SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-20724
WATSON WYATT & COMPANY
(Exact name of registrant as specified in its charter)
Delaware 53-0181291
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
601 13TH STREET, N.W.
Suite 1000
Washington, D.C. 20005
(Address of principal executive offices, including zip code)
TELEPHONE NUMBER (202) 508-4600
(Registrant's telephone number, including area code)
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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 [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of November 4, 1996.
Common Stock, $1.00 par value 17,079,387
- ----------------------------- ----------
Class Number of Shares
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
WATSON WYATT & COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Thousands of U.S. Dollars, Except Per Share Amounts)
Three Months Ended September 30,
--------------------------
1996 1995
---------- -----------
(Unaudited)
<S> <C> <C>
Fees $ 127,497 $ 115,962
Costs of providing services:
Salaries and employee benefits 62,664 62,148
Occupancy and communications 18,997 15,279
Professional and subcontracted services 20,393 12,643
Other 5,663 4,021
-------- ---------
107,717 94,091
General and administrative expenses 9,912 10,539
Depreciation and amortization 5,361 5,025
-------- ---------
122,990 109,655
Income from operations 4,507 6,307
Other:
Interest income 283 451
Interest expense (275) (119)
Loss from affiliates (1,305) (80)
-------- ---------
Income before income taxes and minority interest 3,210 6,559
Provision for income taxes 1,504 3,136
-------- ---------
Income before minority interest 1,706 3,423
Minority interest in net income of consolidated subsidiaries (41) (37)
-------- ---------
Net income $ 1,665 $ 3,386
======== =========
Earnings per share $ 0.09 $ 0.18
======== =========
</TABLE>
See accompanying notes
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<PAGE>
<TABLE>
<CAPTION>
WATSON WYATT & COMPANY
CONSOLIDATED BALANCE SHEETS
(Thousands of U.S. Dollars)
September 30, June 30,
1996 1996
----------- ----------
ASSETS (unaudited)
<S> <C> <C>
Cash and cash equivalents $ 8,081 $ 21,694
Receivables from clients:
Billed, net of allowances 65,327 71,431
Unbilled 64,915 53,122
----------- ----------
130,242 124,553
Other current assets 20,358 6,936
----------- ----------
Total current assets 158,681 153,183
Investment in affiliates 41,263 41,195
Fixed assets 36,415 36,466
Deferred income taxes 41,983 41,983
Deferred software and development costs 36,717 35,746
Other intangible assets 3,850 3,820
Other assets 9,635 8,426
----------- ----------
$ 328,544 $ 320,819
=========== ==========
LIABILITIES, REDEEMABLE COMMON STOCK, AND PERMANENT SHAREHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 90,224 $ 88,203
Note payable 14,800 -
Income taxes payable 829 11,362
Deferred income taxes 34,830 34,830
----------- ----------
Total current liabilities 140,683 134,395
Accrued retirement benefits 84,613 81,141
Deferred rent 13,576 9,904
Other noncurrent liabilities 9,073 10,635
Minority interest in subsidiaries 413 362
Redeemable Common Stock - $1 par value:
25,000,000 shares authorized;
17,157,904 and 18,261,963 issued
and outstanding; at redemption value 84,760 90,214
Permanent shareholders' equity:
Adjustment for redemption value greater than amounts paid in by shareholders (35,232) (37,549)
Retained earnings 29,511 30,677
Cumulative translation gain 1,147 1,040
Commitments and contingencies
----------- ----------
$ 328,544 $ 320,819
=========== ==========
</TABLE>
See accompanying notes
-3-
<PAGE>
<TABLE>
<CAPTION>
WATSON WYATT & COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of U.S. Dollars)
Three Months Ended September 30,
-------------------------------
1996 1995
------------- ------------
<S> <C> <C>
(Unaudited)
Cash flows from operating activities:
Net income $ 1,665 $ 3,386
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for doubtful receivables from clients 3,610 651
Depreciation 3,161 3,279
Amortization of deferred software and development costs
and other intangible assets 2,200 1,746
Change in working capital (46,760) (13,501)
Change in deferred income taxes - 5,819
Loss from affiliates 1,305 80
Minority interest in net income of consolidated subsidiaries 41 37
Other 48 (945)
----------- ----------
Net cash (used in) provided by operating activities (34,730) 552
----------- ----------
Cash flows from investing activities:
Purchases of fixed assets (3,096) (6,085)
Proceeds from sales of fixed assets 5 11
Acquisitions (197) (1,325)
Investment in software and development costs (2,988) (6,371)
Investment in affiliates (1,373) (856)
----------- ----------
Net cash used in investing activities (7,649) (14,626)
----------- ----------
Cash flows from financing activities:
Net borrowings 34,700 13,496
Issuances of Redeemable Common Stock 135 133
Repurchases of Redeemable Common Stock (6,103) (1,980)
----------- ----------
Net cash provided by financing activities 28,732 11,649
----------- ----------
Effect of exchange rate changes on cash 34 (102)
----------- ----------
Decrease in cash and cash equivalents (13,613) (2,527)
Cash and cash equivalents at beginning of period 21,694 11,860
----------- ----------
Cash and cash equivalents at end of period $ 8,081 $ 9,333
=========== ==========
</TABLE>
See accompanying notes
-4-
<PAGE>
<TABLE>
<CAPTION>
WATSON WYATT & COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN PERMANENT SHAREHOLDERS' EQUITY
(Thousands of U.S. Dollars)
Adjustment For Redemption
Cumulative Value Greater Than Amounts
Retained Translation Paid In By
Earnings Gain Shareholders
------------ ------------ --------------
<S> <C> <C> <C>
Balance at June 30, 1996 $ 30,677 $ 1,040 $ (37,549)
Net income 1,665
Effect of repurchases of 1,133,915 shares of
common stock (various prices per share) (2,831) 2,831
Foreign currency translation adjustment 107
Adjustment of redemption value for change
in formula book value per share (514)
------------ ------------ ------------
Balance at September 30, 1996 (unaudited) $ 29,511 $ 1,147 $ (35,232)
============ ============ ============
</TABLE>
See accompanying notes
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<PAGE>
WATSON WYATT & COMPANY
Notes To Consolidated Financial Statements
(Unaudited)
1. The accompanying unaudited consolidated financial statements of Watson
Wyatt & Company and its subsidiaries, (collectively, "Watson Wyatt" or "the
Company"), are presented in accordance with the rules and regulations of
the Securities and Exchange Commission and do not include all of the
disclosures normally required by generally accepted accounting principles.
In the opinion of management, these statements reflect all adjustments,
consisting only of normal recurring adjustments, which are necessary for a
fair presentation of the consolidated financial statements for the interim
periods. The consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes
thereto contained in the Company's Form 10-K for the year ended June 30,
1996.
The results of operations for the three months ended September 30, 1996 are
not necessarily indicative of the results that can be expected for the
entire fiscal year ending June 30, 1997. Certain prior year amounts have
been reclassified to conform to the current year presentation.
2. On March 31, 1996, the Company transferred its employee outsourced benefits
administration operations including certain deferred systems development
costs, to a newly formed limited liability company, Wellspring Resources,
LLC ("Wellspring"). Wellspring, which is owned 50% by the Company and 50%
by State Street Bank and Trust Company ("State Street"), provides benefits
and human resources administration outsourcing services. In connection with
this formation of Wellspring, Watson Wyatt retained certain client
contracts for administrative and recordkeeping services and entered into
agreements, whereby Wellspring will provide the services to Watson Wyatt
and those clients on behalf of the Company for a fee. In management's
opinion, these agreements are on terms equivalent to those which
unaffiliated parties would deem reasonable. Identifiable implementation
costs associated with these long-term contracts to provide clients with
administrative and recordkeeping services are deferred and amortized to
expense ratably over the estimated remaining life of the respective
contracts upon the commencement of services under each contract. The
deferred costs totaled $27.2 million and $25.3 million as of September 30,
1996 and June 30, 1996, respectively.
A portion of the fees received by Watson Wyatt under these long-term
contracts are deferred until the applicable services are commenced, from
which point the deferred fees are recognized ratably over the remaining
life of the contract. The deferred fees related to these contracts are
included in other noncurrent liabilities and totaled $5.7 million and $7.3
million as of September 30, 1996 and June 30, 1996, respectively.
3. Under the Company's stock purchase plan, the Company is obligated to
repurchase its Redeemable Common Stock, except in certain circumstances.
Accordingly, the redemption value of outstanding shares is classified as
Redeemable Common Stock and not as permanent shareholders' equity.
Redeemable Common Stock is equal to the number of shares outstanding
multiplied by the Formula Book Value per share, which was $4.94 per share
at September 30, 1996 and June 30, 1996. Permanent shareholders' equity
includes an adjustment for the difference between the redemption value of
the Redeemable Common Stock and the amounts actually paid by shareholders
for the shares.
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<PAGE>
4. During the three months ended September 30, 1996, the Company repurchased
1,133,915 shares of common stock, at various prices per share. The
computation of earnings per share is based upon the weighted average number
of shares of common stock outstanding during the period. The number of
shares used in the computation is 17,636,000 and 18,964,000 for the three
months ended September 30, 1996 and 1995, respectively.
5. During the first quarter of fiscal year 1997, the Company recorded a
sublease loss of $4.4 million relating to the relocation of a portion of
its corporate office space to a less expensive suburban location. On
November 6, 1996 at the Annual Meeting of Shareholders, the proposed
amendment to the Company's bylaws modifying the calculation of formula book
value was approved by an affirmative shareholder vote. The Company intends
to sublease the remaining corporate office space and is considering the
possible relocation of two other office facilities. An additional pre-tax
loss of approximately $5.4 million will be recognized during the second
quarter of fiscal year 1997 related to the relocation of the corporate
office, with a related reduction of occupancy expense in future years. The
results of the vote at the shareholder's meeting will be disclosed in the
Company's Form 10-Q for the period ended December 31, 1996.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Watson Wyatt & Company, together with its affiliates and consolidated
subsidiaries, (collectively, "Watson Wyatt" or "the Company"), provides human
resource and employee benefits consulting and administrative/recordkeeping
services. The Company also provides a broad range of services in risk management
and general insurance and investment consulting, and derives fees from sales of
surveys and licensing of software. The Company works with organizations of all
sizes, from the largest multinationals to public employers and nonprofit
institutions.
Watson Wyatt's fiscal year ends June 30. The financial statements contained in
this quarterly report reflect consolidated balance sheets as of the end of the
first quarter of fiscal year 1997 (September 30, 1996) and as of the end of the
prior fiscal year 1996 (June 30, 1996), and consolidated statements of
operations, of cash flows and of changes in permanent shareholders' equity for
the three months ended September 30, 1996 and 1995.
RESULTS OF OPERATIONS--THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE
MONTHS ENDED SEPTEMBER 30, 1995.
For the first three months of fiscal year 1997 the Company produced net income
of $1.7 million, a decrease of $1.7 million from net income of $3.4 million for
the first three months of fiscal year 1996. Fiscal year 1997 results include a
sublease loss of $4.4 million associated with the relocation of part of the
corporate offices in Washington, D.C. to a less expensive suburban facility.
Fees for the first three months of fiscal year 1997 total $127.5 million
compared to $116.0 million for the first three months of fiscal year 1996, an
increase of $11.5 million, or 10%. Revenue growth has occurred across most lines
of business, including the Company's Asia/Pacific and Latin American operations.
Salaries and employee benefit expenses for the first quarter of fiscal year 1997
were $62.7 million, an increase of $.6 million, from $62.1 million the first
quarter of fiscal year 1996. The increase in costs is attributable to normal
annual salary increases offset by the sale of the Minneapolis outsourcing center
and the formation of Wellspring.
Occupancy and communication expenses during the first quarter of fiscal year
1997 totaled $19.0 million, an increase of $3.7 million, or 24%, from the first
quarter of the prior year. The increase is due to the $4.4 million in sublease
losses recorded in the first quarter of fiscal year 1997 slightly offset by a
decrease due to the sale of the Minneapolis outsourcing center and the formation
of Wellspring.
Professional and subcontracted services relating to consulting offices were
$20.4 million during the first quarter of fiscal year 1997, an increase of $7.8
million, or 61% over fiscal year 1996. The increase is primarily due to costs
for outsourced benefits administration clients.
Other costs of providing services, which include travel and hotel, publications,
and general office expenses, were $5.7 million for the first quarter of fiscal
year 1997, an increase of $1.7 million, or 41%, from the first quarter of fiscal
year 1996.
General and administrative ("G&A") expenses for the first quarter of fiscal year
1997 were $9.9 million, a $.6 million, or 6%, decrease from the first quarter of
fiscal year 1996. The Company has reduced its overall G&A function and related
expenditures, which is reflected in the slight decrease between years.
-8-
<PAGE>
Depreciation and amortization expense of $5.4 million for the first quarter of
fiscal year 1997 represents an increase of $.4 million over the first quarter of
fiscal year 1996. The increased expense is primarily due to the amortization of
capitalized software costs.
Income before income taxes and minority interest of $3.2 million for the first
three months of fiscal year 1997 resulted in a tax provision of $1.5 million.
This compares to a provision of $3.1 million on $6.6 million of income before
income taxes and minority interest for the first three months of fiscal year
1996. The effective tax rates for the three months ending September 30, 1996 and
September 30, 1995, were 47% and 48%, respectively.
LIQUIDITY AND CAPITAL RESOURCES.
The Company relies primarily on funds from operations and short-term borrowings
as its source of liquidity. The Company believes that it has access to ample
financial resources to finance its growth as well as support ongoing operations.
The Company's cash and cash equivalents at September 30, 1996 totaled $8.1
million, compared to $21.7 million at June 30, 1996. The Company had borrowings
outstanding under its line of credit of $14.8 million at September 30, 1996 and
no borrowings at June 30, 1996.
CASH FROM OPERATIONS. For the first three months of fiscal year 1997, the
Company had cash outflows from operations of $34.7 million, compared to inflows
from operations of $.6 million for the first three months of fiscal year 1996.
The cash outflows in 1997 are due to an increase in bonus and income tax
payments, an increase in funding of the Wellspring operations and a slight
reduction in client collections.
The Company's operating cash flow is generally stable and typically does not
fluctuate widely within an economic cycle. The Company's ratio of current assets
to current liabilities remained constant at 1.1 at September 30, 1996 and June
30, 1996.
CASH FROM INVESTING ACTIVITIES. Investing activity cash outflow was $7.6 million
for the three months of fiscal year 1997, versus $14.6 million in 1996. The
decrease in investing cash outflows is due to lower levels of investment in
client software systems and the acquisition of HRE, Inc. in fiscal year 1996.
Anticipated commitments of funds for the remainder of fiscal year 1997 are
estimated at $37 million, which includes expected purchases of fixed assets, 50%
of the future capital requirements of Wellspring, and 50.1% of the capital
requirements of WWHE. Operating cash flows should, in combination with the line
of credit described below, provide for the Company's ongoing cash needs.
The Company also has a revolving credit line which matures on January 5, 2001.
Thirty-three million dollars of the credit line is available to the Company as
revolving credit for operating needs at September 30, 1996.
CASH FROM FINANCING ACTIVITIES. Cash flow provided by financing activities was
$28.7 million for the first three months of fiscal year 1997, versus $11.6
million in the preceding year. The increase is due primarily to the increased
level of borrowing in fiscal year 1997.
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<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Watson Wyatt is from time to time a defendant in various lawsuits which arise in
the ordinary course of business. These disputes typically involve claims
relating to employment matters or the rendering of professional services. The
management of the Company does not believe that any such currently pending or
threatened litigation is likely to have a material adverse effect on the
business or financial condition of Watson Wyatt.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORMS 8-K
a. Exhibits
None
b. Reports on Form 8-K
None
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 8, 1996
Watson Wyatt & Company
(Registrant)
/S/ A. W. Smith, Jr. /S/ Barbara L. Landes
- ------------------------- --------------------------
Name: A. W. Smith, Jr. Name: Barbara L. Landes
Title: President and Chief Title: Vice President, Finance and
Executive Officer Chief Financial Officer
-11-
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-1-1996
<PERIOD-END> SEP-30-1996
<CASH> 8,081
<SECURITIES> 0
<RECEIVABLES> 137,495
<ALLOWANCES> 7,253
<INVENTORY> 0
<CURRENT-ASSETS> 158,681
<PP&E> 135,355
<DEPRECIATION> 98,940
<TOTAL-ASSETS> 328,544
<CURRENT-LIABILITIES> 140,683
<BONDS> 107,262
0
0
<COMMON> 17,158
<OTHER-SE> 63,028
<TOTAL-LIABILITY-AND-EQUITY> 328,544
<SALES> 0
<TOTAL-REVENUES> 127,780
<CGS> 107,717
<TOTAL-COSTS> 122,990
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 275
<INCOME-PRETAX> 3,210
<INCOME-TAX> 1,504
<INCOME-CONTINUING> 1,706
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,655
<EPS-PRIMARY> .09
<EPS-DILUTED> 0
</TABLE>
