e10vk
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended June 30, 2010
or
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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.) |
875 Third Avenue, New York, NY 10022
(Address of principal executive offices) (Zip Code)
(212) 725-7550
(Registrants
telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class
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Name of each exchange on which registered |
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Class A Common Stock, $0.01 par value
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New York Stock Exchange and
NASDAQ Global Select Market |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes o No þ
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 Website, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post such files). Yes o No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§
229.405 of this chapter) is not contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K 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 the definitions of large accelerated
filer, 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
Act). Yes o No þ
The aggregate market value of the registrants voting and non-voting common stock held by
non-affiliates of the registrant was approximately $2,001,914,497 based on the closing price as of
the last business day of the registrants most recently completed second fiscal quarter, December
31, 2009.
As of August 30, 2010 there were 42,980,157 outstanding shares of Class A common stock and
4,210,088 of Restricted Class A common stock at a par value of $0.01 per share; 10,530,853
outstanding shares of Class B-1 common stock at a par value of $0.01; 5,561,630 outstanding shares
of Class B-2 common stock at a par value of $0.01; 5,561,630 outstanding shares of Class B-3 common
stock at a par value of $0.01; and 5,369,043 outstanding shares of Class B-4 common stock at a par
value of $0.01.
DOCUMENTS INCORPORATED BY REFERENCE:
Parts of Registrants Proxy Statement for the Annual Meeting of Shareholders to be filed within 120
days after June 30, 2010, the end of Towers Watsons fiscal year, are incorporated by reference
into Parts II and III of this Annual Report.
TOWERS WATSON & CO.
INDEX TO ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended June 30, 2010
2
Special Note Regarding Forward-Looking Statements
This Annual Report contains a number of forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These statements include, among others,
statements regarding revenue drivers, growth opportunities and operational cost savings expected to
result from the merger of Towers Perrin and Watson Wyatt, as well as statements contained in
sections such as: Note 10, Retirement Benefits; Note 5, Goodwill and Intangible Assets; Note
15, Income Taxes; Note 11, Debt, Commitments and Contingent Liabilities; and Note 13, Restricted
Stock of the notes to the consolidated financial statements included in Item 15 of this Annual
Report; 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 I, Item 3 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 that could cause actual results to differ materially from the results reflected
in these forward-looking statements are identified under Risk Factors in Item 1A of this Annual
Report on Form 10-K. These statements are based on assumptions that may not come true. All
forward-looking disclosure is speculative by its nature. We undertake no obligation to update any
of the forward-looking information included in this Annual Report, whether as a result of new
information, future events, changed expectations or otherwise.
PART I
Item 1. Business.
The Company
Towers Watson & Co. (referred herein as Towers Watson, company, us, we, or Towers Watson &
Co.) is a leading global professional services firm focused on providing consulting and other
professional services related to employee benefits, human capital and risk and financial
management. We provide advisory services on critical human capital management issues to help our
clients effectively manage their costs, talent and risk. We offer our clients comprehensive
services across three business segments, Benefits, Risk and Financial Services and Talent and
Rewards, through a strong talent pool of approximately 12,750
full-time associates across 34 countries. Our
professional staff are trusted advisors and experts in their fields and include over 2,480 fully
accredited actuaries. Towers Watson was formed on January 1, 2010, from the merger of Towers,
Perrin, Forster & Crosby, Inc. (Towers Perrin) and Watson Wyatt Worldwide, Inc. (Watson Wyatt),
two leading professional services firms that trace their roots back more than 100 years.
We help our clients enhance business performance by improving their ability to attract, retain, and
motivate employees and to manage and mitigate risk. We focus on delivering consulting services and
technology solutions to help organizations anticipate, identify and capitalize on emerging
opportunities in benefits and human capital management. We also provide independent advice and risk
management solutions to insurance companies and corporate clients, as well as investment advice to
help our clients develop disciplined and efficient strategies to manage risk and meet their
investment goals.
Our target market is generally large, multi-national and domestic companies, with additional focus
on the insurance industry. Our clients include many of the worlds leading corporations, including
approximately 85% of the Fortune Global 500 companies, 84% of the Fortune 1000, 76% of the FTSE and
100% of the Dax 30. We also advise more than three-quarters of the worlds leading insurance
companies. We work with major corporations, emerging growth companies, governmental agencies and
not-for-profit institutions in a wide variety of industries.
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 and Towers Perrin combined their businesses through two
simultaneous mergers (the Merger) and became wholly owned subsidiaries of Jupiter Saturn Holding
Company, which subsequently changed its name to Towers Watson & Co. Since the consummation of the
Merger, Towers Perrin changed its name to Towers Watson Pennsylvania Inc., and Watson Wyatt changed
its name to Towers Watson Delaware Holdings Inc. However, for ease of reference, we continue to use
the legacy Towers Perrin and Watson Wyatt names throughout this discussion.
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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 owned approximately 56% 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; as such, the historical results of Watson Wyatt have become those of the new
registrant, Towers Watson, and are presented in this filing. Towers Watsons consolidated financial
statements as of and for the fiscal year ended June 30, 2010, include the results of Towers
Perrins operations beginning January 1, 2010.
Access to Public Filings, Code of Business Conduct and Ethics and Board Committee Charters
Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
amendments to those reports are available, without charge, on our web site (www.towerswatson.com)
or the Securities and Exchange Commission (SEC) web site (www.sec.gov), as soon as reasonably
practicable after they are filed electronically with the SEC. We have also adopted a Code of
Business Conduct and Ethics applicable to all associates, senior financial employees, the principal
executive officer, other officers and members of senior management. We also have a Code of Business
Conduct and Ethics that applies to all of our directors. Both codes are posted on our website, and
any amendments to the codes or any waivers of their requirements will be disclosed on our website.
Towers Watsons Audit Committee, Compensation Committee, Nominating and Governance Committee and
Risk Committee all operate pursuant to written charters adopted by our board of directors. We have
also adopted a set of Corporate Governance Guidelines, copies of which are available on our
website. Copies of all these documents are also available, without charge, from our Investor
Relations Department at 901 N. Glebe Road, Arlington, VA 22203.
Business Overview
As leading economies worldwide become more service-oriented and interconnected, effective human
resources, financial and risk management are increasingly becoming a source of competitive
advantage for companies and other organizations. Employers, regardless of geography or industry,
are facing unprecedented challenges involving the management of their people. Changing technology,
expectations for innovation and quality enhancements, skill shortages in selected areas, and an
aging population in many developed countries have increased employers focus on attracting and
retaining talented employees. Further, employers are focused on achieving productivity improvements
and effectively managing the overall size and volatility of their labor costs. The growing demand
for employee benefits and human capital management services is directly related to the size,
complexity and rapid changes associated with the effective design, financial management and
administration of human resources programs.
The Benefits segment is our largest segment. This segment provides benefits consulting and
administration services through four primary lines of business. Retirement supports organizations
worldwide in designing, managing, administering and communicating all types of retirement plans.
Health and Group Benefits provides advice on the strategy, design, financing, delivery, ongoing
plan management and communication of health and group benefit programs. Through our Technology and
Administration Solutions line of business, we deliver cost-effective benefit outsourcing solutions.
The International Consulting Group provides expertise in dealing with international human capital
management and related benefits and compensation issues for our clients and their subsidiaries. A
significant portion of the revenue in this segment is from recurring work, driven in large part by
the heavily regulated nature of employee benefits plans and our clients annual needs for these
services. The Benefits segment contributed approximately 64% of revenue during the fiscal year
ended June 30, 2010.
The Risk and Financial Services segment, our second largest segment, has three primary lines of
business. Risk Consulting and Software provides the insurance industry with consulting and
industry-specific software solutions that range from asset-liability modeling and product
development to economic capital aggregation and allocation. Reinsurance and Insurance Brokerage
principally provides reinsurance brokerage services. Investment Consulting and Solutions provides
investment strategy consulting and solutions for institutional investors, primarily to defined
benefit and defined contribution pension plans. A significant portion of the revenue in this
segment is from recurring work, driven in large part by the heavily regulated nature of the
insurance industry and industry demands for these services, such as reinsurance brokerage. The Risk
and Financial Services segment contributed approximately 21% of revenue during the fiscal year
ended June 30, 2010.
The Talent and Rewards segment has three primary lines of business. Executive Compensation advises
our clients management and boards of directors on executive pay and incentive programs. Rewards,
Talent and Communication provides consulting on a number of issues facing employers including
employee rewards (pay and incentives), talent management, employee communication and change
management. Data, Surveys and Technology provides data, analytics, consulting and technology
solutions, such as compensation and human capital benchmarking data, employee opinion surveys, and
reward administration and talent management technology, to help employers more effectively manage
their employees and human resources programs. The revenues in this segment are largely comprised of
project-based work from a stable client base. The Talent and Rewards segment contributed
approximately 15% of revenue during the fiscal year ended June 30, 2010.
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Our company is recognized for our thought leadership and proprietary industry content. Our
insights, derived from our extensive research across these three segments, are a core part of our
brand identity and are widely cited by many major news outlets such as The Wall Street Journal in
the United States and Asia, The New York Times, the Financial Times, BBC News and CNBC . We also
produce proprietary studies and white papers on topics such as employee attitudes toward the
workplace, executive pay trends, health care quality and costs, the impact of enterprise risk
management on business performance and strategies for managing pension risk and investments. Our
research on changing demographics in major economies is helping companies prepare for the impact of
these changes on costs, productivity and the ability to attract and retain talented employees.
While we focus our consulting services in the areas described above, management believes that one
of our primary strengths is our ability to draw upon consultants from our different practices to
deliver integrated services to meet the needs of our clients. This capability includes
communication and change management implementation support services.
Principal Services
Our global operations include three segments: Benefits, Risk and Financial Services, and Talent and
Rewards. The percentages of revenue generated in the various groups are as follows:
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Year ended June 30, |
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2010 |
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Benefits |
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Risk and Financial Services |
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Talent and Rewards |
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Total Segment Revenue |
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For more information about our operating segments, see Note 16, Segment Information, of the notes
to the consolidated financial statements included in Item 15 of this Annual Report.
Benefits Segment
The Benefits segment is our largest segment with over 6,000 associates. The Benefits segment
generated approximately 64% of revenue for the fiscal year ended June 30, 2010. This segment has
grown through business combinations as well as strong organic growth. It helps clients create and
manage cost-effective benefits programs that help them attract, retain and motivate a talented
workforce.
The lines of business within the Benefits segment are:
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Retirement; |
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Health and Group Benefits; |
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Technology and Administration Solutions; and |
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International Consulting Group. |
Retirement
Our retirement consulting, which comprises a substantial portion of the Benefits segments revenue
and profit, supports organizations worldwide in designing, managing, and administering all types of
retirement plans. We are one of the worlds leading advisors on retirement plans, providing
actuarial and consulting services for large defined benefit and defined contribution plans,
including design, funding and risk management strategies. We also help our clients assess the
effects of changing workforce demographics on their retirement plans, cash flow requirements, and
retiree benefit adequacy and security.
Our professional staff are named actuaries for many of the worlds largest retirement plan
sponsors. Towers Watson provides actuarial services to more of the top 300 pension funds worldwide
than any other consulting firm. In the United States, we provide actuarial services to three of the
four largest corporate-sponsored defined benefit plans (based on total pension plan assets), and in
the United Kingdom, we are advisor to almost half of the 100 largest corporate pension funds.
Additionally, we have market-leading positions in Canada, Germany and the Netherlands. We offer
clients a full range of integrated and innovative retirement consulting services to meet the needs
of all types of employersincluding those that continue to offer defined benefit plans and those
that are reexamining their retirement benefits strategies. For those clients that want to outsource
some or all of their pension plan management, we offer integrated solutions that combine investment
consulting, pension administration, core actuarial services and communication assistance.
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Our retirement consulting services include:
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Retirement strategy and plan design; |
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Actuarial services and related support; |
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Retirement financial management; |
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Settlement solutions; |
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Compliance and governance strategies; |
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Risk management; and |
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Defined contribution solutions. |
Much of our recent consulting with clients relates to managing risk and cost volatility, various
regulatory changes (global accounting reform and United States and European pension funding
legislation), and a broad-based desire on the part of many employers to revisit their retirement
design approach. We use in-depth data and analytics to provide perspective on the overall
environment and to help our clients with their design decisions. We have tracked the retirement
designs of the largest public companies around the world over many years, providing clients with
data to better understand the true magnitude of the movement from defined benefit to defined
contribution designs.
To further enhance our retirement consulting services, we dedicate significant resources to
technology systems and tools to ensure the consistency and efficiency of service delivery in all
our offices worldwide. We also maintain extensive proprietary databases that enable our clients to
track and benchmark benefit plan provisions. Retirement typically lags reduction in discretionary
spending compared to the other segments, mainly due to ongoing regulatory requirements for our
clients. Our retirement consulting relationships are generally longer term in nature and client
retention rates are high. Revenue for the retirement practice is seasonal, with most of the work we
perform falling around calendar year end reporting and compliance requirements, as clients complete
their pension plan valuations; thus, the third quarter of our fiscal year is seasonally strongest.
Major revenue growth drivers in this practice include changes in regulations, economic uncertainty,
increased global demand and increased market share.
Health and Group Benefits
Through our second largest line of business in the Benefits segment, Health and Group Benefits, we
provide plan management consulting across the full spectrum of health and group benefits programs,
including health, dental, disability, life and other coverage. We also advise clients on emerging
issues specific to their interests and needs, including the impact of health care reform
legislation on their plan strategy and related health plan changes, and the implementation and
monitoring of innovative new programs such as wellness or care management. Clients seek our
evidence-based, practical solutions to improve employee health, satisfaction and productivity while
minimizing costs.
Globally, many health care systems are strained by shrinking resources and increasing demand due to
population aging and changes in employees health status. Our health and group benefits consulting
services help clients provide health and welfare benefits to attract and retain qualified employees
and enhance the health and productivity of their workforce.
In the United States, the enactment of health care reform legislation has prompted employers to
reevaluate their health plan strategies in light of expanded coverage requirements and new tax
considerations. Also, given continued above-inflation increases in health care costs, employers are
seeking new and proven solutions for managing plan costs and engaging members. An increasing number
of employers are adopting consumer-oriented health care approaches that encourage employees and
retirees to participate more actively in health care buying decisions. These models put employees
in charge of spending their own health care dollars and provide them with appropriate incentives,
tools and information to make wiser health purchasing decisions.
We believe we have one of the strongest networks in the health and group benefits consulting
business. We manage numerous collective purchasing initiatives (e.g., pharmacy, retiree health)
that enable employers to achieve greater value from third-party service providers than they can
realize on their own. Our approach to health and group benefits consulting emphasizes health and
productivity, pharmacy, provider quality, effective communication, and data and metrics.
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Our global services include:
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Program strategy, design and pricing; |
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Health condition management consulting; |
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Pharmacy benefit management consulting; |
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Workforce well-being evaluation and wellness and health promotion consulting; |
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Performance measurement and monitoring; |
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Development of funding strategies and forecasting, budgeting and reserve
setting; |
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Vendor evaluation, selection and management; and |
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Claims audits and pre- and post-implementation audits. |
Technology and Administration Solutions
Our Technology and Administration Solutions line of business, the third largest within the Benefits
segment, provides benefits outsourcing services to hundreds of clients across multiple industries.
Our world-class solutions are supported by our technology systems, including our BenefitConnect
system in the United States, and our dedicated, regional service centers.
Supporting more than six million plan participants, we provide:
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Pension and retirement plan administration; and |
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Health and welfare administration. |
We have a 30-year track record of success in benefits outsourcing. We provide clients with three
distinct delivery model options to help meet the needs of employers of all types, ranging from a
full outsourcing option to co-sourcing along with our clients internal benefits departments to
providing system support only.
In the United States, we are a top-tier benefits outsourcing provider and a market leader for
co-sourced defined benefit administration for organizations with 10,000 or more employees. For
retirement administration, BenefitConnect includes case management and administration tools to
assist plan sponsors in managing the entire life cycle of pension administration, from new hire to
retirement, and employee self-service tools that enhance employees understanding of their
retirement benefits future value. For health and welfare administration, BenefitConnect is a
customizable, web-based application that combines self-service employee tools with administrative
and call-center components to facilitate the administration and management of health and welfare
benefits.
In the United Kingdom, we are a leader in retirement administration outsourcing and flexible
benefits administration services to the private sector, using highly automated processes and web
technology to enable members to access their records and improve their understanding of their
benefits. Our technology also provides trustees and human resources departments with timely
management information to monitor activity levels and reduce administration costs. In markets
outside the United States with more complex defined contribution arrangements, we have deployed
sophisticated defined contribution technology, processes and controls. Our defined contribution
administration model in Germany and the United Kingdom leverages web technology and provides
clients with back office reconciliation, while offering the clients the option to outsource or
co-source the front-office operations as needed. Participants can access data allowing them to be
self-sufficient in managing their portfolios.
Within the United States, our client retention rates are approximately 94% for the fiscal year
ended June 30, 2010.
International Consulting Group
To help multi-national companies face the challenges of operating in the global marketplace, Towers
Watson provides expertise in dealing with international human capital management and related
benefits and compensation advice for corporate headquarters and their overseas subsidiaries.
Through our global specialists and in cooperation with our local offices worldwide, we help
multi-national companies on a range of issues, including: financial, accounting, cost and
risk-control solutions for employee benefit plans globally, global actuarial services, and
cross-border support for benefit plan consolidation in mergers, acquisitions and divestitures.
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Risk and Financial Services Segment
Within the Risk and Financial Services segment, our second largest at approximately 21% of revenue
during the fiscal year ended June 30, 2010, we have three lines of business:
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Risk Consulting and Software; |
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Investment Consulting and Solutions; and |
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Reinsurance and Insurance Brokerage. |
The segment is united by an approach to client issues that focuses on risk and capital management.
We help companies around the world improve business performance by effectively integrating risk
management with their overall financial management framework. We work with a variety of client
executives: chief financial officers and treasurers, chief risk officers and senior actuaries,
reinsurance buyers, and pension plan sponsors and trustees. Two of our lines of business, Risk
Consulting and Software and Reinsurance and Insurance Brokerage, have a particular focus on the
insurance industry, while Investment focuses primarily on pension plans. However, all three of our
businesses also apply their expertise to serve broader markets.
We believe we can add significant value to our clients by bringing a wider range of Towers Watson
products and services to bear in addressing the issues they face. Our RiskCapital Solutions
reflects this approach, combining risk consulting and software solutions with brokerage to assist
insurance executives in more holistically managing their risk management and reinsurance
brokerage/risk transfer decision-making. Investment often works with colleagues in our Benefits
segment on retirement financial management issues. In the future, we will look for more
opportunities to combine our services to respond in innovative ways to client needs.
We have also developed a range of financial modeling software products. Our products bring together
innovative actuarial thinking with software expertise to provide comprehensive solutions for our
insurance clients to measure value, manage risk and monitor capital adequacy. Our software
solutions support a variety of activities, ranging from asset-liability modeling and product
development to economic capital aggregation and allocation. These are used internally for
consulting projects and licensed to clients around the world.
Risk Consulting and Software
The largest line of business within Risk and Financial Services, Risk Consulting and Software is
primarily focused on the insurance industry. Our associates use deep analytical skills to solve
practical business problems facing the insurance industry by applying the latest techniques and
software solutions to help our clients improve business performance and create competitive
advantage in areas such as financial and regulatory reporting, risk and capital management, mergers
and acquisitions, corporate restructuring, and product and market strategies. We are also a leading
provider of financial modeling software to the insurance industry. We have more actuaries serving the insurance industry
than any other professional services firm.
Through our legacy companies, we pioneered the use of enterprise risk management to help insurance
companies identify and control their key risks, enhance risk-adjusted returns and meet strategic
objectives. We are a major provider of actuarial valuation and due diligence support for insurance
industry mergers, acquisitions and restructurings. We also help our clients value liabilities and
economic value for financial reporting and management purposes and we provide other services such
as product development, predictive modeling, strategies for entry into new markets, claim
consulting and catastrophe modeling. We also help non-insurance entities with risk management
issues such as evaluating and optimizing their insurance programs as part of their overall risk and
capital management processes, and designing and implementing risk mitigation strategies for their
retirement programs to align their risk profile with overall financial objectives.
Investment Consulting and Solutions
Investment Consulting and Solutions is the second largest line of business within the Risk and
Financial Services segment. Our Investment business helps our clients manage investment complexity,
establish their risk tolerance and improve governance.
We have one of the industrys largest investment consulting practices. Our business is focused on
creating value for institutional investors, primarily defined benefit and defined contribution
pension plans, through independent, best-in-class investment advice. We provide coordinated
investment strategy advice based on expertise in risk assessment, asset-liability modeling,
strategic asset allocation policy setting and investment manager selectionto some of the worlds
largest pension funds and institutional investors.
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We have a large investment strategy team with more than 100 investment manager research
professionals covering all asset classes from mainstream equities and fixed income to alternative
investments, including hedge funds and private equity. With deep specialist expertise in asset
management and actuarial science, we provide practical, independent advice tailored to meet the
needs of our clients. While Investment clients primarily include defined benefit and defined contribution pension plans,
we see significant growth potential in other areas, including insurance company asset management,
endowment funds and sovereign wealth funds.
Reinsurance and Insurance Brokerage
Reinsurance and Insurance Brokerage is the third largest line of business in the Risk and Financial
Services segment. Our Brokerage business primarily serves as an intermediary between our clients
and the insurance and reinsurance and capital markets. The substantial majority of our business is
providing global reinsurance intermediary services and consulting expertise. We maintain trading
relationships with more than 200 reinsurers and Lloyds underwriters.
We help our clients with reinsurance strategy and program review, claims management and program
administration, catastrophe exposure management, contract negotiation and placement, and market
security issues. Our integrated approach to risk and capital management helps our clients allocate,
use and protect the capital they need to achieve financial objectives.
While most of our clients are insurance companies, our Brokerage business also places insurance
programs for corporate clients. We have offices in North America and Europe to serve clients in all
the major insurance markets. Our London office places reinsurance for Lloyds Syndicates and
European insurance companies. In addition, it acts as a correspondent broker, placing reinsurance
for North American companies into Lloyds of London. Together with Risk Consulting and Software,
our Brokerage business has an on-the-ground presence in Bermuda to access and serve this important
market.
Talent and Rewards Segment
Our third largest segment, Talent and Rewards, comprises approximately 15% of revenue for the
fiscal year ended June 30, 2010 and is focused on three lines of business:
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Executive Compensation; |
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Rewards, Talent and Communication; and |
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Data, Surveys and Technology. |
Executive Compensation
We advise our clients management and boards of directors on executive pay programs, including base
pay, annual bonus, long-term incentives, perquisites and other benefits. This work includes helping
clients understand market practices relative to levels of compensation as well as the design of
incentive programs. We also provide clients with executive pay related transactional support
associated with various transactions such as mergers, acquisitions, divestitures, executive
transitions and business restructuring. We have a global network of executive pay practitioners
that allows us to provide comprehensive solutions to our clients. We maintain a number of
proprietary databases that provide us with competitive advantage.
Rewards, Talent and Communication
From this line of business, we provide a broad array of capabilities in designing and implementing
human resources programs and processes that touch employees, managers and leaders. Our solutions
cut across the employment lifecycle, from attracting and deploying talent to managing and rewarding
employees performance to developing their skills and providing relevant career paths to help
retain and engage them over time.
Our primary practice areas are:
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Talent Management. We help organizations develop integrated programs and
processes to identify clients leadership and workforce needs, develop leaders and
employees, and provide performance management to align goals and incentives for those
employees and leaders with the critical drivers of business performance. Also within this
practice, our human resources effectiveness services help clients implement the right human
resources structure, service delivery model and staff to meet the needs of both the
organization and employees efficiently and effectively. |
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Rewards. We provide the strategy, design and execution support for compensation
programs to help clients optimize their reward spend and ensure their programs drive the
behaviors and performance required to meet key business goals. Within this practice, we
also have a sales effectiveness and rewards service offering focused on sales force
productivity and incentives. |
9
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Communication and Change Management. We offer deep expertise in change
management, organizational effectiveness and communication to support our consulting
services and help drive employee engagement and align behavior with business results. |
Data, Surveys and Technology
This line of business combines data, analytics and software to enable more effective management of
people and human resources programs. It brings together our capabilities in employee surveys,
global databases, and talent management and rewards technology.
This business includes our global compensation databases, employee survey practice, human capital
metrics and analytics benchmarking offering, and software applications related to talent,
performance and compensation management. These practices generate recurring revenue by leveraging
data, technology and a pool of staff resources that can be flexibly deployed.
We have data and tools that our competitors cannot easily match. Our compensation databases cover
almost 100 countries across six continents to support global clients wherever they do business. Our
employee surveys offer clients access to the worlds largest normative database of employee
attitudes and opinions. Our human capital metrics database provides benchmarks on key workforce and
human resources measures and analyzes how they link to and drive business performance.
Competition
The human capital management consulting industry is highly competitive. We believe there are
significant barriers to entry and we have developed competitive advantages in providing human
resources consulting services. However, we face intense competition from several different sources.
Our principal competitors in the global human resources consulting industry are Mercer HR
Consulting (a Marsh & McLennan company) and Aon Consulting (an Aon company), which recently
announced it will acquire Hewitt Associates, another major competitor. In addition to these firms,
the industry includes other benefits and compensation firms and the human resources consulting
divisions of diversified professional service firms, such as Deloitte, Accenture and
PricewaterhouseCoopers. Beyond these large players, the global human resources consulting industry
is highly fragmented.
Our major competitors in the insurance consulting and solutions industry include Milliman, Oliver
Wyman (a Marsh & McLennan company) and the big four accounting firms. In the reinsurance brokerage
industry, our major competitors are Aon Benfield (an Aon company), Guy Carpenter (a Marsh &
McLennan company) and Willis.
The market for our services is subject to change as a result of economic, regulatory and
legislative changes, technological developments, and increased competition from established and new
competitors. We believe the primary factors in selecting a human resources consulting firm include
reputation, the ability to provide measurable increases to shareholder value and return on
investment, global scale, quality of service and the ability to tailor services to clients unique
needs. We believe we compete favorably with respect to these factors.
Employees
We
employed approximately 12,750 full-time associates as of
June 30, 2010 in the segments listed below; in addition, we have
a number of part-time and contract associates whose numbers will
fluctuate based on short-term demands.
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As of June 30, |
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2010 |
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2009 |
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Benefits |
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6,165 |
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4,255 |
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Risk and Financial Services |
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2,030 |
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985 |
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Talent and Rewards |
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1,990 |
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1,035 |
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Other |
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215 |
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225 |
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Business Services (incl. corporate and field support) |
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2,350 |
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1,200 |
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Total associates |
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12,750 |
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7,700 |
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Our associates are not subject to collective bargaining agreements, except in four countries:
Brazil, Germany, Belgium and the Netherlands. Associates subject to collective bargaining
agreements comprise less than one percent of our workforce and we believe relations between
management and associates are good.
10
Item 1A Risk Factors
In addition to the factors discussed elsewhere in this Annual Report, the following are some of the
important factors that could cause our actual results to differ materially from those projected in
any forward-looking statements. These risk factors should be carefully considered in evaluating our
business. The descriptions below are not the only risks and uncertainties that we face. Additional
risks and uncertainties that are presently unknown to us may also impair our business operations,
financial condition or results. If any of the risks and uncertainties below or other risks were to
occur, our business operations, financial condition or results of operations could be materially
and adversely impacted.
If we are not able to successfully integrate the operations of Towers Perrin and Watson Wyatt, we
may fail to realize the anticipated growth opportunities and other anticipated benefits of the
Merger.
We face significant challenges in integrating Towers Perrins and Watson Wyatts technologies,
organizations, procedures, policies and operations, as well as in addressing differences in the
business cultures of the two companies, and retaining key Towers Perrin and Watson Wyatt personnel.
The integration process is complex and time consuming and requires substantial resources and
effort. These efforts could divert managements focus and resources from other strategic
opportunities and from business operations during the integration process. Difficulties may occur
during the integration process, including:
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Loss of key officers and employees; |
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Loss of key clients; |
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Loss of revenues; and |
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Increases in operating, tax or other costs. |
The success of the Merger will depend in part on our ability to realize the anticipated growth
opportunities and cost savings from integrating the businesses of Towers Perrin and Watson Wyatt,
while minimizing or eliminating any difficulties that may occur. Even if the integration of the
businesses of Towers Perrin and Watson Wyatt is successful, it may not result in the realization of
the full benefits of the growth opportunities that we currently expect or these benefits may not be
achieved within the anticipated time frame. Any failure to timely realize these anticipated
benefits could have a material adverse effect on our revenues, expenses and results of operations.
The effects of the Merger may be dilutive to our earnings per share in the short term, and our
estimates of the operational cost savings we expect to result from the Merger and of the costs we
expect will be required to achieve such savings are inherently uncertain and may not be accurate,
and we may not be able to achieve the operational cost savings in the expected time frame or at
all.
While we expect to realize significant savings during the first two years following completion of
the Merger, it is uncertain if we will achieve these savings, and the effects of the Merger may be
dilutive to our earnings per share in the short term. We anticipate that full realization of pretax
annual operational cost savings will take at least three years to achieve. Our operational cost
savings estimates are based on a number of assumptions, including the assumption that we will be
able to implement cost saving programs such as personnel reductions and consolidation of
operations, technologies, and administrative functions. In addition, our estimated expenses
required to achieve operational cost savings do not include certain other costs we expect to incur,
including those relating to rebranding, lease termination costs and facilities consolidation, among
others. We may not be able to achieve the operational cost savings that we anticipate in the
expected time frame, based on the expected costs or at all. Failure to successfully implement cost
savings programs on a timely basis, or the need to spend more than anticipated to implement such
programs, will result in lower than expected cost savings in connection with the Merger and could
have a material adverse effect on our operating results.
Changes in Towers Watsons compensation structure relative to each of Towers Perrins and Watson
Wyatts current compensation structures could impair Towers Watsons ability to retain certain
current associates of each of Towers Perrin and Watson Wyatt.
In order to meet our operating margin goals and increase our level of retained earnings, we will
change Towers Perrins and Watson Wyatts respective compensation structures. In particular, Towers
Perrin, as a private company, had not retained a significant amount of annual earnings, resulting
in significant flexibility to vary its levels of cash compensation. Our compensation practices will
be different from Towers Perrins pre-merger practices, because a larger proportion of earnings
will be retained compared to Towers Perrins historical practice, which may affect, in particular,
Towers Watsons ability to retain current associates formerly of Towers Perrin accustomed to the
historical compensation structure of Towers Perrin as a private company. The changes in
compensation structure could materially adversely affect Towers Watsons ability to retain current
former Towers Perrin and Watson Wyatt associates if they do not perceive Towers Watsons total
compensation program to be competitive with that of other firms.
11
The loss of key associates could damage or result in the loss of client relationships and could
result in such associates competing against Towers Watson.
Our success depends on our ability to attract, retain and motivate qualified personnel, including
key managers and associates. In addition, our success largely depends upon our associates
abilities to generate business and provide quality services. In particular, our associates
business relationships with our clients are a critical element of obtaining and maintaining client
engagements. If we lose associates who manage substantial client relationships or possess
substantial experience or expertise or if we are unable to successfully attract new talent, it
could materially adversely affect our ability to secure and complete engagements, which would
materially adversely affect our results of operations and prospects. In addition, if any of our key
associates were to join a competitor or form a competing company, existing and potential clients
could choose to use the services of that competitor instead of Towers Watsons services.
There can be no assurance that confidentiality and non-solicitation/non-competition agreements
signed by senior associates who were former Towers Perrin or Watson Wyatt associates before the
merger of equals between the two entities, or agreements signed by Towers Watson associates in
the future, will be effective in preventing a loss of business.
Our clients could terminate or reduce our services at any time, which could decrease associate
utilization, adversely impacting our profitability and results of operations.
Our clients generally are able to terminate or reduce our engagements at any time. If a client
reduces the scope of, or terminates the use of, our services with little or no notice, our
associate utilization will decline. In such cases, we will need to rapidly re-deploy our associates
to other engagements (if possible) in order to minimize the potential negative impact on our
financial performance. In addition, because a sizeable portion of our work is project-based rather
than recurring in nature, our associate utilization will depend on our ability to continually
secure additional engagements.
Our quarterly revenues could fluctuate while our expenses are relatively fixed.
Quarterly variations in our revenues and results of operations have occurred in the past and could
occur as a result of a number of factors, such as:
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The significance of client engagements commenced and completed during a
quarter; |
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The seasonality of certain types of services. For example, our retirement
revenues typically are more heavily weighted toward the first and fourth quarters of the
calendar year, when annual actuarial valuations are required to be completed for calendar
year-end companies and the related services are performed; |
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The number of business days in a quarter; |
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Associate hiring and utilization rates; |
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Clients ability to terminate engagements without penalty; |
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The size and scope of assignments; and |
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General economic conditions. |
A sizeable portion of our total operating expenses is relatively fixed, encompassing the majority
of administrative, occupancy, communications and other expenses, depreciation and amortization, and
salaries and employee benefits excluding fiscal year-end incentive bonuses. Therefore, a variation
in the number of client assignments or in the timing of the initiation or the completion of client
assignments or our inability to forecast demand can cause significant variations in quarterly
operating results and could result in losses and volatility in our stock price.
Improper management of our engagements could hurt our financial results.
Most of our contracts are structured on a fixed-fee basis or a time-and-expense basis. The
profitability of our fixed-fee engagements depends on our ability to correctly estimate the costs
and timing required for completion of the engagements and our ability to control our costs and
improve our efficiency. The profitability of the engagements that are priced on a time-and-expense
basis depends on our ability to maintain competitive billing rates, as well as our ability to
control our costs. If we do not correctly estimate the costs and manage the performance of our
engagements, we may incur losses on individual engagements and experience lower profit margins and,
as a result, our overall financial results could be materially adversely affected.
12
The trend of employers shifting from defined benefit plans to defined contribution plans could
materially adversely affect our business and results of operations.
Our retirement consulting and actuarial business comprises a substantial portion of our revenue and
profit. We provide clients with actuarial and consulting services relating to both defined benefit
and defined contribution pension plans. Defined benefit pension plans generally require more
actuarial services than defined contribution plans because defined benefit plans typically involve
large asset pools, complex calculations to determine employer costs, funding requirements and
sophisticated analysis to match liabilities and assets over long periods of time. If organizations
shift to defined contribution plans more rapidly than we anticipate, or if we are unable to
otherwise compensate for the decline in our business that results from employers moving away from
defined benefit plans, our business operations and related results of operations will be materially
adversely affected.
Our business will be negatively affected if we are not able to anticipate and keep pace with rapid
changes in government regulations or if government regulations decrease the need for our services
or increase our costs.
A material portion of our revenue is affected by statutory changes. Many areas in which we provide
services are the subject of government regulation, which is constantly evolving. Changes in
government and accounting regulations in the United States and the United Kingdom, two of our
principal geographic markets, affecting the value, use or delivery of benefits and human capital
programs, including recent changes in regulations relating to health care (such as medical plans),
defined contribution plans (such as 401(k) plans), defined benefit plans (such as pension plans) or
executive compensation, may materially adversely affect the demand for, or the profitability of,
our services. Changes to insurance regulatory schemes, or our failure to keep pace with such
changes, could negatively affect demand for services in our Risk and Financial Services business
segment. For example, our continuing ability to provide investment advisory services or reinsurance
brokerage services depends on compliance with the rules and regulations in each of these
jurisdictions. Any failure to comply with these regulations could lead to disciplinary action,
including compensating clients for loss, the imposition of fines or the revocation of the
authorization to operate as well as damage to our reputation.
In addition, we have significant operations throughout the world, which further subject us to
applicable laws and regulations of countries outside the United States and the United Kingdom.
Changes in legislation or regulations and actions by regulators in particular countries, including
changes in administration and enforcement policies, could require operational improvements or
modifications, which may result in higher costs or hinder our ability to operate our business in
those countries.
If we are unable to adapt our services to applicable laws and regulations, our ability to provide
effective services in these areas will be substantially diminished.
Our business could be negatively affected by currently proposed or future legislative or regulatory
activity concerning compensation consultants.
Recent legislative and regulatory activity in the United States has focused on the independence of
compensation consultants retained to provide advice to compensation committees of publicly traded
companies. For example, on July 21, 2010, the U.S. President signed into law the Dodd-Frank Wall
Street Reform and Consumer Protection Act, which requires any compensation consultant or other
similar advisor to the compensation committee of a listed company to meet standards for
independence to be established by SEC regulation. Companies that violate this requirement will be
prohibited from listing any class of equity security with the national securities exchanges and
associations.
On December 16, 2009, the SEC published final rules, which became effective in February 2010, 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 and continued legislative
activity, prior to the Merger, some clients of Towers Perrin and Watson Wyatt 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, our business, financial condition and results of operations could
be materially adversely impacted.
In addition, due in part to such regulation and continued legislative activity, some former Towers
Perrin and Watson Wyatt consultants terminated their relationships with us, and some have indicated
that they intend to compete with us. Such talent migration, and any future such talent migration,
could have a material adverse effect on our business, financial condition and results of
operations.
13
Competition could result in loss of our market share and reduced profitability.
The markets for our principal services are highly competitive. Our competitors include other human
capital and risk management consulting and actuarial firms, as well as the human capital and risk
management divisions of diversified professional services, insurance, brokerage and accounting
firms. Some of our competitors have greater financial, technical and marketing resources than us,
which could enhance their ability to finance acquisitions, fund internal growth and respond more
quickly to professional and technological changes. Some competitors have or may develop a lower
cost structure. New competitors or alliances among competitors could emerge, creating additional
competition and gaining significant market share, resulting in a loss of business for us and a
corresponding decline in revenues and profit margin. In order to respond to increased competition
and pricing pressure, we may have to lower our prices, which would also have an adverse effect on
our revenues and profit margin.
Consolidation in the industries that we serve could materially adversely affect our business.
Companies in the industries that we serve may seek to achieve economies of scale and other
synergies by combining with or acquiring other companies. If two or more of our clients merge or
consolidate and combine their operations, we may experience a decrease in the amount of services we
perform for these clients. If one of our clients merges or consolidates with a company that relies
on another provider for its services, we may lose work from that client or lose the opportunity to
gain additional work. The increased market power of larger companies could also increase pricing
and competitive pressures on us. Any of these possible results of industry consolidation could
materially adversely affect our revenues and profits. Our reinsurance brokerage business is
especially susceptible to this risk given the limited number of insurance companies seeking
reinsurance and reinsurance providers in the marketplace.
We are subject to risks of doing business internationally.
For the six months ended June 30, 2010, 48% of our revenue relates to business located outside the
United States. As a result, a significant portion of our business operations is subject to foreign
financial, tax and business risks, which could arise in the event of:
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Currency exchange rate fluctuations; |
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Unexpected increases in taxes or changes in U.S. or foreign tax laws; |
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Compliance with a variety of international laws and regulations, such as data
privacy, employment regulations, trade barriers and restrictions on the import and export
of technologies, as well as U.S. laws affecting the activities of U.S. companies abroad,
including the Foreign Corrupt Practices Act of 1977 and sanctions programs administered by
the U.S. Department of the Treasury Office of Foreign Assets Control; |
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Absence in some jurisdictions of effective laws to protect our intellectual
property rights; |
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New regulatory requirements or changes in policies and local laws that
materially affect the demand for our services or directly affect our foreign operations; |
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Local economic and political conditions, including unusual, severe, or
protracted recessions in foreign economies and inflation risk; |
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The length of payment cycles and potential difficulties in collecting accounts
receivable, particularly in light of the number of insolvencies in the current economic
environment and the numerous bankruptcy laws to which they are subject; |
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Unusual and unexpected monetary exchange controls, price controls or
restrictions on transfers of cash; or |
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Civil disturbance, terrorism or other catastrophic events that reduce business
activity in other parts of the world. |
These factors may lead to decreased revenues or profits and therefore may have a material adverse
effect on our business, financial condition and results of operations.
Our inability to successfully recover should we experience a disaster or other business continuity
problem could cause material financial loss, loss of human capital, regulatory actions,
reputational harm or legal liability.
Should we experience a disaster or other business continuity problem, such as an earthquake,
hurricane, terrorist attack, pandemic, security breach, power loss, telecommunications failure or
other natural or man-made disaster, our continued success will depend, in part, on the availability
of our personnel, our office facilities, and the proper functioning of our computer,
telecommunication and other related systems and operations. In such an event, we could experience
near-term operational challenges with regard to particular areas of our operations.
14
In particular, our ability to recover from any disaster or other business continuity problem will
depend on our ability to protect our technology infrastructure against damage from business
continuity events that could have a significant disruptive effect on our operations. We could
potentially lose client data or experience material adverse interruptions to our operations or
delivery of services to our clients in a disaster.
We will continue to regularly assess and take steps to improve upon our business continuity plans.
However, a disaster on a significant scale or affecting certain of our key operating areas within
or across regions, or our inability to successfully recover should we experience a disaster or
other business continuity problem, could materially interrupt our business operations and cause
material financial loss, loss of human capital, regulatory actions, reputational harm, damaged
client relationships or legal liability.
Demand for our services could decrease for various reasons, including a continued general economic
downturn, a decline in a clients or an industrys financial condition or prospects, or a decline
in defined benefit pension plans that could materially adversely affect our results of operations.
We can give no assurance that the demand for our services will grow or that we will compete
successfully with our existing competitors, new competitors or our clients internal capabilities.
Client demand for our services may change based on the clients needs and financial conditions.
Our results of operations are affected directly by the level of business activity of our clients,
which in turn are affected by the level of economic activity in the industries and markets that
they serve. Economic slowdowns in some markets, particularly in the United States, have caused and
may continue to cause reduction in discretionary spending by our clients, result in longer client
payment terms, an increase in late payments by clients and an increase in uncollectible accounts
receivable, each of which may reduce the demand for our services, increase price competition and
adversely impact our growth, profit margins and liquidity. If our clients enter bankruptcy or
liquidate their operations (which has already occurred with respect to some of our current
clients), our revenues could be materially adversely affected.
In addition, the demand for many of our core benefit services, including compliance-related
services, is affected by government regulation and taxation of employee benefit plans. Significant
changes in tax or social welfare policy or other regulations could lead some employers to
discontinue their employee benefit plans, including defined benefit pension plans, thereby reducing
the demand for our services. A simplification of regulations or tax policy also could reduce the
need for our services.
The unaudited pro forma financial data included in this Annual Report are illustrative and the
actual financial condition and results of operations of Towers Watson may differ materially from
the historical financial statements of Watson Wyatt and the unaudited pro forma financial data
included in this Annual Report.
The unaudited pro forma financial data included in this Annual Report are presented solely for
illustrative purposes and are not necessarily indicative of what our results of operations would
have been had the Merger been completed on the date indicated. The pro forma financial data reflect
adjustments that were developed using preliminary estimates based on currently available
information and certain assumptions, and may be revised as additional information becomes
available. Accordingly, the unaudited pro forma financial data included in this Annual Report are
illustrative only. The results of operations of Towers Watson will differ materially from the
historical financial statements of Watson Wyatt and may also differ materially from the unaudited
pro forma financial data included in this Annual Report.
Our growth strategy depends, in part, on our ability to make acquisitions, and if we have
difficulty in acquiring, overpay for, or are unable to acquire other businesses, our business may
be materially adversely affected.
Our growth depends in part on our ability to make acquisitions. We may not be successful in
identifying appropriate acquisition candidates or consummating acquisitions on terms acceptable or
favorable to us, on the proposed timetables, or at all. We also face additional risks related to
acquisitions, including that we could overpay for acquired businesses and that any acquired
business could significantly underperform relative to our expectations. If we are unable to
identify and successfully make acquisitions, our business could be materially adversely affected.
We face risks when we acquire businesses, and may have difficulty integrating or managing acquired
businesses, which may harm our business, financial condition, results of operations or reputation.
We may acquire other companies in the future. We cannot be certain that our acquisitions will be
accretive to earnings or otherwise meet our operational or strategic expectations. Acquisitions
involve special risks, including the potential assumption of unanticipated liabilities and
contingencies and difficulties in integrating acquired businesses, and acquired businesses may not
achieve the levels of revenue, profit or productivity we anticipate or otherwise perform as we
expect. In addition, if the operating performance of an acquired business deteriorates
significantly, we may need to write down the value of the goodwill and other acquisition-related
intangible assets recorded on our balance sheet.
15
We may be unable to effectively integrate an acquired business into our organization, and may not
succeed in managing such acquired businesses or the larger company that results from such
acquisitions. The process of integration of an acquired business may subject us to a number of
risks, including:
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Diversion of management attention; |
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Amortization of intangible assets, adversely affecting our reported results of
operations; |
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Inability to retain the management, key personnel and other employees of the
acquired business; |
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Inability to establish uniform standards, controls, systems, procedures and
policies; |
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Inability to retain the acquired companys clients; |
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Exposure to legal claims for activities of the acquired business prior to
acquisition; and |
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Incurrence of additional expenses in connection with the integration process. |
If acquisitions are not successfully integrated, our business, financial condition and results of
operations could be materially adversely affected, as well as our professional reputation.
Damage to our reputation could damage our businesses.
Maintaining a positive reputation is critical to our ability to attract and maintain relationships
with clients and associates. Damage to our reputation could therefore cause significant harm to our
business and prospects. Harm to our reputation can arise from numerous sources, including, among
others, employee misconduct, litigation or regulatory action, failure to deliver minimum standards
of service and quality, compliance failures and unethical behavior. Negative publicity regarding
us, whether or not true, may also result in harm to our prospects.
We could also suffer significant reputational harm if we fail to properly identify and manage
potential conflicts of interest. The failure or perceived failure to adequately address conflicts
of interest could affect the willingness of clients to deal with us, or give rise to litigation or
enforcement actions. There can be no assurance that conflicts of interest will not arise in the
future that could cause material harm to us.
We could be subject to claims arising from our work, as well as government inquiries and
investigations, which could materially adversely affect our reputation, business and financial
condition.
Professional services providers, including those in the human capital and risk management sectors
such as Towers Watson, depend in large part on their relationships with clients and their
reputation for high-quality services. Clients that may become dissatisfied with our services may
terminate their business relationships with us and clients and third parties that claim they
suffered damages caused by our services may bring lawsuits against us. The nature of our work,
particularly our actuarial services, necessarily involves the use of assumptions and the
preparation of estimates relating to future and contingent events, the actual outcome of which we
cannot know in advance. Our actuarial services also rely on substantial amounts of data provided by
clients, the accuracy and quality of which we cannot ensure. In addition, we could make
computational, software programming or data management errors in connection with the services we
provide to clients.
Clients may seek to hold us responsible for the financial consequences of variances between
assumptions and estimates and actual outcomes or for errors. For example, clients may make:
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Claims that actuarial assumptions were unreasonable or that there were
computational errors leading to pension plan underfunding or under-reserving for insurance
claim liabilities; |
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Claims of failure to review adequately or detect deficiencies in data, which
could lead to an underestimation of pension plan or insurance claim liabilities; and |
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Claims that employee benefit plan documents were misinterpreted or plan
amendments were faulty, leading to unintended plan benefits or overpayments to
beneficiaries. |
16
Given that we frequently work with large pension funds and insurance companies, relatively small
percentage errors or variances can create significant financial variances and result in significant
claims for unintended or unfunded liabilities. The risks from such variances or errors could be
aggravated in an environment of declining pension fund asset values and insurance company capital
levels. In almost all cases, our exposure to liability with respect to a particular engagement is
substantially greater than the revenue opportunity that the engagement generates for us.
In the case of liability for pension plan actuarial errors, a clients claims might focus on the
clients alleged reliance that actuarial assumptions were reasonable and, based on such reliance,
the client made benefit commitments the client may later claim are not affordable or funding
decisions that result in plan underfunding if and when actual outcomes vary from actuarial
assumptions.
Claims may also arise as a result of an alleged misinterpretation or misunderstanding of the
benefits conferred under defined benefit plan documentation by us or our failure to detect
inconsistencies between plan documentation and the administration of plan benefits and valuation of
plan liabilities leading to the accrual by plan participants of unintended benefits and
undervaluation of plan liabilities. The current ExxonMobil superannuation plan litigation pending
in Australia, described in Note 11, Commitments and Contingent Liabilities, of the notes to our
consolidated financial statements contained herein, is an example of a claim arising from an
inconsistency between the benefits the plan sponsor intended to confer and the actual language in
the plan documents.
Lawsuits arising out of any of our services could adversely affect our financial performance and
financial condition and could result in increased insurance costs or a reduction in the amount of
available insurance coverage. In addition to defense costs and liability exposure, which may be
significant, claims may produce negative publicity that could hurt our reputation and business and
could require substantial amounts of management attention, which could affect managements focus on
operations.
Finally, we may be subject to inquiries and investigations by federal, state or other governmental
agencies regarding aspects of our clients businesses or our own businesses, especially regulated
businesses such as our broker-dealer and investment advisory services. Such inquiries or
investigations may consume significant management time and result in regulatory sanctions, fines or
other actions as well as significant legal fees, which could have a material adverse impact on our
business, results of operations and liquidity.
We advise or act on behalf of clients regarding investments whose results are not guaranteed, and
clients that experience investment return shortfalls may assert claims against us.
We provide advice on both asset allocation and selection of investment managers. For some clients,
we are responsible for making decisions on both these matters, or we may serve in a fiduciary
capacity. Asset classes may experience poor absolute performance, and investment managers may
underperform their benchmarks; in both cases the investment return shortfall can be significant.
Clients experiencing this underperformance may assert claims against us, and such claims may be for
significant amounts. Defending against these claims can involve potentially significant costs,
including legal defense costs. Our ability to limit our potential liability may be limited in
certain jurisdictions or in connection with claims involving breaches of fiduciary duties or other
alleged errors or omissions.
Our investment activities may require specialized operational competencies, and if we fail to
properly execute our role in cash and investment management, our clients or third parties may
assert claims against us.
For certain clients, we are responsible for some portions of cash and investment management,
including rebalancing of investment portfolios and guidance to third parties on structure of
derivatives and securities transactions. Our failure to properly execute our role can cause
monetary damage to our clients or such third parties for which we might be found liable, and such
claims may be for significant amounts. Defending against these claims can involve potentially
significant costs, including legal defense costs. Our ability to limit our potential liability may
be constrained in certain jurisdictions.
Towers Watson may be engaged in providing services outside the core human capital and risk
management business currently conducted by Towers Perrin and Watson Wyatt, which may carry greater
risk of liability.
We continue to grow the business of providing professional services to institutional investors and
financial services companies. The risk of claims from these lines of business may be greater than
from our core human capital and risk management business, and such claims may be for significant
amounts. For example, we may assist a pension plan to hedge its exposure to changes in interest
rates. If the hedge does not perform as expected, we could be exposed to claims. Contractual
provisions intended to mitigate risk may not be enforceable.
Our business faces rapid technological change, and our failure to respond to this change quickly
could materially adversely affect our business.
To remain competitive in the business lines in which we engage, we have to identify and offer the
most current technologies and methodologies. In some cases, significant technology choices and
investments are required. If we do not respond correctly, quickly or in a cost-effective manner,
our business and results of operations might be harmed.
17
The effort to gain technological expertise and develop new technologies in our business may require
us to incur significant expenses and, in some cases, to implement these new technologies globally.
If we cannot offer new technologies as quickly or effectively as our competitors, we could lose
market share. We also could lose market share if our competitors develop more cost-effective
technologies than we will offer or develop.
Limited protection of our intellectual property could harm our business, and we face the risk that
our services or products may infringe upon the intellectual property rights of others.
We cannot guarantee that trade secret, trademark and copyright law protections are adequate to
deter misappropriation of our intellectual property (including our software, which may become an
increasingly important part of our business). Existing laws of some countries in which we provide
services or products may offer only limited protection of our intellectual property rights.
Redressing infringements may consume significant management time and financial resources. Also, we
may be unable to detect the unauthorized use of our intellectual property and take the necessary
steps to enforce our rights, which may have a material adverse impact on our business, financial
condition or results of operations. We cannot be sure that our services and products, or the
products of others that we offer to our clients, do not infringe on the intellectual property
rights of third parties, and we may have infringement claims asserted against us or our clients.
These claims may harm our reputation, result in financial liability and prevent us from offering
some services or products.
We could have liability or our reputation could be damaged if we do not protect client data or
information systems or if our information systems are breached.
We depend on information technology networks and systems to process, transmit and store electronic
information and to communicate among our locations around the world and with our alliance partners
and clients. Security breaches could lead to shutdowns or disruptions of our systems and potential
unauthorized disclosure of confidential information. We also are required at times to manage,
utilize and store sensitive or confidential client or employee data. As a result, we are subject to
numerous U.S. and foreign jurisdiction laws and regulations designed to protect this information,
such as the European Union Directive on Data Protection and various U.S. federal and state laws
governing the protection of health or other individually identifiable information. If any person,
including any of our associates, fails to comply with, disregards or intentionally breaches our
established controls with respect to such data or otherwise mismanages or misappropriates that
data, we could be subject to monetary damages, fines or criminal prosecution. Unauthorized
disclosure of sensitive or confidential client or employee data, whether through systems failure,
accident, employee negligence, fraud or misappropriation, could damage our reputation and cause us
to lose clients. Similarly, unauthorized access to or through our information systems or those we
develop for our clients, whether by our associates or third parties, could result in significant
additional expenses (including expenses relating to notification of data security breaches and
costs of credit monitoring services), negative publicity, legal liability and damage to our
reputation, as well as require substantial resources and effort of management, thereby diverting
managements focus and resources from business operations.
Insurance may become more difficult or expensive to obtain.
The availability, terms and price of insurance are subject to many variables, including general
insurance market conditions, loss experience in related industries and in the actuarial and
benefits consulting industry, and the specific claims experience of an individual firm. We are
subject to various regulatory requirements relating to insurance as well as client requirements.
There can be no assurance that we will be able to obtain insurance at cost-effective rates or with
reasonable retentions. Increases in the cost of insurance could affect our profitability and the
unavailability of insurance to cover certain risks could have a material adverse effect on our
financial condition or our ability to transact business in certain geographic areas, particularly
in any specific period.
Towers Watson and its subsidiaries could encounter significant obstacles in securing adequate
insurance coverage for errors and omissions liability risks on favorable or acceptable terms.
Towers Perrin and Watson Wyatt each obtained primary insurance for errors and omissions liability
risks from a Vermont-regulated group captive insurance company known as Professional Consultants
Insurance Company, Inc. (which we refer to as PCIC). The stockholders and insureds of PCIC were
legacy Towers Perrin, legacy Watson Wyatt and Milliman, Inc. (Milliman). On January 1, 2010, the
effective date of the Merger of Towers Perrin and Watson Wyatt, Towers Watson became the owner of
72.8% of the stock of PCIC.
Towers Perrin and Watson Wyatt provided PCIC with notice of non-renewal of the respective PCIC
policies of insurance that expired at 12:01 a.m. on July 1, 2010. PCIC provided a notice of
non-renewal to Milliman and will not issue a policy of insurance to Milliman for the policy period
starting July 1, 2010 or thereafter. PCIC will continue to operate in order to pay losses arising
from claims reported by its insureds during the periods covered by previously issued policies of
insurance.
18
Since July 1, 2010, we have obtained our primary insurance for errors and omissions liability risks
from a Vermont-regulated wholly owned captive insurance company known as Stone Mountain Insurance
Company (Stone Mountain). Stone Mountain has secured reinsurance for a portion of the Towers
Watson risks it underwrites. Towers Watson has secured excess errors and omissions liability
coverage above the coverage provided by Stone Mountain in amounts we consider to be prudent. Stone
Mountain has issued a policy of insurance to us that is substantially similar in form to the policy
of insurance issued by PCIC.
The combination of the formation of Stone Mountain, which essentially results in self-insurance by
us of our primary errors and omissions risk, and our controlling ownership interest in PCIC and the
accompanying requirement that we consolidate PCICs financial results into our financial results is
likely to result in increased earnings volatility for us. In addition, the inability of Stone
Mountain to secure reinsurance or our inability to secure excess errors and omissions professional
liability coverage in the future could have a material adverse impact on our financial condition or
our ability to transact business in certain geographic areas, particularly in any specific period.
We have material pension liabilities that can fluctuate significantly.
Towers Perrin and Watson Wyatt have material pension liabilities, which were assumed by us on
January 1, 2010. The combined projected benefit obligation for legacy Towers Perrin and legacy
Watson Wyatt pension and other postretirement benefit plans at June 30, 2010 was $3.5 billion, of
which $746.7 million represented unfunded pension and postretirement liabilities. Movements in the
interest rate environment, inflation or changes in other assumptions that are used for the
estimates of our benefit obligations and other factors could have a material effect on the level of
liabilities in these plans at any given time. These pension plans have minimum funding requirements
that may require material amounts of periodic additional funding. Cash required to fund pension
plans may have to be diverted from other corporate initiatives.
Towers Perrin and Towers Watson are defendants in several lawsuits commenced by former Towers
Perrin shareholders.
On November 5, 2009, certain former Towers Perrin shareholders commenced a legal proceeding in the
United States District Court for the Eastern District of Pennsylvania (the Dugan Action) against
Towers Perrin, members of its board of directors, and certain members of senior management.
Plaintiffs are former members of Towers Perrins senior management who left Towers Perrin at
various times between 1995 and 2000. They seek to represent a class of former Towers Perrin
shareholders who separated from service on or after January 1, 1971, and who meet certain other
specified criteria. Although the complaint in the Dugan Action does not contain a quantification of
the damages sought, on December 9, 2009, plaintiffs made a settlement demand on Towers Perrin of
$800 million to settle the action on behalf of the proposed class.
On December 17, 2009, four other former Towers Perrin shareholders, all 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 (the Allen
Action) in the United States District
Court for the Eastern District of Pennsylvania alleging the same claims in a form similar to 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, another former Towers Perrin shareholder who separated from service in March
2005 when Towers Perrin and Electronic Data Systems, Inc. launched a joint venture that led to the
creation of a corporate entity known as ExcellerateHRO (eHRO), commenced a separate legal
proceeding (the Pao Action) in the United States District Court for the Eastern District of
Pennsylvania, also alleging the same claims in a form similar to those alleged in the Dugan Action.
The plaintiff in this action, in which Towers Watson also is named as a defendant, seeks to
represent a class of former Towers Perrin shareholders who separated from service in connection
with the formation of eHRO and who are excluded from the proposed class in the Dugan Action.
The complaints assert claims for breach of contract, breach of express trust, breach of fiduciary
duty, promissory estoppel, quasi-contract/unjust enrichment, and constructive trust, and seek
equitable relief including an accounting, disgorgement, rescission and/or restitution, and the
imposition of a constructive trust. On January 20, 2010, the United States District Court for the
Eastern District of Pennsylvania consolidated the three actions for all purposes. We believe the
claims are without merit, have filed a motion to dismiss the complaints in their entireties, and
intend to continue to vigorously defend against the actions. We could incur significant costs
defending against these claims. The outcome of this legal proceeding is inherently uncertain and
could be unfavorable to us.
Our reinsurance brokerage business could be subject to claims arising from its work, which could
materially adversely affect our reputation and business.
Our reinsurance brokerage business may be subject to claims brought against it by clients or third
parties. Clients are likely to assert claims if they fail to make full recoveries in respect of
their own claims. If reinsurers with whom we place business for our clients become insolvent or
otherwise fail to make claims payments, this may also result in claims against us.
19
Our reinsurance business assists its clients in placing reinsurance and handling related claims,
which could involve substantial amounts of money. If our work results in claims, claimants may seek
large damage awards and defending these claims can involve potentially significant costs and may
not be successful. Claims could, by way of example, arise as a result of our reinsurance brokers
failing to:
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Place the reinsurance coverage requested by the client; |
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Report claims on a timely basis or as required by the reinsurance contract or
program; |
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Communicate complete and accurate information to reinsurers relating to the
risks being reinsured; or |
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Appropriately model or advise our clients in relation to the extent and scope
of reinsurance coverage that is advisable for a clients needs. |
Moreover, Towers Perrins reinsurance brokerage contracts generally do not limit the maximum
liability to which Towers Perrin, as a subsidiary of Towers Watson, may be exposed for claims
involving alleged errors or omissions.
Reinsurance brokerage revenue is influenced by factors that are beyond our control, and volatility
or declines in premiums or other trends in the insurance and reinsurance markets could
significantly undermine the profitability of our reinsurance brokerage business.
For the six months ended June 30, 2010, we derived approximately five percent of our consolidated
revenue from our reinsurance brokerage business, which in turn derives a majority of its revenue
from commissions. Revenue earned in our capacity as a reinsurance broker is based in large part on
the rates that the global reinsurance marketplace prices for risks. For example, we do not
determine reinsurance premiums on which commissions are generally based.
Premiums are cyclical in nature and may vary widely based on market conditions. When premium rates
decline, the commissions and fees earned for placing certain reinsurance contracts and programs
also tend to decrease. When premium rates rise, we may not be able to earn increased revenue from
providing brokerage services because clients may purchase less reinsurance, there may be less
reinsurance capacity available, or clients may negotiate a reduction to the compensation rate or a
reduced fee for our services.
To the extent our clients are or become materially adversely affected by declining business
conditions in the current economic environment, they may choose to limit their purchases of
insurance and reinsurance coverage, as applicable, which would limit our ability to generate
commission revenue. Clients also may decide not to utilize our risk management services, which
would limit our ability to generate fee revenue.
We may not be able to obtain financing on favorable terms or at all.
The maintenance and growth of our business depends on our access to capital, which will depend in
large part on cash flow generated by our business and the availability of equity and debt
financing. There can be no assurance that our operations will generate sufficient positive cash
flow to finance all of our capital needs or that we will be able to obtain equity or debt financing
on favorable terms or at all.
Our revolving credit facility contains a number of restrictive covenants that restrict our
operations.
The Towers Watson $500 million revolving credit facility contains a number of customary restrictive
covenants imposing operating and financial restrictions on Towers Watson, including restrictions
that limit our ability to engage in acts that may be in our long-term best interests. These
covenants include, among others, limitations (and in some cases, prohibitions) that, directly or
indirectly, restrict our ability to:
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Incur liens or additional indebtedness (including guarantees or contingent
obligations); |
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Engage in mergers and other fundamental changes; |
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Sell or otherwise dispose of property or assets; |
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Pay dividends and other distributions; and |
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Change the nature of our business. |
The credit agreement also contains financial covenants that limit our interest expense and total
debt relative to EBITDA.
20
The operating restrictions and financial covenants in our credit agreement do, and any future
financing agreements may, limit our ability to finance future operations or capital needs or to
engage in other business activities. Our ability to comply with any financial covenants could be
materially affected by events beyond our control, and there can be no assurance that we will
satisfy any such requirements. If we fail to comply with these covenants, we may need to seek
waivers or amendments of such covenants, seek alternative or additional sources of financing or
reduce our expenditures. We may be unable to obtain such waivers, amendments or alternative or
additional financing at all, or on terms favorable to us.
The credit agreement specifies several events of default, including non-payment, certain
cross-defaults, certain bankruptcy events, covenant or representation breaches and certain changes
in control. If an event of default occurs, the lenders under the credit agreement are expected to
be able to elect to declare all outstanding borrowings, together with accrued interest and other
fees, to be immediately due and payable. We may not be able to repay all amounts due under the
credit agreement in the event these amounts are declared due upon an event of default.
We rely on third parties to provide services and their failure to perform the services could harm
our business.
As part of providing services to clients and managing our business, we rely on a number of
third-party service providers. Our ability to perform effectively depends in part on the ability of
these service providers to meet their obligations, as well as on our effective oversight of their
performance. The quality of our services could suffer or we could be required to incur
unanticipated costs if our third-party service providers do not perform as expected or their
services are disrupted. This could have a material adverse effect on our business and results of
operations.
If we are not able to implement any recommended improvements in our internal control over financial
reporting or favorably assess the effectiveness of our internal control over financial reporting,
or if our independent registered public accounting firm is not able to provide an unqualified
attestation report on the effectiveness of our internal control over financial reporting, our
business, financial condition or results of operations could be materially adversely affected.
If our internal control over financial reporting is not effective, the reliability of our financial
statements could be impaired. Since January 1, 2010, the effective time of the Merger, we have
devoted and continue to devote resources, including managements time and other internal and
external resources, to a continuing effort to comply with regulatory requirements relating to
internal control and the preparation of financial statements, including implementing any changes
recommended by our independent registered public accounting firm. In particular, these efforts have
and will continue to focus on Towers Perrin and its subsidiaries, which prior to January 1, 2010
had not been subject to the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as
amended, and the rules promulgated thereunder by the SEC. We are required to certify to and report
on, and our independent registered public accounting firm will be required to attest to, the
effectiveness of our internal control over financial reporting of Towers Watson including material
processes associated with Towers Perrin and its subsidiaries on an annual basis. If we cannot
favorably assess the effectiveness of our internal control over financial reporting, or if our
independent registered public accounting firm is unable to provide an unqualified attestation
report on the effectiveness of our internal control over financial reporting, investor confidence
and, in turn, the market price of our common stock could be materially adversely affected.
There can be no assurance that we will be able to implement and maintain any recommended
improvements in our internal control over financial reporting. Any failure to do so could cause the
reliability of our financial statements to be impaired and could also cause us to fail to meet our
reporting obligations under applicable law, either of which could cause our business, financial
condition or results of operations to be materially adversely affected.
The stock price of Class A common stock may be volatile.
The stock price of the Class A common stock may in the future be volatile and subject to wide
fluctuations. In addition, the trading volume of the Class A common stock may in the future
fluctuate and cause significant price variations to occur. Some of the factors that could cause
fluctuations in the stock price or trading volume of the Class A common stock include:
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General market and economic conditions, including market conditions in the human capital
and risk and financial management consulting industries and regulatory developments in the
United States, foreign countries or both; |
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Actual or expected variations in our quarterly results of operations and in the
quarterly results of operations of companies perceived to be similar to us; |
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Differences between actual results of operations and those expected by investors and
analysts; |
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Changes in recommendations by securities analysts; |
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Operations and stock performance of competitors; |
21
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Accounting charges, including charges relating to the impairment of goodwill or other
intangible assets; |
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Significant acquisitions, dispositions or strategic alliances by us or by competitors; |
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Sales of the Class A common stock, including sales by our directors and officers or
significant investors; |
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Incurrence of additional debt; |
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Dilutive issuance of equity; |
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Recruitment or departure of key personnel; |
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Loss or gain of key clients; |
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Litigation involving us, our general industry or both; and |
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Changes in reserves for professional liability claims. |
There can be no assurance that the stock price of the Class A common stock will not fluctuate or
decline significantly in the future. In addition, the stock market in general can experience
considerable price and volume fluctuations that may be unrelated to our performance.
Shares of Towers Watson common stock eligible for public sale could adversely affect the stock
price.
On January 1, 2010, the then-former Towers Perrin security holders received, in the aggregate, 44%
of Towers Watsons voting common stock then outstanding. Those shares are subject to various
restrictions. For example, shares of Class B common stock automatically convert into freely
tradable Class A common stock in equal annual installments over four years beginning on January 1,
2011. In addition, transfer restrictions on restricted shares of Class A common stock received by a
holder of Towers Perrin restricted stock units lapse over the course of a three-year vesting
schedule (or such other vesting schedule as may be set forth in the holders Towers Perrin
restricted stock unit award agreement) beginning on January 1, 2011. As of August 30, 2010 there
were 42,980,157 outstanding shares of Class A common stock and 4,210,088 of Restricted Class A
common stock at a par value of $0.01 per share; 10,530,853 outstanding shares of Class B-1 common
stock at a par value of $0.01; 5,561,630 outstanding shares of Class B-2 common stock at a par
value of $0.01; 5,561,630 outstanding shares of Class B-3 common stock at a par value of $0.01; and
5,369,043 outstanding shares of Class B-4 common stock at a par value of $0.01.
Pursuant to our certificate of incorporation, our board of directors has the discretion to
accelerate the conversion of any shares of Class B common stock into shares of freely tradable
Class A common stock, provided that the total number of shares so converted does not exceed, in the
aggregate, five percent of the total shares of Class B common stock. On July 30, 2010, we filed a
proxy statement with the SEC regarding a special meeting of stockholders to be held on September 9,
2010. At the special meeting, stockholders will vote on a proposal to amend our certificate of
incorporation to eliminate the restriction on the number of shares of Class B common stock that the
board of directors can convert into shares of Class A common stock. The proposed amendment to our
certificate of incorporation would provide us with the flexibility to release converted shares of
Class B common stock into the public market, if our board of directors determined that such action
were advisable.
The sales or potential sales of a substantial number of shares of Class A common stock in the
public market after the Class B common stock converts or shares of restricted Class A common stock
vest could depress the market price of Class A common stock at such time and could then impair our
ability to raise capital through the sale of additional securities.
We will only pay dividends if and when declared by our board of directors.
Any determination to pay dividends in the future is at the discretion of our board of directors and
will depend upon our results of operations, financial condition, contractual restrictions,
restrictions imposed by applicable law, rule or regulation, business and investment strategy, and
other factors that our board of directors deems relevant. If we do not pay dividends, then the
return on an investment in our common stock will depend entirely upon any future appreciation in
its stock price. There is no guarantee that our common stock will appreciate in value or maintain
its value.
22
We have various mechanisms in place that could prevent a change in control that a stockholder might
favor.
Our certificate of incorporation and bylaws contain provisions that might discourage, delay or
prevent a change in control that a stockholder might favor. Our certificate of incorporation or
bylaws:
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Authorize the issuance of preferred stock without fixed characteristics, which could be
issued by our board of directors pursuant to a stockholder rights plan and deter a takeover
attempt; |
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Provide that only the Chief Executive Officer, President or our board of directors may
call a special meeting of stockholders; |
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Limit business at special stockholder meetings to such business as is brought before the
meeting by or at the direction of our board of directors; |
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Prohibit stockholder action by written consent, and require all stockholder actions to
be taken at an annual or special meeting of the stockholders; |
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Provide our board of directors with exclusive power to change the number of directors; |
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Provide that all vacancies on our board of directors, including new directorships, may
only be filled by a resolution adopted by a majority of the directors then in office; |
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Do not opt out of Section 203 of the Delaware General Corporation Law, which prohibits
business combinations between a corporation and any interested stockholder for a period of
three years following the time that such stockholder became an interested stockholder; |
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Require a supermajority vote for the stockholders to amend the bylaws; and |
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Prohibit any stockholder from presenting a proposal or director nomination at an annual
stockholders meeting unless such stockholder provides us with sufficient advance notice. |
Item 1B. Unresolved SEC Comments
None.
Item 2. Properties.
As of June 30, 2010, we operated offices in more than 100 cities and 34 countries throughout North
America, Europe, Asia-Pacific and Latin America. Operations of each of our segments are carried out
in leased offices under operating leases that typically do not exceed 10 years in length. We do not
anticipate difficulty in meeting our space needs at lease expiration.
The fixed assets owned by us represented approximately five percent of total assets as of June 30,
2010, and consisted primarily of computer equipment and software, office furniture and leasehold
improvements.
Item 3. 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 Item 3 regarding our legal proceedings is
incorporated by reference herein from Note 11, Commitments and Contingent Liabilities, of the
notes to the consolidated financial statements in this Annual Report on Form 10-K for the year
ending June 30, 2010.
23
Item 4. Reserved.
Part II
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Towers Watson & Co. Class A common stock is currently traded on the New York Stock Exchange and
NASDAQ under the symbol TW.
The following table sets forth, for the periods indicated, the high and low sales prices per share
of our Class A common stock since January 4, 2010, the first trading day of the Class A common
stock following consummation of the Merger.
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High |
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Low |
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Fiscal Year 2010 |
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Third quarter (January 4, 2010 March 31, 2010) |
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$ |
51.48 |
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$ |
42.72 |
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Fourth quarter (April 1, 2010 June 30, 2010) |
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$ |
50.00 |
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$ |
38.85 |
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Fiscal Year 2011 |
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First quarter (July 1, 2010 August 30, 2010) |
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$ |
48.29 |
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$ |
38.04 |
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Holders
As of August 30, 2010, there were approximately 133 registered shareholders of our Class A common
stock and 631 registered shareholders of our Class B common stock.
Dividends
Our board of directors has approved the payment of a quarterly cash dividend in the amount of
$0.075 per share. Total dividends paid in fiscal year 2010 and in fiscal year 2009 were
$15.2 million and $12.8 million, respectively.
The continued payment of cash dividends in the future is at the discretion of our board of
directors and depends on numerous factors, including, without limitation, our net earnings,
financial condition, availability of capital, debt covenant limitations and our other business
needs, including those of our subsidiaries and affiliates. Additionally, our credit facility
requires us to observe certain covenants, including requirements for minimum net worth, which
potentially act to restrict dividends.
24
Performance Graph
The graphs below depict total cumulative stockholder return on $100 invested on June 30, 2005 and
January 4, 2010, respectively in (i) Watson Wyatt Worldwide Inc. common stock and Towers Watson &
Co. common stock, (ii) an independently compiled industry peer group index comprised of the common
stock of certain publicly traded companies within the management consulting services standard
industrial classification code having a reported market capitalization exceeding $150 million, and
(iii) the New York Stock Exchange Composite Index. The graphs assume reinvestment of dividends.
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6/05 |
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6/06 |
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6/07 |
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6/08 |
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6/09 |
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12/09 |
|
Watson Wyatt Worldwide, Inc. |
|
$ |
100.00 |
|
|
$ |
138.48 |
|
|
$ |
200.22 |
|
|
$ |
211.03 |
|
|
$ |
150.72 |
|
|
$ |
191.47 |
|
NYSE Composite |
|
|
100.00 |
|
|
|
115.70 |
|
|
|
142.85 |
|
|
|
128.22 |
|
|
|
90.12 |
|
|
|
110.88 |
|
Peer Group |
|
|
100.00 |
|
|
|
122.31 |
|
|
|
167.39 |
|
|
|
165.17 |
|
|
|
134.41 |
|
|
|
163.33 |
|
25
|
|
|
|
|
|
|
|
|
|
|
1/4/10 |
|
|
6/30/10 |
|
Towers Watson & Co. |
|
$ |
100.00 |
|
|
$ |
77.96 |
|
NYSE Composite |
|
|
100.00 |
|
|
|
91.14 |
|
Peer Group |
|
|
100.00 |
|
|
|
91.64 |
|
The two Performance Graphs respectively show (i) legacy Watson Wyatts stock performance from
June 30, 2005 through December 31, 2009, the day prior to the closing date of the Merger and (ii)
Towers Watsons stock performance from January 4, 2010 through June 30, 2010. As a result of the
Merger, as discussed previously, legacy Towers Perrin and legacy Watson Wyatt became wholly owned
subsidiaries of Jupiter Saturn Holding Company (subsequently renamed Towers Watson & Co.). Legacy
Watson Wyatt no longer exists as a publicly traded entity and ceased all trading of its common
stock as of the close of business on December 31, 2009, the date preceding the Merger.
Companies included in the independently compiled industry peer group index included in both graphs
include: Accenture Limited; Corporate Executive Board Company; FTI Consulting Inc.; Hewitt
Associates Inc.; Huron Consulting Group Inc.; Maximus Inc.; and Navigant Consulting Inc.
Issuer Purchases of Equity Securities
Towers Watson will periodically repurchase shares of common stock, in part to offset potential
dilution from shares issued in connection with its benefit plans. During the third quarter of
fiscal year 2010, our board of directors approved the repurchase of up to 750,000 shares of our
Class A common stock. There have been no shares repurchased under this plan as of June 30, 2010.
On May 17, 2010, we filed a tender offer on Schedule TO pursuant to Rule 13e-4 under the
Securities Exchange Act of 1934, as amended, to exchange shares of our Class B-1 common stock, par
value $0.01 per share, for an unsecured subordinated note due March 15, 2012. Each note had a
principal amount equal to the sum of the number of shares of Class B-1 common stock tendered and
$43.43, the exchange ratio. The Class B-1 common stock issued as consideration in the Merger will
convert to freely tradable Class A common stock on January 1, 2011. The purpose of the tender
offer was to enable us to acquire shares of Class B-1 common stock in an orderly fashion to reduce
the impact of any sales or potential sales that may occur on or after January 1, 2011 on the
market price of Class A common stock. As a result of the tender offer, we repurchased 2,267,265
shares of Class B-1 common stock in exchange for notes payable to Class B-1 shareholders of $98.5
million.
26
Item 6. Selected Consolidated Financial Data
The following table sets forth selected consolidated financial data of Towers Watson for each of
the years in the five-year period ended June 30, 2010. The selected consolidated financial data as
of June 30, 2010 and 2009, and for each of the three years in the period ended June 30, 2010, were
derived from the audited consolidated financial statements of Towers Watson included in this Annual
Report on Form 10-K. The selected consolidated financial data as of June 30, 2008, 2007 and 2006,
and for each of the years ended June 30, 2007 and 2006, were derived from audited consolidated
financial statements of Towers Watson not included in this Annual Report on Form 10-K. The
consolidated financial data should be read in conjunction with our consolidated financial
statements and notes thereto.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2010 (a) |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Statement of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(amounts are in thousands, except per share data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
2,387,829 |
|
|
$ |
1,676,029 |
|
|
$ |
1,760,055 |
|
|
$ |
1,486,523 |
|
|
$ |
1,271,811 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of providing services: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits |
|
|
1,540,417 |
|
|
|
1,029,299 |
|
|
|
1,052,992 |
|
|
|
879,341 |
|
|
|
699,049 |
|
Professional and subcontracted services |
|
|
163,848 |
|
|
|
119,323 |
|
|
|
138,983 |
|
|
|
116,527 |
|
|
|
84,165 |
|
Occupancy |
|
|
109,454 |
|
|
|
72,566 |
|
|
|
83,255 |
|
|
|
75,704 |
|
|
|
164,140 |
|
General and administrative expenses |
|
|
220,937 |
|
|
|
172,010 |
|
|
|
185,624 |
|
|
|
178,411 |
|
|
|
147,122 |
|
Depreciation and amortization |
|
|
101,084 |
|
|
|
73,448 |
|
|
|
72,428 |
|
|
|
57,235 |
|
|
|
44,918 |
|
Transaction and integration expenses |
|
|
87,644 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,223,384 |
|
|
|
1,466,646 |
|
|
|
1,533,282 |
|
|
|
1,307,218 |
|
|
|
1,139,394 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
164,445 |
|
|
|
209,383 |
|
|
|
226,773 |
|
|
|
179,305 |
|
|
|
132,417 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)/Income from affiliates |
|
|
(1,274 |
) |
|
|
8,350 |
|
|
|
2,325 |
|
|
|
(5,500 |
) |
|
|
1,135 |
|
Interest income |
|
|
2,950 |
|
|
|
2,022 |
|
|
|
5,584 |
|
|
|
4,066 |
|
|
|
4,325 |
|
Interest expense |
|
|
(7,508 |
) |
|
|
(2,778 |
) |
|
|
(5,977 |
) |
|
|
(1,581 |
) |
|
|
(4,093 |
) |
Other non-operating income/(loss) |
|
|
11,304 |
|
|
|
4,926 |
|
|
|
464 |
|
|
|
178 |
|
|
|
(2,081 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes |
|
|
169,917 |
|
|
|
221,903 |
|
|
|
229,169 |
|
|
|
176,468 |
|
|
|
131,703 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
|
50,907 |
|
|
|
75,276 |
|
|
|
73,470 |
|
|
|
60,193 |
|
|
|
45,585 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
119,010 |
|
|
|
146,627 |
|
|
|
155,699 |
|
|
|
116,275 |
|
|
|
86,118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations (b) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,073 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before non-controlling interests |
|
|
119,010 |
|
|
|
146,627 |
|
|
|
155,699 |
|
|
|
116,275 |
|
|
|
87,191 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) attributable to non-controlling
interests |
|
|
(1,587 |
) |
|
|
169 |
|
|
|
258 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to controlling interests |
|
$ |
120,597 |
|
|
$ |
146,458 |
|
|
$ |
155,441 |
|
|
$ |
116,275 |
|
|
$ |
87,191 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share, continuing operations, basic |
|
$ |
2.01 |
|
|
$ |
3.43 |
|
|
$ |
3.65 |
|
|
$ |
2.74 |
|
|
$ |
2.08 |
|
Earnings per share, continuing operations, diluted |
|
$ |
2.00 |
|
|
$ |
3.42 |
|
|
$ |
3.50 |
|
|
$ |
2.60 |
|
|
$ |
1.99 |
|
Earnings per share, discontinued operations, basic |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
0.03 |
|
Earnings per share, discontinued operations, diluted |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
0.02 |
|
Earnings per share, net income attributable to
controlling interests, basic |
|
$ |
2.04 |
|
|
$ |
3.43 |
|
|
$ |
3.65 |
|
|
$ |
2.74 |
|
|
$ |
2.11 |
|
Earnings per share, net income attributable to
controlling interests, diluted |
|
$ |
2.03 |
|
|
$ |
3.42 |
|
|
$ |
3.50 |
|
|
$ |
2.60 |
|
|
$ |
2.01 |
|
Dividends declared per share |
|
$ |
0.30 |
|
|
$ |
0.30 |
|
|
$ |
0.30 |
|
|
$ |
0.30 |
|
|
$ |
0.30 |
|
Weighted average shares of common stock, basic |
|
|
59,257 |
|
|
|
42,690 |
|
|
|
42,577 |
|
|
|
42,413 |
|
|
|
41,393 |
|
Weighted average shares of common stock, diluted |
|
|
59,372 |
|
|
|
42,861 |
|
|
|
44,381 |
|
|
|
44,684 |
|
|
|
43,297 |
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Balance Sheet and Other Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
600,466 |
|
|
$ |
209,832 |
|
|
$ |
124,632 |
|
|
$ |
248,186 |
|
|
$ |
165,345 |
|
Working capital |
|
|
479,688 |
|
|
|
231,938 |
|
|
|
172,241 |
|
|
|
326,354 |
|
|
|
197,312 |
|
Goodwill and Intangible Assets |
|
|
2,410,652 |
|
|
|
728,987 |
|
|
|
870,943 |
|
|
|
594,651 |
|
|
|
511,116 |
|
Total assets |
|
|
4,573,450 |
|
|
|
1,626,319 |
|
|
|
1,715,976 |
|
|
|
1,529,709 |
|
|
|
1,240,359 |
|
Revolving credit facility |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
105,000 |
|
|
|
30,000 |
|
Dividends declared |
|
|
17,661 |
|
|
|
12,785 |
|
|
|
12,768 |
|
|
|
12,717 |
|
|
|
12,667 |
|
Stockholders equity |
|
|
1,955,607 |
|
|
|
853,638 |
|
|
|
984,395 |
|
|
|
787,519 |
|
|
|
648,761 |
|
Shares outstanding |
|
|
74,204 |
|
|
|
42,657 |
|
|
|
43,578 |
|
|
|
42,299 |
|
|
|
42,386 |
|
|
|
|
(a) |
|
Includes the effect of the Merger as of January 1, 2010. |
|
(b) |
|
In fiscal year 2006, we revised our estimates related to remaining future obligations and
costs associated with the discontinuation in 1998 of our benefits administration outsourcing
business. As a result, we reduced the amount of our liability for losses from disposal, less
the associated income tax expense. |
28
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
Executive Overview
General
We are a leading global professional services firm focused on providing consulting services related
to employee benefits, human capital and financial risk management. In the short term, our revenue
will be 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 our clients,
changes in investment markets, the ability of our associates to attract new clients or provide
additional services to existing clients, the impact of new regulations in the legal and accounting
fields and the impact of our ongoing cost saving initiatives. In the long term, we expect that our
financial results will depend in large part upon how well we succeed in deepening our existing
client relationships through thought leadership and a focus on developing cross-practice solutions,
actively pursuing new clients in our target markets, cross selling and making strategic
acquisitions. We believe the highly fragmented industry in which we operate offers us tremendous
growth opportunities, because we provide a unique business combination of benefits and human
capital consulting, as well as risk and capital management and strategic technology solutions.
Segments
We provide services in three business segments: Benefits, Risk and Financial Services and Talent
and Rewards.
Benefits Segment. The Benefits segment is our largest and most established segment. This
segment has grown through business combinations as well as strong organic growth. It helps clients
create and manage cost-effective benefits programs that help them attract, retain and motivate a
talented workforce.
The primary lines of business within the Benefits segment are:
|
|
|
Retirement; |
|
|
|
|
Health and Group Benefits; |
|
|
|
|
Technology and Administration Solutions; and |
|
|
|
|
International Consulting. |
The Benefits segment provides benefits consulting and administration services through four primary
lines of business. Retirement supports organizations worldwide in designing, managing,
administering and communicating all types of retirement plans. Health and Group Benefits provides
advice on the strategy, design, financing, delivery, ongoing plan management and communication of
health and group benefit programs. Through our Technology and Administration Solutions line of
business, we deliver cost-effective benefit outsourcing solutions. The International Consulting
Group provides expertise in dealing with international human capital management and related
benefits and compensation advice for corporate headquarters and their subsidiaries. A significant
portion of the revenue in this segment is from recurring work, driven in large part by the heavily
regulated nature of employee benefits plans and our clients annual needs for these services. For
the six months ended June 30, 2010, Benefits segment contributed 64% of our total revenue. For the
same period, approximately 43% of the Benefits segments revenue originates from outside the United
States and is thus subject to translation exposure resulting from foreign exchange rate
fluctuations.
Risk and Financial Services Segment. Within the Risk and Financial Services segment, our
second largest segment, we have three primary lines of business:
|
|
|
Risk Consulting and Software (RCS); |
|
|
|
|
Investment Consulting and Solutions (Investment); and |
|
|
|
|
Reinsurance and Insurance Brokerage (Brokerage). |
The Risk and Financial Services segment accounted for 21% of our total revenue for the six months
ended June 30, 2010. Approximately 63% of the segments revenue originates from outside the United
States and is thus subject to translation exposure resulting from foreign exchange rate
fluctuations. The segment has a strong base of recurring revenue, driven by long-term client
relationships in reinsurance brokerage services, retainer investment consulting relationships,
consulting services on financial reporting, and actuarial opinions on property/casualty loss
reserves. Some of these relationships have been in place for more than 20 years. A portion of the
revenue is related to project work, which is more heavily dependent on the overall level of
discretionary spending by clients. This work is favorably influenced by strong client
relationships, particularly related to mergers and acquisitions consulting. Major revenue growth
drivers include changes in regulations, the level of mergers and acquisitions activity in the
insurance industry, growth in pension and other asset pools, and reinsurance retention and pricing
trends.
29
Talent and Rewards Segment. Our third largest segment, Talent and Rewards, is focused on
three primary lines of business:
|
|
|
Executive Compensation |
|
|
|
|
Rewards, Talent and Communication; and |
|
|
|
|
Data, Surveys and Technology. |
The Talent and Rewards segment accounted for approximately 15% of our total revenue for the six
months ended June 30, 2010. Few of the segments projects have a recurring element. As a result,
this segment is most sensitive to changes in discretionary spending due to cyclical economic
fluctuations. Approximately 44% of the segments revenue originates from outside the United States
and is thus subject to translation exposure resulting from foreign exchange rate fluctuations.
Revenue for Talent and Rewards consulting has minimal seasonality, with a small degree of
heightened activity in the second half of the year during the annual compensation, benefits and
survey cycles. Major revenue growth drivers in this group include demand for workforce productivity
improvements and labor cost reductions, focus on high performance culture, globalization of the
workforce, changes in regulations and benefits programs, mergers and acquisitions activity, and the
demand for universal metrics related to workforce engagement.
Financial Statement Overview
Towers Watsons fiscal year ends June 30.
Shown below are Towers Watsons top five markets based on percentage of consolidated revenue. The
fiscal year ended June 30, 2010 includes data of Towers Watsons geographic regions. The fiscal
years ended June 30, 2009 and 2008 include only data of historical Watson Wyatts geographic
regions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
Geographic Region |
|
2010 |
|
|
2009 |
|
|
2008 |
|
United States |
|
|
52 |
% |
|
|
43 |
% |
|
|
41 |
% |
United Kingdom |
|
|
22 |
|
|
|
32 |
|
|
|
32 |
|
Canada |
|
|
6 |
|
|
|
4 |
|
|
|
4 |
|
Germany |
|
|
4 |
|
|
|
4 |
|
|
|
5 |
|
Netherlands |
|
|
3 |
|
|
|
3 |
|
|
|
4 |
|
We derive the majority of our revenue from fees for consulting services, which generally are billed
at standard hourly rates and expense reimbursement, which we refer to as time and expense, or on a
fixed-fee basis. Management believes the approximate percentages for time and expense and fixed-fee
basis engagements are 60% and 40%, respectively. 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 our consolidated revenues for any of our most recent three fiscal years.
Our most significant expense is compensation to associates, which typically comprises approximately
70% of total costs of providing services. In addition to payroll and related benefits and taxes,
compensation to associates also includes incentive bonus expense, which is linked to our operating
performance. Other significant costs of providing services include office rent and related costs,
communications, general and administrative expenses and professional and subcontracted services.
We compensate our directors and select executives with incentive stock-based compensation plans
from time to time. When granted, awards are governed by the Towers Watson & Co. 2009 Long Term
Incentive Plan, which provides for the awards to be valued at their grant date fair value which is
amortized over the expected term of the awards, generally three years. In connection with the
issuance of Towers Watson restricted Class A common stock to Towers Perrin RSU holders in the
Merger, we expect the first year of non-cash compensation expense to be approximately $94.8
million. The current estimate of total non-cash compensation expense relating to Towers Watson
restricted Class A common stock for the three year period is $158.2 million. This estimate was
determined assuming a 10% annual forfeiture rate based on actual and expected attrition and the
graded method of expense methodology. This expense methodology assumes that the restricted shares
are issued to Towers Perrin RSU holders in equal amounts of shares that vest over one year, two
years and three years giving the effect of more expense in the first year than the second and
third. In the event that an associate is involuntarily terminated, vesting is accelerated and
expense is recorded immediately
In delivering consulting services, our 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.
30
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 40
to 60% of the professional and subcontracted services for Watson Wyatt were directly incurred on
behalf of clients and were reimbursed by them, with such reimbursements being included in revenue.
For the six months ended June 30, 2010 for Towers Watson, approximately 40% of professional and
subcontracted services represent these reimbursable services.
Occupancy includes expenses for rent and utilities.
General and administrative expenses includes general counsel, marketing, human resources, finance,
research, technology support, supplies, telephone and other costs to operate office locations as
well as professional fees and insurance, including premiums on excess insurance and losses on
professional liability claims, 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.
Depreciation and amortization includes the depreciation of fixed assets and amortization of
intangible assets and internally-developed software.
Transaction and integration expenses includes fees and charges associated with the Merger.
Transaction and integration expenses principally consist of investment banker fees, regulatory
filing expenses, integration consultants, as well as legal, accounting, marketing, and information
technology integration expenses.
Critical Accounting Policies and Estimates
The preparation of 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 our 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 effect on our
financial condition 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-expense 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 associates billing rates are principally based on a multiple of salary
and compensation costs.
Revenue for fixed-fee arrangements that span multiple months is based upon the percentage of
completion method. We typically have 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.
We have non-recurring system projects that are longer in duration and subject to more changes in
scope as the project progresses. We evaluate at least quarterly, and more often as needed, project
managers estimates-to-complete to assure that the projects current statuses are accounted for
properly. Certain software contracts generally provide that if the client terminates a contract, we
are 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. We recognize 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. We have experienced
certain costs in excess of estimates from time to time. Management believes it is rare, however,
for these excess costs to result in overall project losses.
31
We have 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
us and ownership of the technology and rights to the related code remain with us. 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 brokerage business of Towers Perrin. In
our capacity as a reinsurance broker, we collect premiums from reinsureds and, after deducting our
brokerage commissions, we remit the premiums to the respective reinsurance underwriters on behalf
of reinsureds. In general, compensation for reinsurance brokerage services is earned on a
commission basis. Commissions are calculated as a percentage of a reinsurance premium as stipulated
in the reinsurance contracts with our clients and reinsurers. We recognize brokerage services
revenue on the later of the inception date or billing date of the contract. In addition, we hold
cash needed to settle amounts due reinsurers or reinsureds, net of any commissions due to us,
pending remittance to the ultimate recipient. We are 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
Our 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
our annual operating results are finalized. As a result of the Merger, interim bonuses were paid in
March 2010 relating to the period ended December 31, 2009 and are expected to be paid in September
2010 relating to the six-month period ended June 30, 2010, after which time bonuses are expected to
be paid annually each September.
An estimated annual bonus amount is initially developed at the beginning of each fiscal year in
conjunction with our budgeting process. Estimated annual operating performance is reviewed
quarterly 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.
Income Taxes
We account for income taxes in accordance with Accounting Standards Codification (ASC) 740,
Income Taxes, which prescribes the use of the asset and liability approach to the recognition of
deferred tax assets and liabilities related to the expected future tax consequences of events that
have been recognized in our financial statements or income tax returns. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered or settled. 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. We continually review tax laws, regulations
and related guidance in order to properly record any uncertain tax positions. 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
We sponsor both qualified and non-qualified defined benefit pension plans and other post-employment
benefit or OPEB plans in North America and Europe. These plans represent 98% of our total pension
obligations. We also sponsor funded and unfunded defined benefit pension plans in certain other
countries representing the remaining 2% of the liability.
32
Under the legacy Watson Wyatt 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.
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. Beginning January 2008, Watson Wyatt
made changes to the plan in the United Kingdom 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 plan liabilities
in Germany were a result of Watson Wyatts acquisition of Heissmann GmbH in 2007. A significant
percentage of the liabilities represent the grandfathered pension benefit for associates hired
prior to a July 1991 plan amendment. The pension plan for those hired after July 1991 is a defined
contribution type arrangement. In the Netherlands, the pension benefit is a percentage of service
and average salary over the working life of the associate, where salary includes allowances and
bonuses up to a set maximum salary and is offset by the current social security benefit. The
benefit liability is reflected on the balance sheet. The measurement date for each of the plans is
June 30.
The legacy Towers Perrin pension plans in the United States accrue benefits under a cash-balance
formula for associates hired or rehired after 2002 and for all associates for service after 2007.
For associates hired prior to 2003 and active as of January 2003, benefits prior to 2008 are based
on a combination of a cash balance formula, for the period after 2002, and a final average pay
formula based on years of plan service and the highest five consecutive years of plan compensation
prior to 2008. Under the cash balance formula benefits are based on a percentage of each year of
the associates plan compensation. The Canadian Retirement Plan provides a choice of a defined
benefit approach or a defined contribution approach. The non-qualified plans in North America
provide for pension benefits that would be covered under the qualified plan in the respective
country but are limited by statutory maximums. The non-qualified plans have no assets and therefore
are unfunded arrangements. The U.K. Plan provides predominantly lump sum benefits. Benefit accruals
under the U.K. Plan ceased on March 31, 2008. The plans in Germany mostly provide benefits under a
cash balance benefit formula. Benefits under the Netherlands plan accrue on a final pay basis on
earnings up to a maximum amount each year. The benefit assets and liabilities are reflected on the
balance sheet. The measurement date for each of the plans has historically been December 31, but
has been changed to June 30 as a result of the Merger.
The determination of our pension benefit obligations and related benefit 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 our 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 our pension expense over the
average remaining service period of participating associates. We consider 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.
Assumptions Used in the Valuations of the Defined Benefit Pension Plans
The following assumptions were used in the valuations of Towers Watsons defined benefit pension
plans. The assumptions presented for the North American plans represent the weighted-average of
rates for all U.S. and Canadian plans. The assumptions presented for Towers Watsons European plans
represent the weighted-average of rates for the U.K., Germany and Netherlands plans. In relation to
the acquisition of Towers Perrin on January 1, 2010, the legacy plans of Towers Perrin have been
included in the assumptions as of and for the year ended June 30, 2010. The assumptions as of and
for the years ended June 30, 2009 and 2008 represent only the legacy Watson Wyatt plans.
The assumptions used to determine net periodic benefit cost for the fiscal years ended June 30,
2010, 2009 and 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, 2010 |
|
|
Year Ended June 30, 2009 |
|
|
Year Ended June 30, 2008 |
|
|
|
North |
|
|
|
|
|
|
North |
|
|
|
|
|
|
North |
|
|
|
|
|
|
America |
|
|
Europe |
|
|
America |
|
|
Europe |
|
|
America |
|
|
Europe |
|
Discount rate |
|
|
6.43 |
% |
|
|
6.03 |
% |
|
|
6.91 |
% |
|
|
6.47 |
% |
|
|
6.25 |
% |
|
|
5.72 |
% |
Expected long-term rate of return on
assets |
|
|
8.11 |
% |
|
|
6.48 |
% |
|
|
8.61 |
% |
|
|
6.53 |
% |
|
|
8.61 |
% |
|
|
6.74 |
% |
Rate of increase in compensation levels |
|
|
3.93 |
% |
|
|
5.09 |
% |
|
|
4.08 |
% |
|
|
5.36 |
% |
|
|
3.84 |
% |
|
|
4.73 |
% |
33
The following table presents the assumptions used in the valuation to determine the projected
benefit obligation for the fiscal years ended June 30, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
|
June 30, 2009 |
|
|
|
North |
|
|
|
|
|
|
North |
|
|
|
|
|
|
America |
|
|
Europe |
|
|
America |
|
|
Europe |
|
Discount rate |
|
|
5.86 |
% |
|
|
5.25 |
% |
|
|
7.21 |
% |
|
|
6.29 |
% |
Rate of increase in compensation levels |
|
|
3.88 |
% |
|
|
3.88 |
% |
|
|
3.29 |
% |
|
|
5.15 |
% |
Towers Watsons discount rate assumptions were determined by matching expected future pension
benefit payments with current AA corporate bond yields from the respective countries for the same
periods. In the United States, specific bonds were selected to match plan cash flows. In Canada,
yields were taken from a corporate bond yield curve. In Europe, the discount rate was set based on
yields on European AA corporate bonds at the measurement date.
The expected rates of return assumptions at 8.11% and 6.48% per annum for North America and Europe,
respectively, were supported by an analysis performed by Towers Watson of the weighted-average
yield expected to be achieved with the anticipated makeup of investments.
The following information illustrates the sensitivity to a change in certain assumptions for the
North American pension plans for fiscal year 2011:
|
|
|
|
|
|
|
Effect on FY2011 |
|
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 |
|
+$2.8 million |
25 basis point increase in expected return on assets |
|
-$2.8 million |
The above sensitivities reflect the impact of changing one assumption at a time. Economic factors
and conditions often affect multiple assumptions simultaneously and the effects of changes in key
assumptions are not necessarily linear.
The following information illustrates the sensitivity to a change in certain assumptions for the
Europe pension plans for fiscal year 2011:
|
|
|
|
|
|
|
Effect on FY2011 |
|
Change in Assumption |
|
Pre-Tax Pension Expense |
|
25 basis point decrease in discount rate |
|
+$2.7 million |
25 basis point increase in discount rate |
|
-$2.6 million |
25 basis point decrease in expected return on assets |
|
+$1.0 million |
25 basis point increase in expected return on assets |
|
-$1.0 million |
The sensitivities reflect the effect of assumption changes occurring after purchase accounting has
been applied. The differences in the discount rate and compensation level assumption used for the
North American and European plans above can be attributed to the differing interest rate
environments associated with the currencies and economies to which the plans are subject. The
differences in the expected return on assets are primarily driven by the respective asset
allocation in each plan, coupled with the return expectations for assets in the respective
currencies.
Incurred But Not Reported Claims
We use 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.
Goodwill and Intangible Assets
In applying the purchase method of accounting for business combinations, amounts assigned to
identifiable assets and liabilities acquired were 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. 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 is compared with their carrying value and an impairment
loss would be recognized for the amount by which the carrying amount exceeds the fair value.
Goodwill is tested for impairment annually as of June 30, and whenever indicators of impairment
exist.
34
The evaluation is a two-step process whereby the fair value of the reporting unit is compared with
its carrying amount, including goodwill. In estimating the fair value of a reporting unit, we used
valuation techniques that fall under income or market approaches.
Under the discounted cash flow method,
an income approach, the business enterprise value is determined by discounting to present value the
terminal value which is calculated using debt-free after-tax cash flows for a finite period of
years. Key estimates in this approach are internal financial projection estimates prepared by
management, business risk, and expected rate of return on capital. The guideline company method, a
market approach, develops valuation multiples by comparing our reporting units to similar publicly
traded companies. Key estimates and selection of valuation multiples rely on the selection of
similar companies, obtaining estimates of forecasted revenue and EBITDA estimates for the similar
companies and selection of valuation multiples as they apply to the reporting unit characteristics.
Under the similar transactions method, a market approach, actual transaction prices and operating data
from companies deemed reasonably similar to the reporting units is used to develop valuation
multiples as an indication of how much a knowledgeable investor in the marketplace would be willing
to pay for the business units. 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 the
reporting unit used in step one to all the assets and liabilities of that reporting unit (including
any recognized or unrecognized intangible assets) as if the reporting unit had been acquired in a
business combination. Then the implied fair value of goodwill would be compared to the carrying
amount of goodwill to determine if goodwill is impaired. For the fiscal year ended June 30, 2010,
we did not record any impairment losses of goodwill or intangibles.
Results of Operations
Watson Wyatt is the accounting predecessor in the Merger; as such, the historical results of Watson
Wyatt have become those of Towers Watson and are presented herein as historical results. The
consolidated statement of operations of Towers Watson for the fiscal year ended June 30, 2010
includes the results of Towers Perrins operations beginning January 1, 2010. The consolidated
statement of operations of Towers Watson for the fiscal years ended June 30, 2009 and 2008 include
only the financial results of Watson Wyatt.
In addition to the historical analysis of results of operations, we have prepared unaudited
supplemental pro forma results of operations for the fiscal years ended 2010 and 2009 as if the
Merger had occurred at the beginning of the periods presented and analysis of the pro forma results
of operations by line item. The pro forma analysis is prepared and presented to aid in explaining
the results of operations of the merged Towers Watson.
As a result of the Merger, Towers Watson aligned and grouped general and administrative accounts
using a natural account methodology. The accounting predecessor, Watson Wyatt, allocated certain
support service charges to general and administrative expenses from specific offices, teams and
accounts. The results of operations for the fiscal years ended June 30, 2010, 2009 and 2008 have
been retrospectively realigned to the new general and administrative expense methodology.
35
Historical Results of Operations
The table below sets forth our consolidated statement of operations, on a historical basis, and
data as a percentage of revenue for the periods indicated.
Consolidated Statements of Operations
(Thousands of U.S. dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
Revenue |
|
$ |
2,387,829 |
|
|
|
100 |
% |
|
$ |
1,676,029 |
|
|
|
100 |
% |
|
$ |
1,760,055 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of providing services: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits |
|
|
1,540,417 |
|
|
|
65 |
% |
|
|
1,029,299 |
|
|
|
61 |
% |
|
|
1,052,992 |
|
|
|
60 |
% |
Professional and subcontracted
services |
|
|
163,848 |
|
|
|
7 |
|
|
|
119,323 |
|
|
|
7 |
|
|
|
138,983 |
|
|
|
8 |
|
Occupancy |
|
|
109,454 |
|
|
|
5 |
|
|
|
72,566 |
|
|
|
4 |
|
|
|
83,255 |
|
|
|
5 |
|
General and administrative expenses |
|
|
220,937 |
|
|
|
9 |
|
|
|
172,010 |
|
|
|
10 |
|
|
|
185,624 |
|
|
|
11 |
|
Depreciation and amortization |
|
|
101,084 |
|
|
|
4 |
|
|
|
73,448 |
|
|
|
4 |
|
|
|
72,428 |
|
|
|
4 |
|
Transaction and integration expenses |
|
|
87,644 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,223,384 |
|
|
|
93 |
|
|
|
1,466,646 |
|
|
|
88 |
|
|
|
1,533,282 |
|
|
|
87 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
164,445 |
|
|
|
7 |
|
|
|
209,383 |
|
|
|
12 |
|
|
|
226,773 |
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)/income from affiliates |
|
|
(1,274 |
) |
|
|
|
|
|
|
8,350 |
|
|
|
|
|
|
|
2,325 |
|
|
|
|
|
Interest income |
|
|
2,950 |
|
|
|
|
|
|
|
2,022 |
|
|
|
|
|
|
|
5,584 |
|
|
|
|
|
Interest expense |
|
|
(7,508 |
) |
|
|
|
|
|
|
(2,778 |
) |
|
|
|
|
|
|
(5,977 |
) |
|
|
|
|
Other non-operating income |
|
|
11,304 |
|
|
|
|
|
|
|
4,926 |
|
|
|
|
|
|
|
464 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
169,917 |
|
|
|
7 |
|
|
|
221,903 |
|
|
|
13 |
|
|
|
229,169 |
|
|
|
13 |
|
Provision for income taxes |
|
|
50,907 |
|
|
|
2 |
|
|
|
75,276 |
|
|
|
4 |
|
|
|
73,470 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before non-controlling interests |
|
|
119,010 |
|
|
|
5 |
|
|
|
146,627 |
|
|
|
9 |
|
|
|
155,699 |
|
|
|
9 |
|
Net (loss)/income attributable to non-controlling
interests |
|
|
(1,587 |
) |
|
|
|
|
|
|
169 |
|
|
|
|
|
|
|
258 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to controlling interests |
|
$ |
120,597 |
|
|
|
5 |
% |
|
$ |
146,458 |
|
|
|
9 |
% |
|
$ |
155,441 |
|
|
|
9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
Historical Results of Operations for the Fiscal Year Ended June 30, 2010 Compared to Fiscal Year
Ended June 30, 2009
Revenue for the fiscal year ended June 30, 2010 was $2.4 billion, an increase of $711.8 million, or
42%, compared to $1.7 billion for the fiscal year ended June 30, 2009. The increase was primarily a
result of the Merger and combination of Towers Perrins and Watson Wyatts operations as of January
1, 2010. Net income attributable to controlling interests for the fiscal year ended June 30, 2010
was $120.6 million, a decrease of $25.9 million, or 18%, compared to $146.5 million for the fiscal
year ended June 30, 2009. The decrease was primarily due to transaction and integration expenses of
$87.6 million incurred in connection with the Merger during fiscal year ended June 30, 2010.
Salaries and employee benefits was 65% of revenue for the fiscal year ended June 30, 2010, an
increase of 4% from 61% of revenue for the fiscal year ended June 30, 2009. This increase is the
result of stock-based compensation of $54.7 million recorded in the second half of fiscal 2010,
which consisted of $48.0 million related to the vesting of Restricted A shares issued to Towers
Perrin employees in the Merger and $4.6 million related to the vesting of the unamortized fair
value of Watson Wyatt stock options and deferred stock units outstanding at the time of the Merger.
The remaining increase is the result of higher salaries and employee benefits as a percentage of
revenue for Towers Perrin. There were no other significant increases or decreases of more than one
percent comparing the statements of operations line items as a percent of revenue period over
period for the fiscal years ended June 30, 2010 and 2009.
Provision for income taxes for the fiscal year ended June 30, 2010 was $50.9 million, compared to
$75.3 million for the fiscal year ended June 30, 2009. The effective tax rate for the year was
30.0% for the fiscal year ended June 30, 2010 and 33.9% for the fiscal year ended June 30, 2009.
The provision for income taxes for fiscal year 2010 includes a deferred tax charge for $10.6
million due to the enactment of the Patient Protection and Affordable Care Act and U.S. Health Care
and Education Reconciliation Act of 2010. We also released a net
valuation allowance of $27.5
million for U.S. foreign tax credits. We believe that it is more likely than not that these foreign
tax credits will be realized within the carryforward period as a result of generating future
sources of foreign income. Moreover, we released $3.6 million of reserves related to its uncertain
tax positions as a result of expiring statutes of limitations and effectively settled tax positions
following the examination of our 2007 and 2008 U.S. federal corporate income tax returns.
Net income attributable to controlling interests.
Net income attributable to controlling interests for the fiscal year ended June 30, 2010 was $120.6
million inclusive of the amortization of deal-related intangible assets, deductible and
non-deductible transaction and integration expenses including severance, stock-based compensation
related to Restricted Class A shares (recorded in salaries and employee benefits), loss of the
Medicare Part D subsidy and other Merger-related tax items, compared to net income attributable to
controlling interests of $146.5 million for the fiscal year ended June 30, 2009.
Earnings per share.
Diluted earnings per share for the fiscal year ended June 30, 2010 was $2.03, compared to $3.42 for
the fiscal year ended June 30, 2009.
Non-U.S. GAAP Measures
Diluted earnings per share exclusive of the amortization of intangible assets, deductible and
non-deductible transaction and integration expenses including severance, gain on sale of
investment, stock-based compensation related to Restricted Class A shares (recorded in salaries and
employee benefits), loss of the Medicare Part D subsidy and other Merger-related tax items
(adjusted diluted earnings per share), resulted in adjusted diluted earnings per share, a
non-generally accepted accounting principle in the U.S. (non-U.S. GAAP measure), for the fiscal
year ended June 30, 2010 of $3.69.
We use EBITDA, Adjusted EBITDA, Adjusted Net Income Attributable to Controlling Interests and
Adjusted Diluted Earnings Per Share, non-U.S. GAAP measures, to evaluate our financial performance
and separately evaluate our performance of the transaction and integration activities as well as
changes in tax law. We believe these measures are useful in evaluating our results of operations
and in providing a baseline for the evaluation of future operating results. We define EBITDA as net
income before non-controlling interests adjusted for provision for
income taxes, interest, net and depreciation and amortization. Reconciliation of
EBITDA and Adjusted EBITDA to net income before non-controlling interests, Adjusted Net Income Attributable to Controlling Interests
to net income attributable to controlling interests and Adjusted Diluted Earnings Per Share to
diluted earnings per share are included in the tables below. These non-U.S. GAAP measures are 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.
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Reconciliation of EBITDA and Adjusted EBITDA to net income
before non-controlling interests: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income before non-controlling interests |
|
$ |
119,010 |
|
|
$ |
146,627 |
|
|
$ |
155,699 |
|
Provision for income taxes |
|
|
50,907 |
|
|
|
75,276 |
|
|
|
73,470 |
|
Interest, net |
|
|
4,558 |
|
|
|
756 |
|
|
|
393 |
|
Depreciation and amortization |
|
|
101,084 |
|
|
|
73,448 |
|
|
|
72,428 |
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
|
275,559 |
|
|
|
296,107 |
|
|
|
301,990 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction and integration expenses |
|
|
87,644 |
|
|
|
|
|
|
|
|
|
Stock-based compensation (b) |
|
|
48,006 |
|
|
|
|
|
|
|
|
|
Other non-operating income (a) |
|
|
(10,030 |
) |
|
|
(13,276 |
) |
|
|
(2,789 |
) |
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
$ |
401,179 |
|
|
$ |
282,831 |
|
|
$ |
299,201 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Other non-operating income includes (income)/loss from affiliates, and other non-operating
income. |
|
(b) |
|
Stock-based compensation awarded to former Towers Perrin employees in connection with the
Merger is included in salaries and employee benefits expense. |
A reconciliation of net income attributable to controlling interests, as reported under generally
accepted accounting principles, to adjusted net income attributable to controlling interests, and
of diluted earnings per share as reported under generally accepted accounting principles to
adjusted diluted earnings per share is as follows:
|
|
|
|
|
|
|
Year Ended |
|
|
|
June 30, 2010 |
|
|
|
(In thousands, except share and per |
|
|
|
share amounts) |
|
Net Income Attributable to Controlling Interests |
|
$ |
120,597 |
|
|
|
|
|
|
|
|
|
|
Adjusted for expenses as a result of the Merger (c): |
|
|
|
|
Amortization of intangible assets |
|
|
21,020 |
|
Transaction and integration expenses including severance |
|
|
58,214 |
|
Gain on sale of investment |
|
|
(5,760 |
) |
Stock-based compensation from Restricted Class A Shares |
|
|
31,636 |
|
Other merger-related tax items |
|
|
(17,013 |
) |
Loss of Medicare Part D subsidy |
|
|
10,598 |
|
|
|
|
|
Adjusted Net Income Attributable to Controlling Interests |
|
$ |
219,292 |
|
|
|
|
|
|
|
|
|
|
Weighted Average Shares of Common Stock Diluted (000) |
|
|
59,372 |
|
|
|
|
|
|
|
|
|
|
Earnings Per Share Diluted, As Reported |
|
$ |
2.03 |
|
|
|
|
|
|
|
|
|
|
Adjusted for expenses as a result of the Merger: |
|
|
|
|
Amortization of intangible assets |
|
|
0.36 |
|
Transaction and integration expenses including severance |
|
|
0.98 |
|
Gain on sale of investment |
|
|
(0.10 |
) |
Stock-based compensation from Restricted Class A Shares |
|
|
0.53 |
|
Other merger-related tax items |
|
|
(0.29 |
) |
Loss of Medicare Part D subsidy |
|
|
0.18 |
|
|
|
|
|
Adjusted Earnings Per Share Diluted |
|
$ |
3.69 |
|
|
|
|
|
|
|
|
(c) |
|
The expenses that are adjusted as a result of the Merger for the year ended June 30, 2010
are net of tax. In calculating the net of tax amounts, the effective tax rate for amortization
of intangible assets is 32.8%, transaction and integration expenses including severance is
35.1%, stock-based compensation from Restricted Class A shares is 34.1%. The $10.6 million
related to the loss of Medicare Part D subsidy and $17.0 million of other Merger-related tax
items are items included in the consolidated statement of operations under provision for income
taxes. |
38
Historical Results of Operations for the Fiscal Year Ended June 30, 2009 Compared to Fiscal Year
Ended June 30, 2008
Revenue
Revenue for fiscal year ended June 30, 2009 was $1.68 billion, a decrease of $84.0 million, or 5%,
from $1.76 billion in fiscal year 2008. On a constant currency basis, revenue increased 3% over
fiscal year ended June 30, 2008.
The average exchange rate used to translate our revenue earned in British pounds sterling decreased
to 1.6323 for fiscal year 2009 from 2.0114 for fiscal year 2008, and the average exchange rate used
to translate our revenue earned in Euros decreased to 1.3816 for fiscal year 2009 from 1.4736 for
fiscal year 2008. The impact of the depreciation of the British pound sterling and the Euro was a
$115 million decrease in revenue in fiscal year 2009 as compared to fiscal year 2008. Changes in
the value of other foreign currencies relative to the U.S. dollar resulted in an additional $16
million decrease in revenue in fiscal year 2009 as compared to fiscal year 2008.
The changes in our segment revenue for fiscal year 2009 as compared to fiscal year 2008 are as
follows. Constant currency is calculated by translating prior year revenue at the current year
average exchange rate.
|
|
|
Benefits revenue decreased $33.3 million, or 3%, compared with fiscal year 2008 due to
the strengthening of the U.S. dollar. On a constant currency basis, revenue increased 4%
over fiscal year 2008 due to increased demand for our services. |
|
|
|
|
Technology and Administration Solutions revenue increased $5.1 million, or 3%, compared
with fiscal year 2008, due to increases in both North America and Europe. On a constant
currency basis, Technology and Administration Solutions revenue increased 12% over fiscal
year 2008. In Europe, revenue increased primarily as a result of new clients. In North
America, revenue increased due to additional project work at existing clients as well as to
an increase in the number of projects in on-going service delivery. |
|
|
|
|
Human Capital Group revenue decreased $23.2 million, or 12%, compared with fiscal year
2008. On a constant currency basis, revenue decreased 8% over fiscal year 2008 due to
decreases in demand for compensation, data and organizational effectiveness services. |
|
|
|
|
Investment Consulting revenue decreased $8.4 million, or 5%, compared with fiscal year
2008. On a constant currency basis, revenue increased 11% over fiscal year 2008 due
primarily to increased demand for investment strategy advice and implemented consulting
services. |
|
|
|
|
Insurance and Financial Services revenue decreased $1.4 million, or 1%, compared with
fiscal year 2008. On a constant currency basis, revenue increased 12% over fiscal year 2008
due primarily to additional project work. |
Salaries and Employee Benefits
Salaries and employee benefits expenses was $1.0 billion for fiscal year 2009 and 2008. On a constant currency basis, salaries and employee benefits increased primarily as a
result of increases in pension expense and base salary. Salaries and employee benefits also
includes $12.5 million of severance expense due to cost containment measures in response to
economic conditions in fiscal year 2009. As a percentage of revenue, salaries and employee benefits
increased to 61% from 60%.
Professional and Subcontracted Services
Professional and subcontracted services used in consulting operations for fiscal year 2009 were
$119.3 million, compared to $139.0 million for fiscal year 2008, a decrease of $19.7 million, or
14%. The decrease results primarily from the change in the average exchange rates used to translate
our expenses incurred in British pounds sterling and the Euro. As a percentage of revenue,
professional and subcontracted services decreased from 8% to 7% for the fiscal year 2009 compared
to fiscal year 2008.
Occupancy
Occupancy for fiscal year 2009 was $72.6 million, compared to $83.3 million for fiscal year 2008, a
decrease of $10.7 million, or 13%. The decrease results primarily from the change in the average
exchange rates used to translate our expenses incurred in British pounds sterling and the Euro. As
a percentage of revenue, occupancy decreased to 5% from 4% for the fiscal year 2009 compared to
fiscal year 2008.
General and Administrative Expenses
General and administrative expenses were $172.0 million for fiscal year 2009, compared to $185.6
million for fiscal year 2008, a decrease of $13.6 million, or 7%. On a constant currency basis,
general and administrative expenses decreased due to our cost containment efforts, principally in
the areas of travel, rent, telephone, promotion and office supplies. As a percentage of revenue,
general and administrative expenses decreased from 11% to 10% for the fiscal year 2009 compared to
2008.
39
Depreciation and Amortization
Depreciation and amortization for fiscal year 2009 was $73.4 million, compared to $72.4 million for
fiscal year 2008, an increase of $1.0 million, or 1%. On a constant currency basis, depreciation
and amortization increased principally due to increases in depreciation of internally developed
software used to support our Benefits and Technology and Administration Solutions Groups as well as
depreciation on capital assets. As a percentage of revenue, depreciation and amortization for
fiscal years 2009 and 2008 was 4%.
Income From Affiliates
Income from affiliates for the fiscal year 2009 was $8.4 million compared to $2.3 million for
fiscal year 2008, an increase of $6.0 million. These amounts reflect our portion of PCICs, Fifth
Quadrants, Dubais and IFAs operating results for fiscal year 2009, while the fiscal year 2008
only included our share of PCICs operating results. In addition, our share of PCICs operating
results in fiscal year 2009 reflected favorable claim experience in comparison with fiscal year
2008.
Interest Income
Interest income was $2.0 million for fiscal year 2009, a decrease of $3.6 million from $5.6 million
during fiscal year 2008. 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 was $2.8 million for fiscal year 2009, a decrease of $3.2 million from $6.0
million during fiscal year 2008. The decrease is due to a lower average debt balance as well as a
decrease in the average interest rate in the current year. The higher average debt balance in
fiscal year 2008 was the result of borrowings required for the Heissmann acquisition in July 2007.
Other Non-Operating Income
Other non-operating income was $4.9 million for fiscal year 2009, an increase of $4.5 million from
$0.5 million during fiscal year 2008. The increase was mainly due to the receipt of contingent
payments associated with divestiture of multi-employer business in 2008.
Income before Income Taxes
Income before income taxes for fiscal year 2009 was $221.9 million, a decrease of $7.3 million, or
3%, from $229.2 million for fiscal year 2008. As a percentage of revenue, income before income
taxes for fiscal years 2009 and 2008 was 13%.
Provision for Income Taxes
Provision for income taxes for fiscal year 2009 was $75.3 million, compared to $73.5 million for
fiscal year 2008. Our effective tax rate was 33.9% for fiscal year 2009 and 32.1% for fiscal year
2008. The tax rate increase is due to the geographic mix of income and true ups of the annual tax
provision. We have not provided U.S. deferred taxes on cumulative earnings of foreign subsidiaries
that have been reinvested indefinitely. We record 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.
Net Income Before Non-Controlling Interests
Net income before non-controlling interests for fiscal year 2009 was $146.6 million, a decrease of
$9.1 million, or 6%, from $155.7 million for fiscal year 2008. As a percentage of revenue, net
income for fiscal year 2009 and 2008 was 9%.
Net Income Attributable to Controlling Interests
Net income attributable to controlling interests for fiscal year 2009 was $146.5 million, a
decrease of $9.0 million, or 6%, from $155.4 million for fiscal year 2008. As a percentage of
revenue, net income for fiscal year 2009 and 2008 was 9%.
Diluted Earnings Per Share
Diluted earnings per share was $3.42 for fiscal year 2009, compared to $3.50 for fiscal year 2008.
40
UNAUDITED SUPPLEMENTAL PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
The following unaudited supplemental pro forma combined statements of operations have been
provided to present illustrative combined unaudited statements of operations for the fiscal
years ended June 30, 2010 and 2009, giving effect to the business combination as if it had been
completed on July 1, 2009 and 2008, respectively. The pro forma condensed combined statement of
operations for the fiscal year ended June 30, 2009 combines Watson Wyatts historical audited
consolidated statement of operations for the fiscal year ended June 30, 2009 with Towers
Perrins historical unaudited consolidated statement of operations for the twelve months ended
June 30, 2009. The pro forma condensed consolidated statement of operations for the fiscal year
ended June 30, 2010 combines Towers Watsons historical unaudited consolidated statement of
operations for the six months ended June 30, 2010 with Watson Wyatts and Towers Perrins
historical unaudited consolidated statements of operations for the six months ended December
31, 2009. Watson Wyatts fiscal year ended on June 30 while Towers Perrins fiscal year ended
on December 31. Towers Perrins financial information has been recast to conform to Watson
Wyatts fiscal year end. Towers Perrins historical statement of operations for the twelve
months ended June 30, 2009 was derived by subtracting (1) Towers Perrins unaudited
consolidated statement of operations for the six months ended June 30, 2008 from (2) Towers
Perrins audited consolidated statement of operations for the twelve months ended December 31,
2008, and adding (3) Towers Perrins unaudited consolidated statement of operations for the six
months ended June 30, 2009. Towers Perrins historical unaudited consolidated statement of
operations for the six months ended December 31, 2009 was derived by subtracting Towers
Perrins unaudited consolidated statement of operations for the six months ended June 30, 2009
from Towers Perrins audited consolidated statement of operations for the year ended December
31, 2009. The unaudited pro forma condensed combined financial statements should be read
together with the respective historical financial statements and related notes of Towers Perrin
and Watson Wyatt.
The unaudited pro forma condensed combined statements of operations give effect to the
Merger including:
|
|
|
related Merger consideration; |
|
|
|
|
adjustments made to record the assets and liabilities of Towers
Perrin at their estimated fair values; |
|
|
|
|
reclassifications made to conform Towers Perrins and Watson Wyatts
historical financial statement presentation to Towers Watsons; and |
|
|
|
|
the consolidation of Professional Consultants Insurance Company,
Inc., which we refer to as PCIC. |
Towers Perrin was a private, employee-owned corporation. As a result, Towers Perrins
historical unaudited consolidated statement of operations for the twelve months ended June 30,
2009 does not reflect the level of net income that Towers Perrin is expected to contribute to
Towers Watson, as a public company. Further, the revenue growth that we expect Towers Watson to
achieve from strengthening core services and expanding the existing portfolio of services is
not reflected in the unaudited pro forma condensed combined financial statements.
The unaudited pro forma condensed combined statements of operations do not reflect certain
financial targets relating to the Merger, such as our targeted synergy cost savings, reductions
in compensation and benefits expense resulting from the retirement of Class R participants, and
a further targeted reduction in compensation expense resulting from the elimination of the
principal bonus payments historically paid to legacy Towers Perrin Principals.
Pro forma earnings per share reflect the impact of significant non-cash and non-recurring
expenses resulting from the Merger, including compensation expense incurred as a result of the
issuance of Towers Watson restricted Class A common stock to Towers Perrin restricted stock
unit (RSU) holders and the incremental amortization of acquired intangible assets.
For purposes of these unaudited pro forma condensed combined statements of operations, we have
provided the fair value of the consideration and the allocation to Towers Perrins tangible and
intangible assets acquired and liabilities assumed based on preliminary estimates of their fair
values as of January 1, 2010, the consummation date of the Merger. These allocations are based
on preliminary estimates and assumptions, which are subject to change.
Towers Watson is implementing an integration plan that may affect how the assets acquired,
including intangibles, will be utilized. If assets in the combined company are phased out or no
longer used, additional amortization, depreciation and/or impairment charges would be recorded.
The following unaudited pro forma condensed combined statements of operations are provided for
informational purposes only.
They do not purport to represent what Towers Watsons results of operations would have been had the
Merger been completed as of the date indicated and do not purport to be indicative of the results
of operations that Towers Watson may achieve in the future.
41
Unaudited Supplemental Pro Forma Combined Statement of Operations
Year Ended June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Six Months Ended |
|
|
Year Ended |
|
|
|
June 30, 2010 |
|
|
December 31, 2009 |
|
|
June 30, 2010 |
|
|
|
As Reported |
|
|
Historical |
|
|
Pro Forma |
|
|
|
|
|
|
Towers Watson |
|
|
Towers Perrin |
|
|
PCIC |
|
|
Adjustments |
|
|
As Adjusted |
|
|
|
(In thousands, except share and per share data) |
|
Revenue |
|
$ |
2,387,829 |
|
|
$ |
798,131 |
|
|
$ |
12,750 |
|
|
$ |
(9,404 |
) H |
|
$ |
3,180,916 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,390 |
) K |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of providing services: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits |
|
|
1,540,417 |
|
|
|
558,855 |
|
|
|
107 |
|
|
|
46,832 |
B |
|
|
2,146,211 |
|
Professional and subcontracted services |
|
|
163,848 |
|
|
|
79,421 |
|
|
|
483 |
|
|
|
|
|
|
|
243,752 |
|
Occupancy |
|
|
109,454 |
|
|
|
35,406 |
|
|
|
|
|
|
|
1,835 |
A |
|
|
146,695 |
|
General and administrative expenses |
|
|
220,937 |
|
|
|
40,351 |
|
|
|
16,924 |
|
|
|
(9,404 |
) H |
|
|
268,808 |
|
Depreciation and amortization |
|
|
101,084 |
|
|
|
19,007 |
|
|
|
|
|
|
|
11,508 |
A |
|
|
131,599 |
|
Transaction and integration expenses |
|
|
87,644 |
|
|
|
15,734 |
|
|
|
|
|
|
|
(103,378 |
) E |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,223,384 |
|
|
|
748,774 |
|
|
|
17,514 |
|
|
|
(52,607 |
) |
|
|
2,937,065 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
164,445 |
|
|
|
49,357 |
|
|
|
(4,764 |
) |
|
|
34,813 |
|
|
|
243,851 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from affiliates |
|
|
(1,274 |
) |
|
|
(164 |
) |
|
|
|
|
|
|
353 |
J |
|
|
(1,085 |
) |
Interest income |
|
|
2,950 |
|
|
|
530 |
|
|
|
1,517 |
|
|
|
(266 |
) C |
|
|
4,731 |
|
Interest expense |
|
|
(7,508 |
) |
|
|
(1,536 |
) |
|
|
|
|
|
|
(2,000 |
) D |
|
|
(11,991 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(947 |
) G |
|
|
|
|
Other non-operating income |
|
|
11,304 |
|
|
|
5,281 |
|
|
|
|
|
|
|
|
|
|
|
16,585 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
169,917 |
|
|
|
53,468 |
|
|
|
(3,247 |
) |
|
|
31,953 |
|
|
|
252,091 |
|
Provision for income taxes |
|
|
50,907 |
|
|
|
9,779 |
|
|
|
(1,187 |
) |
|
|
8,419 |
F |
|
|
67,918 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before non-controlling interest |
|
$ |
119,010 |
|
|
$ |
43,689 |
|
|
$ |
(2,060 |
) |
|
$ |
23,534 |
|
|
$ |
184,173 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to non-controlling interests |
|
$ |
(1,587 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
(559 |
) I |
|
$ |
(2,146 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to controlling interests |
|
$ |
120,597 |
|
|
$ |
43,689 |
|
|
$ |
(2,060 |
) |
|
$ |
24,093 |
|
|
$ |
186,319 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to controlling interests basic |
|
$ |
2.04 |
|
|
|
|
|
|
|
|
|
|
|
|
L |
|
$ |
3.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to controlling interests
diluted |
|
$ |
2.03 |
|
|
|
|
|
|
|
|
|
|
|
|
L |
|
$ |
3.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock,
basic (000) |
|
|
59,257 |
|
|
|
|
|
|
|
|
|
|
|
|
L |
|
|
59,257 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock,
diluted (000) |
|
|
59,372 |
|
|
|
|
|
|
|
|
|
|
|
|
L |
|
|
59,372 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42
Unaudited Supplemental Pro Forma Combined Statement of Operations
Year Ended June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma |
|
|
|
|
|
|
Watson Wyatt |
|
|
Towers Perrin |
|
|
PCIC |
|
|
Adjustments |
|
|
As Adjusted |
|
|
|
(In thousands, except share and per share data) |
|
Revenue |
|
$ |
1,676,029 |
|
|
$ |
1,586,299 |
|
|
$ |
39,873 |
|
|
$ |
(27,804 |
) H |
|
$ |
3,251,323 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,074 |
) K |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of providing services: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits |
|
|
1,029,299 |
|
|
|
1,107,619 |
|
|
|
147 |
|
|
|
99,397 |
B |
|
|
2,236,462 |
|
Professional and subcontracted services |
|
|
119,323 |
|
|
|
172,825 |
|
|
|
1,144 |
|
|
|
|
|
|
|
293,292 |
|
Occupancy |
|
|
72,566 |
|
|
|
68,157 |
|
|
|
|
|
|
|
3,669 |
A |
|
|
144,392 |
|
General and administrative expenses |
|
|
172,010 |
|
|
|
200,047 |
|
|
|
19,226 |
|
|
|
(27,804 |
) H |
|
|
352,109 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,370 |
) E |
|
|
|
|
Depreciation and amortization |
|
|
73,448 |
|
|
|
38,758 |
|
|
|
|
|
|
|
24,308 |
A |
|
|
136,514 |
|
Transaction and integration expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
E |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,466,646 |
|
|
|
1,587,406 |
|
|
|
20,517 |
|
|
|
88,200 |
|
|
|
3,162,769 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
209,383 |
|
|
|
(1,107 |
) |
|
|
19,356 |
|
|
|
(139,078 |
) |
|
|
88,554 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from affiliates |
|
|
8,350 |
|
|
|
5,257 |
|
|
|
|
|
|
|
(13,313 |
) J |
|
|
294 |
|
Interest income |
|
|
2,022 |
|
|
|
4,708 |
|
|
|
4,924 |
|
|
|
(3,087 |
) C |
|
|
8,567 |
|
Interest expense |
|
|
(2,778 |
) |
|
|
(3,489 |
) |
|
|
|
|
|
|
(4,000 |
) D |
|
|
(12,160 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,893 |
) G |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other non-operating income |
|
|
4,926 |
|
|
|
14,884 |
|
|
|
|
|
|
|
|
|
|
|
19,810 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
221,903 |
|
|
|
20,253 |
|
|
|
24,280 |
|
|
|
(161,371 |
) |
|
|
105,065 |
|
Provision for income taxes |
|
|
75,276 |
|
|
|
40,223 |
|
|
|
8,268 |
|
|
|
(63,251 |
) F |
|
|
60,516 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before non-controlling interests |
|
$ |
146,627 |
|
|
$ |
(19,970 |
) |
|
$ |
16,012 |
|
|
$ |
(98,120 |
) |
|
$ |
44,549 |
|
Net income attributable to non-controlling interests |
|
$ |
169 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
4,346 |
I |
|
$ |
4,515 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to controlling interests |
|
$ |
146,458 |
|
|
$ |
(19,970 |
) |
|
$ |
16,012 |
|
|
$ |
(102,466 |
) |
|
$ |
40,034 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to controlling interests basic |
|
$ |
3.43 |
|
|
|
|
|
|
|
|
|
|
|
|
L |
|
$ |
0.68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to controlling interests
diluted |
|
$ |
3.42 |
|
|
|
|
|
|
|
|
|
|
|
|
L |
|
$ |
0.67 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock,
basic (000) |
|
|
42,690 |
|
|
|
|
|
|
|
|
|
|
|
|
L |
|
|
59,257 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock,
diluted (000) |
|
|
42,861 |
|
|
|
|
|
|
|
|
|
|
|
|
L |
|
|
59,372 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43
Pro Forma Adjustments
The pro forma adjustments reflected in the unaudited supplemental pro forma condensed
combined financial information are as follows:
|
A) |
|
Reflects estimated amortization of Towers Perrins acquired
intangible assets on an accelerated amortization basis over their estimated
useful lives. Customer-related intangible assets are amortized over a 12-year
estimated life and developed technology intangible assets are amortized over a
weighted-average four-year estimated life. The trademark and trade names
intangible asset has an indefinite life. Also reflects one year of an adjustment
to rent expense to approximate fair value. |
|
|
B) |
|
Reflects non-cash compensation expense in connection with the
issuance of Towers Watson restricted Class A common stock to Towers Perrin RSU
holders in the Merger and $4.6 million of Class A common stock issued pursuant
to the acceleration of vesting of Watson Wyatts outstanding stock options and
RSU awards due to change-in-control provisions. The graded method of expense
methodology assumes that the restricted shares are issued to Towers Perrin RSU
holders in equal amounts of shares which vest over one year, two years and three
years. The current estimate of total non-cash compensation expense relating to
Towers Watson restricted Class A common stock for the three-year period is
$158.2 million. This estimate was determined assuming a 10% annual forfeiture
rate based on actual and expected attrition. |
|
|
C) |
|
Reflects interest income forgone as a result of the cash
consideration of $200 million paid to Towers Perrin Class R Participants in
conjunction with the redemption of Towers Watson Class R common stock. |
|
|
D) |
|
Reflects interest accrued on $200 million principal amount of Towers
Watson Notes issued to Towers Perrin Class R Participants. Interest on the
Towers Watson Notes accrued at a 2.0% fixed rate per annum, compounded annually. |
|
|
E) |
|
Reflects the elimination of Merger-related transaction costs
(including financial advisory, legal and valuation fees). Because transaction
costs will not have a continuing impact, they are not reflected in the unaudited
pro forma condensed combined statement of operations. |
|
|
F) |
|
Reflects the provision for taxes, adjustments to deferred tax asset,
deferred tax liability, goodwill and retained earnings as a result of the
Merger, fair value adjustments to the net assets of Towers Perrin and other
acquisition accounting adjustments. On January 1, 2010, Towers Watson recorded
deferred taxes and other tax adjustments as part of the accounting for the
Merger, including deferred taxes of $235.7 million related to the estimated fair
value adjustments for the acquired assets and liabilities. The deferred taxes
have been calculated based on the U.S. and foreign statutory tax rates for
jurisdictions where the fair value adjustments are estimated. A U.S. statutory
rate of 39.6% was used, except for adjustments related to PCIC for which a 34%
statutory rate was used since PCIC would not be included in the U.S.
consolidated tax return. For purposes of determining the estimated income tax
expense for the adjustments reflected in the unaudited pro forma condensed
combined statement of operations, taxes were determined by applying the
applicable statutory tax rate for jurisdictions where each pro forma adjustment
is expected to be reported. Although not reflected in these unaudited pro forma
condensed combined statements of operations, the effective tax rate of the
combined company could be significantly different depending on post-acquisition
activities, including repatriation decisions, the geographic mix of income, and
post-Merger restructuring activities. |
|
|
G) |
|
Reflects one year of amortization of $5.7 million of bank fees
associated with the Towers Watson credit facility, which will be amortized over
a three-year period. |
|
|
H) |
|
Reflects the elimination of premium revenue and unearned revenues
from Watson Wyatt and Towers Perrin as recorded by PCIC, as well as related
expense recorded by Watson Wyatt and Towers Perrin. |
|
|
I) |
|
Reflects the 27.14% non-controlling interest in PCIC of the remaining
minority shareholder. |
|
|
J) |
|
Reflects the elimination of Watson Wyatts and Towers Perrins
earnings from PCIC as recorded under the equity method. |
|
|
K) |
|
Reflects the reduction of revenue for the acquisition fair value
adjustment of historical Towers Perrin deferred revenue to reflect the
unrecognized revenue relating to the amount of effort that was performed prior
to the Merger which would not be subsequently earned under acquisition
accounting rules. |
|
|
L) |
|
Earnings per share calculations for the year ended June 30, 2010 and
2009 are based on Towers Watsons fully diluted shares outstanding as of June
30, 2010. |
44
Pro Forma Financial Information for the Fiscal Year Ended June 30, 2010
Compared to the Fiscal Year Ended June 30, 2009
Revenue
Towers Watson pro forma revenue for the fiscal year ended June 30, 2010 was $3.18 billion, a
decrease of $70 million, or 2%, from $3.25 billion for the fiscal year ended June 30, 2009.
A comparison of pro forma segment revenue for the fiscal year ended June 30, 2010, as compared to
the fiscal year ended June 30, 2009 is as follows:
|
|
|
Benefits revenue increased less than 1% and was $1.83 billion for the fiscal
year ended June 30, 2010 compared to $1.82 billion for the fiscal year ended June 30,
2009. Health and Group Benefits and Technology and Administration Solutions practices
had single digit increases year over year, which was partially offset by a less than 1%
decrease in the Retirement practice that makes up the majority of the segments revenue. |
|
|
|
|
Risk and Financial Services revenue decreased 4% and was $720.9 million and
$750.4 million for the fiscal years ended June 30, 2010 and 2009, respectively. This
decrease was a result of a decrease in revenue of the Risk Consulting and Software
practice from fiscal year 2009 to fiscal year 2010, which was partially offset by
increases in revenue of the Investment and Brokerage practices in fiscal year 2010
compared to fiscal year 2009. |
|
|
|
|
Talent and Rewards revenue decreased 7% and was $538.8 million and $582.0
million for the fiscal years ended June 30, 2010 and 2009, respectively. This decrease
was primarily the result of a decrease in revenue from the Rewards, Talent and
Communication practice from fiscal year 2009 to fiscal year 2010. Executive Compensation
practice also decreased slightly and was partially offset by a single digit increase in
Data, Surveys and Technology revenue for fiscal year 2010 compared to fiscal year 2009. |
Salaries and Employee Benefits
Salaries and employee benefits was $2.1 billion for the fiscal year ended June 30, 2010 compared to
$2.2 billion for the fiscal year ended 2009. On a constant currency basis, the decrease was
principally due to a decrease in base salary expense and other employee benefits expense resulting
from a 7% reduction in headcount, as well as fiscal year 2009 Towers Perrin principal bonuses,
partially offset by an increase in discretionary compensation and pension expenses. As a
percentage of revenue, salaries and employee benefits decreased to 67.5% for fiscal year 2010 from
68.8% for fiscal year 2009.
Professional and Subcontracted Services
Professional and subcontracted services used in consulting operations for the fiscal year ended
June 30, 2010 were $243.8 million, compared to $293.3 million for the fiscal year ended June 30,
2009, a decrease of $49.5 million, or 16.9%. The decrease results primarily from the change in the
average exchange rates used to translate our expenses incurred in British pounds sterling and the
Euro. On a constant currency basis, the decrease was principally due to a decrease in external
service providers and reimbursable expenses incurred on behalf of clients, primarily attributable
to the current economic environment. As a percentage of revenue, professional and subcontracted
services decreased to 7.7% for fiscal year 2010 from 9.0% for fiscal year 2009.
Occupancy
Occupancy expense for the fiscal year ended June 30, 2010 was $146.7 million compared to $144.4
million for the fiscal year ended June 30, 2009, an increase of $2.3 million, or 1.6%. On a
constant currency basis, the increase was the result of entering into new leases during the third
quarter of fiscal year 2009. As a percentage of revenue, occupancy expense increased to 4.6% for
fiscal year 2010 from 4.4% for fiscal year 2009.
General and Administrative Expenses
General and administrative expenses for the fiscal year ended June 30, 2010 were $268.8 million,
compared to $352.1 million for the fiscal year ended June 30, 2009, a decrease of $83.3 million, or
23.7%. On a constant currency basis, the most significant decreases were due to decreases in
professional liability expense as a result of a reduction in reserves for specific claims and
recognized foreign exchange gains primarily related to the re-measurement of short-term assets.
Other decreases include travel expense, promotion expense, and general office expense. As a
percentage of revenue, general and administrative expenses decreased to 8.5% for fiscal year 2010
from 10.8% for fiscal year 2009.
45
Depreciation and Amortization
Depreciation and amortization expense for the fiscal year ended June 30, 2010 was $131.6 million,
compared to $136.5 million for the fiscal year ended June 30, 2009, a decrease of $4.9 million, or
3.6%. The decrease results primarily from the change in the average exchange rates used to
translate our expenses incurred in British pounds sterling and the Euro. On a constant currency
basis, depreciation and amortization expense increased principally due to an increase in
amortization of intangibles related to the Merger, partially offset by a decrease in depreciation
of fixed assets. As a percentage of revenue, depreciation and amortization expenses was
4.1% and 4.2% for fiscal years 2010 and 2009, respectively.
Transaction and Integration Expenses
Transaction and integration expenses incurred related to the Merger were $103.4 million for the
fiscal year ended June 30, 2010. Transaction and integration expenses principally consist of
investment banker fees, regulatory filing expenses, integration consultants, as well as legal,
accounting, marketing, and IT integration expenses. As a percentage of revenue, transaction and
integration expenses were 3.2% for fiscal year 2010. Transaction and integration expenses are
eliminated in the pro forma condensed combined statements of operations because these costs will
not have a continuing impact.
(Loss)/Income From Affiliates
Loss from affiliates for the fiscal year ended June 30, 2010 was $1.1 million compared to income
from affiliates of $294 thousand for the fiscal year ended June 30, 2009. Income from affiliates
during the fiscal year 2009 included the loss associated with the sale of an investment by Towers
Perrin in June 2009. Loss from affiliates for the fiscal year 2010 includes our share of our
affiliates losses as well as an asset write-down of an equity affiliate.
Interest Income
Interest income for the fiscal year ended June 30, 2010 was $4.7 million, compared to $8.6 million
for the fiscal year ended June 30, 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 fiscal year ended June 30, 2010 was $12.0 million, compared to $12.2
million for the fiscal year ended June 30, 2009. The decrease was principally due to the decline in
London Interbank Offered Rates (Libor).
Other Non-Operating Income
Other non-operating income for the fiscal year ended June 30, 2010 was $16.6 million, compared to
$19.8 million for the fiscal year ended June 30, 2009. The additional income in fiscal year 2009
compared to fiscal year 2010 was principally due to contingent payments received during fiscal year
2009 from an investment that was sold in June 2009, combined with other contingent payments
received in fiscal year 2009.
Explanatory Note Regarding Pro Forma Financial Information
The unaudited pro forma combined statements of operations and pro forma analysis above have been
provided to present illustrative combined unaudited statements of operations for the fiscal years
ended June 30, 2010 and 2009, giving effect to the business combination as if it had been completed
on July 1, 2009 and 2008, respectively. This presentation was for illustrative purposes only and is
not indicative of the results of operations that might have occurred had the business combination
actually taken place as of the dates specified, or that may be expected to occur in the future.
Historical Results of Towers Watson
The following sections of Managements Discussion and Analysis are based on actual results of the
business and do not contain pro forma information.
Liquidity and Capital Resources
Our cash and cash equivalents at June 30, 2010 totaled $600.5 million, compared to $209.8 million
at June 30, 2009. The increase in cash from June 30, 2009 to June 30, 2010 was principally
attributable to the $721.7 million in cash balances acquired
in connection with the Merger less consideration payments of
$200.0 million. In fiscal year 2010, we paid $496.1 million of discretionary compensation
consisting of Watson Wyatts bonus related to both the fiscal
year ended June 30, 2009 and the six months ended
December 31, 2009, as well as, Towers
Perrins bonus for calendar year 2009. Towers Watson also paid $58.6 million in corporate taxes,
$25.8 million in capital expenditures and $15.2 million in dividends during fiscal year 2010. These
outflows of cash were principally funded by cash balances acquired from Towers Perrin.
46
Consistent with our liquidity position, management considers various alternative strategic uses of
cash reserves including acquisitions, dividends and stock buybacks, or any combination of these
options. We believe that we have sufficient resources to fund operations beyond the next 12 months.
The non-U.S. operations are substantially self-sufficient for their working capital needs. As of
June 30, 2010, $307.7 million of Towers Watsons total cash balance of $600.5 million was held
outside of the United States, 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.
Included in cash balances is $68.7 million from the consolidated balance sheet of PCIC, which is
available for payment of professional liability claims reserves, and $164.5 million, which is
available for payment of reinsurance premiums on behalf of reinsurance clients.
Assets and liabilities associated with non-U.S. entities have been translated into U.S. dollars as
of June 30, 2010, 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 fiscal year 2010 were $34.9 million, compared to cash
flows from operating activities of $227.5 million for fiscal year 2009. The difference is primarily
attributable to payment of Watson Wyatts bonus related to both
the fiscal year ended June 30, 2009 and the six months ended December
31, 2009, as well as, Towers Perrins bonus related to calendar
year December 31, 2009.
The allowance for doubtful accounts
increased $3.5 million from June 30, 2009 to June 30, 2010,
primarily related to the Merger. The number of days of accounts receivable increased to 69 at June
30, 2010 compared to 62 at June 30, 2009.
Cash
Flows From/(Used in) Investing Activities.
Cash flows from investing activities for fiscal year 2010 were $489.9 million, compared to $61.1
million of cash flows used in investing activities for fiscal year 2009. The difference was
primarily attributed to Towers Perrins and PCICs cash
balances acquired in the Merger of $721.7 million less $200 million
of cash
consideration paid.
Cash Flows Used in Financing Activities.
Cash flows used in financing activities for fiscal year 2010 were $49.1 million, compared to cash
flows used in financing activities of $83.7 million for fiscal year 2009. This change was primarily
attributable to the repurchase of $34.9 million of Towers Watsons common stock in fiscal year
2010, compared to repurchases of $77.4 million of common stock during fiscal year 2009.
Capital Commitments
Expenditures of capital funds were $25.8 million for fiscal year 2010. Anticipated commitments of
capital funds for Towers Watson are estimated at $93.4 million for fiscal year 2011. We expect cash
from operations to adequately provide for these cash needs.
Dividends
During fiscal year 2010, our board of directors approved the payment of a quarterly cash dividend
in the amount of $0.075 per share. Total dividends paid in fiscal year 2010 and in fiscal year 2009
were $15.2 million and $12.8 million, respectively.
Under our credit facility (see Note 11, Commitments and Contingent Liabilities, of the notes to
the consolidated financial statements included in Item 15 of this Annual Report), we are required
to observe certain covenants (including requirements for a fixed coverage charge, cash flow
leverage ratio and asset coverage) that affect the amounts available for the declaration or payment
of dividends. The continued payment of cash dividends in the future is at the discretion of our
board of directors and depends on numerous factors, including, without limitation, our net income,
financial condition, availability of capital, debt covenant limitations and our other business
needs, including those of our subsidiaries and affiliates.
47
Off-Balance Sheet Arrangements and Contractual Obligations
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Remaining payments by fiscal year due as of June 30, 2010 |
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Contractual Cash |
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Less than |
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More than |
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Obligations (in thousands) |
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Total |
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1 Year |
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1-3 Years |
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|
3-5 Years |
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|
5 Years |
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Notes payable |
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$ |
300,555 |
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|
$ |
201,967 |
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|
$ |
98,588 |
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|
$ |
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|
$ |
|
|
Lease commitments |
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|
628,039 |
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|
|
113,771 |
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|
|
185,138 |
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|
|
133,370 |
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|
|
195,760 |
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|
|
|
|
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|
|
|
|
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|
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$ |
928,594 |
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$ |
315,738 |
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|
$ |
283,726 |
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|
$ |
133,370 |
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|
$ |
195,760 |
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Operating Leases
We lease office space, furniture, cars and selected computer equipment under operating lease
agreements with terms typically ranging from one to 10 years. We have 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 leases will be mainly market driven. An
intangible asset and liability was recognized for the difference between the contractual cash
obligations shown above and the estimated market rates at the time of the acquisition. The
resulting intangibles will amortize to rent expense but do not impact the amounts shown above since
there is no change to our contractual cash obligations.
Pension Contribution
Contributions to our various pension plans for fiscal year 2011 are projected to be approximately
$60 million.
Uncertain Tax Positions
The table above does not include liabilities for uncertain tax positions under ASC 740,
Income Taxes. The settlement period for the $36.4 million noncurrent portion of the liability
cannot be reasonably estimated since it depends on the timing and possible outcomes of tax
examinations with various tax authorities.
Indebtedness
Subordinated Notes due January 2011
On December 30, 2009, in connection with the Merger and the Class R Elections as described in Note
2, Merger with Towers Perrin, of the notes to the consolidated financial statements contained
herein, Towers Watson entered into an indenture with the trustee for the issuance of Towers Watson
Notes in the aggregate principal amount of $200 million. The Towers Watson Notes due January 2011
were issued on January 6, 2010, bearing interest from January 4, 2010 at a fixed per-annum rate of
2.0%, and will mature on January 1, 2011. The indenture contains limited operating covenants, and
obligations under the Towers Watson Notes due January 2011 are subordinated to and junior in right
of payment to the prior payment in full in cash of all Senior Debt (as defined in the indenture).
Subordinated Notes due March 2012
On June 15, 2010, in connection with an offer to exchange shares of Class B-1 common stock for
unsecured subordinated notes, we entered into an indenture with the trustee for the issuance of
Towers Watson Notes due March 2012 in the aggregate principal amount of $98.5 million. The Towers
Watson Notes due March 2012 were issued on June 29, 2010, bearing interest from June 15, 2010 at a
fixed per annum rate, compounded quarterly on the interest reset dates, equal to the greater of
(i) 2.0%, or (ii) 120.0% of the short-term applicable federal rate listed under the quarterly
column, in effect at the applicable interest reset date. The Towers Watson Notes due March 2012
will mature on March 15, 2012 and are included in the other non-current liabilities balance on our
consolidated balance sheet as of June 30, 2010. Obligations under the Towers Watson Notes due March
2012 are subordinated to and junior in right of payment to the prior payment in full in cash of all
Senior Debt (as defined in the indenture).
Towers Watson Senior 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 Senior Credit Facility will bear interest at a spread to
either Libor or the Prime Rate. We are charged a quarterly commitment fee, currently 0.5% of the
Senior Credit Facility, which varies with our financial leverage and is paid on the unused portion
of the Senior Credit Facility. Obligations under the Senior Credit Facility are guaranteed by
Towers Watson and all of its domestic subsidiaries (other than PCIC) and are secured by a pledge of
65% of the voting stock and 100% of the non-voting stock of Towers Perrin Luxembourg Holdings
S.A.R.L.
48
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 June 30, 2010, we had no borrowings outstanding under the Senior Credit Facility.
Letters of Credit under the Senior Credit Facility
As of June 30, 2010, we had standby letters of credit totaling $24.9 million associated with our
captive insurance companies in the event that we fail to meet our financial obligations.
Additionally, we had $0.8 million of standby letters of credit covering various other existing or
potential business obligations. The aforementioned letters of credit are issued under the Senior
Credit Facility, and therefore reduce the amount that can be borrowed under the Senior Credit
Facility by the outstanding amount of these standby letters of credit.
Additional Borrowings, Letters of Credit and Guarantees not part of the Senior Credit Facility
Towers Watson Consultoria Ltda. (Brazil) has a bilateral credit facility with a major bank totaling
Brazilian Real (BRL) 6.5 million (U.S. $3.6 million). As of June 30, 2010 a total of BRL 5.6
million ($3.1 million) was outstanding under this facility.
We have also provided a $5.0 million Australian dollar-denominated letter of credit (U.S. $4.2
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
we believe that the likelihood of future usage is remote.
Towers Watson also has $3.3 million of letters of guarantee from major banks in support of office
leases and performance under existing or prospective contracts.
Risk Management
As a part of our overall risk management program, we purchase customary commercial insurance
policies, including commercial general liability and claims-made professional liability insurance.
Our professional liability insurance currently includes a self-insured retention of $1 million per
claim, and covers professional liability claims against us, including the cost of defending such
claims. Prior to the Merger, Watson Wyatt and Towers Perrin each carried substantial professional
liability insurance with a self-insured retention of $1 million per claim, which policies remained
in force subsequent to the Merger through June 30, 2010. 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. The contingent liabilities recorded are primarily developed
actuarially. Litigation is subject to many factors that are difficult to predict, so there can be
no assurance that in the event of a material unfavorable result in one or more of the pending
claims, we will not incur material costs.
Our professional liability insurance coverage, beyond our self-insured retention, has been written
by PCIC, an affiliated captive insurance company owned, prior to the Merger, by Watson Wyatt,
Towers Perrin and a non-affiliated company, with $25 million of reinsurance provided by various
commercial reinsurers attaching for claims in excess of $26 million. In addition, both legacy
companies carried excess insurance above the self-insured retention and the coverage provided by
PCIC. Prior to the Merger, Watson Wyatt accounted for its share of PCICs earnings using the equity
method. Our ownership interest in PCIC is 72.86% post-Merger. As a consequence, PCICs results of
operations are consolidated into our results of operations. Although the PCIC insurance policies
for Towers Watsons fiscal year 2010 continued to cover professional liability claims above a $1
million per claim self-insured retention (SIR), the consolidation of PCIC will effectively net
PCICs premium income against our premium expense for the first $25 million of loss above the SIR
for each legacy company. Accordingly, the impact of PCICs reserve development may result in
fluctuations in our earnings.
PCIC ceased issuing insurance policies effective July 1, 2010 and at that time entered into a
run-off mode of operation. We have established a new Vermont-regulated wholly owned captive
insurance company, Stone Mountain Insurance Company (Stone Mountain), through which we obtained
similarly structured primary insurance effective July 1, 2010.
In formulating its premium structure, PCIC estimated the amount it expected to pay for losses (and
loss expenses) for the member firms as a whole and then allocated that amount to the member firms
based on the individual members expected losses. PCIC based premium calculations, which were
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.
49
Our shareholder agreements with PCIC could require additional payments to PCIC if development of
claims significantly exceeds prior expectations. If these circumstances were to occur, we would
record a liability at the time it becomes probable and reasonably estimable.
We provide for the self-insured retention where specific estimated losses and loss expenses for
known claims are considered probable and reasonably estimable. Although we maintain professional
liability insurance coverage, this insurance does not cover claims made after expiration of our
current policies of insurance. 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. We use
actuarial assumptions to estimate and record our IBNR liability. As of June 30, 2010, we had a
$222.3 million IBNR liability balance.
As stated above, commencing July 1, 2010, Towers Watson is obtaining primary insurance for errors
and omissions professional liability risks from Stone Mountain. Stone Mountain provides us with $50
million of coverage per claim and in the aggregate on a claims-made basis. Stone Mountain has
secured reinsurance for coverage providing $25 million in excess of the $25 million retained layer
for the current policy period. Stone Mountain has issued a policy of insurance substantially
similar to the historical policies issued by PCIC.
Insurance market conditions for us and our industry have varied in recent years, but the long-term
trend has been increasing premium cost. Although the market for insurance is presently robust,
trends toward higher self-insured retentions, constraints on aggregate excess coverage for this
class of professional liability risk and financial difficulties which have, over the past two
years, been faced by several longstanding E&O carriers are anticipated 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 light of increasing litigation worldwide, including litigation against professionals, we have 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. With the
exception of our brokerage business, nearly 100% of our U.S. and U.K. corporate clients have signed
engagement letters including some if not all of our preferred risk mitigation clauses, and
processes to maintain that protocol in the United States and the United Kingdom, and to complete it
elsewhere, are underway.
Recent Accounting Pronouncements
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. This adoption did not have a
material impact on our financial position or results of operations.
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 us 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
50
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 and as a result, expensed to transaction and integration
expenses $6.0 million of capitalized transaction expenses incurred before adoption.
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, our 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. In addition, our non-controlling interest of $169 thousand and $258 thousand for the fiscal
year ended June 30, 2009 and 2008, which was previously including in (loss)/income from affiliates,
was reclassified to net (loss)/income attributable to non-controlling interests in our results of
operations.
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. We adopted these provisions on July 1, 2009.
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. We 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 our financial position or results of operations.
Not yet adopted
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 and we do not
anticipate that the adoption of these provisions will have a material impact on our financial
position or results of operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
We are 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
For the six months ended June 30, 2009, 48% of our revenue is denominated in currencies other than
the U.S. dollar, typically in the local currency of our foreign operations. 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 sterling, Canadian dollar and 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. At June 30, 2010, a uniform 10%
strengthening in the value of the U.S. dollar relative to the currencies in which our transactions
are denominated would result in a decrease in net income attributable to controlling interests of
$13.5 million, or 11.2%, for the fiscal year ended June 30, 2010. This theoretical calculation
assumes that each exchange rate would change in the same direction relative to the U.S. dollar.
This calculation is not indicative of our actual experience in foreign currency transactions.
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
51
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
operations. Certain of Towers Watsons foreign brokerage subsidiaries, primarily in the United
Kingdom, receive revenue in currencies (primarily in U.S. dollars) that differ from their
functional currencies. To reduce this variability, Towers Watson 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 8. Financial Statements and Supplementary Data.
Our consolidated financial statements, together with the related notes and the report of
independent registered public accounting firm, are set forth on the pages indicated in Item 15.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
There are no changes in accountants or disagreements with accountants on accounting principles and
financial disclosures required to be disclosed in this Item 9.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
An evaluation was performed under the supervision and with the participation of our principal
executive officer, principal financial officer and senior management, of the effectiveness of the
design and operation of our disclosure controls and procedures as of the end of the period covered
by this report. Based upon that evaluation, our principal executive officer, principal financial
officer, and senior management concluded that our disclosure controls and procedures were effective
in providing reasonable assurance that the information required to be disclosed in our periodic
reports we file or submit under the Exchange Act is (1) recorded, processed, summarized and
reported within the time periods specified in SEC rules and forms, and (2) accumulated and
communicated to our management to allow their timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting in the fourth quarter of
fiscal year 2010 that materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
Managements Report on Internal Control over Financial Reporting
Internal control over financial reporting refers to the process designed by, or under the
supervision of, our Chief Executive Officer and Chief Financial Officer, and overseen by our board
of directors, management and other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles, and includes those policies
and procedures that:
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(1) |
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Pertain to the maintenance of records that in reasonable detail accurately and fairly
reflect the transactions and dispositions of the assets of the company; |
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(2) |
|
Provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and |
|
|
(3) |
|
Provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the companys assets that could have a material effect on
the financial statements. |
Internal control over financial reporting cannot provide absolute assurance of achieving financial
reporting objectives because of its inherent limitations. Internal control over financial reporting
is a process that involves human diligence and compliance and is subject to lapses in judgment and
breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion
52
or improper management override. Because of such limitations, there is a
risk that material misstatements may not be prevented or detected on a timely basis by internal
control over financial reporting. However, these inherent limitations are known features of the
financial reporting process. Therefore, it is possible to design into the process safeguards to
reduce, though not eliminate, this risk.
Management is responsible for establishing and maintaining adequate internal control over financial
reporting for the company. Management has used the framework set forth in the report entitled
Internal Control Integrated Framework published by the Committee of Sponsoring Organizations
(COSO) of the Treadway Commission to evaluate the effectiveness of the companys internal control
over financial reporting. Based on this evaluation, management has concluded that the companys
internal control over financial reporting was effective as of June 30, 2010.
In conducting our evaluation of the effectiveness of its internal control over financial reporting,
management has excluded the Merger with Towers Perrin and acquisition of PCIC, which was completed by the
Company on January 1, 2010. Towers Perrin represented approximately $2.8 billion, or 60.9%, of the
Companys total assets as of June 30, 2010 and approximately $747.7 million, or 31.3% of the
Companys total revenues for the year then ended. PCIC represented approximately $225.2 million, or
4.9%, of the Companys total assets as of June 30, 2010 and approximately $5.4 million, or less
than 1%, (after intercompany eliminations) of the Companys total revenues for the year then ended.
This acquisition is discussed more fully in Note 2, Merger with Towers Perrin, to our
consolidated financial statements for fiscal 2010. Under guidelines established by the SEC,
companies are allowed to exclude acquisitions from their first assessment of internal control over
financial reporting following the date of the acquisition.
The effectiveness of our internal controls over financial reporting has been audited by Deloitte &
Touche LLP, an independent registered public accounting firm, as stated in their report, which is
included herein.
53
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Towers Watson & Co.
New York, New York
We have audited the internal control over financial reporting of Towers Watson & Co. and
subsidiaries (the Company) as of June 30, 2010, based on criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. As described in Managements Report on Internal Control over Financial Reporting,
management excluded from its assessment the internal control over financial reporting of Towers
Perrin and Professional Consultants Insurance
Corporation (PCIC), which were acquired on
January 1, 2010.
Towers Perrin represented approximately $2.8 billion, or 60.9%, of
the Companys total assets as of June 30, 2010
and approximately $747.7 million, or 31.3% of the Companys total revenues for the year then ended. PCIC represented
approximately $225.2 million, or 4.9%, of the Companys total assets as of June 30, 2010 and approximately $5.4 million,
or less than 1% (after intercompany eliminations) of the Companys
total revenues for the year then ended.
Accordingly, our audit did not include the internal control over financial
reporting at Towers Perrin and PCIC. The Companys management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying Managements Report on Internal
Controls Over Financial Reporting. Our responsibility is to express an opinion on the Companys
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed by, or under the
supervision of, the companys principal executive and principal financial officers, or persons
performing similar functions, and effected by the companys board of directors, management, and
other personnel to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A companys internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the
possibility of collusion or improper management override of controls, material misstatements due to
error or fraud may not be prevented or detected on a timely basis. Also, projections of any
evaluation of the effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of June 30, 2010, based on the criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated financial statements and financial statement schedule as
of and for the year ended June 30, 2010 of the Company and our
report dated September 7, 2010
expressed an unqualified opinion on those financial statement and financial statement schedule.
/s/ DELOITTE & TOUCHE LLP
McLean, Virginia
September 7, 2010
54
Item 9B. Other Information.
None.
Part III
Item 10. Directors, Executive Officers, and Audit Committee of the Registrant.
The response to this item will be included in a definitive proxy statement to be filed within 120
days after the end of our fiscal year, and that information is incorporated herein by this
reference.
Item 11. Executive Compensation.
The response to this item will be included in a definitive proxy statement to be filed within 120
days after the end of our fiscal year, and that information is incorporated herein by this
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
The response to this item will be included in a definitive proxy statement to be filed within 120
days after the end of our fiscal year, and that information is incorporated herein by this
reference.
Item 13. Certain Relationships and Related Transactions.
The response to this item will be included in a definitive proxy statement to be filed within 120
days after the end of our fiscal year, and that information is incorporated herein by this
reference.
Item 14. Principal Auditor Fees and Services.
The response to this item will be included in a definitive proxy statement to be filed within 120
days after the end of our fiscal year, and that information is incorporated herein by this
reference.
Part IV
Item 15. Exhibits and Financial Statement Schedules
a) Financial Information
|
(1) |
|
Consolidated Financial Statements of Towers Watson & Co. |
Report of Independent Registered Public Accounting Firm
Financial Statements:
Consolidated Statements of Operations for each of the three years in the period ended June 30, 2010
Consolidated Balance Sheets at June 30, 2010 and 2009
Consolidated Statements of Cash Flows for each of the three years in the period ended June 30, 2010
Consolidated Statements of Changes in Stockholders Equity for
each of the three years in the period ended June 30, 2010
Notes to the Consolidated Financial Statements
|
(2) |
|
Consolidated Financial Statement Schedule for each of the three years in the period ended June 30, 2010 |
Valuation and Qualifying Accounts and Reserves (Schedule II)
All other schedules are omitted because they are not applicable or the required information
is shown in the financial statements or notes thereto.
See (b) below.
See
Exhibit Index on page 100.
|
c) |
|
Financial Statement Schedules |
Not applicable.
55
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities 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)
|
|
Date: September 7, 2010 |
By: |
/s/ John J. Haley
|
|
|
|
John J. Haley |
|
|
|
Chief Executive Officer |
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated.
|
|
|
|
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
|
|
Chief Executive Officer and Director
|
|
September 7, 2010 |
John J. Haley |
|
|
|
|
|
|
|
|
|
|
|
President, Chief Operating Officer and Director
|
|
September 7, 2010 |
Mark V. Mactas |
|
|
|
|
|
|
|
|
|
|
|
Chief Financial Officer
|
|
September 7, 2010 |
Roger F. Millay |
|
|
|
|
|
|
|
|
|
|
|
Principal Accounting Officer
|
|
September 7, 2010 |
Peter L. Childs |
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
September 7, 2010 |
Betsy S. Atkins |
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
September 7, 2010 |
Victor F. Ganzi |
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
September 7, 2010 |
John J. Gabarro |
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
September 7, 2010 |
Mark Maselli |
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
September 7, 2010 |
Gail E. McKee |
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
September 7, 2010 |
Brendan R. ONeill |
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
September 7, 2010 |
Linda D. Rabbitt |
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
September 7, 2010 |
Gilbert T. Ray |
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
September 7, 2010 |
Paul D. Thomas |
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
September 7, 2010 |
Wilhelm Zeller |
|
|
|
|
56
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Towers Watson & Co.
New York, New York
We have audited the accompanying consolidated balance sheets of Towers Watson & Co. and
subsidiaries (the Company) as of June 30, 2010 and 2009, and the related consolidated statements
of operations, changes in stockholders equity, and cash flows
for each of the three years in the period ended June 30,
2010. Our audits also included the financial statement schedule listed in the Index at Item 15.
These financial statements and financial statement schedule are the responsibility of the
Companys management. Our responsibility is to express an opinion on the financial statement and
financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects,
the financial position of Towers Watson & Co. and subsidiaries at June 30, 2010 and 2009, and the
results of their operations and their cash flows for each of the three years in the period ended
June 30, 2010, in conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, such financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
As
discussed in Note 1 and Note 15 to the consolidated financial statements,
effective July 1, 2007, the Company adopted the provisions of
Accounting for Uncertain Income Tax Positions, ASC 740-10 Income
Taxes.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the Companys internal control over financial reporting as of June 30, 2010,
based on the criteria established in Internal ControlIntegrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our report
dated September 7, 2010
expressed an unqualified opinion on the Companys internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
McLean, Virginia
September 7, 2010
57
TOWERS WATSON & CO.
Consolidated Statements of Operations
(Thousands of U.S. dollars, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
Revenue |
|
$ |
2,387,829 |
|
|
$ |
1,676,029 |
|
|
$ |
1,760,055 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of providing services: |
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits |
|
|
1,540,417 |
|
|
|
1,029,299 |
|
|
|
1,052,992 |
|
Professional and subcontracted services |
|
|
163,848 |
|
|
|
119,323 |
|
|
|
138,983 |
|
Occupancy |
|
|
109,454 |
|
|
|
72,566 |
|
|
|
83,255 |
|
General and administrative expenses |
|
|
220,937 |
|
|
|
172,010 |
|
|
|
185,624 |
|
Depreciation and amortization |
|
|
101,084 |
|
|
|
73,448 |
|
|
|
72,428 |
|
Transaction and integration expenses |
|
|
87,644 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,223,384 |
|
|
|
1,466,646 |
|
|
|
1,533,282 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
164,445 |
|
|
|
209,383 |
|
|
|
226,773 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)/income from affiliates |
|
|
(1,274 |
) |
|
|
8,350 |
|
|
|
2,325 |
|
Interest income |
|
|
2,950 |
|
|
|
2,022 |
|
|
|
5,584 |
|
Interest expense |
|
|
(7,508 |
) |
|
|
(2,778 |
) |
|
|
(5,977 |
) |
Other non-operating income |
|
|
11,304 |
|
|
|
4,926 |
|
|
|
464 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
169,917 |
|
|
|
221,903 |
|
|
|
229,169 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
|
50,907 |
|
|
|
75,276 |
|
|
|
73,470 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before non-controlling interests |
|
|
119,010 |
|
|
|
146,627 |
|
|
|
155,699 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/income attributable to non-controlling interests |
|
|
(1,587 |
) |
|
|
169 |
|
|
|
258 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to controlling interests |
|
$ |
120,597 |
|
|
$ |
146,458 |
|
|
$ |
155,441 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to controlling interests basic |
|
$ |
2.04 |
|
|
$ |
3.43 |
|
|
$ |
3.65 |
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to controlling interests diluted |
|
$ |
2.03 |
|
|
$ |
3.42 |
|
|
$ |
3.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock,
basic (000) |
|
|
59,257 |
|
|
|
42,690 |
|
|
|
42,577 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock,
diluted (000) |
|
|
59,372 |
|
|
|
42,861 |
|
|
|
44,381 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the
consolidated financial statements
58
TOWERS WATSON & CO.
Consolidated Balance Sheets
(Thousands of U.S. dollars, except share data)
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
Assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
600,466 |
|
|
$ |
209,832 |
|
Short-term investments |
|
|
51,009 |
|
|
|
|
|
Receivables from clients: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Billed, net
of allowances of $7,975 and $4,452 |
|
|
421,602 |
|
|
|
190,991 |
|
Unbilled, at estimated net realizable value |
|
|
215,912 |
|
|
|
111,419 |
|
|
|
|
|
|
|
|
|
|
|
637,514 |
|
|
|
302,410 |
|
|
|
|
|
|
|
|
|
|
Other current assets |
|
|
156,312 |
|
|
|
53,358 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
1,445,301 |
|
|
|
565,600 |
|
|
|
|
|
|
|
|
|
|
Fixed assets, net |
|
|
227,802 |
|
|
|
174,857 |
|
Deferred income taxes |
|
|
333,950 |
|
|
|
111,912 |
|
Goodwill |
|
|
1,727,165 |
|
|
|
542,754 |
|
Intangible assets, net |
|
|
683,487 |
|
|
|
186,233 |
|
Other assets |
|
|
155,745 |
|
|
|
44,963 |
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
4,573,450 |
|
|
$ |
1,626,319 |
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
Accounts payable, accrued liabilities and deferred income |
|
$ |
409,141 |
|
|
$ |
281,946 |
|
Reinsurance payables |
|
|
164,539 |
|
|
|
|
|
Notes payable |
|
|
201,967 |
|
|
|
|
|
Other current liabilities |
|
|
189,966 |
|
|
|
51,716 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
965,613 |
|
|
|
333,662 |
|
|
|
|
|
|
|
|
|
|
Revolving credit facility |
|
|
|
|
|
|
|
|
Accrued retirement benefits |
|
|
1,061,557 |
|
|
|
292,555 |
|
Professional liability claims reserve |
|
|
335,034 |
|
|
|
43,229 |
|
Other noncurrent liabilities |
|
|
246,574 |
|
|
|
102,237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
2,608,778 |
|
|
|
771,683 |
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity |
|
|
|
|
|
|
|
|
Class A Common Stock $.01 par value: |
|
|
|
|
|
|
|
|
300,000,000 shares authorized; 47,160,497 and
0 issued and
47,160,497 and 0 outstanding |
|
|
472 |
|
|
|
|
|
Class A Common Stock $.01 par value: |
|
|
|
|
|
|
|
|
99,000,000 shares authorized; 0 and
43,813,451 issued and
0 and 42,657,431 outstanding |
|
|
|
|
|
|
438 |
|
Class B Common Stock $.01 par value: |
|
|
|
|
|
|
|
|
93,500,000 shares authorized; 27,043,196 and
0 issued and
27,043,196 and 0 outstanding |
|
|
270 |
|
|
|
|
|
Additional paid-in capital |
|
|
1,679,624 |
|
|
|
452,938 |
|
Treasury stock, at cost - 0 and 1,156,020 shares |
|
|
|
|
|
|
(63,299 |
) |
Retained earnings |
|
|
711,570 |
|
|
|
608,634 |
|
Accumulated other comprehensive loss |
|
|
(436,329 |
) |
|
|
(145,073 |
) |
|
|
|
|
|
|
|
Total Stockholders Equity |
|
|
1,955,607 |
|
|
|
853,638 |
|
|
|
|
|
|
|
|
Non-controlling interest |
|
|
9,065 |
|
|
|
998 |
|
|
|
|
|
|
|
|
Total Equity |
|
|
1,964,672 |
|
|
|
854,636 |
|
|
|
|
|
|
|
|
Total Liabilities and Total Equity |
|
$ |
4,573,450 |
|
|
$ |
1,626,319 |
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements
59
TOWERS WATSON & CO.
Consolidated Statements of Cash Flows
(Thousands of U.S. dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Cash flows (used in)/from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
119,010 |
|
|
$ |
146,627 |
|
|
$ |
155,699 |
|
Adjustments to reconcile net income to net cash
from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Provision for doubtful receivables from clients |
|
|
11,759 |
|
|
|
5,355 |
|
|
|
11,207 |
|
Depreciation |
|
|
69,684 |
|
|
|
59,556 |
|
|
|
56,031 |
|
Amortization of intangible assets |
|
|
31,400 |
|
|
|
13,892 |
|
|
|
16,397 |
|
(Benefit)/Provision for deferred income taxes |
|
|
(5,134 |
) |
|
|
14,205 |
|
|
|
11,550 |
|
Equity from affiliates |
|
|
869 |
|
|
|
(8,080 |
) |
|
|
(2,324 |
) |
Stock-based compensation |
|
|
52,953 |
|
|
|
932 |
|
|
|
4,054 |
|
Other, net |
|
|
(9,975 |
) |
|
|
(2,474 |
) |
|
|
4,586 |
|
Changes in operating assets and liabilities (net
of business acquisitions) |
|
|
|
|
|
|
|
|
|
|
|
|
Receivables from clients |
|
|
(41,339 |
) |
|
|
57,991 |
|
|
|
(22,057 |
) |
Other current assets |
|
|
(2,205 |
) |
|
|
3,279 |
|
|
|
443 |
|
Other noncurrent assets |
|
|
50,854 |
|
|
|
(3,497 |
) |
|
|
37,080 |
|
Accounts payable, accrued liabilities and
deferred income |
|
|
(295,402 |
) |
|
|
(28,717 |
) |
|
|
66,431 |
|
Reinsurance payables |
|
|
49,756 |
|
|
|
|
|
|
|
|
|
Accrued retirement benefits |
|
|
(71,292 |
) |
|
|
(42,069 |
) |
|
|
(54,230 |
) |
Professional liability claims reserves |
|
|
16,171 |
|
|
|
(5,900 |
) |
|
|
(195 |
) |
Other current liabilities |
|
|
20,874 |
|
|
|
4,138 |
|
|
|
5,112 |
|
Other noncurrent liabilities |
|
|
(24,050 |
) |
|
|
10,631 |
|
|
|
(1,083 |
) |
Income tax related accounts |
|
|
(8,801 |
) |
|
|
1,678 |
|
|
|
(4,969 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows (used in)/from operating activities: |
|
|
(34,868 |
) |
|
|
227,547 |
|
|
|
283,732 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from/(used in) investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for business acquisitions |
|
|
(200,025 |
) |
|
|
(1,185 |
) |
|
|
(138,830 |
) |
Cash acquired from business acquisitions |
|
|
721,708 |
|
|
|
|
|
|
|
|
|
Purchases of fixed assets |
|
|
(25,752 |
) |
|
|
(39,195 |
) |
|
|
(38,694 |
) |
Capitalized software costs |
|
|
(19,632 |
) |
|
|
(23,374 |
) |
|
|
(21,904 |
) |
Purchases of available-for-sale securities |
|
|
(17,789 |
) |
|
|
|
|
|
|
|
|
Redemption of available-for-sale securities |
|
|
16,191 |
|
|
|
|
|
|
|
|
|
Investment in affiliates |
|
|
|
|
|
|
(2,302 |
) |
|
|
(3,316 |
) |
Increase in restricted cash |
|
|
|
|
|
|
|
|
|
|
(2,331 |
) |
Proceeds from sale of investments |
|
|
10,749 |
|
|
|
|
|
|
|
|
|
Contingent proceeds from divestitures |
|
|
4,486 |
|
|
|
4,926 |
|
|
|
464 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from/(used in) investing activities: |
|
|
489,936 |
|
|
|
(61,130 |
) |
|
|
(204,611 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows used in financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings under credit facility |
|
|
126,333 |
|
|
|
267,912 |
|
|
|
172,841 |
|
Repayments under credit facility |
|
|
(125,650 |
) |
|
|
(267,912 |
) |
|
|
(277,841 |
) |
Financing of credit facility |
|
|
(5,679 |
) |
|
|
|
|
|
|
|
|
Dividends paid |
|
|
(15,249 |
) |
|
|
(12,785 |
) |
|
|
(12,768 |
) |
Repurchases of common stock |
|
|
(34,922 |
) |
|
|
(77,443 |
) |
|
|
(82,031 |
) |
Issuances of common stock and excess tax benefit |
|
|
6,068 |
|
|
|
6,509 |
|
|
|
11,046 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows used in financing activities: |
|
|
(49,099 |
) |
|
|
(83,719 |
) |
|
|
(188,753 |
) |
|
|
|
|
|
|
|
|
|
|
Effect of exchange rates on cash |
|
|
(15,335 |
) |
|
|
2,502 |
|
|
|
(13,922 |
) |
|
|
|
|
|
|
|
|
|
|
Increase/(decrease) in cash and cash equivalents |
|
|
390,634 |
|
|
|
85,200 |
|
|
|
(123,554 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period |
|
|
209,832 |
|
|
|
124,632 |
|
|
|
248,186 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
600,466 |
|
|
$ |
209,832 |
|
|
$ |
124,632 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
2,595 |
|
|
$ |
2,780 |
|
|
$ |
5,951 |
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes, net of refunds |
|
$ |
58,624 |
|
|
$ |
66,480 |
|
|
$ |
76,234 |
|
|
|
|
|
|
|
|
|
|
|
Notes payable issued in connection with the Merger |
|
$ |
200,000 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable issued in connection with the
tender offer |
|
$ |
98,469 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of
stock in connection with the Merger |
|
$ |
1,357,379 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to the consolidated financial statements
60
TOWERS WATSON & CO.
Consolidated Statement of Changes in Stockholders Equity
(In Thousands of U.S. dollars and Number of Shares in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A |
|
|
|
|
|
|
Class B |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Common |
|
|
Class A |
|
|
Common |
|
|
Class B |
|
|
Additional |
|
|
Treasury |
|
|
|
|
|
|
Other |
|
|
|
|
|
|
Stock |
|
|
Common |
|
|
Stock |
|
|
Common |
|
|
Paid-in |
|
|
Stock, |
|
|
Retained |
|
|
Comprehensive |
|
|
|
|
|
|
Outstanding |
|
|
Stock |
|
|
Outstanding |
|
|
Stock |
|
|
Capital |
|
|
at Cost |
|
|
Earnings |
|
|
Loss |
|
|
Total |
|
Balance at June 30, 2007 |
|
|
42,299 |
|
|
$ |
428 |
|
|
|
|
|
|
$ |
|
|
|
$ |
395,521 |
|
|
$ |
(22,251 |
) |
|
$ |
336,101 |
|
|
$ |
77,720 |
|
|
$ |
787,519 |
|
Adoption of FIN 48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,813 |
) |
|
|
|
|
|
|
(3,813 |
) |
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
155,441 |
|
|
|
|
|
|
|
155,441 |
|
Additional minimum pension liability, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32,368 |
) |
|
|
(32,368 |
) |
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,185 |
|
|
|
20,185 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
143,258 |
|
Cash dividends declared |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,768 |
) |
|
|
|
|
|
|
(12,768 |
) |
Repurchases of common stock |
|
|
(1,586 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(82,031 |
) |
|
|
|
|
|
|
|
|
|
|
(82,031 |
) |
Issuances of common stock acquisitions and
contingent consideration |
|
|
2,176 |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
52,694 |
|
|
|
57,999 |
|
|
|
|
|
|
|
|
|
|
|
110,703 |
|
Issuances of common stock and excess tax benefit |
|
|
689 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,466 |
|
|
|
33,061 |
|
|
|
|
|
|
|
|
|
|
|
41,527 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2008 |
|
|
43,578 |
|
|
$ |
438 |
|
|
|
|
|
|
$ |
|
|
|
$ |
456,681 |
|
|
$ |
(13,222 |
) |
|
$ |
474,961 |
|
|
$ |
65,537 |
|
|
$ |
984,395 |
|
Comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
146,458 |
|
|
|
|
|
|
|
146,458 |
|
Additional minimum pension liability, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(79,835 |
) |
|
|
(79,835 |
) |
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(130,775 |
) |
|
|
(130,775 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(64,152 |
) |
Cash dividends declared |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,785 |
) |
|
|
|
|
|
|
(12,785 |
) |
Repurchases of common stock |
|
|
(1,418 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(77,443 |
) |
|
|
|
|
|
|
|
|
|
|
(77,443 |
) |
Issuances of common stock and excess tax benefit |
|
|
497 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,743 |
) |
|
|
27,366 |
|
|
|
|
|
|
|
|
|
|
|
23,623 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2009 |
|
|
42,657 |
|
|
$ |
438 |
|
|
|
|
|
|
$ |
|
|
|
$ |
452,938 |
|
|
$ |
(63,299 |
) |
|
$ |
608,634 |
|
|
$ |
(145,073 |
) |
|
$ |
853,638 |
|
Comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62,468 |
|
|
|
|
|
|
|
62,468 |
|
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(50,218 |
) |
|
|
(50,218 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,250 |
|
Class A Common Stock Watson Wyatt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,090 |
) |
|
|
17,640 |
|
|
|
|
|
|
|
|
|
|
|
15,550 |
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69 |
|
Retirement of treasury stock |
|
|
|
|
|
|
(16 |
) |
|
|
|
|
|
|
|
|
|
|
(80,565 |
) |
|
|
80,581 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009 |
|
|
42,202 |
|
|
$ |
422 |
|
|
|
|
|
|
$ |
|
|
|
$ |
370,352 |
|
|
$ |
|
|
|
$ |
664,738 |
|
|
$ |
(195,291 |
) |
|
$ |
840,221 |
|
Merger of Towers Perrin and Watson Wyatt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A Common Stock Towers Watson |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued for consideration of Merger: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Class A Restricted shares |
|
|
4,249 |
|
|
|
43 |
|
|
|
|
|
|
|
|
|
|
|
43,686 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43,729 |
|
Issuance of Class B1-B4 shares |
|
|
|
|
|
|
|
|
|
|
29,483 |
|
|
|
294 |
|
|
|
1,313,356 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,313,650 |
|
Cash dividends declared |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,297 |
) |
|
|
|
|
|
|
(11,297 |
) |
Issuances of common stock and excess tax benefit |
|
|
536 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
(2,210 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,203 |
) |
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52,884 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52,884 |
|
Repurchases of Class B-1 shares from tender offer |
|
|
|
|
|
|
|
|
|
|
(2,267 |
) |
|
|
(24 |
) |
|
|
(98,444 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(98,468 |
) |
Acceleration of Class B shares to Class A shares |
|
|
173 |
|
|
|
|
|
|
|
(173 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58,129 |
|
|
|
|
|
|
|
58,129 |
|
Additional minimum pension liability, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(163,105 |
) |
|
|
(163,105 |
) |
Hedge effectiveness, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,986 |
) |
|
|
(1,986 |
) |
Unrealized
gain on available-for-sale securities, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98 |
|
|
|
98 |
|
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(76,045 |
) |
|
|
(76,045 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(182,909 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2010 |
|
|
47,160 |
|
|
$ |
472 |
|
|
|
27,043 |
|
|
$ |
270 |
|
|
$ |
1,679,624 |
|
|
$ |
|
|
|
$ |
711,570 |
|
|
$ |
(436,329 |
) |
|
$ |
1,955,607 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements
61
TOWERS WATSON & CO.
Notes to the Consolidated Financial Statements
(Tabular Amounts in Thousands of U.S. Dollars Except Share and Per Share Data)
Note 1 Summary of Significant Accounting Policies
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
subsequently changed its name to Towers Watson & Co. (Towers Watson, the Company or we).
Since the consummation of the Merger, Towers Perrin changed its name to Towers Watson Pennsylvania
Inc., and Watson Wyatt changed its name to Towers Watson Delaware Holdings Inc. However, for ease
of reference, we continue to use the legacy Towers Perrin and Watson Wyatt names throughout this
Report.
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 owned approximately 56% 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 through December 31, 2009 have
become those of the new registrant, Towers Watson. Towers Watsons consolidated financial
statements for the fiscal year ended June 30, 2010 include the results of Towers Perrins
operations beginning January 1, 2010.
Nature of the Business Towers Watson is a leading global professional services firm
focused on providing consulting and other professional services related to employee benefits, human
capital and risk and financial management. We provide advisory services on critical human capital
management issues to help our clients effectively manage their costs, talent and risk. Our fiscal
year ends on June 30th.
Principles of Consolidation Our consolidated financial statements include our accounts
and those of our majority-owned and controlled subsidiaries after elimination of intercompany
accounts and transactions. Investments in affiliated companies over which we have the ability to
exercise significant influence are accounted for using the equity method.
Use of Estimates The preparation of 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. Estimates are used when accounting for revenue recognition, allowances for billed
and unbilled receivables from clients, discretionary compensation, income taxes, pension and
post-retirement assumptions, incurred but not reported claims, and goodwill and intangible assets.
Cash and Cash Equivalents We consider primarily all instruments that are readily
convertible to known amounts of cash and near their maturity to present insignificant interest rate
risk to changes in value to be cash equivalents. Included in cash are amounts payable to
reinsurance carriers or clients, net of our earned commissions. As agents for various reinsurance
carriers, we hold these funds and are permitted to invest this cash pending remittance to carriers
or clients.
Marketable Securities Our investments are classified at the time of purchase as either
available-for-sale or held-to-maturity, and reassessed as of each balance sheet date. Our
marketable securities consist of available-for-sale securities, and are marked-to-market based on
prices provided by our investment advisors, with unrealized gains and temporary unrealized losses
reported as a component of other comprehensive income net of tax, until realized. When realized,
we recognize gains and losses on the sales of the securities on a specific identification method
and includes the realized gains or losses in other income, net, in the consolidated statements of
operations. We include interest, dividends, and amortization of premium or discount on securities
classified as available-for-sale in other income, net in the consolidated statements of
operations. We also evaluate our available-for-sale securities to determine whether a decline in
fair value of a security below the amortized cost basis is other than temporary. Should the
decline be considered other than temporary, we write down the cost of the security and include the
loss in earnings. In making this determination we consider such factors as the reason for and
significance of the decline, current economic conditions, the length of time for which there has
been an unrealized loss, the time to maturity, and other relevant information. Available-for-sale
securities are classified as either short-term or long-term based on managements intention of when
to sell the securities.
62
Receivables from Clients Billed receivables from clients are presented at their billed
amount less an allowance for doubtful accounts. Billed receivables includes reinsurance
intermediary amounts due to us and reinsurance advances. Reinsurance advances represent instances
where we advance premiums, refunds or claims to reinsurance underwriters or parties to reinsurance
contracts prior to collection. Unbilled receivables are stated at net realizable value less an
allowance for unbillable amounts. Allowance for doubtful accounts related to billed receivables was
$8.0 million and $4.5 million as of June 30, 2010 and 2009, respectively. Allowance for unbilled
receivables was $11.7 million and $9.1 million as of June 30, 2010 and 2009, respectively.
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-expense 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. We typically have 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.
We have non-recurring system projects that are longer in duration and subject to more changes in
scope as the project progresses. We evaluate at least quarterly, and more often as needed, project
managers estimates-to-complete to assure that the projects current status is accounted for
properly. Certain subscription contracts generally provide that if the client terminates a
contract, we are 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. We recognize 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. We have 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.
We have 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
us and ownership of the technology and rights to the related code remain with us. 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 as 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 a software
engagement.
In connection with the Merger, we acquired the reinsurance brokerage business of Towers Perrin. In
our capacity as a reinsurance broker, we collect premiums from reinsureds and, after deducting our
brokerage commissions, we remit the premiums to the respective reinsurance underwriters on behalf
of reinsureds. In general, compensation for reinsurance brokerage services is earned on a
commission basis. Commissions are calculated as a percentage of a reinsurance premium as stipulated
in the reinsurance contracts with our clients and reinsurers. We recognize brokerage services
revenue on the later of the inception date or billing date of the contract. In addition, we hold
cash needed to settle amounts due reinsurers or reinsureds, net of any commissions due to us,
pending remittance to the ultimate recipient. We are 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.
Income Taxes We account for income taxes in accordance with Accounting Standards
Codification (ASC) 740, Income Taxes, which prescribes the use of the asset and liability
approach to the recognition of deferred tax assets and liabilities related to the expected future
tax consequences of events that have been recognized in our financial statements or income tax
returns. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences are expected to be recovered or
settled. 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-
63
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.
We continually review tax laws, regulations and related guidance in order to properly record any
uncertain tax liabilities positions. 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.
Foreign Currency Translation Gains and losses on foreign currency transactions, including
settlement of intercompany receivables and payables, are recognized currently in the general and
administrative expenses line of our consolidated statements of operations. Assets and liabilities
of our subsidiaries outside the United States are translated into the reporting currency, the U.S.
dollar, based on exchange rates at the balance sheet date. Revenue and expenses of our subsidiaries
outside the United States are translated into U.S. dollars at weighted average exchange rates.
Gains and losses on translation of our equity interests in our subsidiaries outside the United
States and on intercompany notes are reported separately as accumulated other comprehensive income
within stockholders equity in the consolidated balance sheets, since we do not plan or anticipate
settlement of such balances in the foreseeable future.
Fair Value of Financial Instruments The carrying amount of our cash and cash equivalents,
receivables from clients and notes and accounts payable approximates fair value because of the
short maturity and liquidity of those instruments. The investments are available-for-sale
securities held at estimated fair value with maturities of less than three years. There were no
borrowings outstanding under our revolving credit agreement at June 30, 2010.
Concentration of Credit Risk Financial instruments that potentially subject us to
concentrations of credit risk consist principally of certain cash and cash equivalents, and
receivables from clients. We invest our excess cash in financial instruments that are rated in the
highest short-term rating category by major rating agencies. Concentrations of credit risk with
respect to receivables from clients are limited due to our large number of clients and their
dispersion across many industries and geographic regions.
Correction of Statements of Cash Flows In fiscal year 2010, we corrected the presentation of borrowings and repayments under
the credit facility for each of the prior years presented. Related amounts had previously been presented on a net basis, rather than
on a gross basis in accordance with ASC 230. The correction had no effect on net cash used in financing activities.
Incurred But Not Reported (IBNR) Claims We accrue for IBNR professional liability claims
that are probable and estimable, and for which we have not yet contracted for insurance coverage.
We use actuarial assumptions to estimate and record a liability for 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. This liability was $222.3 million
and $36.6 million at June 30, 2010 and 2009, respectively.
Stock-based Compensation During fiscal years 2010, 2009 and 2008, we recognized
compensation expense of $58.0 million or $0.98 per diluted share, $1.0 million or $0.02 per diluted
share and $4.8 million or $0.11 per diluted share, respectively, in connection with our stock-based
compensation plans. This does not include any expense related to the 2001 Deferred Stock Unit Plan
for Selected Employees, as expense related to shares awarded under this plan is recorded as a
component of our accrual for discretionary compensation.
The total income tax benefit recognized in the income statement for the exercise of non-qualified
stock options, vesting of restricted stock units and the award of stock purchase plan shares was
$28 thousand, $37 thousand and $2.2 million for fiscal years 2010, 2009 and 2008, respectively.
Earnings per Share (EPS) We adopted guidance under ASC 260, Earnings per Share,
relating to the two-class method of presenting EPS. This guidance addresses whether awards granted
in share-based transactions are participating securities prior to vesting and therefore need to be
included in the earning allocation in computing earnings per share using the two-class method. ASC
260-10-45-60 requires non-vested share-based payment awards that have non-forfeitable rights to
dividends or dividend equivalents to be treated as a separate class of securities in calculating
earnings per share. Our participating securities include non-vested restricted stock. The adoption
had no impact on previously reported basic or diluted EPS.
Goodwill and Intangible Assets In applying the purchase method of accounting for business
combinations, amounts assigned to identifiable assets and liabilities acquired were 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. 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 is compared with their carrying value and an
impairment loss would be recognized for the amount by which the carrying amount exceeds the fair
value. 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. In estimating the fair value of a reporting unit, we used
valuation techniques that fall under income or market approaches.
Under the discounted cash flow method,
an income approach, the business enterprise value is determined by discounting to present value the
terminal value which is calculated using debt-free after-tax cash flows for a finite period of
years. Key estimates in this approach are internal financial projection
64
estimates prepared by
management, business risk, and expected rate of return on capital. The guideline company method, a
market approach, develops valuation multiples by comparing our reporting units to similar publicly
traded companies. Key estimates and selection of valuation multiples rely on the selection of
similar companies, obtaining estimates of forecasted revenue and EBITDA estimates for the similar
companies and selection of valuation multiples as they apply to the reporting unit characteristics.
Under the similar transactions method, a market approach, actual transaction prices and operating data
from companies deemed reasonably similar to the reporting units is used to develop valuation
multiples as an indication of how much a knowledgeable investor in the marketplace would be willing
to pay for the business units. 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 the
reporting unit used in step one to all the assets and liabilities of that reporting unit (including
any recognized or unrecognized intangible assets) as if the reporting unit had been acquired in a
business combination. Then the implied fair value of goodwill would be compared to the carrying
amount of goodwill to determine if goodwill is impaired. For the fiscal year ended June 30, 2010,
we did not record any impairment losses of goodwill or intangibles.
Recent Accounting Pronouncements
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. This adoption did not have a
material impact on our financial position or results of operations.
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 us 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 and as a result, expensed to transaction and integration expenses $6.0 million of
capitalized transaction expenses incurred before adoption.
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, our 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. In addition, our non-controlling interest of $169 thousand and $258 thousand for the fiscal
year ended June 30, 2009 and 2008, which was previously including in (loss)/income from affiliates,
was reclassified to net (loss)/income attributable to non-controlling interests in our results of
operations.
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. We adopted these provisions on July 1, 2009.
65
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. We 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 our financial position or results of operations.
Not yet adopted
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 and we do not
anticipate that the adoption of these provisions will have a material impact on our financial
position or results of operations.
Note 2 Merger with Towers Perrin
The strategic reason for the Merger of Watson Wyatt and Towers Perrin to form Towers Watson was to
combine the strengths and a strong set of complementary services of the legacy firms to drive
growth and result in a larger global presence and market share gains across all of our business
lines.
Consideration Exchanged
The consummation of the Merger resulted in the following:
|
|
|
Each share of Watson Wyatt Class A common stock, par value $0.01 per share
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, par value $0.01 per share (the
Class A Common Stock). In addition, outstanding deferred rights to receive Watson Wyatt
Class A 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 Class
A 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 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.
Shares of Towers Watson common stock issued to Towers Perrin shareholders (other than
209,013 shares issued to Towers Perrin shareholders located in certain countries (as
detailed below) and other than shares issued to Towers Perrin shareholders who elected to
receive a portion of their Merger Consideration as shares of Towers Watsons Class R common
stock, par value $0.01 per share) 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. Outstanding shares of Towers Watson Class B common stock generally 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. |
|
|
|
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
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 (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,
shareholders who made valid Class R Elections received shares of Towers Watson Class B-1
common stock in |
66
|
|
|
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% 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 (Restricted Towers Watson Class A Common Stock). At the time of
the Merger, the restricted stock units were converted using the Merger Agreement exchange
ratio (545.627600377) into Towers Watson Restricted Class A common stock. The restriction
on the underlying shares lapses over the service period for the employees, which is from
grant date in October 2009 to January 1, 2011 through 2013, annually. The Towers Watson
Restricted Class A common stock is held by an administrator or in a trust and the dividends
accrue and the shares are voted in blocks according to provisions in the Merger Agreement. |
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 were 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 were 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, three years after the Merger, 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.
The Towers Watson common stock and Towers Watson Notes issued in conjunction with the Merger were
registered under the Securities Act of 1933, as amended, pursuant to 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 Class A Common Stock is listed on The New York Stock Exchange and The
NASDAQ Global Select Market under the ticker symbol TW, and began trading on January 4, 2010.
Fair Value of Consideration
The Merger has been accounted for using the acquisition method of accounting as prescribed in ASC
805, Business Combinations. The total consideration of $1.8 billion is comprised of $200 million of
cash and $200 million of notes payable to Class R shareholders and of stock consideration for the
following: Class A shares for certain foreign shareholders of $9.9 million, Restricted Class B-1,
B-2, B-3 and B-4 shares of $1.3 billion and Restricted Class A shares of $43.7 million.
The consideration given in the form of cash and notes payable was measured in the amount of cash
paid and notes payable issued. According to ASC 805 the fair value of the securities traded in the
market the day before the merger is consummated is used to determine the fair value of the equity
consideration. As accounting predecessor, Watson Wyatts closing share price on the NYSE on
December 31, 2009 of $47.52 was used to determine the fair value of equity consideration. The
equity consideration for the Class A shares to certain foreign shareholders of $9.9 million is
valued at $47.52 multiplied by 209,013, the shares issued. The estimated fair value of the
restricted Class B1-B4 shares of
67
$1.3 billion was calculated at $47.52 multiplied by 29,483,008,
the shares issued and using a discount to approximate the fair value of the one-, two-, three- and
four-year period of restriction lapse until the shares are converted into freely tradable Towers
Watson Class A common stock. The estimated fair value of the Restricted Class A shares of $43.7
million includes (i) the vested portion of the Towers Perrin restricted stock units, which was
earned by employees related to the service condition from grant date in October 2009 until January
1, 2010, the date of the Merger, valued at $47.52 per share and (ii) 10% of the unvested portion of
the Towers Perrin restricted stock units, which is the estimate of forfeitures that will result
from employees not fulfilling the service condition during the three year vesting post-Merger,
which will be proportionately distributed to Class F shareholders, the Towers Perrin shareholders
as of the Merger date.
PCIC
As of December 31, 2009, Towers Perrin and Watson Wyatt each owned a 36.4% 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 applied the equity
method of accounting for its investment in PCIC through
December 31, 2009. As of December 31, 2009, Watson Wyatts
investment in PCIC was $13.7 million. Towers Watsons
financial statements as of and for fiscal year ended June 30, 2010, included herein, reflect Watson
Wyatts equity method of accounting for PCIC for the six month period ended December 31, 2009,
which resulted in a recording a loss from affiliates of $113 thousand.
As a result of the Merger, Towers Watson has a majority ownership interest in PCIC and consequently
retained a majority of the economic risks and rewards of PCIC. As a result, Towers Watson now
consolidates PCICs financial position and results of operations in its consolidated financial
statements beginning January 1, 2010. All intercompany accounts and transactions have been
eliminated in consolidation.
Fair value of net assets acquired and intangibles
According to ASC 805, the assets acquired and liabilities of Towers Perrin assumed by Towers Watson
were recorded at their respective fair values as of the Merger, January 1, 2010. The valuation and
determination of estimated fair value include significant estimates and assumptions. Management
also evaluated the methodology and valuation models to determine the estimated useful lives and
amortization method.
Customer relationships
Customer relationship intangible was identified separate from goodwill based on determination of
the length, strength and contractual nature of the relationship that Towers Perrin shared with its
clients. This customer relationship information was analyzed via the application of the
multi-period excess earnings method, an income approach. Significant assumptions used in the income
approach are revenue growth, retention rate, operating expenses, charge for contributory assets and
trade name and the discount rate used to calculate the present value of the cash flows. The
customer relationship, valued at $140.8 million, is amortized on an accelerated amortization basis
over the estimated useful life of 12 years which correlated to the years of material results
included in the income approach model.
Trademarks and trade names
The Towers Perrin trade name was identified separate from goodwill based on evaluation of the
importance of the Towers Perrin trade name to the Towers Perrin business through understanding the
brand recognition in the market, importance of the trade name to the customer, and the amount of
revenue associated with the trade name. In developing the estimated fair value, the trade name was
valued utilizing the relief from royalty method, an income approach. Significant assumptions used
in the relief from royalty method were revenue growth, royalty rate, and discount rate used to
calculate the present value of cash flows. The Towers Perrin trade name, valued at $275.5 million,
has an estimated indefinite lived asset and is not amortized but tested annually for impairment or
if factors exist to indicate impairment.
Developed technology
Developed technology identified separately from goodwill consists of intellectual property such as
proprietary software used internally for revenue producing activities or by clients. Developed
technology can provide significant advantages to the owner in terms of product differentiation,
cost advantages and other competitive advantages. Three external-use technologies of Towers Perrin:
MoSes, EVALUE and the Global Compensation technology are offered for sale or subscription and have
associated revenue streams. In addition, 22 internally developed technology applications were
identified as primary applications used in Towers Perrins business but did not have associated
revenue streams. The external-use technologies, for which revenue sources were directly identified,
were valued by applying the multi-period excess earnings method, an income approach. The
internal-use technologies were valued by applying the cost to replicate method, a cost approach.
Significant assumptions used in the multi-period excess earnings method were revenue growth, decay
rate, cost of revenue, operating expenses, charge for use of contributory assets and trade name and
discount rate used to calculate the present value of the cash flows. The external-use technology,
valued at $58.2 million, is amortized on an accelerated basis over a weighted-average useful life
of 3.6 years. Significant assumptions used in
68
the cost to replicate method were cost to replace
including the number and skill level of man hours and cost per hour based on fully burdened salary
of staff; profit margin if the work were performed by a third party; and obsolescence factor. The
internal-use technology, valued at $67.2 million, is amortized on a straight-line basis over the
weighted-average estimated useful life of 4.2 years.
Favorable and unfavorable lease contracts
Assets and liabilities for favorable and unfavorable lease contracts were identified separately
from goodwill related to 39 of Towers Perrins real estate leases agreements. The assets and
liabilities were valued by comparing cash obligations for lease agreements to the estimated market
rent at the time of the transactions. The resulting favorable or unfavorable positions are recorded
gross as assets or liabilities on the balance sheet. Significant assumptions used in the valuation
were market rent, annual escalation percentages based on current inflation rates and a discount
rate used to calculate the present value of the cash flows. Both the assets for favorable lease
agreements, valued at $11.1 million, and the liabilities for unfavorable lease agreements, valued
at $28.6 million, are amortized on a straight-line basis over the life of the respective lease to
occupancy costs. The weighted-average estimated useful life for the leases is 7.3 years.
As of the date of the filing of this annual report, the initial accounting for this business
combination is not yet complete. In particular, we are currently performing an assessment of the
key internally developed and developed technology software for internal use and for sale acquired
from Towers Perrin. The assessment will involve decisions regarding duplicate, overlapping systems
or preferred technology of the two legacy companies, which could lead to a decision to cease-use of
a system. In addition, the fair value of fixed assets is currently being evaluated. Although we do not anticipate any significant adjustments, to the
extent that the estimates used need to be refined, we will do so upon making that determination but
not later than one year from the business combination date.
The table below sets forth a preliminary estimate of the Merger consideration transferred to Towers
Perrin shareholders and the preliminary estimate of tangible and intangible net assets received in
the Merger:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, 2010 |
|
|
|
(In thousands, except share and per share data) |
|
Calculation of Consideration Transferred |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid |
|
|
|
|
|
|
|
|
|
$ |
200,000 |
|
Notes payable issued to Towers Perrin shareholders |
|
|
|
|
|
|
|
|
|
|
200,000 |
|
Towers Perrin shares converted to Towers Watson shares |
|
|
42,489,840 |
|
|
|
|
|
|
|
|
|
Less Class R shares |
|
|
(8,548,835 |
) |
|
|
|
|
|
|
|
|
Less 10% of consideration in RSUs |
|
|
(4,248,984 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of Towers Watson stock issued |
|
|
|
|
|
|
29,692,021 |
|
|
|
|
|
Closing price of Watson Wyatt stock, December 31, 2009 |
|
|
|
|
|
$ |
47.52 |
|
|
|
|
|
Average discount for restricted stock |
|
|
|
|
|
|
7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate fair value of the Towers Watson common stock issued |
|
|
|
|
|
|
|
|
|
|
1,313,650 |
|
Fair value of RSUs assumed in the Merger |
|
|
|
|
|
|
|
|
|
|
43,729 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consideration transferred |
|
|
|
|
|
|
|
|
|
$ |
1,757,379 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Tangible and Intangible Net Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
$ |
1,002,567 |
|
|
|
|
|
Other non-current assets |
|
|
|
|
|
|
221,131 |
|
|
|
|
|
Identifiable intangible assets |
|
|
|
|
|
|
552,785 |
|
|
|
|
|
Deferred tax asset, net |
|
|
|
|
|
|
138,850 |
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
(671,866 |
) |
|
|
|
|
Other long-term liabilities |
|
|
|
|
|
|
(760,708 |
) |
|
|
|
|
Goodwill |
|
|
|
|
|
|
1,274,620 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total estimated tangible and intangible net assets |
|
|
|
|
|
|
|
|
|
$ |
1,757,379 |
|
|
|
|
|
|
|
|
|
|
|
|
|
The following unaudited pro forma combined statements of operations have been provided to present
illustrative combined unaudited statements of operations for the fiscal years ended June 30, 2010
and 2009, giving effect to the business combination as if it had been completed on July 1, 2009.
The unaudited pro forma combined financial information shows the impact of the business combination
on Watson Wyatt and Towers Perrins historical results of operations. Included in the pro forma
results and in the historical results of operations of Towers Watson
is approximately $750 million of revenue and $20 million of
earnings
of the legacy firm Towers Perrin for the six months ended June 30, 2010. The unaudited pro forma
combined statements of operation are presented for illustrative purposes only and are not
indicative of the results of operations that might have occurred had the business combination
actually taken place as of the dates specified, or that may be expected to occur in the future. We
do not assume any benefits from any cost savings or synergies expected to result from the Merger,
except for any cost savings or synergies we actually realized for the six-month period ended
June 30, 2010.
69
The unaudited pro forma combined statements of operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
|
(In thousands) |
|
Revenue |
|
$ |
3,180,916 |
|
|
$ |
3,251,323 |
|
|
|
|
|
|
|
|
Costs of providing services: |
|
|
|
|
|
|
|
|
Salaries and employee benefits |
|
|
2,146,211 |
|
|
|
2,236,462 |
|
Professional and subcontracted services |
|
|
243,752 |
|
|
|
293,292 |
|
Occupancy |
|
|
146,695 |
|
|
|
144,392 |
|
General and administrative expenses |
|
|
268,808 |
|
|
|
352,109 |
|
Depreciation and amortization |
|
|
131,599 |
|
|
|
136,514 |
|
|
|
|
|
|
|
|
|
|
|
2,937,065 |
|
|
|
3,162,769 |
|
|
|
|
|
|
|
|
Income from operations |
|
|
243,851 |
|
|
|
88,554 |
|
|
|
|
|
|
|
|
|
|
(Loss)/income from affiliates |
|
|
(1,085 |
) |
|
|
294 |
|
Interest income |
|
|
4,731 |
|
|
|
8,567 |
|
Interest expense |
|
|
(11,991 |
) |
|
|
(12,160 |
) |
Other non-operating income |
|
|
16,585 |
|
|
|
19,810 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
252,091 |
|
|
|
105,065 |
|
Provision for income taxes |
|
|
67,918 |
|
|
|
64,157 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before non-controlling interests |
|
$ |
184,173 |
|
|
$ |
40,908 |
|
Net (loss)/income attributable to non-controlling interests |
|
$ |
(2,146 |
) |
|
$ |
4,515 |
|
|
|
|
|
|
|
|
Net income attributable to controlling interests |
|
$ |
186,319 |
|
|
$ |
36,393 |
|
|
|
|
|
|
|
|
Note 3 Short-Term Investments
Short-term investments are available-for-sale securities that consist of corporate bonds. As of
June 30, 2010, additional information on available-for-sale securities balances are provided in the
following table. There were no available-for-sale securities as of June 30, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
|
|
Amortized |
|
|
Unrealized |
|
|
Estimated |
|
|
|
Cost |
|
|
Gains |
|
|
Fair Value |
|
Short-term investments: due in one year or less |
|
$ |
50,585 |
|
|
$ |
424 |
|
|
$ |
51,009 |
|
Non-current assets: due in one through five years |
|
|
60,142 |
|
|
|
1,956 |
|
|
|
62,098 |
|
Proceeds from sales of investments for available-for-sale securities during the fiscal year 2010
were $16.2 million, resulting in a loss of $10 thousand. There were no investments that have been
in a continuous loss position for more than one year, and there have been no other than temporary
impairments recognized.
70
Note 4 Fixed Assets
Furniture, fixtures, equipment and leasehold improvements are recorded at cost and presented net of
depreciation or amortization. Furniture, fixtures and equipment are depreciated using straight-line
and accelerated methods over lives ranging from three to seven years. Leasehold improvements are
amortized on a straight-line basis over the shorter of the lease terms or the asset lives.
The components of fixed assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
Furniture, fixtures and equipment |
|
$ |
172,899 |
|
|
$ |
147,460 |
|
Computer software |
|
|
239,647 |
|
|
|
212,172 |
|
Leasehold improvements |
|
|
157,554 |
|
|
|
105,618 |
|
|
|
|
|
|
|
|
|
|
|
570,100 |
|
|
|
465,250 |
|
Less: accumulated depreciation and amortization |
|
|
(342,298 |
) |
|
|
(290,393 |
) |
|
|
|
|
|
|
|
Fixed assets, net |
|
$ |
227,802 |
|
|
$ |
174,857 |
|
|
|
|
|
|
|
|
Total unamortized computer software costs were $108.4 million, $101.9 million and $106.4 million as
of June 30, 2010, 2009 and 2008, respectively. Total amortization expense for computer software was
$33.9 million, $31.0 million and $26.5 million for fiscal years 2010, 2009 and 2008, respectively.
Total depreciation expense was $35.8 million, $28.6 million and $29.5 million for fiscal years
2010, 2009 and 2008, respectively.
Note 5 Goodwill and Intangible Assets
The carrying amount of goodwill for the fiscal years ended June 30, 2010 and 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk and |
|
|
Talent and |
|
|
|
|
|
|
|
|
|
Benefits |
|
|
Financial Services |
|
|
Rewards |
|
|
All Other |
|
|
Total |
|
Balance as of June 30, 2008 |
|
$ |
459,430 |
|
|
$ |
138,476 |
|
|
$ |
35,056 |
|
|
$ |
1,214 |
|
|
$ |
634,176 |
|
Goodwill acquired |
|
|
472 |
|
|
|
49 |
|
|
|
664 |
|
|
|
|
|
|
|
1,185 |
|
Translation adjustment |
|
|
(64,948 |
) |
|
|
(22,583 |
) |
|
|
(5,076 |
) |
|
|
|
|
|
|
(92,607 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2009 |
|
|
394,954 |
|
|
|
115,942 |
|
|
|
30,644 |
|
|
|
1,214 |
|
|
|
542,754 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill acquired and
contingent payments |
|
|
825,975 |
|
|
|
368,365 |
|
|
|
80,301 |
|
|
|
|
|
|
|
1,274,641 |
|
Translation adjustment |
|
|
(63,424 |
) |
|
|
(22,336 |
) |
|
|
(4,470 |
) |
|
|
|
|
|
|
(90,230 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2010 |
|
$ |
1,157,505 |
|
|
$ |
461,971 |
|
|
$ |
106,475 |
|
|
$ |
1,214 |
|
|
$ |
1,727,165 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table reflects changes in the net carrying amount of the components of intangible
assets for the fiscal years ended June 30, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademark |
|
|
Customer |
|
|
|
|
|
|
|
|
|
|
Favorable |
|
|
|
|
|
|
& trade |
|
|
related |
|
|
Core/developed |
|
|
Non-compete |
|
|
lease |
|
|
|
|
|
|
name |
|
|
intangible |
|
|
technology |
|
|
agreements |
|
|
agreements |
|
|
Total |
|
Balance as of June 30, 2008 |
|
$ |
121,885 |
|
|
$ |
101,592 |
|
|
$ |
12,604 |
|
|
$ |
686 |
|
|
|
|
|
|
$ |
236,767 |
|
Intangible assets acquired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization |
|
|
(198 |
) |
|
|
(8,763 |
) |
|
|
(4,408 |
) |
|
|
(523 |
) |
|
|
|
|
|
|
(13,892 |
) |
Translation adjustment |
|
|
(21,176 |
) |
|
|
(13,986 |
) |
|
|
(1,439 |
) |
|
|
(41 |
) |
|
|
|
|
|
|
(36,642 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2009 |
|
|
100,511 |
|
|
|
78,843 |
|
|
|
6,757 |
|
|
|
122 |
|
|
|
|
|
|
|
186,233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets acquired |
|
|
275,500 |
|
|
|
140,800 |
|
|
|
125,400 |
|
|
|
|
|
|
|
11,085 |
|
|
|
552,785 |
|
Amortization |
|
|
|
|
|
|
(18,087 |
) |
|
|
(13,170 |
) |
|
|
(120 |
) |
|
|
(1,495 |
) |
|
|
(32,872 |
) |
Translation adjustment |
|
|
(9,218 |
) |
|
|
(12,750 |
) |
|
|
(261 |
) |
|
|
(2 |
) |
|
|
(428 |
) |
|
|
(22,659 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2010 |
|
$ |
366,793 |
|
|
$ |
188,806 |
|
|
$ |
118,726 |
|
|
$ |
|
|
|
$ |
9,162 |
|
|
$ |
683,487 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The intangible unfavorable lease liability recorded as a result of acquisition accounting as of
January 1, 2010 was $28.6 million with a reduction to rent expense of $2.2 million and translation
of $0.4 million for an ending balance of $26.0 million as of June 30, 2010. For the fiscal year
ended June 30, 2010, 2009 and 2008 we have not recorded any impairment losses to goodwill or
intangibles.
71
The following table reflects the rent offset resulting from the amortization of the net lease
intangible assets and liabilities for subsequent fiscal years as follows:
|
|
|
|
|
Fiscal year ending June 30, |
|
Amount |
|
2011 |
|
$ |
(1,616 |
) |
2012 |
|
|
(2,833 |
) |
2013 |
|
|
(2,486 |
) |
2014 |
|
|
(2,125 |
) |
2015 |
|
|
(1,893 |
) |
Thereafter |
|
|
(5,878 |
) |
|
|
|
|
Total |
|
$ |
(16,831 |
) |
|
|
|
|
The following table reflects the carrying value of intangible assets at June 30, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year 2010 |
|
|
Fiscal year 2009 |
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Carrying |
|
|
Accumulated |
|
|
Carrying |
|
|
Accumulated |
|
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
|
Amortization |
|
Intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademark and trade name |
|
$ |
367,195 |
|
|
$ |
402 |
|
|
$ |
100,913 |
|
|
$ |
402 |
|
Customer related intangibles |
|
|
237,072 |
|
|
|
48,266 |
|
|
|
108,821 |
|
|
|
29,978 |
|
Core/developed technology |
|
|
148,664 |
|
|
|
29,938 |
|
|
|
23,525 |
|
|
|
16,768 |
|
Non-compete agreements |
|
|
1,275 |
|
|
|
1,275 |
|
|
|
1,273 |
|
|
|
1,151 |
|
Favorable lease agreements |
|
|
10,657 |
|
|
|
1,495 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets |
|
$ |
764,863 |
|
|
$ |
81,376 |
|
|
$ |
234,532 |
|
|
$ |
48,299 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A component of the change in the gross carrying amount of trademark and trade name, customer
related intangibles and core/developed technology reflects foreign currency translation adjustments
between June 30, 2009 and June 30, 2010. These intangible assets are denominated in the currencies
of our subsidiaries outside the United States, and are translated into our reporting currency, the
U.S. dollar, based on exchange rates at the balance sheet date.
Certain trade-mark and trade-name intangibles have indefinite useful lives and are not amortized.
The weighted average remaining life of amortizable intangible assets at June 30, 2010, was 8.6
years. Future estimated amortization expense is as follows:
|
|
|
|
|
Fiscal year ending June 30, |
|
Amount |
|
2011 |
|
$ |
47,646 |
|
2012 |
|
|
47,740 |
|
2013 |
|
|
43,457 |
|
2014 |
|
|
37,120 |
|
2015 |
|
|
30,181 |
|
Thereafter |
|
|
101,388 |
|
|
|
|
|
Total estimated amortization expense |
|
$ |
307,532 |
|
|
|
|
|
Note 6 Fair Value Measurements
We have categorized our financial instruments into a three-level fair value hierarchy. The fair
value hierarchy gives the highest priority to quoted prices in active markets for identical assets
and liabilities (Level 1) and lowest priority to unobservable inputs (Level 3). In some cases, the
inputs used to measure fair value might fall into different levels of the fair value hierarchy. In
such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair
value measurement in its entirety falls is determined based on the lowest level input that is
significant to the fair value measurement in its entirety.
Financial assets recorded in the accompanying consolidated balance sheets are categorized based on
the inputs in the valuation techniques as follows:
Level 1 Financial assets and liabilities whose values are based on unadjusted quoted prices for
identical assets or liabilities in an active market.
Level 2 Financial assets and liabilities whose values are based on the following:
72
a) |
|
Quoted prices for similar assets or liabilities in active markets; |
b) |
|
Quoted prices for identical or similar assets or liabilities in non-active markets; |
c) |
|
Pricing models whose inputs are observable for substantially the full term of the asset
or liability; and |
d) |
|
Pricing models whose inputs are derived principally from or corroborated by observable
market data through correlation or other means for substantially the full asset or
liability. |
Level 3 Financial assets and liabilities whose values are based on prices, or valuation
techniques that require inputs that are both unobservable and significant to the overall fair value
measurement. These inputs reflect managements own assumptions about the assumptions a market
participant would use in pricing the asset or liability.
The following presents our assets and liabilities measured at fair value on a recurring basis as of
June 30, 2010. There were no assets and liabilities measured at fair value on a recurring basis as
of June 30, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements on a Recurring Basis at |
|
|
|
June 30, 2010 |
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments |
|
$ |
6,196 |
(a) |
|
$ |
44,813 |
(a) |
|
$ |
|
|
|
$ |
51,009 |
|
Other current assets |
|
|
|
|
|
|
768 |
(b) |
|
|
|
|
|
|
768 |
|
Other non-current assets |
|
|
6,278 |
(a) |
|
|
62,098 |
(a) |
|
|
|
|
|
|
68,376 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable,
accrued liabilities and
deferred income |
|
|
|
|
|
|
4,277 |
(b) |
|
|
|
|
|
|
4,277 |
|
|
|
|
(a) |
|
Available-for-sale securities consist of US treasury securities, commercial paper, and corporate fixed income securities. |
|
(b) |
|
Primarily foreign exchange forward contracts and foreign exchange options. |
We recorded a loss of $0.1 million for the fiscal year ended June 30, 2010, under general and
administrative expenses in the consolidated statements of operations related to the changes in the
fair value of its financial instruments for foreign exchange forward contracts and foreign exchange
options accounted for as foreign currency hedges which are still held at June 30, 2010. There was
no gain or loss recorded in the consolidated statements of operations for available-for-sale
securities still held at June 30, 2010.
To determine the fair value of our foreign exchange forward contracts and foreign exchange options,
we receive a quoted value from the counterparty for each contract. The quoted price we receive is a
Level 2 valuation based on observable quotes in the marketplace for the underlying currency. We use
these underlying values to estimate amounts that would be paid or received to terminate the
contracts at the reporting date based on current market prices for the underlying currency.
The available-for-sale securities are valued using quoted market prices as of the end of the
trading day. We monitor the value of the investments for other-than-temporary impairment on a
quarterly basis.
Note 7 Derivative Financial Instruments
We are exposed to market risk from changes in foreign currency exchange rates. To manage this
exposure, we enter into various derivative transactions. These instruments have the effect of
reducing our exposure to unfavorable changes in foreign currency rates. We do not enter into
derivative transactions for trading purposes.
Derivative transactions are governed by our established set of policies and procedures covering
areas such as authorization, counterparty exposure and hedging practices. We also evaluate new and
existing transactions and agreements to determine if they require derivative accounting treatment.
Positions are monitored using fair market value and sensitivity analyses.
Certain derivatives also give rise to credit risks from the possible non-performance by
counterparties. The credit risk is generally limited to the fair value of those contracts that are
favorable to us. We have established strict counterparty credit guidelines and enters into
transactions only with financial institutions with securities of investment grade or better. We
monitor counterparty exposures and review any downgrade in credit rating. To mitigate
pre-settlement risk, minimum credit standards become more stringent as the duration of the
derivative financial instrument increases. To minimize the concentration of credit risk, we enter
into derivative transactions with a portfolio of financial institutions. Based on these factors, we
consider the risk of counterparty default to be minimal.
73
Accounting Policy for Derivatives
All derivative instruments are recognized in the accompanying consolidated balance sheets at fair
value. Derivative instruments with a positive fair value are reported in other current assets and
derivative instruments with a negative fair value are reported in other current liabilities in the
accompanying consolidated balance sheet. Changes in the fair value of derivative instruments are
recognized immediately in general and administrative expenses, unless the derivative is designated
as a hedge and qualifies for hedge accounting.
There are three hedging relationships where a derivative (hedging instrument) may qualify for hedge
accounting: (1) a hedge of the change in fair value of a recognized asset or liability or firm
commitment (fair value hedge), (2) a hedge of the variability in cash flows from forecasted
transactions (cash flow hedge), and (3) a hedge of the variability caused by changes in foreign
currency exchange rates (foreign currency hedge). Under hedge accounting, recognition of derivative
gains and losses can be matched in the same period with that of the hedged exposure and thereby
minimize earnings volatility. If the derivative does not qualify for hedge accounting, we consider
the transaction to be an economic hedge and changes in the fair value of the derivative asset or
liability are recognized immediately in general and administrative expenses. At June 30, 2010, we
had entered into foreign currency cash flow hedges and economic hedges.
In order for a derivative to qualify for hedge accounting, the derivative must be formally
designated as a fair value, cash flow, or a foreign currency hedge by documenting the relationship
between the derivative and the hedged item. Additionally, the hedge relationship must be expected
to be highly effective at offsetting changes in either the fair value or cash flows of the hedged
item at both inception of the hedge and on an ongoing basis. We assess the ongoing effectiveness of
our hedges and measures and records hedge ineffectiveness, if any, at the end of each quarter.
For a cash flow hedge, the effective portion of the change in fair value of a hedging instrument is
recognized in other comprehensive income, as a component of shareholders investment, and
subsequently reclassified to general and administrative expenses. The ineffective portion of a cash
flow hedge is recognized immediately in general and administrative expenses.
We discontinue hedge accounting prospectively when (1) the derivative expires or is sold,
terminated, or exercised, (2) we determine that the hedging transaction is no longer highly
effective, (3) a hedged forecasted transaction is no longer probable of occurring in the time
period described in the hedge documentation, (4) the hedged item matures or is sold, or (5)
management elects to discontinue hedge accounting voluntarily.
When hedge accounting is discontinued because the derivative no longer qualifies as a cash flow
hedge we continue to carry the derivative in the accompanying consolidated balance sheet at its
fair value, recognize subsequent changes in the fair value of the derivative in current-period
general and administrative expenses, and continue to defer the derivative gain or loss in other
comprehensive income or loss until the hedged forecasted transaction affects expenses. If the
hedged forecasted transaction is not likely to occur in the time period described in the hedge
documentation or within a two month period of time thereafter, the deferred derivative gain or loss
is reclassified immediately to general and administrative expenses.
Our reinsurance intermediary subsidiary in the United Kingdom receives revenues in currencies
(primarily in U.S. dollars) that differ from its functional currency. As a result, the foreign
subsidiarys functional currency revenue will fluctuate as the currency exchange rates change. To
reduce this variability, we use foreign exchange forward contracts and over-the-counter options to
hedge the foreign exchange risk of the forecasted collections. We have designated these derivatives
as cash flow hedges of its forecasted foreign currency denominated collections. At June 30, 2010,
the longest outstanding maturity was twenty-nine months. As of June 30, 2010, a net $3.3 million
pretax loss has been deferred in other comprehensive loss, $2.2 million of which is expected to be
reclassified to general and administrative expenses in the next twelve months. Deferred gains or
losses will be reclassified from other comprehensive loss to general and administrative expenses
when the hedged revenue is recognized. During the fiscal year ended June 30, 2010, we recognized no
material gains or losses due to hedge ineffectiveness within general and administrative expenses in
the consolidated statement of operations. We also use derivative financial contracts, principally
foreign exchange forward contracts to hedge non-functional currency obligations. Primarily, these
exposures arise from intercompany lending between entities with different functional currencies.
At June 30, 2010, we had cash flow hedges with a notional value of $87.7 million to hedge revenue
cash flows. We determine the fair value of its foreign currency derivatives based on quoted prices
received from the counterparty for each contract which we evaluate using pricing models whose
inputs are observable. The net fair value of derivatives held as of
June 30, 2010 was a liability of $3.5 million. See Note 6 for further information regarding the determination of fair value.
74
The fair value of our derivative instruments held at June 30, 2010 and their location in the
consolidated balance sheet are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset derivatives |
|
Liability derivatives |
|
|
Balance sheet location |
|
Fair value |
|
Balance sheet location |
|
Fair value |
|
Derivatives designated
as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forwards
|
|
Other current assets
|
|
$ |
731 |
|
|
Accounts payable,
accrued liabilities
and deferred income
|
|
$ |
(4,100 |
) |
Foreign exchange options
|
|
Other current assets
|
|
|
37 |
|
|
Accounts payable,
accrued liabilities
and deferred income
|
|
|
(94 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives designated
as hedging instruments
|
|
|
|
|
768 |
|
|
|
|
|
(4,194 |
) |
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated
as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange options
|
|
Other current assets
|
|
|
|
|
|
Accounts payable,
accrued liabilities
and deferred income
|
| |
(83 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives not
designated as hedging
instruments
|
|
|
|
|
|
|
|
|
|
|
(83 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total derivatives
|
|
|
|
$ |
768 |
|
|
|
|
$ |
(4,277 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The effect of derivative instruments that are designated as hedging instruments on the consolidated
statement of operations and the consolidated statement of changes in stockholders equity for the
fiscal year ended June 30, 2010 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss recognized in |
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of loss |
|
|
income |
|
|
|
|
|
|
|
|
|
|
|
|
|
recognized in |
|
|
(ineffective |
|
|
|
Loss |
|
Location of loss |
|
Loss |
|
income (ineffective |
|
|
portion and |
|
|
|
recognized |
|
reclassified |
|
reclassified |
|
portion and amount |
|
|
amount |
|
|
|
in OCI |
|
from OCI into |
|
from OCI into |
|
excluded from |
|
|
excluded from |
|
Derivatives designated as |
|
(effective |
|
income (effective |
|
income (effective |
|
effectiveness |
|
|
effectiveness |
|
hedging instruments: |
|
portion) |
|
portion) |
|
portion) |
|
testing) |
|
|
testing) |
|
|
Foreign exchange forwards
|
|
$ |
(3,335 |
) |
|
General and
administrative
expenses
|
|
$ |
(266 |
) |
|
General and
administrative
expenses
|
|
$ |
(65 |
) |
Foreign exchange options
|
|
|
(207 |
) |
|
General and
administrative
expenses
|
|
|
|
|
|
General and
administrative
expenses
|
|
|
(32 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
(3,542 |
) |
|
|
|
$ |
(266 |
) |
|
|
|
$ |
(97 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2010, we had $1.5 million of notional value of derivatives, as economic hedges
primarily to hedge intercompany loans that do not receive hedge accounting treatment. The effect of
derivatives that have not been designated as hedging instruments on the consolidated statement of
operations for the fiscal year ended June 30, 2010 are as follows:
|
|
|
|
|
|
|
|
|
Location of gain (loss) |
|
Gain (loss) |
Derivatives not designated |
|
recognized |
|
recognized |
as hedging instruments: |
|
in income |
|
in income |
|
Foreign exchange forwards
|
|
General and
administrative
expenses
|
|
$ |
1,869 |
|
Foreign exchange options
|
|
General and
administrative
expenses
|
|
|
(350 |
) |
|
|
|
|
|
|
|
Total
|
|
|
|
$ |
1,519 |
|
|
|
|
|
|
|
|
75
Note 8 Accounts Payable and Accrued Liabilities, Including Discretionary Compensation
Accounts payable and accrued liabilities consist of:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
Accounts payable and accrued liabilities |
|
$ |
138,654 |
|
|
$ |
77,410 |
|
Accrued salaries and bonuses |
|
|
150,761 |
|
|
|
162,351 |
|
Deferred revenue |
|
|
119,726 |
|
|
|
42,185 |
|
|
|
|
|
|
|
|
Total accounts payable, accrued liabilities and deferred income |
|
$ |
409,141 |
|
|
$ |
281,946 |
|
|
|
|
|
|
|
|
Note 9 Leases
We lease office space, furniture and selected computer equipment under operating lease agreements
with terms generally ranging from one to ten years. Our real estate lease agreements contain rent
increases, rent holidays, leasehold incentives or rent concessions. All costs incurred for rent
expense are recorded on a straight-line basis (inclusive of any lease incentives and rent holidays)
over the life of the lease within occupancy expenses in the statement of operations, with an offset
to deferred rent liabilities recorded in the consolidated balance sheet. Rental expense was $107.3
million, $78.4 million and $90.1 million for fiscal years 2010, 2009 and 2008, respectively,
inclusive of operating expenses related to such space and equipment. We have entered into sublease
agreements for some of our excess leased space. Sublease income was $1.3 million, $1.0 million and
$0.6 million for fiscal years 2010, 2009 and 2008, respectively.
Future minimum lease payments for the operating lease commitments which have not been reduced by
cumulative anticipated cash inflows for sublease income of $4.9 million are:
|
|
|
|
|
|
|
Lease |
|
Fiscal Year |
|
Commitments |
|
2011 |
|
$ |
113,771 |
|
2012 |
|
|
100,180 |
|
2013 |
|
|
84,958 |
|
2014 |
|
|
72,011 |
|
2015 |
|
|
61,359 |
|
Thereafter |
|
|
195,760 |
|
|
|
|
|
Total |
|
$ |
628,039 |
|
|
|
|
|
We evaluate office capacity on an ongoing basis to meet changing needs in our markets with a goal
of minimizing our occupancy expense.
Note 10 Retirement Benefits
Towers Watson sponsors both qualified and non-qualified defined benefit pension plans and other
post-employment benefit or OPEB plans in North America and Europe. These funded and unfunded
plans represent 98% of total Towers Watsons pension obligations and as a result are disclosed
herein. Towers Watson also sponsors funded and unfunded defined benefit pension plans in certain
other countries as well, representing the remaining 2% of the liability.
Under the legacy Watson Wyatt 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.
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. Beginning January 2008, Watson Wyatt
made changes to the plan in the United Kingdom 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 plan liabilities
in Germany were a result of Watson Wyatts acquisition of Heissmann GmbH in 2007. A significant
percentage of the liabilities represent the grandfathered pension benefit for associates hired
prior to a July 1991 plan amendment. The pension plan for those hired after July 1991 is a defined
contribution type arrangement. In the Netherlands, the pension benefit is a percentage of service
and average salary over the working life of the associate, where salary includes allowances and
bonuses up to a set maximum salary and is offset by the current social security benefit. The
benefit liability is reflected on the balance sheet. The measurement date for each of the plans is
June 30.
76
The legacy Towers Perrin pension plans in the United States accrue benefits under a cash-balance
formula for associates hired or rehired after 2002 and for all associates for service after 2007.
For associates hired prior to 2003 and active as of January 2003, benefits prior to 2008 are based
on a combination of a cash balance formula, for the period after 2002, and a final average pay
formula based on years of plan service and the highest five consecutive years of plan compensation
prior to 2008. Under the cash balance formula benefits are based on a percentage of each year of
the associates plan compensation. The Canadian Retirement Plan provides a choice of a defined
benefit approach or a defined contribution approach. The non-qualified plans in North America
provide for pension benefits that would be covered under the qualified plan in the respective
country but are limited by statutory maximums. The non-qualified plans have no assets and therefore
are unfunded arrangements. The U.K. Plan provides predominantly lump sum benefits. Benefit accruals
under the U.K. Plan ceased on March 31, 2008. The plans in Germany mostly provide benefits under a
cash balance benefit formula. Benefits under the Netherlands plan accrue on a final pay basis on
earnings up to a maximum amount each year. The benefit assets and liabilities are reflected on the
balance sheet. The measurement date for each of the plans has historically been December 31, but
has been changed to June 30 as a result of the Merger.
The disclosures for the European plans are shown separately because the amounts are material
relative to North American plans and the assumptions used in the European plans are significantly
different than those used in the North American plans.
The determination of Towers Watsons 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 Towers Watsons 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 Towers Watsons pension expense
over the average remaining service period of participating associates. Towers Watson 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.
Funding is based on actuarially determined contributions and is limited to amounts that are
currently deductible for tax purposes. Since funding calculations are based on different
measurements than those used for accounting purposes, pension contributions are not equal to net
periodic pension cost. We accrue the excess of net periodic pension cost over such contributions
and direct benefit payments under non-qualified plan provisions.
The following table sets forth our projected pension contributions for fiscal year 2011, as well as
the pension contributions to our various plans in fiscal years 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
|
(Projected) |
|
|
(Actual) |
|
|
(Actual) |
|
U.S. |
|
$ |
30,000 |
|
|
$ |
30,000 |
|
|
$ |
30,000 |
|
Canada |
|
|
8,428 |
|
|
|
4,388 |
|
|
|
1,359 |
|
Europe |
|
|
20,285 |
|
|
|
21,020 |
|
|
|
23,872 |
|
The fair value of plan assets is based on the market value of securities that are in the pension
portfolio, which vary by country. To the extent the expected return on the pension portfolio varies
from the actual return, there is an unrecognized gain or loss.
Assumptions Used in the Valuations of the Defined Benefit Pension Plans
The following assumptions were used in the valuations of Towers Watsons defined benefit pension
plans. The assumptions presented for the North American plans represent the weighted-average of
rates for all U.S. and Canadian plans. The assumptions presented for Towers Watsons European plans
represent the weighted-average of rates for the U.K., Germany and Netherlands plans. In relation to
the acquisition of Towers Perrin on January 1, 2010, the legacy plans of Towers Perrin have been
included in the assumptions as of and for the year ended June 30, 2010. The assumptions as of and
for the years ended June 30, 2009 and 2008 represent only the legacy Watson Wyatt plans.
The assumptions used to determine net periodic benefit cost for the fiscals years ended June 30,
2010, 2009 and 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, 2010 |
|
|
Year Ended June 30, 2009 |
|
|
Year Ended June 30, 2008 |
|
|
|
North |
|
|
|
|
|
|
North |
|
|
|
|
|
|
North |
|
|
|
|
|
|
America |
|
|
Europe |
|
|
America |
|
|
Europe |
|
|
America |
|
|
Europe |
|
Discount rate |
|
|
6.43 |
% |
|
|
6.03 |
% |
|
|
6.91 |
% |
|
|
6.47 |
% |
|
|
6.25 |
% |
|
|
5.72 |
% |
Expected long-term rate of return on
assets |
|
|
8.11 |
% |
|
|
6.48 |
% |
|
|
8.61 |
% |
|
|
6.53 |
% |
|
|
8.61 |
% |
|
|
6.74 |
% |
Rate of increase in compensation levels |
|
|
3.93 |
% |
|
|
5.09 |
% |
|
|
4.08 |
% |
|
|
5.36 |
% |
|
|
3.84 |
% |
|
|
4.73 |
% |
77
The following table presents the assumptions used in the valuation to determine the projected
benefit obligation for the fiscal years ended June 30, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,2010 |
|
|
June 30, 2009 |
|
|
|
North |
|
|
|
|
|
|
North |
|
|
|
|
|
|
America |
|
|
Europe |
|
|
America |
|
|
Europe |
|
Discount rate |
|
|
5.86 |
% |
|
|
5.25 |
% |
|
|
7.21 |
% |
|
|
6.29 |
% |
Rate of increase in compensation levels |
|
|
3.88 |
% |
|
|
3.88 |
% |
|
|
3.29 |
% |
|
|
5.15 |
% |
Components of Net Periodic Benefit Cost for Defined Benefit Pension Plans
The following tables set forth the components of net periodic benefit cost for our defined benefit
pension plans for North America and Europe for the fiscal years ended June 30, 2010, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, 2010 |
|
|
Year Ended June 30, 2009 |
|
|
Year Ended June 30, 2008 |
|
|
|
North |
|
|
|
|
|
|
North |
|
|
|
|
|
|
North |
|
|
|
|
|
|
America |
|
|
Europe |
|
|
America |
|
|
Europe |
|
|
America |
|
|
Europe |
|
Service cost |
|
$ |
38,068 |
|
|
$ |
9,844 |
|
|
$ |
24,771 |
|
|
$ |
7,538 |
|
|
$ |
30,592 |
|
|
$ |
10,813 |
|
Interest cost |
|
|
95,845 |
|
|
|
30,631 |
|
|
|
48,504 |
|
|
|
22,759 |
|
|
|
44,918 |
|
|
|
22,966 |
|
Expected return on plan assets |
|
|
(93,257 |
) |
|
|
(27,078 |
) |
|
|
(50,725 |
) |
|
|
(20,945 |
) |
|
|
(55,622 |
) |
|
|
(24,427 |
) |
Amortization of transition
obligation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(65 |
) |
|
|
|
|
Amortization of net
unrecognized losses/(gains) |
|
|
15,275 |
|
|
|
2,615 |
|
|
|
8,649 |
|
|
|
(328 |
) |
|
|
6,222 |
|
|
|
(2,806 |
) |
Amortization of prior service
cost/(credit) |
|
|
(1,623 |
) |
|
|
41 |
|
|
|
(2,279 |
) |
|
|
42 |
|
|
|
(2,594 |
) |
|
|
22 |
|
Other adjustments and
settlements |
|
|
2,293 |
|
|
|
924 |
|
|
|
|
|
|
|
120 |
|
|
|
|
|
|
|
115 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost |
|
$ |
56,601 |
|
|
$ |
16,977 |
|
|
$ |
28,920 |
|
|
$ |
9,186 |
|
|
$ |
23,451 |
|
|
$ |
6,683 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in plan assets and benefit obligations were recognized during fiscal 2010 and 2009 and have
been included as changes to other comprehensive income for the Companys defined benefit pension
plans as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
North |
|
|
|
|
|
|
North |
|
|
|
|
|
|
America |
|
|
Europe |
|
|
America |
|
|
Europe |
|
Current year actuarial loss |
|
$ |
220,113 |
|
|
$ |
37,501 |
|
|
$ |
84,449 |
|
|
$ |
44,288 |
|
Amortization of actuarial loss |
|
|
(15,275 |
) |
|
|
(2,615 |
) |
|
|
(8,649 |
) |
|
|
328 |
|
Amortization of prior service credit (cost) |
|
|
1,623 |
|
|
|
(41 |
) |
|
|
2,279 |
|
|
|
(42 |
) |
Settlement |
|
|
(2,293 |
) |
|
|
(64 |
) |
|
|
|
|
|
|
|
|
Other |
|
|
1,320 |
|
|
|
(4,638 |
) |
|
|
(998 |
) |
|
|
1,289 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recognized in other comprehensive income |
|
$ |
205,488 |
|
|
$ |
30,143 |
|
|
$ |
77,081 |
|
|
$ |
45,863 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The estimated amounts that will be amortized from other comprehensive income into net periodic
benefit cost during fiscal 2011 for the Companys defined benefit pension plans are shown below:
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
|
North |
|
|
|
|
|
|
America |
|
|
Europe |
|
Actuarial loss |
|
$ |
25,229 |
|
|
$ |
5,340 |
|
Prior service (credit) cost |
|
|
(1,624 |
) |
|
|
39 |
|
|
|
|
|
|
|
|
Total |
|
$ |
23,605 |
|
|
$ |
5,379 |
|
|
|
|
|
|
|
|
78
The following table provides a reconciliation of the changes in the qualified plans projected
benefit obligations and fair value of assets for the years ended June 30, 2010 and 2009, and a
statement of funded status as of June 30, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
|
June 30, 2009 |
|
|
|
North |
|
|
|
|
|
|
North |
|
|
|
|
|
|
America |
|
|
Europe |
|
|
America |
|
|
Europe |
|
Change in Benefit Obligation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year |
|
$ |
593,725 |
|
|
$ |
355,701 |
|
|
$ |
612,618 |
|
|
$ |
403,114 |
|
Service cost |
|
|
30,420 |
|
|
|
7,656 |
|
|
|
19,011 |
|
|
|
6,960 |
|
Interest cost |
|
|
77,536 |
|
|
|
27,501 |
|
|
|
41,480 |
|
|
|
21,328 |
|
Actuarial (gains)/losses |
|
|
195,603 |
|
|
|
61,309 |
|
|
|
(48,552 |
) |
|
|
(2,302 |
) |
Benefit payments |
|
|
(65,263 |
) |
|
|
(19,760 |
) |
|
|
(22,667 |
) |
|
|
(5,411 |
) |
Acquisition/business combination/divestiture |
|
|
1,139,366 |
|
|
|
239,603 |
|
|
|
|
|
|
|
|
|
Plan amendments & other |
|
|
|
|
|
|
2,513 |
|
|
|
|
|
|
|
779 |
|
Foreign currency adjustment |
|
|
3,495 |
|
|
|
(57,158 |
) |
|
|
(8,165 |
) |
|
|
(68,767 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year |
|
$ |
1,974,882 |
|
|
$ |
617,365 |
|
|
$ |
593,725 |
|
|
$ |
355,701 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Plan Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets, beginning of year |
|
$ |
517,322 |
|
|
$ |
315,769 |
|
|
$ |
598,463 |
|
|
$ |
384,617 |
|
Actual return on plan assets |
|
|
103,850 |
|
|
|
55,514 |
|
|
|
(81,791 |
) |
|
|
(26,080 |
) |
Company contributions |
|
|
34,388 |
|
|
|
21,020 |
|
|
|
31,359 |
|
|
|
25,696 |
|
Benefit payments |
|
|
(65,263 |
) |
|
|
(19,760 |
) |
|
|
(22,667 |
) |
|
|
(5,411 |
) |
Participant contributions |
|
|
|
|
|
|
1,820 |
|
|
|
|
|
|
|
1,924 |
|
Acquisition/business combination/divestiture |
|
|
1,239,101 |
|
|
|
241,953 |
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
(166 |
) |
|
|
|
|
|
|
630 |
|
Foreign currency adjustment |
|
|
2,606 |
|
|
|
(53,608 |
) |
|
|
(8,042 |
) |
|
|
(65,607 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets, end of year |
|
$ |
1,832,004 |
|
|
$ |
562,541 |
|
|
$ |
517,322 |
|
|
$ |
315,769 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status at end of year |
|
$ |
(142,878 |
) |
|
$ |
(54,824 |
) |
|
$ |
(76,403 |
) |
|
$ |
(39,932 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Benefit Obligation |
|
$ |
1,897,011 |
|
|
$ |
601,461 |
|
|
$ |
554,695 |
|
|
$ |
317,751 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
|
June 30, 2009 |
|
|
|
North |
|
|
|
|
|
|
North |
|
|
|
|
|
|
America |
|
|
Europe |
|
|
America |
|
|
Europe |
|
Amounts recognized in
Consolidated Balance Sheets consist
of : |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent assets |
|
$ |
45,949 |
|
|
$ |
2,568 |
|
|
$ |
|
|
|
$ |
6,490 |
|
Noncurrent liabilities |
|
|
(188,827 |
) |
|
|
(57,392 |
) |
|
|
(76,403 |
) |
|
|
(46,422 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Amount Recognized |
|
$ |
(142,878 |
) |
|
$ |
(54,824 |
) |
|
$ |
(76,403 |
) |
|
$ |
(39,932 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in Accumulated
Other Comprehensive Income consist of
: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss/(gain) |
|
$ |
329,076 |
|
|
$ |
65,553 |
|
|
$ |
157,022 |
|
|
$ |
39,669 |
|
Net prior service cost/(credit) |
|
|
(9,628 |
) |
|
|
572 |
|
|
|
(11,043 |
) |
|
|
673 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Income |
|
$ |
319,448 |
|
|
$ |
66,125 |
|
|
$ |
145,979 |
|
|
$ |
40,342 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79
The following table provides a reconciliation of the changes in the North American and European
non-qualified plans projected benefit obligations for the years ended June 30, 2010 and 2009, and a
statement of funded status as of June 30, 2010 and 2009. The non-qualified plans reflect only the
U.S., Canadian and German plans and are unfunded.
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
Change in Benefit Obligation |
|
|
|
|
|
|
|
|
Benefit obligation, beginning of year |
|
$ |
126,922 |
|
|
$ |
127,297 |
|
Service cost |
|
|
9,836 |
|
|
|
6,338 |
|
Interest cost |
|
|
21,439 |
|
|
|
8,455 |
|
Actuarial (gains)/losses |
|
|
39,032 |
|
|
|
1,243 |
|
Benefit payments |
|
|
(37,003 |
) |
|
|
(11,654 |
) |
Acquisition/business combination/divestiture |
|
|
480,337 |
|
|
|
|
|
Other |
|
|
698 |
|
|
|
|
|
Foreign currency adjustment |
|
|
(13,787 |
) |
|
|
(4,757 |
) |
|
|
|
|
|
|
|
Benefit obligation, end of year |
|
$ |
627,474 |
|
|
$ |
126,922 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Plan Assets |
|
|
|
|
|
|
|
|
Fair value of plan assets, beginning of year |
|
$ |
|
|
|
$ |
|
|
Actual return on plan assets |
|
|
|
|
|
|
|
|
Company contributions |
|
|
37,003 |
|
|
|
11,654 |
|
Benefit payments |
|
|
(37,003 |
) |
|
|
(11,654 |
) |
Participant contributions |
|
|
|
|
|
|
|
|
Foreign currency adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets, end of year |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
Funded status at end of year |
|
$ |
(627,474 |
) |
|
$ |
(126,922 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in Consolidated Balance
Sheets consist of: |
|
|
|
|
|
|
|
|
Noncurrent assets |
|
$ |
|
|
|
$ |
|
|
Current liabilities |
|
|
(81,743 |
) |
|
|
(10,743 |
) |
Noncurrent liabilities |
|
|
(545,731 |
) |
|
|
(116,179 |
) |
|
|
|
|
|
|
|
Net Amount Recognized |
|
$ |
(627,474 |
) |
|
$ |
(126,922 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in Accumulated Other
Comprehensive Income consist of: |
|
|
|
|
|
|
|
|
Net actuarial loss/(gain) |
|
$ |
39,517 |
|
|
$ |
3,438 |
|
Net prior service cost/(credit) |
|
|
(903 |
) |
|
|
(1,136 |
) |
Net transition obligation/(asset) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Income |
|
$ |
38,614 |
|
|
$ |
2,302 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected Benefit Obligation |
|
$ |
627,474 |
|
|
$ |
126,922 |
|
Accumulated Benefit Obligation |
|
|
606,529 |
|
|
|
108,087 |
|
Fair value of plan assets |
|
|
|
|
|
|
|
|
Our investment strategy is designed to generate returns that will reduce the interest rate risk
inherent in each of the plans liabilities and enable each of the plans to meet its future
obligations. The precise amount for which these obligations will be settled depends on future
events, including the life expectancy of the plans members and salary inflation. The obligations
are estimated using actuarial assumptions, based on the current economic environment.
Each pension plan seeks to achieve total returns both sufficient to meet expected future
obligations as well as returns greater than its policy benchmark reflecting the target weights of
the asset classes used in its targeted strategic asset allocation. Each plans targeted strategic
allocation to each asset class is determined through a plan-specific Asset-Liability Modeling
study. These comprehensive studies provide an evaluation of the projected status of asset and
liability measures for each plan under a range of both positive and negative environments. The
studies include a number of different asset mixes, spanning a range of diversification and
potential equity exposures.
In evaluating the strategic asset allocation choices, an emphasis is placed on the long-term
characteristics of each individual asset class, and the benefits of diversification among multiple
asset classes. Consideration is also given to the proper long-term level of risk for each plan,
particularly with respect to the long-term nature of each plans liabilities, the impact of asset
allocation on investment results, and the corresponding impact on the volatility and magnitude of
plan contributions and expense and the impact certain actuarial techniques may have on the plans
recognition of investment experience.
For the legacy Watson Wyatt funded plans, the targeted equity allocation as of June 30, 2010 is 55%
in the U.S. plan, 65% in the Canadian plan, 30% in the Netherlands plan, and 46% in the U.K. plan.
80
For the legacy Towers Perrin funded plans, the targeted equity allocation as of June 30, 2010
is 60% in the U.S. plan, 50% in the Canadian plan and 60% in the U.K. plan. The duration of the
fixed income assets is plan specific and each has been targeted to minimize fluctuations in plan
funded status as a result of changes in interest rates. The Netherlands plan is invested in an
insurance contract. Consequently, the asset allocation of the plan is managed by the insurer.
The U.S. and Canadian plans of legacy Towers Perrin employ a smoothed value of assets in
calculating pension expense. This smoothed value recognizes the impact of deviations from the
assumed rate of return on the non-fixed income portion of the portfolio over a five-year period.
However, the smoothed value of the non-fixed income portion of plan assets must be within a
corridor between 80% and 120% of the fair value. Fixed income investments are valued at market.
The investments of the legacy Watson Wyatt plans are valued at fair market value.
We monitor investment performance and portfolio characteristics on a quarterly basis to ensure that
managers are meeting expectations with respect to their investment approach. With the exception of
securities issued by the U.S. Government and its agencies, no single issue is to comprise more than
5% of the portfolios value although index fund managers are exempt from the security weighting
constraints. There are also various restrictions and controls placed on managers including
prohibition from investing in our stock.
The expected return on assets assumption is developed in conjunction with advisors and using our
asset model that reflects a combination of rigorous historical analysis and the forward-looking
views of the financial markets as revealed through the yield on long-term bonds, the price earnings
ratios of the major stock market indices and long-term inflation. Amounts are tested for
reasonableness against their historical averages. The fair value of our North American and European
plan assets by asset category at June 30, 2010 are as follows (see Note 6 for a description of the
fair value levels):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements on a Recurring Basis at June 30, 2010 |
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|
|
North |
|
|
|
|
|
|
North |
|
|
|
|
|
|
North |
|
|
|
|
|
|
|
|
|
|
America |
|
|
Europe |
|
|
America |
|
|
Europe |
|
|
America |
|
|
Europe |
|
|
|
|
|
Asset category: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
$ |
1,921 |
|
|
$ |
15,375 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
17,296 |
|
Cash equivalents |
|
|
|
|
|
|
|
|
|
|
32,915 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,915 |
|
Equity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. large cap companies |
|
|
21,507 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,507 |
|
U.S. mid cap companies |
|
|
63,353 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63,353 |
|
U.S. small cap companies |
|
|
83,393 |
|
|
|
|
|
|
|
24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83,417 |
|
International equities |
|
|
152,369 |
|
|
|
17,008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
169,377 |
|
Fixed income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasuries |
|
|
71,090 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71,090 |
|
Corporate bonds |
|
|
|
|
|
|
|
|
|
|
503,942 |
|
|
|
99,405 |
|
|
|
|
|
|
|
|
|
|
|
603,347 |
|
Other fixed income |
|
|
64,485 |
|
|
|
97,935 |
|
|
|
85,581 |
(a) |
|
|
18,011 |
(a) |
|
|
|
|
|
|
|
|
|
|
266,012 |
|
Pooled funds |
|
|
|
|
|
|
|
|
|
|
432,490 |
(b) |
|
|
291,206 |
(b) |
|
|
|
|
|
|
|
|
|
|
723,696 |
|
Multi-strategy funds |
|
|
|
|
|
|
|
|
|
|
146,054 |
(c) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
146,054 |
|
Mutual funds |
|
|
|
|
|
|
|
|
|
|
129,174 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
129,174 |
|
Limited partnerships |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,643 |
|
|
|
9,200 |
|
|
|
46,843 |
|
Derivatives |
|
|
|
|
|
|
|
|
|
|
4,059 |
(d) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,059 |
|
Insurance contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,406 |
|
|
|
14,406 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
458,118 |
|
|
$ |
130,318 |
|
|
$ |
1,334,239 |
|
|
$ |
408,622 |
|
|
$ |
37,643 |
|
|
$ |
23,606 |
|
|
$ |
2,392,546 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
This category includes municipal and foreign bonds. |
|
(b) |
|
This category includes pooled funds of both equity and fixed income securities. Fair
value is based on the calculated net asset value of shares held by the plan as reported by
the sponsor of the funds. |
|
(c) |
|
The fund seeks to exceed the total return of the S&P 500 Index by investing under
normal circumstances in S&P 500 Index derivatives, backed by a portfolio of fixed income
instruments. Fair value is based on the calculated net asset value of shares held by the
plan as reported by the sponsor of the funds. |
|
(d) |
|
We use various derivatives such as interest rate swaps, futures and options to match
the duration of the corporate bond portfolio with the duration of the plan liability. |
81
The following table reconciles the net plan investments to the total fair value of the plan
assets:
|
|
|
|
|
Net assets held in investments |
|
$ |
2,392,546 |
|
Dividend and interest receivable |
|
|
11,195 |
|
Other liabilities |
|
|
(9,196 |
) |
|
|
|
|
Fair value of plan assets |
|
$ |
2,394,545 |
|
|
|
|
|
The following table sets forth a summary of changes in the fair value of the plans Level 3 assets
for the year ended June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Limited Partnerships |
|
|
Insurance Contracts |
|
|
Total |
|
Beginning balance at June 30, 2009 |
|
$ |
64,902 |
|
|
$ |
934 |
|
|
$ |
65,836 |
|
Increase due to acquisition |
|
|
|
|
|
|
15,857 |
|
|
|
15,857 |
|
Net actual
return on plan assets
relating to assets still held at the
reporting date |
|
|
7,223 |
|
|
|
178 |
|
|
|
7,401 |
|
Net purchases, sales, and settlements |
|
|
(25,099 |
) |
|
|
(227 |
) |
|
|
(25,326 |
) |
Change in foreign currency exchange rates |
|
|
(183 |
) |
|
|
(2,336 |
) |
|
|
(2,519 |
) |
|
|
|
|
|
|
|
|
|
|
Ending balance at June 30, 2010 |
|
$ |
46,843 |
|
|
$ |
14,406 |
|
|
$ |
61,249 |
|
|
|
|
|
|
|
|
|
|
|
Benefit payments for our defined benefit pension plan, which reflect expected future service, as
appropriate, are expected to be paid as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit Payments |
|
Fiscal Year |
|
North America |
|
|
Europe |
|
|
Total |
|
2011 |
|
$ |
189,567 |
|
|
$ |
26,792 |
|
|
$ |
216,359 |
|
2012 |
|
|
167,442 |
|
|
|
13,349 |
|
|
|
180,791 |
|
2013 |
|
|
172,165 |
|
|
|
15,329 |
|
|
|
187,494 |
|
2014 |
|
|
166,211 |
|
|
|
24,723 |
|
|
|
190,934 |
|
2015 |
|
|
142,508 |
|
|
|
18,849 |
|
|
|
161,357 |
|
Years 2016-2020 |
|
|
554,730 |
|
|
|
129,463 |
|
|
|
684,193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,392,623 |
|
|
$ |
228,505 |
|
|
$ |
1,621,128 |
|
|
|
|
|
|
|
|
|
|
|
Defined Contribution Plan
Under the Watson Wyatt legacy plan, we sponsor a savings plan that provides benefits to
substantially all U.S. associates. We match associate contributions at a rate of 50% of the first
6% up to $60,000 of associates eligible compensation. We will also make an annual profit sharing
contribution to the plan in an amount that is dependent upon our financial performance during the
fiscal year. We contributed $3.4 million, $3.9 million and $3.7 million to the plan in fiscal years
2010, 2009 and 2008 respectively.
The Watson Wyatt U.K. pension plan has a money purchase section to which we make core contributions
plus additional contributions matching those of the participating associates 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
we have paid an equivalent amount as pension contributions. Core contributions amount to 2-6% of
pensionable salary with additional matching contributions of a further 2-6%. Company contributions
to the plan amounted to $6.7 million, $6.5 million and $6.9 million in fiscal years 2010, 2009 and
2008, respectively.
The Towers Perrin legacy plans consist of sponsoring savings plans in 21 countries that provide
benefits to substantially all associates within those countries. Certain of these plans provide for
a Company match to associate contributions at various rates. In the United States, we provide a
matching contribution of 100% of the first 5% of associate contributions. We make contributions of
10% of pay to the legacy Towers Perrin U.K. plan. Company contributions to the plan
amounted to $9.4 million in fiscal year 2010.
Health Care Benefits
In the legacy Watson Wyatt and Towers Perrin U.S. plans, we sponsor a contributory health care plan
that provides hospitalization, medical and dental benefits to substantially all U.S. associates. We
accrue a liability for estimated incurred but unreported claims based on projected use of the plan
as well as prior plan history. The liability totaled
$4.9 million and $1.9 million at
June 30, 2010 and 2009, respectively. This liability is included in accounts payable and
accrued liabilities in the consolidated balance sheets.
82
Postretirement Benefits
Under both the Watson Wyatt and Towers Perrin plans, we provide certain health care and life
insurance benefits for retired associates. The principal plans cover associates in the United
States and Canada who have met certain eligibility requirements. Our principal post-retirement
benefit plans are primarily unfunded. We accrue a liability for these benefits.
Assumptions used in the valuation for the U.S. plan, which comprises the majority of the principal
postretirement plans, included the following as of the end of the last two fiscal years:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
Health care cost trend, accumulated benefit obligation
(decreasing to 5.00% for 2016 and thereafter) |
|
|
8.03 |
% |
|
|
9.50 |
% |
Discount rate, accumulated benefit obligation postretirement benefit |
|
|
5.91 |
% |
|
|
7.25 |
% |
Actuarial gains and losses associated with changing any of the assumptions are accumulated as part
of the unrecognized net gain balance which is amortized and included in the net periodic
postretirement costs over the average remaining service period of participating associates, which
is approximately 13 years.
A one percentage point change in the assumed health care cost trend rates would have the following
effect:
|
|
|
|
|
|
|
|
|
|
|
1% |
|
|
1% |
|
|
|
Increase |
|
|
Decrease |
|
Effect on net periodic postretirement benefit cost in fiscal year 2010 |
|
$ |
1,058 |
|
|
$ |
(861 |
) |
Effect on accumulated postretirement benefit obligation as of June 30, 2010 |
|
|
22,759 |
|
|
|
(18,927 |
) |
Net periodic postretirement benefit cost consists of the following components reflected as expense
in our consolidated statements of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Service cost |
|
$ |
3,313 |
|
|
$ |
1,157 |
|
|
$ |
1,543 |
|
Interest cost |
|
|
8,387 |
|
|
|
2,495 |
|
|
|
2,724 |
|
Expected return on assets |
|
|
(66 |
) |
|
|
|
|
|
|
|
|
Amortization of transition obligation |
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net unrecognized (gains)/losses |
|
|
(1,151 |
) |
|
|
(1,135 |
) |
|
|
(478 |
) |
Amortization of prior service cost |
|
|
(571 |
) |
|
|
(661 |
) |
|
|
(664 |
) |
|
|
|
|
|
|
|
|
|
|
Net periodic postretirement benefit cost |
|
$ |
9,912 |
|
|
$ |
1,856 |
|
|
$ |
3,125 |
|
|
|
|
|
|
|
|
|
|
|
Changes in plan assets and benefit obligations were recognized during fiscal 2010 and 2009 and have
been included as changes to other comprehensive income for the Companys other postretirement
benefit plans as follows:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Current year actuarial (gain)/loss |
|
$ |
16,782 |
|
|
$ |
(5,237 |
) |
Amortization of actuarial gain |
|
|
1,151 |
|
|
|
1,135 |
|
Amortization of prior service credit |
|
|
571 |
|
|
|
661 |
|
Other |
|
|
(156 |
) |
|
|
(16 |
) |
|
|
|
|
|
|
|
Total recognized in other comprehensive income |
|
$ |
18,348 |
|
|
$ |
(3,457 |
) |
|
|
|
|
|
|
|
The estimated amounts that will be amortized from other comprehensive income into net periodic
benefit cost during fiscal 2011 for the Companys other postretirement benefit plans are shown
below:
|
|
|
|
|
|
|
2011 |
|
Actuarial loss |
|
$ |
369 |
|
Prior service credit |
|
|
(515 |
) |
|
|
|
|
Total |
|
$ |
(146 |
) |
|
|
|
|
83
The following table provides a reconciliation of the changes in the accumulated postretirement
benefit obligation and fair value of assets for the years ended June 30, 2010 and 2009 and a
statement of funded status as of June 30, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
Change in Benefit Obligation |
|
|
|
|
|
|
|
|
Benefit obligation, beginning of year |
|
$ |
38,944 |
|
|
$ |
44,156 |
|
Service cost |
|
|
3,313 |
|
|
|
1,157 |
|
Interest cost |
|
|
8,387 |
|
|
|
2,495 |
|
Participant contributions |
|
|
2,161 |
|
|
|
2,145 |
|
Actuarial (gains)/losses |
|
|
16,714 |
|
|
|
(5,237 |
) |
Benefit payments |
|
|
(8,556 |
) |
|
|
(4,191 |
) |
Acquisition/business combination/divestiture |
|
|
183,112 |
|
|
|
|
|
Medicare Part D |
|
|
708 |
|
|
|
|
|
Foreign currency adjustment |
|
|
757 |
|
|
|
(1,581 |
) |
|
|
|
|
|
|
|
Benefit obligation, end of year |
|
$ |
245,540 |
|
|
$ |
38,944 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Plan Assets |
|
|
|
|
|
|
|
|
Fair value of plan assets, beginning of year |
|
$ |
|
|
|
$ |
|
|
Company contributions |
|
|
6,395 |
|
|
|
2,046 |
|
Participant contributions |
|
|
2,161 |
|
|
|
2,145 |
|
Benefit payments |
|
|
(8,556 |
) |
|
|
(4,191 |
) |
Actual return on assets |
|
|
(2 |
) |
|
|
|
|
Acquisition/business combination/divestiture |
|
|
6,577 |
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets, end of year |
|
$ |
6,575 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status at end of year |
|
$ |
(238,965 |
) |
|
$ |
(38,944 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in Consolidated Balance
Sheets consist of |
|
|
|
|
|
|
|
|
Noncurrent assets |
|
$ |
|
|
|
$ |
|
|
Current liabilities |
|
|
(4,438 |
) |
|
|
(2,507 |
) |
Noncurrent liabilities |
|
|
(234,527 |
) |
|
|
(36,437 |
) |
|
|
|
|
|
|
|
Net Amount Recognized |
|
$ |
(238,965 |
) |
|
$ |
(38,944 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in Accumulated Other
Comprehensive Income consist of |
|
|
|
|
|
|
|
|
Net actuarial loss/(gain) |
|
$ |
1,116 |
|
|
$ |
(16,673 |
) |
Net prior service cost/(credit) |
|
|
(2,969 |
) |
|
|
(3,527 |
) |
Net transition obligation/(asset) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Income |
|
$ |
(1,853 |
) |
|
$ |
(20,200 |
) |
|
|
|
|
|
|
|
The following benefit and retiree drug subsidy payments for our postretirement plan, which reflect
expected future service, as appropriate, are expected to be paid:
|
|
|
|
|
|
|
|
|
|
|
Benefit |
|
|
Retiree drug |
|
Fiscal Year |
|
Payments |
|
|
subsidy |
|
2011 |
|
$ |
15,501 |
|
|
$ |
559 |
|
2012 |
|
|
17,060 |
|
|
|
647 |
|
2013 |
|
|
18,299 |
|
|
|
746 |
|
2014 |
|
|
19,558 |
|
|
|
860 |
|
2015 |
|
|
20,855 |
|
|
|
979 |
|
Years 2016-2020 |
|
|
124,693 |
|
|
|
6,692 |
|
|
|
|
|
|
|
|
|
|
$ |
215,966 |
|
|
$ |
10,483 |
|
84
Note
11 Debt, Commitments and Contingent Liabilities
The debt commitment and contingencies described below are currently
in effect and would require Towers
Watson, or its predecessor companies, Watson Wyatt and Towers Perrin, to make payments to third
parties under certain circumstances. In addition to commitments and contingencies specifically
described below, Towers Watson and its historical predecessor companies, Watson Wyatt and Towers
Perrin, have historically provided guarantees on an infrequent basis to third parties in the
ordinary course of business.
Subordinated Notes due January 2011
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 with the trustee for the issuance of Towers Watson Notes
due January 2011 in the aggregate principal amount of $200 million. The Towers Watson Notes due
January 2011 were issued on January 6, 2010, bearing interest from January 4, 2010 at a fixed
per-annum rate of 2.0%, and will mature on January 1, 2011. The indenture contains limited
operating covenants, and obligations under the Towers Watson Notes due January 2011 are
subordinated to and junior in right of payment to the prior payment in full in cash of all Senior
Debt (as defined in the Indenture) on the terms set forth in the Indenture.
Subordinated Notes due March 2012
On June 15, 2010, in connection with an offer to exchange shares of Class B-1 Common Stock for
unsecured subordinated notes, we entered into an indenture with the trustee for the issuance of
Towers Watson Notes due March 2012 in the aggregate principal amount of $98.5 million. The Towers
Watson Notes due March 2012 were issued on June 29, 2010, bearing interest from June 15, 2010 at a
fixed per annum rate, compounded quarterly on the interest reset dates, equal to the greater of
(i) 2.0%, or (ii) 120.0% of the short-term applicable federal rate listed under the quarterly
column, in effect at the applicable interest reset date. The Towers Watson Notes due March 2012
will mature on March 15, 2012 and are included in the other non-current liabilities balance on our
consolidated balance sheet as of June 30, 2010. Obligations under the Towers Watson Notes due March
2012 are subordinated to and junior in right of payment to the prior payment in full in cash of all
Senior Debt (as defined in the indenture).
Towers Watson Senior 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 Senior Credit Facility will bear interest at a spread to
either Libor or the Prime Rate. We are charged a quarterly commitment fee, currently 0.5% of the
Senior Credit Facility, which varies with our financial leverage and is paid on the unused portion
of the Senior Credit Facility. Obligations under the Senior Credit Facility are guaranteed by
Towers Watson and all of its domestic subsidiaries (other than PCIC) and are secured by a pledge of
65% of the voting stock and 100% 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 June 30, 2010, Towers Watson had no borrowings outstanding under the Senior Credit Facility.
Letters of Credit under the Senior Credit Facility
As of June 30, 2010, Towers Watson had standby letters of credit totaling $24.9 million associated
with our captive insurance companies in the event that we fail to meet our financial obligations.
Additionally, Towers Watson had $0.8 million of standby letters of credit covering various other
existing or potential business obligations. The aforementioned letters of credit are issued under
the Senior Credit Facility, and therefore reduce the amount that can be borrowed under the Senior
Credit Facility by the outstanding amount of these standby letters of credit.
Additional Borrowings, Letters of Credit and Guarantees not part of the Senior Credit Facility
Towers Watson Consultoria Ltda. (Brazil) has a bilateral credit facility with a major bank totaling
Brazilian Real (BRL) 6.5 million (U.S. $3.6 million). As of June 30, 2010 a total of BRL 5.6
million ($3.1 million) was outstanding under this facility.
Towers Watson has also provided a $5.0 million Australian dollar-denominated letter of credit (U.S.
$4.2 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 we believe that the likelihood of future usage is remote.
85
Towers Watson also has $3.3 million of letters of guarantee from major banks in support of office
leases and performance under existing or prospective contracts.
Indemnification Agreements
Towers Watson 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 Towers Watsons
obligations and the unique facts of each particular agreement, Towers Watson 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.
Watson Wyatt and Towers Perrin each carried substantial professional liability insurance with a
self-insured retention of $1 million per occurrence, which provided coverage for professional
liability claims including the cost of defending such claims. These policies remained 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. The contingent liabilities recorded are primarily developed actuarially. 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 all pending claims, we will not incur
material costs. Our professional liability insurance coverage beyond our self-insured retention was
written by PCIC, an affiliated captive insurance company, with reinsurance and excess insurance
attaching at $26 million provided by various unaffiliated commercial insurance carriers.
Post-Merger, Towers Watson has a 72.86% 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 professional liability claims above a $1 million per occurrence self-insured
retention for claims reported during the periods these policies were in effect, the consolidation
of PCIC will effectively result in self-insurance for the first $25 million of aggregate loss for
each of Watson Wyatt and Towers Perrin above the $1 million per occurrence self-insured retention.
As a result of consolidating PCICs results of operations in our consolidated financial statements,
the impact of PCICs reserve development also may result in fluctuations in Towers Watsons
earnings.
PCIC ceased issuing insurance policies effective July 1, 2010 and at that time entered into run-off
mode of operation. We have established a new wholly owned captive insurance company, Stone Mountain
Insurance Company, from which it is obtaining similarly structured insurance effective July 1,
2010. Stone Mountain provides us with $50 million of coverage per claim and in the aggregate on a
claims-made basis. Stone Mountain has secured reinsurance for coverage providing $25 million excess
of the $25 million retained layer for the current policy period. This structure effectively results
in self-insurance for the first $25 million of aggregate loss for Towers Watson above the $1
million per occurrence self-insured retention.
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 sp