Hewitt Associates, Inc. (NYSE: HEW), a global human resources
services company, today reported results for its fiscal 2008 third
quarter ended June 30, 2008. Reported net revenues (revenues before
reimbursements) increased 7% in the third quarter, to $777.8
million, from $728.0 million in the prior-year quarter. Benefits
Outsourcing revenues increased 5%, Human Resources Business Process
Outsourcing (HR BPO) revenues declined 5%, and Consulting revenues
increased 18%. Operating income for the third quarter increased to
$81.2 million, compared with $72.4 million in the prior-year
quarter, reflecting improved HR BPO operating performance.
Underlying operating income1 increased 4% in the third quarter, to
$83.5 million, from $80.6 million in the prior-year quarter.
Underlying operating income excludes $2.3 million in pretax charges
in the current period related to a previously disclosed real estate
restructuring as well as $8.3 million in pretax net charges related
to restructuring, severance and a legal settlement in the
prior-year quarter. Current year underlying operating income
includes $9.2 million in net severance costs, principally related
to the previously announced Consulting segment organizational
restructuring and $4.1 million in net litigation charges. Net
income for the third quarter increased to $48.2 million, or $0.48
per diluted share, compared with $47.5 million, or $0.43 per
diluted share in the prior-year quarter. Adjusting for unusual
items, underlying net income for the third quarter increased to
$53.4 million, or $0.53 per diluted share, compared with $50.8
million, or $0.46 per diluted share in the prior-year quarter1.
Adjusted Earnings Before Interest, Taxes, Depreciation and
Amortization (EBITDA)2, a non-GAAP measure, increased to $395.2
million in the current nine-month period, compared to $305.7
million in the prior-year period. During the third quarter, the
Company repurchased 338,900 of its outstanding common shares for a
total of $13.0 million. From July 1, 2008 to August 4, 2008, the
Company repurchased an additional 2.0 million shares for a total of
$71.9 million. Third Quarter Highlights �We had another strong
quarter with good top and bottom line growth, even while we
continued to invest in the future of the business,� said Russ
Fradin, chairman and chief executive officer. �I am pleased with
the progress we�ve made in reducing the HR BPO operating loss while
Benefits Outsourcing and Consulting continue to generate healthy
revenue growth.� Operating Performance Reported net revenues of
$777.8 million in the third quarter included a $10.7 million
benefit from foreign currency translation and a $9.3 million
contribution from acquisitions. Adjusting for these items, and
excluding third-party supplier revenues and the comparable
prior-year contribution of the Cyborg business3, revenues increased
6%. Operating income for the third quarter increased to $81.2
million, compared with $72.4 million in the prior-year quarter.
Higher revenues were partially offset by increased operating
expenses in the current quarter, principally higher compensation
and related costs. Current quarter compensation and related costs
include pretax net severance expenses of $9.2 million related to
workforce restructuring, mainly in the Consulting segment.
Operating margin was 10.4% in the third quarter, compared to 9.9%
in the prior-year period. Third quarter operating results include a
pretax charge of $2.3 million related to the previously-announced
review of the Company�s real estate portfolio. The prior-year
period included pretax charges of $11.6 million related to
severance, the restructuring of an HR BPO contract and the
resolution of a legal dispute. The prior-year period also included
a favorable pretax contribution of $3.3 million related to
comparable Cyborg operations. Adjusting for these items, underlying
operating margin was 10.7% in the third quarter, as compared to
11.2% in the prior-year period. Reported results in the third
quarter reflect an effective tax rate of 43.5%, compared to 36.6%
in the prior-year quarter. Business Segment Results Benefits
Outsourcing Benefits Outsourcing segment revenues increased 5% in
the third quarter, to $375.0 million, from $358.7 million in the
prior-year quarter. Adjusting for acquisitions of $2.8 million, and
the favorable effects of foreign currency translation of $1.2
million, Benefits Outsourcing revenues increased 3%. The
improvement was principally due to an increase in clients going
live with contract services over the last 12 months and increased
project work, partially offset by client losses. Benefits
Outsourcing segment income decreased 2% in the third quarter, to
$92.9 million, compared with $95.1 million in the prior-year
quarter. Segment margin was 24.8%, compared to 26.5% in the
prior-year quarter. The margin decline was mainly due to higher
compensation and client service delivery expenses related to
certain large, complex clients that recently went live with ongoing
services, increased litigation expenses, and higher
performance-based compensation, partially offset by increased
revenue. Third quarter operating results include a pretax charge of
$1.6 million related to the Company�s real estate portfolio review.
The prior-year period included pretax charges of $2.9 million
related to severance and the resolution of a legal dispute with a
vendor. Adjusted for these items, underlying segment margin was
25.2% in the third quarter, compared with 27.4% in the prior-year
quarter. As of June 30, 2008, the Company was live with 19.7
million end-user benefits participants, compared with 18.0 million
as of June 30, 2007. Human Resources Business Process Outsourcing
HR BPO segment revenues decreased 5% in the third quarter, to
$131.0 million, from $138.5 million in the prior-year quarter.
Adjusting for the favorable effects of foreign currency translation
of $2.3 million, and excluding third-party supplier revenues and
the impact of the Cyborg divestiture3, HR BPO revenues increased
4%. The revenue growth was principally due to an increase in
clients going live with contract services over the last 12 months,
partially offset by planned service reductions to certain clients
and favorable one-time adjustments in the prior year. The HR BPO
segment loss was $16.2 million in the third quarter, compared with
a loss of $37.2 million in the prior-year quarter. Segment loss
improved principally due to staffing leverage, infrastructure cost
management efforts and the successful renegotiation of certain
client contracts. Third quarter operating results include a pretax
charge of $0.4 million related to real estate restructuring. The
prior-year period included pretax charges of $7.5 million related
to severance and the restructuring of an HR BPO contract, and a
pretax contribution of $3.3 million from comparable Cyborg
operations. Adjusting for these items, underlying HR BPO operating
loss improved to $15.9 million in the third quarter, compared with
a loss of $33.0 million in the prior-year quarter. As of June 30,
2008, the Company was live with approximately 976,000 client
employees with HR BPO services, compared with approximately 761,000
as of June 30, 2007. Consulting Consulting segment revenues
increased 18% in the third quarter, to $283.5 million, from $240.9
million in the prior-year quarter. Adjusting for the favorable
effects of foreign currency translation of $7.2 million, and the
effects of acquisitions of $6.5 million, Consulting revenues
increased 12% over the prior-year quarter. Growth resulted
principally from strength in Retirement and Financial Management
services in addition to Talent and Organization Consulting
services. Consulting segment income decreased 19% in the third
quarter, to $32.7 million, compared with $40.2 million in the
prior-year quarter. Segment margin was 11.5%, compared with 16.7%
in the prior-year quarter. The margin decrease was primarily a
result of higher compensation costs, which include $6.1 million in
pretax severance charges related to the previously-announced
Consulting segment organizational restructuring. Third quarter
operating results include a pretax charge of $0.3 million related
to real estate restructuring. The prior-year period included a
pretax charge of $0.4 million related to severance. Adjusting for
these items, underlying segment margin was 11.7% in the third
quarter, compared with 16.9% in the prior-year quarter. Unallocated
Shared Service Costs Unallocated shared service costs were $28.2
million, or 3.6% of net revenues, in the third quarter, compared
with $25.7 million, or 3.5% of net revenues, in the prior-year
quarter. The increase in expenses relative to revenues was
primarily the result of higher performance-based compensation
expenses and litigation expenses in the current period and the
timing of favorable adjustments in the prior-year period, partially
offset by lower outside consulting fees. Prior-year period results
include a pretax severance charge of $0.7 million related to
productivity initiatives. Year-to-Date Results Consolidated net
revenues for the nine-month period ended June 30, 2008 increased
8%, to $2.34 billion, compared with $2.17 billion in the prior-year
nine-month period. Current period results include the favorable
effects of net foreign currency translation of $42.5 million and
the favorable resolution of previously announced HR BPO contract
restructurings of $23.1 million. Acquisitions contributed $16.8
million of revenue. Adjusting for these items, and excluding
third-party supplier revenues and the comparable prior-year
contribution of the Cyborg business, net revenues increased 6%.
Consolidated operating income for the nine-month period increased
to $258.6 million, and operating margin was 11.0%, compared to
$137.7 million and 6.3% in the prior-year nine month period,
respectively. The margin improvement was principally due to
increased revenue across all segments that more than offset higher
compensation expenses, mostly in Consulting, in addition to the
previously-mentioned gain on the sale of the Company�s Cyborg
business in the second quarter. Current nine-month period results
include a pretax net gain of $11.8 million related to unusual
items, which includes a pretax net gain of $35.44 million related
to the divestiture of the Cyborg business, pretax net charges of
$13.3 million related to HR BPO contract restructurings, and a
pretax charge of $10.3 million related to the previously-announced
review of the Company�s real estate portfolio. The prior-year
nine-month period included a net pretax charge of $39.0 million
related to unusual items, which includes pretax severance charges
of $23.5 million, a pretax charge of $13.9 million related to an HR
BPO contract restructuring, a pretax charge of $4.5 million related
to the resolution of a legal dispute, a pretax asset impairment
charge of $2.6 million, and a pretax contribution of $5.5 million
from comparable Cyborg operations. Adjusting for these items,
underlying operating margin was 10.6% in the current nine-month
period, compared with 8.2% in the prior-year period. Net income for
the nine-month period increased to $156.6 million, or $1.51 per
diluted share, compared with $90.6 million, or $0.82 per diluted
share in the prior-year period. Adjusting for unusual items,
underlying net income for the nine-month period increased to $156.6
million, or $1.51 per diluted share, compared with $112.9 million,
or $1.02 per diluted share in the prior year period. Cash Flow Cash
flow from operations was $161.1 million in the nine-month period,
compared with $258.0 million in the prior period. Free cash flow,
defined as cash flow from operations less capital expenditures and
capitalized software costs, was $81.3 million, compared with $195.2
million in the prior-year nine-month period. The decrease in free
cash flow was driven primarily by higher performance-based
compensation paid in the current year for fiscal 2007 performance,
higher tax payments, increased client receivables, and HR BPO
contract settlements, partially offset by higher net income.
Adjusted EBITDA, a non-GAAP measure reflecting operating income
adjusted for the previously noted unusual items, depreciation and
amortization, and certain other non-cash items (such as asset
impairment, revenue and compensation deferrals, stock-based
compensation, deferred internal software development costs, and
other costs), increased to $395.2 million in the current nine-month
period, compared to $305.7 million in the prior-year period. The
adjusted EBITDA improvement was principally due to increased
operating profits and lower cash outflows due to more live HR BPO
clients. Share Repurchase During the third quarter, the Company
repurchased 338,900 of its outstanding common shares at an average
price of $38.39 per share, for a total of $13.0 million. Since July
1, 2008, the Company has repurchased an additional 2.0 million
shares at an average price of $36.36 per share, for a total of
$71.9 million. At August 4, 2008, the Company had approximately $83
million remaining under its current $750 million authorization.
Business Outlook In addition to reporting results in accordance
with U.S. GAAP, the Company assesses its performance once unusual
items have been removed. The following revised guidance reflects
expectations for fiscal 2008 on this underlying basis, excluding
the impact of unusual items: Mid- to high-single digit total
Company net revenue growth; Underlying operating income of
approximately $320 million to $335 million; and Underlying diluted
earnings per share of $1.90 to $2.00, with a higher probability of
achieving the upper end of the range. �We feel very positive about
the progress we are making, as evidenced by our strong quarter,�
said Russ Fradin, chairman and chief executive officer. �We are
again raising our guidance for the year even after absorbing over
$13 million in severance and litigation charges in addition to
modest dilution from M&A activity.� The Company�s fiscal 2008
guidance assumes a normalized effective tax rate of 39% and
continued execution of its share repurchase program. Guidance
reflects anticipated additional severance charges related to
further workforce restructuring. Guidance excludes anticipated
total fiscal 2008 real estate portfolio review related charges of
approximately $35 million to $45 million in addition to the
previously noted unusual items, summarized in supporting schedules
contained in this release. Supplemental Information Later this
month, the Company expects to finalize $500 million in new debt
financing. The Company has issued a concurrent press release that
describes the terms of the new debt financing. The weighted average
pretax cost of the financing is expected to be approximately 6%.
Proceeds from the financing will be used for general corporate
purposes, which could include, but are not limited to, the
repayment of certain existing indebtedness, share repurchases, and
future acquisitions. Conference Call At 7:30 a.m. (CT) today,
management will host a conference call with investors to discuss
fiscal 2008 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 For more than
65 years, Hewitt Associates (NYSE: HEW) has provided clients with
best-in-class human resources consulting and outsourcing services.
Hewitt consults with more than 3,000 large and mid-size companies
around the globe to develop and implement HR business strategies
covering retirement, financial and health management; compensation
and total rewards; and performance, talent and change management.
As a market leader in benefits administration, Hewitt delivers
health care and retirement programs to millions of participants and
retirees, on behalf of more than 300 organizations worldwide. In
addition, more than 30 clients rely on Hewitt to provide a broader
range of human resources business process outsourcing services to
nearly a million client employees. Located in 33 countries, Hewitt
employs approximately 23,000 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 (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. 1 In
assessing operating performance, the Company also reviews its
results once unusual adjustments have been removed. The Company
believes that doing so provides a better understanding of
underlying operating performance. A reconciliation of GAAP to
underlying operating income, net income and earnings per share
(each a non-GAAP measure) is included in this press release. 2 A
reconciliation of reported net income to Adjusted EBITDA (a
non-GAAP measure) is included in this press release. 3 On January
31, 2008, the Company closed on the sale of assets related to its
Cyborg business, a licensed payroll and software services
organization acquired in 2003. February through June 2007 Cyborg
results have been excluded from �underlying� and �as adjusted�
amounts for year-over-year comparative purposes. 4 Amount reflects
a $0.2 million reduction to the $35.7 million �gain on sale of
business� reported in the Consolidated Statement of Operations.
This reduction pertains to certain Cyborg employee-related expenses
recorded in Q2 of FY08. � � � � � 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, � 2008 � � � 2007 � %
Change � 2008 � � � 2007 � % Change Revenues: Revenues before
reimbursements (net revenues) $ 777,758 $ 727,982 6.8 % $ 2,344,700
$ 2,170,816 8.0 % Reimbursements � 16,821 � � 14,330 � 17.4 % �
58,419 � � 51,354 � 13.8 % Total revenues � 794,579 � � 742,312 �
7.0 % � 2,403,119 � � 2,222,170 � 8.1 % � Operating expenses:
Compensation and related expenses 500,714 455,069 10.0 % 1,516,865
1,424,555 6.5 % Asset impairment 200 2,996 (93.3 )% 2,496 6,612
(62.3 )% Reimbursable expenses 16,821 14,330 17.4 % 58,419 51,354
13.8 % Other operating expenses 143,538 149,024 (3.7 )% 441,707
454,959 (2.9 )% Selling, general and administrative expenses 52,125
48,521 7.4 % 160,725 147,020 9.3 % Gain on sale of business � - � �
- � n/a � (35,667 ) � - � n/a Total operating expenses � 713,398 �
� 669,940 � 6.5 % � 2,144,545 � � 2,084,500 � 2.9 % � Operating
income 81,181 72,372 12.2 % 258,574 137,670 87.8 % Other income,
net: Interest expense (5,673 ) (3,861 ) 46.9 % (13,658 ) (14,500 )
(5.8 )% Interest income 4,053 7,131 (43.2 )% 17,543 21,906 (19.9 )%
Other income (expense), net � 5,598 � � (682 ) n/m � 5,834 � �
1,033 � 464.8 % Total other income, net � 3,978 � � 2,588 � 53.7 %
� 9,719 � � 8,439 � 15.2 % Income before income taxes � 85,159
74,960 13.6 % 268,293 146,109 83.6 % � Provision for income taxes �
37,009 � � 27,455 � 34.8 % � 111,703 � � 55,553 � 101.1 % � Net
income $ 48,150 � $ 47,505 � 1.4 % $ 156,590 � $ 90,556 � 72.9 % �
Earnings per share: Basic $ 0.50 $ 0.44 $ 1.57 $ 0.83 Diluted (1) $
0.48 $ 0.43 $ 1.51 $ 0.82 � Weighted average shares: Basic �
96,534,101 � 107,331,262 � 100,008,744 � 108,519,023 Diluted �
101,939,390 � 112,496,542 � 105,118,735 � 111,059,224 � (1) Per FAS
128, the diluted EPS calculation includes an addback of $587 and
$1,761 of interest expense on the convertible debt securities for
the three and nine months ended June 30, 2008, respectively, and
$587 for the three months ended June 30, 2007. � � � HEWITT
ASSOCIATES, INC. UNDERLYING OPERATING INCOME, NET INCOME AND
EARNINGS PER SHARE (Unaudited) (Dollars in thousands except for
share and per share amounts) � In assessing operating performance,
the Company also reviews its results once unusual adjustments have
been removed. The Company believes that doing so provides a better
understanding of underlying operating performance. For the three
months and nine months ended June 30, 2008 and June 30, 2007,
underlying operating income and earnings per share were: � Three
Months Ended June 30, Nine Months Ended June 30, � 2008 � � 2007 �
� 2008 � � � 2007 � � Operating income, as reported $ 81,181 $
72,372 $ 258,574 $ 137,670 Adjustments: Cyborg � FY08 gain (1)/FY07
operations (2) - (3,315 ) (35,446 ) (5,525 ) Asset impairment - - -
2,574 Severance (3) - 9,129 - 23,485 Real estate 2,299 - 10,347 -
HR BPO contract restructurings - 1,900 13,323 13,900 Legal
settlement (3) � - � 548 � � - � � 4,548 � Total adjustments 2,299
8,262 (11,776 ) 38,982 � Underlying operating income 83,480 80,634
246,798 176,652 � Total other income, net 3,978 2,588 9,719 8,439
Add A/R interest write-off (4) � - � - � � 273 � � - � Underlying
other income, net 3,978 2,588 9,992 8,439 � Underlying pretax
income 87,458 83,222 256,790 185,091 � Provision for income taxes
(normalized at 39% for the three and nine months ended June 30,
2008 and 2007) (5) � 34,108 � 32,457 � � 100,148 � � 72,185 � �
Underlying net income $ 53,350 $ 50,765 � $ 156,642 � $ 112,906 � �
Underlying earnings per share: Basic $ 0.55 $ 0.47 $ 1.57 $ 1.04
Diluted (6) $ 0.53 $ 0.46 $ 1.51 $ 1.02 � Adjusted shares
outstanding (7): Basic 96,534,101 107,331,262 100,008,744
108,519,023 Diluted 101,939,390 112,496,542 105,118,735 112,929,972
� (1) Amount reflects a $221 reduction to the $35,667 "gain on sale
of business" reported in the Q2 FY08 Consolidated Statement of
Operations. This reduction pertains to certain Cyborg
employee-related expenses recorded in the quarter. � (2) Cyborg
results have been excluded for February through June 2007 to enable
year-over-year comparisons. � (3) In FY07, severance related to
productivity initiatives and charges related to a litigation
settlement were excluded from operating income in deriving
underlying net income, EPS and Adjusted EBITDA. In FY08, severance
and litigation charges of $9,192 and $4,075, respectively, are
included in underlying results. � (4) Related to HR BPO contract
restructurings. � (5) The Company used an effective tax rate of 39%
for the three and nine months ended June 30, 2008 and 2007 for its
underlying net income calculation. The Company believes this
approximates the normalized effective tax rate for both years. �
(6) Per FAS 128, the diluted EPS calculation includes an addback of
$587 and $1,761 of interest expense on the convertible debt
securities for the three and nine months ended June 30, 2008, and
June 30, 2007, respectively. (7) � Three Months Ended June 30, �
Nine Months Ended June 30, 2008 � 2007 2008 � 2007 � Weighted
average basic shares outstanding 96,534,101 107,331,262 100,008,744
108,519,023 Number of shares added to outstanding: Stock options
and warrants 1,909,991 1,836,241 1,916,100 1,028,743 Restricted
stock 1,624,550 1,458,291 1,323,143 1,511,458 Convertible
debentures 1,870,748 1,870,748 1,870,748 1,870,748 Total adjusted
diluted shares 101,939,390 112,496,542 105,118,735 112,929,972 �
Diluted shares outstanding reflect the potential dilution that
could occur if securities or other instruments that are convertible
into common stock were exercised or could result in the issuance of
common stock. Potentially dilutive common stock equivalents include
unvested restricted stock and restricted stock units, unexercised
stock options and warrants that are "in-the-money", and outstanding
convertible debt securities which would have a dilutive effect if
converted from debt to common stock. � � � � � HEWITT ASSOCIATES,
INC. BUSINESS SEGMENT RESULTS (Unaudited) (Dollars in thousands) �
� � Business Segments Three Months Ended June 30, Nine Months Ended
June 30, 2008 � � 2007 (1) % Change � 2008 � � 2007 (1) % Change
Benefits Outsourcing Segment revenues before reimbursements $
374,995 $ 358,664 4.6 % $ 1,162,200 $ 1,106,063 5.1 % Segment
income 92,913 95,114 (2.3 )% 298,701 243,217 22.8 % Segment income
as a percentage of segment revenues 24.8 % 26.5 % 25.7 % 22.0 % �
HR BPO Segment revenues before reimbursements (2) $ 130,996 $
138,497 (5.4 )% $ 419,712 $ 403,132 4.1 % Segment loss (16,234 )
(37,215 ) (56.4 )% (61,657 ) (139,991 ) (56.0 )% Segment loss as a
percentage of segment revenues (12.4 )% (26.9 )% (14.7 )% (34.7 )%
� Consulting Segment revenues before reimbursements $ 283,496 $
240,868 17.7 % $ 798,490 $ 690,103 15.7 % Segment income 32,700
40,199 (18.7 )% 93,867 99,631 (5.8 )% Segment income as a
percentage of segment revenues 11.5 % 16.7 % 11.8 % 14.4 % � Total
Company Segment revenues before reimbursements (2) $ 789,487 $
738,029 7.0 % $ 2,380,402 $ 2,199,298 8.2 % Intersegment revenues �
(11,729 ) � (10,047 ) 16.7 % � (35,702 ) � (28,482 ) 25.3 %
Revenues before reimbursements (net revenues) 777,758 727,982 6.8 %
2,344,700 2,170,816 8.0 % Reimbursements � 16,821 � � 14,330 � 17.4
% � 58,419 � � 51,354 � 13.8 % Total revenues $ 794,579 � $ 742,312
� 7.0 % $ 2,403,119 � $ 2,222,170 � 8.1 % � Segment income $
109,379 $ 98,098 11.5 % $ 330,911 $ 202,857 63.1 % Unallocated
shared services costs � 28,198 � � 25,726 � 9.6 % � 72,337 � �
65,187 � 11.0 % Operating income $ 81,181 � $ 72,372 � 12.2 % $
258,574 � $ 137,670 � 87.8 % � (1) Results for the prior year have
been recast to be comparable to the current year presentation,
primarily due to changes to the Company's current organizational
structure. � (2) HR BPO net revenues include $8,409 and $14,848 of
third-party supplier revenues for the three months ended June 30,
2008 and 2007, respectively, and $30,746 and $54,523 for the nine
months ended June 30, 2008 and 2007, 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 (Dollars in thousands except for share and per share
amounts) � � June 30, September 30, 2008 2007 (Unaudited) ASSETS �
Current Assets: Cash and cash equivalents $ 275,208 $ 378,743
Short-term investments - 216,726 Client receivables and unbilled
work in process, less allowances of $21,626 and $18,933 at June 30,
2008 and September 30, 2007, respectively 662,400 632,011 Prepaid
expenses and other current assets 102,608 86,683 Funds held for
clients 118,703 133,163 Deferred income taxes, net � 45,019 �
32,533 Total current assets � 1,203,938 � 1,479,859 � Non-Current
Assets: Deferred contract costs, net 369,205 372,363 Property and
equipment, net 377,970 355,907 Other intangible assets, net 200,435
196,133 Goodwill 335,104 319,314 Long-term investments 127,598 -
Other non-current assets, net � 67,347 � 31,962 Total non-current
assets � 1,477,659 � 1,275,679 � Total Assets $ 2,681,597 $
2,755,538 � LIABILITIES � Current Liabilities: Accounts payable $
23,530 $ 21,304 Accrued expenses 175,310 212,097 Funds held for
clients 118,703 133,163 Advanced billings to clients 169,213
170,131 Accrued compensation and benefits 343,344 353,265
Short-term debt 131,059 30,369 Current portion of long-term debt
and capital lease obligations � 22,109 � 24,222 Total current
liabilities � 983,268 � 944,551 � Non-Current Liabilities: Deferred
contract revenues 291,686 271,359 Debt and capital lease
obligations, less current portion 265,791 233,465 Other non-current
liabilities 194,861 165,264 Deferred income taxes, net � 114,282 �
102,887 Total non-current liabilities � 866,620 � 772,975 � Total
Liabilities $ 1,849,888 $ 1,717,526 � � HEWITT ASSOCIATES, INC.
CONSOLIDATED BALANCE SHEETS (continued) (Dollars in thousands
except for share and per share amounts) � � June 30, September 30,
2008 2007 (Unaudited) STOCKHOLDERS� EQUITY � Stockholders� Equity:
Class A common stock, par value $0.01 per share, 750,000,000 shares
authorized, 128,977,989 shares issued, 97,409,399 and 107,126,309
shares outstanding, as of June 30, 2008 and September 30, 2007,
respectively $ 1,290 $ 1,277 Additional paid-in capital 1,547,829
1,472,409 Cost of common stock in treasury, 31,568,590 and
20,545,944 shares of Class A common stock as of June 30, 2008 and
September 30, 2007, respectively (1,009,391 ) (597,200 ) Retained
earnings 175,006 38,144 Accumulated other comprehensive income, net
� 116,975 � � 123,382 � Total stockholders� equity � 831,709 � �
1,038,012 � � Total Liabilities and Stockholders� Equity $
2,681,597 � $ 2,755,538 � � � HEWITT ASSOCIATES, INC. CONSOLIDATED
STATEMENTS OF CASH FLOWS (Unaudited) (Amounts in thousands) � �
Nine Months EndedJune 30, 2008 � 2007 Cash flows from operating
activities: Net income $ 156,590 $ 90,556 Adjustments to reconcile
net income to net cash provided by operating activities:
Depreciation and amortization, including amortization of deferred
contract revenues and costs 129,033 137,101 Gain on sale of
business (35,667 ) - Asset impairment 2,496 6,612 Share-based
compensation 38,446 31,439 Deferred income taxes 2,045 11,933
Changes in operating assets and liabilities, net of effect of
acquisitions and dispositions: Client receivables and unbilled work
in process (26,360 ) 34,285 Prepaid expenses and other current
assets (16,244 ) (18,864 ) Deferred contract costs (76,768 )
(106,222 ) Other assets (24,218 ) 866 Accounts payable 1,516 (9,532
) Accrued compensation and benefits (32,007 ) 17,077 Accrued
expenses (39,068 ) (3,597 ) Advanced billings to clients 8,314
(1,263 ) Deferred contract revenues 81,631 76,773 Other long-term
liabilities � (8,624 ) � (9,176 ) Net cash provided by operating
activities 161,115 257,988 � Cash flows from investing activities:
Purchases of investments (426,675 ) (170,044 ) Proceeds from sales
of investments 511,614 189,207 Additions to property and equipment
(79,780 ) (62,844 ) Cash paid for acquisitions and transaction
costs, net of cash acquired (53,187 ) (2,194 ) Cash received for
sale of business � 42,420 � � - � Net cash used in investing
activities (5,608 ) (45,875 ) � Cash flows from financing
activities: Proceeds from the exercise of stock options 31,706
35,417 Excess tax benefits from the exercise of share-based awards
3,790 1,058 Proceeds from short-term borrowings 137,829 76,970
Proceeds from long-term borrowings 39,751 - Repayments of
short-term borrowings, capital leases and long-term debt (62,408 )
(97,927 ) Purchase of Class A common shares for treasury � (412,191
) � (126,955 ) Net cash used in financing activities (261,523 )
(111,437 ) � Effect of exchange rate changes on cash and cash
equivalents � 2,481 � � 7,346 � Net (decrease) increase in cash and
cash equivalents (103,535 ) 108,022 � Cash and cash equivalents,
beginning of period 378,743 138,928 Cash and cash equivalents, end
of period $ 275,208 � $ 246,950 � Supplementary disclosure of cash
paid during the period: Interest paid $ 13,362 $ 16,923 Income
taxes paid $ 117,154 $ 69,057 Schedule of non-cash financing
activities: Capital leases $ 13,185 $ - � � HEWITT ASSOCIATES, INC.
ADJUSTED EBITDA RECONCILIATION (Unaudited) (Dollars in thousands) �
� Nine Months EndedJune 30, 2008 � 2007 � Reported net income $
156,590 $ 90,556 Depreciation and amortization (1) 128,067 141,347
Provision for income taxes 111,703 55,553 Interest expense
(income), net (3,885 ) (7,406 ) � EBITDA 392,475 280,050 �
Adjustments: Cyborg � FY08 gain (2) / FY07 operations (3) (35,446 )
(5,525 ) Asset impairment - 2,574 Severance (4) - 23,485 Real
estate 10,347 - HR BPO contract restructurings 13,323 13,900 Legal
settlement (4) � - � � 4,548 � Underlying adjustments (11,776 )
38,982 Normalized depreciation and amortization addbacks (1) 1,497
- Other expense (income) � (5,834 ) � (1,033 ) Total adjustments
(16,113 ) 37,949 � Adjusted EBITDA before certain non-cash addbacks
376,362 317,999 � Certain non-cash addbacks: Adjustments to asset
impairments 1,307 4,038 Net deferrals (5) 5,351 (29,768 ) Deferred
internal software development costs (17,031 ) (12,129 ) Stock-based
compensation 38,598 31,439 Other � (9,392 ) � (5,847 ) Total
certain non-cash addbacks 18,833 (12,267 ) � Adjusted EBITDA $
395,195 � $ 305,732 � � (1) FY08 depreciation and amortization
includes $1,497 of adjustments related to HR BPO contract and real
estate restructurings. FY07 includes $5,200 relating to Statement
of Operations reclassifications. Additionally, discount accretion
on the Exult convertible debt of $966 and $954 are excluded from
amounts in FY08 and in FY07, respectively. (2) Amount reflects a
$221 reduction to the $35,667 "gain on sale of business" reported
in the Q2 FY08 Consolidated Statement of Operations. This reduction
pertains to certain Cyborg employee-related expenses recorded in
the second quarter of FY08. (3) Cyborg results have been excluded
for February through June 2007 to enable year-over-year
comparisons. (4) In FY07, severance related to productivity
initiatives and charges related to a litigation settlement were
excluded from operating income in deriving underlying net income,
EPS and Adjusted EBITDA. In FY08, severance and litigation charges
of $9,192 and $4,075, respectively, are included in underlying
results. (5) Net deferrals as presented and the net of Revenue and
Cost Deferrals in the Statements of Cash Flows varies by $488 and
$319 for year-to-date FY08 and FY07, respectively, relating to
Balance Sheets and Statements of Operations reclassifications and
amounts included within the HR BPO restructuring adjustment.
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