UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended September 30, 2008
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
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Commission File Number 001-31351
HEWITT ASSOCIATES, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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47-0851756
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(State or other jurisdiction of incorporation)
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(I.R.S. Employer Identification No.)
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100 Half Day Road; Lincolnshire, Illinois
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60069
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(Address of principal executive offices)
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(Zip Code)
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847-295-5000
(Telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
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Title of each Class
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Name of each exchange on which registered
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Class A Common Stock - $0.01 par value
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act:
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Title of each Class
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Name of each exchange on which registered
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None
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None
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Indicate by checkmark if the registrant is a
well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
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No
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Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange
Act. Yes
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No
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
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No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of registrant’s knowledge, in a definitive proxy statement or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer
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Accelerated filer
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Smaller reporting company
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Non-accelerated filer
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(Do not
check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes
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No
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The aggregate market value of the common stock of Hewitt Associates, Inc. outstanding shares estimated to be held by non-affiliates was $2,330,045,730 as of October 31, 2008, based on an October 31, 2008 closing price of $27.89.
While it is difficult to determine the number of shares owned by affiliates (within the meaning of the term under the applicable regulations of the Securities and Exchange Commission), the registrant believes this estimate is reasonable.
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Class
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Outstanding as of October 31, 2008
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Class A Common Stock - $0.01 par value
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94,236,095
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DOCUMENTS INCORPORATED BY REFERENCE
Certain specified portions of the registrant’s Proxy Statement for the Annual Meeting of Stockholders (the “Proxy Statement”) are incorporated by reference
in response to Part III (Items 10 – 14) of this Annual Report to the extent described herein.
HEWITT ASSOCIATES, INC.
FORM 10-K
For The Fiscal Year Ended
September 30, 2008
INDEX
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PART I
Disclosure Regarding Forward-Looking Statements
This report contains forward-looking statements relating to our
operations that are based on our current expectations, estimates and projections. Words such as “anticipates”, “believes”, “continues”, “estimates”, “expects”, “goal”, “intends”,
“may”, “opportunity”, “plans”, “potential”, “projects”, “forecasts”, “should”, “will” and similar expressions are intended to identify such forward-looking statements.
These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Forward-looking statements are based upon assumptions as to future events that may not prove to be accurate.
Actual outcomes and results may differ materially from what is expressed or forecasted in these forward-looking statements. Actual results may differ from the forward-looking statements for many reasons, including those discussed in Item 1A.
“Risk Factors” appearing elsewhere in this Annual Report on Form 10-K. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or for any other reason.
Website Access to Company Reports and Other Information
We make available free of charge through our website,
www.hewitt.com
, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements and any amendments to those documents, as soon as
reasonably practicable after such material is electronically filed with the Securities and Exchange Commission. Our internet website and the information contained therein or incorporated therein are not intended to be incorporated into this Annual
Report.
We have adopted a Code of Conduct that applies to all employees as well as our Board of Directors; a Code of Ethics for Senior Executive Financial
Officers that applies to our principal executive officer, principal financial and accounting officer and certain other senior employees; and corporate governance guidelines for our Board of Directors. The Code of Conduct, Code of Ethics and
corporate governance guidelines, as well as the Charters for the three committees of our Board of Directors, the Audit Committee, the Compensation and Leadership Committee and the Nominating and Corporate Governance Committee, are posted on our
website
www.hewitt.com
. We intend to post on our website any amendments to or waivers of the Code of Ethics for Senior Executive Financial Officers. Copies of these documents will be provided free of charge upon written request directed to
Investor Relations, Hewitt Associates, Inc. 100 Half Day Road, Lincolnshire, IL 60069.
We use the terms “Hewitt”, “the Company”,
“we”, “us” and “our” to refer to the business of Hewitt Associates, Inc. and its subsidiaries.
Overview
Hewitt is a leading global provider of human resource benefits, outsourcing and consulting services, with approximately 23,000 employees based in 33 countries. We help
our clients generate greater value from their employees by helping them address challenges presented by their people, workforce performance and human resources operations. Our business has evolved from our founding in 1940 as a provider of actuarial
services for sponsors of retirement plans and executive compensation consulting. Over the last six decades, we have extended, expanded and created new human resources services that adapt to our clients’ changing workforce-related business needs
and that help them with solutions to their challenges.
Our three business segments, Benefits Outsourcing, Human Resource Business Process Outsourcing (HR
BPO) and Consulting, help clients develop, implement and deliver strategies and programs that ensure effective human resources business process design, administration and technologies as well as help manage the complex human elements necessary to
acquire, develop, motivate and retain the talent required to meet business objectives.
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Clients benefit from the global human capital management strategies, programs and process expertise we have developed
over more than 65 years in this business. We employ this expertise in our Consulting segment to develop and implement human capital solutions within our clients’ environments, and in our Benefits Outsourcing and HR BPO segments to manage,
streamline, automate and administer part or all of our clients’ human resources programs, processes, and functions. Of our $3.2 billion of net revenues in 2008, approximately 49% was generated by our Benefits Outsourcing business, approximately
34% was generated by our Consulting segment and approximately 17% was generated by our HR BPO segment. See Note 22 to the consolidated financial statements for additional information on Segments and Geographic Data.
A primary driver of our historical growth has been our deep, long-term client relationships. Our impressive client portfolio reflects our long-term success at providing
quality services to exceptional companies, and serves as a catalyst for discussions with both prospective and existing clients about how we can deliver value in new or expanded ways. As a result, we believe that the quality of our relationships with
more than 300 Benefits Outsourcing clients, 32 significant multi-service clients as well as a number of smaller single-service clients within HR BPO, and over 3,000 Consulting clients, many of which are
Global 1000
companies, is a competitive
advantage.
Hewitt Associates, Inc. was formed in 2002 in connection with the Company’s transition to a corporate structure and its related initial
public offering. Hewitt Associates, Inc. is a Delaware corporation with no material assets other than its ownership interest in Hewitt Associates LLC, an Illinois limited liability company that serves as Hewitt’s operating entity in the U.S.
and also holds ownership interests in the Company’s subsidiaries.
Benefits Outsourcing Segment
Benefits Outsourcing is the largest part of Hewitt’s business in terms of revenues and profits. As companies look for ways to control benefit costs while meeting
employees’ expectations for enhanced benefit services, such as information and decision support tools, Hewitt helps them by providing management tools to make decisions that improve quality and reduce the cost of their health care and
retirement benefits.
Hewitt’s industry-leading, proprietary Total Benefit Administration
TM
(TBA) system integrates the seamless administration of clients’ primary benefits programs—defined benefits, defined contribution and
health and welfare. The TBA system allows integrated, single-system administration with the flexibility of multiple access channels (call centers, interactive voice response and the internet). Using Hewitt’s web-enabled self-service center,
Your Benefits Resources
TM
(YBR), client employees can execute transactions and manage their benefit programs using modeling tools and various
support references. The Company provides TBA benefits administration services primarily to companies with more than 15,000 employees through contracts that average three to five years. These multi-year contracts combined with high client renewal
rates yield significant annual revenue retention. Hewitt also has a service offering for defined benefit and defined contribution services for companies with 5,000 to 15,000 employees based on its TBA platform, and a new health and welfare service
offering designed for companies with 3,000 or more employees on a new platform acquired through acquisition of RealLife HR in 2007.
Service Offering
Detail
Health and Welfare Plan Administration:
Administering health and welfare benefit programs is an important and complex
task for clients who must manage both the rising cost of providing health insurance and employees’ demands for increased choice of health and welfare benefit options. Companies must provide employees with information explaining available health
and welfare options, answer their questions regarding alternatives and provide them with mechanisms for making their choices and managing their plans. In addition, ongoing health and welfare administration requires managing payroll deductions and
eligibility status data for health plans and providers.
Through the TBA system, Hewitt manages clients’ annual enrollment processes,
communicates to employees their available options and supports employee health and welfare decision-making. Whether through web-based tools, an automated voice response system or call centers, employees can obtain information about available options
and model health and welfare benefit costs under different assumptions. Additionally, Hewitt’s ProviderDirect tool helps employees select in-network medical providers by criteria such as specialty, location and gender, and the Participant
Advocacy service assists employees in resolving health plan eligibility, access and claim issues. The Your Spending Account™ flexible spending account administration service gives employees a paperless way to manage their health care spending
accounts and file claims for reimbursement.
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For ongoing health and welfare plan administration, Hewitt Associates Connections™ service connects
with more than 230 insurance companies and other health plan providers in the United States, Canada and Puerto Rico to facilitate data transfer, resolve quality issues, validate participant eligibility and pay premiums. Additionally, Hewitt offers
automatic payment of employees’ portion of program costs, providing clients with efficiencies and helping to ensure that contributions to health plans for inactive employees and retirees are appropriately credited.
Hewitt provides health and welfare administration services to mid-size companies, or those with fewer than 15,000 employees, via its Core Benefit
Administration offering resulting from the acquisition of RealLife HR in September 2007. The RealLife HR technology platform provides mid-size companies with a robust, streamlined and cost-effective solution to maximize the return on their benefits
investment. The Company believes this offering will enable it to increase its share of the middle market, thereby contributing to the overall growth of the Benefits Outsourcing segment.
Defined Contribution Plan Administration:
Defined contribution administration requires management of participant, payroll and investment fund data
and transactions; daily transaction data transmissions between companies and their defined contribution plan trustees and asset managers; and daily posting of investment results to individual defined contribution accounts. Hewitt provides defined
contribution plan administration both to the mid-market (between 5,000 and 15,000 participants) and the large market (defined as 15,000 or more participants).
Unlike many of Hewitt’s competitors who provide defined contribution outsourcing services in order to accumulate plan assets in their proprietary investment funds, Hewitt does not manage investments. The Company
believes its independence in providing these services is a strength, as Hewitt’s focus is to provide reliable administrative and consultative services to plan sponsors and effective and comprehensive retirement planning and decision support
services to the employee, regardless of the funds that clients choose to include in their plans or their employees’ investment elections. Hewitt also works with researchers at leading academic institutions and other organizations to analyze the
volumes of data accumulated in order to identify trends in participant behavior and leveraging our consulting expertise to develop superior solutions to help clients improve their strategies for addressing employees’ financial needs.
Defined Benefit Plan Administration:
Defined benefit or pension plans are subject to numerous laws and regulations that can make
administration of these programs complex and paper-intensive, and have created risks of significant adverse consequences for inaccurate or improper plan administration. Hewitt has re-engineered, streamlined and automated defined benefit plan
administration to make plan administration more consistent and accurate, so that employees can model their retirement options, initiate and process retirement transactions through Hewitt’s internet-based tools or through its automated voice
response system. Through Hewitt’s call centers, it provides access to pension counselors who are knowledgeable about employees’ pension programs and options and who can explain how their pension plans work. Because Hewitt also provides
comprehensive actuarial and investment consulting services, we believe we can provide complete solutions for clients and deliver services more efficiently than many of our competitors. Similarly, because of our administration of health care, defined
contribution, and pension programs, we can provide end-to-end integrated solutions for employees as well.
Point Solutions:
Point Solutions was formed in 2006 (formerly known as Enhanced Shared Services) and focuses on providing standalone HR services to complement Hewitt’s current core Benefits Outsourcing offers. Examples of standalone solution offerings
include, among others:
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Flexible Spending Account Administration
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Benefit Determination Review Team
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Hewitt’s new Absence Management service offering, acquired through the purchase of LCG in July 2008,
helps employers improve financial and operational performance by minimizing the costs, productivity impact, and liabilities associated with all forms of absence. To do that, we integrate best-in-class competencies in disability management,
technology and analysis, data integration, reporting, and effective return-to-work programs. The integration of these components allows Hewitt to provide excellent, measurable outcomes. This approach helps clients implement sustainable, long-term
absence management strategies.
Hewitt expects to sell and deliver incremental standalone solutions to its existing base of Benefits
Outsourcing and Consulting clients, sell standalone offerings to new prospects and identify new product solutions. We believe this will allow us to grow the business and expand our overall client base.
HR BPO Segment
Hewitt began delivering HR BPO services in the early
2000s, and was an early pioneer in the HR BPO industry.
Today, Hewitt provides clients with secure, market-leading solutions to manage employee data,
administer benefits, payroll and other human resources processes, and record and manage transactions across talent management, workforce management and core process management.
More specifically, Hewitt provides web-based tools for self-management of a wide range of human resources programs by employees, managers and HR professionals. In addition, Hewitt provides call centers for those
interactions and transactions that require personal assistance. Hewitt transmits and transfers data between the client and both their employees and outside parties, such as health plans, trustees and investment managers. Hewitt also provides clients
with web-based tools that enable them to report on and analyze the effectiveness of, and the return on investments in, benefits, compensation and human resources programs, and to facilitate communication and project management.
Companies engage Hewitt for HR BPO services for reasons similar to outsourcing Benefits Administration: to reduce costs and focus on core business while gaining
expertise, innovation and access to current technology and processes through the economies of scale created by using repeatable processes and standardized technologies.
Service Offering Detail
Talent Management:
Hewitt offers the following services to help
clients successfully build upon their most valuable asset, people:
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Recruiting services, including need identification, sourcing and attraction, screening, interviewing and selection, offer management, reporting and compliance.
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Learning and development services, including learning paths and certificates, course catalog administration, event scheduling and logistics, evaluation and
assessments, accounting and content development and sourcing.
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Performance management services, including planning and evaluation support, feedback collection and individual profile maintenance.
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Succession planning services, including maintenance of succession trees, tracking and monitoring of high potential employees and development of incumbent and
candidate profiles.
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Workforce Management:
Hewitt provides a portfolio of services that allows clients to manage
their workforce more effectively and efficiently. The portfolio includes the following services:
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Compensation administration services, including administration of salary, bonus and stock options, administration of salary surveys and total reward communications.
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Total rewards services, including strategy, design, implementation and communication of benefits and compensation programs.
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Workforce administration services, including employee records management, life events, employment events, reduction in force, organization structure changes and
leave management.
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Domestic relocation services, including relocation initiation, policy briefing and administration, expense processing and accounting and inventory management.
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Leave and absence management services, including a comprehensive case management approach to leave initiation, leave tracking and management, and coordination with
third parties for compliance with the Family and Medical Leave Act and disability and personal leave policies.
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Global mobility services including assignment planning, candidate selection support, pre-departure planning and support, on-assignment support and repatriation
planning and support.
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Core Process Management:
Day-to-day transactional processes related to employee events
require solid procedures, knowledge of regulations and efficient systems. Hewitt helps its clients in this regard by offering the following services:
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Payroll services, including time and attendance, on- and off-cycle pay, garnishments and taxes and accounting.
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Benefits services, including program delivery and administration, recordkeeping and reconciliation, benefit accounting, invoice review and payment, and supplier
sourcing and management for health and welfare, defined contribution and defined benefit programs.
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Payments services, including accounts payable/receivable, travel and expense, fixed assets and general ledger, cash and banking/treasury.
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Consulting Segment
Hewitt developed
its human resources expertise over more than 65 years of helping clients develop strategies and design human resources programs to solve the challenges of acquiring, managing, motivating and retaining the pivotal talent needed to create and sustain
a competitive advantage. Companies around the world work with our consultants to develop and implement people-related business strategies and program designs for retirement and health care benefits, compensation and total rewards, performance
management and change management that will lower costs while increasing their ability to meet business objectives.
Service Offering Detail
Retirement and Financial Management (“RFM”) Consulting:
This line of business assists clients in three primary
activities:
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Designing overall retirement program strategies aligned with the needs of companies and their employees;
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Providing actuarial analysis and financial strategies to support clients in their management of pension issues; and
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Consulting on asset allocation, investment policies and investment manager evaluation.
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Health Care Consulting:
This service offering helps clients design comprehensive health and welfare strategies, from the initial philosophical
approach to specific benefit plan changes that support clients’ people-related business strategies. Health Care consultants assist clients in the selection of health plans that balance cost and value and improve employee satisfaction. Health
Care consultants also help clients determine which funding approaches (i.e., insured, self-insured or risk-adjusted insured) and employee contribution strategies will best meet their objectives.
Talent and Organization Consulting:
Talent and Organization Consulting provides clients with strategy and design advice for meeting their people-
and workforce-related business challenges in the following areas:
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Acquiring, managing and motivating talent needed to meet business objectives;
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Recommending effective and competitive compensation and performance management programs that align leaders and the broader workforce with business objectives;
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Resolving people-related issues that determine the success or failure of organizational changes and business restructurings, such as mergers, acquisitions,
divestitures, initial public offerings and joint ventures; and
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Analyzing the activities and costs of the human resources function in order to improve efficiencies, reduce costs and enhance effectiveness of the function.
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Hewitt’s Consulting services are closely aligned with our Benefits Outsourcing services in order to offer clients
total end-to-end solutions. In addition, the segment provides tailored communication services to enhance the success of client solutions in all of our service areas, including Benefits Outsourcing and HR BPO.
Competition
We operate in a highly competitive and rapidly changing
global market and compete with a variety of organizations. In addition, a client may choose to use its own resources rather than engage an outside company for human resources solutions.
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Benefits Outsourcing:
The principal competitors to our Benefits Outsourcing segment are outsourcing divisions of large financial institutions such as ING
Institutional Plan Services, Fidelity Investments, Merrill Lynch, T. Rowe Price and JP Morgan Chase, in addition to consulting firms or technology outsourcing and consulting firms such as Mercer, Affiliated Computer Services, EDS/ExcellerateHRO,
Watson Wyatt Worldwide and Aon.
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HR BPO:
The principal competitors to our HR BPO segment are technology consultants and integrators such as Accenture, Affiliated Computer Services,
EDS/ExcellerateHRO and IBM, and companies that have extended their services into human resources outsourcing such as Automatic Data Processing and Convergys.
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Consulting:
The principal competitors in our Consulting segment are consulting firms focused on broader human resources such as Mercer, Towers Perrin and
Watson Wyatt Worldwide. We also face competition from smaller benefits and compensation firms, as well as from public accounting, consulting and insurance firms offering human resources services.
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We believe the principal competitive advantage strengthening our Benefits Outsourcing, HR BPO and Consulting businesses is our ability to create total human resources
solutions for clients by demonstrating the depth and value of our experience and expertise in the full range of integrated strategy, design, administration, communication and delivery of human resources services. Other important factors are our
deep, long-term client relationships, our technology infrastructure, including underlying proprietary platforms, our ability to add value in a cost-effective manner, our employees’ technical and industry expertise and our professional
reputation.
Seasonality and Inflation
Revenues and
income vary over the fiscal year. Within our Benefits Outsourcing segment, we generally experience a seasonal increase in our fiscal first and fourth quarter revenues because our clients’ benefit enrollment processes typically occur during the
fall. Within our Consulting segment, we typically experience a seasonal peak in the fiscal third and fourth quarters which reflects our clients’ business needs for these services as they design new programs in anticipation of annual enrollment
processes. We believe inflation has had little effect on our results from operations during the past three years.
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Technology Innovation
We believe that our technological capabilities are an essential component of our strategy to grow our Benefits Outsourcing and HR BPO businesses and create new service offerings. Our strategy is to develop proprietary, custom solutions
through open industry standards when we believe we can develop a better solution than is available in the market, and to integrate existing best-in-class systems when we believe these solutions best meet our clients’ needs. Expenditures
relating to the acquisition and internal development of software totaled approximately $93 million, $72 million and $96 million in fiscal years 2008, 2007 and 2006, respectively.
We develop systems that are adaptable across multiple delivery channels (internet, automated voice response and call center). It was this technology strategy that led us to innovations such as
Total Benefit
Administration
™, the first system for administering all three primary benefits programs through a single, integrated database and that enabled real-time interactions over multiple customer channels. Examples of other technology-based tools
and service enhancements include:
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myHR
®
, a comprehensive human resources portal
presenting policies, resources and data personalized by role and by each individual’s eligibility and participation in applicable compensation, benefits and other human resources programs;
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AccessDirect
™, a personalized navigation system for the web or telephone that connects employees to benefits providers;
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Your Benefits Resources
™, a web platform that uses dynamic personalization to provide employees with customized content and decision support tools and
allows real-time management of health and welfare, defined contribution and defined benefit decisions and transactions;
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Hewitt Plan Sponsor Sight
, utilizing best-in-class portal, collaboration and data warehousing technologies, offers an on-line center allowing clients to
collaborate and manage work with us, analyze and report on their benefits programs and interact with a community of their peers; and
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Your Total Rewards
and
Your Total Rewards Executive
, web platforms that present to employees or executives comprehensive information on the full value
of the employment relationship, including base salary and bonuses, stock compensation, retirement plans, health care coverage, life and accident insurance, training and development opportunities, work/life benefits and other rewards.
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Intellectual Property
Our success
has resulted, in part, from our proprietary methodologies, tools, processes, databases and other intellectual property. We recognize the value of intellectual property in the marketplace and vigorously create, harvest and protect our intellectual
property.
To protect our proprietary rights, we rely primarily on a combination of copyright, trade secret and trademark laws, confidentiality agreements
with employees and third parties and protective contractual provisions such as those contained in licenses and other agreements with consultants, suppliers, strategic partners and clients.
We hold no patents and our licenses are ordinary course licenses of software and data. We also have a number of trademarks.
Contracts and Insurance
We have contracts with many of our clients
that define our responsibilities and limit our liability. In addition, we maintain professional liability insurance that covers the services we provide, subject to applicable deductibles and policy limits.
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Employees
As of
September 30, 2008, we had approximately 23,000 employees serving our clients through 111 offices in 33 countries, excluding joint ventures and minority investments.
The outsourcing and consulting markets are highly
competitive, and if we are not able to compete effectively our revenues and profit margins will be adversely affected.
The outsourcing and consulting
markets in which we operate include a large number of service providers and are highly competitive. Many of our competitors are expanding the services they offer in an attempt to gain additional business. Additionally, some competitors have
established and are likely to continue to establish cooperative relationships among themselves or with third parties to increase their ability to address client needs. Some of our competitors have greater financial, technical and marketing
resources, larger customer bases, greater name recognition, stronger international presence and more established relationships with their customers and suppliers than we have. Additional competitors have entered some of the marketplaces in which we
compete. In addition, new competitors or alliances among competitors could emerge and gain significant market share and some of our competitors may have or may develop a lower cost structure, adopt more aggressive pricing policies or provide
services that gain greater market acceptance than the services that we offer or develop. Large and well capitalized competitors may be able to respond to the need for technological changes faster, price their services more aggressively, compete for
skilled professionals, finance acquisitions, fund internal growth and compete for market share more effectively than we do. In order to respond to increased competition and pricing pressure, we may have to lower our prices, which would have an
adverse effect on our revenues and profit margin.
A significant or prolonged economic downturn could have a material adverse effect on our revenues,
financial condition and results of operations.
Our results of operations are affected directly by the level of business activity of our clients, which
in turn are affected by the level of economic activity in the industries and markets that they serve. Many economists are now predicting that the United States economy, and possibly the global economy, may enter into a prolonged recession as a
result of the deterioration in the credit markets and related financial crisis, as well as a variety of other factors. Economic slowdowns in some markets, particularly in the United States, may cause reductions in technology and discretionary
spending by our clients, which may result in reductions in the growth of new business as well as reductions in existing business. If our clients enter bankruptcy or liquidate their operations, our revenues could be adversely affected. Our revenues
under many of our Outsourcing contracts depend upon the number of our clients’ employees or the number of participants in our clients’ employee benefit plans and could be adversely affected by layoffs. We may also experience decreased
demand for our services as a result of postponed or terminated outsourcing of human resources functions or reductions in the size of our clients’ workforce. Reduced demand for our services could increase price competition. Some portion of our
Consulting services may be considered by our clients to be more discretionary in nature and as such, demand for these services may be impacted by economic slowdowns. Furthermore, a prolonged tightening of the credit market could significantly impact
our ability to access capital or liquidate investments in the future. Any of these effects could have a material adverse effect on our revenues, financial condition or results of operations.
The profitability of our engagements with clients may not meet our expectations due to unexpected costs, cost overruns, early contract terminations, unrealized
assumptions used in our contract bidding process and the inability to maintain our prices.
Our profitability is a function of our ability to control
our costs and improve our efficiency. As we adapt to change in our business, enter into new engagements, acquire additional businesses, and take on new employees in new locations, we may not be able to manage our large, diverse and changing
workforce, control our costs or improve our efficiency.
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Most new outsourcing arrangements undergo an implementation process whereby our systems and processes are customized to
match a client’s plans and programs. The cost of this process is estimated by us and often partially funded by our clients. If our actual implementation expense exceeds our estimate or if the ongoing service cost is greater than anticipated,
the client contract may be less profitable than expected.
Even though outsourcing clients typically sign long-term contracts, these contracts may be
terminated at any time, with or without cause, by our client upon 90 to 180 days written notice. Our outsourcing clients are required to pay a termination fee; however, this amount may not be sufficient to fully compensate us for the profit we would
have received if the contract had not been cancelled. Consulting contracts are typically on an engagement-by-engagement basis versus a long-term contract. A client may choose to delay or terminate a current or anticipated project as a result of
factors unrelated to our work product or progress, such as the business or financial condition of the client or general economic conditions. When any of our engagements are terminated, we may not be able to eliminate associated costs or redeploy the
affected employees in a timely manner to minimize the impact on profitability. Any increased or unexpected costs or unanticipated delays in connection with the performance of these engagements, including delays caused by factors outside our control,
could have an adverse effect on our profit margin.
Our profit margin, and therefore our profitability, is largely a function of the rates we are able to
charge for our services and the staffing costs for our personnel. Accordingly, if we are not able to maintain the rates we charge for our services or appropriate staffing costs of our personnel, we will not be able to sustain our profit margin and
our profitability will suffer. The prices we are able to charge for our services are affected by a number of factors, including competitive factors, cost of living adjustment provisions (COLA’s), the extent of ongoing clients’ perception
of our ability to add value through our services and general economic conditions. Our profitability in providing HR BPO services is largely based on our ability to drive cost efficiencies during the term of our contracts for such services. If we
cannot drive suitable cost efficiencies, our profit margins will suffer.
We might not be able to achieve the cost savings required to sustain and
increase our profit margins.
Our outsourcing business model inherently places ongoing pressure on our profit margins. We provide our outsourcing
services over long terms for variable or fixed fees that generally are less than our clients’ historical costs to provide for themselves the services we contract to deliver. Also, clients’ demand for cost reductions may increase over the
term of the agreement. As a result, we bear the risk of increases in the cost of delivering HR BPO services to our clients, and our margins associated with particular contracts will depend on our ability to control our costs of performance under
those contracts and meet our service commitments cost-effectively. Over time, some of our operating expenses will increase as we invest in additional infrastructure and implement new technologies to maintain our competitive position and meet our
client service commitments. We must anticipate and respond to the dynamics of our industry and business by using quality systems, process management, improved asset utilization and effective supplier management tools. We must do this while
continuing to grow our business so that our fixed costs are spread over an increasing revenue base. If we are not effective at this, our ability to sustain and increase profitability will be jeopardized.
Our accounting for our long-term contracts requires using estimates and projections that may change over time. Such changes may have a significant or adverse effect
on our reported results of operations or consolidated balance sheet.
Projecting contract profitability on our long-term outsourcing contracts requires
us to make assumptions and estimates of future contract results. All estimates are inherently uncertain and subject to change. In an effort to maintain appropriate estimates, we review each of our long-term outsourcing contracts, the related
contract reserves and intangible assets on a regular basis. If we determine that we need to change our estimates for a contract, we will change the estimates in the period in which the determination is made. These assumptions and estimates involve
the exercise of judgment and discretion, which may also evolve over time in light of operational experience, regulatory direction, developments in accounting principles and other factors. In particular, HR BPO is a relatively immature industry and
we have limited experience in estimating implementation and ongoing costs compared to our more mature Benefits Outsourcing business. Further, initially foreseen effects could change over time as a result of changes in assumptions, estimates or
developments in the business or the application of accounting principles related to long-term outsourcing contracts. Application of, and changes in, assumptions, estimates and policies may adversely affect our financial results.
11
The loss of a significantly large client or several clients could have a material adverse effect on our revenues and
profitability.
Although no one client comprised more than ten percent of our net revenues in any of the three years ended September 30, 2008, the
loss of a significantly large client or several clients could adversely impact our revenues and profitability. Our largest clients employ us for Benefits Outsourcing and HR BPO services. As a result, given the amount of time needed to implement new
outsourcing clients, there is no assurance that we would be able to promptly replace the revenues or income lost if a significantly large client or several clients terminated our services or decided not to renew their contracts with us.
We may have difficulty integrating or managing acquired businesses, which may harm our financial results or reputation in the marketplace.
Our expansion and growth may be dependent in part on our ability to make acquisitions. The risks we face related to acquisitions include that we could overpay for
acquired businesses, face integration challenges, have difficulty finding appropriate acquisition candidates, and any acquired business could significantly under-perform relative to our expectations. If acquisitions are not successfully integrated,
our revenues and profitability could be adversely affected as well as adversely impact our reputation.
We may pursue additional acquisitions in the
future, which may subject us to a number of risks, including;
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diversion of management attention;
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inability to retain key personnel, other employees and clients of the acquired business;
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potential dilutive effect on our earnings;
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inability to establish uniform standards, controls, procedures and policies;
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entry into new markets or service areas;
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exposure to legal claims for activities of the acquired business prior to acquisition; and
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inability to effectively integrate the acquired company and its employees.
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Any excess of the purchase price paid by Hewitt in an acquisition over the fair value of the net tangible and identifiable intangible assets acquired will be accounted for as goodwill. Goodwill is not amortized
against income but is subject to periodic reviews for impairment. Refer to Critical Accounting Policies and Estimates in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. If an impairment charge
is required in the future, the charge would negatively impact reported earnings in the period of the charge. For the years ended September 30, 2007 and 2006, the Company recorded impairments of goodwill related to the HR BPO segment in the
amounts of $280 million and $172 million, respectively, as a component of operating results in the consolidated statement of operations in Item 8. Financial Statements and Supplementary Data.
Our business will be negatively affected if we are not able to anticipate and keep pace with rapid changes in government regulations or if government regulations
decrease the need for our services or increase our costs.
The areas in which we provide outsourcing and consulting services are the subject of
government regulation which is constantly evolving. Changes in government regulations in the United States, our principal geographic market, affecting the value, use or delivery of benefits and human resources programs, including changes in
regulations relating to health and welfare (such as medical) plans, defined contribution (such as 401(k)) plans, defined benefit (such as pension) plans or payroll delivery, may adversely affect the demand for or profitability of our services. In
addition, our growth strategy includes a number of global expansion objectives which further subject us to applicable laws and regulations of countries outside the United States. If we are unable to adapt our services to applicable laws and
regulations, our ability to grow our business or to provide effective outsourcing and consulting services in these areas will be negatively impacted. Recently, we have seen regulatory initiatives in both the United States and certain European
countries result in companies either discontinuing their defined benefit programs or de-emphasizing the importance such programs play in the overall mix of their benefit programs with a trend toward increased use of defined contribution plans. If
organizations shift to defined contribution plans more rapidly than we anticipate, our results of operation of our business could be adversely affected.
12
If we are unable to satisfy regulatory requirements relating to internal controls over financial reporting, our
business could suffer.
Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. If we
cannot provide reliable financial reports or prevent fraud, both our reputation in the marketplace and our financial results could suffer. We have spent considerable resources reviewing and implementing improvements to our internal controls. Any
failure to implement required new or improved controls, or difficulties encountered in their implementation could harm our operating results or cause us to fail to meet our reporting obligations. Inadequate internal controls could also cause our
clients or our investors to lose confidence in our services delivery or reported financial information, which could have a negative effect on the trading price of our common stock.
Our business performance and growth plans will be negatively affected if we are not able to effectively apply technology in driving value for our clients through technology-based solutions or gain internal
efficiencies through the effective application of technology and related tools.
Our future success depends, in part, on our ability to develop and
implement technology solutions that anticipate and keep pace with rapid and continuing changes in technology, industry standards and client preferences. We may not be successful in anticipating or responding to these developments on a timely and
cost-effective basis, and our ideas may not be accepted in the marketplace. Additionally, the effort to gain technological expertise and develop new technologies in our business requires us to incur significant expenses. If we cannot offer new
technologies as quickly as our competitors or if our competitors develop more cost-effective technologies, it could have a material adverse effect on our ability to obtain and complete client engagements.
Our business is also dependent, in part, upon continued growth in the use of technology in business by our clients, prospective clients and their employees and our
ability to deliver the efficiencies and convenience afforded by technology. If growth in the use of technology does not continue, demand for our services may decrease. Use of new technology for commerce generally requires understanding and
acceptance of a new way of conducting business and exchanging information. Companies that have already invested substantial resources in traditional means of conducting commerce and exchanging information may be particularly reluctant or slow to
adopt a new approach that would not utilize their existing personnel and infrastructure.
If our clients or third parties are not satisfied with our
services, we may face damage to our professional reputation or legal liability.
We depend, to a large extent, on our relationships with our clients
and our reputation for high-quality outsourcing and consulting services. As a result, if a client is not satisfied with our services, it may be more damaging to our business than to other businesses. Moreover, if we fail to meet our contractual
obligations, we could be subject to legal liability or loss of client relationships. The nature of our work, especially our actuarial services, involves assumptions and estimates concerning future events, the actual outcome of which we cannot know
with certainty in advance. In addition, we could make computational, software programming or data management errors. Further, a client may claim it suffered losses due to reliance on our consulting advice. Defending lawsuits arising out of any of
our services could require substantial amounts of management attention, which could adversely affect our financial performance. Our exposure to liability on a particular engagement may be greater than the profit opportunity of the engagement. In
addition to client liability, governmental authorities may impose penalties with respect to our errors or omissions and may preclude us from doing business in relevant jurisdictions. In addition to the risks of liability exposure and increased costs
of defense and insurance premiums, claims arising from our professional services may produce publicity that could hurt our reputation and business.
Improper disclosure of personal data could result in liability and harm our reputation.
One of our significant responsibilities is to
maintain the security and privacy of our clients’ confidential and proprietary information and the personal data of their employees and plan participants. We have established several policies and procedures to help protect the
13
security and privacy of this information. Although we continue to review and improve our policies and procedures, it is possible that our security controls
over personal data, our training of employees and vendors on data security, and other practices we follow may not prevent the improper access to or disclosure of personally identifiable information. Such disclosure could harm our reputation and
subject us to liability under our contracts and laws that protect personal data, resulting in increased costs or loss of revenue. Further, data privacy is subject to frequently changing rules and regulations, which sometimes conflict among the
various jurisdictions and countries in which we provide services. Our failure to adhere to or successfully implement processes in response to changing regulatory requirements in this area could result in legal liability or impairment to our
reputation in the marketplace.
We depend on our employees; the inability to attract new talent or the loss of key employees could damage or result in
the loss of client relationships and adversely affect our business.
Our success and ability to grow are dependent, in part, on our ability to hire and
retain large numbers of talented people. In particular, our employees’ personal relationships with our clients are an important element of obtaining and maintaining client engagements. The inability to attract qualified employees in sufficient
numbers to meet demand or losing employees who manage substantial client relationships or possess substantial experience or expertise could adversely affect our ability to secure and complete engagements, which would adversely affect our results of
operations.
Since our initial public offering, we have made, and anticipate making in the future, equity-based awards to many of our employees to serve,
in part, as an incentive to remain employed with the Company. In addition, the incentives provided by these awards may not be effective in attracting new talent or causing then-current employees to stay with our organization.
Our global operations and expansion strategy pose complex management, foreign currency, legal, tax and economic risks, which we may not adequately address.
As of September 30, 2008, we had a total of 111 offices in 33 countries and 3 additional offices in 2 additional countries through joint ventures
and minority investments. In fiscal 2008, approximately 74% of our total revenues were attributable to activities in the United States and approximately 26% of our revenues were attributable to our activities in Europe, Canada, the Asia-Pacific
region and Latin America. Our ability to provide services from global locations having lower cost structures than the United States and continued penetration of markets beyond the United States are important components of our growth strategy. A
number of risks may inhibit our international operations and global sourcing efforts, preventing us from realizing our global expansion objectives, including:
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insufficient demand for our services in international jurisdictions, which may be due to applicable laws and regulations or benefit practices in such jurisdictions;
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ability to execute effective and efficient cross-border sourcing of services on behalf of our clients;
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the burdens of complying with a wide array of international laws and regulations, and U.S. laws, regulating operations outside the U.S., including but not limited
to regulations regarding the flow and transfer of data and other information between countries;
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multiple and possibly overlapping and conflicting tax laws;
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restrictions on the movement of cash;
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political instability and international terrorism;
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restrictions on the import and export of technologies;
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price controls or restrictions on exchange of foreign currencies;
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inflationary risks in foreign countries.
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The demand for our services may not grow at rates we anticipate.
We continue to devote significant attention to our HR BPO services offering. The market for HR BPO services continues to develop, and we continue to modify our service
offering to meet market need and provide the quality of services our clients expect of us at acceptable margins. Our offering may not be well received by our clients, or the demand for human resources business process outsourcing may not grow as
rapidly as we anticipate, which could have an adverse impact on our revenues and profit margins.
In addition, the growth for certain Benefits Outsourcing
services has slowed, particularly in the large plan market (over 20,000 participants). Most companies have already outsourced their defined contribution plans, many companies have frozen their defined benefit plans and few new defined benefit plans
are being adopted. Some larger companies that have not previously outsourced some of their benefit programs may wish to continue to administer such programs themselves rather than outsource a larger portion of their human resources function. If a
greater than anticipated percentage of such organizations determines not to outsource such programs, it could also have an adverse impact on our revenues and profit margins.
If we fail to establish and maintain alliances for developing, marketing and delivering our services, our ability to increase our revenues and profitability may suffer.
Our growth depends, in part, on our ability to develop and maintain alliances with businesses such as brokerage firms, financial services companies, health care
organizations, insurance companies, other business process outsourcing organizations and other companies in order to develop, market and deliver our services. If our strategic alliances are discontinued or we have difficulty developing new
alliances, our ability to increase or maintain our client base may be substantially diminished.
We rely on third parties to provide services and their
failure to perform the service could do harm to our business.
As part of providing services to clients, we rely on a number of third-party service
providers. These providers include, but are not limited to, plan trustees and payroll service providers responsible for transferring funds to employees or on behalf of employees, and providers of data and information, such as software vendors,
health plan providers, investment managers and investment advisers, that we work with to provide information to clients’ employees. Those providers also include providers of human resource functions such as recruiters and trainers employed by
us in connection with our human resources business processing services delivered to our clients. Failure of third party service providers to perform in a timely manner could result in contractual or regulatory penalties, liability claims from
clients and/or employees, damage to our reputation and harm to our business.
We have only a limited ability to protect the intellectual property rights
that are important to our success, and we face the risk that our services or products may infringe upon the intellectual property rights of others.
Our future success depends, in part, upon our ability to protect our proprietary methodologies and other intellectual property. Existing laws of some countries in which we provide or intend to provide services or products may offer only
limited protection of our intellectual property rights. We rely upon a combination of trade secrets, confidentiality policies, non-disclosure and other contractual arrangements and copyright and trademark laws to protect our intellectual property
rights. The steps we take in this regard may not be adequate to prevent or deter infringement or other misappropriation of our intellectual property, and we may not be able to detect unauthorized use or take appropriate and timely steps to enforce
our intellectual property rights. Protecting our intellectual property rights may also consume significant management time and resources.
We cannot be
sure that our services and products, or the products of others that we offer to our clients, do not infringe on the intellectual property rights of third parties, and we may have infringement claims asserted against us or against our clients. These
claims may harm our reputation, result in financial liabilities and prevent us from offering some services or products. We have generally agreed in our outsourcing contracts to indemnify our clients for any expenses or liabilities resulting from
claimed infringements of the intellectual property rights of third parties. In some instances, the amount of these indemnities may be greater than the revenues we receive from the client. Any claims or litigation in this area, whether we ultimately
win or lose, could be
15
time-consuming and costly, injure our reputation or require us to enter into royalty or licensing arrangements. We may not be able to enter into these
royalty or licensing arrangements on acceptable terms. Any limitation on our ability to provide a service or product could cause us to lose revenue-generating opportunities and require us to incur additional expenses to develop new or modified
solutions for future projects.
We rely heavily on our computing and communications infrastructure and the integrity of these systems in the delivery of
services for our clients, and our operational performance and revenue growth depends, in part, on the reliability and functionality of this infrastructure as a means of delivering human resources services.
The internet is a key mechanism for delivering our services to our clients efficiently and cost effectively. Our clients may not be receptive to human resource services
delivered over the internet due to concerns regarding transaction security, user privacy, the reliability and quality of internet service and other reasons. Our clients’ concerns may be heightened by the fact we use the internet to transmit
extremely confidential information about our clients and their employees, such as compensation, medical information and other personally identifiable information. In addition, the internet has experienced, and is expected to continue to experience,
significant growth in the number of users and volume of traffic. As a result, its performance and reliability may decline. In order to maintain the level of security, service and reliability that our clients require, we may be required to make
significant investments in our on-line means of delivering human resources services. In addition, websites and proprietary on-line services have experienced service interruptions and other delays occurring throughout their infrastructure. If these
outages or delays occur frequently in the future, internet usage as a medium of exchange of information could grow more slowly or decline and the internet might not adequately support our web-based tools. The adoption of additional laws or
regulations with respect to the internet may impede the efficiency of the internet as a medium of exchange of information and decrease the demand for our services. If we cannot use the internet effectively to deliver our services, our revenue growth
and results of operation may be impaired.
We may lose client data as a result of major catastrophes and other similar problems that may materially
adversely impact our operations. We have multiple processing centers around the world which use various commercial methods for disaster recovery capabilities. Our main data processing center, located in Lincolnshire, Illinois is in a dual (separate)
data center configuration to provide back-up capabilities. In the event of a disaster, we have developed business continuity plans; however, they may not be sufficient, and the data recovered may not be sufficient for the administration of our
clients’ human resources programs and processes.
Our quarterly revenues, operating results and profitability will vary from quarter to quarter,
which may result in volatility of our stock price.
Our quarterly revenues, operating results and profitability have varied in the past and are likely
to vary significantly from quarter to quarter. This may lead to volatility in our stock price. The factors that are likely to cause these variations are:
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the rate at which we obtain new outsourcing engagements since our outsourcing engagements often require substantial implementation costs that are recovered over the
term of the engagements;
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seasonality of certain services, including annual benefit enrollment processes;
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timing of consulting projects and their termination;
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timing of commencement of new outsourcing engagements;
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changes in estimates of profitability of outsourcing engagements;
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the introduction of new products or services by us or our competitors;
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pricing pressure on new client services and renewals;
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the timing, success and costs of sales, marketing and product development programs;
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the success of strategic acquisitions, alliances or investments;
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changes in estimates, accruals and payments of variable compensation to our employees; and
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general economic factors.
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16
In addition, our operating results in future periods may be below the expectations of securities analysts and investors
which may materially adversely affect the market price of our Class A common stock.
We may not be able to liquidate our auction rate securities
(“ARS”) at carrying value, which may result in an impairment of the fair value of these securities and may have an impact on our ability to fund our ongoing operations and growth initiatives.
At September 30, 2008, the Company had a total of $124,530 in long-term investments, which are comprised of available-for-sale auction rate securities
(“ARS”). While the underlying securities generally have long-term nominal maturities that exceed one year, the interest rates on these investments reset periodically in scheduled auctions (generally every 7-35 days). During February 2008,
issues in the global credit and capital markets led to failed auctions with respect to the Company’s ARS. During the last three quarters of the fiscal year, all of the Company’s outstanding ARS were subject to failed auctions. As a result,
the Company reclassified the securites from short-term to long-term, determined that there had been a reduction in the fair value of its ARS and recorded an unrealized loss of $6,920 ($4,273 net of tax) within other comprehensive income, a component
of stockholder’s equity. We may not be able to liquidate our ARS when we desire liquidity. If we determine that the fair value of these securities is other than temporarily impaired, we would record a loss in our consolidated statement of
operations, which could materially impact our results of operations.
Refer to Note 5 of the consolidated financial statements for more information
related to our auction rate securities.
There are significant limitations on the ability of any person or company to buy Hewitt without the approval of
the Board of Directors, which may decrease the price of our Class A common stock.
Our amended and restated certificate of incorporation and
by-laws contain provisions that may make the acquisition of Hewitt more difficult without the approval of our Board of Directors, including the following:
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our Board of Directors is classified into three classes, each of which serves for a staggered three-year term;
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a Director may be removed by our stockholders only for cause and then only by the affirmative vote of two-thirds of the outstanding stock entitled to vote generally
in the election of Directors;
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only the Board of Directors or the Chairman of the Board may call special meetings of our stockholders;
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our stockholders may take action only at a meeting of the stockholders and not by written consent;
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our stockholders must comply with advance notice procedures in order to nominate candidates for election to the Board of Directors or to place stockholders’
proposals on the agenda for consideration at meetings of the stockholders;
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the Board of Directors may consider the impact of any proposed change of control transaction on constituencies other than the stockholders in determining what is in
the best interest of Hewitt;
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business combinations involving one or more persons that own or intend to own at least 15% of the voting stock must be approved by the affirmative vote of holders
of at least 75% of the voting stock, unless the consideration paid in the business combination is generally the highest price paid by these persons to acquire the voting stock or a majority of the directors unaffiliated with these persons who were
directors prior to the time these persons acquired their shares approve the transaction; and
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the stockholders may amend or repeal the provisions of the certificate of incorporation and the by-laws regarding change of control transactions and business
combinations only by a vote of holders of two-thirds of the outstanding common stock at that time.
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Section 203 of the Delaware
General Corporation Law may delay, defer or prevent a change in control that our stockholders might consider to be in their best interest.
We are
subject to Section 203 of the Delaware General Corporation Law which, subject to certain exceptions, prohibits certain “business combinations” between a Delaware corporation and an “interested stockholder” (generally defined
as a stockholder who becomes a beneficial owner of 15% or more of a Delaware corporation’s voting stock) for a three-year period following the date that such stockholder became an interested stockholder.
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Section 203 could have the effect of delaying, deferring or preventing a change in control that the stockholders
might consider to be in their best interest.
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Item 1B.
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Unresolved Staff Comments
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None.
Our principal executive offices are located in
Lincolnshire, Illinois with a mailing address of 100 Half Day Road, Lincolnshire, Illinois 60069. Our Lincolnshire complex comprises 11 buildings on two campuses and approximately 2.2 million square feet, including 3 buildings and approximately
0.8 million square feet which are vacated. As of September 30, 2008, we had a total of 111 offices in 33 countries and 3 additional offices in 2 additional countries through joint ventures and minority investments. We do not own any
significant real property, but typically lease office space under long-term leases. We believe that our existing facilities are adequate for our current needs.
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Item 3.
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Legal Proceedings
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The Company is involved in disputes arising in
the ordinary course of its business relating to outsourcing or consulting agreements, professional liability claims, vendors or service providers or employment claims. The Company is also routinely audited and subject to inquiries by governmental
and regulatory agencies. The Company evaluates estimated losses under SFAS 5,
Accounting for Contingencies
. Management considers such factors as the probability of an unfavorable outcome and the ability to make a reasonable estimate of the
amount of loss and records a provision with respect to a claim, suit, investigation or proceeding when it is probable that a liability has been incurred and the amount of the loss can reasonably be estimated. If the reasonable estimate of a probable
loss is a range, and no amount within the range is a better estimate than another, the minimum amount in the range is accrued. If a loss is not probable or a probable loss cannot be reasonably estimated, no liability is recorded.
In December 2007, the Company settled a dispute with a client and incurred a charge of $15 million, which was previously reserved. The Company paid this settlement
during the first quarter.
In March 2008, the Company restructured an outsourcing contract. In conjunction with the restructuring, the Company will
transition back to the client certain HR BPO services and extend the Benefits Outsourcing services portion of the contract. The Company recorded a net charge of $15.9 million in the second quarter, in addition to a $4 million charge recorded in the
first quarter, mostly relating to transition costs. During the third and fourth quarters, the Company recorded positive adjustments to these charges of $1.9 million and $0.2 million, respectively.
During the year ending September 30, 2008, the Company recorded net charges of approximately $20 million related to ongoing disputes and settlements in addition to
those mentioned above.
The Company is involved in a dispute with Philips Electronics UK Limited (Philips) regarding a claim that the Company failed to
properly value certain benefits in connection with actuarial services provided from 1995 to 2000. On August 1, 2008, Philips and Philips Pension Trustees Limited filed suit in the High Court of Justice, Chancery Division, in London, England
against Hewitt Associates Limited, a subsidiary of the Company, Bacon & Woodrow, a predecessor of Hewitt Associates Limited, and Roger Parkin, a former employee of the Company. The suit claims damages of up to £103 million ($187
million at September 30, 2008). The Company believes that it has valid defenses to Philips’ assertions and intends to defend vigorously any claim. Certain of the Company’s professional liability insurers have denied coverage relating
to this matter. The Company disputes the position taken by the insurance carriers that have denied coverage and fully intends to enforce its rights under the policies at issue. The Company has reserved $5 million related to the dispute, net of
expected insurance recoveries.
The Company does not believe that any unresolved dispute will have a material adverse effect on its financial condition or
results of operation. However, litigation in general and the outcome of any matter, in particular, cannot be predicted with certainty. An unfavorable resolution of one or more pending matters could have a material adverse impact on the
Company’s results of operations for one or more reporting periods.
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Item 4.
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Submission of Matters to a Vote of Security Holders
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No matters
were submitted to a vote of security holders during the fourth quarter of fiscal 2008.
PART II
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Item 5.
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Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
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Common Stock Market Information
Our Class A common stock is
traded on the New York Stock Exchange (NYSE) under the symbol “HEW”. The following table sets forth the range of high and low sales price for each quarter for the last two fiscal years.
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Fiscal 2007
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High
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Low
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1
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$
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26.03
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$
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23.54
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2
nd
Quarter
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$
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30.77
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$
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25.40
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3
rd
Quarter
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$
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32.20
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$
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28.42
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4
th
Quarter
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$
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35.05
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$
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29.40
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Fiscal 2008
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High
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Low
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1
st
Quarter
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$
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38.84
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$
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32.17
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2
nd
Quarter
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$
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40.39
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$
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32.48
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3
rd
Quarter
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$
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43.00
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$
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37.32
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|
4
th
Quarter
|
|
$
|
42.22
|
|
$
|
34.40
|
Holders of Record
As of October 31, 2008, there were 803 stockholders of record of our Class A common stock as furnished by our Stock Transfer Agent and Registrar, Computershare. Several brokerage firms, banks and other institutions
(“nominees”) are listed once on the stockholders of record listing. However, in most cases, the nominees’ holdings represent blocks of our stock held in brokerage accounts for a number of individual stockholders. Accordingly, our
actual number of stockholders is difficult to determine with precision, but would be higher than the number of registered stockholders of record.
Dividend Policy
We have not paid cash dividends on our common stock. Our Board of Directors re-evaluates this policy periodically. Any
determination to pay cash dividends will be at the discretion of the Board of Directors and will be dependent upon our results of operations, financial condition, capital requirements, terms of our financing arrangements and such other factors as
the Board of Directors deems relevant.
19
Share Repurchases
The following table provides information about Hewitt’s Class A share repurchase activity for the three months ended September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
Total
Number of
Shares
Purchased
|
|
Average Price
Paid per Share
(1)
|
|
Total Number of Shares
Purchased as Part of
Publicly Announced Plans
or Programs
(2)
|
|
Approximate Dollar Value
of Shares that May Yet Be
Purchased Under the Plans or
Programs
(2)
|
|
July 1 – 31, 2008
(1)
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
2,055,091
|
|
$
|
36.48
|
|
1,813,930
|
|
$
|
89,244,151
|
|
August 1 – 31, 2008
(1)
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
624,630
|
|
$
|
39.00
|
|
615,000
|
|
$
|
65,266,244
|
|
September 1 – 30, 2008
(1)
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
1,914,943
|
|
$
|
38.96
|
|
1,658,045
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Shares Purchased:
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
4,594,664
|
|
$
|
37.86
|
|
4,086,975
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The shares purchased relate to the Company’s share repurchase program and also shares employees have elected to have withheld to cover their minimum withholding requirements
for personal taxes related to the vesting of restricted stock or restricted stock units. The average price paid per share for July 1, 2008 through September 30, 2008 represents a weighted average of the closing stock prices on the dates
the shares were repurchased or withheld.
|
|
(2)
|
During the second quarter of fiscal year 2007, the Board of Directors authorized the Company to repurchase up to $750 million of its outstanding common shares through
January 31, 2009. The Company completed the repurchase under this authorization during the fourth quarter of fiscal 2008.
|
|
Item 6.
|
Selected Financial Data
|
The selected financial data should be read
in conjunction with the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere herein.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
(1)
|
|
2007
(2)
|
|
|
2006
(3)
|
|
|
2005
(4)
|
|
2004
|
|
|
|
(In millions, except per share amounts)
|
|
Fiscal Year ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
3,228
|
|
$
|
2,990
|
|
|
$
|
2,857
|
|
|
$
|
2,890
|
|
$
|
2,257
|
|
Operating income (loss)
|
|
|
313
|
|
|
(143
|
)
|
|
|
(64
|
)
|
|
|
234
|
|
|
223
|
|
Net income (loss)
|
|
|
188
|
|
|
(175
|
)
|
|
|
(116
|
)
|
|
|
135
|
|
|
123
|
|
Income (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.90
|
|
$
|
(1.62
|
)
|
|
$
|
(1.08
|
)
|
|
$
|
1.21
|
|
$
|
1.28
|
|
Diluted
|
|
$
|
1.85
|
|
$
|
(1.62
|
)
|
|
$
|
(1.08
|
)
|
|
$
|
1.19
|
|
$
|
1.25
|
|
|
|
|
|
|
|
|
As of September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents and short-term investments
|
|
$
|
541
|
|
$
|
595
|
|
|
$
|
449
|
|
|
$
|
218
|
|
$
|
313
|
|
Working capital
(5)
|
|
|
424
|
|
|
561
|
|
|
|
429
|
|
|
|
300
|
|
|
425
|
|
Total assets
|
|
|
2,993
|
|
|
2,756
|
|
|
|
2,768
|
|
|
|
2,657
|
|
|
1,808
|
|
Long-term portion of debt and capital lease obligations
|
|
|
650
|
|
|
233
|
|
|
|
255
|
|
|
|
287
|
|
|
201
|
|
Stockholders’ equity
|
|
|
650
|
|
|
1,038
|
|
|
|
1,256
|
|
|
|
1,311
|
|
|
859
|
|
(1)
|
In fiscal 2008, we recorded a pre-tax gain of $36 million related to the sale of the Cyborg business; pre-tax net charges of $13 million related to HR BPO contract restructurings;
and pre-tax charges of $45 million related to the review of our real estate portfolio.
|
|
(2)
|
In fiscal 2007, we recorded non-cash charges of $329 million related to impairment of goodwill, intangible assets and contract loss provisions; a pre-tax severance charge of $32
million resulting from ongoing productivity initiatives across the business; a pre-tax charge of $29 million related to the review of our real estate portfolio; a pre-tax charge of $15 million related to the anticipated restructuring of an HR BPO
contract; and a pre-tax charge of $5 million resulting from the second-quarter resolution of a legal dispute with a vendor.
|
|
(3)
|
In fiscal 2006, we recorded non-cash charges of $264 million related to our HR BPO business.
|
20
|
(4)
|
On October 1, 2004, we completed a merger with Exult, Inc. and its results are included in our results from that date.
|
|
(5)
|
In fiscal 2008, we reclassified the current portion of deferred contract costs of $83 million and deferred contract revenues of $53 million from non-current assets and non-current
liabilities, respectively, into current assets and current liabilities, respectively. Fiscal 2007 results were reclassified to be comparable to the current year presentation; $76 million of deferred contract costs and $50 million of deferred
contract revenues were reclassified into current assets and current liabilities, respectively. Working capital data prior to fiscal 2007 have not been reclassified as it was not practical to do so. Therefore working capital data prior to fiscal 2007
are not comparable to fiscal 2008 and 2007.
|
|
Item 7.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
The following information should be read in conjunction with our consolidated financial statements and related notes, included elsewhere in this Annual Report on Form 10-K. In addition to historical information,
this discussion and analysis may contain forward-looking statements that involve risks, uncertainties and assumptions, which could cause actual results to differ materially from management’s expectations. Please see additional risks and
uncertainties described above, in “Disclosure Regarding Forward-Looking Statements” which appears in Part 1 and in Item 1A.”Risk Factors” which appears elsewhere in this Annual Report.
We use the terms “Hewitt”, “the Company”, “we”, “us”, and “our” to refer to the business of Hewitt Associates, Inc.
and its subsidiaries. All references to years, unless otherwise noted, refer to our fiscal years, which end on September 30. For example, a reference to “2008”or “fiscal 2008” means the twelve-month period that ends
September 30, 2008. References to and adjustments for “foreign currency translation” are made within our discussion of results so that the financial results can be viewed without the impact of fluctuating foreign currency exchange
rates used in reporting results in one currency (U.S. dollar) and helps facilitate a comparative view of business results. Financial results described within this section, except for share and per share information, are stated in thousands of U.S.
dollars unless otherwise noted. Certain prior-period amounts have been reclassified to conform to the current-year presentation.
Overview
Hewitt made significant progress during fiscal year 2008 on executing against the four key strategic priorities established in the prior year. We grew
revenue and expanded margins while continuing to invest in our Benefits Outsourcing and Consulting segments. We focused on stabilizing the HR BPO business, restructuring two more contracts during the year. We raised $500 million from a debt offering
during the fourth quarter and maintained a strong balance sheet with significant liquidity even as the broader economy endured the effects of the credit crisis and equity market volatility. We made three strategic acquisitions to broaden our service
offerings to our clients and completed our existing share repurchase authorization prior to the January 31, 2009 expiration date.
Fiscal year 2008
net revenues, excluding third party supplier revenues and adjusting for the favorable effect of foreign currency translation of $40.9 million and the net favorable effect of acquisitions/divestiture of $9.5 million, increased 7.4% as compared to the
prior-year period and was driven by growth across all segments, particularly in Consulting. Consulting revenue growth over the prior year, adjusting for the favorable effects of foreign currency translation of $26.0 million and acquisitions of $13.9
million, resulted principally from Retirement and Financial Management services as well as Talent and Organizational Consulting services. HR BPO reported revenue growth in the year, excluding third party revenue and adjusting for the favorable
impact of foreign currency translation of $10.5 million and the impact of $21.1 million from the additional revenues generated by Cyborg in the prior fiscal year. The HR BPO revenue increase is primarily related to an increase in the number of
clients who went live with contract services over the last twelve 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. Also contributing to the increase was the benefit of $14.1 million related to the resolution of two contract restructurings. Benefits Outsourcing also reported higher revenue during the year, adjusting for the favorable
impact of foreign currency translation of $4.5 million and acquisitions of $16.7 million. Higher revenue related to Benefits Outsourcing was due to an increase in clients going live with contract services over the last twelve months, increased
project work, and the benefit of $9.0 million of revenue related to the resolution of two contract restructurings, partially offset by lost clients.
21
Fiscal year 2008 operating income increased to $312.8 million, from an operating loss of $143.0 million in the prior
year. The improvement was primarily due to the significant non-cash charges incurred in fiscal year 2007 for goodwill and asset impairment in the HR BPO segment. See Note 8 to the Consolidated Financial Statements for more information relating to
these charges. Revenue growth in the Consulting and Benefits Outsourcing segments and continued improvement in the HR BPO operating results also contributed to the increase in operating income. Segment results are discussed in greater detail later
in this section.
We announced three acquisitions during fiscal 2008: New Bridge Street Consultants, one of the leading specialist compensation
consultancies in the United Kingdom; CSi – The Remuneration Specialists, a specialist compensation consultancy that provides data, analytics and compensation consulting solutions to organizations in Australia and New Zealand; and LCG, which
provides an array of integrated disability, leave and absence management solutions for mid- to large-sized employers. RealLife HR, which was acquired in fiscal year 2007 and provides health and welfare benefits services for middle market companies,
has exceeded expectations for its first year. We also completed the sale of the Cyborg business, a licensed payroll and HR software services organization, to streamline our HR outsourcing offerings.
We continue to maintain an aggressive focus on our overall cost structure and continued several productivity initiatives across our business throughout the year. In
conjunction with an ongoing review of our real estate portfolio, we announced our intention to consolidate facilities, and in some cases, exit certain properties. Accordingly, we recorded pre-tax charges of $44.8 million during the fiscal year.
At September 30, 2008, we had a total of $124.5 million in long-term investments, which are comprised of available-for-sale auction rate securities
(“ARS”). While the underlying securities generally have long-term nominal maturities that exceed one year, the interest rates on these investments reset periodically in scheduled auctions (generally every 7-35 days). We have the
opportunity to sell these investments during such periodic auctions subject to buyer availability.
During February 2008, issues in the global credit and
capital markets led to failed auctions with respect to our ARS. During the second, third and fourth quarter, all of our outstanding ARS were subject to failed auctions. During the third and fourth quarter, $8.0 million of our ARS issues were called
at par. At September 30, 2008, our ARS portfolio had a fair value of $124.5 million and a par value of $131.5 million. We used a discounted cash flow model to determine the estimated fair value of our ARS at September 30, 2008. As a
result, we determined that there was a reduction in the fair value of our ARS and recorded an unrealized loss of $6.9 million ($4.3 million net of tax) within other comprehensive income, a component of stockholders’ equity. Since the
impairments in fair values have been relatively short in duration and considering the overall quality of the underlying investments and the anticipated future market for such investments, the impairment is considered to be temporary as of September
30, 2008.
We believe that the current lack of liquidity relating to our ARS investments will not materially affect our ability to fund our ongoing
operations and growth initiatives. As of September 30, 2008, we have classified the entire ARS investment balance from short-term investments to long-term investments on the consolidated balance sheet reflecting our inability to determine when these
investments in ARS will become liquid. At September 30, 2008, we have determined that we have the intent and ability to hold these securities until maturity and that the current reduction in fair value is temporary.
During fiscal year 2008, we continued to repurchase our outstanding common shares. During the year, we repurchased approximately 15.1 million of our outstanding
shares at an average price of $37.54, for a total of approximately $566.4 million, completing our original $750 million share repurchase authorization announced during the second quarter of fiscal year 2007.
For further discussion of our Company’s results, please see our discussion of Consolidated and Segment results on the following page.
22
CONSOLIDATED RESULTS
The following table sets forth our historical results of operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
|
|
% of Net Revenues
|
|
|
($ in thousands)
|
|
2008
|
|
|
2007
|
|
|
%
Change
|
|
|
2008
|
|
|
2007
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
(1)
|
|
$
|
3,151,389
|
|
|
$
|
2,921,076
|
|
|
7.9
|
%
|
|
|
|
|
|
|
|
Reimbursements
|
|
|
76,259
|
|
|
|
69,250
|
|
|
10.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
3,227,648
|
|
|
|
2,990,326
|
|
|
7.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and related expenses
|
|
|
2,042,623
|
|
|
|
1,906,158
|
|
|
7.2
|
%
|
|
64.8
|
|
|
65.3
|
|
|
Goodwill and asset impairment
|
|
|
4,117
|
|
|
|
326,615
|
|
|
(98.7
|
)%
|
|
0.1
|
|
|
11.2
|
|
|
Reimbursable expenses
|
|
|
76,259
|
|
|
|
69,250
|
|
|
10.1
|
%
|
|
2.4
|
|
|
2.4
|
|
|
Other operating expenses
(1)
|
|
|
624,989
|
|
|
|
636,698
|
|
|
(1.8
|
)%
|
|
19.8
|
|
|
21.8
|
|
|
Selling, general and administrative expenses
|
|
|
202,483
|
|
|
|
194,572
|
|
|
4.1
|
%
|
|
6.5
|
|
|
6.6
|
|
|
Gain on sale of business
|
|
|
(35,667
|
)
|
|
|
—
|
|
|
n/a
|
|
|
(1.1
|
)
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
2,914,804
|
|
|
|
3,133,293
|
|
|
(7.0
|
)%
|
|
92.5
|
|
|
107.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
312,844
|
|
|
|
(142,967
|
)
|
|
n/m
|
|
|
9.9
|
|
|
(4.9
|
)
|
|
|
|
|
|
|
|
|
Other income, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(24,788
|
)
|
|
|
(20,019
|
)
|
|
23.8
|
%
|
|
(0.8
|
)
|
|
(0.7
|
)
|
|
Interest income
|
|
|
22,023
|
|
|
|
30,219
|
|
|
(27.1
|
)%
|
|
0.7
|
|
|
1.0
|
|
|
Other income, net
|
|
|
6,365
|
|
|
|
8,049
|
|
|
(20.9
|
)%
|
|
0.2
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income, net
|
|
|
3,600
|
|
|
|
18,249
|
|
|
(80.3
|
)%
|
|
0.1
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
316,444
|
|
|
|
(124,718
|
)
|
|
n/m
|
|
|
10.0
|
|
|
(4.3
|
)
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
128,302
|
|
|
|
50,362
|
|
|
154.8
|
%
|
|
4.0
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
188,142
|
|
|
$
|
(175,080
|
)
|
|
n/m
|
|
|
6.0
|
%
|
|
(6.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Net revenues include $40,498 and $69,842 of third party supplier revenues 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.
|
Net Revenues
Net revenues, excluding third party supplier revenues and adjusting for the favorable effects of foreign currency translation and net
acquisitions/divestiture of $40.9 million and $9.5 million, respectively, increased 7.4% as compared to the prior year. The increase in net revenues was driven by revenue growth across all segments, with Consulting showing the largest increase.
Consulting revenue growth, adjusting for the favorable effects of foreign currency translation of $26.0 million and acquisitions of $13.9 million, was due to growth in Retirement and Financial Management and Talent and Organizational Consulting
services. HR BPO revenue growth, excluding third party revenue and adjusting for the favorable impact of foreign currency translation of $10.5 million and the impact of $21.1 million from the additional revenue generated by Cyborg in the prior
fiscal year, was primarily due to an increase in the number of clients who went live with contract services over the last twelve 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. Also contributing to the increase in HR BPO revenue was the benefit of $14.1 million related to the resolution of two
23
contract restructurings. Benefits Outsourcing also contributed to the revenue growth, adjusting for the favorable impact of foreign currency translation of
$4.5 million and acquisitions of $16.7 million, primarily due to an increase in clients going live with contract services over the last twelve months, increased project work, and the benefit of $9.0 million of revenue related to the resolution of
two contract restructurings, partially offset by lost clients. Segment results are discussed in greater detail later in this section.
Compensation and
Related Expense
Compensation and related expenses increased 7.2%, or $136.5 million. An increase in salary costs resulted from an increase in
Consulting activities to support Consulting demand and higher performance-based compensation. Offsetting these increases were lower salary costs associated with global sourcing and other cost management efforts and a decrease in severance expense.
Goodwill and Asset Impairment
The current year
impairment charge of $4.1 million resulted from the write-off of deferred set-up costs and capitalized software associated with certain client contracts, in addition to the impairment of customer relationship intangible assets. During the year ended
September 30, 2007, the Company evaluated certain intangible assets related to the HR BPO and Benefits Outsourcing segments for impairment. This review resulted in non-cash impairment charges of $326.6 million including $280 million of goodwill
impairment and $47 million of asset impairment, which included capitalized software and core technology of $33 million, customer relationships of $6 million and $8 million of anticipated losses on certain contracts.
Other Operating Expenses
The decrease in other operating expense of
$11.7 million was primarily due to lower infrastructure costs, including decreases in depreciation and amortization expense mostly resulting from prior year asset impairment and real estate exit charges, in addition to a reduction in third party
supplier costs of $27.8 million. The decrease was partially offset by higher real estate related charges. Current and prior year operating expenses include $44.8 million and $29.3 million, respectively, of real estate-related charges primarily due
to recognition of the fair value of lease vacancy obligations and lease termination charges related to exit of certain locations, and related acceleration of depreciation of leasehold improvements and equipment and other charges in those years. The
current year decrease in other operating expenses was also offset by higher client service delivery charges, net of deferrals, of $8.9 million primarily related to the increased number of clients who are live with ongoing services and the impact of
two previously announced contract restructurings.
Selling, General and Administrative (SG&A) Expense
The increase in SG&A expense of $7.9 million is primarily attributable to net charges related to ongoing disputes and settlements with various clients of
approximately $24.1 million in the current year. Additionally, $4.6 million higher allowance for doubtful accounts contributed to the increase. A $15 million charge associated with the restructuring of an HR BPO contract and a $5 million charge
associated with the resolution of a legal dispute with a vendor were both recorded in the same prior-year period, offsetting the increases noted above.
Gain on Sale of Business
On January 31, 2008, we sold the Cyborg business, which was included in the HR BPO segment. Cyborg was
acquired in 2003 and provides licensed, processed and hosted payroll software services. The divestiture is a part of the Company’s continued efforts to streamline its HR outsourcing service offerings. The Company recorded a pre-tax gain of
$35.7 million during the quarter ended March 31, 2008 as a result of the sale.
24
Total Other Income, Net
Total other income decreased by $14.6 million in the period driven by lower interest income of $8.2 million, due to lower average investment balances and lower average interest rates as compared to the prior-year period. Higher interest
expense of $4.8 million, resulting from higher average debt balances as compared to the prior-year period, and accelerated discount amortization related to the 2.5% convertible senior notes also contributed to the increase.
Lower other income, net of $1.7 million resulted from lower investment gains and higher gains on foreign currency transactions. In fiscal 2008, the Company recognized
gains of $2.6 million related to the sale of two equity investments. In fiscal 2007, the Company recognized a gain of $6.0 million related to the sale of a cost method investment.
Provision for Income Taxes
The Company’s consolidated effective income tax rate is 40.5% for the year ended
September 30, 2008, as compared to 40.4% for the comparable prior-year period. The Company reviews its expected annual effective income tax rates and makes changes on a quarterly basis as necessary based on certain factors such as changes in
forecasted annual operating income; changes to the valuation allowance for net deferred tax assets; changes to actual or forecasted permanent book to tax differences; impacts from future tax settlements with state, federal or foreign tax
authorities; or impacts from tax law changes. Each quarter, the Company identifies items which are not normal and recurring in nature and treats these as discrete events. The tax effect of discrete items is booked entirely in the quarter in which
the discrete event occurs. Due to the volatility of these factors, the Company’s consolidated effective income tax rate can change significantly on a quarterly basis. The higher effective tax rate in the current period compared to the
comparable prior-year period is due to the mix of income across various jurisdictions and the effect of nonrecurring discrete items (including prior year return to provision adjustments and interest on FIN 48 liabilities) in the current period. The
prior year tax rate was impacted by non-deductible goodwill impairment charges.
Effective October 1, 2007, we adopted Financial Accounting Standards
Board (FASB) Interpretation No. (FIN) 48,
Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109
(FIN 48), which requires a more-likely-than-not threshold for financial statement recognition and
measurement of tax positions taken or expected to be taken in a tax return. We record a liability for the difference between the benefit recognized and measured pursuant to FIN 48 and the tax position taken or expected to be taken on our tax return.
To the extent that our assessment of such tax positions changes, the change in estimate is recorded in the period in which the determination is made. Prior to October 1, 2007, we established contingencies for income tax when, despite the belief
that our tax positions were fully supportable, we believed that it was probable that our positions would be challenged and possibly disallowed by various authorities. The consolidated tax provision and related accruals included the impact of such
reasonably estimable losses and related interest and penalties as deemed appropriate.
25
Fiscal Years Ended September 30, 2007 and 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
|
|
% of Net Revenues
|
|
|
($ in thousands)
|
|
2007
|
|
|
2006
|
|
|
%
Change
|
|
|
2007
|
|
|
2006
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
(1)
|
|
$
|
2,921,076
|
|
|
$
|
2,788,722
|
|
|
4.7
|
%
|
|
|
|
|
|
|
|
Reimbursements
|
|
|
69,250
|
|
|
|
68,439
|
|
|
1.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
2,990,326
|
|
|
|
2,857,161
|
|
|
4.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and related expenses
|
|
|
1,906,158
|
|
|
|
1,799,743
|
|
|
5.9
|
%
|
|
65.3
|
|
|
64.5
|
|
|
Goodwill and asset impairment
|
|
|
326,615
|
|
|
|
255,873
|
|
|
27.6
|
%
|
|
11.2
|
|
|
9.2
|
|
|
Reimbursable expenses
|
|
|
69,250
|
|
|
|
68,439
|
|
|
1.2
|
%
|
|
2.4
|
|
|
2.5
|
|
|
Other operating expenses
(1)
|
|
|
636,698
|
|
|
|
642,803
|
|
|
(0.9
|
)%
|
|
21.8
|
|
|
23.1
|
|
|
Selling, general and administrative expenses
|
|
|
194,572
|
|
|
|
154,564
|
|
|
25.9
|
%
|
|
6.6
|
|
|
5.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
3,133,293
|
|
|
|
2,921,422
|
|
|
7.3
|
%
|
|
107.3
|
|
|
104.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(142,967
|
)
|
|
|
(64,261
|
)
|
|
122.5
|
%
|
|
(4.9
|
)
|
|
(2.3
|
)
|
|
|
|
|
|
|
|
|
Other income, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(20,019
|
)
|
|
|
(23,072
|
)
|
|
(13.2
|
)%
|
|
(0.7
|
)
|
|
(0.8
|
)
|
|
Interest income
|
|
|
30,219
|
|
|
|
17,795
|
|
|
69.8
|
%
|
|
1.0
|
|
|
0.6
|
|
|
Other income, net
|
|
|
8,049
|
|
|
|
9,968
|
|
|
(19.3
|
)%
|
|
0.3
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income, net
|
|
|
18,249
|
|
|
|
4,691
|
|
|
289.0
|
%
|
|
0.6
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(124,718
|
)
|
|
|
(59,570
|
)
|
|
109.4
|
%
|
|
(4.3
|
)
|
|
(2.1
|
)
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
50,362
|
|
|
|
56,368
|
|
|
(10.7
|
)%
|
|
1.7
|
|
|
2.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(175,080
|
)
|
|
$
|
(115,938
|
)
|
|
51.0
|
%
|
|
(6.0
|
)%
|
|
(4.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Net revenues include $69,842 and $117,964 of third party supplier revenues for the years ended September 30, 2007 and 2006, respectively. Generally, the third party supplier
arrangements are marginally profitable. The related third party supplier expenses are included in other operating expenses.
|
Net Revenues
The increase in net revenues was primarily driven by revenue growth in the Consulting segment. Revenue strength was attributed to an increased demand
in Consulting for Retirement and Financial Management and Talent and Organizational Consulting services. HR BPO also contributed to the revenue growth due to an increase in the number of clients who went live with contract services over the last
twelve months and growth in revenue from existing clients, including an increase in project work. Net revenues, excluding third party supplier revenues and the favorable effects of foreign currency translation and acquisitions of approximately $48.3
million and $10.3 million, respectively, increased 4.4% as compared to the prior-year. Segment results are discussed in greater detail later in this section.
Compensation and Related Expense
The increase in expense over the prior year included $60.4 million of increased performance-based
compensation and $45.4 million of higher salaries and wages partially offset by $12.7 million of lower share-based compensation related to lower IPO restricted stock award expense and an increase in the forfeiture rate. The increase in
performance-based compensation reflected an overall increase in
26
the expected payout compared to the prior year due to the improvement in underlying performance in fiscal 2007. The increase in salaries and wages was
primarily attributable to increases in compensation, higher labor costs related to servicing live clients, and an increase in severance expense. Partially offsetting the increase in salaries and wages was lower contractor expense due to the
Company’s continued efforts to optimize resources.
Goodwill and Asset Impairment
During the year ended September 30, 2007, the Company evaluated certain intangible assets related to the HR BPO and Benefits Outsourcing segments for impairment. This review resulted in non-cash impairment
charges of $326.6 million including $280 million of goodwill impairment and $47 million of asset impairment, which included capitalized software and core technology of $33 million, customer relationships of $6 million and $8 million of anticipated
losses on certain contracts. During fiscal 2006, the Company recognized $256 million of impairment charges related to HR BPO. The non-cash charges consisted of $172 million of goodwill impairment, $62 million of asset impairment for certain existing
contracts due to higher than expected costs to be incurred over the life of the contracts, $13 million of asset impairment resulting from the termination of a client contract and $9 million of long-lived asset impairment primarily due to lower than
expected utilization of an acquired asset.
Other Operating Expenses
The decrease in other operating expense was due to a reduction in third party supplier costs of $47.8 million, offset by $29.3 million of real estate-related charges primarily due to recognition of the fair value of
lease vacancy obligations and lease termination charges related to exit of certain locations, and related acceleration of depreciation of leasehold improvements and equipment and other charges. Also offsetting the decrease was an increase in client
service delivery charges, net of deferrals, of $7.5 million primarily related to the increased number of HR BPO clients who were live with ongoing services.
Selling, General and Administrative (SG&A) Expense
The increase in SG&A expense was primarily due to a $15 million charge
associated with the anticipated restructuring of an HR BPO contract and a $5 million charge, recorded within Benefits Outsourcing, associated with the resolution of a legal dispute with a vendor. Also contributing to the increase was higher
amortization of intangible assets resulting from the shortening of the remaining useful life of a customer relationship and higher consulting charges related to the Company’s assessment of its longer-term strategy.
Total Other Income, Net
Total other income increased by $14 million
over the prior year due to higher interest income derived from significantly higher average investment balances and rising interest rates yielding higher returns. In addition, in fiscal 2007, we sold an investment that was accounted for using the
cost basis method of accounting and recognized a gain of $6 million. In fiscal 2006, we recognized a $7 million gain in connection with a contribution of our German Retirement and Financial Management business in exchange for an increased investment
in a German actuarial business.
Provision for Income Taxes
Our consolidated effective income tax rate was 40.4% for the year ended September 30, 2007, as compared to 94.6% for the comparable prior-year period. We identify items which are not normal and recurring in nature and treat these as
discrete events. The tax effect of discrete items is booked entirely in the period in which the discrete event occurs. Additionally, tax legislation and tax examinations in the jurisdictions in which we do business may change our effective tax rate
in future periods. While such changes cannot be predicted, if they occur, the impact on our tax assets, obligations and liquidity will need to be measured and recognized in the financial statements.
In fiscal 2007 and 2006, a number of significant items, including a non-deductible goodwill impairment charge, as well as a reduction of deferred tax assets related to
certain foreign entities, impacted the current year rate.
Effective October 1, 2007, we adopted FIN 48, which requires a more-likely-than-not
threshold for financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. We record a liability for the difference between the
27
benefit recognized and measured pursuant to FIN 48 and the tax position taken or expected to be taken on our tax return. To the extent that our assessment of
such tax positions changes, the change in estimate is recorded in the period in which the determination is made. Prior to October 1, 2007, we established contingencies for income tax when, despite the belief that our tax positions were fully
supportable, we believed that it was probable that our positions would be challenged and possibly disallowed by various authorities. The consolidated tax provision and related accruals included the impact of such reasonably estimable losses and
related interest and penalties as deemed appropriate.
SEGMENT RESULTS
The following table sets forth unaudited historical segment results for the periods presented. 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
September 30,
|
|
|
|
|
|
($ in thousands)
|
|
2008
|
|
|
2007
|
|
|
% Change
|
|
|
Benefits Outsourcing
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment revenues before reimbursements
|
|
$
|
1,550,110
|
|
|
$
|
1,475,326
|
|
|
5.1
|
%
|
|
Segment income
|
|
|
365,336
|
|
|
|
303,984
|
|
|
20.2
|
%
|
|
Segment income as a percentage of segment revenues
|
|
|
23.6
|
%
|
|
|
20.6
|
%
|
|
|
|
|
|
|
|
|
|
HR BPO
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment revenues before reimbursements
(1)
|
|
$
|
554,854
|
|
|
$
|
539,452
|
|
|
2.9
|
%
|
|
Segment loss
|
|
|
(83,277
|
)
|
|
|
(492,193
|
)
|
|
(83.1
|
)%
|
|
Segment loss as a percentage of segment revenues
|
|
|
(15.0
|
)%
|
|
|
(91.2
|
)%
|
|
|
|
|
|
|
|
|
|
Consulting
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment revenues before reimbursements
|
|
$
|
1,094,323
|
|
|
$
|
945,866
|
|
|
15.7
|
%
|
|
Segment income
|
|
|
143,217
|
|
|
|
143,992
|
|
|
(0.5
|
)%
|
|
Segment income as a percentage of segment revenues
|
|
|
13.1
|
%
|
|
|
15.2
|
%
|
|
|
|
|
|
|
|
|
|
Total Company
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment revenues before reimbursements
(1)
|
|
$
|
3,199,287
|
|
|
$
|
2,960,644
|
|
|
8.1
|
%
|
|
Intersegment revenues
|
|
|
(47,898
|
)
|
|
|
(39,568
|
)
|
|
21.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues before reimbursements (net revenues)
|
|
|
3,151,389
|
|
|
|
2,921,076
|
|
|
7.9
|
%
|
|
Reimbursements
|
|
|
76,259
|
|
|
|
69,250
|
|
|
10.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
3,227,648
|
|
|
$
|
2,990,326
|
|
|
7.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment income (loss)
|
|
$
|
425,276
|
|
|
$
|
(44,217
|
)
|
|
n/m
|
|
|
Unallocated shared service costs
|
|
|
112,432
|
|
|
|
98,750
|
|
|
13.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
312,844
|
|
|
$
|
(142,967
|
)
|
|
n/m
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
HR BPO net revenues include $40,498 and $69,842 of third party supplier revenues 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.
|
28
Benefits Outsourcing
Benefits Outsourcing net revenue, adjusting for the favorable impact of foreign currency translation of $4.5 million and acquisitions of $16.7 million, increased 3.7%. The increase in revenue is primarily due to an increase in clients going
live with contract services over the last twelve months, increased project work, and the benefit of $9.0 million of revenue related to the resolution of two contract restructurings, partially offset by lost clients.
Benefits Outsourcing operating income increased 20.2% compared to the prior year. Growth was mostly due to an increase from the prior year in higher margin project work,
a decrease in compensation expense associated with lower severance and lower salary costs related to global sourcing, and other infrastructure cost management efforts. This growth was partially offset by higher contractor costs and operating expense
related to certain large, complex clients that went live with ongoing services, as well as higher performance-based compensation and net litigation costs. The prior year results also reflected $10 million of additional loss reserves for anticipated
losses on certain European contracts, and $5 million resulting from the resolution of a legal dispute with a vendor.
HR BPO
HR BPO net revenue, excluding third party revenue and adjusting for the favorable impact of foreign currency translation of $10.5 million and the impact of $21.1 million
from the additional revenues generated by Cyborg in the prior fiscal year, increased 12.4%. The increase is primarily related to an increase in the number of clients who went live with contract services over the last twelve 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. Also contributing to the increase was the benefit of $14.1
million related to the resolution of two contract restructurings.
HR BPO operating loss decreased 83.1% compared to the prior year. The decrease in the
loss was due to lower impairment charges recorded in fiscal 2008 and improvements in operating performance. Fiscal 2007 results reflect charges of $280 million for goodwill impairment and $30 million for intangible asset impairment relating to the
impairment of capitalized software, core technology intangible assets and customer relationship intangibles. The decrease in the loss was also due to lower operating expense in the current year which included a gain on the sale of Cyborg of $35.7
million. The segment loss also improved due to staffing leverage, infrastructure cost management efforts and increased direct revenue. The current year includes net charges of $12.8 million related to the previously announced restructurings of two
HR BPO contracts as compared to $15 million of charges recorded in the prior year related to the restructuring of a client contract. The current year also includes net charges related to ongoing disputes and settlements with various clients of $4
million.
Consulting
Consulting net revenues,
adjusting for the favorable effects of foreign currency translation of $26.0 million and acquisitions of $13.9 million, increased 11.5%. The majority of this growth resulted from increased demand in North America and Europe for Retirement and
Financial Management consulting, in particular, driven by funding legislation and ongoing pension accounting changes. Also contributing to the revenue growth was increased demand for Talent and Organizational Consulting in the U.S., the Asia-Pacific
region, and Europe, as well as demand for Health Management consulting in the U.S.
Segment income decreased 0.5% compared to the prior year. The decrease
was mostly due to higher compensation expense, some of which related to investments for practice growth and driven by increased salaries, performance-based compensation, benefits, and severance. The current year includes $12.6 million in severance
charges related to workforce restructuring. Offsetting the decrease was revenue growth.
Unallocated Shared Service Costs
Unallocated shared service costs are global expenses that are incurred on behalf of the entire Company and are not specific to a business segment. These costs include
finance, legal, management and corporate relations and other related costs.
29
Unallocated costs increased $13.7 million, or 13.9%, primarily due to the result of charges related to the leased real
estate restructurings, higher performance-based compensation expenses and legal fees in the current period, partially offset by lower costs due to severance expense incurred in the prior year related to restructuring actions and lower outside
consulting costs.
Fiscal Years Ended September 30, 2007 and 2006
The following table sets forth unaudited historical segment results for the periods presented. Results for fiscal 2007 have been reclassified to be comparable to the current year presentation, primarily due to changes
to the Company’s current organizational structure. Results for fiscal 2006 have not been reclassified as it was not practical to do so. As a result, the fiscal 2006 segment results do not reflect changes to the Company’s current
organizational structure and are not comparable to fiscal 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
|
|
($ in thousands)
|
|
2007
|
|
|
2006
|
|
|
% Change
|
|
|
Benefits Outsourcing
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment revenues before reimbursements
|
|
$
|
1,475,326
|
|
|
$
|
1,465,710
|
|
|
0.7
|
%
|
|
Segment income
|
|
|
303,984
|
|
|
|
321,735
|
|
|
(5.5
|
)%
|
|
Segment income as a percentage of segment revenues
|
|
|
20.6
|
%
|
|
|
22.0
|
%
|
|
|
|
|
|
|
|
|
|
HR BPO
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment revenues before reimbursements
(1)
|
|
$
|
539,452
|
|
|
$
|
517,502
|
|
|
4.2
|
%
|
|
Segment loss
|
|
|
(492,193
|
)
|
|
|
(423,407
|
)
|
|
16.2
|
%
|
|
Segment loss as a percentage of segment revenues
|
|
|
(91.2
|
)%
|
|
|
(81.8
|
)%
|
|
|
|
|
|
|
|
|
|
Consulting
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment revenues before reimbursements
|
|
$
|
945,866
|
|
|
$
|
842,616
|
|
|
12.3
|
%
|
|
Segment income
|
|
|
143,992
|
|
|
|
137,028
|
|
|
5.1
|
%
|
|
Segment income as a percentage of segment revenues
|
|
|
15.2
|
%
|
|
|
16.3
|
%
|
|
|
|
|
|
|
|
|
|
Total Company
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment revenues before reimbursements
(1)
|
|
$
|
2,960,644
|
|
|
$
|
2,825,828
|
|
|
4.8
|
%
|
|
Intersegment revenues
|
|
|
(39,568
|
)
|
|
|
(37,106
|
)
|
|
6.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues before reimbursements (net revenues)
|
|
|
2,921,076
|
|
|
|
2,788,722
|
|
|
4.7
|
%
|
|
Reimbursements
|
|
|
69,250
|
|
|
|
68,439
|
|
|
1.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
2,990,326
|
|
|
$
|
2,857,161
|
|
|
4.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment (loss) income
|
|
$
|
(44,217
|
)
|
|
$
|
35,356
|
|
|
n/m
|
|
|
Charges not recorded at the segment level:
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial public offering restricted stock awards
|
|
|
—
|
|
|
|
9,397
|
|
|
(100.0
|
)%
|
|
Unallocated shared service costs
|
|
|
98,750
|
|
|
|
90,220
|
|
|
9.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss)
|
|
$
|
(142,967
|
)
|
|
$
|
(64,261
|
)
|
|
122.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
HR BPO net revenues include $69,842 and $117,964 of third party supplier revenues for the year ended September 30, 2007 and 2006, respectively. Generally, the third party
supplier arrangements are marginally profitable. The related third party supplier expenses are included in other operating expenses.
|
30
Benefits Outsourcing
Benefits Outsourcing net revenue, adjusting for the impact of foreign currency translation of $7.6 million, essentially was unchanged as compared to the year ended September 30, 2006. An increase in services to new and existing
clients, organic growth of existing clients and an increase in project work, was offset by the impact of lost clients and longer implementation cycles required for some of the Company’s large, complex clients.
Benefits Outsourcing operating income decreased 5.5% as compared to fiscal 2006. Fiscal 2007 reflected charges of $22 million related to the real estate restructurings,
$13 million related to severance charges, $10 million of additional loss reserves for anticipated losses on certain European contracts, and $5 million resulting from the resolution of a legal dispute with a vendor. Asset impairment charges of $7.6
million primarily related to the write-off of customer relationship intangibles and capitalized software, as well as increased client service delivery expense, also contributed to the decrease in segment income. Partially offsetting the decrease
were efficiencies driven by global sourcing and other cost management efforts.
HR BPO
HR BPO net revenue, excluding third party revenue and adjusting for the impact of foreign currency translation of $7.8 million, increased 15.2% during the year ended September 30, 2007 as compared to the prior
year. The increase was primarily related to an increase in the number of clients who went live with contract services over the last twelve months and growth in revenue from existing clients, including an increase in project work.
HR BPO operating loss increased 16.2% as compared to fiscal 2006. Fiscal 2007 results included charges of $280 million for goodwill impairment and $30 million for
intangible asset impairment relating to the impairment of capitalized software, core technology intangible assets and customer relationship intangibles. Fiscal 2007 also included charges of $5 million related to real estate restructurings, $15
million associated with the anticipated restructuring of a client contract and an increase in severance charges of $11 million. Fiscal 2006 results included charges of $172 million for goodwill impairment, $73 million for anticipated losses on
certain contracts, $10 million net asset impairment from the termination of a client in the first quarter of fiscal 2006 and $9 million for impairment of long-lived assets. Excluding these fiscal 2007 and fiscal 2006 charges, the segment loss
improved primarily due to the stabilization of the existing client base, as well as overall cost management efforts, offset in part by the impact of new contract implementations and increased intangible asset amortization.
Consulting
Consulting net revenues, adjusting for the favorable
effects of foreign currency translation of $32.8 million and acquisitions of approximately $9.4 million, increased 7.2%. The majority of this growth resulted from increased demand in North America and Europe for Retirement and Financial Management
consulting, in particular, driven by the new funding legislation in the U.S. and upcoming pension accounting changes. Also contributing to the revenue growth was increased demand for Talent and Organizational Consulting services, particularly in the
Asia-Pacific region.
Segment income increased 5.1% as compared to fiscal 2006 due to revenue growth, partially offset by higher compensation expense
driven by increased wages and performance-based incentives.
Unallocated Shared Service Costs
Unallocated shared service costs are global expenses that are incurred on behalf of the entire Company and are not specific to a business segment. These costs include
finance, legal, management and corporate relations and other related costs.
Unallocated costs increased 9.5% primarily due to increased professional
services related to the Company’s strategic initiatives and increased performance-based compensation expense, offset by productivity savings resulting from restructuring activities.
31
Critical Accounting Policies and Estimates
Conforming with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts and disclosures in the consolidated financial
statements and this Annual Report. The process of determining significant estimates is fact specific and takes into account factors such as historical experience, known facts, current and expected economic conditions and, in some cases, actuarial
techniques. We periodically re-evaluate these significant factors and make adjustments when facts and circumstances change; however, actual results may differ from estimates. Certain of our accounting policies require higher degrees of judgment than
others in their application. These include certain aspects of accounting for revenue recognition and client contract loss reserves, deferred contract costs and revenues, performance-based compensation, accounts receivable and unbilled work in
process, goodwill and other intangible assets, retirement plans, income taxes, share-based compensation and investments.
Revenue Recognition
Revenues include fees generated from outsourcing contracts and from consulting services provided to our clients. Outsourcing contract terms typically
range from three to five years for benefits contracts and seven to ten years for HR BPO contracts, while consulting arrangements are generally short-term in nature.
In connection with the Emerging Issues Task Force (“EITF”) Issue No. 00-21,
Revenue Arrangements with Multiple Deliverables,
we have contracts with multiple elements primarily in our Benefits
Outsourcing and HR BPO segments. Multiple-element arrangements are assessed to determine whether they can be separated into more than one unit of accounting. EITF Issue 00-21 establishes the following criteria, all of which must be met, in order for
a deliverable to qualify as a separate unit of accounting:
|
|
•
|
|
The delivered items have value to the client on a stand-alone basis;
|
|
|
•
|
|
There is objective and reliable evidence of the fair value of the undelivered items; and
|
|
|
•
|
|
If the arrangement includes a general right of return relative to the delivered items, delivery or performance of the undelivered items is considered probable and
substantially in the control of the Company.
|
If these criteria are not met, deliverables included in an arrangement are accounted for as
a single unit of accounting and revenue is deferred until the period in which the final deliverable is provided or a predominant service level has been attained. If there is objective and reliable evidence of fair value for all units of accounting
in an arrangement, the arrangement consideration is allocated to the separate units of accounting based on each unit’s relative fair value. Revenue is then recognized using a proportional performance method such as recognizing revenue based on
transactional services delivered or on a straight-line basis (as adjusted primarily for volume changes), as appropriate.
Our clients typically pay for
consulting services either on a time-and-material or on a fixed-fee basis. On fixed-fee engagements, revenues are recognized either as services are provided using a proportional performance method, which utilizes estimates of overall profitability
and stages of project completion, or at the completion of the project, based on the facts and circumstances of the client arrangement.
Contract losses on
outsourcing or consulting arrangements are recognized in the period in which the loss becomes probable and the amount of the loss is reasonably estimable. Contract losses are determined to be the amount by which the estimated direct costs, including
any remaining deferred contract costs, exceed the estimated total revenues that will be generated by the contract. When a loss is identified, it is first recorded as an impairment of deferred contract costs related to the specific contract, if
applicable, with the remaining amount recorded as a loss reserve. Estimates are monitored during the term of the contract and any changes to the estimates are recorded in the period the change is identified and may result in adjustments to the loss
reserve.
Deferred Contract Costs and Deferred Contract Revenues
For long-term outsourcing service agreements, implementation efforts are often necessary to set up clients and their human resource or benefit programs on the Company’s systems and operating processes. For
outsourcing services sold separately or accounted for as a separate unit of accounting, specific, incremental and direct costs of implementation incurred prior to the services going live are
32
deferred and amortized over the period the related ongoing services revenue is recognized. Such costs may include internal and external costs for coding or
customizing systems, costs for conversion of client data and costs to negotiate contract terms. For outsourcing services that are accounted for as a combined unit of accounting, specific, incremental and direct costs of implementation, as well as
ongoing service delivery costs incurred prior to revenue recognition commencing are deferred and amortized over the remaining contract services period. Implementation fees are also generally received from our clients either up-front or over the
ongoing services period as a component of the fee per participant. Lump sum implementation fees received from a client are initially deferred and then recognized as revenue evenly over the contract ongoing services period. If a client terminates an
outsourcing services arrangement prior to the end of the contract, a loss on the contract may be recorded if necessary and any remaining deferred implementation revenues and costs would then be recognized into earnings generally over the remaining
service period through the termination date.
Performance-Based Compensation
Our compensation program includes a performance-based component that is determined by management subject to an annual review by the Compensation and Leadership Committee of the Board of Directors. Performance-based
compensation is discretionary and is based on individual, team and total Company performance. Performance-based compensation is paid once per fiscal year after our annual operating results are finalized. The amount of expense for performance-based
compensation recognized at interim reporting dates involves judgment, is based on annual results as compared to internal targets and takes into account other factors, including industry trends and the general economic environment. Annual
performance-based compensation levels may vary from current expectations as a result of changes in the actual performance of the Company, team or individual. As such, accrued amounts are subject to change in future periods if actual performance
varies from performance levels anticipated in prior interim periods.
Client Receivables and Unbilled Work In Process
We periodically evaluate the collectibility of our client receivables and unbilled work in process based on a combination of factors. In circumstances where we become
aware of a specific client’s difficulty in meeting its financial obligations to us (e.g., bankruptcy, failure to pay amounts due to us or to others), we record an allowance for doubtful accounts to reduce the client receivable or unbilled work
in process to what we reasonably believe will be collected. For all other clients, we recognize an allowance for doubtful accounts based on past write-off history and the length of time the receivables are past due or unbilled work in process is not
billed. Facts and circumstances may change, which would require us to alter our estimates of the collectibility of client receivables and unbilled work in process. A key factor mitigating this risk is our diverse client base. For the years ended
September 30, 2008, 2007 and 2006, no single client accounted for more than 10% of our total revenues.
Goodwill and Other Intangible Assets
In applying the purchase method of accounting for business combinations, amounts assigned to identifiable assets and liabilities acquired are based on
estimated fair values as of the date of the acquisitions, with the remainder recorded as goodwill. Estimates of fair value are based primarily upon future cash flow projections for the acquired businesses and net assets, discounted to present value
using a risk-adjusted discount rate. These estimates are generally made in consultation with a third party valuation specialist. We evaluate our goodwill for impairment annually and whenever indicators of impairment exist. The evaluation is based
upon a comparison of the estimated fair value of the reporting unit to which the goodwill has been assigned to the sum of the carrying value of the assets and liabilities for that reporting unit. The fair values used in this evaluation are estimated
based upon discounted future cash flow projections for the reporting unit. Our estimate of future cash flows is based on our experience, knowledge and typically third-party advice or market data. However, these estimates can be affected by other
factors and economic conditions that can be difficult to predict. Intangible assets are initially valued at fair market value using generally accepted valuation methods appropriate for the type of intangible asset. Intangible assets with definite
lives are amortized over their estimated useful lives and are reviewed for impairment if indicators of impairment arise. The evaluation of impairment is based upon a comparison of the carrying amount of the intangible asset to the estimated future
undiscounted net cash flows expected to be generated by the asset. If estimated future undiscounted net cash flows are less than the carrying amount of the asset, the asset is considered impaired. The impairment expense is determined by comparing
the estimated fair value of the intangible asset to its carrying value, with any shortfall from fair value recognized as an expense in the current period.
33
Retirement Plans
We
provide pension benefits to certain of our employees outside of North America and other postretirement benefits to certain of our employees in North America. The valuation of the funded status and net periodic pension and other postretirement
benefit costs are calculated using actuarial assumptions, which are reviewed annually. The assumptions include rates of increases in employee compensation, interest rates used to discount liabilities, the long-term rate of return on plan assets,
anticipated future health-care costs and other assumptions involving demographic factors such as retirement, mortality and turnover. The selection of assumptions is based on both short-term and long-term historical trends and known economic and
market conditions at the time of the valuation. The use of different assumptions would have resulted in different measures of the funded status and net periodic pension and other postretirement benefit expenses. Actual results in the future could
differ from expected results. We are not able to estimate the probability of actual results differing from expected results, but believe our assumptions are appropriate. Please refer to Note 15 for more information on our assumptions. The most
critical assumptions pertain to the plans covering employees outside North America, as these plans are the most significant to our consolidated financial statements.
Income Taxes
We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Significant judgment is
required in determining the worldwide income tax provision. In the ordinary course of global business, there are many transactions and calculations where the ultimate tax outcome is uncertain. Some of these uncertainties arise as a consequence of
revenue sharing and cost reimbursement arrangements among related entities, the process of identifying items of revenue and expense that qualify for preferential tax treatment and segregation of foreign and domestic income and expense to avoid
double taxation. To the extent that the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax provision in the period in which such determination is made. We record
a valuation allowance to reduce our deferred tax assets to the amount of future tax benefit that is more likely than not to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in
assessing the need for the valuation allowance, there is no assurance that the valuation allowance will not need to be increased to cover additional deferred tax assets that may not be realizable. Any increase in the valuation allowance could have a
material adverse impact on our income tax provisions and net income in the period in which such determination is made.
Effective October 1, 2007, we
adopted Financial Accounting Standards Board (FASB) Interpretation No. (FIN) 48,
Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109
(FIN 48), which requires a more-likely-than-not threshold for
financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. We record a liability for the difference between the benefit recognized and measured pursuant to FIN 48 and the tax position taken or
expected to be taken on our tax return. To the extent that our assessment of such tax positions changes, the change in estimate is recorded in the period in which the determination is made. Prior to October 1, 2007, we established contingencies
for income tax when, despite the belief that our tax positions were fully supportable, we believed that it was probable that our positions would be challenged and could be disallowed by various authorities. The consolidated tax provision and related
accruals included the impact of such reasonably estimable losses and related interest and penalties as deemed appropriate.
Share-based Compensation
Our employees and directors may receive awards of nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units,
performance shares, performance units, and cash-based awards, and employees can also receive incentive stock options.
Restricted stock awards, including
restricted stock and restricted stock units, are measured using the fair market value of the stock as of the grant date. The Company recognizes compensation expense, net of estimated forfeitures, on a straight-line basis (if cliff vesting) or on an
accelerated-attribution basis (if graded vesting) annually over the vesting period. Estimated forfeitures are reviewed periodically and changes to the estimated forfeiture rate are adjusted through current period earnings. Employer payroll taxes are
also recorded as expense when they become due over the vesting period. The remaining unvested shares are subject to forfeiture and restrictions on sale or transfer, generally for four years from the grant date.
34
The Company also grants nonqualified stock options at an exercise price equal to the fair market value of the
Company’s stock on the grant date. The Company applies the Black-Scholes valuation method to compute the estimated fair value of the stock options and recognizes compensation expense, net of estimated forfeitures, on a straight-line basis so
that the award is fully expensed at the vesting date. Generally, stock options vest 25 percent on each anniversary of the grant date, are fully vested four years from the grant date and have a term of ten years.
The Company uses the “simplified method”, defined in SEC Staff Accounting Bulletin (“SAB”) No. 107, to determine the expected life assumption
for all of its options. The Company continues to use the “simplified method”, as permitted by SAB No. 110, as it does not believe that it has sufficient historical exercise data to provide a reasonable basis upon which to estimate
expected life due to the limited time its equity shares have been publicly traded.
Investments
Short-term and long-term investments include marketable equity and debt securities that are classified as available-for-sale and recorded at fair value. Marketable debt
securities include auction rate securities (“ARS”) which generally have long-term nominal maturities that exceed one year, with interest rates that reset periodically in scheduled auctions (generally every 7-35 days). Unrealized gains or
losses are reported as a component of accumulated other comprehensive income (loss) to the extent they are considered temporary. Realized gains or losses and other than temporary unrealized losses are reported in other income (expense), net on the
consolidated statements of operations. At September 30, 2008, the Company’s auction rate securities are classified as long-term investments because the auctions have failed.
Refer to Note 5 of the consolidated financial statements for more information related to our auction rate securities.
35
New Accounting Pronouncements
The information required by this Item is provided in Note 2 of the notes to the consolidated financial statements contained in Item 8.
Financial Statements and Supplementary Data.
Liquidity and Capital Resources
We have historically funded our
growth and working capital requirements with internally generated funds, credit facilities and term notes. We believe we have broad access to debt and equity capital markets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summary of Cash Flows
(in thousands)
|
|
Year Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Cash provided by operating activities
|
|
$
|
327,902
|
|
|
$
|
435,230
|
|
|
$
|
381,018
|
|
|
Cash used in investing activities
|
|
|
(122,828
|
)
|
|
|
(32,502
|
)
|
|
|
(387,274
|
)
|
|
Cash used in financing activities
|
|
|
(33,152
|
)
|
|
|
(174,579
|
)
|
|
|
(16,660
|
)
|
|
Effect of exchange rates on cash and cash equivalents
|
|
|
(9,171
|
)
|
|
|
11,666
|
|
|
|
3,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
162,751
|
|
|
|
239,815
|
|
|
|
(19,000
|
)
|
|
Cash and cash equivalents at beginning of year
|
|
|
378,743
|
|
|
|
138,928
|
|
|
|
157,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
541,494
|
|
|
$
|
378,743
|
|
|
$
|
138,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company believes it will be able to meet its cash requirements for operations, anticipated growth and capital
expansion. Cash, cash equivalents and short-term investments were $541 million, $595 million and $449 million as of September 30, 2008, 2007 and 2006, respectively. The Company intends to fund working capital requirements, principal and
interest payments on the Company’s debt, potential acquisitions and other liabilities with cash provided by operations and cash on hand, supplemented by short-term and long-term borrowings under existing credit facilities.
Operating activities:
The Company’s cash provided by operating activities decreased by $107.3 million from the prior year. The Company faced
increasing working capital requirements for client receivables and unbilled work in process, higher tax payments and higher performance-based compensation paid in the current year for fiscal 2007 performance. These factors more than offset the
increase in the Company’s net income, net of non-cash gains and charges, and higher deferred contract costs that provided more operating cash in the prior fiscal year.
The increase in cash provided by operating activities in fiscal 2007 was primarily due to an increase in cash collected on accounts receivable and proceeds from contracts where revenue was deferred until future
periods. These were partially offset by a higher level of performance-based compensation, severance payments and tax payments, net of refunds.
Investing activities:
Cash used in investing activities increased $90.3 million from the prior fiscal year. The primary causes of this change were increases in capital expenditures and additions to capitalized software, along
with an increase in cash used for the Company’s three acquisitions in fiscal year 2008. The cash proceeds received from the sale of the Cyborg business partially offset these increases. Net sales of investments also provided slightly less cash
in the current fiscal year.
The decrease in cash used in investing activities in fiscal 2007 was due to increased proceeds from net sales of short-term
investments and a decrease in capital expenditures. These were partially offset by an increase in the purchase of short-term investments and an increase in acquisitions. The short-term investment proceeds were utilized to fund higher
performance-based compensation and the Company’s share repurchase program.
Financing activities:
Cash used in financing activities
decreased $141.4 million from the prior fiscal year as the proceeds from the Company’s long-term debt offering more than offset the increased use of cash to repurchase Hewitt’s common stock. The Company repurchased approximately
15.1 million of its outstanding shares at an average price of $37.54, for a total of approximately $566.4 million, during the fiscal year. Net payments on the Company’s short-term debt holdings also used more cash in the current fiscal
year.
36
The increase in cash used in financing activities in fiscal 2007 was primarily due to an increase in share repurchases
relating to the Company’s share repurchase program, partially offset by an increase in proceeds from the exercise of stock options. The Company repurchased approximately 6.1 million of its outstanding shares at an average price of $30.24,
for a total of approximately $183.6 million, during fiscal year 2007.
We believe the cash on hand, together with funds from operations, other current
assets and existing credit facilities will satisfy our expected working capital, contractual obligations, planned capital expenditures and investment requirements for the foreseeable future.
At September 30, 2008, the Company had available credit facilities with domestic and foreign banks for various corporate purposes. The amount of unused credit
facilities as of September 30, 2008 was approximately $225.9 million. Additional information on the Company’s borrowings and available credit is included in Note 10 and Note 11 to the consolidated financial statements.
Contractual Obligations
Significant ongoing commitments consist
primarily of leases, debt, purchase commitments and other long-term liabilities. The following table shows the minimum payments required under existing agreements which have initial or remaining non-cancelable terms in excess of one year as of
September 30, 2008.
Contractual Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due in Fiscal Year
|
|
|
|
Total
|
|
2009
|
|
2010-
2011
|
|
2012-
2013
|
|
Thereafter
|
|
|
|
(in millions)
|
|
Operating leases
(1)
|
|
$
|
667
|
|
$
|
93
|
|
$
|
164
|
|
$
|
143
|
|
$
|
267
|
|
|
|
|
|
|
|
|
Capital leases
(2)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
|
|
|
82
|
|
|
8
|
|
|
18
|
|
|
20
|
|
|
36
|
|
Interest
|
|
|
26
|
|
|
5
|
|
|
9
|
|
|
7
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
108
|
|
|
13
|
|
|
27
|
|
|
27
|
|
|
41
|
|
|
|
|
|
|
|
|
Debt
(3)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
|
|
|
719
|
|
|
144
|
|
|
56
|
|
|
289
|
|
|
230
|
|
Interest
|
|
|
193
|
|
|
36
|
|
|
64
|
|
|
53
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
912
|
|
|
180
|
|
|
120
|
|
|
342
|
|
|
270
|
|
|
|
|
|
|
|
|
Purchase commitments
(4)
|
|
|
116
|
|
|
57
|
|
|
52
|
|
|
6
|
|
|
1
|
|
|
|
|
|
|
|
|
Other long-term obligations
(5)
|
|
|
92
|
|
|
9
|
|
|
17
|
|
|
17
|
|
|
49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$
|
1,895
|
|
$
|
352
|
|
$
|
380
|
|
$
|
535
|
|
$
|
628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
We have various third party operating leases for office space, furniture and equipment such as copiers, servers and disk drives with terms ranging from one to twenty years. Refer to
Note 12 to the consolidated financial statements for additional information on operating leases.
|
|
(2)
|
We have various telecommunications equipment installment notes under capital lease which are payable over three to five years and are secured by the related equipment. Refer to Note
12 to the consolidated financial statements for additional information on capital leases.
|
|
(3)
|
The amounts for long-term debt assume that the respective debt instruments will be outstanding until their scheduled maturity dates. Convertible debt is included at its face value.
The amounts include interest on both fixed and variable interest rate debt. The current rate as of September 30, 2008 is assumed for the variable rate debt. See Note 10 and Note 11 to the consolidated financial statements for additional
information regarding our debt.
|
|
(4)
|
Purchase commitments include, among other things, telecommunication usage, software licenses, consulting services and insurance coverage obligations as well as other obligations in
the ordinary course of business that we cannot cancel or where we would be required to pay a termination fee in the event of cancellation.
|
|
(5)
|
Other long-term obligations consist primarily of payments for pension plans, post retirement benefit plans and other long-term obligations. Other long-term obligations do not
include income taxes payable or long-term income taxes payable for uncertain tax positions. We are unable to reasonably estimate the timing of future payments related to uncertain tax positions. Refer to Note 20 to the consolidated financial
statements for additional information on uncertain tax positions.
|
37
Off-Balance Sheet Arrangements
We do not have any obligations that meet the definition of an off-balance sheet arrangement or are reasonably likely to have a material effect on our consolidated financial statements.
Self-Insurance
We established a captive insurance subsidiary in
fiscal 2003 as a way to self-insure against certain business risks and losses. The captive insurance subsidiary has issued policies to cover the deductible and an excess portion of various insured exposures, including the deductible portions of our
workers compensation and professional liability insurance. We carry an umbrella policy to cover exposures in excess of our deductibles.
|
Item 7A.
|
Quantitative and Qualitative Disclosures About Market Risk
|
We are
exposed to market risk primarily from changes in interest rates and foreign currency exchange rates. In December 2007, we initiated a foreign currency management program involving the uses of financial derivatives and, in August 2008, we initiated a
debt risk management program involving interest rate swaps. Historically, we have not entered into hedging transactions, such as foreign currency forward contracts or interest rate swaps, to manage this risk due to our low percentage of foreign debt
and restrictions on our fixed rate debt. We do not hold or issue derivative financial instruments for trading purposes. At September 30, 2008, we were a party to hedging transactions including the use of derivative financial instruments, as
discussed below.
Foreign exchange risk
For the year
ended September 30, 2008, revenues from U.S. operations as a percent of total revenues were approximately 74%. Operating in international markets means that we are exposed to fluctuations in foreign exchange rates. Approximately 12% of our net
revenues for the year ended September 30, 2008, were from the United Kingdom and approximately 6% of our net revenues for the year ended September 30, 2008, were from Canada. Changes in these foreign exchange rates can have a significant
impact on our translated international results of operations in U.S. dollars. A 10% change in the average exchange rate for the British pound sterling for the year ended September 30, 2008, would have impacted our annual operating income by
approximately $1.9 million. A 10% change in the average exchange rate for the Canadian dollar for the year ended September 30, 2008, would have impacted our annual operating income by approximately $2.7 million.
The Company has a substantial operation in India for the development and deployment of technology solutions as well as for client support activities. In December 2007,
the Company initiated a foreign currency risk management program involving the use of foreign currency derivatives related to exposures in fluctuations in the Indian rupee and expects to hedge approximately 75% of future exposures. As of
September 30, 2008, the Company was a party to foreign currency derivative instruments related to exposures to the Indian rupee for approximately 73% of forecasted transactions of approximately $117 million. A 10% change in the exchange rate on
the related exposure will result in an increase or decrease of related expenses of approximately $12 million. Consistent with the use of the derivatives to offset the effect of exchange rate fluctuations, such increases or decreases in expenses
would be offset by corresponding gains or losses, respectively, of approximately $8 million on settlement of the derivative instruments.
Interest rate
risk
We are exposed to interest rate risk primarily through our portfolio of cash and cash equivalents, short-term and long-term investments and
variable interest rate debt.
Our portfolio of cash and cash equivalents is designed for safety of principal and liquidity. We invest in U.S. treasuries
and agencies, AAA rated money market funds, A1/P1 rated commercial paper and bank/term deposits and regularly monitor the investment ratings. The investments are subject to inherent interest rate risk as investments mature and are reinvested at
current market interest rates. Our portfolio earned interest at an average rate of 4.0% during the year ended September 30, 2008. A one percentage point change would have impacted our interest income by approximately $3.6 million for the year
ended September 30, 2008.
Our long-term investments consist of auction rate securities (“ARS”) which are comprised of federally insured
student loan backed securities. These securities were valued using a discounted cash flow model based on assumptions including current interest yields and an after-tax discount rate commensurate with the expected holding period. A one percentage
point change on the interest income yields would impact the fair value of the ARS holdings by approximately $3.2 million. A one percentage point change on the discount rate used for valuing the ARS holdings would impact the fair value of the ARS
holdings by approximately $3.3 million.
38
Our short-term variable rate debt consists of our unsecured lines of credit. Our variable interest rate debt had an
effective interest rate of 4.54% during the year ended September 30, 2008. A one percentage point change would have impacted our interest expense related to all outstanding variable rate debt by approximately $1.4 million for the year ended
September 30, 2008.
On August 8, 2008, the Company entered into a long term loan agreement that provides for a senior unsecured term loan in the
amount of $270 million (the “Term Loan”). The Term Loan initially bears interest at a margin of 150 basis points over LIBOR and the margin will change depending on the Company’s leverage ratio. The Term Loan matures on August 8,
2013 without amortization. The Company is exposed to interest rate risk from this long term variable rate debt. The Company entered into interest rate swaps to partially convert this variable rate exposure into fixed rate. The Company swapped $170
million of the Term Loan for the first three years and $85 million of the Term Loan for the fourth year. Only the variable LIBOR component of the Term Loan debt was swapped to fixed rate. As of September 30, 2008, these hedges are still in
place. A one percentage point change in LIBOR would increase or decrease our interest expense related to the Term Loan, by approximately $2.7 million over a full year. Consistent with the use of the derivatives to offset the effect of interest rate
fluctuations, such increases or decreases in interest rate expenses would be offset by corresponding gains or losses, respectively of approximately $1.7 million on settlement of the derivative instruments.
|
Item 8.
|
Financial Statements and Supplementary Data
|
The financial
information required by Item 8 is contained in Item 15 of Part IV.
|
Item 9.
|
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
|
There have been no changes in or disagreements with our independent registered public accounting firm on accounting and financial disclosure.
|
Item 9A.
|
Controls and Procedures
|
Evaluation of Disclosure Controls and
Procedures
Under the supervision and with the participation of our senior management, including our chief executive officer and chief financial
officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”), as of the end of the period covered by this Annual Report (the “Evaluation Date”). Based on this evaluation, our chief executive officer and chief financial officer concluded as of the Evaluation Date that our disclosure
controls and procedures were effective such that the information relating to the Company, including consolidated subsidiaries, required to be disclosed in our Securities and Exchange Commission (“SEC”) reports (i) is recorded,
processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to the Company’s management, including our chief executive officer and chief financial officer, as
appropriate to allow timely decisions regarding required disclosure.
As required under this Item 9A, the management report titled
“Management’s Assessment of Internal Control Over Financial Reporting” and the auditor’s attestation report titled “Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting”
appear on pages 44 and 45 of this Annual Report.
39
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2008 that have materially affected or are reasonably likely to materially affect
our internal control over financial reporting.
|
Item 9B.
|
Other Information
|
The Company has no information to report
pursuant to Item 9B.
PART III
|
Item 10.
|
Directors, Executive Officers and Corporate Governance
|
Reference
is made to the Proxy Statement under the headings “Election of Directors”, “Directors and Officers” and “Corporate Governance” (hereby incorporated by reference) for this information.
|
Item 11.
|
Executive Compensation
|
Reference is made to the Proxy Statement
under the headings “Executive Compensation” and “Director Compensation” (hereby incorporated by reference) for this information.
|
Item 12.
|
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|
Reference is made to the Proxy Statement under the heading “Security Ownership of Certain Beneficial Owners and Management” and “Securities Authorized for Issuance under Equity Compensation Plans”
(hereby incorporated by reference) for this information.
|
Item 13.
|
Certain Relationships, Related Transactions and Director Independence
|
Reference is made to the Proxy Statement under the heading “Director Independence” (hereby incorporated by reference) for information related to director independence and to “Certain Relationships and Related
Transactions” for information related to transactions with related persons.
|
Item 14.
|
Principal Accounting Fees and Services
|
Reference is made to the
Proxy Statement under the heading “Audit Fees” (hereby incorporated by reference) for this information.
PART IV
|
Item 15.
|
Exhibits, Financial Statement Schedules
|
1.
Financial Statements
The financial statements listed on the Index to Financial Statements (page 43) are filed as part of this Annual
Report.
40
2. Financial Statement Schedules
These schedules have been omitted because the required information is included in the consolidated financial statements or notes thereto or because they
are not applicable or not required.
3. Exhibits
The exhibits listed on the Index to Exhibits (pages 93 through 96) are filed as part of this Annual Report.
41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
|
|
|
H
EWITT
A
SSOCIATES
, I
NC
.
|
|
|
|
|
By:
|
|
/s/ JOHN J. PARK
|
|
|
|
John J. Park
|
|
|
|
Chief Financial Officer
|
|
|
|
(Principal financial and accounting officer)
|
|
|
|
|
Date:
|
|
November 17, 2008
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the
following persons on behalf of the Registrant and in the capacities indicated on the 17th day of November 2008:
|
|
|
|
|
|
|
/s/ RUSSELL P. FRADIN
|
|
|
|
/s/ MICHAEL E. GREENLEES
|
|
Russell P. Fradin
|
|
|
|
Michael E. Greenlees
|
|
Chairman and Chief Executive Officer
|
|
|
|
Director
|
|
(Principal executive officer)
|
|
|
|
|
|
|
|
|
|
/s/ JOHN J. PARK
|
|
|
|
/s/ MICHELE M. HUNT
|
|
John J. Park
|
|
|
|
Michele M. Hunt
|
|
Chief Financial Officer
|
|
|
|
Director
|
|
(Principal financial and accounting officer)
|
|
|
|
|
|
|
|
|
|
/s/ WILLIAM J. CONATY
|
|
|
|
/s/ ALEX J. MANDL
|
|
William J. Conaty
|
|
|
|
Alex J. Mandl
|
|
Director
|
|
|
|
Director
|
|
|
|
|
|
/s/ STEVEN A. DENNING
|
|
|
|
/s/ CARY D. McMILLAN
|
|
Steven A. Denning
|
|
|
|
Cary D. McMillan
|
|
Director
|
|
|
|
Director
|
|
|
|
|
|
/s/ CHERYL A. FRANCIS
|
|
|
|
/s/ THOMAS J. NEFF
|
|
Cheryl A. Francis
|
|
|
|
Thomas J. Neff
|
|
Director
|
|
|
|
Director
|
|
|
|
|
|
/s/ JULIE S. GORDON
|
|
|
|
/s/ STEVEN P. STANBROOK
|
|
Julie S. Gordon
|
|
|
|
Steven P. Stanbrook
|
|
Director
|
|
|
|
Director
|
42
INDEX TO FINANCIAL STATEMENTS
43
MANAGEMENT’S ASSESSMENT OF
INTERNAL CONTROL OVER FINANCIAL REPORTING
The
financial statements were prepared by management, which is responsible for their integrity and objectivity and for establishing and maintaining adequate internal controls over financial reporting.
The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that:
|
|
i.
|
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
|
|
|
ii.
|
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
|
|
|
iii.
|
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect
on the financial statements.
|
There are inherent limitations in the effectiveness of any internal control, including the possibility of human
error and the circumvention or overriding of controls. Accordingly, even effective internal controls can provide only reasonable assurances with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness
of internal controls may vary over time.
Management assessed the design and effectiveness of the Company’s internal control over financial reporting
as of September 30, 2008. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control – Integrated Framework. Based on
management’s assessment using those criteria, as of September 30, 2008, management believes that the Company’s internal controls over financial reporting are effective.
Ernst & Young, LLP, independent registered public accounting firm, has audited the financial statements of the Company for the fiscal years ended September 30, 2008, 2007 and 2006 and the Company’s
internal control over financial reporting as of September 30, 2008. Their reports are presented on the following pages. The independent registered public accountants and internal auditors advise management of the results of their audits, and
make recommendations to improve the system of internal controls. Management evaluates the audit recommendations and takes appropriate action.
HEWITT
ASSOCIATES, INC.
44
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL
OVER FINANCIAL REPORTING
To the
Board of Directors and Stockholders of Hewitt Associates, Inc.:
We have audited Hewitt Associates, Inc.’s (the Company) internal control over
financial reporting as of September 30, 2008, based on criteria established in
Internal Control — Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Hewitt
Associates, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying report on
Management’s Assessment of Internal Control over Financial Reporting. Our responsibility is to express an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances.
We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could
have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, Hewitt Associates, Inc. maintained, in all material respects, effective internal control over financial
reporting as of September 30, 2008, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the accompanying consolidated financial statements of Hewitt Associates, Inc. as of September 30, 2008 and 2007, and for each of the three years in the period ended September 30, 2008, and our
report dated November 14, 2008, expressed an unqualified opinion thereon.
ERNST & YOUNG LLP
Chicago, Illinois
November 14, 2008
45
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Hewitt Associates, Inc.:
We
have audited the accompanying consolidated balance sheets of Hewitt Associates, Inc. and subsidiaries (the “Company”) as of September 30, 2008 and 2007, and the related consolidated statements of operations, stockholders’ equity
and cash flows for each of the three years in the period ended September 30, 2008. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the Company as of September 30, 2008 and 2007, and the consolidated results of its operations and its cash flows for each of the three years in the period ended
September 30, 2008, in conformity with U.S. generally accepted accounting principles.
As disclosed in Note 2 in the notes to the consolidated
financial statements, effective October 1, 2007 the Company adopted Financial Accounting Standard Board (FASB) Interpretation No. 48
Accounting for Uncertainty in Income Taxes
,
an interpretation of FASB Statement No. 109
and
EITF 06-2
Accounting for Sabbatical Leave and Other Similar Benefits Pursuant to FASB Statement No. 43, Accounting for Compensated Absences
. As disclosed in Note 2 in the notes to the consolidated financial statements, effective
September 30, 2007, the Company adopted the recognition and disclosure requirements of Statement of Financial Accounting Standard (SFAS) No. 158
Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans
– an amendment of FASB Statements No. 87, 88, 106, and 132(R
).
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), Hewitt Associates, Inc.’s internal control over financial reporting as of September 30, 2008, based on criteria established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our report dated November 14, 2008 expressed an unqualified opinion thereon.
ERNST &
YOUNG LLP
Chicago, Illinois
November 14, 2008
46
HEWITT ASSOCIATES, INC.
CONSOLIDATED BALANCE SHEETS
(In
thousands except for share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
September 30,
2008
|
|
September 30,
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
|
|
|
|
|
|
|
|
|
47
HEWITT ASSOCIATES, INC.
CONSOLIDATED BALANCE SHEETS - Continued
(In thousands except for share and per
share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2008
|
|
|
September 30,
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 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
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
48
HEWITT ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except for share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues before reimbursements (net revenues)
|
|
$
|
3,151,389
|
|
|
$
|
2,921,076
|
|
|
$
|
2,788,722
|
|
|
Reimbursements
|
|
|
76,259
|
|
|
|
69,250
|
|
|
|
68,439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
3,227,648
|
|
|
|
2,990,326
|
|
|
|
2,857,161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and related expenses
|
|
|
2,042,623
|
|
|
|
1,906,158
|
|
|
|
1,799,743
|
|
|
Goodwill and asset impairment
|
|
|
4,117
|
|
|
|
326,615
|
|
|
|
255,873
|
|
|
Reimbursable expenses
|
|
|
76,259
|
|
|
|
69,250
|
|
|
|
68,439
|
|
|
Other operating expenses
|
|
|
624,989
|
|
|
|
636,698
|
|
|
|
642,803
|
|
|
Selling, general and administrative expenses
|
|
|
202,483
|
|
|
|
194,572
|
|
|
|
154,564
|
|
|
Gain on sale of business
|
|
|
(35,667
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
2,914,804
|
|
|
|
3,133,293
|
|
|
|
2,921,422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
312,844
|
|
|
|
(142,967
|
)
|
|
|
(64,261
|
)
|
|
|
|
|
|
|
Other income, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(24,788
|
)
|
|
|
(20,019
|
)
|
|
|
(23,072
|
)
|
|
Interest income
|
|
|
22,023
|
|
|
|
30,219
|
|
|
|
17,795
|
|
|
Other income, net
|
|
|
6,365
|
|
|
|
8,049
|
|
|
|
9,968
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income, net
|
|
|
3,600
|
|
|
|
18,249
|
|
|
|
4,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
316,444
|
|
|
|
(124,718
|
)
|
|
|
(59,570
|
)
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
128,302
|
|
|
|
50,362
|
|
|
|
56,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
188,142
|
|
|
$
|
(175,080
|
)
|
|
$
|
(115,938
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.90
|
|
|
$
|
(1.62
|
)
|
|
$
|
(1.08
|
)
|
|
Diluted
|
|
$
|
1.85
|
|
|
$
|
(1.62
|
)
|
|
$
|
(1.08
|
)
|
|
|
|
|
|
|
Weighted average shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
98,791,739
|
|
|
|
107,866,281
|
|
|
|
107,642,383
|
|
|
Diluted
|
|
|
101,970,321
|
|
|
|
107,866,281
|
|
|
|
107,642,383
|
|
The accompanying notes are an integral part of these financial statements.
49
HEWITT ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands except for share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
Common Shares
|
|
|
Class B
Common Shares
|
|
|
Class C
Common Shares
|
|
|
Restricted
Stock Units
|
|
|
Additional
Paid-in
Capital
|
|
|
Treasury Stock,
at Cost
|
|
|
Retained
Earnings
|
|
|
Unearned
Compensation
|
|
|
Accumulated
Other
Comprehensive
Income
|
|
Total
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
|
Shares
|
|
Amount
|
|
|
|
|
|
|
Balance at September 30, 2005
|
|
72,970,960
|
|
|
730
|
|
|
45,181,849
|
|
|
452
|
|
|
3,540,461
|
|
|
35
|
|
|
98,967
|
|
|
2,035
|
|
|
1,315,119
|
|
|
13,514,395
|
|
(388,638
|
)
|
|
329,162
|
|
|
(17,326
|
)
|
|
$
|
69,788
|
|
1,311,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
|
(115,938
|
)
|
|
—
|
|
|
|
—
|
|
(115,938
|
)
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum pension liability adjustment, net of tax
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
2,397
|
|
2,397
|
|
|
Unrealized gains on short-term investments, net of tax
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
127
|
|
127
|
|
|
Foreign currency translation adjustments, net of tax
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
2,760
|
|
2,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,284
|
|
5,284
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(110,654
|
)
|
|
Restricted stock award grant
|
|
2,750,481
|
|
|
28
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(28
|
)
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
—
|
|
|
Share-based compensation expense
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
55,126
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
55,126
|
|
|
Cumulative effect of a change in accounting principle
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(119
|
)
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
(119
|
)
|
|
Excess tax benefits from stock plans
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,151
|
)
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
(1,151
|
)
|
|
Restricted stock unit vesting
|
|
121,520
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
—
|
|
|
Purchase of Class A common shares for treasury
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
595,385
|
|
(12,727
|
)
|
|
—
|
|
|
—
|
|
|
|
—
|
|
(12,727
|
)
|
|
Issuance of Class A common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock options
|
|
647,740
|
|
|
6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
14,531
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
14,537
|
|
|
Outside Directors
|
|
17,089
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
—
|
|
|
Rule 144 share conversions and other share conversions
|
|
48,722,310
|
|
|
487
|
|
|
(45,181,849
|
)
|
|
(452
|
)
|
|
(3,540,461
|
)
|
|
(35
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
—
|
|
|
Net forfeiture of restricted common stock pursuant to the global stock plan and other
|
|
(297,911
|
)
|
|
(3
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
(3
|
)
|
|
Adoption of SFAS 123(R) – Adjustment to remove restricted stock units and unearned compensation
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(98,967
|
)
|
|
(2,035
|
)
|
|
(15,288
|
)
|
|
—
|
|
—
|
|
|
—
|
|
|
17,326
|
|
|
|
—
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2006
|
|
124,932,189
|
|
|
1,249
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,368,189
|
|
|
14,109,780
|
|
(401,365
|
)
|
|
213,224
|
|
|
—
|
|
|
|
75,072
|
|
1,256,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
HEWITT ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY - Continued
(In thousands
except for share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
Common Shares
|
|
|
Class B
Common Shares
|
|
Class C
Common Shares
|
|
Restricted
Stock Units
|
|
Additional
Paid-in
Capital
|
|
|
Treasury Stock,
at Cost
|
|
|
Retained
Earnings
|
|
|
Unearned
Compensation
|
|
Accumulated
Other
Comprehensive
Income
|
|
|
Total
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
|
Shares
|
|
Amount
|
|
|
|
|
|
|
Balance at September 30, 2006
|
|
124,932,189
|
|
|
|
1,249
|
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
1,368,189
|
|
|
14,109,780
|
|
|
(401,365
|
)
|
|
|
213,224
|
|
|
|
—
|
|
|
75,072
|
|
|
|
1,256,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
(175,080
|
)
|
|
|
—
|
|
|
—
|
|
|
|
(175,080
|
)
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains on short-term investments, net of tax
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
8
|
|
|
|
8
|
|
|
Foreign currency translation adjustments, net of tax
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
49,827
|
|
|
|
49,827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49,835
|
|
|
|
49,835
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(125,245
|
)
|
|
Share-based compensation expense
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
40,925
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
|
40,925
|
|
|
Excess tax benefits from stock plans
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
9,140
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
|
9,140
|
|
|
Restricted stock unit vesting
|
|
613,678
|
|
|
|
6
|
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
(6
|
)
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
Purchase of Class A common shares for treasury
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6,436,164
|
|
|
(195,835
|
)
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
|
(195,835
|
)
|
|
Issuance of Class A common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock options
|
|
2,377,618
|
|
|
|
24
|
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
54,159
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
|
54,183
|
|
|
Outside Directors
|
|
3,508
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
Net forfeiture of restricted common stock pursuant to the global stock plan and other
|
|
(254,740
|
)
|
|
|
(2
|
)
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
Adoption of SFAS 158 (net of tax)
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
(1,525
|
)
|
|
|
(1,525
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2007
|
|
127,672,253
|
|
|
$
|
1,277
|
|
|
—
|
|
$
|
—
|
|
—
|
|
$
|
—
|
|
—
|
|
$
|
—
|
|
$
|
1,472,409
|
|
|
20,545,944
|
|
$
|
(597,200
|
)
|
|
$
|
38,144
|
|
|
$
|
—
|
|
$
|
123,382
|
|
|
$
|
1,038,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51
HEWITT ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY - Continued
(In thousands
except for share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
Common
Shares
|
|
Class B
Common
Shares
|
|
Class C
Common
Shares
|
|
Restricted
Stock
Units
|
|
Additional
Paid-in
Capital
|
|
|
Treasury
Stock,
at Cost
|
|
|
Retained
Earnings
|
|
|
Unearned
Compensation
|
|
Accumulated
Other
Comprehensive
Income
|
|
|
Total
|
|
|
|
Shares
|
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
|
Shares
|
|
Amount
|
|
|
|
|
|
|
Balance at September 30, 2007
|
|
127,672,253
|
|
|
$
|
1,277
|
|
—
|
|
$
|
—
|
|
—
|
|
$
|
—
|
|
—
|
|
$
|
—
|
|
$
|
1,472,409
|
|
|
20,545,944
|
|
$
|
(597,200
|
)
|
|
$
|
38,144
|
|
|
$
|
—
|
|
$
|
123,382
|
|
|
$
|
1,038,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
—
|
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
188,142
|
|
|
|
—
|
|
|
—
|
|
|
|
188,142
|
|
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses on investments, net of tax
|
|
—
|
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
(4,273
|
)
|
|
|
(4,273
|
)
|
|
Retirement Plans, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,834
|
)
|
|
|
(23,834
|
)
|
|
Unrealized gains (losses) on hedging transactions, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,412
|
)
|
|
|
(6,412
|
)
|
|
Foreign currency translation adjustments, net of tax
|
|
—
|
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
(42,173
|
)
|
|
|
(42,173
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other
comprehensive
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(76,692
|
)
|
|
|
(76,692
|
)
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
111,450
|
|
|
Share-based compensation expense
|
|
—
|
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
48,345
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
|
48,345
|
|
|
Excess tax benefits from stock plans
|
|
—
|
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
14,744
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
|
14,744
|
|
|
Restricted stock unit vesting
|
|
938,872
|
|
|
|
9
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
(9
|
)
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
Purchase of Class A common shares for treasury
|
|
—
|
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
15,617,816
|
|
|
(586,227
|
)
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
|
(586,227
|
)
|
|
Issuance of Class A common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock options
|
|
1,847,653
|
|
|
|
18
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
43,588
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
|
43,606
|
|
|
Net forfeiture of restricted common stock pursuant to the global stock plan and other
|
|
(67,898
|
)
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
Adoption of FIN 48
|
|
—
|
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
(7,036
|
)
|
|
|
—
|
|
|
—
|
|
|
|
(7,036
|
)
|
|
Adoption of EITF 06-02 (net of tax)
|
|
—
|
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
(12,692
|
)
|
|
|
—
|
|
|
—
|
|
|
|
(12,692
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2008
|
|
130,390,880
|
|
|
$
|
1,304
|
|
—
|
|
$
|
—
|
|
—
|
|
$
|
—
|
|
—
|
|
$
|
—
|
|
$
|
1,579,077
|
|
|
36,163,760
|
|
$
|
(1,183,427
|
)
|
|
$
|
206,558
|
|
|
$
|
—
|
|
$
|
46,690
|
|
|
$
|
650,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
52
HEWITT ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
188,142
|
|
|
$
|
(175,080
|
)
|
|
$
|
(115,938
|
)
|
|
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
|
|
|
|
166,603
|
|
|
Goodwill and asset impairment
|
|
|
4,117
|
|
|
|
326,615
|
|
|
|
255,873
|
|
|
Gain on sale of business
|
|
|
(35,667
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Share-based compensation
|
|
|
48,345
|
|
|
|
40,937
|
|
|
|
55,007
|
|
|
Deferred income taxes
|
|
|
6,976
|
|
|
|
(19,147
|
)
|
|
|
17,906
|
|
|
Gain on contribution of business
|
|
|
—
|
|
|
|
—
|
|
|
|
(7,127
|
)
|
|
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
|
|
|
|
(14,634
|
)
|
|
Prepaid expenses and other current assets
|
|
|
(51,155
|
)
|
|
|
(4,581
|
)
|
|
|
21,072
|
|
|
Deferred contract costs
|
|
|
(102,214
|
)
|
|
|
(143,619
|
)
|
|
|
(170,309
|
)
|
|
Other assets
|
|
|
(22,646
|
)
|
|
|
(5,102
|
)
|
|
|
1,244
|
|
|
Accounts payable
|
|
|
(4,962
|
)
|
|
|
(11,183
|
)
|
|
|
(27,324
|
)
|
|
Accrued compensation and benefits
|
|
|
34,787
|
|
|
|
82,024
|
|
|
|
89,864
|
|
|
Accrued expenses
|
|
|
22,518
|
|
|
|
30,842
|
|
|
|
2,513
|
|
|
Advanced billings to clients
|
|
|
(1,515
|
)
|
|
|
(7,525
|
)
|
|
|
18,361
|
|
|
Deferred contract revenues
|
|
|
96,077
|
|
|
|
111,930
|
|
|
|
95,189
|
|
|
Other long-term liabilities
|
|
|
7,184
|
|
|
|
11,366
|
|
|
|
(7,282
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
327,902
|
|
|
|
435,230
|
|
|
|
381,018
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of investments
|
|
|
(426,675
|
)
|
|
|
(400,794
|
)
|
|
|
(356,365
|
)
|
|
Proceeds from sales of investments
|
|
|
513,064
|
|
|
|
502,331
|
|
|
|
105,678
|
|
|
Additions to property and equipment
|
|
|
(117,556
|
)
|
|
|
(88,477
|
)
|
|
|
(129,936
|
)
|
|
Cash paid for acquisitions and transaction costs, net of cash acquired
|
|
|
(134,081
|
)
|
|
|
(45,562
|
)
|
|
|
(6,651
|
)
|
|
Cash received for sale of business
|
|
|
42,420
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(122,828
|
)
|
|
|
(32,502
|
)
|
|
|
(387,274
|
)
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from the exercise of stock options
|
|
|
43,606
|
|
|
|
54,183
|
|
|
|
14,537
|
|
|
Excess tax benefits from the exercise of share-based awards
|
|
|
10,227
|
|
|
|
4,912
|
|
|
|
1,084
|
|
|
Proceeds from short-term borrowings
|
|
|
185,468
|
|
|
|
103,771
|
|
|
|
140,154
|
|
|
Proceeds from long-term borrowings
|
|
|
539,751
|
|
|
|
—
|
|
|
|
—
|
|
|
Repayments of short-term borrowings, capital leases and long-term debt
|
|
|
(225,977
|
)
|
|
|
(141,610
|
)
|
|
|
(159,708
|
)
|
|
Purchase of Class A common shares for treasury
|
|
|
(586,227
|
)
|
|
|
(195,835
|
)
|
|
|
(12,727
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(33,152
|
)
|
|
|
(174,579
|
)
|
|
|
(16,660
|
)
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(9,171
|
)
|
|
|
11,666
|
|
|
|
3,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
162,751
|
|
|
|
239,815
|
|
|
|
(19,000
|
)
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of year
|
|
|
378,743
|
|
|
|
138,928
|
|
|
|
157,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
541,494
|
|
|
$
|
378,743
|
|
|
$
|
138,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
53
HEWITT ASSOCIATES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2008, 2007 and 2006
(In thousands except for share and per share amounts)
|
1.
|
Description of Business
|
Hewitt Associates, Inc., a Delaware
corporation, and its subsidiaries (“Hewitt” or the “Company”) provide global human resources benefits, outsourcing and consulting services. Benefits Outsourcing includes administrative services for health and welfare, defined
contribution and defined benefit plans. Human Resource Business Process Outsourcing (HR BPO) includes workforce administration, rewards management, recruiting and staffing, payroll processing, performance management, learning and development, talent
management, relocation services, time and attendance, accounts payable, procurement expertise and vendor management. Hewitt’s Consulting business provides a wide array of consulting and actuarial services covering the design, implementation,
communication and operation of health and welfare, compensation and retirement plans, and broader human resources programs and processes.
|
2.
|
Summary of Significant Accounting Policies
|
The consolidated
financial statements are prepared on the accrual basis of accounting. The significant accounting policies are summarized below:
Principles of
Consolidation and Combination
The accompanying consolidated financial statements reflect the operations of the Company and its majority owned
subsidiaries after elimination of intercompany accounts and transactions. Investments in affiliated companies in which the Company does not have control, but has the ability to exercise significant influence over governance and operations (generally
20-50 percent ownership), are accounted for by the equity method.
Use of Estimates
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and accompanying notes. Estimates are used for, but are not limited to, the accounting for contract and project loss reserves, performance-based compensation, the allowance for
doubtful accounts, depreciation and amortization, long-term investments, asset impairment, taxes and contingencies. Although these estimates are based on management’s best knowledge of current events and actions that the Company may undertake
in the future, actual results may differ from the estimates.
Revenue Recognition
Revenues include fees generated from outsourcing contracts and from consulting services provided to the Company’s clients. Revenues from sales or licensing of software are not material. The Company recognizes
revenue when persuasive evidence of an arrangement exists, services have been rendered, the fee is determinable and collectibility is reasonably assured.
The Company’s outsourcing contracts typically have three to five year terms for benefits services and seven to ten year terms for HR BPO services. The Company recognizes revenues for non-refundable, up-front implementation fees evenly
over the period that the related ongoing service revenues are recognized. Services provided outside the scope of the Company’s outsourcing contracts are recognized on a time-and-material or fixed-fee basis.
The Company’s clients typically pay for consulting services either on a time-and-material or fixed-fee basis. Revenues are recognized monthly under
time-and-material based arrangements as services are provided. On fixed-fee engagements, revenues are recognized either as services are provided using a proportional performance method or at the completion of a project based on facts and
circumstances of the client arrangement.
54
Contract losses on outsourcing or consulting arrangements are recognized in the period in which the loss becomes probable
and the amount of the loss is reasonably estimable. Contract losses are determined to be the amount by which the estimated direct costs, including any remaining deferred contract costs, exceed the estimated total revenues that will be generated by
the contract. When a loss is identified, it is first recorded as an impairment of deferred contract costs related to the specific contract, if applicable, with the remaining amount recorded as a loss reserve. Estimates are monitored during the term
of the contract and any changes to the estimates are recorded in the period the change is identified and may result in an adjustment to the loss reserve.
During fiscal 2007, the Company recorded a $10,146 pre-tax, non-cash charge related to certain European Benefits Outsourcing contracts. This charge is reflected as a $3,140 impairment of deferred contract costs and a $7,006 loss reserve
provision included in compensation and related expenses.
During fiscal 2006, the Company recorded a $72,641 pre-tax, non-cash charge related to certain HR
BPO contracts resulting from higher than expected implementation and future ongoing costs to be incurred over the life of the contract. This charge was reflected as a $61,614 impairment of deferred contract costs and a $11,027 loss reserve provision
included in compensation and related expenses.
In connection with Emerging Issues Task Force (“EITF”) Issue No. 00-21,
Revenue Arrangements
with Multiple Deliverables,
the Company has contracts with multiple elements primarily in its Benefits Outsourcing and HR BPO segments. Multiple-element arrangements are assessed to determine whether they can be separated into more than one unit
of accounting. EITF Issue 00-21 establishes the following criteria, all of which must be met, in order for a deliverable to qualify as a separate unit of accounting:
|
|
•
|
|
The delivered items have value to the client on a stand-alone basis;
|
|
|
•
|
|
There is objective and reliable evidence of the fair value of the undelivered items; and
|
|
|
•
|
|
The arrangement includes a general right of return relative to the delivered items, and delivery or performance of the undelivered items is considered probable and
substantially in the control of the Company.
|
If there is objective and reliable evidence of fair value for all units of accounting in an
arrangement, the arrangement consideration is allocated to the separate units of accounting based on each unit’s relative fair value. Revenue is then recognized using a proportional performance method such as recognizing revenue based on
transactional services delivered or on a straight-line basis (as adjusted primarily for volume changes), as appropriate. If these criteria are not met, deliverables included in an arrangement are accounted for as a single unit of accounting and
revenue and cost are deferred until the period in which the final deliverable is provided or a predominant service level has been attained and then recognized over the life of the contract.
Revenues earned in excess of billings are recorded as unbilled work in process. Billings in excess of revenues earned are recorded as advanced billings to clients, a
deferred revenue liability, until services are rendered.
The Company considers the criteria established by EITF Issue No. 99-19,
Reporting Revenue
Gross as a Principal versus Net as an Agent,
in determining whether revenue should be recognized on a gross versus a net basis. In consideration of these criteria, the Company recognizes revenue primarily on a gross basis. Factors considered in
determining if gross or net recognition is appropriate include whether the Company is primarily responsible to the client for the delivery of services, changes to the delivered product, performs part of the service delivered, has discretion on
vendor selection or bears credit risk.
In accordance with EITF Issue No. 01-14,
Income Statement Characterization of Reimbursements Received for
“Out-of-Pocket” Expenses Incurred,
reimbursements received for out-of-pocket expenses incurred are characterized as revenues and are shown as a separate component of total revenues. Similarly, related reimbursable expenses are also
shown separately within operating expenses.
55
Deferred Contract Costs and Deferred Contract Revenues
For long-term outsourcing service agreements, implementation efforts are often necessary to set up clients and their human resource or benefit programs on the
Company’s systems and operating processes. For outsourcing services sold separately or accounted for as a separate unit of accounting, specific, incremental and direct costs of implementation incurred prior to the services going live are
deferred and amortized over the period that the related ongoing services revenue is recognized. Such costs may include internal and external costs for coding or customizing systems, costs for conversion of client data and costs to negotiate contract
terms. For outsourcing services that are accounted for as a combined unit of accounting, specific, incremental and direct costs of implementation, as well as ongoing service delivery costs incurred prior to revenue recognition commencing are
deferred and amortized over the remaining contract services period. Implementation fees are also generally received from our clients either up-front or over the ongoing services period as a component of the fee per participant. Lump sum
implementation fees received from a client are initially deferred and then recognized as revenue evenly over the ongoing contract services period. If a client terminates an outsourcing services arrangement prior to the end of the contract, a loss on
the contract may be recorded, if necessary, and any remaining deferred implementation revenues and costs would then be recognized into earnings generally over the remaining service period through the termination date.
Performance-Based Compensation
The Company’s compensation
program includes a performance-based component that is determined by management subject to annual review by the Compensation and Leadership Committee of the Board of Directors. Performance-based compensation is discretionary and is based on
individual, team and total Company performance. Performance-based compensation is paid once per fiscal year after the Company’s annual operating results are finalized. The amount of expense for performance-based compensation recognized at
interim dates involves judgment, is based on annual results as compared to internal targets and takes into account other factors, including industry trends and the general economic environment. Annual performance-based compensation levels may vary
from current expectations as a result of changes in the actual performance of the Company, team or individual. As such, accrued amounts are subject to change in future periods if actual performance varies from performance levels anticipated in prior
interim periods.
Income Taxes
The Company applies the
asset and liability method described in Statement of Financial Accounting Standards (“SFAS”) No. 109,
Accounting for Income Taxes
. Deferred tax assets and liabilities are recognized for future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using tax rates expected
to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the
enactment date. Valuation allowances are recognized to reduce the deferred tax assets to the amount that is more likely than not to be realized. In assessing the likelihood of realization, management considers estimates of future taxable income.
Effective October 1, 2007, the Company adopted Financial Accounting Standards Board (FASB) Interpretation No. (FIN) 48,
Accounting for
Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109
(FIN 48), which requires a more-likely-than-not threshold for financial statement recognition and measurement of tax positions taken or expected to be taken in a tax
return. The Company records a liability for the difference between the benefit recognized and measured pursuant to FIN 48 and the tax position taken or expected to be taken on its tax return. To the extent that the Company’s assessment of such
tax positions changes, the change in estimate is recorded in the period in which the determination is made. Prior to October 1, 2007, the Company established contingencies for income tax when, despite the belief that its tax positions were
fully supportable, the Company believed that it was probable that its positions would be challenged and could be disallowed by various authorities. The consolidated tax provision and related accruals included the impact of such reasonably estimable
losses and related interest and penalties as deemed appropriate.
56
Foreign Currency Translation
The Company’s foreign operations use local currency as their functional currency. Accordingly, assets and liabilities of foreign subsidiaries are translated into U.S. dollars at exchange rates in effect at year-end, while revenues and
expenses are translated at average exchange rates prevailing during the year. Translation adjustments are reported as a component of accumulated other comprehensive income (loss) in stockholders’ equity. Gains or losses resulting from foreign
exchange transactions are recorded in earnings within other income (expense), net. Transaction gains (losses) totaled $254, ($3,589) and ($94) in fiscal 2008, 2007 and 2006, respectively.
Concentrations of Credit Risk
The Company’s financial
instruments that are exposed to concentrations of credit risk consist of cash equivalents, client receivables, unbilled work in process and long-term investments. Hewitt invests its cash equivalents in government and agency paper, the highest rated
money market and similar investments and continuously monitors the investment ratings. Concentrations of credit risk with respect to unbilled revenues and receivables are limited as no client makes up a significant portion of the Company’s
billings. The majority of the Company’s long-term investments are comprised of federally insured student loan backed securities which are rated Aaa/AAA by Moody’s and S&P, respectively, and are spread among many state issuers. Credit
risk itself is limited due to the Company’s large number of
Fortune 500
clients, its clients’ strong credit histories and their dispersion across many different industries and geographic regions. For each of the years ended
September 30, 2008, 2007 and 2006, no single client represented ten percent or more of the Company’s total revenues.
Fair Value of Financial
Instruments
Cash and cash equivalents and client receivables are financial assets with carrying values that approximate fair value. Accounts payable
and the Company’s variable rate debt are financial liabilities with carrying values that approximate fair value. As of September 30, 2008 and 2007, the carrying value of the Company’s fixed rate unsecured senior term notes was
$283,000 and $70,000, respectively, and the fair value was estimated to be approximately $287,649 and $74,955, respectively. The estimate of fair value was calculated by discounting the future cash flows of the senior term notes at rates currently
offered to the Company for similar debt instruments with comparable maturities. At September 30, 2008 and 2007, the carrying value of the Company’s unsecured convertible senior notes with a face value of $110,000 was $110,000 and $106,080,
respectively, and the fair value was estimated to be $109,104 and $106,563, respectively based on the current market value of this publicly traded security. Refer to Note 5 for discussion on fair value of auction rate securities.
Cash and Cash Equivalents
The Company defines cash and cash
equivalents as cash and investments with maturities of 90 days or less when purchased. At September 30, 2008 and 2007, cash and cash equivalents included cash in checking and money market accounts as well as corporate tax-advantaged money
market investments maturing in 90 days or less. At September 30, 2008, $814 of the Company’s cash was restricted in connection with a prior year acquisition. The restricted cash was paid out under the terms of an Escrow Agreement on
October 30, 2008.
Funds Held for Clients
Some of
the Company’s outsourcing agreements require the Company to hold funds on behalf of clients. Funds held on behalf of clients are segregated from Hewitt corporate funds. There is usually a short period of time between when we receive funds and
when we pay obligations on behalf of clients.
Investments
Short-term and long-term investments include marketable equity and debt securities that are classified as available-for-sale and recorded at fair value. Marketable debt securities include auction rate securities (“ARS”) which
generally have long-term nominal maturities that exceed one year, with interest rates that reset periodically in scheduled auctions (generally every 7-35 days). Unrealized gains or losses are reported as a component of accumulated other
comprehensive income (loss) to the extent they are deemed temporary. Realized gains or losses and other than temporary unrealized losses are reported in other income (expense), net on the consolidated statements of operations. At September 30,
2008, the Company’s auction rate securities are classified as long-term investments because the auctions have failed.
Refer to Note 5 for more
information on the Company’s investments.
57
Client Receivables and Unbilled Work in Process
The Company periodically evaluates the collectibility of its client receivables and unbilled work in process based on a combination of factors. In circumstances where the Company becomes aware of a specific
client’s difficulty in meeting its financial obligations (e.g., bankruptcy filings, failure to pay amounts due to the Company or to others), the Company records an allowance for doubtful accounts to reduce the client receivable or unbilled work
in process to what the Company reasonably believes will be collected. For all other clients, the Company recognizes an allowance for doubtful accounts based on past write-off history and the length of time the receivables are past due or unbilled
work in process is not billed. Facts and circumstances may change that would require the Company to alter its estimates of the collectibility of client receivables and unbilled work in process. Accounts are written off against the allowance when the
Company determines that the receivable will not be collected.
Property and Equipment
Property and equipment, which include amounts recorded under capital leases, are recorded at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the
assets, which are as follows:
|
|
|
|
|
Asset Description
|
|
Asset Life
|
|
Computer equipment
|
|
3 to 5 years
|
|
Capitalized software
|
|
3 to 5 years
|
|
Telecommunications equipment
|
|
5 years
|
|
Furniture and equipment
|
|
5 to 15 years
|
|
Buildings
|
|
15 to 39 years
|
|
Leasehold improvements
|
|
Lesser of estimated useful life or lease term
|
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of long-lived assets held for use are assessed by a comparison of the carrying amount of the asset to the estimated future undiscounted net cash flows expected to be generated by the
asset. If estimated future undiscounted net cash flows are less than the carrying amount of the asset, the asset is considered impaired and expense is recorded in an amount required to reduce the carrying amount of the asset to its fair value.
58
Software Development Costs
Costs for software developed for internal use are accounted for in accordance with the American Institute of Certified Public Accountants’ Statement of Position No. 98-1 (“SOP 98-1”),
Accounting for Costs of Computer
Software Developed or Obtained for Internal Use.
SOP 98-1 requires the capitalization of certain costs incurred in connection with developing or obtaining internal use software. Costs capitalized in accordance with SOP 98-1 are included in
deferred contract costs in the consolidated balance sheet. The Company amortizes the software costs over periods ranging from three to five years.
Costs
that are incurred in the preliminary project stage are expensed as incurred. Once the capitalization criteria of SOP 98-1 have been met, external direct costs of materials and services consumed in developing or obtaining internal-use computer
software, payroll and payroll-related costs for employees who are directly associated with and who devote time to the internal-use computer software project (to the extent of their time spent directly on the project) and interest costs incurred when
developing computer software for internal use are capitalized.
Goodwill and Intangible Assets
Goodwill is not amortized but is reviewed for impairment annually or more frequently if indicators of impairment arise. The evaluation is based upon a comparison of the
estimated fair value of the reporting unit to which the goodwill has been assigned to the sum of the carrying values of the assets and liabilities for that reporting unit. The fair values used in this evaluation are estimated based upon discounted
future cash flow projections for the reporting unit. These cash flow projections are based upon a number of estimates and assumptions.
Intangible assets
are initially valued at fair market value using generally accepted valuation methods appropriate for the type of intangible asset. Intangible assets with definite lives are amortized over their estimated useful lives and are reviewed for impairment
if indicators of impairment arise. The evaluation of impairment is based upon a comparison of the carrying amount of the intangible asset to the estimated future undiscounted net cash flows expected to be generated by the asset. If estimated future
undiscounted net cash flows are less than the carrying amount of the asset, the asset is considered impaired. The impairment expense is determined by comparing the estimated fair value of the intangible asset to its carrying value, with any
shortfall from fair value recognized as an expense in the current period.
Amortization of the Company’s definite-lived intangible assets is computed
using the straight-line method over the estimated useful lives of the assets, which are as follows:
|
|
|
|
|
Asset Description
|
|
Asset Life
|
|
Trademarks and tradenames
|
|
3 to 10 years
|
|
Core technology
|
|
10 years
|
|
Customer relationships
|
|
10 to 30 years
|
Share-Based Compensation
On October 1, 2005, the Company adopted SFAS 123(R),
Share-Based Payment
(“SFAS 123(R)”), using the modified prospective method. Upon the adoption of SFAS 123(R), the Company recognized an
immaterial one-time gain in compensation and related expenses related to the requirement to apply an estimated forfeiture rate to unvested awards. Previously, the Company recorded forfeitures as incurred. The Company has also elected to recognize
the compensation cost of all share-based awards, other than those with performance conditions, on a straight-line basis over the vesting period of the award. Compensation cost of all share-based awards with performance conditions are recognized on a
straight-line basis (if cliff vesting) or on an accelerated-attribution basis (if graded vesting) over the requisite service period or the implicit service period, if it is probable that the performance conditions will be met. Under SFAS 123(R),
benefits of tax deductions in excess of recognized compensation expense are now reported as a financing cash flow.
Restricted stock awards, including
restricted stock and restricted stock units, are measured using the fair market value of the stock as of the grant date. The Company recognizes compensation expense, net of estimated forfeitures, on a straight-line basis over the vesting period.
Estimated forfeitures are reviewed periodically and changes to the estimated forfeiture rate are recorded in current period earnings. Employer payroll taxes are also recorded as expense when they become due over the vesting period. The remaining
unvested shares are subject to forfeiture and restrictions on sale or transfer based on vesting dates.
59
The Company also grants nonqualified stock options at an exercise price equal to the fair market value of the
Company’s stock on the grant date. The Company applies the Black-Scholes valuation method to compute the estimated fair value of the stock options and recognizes compensation expense, net of estimated forfeitures, on a straight-line basis so
that the award is fully expensed at the vesting date. Generally, stock options vest 25 percent on each anniversary of the grant date, are fully vested four years from the grant date and have a term of ten years.
The Company uses the “simplified method”, defined in SEC Staff Accounting Bulletin (“SAB”) No. 107, to determine the expected life assumption
for all of its options. The Company continues to use the “simplified method”, as permitted by SAB No. 110, as it does not believe that it has sufficient historical exercise data to provide a reasonable basis upon which to estimate
expected life due to the limited time its equity shares have been publicly traded.
New Accounting Pronouncements
In March 2008, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging Activities
– an amendment of FASB Statement No. 133
(“SFAS No. 161”). This Statement amends and expands the disclosure requirements of FASB Statement No. 133,
Accounting for Derivative Instruments and Hedging
Activities
. SFAS No. 161 will become effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008 (Hewitt’s second quarter of fiscal year 2009). The Company is currently
evaluating the potential impact, if any, of SFAS No. 161 on its consolidated financial statements.
In December 2007, the FASB issued SFAS
No. 160,
Noncontrolling Interest in Consolidated Financial Statements-an amendment of ARB No. 51
(“SFAS No. 160”). This Statement establishes accounting and reporting standards for noncontrolling interests and
transactions between the reporting party and such noncontrolling interests. This Statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008 (Hewitt’s fiscal year 2010).
The Company is currently evaluating the potential impact, if any, of SFAS No. 160 on its consolidated financial statements.
In December 2007, the
FASB issued SFAS No. 141(R),
Business Combinations
, (“SFAS No. 141(R)”). SFAS No. 141(R) requires the Company to continue to follow the guidance in SFAS No. 141 for certain aspects of business combinations, with additional guidance
provided defining the acquirer, recognizing and measuring the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree, assets and liabilities arising from contingencies, defining a bargain purchase and
recognizing and measuring goodwill or a gain from a bargain purchase. In addition, under SFAS No. 141(R), adjustments associated with changes in tax contingencies that occur after the measurement period, not to exceed one year, are recorded as
adjustments to income. This statement is effective for all business combinations for which the acquisition date is on or after the beginning of an entity’s first fiscal year that begins after December 15, 2008 (Hewitt’s fiscal year 2010);
however, the guidance in this standard regarding the treatment of income tax contingencies is retrospective to business combinations completed prior to October 1, 2009. The Company will adopt SFAS No. 141(R) for any business combinations occurring
at or subsequent to October 1, 2009.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities—Including an amendment of FASB Statement No. 115
(“SFAS No. 159”). This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. This Statement is
effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007 (Hewitt’s fiscal year 2009). The Company is currently evaluating the potential impact, if any, of SFAS No. 159 on its consolidated
financial statements.
In September 2006, the SEC issued Staff Accounting Bulletin (SAB) No. 108,
Considering the Effects of Prior Year
Misstatements When Quantifying Misstatements in Current Year Financial Statements
, (“SAB No. 108”). SAB No. 108 addresses the process and diversity in practice of quantifying financial statement misstatements resulting in the
potential build up of improper amounts on the balance sheet. The adoption of SAB No. 108, effective September 30, 2007, did not have a material impact on the Company’s consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
, (“SFAS No. 157”). SFAS No. 157 establishes a framework for
measuring fair value and expands disclosures about fair value measurements. The changes to current practice resulting
60
from the application of this Statement relate to the definition of fair value, the methods used to measure fair value, and the expanded disclosures about
fair value measurements. The Statement is effective for fiscal years beginning after November 15, 2007 (Hewitt’s fiscal year 2009) and interim periods within those fiscal years. In February 2008, the FASB issued FASB Staff Position
No. FAS 157-2,
Effective Date of FASB Statement No. 157
, which provides a one year deferral of the effective date of SFAS No. 157 for non-financial assets and non-financial liabilities, except those that are recognized or
disclosed in the financial statements at fair value at least annually. On October 10, 2008, the FASB issued FSP No. 157-3,
Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active
, (“FSP 157-3”)
that clarifies the application of SFAS No. 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial assets is not active. FSP
157-3 is effective upon issuance. The Company does not believe that the adoption of the provisions of SFAS No. 157 will materially impact its financial position and results of operations.
In September 2006, the FASB issued SFAS No. 158,
Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of
FASB Statements No. 87, 88, 106, and 132(R
), (“SFAS No. 158”). SFAS No. 158 requires an employer to recognize the over-funded or under-funded status of a defined benefit postretirement plan (other than a multiemployer
plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through other comprehensive income. SFAS No. 158 also requires an employer to measure
plan assets and benefit obligations as of the date of the employer’s fiscal year-end. The provisions of this Statement are effective for an employer with publicly traded equity securities which require the Company to recognize the funded status
of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after December 15, 2006 (Hewitt’s fiscal year 2007); the measurement requirements are effective for fiscal years
ending after December 15, 2008 (Hewitt’s fiscal year 2009). The Company adopted the recognition and disclosure requirements of SFAS No. 158 as of September 30, 2007. Adoption of SFAS No. 158 resulted in a decrease to
accumulated other comprehensive income of approximately $1,525, net of deferred income tax of $1,202.
The following table summarizes the incremental
effects of the initial adoption of SFAS No. 158 on the consolidated balance sheet at September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before Application of
SFAS No. 158
|
|
SFAS No. 158
Adjustments
|
|
|
After Application of
SFAS No. 158
|
|
Current assets – deferred income taxes, net
|
|
$
|
31,795
|
|
$
|
738
|
|
|
$
|
32,533
|
|
Other non-current liabilities
|
|
|
162,537
|
|
|
2,727
|
|
|
|
165,264
|
|
Non-current liabilities – deferred income taxes, net
|
|
|
103,351
|
|
|
(464
|
)
|
|
|
102,887
|
|
Accumulated other comprehensive income, net
|
|
|
124,907
|
|
|
(1,525
|
)
|
|
|
123,382
|
For further discussion on Hewitt’s retirement plans, see Note 15.
In June 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109
(“FIN
48”). FIN 48 prescribes detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109,
Accounting for Income Taxes
. Tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized upon the adoption of FIN 48 and in subsequent periods. The Company adopted the provisions of FIN 48 on
October 1, 2007. The cumulative effect of applying the provisions of this interpretation has been recorded as a decrease of $7,036 to retained earnings, a decrease of $3,963 to the income tax payable, a decrease of $5,047 to deferred tax assets
and an increase to the FIN 48 liability account of $5,952 as of October 1, 2007. Refer to Note 20 for further discussion.
In June 2006, the FASB
ratified Emerging Issues Task Force Issue 06-2,
Accounting for Sabbatical Leave and Other Similar Benefits Pursuant to FASB Statement No. 43, Accounting for Compensated Absences
(“EITF 06-2”). Under EITF 06-2, compensation
costs associated with a sabbatical should be accrued over the requisite service period, assuming certain conditions are met. Previously, the Company expensed sabbatical costs as incurred. The Company adopted EITF 06-2 effective October 1, 2007,
as required and recorded a $12,692 cumulative adjustment, net of tax, to decrease retained earnings on October 1, 2007.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation, including the reclassification of the current portion of
deferred contract costs and deferred contract revenues from non-current assets and non-current liabilities, respectively, into current assets and current liabilities, respectively.
61
Basic earnings per share (“EPS”) is
calculated by dividing net income by the weighted average number of shares of common stock outstanding. Diluted EPS includes the components of basic EPS and also gives effect to dilutive common stock equivalents. Treasury stock is not considered
outstanding for either basic or diluted EPS as weighted from the date the shares were placed into treasury. For purposes of calculating basic and diluted earnings per share, vested restricted stock awards are considered outstanding. Under the
treasury stock method, diluted EPS reflects 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. Restricted stock awards generally vest 25 percent on each anniversary of the grant date and are not considered outstanding in basic earnings per share until the vesting date.
In July 2006, the Company’s Class B stockholders who were parties to a Stockholders’ Agreement, agreed to terminate that agreement which provided for, among
other things, block voting of Class B common stock. In connection with the termination of the Stockholders’ Agreement, effective July 31, 2006, an aggregate of 34,703,814 shares of Class B common stock and 2,892,943 shares of Class C
common stock were converted into an aggregate of 37,596,757 shares of Class A common stock. As a result, the Company has no Class B or Class C shares outstanding, effective with that date. Prior to that date, each share of the Company’s
Class B and Class C common stock was convertible into Class A common stock on a one-for-one basis, subject to certain restrictions. The Company has amended its Certificate of Incorporation to eliminate the Class B and Class C common stock.
The following table presents computations of basic and diluted EPS in accordance with accounting principles generally accepted in the United States of
America:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
|
2008
|
|
2007
|
|
|
2006
|
|
|
Net income (loss) as reported
|
|
$
|
188,142
|
|
$
|
(175,080
|
)
|
|
$
|
(115,938
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average outstanding shares – basic
|
|
|
98,791,739
|
|
|
107,866,281
|
|
|
|
107,642,383
|
|
|
|
|
|
|
|
Incremental effect of dilutive common stock equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested restricted stock awards
|
|
|
1,303,573
|
|
|
—
|
|
|
|
—
|
|
|
Unexercised stock options
|
|
|
1,872,704
|
|
|
—
|
|
|
|
—
|
|
|
Unexercised warrants
|
|
|
2,305
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average outstanding shares – diluted
|
|
|
101,970,321
|
|
|
107,866,281
|
|
|
|
107,642,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share – basic
|
|
$
|
1.90
|
|
$
|
(1.62
|
)
|
|
$
|
(1.08
|
)
|
|
Earnings (loss) per share – diluted
|
|
$
|
1.85
|
|
$
|
(1.62
|
)
|
|
$
|
(1.08
|
)
|
During fiscal 2007 and 2006, the Company reported a consolidated net loss. As a result of the net loss, unvested
restricted stock awards and unexercised in-the-money stock options were antidilutive for these years and were not included in the computation of diluted weighted average shares.
Debt securities convertible into 1,870,748 weighted average shares of Class A common stock were outstanding in the years ended September 30, 2008, 2007 and 2006, but were not included in the computation of
diluted earnings per share because the effect of including the convertible debt securities would be antidilutive. Refer to Note 26 for recent developments related to the Company’s convertible debt. Warrants to purchase 200,000 weighted average
shares of Class A common stock were outstanding in the years ended September 30, 2008, 2007 and 2006, but were not included in the computation of diluted earnings per share for the years ended September 30, 2007 and 2006 because the
exercise price of the warrants, which is formula-based with a minimum price of $37.75 per share, was greater than the average market price of Class A common stock. Of the outstanding stock options as of September 30, 2008, 2007 and 2006,
54,244, 888,494 and 9,822,136 weighted average shares for each year, respectively, were not included in the computation of diluted earnings per share because the effects of including the stock options would have been antidilutive.
62
|
4.
|
Acquisitions and Divestitures
|
The Company continually assesses
strategic acquisitions to complement its current business or to expand related services. During fiscal 2008, 2007 and 2006, the Company completed the following acquisitions and divestitures:
2008 Acquisitions and Divestitures
Sale of Cyborg
On January 31, 2008, the Company sold the net assets of its Cyborg business (“Cyborg”). Cyborg was acquired in 2003 and provides
licensed, processed and hosted payroll software services. Its operations were included in the HR BPO segment. The divestiture is a part of the Company’s continued efforts to streamline its HR outsourcing service offerings. The Company recorded
a pre-tax gain of $35,667 during the quarter ended March 31, 2008 as a result of the sale.
2008 Acquisitions
During 2008, the Company acquired various entities for cash at an aggregate cost of $134,081. The purchase price allocations resulted in the preliminary aggregate
allocation of $83,779 to goodwill, of which $46,920 was assigned to the Benefits Outsourcing segment and $36,859 assigned to the Consulting segment. The Company will finalize the opening balance sheet related to these acquisitions during fiscal 2009
in accordance with the requirements of SFAS No. 141,
Business Combinations
(“SFAS No. 141”).
2007 Acquisitions
RealLife HR Acquisition
On September 4, 2007, the
Company purchased 100% of the outstanding shares of RealLife HR (“RealLife”) for $42,000. The purchase price was paid in cash with $4,000 of the consideration paid to an escrow fund to be utilized to settle purchase price adjustments.
RealLife was a health and welfare administration firm located in the U.S. RealLife historically had focused on outsourcing services for middle market entities. The Company finalized its purchase price allocation, resulting in goodwill of $23,416
recorded in the Benefits Outsourcing segment.
2006 Acquisitions and Divestitures
On September 20, 2006, the Company purchased 100% of the outstanding shares of an analytical consultancy business focused on pay and benefits benchmarking in Sweden
for approximately $6,400. The purchase price is subject to certain contingent payments of approximately $814, held as restricted cash, if the acquired entity achieved specific operating targets. The restricted cash was paid out under the terms of an
Escrow Agreement on October 30, 2008 and will be accounted for as additional purchase price in accordance with SFAS No. 141 in fiscal 2009.
On
October 1, 2005, the Company contributed its retirement and financial management business in Germany in exchange for an increased investment in a German actuarial business (“investee”). The Company had acquired a minority interest in
investee on July 13, 2005 for approximately $5,400 and currently has a 28% non-controlling interest in the investee. The investment is accounted for under the equity method of accounting. At the end of year six from the original investment
date, the Company has an option to purchase the remaining interest in the investee and the investee stockholders have an option to put their remaining interest in the investee to the Company. The final purchase price will be subject to a third party
independent appraiser.
63
At September 30, 2008, the Company had a total
of $124,530 in long-term investments, which are comprised of available-for-sale auction rate securities (“ARS”). While the underlying securities generally have long-term nominal maturities that exceed one year, the interest rates on these
investments reset periodically in scheduled auctions (generally every 7-35 days). The Company has the opportunity to sell its investments during such periodic auctions subject to buyer availability.
During February 2008, issues in the global credit and capital markets led to failed auctions with respect to the Company’s ARS and there have been no successful
auctions to date. During the last three quarters of the fiscal year, all of the Company’s outstanding ARS were subject to failed auctions. In the third quarter and fourth quarter, $6,500 and $1,450, respectively, of the Company’s ARS
issues were called at par. At September 30, 2008, the Company’s ARS portfolio with a par value of $131,450 had a fair value of $124,530. In the absence of observable market data, the Company used a discounted cash flow model to determine the
estimated fair value of its ARS at September 30, 2008.
The assumptions used in the preparation of the discounted cash flow model were based on data
available as of September 30, 2008 and include estimates of interest rates, timing and amount of cash flows, credit and liquidity premiums and expected holding periods of the ARS. These assumptions will be subject to change as the underlying data
changes and market conditions evolve. Based on the valuation, the Company determined that the fair value of its ARS was $124,530 and recorded an unrealized loss of $6,920 ($4,273 net of tax) within other comprehensive income, a component of
stockholders’ equity, as the unrealized loss is considered to be temporary.
A one percentage point change on the interest income yields would impact
the fair value of the ARS holdings by approximately $3.2 million. A one percentage point change on the discount rate used for valuing the ARS holdings would impact the fair value of the ARS holdings by approximately $3.3 million.
As of September 30, 2008, approximately 97% of the Company’s ARS portfolio was comprised of federally insured student loan backed securities and 91% of the
Company’s ARS portfolio was comprised of Aaa/AAA rated investments by Moody’s and S&P, respectively.
Because the impairments in fair values
have been relatively short in duration and considering the overall quality of the underlying investments and the anticipated future market for such investments, and given the Company’s ability and intent to hold these investments until they
fully recover in value (including until contractual maturity if necessary), the impairment is considered to be temporary. However, the Company will reassess this conclusion in future reporting periods based on several factors, including possible
failure of the investments to be redeemed, potential deterioration of the credit ratings of the investments, market risk, the Company’s continued ability and intent to hold until contractual maturity and other factors. Such a reassessment may
result in a conclusion that these investments are other-than-temporarily impaired. If it is determined that the fair value of these securities is other-than-temporarily impaired, the Company would record a loss in its consolidated statements of
operations, which could materially adversely impact its results of operations and financial condition.
Based on the contractual maturities of the
available-for-sale auction rate securities as of September 30, 2008, the par value and estimated fair market value of the securities were as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
|
|
Par Value
|
|
Estimated
Fair Value
|
|
Long-term investments:
|
|
|
|
|
|
|
|
Due in less than one year
|
|
$
|
—
|
|
$
|
—
|
|
Due after one year through five years
|
|
|
—
|
|
|
—
|
|
Due after five years through ten years
|
|
|
5,000
|
|
|
5,000
|
|
Due after ten years
|
|
|
126,450
|
|
|
119,530
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
131,450
|
|
$
|
124,530
|
|
|
|
|
|
|
|
|
As of September 30, 2008, the Company has classified the entire ARS investment balance from short-term investments
to long-term investments on the consolidated balance sheet reflecting the Company’s inability to determine when these investments in ARS will become liquid. At September 30, 2007, the Company had a total of $216,726 of ARS classified as
short-term investments.
64
Short-term investments
As of September 30, 2007, short-term investments were comprised of available-for-sale securities as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
|
|
Par Value
|
|
Estimated
Fair Value
|
|
Short-term investments:
|
|
|
|
|
|
|
|
Auction rate securities
|
|
$
|
216,726
|
|
$
|
216,726
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
216,726
|
|
$
|
216,726
|
|
|
|
|
|
|
|
|
Based on the contractual maturities of the available-for-sale debt securities as of September 30, 2007, the par
value and estimated fair market value of the securities were as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
|
|
Par Value
|
|
Estimated
Fair Value
|
|
Short-term investments:
|
|
|
|
|
|
|
|
Due in less than one year
|
|
$
|
—
|
|
$
|
—
|
|
Due after one year through five years
|
|
|
—
|
|
|
—
|
|
Due after five years through ten years
|
|
|
5,000
|
|
|
5,000
|
|
Due after ten years
|
|
|
211,726
|
|
|
211,726
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
216,726
|
|
$
|
216,726
|
|
|
|
|
|
|
|
|
As of September 30, 2007, there were no unrealized holding gains and losses.
In October 2008, the Company received an offer from UBS AG (“UBS”), one of its investment brokers, to sell at par value auction rate securities originally
purchased from UBS (approximately $68,800 of par value) at any time during a two-year period beginning June 30, 2010. The Company has accepted this non-transferable offer.
65
|
6.
|
Client Receivables and Unbilled Work in Process
|
Client receivables
and unbilled work in process, net of allowances, at September 30, 2008 and 2007, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
Client receivables
|
|
$
|
414,160
|
|
$
|
401,282
|
|
Unbilled work in process
|
|
|
241,383
|
|
|
230,729
|
|
|
|
|
|
|
|
|
|
|
|
$
|
655,543
|
|
$
|
632,011
|
|
|
|
|
|
|
|
|
As of September 30, 2008 and 2007, $53 and $4,552, respectively, of long-term unbilled work in process is
classified within other non-current assets, net.
The activity in the client receivable and unbilled work in process allowances for the years ended
September 30, 2008, 2007 and 2006, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Balance at beginning of year
|
|
$
|
18,933
|
|
|
$
|
25,333
|
|
|
$
|
23,922
|
|
|
Increase in allowances
|
|
|
12,044
|
|
|
|
8,667
|
|
|
|
8,360
|
|
|
Use of allowances
|
|
|
(12,948
|
)
|
|
|
(15,067
|
)
|
|
|
(6,949
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
18,029
|
|
|
$
|
18,933
|
|
|
$
|
25,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66
|
7.
|
Property and Equipment
|
As of September 30, 2008 and 2007, net
property and equipment, which includes assets under capital leases, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Property and equipment:
|
|
|
|
|
|
|
|
|
|
Buildings
|
|
$
|
93,756
|
|
|
$
|
93,930
|
|
|
Capitalized software
|
|
|
351,048
|
|
|
|
311,741
|
|
|
Computer equipment
|
|
|
289,637
|
|
|
|
283,888
|
|
|
Telecommunications equipment
|
|
|
137,175
|
|
|
|
136,418
|
|
|
Furniture and equipment
|
|
|
164,815
|
|
|
|
148,088
|
|
|
Leasehold improvements
|
|
|
189,907
|
|
|
|
160,354
|
|
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment
|
|
|
1,226,338
|
|
|
|
1,134,419
|
|
|
Less accumulated depreciation and amortization
|
|
|
(840,453
|
)
|
|
|
(778,512
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
385,885
|
|
|
$
|
355,907
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2008 and 2007, buildings under capital leases were $88,944.
Long-lived assets with definite useful lives are depreciated or amortized over their estimated useful lives and are tested for impairment whenever indicators of
impairment arise.
During the years ended September 30, 2008, 2007 and 2006, the Company evaluated certain long-lived assets for impairment. For the
years ended September 30, 2008, 2007 and 2006, the Company recorded $965, $13,645 and $5,718, respectively, of non-cash charges related to the impairment of capitalized software, shown within goodwill and asset impairment in the accompanying
consolidated statements of operations, which was recorded as a decrease to the gross carrying value of the asset. The fiscal 2008 impairment charges were recorded within the HR BPO segment results. Fiscal 2007 impairment charges were recorded within
the HR BPO, Benefits Outsourcing and Consulting segment results in the amounts of $9,521, $3,237 and $887, respectively. Fiscal 2006 impairment charges were recorded within the HR BPO segment results. The impairment charges were primarily due to
lower than expected utilization of certain assets. Fair value was calculated using estimated discounted future cash flow projections and also, for the years ended September 30, 2007 and 2006, a third-party valuation firm.
For the years ended September 30, 2008, 2007 and 2006, the Company recognized depreciation and amortization expense on its property and equipment, which includes
assets under capital leases, of $117,043, $135,700 and $124,240, respectively. The Company recognized $1,755 and $8,166 of accelerated depreciation related to the leased real estate restructuring activities during the years ended September 30,
2008 and 2007, respectively. Refer to Note 14 for a discussion on restructuring activities of the Company’s leased real estate.
|
8.
|
Goodwill and Other Intangible Assets
|
In conformity with SFAS
No. 142,
Goodwill and Other Intangible Assets,
the Company tests goodwill for impairment annually or whenever indicators of impairment arise. During the fourth quarter of fiscal 2008, the Company performed its annual impairment review of
goodwill. This review resulted in no impairment of goodwill during fiscal 2008.
During the fourth quarter of fiscal 2007, the Company performed its annual
impairment review of goodwill. This review resulted in a non-cash impairment charge of $279,843 related to the HR BPO segment recorded as a component of operating results in the accompanying consolidated statements of operations, due to reduced
growth expectations for the overall business, partially due to a revised strategy. The reduced growth expectations were driven by a reduction in the likely number of future engagements and reduced contract value of each engagement, as the Company
focuses on identifying potential customers seeking a more standardized set of platforms and services. The Company engaged a third-party valuation firm to assist in determining the fair value of the reporting unit. The valuation was based on
estimates of future cash flows developed by management. In determining the amount of goodwill impairment, the Company also used the outside valuation firm to assist in valuing the significant intangible assets of the reporting unit.
During fiscal 2006, the Company performed an interim impairment review of goodwill allocated to its HR BPO segment. This review was triggered by lower than expected
performance of some of the Company’s HR BPO contracts. This review resulted in a non-cash charge of $172,000 recorded as a component of operating results in the accompanying consolidated statements of operations. The Company engaged a
third-party valuation firm to assist in determining the fair value of the reporting unit. The valuation was based on estimates of future cash flows developed by management. In determining the amount of goodwill impairment, the Company also used the
outside valuation firm to assist in valuing the significant intangible assets of the reporting unit.
67
The following is a summary of changes in the carrying amount of goodwill for the year ended September 30, 2008 and
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits
Outsourcing
|
|
|
HR BPO
|
|
|
Consulting
|
|
|
Total
|
|
|
Balance at September 30, 2006
|
|
$
|
16,739
|
|
|
$
|
268,948
|
|
|
$
|
259,235
|
|
|
$
|
544,922
|
|
|
Additions
|
|
|
30,859
|
|
|
|
—
|
|
|
|
3,009
|
|
|
|
33,868
|
|
|
Adjustment and reclassifications
|
|
|
—
|
|
|
|
—
|
|
|
|
(12,977
|
)
|
|
|
(12,977
|
)
|
|
Impairment
|
|
|
—
|
|
|
|
(279,843
|
)
|
|
|
—
|
|
|
|
(279,843
|
)
|
|
Effect of changes in foreign exchange rates
|
|
|
782
|
|
|
|
10,895
|
|
|
|
21,667
|
|
|
|
33,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2007
|
|
|
48,380
|
|
|
|
—
|
|
|
|
270,934
|
|
|
|
319,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
46,920
|
|
|
|
—
|
|
|
|
36,859
|
|
|
|
83,779
|
|
|
Adjustment and reclassifications
|
|
|
(7,443
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(7,443
|
)
|
|
Effect of changes in foreign exchange rates
|
|
|
148
|
|
|
|
—
|
|
|
|
(31,657
|
)
|
|
|
(31,509
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2008
|
|
$
|
88,005
|
|
|
$
|
—
|
|
|
$
|
276,136
|
|
|
$
|
364,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The additions to goodwill during fiscal 2008 in Consulting relate to the acquisitions of Talent and Organizational
Consulting businesses, while the additions to Benefits Outsourcing are due to the acquisition of a leaves management business. The Company will finalize the opening balance sheet related to these acquisitions during fiscal 2009. The adjustment and
reclassification from goodwill in Benefits Outsourcing during fiscal 2008 pertains to adjustments to the opening balance sheet related to the fiscal 2007 acquisition of RealLife HR as discussed in Note 4. The Company finalized the opening balance
sheet related to this acquisition during the fourth quarter of the current year.
The additions to goodwill during the year ended September 30, 2007
primarily related to the acquisition of Real Life HR (Note 4) within the Benefits Outsourcing segment. The adjustments and reclassifications to goodwill during the year ended September 30, 2007 primarily related to a previously unclaimed tax
benefit for share-based compensation relating to a prior year acquisition within the Consulting segment.
Intangible assets with definite useful lives are
amortized over their estimated useful lives and are tested for impairment whenever indicators of impairment arise.
During the year ended
September 30, 2008, the Company evaluated certain intangible assets related to the HR BPO segment for impairment. For the year ended September 30, 2008, $769 of non-cash charges were recorded in the HR BPO segment results, shown within
goodwill and asset impairment in the accompanying consolidated statements of operations, which is recorded as a decrease to the gross carrying value of the asset. The impairment charges related to customer relationships and were primarily due to
lower than expected future cash flows. Fair value was determined using estimated discounted future cash flows.
During the year ended September 30,
2007, the Company evaluated certain intangible assets related to the HR BPO and Benefits Outsourcing segments for impairment. For the year ended September 30, 2007, the Company recorded $20,879 of non-cash charges in the HR BPO segment results
and $4,395 of non-cash charges in the Benefits Outsourcing results, shown within goodwill and asset impairment in the accompanying consolidated statements of operations, which were recorded as a decrease to the gross carrying value of the assets.
The impairment charge in the HR BPO segment primarily related to the impairment of core technology of $18,501, due to lower than expected utilization of the assets, and also customer relationships of $2,028, primarily due to lower than expected
future cash flows. The impairment charge in the Benefits Outsourcing segment primarily related to the impairment of customer relationships of $3,957, primarily attributable to lower than expected future cash flows. Fair value was determined using
estimated discounted future cash flows and a third-party valuation firm.
During the year ended September 30, 2006, the Company evaluated certain
intangible assets related to the HR BPO segment for impairment. For the year ended September 30, 2006, $1,705 of non-cash charges were recorded in the HR BPO segment results, shown within goodwill and asset impairment in the accompanying
consolidated statements of operations and were reflected as a decrease to the gross carrying value of the asset. The impairment charges were primarily due to changes in customer contract provisions. Fair value was determined using estimated
discounted future cash flows.
68
The following was a summary of intangible assets at September 30, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
September 30, 2007
|
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
|
|
Trademarks and tradenames
|
|
$
|
16,380
|
|
$
|
13,726
|
|
$
|
2,654
|
|
$
|
15,548
|
|
$
|
14,498
|
|
$
|
1,050
|
|
Core technology
|
|
|
32,999
|
|
|
15,865
|
|
|
17,134
|
|
|
25,499
|
|
|
12,572
|
|
|
12,927
|
|
Customer relationships
|
|
|
274,575
|
|
|
87,541
|
|
|
187,034
|
|
|
256,024
|
|
|
73,868
|
|
|
182,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
323,954
|
|
$
|
117,132
|
|
$
|
206,822
|
|
$
|
297,071
|
|
$
|
100,938
|
|
$
|
196,133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in the gross carrying amount of core technology pertains to adjustments to the opening balance sheet
related to the acquisition of a benefits management services provider which occurred in the fourth quarter of fiscal 2007. The increase in the gross carrying amount of customer relationships primarily pertains to the acquisitions of Talent and
Organizational Consulting businesses during fiscal 2008 and the acquisition of a benefits management services provider which occurred in the fourth quarter of fiscal 2007, partially offset by the divestiture of the Company’s Cyborg business.
Refer to Note 4 for additional information on acquisitions and divestitures.
Amortization expense related to definite-lived intangible assets for the
years ended September 30, 2008, 2007 and 2006, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
Trademarks and tradenames
|
|
$
|
780
|
|
$
|
1,895
|
|
$
|
2,694
|
|
Core technology
|
|
|
3,293
|
|
|
4,271
|
|
|
4,824
|
|
Customer relationships
|
|
|
25,808
|
|
|
27,492
|
|
|
17,222
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
29,881
|
|
$
|
33,658
|
|
$
|
24,740
|
|
|
|
|
|
|
|
|
|
|
|
Applying current foreign exchange rates, estimated amortization expense related to intangible assets with definite
lives at September 30, 2008, for each of the years in the five-year period ending September 30, 2013 and thereafter is projected to be as follows:
|
|
|
|
|
|
|
|
Total
|
|
Fiscal year ending:
|
|
|
|
|
2009
|
|
$
|
23,991
|
|
2010
|
|
|
21,597
|
|
2011
|
|
|
19,708
|
|
2012
|
|
|
19,321
|
|
2013
|
|
|
19,285
|
|
2014 and thereafter
|
|
|
102,920
|
|
|
|
|
|
|
Total
|
|
$
|
206,822
|
|
|
|
|
|
|
9.
|
Other Non-Current Assets, Net
|
As of September 30, 2008 and
2007, other non-current assets, net, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
Other non-current assets, net:
|
|
|
|
|
|
|
|
Long-term unbilled work in process
|
|
$
|
53
|
|
$
|
4,552
|
|
Prepaid long-term service contracts
|
|
|
18,272
|
|
|
1,194
|
|
Investments in affiliated companies
|
|
|
19,394
|
|
|
20,017
|
|
Prepaid pension asset
|
|
|
5,403
|
|
|
6,199
|
|
Long-term note receivable, net
|
|
|
2,901
|
|
|
—
|
|
Income tax receivable
|
|
|
17,739
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Other non-current assets, net
|
|
$
|
63,762
|
|
$
|
31,962
|
|
|
|
|
|
|
|
|
69
The Company has several prepaid long-term contracts for maintenance on computer software systems. Benefits and expense
related to these long-term prepaid maintenance contracts are received and recognized over the contractual period. In connection with a fiscal 2008 acquisition, the Company recorded prepaid compensation related to service agreements.
Investments in less than 50%-owned affiliated companies over which the Company has the ability to exercise significant influence, but lacks control, are accounted for
using the equity method of accounting.
As of September 30, 2008 and 2007, the
Company had short-term debt outstanding of $17,602 and $30,369, respectively, consisting of borrowings on unsecured lines of credit.
Unsecured lines of
credit
As part of the 2005 merger with Exult, the Company assumed a domestic unsecured revolving line of credit facility. On September 26, 2007,
the Company replaced the facility with an unsecured revolving line of credit facility which provided for borrowings up to $19,500 and accrued interest at LIBOR plus 30-60 basis points or a base rate. On August 7, 2008, the Company signed a new
agreement and extended this facility until May 24, 2010. Borrowings under this facility accrue interest at LIBOR plus 100 basis points or a base rate. The Company had borrowings of $17,602 and $13,345 and accrued interest at a weighted average
rate of 4.5% and 6.9% at September 30, 2008 and 2007, respectively.
On May 23, 2005, the Company entered into a five-year credit facility with a
six-bank syndicate that provides for borrowings and letters of credit up to $200,000. Borrowings under this facility accrued interest at LIBOR plus 30-60 basis points or the prime rate, at the Company’s option. Borrowings are repayable at
expiration of the facility on May 23, 2010 and quarterly facility fees ranging from 7.5-15 basis points are charged on the average daily commitment under the facility. On July 30, 2008, this facility was amended to change the
Administrative Agent and, in September 2008, the number of banks participating in this credit facility increased to seven. At September 30, 2008 and 2007, there were no borrowings outstanding against this facility and the letters of credit
secured by this facility were $10,500 at either date.
Hewitt Bacon & Woodrow Ltd., the Company’s U.K. subsidiary, has an unsecured British
pound sterling line of credit. In July 2005, the line of credit was amended and extended to allow for borrowings up to £5,000 until the expiration of the facility on July 31, 2006, which has been extended several times, currently through
December 31, 2008. The Company plans to renew this facility upon expiration. The interest rate for this line of credit is LIBOR plus 87.5 basis points or a base rate plus 100 basis points. As of September 30, 2008 and 2007, the interest
rates on the line of credit were 7.4% and 7.1%, respectively, and there was no outstanding balance at either date.
The Company has a contract with a
lender to guarantee borrowings of its subsidiaries up to $20,500 in multiple currency loans and letters of credit as well as bank guarantees up to $2,715 in multiple currencies. There is no fixed termination date on this contract. This contract
allows the Company’s foreign subsidiaries to secure financing at rates based on the Company’s creditworthiness. The facility provides for borrowings at LIBOR plus 75 basis points and is payable upon demand. As of September 30, 2008
and 2007, there were borrowings of $0 and $17,024 respectively, and letters of credit and bank guarantees of $2,715 and $2,727, respectively.
The Company
has overdraft facilities and lines of credit of $4,967 available across Europe. There are no fixed termination dates for these contracts. As of September 30, 2008, there were no borrowings outstanding against these facilities and lines of
credit.
70
Debt at September 30, 2008 and 2007, consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
Term loan credit facility
|
|
$
|
38,449
|
|
$
|
8,122
|
|
Unsecured senior term loan
|
|
|
270,000
|
|
|
—
|
|
Capital lease obligations
|
|
|
81,649
|
|
|
72,910
|
|
Unsecured convertible senior term notes
|
|
|
110,000
|
|
|
106,080
|
|
Unsecured senior term notes
|
|
|
283,000
|
|
|
70,000
|
|
Other foreign debt
|
|
|
86
|
|
|
575
|
|
|
|
|
|
|
|
|
|
|
|
|
783,184
|
|
|
257,687
|
|
Current portion of long-term debt and capital lease obligations
|
|
|
133,002
|
|
|
24,222
|
|
|
|
|
|
|
|
|
|
Debt and capital lease obligations, less current portion
|
|
$
|
650,182
|
|
$
|
233,465
|
|
|
|
|
|
|
|
|
The principal portion of long-term debt, excluding capital lease obligations, at September 30, 2008 becomes
due as follows:
|
|
|
|
|
|
Fiscal year ending:
|
|
|
|
|
2009
|
|
$
|
125,578
|
|
2010
|
|
|
25,568
|
|
2011
|
|
|
30,568
|
|
2012
|
|
|
15,548
|
|
2013
|
|
|
274,273
|
|
2014 and thereafter
|
|
|
230,000
|
|
|
|
|
|
|
Total
|
|
$
|
701,535
|
|
|
|
|
|
Various debt agreements call for the maintenance of specified financial ratios, among other restrictions. At
September 30, 2008 and 2007, the Company was in compliance with all debt covenants.
Unsecured senior term loan
On August 8, 2008, the Company entered into a loan agreement that provides for a senior unsecured term loan in the amount of $270,000 (the “Term Loan”).
The Term Loan initially bears interest at a margin of 150 basis points over LIBOR and the margin will change depending on the leverage ratio of the Company. The Term Loan matures on August 8, 2013 without amortization. The Company has the
option to prepay the Term Loan in whole or in part at any time without penalty subject to certain conditions. The Loan Agreement includes leverage ratio and interest coverage ratio covenants. The Company is exposed to interest rate risk from this
long term variable rate debt. The Company uses cash flow hedges to hedge future interest payments on the Term Loan. The Company entered into interest rate swaps to convert this variable rate exposure into fixed rate. The Company swapped $170,000 of
the Term Loan for the first three years and $85,000 of the Term Loan for the fourth year. Only the variable LIBOR piece of the Term Loan debt was swapped to fixed rate. These contracts protect against the risk that the eventual cash flows resulting
from such transactions will be adversely affected by changes in interest rates. Refer to Note 18 for additional information on derivative instruments.
Unsecured senior term notes
On August 21, 2008, the Company issued and sold $230,000 aggregate principal amount of privately placed
senior unsecured notes (the “Notes”), consisting of (a) $175,000 of 6.57% Series F Senior Notes due August 21, 2015 and (b) $55,000 of 6.98% Series G Senior Notes due August 21, 2018. Interest is payable semiannually in
arrears. Subject to certain conditions, the Company may, at its option, prepay all or part of the Notes at any time with a make-whole adjustment. The Note Purchase Agreement includes leverage ratio and interest coverage ratio covenants. In the event
of a default by the Company under the Note Purchase Agreement, any outstanding obligations under the Note Purchase Agreement may become due and payable immediately.
71
The Company also has outstanding unsecured senior term notes issued between May 30, 1996 and March 30, 2000.
These notes were issued to various financial institutions. The terms and balances of the unsecured senior term notes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Terms
|
|
Balance at
Issuance
|
|
Interest
Rate
|
|
|
September 30,
2008
|
|
September 30,
2007
|
|
Issued May 30, 1996, repayable in five annual installments beginning May 2004 through May 2008
|
|
|
50,000
|
|
7.45
|
%
|
|
$
|
—
|
|
$
|
10,000
|
|
Issued July 7, 2000, repayable on June 30, 2010
|
|
|
10,000
|
|
8.11
|
%
|
|
|
10,000
|
|
|
10,000
|
|
Issued on October 16, 2000, repayable on October 15, 2010
|
|
|
15,000
|
|
7.90
|
%
|
|
|
15,000
|
|
|
15,000
|
|
Issued on March 30, 2000, repayable in five annual installments beginning March 2008 through March 2012
|
|
|
35,000
|
|
8.08
|
%
|
|
|
28,000
|
|
|
35,000
|
|
Issued on August 21, 2008, repayable on August 21, 2015
|
|
|
175,000
|
|
6.57
|
%
|
|
|
175,000
|
|
|
—
|
|
Issued on August 21, 2008, repayable on August 21, 2018
|
|
|
55,000
|
|
6.98
|
%
|
|
|
55,000
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
340,000
|
|
|
|
|
$
|
283,000
|
|
$
|
70,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured convertible senior term notes
In connection with the Company’s merger with Exult, the Company became obligated for $110,000 aggregate principal amount of 2.50% Convertible Senior Notes due October 1, 2010. The notes ranked equally with
all of Hewitt’s existing and future senior unsecured debt and were effectively subordinated to all liabilities of each of its subsidiaries. The Company recorded the notes at their estimated fair value of $102,300 as of October 1, 2004 and
accreted the value of the discount over the remaining term of the notes to their stated maturity value using a method that approximates the effective interest method. As of September 30, 2008 and 2007, the carrying value on the notes was
$110,000 and $106,080, respectively, with an unamortized discount of $0 and $3,920, respectively.
The notes were convertible into shares of Hewitt
Class A common stock at any time before the close of business on the date of their maturity, unless the notes had previously been redeemed or repurchased, if (1) the price of Hewitt’s Class A common stock issuable upon conversion
of a note reached a specified threshold, (2) the notes were called for redemption, (3) specified corporate transactions occurred or (4) the trading price of the notes fell below certain thresholds. The conversion rate was 17.0068
shares of Hewitt Class A common stock per each $1,000 principal amount of notes, subject to adjustment in certain circumstances. This was equivalent to a conversion price of approximately $58.80 per share. Based upon the $58.80 conversion
price, the notes would be convertible into 1,870,748 shares of Hewitt Class A common stock. Holders had the option, subject to certain conditions, to require Hewitt to repurchase all or a portion of the notes held by the holder on
October 1, 2008 or upon a change in control, at a price equal to 100% of the principal amount of the notes plus accrued interest and liquidated damages owed, if any, to the date of purchase.
On or after October 5, 2008, Hewitt had the option to redeem all or a portion of the notes that had not been previously converted or repurchased at a redemption
price of 100% of the principal amount of the notes plus accrued interest and liquidated damages owed, if any, to the redemption date.
Subsequent to the
year ended September 30, 2008, the majority of the noteholders exercised their option to require Hewitt to repurchase $109,800 of the $110,000 aggregate notes on October 1, 2008. Hewitt paid the principal amount of $109,800 plus accrued
interest on October 2, 2008. Hewitt intends to redeem the remaining $200 of the $110,000 notes in fiscal year 2009.
72
Term loan credit facility
On December 22, 2004, Hewitt Bacon & Woodrow Ltd., entered into a £6,000 term loan credit facility agreement which was repayable in 24 quarterly installments through December 2010 and accrues interest at LIBOR plus 80
basis points. On March 26, 2008, the Company replaced the term loan credit facility agreement and increased the amount to £23,750 which is repayable in 20 quarterly installments through March 26, 2013 and accrues interest at LIBOR
plus 50 basis points. At September 30, 2008 and 2007, the outstanding balance of the term loan was approximately £21,375 or $38,449 and £4,000 or $8,122, respectively, and was accruing interest at 6.6% and 7.2%, respectively.
Other foreign debt
Other foreign debt outstanding at
September 30, 2008 and 2007 totaled $86 and $575, respectively, pursuant to local banking relationships.
The Company has obligations under long-term,
non-cancelable lease agreements, principally for office space, furniture and equipment, with terms ranging from one to twenty years. At September 30, 2008 and 2007, all leases were with third-parties.
Capital Leases
Capital lease obligations at September 30, 2008
and 2007, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
Building capital leases
|
|
$
|
67,527
|
|
$
|
72,123
|
|
Computer and telecommunications equipment capital leases
|
|
|
14,122
|
|
|
787
|
|
|
|
|
|
|
|
|
|
|
|
|
81,649
|
|
|
72,910
|
|
Current portion
|
|
|
7,424
|
|
|
4,692
|
|
|
|
|
|
|
|
|
|
Capital lease obligations, less current portion
|
|
$
|
74,225
|
|
$
|
68,218
|
|
|
|
|
|
|
|
|
The following is a schedule of minimum future rental payments required as of September 30, 2008, under
capital leases which have an initial or remaining non-cancelable lease term in excess of one year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
|
|
Interest
|
|
Total
|
|
Fiscal year ending:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
$
|
7,424
|
|
$
|
5,109
|
|
$
|
12,533
|
|
2010
|
|
|
8,903
|
|
|
4,707
|
|
|
13,610
|
|
2011
|
|
|
9,016
|
|
|
4,178
|
|
|
13,194
|
|
2012
|
|
|
9,802
|
|
|
3,598
|
|
|
13,400
|
|
2013
|
|
|
10,648
|
|
|
2,962
|
|
|
13,610
|
|
2014 and thereafter
|
|
|
35,856
|
|
|
5,023
|
|
|
40,879
|
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
81,649
|
|
$
|
25,577
|
|
$
|
107,226
|
|
|
|
|
|
|
|
|
|
|
|
Building capital leases
The Norwalk, Connecticut, and Newport Beach, California, capital leases are payable in monthly installments at 7.3% interest and expire in April 2017 and May 2017, respectively. The leases provide for stepped rents
over the lease term with the option for two renewal terms of five years each. The capitalized leases and the related capital lease obligations were recorded at lease inception and the capitalized lease assets are being amortized over the remaining
lease term on a straight-line basis. The terms of the Norwalk lease also provide the Company with a right of first refusal if the landlord receives an offer for the sale of the building. In April 2007, the Company entered into a sublease agreement
for the Norwalk lease. Minimum sublease rentals expected to be received in the future under the sublease are $23,979 at September 30, 2008.
73
Computer and telecommunications equipment capital leases
During fiscal 2008, the Company entered into a capitalized lease agreement in the amount of $13,278 relating to Voice Over Internet Protocol equipment. The Company is
currently finalizing the terms of the lease, which is expected to include payments over five years in monthly installments at an interest rate of 6.5 percent, beginning on the date the equipment becomes operational. The Company expects to make
payments on this lease starting in the first quarter of fiscal 2009.
The Company’s computer and other telecommunications equipment installment notes
and capitalized leases are secured by the related equipment and are typically payable over three to five years in monthly or quarterly installments at an interest rate of 5.0 percent.
Operating Leases
The Company also has various third-party operating leases for office space, furniture and equipment
with terms ranging from one to twenty years. The Company has various office leases that grant a free rent period and have escalating rents. Certain office leases include landlord incentives for leasehold improvements. Landlord incentives are
recognized as a reduction to rental expense over the term of the lease. The accompanying consolidated statements of operations include rent expense on a straight-line basis, recognized over the term of the leases. The difference between
straight-line basis rent and the amount paid has been recorded as accrued lease obligations. The Company also has leases that have lease renewal provisions.
The following is a schedule of minimum future rental commitments as of September 30, 2008, under operating leases with an initial or remaining non-cancelable lease term in excess of one year:
|
|
|
|
|
|
|
|
|
Total
|
|
|
Fiscal year ending:
|
|
|
|
|
|
2009
|
|
$
|
93,423
|
|
|
2010
|
|
|
85,374
|
|
|
2011
|
|
|
78,270
|
|
|
2012
|
|
|
73,695
|
|
|
2013
|
|
|
68,892
|
|
|
2014 and thereafter
|
|
|
267,183
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
|
666,837
|
|
|
|
|
|
|
|
|
Total anticipated future sublease receipts
|
|
|
(28,599
|
)
|
|
|
|
|
|
|
|
|
|
$
|
638,238
|
|
|
|
|
|
|
|
Total rental expense for operating leases amounted to $131,686, $106,092 and $99,266 in 2008, 2007 and 2006,
respectively. Included in rental expense for the years ended September 30, 2008 and 2007, are $40,688 and $17,777, respectively, related to the Company’s leased real estate restructuring activities. Refer to Note 14 for a discussion on
restructuring activities of the Company’s leased real estate.
As of September 30, 2008, the Company has
estimated its severance obligations to be $27,859 in accordance with Statement of Financial Accounting Standards No. 112 (as Amended),
Employers’ Accounting for Postemployment Benefits – an amendment of FASB Statements No. 5
and 43.
The Company’s severance policy provides that the affected employees are entitled to receive an amount of severance pay that is based on the employee’s length of service, current employment status and level and benefits
elections. For certain affected employees outside of the United States, the amount of severance is based upon the requirements of local regulations. The Company’s severance policy provides, in most cases, for salary continuation payments rather
than lump sum termination payments. The Company recorded adjustments of $4,007 during the year ended September 30, 2008 primarily relating to higher than expected attrition and redeployment of associates to other positions, in addition to a
refinement of estimates.
74
The following table summarizes the activity in the severance accrual for the years ended September 30, 2008 and
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Balance at beginning of year
|
|
$
|
10,661
|
|
|
$
|
—
|
|
|
Additions
|
|
|
31,630
|
|
|
|
31,887
|
|
|
Payments
|
|
|
(10,425
|
)
|
|
|
(21,226
|
)
|
|
Adjustments
|
|
|
(4,007
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
27,859
|
|
|
$
|
10,661
|
|
|
|
|
|
|
|
|
|
|
|
The additions and adjustments were recorded in compensation and related expenses within the consolidated
statements of operations. The Company anticipates that the majority of the remaining accrual will be paid out by the end of fiscal 2009, with the balance paid out by the end of fiscal 2010 based on the last date of potential salary continuation.
75
|
14.
|
Restructuring Activities
|
In conjunction with an ongoing review of
the Company’s leased real estate portfolio, during the third quarter of fiscal 2007, the Company announced its intention to consolidate facilities, and in some cases, exit certain properties. During the fourth quarter of fiscal 2007, the
Company recorded expense of $17,777 related to the exit and consolidation of certain facilities in both the U.S. and international locations. The charges consisted of $21,649 for recognition of the fair value of lease vacancy obligations and lease
termination charges. This was offset by the reversal of accrued rent of $3,872. The net costs were recorded in other operating expense within the consolidated statements of operations and charged to the Benefits Outsourcing, HR BPO and Consulting
segments in the amounts of $13,469, $3,082 and $1,226, respectively.
During the second quarter of fiscal 2008, the Company recorded expense of $5,934
related to the exit and consolidation of a certain facility in the U.S. The charge consisted of $5,570 for recognition of the fair values of lease vacancy obligations. Additionally, prepaid rent of $364 was reversed. The net cost was recorded in
other operating expense within the consolidated statements of operations and charged to the Benefits Outsourcing, HR BPO and Consulting segments in the amounts of $321, $436 and $4,016, respectively; $1,161 was recorded to shared services and was
not allocated to the segments.
During the third quarter of fiscal 2008, the Company recorded expense of $894 related to the exit and consolidation of a
facility in the Netherlands. The charge was for recognition of the fair values of lease vacancy obligations. The cost was recorded in other operating expense within the consolidated statements of operations and charged to the Benefits Outsourcing
and Consulting segments in the amounts of $599 and 295, respectively.
During the fourth quarter of fiscal 2008, the Company recorded expense of $33,860
related to the exit and consolidation of certain facilities in the U.S. The charge consisted of $37,390 for recognition of the fair values of lease vacancy obligations. This was offset by the reversal of accrued rent of $3,530. The cost was recorded
in other operating expense within the consolidated statements of operations and charged to the Benefits Outsourcing and HR BPO segments in the amounts of $13,567 and $11,904, respectively; $8,389 was recorded to shared services and was not allocated
to the segments.
The following table summarizes the activity in the restructuring reserves for the years ended September 30, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Balance at beginning of year
|
|
$
|
20,887
|
|
|
$
|
—
|
|
|
Additions
|
|
|
43,854
|
|
|
|
21,649
|
|
|
Payments, net
|
|
|
(13,504
|
)
|
|
|
(762
|
)
|
|
Adjustments
|
|
|
(34
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
51,203
|
|
|
$
|
20,887
|
|
|
|
|
|
|
|
|
|
|
|
The Company recorded an adjustment of $2,114 during the year ended September 30, 2008 relating to a revision
in the estimated fair value of a lease vacancy obligation which was recorded as a reduction in other operating expenses, offset by the effect of foreign currency translation and the accretion of fair values.
The Company anticipates that the remaining accrual will be paid out by fiscal 2018, based on the longest term remaining on the Company’s leased real estate.
In connection with the fiscal 2008 acquisition of a Talent and Organizational Consulting business, the Company formulated facility exit strategies. The
Company recorded $1,622 of estimated liabilities for costs related to exit the property acquired in this acquisition. The accrued obligation was recorded to goodwill as part of the preliminary purchase accounting. The Company expects to finalize the
opening balance sheet related to this acquisition by the end of the second quarter of fiscal 2009. Lease termination costs are expected to be paid by January 2012.
76
In connection with the 2005 Exult merger, the Company formulated facility exit and severance strategies. The Company
recorded $13,721 of estimated liabilities for costs related to Exult facilities consolidation, the related impact on Exult outstanding real estate leases and Exult involuntary employee terminations and relocations. The accrued obligation was $1,967
and $3,132 as of September 30, 2008 and 2007, respectively. All severance amounts were paid out as of September 30, 2006. Lease termination costs are expected to be paid by October 2011.
|
15.
|
Pension and Postretirement Benefit Plans
|
Employee 401(k) and
Profit Sharing Plan
The Company has a qualified 401(k) and profit sharing plan for its eligible employees. Under the plan, Hewitt makes annual
contributions equal to a percentage of participants’ total cash compensation and may make additional contributions in accordance with the terms of the plan. Additionally, employees may make contributions in accordance with the terms of the
plan, with a portion of those contributions matched by the Company. In 2008, 2007 and 2006, profit sharing plan and company match contribution expenses were $60,184, $58,179 and $53,617, respectively.
Defined Benefit Plans
Through various acquisitions, the Company has
defined benefit pension plans, the largest of which was closed to new entrants in 1998, providing retirement benefits to eligible employees. The Company also has other smaller defined benefit pension plans to provide benefits to eligible employees.
It is the Company’s policy to fund these defined benefit plans in accordance with local practice and legislation.
Healthcare Plans
The Company provides health benefits for retired employees and certain dependents when the employee becomes eligible by satisfying plan provisions, which include
certain age and service requirements. The health benefit plans covering substantially all U.S. and Canadian employees are contributory, with contributions reviewed annually and adjusted as appropriate. These plans contain other cost-sharing features
such as deductibles and coinsurance. The Company does not pre-fund these plans and has the right to modify or terminate any of these plans in the future.
Effective September 30, 2007, the Company adopted SFAS No. 158,
Employers’ Accounting for Defined Benefit and Other Postretirement Plans
. See Note 2 for the incremental effects of the initial adoption of SFAS
No. 158 on the Company’s consolidated balance sheet.
77
The following tables provide a reconciliation of the changes in the defined benefit and healthcare plans’ benefit
obligations and fair value of assets for the years ended September 30, 2008 and 2007, and a statement of funded status as of September 30, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Health Benefits
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Change in Benefit Obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation, beginning of year
|
|
$
|
211,633
|
|
|
$
|
182,707
|
|
|
$
|
13,713
|
|
|
$
|
13,638
|
|
|
Service cost
|
|
|
12,527
|
|
|
|
12,078
|
|
|
|
199
|
|
|
|
155
|
|
|
Interest cost
|
|
|
11,146
|
|
|
|
9,293
|
|
|
|
855
|
|
|
|
852
|
|
|
Actuarial (gains)/losses
|
|
|
13,876
|
|
|
|
(5,453
|
)
|
|
|
(1,216
|
)
|
|
|
(321
|
)
|
|
Benefit payments
|
|
|
(5,512
|
)
|
|
|
(7,115
|
)
|
|
|
(831
|
)
|
|
|
(611
|
)
|
|
Settlement payment
|
|
|
—
|
|
|
|
(31
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Changes in foreign exchange rates
|
|
|
(16,815
|
)
|
|
|
20,154
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation, end of year
|
|
$
|
226,855
|
|
|
$
|
211,633
|
|
|
$
|
12,720
|
|
|
$
|
13,713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Plan Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets, beginning of year
|
|
$
|
193,589
|
|
|
$
|
151,553
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Actual return on plan assets
|
|
|
(12,222
|
)
|
|
|
14,214
|
|
|
|
—
|
|
|
|
—
|
|
|
Employer contribution
|
|
|
19,585
|
|
|
|
19,693
|
|
|
|
831
|
|
|
|
611
|
|
|
Benefit payments
|
|
|
(5,512
|
)
|
|
|
(7,115
|
)
|
|
|
(831
|
)
|
|
|
(611
|
)
|
|
Settlement payment
|
|
|
—
|
|
|
|
(31
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Changes in foreign exchange rates
|
|
|
(13,058
|
)
|
|
|
15,275
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets, end of year
|
|
$
|
182,382
|
|
|
$
|
193,589
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Health Benefits
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Reconciliation of Accrued Obligation and Total Amount Recognized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unfunded status
(1)
|
|
$
|
(44,473
|
)
|
|
$
|
(18,044
|
)
|
|
$
|
(12,720
|
)
|
|
$
|
(13,713
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized, end of year
|
|
$
|
(44,473
|
)
|
|
$
|
(18,044
|
)
|
|
$
|
(12,720
|
)
|
|
$
|
(13,713
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recorded in accumulated other comprehensive income, pre-tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost
|
|
$
|
480
|
|
|
$
|
711
|
|
|
$
|
19
|
|
|
$
|
20
|
|
|
Net actuarial (gain) loss
|
|
|
32,036
|
|
|
|
(2,465
|
)
|
|
|
3,071
|
|
|
|
4,459
|
|
|
Transition obligation
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
32,516
|
|
|
$
|
(1,754
|
)
|
|
$
|
3,091
|
|
|
$
|
4,481
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Fair value of assets less projected benefit obligation, shown in the preceding tables.
|
The amounts recognized in the consolidated balance sheet as of September 30, 2008 and 2007 consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Health Benefits
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Other non-current assets, net
|
|
$
|
3,278
|
|
|
$
|
6,199
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Accrued expenses
|
|
|
(4,884
|
)
|
|
|
(2,725
|
)
|
|
|
(831
|
)
|
|
|
(699
|
)
|
|
Other non-current liabilities
|
|
|
(42,867
|
)
|
|
|
(21,518
|
)
|
|
|
(11,889
|
)
|
|
|
(13,014
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(44,473
|
)
|
|
$
|
(18,044
|
)
|
|
$
|
(12,720
|
)
|
|
$
|
(13,713
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2008, the above recognized unfunded status of pension plans determined using a June 30,
2008 measurement date was reduced by $3,793 primarily due to employer contributions made during the fourth quarter.
78
Relating to the pension plans, the estimated net loss (gain), service cost and transition obligation that will be
amortized from shareholders’ equity into pension cost in fiscal 2009 are $547, $87, and zero, respectively. Comparable amounts amortized in fiscal 2008, respectively, were $(27), $86 and zero.
Relating to the health benefit plans, the estimated net loss, prior service cost and transition obligation that will be amortized from shareholders’ equity into
pension cost in fiscal 2009 are $106, $2, and zero, respectively. Comparable amounts amortized in fiscal 2008, respectively, were $172, $2 and zero.
The
accumulated benefit obligation for the pension plans was $200,265 and $185,044 as of September 30, 2008 and 2007, respectively.
The assumptions used
in the measurement of the benefit obligations at June 30, 2008 and 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Health Benefits
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
5.71
|
%
|
|
5.35
|
%
|
|
7.10
|
%
|
|
6.40
|
%
|
|
Rate of compensation increase
|
|
4.57
|
%
|
|
4.13
|
%
|
|
N/A
|
|
|
N/A
|
|
The assumptions used in the measurement of the net benefit costs for the years ended September 30, 2008, 2007
and 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Health Benefits
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
5.35
|
%
|
|
4.85
|
%
|
|
4.39
|
%
|
|
6.40
|
%
|
|
6.00
|
%
|
|
5.00
|
%
|
|
Expected return on plan assets
|
|
6.20
|
%
|
|
5.77
|
%
|
|
5.26
|
%
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
Rate of compensation increase
|
|
4.13
|
%
|
|
3.89
|
%
|
|
3.54
|
%
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
The health plans provide flat dollar credits based on years of service and age at retirement. Service for
determining credits was frozen as of December 31, 2005. The amendment to the plan resulted in a $3,153 decrease ($2,728 decrease to the unrecognized prior service cost and $425 decrease to the unrecognized transition obligation) in the
accumulated postretirement benefit obligation during 2006. There is a small group of grandfathered retirees who receive postretirement medical coverage at a percentage of cost. The liabilities for these retirees are valued assuming a 9.0% health
care cost trend rate for 2008. The rate was assumed to decrease gradually to 6.0% in 2014 and remain at that level thereafter.
The effect of a one
percentage point increase or decrease in the assumed health care cost trend rates on total service and interest costs and the postretirement benefit obligation are provided in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Effect of 1% Change in the Assumed Health Care Cost Trend Rates
|
|
|
|
|
|
|
|
|
|
Effect of 1% increase on:
|
|
|
|
|
|
|
|
|
|
Total of service and interest cost components
|
|
$
|
3
|
|
|
$
|
3
|
|
|
Benefit obligations
|
|
|
42
|
|
|
|
45
|
|
|
Effect of 1% decrease on:
|
|
|
|
|
|
|
|
|
|
Total of service and interest cost components
|
|
$
|
(3
|
)
|
|
$
|
(3
|
)
|
|
Benefit obligation
|
|
|
(39
|
)
|
|
|
(42
|
)
|
79
The Company’s pension plan weighted average asset allocations at September 30, 2008, and 2007, by asset
category were as follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Asset Category
|
|
|
|
|
|
|
|
Equity securities
|
|
43.41
|
%
|
|
49.51
|
%
|
|
Debt securities
|
|
48.74
|
|
|
45.88
|
|
|
Real estate
|
|
3.75
|
|
|
3.57
|
|
|
Other
|
|
4.10
|
|
|
1.04
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
100.00
|
%
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
The investment objectives for the pension plan assets are to generate returns that will enable the plans to meet
their future obligations. The strategies balance the requirement to generate returns through investments such as equity securities, with the need to control risk through less volatile assets such as fixed income securities, while also meeting local
regulations. Approximately 90% of the Company’s plan assets relate to the Company’s pension plans in the United Kingdom and Switzerland. In the United Kingdom, the plan assets are managed in two separate portfolios, an equity portfolio and
a bond portfolio. The strategy is to invest 56% and 44% of the plan assets in equity securities and debt securities, respectively. The total return is tracked to the relevant market index, within specified tolerances and after allowance for
withholding tax, where applicable, for each of the funds in which the assets are invested. The plan assets for the Switzerland plan are managed in accordance with the laws in Switzerland. Within the scope of the Swiss laws, the strategy targets
equity securities of 35%-45%, debt securities of 35%-65%, real estate investments of 5%-15% and other investments of 0%-5%.
The following benefit
payments, which reflect expected future service, as appropriate, are expected to be paid as follows:
|
|
|
|
|
|
|
|
|
|
|
Pension
Benefits
|
|
Health
Benefits
|
|
2009
|
|
$
|
5,697
|
|
$
|
663
|
|
2010
|
|
|
6,565
|
|
|
703
|
|
2011
|
|
|
6,295
|
|
|
701
|
|
2012
|
|
|
7,028
|
|
|
696
|
|
2013
|
|
|
8,398
|
|
|
700
|
|
Years 2014 through 2018
|
|
|
49,205
|
|
|
4,386
|
The components of net periodic benefit costs for the three years ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Health Benefits
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
2007
|
|
2006
|
|
Components of Net Periodic Benefit Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
12,527
|
|
|
$
|
12,078
|
|
|
$
|
11,028
|
|
|
$
|
199
|
|
$
|
155
|
|
$
|
9
|
|
Interest cost
|
|
|
11,146
|
|
|
|
9,293
|
|
|
|
7,494
|
|
|
|
855
|
|
|
852
|
|
|
716
|
|
Expected return on plan assets
|
|
|
(12,002
|
)
|
|
|
(9,090
|
)
|
|
|
(6,748
|
)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
(Gain) loss recognized in the year
|
|
|
(70
|
)
|
|
|
322
|
|
|
|
(15
|
)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Loss on settlement
|
|
|
—
|
|
|
|
—
|
|
|
|
86
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Amortization of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized prior service cost
|
|
|
86
|
|
|
|
92
|
|
|
|
(20
|
)
|
|
|
2
|
|
|
2
|
|
|
2
|
|
Unrecognized loss
|
|
|
(27
|
)
|
|
|
229
|
|
|
|
552
|
|
|
|
172
|
|
|
246
|
|
|
283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
11,660
|
|
|
$
|
12,924
|
|
|
$
|
12,377
|
|
|
$
|
1,228
|
|
$
|
1,255
|
|
$
|
1,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company presently anticipates contributing approximately $24,085 to fund its pension plans and $663 to fund
its health benefit plans in fiscal 2009. The Company does not expect any plan assets to be returned to the Company during fiscal 2009.
80
|
16.
|
Share-Based Compensation Plans
|
During the years ended
September 30, 2008, 2007 and 2006, the Company recorded pre-tax share-based compensation expense of $48,345, $40,937 and $55,007, respectively, related to the Company’s non-qualified stock options, restricted stock and restricted stock
units. During the third quarter of fiscal 2007, the Company reduced share-based compensation expense by $4,505 related to adjustments in the forfeiture rate used to record share-based compensation.
For the years ended September 30, 2008, 2007 and 2006, the excess tax benefits of $10,227, $4,912 and $1,084, respectively, were recorded as cash flows from
financing activities in the consolidated statement of cash flows. The total compensation cost related to non-vested restricted stock and stock option awards not yet recognized as of September 30, 2008 was approximately $70,921, which is
expected to be recognized over a weighted average of 2.3 years.
Under the Company’s Global Stock and Incentive Compensation Plan (the
“Plan”), which was adopted in fiscal 2002 and is administered by the Compensation and Leadership Committee (the “Committee”) of the Company’s Board of Directors, employees and directors may receive awards of nonqualified
stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance share units and cash-based awards; employees can also receive incentive stock options. The Plan was amended in January 2008 to
increase the number of shares of Class A common stock authorized and reserved for issuance by 7,000,000 shares. As of September 30, 2008, only restricted stock, restricted stock units, performance share units and nonqualified stock options
have been granted. A total of 32,000,000 shares of Class A common stock have been reserved for issuance under the Plan. As of September 30, 2008, there were 8,091,371 shares available for grant under the Plan.
Restricted Stock and Restricted Stock Units
The following table
summarizes restricted stock activity during 2008, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
Restricted
Stock
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Restricted
Stock
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Restricted
Stock
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Shares outstanding at beginning of fiscal year
|
|
1,190,808
|
|
|
$
|
25.45
|
|
2,076,201
|
|
|
$
|
26.00
|
|
1,227,687
|
|
|
$
|
22.47
|
|
Granted
|
|
—
|
|
|
$
|
—
|
|
—
|
|
|
$
|
—
|
|
2,953,681
|
|
|
$
|
26.44
|
|
Vested
|
|
(781,989
|
)
|
|
$
|
24.66
|
|
(603,153
|
)
|
|
$
|
26.89
|
|
(1,811,750
|
)
|
|
$
|
24.18
|
|
Forfeited
|
|
(92,898
|
)
|
|
$
|
27.11
|
|
(282,240
|
)
|
|
$
|
26.41
|
|
(293,417
|
)
|
|
$
|
26.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares outstanding at end of fiscal year
|
|
315,921
|
|
|
$
|
26.94
|
|
1,190,808
|
|
|
$
|
25.45
|
|
2,076,201
|
|
|
$
|
26.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81
The following table summarizes restricted stock units activity during 2008, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
Restricted
Stock Units
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Restricted
Stock Units
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Restricted
Stock Units
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Shares outstanding at beginning of fiscal year
|
|
1,945,014
|
|
|
$
|
25.72
|
|
294,657
|
|
|
$
|
25.56
|
|
89,255
|
|
|
$
|
21.18
|
|
Granted
|
|
1,623,680
|
|
|
$
|
36.75
|
|
2,591,352
|
|
|
$
|
25.59
|
|
359,999
|
|
|
$
|
25.93
|
|
Vested
|
|
(971,149
|
)
|
|
$
|
29.84
|
|
(625,167
|
)
|
|
$
|
25.20
|
|
(101,044
|
)
|
|
$
|
24.70
|
|
Forfeited
|
|
(333,559
|
)
|
|
$
|
29.14
|
|
(315,828
|
)
|
|
$
|
25.50
|
|
(53,553
|
)
|
|
$
|
22.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares outstanding at end of fiscal year
|
|
2,263,986
|
|
|
$
|
31.36
|
|
1,945,014
|
|
|
$
|
25.72
|
|
294,657
|
|
|
$
|
25.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance share units (PSUs) are intended to provide an incentive for achieving specific performance objectives
over a defined period. Performance share units represent an obligation of the Company to deliver at the end of the performance period, a number of shares ranging from zero to 200% of the initial number of units granted, depending on performance
against objective, pre-established financial metrics.
The Company assumes that such goals will be achieved for shares which vest upon meeting certain financial performance conditions, and these goals are evaluated quarterly. If such goals are
not met or it is probable the goals will not be met, no compensation cost is recognized and any recognized compensation cost is reversed.
During fiscal
2008, 112,900 PSUs were granted to certain Hewitt leadership which is included in the restricted stock unit amount disclosed above. The financial metrics for these grants are based on Hewitt’s corporate performance in fiscal 2008 and are
calculated to be paid out at a rate of 195%. These grants are scheduled to vest in one-third increments on September 30, 2008, 2009 and 2010. During fiscal 2007, 137,000 PSUs were granted to certain Hewitt leadership which is included in the
restricted stock unit amount disclosed above. The financial metrics for these grants were based on Hewitt’s fiscal 2007 corporate performance and are to be paid out at a rate of 180%. The fiscal 2007 grants are scheduled to cliff vest on
September 30, 2010. During fiscal year 2006, 186,111 performance-based restricted stock grants were awarded which is included in the restricted stock unit amount disclosed above. The Company evaluated the goals under the fiscal 2006 performance
plan in fiscal 2006 and it was determined that it was probable that the goals would not be met. No compensation expense was recognized for these grants during fiscal 2006. The final measurement period for this plan is fiscal year 2008. The
Company’s final evaluation of the results confirm that no payout will be made on the fiscal 2006 grants.
Stock Options
The Committee may grant both incentive stock options and nonqualified stock options to purchase shares of Class A common stock. Subject to the terms and provisions
of the Plan, options may be granted to participants, as determined by the Committee, provided that incentive stock options may not be granted to non-employee directors. The option price is determined by the Committee, provided that for options
issued to participants in the United States, the option price may not be less than 100% of the fair market value of the shares on the date the option is granted and no option may be exercisable later than the tenth anniversary of its grant. The
nonqualified stock options generally vest in equal annual installments over a period of four years.
82
The fair value used to determine compensation expense for the years ended September 30, 2008, 2007 and 2006 was
estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Expected volatility
|
|
26.61
|
%
|
|
28.15
|
%
|
|
28.89
|
%
|
|
Risk-free interest rate
|
|
3.83
|
%
|
|
4.42
|
%
|
|
4.73
|
%
|
|
Expected life (in years)
|
|
6.03
|
|
|
6.23
|
|
|
5.68
|
|
|
Dividend yield
|
|
0
|
%
|
|
0
|
%
|
|
0
|
%
|
The Company uses the “simplified method,” as defined in SEC Staff Accounting Bulletin (“SAB”)
No. 107, to determine the expected life assumption for all of its options. The Company continues to use the “simplified method,” as permitted by SAB No. 110, as it does not believe that it has sufficient historical exercise data
to provide a reasonable basis upon which to estimate expected life due to the limited time its equity shares have been publicly traded.
The following
table summarizes stock option activity during 2008, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
Outstanding at beginning of fiscal year
|
|
7,611,095
|
|
|
$
|
24.12
|
|
9,664,292
|
|
|
$
|
23.73
|
|
10,364,866
|
|
|
$
|
23.75
|
|
Granted
|
|
772,620
|
|
|
$
|
37.53
|
|
937,650
|
|
|
$
|
25.66
|
|
331,600
|
|
|
$
|
22.80
|
|
Exercised
|
|
(1,847,653
|
)
|
|
$
|
23.61
|
|
(2,377,618
|
)
|
|
$
|
22.78
|
|
(647,740
|
)
|
|
$
|
22.44
|
|
Forfeited
|
|
(199,426
|
)
|
|
$
|
29.65
|
|
(197,847
|
)
|
|
$
|
24.95
|
|
(183,863
|
)
|
|
$
|
24.23
|
|
Expired
|
|
(52,709
|
)
|
|
$
|
23.69
|
|
(415,382
|
)
|
|
$
|
25.79
|
|
(200,571
|
)
|
|
$
|
26.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of fiscal year
|
|
6,283,927
|
|
|
$
|
25.75
|
|
7,611,095
|
|
|
$
|
24.12
|
|
9,664,292
|
|
|
$
|
23.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable options at end of fiscal year
|
|
5,271,903
|
|
|
$
|
24.53
|
|
6,758,976
|
|
|
$
|
23.94
|
|
8,677,556
|
|
|
$
|
23.66
|
The weighted average estimated fair value of employee stock options granted during 2008, 2007 and 2006 was $12.81,
$9.74 and $8.49 per share, respectively. These stock options were granted at exercise prices equal to the current fair market value of the underlying stock on the grant date.
The following table summarizes information about stock options outstanding at September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Options
|
|
Exercisable Options
|
|
|
|
Number
Outstanding
|
|
Weighted
Average
Exercise
Price
|
|
Aggregate
Intrinsic
Value
|
|
Weighted
Average
Term
(Years)
|
|
Number
Outstanding
|
|
Weighted
Average
Exercise
Price
|
|
Aggregate
Intrinsic
Value
|
|
Summary price range groupings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$19.00
|
|
1,217,412
|
|
$
|
19.00
|
|
$
|
21,232
|
|
3.7
|
|
1,217,412
|
|
$
|
19.00
|
|
$
|
21,232
|
|
$19.01-$30.00
|
|
4,290,688
|
|
$
|
25.52
|
|
|
46,847
|
|
5.8
|
|
3,828,907
|
|
$
|
25.60
|
|
|
41,512
|
|
$30.01-$40.00
|
|
775,827
|
|
$
|
37.02
|
|
|
375
|
|
8.9
|
|
225,584
|
|
$
|
36.18
|
|
|
253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,283,927
|
|
$
|
25.75
|
|
$
|
68,454
|
|
5.8
|
|
5,271,903
|
|
$
|
24.53
|
|
$
|
62,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total intrinsic value of options exercised during the years ended September 30, 2008, 2007 and 2006,
based upon the average market price during the period, was approximately $28,265, $18,027 and $3,426, respectively.
83
The Company is involved in disputes arising in
the ordinary course of its business relating to outsourcing or consulting agreements, professional liability claims, vendors or service providers or employment claims. The Company is also routinely audited and subject to inquiries by governmental
and regulatory agencies. The Company evaluates estimated losses under SFAS 5,
Accounting for Contingencies
. Management considers such factors as the probability of an unfavorable outcome and the ability to make a reasonable estimate of the
amount of loss and records a provision with respect to a claim, suit, investigation or proceeding when it is probable that a liability has been incurred and the amount of the loss can reasonably be estimated. If the reasonable estimate of a probable
loss is a range, and no amount within the range is a better estimate, the minimum amount in the range is accrued. If a loss is not probable or a probable loss cannot be reasonably estimated, no liability is recorded.
In December 2007, the Company settled a dispute with a client and incurred a charge of $15 million, which was previously reserved. The Company paid this settlement
during the first quarter.
In March 2008, the Company restructured an outsourcing contract. In conjunction with the restructuring, the Company will
transition back to the client certain HR BPO services and extend the Benefits Outsourcing services portion of the contract. The Company recorded a net charge of $15.9 million in the second quarter, in addition to a $4 million charge recorded in the
first quarter, mostly relating to transition costs. During the third and fourth quarters, the Company recorded positive adjustments to these charges of $1.9 million and $0.2 million, respectively.
During the year ending September 30, 2008, the Company recorded net charges of approximately $20 million related to ongoing disputes and settlements in addition to
those mentioned above.
The Company is involved in a dispute with Philips Electronics UK Limited (Philips) regarding a claim that the Company failed to
properly value certain benefits in connection with actuarial services provided from 1995 to 2000. On August 1, 2008, Philips and Philips Pension Trustees Limited filed suit in the High Court of Justice, Chancery Division, in London, England
against Hewitt Associates Limited, a subsidiary of the Company, Bacon & Woodrow, a predecessor of Hewitt Associates Limited, and Roger Parkin, a former employee of the Company. The suit claims damages of up to £103 million ($187
million at September 30, 2008). The Company believes that it has valid defenses to Philips’ assertions and intends to defend vigorously any claim. Certain of the Company’s professional liability insurers have denied coverage relating
to this matter. The Company disputes the position taken by the insurance carriers that have denied coverage and fully intends to enforce its rights under the policies at issue. The Company has reserved $5 million related to the dispute, net of
expected insurance recoveries.
The Company does not believe that any unresolved dispute will have a material adverse effect on its financial condition or
results of operation. However, litigation in general and the outcome of any matter, in particular, cannot be predicted with certainty. An unfavorable resolution of one or more pending matters could have a material adverse impact on the
Company’s results of operations for one or more reporting periods.
|
18.
|
Derivative Instruments
|
In the normal course of business, the
Company is exposed to the impact of foreign currency fluctuations and interest rate changes. The Company manages a portion of these risks by using derivative instruments to reduce the effects from fluctuations caused by volatility in currency
exchange and interest rates on its operating results and cash flows.
As a result of the use of derivative instruments, the Company is exposed to the risk
that counterparties to derivative contracts will fail to meet their contractual obligations. To mitigate the counterparty credit risk, the Company has a policy of only entering into contracts with carefully selected major financial institutions
based upon their credit ratings and other factors. The Company also continually assesses the creditworthiness of counterparties.
84
In its hedging programs, the Company uses forward contracts and interest-rate swaps. The Company does not use derivatives
for trading or speculative purposes. A brief description of the Company’s hedging programs is as follows:
Currency Hedging
The Company has a substantial operation in India for the development and deployment of technology solutions as well as for client support activities. In December 2007,
the Company initiated a foreign currency risk management program involving the use of foreign currency derivatives to hedge approximately 75% of future Indian rupee (“INR”) exposure. The Company uses cash flow hedges to hedge forecasted
transactions with its India operations. The Company enters into non-deliverable forward exchange contracts expiring within 12 months as hedges of anticipated cash flows denominated in Indian rupees. These contracts protect against the risk that the
eventual cash flows resulting from such transactions will be adversely affected by changes in exchange rates between the U.S. dollar and the Indian rupee.
Interest Rate Risk Management
On August 8, 2008, the Company entered into a loan agreement that provides for a senior unsecured term
loan in the amount of $270,000 (the “Term Loan”). The Term Loan initially bears interest at a margin of 150 basis points over LIBOR and matures on August 8, 2013 without amortization. The Company is exposed to interest rate risk from
this long term variable rate debt. The Company uses cash flow hedges to hedge future interest payments on the Term Loan. The Company entered into interest rate swaps to convert this variable rate exposure into fixed rate. The Company swapped
$170,000 of the Term Loan for the first three years and $85,000 of the Term Loan for the fourth year. Only the variable LIBOR piece of the Term Loan debt was swapped to fixed rate. These contracts protect against the risk that the eventual cash
flows resulting from such transactions will be adversely affected by changes in interest rates.
All derivatives are recognized in the balance sheet at
fair value. Fair values for the Company’s derivative financial instruments are based on quoted market prices of comparable instruments or, if none are available, on pricing models or formulas using current assumptions. Changes in the fair value
of derivatives that are highly effective are recorded in other comprehensive income until the underlying transactions occur. Any realized gains or losses resulting from the cash flow hedges are recognized together with the hedged transaction in the
consolidated statement of operations. The effectiveness of the cash flow hedges is evaluated on a quarterly basis. If a cash flow hedge is no longer highly effective, the unrealized gains or losses are recognized in the consolidated statements of
operations. At inception date, the Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedging activities. This process includes
matching all derivatives that are designated as cash flow hedges to specific forecasted transactions. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging
transactions are highly effective in offsetting changes in cash flows of hedged items. At September 30, 2008, all hedges were determined to be highly effective.
The following table summarizes the net fair value of the derivative instruments at September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Deliverable
Forward related to
Indian Rupee
|
|
|
Interest Rate Swap
related to Term Loan
|
|
|
Total
|
|
|
Derivative Net Asset/(Liability)
|
|
$
|
(9,110
|
)
|
|
$
|
(1,273
|
)
|
|
$
|
(10,383
|
)
|
|
Deferred Tax Asset/(Liability)
|
|
$
|
3,484
|
|
|
$
|
487
|
|
|
$
|
3,971
|
|
|
Other Comprehensive Loss
|
|
$
|
5,626
|
|
|
$
|
786
|
|
|
$
|
6,412
|
|
85
At September 30, 2008, the notional value of the derivatives related to outstanding non-deliverable Indian rupee
forward contracts maturing within 12 months was $85,052 (INR 3,628,055) and the notional value of the derivatives related to the interest-rate swaps was $170,000.
During the year ended September 30, 2008, the Company recorded net realized losses of $4,006 related to the settlement of non-deliverable forward contracts which were designated as cash flow hedges. These amounts have been classified
together with the underlying hedged transactions in the consolidated statement of operations as compensation and related expenses.
|
19.
|
Other Comprehensive Income, Net
|
Accumulated other comprehensive
income consists of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency
Translation
Adjustments
|
|
|
Minimum
Pension
Liability
|
|
|
Unrealized
Gains (Losses)
on Investments
|
|
|
Retirement
Plans
|
|
|
Net
Unrealized
Losses on
Hedging
Transactions
|
|
|
Accumulated
Other
Comprehensive
Income
|
|
|
As of September 30, 2005
|
|
$
|
72,320
|
|
|
$
|
(2,397
|
)
|
|
$
|
(135
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
69,788
|
|
|
Other comprehensive income
|
|
|
2,760
|
|
|
|
2,397
|
|
|
|
127
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2006
|
|
|
75,080
|
|
|
|
—
|
|
|
|
(8
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
75,072
|
|
|
Other comprehensive income
|
|
|
49,827
|
|
|
|
—
|
|
|
|
8
|
|
|
|
—
|
|
|
|
—
|
|
|
|
49,835
|
|
|
Adjustment to initially apply SFAS No.158 (net of tax)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,525
|
)
|
|
|
—
|
|
|
|
(1,525
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2007
|
|
|
124,907
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,525
|
)
|
|
|
—
|
|
|
|
123,382
|
|
|
Other comprehensive loss
|
|
|
(42,173
|
)
|
|
|
—
|
|
|
|
(4,273
|
)
|
|
|
(23,834
|
)
|
|
|
(6,412
|
)
|
|
|
(76,692
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2008
(1)
|
|
$
|
82,734
|
|
|
$
|
—
|
|
|
$
|
(4,273
|
)
|
|
$
|
(25,359
|
)
|
|
$
|
(6,412
|
)
|
|
$
|
46,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Net of $35,547 of taxes.
|
At September 30, 2008, the Company
recorded an unrealized loss of $6,920 ($4,273 net of tax) relating to its Auction Rate Securities. Refer to Note 5 for more information on ARS.
In
December 2007, the Company initiated a foreign currency risk management program involving the use of forward foreign currency derivatives. In August 2008, the Company entered into interest rate swap derivative instruments to convert variable rate
debt entered into in August 2008 to fixed rate debt. Refer to Notes 11 and 18 for more information on debt and derivative instruments, respectively.
The
change in foreign currency translation during the year ended September 30, 2008 and 2007 was primarily related to the changes in value of the British pound sterling and Indian rupee relative to the U.S. dollar. The change in foreign currency
translation during the year ended September 30, 2006 was primarily related to changes in the value of the British pound sterling relative to the U.S. dollar.
86
For the years ended September 30, 2008, 2007 and
2006, the Company’s provision for income taxes aggregated $128,302, $50,362, and $56,368, respectively, and consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
|
2006
|
|
|
|
Current
|
|
Deferred
|
|
|
Total
|
|
Current
|
|
Deferred
|
|
|
Total
|
|
|
Current
|
|
Deferred
|
|
|
Total
|
|
U.S. Federal
|
|
$
|
89,592
|
|
$
|
18,791
|
|
|
$
|
108,383
|
|
$
|
55,088
|
|
$
|
(5,961
|
)
|
|
$
|
49,127
|
|
|
$
|
24,228
|
|
$
|
2,570
|
|
|
$
|
26,798
|
|
State and local
|
|
|
15,725
|
|
|
(2,317
|
)
|
|
|
13,408
|
|
|
10,976
|
|
|
(6,474
|
)
|
|
|
4,502
|
|
|
|
6,620
|
|
|
(935
|
)
|
|
|
5,685
|
|
Foreign
|
|
|
14,905
|
|
|
(8,394
|
)
|
|
|
6,511
|
|
|
2,232
|
|
|
(5,499
|
)
|
|
|
(3,267
|
)
|
|
|
5,765
|
|
|
18,120
|
|
|
|
23,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
120,222
|
|
$
|
8,080
|
|
|
$
|
128,302
|
|
$
|
68,296
|
|
$
|
(17,934
|
)
|
|
$
|
50,362
|
|
|
$
|
36,613
|
|
$
|
19,755
|
|
|
$
|
56,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefits associated with the vesting of restricted stock and restricted stock units and the exercise of
nonqualified stock options were credited directly to additional paid-in capital and amounted to $14,744, $9,535, and $191 in 2008, 2007 and 2006, respectively.
The effective income tax rate for the year ended September 30, 2008 was 40.5% as compared to 40.4% in fiscal 2007. The current year’s effective rate was impacted by a number of significant items including tax reserves and related
interest as well as an increase of deferred tax assets related to foreign entities. The impact of these significant items was to increase the rate by a net 0.2%. In addition, the Company reduced $3,959 of deferred tax assets associated with
acquisitions.
Income tax expense for the period differed from the amounts computed by applying the U.S. federal income tax rate of 35% to income before
taxes as a result of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Provision (benefit) for taxes at U.S. federal statutory rate
|
|
$
|
110,755
|
|
|
$
|
(43,651
|
)
|
|
$
|
(20,850
|
)
|
|
Increase (reduction) in income taxes resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill impairment at U.S. federal statutory rate
|
|
|
(122
|
)
|
|
|
88,717
|
|
|
|
58,665
|
|
|
Change in deferred tax assets related to foreign entities
|
|
|
(5,566
|
)
|
|
|
(5,499
|
)
|
|
|
18,343
|
|
|
Reserves and related interest
|
|
|
6,201
|
|
|
|
9,237
|
|
|
|
(4,238
|
)
|
|
State and local income taxes, net of federal income tax benefits
|
|
|
8,718
|
|
|
|
2,138
|
|
|
|
3,432
|
|
|
Nondeductible expenses
|
|
|
1,768
|
|
|
|
3,672
|
|
|
|
2,838
|
|
|
Tax impact on foreign subsidiaries
|
|
|
6,548
|
|
|
|
(2,843
|
)
|
|
|
(4,793
|
)
|
|
Other
|
|
|
—
|
|
|
|
(1,409
|
)
|
|
|
2,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
128,302
|
|
|
$
|
50,362
|
|
|
$
|
56,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
87
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred
tax liabilities are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Deferred contract revenues
|
|
$
|
89,396
|
|
|
$
|
101,358
|
|
|
Accrued expenses
|
|
|
23,410
|
|
|
|
8,794
|
|
|
Foreign tax loss carryforwards
|
|
|
46,993
|
|
|
|
44,322
|
|
|
Foreign accrued expenses
|
|
|
3,166
|
|
|
|
6,389
|
|
|
Depreciation and amortization
|
|
|
5,764
|
|
|
|
11,113
|
|
|
Compensation and benefits
|
|
|
68,925
|
|
|
|
24,223
|
|
|
Domestic tax loss carryforwards
|
|
|
13,359
|
|
|
|
29,321
|
|
|
Other
|
|
|
6,826
|
|
|
|
2,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
257,839
|
|
|
|
228,369
|
|
|
Valuation allowance
|
|
|
(49,942
|
)
|
|
|
(44,224
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
207,897
|
|
|
$
|
184,145
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Deferred contract costs
|
|
$
|
117,262
|
|
|
$
|
123,118
|
|
|
Goodwill and intangible amortization
|
|
|
110,793
|
|
|
|
92,902
|
|
|
Currency translation adjustment
|
|
|
22,796
|
|
|
|
38,479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
250,851
|
|
|
$
|
254,499
|
|
|
|
|
|
|
|
|
|
|
|
The domestic federal net operating loss carryforward of $19,016 relates to the RealLife HR acquisition and expires
from fiscal 2024–2027. All of the domestic net operating losses are expected to be utilized through fiscal 2027.
At September 30, 2008, the
Company has available foreign net operating losses of approximately $172,160, of which $156,006 has already provided a U.S. tax benefit. The remaining net operating loss carryforward of $16,154 includes $10,174 which expires at various dates between
fiscal years 2008 and 2022, and the remainder has an indefinite carryforward period. The foreign local country net operating loss carryforwards of approximately $172,160 have a valuation allowance of $168,179 offsetting the benefit. The valuation
allowance primarily represents loss carryforwards and deductible temporary differences for which utilization is uncertain given the lack of sustained profitability of foreign entities and/or limited carryforward periods.
The Company has a tax holiday in a foreign country through March 31, 2010. The tax benefit of the tax holiday related to the current fiscal year income is
approximately $7,700 or $0.08 per diluted share.
United States income taxes have not been provided on undistributed earnings of international
subsidiaries. Those earnings are considered to be indefinitely reinvested. Upon distribution of those earnings in the form of dividends or otherwise, the Company may be subject to both U.S. income taxes (subject to adjustment for foreign tax
credits) and withholding taxes payable to the various foreign countries.
Effective October 1, 2007, the Company adopted FIN 48 which prescribes a
more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on derecognition of income tax assets and liabilities,
classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods and income tax disclosures. Income tax-related interest
expense and income tax-related penalties have continued to be reported as a component of the provision for income tax in the consolidated statement of operations. The Company included interest and penalties of $1,530 for the year ended September 30,
2008 in the provision for income taxes in the consolidated statement of operations. As of September 30, 2008, the total amount of accrued income tax-related interest and penalties included in the consolidated balance sheets was $13,857. The
cumulative effect of applying the provisions of this interpretation has been recorded as a decrease of $7,036 to retained earnings, a decrease of $3,963 to the income tax payable, a decrease of $5,047 to deferred tax assets and an increase to the
FIN 48 liability account of $5,952 as of October 1, 2007.
In conjunction with adoption of FIN 48, the Company classified uncertain tax positions as
non-current income tax liabilities unless expected to be paid in one year.
88
The Company is subject to examination in the U.S. federal tax jurisdiction for the tax years ending September 30,
2004 through September 30, 2006. The Company is also subject to examination in a number of state and foreign jurisdictions for the 2003-2007 tax years, for which no individually material unrecognized tax benefits exist. The Company has also
filed an appeal with the IRS for the tax year ended September 30, 2003. The Company believes appropriate provisions for all outstanding issues have been made for all jurisdictions and all open years.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
Unrecognized tax benefits – October 1, 2007
|
|
$
|
74,604
|
|
|
Gross increases – tax positions in prior periods
|
|
|
3,848
|
|
|
Gross decreases – tax positions in prior periods
|
|
|
(4,355
|
)
|
|
Gross increases – current period tax positions
|
|
|
5,424
|
|
|
Lapse of statute of limitations
|
|
|
(2,083
|
)
|
|
|
|
|
|
|
|
Unrecognized tax benefits – September 30, 2008
|
|
$
|
77,438
|
|
|
|
|
|
|
|
As of September 30, 2008 and October 1, 2007, the total amount of unrecognized tax benefits was $77,438
and $74,604. If tax matters for the 2003-2006 years are effectively settled with the IRS within the next 12 months, settlement could increase earnings by $21,600 to $55,084 based on current estimates. Audit outcomes and the timing of audit
settlements are subject to significant uncertainty.
|
21.
|
Supplemental Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Supplementary disclosure of cash paid during the year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
20,730
|
|
|
$
|
23,534
|
|
|
$
|
20,497
|
|
|
Income taxes paid
|
|
|
136,347
|
|
|
|
73,837
|
|
|
|
25,098
|
|
|
Schedule of non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions, cash paid, net of cash acquired:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction costs
|
|
$
|
625
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Fair value of assets acquired
|
|
|
(79,409
|
)
|
|
|
(14,398
|
)
|
|
|
(805
|
)
|
|
Fair value of liabilities assumed
|
|
|
28,482
|
|
|
|
2,704
|
|
|
|
656
|
|
|
Goodwill
|
|
|
(83,779
|
)
|
|
|
(33,868
|
)
|
|
|
(6,502
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid, net of cash acquired
|
|
|
(134,081
|
)
|
|
|
(45,562
|
)
|
|
|
(6,651
|
)
|
|
Capital leases
|
|
|
13,278
|
|
|
|
—
|
|
|
|
—
|
|
|
22.
|
Segments and Geographic Data
|
Under SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information,
the Company has determined that it has three reportable segments based on similarities among the operating units including homogeneity of services, service delivery methods
and use of technology. The three reportable segments are Benefits Outsourcing, HR BPO and Consulting.
The Company operates many of the administrative and
support functions of its business through the use of centralized shared service operations to provide an economical and effective means of supporting the operating segments. These shared services include information technology services, human
resources, management, corporate relations, finance, general counsel, real estate management, supplier management and other supporting services. Many of these costs, such as information technology services, human resources, real estate management
and other support services, are assigned to the business segments based on usage and consumption factors. Certain unallocated costs within finance, general counsel, management, client and market leadership and corporate relations, are not allocated
to the business segments and remain in unallocated shared service costs.
The table on the following page summarizes the Company’s reportable segment
results. Results for fiscal 2007 have been reclassified to be comparable to the current year presentation, primarily due to changes to the Company’s current organizational structure. Results for fiscal 2006 have not been reclassified as it was
not practical to do so. As a result, the fiscal 2006 segment results do not reflect changes to the Company’s current organizational structure and are not comparable to fiscal 2007.
89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Benefits Outsourcing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment revenues before reimbursements
|
|
$
|
1,550,110
|
|
|
$
|
1,475,326
|
|
|
$
|
1,465,710
|
|
|
Segment income
|
|
|
365,336
|
|
|
|
303,984
|
|
|
|
321,735
|
|
|
Net client receivables and unbilled work in process
|
|
|
243,823
|
|
|
|
249,247
|
|
|
|
|
|
|
Long-term unbilled work in process
|
|
|
—
|
|
|
|
658
|
|
|
|
|
|
|
Goodwill and intangible assets
|
|
|
134,071
|
|
|
|
54,829
|
|
|
|
|
|
|
Short-term deferred contract costs, net
|
|
|
33,518
|
|
|
|
28,739
|
|
|
|
|
|
|
Deferred contract costs, net, less current portion
|
|
|
136,076
|
|
|
|
104,308
|
|
|
|
|
|
|
|
|
|
|
|
HR BPO
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment revenues before reimbursements
|
|
$
|
554,854
|
|
|
$
|
539,452
|
|
|
$
|
517,502
|
|
|
Segment loss
|
|
|
(83,277
|
)
|
|
|
(492,193
|
)
|
|
|
(423,407
|
)
|
|
Net client receivables and unbilled work in process
|
|
|
108,470
|
|
|
|
121,995
|
|
|
|
|
|
|
Long-term unbilled work in process
|
|
|
31
|
|
|
|
3,894
|
|
|
|
|
|
|
Goodwill and intangible assets
|
|
|
79,412
|
|
|
|
112,663
|
|
|
|
|
|
|
Short-term deferred contract costs, net
|
|
|
49,430
|
|
|
|
46,284
|
|
|
|
|
|
|
Deferred contract costs, net, less current portion
|
|
|
149,696
|
|
|
|
191,462
|
|
|
|
|
|
|
|
|
|
|
|
Consulting
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment revenues before reimbursements
|
|
$
|
1,094,323
|
|
|
$
|
945,866
|
|
|
$
|
842,616
|
|
|
Segment income
|
|
|
143,217
|
|
|
|
143,992
|
|
|
|
137,028
|
|
|
Net client receivables and unbilled work in process
|
|
|
303,250
|
|
|
|
260,769
|
|
|
|
|
|
|
Long-term unbilled work in process
|
|
|
22
|
|
|
|
—
|
|
|
|
|
|
|
Goodwill and intangible assets
|
|
|
357,480
|
|
|
|
347,955
|
|
|
|
|
|
|
Short-term deferred contract costs, net
|
|
|
496
|
|
|
|
661
|
|
|
|
|
|
|
Deferred contract costs, net, less current portion
|
|
|
1,288
|
|
|
|
909
|
|
|
|
|
|
|
|
|
|
|
|
Total Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment revenues before reimbursements
|
|
$
|
3,199,287
|
|
|
$
|
2,960,644
|
|
|
$
|
2,825,828
|
|
|
Intersegment revenues
|
|
|
(47,898
|
)
|
|
|
(39,568
|
)
|
|
|
(37,106
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues before reimbursements (net revenues)
|
|
|
3,151,389
|
|
|
|
2,921,076
|
|
|
|
2,788,722
|
|
|
Reimbursements
|
|
|
76,259
|
|
|
|
69,250
|
|
|
|
68,439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
3,227,648
|
|
|
$
|
2,990,326
|
|
|
$
|
2,857,161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment income (loss)
|
|
$
|
425,276
|
|
|
$
|
(44,217
|
)
|
|
$
|
35,356
|
|
|
|
|
|
|
|
Charges not recorded at the Segment level
Initial public offering restricted stock awards
|
|
|
—
|
|
|
|
—
|
|
|
|
9,397
|
|
|
Unallocated shared costs
|
|
|
112,432
|
|
|
|
98,750
|
|
|
|
90,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
312,844
|
|
|
$
|
(142,967
|
)
|
|
$
|
(64,261
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net client receivables and unbilled work in process
|
|
$
|
655,543
|
|
|
$
|
632,011
|
|
|
|
|
|
|
Long-term unbilled work in process
|
|
|
53
|
|
|
|
4,552
|
|
|
|
|
|
|
Goodwill and certain intangible assets
|
|
|
570,963
|
|
|
|
515,447
|
|
|
|
|
|
|
Short-term deferred contract costs, net
|
|
|
83,444
|
|
|
|
75,684
|
|
|
|
|
|
|
Deferred contract costs, net, less current portion
|
|
|
287,060
|
|
|
|
296,679
|
|
|
|
|
|
|
Assets not reported by segment
|
|
|
1,395,739
|
|
|
|
1,231,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,992,802
|
|
|
$
|
2,755,538
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90
Revenues and long-lived assets by geographic area for the following fiscal years are provided below. Revenues are
attributed to geographic areas based on the country where the associates perform the services. Long-lived assets include net property and equipment, deferred contract costs, goodwill and intangible assets, but exclude investments in affiliated
companies.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
2,398,335
|
|
$
|
2,269,966
|
|
$
|
2,238,901
|
|
United Kingdom
|
|
|
389,070
|
|
|
370,980
|
|
|
344,533
|
|
All Other Countries
|
|
|
440,243
|
|
|
349,380
|
|
|
273,727
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,227,648
|
|
$
|
2,990,326
|
|
$
|
2,857,161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Lived Assets
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
930,247
|
|
$
|
701,662
|
|
|
|
|
United Kingdom
|
|
|
351,635
|
|
|
346,453
|
|
|
|
|
All Other Countries
|
|
|
130,924
|
|
|
131,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,412,806
|
|
$
|
1,179,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23.
|
Quarterly Financial Information (Unaudited)
|
The following tables
set forth the historical unaudited quarterly financial data for the periods indicated. The information for each of these periods has been prepared on the same basis as the audited consolidated financial statements and, in the Company’s opinion,
reflects all adjustments necessary to present fairly the Company’s financial results. Operating results for previous periods do not necessarily indicate results that may be achieved in any future period. Amounts are in thousands, except
earnings per share information.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
|
Fiscal 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues before reimbursements (net revenues)
|
|
$
|
793,843
|
|
$
|
773,099
|
|
$
|
777,758
|
|
$
|
806,689
|
|
|
Reimbursements
|
|
|
25,149
|
|
|
16,449
|
|
|
16,821
|
|
|
17,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
818,992
|
|
$
|
789,548
|
|
$
|
794,579
|
|
$
|
824,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
(1)
|
|
$
|
108,933
|
|
$
|
68,460
|
|
$
|
81,181
|
|
$
|
54,270
|
|
|
Net income
(1)
|
|
$
|
63,947
|
|
$
|
44,493
|
|
$
|
48,150
|
|
$
|
31,552
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.61
|
|
$
|
0.45
|
|
$
|
0.50
|
|
$
|
0.33
|
|
|
Diluted
|
|
$
|
0.59
|
|
$
|
0.43
|
|
$
|
0.48
|
|
$
|
0.32
|
|
|
|
|
|
|
|
|
Fiscal 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues before reimbursements (net revenues)
|
|
$
|
726,630
|
|
$
|
716,203
|
|
$
|
727,982
|
|
$
|
750,261
|
|
|
Reimbursements
|
|
|
19,420
|
|
|
17,605
|
|
|
14,330
|
|
|
17,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
746,050
|
|
$
|
733,808
|
|
$
|
742,312
|
|
$
|
768,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
(2)
|
|
$
|
46,533
|
|
$
|
18,765
|
|
$
|
72,372
|
|
$
|
(280,637
|
)
|
|
Net income (loss)
(2)
|
|
$
|
30,065
|
|
$
|
12,986
|
|
$
|
47,505
|
|
$
|
(265,636
|
)
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.28
|
|
$
|
0.12
|
|
$
|
0.44
|
|
$
|
(2.51
|
)
|
|
Diluted
|
|
$
|
0.27
|
|
$
|
0.12
|
|
$
|
0.43
|
|
$
|
(2.51
|
)
|
91
|
(1)
|
Fourth quarter fiscal 2008 results include a pre-tax charge of $34,429 related to the review of the Company’s leased real estate portfolio.
|
|
(2)
|
Fourth quarter fiscal 2007 results include non-cash, pre-tax charges of $326,312 related to impairment of goodwill, intangible assets and contract loss provisions; a pre-tax charge
of $29,339 related to the review of the Company’s leased real estate portfolio; and a pre-tax severance charge of $8,032 resulting from ongoing productivity initiatives across the business.
|
Hewitt Financial Services LLC
(“HFS”), a wholly-owned subsidiary of the Company, is a registered U.S. broker-dealer. HFS is subject to the Securities and Exchange Commission’s minimum net capital rule (Rule 15c3-1), which requires that HFS maintain net capital (as
defined) equal to the greater of $50,000 or 6 2/3 percent of aggregate indebtedness, (as defined). As of September 30, 2008 and 2007, HFS was in compliance with its net capital requirements.
|
25.
|
Related Party Transactions
|
There were no related party
transactions in fiscal 2008, except that (i) the Company paid to Hexaware Technologies Limited (“Hexaware”) approximately $12,672 for certain computer programming services, and (ii) Liberata Limited (“Liberata”) and
Gavilon Holdings LLC (“Gavilon”) paid approximately $1,430 and $323, respectively, to the Company for consulting services. The Company paid approximately $14,382 and $14,249 to Hexaware for similar services in fiscal 2007 and 2006,
respectively. Liberata paid the Company approximately $961 and $402 for similar services in fiscal 2007 and 2006, respectively.
General Atlantic LLC
(“General Atlantic”), a beneficial owner of more than 5% of the Company’s stock, beneficially owns approximately 14.7% of Hexaware, approximately 98% of Liberata and approximately 21% of Gavilon. The Company believes fees for such
services were at prevailing market rates. The agreement pursuant to which services were provided to Hexaware was renewed for fiscal 2009 after a competitive bidding process. We expect to continue providing consulting services to Liberata and Gavilon
on similar terms in fiscal 2009. Mr. Denning, one of the Company’s directors and the Chairman and Managing Director of General Atlantic, did not participate in any decision relating to these services, none of which are material to the
Company or General Atlantic.
Unsecured convertible senior notes
On October 1, 2008, certain holders of the $110,000 aggregate principal amount of 2.50% Convertible Senior Notes due October 1, 2010
exercised their option to require the Company to repurchase the notes. The Company redeemed these notes at a price equal to 100% of the principal amount of the notes of $109,800 plus accrued interest as of October 1, 2008.
Hewitt intends to redeem the remaining $200 of the $110,000 aggregate notes in fiscal year 2009. As of September 30, 2008, the carrying value of the notes was
$110,000.
92
INDEX TO EXHIBITS
|
|
|
|
|
Exhibit
|
|
Description
|
|
3.1
|
|
Second Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Quarterly Report on Form 10-Q filed February 6, 2007).
|
|
|
|
|
3.2
|
|
Amended and Restated By-laws (incorporated by reference to Exhibit 3.2 to Hewitt Associates, Inc.’s Registration Statement on Form S-1, as amended, Registration No.
333-84198).
|
|
|
|
|
4.1
|
|
Specimen Class A Common Stock Certificate of the Registrant (incorporated by reference to Exhibit 4.1 to Hewitt Associates, Inc.’s Registration Statement on Form S-1, as amended,
Registration No. 333-84198).
|
|
|
|
|
4.2
|
|
Indenture, dated as of September 30, 2003, by and between Exult, Inc. and Bank One Trust Company, N.A., as Trustee (incorporated by reference to Exhibit 4.1 to Hewitt Associates, Inc.’s
Registration Statement on Form S-3, Registration No. 333-119576).
|
|
|
|
|
10.1
|
|
Hewitt Amended and Restated Global Stock and Incentive Compensation Plan (incorporated by reference to Exhibit 10.5 to Hewitt Associates, Inc.’s Quarterly Report on Form 10-Q for the
quarter ended December 31, 2007).
|
|
|
|
|
10.2
|
|
Stockholders Agreement, dated as of June 15, 2004, by and among Hewitt Associates, Inc., General Atlantic Partners 54, L.P., General Atlantic Partners 57, L.P., General Atlantic Partners 60,
L.P., GAP Coinvestment Partners, L.P. and GAP Coinvestment Partners II, L.P. (incorporated by reference to Exhibit 99.2 to Hewitt Associates, Inc.’s Current Report on Form 8-K, dated June 15, 2004).
|
|
|
|
|
10.3
|
|
Hewitt Associates LLC Note Purchase Agreement, dated as of March 15, 2000, authorizing the issue and sale of $15,000,000 aggregate principal amount of its 7.94% Senior Notes, Series A, Tranche
1, due March 30, 2007 and $35,000,000 aggregate principal amount of its 8.08% Senior Notes, Series A, Tranche 2, due March 30, 2012 (incorporated by reference to Exhibit 10.5 to Hewitt Associates, Inc.’s Registration Statement on Form S-1, as
amended, Registration No. 333-105560).
|
|
|
|
|
10.4
|
|
Hewitt Associates LLC First Amendment to Note Purchase Agreement, dated as of June 15, 2000, amending the Note Purchase Agreement authorizing the issue and sale of $15,000,000 aggregate
principal amount of its 7.94% Senior Notes, Series A, Tranche 1, due March 30, 2007 and $35,000,000 aggregate principal amount of its 8.08% Senior Notes, Series A, Tranche 2, due March 30, 2012 (incorporated by reference to Exhibit 10.6 to Hewitt
Associates, Inc.’s Registration Statement on Form S-1, as amended, Registration No. 333-84198).
|
|
|
|
|
10.5
|
|
Hewitt Associates LLC Supplemental Note Purchase Agreement (Series B), dated as of June 15, 2000, authorizing the issue and sale of $10,000,000 aggregate principal amount of Subsequent Notes
designated as its 8.11% Senior Notes, Series B, due June 30, 2010 (incorporated by reference to Exhibit 10.7 to Hewitt Associates, Inc.’s Registration Statement on Form S-1, as amended, Registration No. 333-105560).
|
|
|
|
|
10.6
|
|
Hewitt Associates LLC Supplemental Note Purchase Agreement (Series E), dated as of October 1, 2000, authorizing the issue and sale of $15,000,000 aggregate principal amount of Subsequent Notes
designated as its 7.90% Senior Notes, Series E, due October 15, 2010 (incorporated by reference to Exhibit 10.10 to Hewitt Associates, Inc.’s Registration Statement on Form S-1, as amended, Registration No. 333-105560).
|
|
|
|
|
10.7
|
|
First Amendment and Waiver to Note Purchase Agreement, dated May 31, 2002, authorizing the issue and sale of $50,000,000 aggregate principal amount of its 7.45% Senior Notes due May 30, 2008
(incorporated by reference to Exhibit 10.16 to Hewitt Associates, Inc.’s Registration Statement on Form S-1, as amended, Registration No. 333-105560).
|
93
|
|
|
|
|
10.8
|
|
Second Amendment and Waiver to Note Purchase Agreement, dated May 31, 2002, authorizing the issue and sale of $15,000,000 of its 7.94% Senior Notes, Series A, Tranche 1, $35,000,000 of
its 8.08% Senior Notes, Series A, Tranche 2, $10,000,000 of its 8.11% Senior Notes, Series B, $15,000,000 of its 7.93% Senior Notes, Series C, $10,000,000 of its 7.65%, Senior Notes, Series D, and $15,000,000 of its 7.90% Senior Notes, Series E
(incorporated by reference to Exhibit 10.17 to Hewitt Associates, Inc.’s Registration Statement on Form S-1, as amended, Registration No. 333-105560).
|
|
|
|
|
10.9
|
|
Credit Agreement, by and among Hewitt Associates LLC, Hewitt Associates, Inc. and the lenders named therein, such other lenders as may become a party thereto and Wachovia Bank, National
Association, as Administrative Agent for the Lenders, dated May 23, 2005 (incorporated by reference to Exhibit 99.1 to Current Report on Form 8-K filed May 27, 2005).
|
|
|
|
|
10.10
|
|
Amendment to the Credit Agreement, by and among Hewitt Associates LLC, Hewitt Associates, Inc. and the lenders named herein and such other lenders as may become a party hereto and Wachovia Bank,
National Association, as Administrative Agent for the Lenders, dated May 23, 2005, amended as of August 11, 2006 (incorporated by reference to Exhibit 10.4 to the Quarterly Report on Form 10-Q filed August 14, 2006).
|
|
|
|
|
10.11
|
|
Second Amendment, dated August 6, 2007, to the Credit Agreement, by and among Hewitt Associates LLC, Hewitt Associates, Inc. and the lenders named herein and such other lenders as may become a
party hereto and Wachovia Bank, National Association, as Administrative Agent for the Lenders, dated May 23, 2005, amended as of August 11, 2006 (incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q filed August 8, 2007).
|
|
|
|
|
10.12
|
|
Third Amendment, dated November 9, 2007, to Credit Agreement dated as of May 23, 2005, among Hewitt Associates LLC, Hewitt Associates, Inc., the lenders named therein, such other lenders as may
become a party thereto and Wachovia Bank, National Association, as Administrative Agent for the Lenders, (incorporated by reference to Exhibit 10.13 to the Annual Report on Form 10-K for the year ended September 30, 2007).
|
|
|
|
|
10.13
|
|
Fourth Amendment, dated March 10, 2008, to Credit Agreement dated as of May 23, 2005, among Hewitt Associates LLC, Hewitt Associates, Inc., the lenders named therein, such other lenders as may
become a party thereto and Wachovia Bank, National Association, as Administrative Agent for the Lenders (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2008).
|
|
|
|
|
10.14
|
|
Fifth Amendment, dated June 18, 2008, to Credit Agreement dated as of May 23, 2005 among Hewitt Associates LLC, Hewitt Associates, Inc., the lenders named therein, such other lenders as may
become a party thereto and Wachovia Bank, National Association, as Administrative Agent for the Lenders, dated May 23, 2005 (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended June 30,
2008).
|
|
|
|
|
10.15
|
|
Sixth Amendment, dated July 30, 2008, to Credit Agreement dated as of May 23, 2005 among Hewitt Associates LLC, Hewitt Associates, Inc., the lenders named therein, such other lenders as may
become a party thereto, Wachovia Bank, National Association, as resigning Administrative Agent for the Lenders and JP Morgan Chase Bank, N.A. as successor Administrative Agent for the Lenders, dated May 23, 2005 (incorporated by reference to Exhibit
10.2 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2008).
|
|
|
|
|
10.16
|
|
Loan Agreement dated August 8, 2008 among Hewitt Associates LLC, Hewitt Associates, Inc., the lenders named therein, BMO Capital Markets as Syndication Agent, Barclays Bank PLC, RBS Citizens,
N.A. and U.S. Bank National Association, as Documentation Agents, and JPMorgan Chase Bank, N.A., as Administrative Agent (incorporated by reference to Exhibit 99.1 to Current Report on Form 8-K filed August 11, 2008)
|
94
|
|
|
|
|
10.17
|
|
Note Purchase Agreement by and among Hewitt Associates L.L.C. as issuer, Hewitt Associates, Inc., as guarantor, and the purchasers named therein (incorporated by reference to Exhibit 99.1 to
Current Report on Form 8-K filed August 22, 2008)
|
|
|
|
|
10.18
|
|
Form of Restricted Stock Award (incorporated by reference to Exhibit 10.40 to the Annual Report on Form 10-K filed November 18, 2005).
|
|
|
|
|
10.19
|
|
Form of Stock Option Agreement (incorporated by reference to Exhibit 10.41 to the Annual Report on Form 10-K filed November 18, 2005).
|
|
|
|
|
10.20
|
|
Change in Control Executive Severance Plan (incorporated by reference to Exhibit 99.3 to Current Report on Form 8-K filed October 7, 2005).
|
|
|
|
|
10.21
|
|
Common Stock Warrant Issued to Bank of Montreal on April 23, 2003 (incorporated by reference to Exult, Inc’s Report on Form 10-Q for the Quarter ended June 30, 2003).
|
|
|
|
|
10.22
|
|
Warrant Adjustment and Assumption Agreement dated as of October 1, 2004 by and among Exult, Inc., Hewitt Associates, Inc. and Bank of Montreal (incorporated by reference to Exhibit 10.50 to the
Annual Report on Form 10-K filed November 18, 2005).
|
|
|
|
|
10.23
|
|
Form of Director Stock Option Agreement (incorporated by reference to Exhibit 10.51 to the Annual Report on Form 10-K filed November 18, 2005).
|
|
|
|
|
10.24
|
|
Form of Director Restricted Stock Agreement (incorporated by reference to Exhibit 10.52 to the Annual Report on Form 10-K filed November 18, 2005).
|
|
|
|
|
10.25
|
|
Letter Agreement between Russell P. Fradin and Hewitt Associates, Inc. dated August 8, 2006 (incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q filed August 14,
2006).
|
|
|
|
|
10.26
|
|
Corrected Fiscal Year 2007 Performance Share Program Award Agreement (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q filed May 9, 2007).
|
|
|
|
|
10.27
|
|
Employment letter dated December 18, 2006 to Matthew Levin (incorporated by reference to Exhibit 10.23 to the Annual Report on Form 10-K for the year ended September 30, 2007).
|
|
|
|
|
10.28
|
|
Employment letter dated April 16, 2007 to Jay Rising (incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q filed May 9, 2007).
|
|
|
|
|
10.29
|
|
Employment letter dated March 23, 2007 to Tracy Keogh (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q filed August 8, 2007).
|
|
|
|
|
10.30
|
|
Letter Agreement dated as of August 2, 2008 between Hewitt Associates LLC and Perry O. Brandorff (incorporated by reference to Exhibit 99.1 to Current Report on Form 8-K filed August 8, 2008).
|
|
|
|
|
10.31
|
|
Employment letter dated October 10, 2007 to Steven J. Kyono (incorporated by reference to Exhibit 10.27 to the Annual Report on Form 10-K for the year ended September 30, 2007).
|
|
|
|
|
10.32
|
|
Employment letter dated May 5, 2008 to Vincent R. Coppola (incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2008)
|
|
|
|
|
10.33
|
|
Form of Fiscal Year 2008 Performance Share Program Award Agreement (incorporated by reference to Exhibit 99.1 to Current Report on Form 8-K filed December 12, 2007)
|
95
|
|
|
|
|
10.34
|
|
Form of Fiscal Year 2008 Stock Option Program Award Agreement (incorporated by reference to Exhibit 99.2 to Current Report on Form 8-K filed December 12, 2007)
|
|
|
|
|
10.35
|
|
Form of Fiscal Year 2008 Director Equity Deferral Agreement (incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q for the Quarter ended December 31,
2007)
|
|
|
|
|
10.36
|
|
Form of Fiscal Year 2008 Director Retainer Deferral Agreement (incorporated by reference to Exhibit 10.4 to the Quarterly Report on Form 10-Q for the Quarter ended December 31,
2007)
|
|
|
|
|
10.37
|
|
Summary of Compensation Arrangements for Eric Fiedler and Yvan Legris (incorporated by reference to Item 5.02 to Current Report on Form 8-K/A filed October 3, 2008
|
|
|
|
|
12.1
|
|
Ratio of Earnings to Fixed Charges (filed herewith).
|
|
|
|
|
14.
|
|
Code of Ethics (incorporated by reference to Exhibit 14 to Hewitt Associates, Inc.’s Annual Report on Form 10-K for the year ended September 30, 2003.)
|
|
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21.
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Subsidiaries (filed herewith).
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23.1
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Consent of Independent Registered Public Accounting Firm (filed herewith).
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31.1
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Certification of Chief Executive Officer pursuant to 15 U.S.C. Section 10A, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
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31.2
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Certification of Chief Financial Officer pursuant to 15 U.S.C. Section 10A, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
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32.1
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Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
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32.2
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Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
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96
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