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, 2011
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 þ No o
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 þ
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Accelerated filer o
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Non-accelerated filer o
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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 $3,793,803,434 based on the closing price as of
the last business day of the registrants most recently completed second fiscal quarter, December
31, 2010.
As of August 17, 2011 there were 55,085,090 outstanding shares of Class A common stock and 2,415,481 of
Restricted Class A common stock at a par value of $0.01 per share; 5,547,733 outstanding shares of Class
B-2 common stock at a par value of $0.01; 5,661,591 outstanding shares of Class B-3 common stock at a par
value of $0.01; and 5,387,241 outstanding shares of Class B-4 common stock at a par value of $0.01.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the definitive Proxy Statement for the Annual Meeting of Stockholders are incorporated
by reference into Part III of this Annual Report.
TOWERS WATSON & CO.
INDEX TO ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended June 30, 2011
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, the Company, us, or we) is a leading
global professional services company that helps organizations improve performance through effective
people, risk and financial management. We offer solutions in the areas of employee benefits, talent
management, rewards, and risk and capital management. 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 13,100 full-time associates across 38 countries. Our
professional staff are trusted advisors and experts in their fields and include approximately 2,500
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 qualified employees. We focus on delivering consulting services and solutions that help
organizations anticipate, identify and capitalize on emerging opportunities in benefits and human
capital management. We also advise the insurance industry on a wide range of strategic and risk
management issues and we help our clients mitigate risk through insurance, reinsurance and capital
markets transactions. In addition, we provide investment advice and solutions to help our clients
develop and implement disciplined and efficient strategies to 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 100
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, Watson Wyatt and Towers Perrin combined their businesses through two
simultaneous mergers (the Merger) and became 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.
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, and
are presented in this filing. Towers Watsons consolidated financial statements as of and for the
fiscal year ended June 30, 2011 include the results of Towers Perrins operations. The consolidated
financial statements of Towers Watson as of and for the fiscal year ended June 30, 2010 include the
results of Towers Perrins operations beginning January 1, 2010.
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Business Overview
As leading economies worldwide become more service-oriented and interconnected, effective human
resources, financial and risk management are increasingly 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 59% of revenue during the fiscal year
ended June 30, 2011.
The Risk and Financial Services segment, our second largest segment, has three primary lines of
business that are united by an approach that focuses on risk, capital and value. Our aim is to help
clients improve business performance by effectively integrating risk management into their overall
financial management framework. Risk Consulting and Software provides risk consulting and financial
modeling software solutions primarily to the insurance industry. Reinsurance and Insurance
Brokerage provides a range of risk transfer solutions, principally reinsurance brokerage services.
Investment Consulting and Solutions provides consulting and solutions focused on investment
strategy, risk assessment, asset allocation, and investment manager selection to institutional
investors, primarily 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
ongoing demand for services such as reinsurance brokerage and investment consulting. The Risk and
Financial Services segment contributed approximately 24% of revenue during the fiscal year ended
June 30, 2011.
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 alignment, design and delivery of employee rewards
(pay and incentives), talent management programs and processes including career development,
performance management and leadership succession, and organization and employee communication and
change management. Data, Surveys and Technology provides human capital data, analytics and
technology solutions, such as compensation benchmarking data, employee opinion surveys, HR function
metrics, and reward administration and talent management technology solutions, to enable
benchmarking, evaluation of return on investments, resource allocation decisions and effective
administration of 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 17% of revenue during the fiscal year ended June 30, 2011.
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, 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 are focused on maintaining depth of expertise in products and services in the areas
described above, management believes that one of our primary strengths is our ability to link
products and services from our different practices to comprehensively meet the complex needs of our
clients that typically span these areas.
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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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2011 |
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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 59% of revenue for the fiscal year ended June 30, 2011. 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. |
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 employers including 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.
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. |
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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.
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.
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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 in our Technology and Administration Solutions
line of business are approximately 96% for the fiscal year ended June 30, 2011.
International Consulting
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.
Risk and Financial Services Segment
Within the Risk and Financial Services segment, our second largest at approximately 24% of revenue
during the fiscal year ended June 30, 2011, 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. |
We work with a variety of client executives: chief financial officers and treasurers, chief risk
officers, 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. For example, we have combined our
risk consulting and software solutions with brokerage to assist insurance executives in more
holistically managing their capital and making optimal reinsurance/risk transfer decisions. In
addition, our investment experts often work 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 price their products, measure value, manage risk and monitor capital adequacy.
Our software solutions support a variety of activities, including risk and capital management,
asset-
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liability modeling, pricing, reserving and, product development. These are used internally for
consulting projects and licensed to clients around the world. We significantly strengthened our
software offerings with the acquisition of EMB in January 2011.
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. We serve three-quarters of the worlds top 100 insurance companies and are also a
leading provider of financial modeling software to the insurance industry. In fact, we have more
actuaries serving the insurance industry than any other firm.
Our Risk Consulting and Software services include:
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Financial and regulatory reporting |
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Enterprise risk and capital management |
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M&A and corporate restructuring (including actuarial valuation, capital
analysis and due diligence) |
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Product and market strategies (including pricing and predictive modeling) |
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Financial modeling software and implementation support |
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Integrated consulting and risk transfer |
We provide a wide range of enterprise risk management services 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 calculate economic
capital for financial reporting and management purposes and we help them respond to regulatory
changes that impact financial reporting, such as Solvency II. In addition, 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 to align
their risk profile with overall financial objectives. Finally, we are extending our offerings into
new areas like telematics or usage based insurance building on our traditional strengths in
modeling and data analysis.
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 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
selection to some of the worlds largest pension funds and institutional investors.
Our Investment services include:
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Development of investment policy, governance and risk assessment |
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Investment strategy |
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Structured products design |
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Manager structure and selection |
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Manager monitoring and evaluation; performance reporting |
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Implemented consulting |
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, investment banking 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.
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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, reinsurance and capital markets. The substantial majority of our business is
providing global reinsurance intermediary services and consulting expertise. We cover all major
lines of business and maintain trading relationships with more than 200 reinsurers and Lloyds
underwriters.
Our Brokerage services include:
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Reinsurance strategy and program review |
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Claims management and program administration |
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Catastrophe exposure management |
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Contract negotiation and placement |
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Market security evaluation and monitoring |
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Integrated consulting and risk transfer |
In addition to our insurance and reinsurance intermediary services and consulting, we provide
capital market broker/dealer capabilities. We help our clients make informed decisions about risk
and capital management and execute comprehensive solutions that achieve broad coverage at
competitive prices. 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 17% of revenue for the
fiscal year ended June 30, 2011 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 all aspects of 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. Given that companies in all regions of the world are facing more
intense scrutiny of executive pay from shareholders, regulators and other stakeholders, our goal is
to ensure that pay plans support the organizations business strategy and drive desired
performance. We help select effective performance metrics and assess program risks to ensure good
governance. Our services include executive compensation philosophy and strategy development,
modeling and valuation of pay plan elements, performance measurement selection and calibration,
board of director compensation and plan design, advice on change-in-control and severance programs,
and total compensation assessment and benchmarking. 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, with consults on the ground in key
countries worldwide supported by research and data covering the worlds top markets, that allows us
to provide comprehensive solutions to our clients. We maintain a number of proprietary databases
that provide us with competitive advantage. We have dedicated in-house experts on legislative and
regulatory requirements, tax and accounting issues, proxy advisor policies, disclosure rules and
other key considerations in designing executive pay programs. Whether we are retained by the
boards compensation committee or by management, our extensive consulting protocols help ensure
that our executive compensation clients receive fully independent, objective advice.
Rewards, Talent and Communication
From this line of business, we have a broad array of capabilities in designing and implementing
human resources programs and processes for employees, managers and leaders. Our solutions cut
across the employment lifecycle: attracting and deploying talent,
9
managing and rewarding employees performance, 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. |
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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, HR service delivery consulting, 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, providing benchmarks for over 60 countries and 38 industries. Our human
capital metrics database provides benchmarks on key workforce and human resources measures and
analyzes how they link to and drive business performance.
We support clients in implementing new HR technology, including Workday, SAP and PeopleSoft. Our
capabilities include business case development, project planning, requirements definition, process
design and implementation services supported by our change management expertise. We also provide a
broad array of proprietary technology solutions, including:
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Talent|REWARD, an integrated suite of applications that covers recruiting,
performance management, global job leveling, compensation planning and administration,
succession planning, career development, and learning management |
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Total Rewards portals and statements |
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Onboarding applications |
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HR portals |
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AnswerKey, a set of tools to help support HR shared services/call centers |
Competition
The human capital and risk management consulting and reinsurance brokerage industries are 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 strong 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 Hewitt Consulting (an Aon company). 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.
10
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 or risk management
consulting firm or reinsurance broker 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.
Executive Officers of the Company
As of August 17, 2011, the following individuals were executive officers of the Company:
Walter W. Bardenwerper (age 60) has served as Vice President, General Counsel and Secretary of
Towers Watson since January 1, 2010. He served as Vice President and General Counsel of Watson
Wyatt since joining Watson Wyatt in 1987 and served as Secretary since 1992. Mr. Bardenwerper was a
director of Watson Wyatt & Company from 1992 to 1997. Mr. Bardenwerper was previously an attorney
with Cadwalader, Wickersham & Taft and Assistant General Counsel and Secretary of Satellite
Business Systems. Presently, Mr. Bardenwerper is a director of the Professional Consultants
Insurance Company and has served on the board of directors of the Association of Management
Consulting Firms. He has a B.A. with Honors in Economics and graduated Phi Beta Kappa from the
University of Virginia, has a J.D. from the University of Virginia Law School and served as a law
clerk to United States District Court Judge Albert W. Coffrin.
James K. Foreman (age 53) has served as Managing Director of the North America region of Towers
Watson since January 1, 2010. Prior to the Merger, Mr. Foreman served as Managing Director of the
Human Capital Group of Towers Perrin beginning June 2007, with overall responsibility for the
global lines of business and geographic operations of Towers Perrins Human Capital Group. Mr.
Foreman joined Towers Perrin in 1985 and worked for almost 20 years at Towers Perrin in a number of
leadership positions, including Managing Director of Towers Perrins Health & Welfare practice and
member of Towers Perrins board of directors from 2003 to 2005, before joining Aetna Inc. in 2005
to become the executive vice president of their national businesses division. He rejoined Towers
Perrin in June 2007. Mr. Foreman holds a B.A. in Business Economics from the University of
California at Los Angeles.
Julie J. Gebauer (age 50) has served as Managing Director of Towers Watsons Talent and Rewards
business segment since January 1, 2010. Beginning 2002, she served as a Managing Director of Towers
Perrin and led Towers Perrins global Workforce Effectiveness Practice and the global Towers
Perrin-International Survey Research Corporation line of business. Ms. Gebauer was a member of
Towers Perrins board of directors from 2003 through 2006. She joined Towers Perrin in 1986 as a
consultant and held several leadership positions at Towers Perrin, serving as the Managing
Principal for the New York office from 1999 to 2001 and the U.S. East Region Leader for the Human
Capital Group from 2002 to 2006. Ms. Gebauer is a fellow of the Society of Actuaries and is an
Enrolled Actuary in the Joint Board for Enrolled Actuaries. Ms. Gebauer graduated Phi Beta Kappa
from the University of Nebraska-Lincoln with a B.S. in Mathematics and English.
Patricia L. Guinn (age 56) has served as Managing Director of the Risk and Financial Services
business segment of Towers Watson since January 1, 2010. Previously, she served as Managing
Director of the Risk and Financial Services business group of Towers Perrin beginning in 2001. She
was a member of Towers Perrins board of directors from 2001 through 2004 and from 2007 until the
consummation of the Merger. She joined Towers Perrin in 1976 and has held a number of leadership
positions at the firm. She is a fellow of the Society of Actuaries, a member of the American
Academy of Actuaries and a member of the Conference of Consulting Actuaries. Ms. Guinn graduated
with honors from Hendrix College with a B.A. degree in Mathematics.
John J. Haley (age 61) has served as the Chief Executive Officer and as Chairman of the Board of
Directors of Towers Watson since January 1, 2010. Previously, he served as President and Chief
Executive Officer of Watson Wyatt beginning on January 1, 1999, as Chairman of the Board of Watson
Wyatt beginning in 1999 and as a director of Watson Wyatt beginning in 1992. Mr. Haley joined
Watson Wyatt in 1977. Prior to becoming President and Chief Executive Officer of Watson Wyatt, he
was the Global Director of the Benefits Group at Watson Wyatt. Mr. Haley is a Fellow of the Society
of Actuaries and is a co-author of Fundamentals of Private Pensions (University of Pennsylvania
Press). Mr. Haley also serves on the boards of MAXIMUS, Inc., a provider of health and human
services program management, consulting services and system solutions, and Hudson Highland Group,
Inc., an executive search, specialty staffing and related consulting services firm. He has an A.B.
in Mathematics from Rutgers College and studied under a Fellowship at the Graduate School of
Mathematics at Yale University.
Mark V. Mactas (age 59) has served as the President and Chief Operating Officer and as a director
of Towers Watson since January 1, 2010. Mr. Mactas became Towers Perrins Chief Executive Officer
and Chairman of the Board of Directors in 2001, and became Towers Perrins President in 2000. He
joined Towers Perrins New York office as an international consultant in 1980 and also spent
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seven years in Towers Perrins San Francisco office and five years in Towers Perrins Chicago
office. Mr. Mactas previously managed Towers Perrins global Health & Welfare practice and has
served as a member of Towers Perrins management committee. Mr. Mactas is a fellow of the Society
of Actuaries and the Conference of Consulting Actuaries and is a member of the American Academy of
Actuaries and the International Actuarial Association. In addition, he has served as president of
the Conference of Consulting Actuaries and has served on the board of directors of the American
Academy of Actuaries. He previously served on the board of directors and executive committee of the
Association of Management Consulting Firms. He currently serves on the Executive Committee and the
Board of Trustees of Save the Children. Mr. Mactas holds a B.A. degree in Mathematics and Economics
from Lehigh University.
Roger F. Millay (age 54) has served as Vice President and Chief Financial Officer of Towers Watson
since January 1, 2010, and he previously held the same position at Watson Wyatt from August 2008
until the consummation of the Merger. Prior to joining Watson Wyatt, Mr. Millay was with Discovery
Communications LLC, a global cable TV programmer and digital media provider, where he served as
Senior Executive Vice President and Chief Financial Officer beginning in 2006. At Discovery, he was
responsible for the global financial functions, including accounting, treasury, budgeting, audit
and tax. From 1999 to 2006, Mr. Millay was Senior Vice President and Chief Financial Officer with
Airgas, Inc., an industrial gases and supplies distributor and producer. Mr. Millay has over 25
years of experience in financial officer positions, including roles at Arthur Young & Company,
Citigroup, and GE Capital. He holds a B.A. degree from the University of Virginia and an M.S. in
Accounting from Georgetown Universitys Graduate School of Business, and he is a Certified Public
Accountant.
Chandrasekhar (Babloo) Ramamurthy (age 55) has served as Managing Director for Towers Watson in
Europe, the Middle East and Africa since January 1, 2010. He was Vice President, Regional Manager
(Europe) of Watson Wyatt from 2005 until the consummation of the Merger, and he served as a member
of Watson Wyatts board of directors from 2005 to 2008. He joined The Wyatt Company in 1977.
Following the establishment of the global Watson Wyatt Worldwide alliance in 1995, Mr. Ramamurthy
became a partner of Watson Wyatt LLP. Mr. Ramamurthy was based primarily in London, although
between 1983 and 1986 he transferred to the international benefits and compensation consulting team
based in the New York region, where he dealt primarily with the head offices of U.S. multinational
companies. Upon returning to Europe, Mr. Ramamurthy was the account manager for a number of the
companys major clients in the U.K., advising on a broad range of human capital and employee
benefits issues both in the U.K. and overseas. Mr. Ramamurthy was the Head of the European Benefits
Consulting Practice from 1999 to 2004, before being appointed Managing Partner of Watson Wyatt LLP
in 2004, and has also served on Watson Wyatt LLPs Partnership Board. Mr. Ramamurthy holds an
honours degree in Mathematics from Kings College, London.
Gene H. Wickes (age 59) has served as the Managing Director of the Benefits business segment of
Towers Watson since January 1, 2010. Previously, he served as the Global Director of the Benefits
Practice of Watson Wyatt beginning in 2005 and as a member of Watson Wyatts board of directors
from 2002 to 2007. Mr. Wickes was Watson Wyatts Global Retirement Practice Director in 2004 and
the U.S. West Divisions Retirement Practice Leader from 1997 to 2004. Mr. Wickes joined Watson
Wyatt in 1996 as a senior consultant and consulting actuary. Prior to joining Watson Wyatt, he
spent 18 years with Towers Perrin, where he assisted organizations with welfare, retirement, and
executive benefit issues. Mr. Wickes is a Fellow of the Society of Actuaries and has a B.S. in
Mathematics and Economics, an M.S. in Mathematics and an M.S. in Economics, all from Brigham Young
University.
Employees
We employed approximately 13,100 full-time associates as of June 30, 2011 in the segments listed
below; in addition, we have a number of part-time and contract associates whose numbers fluctuate
based on short-term demands.
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As of June 30, |
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2011 |
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2010 |
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Benefits |
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6,300 |
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6,200 |
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Risk and Financial Services |
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2,300 |
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2,000 |
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Talent and Rewards |
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2,100 |
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2,000 |
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Other |
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300 |
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200 |
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Business Services (incl. Corporate and field support) |
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2,100 |
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2,400 |
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Total associates |
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13,100 |
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12,800 |
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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 any
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 electronically with, or furnished to, the SEC. We have also adopted a
Code of Business Conduct and Ethics applicable to all associates, senior financial employees, the
principal executive
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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. Any
amendments to the codes or any waivers of the director code requirements, or to the Code of
Business Conduct and Ethics for any of our Chief Executive Officer, Chief Financial Officer, or our
Chief Accounting Officer and Controller will be disclosed on our website or in a Form 8-K. 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, which are
available on our website. 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.
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 three 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.
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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 have
changed 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 are 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.
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.
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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.
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. 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 and, after the
Merger, some clients of Towers Watson 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.
In addition, on July 21, 2010, the U.S. President signed into law the Dodd-Frank Wall Street Reform
and Consumer Protection Act, which requires the SEC to issue rules directing national securities
exchanges and associations to require the compensation committee of a listed company to consider
the independence of an advisor when selecting a compensation consultant. The SEC is required to
identify factors affecting independence.
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On March 30, 2011, the SEC issued proposed rules to implement these provisions of the Dodd-Frank
Act pertaining to the role of, and certain disclosure relating to, compensation consultants. The
proposed rules would require the national security exchanges to adopt listing standards requiring a
companys compensation committee to consider certain independence factors, including whether the
compensation consultants firm provides other services to the company, before selecting a
compensation consultant. The proposed rules would also require a company to disclose in its proxy
statement whether its compensation committee has retained or obtained the advice of a compensation
consultant, whether the work of the compensation consultant raised any conflicts of interest, and
if so, the nature of the conflicts and how any such conflicts are being addressed.
The proposed rules do not require that the selected compensation consultant be independent. But if
the proposed rules are adopted substantially in their current form and companies compensation
committees engage compensation consultants that do not perform any other services for the company,
then this could cause additional clients to terminate their relationships with Towers Watson
(either with respect to compensation consulting services or with respect to other consulting
services) to avoid perceived or potential conflicts of interest. If this happens, the future
termination of such relationships could have a material adverse effect on our business, financial
condition and results of operations.
In addition, due in part to such regulation and continued legislative activity, some former Towers
Perrin, Watson Wyatt or Towers Watson consultants terminated their relationships with us, and many
have begun to compete with us or 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.
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 year ended June 30, 2011, 51% 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, and similar foreign
laws such as the U.K. Bribery Act; |
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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.
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 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.
17
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 such as our recent acquisitions of Aliquant and EMB, 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.
We may be unable to effectively integrate an acquired business, such as the recently acquired
Aliquant and EMB businesses, 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.
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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. |
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.
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.
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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.
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,
particularly with respect to the integration activities that are ongoing in connection with the
Merger. 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 historically 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).
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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.
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, 2011 was $3.6 billion, of
which $876.1 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. On February 22,
2010, defendants filed a motion to dismiss the complaints in their entireties. By order dated
September 30, 2010, the court granted the motion to dismiss plaintiffs claim for a constructive
trust and denied the motion with respect to all other claims alleged. Pursuant to the courts
September 30 order,
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defendants also filed answers to plaintiffs complaints on October 22, 2010. The parties are
currently engaged in fact discovery. We believe the claims are without merit and intend to
continue to vigorously defend against the actions. We are likely to incur significant costs
defending against these claims. The outcome of these legal proceedings 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.
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 year ended June 30, 2011, 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.
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.
We are a holding company and, therefore, may not be able to receive dividends or other
distributions in needed amounts from our subsidiaries.
The Company is organized as a holding company, a legal entity separate and distinct from our
operating subsidiaries. As a holding company without significant operations of our own, we are
dependent upon dividends and other payments from our operating subsidiaries to meet our obligations
for paying principal and interest on outstanding debt obligations, for paying dividends to
stockholders and for corporate expenses. In the event our operating subsidiaries are unable to pay
dividends and other payments to the Company, we may not be able to service debt, pay obligations or
pay dividends on common stock.
Further, the Company derives a significant portion of its revenue and operating profit from
operating subsidiaries located outside the U.S. Since the majority of financing obligations as well
as dividends to stockholders are made from the U.S., it is important to be able to access cash
generated outside the U.S. Funds from the Companys operating subsidiaries outside of the U.S. are
periodically repatriated to the U.S. via shareholder distributions and repayment of intercompany
financing. A number of factors may arise that could limit our ability to repatriate funds or make
repatriation cost prohibitive, including, but not limited to, foreign exchange rates and
tax-related costs.
In the event we are unable to generate cash from our operating subsidiaries for any of the reasons
discussed above, our overall liquidity could deteriorate.
Changes in our accounting estimates and assumptions could negatively affect our financial position
and results of operations.
We prepare our financial statements in accordance with U.S. GAAP. These accounting principles
require us to make estimates and assumptions that affect the reported amounts of assets and
liabilities, and the disclosure of contingent assets and liabilities at the date of our financial
statements. We are also required to make certain judgments that affect the reported amounts of
revenues and expenses during each reporting period. We periodically evaluate our estimates and
assumptions including those relating to restructuring, pensions, goodwill and other intangible
assets, contingencies, share-based payments and income taxes. We base our estimates on historical
experience and various assumptions that we believe to be reasonable based on specific
circumstances. Actual results could differ from these estimates, and changes in accounting
standards could have an adverse impact on our future financial position and results of operations.
Our accounting for our long-term outsourcing contracts requires using estimates and projections
that may change over time. These changes may have a significant or adverse effect on our reported
results of operations or financial condition.
Projecting contract profitability on our long-term outsourcing contracts requires us to make
assumptions and estimates of future contract results. All estimates are inherently uncertain and
subject to change. In an effort to maintain appropriate estimates, we review each of our long-term
outsourcing contracts, the related contract reserves and intangible assets on a regular basis. If
we determine that
23
we need to change our estimates for a contract, we will change the estimates in the period in which
the determination is made. These assumptions and estimates involve the exercise of judgment and
discretion, which may also evolve over time in light of operational experience, regulatory
direction, developments in accounting principles and other factors. Further, changes in
assumptions, estimates or developments in the business or the application of accounting principles
related to long-term outsourcing contracts may change our initial estimates of future contract
results. Application of, and changes in, assumptions, estimates and policies may adversely affect
our financial results.
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:
|
|
|
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; |
|
|
|
|
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; |
|
|
|
|
Differences between actual results of operations and those expected by
investors and analysts; |
|
|
|
|
Changes in recommendations by securities analysts; |
|
|
|
|
Operations and stock performance of competitors; |
|
|
|
|
Accounting charges, including charges relating to the impairment of goodwill or
other intangible assets; |
|
|
|
|
Significant acquisitions, dispositions or strategic alliances by us or by
competitors; |
|
|
|
|
Sales of the Class A common stock, including sales by our directors and
officers or significant investors; |
|
|
|
|
Incurrence of additional debt; |
|
|
|
|
Dilutive issuance of equity; |
|
|
|
|
Recruitment or departure of key personnel; |
|
|
|
|
Loss or gain of key clients; |
|
|
|
|
Litigation involving us, our general industry or both; and |
|
|
|
|
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 issued to the then-former Towers Perrin
security holders automatically convert into freely tradable Class A common stock in equal annual
installments over four years. The first conversion of Class B common stock to Class A common stock
occurred 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). The first tranche of restricted stock units received by
legacy Towers Perrin associates vested on January 1, 2011. As of August 17, 2011 there were
55,085,090 outstanding shares of Class A common stock and 2,415,481 of Restricted Class A common stock;
5,547,733 outstanding shares of Class B-2 common stock; 5,661,591 outstanding shares of Class B-3 common
stock; and 5,387,241 outstanding shares of Class B-4 common stock.
In addition, pursuant to our certificate of incorporation, our board of directors has the
discretion to accelerate the conversion of any number of shares of Class B common stock into shares
of freely tradable Class A common stock.
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 automatically converts or shares are converted by our
Board of Directors, 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
24
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.
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:
|
|
|
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; |
|
|
|
|
Provide that only the Chief Executive Officer, President or our board of
directors may call a special meeting of stockholders; |
|
|
|
|
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; |
|
|
|
|
Prohibit stockholder action by written consent, and require all stockholder
actions to be taken at an annual or special meeting of the stockholders; |
|
|
|
|
Provide our board of directors with exclusive power to change the number of
directors; |
|
|
|
|
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; |
|
|
|
|
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; |
|
|
|
|
Require a supermajority vote for the stockholders to amend the bylaws; and |
|
|
|
|
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 Staff Comments.
None.
Item 2. Properties.
As of June 30, 2011, we operated offices in more than 100 cities and 38 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,
2011, 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, Debt, 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, 2011.
Item 4. (Removed and 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.
25
|
|
|
|
|
|
|
|
|
|
|
High |
|
|
Low |
|
Fiscal Year 2010 |
|
|
|
|
|
|
|
|
Third quarter (January 4, 2010 - March 31, 2010) |
|
$ |
51.48 |
|
|
$ |
42.72 |
|
Fourth quarter (April 1, 2010 - June 30, 2010) |
|
$ |
50.00 |
|
|
$ |
38.85 |
|
Fiscal Year 2011 |
|
|
|
|
|
|
|
|
First quarter (July 1, 2010 - September 30, 2010) |
|
$ |
49.18 |
|
|
$ |
38.35 |
|
Second quarter (October 1, 2010 - December 31, 2010) |
|
$ |
53.47 |
|
|
$ |
48.96 |
|
Third quarter (January 1, 2011 - March 31, 2011) |
|
$ |
58.80 |
|
|
$ |
52.89 |
|
Fourth quarter (April 1, 2011 - June 30, 2011) |
|
$ |
65.71 |
|
|
$ |
54.33 |
|
Fiscal Year 2012 |
|
|
|
|
|
|
|
|
First quarter (July 1, 2011 - August 17, 2011) |
|
$ |
66.38 |
|
|
$ |
52.26 |
|
Holders
As of August 17, 2011, there were approximately 234 registered stockholders of our Class A common
stock and 564 registered stockholders 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 2011 and in fiscal year 2010 were $21.6
million and $15.2 million, respectively.
In August, 2011, our board of directors approved an increase in future quarterly cash dividends to
$0.10 per share. Our next dividend is payable in October, 2011 to the stockholders of record at
the close of our first quarter of fiscal 2012, on September 30, 2011.
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.
Performance Graph
The graphs below depict total cumulative stockholder return on $100 invested on June 30, 2006 and
January 4, 2010, respectively in (i) Watson Wyatt Worldwide Inc. common stock and Towers Watson &
Co. common stock, (ii) the New York Stock Exchange Composite Index; (iii) an old 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 (iv) a new peer group index comprised of the common stock of Aon Corporation and
Marsh & McLennan Companies and certain publicly traded companies within the management consulting
services standard industrial classification code having a reported market capitalization exceeding
$150 million. The graphs assume reinvestment of dividends.
Aon Corporation was added to the new peer group index due in part to Aon Corporations acquisition
of Hewitt Associates Inc. and in part to its subsidiary, Aon Benfield, being a direct competitor.
Hewitt Associates was previously included in the old peer group index and has been eliminated from
the old peer group index due to its acquisition by Aon Corporation. Marsh & McLennan Companies was
added to the new peer group index due to its subsidiaries, Mercer HR Consulting, Guy Carpenter and
Oliver Wyman, being some of Towers Watsons closest competitors.
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6/06 |
|
|
6/07 |
|
|
6/08 |
|
|
6/09 |
|
|
12/09 |
|
Watson Wyatt Worldwide, Inc. |
|
|
100.00 |
|
|
|
144.59 |
|
|
|
152.40 |
|
|
|
108.84 |
|
|
|
138.27 |
|
NYSE Composite |
|
|
100.00 |
|
|
|
123.47 |
|
|
|
110.83 |
|
|
|
77.89 |
|
|
|
95.83 |
|
Old Peer Group |
|
|
100.00 |
|
|
|
136.48 |
|
|
|
131.57 |
|
|
|
107.63 |
|
|
|
128.46 |
|
New Peer Group |
|
|
100.00 |
|
|
|
128.21 |
|
|
|
124.12 |
|
|
|
101.13 |
|
|
|
115.09 |
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1/4/10 |
|
|
6/30/10 |
|
|
6/30/11 |
|
Towers Watson & Co. |
|
|
100.00 |
|
|
|
77.96 |
|
|
|
132.60 |
|
NYSE Composite |
|
|
100.00 |
|
|
|
91.14 |
|
|
|
120.29 |
|
Old Peer Group |
|
|
100.00 |
|
|
|
93.03 |
|
|
|
142.18 |
|
New Peer Group |
|
|
100.00 |
|
|
|
96.64 |
|
|
|
143.04 |
|
The two Performance Graphs respectively show (i) legacy Watson Wyatts stock performance from June
30, 2006 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, 2011. 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 new peer group index in both graphs include: Accenture PLC, Aon
Corporation, FTI Consulting Inc., Huron Consulting Group Inc.; Marsh & McLennan Companies; Maximus
Inc.; Navigant Consulting Inc.; and The Corporate Executive Board Company.
Companies included in the old peer group index in both graphs include: Accenture PLC, FTI
Consulting Inc., Huron Consulting Group Inc.; Maximus Inc.; Navigant Consulting Inc.; and The
Corporate Executive Board Company.
Issuer Purchases of Equity Securities
Towers Watson will periodically repurchase shares of common stock, one purpose of which is to
offset potential dilution from shares issued in connection with its benefit plans. During the third
quarter of fiscal year 2010, the Companys Board of Directors approved the repurchase of up to
750,000 shares of our Class A Common Stock. During the second quarter of fiscal year 2011, the
Companys Board of Directors approved the repurchase of up to $100 million of the Companys Class A
common stock. This repurchase is in
28
addition to the ongoing stock repurchase program initiated by the Company to offset dilution from
employee benefit plans in fiscal year 2010. There are no expiration dates for either of these
repurchase plans or programs. The table below presents specified information about our Class A
common stock repurchases in the fourth quarter of fiscal year 2011 and our repurchase plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of Shares |
|
|
Maximum Number of |
|
|
|
Total Number |
|
|
|
|
|
|
Purchased as Part of |
|
|
Shares that May Yet Be |
|
|
|
of Shares |
|
|
Average Price Paid |
|
|
Publicly Announced Plans |
|
|
Purchased Under the Plans |
|
Period |
|
Purchased (a) |
|
|
per Share |
|
|
or Programs |
|
|
or Programs (b) |
|
April 1, 2011 through April 30, 2011 |
|
|
33,000 |
|
|
|
55.19 |
|
|
|
33,000 |
|
|
|
2,128,838 |
|
May 1, 2011 through May 31, 2011 |
|
|
36,000 |
|
|
|
59.48 |
|
|
|
36,000 |
|
|
|
2,092,838 |
|
June 1, 2011 through June 30, 2011 |
|
|
334,489 |
|
|
|
61.93 |
|
|
|
334,489 |
|
|
|
1,758,349 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
403,489 |
|
|
|
|
|
|
|
403,489 |
|
|
|
1,758,349 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Of the 403,489 shares of Class A common stock repurchased in the fourth quarter of fiscal
year 2011, 54,000 shares were repurchased under the plan approved by our Board of Directors
during the third quarter of fiscal year 2010. The remaining 349,489 shares were repurchased
under the plan approved by our Board of Directors during the second quarter of fiscal year
2011. |
|
(b) |
|
The maximum number of shares that may yet be purchased under our plans includes the
remaining shares under our two stock repurchase plans. An estimate of the maximum number of
shares under the repurchase of up to $100 million of 1,521,838 shares was determined using the
closing price of our stock on June 30, 2011 of $65.71. |
29
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, 2011. The selected consolidated financial data as
of June 30, 2011 and 2010, and for each of the three years in the period ended June 30, 2011, 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, 2009, 2008 and 2007,
and for each of the years ended June 30, 2008 and 2007, 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Operations Data: |
|
Year Ended June 30, |
|
(amounts are in thousands, except per share data) |
|
2011 |
|
|
2010 (a) |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Revenue |
|
$ |
3,259,451 |
|
|
$ |
2,387,829 |
|
|
$ |
1,676,029 |
|
|
$ |
1,760,055 |
|
|
$ |
1,486,523 |
|
Costs of providing services: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits |
|
|
2,043,063 |
|
|
|
1,540,417 |
|
|
|
1,029,299 |
|
|
|
1,052,992 |
|
|
|
879,341 |
|
Professional and subcontracted services |
|
|
246,348 |
|
|
|
163,848 |
|
|
|
119,323 |
|
|
|
138,983 |
|
|
|
116,527 |
|
Occupancy |
|
|
144,191 |
|
|
|
109,454 |
|
|
|
72,566 |
|
|
|
83,255 |
|
|
|
75,704 |
|
General and administrative expenses |
|
|
281,576 |
|
|
|
220,937 |
|
|
|
172,010 |
|
|
|
185,624 |
|
|
|
178,411 |
|
Depreciation and amortization |
|
|
130,575 |
|
|
|
101,084 |
|
|
|
73,448 |
|
|
|
72,428 |
|
|
|
57,235 |
|
Transaction and integration expenses |
|
|
100,535 |
|
|
|
87,644 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,946,288 |
|
|
|
2,223,384 |
|
|
|
1,466,646 |
|
|
|
1,533,282 |
|
|
|
1,307,218 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
313,163 |
|
|
|
164,445 |
|
|
|
209,383 |
|
|
|
226,773 |
|
|
|
179,305 |
|
Income/(Loss) from affiliates |
|
|
1,081 |
|
|
|
(1,274 |
) |
|
|
8,350 |
|
|
|
2,325 |
|
|
|
(5,500 |
) |
Interest income |
|
|
5,523 |
|
|
|
2,950 |
|
|
|
2,022 |
|
|
|
5,584 |
|
|
|
4,066 |
|
Interest expense |
|
|
(12,475 |
) |
|
|
(7,508 |
) |
|
|
(2,778 |
) |
|
|
(5,977 |
) |
|
|
(1,581 |
) |
Other non-operating income |
|
|
19,349 |
|
|
|
11,304 |
|
|
|
4,926 |
|
|
|
464 |
|
|
|
178 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
326,641 |
|
|
|
169,917 |
|
|
|
221,903 |
|
|
|
229,169 |
|
|
|
176,468 |
|
Provision for income taxes |
|
|
129,916 |
|
|
|
50,907 |
|
|
|
75,276 |
|
|
|
73,470 |
|
|
|
60,193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before non-controlling interests |
|
|
196,725 |
|
|
|
119,010 |
|
|
|
146,627 |
|
|
|
155,699 |
|
|
|
116,275 |
|
Net income/(loss) attributable to
non-controlling interests |
|
|
2,288 |
|
|
|
(1,587 |
) |
|
|
169 |
|
|
|
258 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to controlling interests |
|
$ |
194,437 |
|
|
$ |
120,597 |
|
|
$ |
146,458 |
|
|
$ |
155,441 |
|
|
|
116,275 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: net income attributable
to controlling interests: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
2.62 |
|
|
$ |
2.04 |
|
|
$ |
3.43 |
|
|
$ |
3.65 |
|
|
$ |
2.74 |
|
Diluted |
|
$ |
2.62 |
|
|
$ |
2.03 |
|
|
$ |
3.42 |
|
|
$ |
3.50 |
|
|
$ |
2.60 |
|
Dividends declared per share |
|
$ |
0.30 |
|
|
$ |
0.30 |
|
|
$ |
0.30 |
|
|
$ |
0.30 |
|
|
$ |
0.30 |
|
Weighted average shares of common stock (000): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
74,075 |
|
|
|
59,257 |
|
|
|
42,690 |
|
|
|
42,577 |
|
|
|
42,413 |
|
Diluted |
|
|
74,139 |
|
|
|
59,372 |
|
|
|
42,861 |
|
|
|
44,381 |
|
|
|
44,684 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet and Other Data: |
|
As of June 30, |
|
(amounts are in thousands) |
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Cash and cash equivalents |
|
$ |
528,923 |
|
|
$ |
435,927 |
|
|
$ |
209,832 |
|
|
$ |
124,632 |
|
|
$ |
248,186 |
|
Restricted Cash |
|
|
153,154 |
|
|
|
164,539 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital |
|
|
472,074 |
|
|
|
479,521 |
|
|
|
231,938 |
|
|
|
172,241 |
|
|
|
326,354 |
|
Goodwill and Intangible assets |
|
|
2,638,496 |
|
|
|
2,400,782 |
|
|
|
728,987 |
|
|
|
870,943 |
|
|
|
594,651 |
|
Total assets |
|
|
5,098,950 |
|
|
|
4,573,617 |
|
|
|
1,626,319 |
|
|
|
1,715,976 |
|
|
|
1,529,709 |
|
Revolving credit facility |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
105,000 |
|
Dividends declared |
|
|
22,846 |
|
|
|
17,661 |
|
|
|
12,785 |
|
|
|
12,768 |
|
|
|
12,717 |
|
Stockholders equity |
|
|
2,591,527 |
|
|
|
1,955,607 |
|
|
|
853,638 |
|
|
|
984,395 |
|
|
|
787,519 |
|
Shares outstanding |
|
|
73,601 |
|
|
|
74,204 |
|
|
|
42,657 |
|
|
|
43,578 |
|
|
|
42,299 |
|
|
|
|
(a) |
|
Includes the effect of the Merger as of January 1, 2010 |
30
|
|
|
Item 7. |
|
Managements Discussion and Analysis of Financial Condition and Results of Operations. |
Executive Overview
General
We are a global consulting firm focusing on providing human capital and financial consulting
services.
In the short term, our revenue is driven by many factors, including the general state of the global
economy and the resulting level of discretionary spending, the continuing regulatory compliance
requirements of our clients, changes in investment markets, the ability of our consultants 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 that the highly fragmented industry in
which we operate offers us 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 Benefits segment provides benefits consulting and administration services through four primary
lines of business:
|
|
|
Retirement; |
|
|
|
|
Health and Group Benefits; |
|
|
|
|
Technology and Administration Solutions; and |
|
|
|
|
International Consulting. |
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 fiscal year ended June 30,
2011, the Benefits segment contributed 59% of our segment revenue. For the same period,
approximately 44% 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 24% of our total revenue for the fiscal year
ended June 30, 2011. Approximately 65% 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.
31
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.
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 17% of our total revenue for the fiscal
year ended June 30, 2011. 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 50% 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 years ended June 30, 2011 and 2010 include data of Towers Watsons geographic regions. The
fiscal year ended June 30, 2009 includes only data of historical Watson Wyatts geographic regions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
Geographic Region |
|
2011 |
|
|
2010 |
|
|
2009 |
|
United States |
|
|
49 |
% |
|
|
52 |
% |
|
|
43 |
% |
United Kingdom |
|
|
22 |
|
|
|
22 |
|
|
|
32 |
|
Canada |
|
|
6 |
|
|
|
6 |
|
|
|
4 |
|
Germany |
|
|
4 |
|
|
|
4 |
|
|
|
4 |
|
Netherlands |
|
|
3 |
|
|
|
3 |
|
|
|
3 |
|
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 1% 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.
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 total
non-cash compensation expense relating to Towers Watson restricted Class A common stock for the three year period to be $160.0 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
were 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 other than for cause, vesting is accelerated and expense is recorded immediately.
Salaries and employee benefits are comprised of wages paid to associates, related taxes, severance, benefit expenses such as pension, medical and insurance costs, and fiscal year-end incentive bonuses.
Professional and subcontracted services represent fees paid to external service providers for employment, marketing and other services. For the three most recent fiscal years, approximately 40 to 60% of the professional and subcontracted services were directly incurred on behalf of clients and were reimbursed by them, with such reimbursements being included in revenue. For the fiscal year
32
ended June 30, 2011 for Towers Watson, approximately 36% of professional and subcontracted services
represent these reimbursable services.
Occupancy includes expenses for rent and utilities.
General and administrative expenses include legal, 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 include fees and charges associated with the Merger and with
our other acquisitions. 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.
33
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 during the implementation stage. 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 were also paid 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.
34
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. Our estimated IBNR liability does not include actuarial projections for the effect of
claims data for large cases due to the insufficiency of actuarial experience with such cases. Our
estimated IBNR liability will fluctuate if claims experience changes over time. Our IBNR liability
was $274.8 million and $222.3 million as of June 30, 2011 and 2010, respectively.
To the extent our captive insurance companies, PCIC and SMIC, expect losses to be covered by a third
party they record a receivable for the amount expected to be recovered. This receivable is classified in other
current or other noncurrent assets in our consolidated balance sheet.
Pension Assumptions
We sponsor both qualified and non-qualified defined benefit pension plans and other post-retirement
benefit plan or OPEB plans in North America and Europe. These plans represented 98% of our total
pension obligations as of June 30, 2011. We also sponsor funded and unfunded defined benefit
pension plans in certain other countries 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.
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.
The compensation committee of our board of directors approved an amendment to the terms of the
existing U.S. qualified and non-qualified defined benefit pension plans, postretirement benefit
plans and defined contribution plans which was communicated in September 2010. Effective December
31, 2010, the existing U.S. qualified and non-qualified pension plans were frozen to new
participants, and benefit accruals will be frozen under the current benefit formulas effective
December 31, 2011. New pension benefits will accrue beginning on January 1, 2012 under a new stable
value pension design for qualified and non-qualified pension plans maintained for U.S. associates,
including U.S. named executive officers. Retiree medical benefits provided under our U.S.
postretirement benefit plans were frozen to new hires effective January 1, 2011. Life insurance
benefits under the same plans will be frozen with respect to service, eligibility and amounts as of
January 1, 2012 for active associates. As a result of these changes to the U.S. pension and
post-retirement benefit plans, there were remeasurements of the legacy Watson Wyatt U.S. plans and
the legacy
35
Towers Perrin post-retirement benefit plan as of September 30, 2010. The legacy Towers Perrin
pension plan was not required to be remeasured due to the plan design.
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 years ended June 30, 2011 and 2010. The assumptions
as of and for the year ended June 30, 2009 represent only the legacy Watson Wyatt plans.
The assumptions used to determine net periodic benefit cost for the fiscal years ended June 30,
2011, 2010 and 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
|
North |
|
|
|
|
|
|
North |
|
|
|
|
|
|
North |
|
|
|
|
|
|
America |
|
|
Europe |
|
|
America |
|
|
Europe |
|
|
America |
|
|
Europe |
|
Discount rate |
|
|
5.80 |
% |
|
|
5.25 |
% |
|
|
6.43 |
% |
|
|
6.03 |
% |
|
|
6.91 |
% |
|
|
6.47 |
% |
Expected long-term rate of return on assets |
|
|
8.16 |
% |
|
|
6.79 |
% |
|
|
8.11 |
% |
|
|
6.48 |
% |
|
|
8.61 |
% |
|
|
6.53 |
% |
Rate of increase in compensation levels |
|
|
3.88 |
% |
|
|
3.88 |
% |
|
|
3.93 |
% |
|
|
5.09 |
% |
|
|
4.08 |
% |
|
|
5.36 |
% |
The following table presents the assumptions used in the valuation to determine the projected
benefit obligation for the fiscal years ended June 30, 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011 |
|
|
June 30, 2010 |
|
|
|
North |
|
|
|
|
|
|
North |
|
|
|
|
|
|
America |
|
|
Europe |
|
|
America |
|
|
Europe |
|
Discount rate |
|
|
5.79 |
% |
|
|
5.62 |
% |
|
|
5.86 |
% |
|
|
5.25 |
% |
Rate of increase in
compensation levels |
|
|
3.82 |
% |
|
|
3.93 |
% |
|
|
3.88 |
% |
|
|
3.88 |
% |
For the 2011 fiscal year, the discount rate used to determine net periodic benefit cost was
initially based on the rates in the table shown above for the determination of the projected
benefit obligation as of June 30, 2010, which included a 5.86% rate for North America. As a result
of plan changes adopted during the first quarter of fiscal year 2011, the legacy Watson Wyatt U.S.
Pension Plans were remeasured as of September 30, 2010. Upon remeasurement the discount rate
assumption was changed for these plans and the net periodic benefit cost for the 2011 fiscal year
is now calculated using a weighted average discount rate of 5.79% for North America.
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 8.16% and 6.79% 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 2012:
|
|
|
|
|
|
|
Effect on FY 2012 |
|
Change in Assumption |
|
Pre-Tax Pension Expense |
|
25 basis point decrease in discount rate |
|
+$8.3 million |
25 basis point increase in discount rate |
|
-$8.2 million |
25 basis point decrease in expected return on assets |
|
+$4.9 million |
25 basis point increase in expected return on assets |
|
-$4.9 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.
36
The following information illustrates the sensitivity to a change in certain assumptions for the
European pension plans for fiscal year 2012:
|
|
|
|
|
|
|
Effect on FY 2012 |
|
Change in Assumption |
|
Pre-Tax Pension Expense |
|
25 basis point decrease in discount rate |
|
+$3.9 million |
25 basis point increase in discount rate |
|
-$4.0 million |
25 basis point decrease in expected return on assets |
|
+$1.5 million |
25 basis point increase in expected return on assets |
|
-$1.5 million |
The sensitivities reflect the effect of assumption changes occurring after acquisition 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.
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 March 31. 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 March 31, 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 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, 2011, 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, 2011
includes the results of operations of the merged Towers Watson.
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, or six months of the
twelve-month period. As a result, the consolidated statement of operations for fiscal year ended
June 30, 2011 is compared to the pro forma combined financial information for fiscal year ended
June 30, 2010 is prepared and presented to aid in explaining the results of operations of the
merged Towers Watson. The pro forma unaudited consolidated statement of operations of Towers Watson
for the fiscal year ended June 30, 2010 is prepared as if the Merger occurred on July 1, 2009. The
pro forma unaudited consolidated statement of operations of Towers Watson for the fiscal year ended
June 30, 2009 is prepared as if the Merger occurred on July 1, 2008.
37
The consolidated statement of operations of Towers Watson for the fiscal year ended June 30, 2009
includes only the financial results of Watson Wyatt.
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, and 2009 have been
retrospectively realigned to the new general and administrative expense methodology.
38
Historical Results of Operations
The table below sets forth our consolidated statements 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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Revenue |
|
$ |
3,259,451 |
|
|
|
100 |
% |
|
$ |
2,387,829 |
|
|
|
100 |
% |
|
$ |
1,676,029 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of providing services: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits |
|
|
2,043,063 |
|
|
|
63 |
% |
|
|
1,540,417 |
|
|
|
65 |
% |
|
|
1,029,299 |
|
|
|
61 |
% |
Professional and subcontracted services |
|
|
246,348 |
|
|
|
8 |
% |
|
|
163,848 |
|
|
|
7 |
% |
|
|
119,323 |
|
|
|
7 |
% |
Occupancy |
|
|
144,191 |
|
|
|
4 |
% |
|
|
109,454 |
|
|
|
5 |
% |
|
|
72,566 |
|
|
|
4 |
% |
General and administrative expenses |
|
|
281,576 |
|
|
|
9 |
% |
|
|
220,937 |
|
|
|
9 |
% |
|
|
172,010 |
|
|
|
10 |
% |
Depreciation and amortization |
|
|
130,575 |
|
|
|
4 |
% |
|
|
101,084 |
|
|
|
4 |
% |
|
|
73,448 |
|
|
|
4 |
% |
Transaction and integration expenses |
|
|
100,535 |
|
|
|
3 |
% |
|
|
87,644 |
|
|
|
4 |
% |
|
|
|
|
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,946,288 |
|
|
|
90 |
% |
|
|
2,223,384 |
|
|
|
93 |
% |
|
|
1,466,646 |
|
|
|
88 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
313,163 |
|
|
|
10 |
% |
|
|
164,445 |
|
|
|
7 |
% |
|
|
209,383 |
|
|
|
12 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) from affiliates |
|
|
1,081 |
|
|
|
|
% |
|
|
(1,274 |
) |
|
|
|
% |
|
|
8,350 |
|
|
|
|
% |
Interest income |
|
|
5,523 |
|
|
|
|
% |
|
|
2,950 |
|
|
|
|
% |
|
|
2,022 |
|
|
|
|
% |
Interest expense |
|
|
(12,475 |
) |
|
|
|
% |
|
|
(7,508 |
) |
|
|
|
% |
|
|
(2,778 |
) |
|
|
|
% |
Other non-operating income |
|
|
19,349 |
|
|
|
1 |
% |
|
|
11,304 |
|
|
|
|
% |
|
|
4,926 |
|
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
326,641 |
|
|
|
10 |
% |
|
|
169,917 |
|
|
|
7 |
% |
|
|
221,903 |
|
|
|
13 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
|
129,916 |
|
|
|
4 |
% |
|
|
50,907 |
|
|
|
2 |
% |
|
|
75,276 |
|
|
|
4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before non-controlling interests |
|
|
196,725 |
|
|
|
6 |
% |
|
|
119,010 |
|
|
|
5 |
% |
|
|
146,627 |
|
|
|
9 |
% |
Net income/(loss) attributable to
non-controlling interests |
|
|
2,288 |
|
|
|
|
% |
|
|
(1,587 |
) |
|
|
|
% |
|
|
169 |
|
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to controlling interests |
|
$ |
194,437 |
|
|
|
6 |
% |
|
$ |
120,597 |
|
|
|
5 |
% |
|
$ |
146,458 |
|
|
|
9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical Results of Operations for the Fiscal Year Ended June 30, 2011 Compared to Fiscal Year
Ended June 30, 2010
Revenue for the fiscal year ended June 30, 2011 was $3.3 billion, an increase of $871.6 million, or
37%, compared to $2.4 billion for the fiscal year ended June 30, 2010. 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, 2011
was $194.4 million, an increase of $73.8 million, or 61%, compared to $120.6 million for the fiscal
year ended June 30, 2010.
Salaries and employee benefits were 63% of revenue for the fiscal year ended June 30, 2011, a
decrease of 2% from 65% of revenue for the fiscal year ended June 30, 2010. Transaction and
integration expenses related to the Merger were 3% of revenue for fiscal year 2011, a decrease 1%,
from 4% of revenue for fiscal year 2010. 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, 2011 and 2010.
The provision for income taxes for fiscal year 2011 is 39.8% compared with 30.0% in fiscal year
2010. Our effective tax rate increased for fiscal year 2011 as compared to fiscal year 2010
primarily due to a change in the mix of income between foreign and U.S. operations and an increase
in the valuation allowance for foreign jurisdictions for fiscal year 2011. The effective tax rate
in fiscal year 2010 was significantly lower due to a valuation allowance release on U.S. foreign
tax credits as we determined that it was more likely than not that these foreign tax credits would
be realized within the carryforward period.
39
Net income attributable to controlling interests.
Net income attributable to controlling interests for the fiscal year ended June 30, 2011 was $194.4
million compared to net income attributable to controlling interests of $120.6 million for the
fiscal year ended June 30, 2010.
Earnings per share.
Diluted earnings per share for the fiscal year ended June 30, 2011 was $2.62, compared to $2.03 for
the fiscal year ended June 30, 2010.
Non-U.S. GAAP Measures
Diluted earnings per share has been adjusted to exclude certain Merger-related items including
amortization of intangible assets, transaction and integration expenses (deductible and
non-deductible for taxes), stock-based compensation related to Restricted Class A shares (recorded
in salaries and employee benefits), other tax items and a deferred payment from divestiture. After
excluding these items, adjusted diluted earnings per share, a non-U.S. GAAP measure, for the fiscal
year ended June 30, 2011 was $4.46.
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Reconciliation of net income before non-controlling interests to EBITDA
and Adjusted EBITDA is as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income before non-controlling interests |
|
$ |
196,725 |
|
|
$ |
119,010 |
|
|
$ |
146,627 |
|
Provision for income taxes |
|
|
129,916 |
|
|
|
50,907 |
|
|
|
75,276 |
|
Interest, net |
|
|
6,952 |
|
|
|
4,558 |
|
|
|
756 |
|
Depreciation and amortization |
|
|
130,575 |
|
|
|
101,084 |
|
|
|
73,448 |
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
|
464,168 |
|
|
|
275,559 |
|
|
|
296,107 |
|
Transaction and integration expenses |
|
|
100,535 |
|
|
|
87,644 |
|
|
|
|
|
Stock-based compensation (a) |
|
|
71,715 |
|
|
|
48,006 |
|
|
|
|
|
Other non-operating income (b) |
|
|
(20,430 |
) |
|
|
(10,030 |
) |
|
|
(13,276 |
) |
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
$ |
615,988 |
|
|
$ |
401,179 |
|
|
$ |
282,831 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Stock-based compensation is included in salary and employee benefits expense and relates to
shares of Restricted Class A common stock held by our current associates which were awarded to
them as former Towers Perrin employees in connection with the Merger. |
|
(b) |
|
Other non-operating income includes income from affiliates, and other non-operating income. |
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:
40
|
|
|
|
|
|
|
Year Ended |
|
|
|
June 30, 2011 |
|
|
|
(In thousands, except share and |
|
|
|
per share amounts) |
|
Net income attributable to controlling interests |
|
$ |
194,437 |
|
Adjusted for certain Merger-related items (c): |
|
|
|
|
Amortization of intangible assets |
|
|
34,087 |
|
Transaction and integration expenses including severance (d) |
|
|
64,799 |
|
Stock-based compensation (e) |
|
|
46,850 |
|
Deferred payment from divestiture (f) |
|
|
(9,429 |
) |
Other tax items |
|
|
603 |
|
|
|
|
|
Adjusted net income attributable to controlling interests |
|
$ |
331,347 |
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock diluted (000) |
|
|
74,139 |
|
|
|
|
|
|
|
|
|
|
Earnings per share diluted, as reported |
|
$ |
2.62 |
|
Adjusted for certain Merger-related items: |
|
|
|
|
Amortization of intangible assets |
|
|
0.46 |
|
Transaction and integration expenses including severance |
|
|
0.87 |
|
Stock-based compensation |
|
|
0.63 |
|
Deferred payment from divestiture |
|
|
(0.13 |
) |
Other tax items |
|
|
0.01 |
|
|
|
|
|
Adjusted earnings per share diluted |
|
$ |
4.46 |
|
|
|
|
|
|
|
|
(c) |
|
The adjustments to net income attributable to controlling interests and diluted earnings per
share of certain Merger-related items are net of tax. In calculating the net of tax amounts,
the effective tax rate for amortization of intangible assets was 34.4%, transaction and
integration expenses including severance was 35.6%, stock-based compensation was 34.7%, other
non-operating income was 34.5%, deferred payment was 34.5%. Included in other tax items was a
$1.1 million benefit resulting from a tax restructuring in Japan and $1.7 million expense
resulting from incorporation of former Watson Wyatt branches, which is included in the
consolidated statement of operations under provision for income taxes. |
|
(d) |
|
Included in transaction and integration expenses including severance is approximately $2.0
million of expenses related to the recent acquisitions of Aliquant and EMB which were
completed in the second quarter and third quarter of fiscal year 2011, respectively. |
|
(e) |
|
Stock-based compensation relates to shares of Restricted Class A common stock held by our
current associates which were awarded to them as former Towers Perrin employees in connection
with the Merger. |
|
(f) |
|
Reflects a gain on the sale of e-Value, a sale of a financial modeling software, and the
deferred payment from divestiture received in the second quarter related to a divestiture by
former Towers Perrin in June 2009 before the closing of the Merger which is included in
non-operating income. Both items are included in non operating income. |
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 were 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.
41
Moreover, we released $3.6 million of reserves related to 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 were $2.03, compared to $3.42
for the fiscal year ended June 30, 2009.
42
UNAUDITED SUPPLEMENTAL PRO FORMA COMBINED STATEMENTS OF OPERATIONS
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, or six months of the
twelve-month period. As a result, the consolidated statement of operations for fiscal year ended
June 30, 2011 is compared to the unaudited supplemental pro forma combined financial information
for fiscal year ended June 30, 2010 is prepared and presented to aid in explaining the results of
operations of the merged Towers Watson. The pro forma unaudited consolidated statement of
operations of Towers Watson for the fiscal year ended June 30, 2010 is prepared as if the Merger
occurred on July 1, 2009.
The pro forma 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.
The pro forma unaudited consolidated statement of operations of Towers Watson for the fiscal year
ended June 30, 2009 is prepared as if the Merger occurred on July 1, 2008. 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 combined financial
statements should be read together with the respective historical financial statements and related
notes of Towers Perrin and Watson Wyatt and the section entitled Managements Discussion and
Analysis of Financial Condition and Results of Operations.
The unaudited pro forma 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. |
Prior to the Merger, Towers Perrin was a private, employee-owned corporation. As a result, Towers
Perrins historical unaudited consolidated statement of operations for the six months ended June
30, 2009 does not reflect the level of net income that Towers Perrin contributes 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 combined financial statements.
The unaudited pro forma combined statements of operations for the fiscal year ended June
30, 2010 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.
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 combined statements of operations for the fiscal years
ended June 30, 2010 and 2009 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.
43
Consolidated Statement of Operations
Year Ended June 30, 2011
|
|
|
|
|
|
|
Year Ended |
|
|
|
June 30, 2011 |
|
Revenue |
|
$ |
3,259,451 |
|
|
|
|
|
|
|
|
|
|
Costs of providing services: |
|
|
|
|
Salaries and employee benefits |
|
|
2,043,063 |
|
Professional and subcontracted services |
|
|
246,348 |
|
Occupancy |
|
|
144,191 |
|
General and administrative expenses |
|
|
281,576 |
|
Depreciation and amortization |
|
|
130,575 |
|
Transaction and integration expenses |
|
|
100,535 |
|
|
|
|
|
|
|
|
2,946,288 |
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
313,163 |
|
|
|
|
|
|
Income from affiliates |
|
|
1,081 |
|
Interest income |
|
|
5,523 |
|
Interest expense |
|
|
(12,475 |
) |
Other non-operating income |
|
|
19,349 |
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
326,641 |
|
Provision for income taxes |
|
|
129,916 |
|
|
|
|
|
|
|
|
|
|
Net income before non-controlling interests |
|
|
196,725 |
|
Net income attributable to non-controlling interests |
|
|
2,288 |
|
|
|
|
|
|
|
|
|
|
Net income attributable to controlling interests |
|
$ |
194,437 |
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
Net income Basic |
|
$ |
2.62 |
|
|
|
|
|
|
|
|
|
|
Net income Diluted |
|
$ |
2.62 |
|
|
|
|
|
Weighted average shares of common stock,
basic (000) |
|
|
74,075 |
|
|
|
|
|
Weighted average shares of common stock,
diluted (000) |
|
|
74,139 |
|
|
|
|
|
44
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 from operations |
|
|
164,445 |
|
|
|
49,357 |
|
|
|
(4,764 |
) |
|
|
34,813 |
|
|
|
243,851 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)/income 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 before non-controlling interests |
|
|
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 Basic |
|
$ |
2.04 |
|
|
|
|
|
|
|
|
|
|
|
|
M |
|
$ |
3.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income Diluted |
|
$ |
2.03 |
|
|
|
|
|
|
|
|
|
|
|
|
M |
|
$ |
3.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock,
basic (000) |
|
|
59,257 |
|
|
|
|
|
|
|
|
|
|
|
|
M |
|
|
59,257 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock,
diluted (000) |
|
|
59,372 |
|
|
|
|
|
|
|
|
|
|
|
|
M |
|
|
59,372 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45
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 |
|
|
|
|
1,466,646 |
|
|
|
1,587,406 |
|
|
|
20,517 |
|
|
|
88,200 |
|
|
|
3,162,769 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
209,383 |
|
|
|
(1,107 |
) |
|
|
19,356 |
|
|
|
(139,078 |
) |
|
|
88,554 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)/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 before non-controlling interests |
|
|
146,627 |
|
|
|
(19,970 |
) |
|
|
16,012 |
|
|
|
(98,120 |
) |
|
|
44,549 |
|
Net loss attributable to non-controlling
interests |
|
|
169 |
|
|
|
|
|
|
|
|
|
|
|
4,346 |
I |
|
|
4,515 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to controlling
interests |
|
$ |
146,458 |
|
|
$ |
(19,970 |
) |
|
$ |
16,012 |
|
|
$ |
(102,466 |
) |
|
$ |
40,034 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income basic |
|
$ |
3.43 |
|
|
|
|
|
|
|
|
|
|
|
|
M |
|
$ |
0.68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income diluted |
|
$ |
3.42 |
|
|
|
|
|
|
|
|
|
|
|
|
M |
|
$ |
0.67 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock,
basic (000) |
|
|
42,690 |
|
|
|
|
|
|
|
|
|
|
|
|
M |
|
|
59,257 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock,
diluted (000) |
|
|
42,861 |
|
|
|
|
|
|
|
|
|
|
|
|
M |
|
|
59,372 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46
Pro Forma Adjustments
The pro forma adjustments reflected in the unaudited supplemental pro forma 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 an adjustment to rent expense to
approximate fair value of acquired leases. |
|
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. 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 $160.0 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 combined statement of operations. |
|
F) |
|
Reflects the provision for taxes as a result of the Merger. A U.S. statutory rate of 40.0%
was used for the fiscal year 2011, 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 the fiscal year 2010 the U.S. statutory rate of 39.6% was used. For purposes of
determining the estimated income tax expense for the adjustments reflected in the unaudited
pro forma 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 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 to Towers Perrins software revenue attributable to performance
obligations completed prior to the Merger. This reduction is required to reflect the acquired
deferred software revenue at fair value as of the date of the Merger. |
|
L) |
|
Reflects the elimination of merger-related deferred payment on the sale of an investment.
Because this deferred payment will not have a continuing impact, it is not reflected in the
unaudited pro forma consolidated statement of operations. |
|
M) |
|
Earnings per share calculations for the fiscal years ended June 30, 2011, 2010 and 2009 are
based on Towers Watsons fully diluted shares outstanding as of June 30, 2011, 2010 and 2009,
respectively. |
47
Statement of Operations for the Fiscal Year Ended June 30, 2011
Compared to Pro Forma Financial Information for the Fiscal Year Ended June 30, 2010
Revenue
Towers Watson revenue for the fiscal year ended June 30, 2011 was $3.3 billion, an increase of
$78.5 million, or 2%, from pro forma revenue of $3.2 billion for the fiscal year ended June 30,
2010. Our revenue growth reflects increased revenue from both new and existing clients. In
addition, revenue from our two new acquisitions, Aliquant and EMB, contributed to the increase in
revenue in the second half of fiscal year 2011.
We use constant currency to evaluate our results of operations because we are a global company
subject to foreign currency translation fluctuations in our year-over-year comparisons. Constant
currency is calculated by translating prior year revenue at the current year average exchange rate.
The average exchange rate used to translate our revenues earned in British pounds sterling
was 1.5878 for fiscal 2011, and the average exchange rate
used to translate our revenues earned in Euros was 1.3637 for fiscal year 2011.
A comparison of segment revenue for the fiscal year ended June 30, 2011, as compared to the fiscal
year ended June 30, 2010 is as follows:
|
|
|
Benefits revenue increased 2% and was $1.9 billion for fiscal year 2011 compared to $1.8
billion for fiscal year 2010. On a constant currency basis, our Retirement practice revenue
remained consistent, which represents the majority of the segments revenue. The growth in
the Retirement practice is from the developing markets in Asia and Latin America which is
driven by new legislation and client demand. The Retirement practice in North America and
Europe experienced decreased revenue in fiscal year 2011 compared to the same period in
fiscal year 2010 because of a strong prior year comparable from project work related to
regulatory changes. Revenue increased on a constant currency basis in our Technology and
Administration Solutions practice, with revenue growth in the U.S. and a slight decline in
Europe. Growth in the U.S. was largely due to the addition of Aliquant, a health and welfare
benefits administration outsourcing firm that we acquired during the second quarter of
fiscal year 2011. Revenue increased in our Health and Group Benefits practice as health care
reform deadlines approach. Revenue in our Benefits segment increased 1% on an organic basis
which excludes the effects of acquisitions and currency effects. |
|
|
|
|
Risk and Financial Services revenue increased 2% and was $740.7 million and $727.6
million for the fiscal years ended June 30, 2011 and 2010, respectively. Revenue increased
on a constant currency basis in our Risk Consulting and Software practice primarily due to
the addition of EMB, a non-life consulting and software company, that we acquired during our
third quarter of fiscal year 2011. Revenue for our Risk Consulting and Software practice,
without the inclusion of EMB, decreased due to a decrease in project activity. Revenue from
our Brokerage practice decreased on a constant currency basis from decreases in pricing and
volume as a result of overall market conditions in the U.S. property and casualty insurance
marketplace, which were only partially offset from new client activity in Europe. Revenue
from our Investment practice decreased on a constant currency basis compared to fiscal year
2010 due to less activity in North America, a change in revenue mix in Europe and due to a
strong Investment practice comparable in the prior year. Revenue in our Risk and Financial
Services segment decreased 2% on an organic basis which excludes the effects of acquisitions
and currency. |
|
|
|
|
Talent and Rewards revenue remained consistent and was $543.5 million and $540.0 million
for the fiscal year ended June 30, 2011 and 2010, respectively. Revenues from our Executive
Compensation practice continued to decrease as work moved to a new Board-focused Executive
Compensation boutique firm, Pay Governance, to help some of our clients address perceived
independence issues. After adjusting for the revenue that was transferred to Pay Governance
and for two small acquisitions in Dubai and Sweden, Talent and Rewards experienced 7%
constant currency revenue growth. On an organic basis, revenues in all practices, Executive
Compensation; Rewards, Talent and Communication; and Data, Surveys and Technology,
increased. The organic increase in revenue for Executive Compensation is due to increased
project activity in North America in both management and compensation committee consulting
and strong growth in Asia Pacific. Increases in revenue in Asia Pacific, particularly China,
is attributed to local companies expanding nationally, regionally and globally and implement
executive pay plans to support growth. Organic revenue growth in Reward, Talent and
Communication was due to significant increases in all geographic regions especially in Asia.
We also experienced organic revenue growth in our Data, Surveys and Technology practice due
to growth in data and surveys in all geographic regions, especially in Asia. |
Salaries and Employee Benefits
Salaries and employee benefits were $2.0 billion for the fiscal year ended June 30, 2011 compared
to $2.1 billion for the fiscal year ended 2010, a decrease of $103.1 million, or 5%. The decrease
is principally due to decreases in discretionary compensation, pension
48
and employer related taxes partially offset by an increase in other employee benefits. As a
percentage of revenue, salaries and employee benefits decreased to 63% for fiscal year 2011 from
67% for fiscal year 2010.
Professional and Subcontracted Services
Professional and subcontracted services used in consulting operations for the fiscal year ended
June 30, 2011 were $246.3 million, compared to $243.8 million for the fiscal year ended June 30,
2010, an increase of $2.6 million, or 1%. The increase was principally due to increased use of
external service providers to supplement our day-to-day operations. Professional and subcontracted
services were 8% of revenue for fiscal year 2011 and 2010.
Occupancy
Occupancy expense for the fiscal year ended June 30, 2011 was $144.2 million compared to $146.7
million for the fiscal year ended June 30, 2010, a decrease of $2.5 million, or 2%. This decrease
is principally due to the reduction of leased office space resulting from the Merger. As a
percentage of revenue, occupancy expense decreased to 4% for fiscal year 2011 from 5% for fiscal
year 2010.
General and Administrative Expenses
General and administrative expenses for the fiscal year ended June 30, 2011 were $281.6 million,
compared to $268.8 million for the fiscal year ended June 30, 2010, an increase of $12.8 million,
or 5%. This increase is primarily due to increases in travel and entertainment expenses, general
office costs as well as increases in promotions offset by decreases in professional liability
expense as a result of a reduction in reserves for specific claims. As a percentage of revenue,
general and administrative expenses increased to 9% for fiscal year 2011 from 8% for fiscal year
2010.
Depreciation and Amortization
Depreciation and amortization expense for the fiscal year ended June 30, 2011 was $130.6 million,
compared to $131.6 million for the fiscal year ended June 30, 2010, a decrease of $1.0 million, or
1%. 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 Aliquant and EMB acquisitions in fiscal year 2011, partially offset by a
decrease in depreciation of fixed assets. As a percentage of revenue, depreciation and amortization
expense was 4% for fiscal years 2011 and 2010.
Transaction and Integration Expenses
Transaction and integration expenses incurred related to the Merger were $100.5 million for the
fiscal year ended June 30, 2011 compared to $103.4 million for the fiscal year ended June 30, 2010,
a decrease of $2.8 million, or 3%. 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% for fiscal year 2011 and 4% for fiscal year 2010. Transaction and
integration expenses are eliminated in the pro forma combined statements of operations
because these costs will not have a continuing impact.
Income / (Loss) From Affiliates
Income from affiliates for the fiscal year ended June 30, 2011 was $1.1 million compared to loss
from affiliates of $1.1 million for the fiscal year ended June 30, 2010, an increase of $2.2
million, or 200%. During fiscal year 2011, we increased our effective ownership interest in Fifth
Quadrant Actuaries and Consultants Holdings (Pty) Ltd. (Fifth Quadrant) from 20% to 40%. As a
result, 40% of Fifth Quadrants operating results are included in our income from affiliates. Loss
from affiliates for 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, 2011 was $5.5 million, compared to $4.7 million
for the fiscal year ended June 30, 2010. The increase is mainly due to a higher average cash
balance in the current period compared to the prior period, combined with higher short-term
interest rates in Canada and Europe.
Interest Expense
Interest expense for the fiscal year ended June 30, 2011 was $12.5 million, compared to $12.0
million for the fiscal year ended June 30, 2010. The increase was due to higher debt balances in
fiscal year 2011 compared to fiscal year 2010.
Other Non-Operating Income
Other non-operating income for the fiscal year ended June 30, 2011 was $19.3 million, compared to
$16.6 million for the fiscal year ended June 30, 2010. Included in fiscal year 2011 is a gain on
the sale of eValue, a financial modeling software acquired from Towers Perrin in the Merger.
Included in historical other non-operating income for fiscal 2011 is a $9.4 million deferred
payment we received related to a divestiture by Towers Perrin in June 2009 before the closing of
the Merger and a gain on divestiture of a technology. The first nine months of fiscal 2010 included
$5.0 million of payments received from the licensing of a brand name in conjunction with the sale
of an investment.
49
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 $3.2 billion, a
decrease of $70.4 million, or 2%, from $3.3 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 $1.8 billion for the fiscal
year ended June 30, 2010 compared to $1.8 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 were $2.1 billion for the fiscal year ended June 30, 2010 compared
to $2.2 billion for the fiscal year ended 2009, a decrease of $90.3 million or 4%. 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% for
fiscal year 2010 from 69% 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 17%. 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 8% for fiscal year 2010 from 9% 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 2%. 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 5% for fiscal year
2010 from 4% for fiscal year 2009.
50
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
24%. 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% for fiscal year 2010
from 11% for fiscal year 2009.
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
4%. 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 expense was 4% for fiscal years 2010 and
2009.
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% for fiscal year 2010. Transaction and integration expenses are
eliminated in the pro forma 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
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 fiscal years ended
June 30, 2010 and 2009, giving effect to the business combination as if it had been completed on
July 1, 2009. 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.
51
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 most significant sources of liquidity are funds generated by operating activities, available
cash and cash equivalents, and our credit facilities. 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,
including $99.3 million payable in March 2012 in principal and interest on the notes issued in
connection with the tender offer we completed in June 2010. The key variables that we manage in
response to current and projected capital resource needs include credit facilities and short-term
borrowing arrangements, working capital and our stock repurchase program.
Our cash and cash equivalents at June 30, 2011 totaled $528.9 million, compared to $435.9 million
at June 30, 2010. The increase in cash from June 30, 2010 to June 30, 2011 was principally
attributable to cash flows from operations including an increase in net income.
Our cash and cash equivalents balance includes $76.7 million from the consolidated balance sheets
of PCIC and SMIC, which is available for payment of professional liability claims reserves. As a
result, we have a net $452.2 million of cash that is available for our use.
Our restricted cash at June 30, 2011 totaled $153.2 million, compared to $164.5 million at June 30,
2010, of which $147.9 million is available for payment of reinsurance premiums on behalf of
reinsurance clients and an additional $5.3 million is held for payment of health and welfare
premiums on behalf of our clients.
Our non-U.S. operations are substantially self-sufficient for their working capital needs. As of
June 30, 2011, $412.2 million of Towers Watsons total cash balance of $528.9 million was held
outside of the United States. There are no significant repatriation restrictions other than local
or U.S. taxes associated with repatriation.
While we currently do not foresee a need to repatriate funds, should we require more capital in the
U.S. than is generated by our operations locally, we could elect to repatriate funds held in
foreign jurisdictions or raise capital in the U.S. through debt or equity issuances. These
alternatives could result in higher effective tax rates or increased interest expense.
Assets and liabilities associated with non-U.S. entities have been translated into U.S. dollars as
of June 30, 2011, at U.S. dollar rates that fluctuate 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.
Events that could temporarily change the historical cash flow dynamics discussed above include
significant changes in operating results, material changes in geographic sources of cash,
unexpected adverse impacts from litigation or future pension funding during periods of severe
downturn in the capital markets.
Cash Flows From/(Used in) Operating Activities.
Cash flows from operating activities was $541.2 million for fiscal year 2011 compared to cash flows
used in operating activities of $84.6 million for fiscal year 2010. This increase of $625.9 million
is primarily attributable to the following:
|
|
|
a $77.7 million increase in net income for fiscal year 2011 compared to fiscal
year 2010; |
|
|
|
|
a $534.2 million increase in cash flows from an increase in accounts payable,
accrued liabilities and deferred income. The fiscal year 2010 comparable period experienced
a decrease in cash flows due to the 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 $4.7 million from June 30, 2010 to June 30, 2011. The
number of days of accounts receivable increased to 78 at June 30, 2011 compared to 69 at June 30,
2010.
52
Cash Flows Used in Investing Activities.
Cash flows used in investing activities for fiscal year 2011 were $200.9 million, compared to
$371.4 million of cash flows from investing activities for fiscal year 2010. The decrease is due to
$141.9 million of cash paid for the acquisitions of EMB and Aliquant in fiscal 2011 less $10.3
million cash acquired in the acquisitions.
Cash Flows Used in Financing Activities.
Cash flows used in financing activities for fiscal year 2011 were $272.7 million, compared to $49.1
million for fiscal year 2010. The decrease was due to $200 million repayment of notes payable, plus
interest, in fiscal year 2011.
Capital Commitments
Expenditures of capital were $76.9 million for fiscal year 2011.
Dividends
During the fiscal year ended June 30, 2011, 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 June
30, 2011 and 2010 were $21.6 million and $15.2 million, respectively.
Off-Balance Sheet Arrangements and Contractual Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining payments by fiscal year due as of June 30, 2011 |
|
|
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
|
|
|
More Than |
|
Contractual Cash Obligations (in thousands) |
|
Total |
|
|
1 Year |
|
|
1-3 Years |
|
|
3-5 Years |
|
|
5 Years |
|
Notes Payable and accrued interest* |
|
$ |
99,341 |
|
|
$ |
99,341 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Lease Commitments |
|
|
601,226 |
|
|
|
105,107 |
|
|
|
180,236 |
|
|
|
132,370 |
|
|
|
183,512 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
700,567 |
|
|
$ |
204,448 |
|
|
$ |
180,236 |
|
|
$ |
132,370 |
|
|
$ |
183,512 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
The $99.3 million is due in March 2012. |
Operating Leases. We lease office space under operating lease agreements with terms typically
averaging 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. Intangible assets and liabilities were
recognized for the difference between the contractual cash obligations shown above and the
estimated market rates at the time of the acquisitions. 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 2012 are projected
to be $33.2 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 $39.8 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.
Contingent Consideration from Acquisitions. The table above does not include liabilities for
contingent consideration for our Aliquant and EMB acquisitions in fiscal year 2011. We expect to
pay out approximately $1 million and £2.4 million in fiscal year 2012 and £2.4 million per year for
fiscal year 2013 through fiscal year 2016 related to these contingent consideration provisions in
our agreements and subject to performance requirements on behalf of the sellers.
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, 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 matured on January 1, 2011. The indenture contained limited operating
covenants, and obligations under the Towers Watson Notes due January 2011 were 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. On January 3, 2011 (the first business day
53
following the note maturity date), Towers Watson repaid both principal and interest on the Notes
which was funded in part by a $75 million borrowing under our Senior Credit Facility.
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, Towers Watson entered into an indenture with the trustee for the
issuance of Towers Watson Notes due March 2012 in the aggregate principal amount of $97.3 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 notes payable balance on our
consolidated balance sheet as of June 30, 2011. 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), which expires on December 31, 2012. Borrowings under the Senior Credit Facility
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 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, 2011, we were in compliance with our covenants.
As of June 30, 2011 and 2010, Towers Watson had no borrowings outstanding under the Senior Credit
Facility.
Letters of Credit under the Senior Credit Facility
As of June 30, 2011, 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 $1.9 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. $4.2 million). As of June 30, 2011, a total of BRL $5.3
million (U.S. $3.4 million) was outstanding under this facility.
Towers Watson has also provided a $5.0 million Australian dollar-denominated letter of credit (U.S.
$5.4 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 $6.5 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 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.
54
Effective July 1, 2010, Stone Mountain Insurance Company (SMIC), a wholly-owned captive insurance
company, has provided us with $50 million of professional liability insurance coverage per claim
and in the aggregate, including the cost of defending such claims, above the $1 million
self-insured retention. SMIC secured $25 million of reinsurance coverage from unaffiliated
reinsurance companies in excess of the $25 million SMIC retained layer. Excess insurance attaching
above the SMIC coverage is provided by various unaffiliated commercial insurance companies.
Because we have a self-insured retention for each claim and because Stone Mountain is wholly-owned
by us, our primary errors and omissions risk is self-insured. 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.
For the policy period beginning July 1, 2011 and ending July 1, 2012, our professional liability
insurance includes a self-insured retention of $1 million per claim. For this policy period,
Towers Watson also retains $10 million in the aggregate above the $1 million self-insured retention
per claim. SMIC provides us with $40 million of coverage per claim and in the aggregate, above the
retentions. SMIC secured $25 million of reinsurance from unaffiliated reinsurance companies in
excess of the $15 million SMIC retained layer. Excess insurance attaching above the SMIC coverage
is provided by various unaffiliated commercial insurance companies. Because of the $1 million
self-insured retention per claim and the additional $10 million aggregate retention above, and
because Stone Mountain is wholly-owned by us, our primary errors and omissions risk is
self-insured.
Before the Merger, Watson Wyatt and Towers Perrin each obtained substantial professional liability
insurance from an affiliated captive insurance company, Professional Consultants Insurance Company
(PCIC). A limit of $50 million per claim and in the aggregate was provided by PCIC subject to a
$1 million per claim self-insured retention and coverage was structured substantially similarly to
the coverage currently provided by SMIC. PCIC secured reinsurance of $25 million attaching above
the $25 million PCIC retained layer. In addition, both legacy companies carried excess insurance
from unaffiliated commercial insurance companies above the self-insured retention and the coverage
provided by PCIC.
Before 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 continue to cover professional liability claims above a $1
million per claim self-insured retention, the consolidation of PCIC will effectively net PCICs
premium income against our premium expense for the first $25 million of loss above the self-insured
retention 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. 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, 2011, we had a
$274.8 million IBNR liability balance. To the extent our captive insuance companies, PCIC and SMIC,
expect losses to be covered by a third party they record a receivable for the amount expected to be recovered.
This receivable is classified in other current or other noncurrent assets in our consolidated balance sheet.
As stated above, commencing July 1, 2010, Towers Watson obtained primary insurance for errors and
omissions professional liability risks from SMIC on a claims-made basis. SMIC has issued a policy
of insurance substantially similar to the policies historically 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 few
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.
55
Recent Accounting Pronouncements
Adopted
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 $1.6 million for the year ended June 30, 2010,
which was previously included in (loss)/income from affiliates, was reclassified to net
(loss)/income attributable to non-controlling interests in our results of operations.
Not yet adopted
On December 17, 2010, the Financial Accounting Standards Board (FASB) issued ASU 2010-28,
IntangiblesGoodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test
for Reporting Units with Zero or Negative Carrying Amounts (a consensus of the FASB Emerging Issues
Task Force), which (1) does not prescribe a specific method of calculating the carrying value of a
reporting unit in the performance of step 1 of the goodwill impairment test and (2) requires
entities with a zero or negative carrying value to assess, considering qualitative factors such as
but not limited to those listed in ASC 350-20-35-30 whether it is more likely than not that a
goodwill impairment exists. If an entity concludes that it is more likely than not that an
impairment of goodwill exists, the entity must perform step 2 of the goodwill impairment test.
These provisions are effective for impairment tests performed in our fiscal year 2012. Upon
adoption, if any of our reporting units have a zero or negative carrying value, we must assess, on
the basis of current facts and circumstances, whether it is more likely than not that an impairment
of our goodwill exists. If so, we would perform step 2 of the goodwill impairment test on the day
of adoption and record the impairment charge, if any, as a cumulative-effect adjustment through
beginning retained earnings. We are currently evaluating the impact, if any, on our financial
position or results of operations of adopting this provision.
On June 16, 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation of
Comprehensive Income, which revised the manner in which entities present comprehensive income in
their financial statements. The new guidance removes the presentation options in ASC 220,
Comprehensive Income, and requires entities to report components of comprehensive income in either
(1) a continuous statement of comprehensive income or (2) two separate but consecutive statements.
The ASU does not change the items that must be reported in other comprehensive income. For public
entities, the amendments are effective for fiscal years, and interim periods within those years,
beginning after December 15, 2011 with early adoption permitted. We are still evaluating the
impact of the change in presentation to our consolidated statement of operations and our
consolidated statement of changes in stockholders equity and will adopt the new presentation in
our fiscal 2013 filings.
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 fiscal year ended June 30, 2011, 48.7% of our revenue was 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, 2011, 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
$13.0 million, or 7.1%,
56
for the fiscal year ended June 30, 2011. 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 preparing our
consolidated balance sheet. Additionally, foreign exchange rate fluctuations may adversely impact
our 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 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. See Note 7,
Derivative Financial Instruments in the notes to the consolidated financial statements contained
on this Form 10-K for a further discussion of our foreign currency forwards and their fair market
value.
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.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
An evaluation was performed under the supervision and with the participation of the chief executive
officer, or CEO, and chief financial officer, or CFO, of the effectiveness of the design and
operation of our disclosure controls and procedures as of the end of the period covered by this
report. Based upon that evaluation, our management, including the CEO and CFO, concluded that our
disclosure controls and procedures were effective as of June 30, 2011 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 quarter ended June
30, 2011 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:
|
(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 |
57
|
(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 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, 2011.
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.
58
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, 2011, based on criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. 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 Control 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, 2011, 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, 2011 of the Company and our report dated August 29, 2011 expressed
an unqualified opinion on those financial statement and financial statement schedule.
/s/ DELOITTE & TOUCHE LLP
McLean, Virginia
August 29, 2011
59
Item 9B. Other Information.
None.
Part III.
Item 10. Directors, Executive Officers, and Audit Committee of the Registrant.
Information with respect to the executive officers of the Company is provided in Part I, Item 1
above under the heading Executive Officers of the Company. Information as to the individuals
serving on the board of directors of the Company is set forth below.
The remaining information required by 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.
Directors of the Company
John J. Gabarro
Professor Emeritus, Harvard Business School
Victor F. Ganzi
Retired Chief Executive Officer, The Hearst Corporation
John J. Haley
Chief Executive Officer and Chairman of the Board of Directors
Mark V. Mactas
President, Chief Operating Officer, Deputy Chair of the Board of Directors
Mark Maselli
Managing Director, Health and Group Benefits
Brendan R. ONeill
Retired Chief Executive Officer, Imperial Chemical Industries PLC
Linda D. Rabbitt
Founder and Chief Executive Officer, Rand Construction Corporation, and Lead Director
Gilbert T. Ray
Retired Partner, OMelveny & Myers LLP
Paul Thomas
Senior Executive, Rank North America
Wilhelm Zeller
Retired Chief Executive Officer, Hannover Re Group
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.
60
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, 2011
Consolidated Balance Sheets at June 30, 2011 and 2010
Consolidated Statements of Cash Flows for each of the three years in the period ended June
30, 2011
Consolidated Statements of Changes in Stockholders Equity for each of the three years in
the period ended June 30, 2011
Notes to the Consolidated Financial Statements
|
(2) |
|
Consolidated Financial Statement Schedule for each of the three years in the period ended
June 30, 2011 |
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.
61
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: August 29, 2011 |
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
|
|
August 29, 2011 |
John J. Haley |
|
|
|
|
|
|
|
|
|
|
|
President, Chief Operating Officer and Director
|
|
August 29, 2011 |
Mark V. Mactas |
|
|
|
|
|
|
|
|
|
|
|
Chief Financial Officer
|
|
August 29, 2011 |
Roger F. Millay |
|
|
|
|
|
|
|
|
|
/s/ Peter L. Childs
|
|
Principal Accounting Officer
|
|
August 29, 2011 |
|
|
|
|
|
Peter L. Childs |
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
August 29, 2011 |
John J. Gabarro |
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
August 29, 2011 |
Victor F. Ganzi |
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
August 29, 2011 |
Mark Maselli |
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
August 29, 2011 |
Brendan R. ONeill |
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
August 29, 2011 |
Linda D. Rabbitt |
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
August 29, 2011 |
Gilbert T. Ray |
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
August 29, 2011 |
Paul D. Thomas |
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
August 29, 2011 |
Wilhelm Zeller |
|
|
|
|
62
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, 2011 and 2010, 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, 2011. 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, 2011 and 2010, and the
results of their operations and their cash flows for each of the three years in the period ended
June 30, 2011, 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.
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, 2011,
based on the criteria established in Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report dated August 29,
2011 expressed an unqualified opinion on the Companys internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
McLean, Virginia
August 29, 2011
63
TOWERS WATSON & CO.
Consolidated Statements of Operations
(Thousands of U.S. dollars, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Revenue |
|
$ |
3,259,451 |
|
|
$ |
2,387,829 |
|
|
$ |
1,676,029 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of providing services: |
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits |
|
|
2,043,063 |
|
|
|
1,540,417 |
|
|
|
1,029,299 |
|
Professional and subcontracted services |
|
|
246,348 |
|
|
|
163,848 |
|
|
|
119,323 |
|
Occupancy |
|
|
144,191 |
|
|
|
109,454 |
|
|
|
72,566 |
|
General and administrative expenses |
|
|
281,576 |
|
|
|
220,937 |
|
|
|
172,010 |
|
Depreciation and amortization |
|
|
130,575 |
|
|
|
101,084 |
|
|
|
73,448 |
|
Transaction and integration expenses |
|
|
100,535 |
|
|
|
87,644 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,946,288 |
|
|
|
2,223,384 |
|
|
|
1,466,646 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
313,163 |
|
|
|
164,445 |
|
|
|
209,383 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) from affiliates |
|
|
1,081 |
|
|
|
(1,274 |
) |
|
|
8,350 |
|
Interest income |
|
|
5,523 |
|
|
|
2,950 |
|
|
|
2,022 |
|
Interest expense |
|
|
(12,475 |
) |
|
|
(7,508 |
) |
|
|
(2,778 |
) |
Other non-operating income |
|
|
19,349 |
|
|
|
11,304 |
|
|
|
4,926 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
326,641 |
|
|
|
169,917 |
|
|
|
221,903 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
|
129,916 |
|
|
|
50,907 |
|
|
|
75,276 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before non-controlling interests |
|
|
196,725 |
|
|
|
119,010 |
|
|
|
146,627 |
|
Net income/(loss) attributable to non-controlling interests |
|
|
2,288 |
|
|
|
(1,587 |
) |
|
|
169 |
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to controlling interests |
|
$ |
194,437 |
|
|
$ |
120,597 |
|
|
$ |
146,458 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to
controlling interests basic |
|
$ |
2.62 |
|
|
$ |
2.04 |
|
|
$ |
3.43 |
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to
controlling interests diluted |
|
$ |
2.62 |
|
|
$ |
2.03 |
|
|
$ |
3.42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock, basic (000) |
|
|
74,075 |
|
|
|
59,257 |
|
|
|
42,690 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock, diluted (000) |
|
|
74,139 |
|
|
|
59,372 |
|
|
|
42,861 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements
64
TOWERS WATSON & CO.
Consolidated Balance Sheets
(Thousands of U.S. dollars, except share data)
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
Assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
528,923 |
|
|
$ |
435,927 |
|
Restricted cash |
|
|
153,154 |
|
|
|
164,539 |
|
Short-term investments |
|
|
43,682 |
|
|
|
51,009 |
|
Receivables from clients: |
|
|
|
|
|
|
|
|
Billed, net of allowances of $12,636 and $7,975 |
|
|
502,910 |
|
|
|
421,602 |
|
Unbilled, at estimated net realizable value |
|
|
276,020 |
|
|
|
215,912 |
|
|
|
|
|
|
|
|
|
|
|
778,930 |
|
|
|
637,514 |
|
Other current assets |
|
|
145,862 |
|
|
|
156,312 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
1,650,551 |
|
|
|
1,445,301 |
|
Fixed assets, net |
|
|
252,343 |
|
|
|
227,308 |
|
Deferred income taxes |
|
|
188,569 |
|
|
|
344,481 |
|
Goodwill |
|
|
1,943,574 |
|
|
|
1,717,295 |
|
Intangible assets, net |
|
|
694,922 |
|
|
|
683,487 |
|
Other assets |
|
|
368,991 |
|
|
|
155,745 |
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
5,098,950 |
|
|
$ |
4,573,617 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
Accounts payable, accrued liabilities and deferred income |
|
$ |
683,810 |
|
|
$ |
409,308 |
|
Reinsurance payables |
|
|
147,902 |
|
|
|
164,539 |
|
Note payable |
|
|
99,341 |
|
|
|
201,967 |
|
Other current liabilities |
|
|
247,424 |
|
|
|
189,966 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
1,178,477 |
|
|
|
965,780 |
|
|
|
|
|
|
|
|
|
|
Revolving credit facility |
|
|
|
|
|
|
|
|
Accrued retirement benefits |
|
|
784,559 |
|
|
|
1,061,557 |
|
Professional liability claims reserve |
|
|
312,108 |
|
|
|
335,034 |
|
Other noncurrent liabilities |
|
|
221,136 |
|
|
|
246,574 |
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
2,496,280 |
|
|
|
2,608,945 |
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity |
|
|
|
|
|
|
|
|
Class A Common Stock $.01 par value: 300,000,000 shares authorized;
57,897,889 and 47,160,497 issued and 56,949,548 and 47,160,497 outstanding |
|
|
579 |
|
|
|
472 |
|
Class B Common Stock $.01 par value: 93,500,000 shares authorized;
16,651,890 and 27,043,196 issued and 16,651,890 and 27,043,196 outstanding |
|
|
167 |
|
|
|
270 |
|
Additional paid-in capital |
|
|
1,773,285 |
|
|
|
1,679,624 |
|
Treasury stock, at cost 948,341 and 0 shares |
|
|
(52,360 |
) |
|
|
|
|
Retained earnings |
|
|
883,161 |
|
|
|
711,570 |
|
Accumulated other comprehensive loss |
|
|
(13,305 |
) |
|
|
(436,329 |
) |
|
|
|
|
|
|
|
Total Stockholders Equity |
|
|
2,591,527 |
|
|
|
1,955,607 |
|
|
|
|
|
|
|
|
Non-controlling interest |
|
|
11,143 |
|
|
|
9,065 |
|
|
|
|
|
|
|
|
Total Equity |
|
|
2,602,670 |
|
|
|
1,964,672 |
|
|
|
|
|
|
|
|
Total Liabilities and Total Equity |
|
$ |
5,098,950 |
|
|
$ |
4,573,617 |
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements
65
TOWERS WATSON & CO.
Consolidated Statements of Cash Flows
(Thousands of U.S. dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Cash flows from/(used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income before non-controlling interests |
|
$ |
196,725 |
|
|
$ |
119,010 |
|
|
$ |
146,627 |
|
Adjustments to reconcile net income to net cash from/(used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Provision for doubtful receivables from clients |
|
|
13,004 |
|
|
|
11,759 |
|
|
|
5,355 |
|
Depreciation |
|
|
78,461 |
|
|
|
69,684 |
|
|
|
59,556 |
|
Amortization of intangible assets |
|
|
52,114 |
|
|
|
31,400 |
|
|
|
13,892 |
|
Provision/(benefit) for deferred income taxes |
|
|
14,448 |
|
|
|
(5,134 |
) |
|
|
14,205 |
|
Equity from affiliates |
|
|
(622 |
) |
|
|
869 |
|
|
|
(8,080 |
) |
Stock-based compensation |
|
|
79,922 |
|
|
|
52,953 |
|
|
|
932 |
|
Other, net |
|
|
(10,209 |
) |
|
|
(9,975 |
) |
|
|
(2,474 |
) |
Changes in operating assets and liabilities (net of business acquisitions) |
|
|
|
|
|
|
|
|
|
|
|
|
Receivables from clients |
|
|
(98,468 |
) |
|
|
(41,339 |
) |
|
|
57,991 |
|
Other current assets |
|
|
18,728 |
|
|
|
(2,205 |
) |
|
|
3,279 |
|
Other noncurrent assets |
|
|
(39,343 |
) |
|
|
50,854 |
|
|
|
(3,497 |
) |
Accounts payable, accrued liabilities and deferred income |
|
|
238,824 |
|
|
|
(295,402 |
) |
|
|
(28,717 |
) |
Restricted cash |
|
|
22,167 |
|
|
|
(49,756 |
) |
|
|
|
|
Reinsurance payables |
|
|
(20,431 |
) |
|
|
49,756 |
|
|
|
|
|
Accrued retirement benefits |
|
|
(55,859 |
) |
|
|
(71,292 |
) |
|
|
(42,069 |
) |
Professional liability claims reserves |
|
|
(28,746 |
) |
|
|
16,171 |
|
|
|
(5,900 |
) |
Other current liabilities |
|
|
8,857 |
|
|
|
20,874 |
|
|
|
4,138 |
|
Other noncurrent liabilities |
|
|
20,944 |
|
|
|
(24,050 |
) |
|
|
10,631 |
|
Income tax related accounts |
|
|
50,721 |
|
|
|
(8,801 |
) |
|
|
1,678 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from/(used in) operating activities |
|
|
541,237 |
|
|
|
(84,624 |
) |
|
|
227,547 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows (used in)/from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for business acquisitions |
|
|
(141,885 |
) |
|
|
(200,025 |
) |
|
|
(1,185 |
) |
Cash acquired from business acquisitions |
|
|
10,349 |
|
|
|
603,208 |
|
|
|
|
|
Purchases of fixed assets |
|
|
(76,859 |
) |
|
|
(25,752 |
) |
|
|
(39,195 |
) |
Capitalized software costs |
|
|
(22,487 |
) |
|
|
(19,632 |
) |
|
|
(23,374 |
) |
Purchases of held-to-maturity securities |
|
|
(14,295 |
) |
|
|
|
|
|
|
|
|
Redemptions of held-to-maturity securities |
|
|
14,295 |
|
|
|
|
|
|
|
|
|
Purchases of available-for-sale securities |
|
|
(54,696 |
) |
|
|
(17,789 |
) |
|
|
|
|
Redemption of available-for-sale securities |
|
|
72,703 |
|
|
|
16,191 |
|
|
|
|
|
Investment in affiliates |
|
|
(5,805 |
) |
|
|
|
|
|
|
(2,302 |
) |
Proceeds from sale of investments |
|
|
|
|
|
|
10,749 |
|
|
|
|
|
Proceeds from divestitures |
|
|
17,772 |
|
|
|
4,486 |
|
|
|
4,926 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows (used in)/from investing activities |
|
|
(200,908 |
) |
|
|
371,436 |
|
|
|
(61,130 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows used in financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings under credit facility |
|
|
75,000 |
|
|
|
126,333 |
|
|
|
267,912 |
|
Repayments under credit facility |
|
|
(75,000 |
) |
|
|
(125,650 |
) |
|
|
(267,912 |
) |
Financing of credit facility |
|
|
|
|
|
|
(5,679 |
) |
|
|
|
|
Repayments of notes payable |
|
|
(200,000 |
) |
|
|
|
|
|
|
|
|
Dividends paid |
|
|
(21,599 |
) |
|
|
(15,249 |
) |
|
|
(12,785 |
) |
Repurchases of common stock |
|
|
(30,646 |
) |
|
|
(34,922 |
) |
|
|
(77,443 |
) |
Tax payment on vested shares |
|
|
(26,596 |
) |
|
|
|
|
|
|
|
|
Issuances of common stock and excess tax benefit |
|
|
6,158 |
|
|
|
6,068 |
|
|
|
6,509 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows used in financing activities |
|
|
(272,683 |
) |
|
|
(49,099 |
) |
|
|
(83,719 |
) |
|
|
|
|
|
|
|
|
|
|
Effect of exchange rates on cash |
|
|
25,350 |
|
|
|
(11,618 |
) |
|
|
2,502 |
|
|
|
|
|
|
|
|
|
|
|
Increase/(decrease) in cash and cash equivalents |
|
|
92,996 |
|
|
|
226,095 |
|
|
|
85,200 |
|
Cash and cash equivalents at beginning of period |
|
|
435,927 |
|
|
|
209,832 |
|
|
|
124,632 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
528,923 |
|
|
$ |
435,927 |
|
|
$ |
209,832 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
4,268 |
|
|
$ |
2,595 |
|
|
$ |
2,780 |
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes, net of refunds |
|
$ |
64,117 |
|
|
$ |
58,624 |
|
|
$ |
66,480 |
|
|
|
|
|
|
|
|
|
|
|
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 conjunction with the acquisitions of EMB and the Merger |
|
$ |
11,250 |
|
|
$ |
1,357,379 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Contingent payments accrued in conjunction with the acquisitions of EMB and Aliquant |
|
$ |
20,026 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Common stock associated with vesting of Restricted A Shares |
|
|
26,248 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements
66
TOWERS WATSON & CO.
Consolidated Statement of Changes in 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 |
|
|
Non- |
|
|
|
|
|
|
Stock |
|
|
Common |
|
|
Stock |
|
|
Common |
|
|
Paid-in |
|
|
Stock, |
|
|
Retained |
|
|
Comprehensive |
|
|
Controlling |
|
|
|
|
|
|
Outstanding |
|
|
Stock |
|
|
Outstanding |
|
|
Stock |
|
|
Capital |
|
|
at Cost |
|
|
Earnings |
|
|
Loss |
|
|
Interest |
|
|
Total |
|
Balance as of June 30, 2009 |
|
|
42,657 |
|
|
$ |
438 |
|
|
|
|
|
|
$ |
|
|
|
$ |
452,938 |
|
|
$ |
(63,299 |
) |
|
$ |
608,634 |
|
|
$ |
(145,073 |
) |
|
$ |
|
|
|
$ |
853,638 |
|
Comprehensive Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62,468 |
|
|
|
|
|
|
|
|
|
|
|
62,468 |
|
Foreign currency translation adjustment, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 as of 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 |
|
|
|
|
|
|
|
9,065 |
|
|
|
67,194 |
|
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, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(76,045 |
) |
|
|
|
|
|
|
(76,045 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(173,844 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
194,437 |
|
|
|
|
|
|
|
2,288 |
|
|
|
196,725 |
|
Additional minimum pension liability, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
263,903 |
|
|
|
|
|
|
|
263,903 |
|
Foreign currency translation adjustment, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
192 |
|
|
|
|
|
|
|
|
|
|
|
154,995 |
|
|
|
|
|
|
|
155,187 |
|
Unrealized loss on available for sale securities, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
968 |
|
|
|
(210 |
) |
|
|
758 |
|
Hedge effectiveness, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,158 |
|
|
|
|
|
|
|
3,158 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
619,731 |
|
Repurchases of common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(30,646 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(30,646 |
) |
Shares received for employee taxes upon conversion of Restricted A shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(26,596 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(26,596 |
) |
Exercises of stock options and purchases under our ESPP |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,882 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,882 |
|
Class A Common Stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22,846 |
) |
|
|
|
|
|
|
|
|
|
|
(22,846 |
) |
Issuances of common stock and excess tax benefits |
|
|
111 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
1,097 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,098 |
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79,922 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79,922 |
|
Conversion of Restricted A shares to Class A shares |
|
|
(19 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
83 |
|
|
|
1 |
|
|
|
(84 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Adjustment to repurchases of Class B-1 shares from tender offer |
|
|
|
|
|
|
|
|
|
|
28 |
|
|
|
|
|
|
|
1,202 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,202 |
|
Secondary offering conversion of Class B1 shares to Class A shares |
|
|
4,921 |
|
|
|
49 |
|
|
|
(4,921 |
) |
|
|
(49 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2011 |
|
|
57,898 |
|
|
$ |
579 |
|
|
|
16,652 |
|
|
$ |
167 |
|
|
$ |
1,773,285 |
|
|
$ |
(52,360 |
) |
|
$ |
883,161 |
|
|
$ |
(13,305 |
) |
|
$ |
11,143 |
|
|
$ |
2,602,670 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements
67
TOWERS WATSON & CO.
Notes to the Consolidated Financial Statements
(Tabular amounts in thousands except 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. As such, the historical results of Watson Wyatt through
December 31, 2009 have become those of the new registrant, Towers Watson. The consolidated
financial statements of Towers Watson as of and for the fiscal year ended June 30, 2011 include the
results of Towers Perrins operations. The consolidated financial statements of Towers Watson as of
and for the fiscal year ended June 30, 2010 include the results of Towers Perrins operations
beginning January 1, 2010. The consolidated financial statements of Towers Watson for the fiscal
year ended June 30, 2009 include only the results of Watson Wyatt.
Nature of the Business Towers Watson is a leading global professional services company
that helps organizations improve performance through effective people, risk and financial
management. We offer solutions in the areas of employee benefits, talent management, rewards, and
risk and capital management. 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 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 June 30, 2011 and 2010 includes $147.9
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,
at June 30, 2011 we have $5.3 million of restricted cash from our recently acquired Aliquant
business which is restricted for the payment of our clients 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.
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
include 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
68
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 or maturity date, if applicable.
Receivables from Clients Billed receivables from clients are presented at their billed
amount less an allowance for doubtful accounts. Billed receivables include 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 $12.6 million
and $8.0 million as of June 30, 2011 and 2010, respectively. Allowance for unbilled receivables was
$16.7 million and $11.7 million as of June 30, 2011 and 2010, 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 during the implementation stage. 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.
69
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 liability 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. Foreign
currency transactions resulted in gains (losses) of $0.2 million, $1.3 million and ($3.3) million
in fiscal years 2011, 2010 and 2009, respectively. 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, 2011.
Concentration of Credit Risk Financial instruments that potentially subject us to
concentrations of credit risk consist principally of certain cash and cash equivalents, fixed
income securities, 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.
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 fiscal year ended June 30, 2010 by $164.5
million related to the amount of reinsurance cash received from Towers Perrin in the Merger. In
addition, the change in restricted cash from January 1, 2010 to June 30, 2010 is included as an
increase in restricted cash in the cash flows from operating activities of $49.8 million, which is
offset by an increase in reinsurance payables.
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 $274.8 million
and $222.3 million at June 30, 2011 and 2010, respectively.
To the extent our captive insuance companies, PCIC and SMIC,
expect losses to be covered by a third party they record a receivable for the amount expected to be recovered.
This receivable is classified in other current or other noncurrent assets in our consolidated balance sheet.
Stock-based Compensation During fiscal years 2011, 2010 and 2009, we recognized
compensation expense of $79.9 million, $57.9 million and $1.0 million, 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
$37 thousand, $28 thousand and $37 thousand for fiscal years 2011, 2010 and 2009, respectively.
70
Earnings per Share (EPS) We adhere to 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.
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 March 31. 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 March 31, 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
level 3 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 did 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, 2011, we did not record any impairment losses of goodwill or intangibles.
Recent Accounting Pronouncements
Adopted
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 $1.6 million for the year ended June 30, 2010,
which was previously included in (loss)/income from affiliates, was reclassified to net
(loss)/income attributable to non-controlling interests in our results of operations.
Not yet adopted
On December 17, 2010, the Financial Accounting Standards Board (FASB) issued ASU 2010-28,
IntangiblesGoodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test
for Reporting Units with Zero or Negative Carrying Amounts (a consensus of the FASB Emerging Issues
Task Force), which (1) does not prescribe a specific method of calculating the carrying value of a
reporting unit in the performance of step 1 of the goodwill impairment test and (2) requires
entities with a zero or negative carrying value to assess, considering qualitative factors such as
but not limited to those listed in ASC 350-20-35-30 whether it is more likely than not that a
goodwill impairment exists. If an entity concludes that it is more likely than not that an
impairment of goodwill exists, the entity must perform step 2 of the goodwill impairment test.
These provisions are effective for impairment tests performed in our fiscal year 2012. Upon
adoption, if any of our reporting units have a zero or negative carrying value, we must assess, on
the basis of current facts and circumstances, whether it is more likely than not that an impairment
of our goodwill exists. If so, we would
71
perform step 2 of the goodwill impairment test on the day of adoption and record the impairment
charge, if any, as a cumulative-effect adjustment through beginning retained earnings. We are
currently evaluating the impact, if any, on our financial position or results of operations of
adopting this provision.
On June 16, 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation of
Comprehensive Income, which revised the manner in which entities present comprehensive income in
their financial statements. The new guidance removes the presentation options in ASC 220,
Comprehensive Income, and requires entities to report components of comprehensive income in either
(1) a continuous statement of comprehensive income or (2) two separate but consecutive statements.
The ASU does not change the items that must be reported in other comprehensive income. For public
entities, the amendments are effective for fiscal years, and interim periods within those years,
beginning after December 15, 2011 with early adoption permitted. We are still evaluating the
impact of the change in presentation to our consolidated statement of operations and our
consolidated statement of changes in stockholders equity and will adopt the new presentation in
our fiscal 2013 filings.
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
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 13, and
all of which remaining shares were converted to shares of Class A Common Stock on
January 1, 2011); |
|
|
|
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.
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
72
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 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 Wyatts investment in PCIC was $13.7 million. Towers Watsons financial statements as of and
for the fiscal year ended June 30, 2010, included herein, reflect Watson Wyatts 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 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 January 1, 2010, the Mergers 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.
73
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 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 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 Perrins 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 on the acquisition date
was 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 (1) increase non-current deferred tax asset by $10.5 million, (2)
decrease to non-current assets by $0.9 million, (3) decrease fixed assets by $0.5 million, (4)
increase accounts payable, (5) accrued liabilities and (6) 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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
74
The following unaudited pro forma combined statement of operations have been provided to
present illustrative combined unaudited statement of operations for the fiscal year ended June 30,
2010 and 2009, giving effect to the business combination as if it had been completed on July 1,
2009. The pro forma combined statement of operations for the fiscal year ended June 30,
2010 combines Watson Wyatts historical unaudited consolidated statement of operations
for the six months ended December 31, 2009 with Towers Perrins historical unaudited
consolidated statement of operations for the six months ended December 31, 2009 and Towers Watson
unaudited consolidated statement of operations for the six months ended June 30, 2010.
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 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:
|
|
|
|
|
|
|
|
|
|
|
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 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 attributable to non-controlling interests |
|
|
(2,146 |
) |
|
|
4,515 |
|
|
|
|
|
|
|
|
Net income attributable to controlling interests |
|
$ |
186,319 |
|
|
$ |
36,393 |
|
|
|
|
|
|
|
|
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 $13.9 million and the relief from royalty method for
the developed technology intangible of $4.0 million. Significant assumptions used in the valuation
are: revenue growth rate, retention rate, expense and contributory asset charges, royalty rate and
discount rate. As of June 30, 2011, we recorded $49.5 million of goodwill related to the
acquisition of Aliquant.
75
On January 31, 2011, Towers Watson purchased EMB, a large specialist property/casualty consulting
and software company. The EMB business complements our Risk Consulting and Software line of
business in our Risk and Financial Services segment. We paid $69.8 million cash and issued common
stock valued at $11.4 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 $16.9 million in consideration.
The purchase agreement calls for deferred cash payments totaling $27.9 million which are recorded
as compensation expense over the period earned by the former partners subject to continued
employment. During the third and fourth quarters of fiscal 2011, we recorded the tangible assets
received and liabilities assumed and the preliminary fair value of deferred revenue and
intangibles: $13.5 million of customer related intangibles, $12.1 million of developed technology,
$1.6 million of in-process technology and less than $1 million of favorable or unfavorable lease
agreements and tradename intangible. We estimated that a discount of $9.6 million was required to
record the fair value of the deferred maintenance revenue acquired based on the cost of maintenance
plus a modest profit over the remaining contract period. We also recorded $5.4 million of related
deferred income tax amounts. As a result of our preliminary assessment we determined that total
consideration transferred was $101.9 million and preliminary goodwill was $50.3 million.
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
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 June 30, 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011 |
|
|
June 30, 2010 |
|
|
|
Amortized |
|
|
Unrealized |
|
|
Estimated |
|
|
Amortized |
|
|
Unrealized |
|
|
Estimated |
|
|
|
Cost |
|
|
Gains |
|
|
Fair Value |
|
|
Cost |
|
|
Gains |
|
|
Fair Value |
|
Short-term investments: due in
one year or less |
|
$ |
43,227 |
|
|
$ |
430 |
|
|
$ |
43,657 |
|
|
$ |
50,585 |
|
|
$ |
424 |
|
|
$ |
51,009 |
|
Non-current assets: due in
one through five years |
|
|
49,625 |
|
|
|
769 |
|
|
|
50,394 |
|
|
|
60,142 |
|
|
|
1,956 |
|
|
|
62,098 |
|
Proceeds from sales and maturities of investments for fixed income securities during the fiscal
year ended June 30, 2011 were $72.7 million, resulting in a gain of $0.3 million. Proceeds from
sales of investments for fixed income securities during the fiscal year ended June 30, 2010 were
$16.2 million, resulting in a loss of $0.01 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 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 straight-line 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, |
|
|
|
2011 |
|
|
2010 |
|
Furniture, fixtures and equipment |
|
$ |
195,891 |
|
|
$ |
172,899 |
|
Computer software |
|
|
276,384 |
|
|
|
239,153 |
|
Leasehold improvements |
|
|
165,847 |
|
|
|
157,554 |
|
|
|
|
|
|
|
|
|
|
|
638,122 |
|
|
|
569,606 |
|
Less: accumulated depreciation and
amortization |
|
|
(385,779 |
) |
|
|
(342,298 |
) |
|
|
|
|
|
|
|
Fixed assets, net |
|
$ |
252,343 |
|
|
$ |
227,308 |
|
|
|
|
|
|
|
|
Total unamortized computer software costs were $116.1 million and $108.4 million as of June 30,
2011 and 2010, respectively. Total amortization expense for computer software was $34.6 million,
$33.9 million and $31.0 million for fiscal years 2011, 2010 and 2009, respectively. Total
depreciation expense was $44.0 million, $35.8 million and $28.6 million for fiscal years 2011, 2010
and 2009, respectively.
76
Note 5 Goodwill and Intangible Assets
The components of goodwill and intangible assets are outlined below for the fiscal years ended June
30, 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial |
|
|
Talent and |
|
|
|
|
|
|
|
|
|
Benefits |
|
|
Services |
|
|
Rewards |
|
|
All Other |
|
|
Total |
|
Balance as of June 30, 2009 |
|
$ |
394,954 |
|
|
$ |
115,942 |
|
|
$ |
30,644 |
|
|
$ |
1,214 |
|
|
$ |
542,754 |
|
Goodwill acquired and contingent payments |
|
|
820,151 |
|
|
|
365,767 |
|
|
|
79,735 |
|
|
|
|
|
|
|
1,265,653 |
|
Translation adjustment |
|
|
(63,424 |
) |
|
|
(22,336 |
) |
|
|
(5,352 |
) |
|
|
|
|
|
|
(91,112 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2010 |
|
|
1,151,681 |
|
|
|
459,373 |
|
|
|
105,027 |
|
|
|
1,214 |
|
|
|
1,717,295 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill acquired |
|
|
49,769 |
|
|
|
49,150 |
|
|
|
2,191 |
|
|
|
|
|
|
|
101,110 |
|
Translation adjustment |
|
|
86,909 |
|
|
|
30,241 |
|
|
|
8,019 |
|
|
|
|
|
|
|
125,169 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2011 |
|
$ |
1,288,359 |
|
|
$ |
538,764 |
|
|
$ |
115,237 |
|
|
$ |
1,214 |
|
|
$ |
1,943,574 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The $49.8 of goodwill acquired in Benefits primarily relates to the acquisition of Aliquant which
was completed on December 31, 2010 and amounted to $49.5 in goodwill.
The $49.2 of goodwill acquired in Risk and Financial Services is primarily due to the addition $50.3 in
goodwill related to the acquisition of EMB, which was completed on January 31, 2011. The addition
was partially offset by the write-off of $1.1 of goodwill, which resulted from the sale of e-Value
(financial modeling software).
The following table reflects changes in the net carrying amount of the components of intangible
assets for the fiscal years ended June 30, 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer |
|
|
Core/ |
|
|
|
|
|
|
Favorable |
|
|
|
|
|
|
Trademark & |
|
|
related |
|
|
developed |
|
|
Non-compete |
|
|
lease |
|
|
|
|
|
|
trade name |
|
|
intangible |
|
|
technology |
|
|
agreements |
|
|
agreements |
|
|
Total |
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets acquired |
|
|
|
|
|
|
27,396 |
|
|
|
17,806 |
|
|
|
250 |
|
|
|
|
|
|
|
45,452 |
|
Intangible assets written-off |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,376 |
) |
|
|
(1,376 |
) |
Amortization |
|
|
|
|
|
|
(29,081 |
) |
|
|
(22,603 |
) |
|
|
(250 |
) |
|
|
(2,622 |
) |
|
|
(54,556 |
) |
Translation adjustment |
|
|
6,769 |
|
|
|
15,034 |
|
|
|
(162 |
) |
|
|
|
|
|
|
274 |
|
|
|
21,915 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2011 |
|
$ |
373,562 |
|
|
$ |
202,155 |
|
|
$ |
113,767 |
|
|
$ |
|
|
|
$ |
5,438 |
|
|
$ |
694,922 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the fiscal years ended June 30, 2011 and 2010, we recorded $52.0 million and $31.3 million of
amortization related to our intangible assets, respectively. This amount excluded amortization of favorable lease agreements which is recorded as an increase to rent expense.
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 June 30, 2011 and 2010 this liability was
$21.3 million and $26.0 million, respectively. The change for the fiscal year ended June 30, 2011
was comprised of a reduction to rent expense of $4.4 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 2011 as well as the addition of
the intangible assets identified from the acquisition of Aliquant and EMB. Additionally, certain
intangible assets associated with favorable lease agreements were written off during the year as a
result of the combining of office space associated with the Merger. 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.
77
The following table reflects the carrying value of intangible assets and liabilities as of June 30,
2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2011 |
|
|
Fiscal Year 2010 |
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Carrying |
|
|
Accumulated |
|
|
Carrying |
|
|
Accumulated |
|
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
|
Amortization |
|
Intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademark and trade name |
|
$ |
373,964 |
|
|
$ |
402 |
|
|
$ |
367,195 |
|
|
$ |
402 |
|
Customer related intangibles |
|
|
280,547 |
|
|
|
78,392 |
|
|
|
237,072 |
|
|
|
48,266 |
|
Core/developed technology |
|
|
166,110 |
|
|
|
52,343 |
|
|
|
148,664 |
|
|
|
29,938 |
|
Non-compete agreements |
|
|
1,525 |
|
|
|
1,525 |
|
|
|
1,275 |
|
|
|
1,275 |
|
Favorable lease agreements |
|
|
6,808 |
|
|
|
1,370 |
|
|
|
10,657 |
|
|
|
1,495 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets |
|
$ |
828,954 |
|
|
$ |
134,032 |
|
|
$ |
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 June 30,
2011 was 8.1 years.
The following table reflects:
|
1) |
|
future estimated amortization expense for amortizable intangible assets consisting of: |
|
|
|
customer related intangibles |
|
|
|
core/developed technology |
|
2) |
|
the rent offset resulting from the amortization of the net lease intangible assets and
liabilities for future fiscal years as follows: |
|
|
|
|
|
|
|
|
|
Fiscal year ending June 30, |
|
Amortization |
|
|
Rent Offset |
|
2012 |
|
$ |
56,843 |
|
|
$ |
(3,045 |
) |
2013 |
|
|
52,525 |
|
|
|
(2,731 |
) |
2014 |
|
|
45,276 |
|
|
|
(2,407 |
) |
2015 |
|
|
37,714 |
|
|
|
(2,083 |
) |
2016 |
|
|
32,760 |
|
|
|
(1,566 |
) |
Thereafter |
|
|
90,804 |
|
|
|
(4,064 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
315,922 |
|
|
$ |
(15,896 |
) |
|
|
|
|
|
|
|
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 and liabilities 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:
|
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.
78
The following presents our assets and liabilities measured at fair value on a recurring basis
as of June 30, 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements on a Recurring Basis at |
|
|
|
June 30, 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) |
|
$ |
2,043 |
|
|
$ |
31,304 |
|
|
$ |
|
|
|
$ |
33,347 |
|
Corporate bonds (a) |
|
|
|
|
|
|
46,085 |
|
|
|
|
|
|
|
46,085 |
|
Obligations of states, municipalities and political subdivisions (a) |
|
|
|
|
|
|
14,620 |
|
|
|
|
|
|
|
14,620 |
|
Equity securities (b) |
|
|
1,383 |
|
|
|
|
|
|
|
|
|
|
|
1,383 |
|
Mutual funds (c) |
|
|
7,138 |
|
|
|
|
|
|
|
|
|
|
|
7,138 |
|
Derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forwards (d) |
|
|
|
|
|
|
2,665 |
|
|
|
|
|
|
|
2,665 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forwards (d) |
|
$ |
|
|
|
$ |
137 |
|
|
$ |
|
|
|
$ |
137 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
(a) |
|
These assets are included in short-term investments or other assets on the consolidated
balance sheet. See Note 3 for the classification of all fixed income securities as current or
non-current. |
|
(b) |
|
These assets are included in short-term investments or other assets on the consolidated
balance sheet. |
|
(c) |
|
These assets are included in other assets on the consolidated balance sheet. |
|
(d) |
|
These derivative investments are included in other current assets or accounts payable,
accrued liabilities and deferred income on the consolidated balance sheet. See Note 7 for
further information on our derivative investments. |
We recorded a gain of $0.6 million and a loss of $0.1 million, respectively, for the fiscal years
ended June 30, 2011 and 2010, in general and administrative expenses in the consolidated statements
of operations related to the changes in the fair value of our financial instruments for foreign
exchange forward contracts and foreign exchange options accounted for as foreign currency hedges,
which were still held at June 30, 2011 and 2010, respectively. There was no material gain or loss
recorded in the consolidated statements of operations for available-for-sale securities still held
at June 30, 2011 or 2010.
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
79
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 U.S. Treasury securities, equity securities and mutual funds are valued using quoted market
prices as of the end of the trading day. Corporate bonds and certain obligations of government
agencies or states, municipalities and political subdivisions are valued based on yields currently
available on comparable securities of issuers with similar credit ratings. We monitor the value of
the investments for other-than-temporary impairment on a quarterly basis.
The availability of observable market data is monitored to assess the appropriate classification
of financial instruments within the fair value hierarchy. Changes in economic conditions or
model-based valuation techniques may require the transfer of financial instruments from one
fair value level to another. In such instances, the transfer is reported at the beginning of
the reporting period. There were no transfers between Levels 1, 2 or 3 during the year ended
June 30, 2011.
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 enter 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.
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, 2011, 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
80
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 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 June 30, 2011, the longest outstanding maturity was 17
months. As of June 30, 2011, a net $1.9 million pretax gain has been deferred in other
comprehensive income. A pretax gain of $1.4 million is expected to be recognized in general and
administrative expenses during the next twelve months when the hedged revenue is recognized. During
the fiscal years ended June 30, 2011 and 2010, we recognized no material gains or losses due to
hedge ineffectiveness.
As of June 30, 2011 and 2010, we had cash flow hedges with a notional value of $69.3 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 June 30, 2011 and 2010 was an asset/(liability) of $2.5 million and
($3.5) million, respectively. See Note 6, Fair Value Measurements, for further information
regarding the determination of fair value.
The fair value of our derivative instruments held as of June 30, 2011 and 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 |
|
|
|
|
June 30, |
|
|
|
June 30, |
|
|
|
|
2011 |
|
2010 |
|
|
|
2011 |
|
2010 |
Derivatives designated as
hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forwards
|
|
Other current assets
|
|
$ |
2,073 |
|
|
$ |
731 |
|
|
Accounts payable, accrued
liabilities and deferred
income
|
|
$ |
(114 |
) |
|
$ |
(4,100 |
) |
Foreign exchange options
|
|
Other current assets
|
|
|
|
|
|
|
37 |
|
|
Accounts payable, accrued
liabilities and deferred
income
|
|
|
|
|
|
|
(94 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives designated
as hedging instruments
|
|
|
|
|
2,073 |
|
|
|
768 |
|
|
|
|
|
(114 |
) |
|
|
(4,194 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as
hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forwards
|
|
Other current assets
|
|
$ |
592 |
|
|
$ |
|
|
|
Accounts payable, accrued
liabilities and deferred
income
|
|
$ |
(23 |
) |
|
$ |
|
|
Foreign exchange options
|
|
Other current assets
|
|
|
|
|
|
|
|
|
|
Accounts payable, accrued
liabilities and deferred
income
|
|
|
|
|
|
|
(83 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives not designated
as hedging instruments
|
|
|
|
|
592 |
|
|
|
|
|
|
|
|
|
(23 |
) |
|
|
(83 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative assets (liabilities)
|
|
|
|
$ |
2,665 |
|
|
$ |
768 |
|
|
|
|
$ |
(137 |
) |
|
$ |
(4,277 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81
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 years ended June 30, 2011 and 2010 are as follows (there were no such
instruments held during the fiscal year ended June 30, 2009):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 fiscal years ended |
|
recognized in OCI |
|
|
from OCI into income |
|
|
from OCI into income |
|
|
amount excluded from |
|
|
amount excluded from |
|
June 30, 2011 and 2010: |
|
(effective portion) |
|
|
(effective portion) |
|
|
(effective portion) |
|
|
effectiveness testing) |
|
|
effectiveness testing) |
|
|
|
2011 |
|
|
2010 |
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
|
|
|
|
2011 |
|
|
2010 |
|
Foreign exchange forwards |
|
$ |
4,323 |
|
|
$ |
(3,335 |
) |
|
General and
administrative expenses |
|
$ |
(683 |
) |
|
$ |
(266 |
) |
|
General and
administrative expenses |
|
$ |
125 |
|
|
$ |
(65 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange options |
|
|
|
|
|
|
(207 |
) |
|
General and
administrative expenses |
|
|
(207 |
) |
|
|
|
|
|
General and
administrative expenses |
|
|
|
|
|
|
(32 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
4,323 |
|
|
$ |
(3,542 |
) |
|
|
|
|
|
$ |
(890 |
) |
|
$ |
(266 |
) |
|
|
|
|
|
$ |
125 |
|
|
$ |
(97 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2011 and 2010, we had $22.5 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 consolidated statement of operations for the fiscal years
ended June 30, 2011 and 2010 is as follows (there were no such instruments held during the fiscal
year ended June 30, 2009):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) recognized in income |
|
Derivatives not designated |
|
Location of gain (loss) |
|
|
Fiscal year ended June 30, |
|
as hedging instruments: |
|
recognized in income |
|
|
2011 |
|
|
2010 |
|
Foreign exchange forwards |
|
General and administrative expenses |
|
$ |
2,976 |
|
|
$ |
1,869 |
|
Foreign exchange options |
|
General and administrative expenses |
|
|
|
|
|
|
(350 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
2,976 |
|
|
$ |
1,519 |
|
|
|
|
|
|
|
|
|
|
|
|
Note 8 Accounts Payable and Accrued Liabilities, Including Discretionary Compensation
Accounts payable and accrued liabilities consist of:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
Accounts payable and accrued liabilities |
|
$ |
199,456 |
|
|
$ |
138,821 |
|
Accrued payroll and bonuses |
|
|
348,143 |
|
|
|
150,761 |
|
Deferred revenue |
|
|
136,211 |
|
|
|
119,726 |
|
|
|
|
|
|
|
|
Total accounts
payable, accrued
liabilities and
deferred income |
|
$ |
683,810 |
|
|
$ |
409,308 |
|
|
|
|
|
|
|
|
Note 9 Leases
We lease office space under operating lease agreements with terms generally averaging 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 $146.9 million, $107.3 million and $78.4 million
for fiscal years 2011, 2010 and 2009, respectively, inclusive of operating expenses related to such
space. We have entered into sublease agreements for some of our excess leased space. Sublease
income was $2.7 million, $1.3 million and $1.0 million for fiscal years 2011, 2010 and 2009,
respectively.
82
Future minimum lease payments for the operating lease commitments which have not been reduced by
cumulative anticipated cash inflows for sublease income of $5.6 million are:
|
|
|
|
|
Fiscal year ending June 30, |
|
Amortization |
|
2012 |
|
$ |
105,107 |
|
2013 |
|
|
94,624 |
|
2014 |
|
|
85,611 |
|
2015 |
|
|
72,730 |
|
2016 |
|
|
59,640 |
|
Thereafter |
|
|
183,513 |
|
|
|
|
|
Total |
|
$ |
601,225 |
|
|
|
|
|
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
Defined Benefit Plans
Towers Watson sponsors both qualified and non-qualified defined benefit pension plans and other
post-retirement benefit plan or OPEB plans in North America and Europe. As of June 30, 2011,
these funded and unfunded plans represented 98 percent 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 percent 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. Watson Wyatt made changes in 2008 to
the plan in the U.K. related to years of service used in calculating benefits for associates.
Benefits earned prior to January 2008 are based on the number of years of service and the
associates compensation during the three years before leaving the plan and benefits earned after
January 2008 are based on the number of years of service and the associates average compensation
during the associates term of service since that date. The 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 employees 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 employee, where salary includes allowances and bonuses up to a set
maximum salary and is offset by the current social security benefit. The benefit asset and
liability are reflected on the balance sheet. The measurement date for each of the plans is June
30.
The legacy Towers Perrin pension plans in the U.S. 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
employees 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 had historically been December 31 but has
been changed to June 30 as a result of the Merger.
The compensation committee of our board of directors approved an amendment to the terms of the
existing U.S. qualified and non-qualified defined benefit pension plans, postretirement benefit
plans and defined contribution plans which was communicated in September 2010. Effective December
31, 2010, the existing U.S. qualified and non-qualified pension plans were frozen to new
83
participants, and benefit accruals will be frozen under the current benefit formulas effective
December 31, 2011. New pension benefits will accrue beginning on January 1, 2012 under a new stable
value pension design for qualified and non-qualified pension plans maintained for U.S. associates,
including U.S. named executive officers. Retiree medical benefits provided under our U.S.
postretirement benefit plans were frozen to new hires effective January 1, 2011. Life insurance
benefits under the same plans will be frozen with respect to service, eligibility and amounts as of
January 1, 2012 for active associates. As a result of these changes to the U.S. pension and
post-retirement benefit plans, there were remeasurements of the legacy Watson Wyatt U.S. plans and
the legacy Towers Perrin post-retirement benefit plan as of September 30, 2010. The legacy Towers
Perrin pension plan was not required to be remeasured due to the plan design.
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 2012, as well as
the pension contributions to our various plans in fiscal years 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012 |
|
|
2011 |
|
|
2010 |
|
|
|
(Projected) |
|
|
(Actual) |
|
|
(Actual) |
|
U.S |
|
$ |
|
|
|
$ |
30,000 |
|
|
$ |
30,000 |
|
Canada |
|
|
15,202 |
|
|
|
6,346 |
|
|
|
4,388 |
|
Europe |
|
|
17,986 |
|
|
|
19,216 |
|
|
|
21,020 |
|
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 years ended June 30, 2010 and 2011. The assumptions
as of and for the year ended June 30, 2009 represent only the legacy Watson Wyatt plans.
The assumptions used to determine net periodic benefit cost for the fiscals years ended June 30,
2011, 2010 and 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
|
North |
|
|
|
|
|
|
North |
|
|
|
|
|
|
North |
|
|
|
|
|
|
America |
|
|
Europe |
|
|
America |
|
|
Europe |
|
|
America |
|
|
Europe |
|
Discount rate |
|
|
5.80 |
% |
|
|
5.25 |
% |
|
|
6.43 |
% |
|
|
6.03 |
% |
|
|
6.91 |
% |
|
|
6.47 |
% |
Expected long-term rate of return on assets |
|
|
8.16 |
% |
|
|
6.79 |
% |
|
|
8.11 |
% |
|
|
6.48 |
% |
|
|
8.61 |
% |
|
|
6.53 |
% |
Rate of increase in compensation levels |
|
|
3.88 |
% |
|
|
3.88 |
% |
|
|
3.93 |
% |
|
|
5.09 |
% |
|
|
4.08 |
% |
|
|
5.36 |
% |
84
The following table presents the assumptions used in the valuation to determine the projected
benefit obligation for the fiscal years ended June 30, 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011 |
|
|
June 30, 2010 |
|
|
|
North |
|
|
|
|
|
|
North |
|
|
|
|
|
|
America |
|
|
Europe |
|
|
America |
|
|
Europe |
|
Discount rate |
|
|
5.79 |
% |
|
|
5.62 |
% |
|
|
5.86 |
% |
|
|
5.25 |
% |
Rate of increase in
compensation levels |
|
|
3.82 |
% |
|
|
3.93 |
% |
|
|
3.88 |
% |
|
|
3.88 |
% |
For the 2011 fiscal year, the discount rate used to determine net periodic benefit cost was
initially based on the rates in the table shown above for the determination of the projected
benefit obligation as of June 30, 2010, which included a 5.86% rate for North America. As a result
of plan changes adopted during the first quarter of fiscal year 2011, the legacy Watson Wyatt U.S.
Pension Plans were remeasured as of September 30, 2010. Upon remeasurement the discount rate assumption was changed
for these plans and the net periodic benefit cost for the 2011 fiscal year was calculated using a
weighted average discount rate of 5.79% for North America.
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, 2011, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
|
North |
|
|
|
|
|
|
North |
|
|
|
|
|
|
North |
|
|
|
|
|
|
America |
|
|
Europe |
|
|
America |
|
|
Europe |
|
|
America |
|
|
Europe |
|
Service cost |
|
$ |
58,050 |
|
|
$ |
12,218 |
|
|
$ |
38,068 |
|
|
$ |
9,844 |
|
|
$ |
24,771 |
|
|
$ |
7,538 |
|
Interest cost |
|
|
139,840 |
|
|
|
39,000 |
|
|
|
95,845 |
|
|
|
30,631 |
|
|
|
48,504 |
|
|
|
22,759 |
|
Expected return on plan assets |
|
|
(158,708 |
) |
|
|
(40,420 |
) |
|
|
(93,257 |
) |
|
|
(27,078 |
) |
|
|
(50,725 |
) |
|
|
(20,945 |
) |
Amortization of net loss/(gain) |
|
|
23,997 |
|
|
|
5,574 |
|
|
|
15,275 |
|
|
|
2,615 |
|
|
|
8,649 |
|
|
|
(328 |
) |
Amortization of prior service
(credit)/cost |
|
|
(6,632 |
) |
|
|
41 |
|
|
|
(1,623 |
) |
|
|
41 |
|
|
|
(2,279 |
) |
|
|
42 |
|
Settlement/(curtailment) and
other adjustments |
|
|
5,038 |
|
|
|
(2,279 |
) |
|
|
2,293 |
|
|
|
924 |
|
|
|
|
|
|
|
120 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
61,585 |
|
|
$ |
14,134 |
|
|
$ |
56,601 |
|
|
$ |
16,977 |
|
|
$ |
28,920 |
|
|
$ |
9,186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in plan assets and benefit obligations were recognized during fiscal 2011 and 2010 and have
been included as changes to other comprehensive income for the Companys defined benefit pension
plans as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
|
North |
|
|
|
|
|
|
North |
|
|
|
|
|
|
America |
|
|
Europe |
|
|
America |
|
|
Europe |
|
Current year actuarial (gain)/loss |
|
$ |
(172,078 |
) |
|
$ |
(107,560 |
) |
|
$ |
220,113 |
|
|
$ |
37,501 |
|
Amortization of actuarial loss |
|
|
(23,997 |
) |
|
|
(5,574 |
) |
|
|
(15,275 |
) |
|
|
(2,615 |
) |
Current year prior service credit |
|
|
(73,926 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service credit/(cost) |
|
|
6,632 |
|
|
|
(41 |
) |
|
|
1,623 |
|
|
|
(41 |
) |
(Settlement)/curtailment |
|
|
(4,170 |
) |
|
|
2,323 |
|
|
|
(2,293 |
) |
|
|
(64 |
) |
Other |
|
|
5,378 |
|
|
|
4,058 |
|
|
|
1,320 |
|
|
|
(4,638 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recognized in other comprehensive income |
|
$ |
(262,161 |
) |
|
$ |
(106,794 |
) |
|
$ |
205,488 |
|
|
$ |
30,143 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The actuarial gains were primarily the result of favorable asset performance globally, together with liability gains resulting from the use of higher discount rates in Germany and the UK. The prior service credits resulted from changes to the U.S. plan provisions which will become effective on January 1, 2012.
The estimated amounts that will be amortized from other comprehensive income into net periodic
benefit cost during fiscal 2012 for the Companys defined benefit pension plans are shown below:
|
|
|
|
|
|
|
|
|
|
|
2012 |
|
|
|
North |
|
|
|
|
|
|
America |
|
|
Europe |
|
Actuarial loss/(gain) |
|
$ |
20,094 |
|
|
$ |
(2,445 |
) |
Prior service (credit)/cost |
|
|
(8,336 |
) |
|
|
42 |
|
|
|
|
|
|
|
|
Total |
|
$ |
11,758 |
|
|
$ |
(2,403 |
) |
|
|
|
|
|
|
|
85
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, 2011 and 2010, and a
statement of funded status as of June 30, 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
|
North |
|
|
|
|
|
|
North |
|
|
|
|
|
|
America |
|
|
Europe |
|
|
America |
|
|
Europe |
|
Change in Benefit Obligation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year |
|
$ |
1,974,882 |
|
|
$ |
617,365 |
|
|
$ |
593,725 |
|
|
$ |
355,701 |
|
Service cost |
|
|
46,955 |
|
|
|
8,239 |
|
|
|
30,420 |
|
|
|
7,656 |
|
Interest cost |
|
|
112,391 |
|
|
|
34,236 |
|
|
|
77,536 |
|
|
|
27,501 |
|
Actuarial losses/(gains) |
|
|
32,756 |
|
|
|
(68,732 |
) |
|
|
195,603 |
|
|
|
61,309 |
|
Benefit payments |
|
|
(83,171 |
) |
|
|
(15,332 |
) |
|
|
(65,263 |
) |
|
|
(19,760 |
) |
Participant contributions |
|
|
|
|
|
|
1,740 |
|
|
|
|
|
|
|
|
|
Acquisition/business combination/divestiture |
|
|
|
|
|
|
|
|
|
|
1,139,366 |
|
|
|
239,603 |
|
Plan amendments and other |
|
|
(55,930 |
) |
|
|
44 |
|
|
|
|
|
|
|
2,513 |
|
Curtailments |
|
|
|
|
|
|
(4,889 |
) |
|
|
|
|
|
|
|
|
Foreign currency adjustment |
|
|
24,120 |
|
|
|
49,693 |
|
|
|
3,495 |
|
|
|
(57,158 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year |
|
$ |
2,052,003 |
|
|
$ |
622,364 |
|
|
$ |
1,974,882 |
|
|
$ |
617,365 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Plan Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets, beginning of year |
|
$ |
1,832,004 |
|
|
$ |
562,542 |
|
|
$ |
517,322 |
|
|
$ |
315,769 |
|
Actual return on plan assets |
|
|
369,875 |
|
|
|
64,026 |
|
|
|
103,850 |
|
|
|
55,514 |
|
Company contributions |
|
|
36,346 |
|
|
|
19,216 |
|
|
|
34,388 |
|
|
|
21,020 |
|
Benefit payments |
|
|
(83,171 |
) |
|
|
(15,332 |
) |
|
|
(65,263 |
) |
|
|
(19,760 |
) |
Participant contributions |
|
|
|
|
|
|
1,740 |
|
|
|
|
|
|
|
1,820 |
|
Acquisition/business combination/divestiture |
|
|
|
|
|
|
|
|
|
|
1,239,101 |
|
|
|
241,953 |
|
Other |
|
|
|
|
|
|
(116 |
) |
|
|
|
|
|
|
(166 |
) |
Foreign currency adjustment |
|
|
19,825 |
|
|
|
47,083 |
|
|
|
2,606 |
|
|
|
(53,609 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets, end of year |
|
$ |
2,174,879 |
|
|
$ |
679,159 |
|
|
$ |
1,832,004 |
|
|
$ |
562,541 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status at end of year |
|
$ |
122,876 |
|
|
$ |
56,795 |
|
|
$ |
(142,878 |
) |
|
$ |
(54,824 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Benefit Obligation |
|
$ |
2,013,171 |
|
|
$ |
602,193 |
|
|
$ |
1,897,011 |
|
|
$ |
601,461 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
|
North |
|
|
|
|
|
|
North |
|
|
|
|
|
|
America |
|
|
Europe |
|
|
America |
|
|
Europe |
|
Amounts recognized in Consolidated Balance
Sheets consist of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent assets |
|
$ |
179,546 |
|
|
$ |
56,795 |
|
|
$ |
45,949 |
|
|
$ |
2,568 |
|
Noncurrent liabilities |
|
|
(56,670 |
) |
|
|
|
|
|
|
(188,827 |
) |
|
|
(57,392 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized |
|
$ |
122,876 |
|
|
$ |
56,795 |
|
|
$ |
(142,878 |
) |
|
$ |
(54,824 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in Accumulated Other
Comprehensive Income consist of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss/(gain) |
|
$ |
136,080 |
|
|
$ |
(30,437 |
) |
|
$ |
329,076 |
|
|
$ |
65,553 |
|
Net prior service (credit)/cost |
|
|
(61,210 |
) |
|
|
573 |
|
|
|
(9,628 |
) |
|
|
572 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Income |
|
$ |
74,870 |
|
|
$ |
(29,864 |
) |
|
$ |
319,448 |
|
|
$ |
66,125 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86
The following table presents the projected benefit obligation and fair value of plan assets for our
qualified plans that have a projected benefit obligation in excess of plan assets as of June 30,
2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
|
North |
|
|
|
|
|
|
North |
|
|
|
|
|
|
America |
|
|
Europe |
|
|
America |
|
|
Europe |
|
Projected benefit obligation at end of year |
|
$ |
972,481 |
|
|
$ |
|
|
|
$ |
932,277 |
|
|
$ |
594,687 |
|
Fair value of plan assets, end of year |
|
$ |
915,811 |
|
|
$ |
|
|
|
$ |
743,450 |
|
|
$ |
537,296 |
|
As of June 30, 2011, our European plan assets
exceeded our plans projected benefit obligation.
The following table presents the projected benefit obligation, accumulated benefit obligation and
fair value of plan assets for our qualified plans that have an accumulated benefit obligation in
excess of plan assets as of June 30, 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
|
North |
|
|
|
|
|
|
North |
|
|
|
|
|
|
America |
|
|
Europe |
|
|
America |
|
|
Europe |
|
Projected benefit obligation at end of year |
|
$ |
277,907 |
|
|
$ |
|
|
|
$ |
932,277 |
|
|
$ |
575,196 |
|
Accumulated benefit obligation at end of year |
|
$ |
243,221 |
|
|
$ |
|
|
|
$ |
854,406 |
|
|
$ |
564,959 |
|
Fair value of plan assets at end of year |
|
$ |
223,457 |
|
|
$ |
|
|
|
$ |
743,450 |
|
|
$ |
519,880 |
|
As of June 30, 2011 our European plan assets, exceeded our
plans projected benefit obligation as well as the accumulated benefit obligation.
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, 2011 and 2010, and a
statement of funded status as of June 30, 2011 and 2010. The non-qualified plans reflect only the
U.S., Canadian and German plans and are unfunded.
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
Change in Benefit Obligation |
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year |
|
$ |
627,474 |
|
|
$ |
126,922 |
|
Service cost |
|
|
15,075 |
|
|
|
9,836 |
|
Interest cost |
|
|
32,213 |
|
|
|
21,439 |
|
Actuarial (gains)/losses |
|
|
(4,117 |
) |
|
|
39,032 |
|
Benefit payments |
|
|
(78,242 |
) |
|
|
(37,003 |
) |
Acquisition/business combination/divestiture |
|
|
|
|
|
|
480,337 |
|
Plan amendments and other |
|
|
(17,127 |
) |
|
|
698 |
|
Foreign currency adjustment |
|
|
26,328 |
|
|
|
(13,787 |
) |
|
|
|
|
|
|
|
Benefit obligation at end of year |
|
$ |
601,604 |
|
|
$ |
627,474 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Plan Assets |
|
|
|
|
|
|
|
|
Fair value of plan assets, beginning of year |
|
$ |
|
|
|
$ |
|
|
Actual return on plan assets |
|
|
|
|
|
|
|
|
Company contributions |
|
|
78,242 |
|
|
|
37,003 |
|
Benefit payments |
|
|
(78,242 |
) |
|
|
(37,003 |
) |
Participant contributions |
|
|
|
|
|
|
|
|
Foreign currency adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status at end of year |
|
$ |
(601,604 |
) |
|
$ |
(627,474 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in Consolidated Balance Sheets consist of: |
|
|
|
|
|
|
|
|
Noncurrent assets |
|
$ |
|
|
|
$ |
|
|
Current liabilities |
|
|
(91,499 |
) |
|
|
(81,743 |
) |
Noncurrent liabilities |
|
|
(510,105 |
) |
|
|
(545,731 |
) |
|
|
|
|
|
|
|
Net amount recognized |
|
$ |
(601,604 |
) |
|
$ |
(627,474 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in Accumulated Other Comprehensive Income consist of: |
|
|
|
|
|
|
|
|
Net actuarial loss |
|
$ |
26,826 |
|
|
$ |
39,517 |
|
Net prior service credit |
|
|
(16,600 |
) |
|
|
(903 |
) |
|
|
|
|
|
|
|
Accumulated Other Comprehensive Income |
|
$ |
10,226 |
|
|
$ |
38,614 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Information for plans with obligations in excess of plan assets: |
|
|
|
|
|
|
|
|
Projected Benefit Obligation |
|
$ |
601,604 |
|
|
$ |
627,474 |
|
Accumulated Benefit Obligation |
|
|
590,644 |
|
|
|
606,529 |
|
Fair value of plan assets |
|
|
|
|
|
|
|
|
87
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, 2011 is 55%
in the U.S. plan, 65% in the Canadian plan, 30% in the Netherlands plan, and 46% in the U.K. plan.
For the legacy Towers Perrin funded plans, the targeted equity allocation as of June 30, 2011 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, 2011 and 2010 are as follows (see Note 6 for a
description of the fair value levels):
88