<< Back
Hewitt Associates Reports Third Quarter Results

Click here for Printer Friendly Version

Company Announces Dutch Auction Tender Offer

LINCOLNSHIRE, Ill.--(BUSINESS WIRE)--Aug. 7, 2007--Hewitt Associates, Inc. (NYSE:HEW), a global human resources services company, today reported results for its fiscal 2007 third quarter ended June 30, 2007.

  • Reported net revenues (revenues before reimbursements) increased 4% in the third quarter, to $728.0 million, from $698.2 million in the prior-year quarter. Consulting revenues increased 10%, Human Resources Business Process Outsourcing (HR BPO) revenues increased 7%, and Benefits Outsourcing revenues were essentially flat.


  • Operating income for the third quarter was $72.4 million, compared with an operating loss of $207.6 million in the prior-year quarter. The improvement reflects a $13 million pretax benefit related to the timing impact of the Company's bonus accruals and a $9 million pretax severance charge in the current quarter, as well as $249 million of pretax HR BPO-related charges in the prior-year quarter. Adjusting for these items in the appropriate periods, operating income for the current quarter was $81.5 million, compared with $54.4 million in the prior-year quarter.


  • Net income for the third quarter was $47.5 million, or $0.43 per diluted share, compared with a net loss of $202.2 million, or $1.88 diluted loss per share in the prior-year quarter.


  • As of August 6, under its $750 million share repurchase authorization, the Company had repurchased approximately 5.9 million of its outstanding common shares, for a total of approximately $177 million.


  • Also under the existing authorization, the Company today announced its intention to purchase up to 15,625,000 shares, or approximately 14% of its outstanding Class A common stock, through a modified "Dutch Auction" tender offer.

Third Quarter Highlights

"We saw good progress in each of our businesses again this quarter," said Russ Fradin, chairman and chief executive officer. "Our Consulting business continues to post solid top-line growth, our Benefits Outsourcing business is showing nice underlying margin gains, and we are beginning to realize the benefits of our stabilization and improvement efforts in the HR BPO business."

"We are now focused on entering 2008 with strong momentum against our key objectives, making sure we perform for clients, deliver for our shareholders, and reward associates who help us do both. We've clearly made a lot of progress addressing our cost structure. We recently announced our plans to significantly reduce our real estate costs, and you should expect to hear more from us about other similar opportunities to improve productivity as we go forward. In addition, today's announcement that the board has authorized a more aggressive share repurchase program demonstrates our continued flexibility to return cash to our shareholders, even as we improve our earnings and invest in future growth."

Operating Performance

The current quarter's revenue of $728.0 million was impacted by the favorable effects of foreign currency translation of $11 million, and a $7 million decline in marginally profitable third-party supplier revenues. Acquisitions contributed $3 million of revenue in the quarter. After adjusting for these items, net revenues increased 3%.

Net income for the third quarter was $47.5 million, compared with a net loss of $202.2 million in the prior-year quarter. Third quarter results include $13 million of lower compensation expense driven by the timing impact of the Company's bonus accrual methodology, and a $9 million pretax severance charge resulting from ongoing productivity initiatives, primarily in the HR BPO business and overhead functions. The prior-year quarter included $249 million of non-cash pretax charges related to the HR BPO business.

Business Segment Results

In the second quarter of fiscal 2007, the Company modified how certain costs are allocated, impacting the reported operating income of each segment, as well as reducing the overall level of unallocated shared service costs. Prior-year segment results have been presented on an adjusted basis to assist in the comparison of current-period results.

Benefits Outsourcing

Benefits Outsourcing segment revenues of $358.7 million in the third quarter were essentially flat, compared with $360.4 million in the prior-year quarter. Adjusting for the favorable effects of foreign currency translation of approximately $2 million, Benefits Outsourcing revenues declined 1%. An increase in project work was more than offset by the impact of lost clients and longer implementation cycles required for some of the Company's large, complex clients.

Benefits Outsourcing segment income increased 25% in the third quarter, to $95.5 million, compared with $76.2 million in the prior-year quarter. Benefits Outsourcing segment margin was 26.6%, compared with 21.1% in the prior-year quarter. The increased margin was primarily due to increased efficiencies driven by global sourcing and other cost management efforts.

As of June 30, 2007, the Company was live with 18.3 million end-user benefits participants, compared with 18.7 million as of June 30, 2006.

Human Resources Business Process Outsourcing

HR BPO segment revenues increased 7% in the third quarter, to $138.5 million, from $128.8 million in the prior-year quarter. Adjusting for the decline in third-party supplier revenues of $7 million, and the favorable effects of foreign currency translation of approximately $2 million, HR BPO revenues increased 14%. The increase was driven primarily by the growth of existing clients, including an increase in project work, as well as by contracts that went live within the twelve-month period.

The HR BPO segment loss was $37.8 million in the third quarter, compared with a loss of $293.5 million in the prior-year third quarter. The reduced loss was primarily due to $249 million of non-cash pretax charges recorded in the prior-year quarter, comprised of $172 million of goodwill impairment, $70 million of contract loss provisions, and $7 million of intangible asset impairment. Excluding these charges, the segment loss improved primarily due to the stabilization of the existing client base, as well as overall cost management efforts. The improvement was offset in part by a $6 million pretax severance charge, as well as increased intangible asset amortization.

As of June 30, 2007, the Company was live with approximately 762,000 client employees with HR BPO services, compared with 742,000 as of June 30, 2006.

Consulting

Consulting segment revenues increased 10% in the third quarter, to $240.9 million, from $218.8 million in the prior-year quarter. Adjusting for the favorable effects of foreign currency translation of approximately $7 million, and the effects of acquisitions of approximately $3 million, Consulting revenues increased 5% over the prior-year quarter. Growth was primarily due to strength in retirement and financial management consulting, as well as talent and organization consulting.

Consulting segment income increased 35% in the third quarter, to $40.9 million, compared with $30.2 million in the prior-year quarter. Consulting segment margin was 17.0%, compared with 13.8% in the prior-year quarter. The increase was primarily driven by revenue growth, as well as $8 million of lower compensation expense due to the timing impact of the Company's bonus accrual methodology.

Unallocated Shared Service Costs

Reported unallocated shared service costs were $26.1 million, 3.6% of net revenues, in the third quarter, compared with $18.7 million, 2.7% of net revenues, in the prior-year quarter. The increase in expenses relative to revenues was primarily a result of higher professional services fees related to ongoing strategic initiatives.

Year-to-Date Results

Net revenues for the nine-month period ended June 30, 2007 increased 5% on both a reported and direct organic constant currency basis. Reported net revenues were $2.17 billion, compared with $2.08 billion in the prior-year nine-month period. The period was impacted by a $40 million decline in third-party supplier revenues, and the favorable effects of foreign currency translation of $36 million. Acquisitions contributed $7 million of revenue.

Total Company operating income for the nine-month period increased to $137.7 million, compared with an operating loss of $106.5 million in the prior-year nine-month period. Current-period results include approximately $25 million of pretax charges recorded primarily in the second quarter related to the anticipated restructuring of an HR BPO contract, the resolution of a legal dispute, and asset impairments, $24 million of pretax severance charges primarily recorded in the first and third quarters resulting from ongoing productivity initiatives across the Company, approximately $7 million of higher compensation expense due to the timing impact of the Company's bonus accrual methodology, and increased intangible asset amortization. The prior-year period included $266 million of non-cash pretax charges related to the HR BPO business, as well as a $7 million pretax charge related to selected staffing reductions.

Net income for the nine-month period was $90.6 million, or $0.82 per diluted share, compared with a net loss of $138.9 million, or $1.30 diluted loss per share in the prior-year nine-month period.

Cash Flow and Investments

Reported cash flow from operations was $258.0 million in the nine-month period, compared with $288.9 million in the prior-year nine-month period. Free cash flow, defined as cash flow from operations less investments (capital expenditures and capitalized software costs), was $195.1 million, compared with $210.9 million in the prior-year nine-month period. The decrease in free cash flow was driven primarily by lower tax refunds and higher tax prepayments, as well as higher performance-based compensation paid in the current period for fiscal 2006 performance as compared to the prior-year payment for fiscal 2005 performance. The decrease was offset by lower net deferrals and capital expenditures.

Share Repurchase

During the third quarter, the Company repurchased approximately 2.9 million of its outstanding common shares at an average price of $30.29 per share, for a total of approximately $88 million. Since July 1, 2007, the Company has repurchased an additional 1.6 million shares at an average price of $30.59 per share, for a total of approximately $50 million, bringing total activity under the $750 million authorization to $177 million.

Separately, under the existing authorization, the Company also announced today its intention to purchase up to 15,625,000 shares, or approximately 14% of its outstanding Class A common stock, through a modified "Dutch Auction" tender offer. The stated purchase price for the tender offer is between $28.75 and $32.00 per share. The offer is set to commence tomorrow, August 8, 2007, and expire at 12:00 midnight EDT on September 5, 2007.

Conference Call

At 7:30 a.m. (CT) today, management will host a conference call with investors to discuss third quarter results. The live presentation is accessible through the Investor Relations section of Hewitt's Web site at www.hewitt.com. The Webcast will be archived on the site for approximately one month.

About Hewitt Associates

With more than 65 years of experience, Hewitt Associates (NYSE:HEW) is the world's foremost provider of human resources outsourcing and consulting services. The company consults with more than 2,300 companies and administers human resources, health care, payroll and retirement programs on behalf of more than 340 companies to millions of employees and retirees worldwide. Located in 35 countries, Hewitt employs approximately 24,000 associates. For more information, please visit www.hewitt.com.

Forward-Looking Information

This presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are based upon the current beliefs and expectations of Hewitt's management and are subject to significant risks and uncertainties. Actual results may differ from those set forth in the forward-looking statements. Factors that could cause actual results to differ materially from those expressed or implied include general economic conditions and the factors discussed under the "Risk Factors" heading in the Business section of the Company's most recent annual report on Form 10-K filed with the Securities and Exchange Commission ("SEC") and available at the SEC's internet site (http://www.sec.gov). Hewitt disclaims any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or any other reason.

                       HEWITT ASSOCIATES, INC.
                CONSOLIDATED STATEMENTS OF OPERATIONS
                             (Unaudited)
    (Dollars in thousands except for share and per share amounts)


                                       Three Months Ended
                                            June 30,
                                    -------------------------
                                        2007         2006     % Change
                                    ------------ ------------ --------
Revenues:
    Revenues before reimbursements
     (net revenues)                 $    727,982 $    698,174     4.3%
    Reimbursements                        14,330       16,271  (11.9)%
                                    ------------ ------------
      Total revenues                     742,312      714,445     3.9%
                                    ------------ ------------

Operating expenses:
    Compensation and related
     expenses                            455,069      480,645   (5.3)%
    Goodwill and asset impairment          2,996      236,692  (98.7)%
    Reimbursable expenses                 14,330       16,271  (11.9)%
    Other operating expenses             149,022      150,187   (0.8)%
    Selling, general and
     administrative expenses              48,521       38,274    26.8%
                                    ------------ ------------
      Total operating expenses           669,938      922,069  (27.3)%
                                    ------------ ------------

Operating income (loss)                   72,374    (207,624)      n/m

    Other income (expense), net            2,586          200      n/m
                                    ------------ ------------

Income (loss) before income taxes         74,960    (207,424)      n/m

Provision (benefit) for income
 taxes                                    27,455      (5,177)      n/m
                                    ------------ ------------

Net income (loss)                   $     47,505 $  (202,247)      n/m
                                    ============ ============

Earnings (loss) per share:
    Basic                           $       0.44      ($1.88)
    Diluted (1)                     $       0.43      ($1.88)

Weighted average shares:
    Basic                            107,331,262  107,550,367
    Diluted (1)                      112,496,542  107,550,367



                                        Nine Months Ended
                                            June 30,
                                    -------------------------
                                        2007         2006     % Change
                                    ------------ ------------ --------
Revenues:
    Revenues before reimbursements
     (net revenues)                 $  2,170,816 $  2,075,375     4.6%
    Reimbursements                        51,354       54,181   (5.2)%
                                    ------------ ------------
      Total revenues                   2,222,170    2,129,556     4.3%
                                    ------------ ------------

Operating expenses:
    Compensation and related
     expenses                          1,424,555    1,337,727     6.5%
    Goodwill and asset impairment          6,612      257,229  (97.4)%
    Reimbursable expenses                 51,354       54,181   (5.2)%
    Other operating expenses             454,951      476,293   (4.5)%
    Selling, general and
     administrative expenses             147,020      110,624    32.9%
                                    ------------ ------------
      Total operating expenses         2,084,492    2,236,054   (6.8)%
                                    ------------ ------------

Operating income (loss)                  137,678    (106,498)      n/m

    Other income (expense), net            8,431        3,359      n/m
                                    ------------ ------------

Income (loss) before income taxes        146,109    (103,139)      n/m

Provision (benefit) for income
 taxes                                    55,553       35,794    55.2%
                                    ------------ ------------

Net income (loss)                   $     90,556 $  (138,933)      n/m
                                    ============ ============

Earnings (loss) per share:
    Basic                           $       0.83      ($1.30)
    Diluted (1)                     $       0.82      ($1.30)

Weighted average shares:
    Basic                            108,519,023  107,236,878
    Diluted (1)                      111,059,224  107,236,878


(1) For the three- and nine-month periods ended June 30, 2007 and
 2006, the Company had debt securities convertible into 1,870,748
 shares of Class A common stock. For the three-month period ended June
 30, 2007, the securities were dilutive, and the shares and $587 of
 interest expense, net of taxes, were included in the diluted earnings
 per share calculation. For the nine-month period ended June 30, 2007,
 and the three- and nine-month periods ended June 30, 2006, the
 securities were anti-dilutive, and therefore were not included in the
 diluted earnings per share calculation.
                       HEWITT ASSOCIATES, INC.
                       BUSINESS SEGMENT RESULTS
                             (Unaudited)
                        (Dollars in thousands)


                                         Three Months Ended
Business Segments                             June 30,
                                        ---------------------
                                           2007     2006 (1)  % Change
                                        ---------- ---------- --------
 Benefits Outsourcing
 Segment revenues before reimbursements $  358,678 $  360,438   (0.5)%
 Segment income                             95,461     76,208    25.3%
 Segment income as a percentage of
  segment revenues                           26.6%      21.1%

 HR BPO
 Segment revenues before reimbursements
  (2)                                   $  138,474 $  128,829     7.5%
 Segment loss                             (37,820)  (293,509)    87.1%
 Segment loss as a percentage of
  segment revenues                         (27.3)%   (227.8)%

 Consulting
 Segment revenues before reimbursements $  240,875 $  218,777    10.1%
 Segment income                             40,882     30,247    35.2%
 Segment income as a percentage of
  segment revenues                           17.0%      13.8%

 Total Company
 Segment revenues before reimbursements
  (2)                                   $  738,027 $  708,044     4.2%
 Intersegment revenues                    (10,045)    (9,870)     1.8%
                                        ---------- ----------
 Revenues before reimbursements (net
  revenues)                                727,982    698,174     4.3%
 Reimbursements                             14,330     16,271  (11.9)%
                                        ---------- ----------
 Total revenues                         $  742,312 $  714,445     3.9%
                                        ========== ==========

 Segment income (loss)                  $   98,523 $(187,054)      n/m

 Charges not recorded at the segment
  level:
    Initial public offering restricted
     stock awards                                -      1,822 (100.0)%
    Unallocated shared services costs       26,149     18,748    39.5%
                                        ---------- ----------
 Operating income (loss)                $   72,374 $(207,624)      n/m
                                        ========== ==========



                                          Nine Months Ended
Business Segments                             June 30,
                                        ---------------------
                                           2007     2006 (1)  % Change
                                        ---------- ---------- --------
 Benefits Outsourcing
 Segment revenues before reimbursements $1,106,062 $1,092,390     1.3%
 Segment income                            244,450    237,226     3.0%
 Segment income as a percentage of
  segment revenues                           22.1%      21.7%

 HR BPO
 Segment revenues before reimbursements
  (2)                                   $  403,103 $  386,294     4.4%
 Segment loss                            (141,710)  (379,369)    62.6%
 Segment loss as a percentage of
  segment revenues                         (35.2)%    (98.2)%

 Consulting
 Segment revenues before reimbursements $  690,133 $  622,528    10.9%
 Segment income                            102,025    108,560   (6.0)%
 Segment income as a percentage of
  segment revenues                           14.8%      17.4%

 Total Company
 Segment revenues before reimbursements
  (2)                                   $2,199,298 $2,101,212     4.7%
 Intersegment revenues                    (28,482)   (25,837)    10.2%
                                        ---------- ----------
 Revenues before reimbursements (net
  revenues)                              2,170,816  2,075,375     4.6%
 Reimbursements                             51,354     54,181   (5.2)%
                                        ---------- ----------
 Total revenues                         $2,222,170 $2,129,556     4.3%
                                        ========== ==========

 Segment income (loss)                  $  204,765 $ (33,583)      n/m

 Charges not recorded at the segment
  level:
    Initial public offering restricted
     stock awards                                -      8,905 (100.0)%
    Unallocated shared services costs       67,087     64,010     4.8%
                                        ---------- ----------
 Operating income (loss)                $  137,678 $(106,498)      n/m
                                        ========== ==========


(1) Prior year results have been reclassified to conform with the
 current year presentation. See www.hewitt.com for additional
 information.
(2) HR BPO net revenues include $14,275 and $21,279 of third-party
 supplier revenues for the three months ended June 30, 2007 and 2006,
 respectively, and $51,857 and $90,704 for the nine months ended June
 30, 2007 and 2006, respectively. The third-party supplier
 arrangements are generally marginally profitable. The related third-
 party supplier expenses are included in other operating expenses.
                       HEWITT ASSOCIATES, INC.
                     CONSOLIDATED BALANCE SHEETS
        (In thousands except for share and per share amounts)

                                              June 30,   September 30,
                                                 2007          2006
                                             ----------- -------------
                                             (Unaudited)
                   ASSETS

Current Assets
   Cash and cash equivalents                  $  246,950    $  138,928
   Short-term investments                        291,376       310,527
   Client receivables and unbilled work in
    process, less allowances of $20,680 and
    $25,333 at June 30, 2007 and September
    30, 2006, respectively                       605,136       622,270
   Prepaid expenses and other current assets      96,901        72,986
   Funds held for clients                        119,254        83,026
   Deferred income taxes, net                     27,989        17,096
                                             ----------- -------------
      Total current assets                     1,387,606     1,244,833
                                             ----------- -------------

Non-Current Assets
   Deferred contract costs                       352,655       289,654
   Property and equipment, net                   376,218       411,205
   Other intangible assets, net                  223,114       242,108
   Goodwill                                      576,002       544,922
   Other non-current assets, net                  29,931        34,956
                                             ----------- -------------
      Total non-current assets                 1,557,920     1,522,845
                                             ----------- -------------

Total Assets                                  $2,945,526    $2,767,678
                                             =========== =============


                 LIABILITIES

Current Liabilities
   Accounts payable                           $   22,437    $   31,256
   Accrued expenses                              187,250       194,736
   Funds held for clients                        119,254        83,026
   Advanced billings to clients                  175,987       176,563
   Accrued compensation and benefits             284,981       263,143
   Short-term debt                                29,535        32,246
   Current portion of long-term debt and
    capital lease obligations                     39,234        34,742
                                             ----------- -------------
      Total current liabilities                  858,678       815,712
                                             ----------- -------------

Non-Current Liabilities
   Deferred contract revenues                    244,530       193,638
   Debt and capital lease obligations, less
    current portion                              234,654       254,852
   Other non-current liabilities                 142,207       148,794
   Deferred income taxes, net                    134,028        98,313
                                             ----------- -------------
      Total non-current liabilities              755,419       695,597
                                             ----------- -------------

 Total Liabilities                            $1,614,097    $1,511,309
                                             ----------- -------------
                       HEWITT ASSOCIATES, INC.
               CONSOLIDATED BALANCE SHEETS (continued)
        (In thousands except for share and per share amounts)

                                             June 30,    September 30,
                                                2007          2006
                                           ------------- -------------
                                            (Unaudited)
           STOCKHOLDERS' EQUITY

Stockholders' Equity
   Class A common stock, par value $0.01
    per share, 750,000,000 shares
    authorized, 126,317,979 and
    124,932,189 shares issued, 107,973,448
    and 110,822,409 shares outstanding, as
    of June 30, 2007 and September 30,
    2006, respectively                     $       1,263 $       1,249
   Additional paid-in capital                  1,437,841     1,368,189
   Cost of common stock in treasury,
    18,344,531 and 14,109,780 shares of
    Class A common stock as of June 30,
    2007 and September 30, 2006,
    respectively                               (528,320)     (401,365)
   Retained earnings                             303,780       213,224
   Accumulated other comprehensive income,
    net                                          116,865        75,072
                                           ------------- -------------
      Total stockholders' equity               1,331,429     1,256,369
                                           ------------- -------------

Total Liabilities and Stockholders' Equity $   2,945,526 $   2,767,678
                                           ============= =============
                       HEWITT ASSOCIATES, INC.
                CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Unaudited)
                        (Amounts in thousands)

                                                   Nine Months Ended
                                                       June 30,
                                                 ---------------------
                                                    2007       2006
                                                 ---------- ----------
Cash flows from operating activities:
   Net income (loss)                             $   90,556 $(138,933)
   Adjustments to reconcile net income (loss) to
    net cash provided by operating activities:
       Depreciation and amortization, including
        amortization of deferred contract
        revenues and costs                          137,101    123,007
       Goodwill and asset impairment                  6,612    257,229
       Stock-based compensation                      31,439     49,797
       Deferred income taxes                         11,933   (14,771)
       Gain on contribution of business                   -    (7,127)
     Changes in operating assets and
      liabilities, net of effect of acquisitions
      and dispositions:
       Client receivables and unbilled work in
        process                                      34,285     25,566
       Prepaid expenses and other current assets   (18,864)     30,425
       Deferred contract costs                    (106,222)  (128,002)
       Other assets                                     866    (2,039)
       Accounts payable                             (9,532)   (28,890)
       Accrued compensation and benefits             17,077     37,519
       Accrued expenses                             (3,597)    (7,499)
       Advanced billings to clients                 (1,263)     28,899
       Deferred contract revenues                    76,773     64,771
       Other long-term liabilities                  (9,176)    (1,066)
                                                 ---------- ----------
   Net cash provided by operating activities        257,988    288,886

Cash flows from investing activities:
   Purchases of short-term investments            (170,044)  (284,365)
   Proceeds from sales of short-term investments    189,207     80,404
   Additions to property and equipment and
    intangible assets                              (62,844)   (77,939)
   Cash paid for acquisitions, net of cash
    received                                        (2,194)    (1,400)
                                                 ---------- ----------
   Net cash used in investing activities           (45,875)  (283,300)

Cash flows from financing activities:
   Proceeds from the exercise of stock options       36,475     13,992
   Short-term borrowings                             76,970     98,444
   Repayments of short-term borrowings, capital
    leases and long-term debt                      (97,927)  (117,062)
   Purchase of Class A common shares for
    treasury                                      (126,955)    (8,516)
                                                 ---------- ----------
   Net cash used in financing activities          (111,437)   (13,142)

Effect of exchange rate changes on cash and cash
 equivalents                                          7,346      2,888
                                                 ---------- ----------
Net increase (decrease) in cash and cash
 equivalents                                        108,022    (4,668)

Cash and cash equivalents, beginning of period      138,928    157,928
                                                 ---------- ----------
Cash and cash equivalents, end of period         $  246,950 $  153,260
                                                 ========== ==========

Supplementary disclosure of cash paid during the
 period:
   Interest paid                                 $   16,923 $   16,929
   Income taxes paid                             $   69,057 $   24,289

CONTACT: Hewitt Associates, Inc.
Genny Pennise, 847-442-6793 (Investors)
genny.pennise@hewitt.com
Maurissa Kanter, 847-442-7656 (Media)
maurissa.kanter@hewitt.com

SOURCE: Hewitt Associates, Inc.

"Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995: Statements in this press release regarding Hewitt Associates's business which are not historical facts are "forward-looking statements" that involve risks and uncertainties. For a discussion of such risks and uncertainties, which could cause actual results to differ from those contained in the forward-looking statements, see "Risk Factors" in the Company's Annual Report or Form 10-K for the most recently ended fiscal year.