Hewitt Associates, Inc. (NYSE:HEW), a global human resources
services company, today reported results for its fourth quarter and
fiscal year ended September 30, 2008. Fourth Quarter 2008
Highlights Reported net revenues (revenues before reimbursements)
increased 8% in the fourth quarter. Reported operating income
increased to $54.3 million, compared with an operating loss of
$280.6 million in the prior-year quarter. Underlying operating
income1 increased 8% in the fourth quarter, to $87.2 million, from
$80.5 million in the prior-year quarter. Underlying operating
income excludes $32.9 million in pretax net charges in the current
quarter and $361.1 million in pretax net charges in the prior-year
quarter, both related to unusual items. Reported net income
increased to $31.6 million, or $0.32 per diluted share, compared
with a net loss of $265.6 million, or a loss of $2.51 per diluted
share in the prior-year quarter. Adjusting for unusual items,
underlying net income was $49.4 million, or $0.50 per diluted
share, compared with $51.4 million, or $0.47 per diluted share in
the prior-year quarter1. Fiscal 2008 Highlights Reported net
revenues increased 8% in fiscal 2008. Reported operating income
increased to $312.8 million, compared with an operating loss of
$143.0 million in the prior year. Underlying operating income
increased 30% to $334.0 million, from $257.1 million in the prior
year. Underlying operating income excludes $21.1 million in pretax
net charges in the current year and $400.1 million in pretax net
charges in the prior year, both related to unusual items. Reported
net income increased to $188.1 million, or $1.85 per diluted share,
compared with a net loss of $175.1 million, or a loss of $1.62 per
diluted share in the prior year. Adjusting for unusual items,
underlying net income increased to $206.1 million, or $2.02 per
diluted share, compared with $164.3 million, or $1.48 per diluted
share in the prior year. Free cash flow was $210.3 million in
fiscal 2008, compared to $346.8 million in the prior year. Adjusted
Earnings Before Interest, Taxes, Depreciation and Amortization
(EBITDA)2, a non-GAAP measure, increased to $524.2 million,
compared to $435.0 million in the prior year. During fiscal 2008,
the Company repurchased 15.1 million of its outstanding common
shares for a total of $566.4 million. The board of directors has
authorized the Company to repurchase up to $300 million of its
outstanding common shares over the next 24 months. "We are
delighted with our fourth quarter performance, which represented a
strong finish to a very good year for Hewitt,� said Russ Fradin,
chairman and chief executive officer. �During the quarter we saw
healthy revenue momentum and exceeded our profit expectations while
absorbing some key investment costs. I am pleased that we were able
to do this in the face of such unprecedented economic turmoil.� "We
expect a difficult environment in fiscal 2009, but we are fortunate
to have taken actions in the past year to streamline our cost
structure and obtain significant incremental financing to add to
our already strong financial position. Our strategies and plans are
intended to deliver solid revenue and profit growth in 2009 as we
continue to meet our clients' needs during this period of
significant change and disruption.� Operating Performance Fourth
Quarter 2008 Reported net revenues of $806.7 million in the fourth
quarter include a $13.8 million contribution from acquisitions and
$1.6 million in unfavorable foreign currency translation. Adjusting
for these items, and excluding third-party supplier revenues and
the comparable prior-year contribution of the Cyborg business3,
revenues increased 8%. Operating income for the fourth quarter
increased to $54.3 million, compared with an operating loss of
$280.6 million in the prior-year quarter. Fiscal 2008 fourth
quarter results include the following unusual items: A pretax
charge of $34.4 million related to the previously-announced review
of the Company�s real estate portfolio. A favorable pretax
adjustment of $1.5 million related to a previous HR BPO contract
restructuring. Fiscal 2007 fourth quarter results included the
following unusual items: Pretax charges of $326.0 million,
comprised of $280.2 million of goodwill impairment driven by lower
growth expectations for the HR BPO business, $36.0 million of asset
impairment largely related to the HR BPO business, and $10.2
million of contract loss provisions reflecting the Company�s
revised profitability expectations for its European Benefits
Outsourcing business. A pretax charge of $29.3 million related to
the previously-announced review of the Company�s real estate
portfolio. A pretax severance charge of $8.0 million related to
workforce restructuring. A favorable pretax contribution of $3.3
million related to comparable Cyborg operations3. A pretax charge
of $1.1 million related to an HR BPO contract restructuring. A
pretax non-operating gain of $6.0 million related to the sale of an
investment. Adjusting for the appropriate items in both periods,
underlying operating margin was 10.8% in the fourth quarter, flat
compared to the prior-year quarter. The flat margin reflects a
reduced HR BPO loss that was offset by margin declines in Benefits
Outsourcing and Consulting. Current quarter underlying operating
income includes $17.2 million in pretax severance expense,
principally related to workforce reductions. Prior-year quarter
underlying results excluded $8.0 million in pretax severance
expense related to workforce restructuring and included $2.0
million in pretax severance expense related to workforce
reductions. Reported results in the fourth quarter reflect an
effective tax rate of 34.5%. Fiscal 2008 Reported net revenues of
$3.2 billion include a $40.9 million benefit from foreign currency
translation and a $23.1 million benefit due to the resolution of
previously-announced HR BPO contract restructurings. Acquisitions
contributed $30.6 million. Adjusting for these items, and excluding
third-party supplier revenues and the comparable prior-year
contribution of the Cyborg business, revenues increased 7%.
Operating income for the fiscal year increased to $312.8 million,
compared with an operating loss of $143.0 million in the prior
year. Fiscal 2008 results include the following unusual items:
Pretax charges of $44.8 million related to the previously-announced
review of the Company�s real estate portfolio. A pretax net gain of
$35.4 million related to the divestiture of the Cyborg business.
Pretax net charges of $11.8 million related to HR BPO contract
restructurings. Fiscal 2007 results included the following unusual
items: Pretax net charges of $328.5 million, related to goodwill
and asset impairment and additional contract loss provisions,
principally in the HR BPO business. A pretax severance charge of
$31.5 million related to workforce restructuring. Pretax charges of
$29.3 million related to the previously-announced review of the
Company�s real estate portfolio. A pretax charge of $15.0 million
related to the previously-announced anticipated restructuring of an
HR BPO contract. A favorable pretax contribution of $8.8 million
related to comparable Cyborg operations. A pretax charge of $4.5
million resulting from the resolution of a legal dispute with a
vendor. A pretax non-operating gain of $6.0 million related to the
sale of an investment. Adjusting for the appropriate items in both
periods, underlying operating margin was 10.7%, as compared to 8.9%
in the prior year. The margin improvement reflects a reduced HR BPO
loss that was partially offset by a margin decline in Consulting.
Current year underlying operating income includes $30.8 million in
pretax severance expense, principally related to workforce
reductions. Prior year underlying results excluded $31.5 million in
pretax severance expense related to workforce restructuring and
included $7.6 million in pretax severance expense related to
workforce reductions. Reported results in the current year reflect
an effective tax rate of 40.5%. Business Segment Results Benefits
Outsourcing Fourth Quarter 2008 Benefits Outsourcing segment
revenues increased 5% in the fourth quarter, to $387.9 million,
from $369.3 million in the prior-year quarter. Adjusting for
acquisitions of $8.1 million and unfavorable foreign currency
translation of $0.6 million, Benefits Outsourcing revenues
increased 3%. The improvement was principally driven by increased
project work and an increase in clients going live with contract
services over the last 12 months, partially offset by client
losses. Benefits Outsourcing segment income increased 10% in the
fourth quarter, to $66.6 million, compared with $60.8 million in
the prior-year quarter. Segment margin was 17.2%, compared to 16.5%
in the prior-year quarter. Fourth quarter operating results include
a pretax charge of $14.0 million related to the
previously-announced review of the Company�s real estate portfolio.
The prior-year quarter included a pretax charge of $22.2 million
related to the review of the real estate portfolio, $16.6 million
of pretax contract loss provisions and asset impairments, and a
pretax severance charge of $3.0 million. Adjusted for these items,
underlying segment margin was 20.8% in the fourth quarter, compared
with 27.8% in the prior-year quarter. The margin decline was
principally due to higher compensation and client service delivery
expenses related to certain large, complex clients that recently
went live with ongoing services, higher severance and
performance-based compensation, which more than offset the
increased revenue. Current quarter underlying operating income
includes $8.4 million in pretax severance expense, principally
related to workforce reductions. Prior-year quarter underlying
results excluded $3.0 million in pretax severance expense related
to workforce restructuring and included $0.4 million in pretax
severance expense related to workforce reductions. Fiscal 2008
Benefits Outsourcing segment revenues increased 5% in fiscal 2008,
to $1.55 billion, from $1.48 billion in the prior year. Adjusting
for acquisitions of $16.7 million, a $9.0 million benefit due to HR
BPO contract restructurings, and the favorable effects of foreign
currency translation of $4.5 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 increased 20% in fiscal 2008,
to $365.3 million, compared with $304.0 million in the prior year.
Segment margin was 23.6%, compared to 20.6% in the prior year.
Current year results include a pretax charge of $17.9 million
related to the Company�s real estate portfolio review and a pretax
benefit of $4.7 million related to HR BPO contract restructurings.
The prior year included a pretax charge of $22.2 million related to
the real estate portfolio review, $16.6 million of pretax contract
loss provisions and asset impairments, a $13.3 million pretax
severance charge, and a $4.5 million pretax charge related to the
resolution of a legal dispute with a vendor. Adjusted for these
items, underlying segment margin was 24.6% in fiscal 2008, compared
to 24.5% in the prior year. The flat margin reflects higher revenue
offset by higher compensation and client service delivery expenses
related to certain large, complex clients that recently went live
with ongoing services, higher performance-based compensation, and
increased net litigation charges. Current year underlying operating
income includes $11.6 million in pretax severance expense,
principally related to workforce reductions. Prior year underlying
results excluded $13.3 million in pretax severance expense related
to workforce restructuring and included $2.0 million in pretax
severance expense related to workforce reductions. As of September
30, 2008, the Company was live with 19.7 million end-user benefits
participants, compared with 18.4 million as of September 30, 2007.
Human Resources Business Process Outsourcing Fourth Quarter 2008 HR
BPO segment revenues declined 1% in the fourth quarter, to $135.1
million, from $136.3 million in the prior-year quarter. Adjusting
for the favorable effects of foreign currency translation of $0.2
million, and excluding third-party supplier revenues and the impact
of the Cyborg divestiture, HR BPO revenues increased 11%. 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 planned service reductions to
certain current and former clients. The HR BPO segment loss was
$21.6 million in the fourth quarter, compared with a loss of $352.2
million in the prior-year quarter. Fourth quarter results include a
pretax charge of $12.1 million related to the Company�s real estate
portfolio review and a favorable pretax adjustment of $1.5 million
related to a prior HR BPO contract restructuring. Prior-year
quarter results included pretax charges of $309.4 million related
to goodwill and asset impairments, a pretax charge of $5.1 million
related to the real estate portfolio review, a pretax contribution
of $3.3 million from comparable Cyborg operations, pretax severance
charges of $2.3 million, and a pretax charge of $1.1 million
related to an HR BPO contract restructuring. Adjusting for these
items, the underlying HR BPO operating loss improved to $11.0
million in the fourth quarter, compared with a loss of $37.6
million in the prior-year quarter. The improvement over the
prior-year period was principally due to staffing leverage,
infrastructure cost management efforts and the successful
renegotiation of certain client contracts. Current quarter
underlying results include $1.3 million in pretax severance
expense, principally related to workforce reductions. Prior-year
quarter underlying results excluded $2.3 million in pretax
severance expense related to workforce restructuring and included
$1.4 million in pretax severance expense related to workforce
reductions. Fiscal 2008 The HR BPO segment revenues increased 3% in
fiscal 2008, to $554.9 million, from $539.5 million in the prior
year. Adjusting for a $14.1 million benefit due to HR BPO contract
restructurings, the favorable effects of foreign currency
translation of $10.5 million, and excluding third-party supplier
revenues and the impact of the Cyborg divestiture, HR BPO revenues
increased 9%. The improvement was principally due to an increase in
the number of clients who went live with contract services in the
last 12 months and growth in revenue from existing clients,
including an increase in project work and transactional volumes.
This was partially offset by planned service reductions to certain
current and former clients. HR BPO segment loss was $83.3 million
in fiscal 2008, compared with a loss of $492.2 million in the prior
year. Current year results include a pretax net gain of $35.4
million related to the divestiture of the Cyborg business, a pretax
net charge of $16.2 million related to HR BPO contract
restructurings, and a pretax charge of $13.1 million related to the
Company�s real estate portfolio review. Prior year results included
pretax charges of $311.9 million related to goodwill and asset
impairments, a pretax charge of $15.0 million related to an HR BPO
contract restructuring, pretax severance charges of $11.1 million,
a pretax contribution of $8.8 million from comparable Cyborg
operations, and a pretax charge of $5.1 million related to the real
estate portfolio review. Adjusting for these items, underlying HR
BPO operating loss improved to $89.5 million in fiscal 2008,
compared with a loss of $157.9 million in the prior year. The
improvement was principally due to staffing leverage,
infrastructure cost management efforts and the successful
renegotiation of certain client contracts. Current year underlying
operating results include $3.2 million in pretax severance expense,
principally related to workforce reductions. Prior year underlying
results excluded $11.1 million in pretax severance expense related
to workforce restructuring and included $3.9 million in pretax
severance expense related to workforce reductions. As of September
30, 2008, the Company was live with approximately 987,000 client
employees with HR BPO services, compared with approximately 934,000
as of September 30, 2007. Consulting Fourth Quarter 2008 Consulting
segment revenues increased 16% in the fourth quarter, to $295.8
million, from $255.8 million in the prior-year quarter. Adjusting
for acquisitions of $5.7 million and the unfavorable effects of
foreign currency translation of $1.2 million, Consulting revenues
increased 14%. Growth resulted principally from strength in
Retirement and Financial Management services in addition to Talent
and Organization Consulting services. Consulting segment income
increased 11% in the fourth quarter, to $49.4 million, compared
with $44.4 million in the prior-year quarter. Segment margin was
16.7%, compared with 17.3% in the prior-year quarter. Prior-year
period results included a pretax charge of $2.0 million related to
real estate restructuring and a total pretax severance charge of
$1.1 million related to workforce restructuring. Adjusting for
these items, underlying segment margin was 16.6% in the fourth
quarter, compared with 18.6% in the prior-year quarter. The margin
decline was principally due to higher compensation expense,
including higher salaries, performance-based compensation and
severance, which more than offset increased revenues. Current
quarter underlying operating income includes pretax severance
expense of $5.4 million, principally related to workforce
reductions. Fiscal 2008 Consulting segment revenues increased 16%
in fiscal 2008, to $1.09 billion, from $945.9 million in the prior
year. Adjusting for acquisitions of $13.9 million, and the
favorable effects of foreign currency translation of $26.0 million,
Consulting revenues increased 12%. Growth resulted principally from
strength in Retirement and Financial Management services in
addition to Talent and Organization Consulting services. Consulting
segment income was $143.2 million in fiscal 2008, compared with
$144.0 million in the prior year. Segment margin was 13.1%,
compared to 15.2% in the prior year. Fiscal 2008 results include a
pretax charge of $4.2 million related to the Company�s real estate
review. Prior-year results included a pretax charge of $2.3 million
related to severance and a pretax charge of $2.0 million related to
the real estate portfolio review. Adjusting for these items,
underlying segment margin was 13.5% in fiscal 2008, compared with
15.7% in the prior year. The margin decline was principally due to
higher compensation expense, some of which related to investments
for practice growth and driven by higher salaries,
performance-based compensation, benefits and severance, which more
than offset increased revenues. Current-year underlying operating
income includes pretax severance expense of $13.5 million,
principally related to workforce reductions. Prior year underlying
results excluded $2.3 million in pretax severance expense related
to workforce restructuring and included $1.2 million in pretax
severance expense related to workforce reductions. Unallocated
Shared Service Costs Unallocated shared service costs were $40.1
million, or 5.0% of net revenues, in the fourth quarter, compared
with $33.6 million, or 4.5% of net revenues, in the prior-year
quarter. For the full year, unallocated shared service costs were
$112.4 million, or 3.6% of net revenues, compared with $98.7
million, or 3.4% of net revenues, in the prior year. The increase
in expenses relative to revenues for the full year was primarily
the result of higher performance-based compensation expenses and
litigation expenses in the current year, partially offset by lower
outside consulting fees. Current-year results include pretax
charges of $9.6 million related to the real estate portfolio
review. Prior year results included $4.8 million in severance
charges. Adjusting for these items, unallocated shared service
costs as a percent of net revenues were 3.3% in the current year,
compared to 3.2% in the prior year. Current-year underlying results
include pretax severance expense of $2.5 million, principally
related to workforce reductions. Prior year underlying results
excluded $4.8 million in pretax severance expense related to
workforce restructuring and included $0.5 million in pretax
severance expense related to workforce reductions. Cash Flow Cash
flow from operations was $327.9 million in fiscal 2008, compared
with $435.2 million in fiscal 2007. Free cash flow, defined as cash
flow from operations less capital expenditures and capitalized
software costs, was $210.3 million, compared with $346.8 million in
the prior year. The decrease in free cash flow was driven primarily
by higher performance-based compensation paid in the current year
for fiscal 2007 performance, and higher tax payments. 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
$524.2 million in fiscal 2008, compared to $435.0 million in the
prior year. The adjusted EBITDA improvement was due to increased
operating profits and lower cash outflows due to more live HR BPO
clients. Share Repurchase During the fourth quarter, the Company
repurchased 4.1 million of its outstanding common shares at an
average price of $37.97 per share, for a total of $155.2 million,
completing its $750 million share buyback authorization. During
fiscal 2008, the Company repurchased 15.1 million shares at an
average price of $37.54 per share, for a total of $566.4 million.
Under the overall $750 million authorization, the Company
repurchased 21.2 million shares at an average price of $35.44 per
share. Supplemental Information During the fourth quarter, the
Company finalized $500 million in new debt financing, consisting of
a $270 million five-year syndicated term loan and $230 million in
privately-placed senior unsecured notes with maturities of 7 to 10
years. The weighted average pre-tax cost of financing was
approximately 6%. Proceeds from the loan and note financings will
be used for general corporate purposes. On October 1, 2008, holders
of the Company�s $110 million aggregate principal amount 2.5%
Convertible Senior Notes due October 1, 2010 exercised their option
requiring Hewitt to repurchase $109.8 million of the $110 million
notes. Hewitt paid the principal amount of $109.8 million plus
accrued interest on October 2, 2008. The Company plans to redeem
the remaining $0.2 million of the $110 million notes in fiscal year
2009. The board of directors has authorized the Company to
repurchase up to $300 million of its outstanding common shares over
the next 24 months. Purchases may be made in the open market or in
privately negotiated transactions, with the level and timing of
activity depending on market conditions and other investment
opportunities. Business Outlook The following guidance reflects the
Company�s expectations for fiscal 2009: Low-single digit total
Company net revenue growth, with healthy growth in Consulting and
Benefits Outsourcing partially offset by a decline in HR BPO;
Operating income of approximately $420 to $435 million; and Diluted
earnings per share of $2.35 to $2.45. The Company�s fiscal 2009
guidance assumes a normalized effective tax rate of 39.6%. �As the
economy has worsened, our organization has been able to adapt and
offset the down currents with new opportunities brought about by
the turmoil,� said Russ Fradin, chairman and chief executive
officer. �We are pleased to say that we expect another year of
revenue and earnings growth, thanks to our solid base of recurring
revenue and the resourceful and proactive associates throughout our
organization.� Conference Call At 7:30 a.m. (CT) today, management
will host a conference call with investors to discuss fiscal 2008
results. The live presentation is accessible through the Investor
Relations section of Hewitt�s website 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 September 2007 Cyborg results have been excluded
from �underlying� and �as adjusted� amounts for year-over-year
comparative purposes. HEWITT ASSOCIATES, INC. CONSOLIDATED
STATEMENTS OF OPERATIONS (Dollars in thousands except for share and
per share amounts) � � � � Three Months Ended September 30, Year
Ended September 30, 2008 2007 % Change 2008 2007 % Change Revenues:
Revenues before reimbursements (net revenues) (1) $ 806,689 $
750,261 7.5 % $ 3,151,389 $ 2,921,076 7.9 % Reimbursements 17,840 �
17,895 � (0.3 )% 76,259 69,250 10.1 % Total revenues 824,529 �
768,156 � 7.3 % 3,227,648 2,990,326 7.9 % � Operating expenses:
Compensation and related expenses 525,758 481,603 9.2 % 2,042,623
1,906,158 7.2 % Goodwill and asset impairment 1,621 320,003 (99.5
)% 4,117 326,615 (98.7 )% Reimbursable expenses 17,840 17,896 (0.3
)% 76,259 69,250 10.1 % Other operating expenses 183,282 181,739
0.8 % 624,989 636,698 (1.8 )% Selling, general and administrative
expenses 41,758 47,552 (12.2 )% 202,483 194,572 4.1 % Gain on sale
of business - � - � n/a (35,667 ) - � n/a Total operating expenses
770,259 � 1,048,793 � (26.6 )% 2,914,804 � 3,133,293 � (7.0 )% �
Operating income (loss) 54,270 (280,637 ) n/m 312,844 (142,967 )
n/m Other income, net: Interest expense (11,130 ) (5,519 ) 101.7 %
(24,788 ) (20,019 ) 23.8 % Interest income 4,480 8,313 (46.1 )%
22,023 30,219 (27.1 )% Other income, net 531 � 7,016 � (92.4 )%
6,365 � 8,049 � (20.9 )% Total other income (expense), net (6,119 )
9,810 � n/m 3,600 � 18,249 � (80.3 )% Income (loss) before income
taxes � 48,151 (270,827 ) n/m 316,444 (124,718 ) n/m � Provision
(benefit) for income taxes 16,599 � (5,191 ) n/m 128,302 � 50,362 �
154.8 % � Net income (loss) $ 31,552 $ (265,636 ) n/m $ 188,142 $
(175,080 ) n/m � Earnings (loss) per share: Basic $ 0.33 $ (2.51 )
$ 1.90 $(1.62 ) Diluted (2) $ 0.32 $ (2.51 ) $ 1.85 $(1.62 ) �
Weighted average shares: Basic 95,167,179 105,929,341 98,791,739
107,866,281 Diluted 98,163,780 105,929,341 101,970,321 107,866,281
� (1) Net revenues include $9,752 and $15,320 of third party
supplier revenues for the three months ended September 30, 2008 and
2007, respectively, and $40,498 and $69,842 for the years ended
September 30, 2008 and 2007, respectively. Generally, the third
party supplier arrangements are marginally profitable. The related
third party supplier expenses are included in other operating
expenses. � (2) Debt securities convertible into 1,870,748 weighted
average shares of Class A common stock were outstanding in the
three months and year ended September 30, 2008 and 2007, but were
not included in the computation of diluted earnings per share
because the effect of including the convertible debt securities
would be antidilutive. 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 year ended September 30, 2008
and September 30, 2007, underlying operating income and earnings
per share were: � Three Months Ended September 30, Year Ended
September 30, � 2008 � � � 2007 � � 2008 � � � 2007 � � Operating
income (loss), as reported $ 54,270 $ (280,637 ) $ 312,844 $
(142,967 ) Adjustments: Cyborg � FY08 gain (1)/FY07 operations (2)
- (3,315 ) (35,446 ) (8,840 ) Asset impairment - 325,966 - 328,540
Severance (3) - 8,033 - 31,518 Real estate 34,429 29,339 44,775
29,339 HR BPO contract restructurings (1,525 ) 1,100 11,798 15,000
Legal settlement � - � � - � � - � � 4,548 � Total adjustments
32,904 361,123 21,127 400,105 � Underlying operating income 87,174
80,486 333,971 257,138 � Total other income (expense), net (6,119 )
9,810 3,600 18,249 Add A/R interest write-off (4) - - 273 -
Subtract gain on sale of investment � - � � (5,982 ) � - � � (5,982
) Underlying other income, net (6,119 ) 3,828 3,873 12,267 �
Underlying pretax income 81,055 84,314 337,844 269,406 � Provision
for income taxes (normalized at 39% for the three months and year
ended September 30, 2008 and 2007) (5) � 31,611 � � 32,882 � �
131,759 � � 105,068 � � Underlying net income $ 49,444 � $ 51,432 �
$ 206,085 � $ 164,337 � � Underlying earnings per share: Basic $
0.52 $ 0.49 $ 2.09 $ 1.52 Diluted (6) $ 0.50 $ 0.47 $ 2.02 $ 1.48 �
Adjusted shares outstanding (7): Basic 95,167,179 105,929,341
98,791,739 107,866,281 Diluted 98,163,780 110,914,917 101,970,321
112,422,432 (1) Amount reflects a $221 reduction to the $35,667
�gain on sale of business� reported in the FY08 Consolidated
Statement of Operations. This reduction pertains to certain Cyborg
employee-related expenses recorded in the second fiscal quarter.
(2) Cyborg results have been excluded for February through
September 2007 to enable year-over-year comparisons. (3) In FY07,
severance related to workforce restructuring initiatives was
excluded from operating income in deriving underlying operating
income, net income, EPS and Adjusted EBITDA. Severance charges
(representing both restructuring and workforce reductions) of
$10,001 and $39,142, respectively, are included in the reported
results for the three months and year ended September 30, 2007.
Severance charges of $17,243 and $30,783, respectively, are
included in underlying results for the three months and year ended
September 30, 2008. (4) Related to HR BPO contract restructurings.
(5) The Company used an effective tax rate of 39% for the three
months and year ended September 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 $2,349 of interest expense on the convertible debt
securities for the three months and year ended September 30, 2007.
(7) � Three Months Ended September 30, � Year Ended September 30,
2008 � 2007 2008 � 2007 � Weighted average basic shares outstanding
95,167,179 105,929,341 98,791,739 107,866,281 Number of shares
added to outstanding: Stock options and warrants 1,751,741
1,886,973 1,875,010 1,605,337 Restricted stock 1,244,860 1,227,855
1,303,573 1,080,067 Convertible debentures - 1,870,748 - 1,870,748
Total adjusted diluted shares 98,163,780 110,914,917 101,970,321
112,422,432 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. Debt securities convertible into 1,870,748 weighted average
shares of Class A common stock were outstanding in the three months
and year ended September 30, 2008, but were not included in the
computation of diluted earnings per share because the effect of
including the convertible debt securities would be antidilutive.
HEWITT ASSOCIATES, INC. BUSINESS SEGMENT RESULTS (Dollars in
thousands) � � � � � Business Segments Three Months Ended September
30, � Year Ended September 30, � 2008 � � 2007 (1 ) % Change � �
2008 � � 2007 (1 ) % Change � Benefits Outsourcing Segment revenues
before reimbursements $ 387,910 $ 369,261 5.1 % $ 1,550,110 $
1,475,326 5.1 % Segment income 66,635 60,766 9.7 % 365,336 303,984
20.2 % Segment income as a percentage of segment revenues 17.2 %
16.5 % 23.6 % 20.6 % � HR BPO Segment revenues before
reimbursements (2) $ 135,142 $ 136,311 (0.9 )% $ 554,854 $ 539,452
2.9 % Segment loss (21,620 ) (352,210 ) (93.9 )% (83,277 ) (492,193
) (83.1 )% Segment loss as a percentage of segment revenues (16.0
)% (258.4 )% (15.0 )% (91.2 )% � Consulting Segment revenues before
reimbursements $ 295,833 $ 255,764 15.7 % $ 1,094,323 $ 945,866
15.7 % Segment income 49,350 44,361 11.2 % 143,217 143,992 (0.5 )%
Segment income as a percentage of segment revenues 16.7 % 17.3 %
13.1 % 15.2 % � Total Company Segment revenues before
reimbursements (2) $ 818,884 $ 761,336 7.6 % $ 3,199,287 $
2,960,644 8.1 % Intersegment revenues � (12,196 ) (11,076 ) 10.1 %
� (47,898 ) (39,568 ) 21.1 % Revenues before reimbursements (net
revenues) 806,689 750,261 7.5 % 3,151,389 2,921,076 7.9 %
Reimbursements � 17,840 � 17,895 � (0.3 )% � 76,259 � 69,250 � 10.1
% Total revenues $ 824,529 � $ 768,156 � 7.3 % $ 3,227,648 � $
2,990,326 � 7.9 % � Segment income (loss) $ 94,364 $ (247,084 ) n/m
$ 425,276 $ (44,217 ) n/m Unallocated shared services costs �
40,094 � 33,553 � 19.5 % � 112,432 � 98,750 � 13.9 % Operating
income (loss) $ 54,270 � $ (280,637 ) n/m $ 312,844 � $ (142,967 )
n/m � (1) Results for the prior year have been reclassified 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 $9,752 and $15,320 of third-party supplier
revenues for the three months ended September 30, 2008 and 2007,
respectively, and $40,498 and $69,842 for the year ended September
30, 2008 and 2007, respectively. Generally, the third-party
supplier arrangements are 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) � � �
September 30, September 30, 2008 2007 � ASSETS � Current Assets:
Cash and cash equivalents $ 541,494 $ 378,743 Short-term
investments - 216,726 Client receivables and unbilled work in
process, less allowances of $18,029 and $18,933 at September 30,
2008 and 2007, respectively 655,543 632,011 Prepaid expenses and
other current assets 129,529 86,683 Funds held for clients 116,488
133,163 Short-term deferred contract costs, net 83,444 75,684
Deferred income taxes, net � 34,104 � 32,533 Total current assets �
1,560,602 � 1,555,543 � Non-Current Assets: Deferred contract
costs, net, less current portion 287,060 296,679 Property and
equipment, net 385,885 355,907 Other intangible assets, net 206,822
196,133 Goodwill 364,141 319,314 Long-term investments 124,530 -
Other non-current assets, net � 63,762 � 31,962 Total non-current
assets � 1,432,200 � 1,199,995 � Total Assets $ 2,992,802 $
2,755,538 � LIABILITIES � Current Liabilities: Accounts payable $
15,880 $ 21,304 Accrued expenses 239,521 212,097 Funds held for
clients 116,488 133,163 Advanced billings to clients 158,238
170,131 Accrued compensation and benefits 403,611 353,265
Short-term deferred contract revenues 52,733 49,581 Short-term debt
17,602 30,369 Current portion of long-term debt and capital lease
obligations � 133,002 � 24,222 Total current liabilities �
1,137,075 � 994,132 � Non-Current Liabilities: Deferred contract
revenues, less current portion 237,648 221,778 Debt and capital
lease obligations, less current portion 650,182 233,465 Other
non-current liabilities 240,637 165,264 Deferred income taxes, net
� 77,058 � 102,887 Total non-current liabilities � 1,205,525 �
723,394 � Total Liabilities $ 2,342,600 $ 1,717,526 HEWITT
ASSOCIATES, INC. CONSOLIDATED BALANCE SHEETS (continued) (Dollars
in thousands except for share and per share amounts) � � September
30, September 30, � 2008 � � 2007 � � STOCKHOLDERS� EQUITY �
Stockholders� Equity: Class A common stock, par value $0.01 per
share, 750,000,000 shares authorized, 130,390,880 and 127,672,253
issued, 94,227,120 and 107,126,309 shares outstanding, as of
September 30, 2008 and September 30, 2007, respectively $ 1,304 $
1,277 Additional paid-in capital 1,579,077 1,472,409 Cost of common
stock in treasury, 36,163,760 and 20,545,944 shares of Class A
common stock as of September 30, 2008 and 2007, respectively
(1,183,427 ) (597,200 ) Retained earnings 206,558 38,144
Accumulated other comprehensive income, net � 46,690 � � 123,382 �
Total stockholders� equity � 650,202 � � 1,038,012 � � Total
Liabilities and Stockholders� Equity $ 2,992,802 � $ 2,755,538 �
HEWITT ASSOCIATES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands) � Year Ended September 30, � 2008 � � � 2007
� Cash flows from operating activities: Net income (loss) $ 188,142
$ (175,080 ) Adjustments to reconcile net income (loss) to net cash
provided by operating activities: Depreciation and amortization,
including amortization of deferred contract revenues and costs
174,767 190,393 Goodwill and asset impairment 4,117 326,615 Gain on
sale of business (35,667 ) - Share-based compensation 48,345 40,937
Deferred income taxes (6,976 ) (19,147 ) Gain on sale of
investments (2,581 ) (5,982 ) Changes in operating assets and
liabilities, net of effect of acquisitions and dispositions: Client
receivables and unbilled work in process (34,271 ) 13,342 Prepaid
expenses and other current assets (51,155 ) (4,581 ) Deferred
contract costs (102,214 ) (143,619 ) Other assets (22,646 ) (5,102
) Accounts payable (4,962 ) (11,183 ) Accrued compensation and
benefits 34,787 82,024 Accrued expenses 22,518 30,842 Advanced
billings to clients (1,515 ) (7,525 ) Deferred contract revenues
96,077 111,930 Other long-term liabilities � 7,184 � � 11,366 � Net
cash provided by operating activities 327,902 435,230 � Cash flows
from investing activities: Purchases of investments (426,675 )
(400,794 ) Proceeds from sales of investments 513,064 502,331
Additions to property and equipment (117,556 ) (88,477 ) Cash paid
for acquisitions and transaction costs, net of cash acquired
(134,081 ) (45,562 ) Cash received for sale of business � 42,420 �
� - � Net cash used in investing activities (122,828 ) (32,502 ) �
Cash flows from financing activities: Proceeds from the exercise of
stock options 43,606 54,183 Excess tax benefits from the exercise
of share-based awards 10,227 4,912 Proceeds from short-term
borrowings 185,468 103,771 Proceeds from long-term borrowings
539,751 - Repayments of short-term borrowings, capital leases and
long-term debt (225,977 ) (141,610 ) Purchase of Class A common
shares for treasury � (586,227 ) � (195,835 ) Net cash used in
financing activities (33,152 ) (174,579 ) � Effect of exchange rate
changes on cash and cash equivalents � (9,171 ) � 11,666 � Net
increase in cash and cash equivalents 162,751 239,815 � Cash and
cash equivalents, beginning of year 378,743 138,928 Cash and cash
equivalents, end of year $ 541,494 � $ 378,743 � Supplementary
disclosure of cash paid during the period: Interest paid $ 20,730 $
23,534 Income taxes paid $ 136,347 $ 73,837 Schedule of non-cash
financing activities: Capital leases $ 13,278 $ - HEWITT
ASSOCIATES, INC. ADJUSTED EBITDA RECONCILIATION (Unaudited)
(Dollars in thousands) � Year EndedSeptember 30, � 2008 � � � 2007
� � Reported net income $ 188,142 $ (175,080 ) Depreciation and
amortization (1) 170,847 196,852 Provision for income taxes 128,302
50,362 Interest expense (income), net 2,765 (10,199 ) � EBITDA
490,057 61,935 � Adjustments: Cyborg � FY08 gain (2) / FY07
operations (3) (35, 446 ) (8,840 ) Asset impairment - 328,540
Severance (4) - 31,518 Real estate 44,775 29,339 HR BPO contract
restructurings 11,798 15,000 Legal settlement � - � � 4,548 �
Underlying adjustments 21,127 400,105 Normalized depreciation and
amortization addbacks (1) 1,104 (10,733 ) Other (income) � (6,366 )
� (8,050 ) Total adjustments 15,865 381,322 � Adjusted EBITDA
before certain non-cash addbacks 505,921 443,257 � Certain non-cash
addbacks: Adjustments to asset impairments 2,927 4,735 Net
deferrals (5) (5,559 ) (30,324 ) Deferred internal software
development costs (23,085 ) (16,600 ) Stock-based compensation
52,084 40,937 Other � (8,118 ) � (6,974 ) Total certain non-cash
addbacks 18,249 (8,226 ) � Adjusted EBITDA $ 524,170 � $ 435,031 �
� (1) FY08 depreciation and amortization includes $1,104 of
adjustments related to HR BPO contract and real estate
restructurings. FY07 includes $3,001 relating to Statement of
Operations reclassifications. Additionally, discount accretion on
the Exult convertible debt of $3,920 and $1,274 is 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 FY08 Consolidated Statement of Operations. This reduction
pertains to certain Cyborg employee-related expenses recorded in
the second fiscal quarter. � (3) Cyborg results have been excluded
for February through September 2007 to enable year-over-year
comparisons. � (4) In FY07, severance charges related to workforce
restructuring initiatives of $31,518 were excluded from operating
income in deriving underlying operating income, net income, EPS and
Adjusted EBITDA. Severance charges (representing both workforce
restructuring and workforce reductions) of $39,142 are included in
reported results for the year ended September 30, 2007. Severance
charges of $30,783 are included in underlying results for the year
ended September 30, 2008. � (5) Net deferrals as presented and the
net of Revenue and Cost Deferrals in the Statements of Cash Flows
vary by $578 and $1,365 for 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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