HEW Hewitt Associates

Hewitt Associates, Inc. (NYSE:HEW), a global human resources services company, today reported results for its fiscal 2007 third quarter ended June 30, 2007. Reported net revenues (revenues before reimbursements) increased 4% in the third quarter, to $728.0 million, from $698.2 million in the prior-year quarter. Consulting revenues increased 10%, Human Resources Business Process Outsourcing (HR BPO) revenues increased 7%, and Benefits Outsourcing revenues were essentially flat. Operating income for the third quarter was $72.4 million, compared with an operating loss of $207.6 million in the prior-year quarter. The improvement reflects a $13 million pretax benefit related to the timing impact of the Company�s bonus accruals and a $9 million pretax severance charge in the current quarter, as well as $249 million of pretax HR BPO-related charges in the prior-year quarter. Adjusting for these items in the appropriate periods, operating income for the current quarter was $81.5 million, compared with $54.4 million in the prior-year quarter. Net income for the third quarter was $47.5 million, or $0.43 per diluted share, compared with a net loss of $202.2 million, or $1.88 diluted loss per share in the prior-year quarter. As of August 6, under its $750 million share repurchase authorization, the Company had repurchased approximately 5.9 million of its outstanding common shares, for a total of approximately $177 million. Also under the existing authorization, the Company today announced its intention to purchase up to 15,625,000 shares, or approximately 14% of its outstanding Class A common stock, through a modified �Dutch Auction� tender offer. Third Quarter Highlights �We saw good progress in each of our businesses again this quarter,� said Russ Fradin, chairman and chief executive officer. �Our Consulting business continues to post solid top-line growth, our Benefits Outsourcing business is showing nice underlying margin gains, and we are beginning to realize the benefits of our stabilization and improvement efforts in the HR BPO business.� �We are now focused on entering 2008 with strong momentum against our key objectives, making sure we perform for clients, deliver for our shareholders, and reward associates who help us do both. We�ve clearly made a lot of progress addressing our cost structure. We recently announced our plans to significantly reduce our real estate costs, and you should expect to hear more from us about other similar opportunities to improve productivity as we go forward. In addition, today�s announcement that the board has authorized a more aggressive share repurchase program demonstrates our continued flexibility to return cash to our shareholders, even as we improve our earnings and invest in future growth.� Operating Performance The current quarter�s revenue of $728.0 million was impacted by the favorable effects of foreign currency translation of $11 million, and a $7 million decline in marginally profitable third-party supplier revenues. Acquisitions contributed $3 million of revenue in the quarter. After adjusting for these items, net revenues increased 3%. Net income for the third quarter was $47.5 million, compared with a net loss of $202.2 million in the prior-year quarter. Third quarter results include $13 million of lower compensation expense driven by the timing impact of the Company�s bonus accrual methodology, and a $9 million pretax severance charge resulting from ongoing productivity initiatives, primarily in the HR BPO business and overhead functions. The prior-year quarter included $249 million of non-cash pretax charges related to the HR BPO business. Business Segment Results In the second quarter of fiscal 2007, the Company modified how certain costs are allocated, impacting the reported operating income of each segment, as well as reducing the overall level of unallocated shared service costs. Prior-year segment results have been presented on an adjusted basis to assist in the comparison of current-period results. Benefits Outsourcing Benefits Outsourcing segment revenues of $358.7 million in the third quarter were essentially flat, compared with $360.4 million in the prior-year quarter. Adjusting for the favorable effects of foreign currency translation of approximately $2 million, Benefits Outsourcing revenues declined 1%. An increase in project work was more than offset by the impact of lost clients and longer implementation cycles required for some of the Company�s large, complex clients. Benefits Outsourcing segment income increased 25% in the third quarter, to $95.5 million, compared with $76.2 million in the prior-year quarter. Benefits Outsourcing segment margin was 26.6%, compared with 21.1% in the prior-year quarter. The increased margin was primarily due to increased efficiencies driven by global sourcing and other cost management efforts. As of June 30, 2007, the Company was live with 18.3 million end-user benefits participants, compared with 18.7 million as of June 30, 2006. Human Resources Business Process Outsourcing HR BPO segment revenues increased 7% in the third quarter, to $138.5 million, from $128.8 million in the prior-year quarter. Adjusting for the decline in third-party supplier revenues of $7 million, and the favorable effects of foreign currency translation of approximately $2 million, HR BPO revenues increased 14%. The increase was driven primarily by the growth of existing clients, including an increase in project work, as well as by contracts that went live within the twelve-month period. The HR BPO segment loss was $37.8 million in the third quarter, compared with a loss of $293.5 million in the prior-year third quarter. The reduced loss was primarily due to $249 million of non-cash pretax charges recorded in the prior-year quarter, comprised of $172 million of goodwill impairment, $70 million of contract loss provisions, and $7 million of intangible asset impairment. Excluding these charges, the segment loss improved primarily due to the stabilization of the existing client base, as well as overall cost management efforts. The improvement was offset in part by a $6 million pretax severance charge, as well as increased intangible asset amortization. As of June 30, 2007, the Company was live with approximately 762,000 client employees with HR BPO services, compared with 742,000 as of June 30, 2006. Consulting Consulting segment revenues increased 10% in the third quarter, to $240.9 million, from $218.8 million in the prior-year quarter. Adjusting for the favorable effects of foreign currency translation of approximately $7 million, and the effects of acquisitions of approximately $3 million, Consulting revenues increased 5% over the prior-year quarter. Growth was primarily due to strength in retirement and financial management consulting, as well as talent and organization consulting. Consulting segment income increased 35% in the third quarter, to $40.9 million, compared with $30.2 million in the prior-year quarter. Consulting segment margin was 17.0%, compared with 13.8% in the prior-year quarter. The increase was primarily driven by revenue growth, as well as $8 million of lower compensation expense due to the timing impact of the Company�s bonus accrual methodology. Unallocated Shared Service Costs Reported unallocated shared service costs were $26.1 million, 3.6% of net revenues, in the third quarter, compared with $18.7 million, 2.7% of net revenues, in the prior-year quarter. The increase in expenses relative to revenues was primarily a result of higher professional services fees related to ongoing strategic initiatives. Year-to-Date Results Net revenues for the nine-month period ended June 30, 2007 increased 5% on both a reported and direct organic constant currency basis. Reported net revenues were $2.17 billion, compared with $2.08 billion in the prior-year nine-month period. The period was impacted by a $40 million decline in third-party supplier revenues, and the favorable effects of foreign currency translation of $36 million. Acquisitions contributed $7 million of revenue. Total Company operating income for the nine-month period increased to $137.7 million, compared with an operating loss of $106.5 million in the prior-year nine-month period. Current-period results include approximately $25 million of pretax charges recorded primarily in the second quarter related to the anticipated restructuring of an HR BPO contract, the resolution of a legal dispute, and asset impairments, $24 million of pretax severance charges primarily recorded in the first and third quarters resulting from ongoing productivity initiatives across the Company, approximately $7 million of higher compensation expense due to the timing impact of the Company�s bonus accrual methodology, and increased intangible asset amortization. The prior-year period included $266 million of non-cash pretax charges related to the HR BPO business, as well as a $7 million pretax charge related to selected staffing reductions. Net income for the nine-month period was $90.6 million, or $0.82 per diluted share, compared with a net loss of $138.9 million, or $1.30 diluted loss per share in the prior-year nine-month period. Cash Flow and Investments Reported cash flow from operations was $258.0 million in the nine-month period, compared with $288.9 million in the prior-year nine-month period. Free cash flow, defined as cash flow from operations less investments (capital expenditures and capitalized software costs), was $195.1 million, compared with $210.9 million in the prior-year nine-month period. The decrease in free cash flow was driven primarily by lower tax refunds and higher tax prepayments, as well as higher performance-based compensation paid in the current period for fiscal 2006 performance as compared to the prior-year payment for fiscal 2005 performance. The decrease was offset by lower net deferrals and capital expenditures. Share Repurchase During the third quarter, the Company repurchased approximately 2.9 million of its outstanding common shares at an average price of $30.29 per share, for a total of approximately $88 million. Since July 1, 2007, the Company has repurchased an additional 1.6 million shares at an average price of $30.59 per share, for a total of approximately $50 million, bringing total activity under the $750 million authorization to $177 million. Separately, under the existing authorization, the Company also announced today its intention to purchase up to 15,625,000 shares, or approximately 14% of its outstanding Class A common stock, through a modified �Dutch Auction� tender offer. The stated purchase price for the tender offer is between $28.75 and $32.00 per share. The offer is set to commence tomorrow, August 8, 2007, and expire at 12:00 midnight EDT on September 5, 2007. Conference Call At 7:30 a.m. (CT) today, management will host a conference call with investors to discuss third quarter results. The live presentation is accessible through the Investor Relations section of Hewitt�s Web site at www.hewitt.com. The Webcast will be archived on the site for approximately one month. About Hewitt Associates With more than 65 years of experience, Hewitt Associates (NYSE:HEW) is the world's foremost provider of human resources outsourcing and consulting services. The company consults with more than 2,300 companies and administers human resources, health care, payroll and retirement programs on behalf of more than 340 companies to millions of employees and retirees worldwide. Located in 35 countries, Hewitt employs approximately 24,000 associates. For more information, please visit www.hewitt.com. Forward-Looking Information This presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are based upon the current beliefs and expectations of Hewitt's management and are subject to significant risks and uncertainties. Actual results may differ from those set forth in the forward-looking statements. Factors that could cause actual results to differ materially from those expressed or implied include general economic conditions and the factors discussed under the �Risk Factors� heading in the Business section of the Company�s most recent annual report on Form 10-K filed with the Securities and Exchange Commission ("SEC") and available at the SEC's internet site (http://www.sec.gov). Hewitt disclaims any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or any other reason. HEWITT ASSOCIATES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (Dollars in thousands except for share and per share amounts) � Three Months Ended June 30, Nine Months Ended June 30, � 2007 � 2006 % Change � 2007 � 2006 % Change Revenues: Revenues before reimbursements (net revenues) $ 727,982 $ 698,174 4.3% $ 2,170,816 $ 2,075,375 4.6% Reimbursements � 14,330 � 16,271 (11.9)% � 51,354 � 54,181 (5.2)% Total revenues � 742,312 � 714,445 3.9% � 2,222,170 � 2,129,556 4.3% � Operating expenses: Compensation and related expenses 455,069 480,645 (5.3)% 1,424,555 1,337,727 6.5% Goodwill and asset impairment 2,996 236,692 (98.7)% 6,612 257,229 (97.4)% Reimbursable expenses 14,330 16,271 (11.9)% 51,354 54,181 (5.2)% Other operating expenses 149,022 150,187 (0.8)% 454,951 476,293 (4.5)% Selling, general and administrative expenses � 48,521 � 38,274 26.8% � 147,020 � 110,624 32.9% Total operating expenses � 669,938 � 922,069 (27.3)% � 2,084,492 � 2,236,054 (6.8)% � Operating income (loss) 72,374 (207,624) n/m 137,678 (106,498) n/m � Other income (expense), net � 2,586 � 200 n/m � 8,431 � 3,359 n/m � Income (loss) before income taxes 74,960 (207,424) n/m 146,109 (103,139) n/m � Provision (benefit) for income taxes � 27,455 � (5,177) n/m � 55,553 � 35,794 55.2% � Net income (loss) $ 47,505 $ (202,247) n/m $ 90,556 $ (138,933) n/m � Earnings (loss) per share: Basic $ 0.44 ($1.88) $ 0.83 ($1.30) Diluted (1) $ 0.43 ($1.88) $ 0.82 ($1.30) � Weighted average shares: Basic 107,331,262 107,550,367 108,519,023 107,236,878 Diluted (1) 112,496,542 107,550,367 111,059,224 107,236,878 � (1) For the three- and nine-month periods ended June 30, 2007 and 2006, the Company had debt securities convertible into 1,870,748 shares of Class A common stock. For the three-month period ended June 30, 2007, the securities were dilutive, and the shares and $587 of interest expense, net of taxes, were included in the diluted earnings per share calculation. For the nine-month period ended June 30, 2007, and the three- and nine-month periods ended June 30, 2006, the securities were anti-dilutive, and therefore were not included in the diluted earnings per share calculation. HEWITT ASSOCIATES, INC. BUSINESS SEGMENT RESULTS (Unaudited) (Dollars in thousands) � Business Segments Three Months Ended June 30, Nine Months Ended June 30, � 2007 � 2006 (1) % Change � 2007 � 2006 (1) % Change Benefits Outsourcing Segment revenues before reimbursements $ 358,678 $ 360,438 (0.5)% $ 1,106,062 $ 1,092,390 1.3% Segment income 95,461 76,208 25.3% 244,450 237,226 3.0% Segment income as a percentage of segment revenues 26.6% 21.1% 22.1% 21.7% � HR BPO Segment revenues before reimbursements (2) $ 138,474 $ 128,829 7.5% $ 403,103 $ 386,294 4.4% Segment loss (37,820) (293,509) 87.1% (141,710) (379,369) 62.6% Segment loss as a percentage of segment revenues (27.3)% (227.8)% (35.2)% (98.2)% � Consulting Segment revenues before reimbursements $ 240,875 $ 218,777 10.1% $ 690,133 $ 622,528 10.9% Segment income 40,882 30,247 35.2% 102,025 108,560 (6.0)% Segment income as a percentage of segment revenues 17.0% 13.8% 14.8% 17.4% � Total Company Segment revenues before reimbursements (2) $ 738,027 $ 708,044 4.2% $ 2,199,298 $ 2,101,212 4.7% Intersegment revenues � (10,045) � (9,870) 1.8% � (28,482) � (25,837) 10.2% Revenues before reimbursements (net revenues) 727,982 698,174 4.3% 2,170,816 2,075,375 4.6% Reimbursements � 14,330 � 16,271 (11.9)% � 51,354 � 54,181 (5.2)% Total revenues $ 742,312 $ 714,445 3.9% $ 2,222,170 $ 2,129,556 4.3% � Segment income (loss) $ 98,523 $ (187,054) n/m $ 204,765 $ (33,583) n/m � Charges not recorded at the segment level: Initial public offering restricted stock awards - 1,822 (100.0)% - 8,905 (100.0)% Unallocated shared services costs � 26,149 � 18,748 39.5% � 67,087 � 64,010 4.8% Operating income (loss) $ 72,374 $ (207,624) n/m $ 137,678 $ (106,498) n/m � (1) Prior year results have been reclassified to conform with the current year presentation. See www.hewitt.com for additional information. (2) HR BPO net revenues include $14,275 and $21,279 of third-party supplier revenues for the three months ended June 30, 2007 and 2006, respectively, and $51,857 and $90,704 for the nine months ended June 30, 2007 and 2006, respectively. The third-party supplier arrangements are generally marginally profitable. The related third-party supplier expenses are included in other operating expenses. HEWITT ASSOCIATES, INC. CONSOLIDATED BALANCE SHEETS (In thousands except for share and per share amounts) � June 30, September 30, � 2007 � 2006 (Unaudited) ASSETS � Current Assets Cash and cash equivalents $ 246,950 $ 138,928 Short-term investments 291,376 310,527 Client receivables and unbilled work in process, less allowances of $20,680 and $25,333 at June 30, 2007 and September 30, 2006, respectively 605,136 622,270 Prepaid expenses and other current assets 96,901 72,986 Funds held for clients 119,254 83,026 Deferred income taxes, net � 27,989 � 17,096 Total current assets � 1,387,606 � 1,244,833 � Non-Current Assets Deferred contract costs 352,655 289,654 Property and equipment, net 376,218 411,205 Other intangible assets, net 223,114 242,108 Goodwill 576,002 544,922 Other non-current assets, net � 29,931 � 34,956 Total non-current assets � 1,557,920 � 1,522,845 � Total Assets $ 2,945,526 $ 2,767,678 � � LIABILITIES � Current Liabilities Accounts payable $ 22,437 $ 31,256 Accrued expenses 187,250 194,736 Funds held for clients 119,254 83,026 Advanced billings to clients 175,987 176,563 Accrued compensation and benefits 284,981 263,143 Short-term debt 29,535 32,246 Current portion of long-term debt and capital lease obligations � 39,234 � 34,742 Total current liabilities � 858,678 � 815,712 � Non-Current Liabilities Deferred contract revenues 244,530 193,638 Debt and capital lease obligations, less current portion 234,654 254,852 Other non-current liabilities 142,207 148,794 Deferred income taxes, net � 134,028 � 98,313 Total non-current liabilities � 755,419 � 695,597 � Total Liabilities $ 1,614,097 $ 1,511,309 HEWITT ASSOCIATES, INC. CONSOLIDATED BALANCE SHEETS (continued) (In thousands except for share and per share amounts) � June 30, September 30, � 2007 � 2006 (Unaudited) STOCKHOLDERS� EQUITY � Stockholders� Equity Class A common stock, par value $0.01 per share, 750,000,000 shares authorized, 126,317,979 and 124,932,189 shares issued, 107,973,448 and 110,822,409 shares outstanding, as of June 30, 2007 and September 30, 2006, respectively � $ � 1,263 � � $ � � 1,249 Additional paid-in capital 1,437,841 1,368,189 Cost of common stock in treasury, 18,344,531 and 14,109,780 shares of Class A common stock as of June 30, 2007 and September 30, 2006, respectively � (528,320) � (401,365) Retained earnings 303,780 213,224 Accumulated other comprehensive income, net � 116,865 � 75,072 Total stockholders� equity � 1,331,429 � 1,256,369 � Total Liabilities and Stockholders� Equity $ 2,945,526 $ 2,767,678 HEWITT ASSOCIATES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Amounts in thousands) � Nine Months Ended June 30, � 2007 � 2006 Cash flows from operating activities: Net income (loss) $ 90,556 $ (138,933) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization, including amortization of deferred contract revenues and costs 137,101 123,007 Goodwill and asset impairment 6,612 257,229 Stock-based compensation 31,439 49,797 Deferred income taxes 11,933 (14,771) Gain on contribution of business - (7,127) Changes in operating assets and liabilities, net of effect of acquisitions and dispositions: Client receivables and unbilled work in process 34,285 25,566 Prepaid expenses and other current assets (18,864) 30,425 Deferred contract costs (106,222) (128,002) Other assets 866 (2,039) Accounts payable (9,532) (28,890) Accrued compensation and benefits 17,077 37,519 Accrued expenses (3,597) (7,499) Advanced billings to clients (1,263) 28,899 Deferred contract revenues 76,773 64,771 Other long-term liabilities � (9,176) � (1,066) Net cash provided by operating activities 257,988 288,886 � Cash flows from investing activities: Purchases of short-term investments (170,044) (284,365) Proceeds from sales of short-term investments 189,207 80,404 Additions to property and equipment and intangible assets (62,844) (77,939) Cash paid for acquisitions, net of cash received � (2,194) � (1,400) Net cash used in investing activities (45,875) (283,300) � Cash flows from financing activities: Proceeds from the exercise of stock options 36,475 13,992 Short-term borrowings 76,970 98,444 Repayments of short-term borrowings, capital leases and long-term debt (97,927) (117,062) Purchase of Class A common shares for treasury � (126,955) � (8,516) Net cash used in financing activities (111,437) (13,142) � Effect of exchange rate changes on cash and cash equivalents � 7,346 � 2,888 Net increase (decrease) in cash and cash equivalents 108,022 (4,668) � Cash and cash equivalents, beginning of period � 138,928 � 157,928 Cash and cash equivalents, end of period $ 246,950 $ 153,260 � Supplementary disclosure of cash paid during the period: Interest paid $ 16,923 $ 16,929 Income taxes paid $ 69,057 $ 24,289