Exhibit 99.3
Hewitt Associates, Inc. 100 Half Day Road Lincolnshire, IL 60069 Tel (847) 295-5000 Fax (847) 295-7634 www.hewitt.com
Argentina Australia Austria Belgium Brazil Canada Channel Islands Chile China Czech Republic France Germany Greece Hong Kong Hungary India Ireland Italy Japan Malaysia Mauritius Mexico Netherlands Philippines Poland Puerto Rico Singapore South Africa South Korea Spain Sweden Switzerland Thailand United Kingdom United States Venezuela | For Immediate Release | |||
| November 10, 2005 | ||||
Contact: |
Investors: Genny Pennise (847) 295-5000,investor.relations@hewitt.com | |||
| Media: Kelly Zitlow (847) 442-7664,kelly.zitlow@hewitt.com | ||||
Hewitt Associates Reports 2005 Fourth Quarter and Full Year Results | ||||
Company Appoints Chief Financial Officer | ||||
LINCOLNSHIRE, Ill. - Hewitt Associates, Inc. (NYSE: HEW), a global human resources services firm, today reported results for its fourth quarter and fiscal year ended September 30, 2005. Results include the operations of Exult, Inc. acquired on October 1, 2004. | ||||
Fourth Quarter: | ||||
• Reported net revenues (revenues before reimbursements) increased 25%, to $721.0 million, from $574.6 million in the prior-year quarter. Outsourcing revenues increased 37%, and Consulting revenues increased 5%. The net favorable impact on revenues from foreign currency translation was $3 million. | ||||
• Reported net income was $40.5 million, $0.37 per diluted share, versus $33.1 million, $0.34 per diluted share in the prior-year quarter. | ||||
Fiscal 2005: | ||||
• Reported net revenues increased 29%, to $2.84 billion, compared to $2.20 billion in fiscal 2004. Outsourcing revenues increased 41% for the year, and Consulting revenues increased 6%. The net favorable impact on revenues from foreign currency translation was $27 million. | ||||
• Reported net income for the year was $134.7 million, $1.19 per diluted share, versus $122.8 million, $1.25 per diluted share, in the prior year. | ||||
“Fiscal 2005 was a transformational year for our Company. With the integration of Exult, we established Hewitt as the clear market leader in the emerging HR BPO marketplace, with both the highest total number of clients and the largest number of new client wins in 2005,” said Dale L. Gifford, chairman and chief executive officer. “Establishing our front-runner position in HR BPO, while at the same time growing our Benefits Outsourcing and Consulting businesses, required significant investments and expense in the year. To balance those investments, we have initiated and continue to make solid progress on our cost reduction efforts,” he added. | ||||
“We are absolutely committed to improving our financial performance going forward. The Company is poised for future growth and improved profitability as a result of actions we’ve taken in the past twelve months. In the year ahead, we will continue to focus on execution—making sure that we perform for clients, deliver for our stockholders and appropriately reward those employees who help us do both.” | ||||
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In a separate announcement, the Company today also announced that John J. Park will succeed Dan A. DeCanniere as the Company’s CFO, effective November 21, 2005. Mr. Park has held senior financial positions at PepsiCo, Inc., Diageo PLC, and Sears, Roebuck and Company, most recently serving as chief financial officer and acting president of Orbitz, Inc. “We are extremely pleased to be able to welcome John to Hewitt,” said Mr. Gifford. “He has a strong reputation for successfully helping to lead companies through change, and his depth of experience in both financial and business strategy will benefit Hewitt as we capitalize on our past investments and leading market position.” The Company announced the resignation of Mr. DeCanniere in June.
Reported Results
Fourth Quarter:
| • | Reported total Company operating income for the fourth quarter increased 18%, and reported operating margin was 9.4%, compared to 10.0% in the prior-year quarter. |
| • | Reported net income for the fourth quarter was $40.5 million, or $0.37 per diluted share, compared with $33.1 million, or $0.34 per diluted share in the prior-year quarter. |
Reported operating income and earnings in the fourth quarter included lower provisions for incentive compensation costs versus the prior-year quarter of $15 million and lower discretionary benefit plan expenses of $17 million. These items more than offset $5 million of non-cash intangibles and other amortization expense and $3 million of restricted stock expense related to the merger with Exult. Cost synergy savings realized in connection with the Exult merger were approximately $9 million in the fourth quarter. Reported earnings in the current period reflect a reduction in the effective tax rate for the fiscal year from 41% to 39%, which reduced the effective tax rate for the fourth quarter to 36%. Total Company operating income and earnings also included $4.6 million and $4.3 million of pretax expenses for the IPO-related grant of restricted stock to employees for the 2005 and 2004 fourth quarters, respectively.
Fiscal 2005:
| • | Reported total Company operating income for fiscal 2005 increased 5%, and reported operating margin was 8.2%, compared to 10.1% in fiscal 2004. |
| • | Reported net income for fiscal 2005 was $134.7 million, or $1.19 per diluted share, compared with $122.8 million, or $1.25 per diluted share in the prior year. |
Reported operating income and earnings in fiscal 2005 included lower provisions for incentive compensation costs versus the prior year of $65 million and lower discretionary benefit plan expenses of $24 million. These items more than offset $20 million of non-cash intangibles and other amortization expense and $14 million of integration costs and restricted stock expense related to the merger with Exult, a non-cash charge for the impairment of customer relationship intangible assets of $10 million and a $9 million
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severance charge primarily related to the client development group realignment. Cost synergy savings realized in connection with the Exult merger were approximately $30 million in fiscal 2005. Reported earnings in the current year reflect a reduction in the effective tax rate for the fiscal year from 41% to 39%, primarily related to an increase in the reported earnings of the Company’s international subsidiaries and a change in the income apportioned to each state in the United States. Total Company operating income and earnings also included $17.4 million and $16.7 million of pretax expenses for the IPO-related grant of restricted stock to employees for fiscal 2005 and fiscal 2004, respectively.
Pro Forma Results
In accordance with SEC regulations for the determination of pro forma results, the prior-year pro forma results have been prepared assuming that the Company’s merger with Exult had occurred on October 1, 2003, and exclude all merger-related non-recurring items. Prior year pro forma information, as if Hewitt and Exult operations were combined in fiscal 2004, is provided to assist in the comparability with current-period results.
Fourth Quarter:
| • | Pro forma net revenues increased 3%. On this basis, Outsourcing revenues increased 3%, and Consulting revenues increased 5%. The net favorable impact on revenues from foreign currency translation was $3 million. |
| • | Pro forma total Company operating income increased 24%, and pro forma operating margin was 9.4%, compared to 7.8% in the pro forma prior-year quarter. |
| • | Pro forma net income increased 30%, compared with prior-year pro forma net income of $31.2 million, or $0.26 per diluted share. |
Fiscal 2005:
| • | Pro forma net revenues increased 7%. On this basis, Outsourcing revenues increased 7%, and Consulting revenues increased 6%. |
| • | Pro forma total Company operating income increased 11%, and pro forma operating margin was 8.2%, compared to 7.9% in the pro forma prior year. |
| • | Pro forma net income increased 17%, compared with prior-year pro forma net income of $114.7 million, or $0.95 per diluted share. |
For the year, adjusting for the net favorable effects of foreign currency translation of approximately $27 million, and approximately $18 million for the fiscal 2005 impacts of Exult’s ReloAction acquisition, the acquisition of the majority interest of the Company’s Puerto Rico operations, and the September acquisition of the pension administration business of Royal Philips Electronics, pro forma total Company revenues increased 5%.
The improvement in pro forma operating margin was due to lower total incentive compensation and discretionary benefit plan expenses, increased Consulting revenues and margins, and lower unallocated shared services costs. The improvement was offset by lower Outsourcing margins.
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Core Earnings
Core earnings, a non-GAAP financial measure, consist of reported results, excluding pretax charges of $4.6 million and $4.3 million for the 2005 and 2004 fourth quarters, respectively, and $17.4 million and $16.7 million for the 2005 and 2004 fiscal years, respectively, related to the amortization of the one-time, IPO-related grant of restricted stock to employees. Core earnings also reflect a reduction in the effective tax rate for the fiscal year from 41% to 39%. Core earnings per share include the shares issued in the IPO-related grant as if they had been outstanding for all reported periods.
| • | Core earnings for the fourth quarter increased 23%, to $43.6 million, $0.40 per diluted share, from $35.5 million, $0.36 per diluted share in the prior-year quarter. |
| • | For the full year, core earnings increased 10%, to $145.3 million, from $132.5 million, but declined on a per share basis due to higher outstanding shares, to $1.28 per diluted share, from $1.33 per diluted share in fiscal 2004. |
Business Segment Results
Outsourcing
Fourth Quarter:
| • | Outsourcing segment revenues increased 37% in the fourth quarter, to $509.8 million, from $372.9 million in the prior-year quarter, and increased 3% compared with pro forma revenues of $497.0 million in the prior-year quarter. Adjusting for the net favorable effects of foreign currency translation of approximately $3 million, Outsourcing revenues increased 2% over the pro forma prior-year quarter. |
| • | Outsourcing segment income (which excludes certain shared services costs not allocated to segments) was $64.6 million in the fourth quarter, compared with $81.2 million in the prior-year fourth quarter. Compared with pro forma income of $84.0 million in the prior-year period, Outsourcing segment income decreased 23%, and Outsourcing segment margin was 12.7%, compared with 16.9% in the pro forma prior-year quarter. |
Fiscal 2005:
| • | Outsourcing revenues increased 41% in fiscal 2005, to $2.02 billion, from $1.43 billion in the prior year, and increased 7% compared with pro forma revenues of $1.89 billion in the prior year. |
| • | Outsourcing segment income (which excludes certain shared services costs not allocated to segments) was $253.5 million in fiscal 2005, compared with $297.9 million in the prior year, and prior-year pro forma income of $304.2 million. Outsourcing segment income decreased 17%, and Outsourcing segment margin was 12.5%, compared with 16.1% in the pro forma prior year. |
For the year, Outsourcing pro forma revenues increased 6% after adjusting for the favorable effects of acquisitions (ReloAction and the majority interest in the Company’s Puerto Rico operations) of approximately $16 million, and the net favorable effects of foreign currency translation of approximately $12 million. The increase was due to
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growth in the HR BPO business (including third-party supplier revenues), and to a lesser extent growth in stand-alone benefits revenues. Growth in the stand-alone benefits business, driven by increased participant volume, was partially offset by the planned re-pricing of some older contracts to current market prices.
The decrease in margin was due to a greater mix of early-stage HR BPO and third-party supplier services revenues; a higher-than-anticipated level of investment in that business, including the build-out of global capabilities; impairments of customer relationship intangibles of approximately $10 million; and lower benefits outsourcing margins. The decline was partially mitigated by lower incentive compensation and discretionary benefit plan expenses versus the prior year.
As of September 30, 2005, the Company was serving 19.1 million end-user benefits participants and approximately 685,000 client employees with HR BPO services. The Company solidified its position as market leader in fiscal 2005 with over 30 HR BPO clients.
The Company now has nearly $180 million of annualized Outsourcing revenue in backlog (defined as a signed contract or letter of intent), of which about 80% is related to HR BPO services and the remainder is for stand-alone benefits services. The Company has nearly $330 million of annualized Outsourcing revenue in the pipeline (defined as a formal proposal outstanding), of which more than 65% is related to HR BPO.
Consulting
Fourth Quarter:
| • | Consulting segment revenues increased 5% in the fourth quarter, on both a reported and a pro forma basis, to $211.1 million, from $201.7 million in the prior-year quarter. Adjusting for the favorable effects of acquisitions of approximately $1 million, Consulting revenues increased 4% over the prior-year quarter. |
| • | Consulting segment income (which excludes certain shared services costs not allocated to segments) increased 39% in the fourth quarter, to $43.1 million, compared with $31.1 million in the prior-year quarter, and increased 35% compared to pro forma income of $31.9 million in the prior-year quarter. Consulting segment margin was 20.4% in the fourth quarter, compared with 15.8% in the pro forma prior-year quarter. |
Fiscal 2005:
| • | Consulting segment revenues increased 6% in fiscal 2005, on both a reported and a pro forma basis, to $817.7 million, from $772.6 million in the prior year. |
| • | Consulting segment income (which excludes certain shared services costs not allocated to segments) increased 35%, to $169.8 million, compared with $126.1 million in the prior year, and increased 32% compared to pro forma income of $128.7 million in the prior year. Consulting segment margin was 20.8% in fiscal 2005, compared with 16.7% in the pro forma prior year. |
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For the year, Consulting revenues increased 4% after adjusting for the net favorable effects of foreign currency translation of approximately $15 million, and the favorable effects of acquisitions (the majority interest in the Company’s Puerto Rico operations and the pension administration business of Royal Philips Electronics) of approximately $2 million. The increase was driven by growth in retirement and financial management consulting services, primarily in Europe and North America, and talent and organization consulting services, primarily outside North America.
The margin increase was primarily a result of lower incentive compensation and discretionary benefit plan expenses versus the prior year. Excluding the effect of these items, Consulting margins improved in retirement and financial management and talent and organization consulting services in all regions, primarily due to higher revenues combined with successful cost containment efforts.
Unallocated Shared Services Costs
Reported unallocated shared services costs were $35.4 million in the fourth quarter, compared with $50.8 million in the prior-year quarter, and $57.0 million in the pro forma comparable prior-year quarter. Unallocated shared services costs as a percentage of revenues were 4.9%, compared with 8.2% in the pro forma prior-year quarter. For the full year, reported unallocated shared services costs were $171.7 million in fiscal 2005, compared with $184.4 million in the prior year, and $204.8 million in the pro forma prior year. Unallocated shared services costs as a percentage of revenues were 6.0%, compared with 7.7% in the pro forma prior year. The decline primarily reflects lower incentive compensation and discretionary benefit plan expenses, in addition to lower shared service operating expenses relative to revenues.
Cash Flow and Investments
Reported cash flow from operations increased 44% in fiscal 2005, to $346.1 million, from $241.1 million in fiscal 2004. Free cash flow, defined as cash flow from operations less investments (capital expenditures, capitalized software costs, and increase in other assets), increased 15%, to $161.4 million, from $140.2 million in the prior year. This increase in free cash flow was driven primarily by increased cash collections during the period, in addition to one-time proceeds of $11 million from pre-paid rent and $3 million of proceeds received upon renegotiation of real estate lease terms.
Share Repurchase
During fiscal 2005, the Company repurchased 12.7 million shares, more than 10% of the shares outstanding at the beginning of the year.
Business Outlook
For fiscal 2006, the Company expects total Company net revenue to be comparable to fiscal 2005’s level, comprising a low-single digit decrease in Outsourcing, and mid-single digit growth in Consulting. The outlook reflects mid-single digit growth in direct revenues and a substantial reduction in third-party supplier revenues primarily as a result of the previously disclosed termination of the Bank of America contract, and additional planned reductions in third-party revenues.
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In fiscal 2006, the Company expects core earnings of about $145 million to $150 million, including approximately $39 million of pretax stock-based compensation expense. For fiscal 2006, the Company expects free cash flow of approximately $200 million to $220 million.
For the first quarter of fiscal 2006, the Company expects a low-single digit decrease in total Company net revenue, due to a significant decline in third-party supplier revenues. The Company expects core earnings of about $32 million to $35 million, including approximately $10 million of pretax stock-based compensation expense, and approximately $10 million of pretax expense related to selected staffing reductions.
Conference Call
At 7:30 a.m. (CT) today, management will host a conference call with investors to discuss fiscal 2005 results and the Company’s outlook for fiscal 2006. The live presentation is accessible through the Investor Relations section of Hewitt’s Web site atwww.hewitt.com. The Webcast will be archived on the site for approximately one month. During the call, management will discuss “core earnings” and, with the addition of Exult, Inc., “pro forma earnings,” both non-GAAP financial measures. A full reconciliation of core earnings to GAAP earnings, and the computation of pro forma earnings, is included in this press release and posted on our Web site. This release will be under the Investor Relations section ofwww.hewitt.com.
About Hewitt Associates
With more than 60 years of experience, Hewitt Associates (NYSE: HEW) is the world’s foremost provider of human resources outsourcing and consulting services. The firm consults with more than 2,300 companies and administers human resources, health care, payroll and retirement programs on behalf of more than 300 companies to millions of employees and retirees worldwide. Located in 35 countries, Hewitt employs approximately 22,000 associates. For more information, please visitwww.hewitt.com.
Forward-Looking and Pro Forma Information
This release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include, but are not limited to, statements about the benefits of the merger between Hewitt and Exult, including future financial and operating results, Hewitt’s plans, objectives, expectations and intentions, and other statements that are not historical facts. Such statements are based upon the current beliefs and expectations of Hewitt’s management and are subject to significant risks and uncertainties. Actual results may differ from those set forth in the forward-looking statements.
The following factors, among others, could cause actual results to differ from those set forth in the forward-looking statements: the risk that the heritage Hewitt and Exult businesses will not be integrated successfully; the risk that the cost savings and any revenue synergies from merging Hewitt and Exult may not be fully realized or may take longer to realize than expected; disruption from the merger, making it more difficult to maintain relationships with clients, employees or suppliers; increased competition and its effect on pricing, spending, third-party relationships and revenues; and the risk of new and changing regulations in the U.S. and internationally. Additional factors that could cause Hewitt’s results to differ materially from those described in the forward-looking statements can be found in Hewitt’s most recent Form 10-K and most recent prospectus filed with the Securities and Exchange Commission (SEC) and available at the SEC’s Internet site (www.sec.gov). Hewitt disclaims any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or any other reason.
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The unaudited pro forma combined fiscal 2004 statement of operations is presented for illustrative purposes only and is not indicative of the results of operations that might have occurred had the merger with Exult actually taken place as of the dates specified, or that may be expected to occur in the future. It does not assume any benefits from cost savings or synergies, and does not reflect any integration costs that the combined Company realized or incurred after the merger. The unaudited pro forma combined statement of operations does reflect the estimated effect of Exult’s adoption of Hewitt’s accounting policy of recognizing revenue. Exult’s policy was to recognize revenue for long-term multi-deliverable process management contracts based on the proportion of contract costs incurred to date to then-current estimates of total contract costs. The effect of changes to total estimated contract revenues or costs was recognized in the period in which the determination was made that facts and circumstances dictated a change of estimate. For a more detailed description of Hewitt’s and the former Exult, Inc.’s revenue recognition policies, please refer to Hewitt’s Form 10-K for the year ended September 30, 2005 expected to be filed in November 2005 and Exult, Inc.’s past SEC filings.
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HEWITT ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands, except for share and per-share amounts)
Three Months Ended September 30, | Twelve Months Ended September 30, | |||||||||||||||||||||
| 2005 (1) | 2004 | % Change | 2005 (1) | 2004 | % Change | |||||||||||||||||
Revenues: | ||||||||||||||||||||||
Revenues before reimbursements (net revenues) | $ | 720,956 | $ | 574,600 | 25.5 | % | $ | 2,840,307 | $ | 2,204,682 | 28.8 | % | ||||||||||
Reimbursements | 14,952 | 13,728 | 8.9 | % | 58,143 | 57,545 | 1.0 | % | ||||||||||||||
Total revenues | 735,908 | 588,328 | 25.1 | % | 2,898,450 | 2,262,227 | 28.1 | % | ||||||||||||||
Operating expenses: | ||||||||||||||||||||||
Compensation and related expenses, excluding initial public offering restricted stock awards | 391,761 | 366,337 | 6.9 | % | 1,628,949 | 1,412,908 | 15.3 | % | ||||||||||||||
Initial public offering restricted stock awards | 4,630 | 4,263 | 8.6 | % | 17,355 | 16,733 | 3.7 | % | ||||||||||||||
Reimbursable expenses | 14,952 | 13,728 | 8.9 | % | 58,143 | 57,545 | 1.0 | % | ||||||||||||||
Other operating expenses | 214,719 | 113,026 | 90.0 | % | 789,938 | 431,912 | 82.9 | % | ||||||||||||||
Selling, general and administrative expenses | 42,162 | 33,789 | 24.8 | % | 169,790 | 120,296 | 41.1 | % | ||||||||||||||
Total operating expenses | 668,224 | 531,143 | 25.8 | % | 2,664,175 | 2,039,394 | 30.6 | % | ||||||||||||||
Operating income | 67,684 | 57,185 | 18.4 | % | 234,275 | 222,833 | 5.1 | % | ||||||||||||||
Other expenses, net: | ||||||||||||||||||||||
Interest expense | (5,722 | ) | (4,134 | ) | 38.4 | % | (23,086 | ) | (18,608 | ) | 24.1 | % | ||||||||||
Interest income | 2,053 | 1,336 | 53.7 | % | 8,947 | 3,316 | 169.8 | % | ||||||||||||||
Other income, net | (361 | ) | 1,440 | (125.1 | )% | 379 | 318 | 19.2 | % | |||||||||||||
Total other expenses, net | (4,030 | ) | (1,358 | ) | 196.8 | % | (13,760 | ) | (14,974 | ) | (8.1 | )% | ||||||||||
Income before income taxes | 63,654 | 55,827 | 14.0 | % | 220,515 | 207,859 | 6.1 | % | ||||||||||||||
Provision for income taxes (2) | 23,113 | 22,682 | 1.9 | % | 85,783 | 85,015 | 0.9 | % | ||||||||||||||
Net income | $ | 40,541 | $ | 33,145 | 22.3 | % | $ | 134,732 | $ | 122,844 | 9.7 | % | ||||||||||
Earnings per share: | ||||||||||||||||||||||
Basic | $ | 0.38 | $ | 0.34 | 10.5 | % | $ | 1.21 | $ | 1.28 | (5.4 | )% | ||||||||||
Diluted | $ | 0.37 | $ | 0.34 | 10.1 | % | $ | 1.19 | $ | 1.25 | (5.0 | )% | ||||||||||
Weighted average shares: | ||||||||||||||||||||||
Basic | 106,811,793 | 96,521,841 | 10.7 | % | 111,340,261 | 96,031,389 | 15.9 | % | ||||||||||||||
Diluted (3) | 110,106,500 | 97,656,595 | 12.7 | % | 113,105,722 | 97,950,088 | 15.5 | % | ||||||||||||||
| (1) | The results of Exult, Inc. are included in the Company’s results from the acquisition date of October 1, 2004. |
| (2) | The fiscal 2005 fourth quarter provision for income taxes includes a $2 million reduction related to the year-to-date expense reported in the third quarter ended June 30, 2005. |
| (3) | For the three- and twelve-month periods ended September 30, 2005, the dilutive effect of debt securities convertible into 1,870,748 shares was calculated using the If-Converted Method as outlined in SFAS No. 128,Earnings Per Share. For the three-month period ended September 30, 2005, in addition to the shares outstanding for core basic EPS, the dilutive effect was 1,870,748 shares and the interest expense, net of taxes, was $597. For the twelve-month period ended September 30, 2005, the debt securities were not dilutive. |
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HEWITT ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
PRO FORMA COMPARISON
(Unaudited)
(Dollars in thousands, except for share and per-share amounts)
Three Months Ended September 30, | Twelve Months Ended September 30, | |||||||||||||||||||||
| 2005 | 2004 (1) | % Change | 2005 | 2004 (1) | % Change | |||||||||||||||||
| Pro Forma | Pro Forma | |||||||||||||||||||||
Revenues: | ||||||||||||||||||||||
Revenues before reimbursements (net revenues) | $ | 720,956 | $ | 698,684 | 3.2 | % | $ | 2,840,307 | $ | 2,662,252 | 6.7 | % | ||||||||||
Reimbursements | 14,952 | 13,728 | 8.9 | % | 58,143 | 57,545 | 1.0 | % | ||||||||||||||
Total revenues | 735,908 | 712,412 | 3.3 | % | 2,898,450 | 2,719,797 | 6.6 | % | ||||||||||||||
Operating expenses: | ||||||||||||||||||||||
Compensation and related expenses, excluding initial public offering restricted stock awards | 391,761 | 413,837 | (5.3 | )% | 1,628,949 | 1,585,540 | 2.7 | % | ||||||||||||||
Initial public offering restricted stock awards | 4,630 | 4,263 | 8.6 | % | 17,355 | 16,733 | 3.7 | % | ||||||||||||||
Reimbursable expenses | 14,952 | 13,728 | 8.9 | % | 58,143 | 57,545 | 1.0 | % | ||||||||||||||
Other operating expenses | 214,719 | 181,717 | 18.2 | % | 789,938 | 689,314 | 14.6 | % | ||||||||||||||
Selling, general and administrative expenses | 42,162 | 44,177 | (4.6 | )% | 169,790 | 159,298 | 6.6 | % | ||||||||||||||
Total operating expenses | 668,224 | 657,722 | 1.6 | % | 2,664,175 | 2,508,430 | 6.2 | % | ||||||||||||||
Operating income | 67,684 | 54,690 | 23.8 | % | 234,275 | 211,367 | 10.8 | % | ||||||||||||||
Other expenses, net | (4,030 | ) | (1,812 | ) | 122.4 | % | (13,760 | ) | (16,964 | ) | (18.9 | )% | ||||||||||
Income before income taxes | 63,654 | 52,878 | 20.4 | % | 220,515 | 194,403 | 13.4 | % | ||||||||||||||
Provision for income taxes (2) | 23,113 | 21,680 | 6.6 | % | 85,783 | 79,705 | 7.6 | % | ||||||||||||||
Net income | $ | 40,541 | $ | 31,198 | 29.9 | % | $ | 134,732 | $ | 114,698 | 17.5 | % | ||||||||||
Earnings per share: | ||||||||||||||||||||||
Basic | $ | 0.38 | $ | 0.26 | 44.3 | % | $ | 1.21 | $ | 0.97 | 24.6 | % | ||||||||||
Diluted | $ | 0.37 | $ | 0.26 | 43.4 | % | $ | 1.19 | $ | 0.95 | 24.9 | % | ||||||||||
Weighted average shares: | ||||||||||||||||||||||
Basic | 106,811,793 | 118,614,667 | (10.0 | )% | 111,340,261 | 118,124,215 | (5.7 | )% | ||||||||||||||
Diluted (3) | 110,106,500 | 119,749,421 | (8.1 | )% | 113,105,722 | 120,233,849 | (5.9 | )% | ||||||||||||||
| (1) | In accordance with SEC regulations for the determination of pro forma results, the prior-year pro forma results assume that the Company’s merger with Exult had occurred on October 1, 2003, and exclude all related non-recurring adjustments to allow for comparability. See additional information on the pro forma results on our Web site atwww.hewitt.com. |
| (2) | The fiscal 2005 fourth quarter provision for income taxes includes a $2 million reduction related to the year-to-date expense reported in the third quarter ended June 30, 2005. |
| (3) | For the three- and twelve-month periods ended September 30, 2005, the dilutive effect of debt securities convertible into 1,870,748 shares was calculated using the If-Converted Method as outlined in SFAS No. 128,Earnings Per Share. For the three-month period ended September 30, 2005, in addition to the shares outstanding for core basic EPS, the dilutive effect was 1,870,748 shares and the interest expense, net of taxes, was $597. For the twelve-month period ended September 30, 2005, the debt securities were not dilutive. |
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HEWITT ASSOCIATES, INC.
CORE EARNINGS AND CORE EARNINGS PER SHARE
(Unaudited)
(Dollars in thousands, except for share and per-share amounts)
Core Earnings and Core Earnings Per Share – a non-GAAP financial measure
The Company reported net income of $41 million and $135 million, and diluted earnings per share of $0.37 and $1.19 for the three and twelve months ended September 30, 2005, in accordance with accounting principles generally accepted in the United States of America. In assessing operating performance, the Company also reviews its results once all non-recurring or offering-related adjustments made in connection with the Company’s initial public offering have been removed. We call this measure of earnings “core earnings,” a non-GAAP financial measure. We believe this measure provides a better understanding of our underlying operating performance. For the three and twelve months ended September 30, 2005 and 2004, our core earnings and core EPS were:
Core Earnings and Core Earnings Per Share
Three Months Ended September 30, | Twelve Months Ended September 30, | |||||||||||||||||||||
| 2005 | 2004 | % Change | 2005 | 2004 | % Change | |||||||||||||||||
Operating income as reported | $ | 67,684 | $ | 57,185 | 18.4 | % | $ | 234,275 | $ | 222,833 | 5.1 | % | ||||||||||
Add back amortization of one-time initial public offering restricted stock awards | 4,630 | 4,263 | 8.6 | % | 17,355 | 16,733 | 3.7 | % | ||||||||||||||
Core operating income | 72,314 | 61,448 | 17.7 | % | 251,630 | 239,566 | 5.0 | % | ||||||||||||||
Other expenses, net as reported | (4,030 | ) | (1,358 | ) | 196.8 | % | (13,760 | ) | (14,974 | ) | 8.1 | % | ||||||||||
Core pretax income | $ | 68,284 | $ | 60,090 | 13.6 | % | $ | 237,870 | $ | 224,592 | 5.9 | % | ||||||||||
Adjusted income tax expense (1) | 24,700 | 24,637 | 0.3 | % | 92,534 | 92,083 | 0.5 | % | ||||||||||||||
Core earnings | $ | 43,584 | $ | 35,453 | 22.9 | % | $ | 145,336 | $ | 132,509 | 9.7 | % | ||||||||||
Core earnings per share: | ||||||||||||||||||||||
Basic | $ | 0.41 | $ | 0.36 | 12.2 | % | $ | 1.29 | $ | 1.35 | (4.3 | )% | ||||||||||
Diluted | $ | 0.40 | $ | 0.36 | 11.4 | % | $ | 1.28 | $ | 1.33 | (4.2 | )% | ||||||||||
Core shares outstanding: | ||||||||||||||||||||||
Basic (2) | 107,580,307 | 98,166,226 | 9.6 | % | 112,726,010 | 98,326,555 | 14.6 | % | ||||||||||||||
Diluted (3) | 110,689,672 | 98,980,825 | 11.8 | % | 115,840,121 | 99,507,352 | 16.4 | % | ||||||||||||||
| (1) | Assumes an effective tax rate of 39% for the twelve months ended September 30, 2005 and 41% for the twelve months ended September 30, 2004. The change in the expected effective tax rate for fiscal 2005 from 41% to 39% occurred in the six months ended September 30, 2005, and was the result of an increased mix of earnings coming from lower tax rate states and international locations. The effect of the change was a decrease in the effective tax rate in the quarter to 36%. |
| (2) | Shares are weighted for the time that they are outstanding as noted below. Core shares outstanding assumes that the following shares of common stock are outstanding— |
For the entire period:
| • | 70,819,520 shares of common stock issued to FORE Holdings LLC for the benefit of our owners in connection with the transition to a corporate structure; |
| • | 5,789,908 shares underlying the one-time, initial public offering restricted stock award less net forfeitures of 478,568 and 402,369 at September 30, 2005 and 2004, respectively, and 13,514,395 and 526,518 of treasury stock at September 30, 2005 and 2004, respectively. |
Since the acquisition date, June 5, 2002:
| • | 9,417,526 shares issued in connection with the June 5, 2002, acquisition of the actuarial and benefits consulting business of Bacon & Woodrow. |
Since the offering date, June 27, 2002:
| • | 11,150,000 shares of common stock issued in connection with the initial public offering weighted as of June 27, 2002; |
| • | 1,672,500 shares of common stock issued in connection with the exercise of the over-allotment option for the initial public offering weighted as of July 9, 2002. |
Since the Exult acquisition date, October 1, 2004:
| • | 22,092,826 shares of common stock issued in connection with the acquisition weighted as of October 1, 2004. |
Throughout the periods presented:
| • | 32,061 and 24,105 shares of common stock, restricted stock and restricted stock units issued for Director compensation at September 30, 2005 and 2004, respectively. |
| • | 526,300 and 221,042 shares of common stock issued to fulfill the exercise of stock options at September 30, 2005 and 2004, respectively. |
| (3) | In addition to the shares outstanding for core basic EPS, the dilutive effect of stock options, restricted stock and restricted stock units issued outside of the initial public offering restricted stock award calculated using the Treasury Stock Method as outlined in SFAS No. 128,Earnings Per Share, was 1,238,617 shares and 1,243,363 shares for the three- and twelve-month periods ended September 30, 2005, respectively, and was 814,599 shares and 1,180,797 shares for the three- and twelve-month periods ended September 30, 2004, respectively. |
| (4) | For the three- and twelve-month periods ended September 30, 2005, the dilutive effect of debt securities convertible into 1,870,748 shares was calculated using the If-Converted Method as outlined in SFAS No. 128,Earnings Per Share. For the three-and twelve-month periods ended September 30, 2005, in addition to the shares outstanding for core basic EPS, the dilutive effect was 1,870,748 shares and the interest expense, net of taxes, was $597 and $2,387, respectively. |
11
HEWITT ASSOCIATES, INC.
BUSINESS SEGMENT RESULTS
(Unaudited)
(Dollars in thousands)
Three Months Ended September 30, | Twelve Months Ended September 30, | |||||||||||||||||||||
| Business Segments | 2005 | 2004 | % Change | 2005 | 2004 | % Change | ||||||||||||||||
Outsourcing (1) | ||||||||||||||||||||||
Revenues before reimbursements (net revenues) | $ | 509,820 | $ | 372,896 | 36.7 | % | $ | 2,022,634 | $ | 1,432,091 | 41.2 | % | ||||||||||
Segment income | 64,607 | 81,194 | (20.4 | )% | 253,474 | 297,911 | (14.9 | )% | ||||||||||||||
Segment income as a percentage of segment net revenues | 12.7 | % | 21.8 | % | 12.5 | % | 20.8 | % | ||||||||||||||
Consulting | ||||||||||||||||||||||
Revenues before reimbursements (net revenues) | $ | 211,136 | $ | 201,704 | 4.7 | % | $ | 817,673 | $ | 772,591 | 5.8 | % | ||||||||||
Segment income | 43,099 | 31,100 | 38.6 | % | 169,806 | 126,064 | 34.7 | % | ||||||||||||||
Segment income as a percentage of segment net revenues | 20.4 | % | 15.4 | % | 20.8 | % | 16.3 | % | ||||||||||||||
Total Company (1) | ||||||||||||||||||||||
Revenues before reimbursements (net revenues) | $ | 720,956 | $ | 574,600 | 25.5 | % | $ | 2,840,307 | $ | 2,204,682 | 28.8 | % | ||||||||||
Reimbursements | 14,952 | 13,728 | 8.9 | % | 58,143 | 57,545 | 1.0 | % | ||||||||||||||
Total revenues | $ | 735,908 | $ | 588,328 | 25.1 | % | $ | 2,898,450 | $ | 2,262,227 | 28.1 | % | ||||||||||
Segment income | $ | 107,706 | $ | 112,294 | (4.1 | )% | $ | 423,280 | $ | 423,975 | (0.2 | )% | ||||||||||
Charges not recorded at the segment level: | ||||||||||||||||||||||
Initial public offering restricted stock awards (2) | 4,630 | 4,263 | 8.6 | % | 17,355 | 16,733 | 3.7 | % | ||||||||||||||
Unallocated shared services costs | 35,392 | 50,846 | (30.4 | )% | 171,650 | 184,409 | (6.9 | )% | ||||||||||||||
Operating income | $ | 67,684 | $ | 57,185 | 18.4 | % | $ | 234,275 | $ | 222,833 | 5.1 | % | ||||||||||
| (1) | Exult’s results are included in the Company’s Outsourcing segment results from the merger date of October 1, 2004, and as such are included in fiscal 2005 but not in reported fiscal 2004 results. |
| (2) | In connection with the Company’s initial public offering, the Company made a one-time restricted stock grant to associates, which vests over time. As such, related expenses of approximately $5 million and $4 million were incurred in the three-month periods ended September 30, 2005 and 2004, respectively, and $17 million in each of the twelve-month periods ended September 30, 2005 and 2004. |
12
HEWITT ASSOCIATES, INC.
BUSINESS SEGMENT RESULTS
PRO FORMA COMPARISON
(Unaudited)
(Dollars in thousands)
Three Months Ended September 30, | Twelve Months Ended September 30, | |||||||||||||||||||||
| Business Segments | 2005 | 2004 | % Change | 2005 | 2004 | % Change | ||||||||||||||||
| Pro Forma | Pro Forma | |||||||||||||||||||||
Outsourcing (1) | ||||||||||||||||||||||
Revenues before reimbursements (net revenues) | $ | 509,820 | $ | 496,980 | 2.6 | % | $ | 2,022,634 | $ | 1,889,661 | 7.0 | % | ||||||||||
Segment income | 64,607 | 84,047 | (23.1 | )% | 253,474 | 304,196 | (16.7 | )% | ||||||||||||||
Segment income as a percentage of segment net revenues | 12.7 | % | 16.9 | % | 12.5 | % | 16.1 | % | ||||||||||||||
Consulting | ||||||||||||||||||||||
Revenues before reimbursements (net revenues) | $ | 211,136 | $ | 201,704 | 4.7 | % | $ | 817,673 | $ | 772,591 | 5.8 | % | ||||||||||
Segment income | 43,099 | 31,880 | 35.2 | % | 169,806 | 128,727 | 31.9 | % | ||||||||||||||
Segment income as a percentage of segment net revenues | 20.4 | % | 15.8 | % | 20.8 | % | 16.7 | % | ||||||||||||||
Total Company (1) | ||||||||||||||||||||||
Revenues before reimbursements (net revenues) | $ | 720,956 | $ | 698,684 | 3.2 | % | $ | 2,840,307 | $ | 2,662,252 | 6.7 | % | ||||||||||
Reimbursements | 14,952 | 13,728 | 8.9 | % | 58,143 | 57,545 | 1.0 | % | ||||||||||||||
Total revenues | $ | 735,908 | $ | 712,412 | 3.3 | % | $ | 2,898,450 | $ | 2,719,797 | 6.6 | % | ||||||||||
Segment income | $ | 107,706 | $ | 115,927 | (7.1 | )% | $ | 423,280 | $ | 432,923 | (2.2 | )% | ||||||||||
Charges not recorded at the segment level: | ||||||||||||||||||||||
Initial public offering restricted stock awards (2) | 4,630 | 4,263 | 8.6 | % | 17,355 | 16,733 | 3.7 | % | ||||||||||||||
Unallocated shared services costs | 35,392 | 56,974 | (37.9 | )% | 171,650 | 204,823 | (16.2 | )% | ||||||||||||||
Operating income | $ | 67,684 | $ | 54,690 | 23.8 | % | $ | 234,275 | 211,367 | 10.8 | % | |||||||||||
| (1) | In accordance with SEC regulations for the determination of pro forma results, the prior-year pro forma results assume that the Company’s merger with Exult had occurred on October 1, 2003, the beginning of fiscal 2004, and exclude all merger-related non-recurring adjustments to allow for comparability. |
| (2) | In connection with the Company’s initial public offering, the Company made a one-time restricted stock grant to associates, which vests over time. As such, related expenses of approximately $5 million and $4 million were incurred in the three-month periods ended September 30, 2005 and 2004, respectively, and $17 million in each of the twelve-month periods ended September 30, 2005 and 2004. |
13
HEWITT ASSOCIATES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands, except for share amounts)
| September 30, 2005 | September 30, 2004 | |||||
| ASSETS | ||||||
Current Assets | ||||||
Cash and cash equivalents | $ | 163,928 | $ | 129,481 | ||
Short-term investments | 53,693 | 183,205 | ||||
Client receivables and unbilled work in process, less allowances of $23,922 and $21,732 at September 30, 2005 and September 30, 2004, respectively | 595,691 | 522,882 | ||||
Refundable income taxes | 23,100 | — | ||||
Prepaid expenses and other current assets | 60,662 | 50,546 | ||||
Funds held for clients | 97,907 | 14,693 | ||||
Deferred income taxes, net | — | 246 | ||||
Total current assets | 994,981 | 901,053 | ||||
Non-Current Assets | ||||||
Deferred contract costs | 253,505 | 162,602 | ||||
Property and equipment, net | 302,875 | 236,099 | ||||
Capitalized software, net | 110,997 | 85,350 | ||||
Other intangible assets, net | 261,999 | 107,322 | ||||
Goodwill | 694,370 | 285,743 | ||||
Other assets, net | 32,711 | 29,805 | ||||
Total non-current assets | 1,656,457 | 906,921 | ||||
Total Assets | $ | 2,651,438 | $ | 1,807,974 | ||
| LIABILITIES | ||||||
Current Liabilities | ||||||
Accounts payable | $ | 57,412 | $ | 20,909 | ||
Accrued expenses | 156,575 | 83,226 | ||||
Funds held for clients | 97,907 | 14,693 | ||||
Advanced billings to clients | 156,257 | 106,934 | ||||
Accrued compensation and benefits | 141,350 | 181,812 | ||||
Deferred income taxes, net | 19,098 | — | ||||
Short-term debt and current portion of long-term debt | 35,915 | 13,445 | ||||
Current portion of capital lease obligations | 3,989 | 5,373 | ||||
Employee deferred compensation and accrued profit sharing | 30,136 | 49,450 | ||||
Total current liabilities | 698,639 | 475,842 | ||||
Long-Term Liabilities | ||||||
Deferred contract revenues | 140,474 | 118,025 | ||||
Debt , less current portion | 222,692 | 121,253 | ||||
Capital lease obligations, less current portion | 76,477 | 79,982 | ||||
Other long-term liabilities | 127,376 | 83,063 | ||||
Deferred income taxes, net | 74,423 | 70,456 | ||||
Total long-term liabilities | 641,442 | 472,779 | ||||
Total Liabilities | $ | 1,340,081 | $ | 948,621 | ||
14
HEWITT ASSOCIATES, INC.
CONSOLIDATED BALANCE SHEETS (continued)
(Unaudited)
(Dollars in thousands, except for share amounts)
| September 30, | September 30, | |||||||
| 2005 | 2004 | |||||||
| STOCKHOLDERS’ EQUITY | ||||||||
Stockholders’ Equity | ||||||||
Class A common stock, par value $0.01 per share, 750,000,000 shares authorized, 72,970,960 and 32,480,669 shares issued, 59,456,565 and 31,954,151 shares outstanding as of September 30, 2005 and 2004, respectively | $ | 730 | $ | 325 | ||||
Class B common stock, par value $0.01 per share, 200,000,000 shares authorized, 45,181,849 and 61,707,114 shares issued and outstanding as of September 30, 2005 and 2004, respectively | 452 | 617 | ||||||
Class C common stock, par value $0.01 per share, 50,000,000 shares authorized, 3,540,461 and 4,391,862 shares issued and outstanding as of September 30, 2005 and 2004, respectively | 35 | 44 | ||||||
Restricted stock units, 98,967 and 118,363 units issued and outstanding as of September 30, 2005 and 2004, respectively | 2,035 | 2,166 | ||||||
Additional paid-in capital | 1,315,119 | 633,934 | ||||||
Cost of common stock in treasury, 13,514,395 and 526,518 shares of Class A common stock as of September 30, 2005 and 2004, respectively | (388,638 | ) | (13,414 | ) | ||||
Retained earnings | 329,162 | 194,430 | ||||||
Unearned compensation | (17,326 | ) | (27,799 | ) | ||||
Accumulated other comprehensive income | 69,788 | 69,050 | ||||||
Total stockholders’ equity | 1,311,357 | 859,353 | ||||||
Total Liabilities and Stockholders’ Equity | $ | 2,651,438 | $ | 1,807,974 | ||||
15
HEWITT ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Twelve Months Ended September 30, | ||||||||
| 2005 | 2004 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 134,732 | $ | 122,844 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation | 83,720 | 75,412 | ||||||
Amortization | 65,962 | 42,806 | ||||||
Amortization of premiums and discounts on financial instruments | 1,625 | — | ||||||
Impairment of customer relationship intangible assets | 9,615 | — | ||||||
Restricted stock awards | 25,895 | 15,017 | ||||||
Director stock remuneration | 304 | 280 | ||||||
Deferred income taxes | 81,788 | 31,590 | ||||||
Realized losses on short-term investments, net | 476 | — | ||||||
Changes in operating assets and liabilities: | ||||||||
Client receivables and unbilled work in process | 11,678 | (61,890 | ) | |||||
Refundable income taxes | (23,100 | ) | — | |||||
Prepaid expenses and other current assets | 21,266 | (6,220 | ) | |||||
Funds held for clients | (58,577 | ) | (6,400 | ) | ||||
Deferred contract costs, net of amortization | (90,144 | ) | (24,427 | ) | ||||
Accounts payable | 14,545 | 6,001 | ||||||
Accrued compensation and benefits | (54,236 | ) | 31,524 | |||||
Accrued expenses | (3,299 | ) | 1,427 | |||||
Funds held for clients’ liability | 58,577 | 6,400 | ||||||
Advanced billings to clients | 43,817 | (391 | ) | |||||
Deferred contract revenues | 22,265 | (270 | ) | |||||
Employee deferred compensation and accrued profit sharing | (19,564 | ) | 1,724 | |||||
Other long-term liabilities | 18,732 | 5,662 | ||||||
Net cash provided by operating activities | 346,077 | 241,089 | ||||||
Cash flows from investing activities: | ||||||||
Purchases of short-term investments | (220,242 | ) | (521,185 | ) | ||||
Sales of short-term investments | 459,175 | 497,700 | ||||||
Additions to property and equipment | (129,681 | ) | (70,025 | ) | ||||
Additions to capitalized software | (47,599 | ) | (23,953 | ) | ||||
Cash paid for acquisitions and transaction costs, net of cash acquired | (6,726 | ) | (11,450 | ) | ||||
Increase in other assets | (7,349 | ) | (6,874 | ) | ||||
Net cash provided by (used in) investing activities | 47,578 | (135,787 | ) | |||||
Cash flows from financing activities: | ||||||||
Proceeds from the exercise of stock options | 9,863 | 3,890 | ||||||
Short-term borrowings | 129,048 | 18,064 | ||||||
Repayments of short-term borrowings | (103,475 | ) | (38,639 | ) | ||||
Repayments of long-term debt | (13,000 | ) | (13,000 | ) | ||||
Repayments of capital lease obligations | (5,732 | ) | (7,684 | ) | ||||
Purchase of Class A common shares into treasury | (375,224 | ) | (7,250 | ) | ||||
Net cash used in financing activities | (358,520 | ) | (44,619 | ) | ||||
Effect of exchange rate changes on cash and cash equivalents | (688 | ) | 1,013 | |||||
Net increase in cash and cash equivalents | 34,447 | 61,696 | ||||||
Cash and cash equivalents, beginning of period | 129,481 | 67,785 | ||||||
Cash and cash equivalents, end of period | $ | 163,928 | $ | 129,481 | ||||
Supplementary disclosure of cash paid during the year: | ||||||||
Interest paid | $ | 15,593 | $ | 18,398 | ||||
Income taxes paid | 28,942 | 56,847 | ||||||
16