Towers Watson Reports Strong Third Quarter Earnings

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Towers Watson Reports Strong Third Quarter Earnings

  • Revenue increased 4% over prior year (5.5% constant currency)
  • Diluted EPS of $1.34, an increase of 41% over prior year
  • Adjusted Diluted EPS of $1.60, an increase of 15% over prior year
  • Increasing full year adjusted diluted EPS guidance range to $5.44 to $5.49

NEW YORK--(BUSINESS WIRE)-- Towers Watson (NYSE, NASDAQ: TW),a leading global professional services company, today announced financial results for the third quarter of fiscal year 2013, which ended March 31, 2013.

Total revenues were $941 million for the quarter, an increase of 4% (5.5% constant currency) from $902 million for the third quarter of fiscal 2012. On an organic basis, which excludes the impact of changes in foreign currency exchange rates, acquisitions and divestitures, revenues increased 2% from the prior-year third quarter. Currency translation negatively impacted our third quarter revenue by approximately $10 million or 1%.


Adjusted EBITDA for the third quarter of fiscal 2013 was $191 million, or 20.3% of revenues, versus $180 million, or 19.9% of revenues, for the prior-year third quarter. Adjusted EBITDA excludes transaction and integration expenses, non-cash stock-based compensation arising from merger and acquisition activity and for the prior year third quarter, a change in accounting method for pension.

Net income attributable to controlling interests for the third quarter of fiscal 2013 was $95 million, an increase from $68 million for the prior-year third quarter. For the quarter, diluted earnings per share were $1.34 and adjusted diluted earnings per share were $1.60. Adjusted diluted earnings per share exclude transaction and integration costs, non-cash stock-based compensation arising from merger and acquisition activity, amortization of merger and acquisition accounting intangible assets and non-recurring other income. Currency translation negatively impacted our adjusted diluted earnings per share by $0.02. The tax rate for the quarter was 31%, which is lower than our expected range of 35% to 36% due to certain non-recurring benefits.

"Our third quarter results were strong and I continue to be impressed with the efforts of our associates working in this challenging global environment," said John Haley, chief executive officer. "The success we've had is in large part due to their consideration of our clients' needs as we continue to bring innovative ideas to the market with a disciplined financial approach. This quarter also marked a milestone for our Exchange Solutions segment. The seasonal enrollment costs were reduced as part of our normal business cycle as the revenues from the 2013 enrollment season began to be recognized, resulting in a very profitable quarter."

Third Quarter Company Highlights

Benefits

For the quarter, the Benefits segment had revenues of $523 million, an increase of 1% (1.5% increase constant currency) from $520 million in the prior-year third quarter. Retirement had modest constant currency revenue growth. Health and Group Benefits constant currency revenue grew by mid-single digits as compared to strong growth in the third quarter last year. Technology and Administration Solutions constant currency revenue grew by high single digits due to new client work. The Benefits segment had a Net Operating Income ("NOI") margin of 35% in the third quarter of fiscal 2013.

Risk and Financial Services

For the quarter, the Risk and Financial Services segment had revenues of $225 million, an increase of 3% (4% increase constant currency) from $220 million in the prior-year third quarter. Investment Consulting and Brokerage had constant currency revenue growth in all regions. Investment Consulting constant currency revenue growth was led by the EMEA region with double digit growth. Brokerage benefited from pricing increases and new business wins. Risk Consulting and Software constant currency revenue growth had a single digit decline primarily due to a drop in project demand in EMEA. The Risk and Financial Services segment had an NOI margin of 29% in the third quarter of fiscal 2013.

Talent and Rewards

For the quarter, the Talent and Rewards segment had revenues of $125 million, a decrease of 5% (4% decrease constant currency) from $131 million in the prior-year third quarter. Executive Compensation had constant currency revenue growth in the low-single digits with continued strong demand in EMEA and Asia Pacific. Rewards, Talent and Communication and Data, Surveys and Technology both had single digit constant currency revenue declines due to lessening demand in a number of countries. The Talent and Rewards segment had an NOI margin of 11% in the third quarter of fiscal 2013. The first half of the year typically has stronger margins due to the seasonality of the business.

Exchange Solutions

For the quarter, the Exchange Solutions segment had revenues of $31 million. On a proforma basis, revenues grew by 75%, excluding the impact of the $0.5 million deferred revenue write-off from the acquired balance sheet required by purchase accounting rules. The Exchange Solutions segment had an NOI margin of 48% in the third quarter of fiscal 2013. The second half of the fiscal year is seasonally stronger due to the timing of enrollments.

Outlook for Fiscal 2013

For fiscal 2013, the company expects to report revenues of approximately $3.6 billion, reflecting constant currency revenue growth in the range of 6% to 7%, and adjusted diluted earnings per share in the range of $5.44 to $5.49.

For the fourth quarter of fiscal 2013, the company expects to report revenues in the range of $870 million to $890 million, reflecting constant currency revenue growth in the range of 6% to 9%, and adjusted diluted earnings per share in the range of $1.23 to $1.28. This guidance assumes an average exchange rate of 1.51 U.S. dollars to the British Pound and 1.30 U.S. dollars to the Euro for the fourth quarter of fiscal 2013.

Conference Call

The company will host a live webcast and conference call to discuss the financial results for the third quarter of fiscal 2013. It will be held on Tuesday, May 7, 2013, beginning at 9:00 a.m. Eastern Time, and can be accessed via the Internet at www.towerswatson.com. The replay of the call will be available shortly after the live call for a period of three months. A telephonic replay will also be available for two weeks after the call by dialing 617-801-6888 and using confirmation number 65966102.

About Towers Watson

Towers Watson (NYSE, NASDAQ: TW) is a leading global professional services company that helps organizations improve performance through effective people, risk and financial management. The company offers solutions in the areas of benefits, talent management, rewards, and risk and capital management. Towers Watson has 14,000 associates around the world and is located on the web at www.towerswatson.com.

Use of Non-GAAP Measures

In order to assist readers of our financial statements in understanding the company's core operating results, we present (1) Adjusted EBITDA, (2) Adjusted Net Income Attributable to Controlling Interests, and (3) Adjusted Diluted Earnings Per Share (which are all non-U.S. GAAP measures), to eliminate the effect of acquisition-related expenses from the financial results of our operations. The company's management uses these measures to evaluate the performance of the business and for financial planning. The company defines Adjusted EBITDA as net income before non-controlling interests adjusted for provision for income taxes, interest, depreciation and amortization, transaction and integration expenses, merger related stock-based compensation, change in accounting method for pension and other non-operating income. We use Adjusted Net Income Attributable to Controlling Interests (the numerator) for the purpose of calculating Adjusted Diluted Earnings Per Share. The company believes that Adjusted EBITDA and Adjusted Diluted Earnings Per Share are relevant and useful measures widely used by analysts, investors and other interested parties in our industry to provide a baseline for evaluating and comparing our operating results.

Since the merger in January 2010, we have incurred significant acquisition-related expenses related to the transaction and integration activities necessary to combine Watson Wyatt and Towers Perrin. These acquisition-related expenses include transaction and integration costs, severance costs, non-cash charges for amortization of intangible assets, change in accounting method for pension and stock-based compensation costs from the issuance of merger-related restricted shares. Adjusted EBITDA and Adjusted Diluted Earnings Per Share are important in illustrating what our operating results would have been had we not incurred these acquisition-related expenses. We consider Adjusted EBITDA and Adjusted Diluted Earnings Per Share to be important financial measures, which we use to internally evaluate and assess our core operations, and benchmark our operating results against our competitors. We use Adjusted EBITDA to evaluate and measure performance under our performance-based compensation plans.

Reconciliations of net income before non-controlling interests to Adjusted EBITDA and Diluted Earnings Per Share to Adjusted Diluted Earnings Per Share are included in the accompanying tables to today's press release.

Each of these non-U.S. GAAP measures is not defined in the same manner by all companies, and may not be comparable to other similarly titled measures of other companies. Non-U.S. GAAP measures should be considered in addition to, and not as a substitute for, the information contained within our financial statements.

Forward-Looking Statements

This document contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. You can identify these statements and other forward-looking statements in this document by words such as "may", "will", "would", "expect", "anticipate", "believe", "estimate", "plan", "intend", "continue", or similar words, expressions or the negative of such terms or other comparable terminology. Such statements are based upon the current beliefs and expectations of Towers Watson's management and are subject to significant risks and uncertainties. Actual results may differ from those set forth in the forward-looking statements.

The following factors, among others, could cause actual results to differ from those set forth in the forward-looking statements: the ability to successfully make suitable acquisitions and divestitures; the risk that the acquisition of Extend Health is not profitable or is not otherwise successfully integrated; the ability to successfully address issues surrounding the number of company shares that will become freely tradable on January 1, 2014; the risk that potential changes in federal and state health care regulations, or future interpretation of existing regulations, may have a material adverse impact on our business; the risk that our newly-acquired Extend Health business fails to maintain good relationships with insurance carriers, becomes dependent upon a limited number of insurance carriers or fails to develop new insurance carrier relationships; the risk that changes and developments in the health insurance system in the United States could harm our business; our ability to respond to rapid technological changes; the ability to recruit and retain qualified employees; and to retain client relationships, particularly in the executive compensation business, given recent Securities and Exchange Commission (SEC) and other regulatory actions; and the risk that a significant or prolonged economic downturn could have a material adverse effect on Towers Watson's business, financial condition and results of operations. Additional risks and factors are identified under "Risk Factors" in Towers Watson's most recent Annual Report on Form 10-K filed with the SEC.

You should not rely upon forward-looking statements as predictions of future events because these statements are based on assumptions that may not come true and are speculative by their nature. Towers Watson does not undertake an obligation to update any of the forward-looking information included in this document, whether as a result of new information, future events, changed expectations or otherwise.

 
TOWERS WATSON & CO.
Supplemental Segment Information
(Thousands of U.S. Dollars)
(Unaudited)
             
 
Segment Revenue
 
Revenue for the Three
Months Ended March 31% ChangeCurrencyAcquisitions/% Change
20132012GAAPImpactDivestituresOrganic
 
Benefits$523,489$520,1441%-1%0%1%
Risk & Financial Services225,382219,7223%-1%0%4%
Talent & Rewards124,914131,128-5%-1%0%-4%
Exchange Solutions 30,621   - N/AN/AN/AN/A
Reportable Segments$904,406$870,994
 
 
Revenue for the Nine
Months Ended March 31% ChangeCurrencyAcquisitions/% Change
20132012GAAPImpactDivestituresOrganic
 
Benefits$1,500,035$1,450,1703%-1%0%4%
Risk & Financial Services625,418618,8711%-1%0%2%
Talent & Rewards441,334440,1110%-1%0%1%
Exchange Solutions 60,259   - N/AN/AN/AN/A
Reportable Segments$2,627,046$2,509,152
 
 
Reconciliation of Reportable Segment Revenues to Consolidated Revenues
 
Three Months Ended March 31Nine Months Ended March 31
2013201220132012
 
Reportable Segments$904,406$870,994$2,627,046$2,509,152
Reimbursable Expenses and Other 36,561  30,522  94,415  82,425 
Consolidated Revenues$940,967$901,516$2,721,461$2,591,577
 
 
Segment Net Operating Income
 
Three Months Ended March 31Nine Months Ended March 31
2013201220132012
 
Benefits$184,304$193,419$505,975$499,963
Risk & Financial Services65,31465,039147,442168,507
Talent & Rewards13,17917,06299,04898,036
Exchange Solutions 14,648  -  (1,245) - 
Reportable Segments$277,445$275,520$751,220$766,506
 
 
Reconciliation of Reportable Segment Net Operating Income to Income from Operations
 
Three Months Ended March 31Nine Months Ended March 31
2013201220132012
 
Reportable Segments$277,445$275,520$751,220$766,506
Differences in Allocation Methods(720)(7,285)11,6961,960
Amortization of Intangible Assets(19,395)(17,728)(59,237)(48,393)
Transaction and Integration Expenses(12,328)(21,411)(30,753)(65,221)
Stock-Based Compensation1,305(7,572)(17,459)(39,415)
Discretionary Compensation(99,659)(90,545)(278,405)(275,263)
Payroll Tax on Discretionary Compensation(5,880)(5,312)(15,975)(16,158)
Change in Accounting Method for Pension-(6,237)-(6,237)
Other, net (1,190) (10,547) (14,121) (14,753)
Income from Operations$139,578$108,883
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