UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2011

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

TOWERS WATSON & CO.

(Exact name of registrant as specified in its charter)

Delaware		27-0676603
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)
875 Third Avenue
New York, NY		10022
(Address of principal executive offices)		(zip code)

(212) 725-7550
(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o No o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer” and “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer o		Non-accelerated filer þ		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

As of April 29, 2011 there were 54,416,217 outstanding shares of Class A Common Stock and 2,880,361 outstanding shares of Restricted Class A Common Stock at a par value of $0.01 per share; 5,561,630 outstanding shares of Class B-2 Common Stock at a par value of $0.01; 5,675,488 outstanding shares of Class B-3 Common Stock at a par value of $0.01; and 5,440,521 outstanding shares of Class B-4 Common Stock at a par value of $0.01.

 

 

TOWERS WATSON & CO.

INDEX TO FORM 10-Q

For the Three and Nine Months Ended March 31, 2011

		Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Operations — Three and Nine Months Ended March 31, 2011 and 2010			1
Condensed Consolidated Balance Sheets — March 31, 2011 and June 30, 2010			2
Condensed Consolidated Statements of Cash Flows — Nine Months Ended March 31, 2011 and 2010			3
Condensed Consolidated Statement of Changes in Stockholders’ Equity — Nine Months Ended March 31, 2011			4
Notes to the Condensed Consolidated Financial Statements			5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			32
Item 3. Quantitative and Qualitative Disclosures About Market Risk			54
Item 4. Controls and Procedures			55
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			56
Item 1A. Risk Factors			56
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			57
Item 3. Defaults Upon Senior Securities			57
Item 4. Removed and Reserved			57
Item 5. Other Information			57
Item 6. Exhibits			57
Signatures			58
Certifications
EX-21.1
EX-31.1
EX-31.2
EX-32.1

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

TOWERS WATSON & CO.

(In thousands of U.S. dollars, except per share data)

(Unaudited)

		Three Months Ended March 31,								Nine Months Ended March 31,
		2011				2010				2011				2010
Revenue		$	866,081			$	803,963			$	2,408,186			$	1,637,922
Costs of providing services:
Salaries and employee benefits			539,489				537,706				1,530,595				1,062,251
Professional and subcontracted services			59,354				52,139				177,495				102,004
Occupancy			35,124				35,735				106,939				73,402
General and administrative expenses			66,609				69,999				196,612				141,454
Depreciation and amortization			33,990				32,834				95,395				69,019
Transaction and integration expenses			29,242				24,405				77,634				49,697
			763,808				752,818				2,184,670				1,497,827
Income from operations			102,273				51,145				223,516				140,095
Income/(loss) from affiliates			199				(1,049	)			484				(1,213	)
Interest income			1,224				1,169				3,808				1,708
Interest expense			(2,788	)			(2,273	)			(9,616	)			(3,326	)
Other non-operating income			7,218				704				20,191				3,604
Income before income taxes			108,126				49,696				238,383				140,868
Provision for income taxes			38,216				40,329				86,163				77,792
Net income before non-controlling interests			69,910				9,367				152,220				63,076
Net income attributable to non-controlling interests			674				552				1,639				608
Net income attributable to controlling interests		$	69,236			$	8,815			$	150,581			$	62,468
Earnings per share:
Net income attributable to controlling interests— basic		$	0.94			$	0.12			$	2.03			$	1.16
Net income attributable to controlling interests— diluted		$	0.94			$	0.12			$	2.03			$	1.16
Weighted average shares of common stock, basic (000)			73,970				76,414				74,159				53,777
Weighted average shares of common stock, diluted (000)			74,033				76,416				74,225				53,920

See accompanying notes to the condensed consolidated financial statements

TOWERS WATSON & CO.

(In thousands of U.S. dollars, except share data)

(Unaudited)

		March 31,				June 30,
		2011				2010
Assets
Cash and cash equivalents		$	381,372			$	435,927
Restricted cash			130,959				164,539
Short-term investments			32,831				51,009
Receivables from clients:
Billed, net of allowances of $13,389 and $7,975			477,733				421,602
Unbilled, at estimated net realizable value			290,164				215,912
			767,897				637,514
Other current assets			142,970				156,312
Total current assets			1,456,029				1,445,301
Fixed assets, net			229,226				227,308
Deferred income taxes			282,182				344,481
Goodwill			1,975,600				1,717,295
Intangible assets, net			681,558				683,487
Other assets			172,300				155,745
Total Assets		$	4,796,895			$	4,573,617
Liabilities
Accounts payable, accrued liabilities and deferred income		$	587,658			$	409,308
Reinsurance payables			125,026				164,539
Note payable			98,841				201,967
Other current liabilities			193,842				189,966
Total current liabilities			1,005,367				965,780
Revolving credit facility			—				—
Accrued retirement benefits			918,879				1,061,557
Professional liability claims reserve			309,713				335,034
Other noncurrent liabilities			184,608				246,574
Total Liabilities			2,418,567				2,608,945
Commitments and contingencies
Stockholders’ Equity
Class A Common Stock — $.01 par value: 300,000,000 shares authorized; 57,884,465 and 47,160,497 issued and 57,307,680 and 47,160,497 outstanding			579				472
Class B Common Stock — $.01 par value: 93,500,000 shares authorized; 16,679,003 and 27,043,196 issued and 16,679,003 and 27,043,196 outstanding			167				270
Additional paid-in capital			1,759,561				1,679,624
Treasury stock, at cost - 576,785 and 0 shares			(29,622	)			—
Retained earnings			845,670				711,570
Accumulated other comprehensive loss			(208,506	)			(436,329	)
Total Stockholders’ Equity			2,367,849				1,955,607
Non-controlling interest			10,479				9,065
Total Equity			2,378,328				1,964,672
Total Liabilities and Total Equity		$	4,796,895			$	4,573,617

See accompanying notes to the condensed consolidated financial statements

TOWERS WATSON & CO.

(In thousands of U.S. dollars)

(Unaudited)

		Nine Months Ended March 31,
		2011				2010
Cash flows from/(used in) operating activities:
Net income before non-controlling interests		$	152,220			$	63,076
Adjustments to reconcile net income to net cash from/(used in) operating activities:
Provision for doubtful receivables from clients			11,108				6,192
Depreciation			58,153				49,683
Amortization of intangible assets			37,242				19,336
(Benefit)/Provision for deferred income taxes			(520	)			63,364
Equity from affiliates			(30	)			1,605
Stock-based compensation			64,946				27,016
Other, net			(14,689	)			(3,117	)
Changes in operating assets and liabilities (net of business acquisitions)
Receivables from clients			(88,594	)			(53,004	)
Other current assets			8,143				(6,879	)
Other noncurrent assets			(2,232	)			(14,441	)
Accounts payable, accrued liabilities and deferred income			133,461				(311,237	)
Reinsurance payables			(41,942	)			37,614
Restricted cash			42,997				(37,614	)
Accrued retirement benefits			(41,137	)			(6,313	)
Professional liability claims reserves			(30,732	)			14,870
Other current liabilities			(36,166	)			(3,001	)
Other noncurrent liabilities			18,852				(32,846	)
Income tax related accounts			56,029				(41,486	)
Cash flows from/(used in) operating activities		$	327,109			$	(227,182	)
Cash flows (used in)/from investing activities:
Cash paid for business acquisitions			(137,298	)			(200,025	)
Cash acquired from business acquisitions			10,349				603,208
Purchases of fixed assets			(38,211	)			(11,479	)
Capitalized software costs			(16,547	)			(15,638	)
Purchases of held-to-maturity securities			(14,295	)			—
Redemptions of held-to-maturity securities			14,295				—
Purchases of available-for-sale securities			(44,129	)			(17,789	)
Redemption of available-for-sale securities			55,740				5,623
Investment in affiliates			(5,689	)			—
Proceeds from divestitures			16,918				3,336
Cash flows (used in)/from investing activities		$	(158,867	)		$	367,236
Cash flows used in financing activities:
Borrowings under credit facility			75,000				15,368
Repayments under credit facility			(75,000	)			—
Repayments of notes payable			(200,000	)			—
Dividends paid			(16,008	)			(9,562	)
Repurchases of common stock			(5,957	)			(34,922	)
Tax payment on vested shares			(26,248	)			—
Issuances of common stock and excess tax benefit			5,511				4,447
Cash flows used in financing activities		$	(242,702	)		$	(24,669	)
Effect of exchange rates on cash		$	19,905			$	(3,376	)
Increase/(decrease) in cash and cash equivalents			(54,555	)			112,009
Cash and cash equivalents at beginning of period			435,927				209,832
Cash and cash equivalents at end of period		$	381,372			$	321,841
Supplemental disclosures:
Cash paid for interest		$	4,268			$	1,884
Cash paid for income taxes, net of refunds		$	35,174			$	48,823
Notes payable  and issued in connection with Merger						$	200,000
Contingent payments accrued in conjunction with the acquisitions of EMB and Aliquant		$	20,026			$	—
Issuance of stock in conjunction with the acquistions of EMB and the Merger		$	11,250			$	1,357,379
Common stock associated with vesting of Restricted A Shares			26,248				—

See accompanying notes to the condensed consolidated financial statements

TOWERS WATSON & CO.

Condensed Consolidated Statement of Changes in Stockholders’ Equity

(In thousands of U.S. Dollars and numbers of shares in thousands)

(Unaudited)

		Class A								Class B																				Accumulated
		Common				Class A				Common				Class B				Additional				Treasury								Other				Non-
		Stock				Common				Stock				Common				Paid-in				Stock, at				Retained				Comprehensive				Controlling
		Outstanding				Stock				Outstanding				Stock				Capital				Cost				Earnings				Loss				Interest				Total
Balance as of June 30, 2010			47,160			$	472				27,043			$	270			$	1,679,624			$	—			$	711,570			$	(436,329	)		$	9,065			$	1,964,672
Comprehensive income
Net income			—				—				—				—				—				—				150,581				—				1,639				152,220
Additional minimum pension liability, net of tax			—				—				—				—				—				—				—				77,135				—				77,135
Foreign currency translation adjustment, net of tax			—				—				—				—				192				—				—				148,209				—				148,401
Unrealized loss on available for sale securities, net of tax			—				—				—				—				—				—				—				(601	)			(225	)			(826	)
Hedge effectiveness, net of tax			—				—				—				—				—				—				—				3,080				—				3,080
Total comprehensive income							—				—				—				—																				380,010
Repurchases of common stock			—				—				—				—				—				(5,957	)			—				—				—				(5,957	)
Shares received for employee taxes upon conversion of Restricted A shares			—				—				—				—				—				(26,248	)			—				—				—				(26,248	)
Exercises of stock options and purchases under our ESPP			—				—				—				—				—				2,583				—				—				—				2,583
Class A Common Stock:
Cash dividends declared			—				—				—				—				—				—				(16,481	)			—				—				(16,481	)
Issuances of common stock and excess tax benefits			113				1				—				—				2,349				—				—				—				—				2,350
Stock-based compensation			—				—				—				—				64,946				—				—				—				—				64,946
Conversion of Restricted A shares to Class A shares			(8	)			—				—				—				—				—				—				—				—				—
Conversion of Class B-1 shares to Class A shares			5,642				56				(5,642	)			(56	)			—				—				—				—				—				—
Issuance of Class B-3 and B-4 shares for acquisition			—				—				228				2				11,248				—				—				—				—				11,250
Acceleration of Class B shares to Class A shares			56				1				(57	)			—				—				—				—				—				—				1
Adjustment to repurchases of Class B-1 shares from tender offer			—				—				28				—				1,202				—				—				—				—				1,202
Secondary offering conversion of Class B-1 shares to Class A shares			4,921				49				(4,921	)			(49	)			—				—				—				—				—				—
Balance as of March 31, 2011			57,884			$	579				16,679			$	167			$	1,759,561			$	(29,622	)		$	845,670			$	(208,506	)		$	10,479			$	2,378,328

See accompanying notes to the condensed consolidated financial statements

TOWERS WATSON & CO.

Notes to the Condensed Consolidated Financial Statements

(Tabular amounts are in thousands, except per share data)

(Unaudited)

Note 1 — Organization and Basis of Presentation.

On January 1, 2010, pursuant to the Agreement and Plan of Merger, as amended by Amendment No. 1 (the “Merger Agreement”), Watson Wyatt Worldwide, Inc. (“Watson Wyatt”) and Towers, Perrin, Forster & Crosby, Inc. (“Towers Perrin”) combined their businesses through two simultaneous mergers (the “Merger”) and became wholly-owned subsidiaries of Jupiter Saturn Holding Company, which subsequently changed its name to Towers Watson & Co. (“Towers Watson,” the “Company” or “we”).

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 percent of all Towers Watson common stock after the redemption of Towers Watson Class R common stock and that Watson Wyatt’s 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 Watson’s condensed consolidated financial statements as of and for the three and nine months ended March 31, 2011 include the results of Towers Perrin’s operations. The condensed consolidated financial statements of Towers Watson as of and for the three and nine months ended March 31, 2010, include the results of Towers Perrin’s operations beginning January 1, 2010.

The accompanying unaudited quarterly condensed consolidated financial statements of Towers Watson & Co. and our subsidiaries are presented in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) for quarterly reports on Form 10-Q and therefore do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“GAAP”). In the opinion of management, these condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair presentation of the condensed consolidated financial statements and results for the interim periods. All intercompany accounts and transactions have been eliminated in consolidation. The condensed consolidated financial statements should be read together with the Towers Watson audited consolidated financial statements and notes thereto contained in its Annual Report on Form 10-K for the fiscal year ended June 30, 2010, which was filed with the SEC and may be accessed via EDGAR on the SEC’s web site at www.sec.gov. Balance sheet data as of June 30, 2010 was derived from Towers Watson’s audited financial statements.

Our fiscal year 2011 began July 1, 2010 and ends June 30, 2011.

The results of operations for the three and nine months ended March 31, 2011 are not indicative of the results that can be expected for the entire fiscal year ending June 30, 2011. The results reflect certain estimates and assumptions made by management including those estimates used in calculating consideration and fair value of tangible and intangibles, estimated bonuses and anticipated tax liabilities that affect the amounts reported in the condensed consolidated financial statements and related notes.

Cash and Cash Equivalents — We consider all instruments that are readily convertible to known amounts of cash, and so near their maturity that they present insignificant risk of changes in value because of changes in interest rates to be cash equivalents.

Restricted Cash — Our restricted cash balance as of March 31, 2011 and June 30, 2010, includes $125.0 million and $164.5 million, respectively, of cash received from our clients and reinsurers in connection with our reinsurance brokerage business. This cash is under our control such that we direct the investment of this cash and retain the interest income but is restricted to current operation of this business, consisting of the payment of reinsurance premiums, refund of overpayments and reinsurer payments on claims. According to regulations governing our reinsurance business, we are unable to use the cash in a way that deviates from these activities. In addition, we have $5.9 million of restricted cash from our recently acquired Aliquant business which is restricted for the payment of our client’s health and welfare premiums. The change in restricted cash from period to period is included in the cash flows from operating activities on our statement of cash flows.

Change to Presentation of our Balance Sheet and Cash flows — We have changed the presentation of our cash received from our clients and reinsurers in connection with our reinsurance brokerage business to restricted cash from cash and cash equivalents on our consolidated balance sheet as of June 30, 2010. As a result of the balance sheet change, we decreased cash flows from investing activities by $118.5 million and total ending cash and cash equivalents on the statement of cash flows for the nine months ended March 31, 2010 related to the amount of reinsurance cash received from Towers Perrin in the Merger by $ 153.1 million. In addition, the change in restricted cash from the Merger date to March 31, 2010 is included as an increase in restricted cash in the cash flows from operating activities of $37.6 million, which is offset by an increase in reinsurance payables.

Note 2 — Mergers and Acquisitions.

Merger

Watson Wyatt and Towers Perrin merged on January 1, 2010 to form Towers Watson 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 Watson’s Class R common stock, par value $0.01 per share) were 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. Class B-1 shares converted into shares of freely transferable shares of Towers Watson Class A common stock on January 1, 2011. The remaining 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-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 Watson’s executive committee) and received 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 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. Shares of Towers Watson Class B-1 common stock converted 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 (which was subsequently reduced by 2,267,265 shares related to our tender offer in June 2010 and 4,921,001 shares related to our secondary offering in September 2010, further described in Note 10);
	•		5,561,630 shares of Class B-2 Common Stock;
	•		5,561,630 shares of Class B-3 Common Stock;
	•		5,561,630 shares of Class B-4 Common Stock; and

•

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 issued in conjunction with the Merger was registered under the Securities Act of 1933, as amended, pursuant to Towers Watson’s 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 Accounting Standards Codification 805, Business Combinations (“ASC 805”). 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 Wyatt’s 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 number of shares issued. The estimated fair value of the restricted Class B-1-B-4 shares of $1.3 billion was calculated at $47.52 multiplied by 29,483,008, the number of shares issued and applying 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 Wyatt’s investment in PCIC was $13.7 million. Towers Watson’s financial statements as of and for the nine month period ended March 31, 2010, included herein, reflect Watson Wyatt’s equity method of accounting for PCIC for the six months ended December 31, 2009, which resulted in recording a loss from affiliates of $0.1 million.

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 PCIC’s 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 January 1, 2010, the Merger’s effective date. 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

A customer relationship intangible asset 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 as an intangible asset 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 as an intangible asset 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 Perrin’s 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 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 Towers Perrin’s real estate lease 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.

Measurement period

As of December 31, 2010, the accounting for the Merger was complete. During the six months ended December 31, 2010, we identified the following adjustments to the initial fair value of the opening balance sheet of Towers Perrin to increase non-current deferred tax asset by $10.5 million, decrease to non-current assets by $0.9 million, decrease fixed assets by $0.5 million, increase accounts payable, accrued liabilities and deferred income by $0.2 million, resulting in a decrease to goodwill of $8.9 million. Our June 30, 2010 comparative balance sheet has been retrospectively adjusted to reflect these adjustments.

The table below sets forth the Merger consideration transferred to Towers Perrin shareholders and the 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
Tangible and Intangible Net Assets:
Current assets						$	1,002,567
Other non-current assets							219,755
Identifiable intangible assets							552,785
Deferred tax asset, net							149,381
Current liabilities							(672,033	)
Other long-term liabilities							(760,708	)
Goodwill							1,265,632
Total tangible and intangible net assets										$	1,757,379

The following unaudited pro forma condensed combined statement of operations have been provided to present illustrative combined unaudited statement of operations for the nine months ended March 31, 2010, giving effect to the business combination as if it had been completed on July 1, 2009. The pro forma condensed combined statement of operations for the nine months ended March 31, 2010 combines Watson Wyatt’s historical unaudited condensed consolidated statement of operations for the six months ended December 31, 2009 with Towers Perrin’s historical unaudited condensed consolidated statement of operations for the six months ended December 31, 2009 and Towers Watson unaudited condensed consolidated statement of operations for the three months ended March 31, 2010. The unaudited pro forma condensed consolidated 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 date specified, or that may be expected to occur in the future. The unaudited pro forma combined statement of operations are as follows:

		Nine Months Ended
		March 31,
		2010
		(in thousands)
Revenue		$	2,431,009
Costs of providing services:
Salaries and employee benefits			1,669,131
Professional and subcontracted services			170,764
Occupancy			110,559
General and administrative expenses			189,323
Depreciation and amortization			100,617
Transaction and integration			—
			2,240,394
Income from operations			190,615
Income/(loss) from affiliates			(1,150	)
Interest income			3,490
Interest expense			(7,808	)
Other non-operating income			8,885
Income before income taxes			194,032
Provision for income taxes			71,440
Net income before non-controlling interests			122,592
Net income attributable to non-controlling interests			50
Net income attributable to controlling interests		$	122,542

Acquisitions

During the second and third quarters of fiscal 2011, we completed two acquisitions. These acquisitions individually or combined were insignificant for pro forma and other disclosures required by ASC 805. The following summary is provided to give our investors better understanding of our recent strategic acquisitions.

On December 31, 2010, Towers Watson purchased Aliquant, a privately-held, full-service health and welfare benefits administration outsourcing firm for $67.7 million. The Aliquant business complements our Technology and Administration Solutions practice in our Benefits segment. The preliminary estimate of consideration transferred and allocation of the fair value to tangible and intangible assets received and liabilities assumed was recorded in the third quarter of fiscal 2011, which included fixed assets, customer related intangibles, developed technology and non-compete agreements at their estimated acquisition date fair values. Our estimate of fair value was developed using income approach valuation models such as the multi-period excess earnings method for the customer related intangibles of $12.9 million and the relief from royalty method for the developed technology intangible of $4 million. Significant assumptions used in the valuation are: revenue growth rate, retention rate, expense and contributory asset charges, royalty rate and discount rate. We also anticipate recording additional intangible assets or liabilities during the fourth quarter of fiscal 2011 related to Aliquant’s favorable or unfavorable lease agreements. As of March 31, 2011, we recorded $50.6 million of goodwill related to the acquisition of Aliquant.

On January 31, 2011, Towers Watson purchased EMB, a non-life insurance consulting and software company. The EMB business complements our Risk Consulting and Software practice in our Risk and Financial Services segment. We paid $69.8 million cash and issued common stock valued at $11.2 million consisting of 113,858 shares of Class B-3 and 113,858 shares of Class B-4 common stock, which convert to Towers Watson Class A common stock on January 1, 2013 and 2014, respectively. The Asian put model was used to calculate the discounts on the restrictions of the underlying stock. We have included an estimated earn-out payment of $19.0 million in consideration. The purchase agreement calls for deferred cash payments totaling $25.5 million which are recorded as compensation expense over the period earned by the former partners subject to continued employment. During the third quarter of fiscal 2011, we recorded the tangible assets received and liabilities assumed and we expect to record the preliminary fair value of deferred revenue and intangibles (customer related intangibles, developed technology, trademark and trade name and favorable or unfavorable lease agreements) and related deferred income tax amounts in the fourth quarter of fiscal 2011. As a result of our preliminary assessment we determined that total consideration transferred was $104.3 million and preliminary goodwill was $90.6 million. Goodwill will be reduced in the fourth quarter of fiscal 2011 as we record the estimated fair value of deferred revenue, deferred income tax and intangible assets.

Note 3 — Fixed Income Securities.

We hold available-for-sale fixed income securities comprised of U.S. treasury securities and obligations of the U.S. government, government agencies and authorities; corporate bonds; and obligations of states, municipalities and political subdivisions. The fixed income securities are classified either as short-term investments or non-current assets (within other assets on the condensed consolidated balance sheet) depending on the date of their maturity. Additional information on fixed income security balances is provided in the following table as of March 31, 2011 and June 30, 2010:

		March 31, 2011												June 30, 2010
						Unrealized												Unrealized
		Amortized				Gains/				Estimated				Amortized				Gains/				Estimated
		Cost				(Losses)				Fair Value				Cost				(Losses)				Fair Value
Short-term investments: due in one year or less		$	32,276			$	457			$	32,733			$	50,585			$	424			$	51,009
Non-current assets: due in one through five years			67,533				662				68,195				60,142				1,956				62,098

Proceeds from sales and maturities of investments for fixed income securities during the nine months ended March 31, 2011 were $70.0 million, resulting in a gain of $0.3 million. 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.

Note 4 — Goodwill and Intangible Assets.

The components of goodwill and intangible assets are outlined below for the nine months ended March 31, 2011:

						Risk and
						Financial				Talent and
		Benefits				Services				Rewards				All Other				Total
Balance as of June 30, 2010		$	1,150,799			$	459,373			$	105,909			$	1,214			$	1,717,295
Goodwill acquired			50,597				90,642				2,027				—				143,266
Translation adjustment			78,494				30,018				6,527				—				115,039
Balance as of March 31, 2011		$	1,279,890			$	580,033			$	114,463			$	1,214			$	1,975,600

The $50.6 of goodwill acquired in Benefits relates to the acquisition of Aliquant which was completed on December 31, 2010. We had previously recorded the entire consideration as goodwill as we had not yet completed the preliminary assessment of the fair value of tangible assets and liabilities and intangible assets separate from goodwill as of December 31, 2010. In the three months ended March 31, 2011, we reclassified $17.2 million to intangible assets consisting of customer related intangible, developed technology and non-compete intangible. We anticipate establishing additional intangibles related to Aliquant’s favorable and unfavorable lease agreements during the fourth quarter of fiscal 2011.

The $90.6 of goodwill acquired in Risk and Financial Services relates to the acquisition of EMB which was completed on January 31, 2011. We recorded the consideration less the tangible assets and liabilities as goodwill as of March 31, 2011. We have not yet completed the preliminary assessment of the fair value of tangible assets and liabilities and intangible assets separate from goodwill but expect to do so in the fourth quarter of fiscal year 2011.

The following table reflects changes in the net carrying amount of the components of intangible assets for the nine months ended March 31, 2011:

						Customer				Core/								Favorable
		Trademark &				related				developed				Non-compete				lease
		trade name				intangible				technology				agreements				agreements				Total
Balance as of June 30, 2010		$	366,793			$	188,806			$	118,726			$	—			$	9,162			$	683,487
Intangible assets acquired during the period			—				12,900				4,000				250				—				17,150
Amortization			—				(21,077	)			(15,916	)			(250	)			(2,328	)			(39,571	)
Translation adjustment			6,616				13,535				41				—				300				20,492
Balance as of March 31, 2011		$	373,409			$	194,164			$	106,851			$	—			$	7,134			$	681,558

For the three and nine months ended March 31, 2011, we recorded $13.7 million and $37.2 million of amortization related to our intangible assets, respectively. For the three and nine months March 31, 2010, we recorded $12.5 million and $19.3 million of amortization related to our intangible assets, respectively.

In conjunction with the Merger and ASC 805, we estimated the fair value of acquired leases and recorded an intangible unfavorable lease liability. As of March 31, 2011 and June 30, 2010 this liability was $22.3 million and $26.0 million, respectively. The change for the nine months ended March 31, 2011 was comprised of a reduction to rent expense of $4.0 million and translation of $0.3 million.

Components of the change in the gross carrying amount of trademark and trade name, customer related intangibles, core/developed technology and favorable and unfavorable lease agreements reflect foreign currency translation adjustments between June 30, 2010 and March 31, 2011 as well as the addition of the intangible assets identified from the acquisition of Aliquant. Certain of the intangible assets and liabilities 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.

The following table reflects the carrying value of intangible assets and liabilities as of March 31, 2011 and June 30, 2010:

		As of March 31, 2011								As of June 30, 2010
		Gross								Gross
		Carrying				Accumulated				Carrying				Accumulated
		Amount				Amortization				Amount				Amortization
Intangible assets:
Trademark and trade name		$	373,811			$	402			$	367,195			$	402
Customer related intangibles			264,314				70,150				237,072				48,266
Core/developed technology			152,502				45,651				148,664				29,938
Non-compete agreements			1,275				1,275				1,275				1,275
Favorable lease agreements			11,128				3,994				10,657				1,495
Total intangible assets		$	803,030			$	121,472			$	764,863			$	81,376

Certain trademark and trade-name intangibles have indefinite useful lives and are not amortized. The weighted average remaining life of amortizable intangible assets and liabilities at March 31, 2011, was 8.2 years.

The following table reflects

1) future estimated amortization expense for amortizable intangible assets consisting of:

	•		customer related intangibles
	•		core/developed technology
	•		non-compete agreements

2) the rent offset resulting from the amortization of the net lease intangible assets and liabilities for the remainder of fiscal 2011 and for subsequent fiscal years:

Fiscal year ending June 30,		Amortization				Rent Offset
2011		$	13,416			$	(653	)
2012			52,388				(2,850	)
2013			47,822				(2,506	)
2014			41,106				(2,152	)
2015			33,833				(1,916	)
Thereafter			112,450				(5,085	)
Total		$	301,015			$	(15,162	)

Note 5 — 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 condensed 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:

	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 management’s 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 March 31, 2011 and June 30, 2010:

		Fair Value Measurements on a Recurring Basis at
		March 31, 2011
		Level 1				Level 2				Level 3				Total
Assets:
Available-for-sale securities:
U.S. treasury securities and obligations of the U.S government, government agencies and authorities (a)		$	2,019			$	42,604			$	—			$	44,623
Corporate bonds (a)			—				40,573				—				40,573
Obligations of states, municipalities and political subdivisions (a)			—				15,732				—				15,732
Equity securities (b)			1,337				—				—				1,337
Mutual funds (c)			6,917				—				—				6,917
Derivatives:
Foreign exchange forwards (d)			—				2,043				—				2,043
Liabilities:
Derivatives:
Foreign exchange forwards (d)		$	—			$	221			$	—			$	221

		Fair Value Measurements on a Recurring Basis at
		June 30, 2010
		Level 1				Level 2				Level 3				Total
Assets:
Available-for-sale securities:
U.S. treasury securities and obligations of the U.S government, government agencies and authorities (a)		$	6,183			$	15,957			$	—			$	22,140
Corporate bonds (a)			—				72,076				—				72,076
Obligations of states, municipalities and political subdivisions (a)			—				18,878				—				18,878
Equity securities (b)			1,056				—				—				1,056
Mutual funds (c)			5,235				—				—				5,235
Derivatives:
Foreign exchange forwards (d)			—				731				—				731
Foreign exchange options (d)			—				37				—				37
Liabilities:
Derivatives:
Foreign exchange forwards (d)		$	—			$	4,100			$	—			$	4,100
Foreign exchange options (d)			—				177				—				177

We recorded a gain of $0.1 million for both the three and nine months ended March 31, 2011, in general and administrative expenses in the condensed consolidated statements of operations related to the changes in the fair value of our financial instruments for foreign exchange forward contracts accounted for as foreign currency hedges, which are still held at March 31, 2011. There was no material gain or loss recorded in the condensed consolidated statements of operations for available-for-sale securities still held at March 31, 2011.

To determine the fair value of our derivative investments, 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 6 — 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.

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 subsidiary’s 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. 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 March 31, 2011, the longest outstanding maturity was twenty months. As of March 31, 2011, a net $1.8 million pretax gain has been deferred in accumulated other comprehensive income. A pretax gain of $0.7 million is expected to be recognized in general and administrative expenses during the next twelve months when the hedged revenue is recognized. During the three and nine months ended March 31, 2011, we recognized no material gains or losses due to hedge ineffectiveness.

As of March 31, 2011 and June 30, 2010, we had cash flow hedges with a notional value of $98.1 million and $87.7 million, respectively, to hedge revenue cash flows. We determine the fair value of our 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 all derivatives held as of March 31, 2011 and June 30, 2010 was an asset/(liability) of $1.8 million and ($3.5) million, respectively. See Note 5 Fair Value Measurements, for further information regarding the determination of fair value.

The fair value of our derivative instruments held as of March 31, 2011 and June 30, 2010 and their location in the condensed consolidated balance sheet are as follows:

		Asset derivatives												Liability derivatives
		Balance sheet location				Fair value								Balance sheet location				Fair value
						March 31,				June 30,								March 31,				June 30,
						2011				2010								2011				2010
Derivatives designated as hedging instruments:
Foreign exchange forwards		Other current assets				$	1,998			$	731			Accounts payable, accrued liabilities and deferred income				$	(221	)		$	(4,100	)
Foreign exchange options		Other current assets					—				37			Accounts payable, accrued liabilities and deferred income					—				(94	)
Total derivatives designated as hedging instruments							1,998				768								(221	)			(4,194	)
Derivatives not designated as hedging instruments:
Foreign exchange forwards		Other current assets				$	45			$	—			Accounts payable, accrued liabilities and deferred income				$	—			$	—
Foreign exchange options		Other current assets					—				—			Accounts payable, accrued liabilities and deferred income					—				(83	)
Total derivatives not designated as hedging instruments							45				—								—				(83	)
Total derivative assets (liabilities)						$	2,043			$	768							$	(221	)		$	(4,277	)

The effect of derivative instruments that are designated as hedging instruments on the condensed consolidated statement of operations and the condensed consolidated statement of changes in stockholders’ equity for the three months ended March 31, 2011 and 2010 and for the nine months ended March 31, 2011 and 2010 are as follows:

																						Location of gain (loss)				Gain (loss)
Derivatives designated as										Location												recognized in income				recognized in income
hedging instruments for		Gain (loss)								of loss reclassified				Loss reclassified								(ineffective portion and				(ineffective portion and
the three months ended		recognized in OCI								from OCI into income				from OCI into income								amount excluded from				amount excluded from
March 31, 2011 and 2010:		(effective portion)								(effective portion)				(effective portion)								effectiveness testing)				effectiveness testing)
		2011				2010								2011				2010								2011				2010
Foreign exchange forwards		$	1,433			$	(3,150	)		General and administrative expenses				$	(183	)		$	(835	)		General and administrative expenses				$	51			$	(36	)
Foreign exchange options			—				(173	)		General and administrative expenses					—				—			General and administrative expenses					—				(27	)
Total		$	1,433			$	(3,323	)						$	(183	)		$	(835	)						$	51			$	(63	)

																						Location of gain (loss)				Gain (loss)
Derivatives designated as										Location												recognized in income				recognized in income
hedging instruments for		Gain (loss)								of loss reclassified				Loss reclassified								(ineffective portion and				(ineffective portion and
the nine months ended		recognized in OCI								from OCI into income				from OCI into income								amount excluded from				amount excluded from
March 31, 2011 and 2010:		(effective portion)								(effective portion)				(effective portion)								effectiveness testing)				effectiveness testing)
		2011				2010								2011				2010								2011				2010
Foreign exchange forwards		$	4,149			$	(3,150	)		General and administrative expenses				$	(725	)		$	(835	)		General and administrative expenses				$	121			$	(36	)
Foreign exchange options			—				(173	)		General and administrative expenses					(207	)			—			General and administrative expenses					—				(27	)
Total		$	4,149			$	(3,323	)						$	(932	)		$	(835	)						$	121			$	(63	)

As of March 31, 2011 and June 30, 2010, we had $41.6 million and $1.5 million, respectively, of notional value of derivatives held as economic hedges primarily to hedge intercompany loans denominated in currencies other than the functional currency. The effect of derivatives that have not been designated as hedging instruments on the condensed consolidated statement of operations for the three and nine months ended March 31, 2011 and 2010 are as follows:

						Gain (loss) recognized in income
						Three Months Ended								Nine Months Ended
Derivatives not designated as		Location of gain (loss)				March 31,								March 31,
hedging instruments:		recognized in income				2011				2010				2011				2010
Foreign exchange forwards		General and administrative expenses				$	267			$	2,236			$	2,181			$	2,236
Foreign exchange options		General and administrative expenses					—				(364	)			—				(364	)
Total						$	267			$	1,872			$	2,181			$	1,872