in favor of
adoption of the Merger Agreement. Approximately 99 percent of the shares of Watson Wyatt Class A
common stock present and entitled to be cast on November 3, 2009, the record date for Watson
Wyatts special meeting, were voted in favor of adopting the Merger Agreement, and approximately 85
percent were voted in favor of the 2009 Plan.
The Merger became effective on January 1, 2010.
For further information, please see Jupiter Saturn Holding Companys Current Report on Form 8-K
filed with the Securities and Exchange Commission (Registration No. 333-161705) on December 18,
2009.
ITEM 5. OTHER INFORMATION.
None.
54
ITEM 6. EXHIBITS.
EXHIBIT INDEX
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
2.1 |
|
|
Agreement and Plan of Merger among Watson Wyatt Worldwide, Inc., Towers, Perrin,
Forster & Crosby, Inc., Jupiter Saturn Holding Company, Jupiter Saturn Delaware
Inc. and Jupiter Saturn Pennsylvania Inc., dated as of June 26, 2009. (1) |
|
|
|
|
|
|
2.2 |
|
|
Amendment No. 1 to Agreement and Plan of Merger among Watson Wyatt Worldwide,
Inc., Towers, Perrin, Forster & Crosby, Inc., Jupiter Saturn Holding Company,
Jupiter Saturn Delaware Inc. and Jupiter Saturn Pennsylvania Inc., dated as of
October 19, 2009. (1) |
|
|
|
|
|
|
3.1 |
|
|
Amended and Restated Certificate of Incorporation of Towers Watson & Co. (2) |
|
|
|
|
|
|
3.2 |
|
|
Amended and Restated Bylaws of Towers Watson & Co. (3) |
|
|
|
|
|
|
4.2 |
|
|
Indenture, dated as of December 30, 2009, by and between Towers Watson & Co. and
Wilmington Trust FSB, as Trustee, and form of Towers Watson Notes. (4) |
|
|
|
|
|
|
10.1 |
|
|
Credit Agreement dated as of January 1, 2010, among Towers Watson & Co. and
certain subsidiaries, as borrowers, each lender from time to time party thereto
and Bank of America, N.A., as administrative agent, swing line lender and L/C
issuer. (5) |
|
|
|
|
|
|
10.2 |
|
|
Towers Watson & Co. 2009 Long Term Incentive Plan. (6) |
|
|
|
|
|
|
10.3 |
|
|
Form of Transaction Based Compensation Agreement between Towers, Perrin, Forster
& Crosby, Inc. (now known as Towers Watson Pennsylvania Inc.) and certain
executives. (7) |
|
|
|
|
|
|
10.4 |
|
|
Towers, Perrin, Forster & Crosby, Inc. Restricted Stock Unit Plan. (8) |
|
|
|
|
|
|
10.5 |
|
|
Form of Award pursuant to the Towers, Perrin, Forster & Crosby, Inc. Restricted
Stock Unit Plan. (9) |
|
|
|
|
|
|
10.6 |
|
|
Form of Transaction Award pursuant to the Towers, Perrin, Forster & Crosby, Inc.
Restricted Stock Unit Plan. (10) |
|
|
|
|
|
|
10.7 |
|
|
Form of Indemnification Agreement with directors and executive officers. (11) |
|
|
|
|
|
|
10.8 |
|
|
Trust Deed and Rules of the Watson Wyatt Share Incentive Plan 2005 (U.K). (12) |
|
|
|
|
|
|
10.9 |
|
|
Watson Wyatt Share Incentive Plan 2005 Deed of Amendment (U.K.). (12) |
|
|
|
|
|
|
10.10 |
|
|
Share Purchase Plan 2005 (Spain). (12) |
|
|
|
|
|
|
10.11 |
|
|
Trust Deed and Rules of the Watson Wyatt Ireland Share Participation Scheme. (12) |
|
|
|
|
|
|
10.12 |
|
|
Watson Wyatt Amended and Restated Senior Officer Deferred Compensation Plan. (13) |
55
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
10.13 |
|
|
Watson Wyatt Amended Voluntary Deferred Compensation Plan for Non-Employee
Directors. (14) |
|
|
|
|
|
|
21 |
|
|
Subsidiaries of Towers Watson & Co. |
|
|
|
|
|
|
31.1 |
|
|
Certification of the Registrants Chief Executive Officer, John J. Haley,
pursuant to Rule 13a-14 of the Securities Exchange Act of 1934. |
|
|
|
|
|
|
31.2 |
|
|
Certification of the Registrants Chief Financial Officer, Roger F. Millay,
pursuant to Rule 13a-14 of the Securities Exchange Act of 1934. |
|
|
|
|
|
|
32.1 |
|
|
Certification of the Registrants Chief Executive Officer, John J. Haley,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
|
32.2 |
|
|
Certification of the Registrants Chief Financial Officer, Roger F. Millay,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
|
99.1 |
|
|
Risk Factors section on Form 10-Q filed by the Registrant on December 23,
2009. (15) |
|
|
|
(1) |
|
Incorporated by reference to Exhibit 2.1 to the Registrants joint proxy
statement/prospectus included in the Registration Statement on Form S-4/A (File No.
333-161705) filed by the Registrant with the Securities and Exchange Commission and declared
effective on November 9, 2009, as supplemented by the prospectus supplement filed pursuant to
Rule 424(b)(3) on December 14, 2009 (collectively, the Joint Proxy Statement/Prospectus). |
|
(2) |
|
Incorporated by reference to Exhibit 4.1 to the Form 8-A filed by the Registrant on January
4, 2010. |
|
(3) |
|
Incorporated by reference to Exhibit 3.4 to the Joint Proxy Statement/Prospectus. |
|
(4) |
|
Incorporated by reference to Exhibit 4.1 to the Form 8-K filed by the Registrant on January
4, 2010. |
|
(5) |
|
Incorporated by reference to Exhibit 10.1 to the Form 8-K filed by the Registrant on January
4, 2010. |
|
(6) |
|
Incorporated by reference to Annex G to the Joint Proxy Statement/Prospectus. |
|
(7) |
|
Incorporated by reference to Exhibit 10.4 to the Joint Proxy Statement/Prospectus. |
|
(8) |
|
Incorporated by reference to Exhibit 10.5 to the Joint Proxy Statement/Prospectus. |
|
(9) |
|
Incorporated by reference to Exhibit 10.6 to the Joint Proxy Statement/Prospectus. |
|
(10) |
|
Incorporated by reference to Exhibit 10.7 to the Joint Proxy Statement/Prospectus. |
|
(11) |
|
Incorporated by reference to Exhibit 10.8 to the Joint Proxy Statement/Prospectus. |
|
(12) |
|
Incorporated by reference from Watson Wyatt Worldwide Inc., Form 10-K filed on September 1, 2006. |
|
(13) |
|
Incorporated by reference to Exhibit 10.11 to the Joint Proxy Statement/Prospectus. |
|
(14) |
|
Incorporated by reference to Exhibit 10.12 to the Joint Proxy Statement/Prospectus. |
|
(15) |
|
Incorporated by reference to Exhibit 99.1 to the Form 10-Q filed by the Registrant on December 23, 2009. |
56
Signatures
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Towers Watson & Co.
(Registrant)
|
|
|
|
|
|
|
|
|
/s/ John J. Haley |
|
|
|
February 8, 2010 |
|
|
|
|
|
|
|
Name:
|
|
John J. Haley
|
|
|
|
Date |
|
Title:
|
|
Chief Executive Officer |
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Roger F. Millay |
|
|
|
February 8, 2010 |
|
|
|
|
|
|
|
Name:
|
|
Roger F. Millay
|
|
|
|
Date |
|
Title:
|
|
Chief Financial Officer |
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Peter L. Childs |
|
|
|
February 8, 2010 |
|
|
|
|
|
|
|
Name:
|
|
Peter L. Childs
|
|
|
|
Date |
|
Title:
|
|
Principal Accounting Officer and |
|
|
|
|
|
|
|
Controller |
|
|
|
|
|
57