UNITED STATES
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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____
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)
6707 DEMOCRACY BOULEVARD
SUITE 800
BETHESDA, MD 20817
(Address of principal executive offices, including zip code)
(301) 581-4600
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
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 14, 1997.
Common Stock, $1.00 par value 17,680,267
- ----------------------------- ----------
Class Number of Shares
<PAGE>
<TABLE>
<CAPTION>
WATSON WYATT & COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Thousands of U.S. Dollars, Except Per Share Amounts)
Three Months Ended September 30,
--------------------------------
1997 1996
------------- ------------
(Unaudited)
<S> <C> <C>
Fees $ 133,475 $ 127,497
Costs of providing services:
Salaries and employee benefits 64,207 62,664
Occupancy and communications 15,219 18,997
Professional and subcontracted services 19,723 20,393
Other 7,000 5,663
------------- ------------
106,149 107,717
General and administrative expenses 10,378 9,912
Depreciation and amortization 6,514 5,361
------------- ------------
123,041 122,990
Income from operations 10,434 4,507
Other:
Interest income 249 283
Interest expense (409) (275)
Loss from affiliates (438) (1,305)
------------- ------------
Income before income taxes and minority interest 9,836 3,210
Provision for (benefit from) income taxes:
Current 4,515 1,504
Deferred 134 -
------------- ------------
4,649 1,504
------------- ------------
Income before minority interest 5,187 1,706
Minority interest in net income of consolidated
subsidiaries (44) (41)
------------- ------------
Net income $ 5,143 $ 1,665
============= ============
Earnings per share $ 0.29 $ 0.09
============= ============
</TABLE>
See accompanying notes
-2-
<PAGE>
<TABLE>
<CAPTION>
WATSON WYATT & COMPANY
CONSOLIDATED BALANCE SHEETS
(Thousands of U.S. Dollars)
September 30, June 30,
1997 1997
-------------- --------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 10,874 $ 26,257
Receivables from clients:
Billed, net of allowances of $4,838 and $2,525 69,891 67,393
Unbilled 65,601 56,368
-------------- --------------
135,492 123,761
Other current assets 9,340 7,287
-------------- --------------
Total current assets 155,706 157,305
Investment in affiliates 55,523 52,516
Fixed assets 37,179 37,045
Deferred income taxes 34,560 39,025
Deferred software and development costs 31,030 32,869
Other intangible assets 2,786 2,661
Other assets 10,425 10,357
-------------- --------------
$ 327,209 $ 331,778
============== ==============
LIABILITIES, REDEEMABLE COMMON STOCK, AND PERMANENT SHAREHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 89,418 $ 103,415
Note payable and book overdrafts 13,608 408
Income taxes payable 4,569 3,563
Deferred income taxes 24,177 28,612
-------------- --------------
Total current liabilities 131,772 135,998
Accrued retirement benefits 87,724 86,697
Deferred rent and accrued lease losses 13,812 14,938
Other noncurrent liabilities 7,903 9,908
Minority interest in subsidiaries 330 351
Redeemable Common Stock - $1 par value:
25,000,000 shares authorized;
17,816,636 and 18,130,429 issued
and outstanding; at redemption value 94,428 96,091
Permanent shareholders' equity:
Adjustment for redemption value greater than
amounts paid in by shareholders (36,844) (37,674)
Retained earnings 28,565 24,633
Cumulative translation gain (loss) (481) 836
Commitments and contingencies
-------------- --------------
$ 327,209 $ 331,778
============== ==============
</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,
--------------------------------
1997 1996
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 5,143 $ 1,665
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for doubtful receivables from clients 3,830 3,610
Depreciation 3,559 3,161
Amortization of deferred software and development costs
and other intangible assets 2,954 2,200
Change in deferred income taxes 30 -
Loss from affiliates 438 1,305
Minority interest in net income of consolidated subsidiaries 44 41
Other (6) 48
(Increase) decrease in assets:
Receivables from clients (15,560) (9,299)
Income taxes receivable (145) -
Other current assets (1,908) (13,422)
Other assets (379) (1,209)
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities (13,997) (17,879)
Income taxes payable 1,006 (10,533)
Accrued retirement benefits 1,027 3,472
Deferred rent (1,126) 3,672
Other noncurrent liabilities (2,005) (1,562)
------------- -------------
Net cash used by operating activities (17,095) (34,730)
------------- -------------
Cash flows from investing activities:
Purchases of fixed assets (3,925) (3,091)
Acquisitions - (197)
Investment in software and development costs (899) (2,988)
Investment in affiliates (3,990) (1,373)
------------- -------------
Net cash used in investing activities (8,814) (7,649)
------------- -------------
Cash flows from financing activities:
Net borrowings and bank overdrafts 13,200 34,700
Issuances of Redeemable Common Stock 525 135
Repurchases of Redeemable Common Stock (2,569) (6,103)
------------- -------------
Net cash provided by financing activities 11,156 28,732
------------- -------------
Effect of exchange rate changes on cash (630) 34
------------- -------------
Decrease in cash and cash equivalents (15,383) (13,613)
Cash and cash equivalents at beginning of period 26,257 21,694
------------- -------------
Cash and cash equivalents at end of period $ 10,874 $ 8,081
============= =============
</TABLE>
See accompanying notes
-4-
<PAGE>
<TABLE>
<CAPTION>
WATSON WYATT & COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN PERMANENT SHAREHOLDERS' EQUITY
(Thousands of U.S. Dollars)
Excess of Redemption
Cumulative Value Over Amounts
Retained Translation Paid in by
Earnings Gain Shareholders
------------- ------------- -------------
<S> <C> <C> <C>
Balance at June 30, 1997 $ 24,633 $ 836 $ (37,674)
Net income 5,143 - -
Effect of repurchases of 420,046 shares of
common stock (various prices per share) (1,211) - 1,211
Foreign currency translation adjustment - (1,317) -
Adjustment of redemption value for change
in formula book value per share - - (381)
------------- ------------- -------------
Balance at September 30, 1997 $ 28,565 $ (481) $ (36,844)
============= ============= =============
</TABLE>
See accompanying notes
-5-
<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, 1997.
The results of operations for the three months ended September 30,
1997 are not necessarily indicative of the results that can be expected
for the entire fiscal year ending June 30, 1998. Certain prior year
amounts have been reclassified to conform to the current year presentation.
2. Under the Company's bylaws, 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 $5.30 per share at September 30,
1997 and June 30, 1997. 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.
3. During the three months ended September 30, 1997, the Company repurchased
420,046 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 17,981,000 and 17,636,000 for
the three months ended September 30, 1997 and 1996, respectively.
4. Summarized operating results reported by the Company's affiliate,
Wellspring Resources, LLC ("Wellspring"), for the quarter ended September
30, 1997, are an after tax loss of $0.5 million reflecting $13.2 million
in revenue and expenses of $13.7 million. The Company contributed $4.8
million in the first quarter to fund Wellspring's cash operating needs.
Wellspring operating losses are expected to continue and additional cash
requirements are expected.
The Company guarantees certain leases for office premises and equipment
for Wellspring. Minimum rentals guaranteed under these leases are $2.5
million for the remainder of fiscal year 1998 and aggregate $71.7 million
for the remaining lease terms, which expire at various dates through
2007. These leases are also jointly and severally guaranteed by the
Company's partner, State Street Global Advisors. In addition, the Company
guarantees Wellspring's obligation to a customer in the event of
termination without cause. The amount of the guarantee at September 30,
1997 was $5.2 million, and declines monthly through the year 2002.
5. The first quarter results of fiscal year 1997 were reduced by a $4.4
million sublease loss due to the relocation of the corporate and certain
operating offices.
-6-
<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.
Founded in 1946, Watson Wyatt is owned almost entirely by its active
employees. The Company is incorporated in Delaware, and its principal
executive offices are located at 6707 Democracy Boulevard, Bethesda, MD
20817. Together with its affiliates, it operates globally as Watson Wyatt
Worldwide.
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 1998 (September 30, 1997) and as of the end
of the prior fiscal year 1997 (June 30, 1997), and consolidated statements of
operations, of cash flows and of changes in permanent shareholders' equity
for the three months ended September 30, 1997 and 1996.
RESULTS OF OPERATIONS--THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO
THREE MONTHS ENDED SEPTEMBER 30, 1996.
For the first three months of fiscal year 1998 the Company produced net
income of $5.1 million, an increase of $3.4 million from net income of $1.7
million for the first three months of fiscal year 1997. Income for the first
quarter of 1997 was reduced by the $2.3 million after tax effect of the lease
loss.
Fees for the first three months of fiscal year 1998 total $133.5 million
compared to $127.5 million for the first three months of fiscal year 1997, an
increase of $6.0 million, or 5%. The revenue growth is attributable to
improved performance in the Company's consulting offices.
Salaries and employee benefit expenses for the first quarter of fiscal year
1998 were $64.2 million, an increase of $1.5 million, from $62.7 million in
the first quarter of fiscal year 1997. The increase in costs is attributable
to normal annual salary increases, with the number of associates essentially
unchanged from the same period in fiscal year 1997.
Occupancy and communication expenses during the first quarter of fiscal year
1998 totaled $15.2 million, a decrease of $3.8 million, or 20%, from the
first quarter of the prior year. The change is due to a $4.4 million lease
loss recorded in fiscal year 1997 for the relocation of the corporate offices
to lower cost space in a suburban location.
Professional and subcontracted services decreased by $0.7 million, or 3% from
fiscal year 1997. Such services in the consulting offices decreased by $1.5
million and were partially offset by an increase of $0.8 million in higher
charges for the continued servicing of the retained outsourcing contracts by
the Company's affiliate, Wellspring.
-7-
<PAGE>
Other costs of providing services were $7.0 million for the first quarter of
fiscal year 1998, up $1.3 million, or 24%, from the first quarter of fiscal
year 1997. The expense growth includes the following increases: travel and
hotel $0.7 million, publications $0.3 million, and general office expenses
$0.4 million.
General and administrative ("G&A") expenses for the first quarter of fiscal
year 1998 were $10.4 million, a $0.5 million, or 5%, increase from the first
quarter of fiscal year 1997, related primarily to increased advertising
expense.
Depreciation and amortization expense of $6.5 million for the first quarter
of fiscal year 1998 represents an increase of $1.1 million over the first
quarter of fiscal year 1997. The increased expense is primarily due to the
amortization of capitalized software and development costs.
Income before income taxes and minority interest of $9.8 million in the first
quarter of fiscal year 1998 resulted in a tax provision of $4.6 million.
This compares to a provision of $1.5 million on $3.2 million of income in
fiscal year 1997. The effective tax rate for both periods was 47%.
Loss from affiliates was $0.4 million for the quarter ended September 30,
1997 compared to $1.3 million for the quarter ended September 30, 1996. The
majority of these losses result from the Company's affiliate, Wellspring.
The Company, two days before filing, received financial projections from
Wellspring indicating additional cash requirements for Wellspring and the
three outsourcing contracts retained by the Company ("Retained Clients") and
operating losses greater than previously expected or included in the
Company's annual financial plan. The Company is evaluating this forecast and
is requiring further information from Wellspring.
The Company and its partner, State Street, have indicated their intention to
fund Wellspring's cash requirements as needed. The Company is evaluating
alternative sources of capital for Wellspring including potential investments
from third parties. These discussions are in preliminary stages and the
Company cannot, therefore, assess the probable outcome.
LIQUIDITY AND CAPITAL RESOURCES.
The Company relies primarily on funds from operations and short-term
borrowings as its sources of liquidity. The Company believes that it has
access to ample financial resources to finance its growth, meet its
commitments to affiliates as well as support ongoing operations. The
Company's cash and cash equivalents at September 30, 1997 totaled $10.9
million, compared to $26.3 million at June 30, 1997. This decrease was
typical for the first quarter of the year and was expected as both income tax
and bonus payments were made in the first quarter. The Company had no
borrowings under its line of credit at September 30 or June 30, 1997.
CASH FROM OPERATIONS. For the first three months of fiscal year 1998, the
Company had cash outflows from operations of $17.1 million, compared to
outflows from operations of $34.7 million for the first three months of
fiscal year 1997. The decrease in cash outflows from 1997 was due to lower
income tax payments and the collection of a receivable from an affiliate,
offset by decreased collection of accounts receivable.
The Company's ratio of current assets to current liabilities increased
slightly to 1.2 at September 30, 1997 compared to 1.1 at June 30, 1997.
-8-
<PAGE>
CASH FROM INVESTING ACTIVITIES. Investing activity cash outflow was $8.8
million for the three months of fiscal year 1998, versus $7.6 million for the
same period in 1997. The increase in investing cash outflows was due to
increased expenditures for fixed assets, $0.8 million, and a higher
investment in affiliates, $2.6 million, offset by lower investment in
software and development costs, $2.1 million.
Anticipated commitments of funds are estimated at $29.3 million for the
remainder of fiscal year 1998, including expected purchases of fixed assets,
50% of the capital requirements of Wellspring, and 50.1% of the capital
requirements of WWHE. Additional cash requirements for Wellspring referred
to above are under evaluation and are not included in the aforementioned
commitment of funds. The Company expects operating cashflows to provide for
the Company's cash needs.
The Company's revolving credit line matures on January 5, 2001. As of
September 30, 1997, $44.8 million dollars of the credit line was available to
the Company as revolving credit for operating needs, compared to $33.0
million on September 30, 1996.
CASH FROM FINANCING ACTIVITIES. Cash flow provided by financing activities
was $11.2 million for the first three months of fiscal year 1998, versus
$28.7 million in the preceding fiscal year. The decrease is due primarily to
the lower level of borrowing and bank overdrafts in fiscal year 1998.
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.
-9-
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
None
b. Reports on Form 8-K
None
-10-
<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.
Watson Wyatt & Company
(Registrant)
/S/ A. W. Smith, Jr. November 14, 1997
- --------------------- -----------------
Name: A. W. Smith, Jr. Date
Title: President and Chief
Executive Officer
/S/ Barbara L. Landes November 14, 1997
- --------------------- -----------------
Name: Barbara L. Landes Date
Title: Vice President, Finance and
Chief Financial Officer
-11-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Jun-30-1998
<PERIOD-START> Jul-01-1997
<PERIOD-END> Sep-30-1997
<CASH> 10,874
<SECURITIES> 0
<RECEIVABLES> 140,330
<ALLOWANCES> 4,838
<INVENTORY> 0
<CURRENT-ASSETS> 155,706
<PP&E> 132,717
<DEPRECIATION> 95,538
<TOTAL-ASSETS> 327,209
<CURRENT-LIABILITIES> 131,772
<BONDS> 109,439
0
0
<COMMON> 17,817
<OTHER-SE> 67,851
<TOTAL-LIABILITY-AND-EQUITY> 327,209
<SALES> 0
<TOTAL-REVENUES> 133,475
<CGS> 106,149
<TOTAL-COSTS> 123,041
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 409
<INCOME-PRETAX> 9,836
<INCOME-TAX> 4,649
<INCOME-CONTINUING> 5,187
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,143
<EPS-PRIMARY> 0.29
<EPS-DILUTED> 0
</TABLE>
