Attached files

file filename
EX-10.1 - AMENDED AND RESTATED CHANGE-IN-CONTROL EXECUTIVE SEVERANCE PLAN - HEWITT ASSOCIATES INCdex101.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER - HEWITT ASSOCIATES INCdex312.htm
EX-32.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER - HEWITT ASSOCIATES INCdex321.htm
EX-32.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER - HEWITT ASSOCIATES INCdex322.htm
EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER - HEWITT ASSOCIATES INCdex311.htm
EXCEL - IDEA: XBRL DOCUMENT - HEWITT ASSOCIATES INCFinancial_Report.xls
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2010

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-31351

LOGO

HEWITT ASSOCIATES, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   47-0851756

(State or other jurisdiction of

incorporation)

 

(I.R.S. Employer

Identification No.)

 

100 Half Day Road; Lincolnshire, Illinois   60069
(Address of principal executive offices)   (Zip Code)

847-295-5000

(Registrant’s telephone number, including area code)

N/A

(Former Name, Former Address & Former Fiscal Year, if changed since last report)

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 periods as 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 by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  x   Accelerated filer  ¨
Non-accelerated filer  ¨  (Do not check if a smaller  reporting company)   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  ¨    No  x

Indicate the number of shares outstanding of each class of the issuer’s common stock, as of the latest practical date.

 

Class

 

Outstanding shares at June 30, 2010

Class A Common Stock - $0.01 par value   91,956,752

 

 

 


Table of Contents

HEWITT ASSOCIATES, INC.

FORM 10-Q

For the Period Ended

June 30, 2010

INDEX

 

          PAGE
Part I. FINANCIAL INFORMATION   

Item 1.

   Financial Statements:   
   Consolidated Balance Sheets - June 30, 2010 (Unaudited) and September 30, 2009    3
  

Consolidated Statements of Operations - Three and Nine Months Ended June 30, 2010 and 2009 (Unaudited)

   5
   Consolidated Statements of Cash Flows - Nine Months Ended June 30, 2010 and 2009 (Unaudited)    6
   Notes to the Consolidated Financial Statements (Unaudited)    7

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    27

Item 3.

   Quantitative and Qualitative Disclosures about Market Risk    39

Item 4.

   Controls and Procedures    39
Part II. OTHER INFORMATION   

Item 1.

   Legal Proceedings    40

Item 1A.

   Risk Factors    40

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds    42

Item 6.

   Exhibits    42
Signatures       43

 

2


Table of Contents

Part I. Financial Information

 

Item 1. Financial Statements

HEWITT ASSOCIATES, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands except for share and per share amounts)

 

     June 30,    September 30,
     2010    2009
     (Unaudited)     
ASSETS      

Current Assets:

     

Cash and cash equivalents

   $ 686,463    $ 581,642

Short-term investments

     48,386      60,994

Client receivables and unbilled work in process, less allowances of $14,546 and $14,381 at June 30, 2010 and September 30, 2009, respectively

     522,437      527,272

Prepaid expenses and other current assets

     168,078      169,533

Funds held for clients

     114,176      131,801

Short-term deferred contract costs, net

     95,525      89,919

Deferred income taxes, net

     101,730      34,119
             

Total current assets

     1,736,795      1,595,280
             

Non-Current Assets:

     

Deferred contract costs, less current portion

     231,782      254,905

Property and equipment, net

     366,613      384,254

Other intangible assets, net

     175,631      191,479

Goodwill

     373,023      412,745

Long-term investments

     43,458      54,442

Other non-current assets, net

     17,848      31,535
             

Total non-current assets

     1,208,355      1,329,360
             

Total Assets

   $ 2,945,150    $ 2,924,640
             
LIABILITIES      

Current Liabilities:

     

Accounts payable

   $ 15,407    $ 20,790

Accrued expenses

     220,735      164,724

Funds held for clients

     114,176      131,801

Advanced billings to clients

     149,787      137,447

Accrued compensation and benefits

     340,724      393,463

Short-term deferred contract revenues, net

     64,055      61,356

Current portion of long-term debt and capital lease obligations

     39,189      36,282
             

Total current liabilities

     944,073      945,863
             

Non-Current Liabilities:

     

Deferred contract revenues, less current portion

     163,379      192,056

Debt and capital lease obligations, less current portion

     584,961      618,561

Other non-current liabilities

     187,591      223,835

Deferred income taxes, net

     77,892      84,023
             

Total non-current liabilities

     1,013,823      1,118,475
             

Total Liabilities

   $ 1,957,896    $ 2,064,338
             

The accompanying notes are an integral part of these financial statements.

 

3


Table of Contents

HEWITT ASSOCIATES, INC.

CONSOLIDATED BALANCE SHEETS—Continued

(In thousands except for share and per share amounts)

 

     June 30,     September 30,  
     2010     2009  
     (Unaudited)        
STOCKHOLDERS’ EQUITY     

Stockholders’ Equity:

    

Class A common stock, par value $0.01 per share, 750,000,000 shares authorized, 134,624,475 and 132,844,269 shares issued, 91,956,752 and 93,535,270 shares outstanding, as of June 30, 2010 and September 30, 2009, respectively

   $ 1,346      $ 1,328   

Additional paid-in capital

     1,743,611        1,662,687   

Cost of common stock in treasury, 42,667,723 and 39,308,999 shares of Class A common stock as of June 30, 2010 and September 30, 2009, respectively

     (1,406,459     (1,277,815

Retained earnings

     673,520        469,777   

Accumulated other comprehensive (loss) income, net

     (24,764     4,325   
                

Total Stockholders’ Equity

     987,254        860,302   
                

Total Liabilities and Stockholders’ Equity

   $ 2,945,150      $ 2,924,640   
                

The accompanying notes are an integral part of these financial statements.

 

4


Table of Contents

HEWITT ASSOCIATES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands except for share and per share amounts)

 

     Three Months Ended
June 30,
    Nine Months Ended
June 30,
 
     2010     2009     2010     2009  

Revenues:

        

Revenues before reimbursements

   $ 730,576      $ 729,009      $ 2,261,186      $ 2,246,025   

Reimbursements

     16,019        14,710        56,880        53,499   
                                

Total revenues

     746,595        743,719        2,318,066        2,299,524   
                                

Operating expenses:

        

Compensation and related expenses

     460,800        451,432        1,401,440        1,403,191   

Other operating expenses

     145,062        137,500        412,474        412,809   

Selling, general and administrative expenses

     40,912        30,262        115,830        106,925   

Reimbursable expenses

     16,019        14,710        56,880        53,499   

Goodwill and asset impairment

     4,571        758        21,597        4,159   

Loss (gain) on sale of businesses

     —          —          2,359        (9,379
                                

Total operating expenses

     667,364        634,662        2,010,580        1,971,204   
                                

Operating income

     79,231        109,057        307,486        328,320   

Other (expense) income, net:

        

Interest expense

     (9,646     (9,620     (28,881     (30,159

Interest income

     2,187        1,375        5,025        7,240   

Other (expense) income, net

     (1,310     3,305        (4,399     6,125   
                                

Total other expense, net

     (8,769     (4,940     (28,255     (16,794
                                

Income before income taxes

     70,462        104,117        279,231        311,526   

(Benefit) provision for income taxes

     (7,480     35,720        75,488        110,825   
                                

Net income

   $ 77,942      $ 68,397      $ 203,743      $ 200,701   
                                

Earnings per share:

        

Basic

   $ 0.84      $ 0.73      $ 2.18      $ 2.14   

Diluted

   $ 0.82      $ 0.71      $ 2.13      $ 2.10   

Weighted average shares:

        

Basic

     92,884,931        93,439,928        93,429,402        93,683,106   

Diluted

     95,107,474        95,861,701        95,599,034        95,629,182   

The accompanying notes are an integral part of these financial statements.

 

5


Table of Contents

HEWITT ASSOCIATES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Amounts in thousands)

 

     Nine Months Ended
June 30,
 
     2010     2009  

Cash flows from operating activities:

    

Net income

   $ 203,743      $ 200,701   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization, including amortization of deferred contract revenues and costs

     130,480        119,130   

Share-based compensation

     40,308        40,950   

Deferred income taxes

     3,771        32,058   

Goodwill and asset impairment

     21,597        4,159   

Loss (gain) on sale of businesses

     2,359        (9,379

Fair value adjustment related to financial assets

     (18     404   

Changes in operating assets and liabilities, net of effect of acquisitions and dispositions:

    

Client receivables and unbilled work in process

     (3,973     104,970   

Prepaid expenses and other current assets

     38,109        (51,499

Deferred contract costs

     (54,007     (72,677

Other assets

     15,522        7,693   

Accounts payable

     (4,967     281   

Accrued compensation and benefits

     (48,841     (60,457

Accrued expenses

     (4,927     (58,861

Advanced billings to clients

     13,581        4,050   

Deferred contract revenues

     16,710        31,388   

Other long-term liabilities

     (33,691     (6,627
                

Net cash provided by operating activities

     335,756        286,284   

Cash flows from investing activities:

    

Purchases of investments

     (48,545     —     

Proceeds from sales of investments

     49,850        4,825   

Additions to property and equipment

     (71,543     (93,988

Cash paid for acquisitions, net of cash acquired

     (21,319     (62,067

Cash received for sale of businesses

     —          1,105   

Other investing activities

     (10,885     —     
                

Net cash used in investing activities

     (102,442     (150,125

Cash flows from financing activities:

    

Proceeds from the exercise of stock options

     33,511        7,906   

Excess tax benefits from the exercise of share-based awards

     3,724        2,345   

Proceeds from short-term borrowings

     —          18,119   

Repayments of short-term borrowings, capital leases and long-term debt

     (28,928     (149,734

Purchase of Class A common shares for treasury

     (128,644     (45,458
                

Net cash used in financing activities

     (120,337     (166,822

Effect of exchange rate changes on cash and cash equivalents

     (8,156     (6,892
                

Net increase (decrease) in cash and cash equivalents

     104,821        (37,555

Cash and cash equivalents, beginning of period

     581,642        541,494   
                

Cash and cash equivalents, end of period

   $ 686,463      $ 503,939   
                

Supplementary disclosure of cash paid during the period:

    

Interest paid

   $ 26,489      $ 27,865   

Income taxes paid

   $ 62,222      $ 75,439   

The accompanying notes are an integral part of these financial statements.

 

6


Table of Contents

HEWITT ASSOCIATES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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, and absence management, in addition to other standalone HR outsourcing services. Human Resource Business Process Outsourcing (“HR BPO”) includes workforce administration, rewards management, recruiting and staffing, payroll processing, performance management, learning and development, talent management, time and attendance, 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, in addition to investment consulting services.

On July 11, 2010, Hewitt entered into an Agreement and Plan of Merger with Aon Corporation (“Aon”), Alps Merger Corp., a wholly owned subsidiary of Aon, and Alps Merger LLC, a wholly owned subsidiary of Aon, pursuant to which Aon has agreed to acquire Hewitt. The merger agreement has been approved and adopted by the boards of directors of each of Aon and Hewitt. The transaction is expected to close during the fourth calendar quarter of 2010. Refer to Note 18 for additional information on the merger agreement and the proposed transaction.

2. Basis of Presentation

The accompanying unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for quarterly reports on Form 10-Q. In the opinion of management, these financial statements include all adjustments necessary to present fairly the financial position, results of operations and cash flows as of June 30, 2010, and for all periods presented. The consolidated financial statements are prepared on the accrual basis of accounting. All adjustments made have been of a normal and recurring nature. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted. The Company believes that the disclosures included are adequate and provide a fair presentation of interim period results. Interim financial statements are not necessarily indicative of the Company’s financial position or operating results for an entire year. It is suggested that these interim financial statements be read in conjunction with the audited financial statements and the notes thereto, together with management’s discussion and analysis of financial condition and results of operations, included in the Company’s Form 10-K for the fiscal year ended September 30, 2009, as filed with the SEC.

Recent Accounting Pronouncements

In October 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2009-13, Revenue Recognition – Multiple Deliverable Revenue Arrangements (“ASU 2009-13”). ASU 2009-13 updates the existing multiple-element revenue arrangements guidance currently included in Accounting Standards Codification (“ASC”) 605-25. The revised guidance provides for two significant changes to the existing multiple-element revenue arrangements guidance. The first change relates to the determination of when the individual deliverables included in a multiple-element arrangement may be treated as separate units of accounting. This change will result in the requirement to separate more deliverables within an arrangement, ultimately leading to less revenue and cost deferral. The second change modifies the manner in which the transaction consideration is allocated across the separately identified deliverables. Together, these changes will result in earlier recognition of revenue and related costs for multiple-element arrangements than under previous guidance. This guidance also expands the disclosures required for multiple-element revenue arrangements. The Company early adopted the provisions of this ASU on a prospective basis for all new contracts and materially modified contracts on or after October 1, 2009.

As a result of the adoption of ASU 2009-13, revenues before reimbursements (“net revenues”) were higher by $2.6 million and $16.4 million for the three and nine months ended June 30, 2010, respectively, and operating income was higher by $0.4 million and $7.6 million for the three and nine months ended June 30, 2010, respectively. The impact resulted from contracts that were materially modified subsequent to October 1, 2009 and thus qualified for accounting under the new guidance. As a result, the Company recognized revenue and costs that had been deferred under the previous guidance as well as ongoing revenue and costs that are no longer required to be deferred under the new guidance. The new guidance allows for deliverables for which revenue was previously deferred to be separated and recognized as the services are delivered, rather than defer revenue for all deliverables until the final service is provided or a predominant service level has been attained. The Company is not able to reasonably estimate the effect of adopting this guidance on future financial periods as the impact will vary based on the nature and volume of new or materially modified contracts in any given period.

 

7


Table of Contents

The Company has modified its accounting policy related to revenue recognition that was included in the Company’s Form 10-K for the fiscal year ended September 30, 2009 to reflect the adoption of ASU 2009-13. To highlight these changes, the Company has included herein the revised accounting policy for revenue recognition. The accounting policy for revenue recognition included in the Company’s Form 10-K for the fiscal year ended September 30, 2009 remains effective for contracts that were in place as of, and were not materially modified after, September 30, 2009. The revised policy is as follows:

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 fixed or determinable and collectibility is reasonably assured.

The Company’s outsourcing contracts typically have three to five year terms for benefits services and five 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 provides consulting services to its clients 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.

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.

The Company has contracts with multiple-element arrangements 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. The following criteria 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; 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.

Pursuant to ASU 2009-13, for all new contracts and materially modified contracts on or after October 1, 2009, the arrangement consideration is allocated to the separate units of accounting at the inception of the arrangement to all deliverables based on their relative selling price. Under this method, the selling price for each deliverable is determined using vendor specific objective evidence of selling price (“VSOE”), third-party evidence of selling price (“TPE”), or in the absence of VSOE and TPE, the Company’s best estimate of selling price. The best estimate of selling price is the price at which the Company would offer the service if the deliverable were sold regularly on a standalone basis. Due to the level of customization of the Company’s services to its clients, selling price is generally determined by best estimate.

For deliverables within Benefits Outsourcing, the Company typically determines the best estimate of selling price by analyzing market conditions and engagement specific risks. This includes the number of participants expected in a plan, the level of customization and the complexity of the services to be delivered, as well as knowledge of market competition in the bid process. For deliverables within HR BPO, the Company typically determines the best estimate of selling price using cost-plus pricing. This involves evaluating the expected costs required to deliver the services as well as profit margin objectives.

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.

The Company evaluates arrangement modifications such as changes to pricing, changes to the period of the arrangement, changes to the population size, or changes to the contracted deliverables for both quantitative and

 

8


Table of Contents

qualitative implications in assessing whether an arrangement is materially modified in accordance with ASU 2009-13. The determination of whether a modification to an existing revenue arrangement represents a material modification requires the use of judgment and considers the relevant facts and circumstances that exist when an arrangement is modified.

For materially modified contracts, the Company reallocates the arrangement consideration to all of the identified services in the arrangement (both delivered and undelivered) based on the information available at the time the contract is materially modified. Allocated consideration is recognized in revenue for all delivered services (adjusting previously deferred revenue as appropriate), and consideration attributable to the undelivered services is deferred and recognized in the future as those services are delivered.

The Company records revenues earned in excess of amounts billed as a current asset (unbilled work in process). The Company records amounts billed in excess of revenues earned, prior to rendering services, as a current liability (advanced billings to clients).

The Company considers the criteria established by ASC 605-45-45, Revenue Recognition – Principal Agent Considerations, in determining whether revenue should be recognized on a gross or 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 the delivered product, performs part of the service delivered, has discretion on vendor selection and bears credit risk.

Reimbursements received for out-of-pocket expenses incurred are characterized as revenues and are shown as a separate component of total revenues in accordance with ASC 605-45-45-23, Reimbursements Received for Out-of-Pocket Expenses Incurred. Similarly, related reimbursable expenses are also shown separately within operating expenses.

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations. This guidance is included in ASC 805, Business Combinations. This guidance requires the Company to continue to follow the guidance in SFAS No. 141 (also included in ASC 805) for certain aspects of business combinations, and provides additional guidance 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. This guidance also requires transaction costs to be charged to earnings and requires contingent consideration to be recorded at its fair value on the acquisition date. In addition, this guidance requires adjustments associated with changes in tax contingencies that occur after the measurement period, not to exceed one year, to be recorded as adjustments to income. This guidance 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 regarding the treatment of income tax contingencies is retrospective to business combinations completed prior to October 1, 2009. The Company adopted this guidance for its business combinations occurring subsequent to October 1, 2009. Refer to Note 4 for additional information on acquisitions.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51. Also, refer to ASC 810-10, Consolidation – Overall. This guidance establishes accounting and reporting standards for noncontrolling interests and transactions between the reporting party and such noncontrolling interests. This guidance 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 adopted this guidance as of October 1, 2009. As of June 30, 2010, the Company does not have any noncontrolling interests included in the consolidated financial statements. As a result, the adoption of this guidance did not have a material effect on the consolidated financial statements.

In December 2007, the FASB issued EITF 07-1, Accounting for Collaborative Arrangements. This guidance is included in ASC 808, Collaborative Arrangements. This guidance defines a collaborative agreement as a contractual arrangement in which the parties are active participants to the arrangement and are exposed to the significant risks and rewards that are dependent on the ultimate commercial success of the endeavor. Additionally, the guidance requires that revenue generated and costs incurred on sales to third parties from a collaborative agreement be recognized on a gross basis in the financial statements of the party that is identified as the principal participant in a transaction. It also requires payments between participants to be accounted for in accordance with existing GAAP, unless none exists, in which case a reasonable, rational, consistent method should be used. The Company adopted this guidance as of October 1, 2009. The adoption did not have a material impact on the consolidated financial statements as of June 30, 2010.

In June 2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities. This guidance is included in ASC 260-10-55, Earnings Per Share – Overall – Implementation Guidance and Illustrations. This guidance addresses whether securities granted in share-based payment

 

9


Table of Contents

transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share under the two-class method described in ASC 260-10-45-59A/60B, Earnings Per Share – Overall – Other Presentation Matters. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those years (Hewitt’s first quarter of fiscal 2010). The Company adopted this guidance as of October 1, 2009. The Company has determined that this guidance does not currently impact its consolidated financial statements as it does not have participating securities with a non-forfeitable right to dividends or dividend equivalents pursuant to ASC 260-10-55 as of June 30, 2010.

In August 2009, the FASB issued ASU 2009-05, Fair Value Measurements and Disclosures, Measuring Liabilities at Fair Value (“ASU 2009-05”). ASU 2009-05 provides amendments to ASC 820-10, Fair Value Measurements and Disclosures – Overall, for the fair value measurement of liabilities. This update provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, an entity is required to measure fair value using a valuation technique that uses a quoted price of the identical liability when traded as an asset, a quoted price for similar liabilities or similar liabilities when traded as an asset, or another valuation technique that is consistent with the principles of ASC 820. This ASU is effective for the first period (including interim periods) beginning after issuance (Hewitt’s first quarter of fiscal year 2010). The Company adopted this ASU as of October 1, 2009. The adoption did not have a material effect on the consolidated financial statements. See Note 7 for additional information on fair value measurements.

In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R). Also refer to ASC 810-10, Consolidation – Overall. This guidance relates to the consolidation of variable interest entities. It eliminates the quantitative approach previously required for determining the primary beneficiary of a variable interest entity and requires ongoing qualitative reassessments of whether an enterprise is the primary beneficiary of a variable interest entity. This guidance also requires additional disclosures about an enterprise’s involvement in variable interest entities. This guidance is effective as of the beginning of an entity’s fiscal year, and interim periods within the fiscal year, beginning after November 15, 2009 (Hewitt’s fiscal year 2011). The Company will adopt this guidance in the first quarter of fiscal 2011. The Company is currently evaluating the potential impact, if any, of this guidance on its consolidated financial statements.

In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (“ASU 2010-06”). ASU 2010-06 provides new and amended disclosure requirements related to fair value measurements. Specifically, this ASU requires new disclosures relating to activity within Level 3 fair value measurements, as well as transfers in and out of Level 1 and Level 2 fair value measurements. ASU 2010-06 also amends the existing disclosure requirements relating to valuation techniques used for fair value measurements and the level of disaggregation a reporting entity should include in fair value disclosures. This update is effective for interim and annual reporting periods beginning after December 15, 2009 (Hewitt’s second quarter of fiscal 2010). The Company adopted this ASU as of January 1, 2010. Refer to Note 7 for additional information on fair value measurements.

3. Restricted Cash

At June 30, 2010 and September 30, 2009, the Company had short-term interest-bearing restricted cash of $10.9 million and zero, respectively, included in prepaid expenses and other current assets in the consolidated balance sheets. This amount collateralizes the Company’s issuances of standby letters of credit. The change in the restricted cash is reflected as a cash outflow from investing activities in the consolidated statement of cash flows for the nine months ended June 30, 2010.

4. Acquisitions and Divestitures

Acquisitions

On May 5, 2010, the Company acquired certain net assets of HRAdvance, Inc. (“HRAdvance”), a dependent eligibility audit and ongoing verification service firm, for cash of $11.2 million. The preliminary purchase price allocation resulted in the aggregate allocation of $4.8 million to goodwill, which was assigned to the Benefits Outsourcing segment.

On March 3, 2010, the Company acquired Senior Educators Limited (“Senior Educators”), a Web-based retiree medical insurance exchange, for cash at an aggregate cost of $15.4 million. The preliminary purchase price allocation resulted in the aggregate allocation of $10.9 million to goodwill, which was assigned to the Benefits Outsourcing segment.

On June 30, 2009, the Company acquired the remaining shares of its former joint venture BodeHewitt AG & Co. KG (“BodeHewitt”), one of the leading pension and benefits consultancies in Germany. The total purchase price of €62.5 million ($85.4 million at various dates) reflects the acquisition of 100% of BodeHewitt shares in stages over several years. In June 2009, the Company paid €50 million ($70.4 million at June 30, 2009) in cash in exchange for the remaining 72.25% of outstanding shares of BodeHewitt. The purchase price allocation resulted in the aggregate allocation of $59.8 million to

 

10


Table of Contents

goodwill, which was assigned to the Consulting segment. The Company completed the purchase price allocation related to this acquisition during the third quarter of fiscal 2010. The results of operations have been included in the consolidated statements of operations beginning with the Company’s fourth quarter of fiscal 2009. Prior to this date, the Company accounted for its investment in BodeHewitt under the equity method of accounting.

These acquisitions are not considered to be material to the Company, individually or in the aggregate, and, therefore, pro forma information has not been presented.

Divestitures

On January 28, 2010, the Company signed an agreement to divest a portion of its North America Executive Compensation (“EC”) consulting business focused on advising boards of directors. The divestiture will take place in two phases. Its operations are included in the Consulting segment. This partial divestiture is in response to issues stemming from recent regulations promulgated by the SEC regarding the independence of consulting firms that provide EC services. The first phase, which involved a select group of consultants leaving the Company to form Meridian Compensation Partners (“Meridian”), a fully-independent EC services boutique, closed on January 28, 2010. The Company received a promissory note in consideration for the divested business. The second phase, which involves a second group of consultants leaving the Company to join Meridian, is expected to close during the first quarter of fiscal 2011. The Company recorded a pretax loss of $1.8 million as a result of the first phase of the sale in the second quarter of fiscal 2010. The Company also recorded an estimated loss of $0.6 million related to the second phase of the transaction in the second quarter of fiscal 2010 since it expects to incur a loss when it completes the second phase of this transaction.

In February 2009, the Company closed on the sale of the net assets and stock relating to its Latin America HR BPO business. Additionally, in March 2009, the Company closed on the sale of the net assets relating to its HR BPO mobility services business. Both divestitures were part of the Company’s continued efforts to streamline its HR BPO service offerings. The Company recorded a pretax gain of $9.1 million primarily related to the recognition of cumulative currency translation adjustments during the quarter ended March 31, 2009 as a result of the sale of its Latin America HR BPO business. The Company recorded a pretax gain of $0.3 million during the quarter ended March 31, 2009 as a result of the sale of its HR BPO mobility services business.

The Company has ongoing contractual obligations to provide the services previously provided by the divested businesses, has contracted with the buyers for those services and continues to have direct cash flows with respect to such services. Because of the Company’s continued direct cash flows related to these divested businesses, the related operations are not classified as discontinued operations.

5. Investments

At June 30, 2010, the Company’s short-term investments were comprised of $48.4 million of fixed-rate money market investments denominated in Indian rupees with a maturity greater than 90 days, and its long-term investments were comprised of $43.5 million in auction rate securities (“ARS”).

During February 2008, issues in the global credit and capital markets led to failed auctions with respect to the Company’s ARS. Since February 2008, all of the Company’s outstanding ARS have been subject to failed auctions. During the nine months ended June 30, 2010, $49.9 million of the Company’s ARS issues were called by the issuers at par.

In November 2008, the Company accepted an offer from UBS AG (“UBS”), one of its investment brokers, to sell auction rate securities at par value originally purchased from UBS at any time during a two-year period beginning June 30, 2010. UBS also had the right to buy the ARS at par value from the Company at any time. By accepting this put option, the Company demonstrated it had the intent to sell these ARS under the terms of the UBS offer. At that time, the Company changed the classification of the UBS-brokered ARS from available-for-sale securities to trading securities.

On June 30, 2010, the Company exercised its put option and sold the remaining UBS ARS at par value of $29.7 million (included within prepaid expenses and other current assets in the consolidated balance sheets at June 30, 2010) in accordance with the terms of this offer and received the related proceeds on July 1, 2010. The realized gain from the sale of the UBS ARS was offset by the decrease in fair value of the put option to zero. The total impact of the put option and changes in the fair value of the UBS-brokered ARS during the nine months ended June 30, 2010 was not material.

At June 30, 2010, the Company’s remaining ARS portfolio, with a par value of $46.7 million, had a fair value of $43.5 million. 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 June 30, 2010. Refer to Note 7 for additional information on the fair value measurement process for the Company’s ARS.

 

11


Table of Contents

Based on the contractual maturities of the available-for-sale ARS as of June 30, 2010 and September 30, 2009, the par value and estimated fair value of the securities were as follows (in thousands):

 

     June 30, 2010    September 30, 2009
     Par Value    Estimated
Fair  Value
   Par Value    Estimated
Fair  Value

Due after ten years

   $ 46,650    $ 43,458    $ 59,000    $ 54,442
                           

Total

   $ 46,650    $ 43,458    $ 59,000    $ 54,442
                           

The total unrealized loss recorded in accumulated other comprehensive (loss) income, net, related to available-for-sale securities was $3.2 million ($2.0 million net of tax) and $4.6 million ($2.8 million net of tax) as of June 30, 2010 and September 30, 2009, respectively.

Below is a reconciliation of the par value and estimated fair value of the Company’s ARS for the nine months ended June 30, 2010 (in thousands):

 

     Trading     Available-For-Sale        
     UBS-Brokered ARS     Non-UBS-Brokered ARS     Total ARS  
     Par Value     Estimated
Fair Value
    Par Value     Estimated
Fair  Value
    Par Value     Estimated
Fair Value
 

Balance at October 1, 2009

   $ 67,150      $ 60,994      $ 59,000      $ 54,442      $ 126,150      $ 115,436   

Sold during the period

     (3,000     (3,000     (50     (50     (3,050     (3,050

Change in unrealized loss included in other comprehensive income

     —          —          —          (128     —          (128

Gains included in earnings (1 )

     —          268        —          —          —          268   
                                                

Balance at December 31, 2009

     64,150        58,262        58,950        54,264        123,100        112,526   
                                                

Sold during the period

     (3,650     (3,650     (200     (200     (3,850     (3,850

Change in unrealized loss included in other comprehensive income

     —          —          —          501        —          501   

Gains included in earnings (1)

     —          591        —          —          —          591   
                                                

Balance at March 31, 2010

     60,500        55,203        58,750        54,565        119,250        109,768   
                                                

Sold during the period

     (60,500     (60,500     (12,100     (12,100     (72,600     (72,600

Change in unrealized loss included in other comprehensive income

     —          —          —          993        —          993   

Gains included in earnings (1)

     —          5,297        —          —          —          5,297   
                                                

Balance at June 30, 2010

   $ —        $ —        $ 46,650      $ 43,458      $ 46,650      $ 43,458   
                                                

 

(1)

Gains are recorded in other (expense) income, net, within the consolidated statements of operations.

As of June 30, 2010, 99.7% of the Company’s ARS portfolio was comprised of federally insured, student loan-backed securities and 84.9% of the Company’s ARS portfolio was comprised of Aaa/AAA/AAA rated investments by Moody’s, S&P and Fitch, respectively.

The impairment of the non-UBS-brokered available-for-sale ARS portfolio is considered to be temporary because the Company does not have the intent to sell, nor is it more-likely-than-not that the Company will be required to sell, any of its available-for-sale ARS before recovery of its cost basis, and because there has been no significant deterioration in the creditworthiness of the underlying issuers. 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 intent to not sell any of the available-for-sale ARS before recovery of its cost basis 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.

 

12


Table of Contents

6. 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 of changes in foreign currency exchange rates 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.

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 and business support activities. The Company utilizes a foreign currency risk management program involving the use of foreign currency derivatives to hedge up to 75% of the 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 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

In August 2008, the Company entered into a loan agreement that provides for a senior unsecured term loan in the amount of $270.0 million (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 partially convert this variable rate exposure into fixed rate. As of March 31, 2009, the Company had swapped $270.0 million of the Term Loan for the first three years, $185.0 million for the fourth year and $100.0 million for the fifth year. Only the variable LIBOR component of the Term Loan was swapped to fixed rate. As of June 30, 2010, these hedges are still in place. 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, net, until the underlying transactions occur. 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 for the ineffective portion are recognized in other income (expense), net, in the consolidated statements of operations. At the 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 June 30, 2010, all hedges were determined to be highly effective.

 

13


Table of Contents

The following table summarizes the fair value of derivative instruments and their respective balance sheet classifications at June 30, 2010 and September 30, 2009 (in thousands):

 

     As of June 30, 2010
     Asset Derivatives    Liability Derivatives

Derivatives designated as hedging instruments:

     

Foreign exchange contracts (1)

   $ 3,644    $ 2,388

Interest rate contracts (1)

     —        11,013
             

Total derivatives designated as hedging instruments

   $ 3,644    $ 13,401
             

Total derivatives

   $ 3,644    $ 13,401
             
     As of September 30, 2009
     Asset Derivatives    Liability Derivatives

Derivatives designated as hedging instruments:

     

Foreign exchange contracts (1)

   $ 5,492    $ —  

Interest rate contracts (1)

     618      9,684
             

Total derivatives designated as hedging instruments

   $ 6,110    $ 9,684
             

Total derivatives

   $ 6,110    $ 9,684
             

 

(1)

Asset derivatives are classified within prepaid expenses and other current assets in the consolidated balance sheets. Liability derivatives are classified within accrued expenses in the consolidated balance sheets.

The following table summarizes the effect of derivative instruments that are in cash flow hedging relationships on the consolidated statements of operations for the three months ended June 30, 2010 and 2009 (in thousands):

 

     Amount of Gain (Loss)
Recognized in Other
Comprehensive Income
(“OCI”) on Derivatives
(effective portion)
   Amount of Gain (Loss)
Reclassified from  Accumulated

OCI into Income
(effective portion)
 
     Three Months Ended June 30,    Three Months Ended June 30,  
     2010     2009    2010    2009  

Foreign exchange contracts(1)

   $ (5,643   $ 8,469    $ 2,054    $ (1,882

Interest rate contracts

     (1,634     5,243      n/a      n/a   
                              

Total

   $ (7,277   $ 13,712    $ 2,054    $ (1,882
                              

 

(1)

Gain (loss) reclassified from accumulated OCI into income (effective portion) is included in compensation and related expenses in the consolidated statements of operations.

 

14


Table of Contents

The following table summarizes the effect of derivative instruments that are in cash flow hedging relationships on the consolidated statements of operations for the nine months ended June 30, 2010 and 2009 (in thousands):

 

     Amount of Gain (Loss)
Recognized in Other
Comprehensive Income
(“OCI”) on Derivatives
(effective portion)
    Amount of Gain (Loss)
Reclassified from Accumulated

OCI into Income
(effective portion)
 
     Nine Months Ended June 30,     Nine Months Ended June 30,  
     2010     2009     2010    2009  

Foreign exchange contracts(1)

   $ 2,516      $ 2,874      $ 6,752    $ (10,639

Interest rate contracts

     (1,947     (5,821     n/a      n/a   
                               

Total

   $ 569      $ (2,947   $ 6,752    $ (10,639
                               

 

(1)

Gain (loss) reclassified from accumulated OCI into income (effective portion) is included in compensation and related expenses in the consolidated statements of operations.

At June 30, 2010, the notional value of the derivatives related to outstanding non-deliverable Indian rupee forward contracts maturing by September 2012 was $160.1 million (INR 7.7 billion) and the notional value of the derivatives related to the interest rate swaps was $270.0 million. The estimated net amount of gains and losses at June 30, 2010 that is expected to be reclassified from accumulated other comprehensive (loss) income into income within the next twelve months is a net gain of approximately $2.9 million.

7. Fair Value Measurements

ASC 820 establishes a framework for measuring fair value, clarifies the definition of fair value within that framework and expands disclosures about the use of fair value measurements. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (i.e., an exit price) in an orderly transaction between market participants at the measurement date. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability.

ASC 820 specifies a hierarchy of valuation techniques based upon whether the inputs to those valuation techniques reflect assumptions that other market participants would use based upon market data obtained from independent sources (observable inputs) or reflect the Company’s own assumptions of market participant valuation (unobservable inputs). Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. ASC 820 establishes a fair value hierarchy that prioritizes the use of inputs used in valuation techniques into the following three levels:

 

   

Level 1 – Quoted prices in active markets that are unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;

 

   

Level 2 – Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or financial instruments for which significant inputs are observable, either directly or indirectly; and

 

   

Level 3 – Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

When available, the Company uses unadjusted quoted market prices to measure fair value and classifies such items within Level 1. If quoted market prices are not available, fair value is based upon internally-developed models that use, where possible, current market-based or independently-sourced market parameters such as interest rates and currency rates. Items valued using internally-generated models are classified according to the lowest level input or value driver that is significant to the valuation. Thus, an item may be classified in Level 3 even though there may be inputs that are readily observable. If quoted market prices are not available, the valuation model used depends on the specific asset or liability being valued.

 

15


Table of Contents

Pursuant to ASC 825, Financial Instruments, the Company elected to measure and report a put option relating to its ARS at fair value in order to account for the put option on the same basis (measured at fair value through earnings) as the associated asset (the ARS). The put option ceased to exist as of June 30, 2010, as the Company exercised the put option on June 30, 2010. Refer to Note 5 for more information.

The following table represents the Company’s fair value hierarchy for its financial assets and liabilities (cash equivalents, investments and derivatives) measured at fair value on a recurring basis as of June 30, 2010 (in thousands):

 

     Fair Value Measurements at Reporting Date Using:  
     Level 1    Level 2     Level 3    Total  

Assets:

          

Cash, commercial paper and money market funds

   $ 697,348    $ —        $ —      $ 697,348   

Auction-rate securities

     —        —          43,458      43,458   

Other short-term investments

     48,386      —          —        48,386   

Derivative assets

     —        3,644        —        3,644   
                              

Total assets

   $ 745,734    $ 3,644      $ 43,458    $ 792,836   
                              

Liabilities:

          

Derivative liabilities

   $ —      $ 13,401      $ —      $ 13,401   
                              

Total liabilities

   $ —      $ 13,401      $ —      $ 13,401   
                              

Amounts included in:

          

Cash and cash equivalents

   $ 686,463    $ —        $ —      $ 686,463   

Prepaid expenses and other current assets

     10,885      3,644        —        14,529   

Short-term investments

     48,386      —          —        48,386   

Long-term investments

     —        —          43,458      43,458   

Accrued expenses

     —        (13,401     —        (13,401
                              

Total

   $ 745,734    $ (9,757   $ 43,458    $ 779,435   
                              

Level 2 assets and liabilities consist of derivative instruments used to reduce the effects of changes in foreign currency exchange rates and interest rates on the Company’s operating results and cash flows. 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.

Level 3 assets consist of available-for-sale ARS classified as long-term investments as of June 30, 2010. In the absence of observable market data, the Company used a discounted cash flow model to determine the estimated fair value of its ARS.

The assumptions used in the preparation of the discounted cash flow model were based on data available as of June 30, 2010, 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. The assumed interest income yields for the Company’s ARS used in the discounted cash flow model were based on the yields provided for in the prospectus of each of the Company’s ARS issues, factoring in the forward yield curve. The assumed discount rate used in the discounted cash flow model was based on the implied spreads on recent student loan issues and included an illiquidity factor, which reflects the illiquidity in the ARS market. The assumed discount period used in the discounted cash flow model was determined by assigning a set of probabilities based on how the Company views its ARS to be liquidated, and included the current pace of redemptions at par and the average term that students take to repay related student loans.

A one percentage point change on the interest income yields would impact the fair value of the ARS holdings by approximately $2.8 million. A one percentage point change on the discount rate used for valuing the ARS holdings would impact the fair value by approximately $1.8 million.

Refer to Note 5 for additional information on the Company’s ARS.

 

16


Table of Contents

The following table provides a reconciliation of the beginning and ending balances for the assets measured at fair value using significant unobservable inputs (Level 3) (in thousands):

 

     Fair Value Measurements at Reporting Date
Using Significant Unobservable Inputs

(Level 3)
 
     Auction
rate
securities
    Put
option
    Total  

Balance at October 1, 2009

   $ 115,436      $ 6,138      $ 121,574   

Change in unrealized loss included in other comprehensive income

     (128     —          (128

Gains (losses) included in earnings (1)

     268        (283     (15

Sold during the period

     (3,050     —          (3,050
                        

Balance at December 31, 2009

     112,526        5,855        118,381   
                        

Change in unrealized loss included in other comprehensive income

     501        —          501   

Gains (losses) included in earnings (1)

     591        (559     32   

Sold during the period

     (3,850     —          (3,850
                        

Balance at March 31, 2010

   $ 109,768      $ 5,296      $ 115,064   
                        

Change in unrealized loss included in other comprehensive income

     993        —          993   

Gains (losses) included in earnings (1)

     5,297        (5,296     1   

Sold during the period

     (72,600     —          (72,600
                        

Balance at June 30, 2010

   $ 43,458      $ —        $ 43,458   
                        

 

(1)

Gains (losses) are recorded in other expense, net, within the consolidated statements of operations.

As discussed in Note 8, the Company recorded a pretax non-cash goodwill impairment charge of $17.0 million ($10.6 million net of tax) during the three months ended March 31, 2010. The goodwill impairment charge was a result of comparing the estimated fair value of the reporting unit to its carrying value. The fair value of the reporting unit was estimated using the expected present value of future cash flows, and included estimates, judgments and assumptions that management believes were appropriate in the circumstances. The estimates and judgments that most significantly affected the fair value calculations were assumptions related to revenue growth, compensation levels and discount rates. The fair value of the reporting unit impacted by the goodwill impairment charge is considered a non-recurring Level 3 fair value measurement.

As discussed in Note 10, during the third quarter of fiscal 2010 the Company recorded an expense of $5.6 million related to the exit and consolidation of facilities in the United States and the United Kingdom, and an expense of $5.2 million related to updated sublease rental assumptions used to determine the fair value of the liabilities incurred to exit certain facilities. The fair values of expected lease obligations for these vacated facilities are considered non-recurring Level 3 fair value measurements. Refer to Note 10 for additional information on the Company’s real estate restructuring activities.

During the three months ended June 30, 2010, the Company recorded a pretax non-cash asset impairment charge of $4.6 million related to internally-developed capitalized software. The Company determined that it was no longer probable that the software would be completed and placed in service. As a result, the software has a fair value of zero. The net charge of $4.6 million was recorded as a component of operating expenses in the accompanying consolidated statements of operations and recorded to the Consulting segment. This software impairment is a non-recurring Level 3 fair value measurement.

 

17


Table of Contents

8. Goodwill and Other Intangible Assets

The following is a summary of changes in the carrying amount of goodwill for the nine months ended June 30, 2010 (in thousands):

 

     Benefits
Outsourcing
    Consulting     Total  

Balance at September 30, 2009

   $ 100,818      $ 311,927      $ 412,745   

Additions

     15,646        —          15,646   

Impairment

     —          (17,026     (17,026

Allocation to divested business

     —          (4,549     (4,549

Adjustments and reclassifications

     (4,765     (619     (5,384

Effect of changes in foreign exchange rates

     (1,374     (27,035     (28,409
                        

Balance at June 30, 2010

   $ 110,325      $ 262,698      $ 373,023   
                        

As discussed in Note 4, on January 28, 2010, the Company divested a portion of its North America EC Consulting business focused on advising boards of directors. As a result, the Company allocated goodwill between the portion of the reporting unit retained and the portion of the reporting unit disposed of, based on their relative fair values on January 28, 2010. The fair values of the portion of the reporting unit retained and the portion of the reporting unit disposed of were estimated using the expected present value of future cash flows, and included estimates, judgments and assumptions that management believes were appropriate in the circumstances. The estimates and judgments that most significantly affected the fair value calculations were assumptions related to revenue growth, compensation levels and discount rates. The allocation of goodwill resulted in $4.5 million of goodwill assigned to the portion of the reporting unit disposed of in the first phase of the divestiture.

As a result of this partial divestiture, the Company was required to test the reporting unit impacted by the partial divestiture for impairment as of January 28, 2010 pursuant to ASC 350, Intangibles – Goodwill and Other. This goodwill impairment test was based upon a comparison of the estimated fair value of the reporting unit to its carrying value. This analysis resulted in a pretax non-cash impairment charge of $17.0 million ($10.6 million net of tax) related to the Consulting segment recorded as a component of operating expenses in the accompanying consolidated statements of operations.

The additions to goodwill for Benefits Outsourcing for the nine months ended June 30, 2010 related to the second quarter fiscal 2010 acquisition of Senior Educators and the third quarter fiscal 2010 acquisition of HRAdvance. The Company assigned $10.9 million and $4.8 million, respectively, to goodwill related to these acquisitions. Adjustments and reclassifications to Benefits Outsourcing goodwill for the nine months ended June 30, 2010 related to the reduction in purchase price for the recovery of funds held in escrow relating to the 2008 acquisition of an absence management business within Benefits Outsourcing.

 

18


Table of Contents

Intangible assets with definite useful lives are amortized over their estimated useful lives and are tested for impairment whenever indicators of impairment arise. The following is a summary of intangible assets at June 30, 2010 and September 30, 2009 (in thousands):

 

     June 30, 2010    September 30, 2009
     Gross
Carrying
Amount
   Accumulated
Amortization
   Net    Gross
Carrying
Amount
   Accumulated
Amortization
   Net

Customer relationships

   $ 253,716    $ 107,612    $ 146,104    $ 260,664    $ 97,887    $ 162,777

Core technology

     53,936      25,433      28,503      48,551      21,310      27,241

Trademarks and tradenames

     5,562      4,538      1,024      5,371      3,910      1,461
                                         

Total

   $ 313,214    $ 137,583    $ 175,631    $ 314,586    $ 123,107    $ 191,479
                                         

Amortization expense related to definite-lived intangible assets for the three and nine months ended June 30, 2010 and 2009 was as follows (in thousands):

 

     Three Months Ended
June  30,
   Nine Months Ended
June 30,
     2010    2009    2010    2009

Customer relationships

   $ 3,802    $ 3,378    $ 11,376    $ 10,880

Core technology

     1,530      1,283      4,129      2,661

Trademarks and tradenames

     51      387      820      1,120
                           

Total

   $ 5,383    $ 5,048    $ 16,325    $ 14,661
                           

9. Debt

Long-term debt at June 30, 2010 and September 30, 2009 consisted of the following (in thousands):

 

     June 30,
2010
   September 30,
2009

Unsecured senior term loan

   $ 270,000    $ 270,000

Unsecured senior term notes

     259,000      276,000

Term loan credit facility

     19,594      26,631

Capital lease obligations

     75,522      82,161

Other foreign debt

     34      51
             

Subtotal

     624,150      654,843

Current portion of long-term debt and capital lease obligations

     39,189      36,282
             

Debt and capital lease obligations, less current portion

   $ 584,961    $ 618,561
             

In October 2009, the Company entered into a three-year $250.0 million credit facility with a multi-bank syndicate. This credit facility contains a $25.0 million sub-limit for the issuance of letters of credit. This credit facility replaced the previous five-year $200.0 million credit facility. Borrowings under this facility accrue interest at LIBOR plus 200-300 basis points or a base rate plus 100-200 basis points. Borrowings are repayable at expiration of the facility on October 9, 2012 and quarterly commitment fees ranging from 30-50 basis points are charged under the credit facility. At June 30, 2010, there were no borrowings outstanding or letters of credit secured by this facility.

 

19


Table of Contents

10. Restructuring Activities

During the third quarter of fiscal 2007 and throughout fiscal 2008, 2009 and 2010, the Company recorded charges related to the exit and consolidation of facilities in the U.S. and international locations. These charges consisted of the recognition of the fair value of expected lease obligations for vacated facilities, lease termination and cancellation penalties and the reversal of prepaid and accrued rents. The charges also included adjustments to the fair value of expected lease obligations for vacated facilities related to an update of sublease assumptions. The significant assumptions used in computing the fair value of expected lease obligations for vacated facilities include estimates of the timing and amounts of sublease receipts related to the vacated facilities as well as prevailing discount rates. Refer to Note 7 for additional information on fair value measurements.

The following table summarizes the activity in the restructuring reserves for the nine months ended June 30, 2010 and 2009 (in thousands):

 

     Nine Months Ended
June 30,
 
     2010     2009  

Balance at beginning of period

   $ 52,207      $ 51,203   

Additions

     5,622        3,352   

Payments, net

     (10,648     (12,232

Adjustments

     5,353        7,113   
                

Balance at end of period

   $ 52,534      $ 49,436   
                

During the third quarter of fiscal 2010, the Company recorded expense of $5.6 million related to the exit and consolidation of facilities in the United States and the United Kingdom. The charges consisted of the recognition of the fair value of expected lease obligations for these exited facilities. The net costs were recorded in other operating expense within the consolidated statements of operations and charged to the Benefits Outsourcing and Consulting segments in the amounts of $3.2 million and $2.4 million, respectively.

Additionally, during the third quarter of fiscal 2010, the Company updated estimated sublease rental assumptions used to determine the fair value of the liabilities incurred to exit certain facilities. These assumptions were updated to reflect current market conditions relating to the commercial real estate rental market in the U.S. As a result, the Company recorded adjustments to increase the restructuring reserve by $5.2 million. These additional costs were recorded in other operating expenses within the consolidated statements of operations and charged to the Benefits Outsourcing, HR BPO and Consulting segments in the amounts of $1.7 million, $1.8 million and $0.2 million respectively; $1.5 million was recorded to shared services and was not allocated to the segments.

During the second quarter of fiscal 2009, the Company updated estimated sublease rental assumptions initially used to determine the fair value of the liabilities incurred to exit certain facilities. These assumptions were updated to reflect current market conditions relating to the commercial real estate rental market in the U.S. As a result, the Company recorded adjustments to increase the restructuring reserve by $6.3 million. These additional costs were recorded in other operating expenses within the consolidated statements of operations and charged to the Benefits Outsourcing and HR BPO segments in the amounts of $1.8 million and $3.0 million respectively; $1.5 million was recorded to shared services and was not allocated to the segments.

Additionally, during the second quarter of fiscal 2009, the Company recorded expense of $0.4 million related to the exit and consolidation of a certain facility in the U.S. The charges consisted of $0.5 million for the recognition of the fair value of expected lease obligation for this vacated facility offset slightly by the reversal of accrued rent. These costs were recorded in other operating expenses within the consolidated statements of operations and charged to the Consulting segment.

During the third quarter of fiscal 2009, the Company recorded expense of $2.9 million related to the exit and consolidation of a facility in the U.S. The charges consisted of a lease cancellation penalty incurred when the Company notified the landlord during the third quarter of its intent to terminate the lease agreement. The net costs were recorded in other operating expense within the consolidated statements of operations and charged to the Benefits Outsourcing and Consulting segments in the amounts of $2.2 million and $0.7 million, respectively.

Adjustments also include the accretion of fair values and the effect of foreign currency translation during the nine months ended June 30, 2010 and 2009.

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.

 

20


Table of Contents

11. Earnings Per Share

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 EPS, 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 units and unexercised stock options that are in-the-money. Restricted stock unit awards generally vest 25 percent at each fiscal year end following the grant date and are not considered outstanding in basic EPS until the vesting date.

The following table presents computations of basic and diluted EPS in accordance with U.S. GAAP (in thousands, except share and per share data):

 

     Three Months Ended
June 30,
   Nine Months Ended
June 30,
     2010    2009    2010    2009

Net income as reported

   $ 77,942    $ 68,397    $ 203,743    $ 200,701
                           

Weighted average outstanding shares – basic

     92,884,931      93,439,928      93,429,402      93,683,106

Incremental effect of dilutive common stock equivalents:

           

Unexercised stock options

     1,179,847      1,094,171      1,333,900      1,032,805

Unvested restricted stock unit awards

     1,042,696      1,327,602      835,732      913,271
                           

Weighted average outstanding shares – diluted

     95,107,474      95,861,701      95,599,034      95,629,182
                           

Earnings per share – basic

   $ 0.84    $ 0.73    $ 2.18    $ 2.14

Earnings per share – diluted

   $ 0.82    $ 0.71    $ 2.13    $ 2.10

Of the outstanding stock options as of June 30, 2010 and 2009, 543,537 and 735,235 weighted average shares for each quarter and 453,180 and 771,791 for each nine month period, respectively, were not included in the computation of diluted earnings per share because the options were anti-dilutive.

12. Pension and Postretirement 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. The Company provides health benefits for retired U.S. and Canadian employees and certain dependents when those employees become eligible for these benefits by satisfying plan provisions, which include certain age and service requirements. These plans were closed in 2006 to new participants who did not meet certain service requirements as of December 31, 2006. The health benefit plans are contributory, and contributions are reviewed annually and adjusted as appropriate.

The components of net periodic pension benefit costs for the three and nine months ended June 30, 2010 and 2009 were as follows (in thousands):

 

     Pension Benefits  
     Three Months Ended
June 30,
    Nine Months Ended
June 30,
 
     2010     2009     2010     2009  

Service cost

   $ 2,471      $ 2,432      $ 7,793      $ 7,138   

Interest cost

     2,774        2,924        8,715        8,592   

Expected return on plan assets

     (2,885     (2,648     (9,064     (7,509

Unrecognized prior service cost

     (1     (11     (5     19   

Unrecognized loss

     351        194        1,091        505   
                                

Net periodic benefit cost

   $ 2,710      $ 2,891      $ 8,530      $ 8,745   
                                

 

21


Table of Contents

The components of net periodic health benefit costs for the three and nine months ended June 30, 2010 and 2009 were as follows (in thousands):

 

     Health Benefits
     Three Months Ended
June  30,
   Nine Months Ended
June  30,
     2010    2009    2010    2009

Service cost

   $ 61    $ 42    $ 182    $ 126

Interest cost

     227      220      682      660

Unrecognized prior service cost

     11      —        33      2

Unrecognized loss

     61      26      183      78
                           

Net periodic benefit cost

   $ 360    $ 288    $ 1,080    $ 866
                           

The Company contributed approximately $10.1 million to the pension plans during the nine months ended June 30, 2010 and presently anticipates contributing approximately $9.6 million to fund its pension plans during the fourth quarter of fiscal 2010 (applying foreign exchange rates at June 30, 2010).

13. Share-Based Compensation Plans

The Company recorded pretax share-based compensation expense of $14.5 million and $14.1 million during the three months ended June 30, 2010 and 2009, respectively, and $40.3 million and $41.0 million during the nine months ended June 30, 2010 and 2009, respectively, related to the Company’s stock options, restricted stock units and performance share units.

Under the Company’s Global Stock and Incentive Compensation Plan (the “Plan”), which was adopted in fiscal 2002, amended in January 2008 and administered by the Compensation and Leadership Committee (the “Committee”) of the Company’s Board of Directors, employees and directors may receive awards of 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. As of June 30, 2010, only restricted stock, restricted stock units, performance share units and 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 June 30, 2010, there were 4,941,015 shares available for grant under the Plan, which includes shares tendered to the Company by employees to satisfy their minimum tax withholding requirements related to vested awards.

Restricted Stock Units

The following table summarizes restricted stock units activity, including performance share units activity, during the nine months ended June 30, 2010:

 

     June 30, 2010
     Restricted
Stock Units
    Weighted
Average Grant
Date

Fair Value

Outstanding at beginning of period

   2,419,832      $ 29.42

Granted

   1,625,047      $ 41.24

Vested

   (73,568   $ 32.10

Forfeited

   (204,088   $ 31.71
        

Outstanding at end of period

   3,767,223      $ 34.34
        

Stock Options

The Committee may grant both incentive stock options and 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 U.S., 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 stock options generally vest in equal annual installments over a period of four years.

 

22


Table of Contents

The fair value used to determine compensation expense for the nine months ended June 30, 2010 and 2009 was estimated at the date of grant using a Black-Scholes option pricing model. The following table summarizes the weighted-average assumptions used to determine fair value for options granted during the nine months ended June 30, 2010 and 2009:

 

     June 30,  
     2010     2009  

Expected volatility

   29.08   29.30

Risk-free interest rate

   2.53   2.13

Expected life (in years)

   6.17      6.17   

Dividend yield

   0   0

The Company uses the simplified method to determine the expected life assumption for all of its options. The Company continues to use the simplified method 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 the nine months ended June 30, 2010:

 

     June 30, 2010
     Options     Weighted
Average
Exercise
Price

Outstanding at beginning of fiscal year

   6,298,321      $ 26.04

Granted

   494,632      $ 41.40

Exercised

   (1,370,976   $ 24.44

Forfeited

   (159,215   $ 30.87

Expired

   (7,262   $ 30.95
        

Outstanding at end of period

   5,255,500      $ 27.74
        

Exercisable options at end of period

   3,600,942      $ 25.58

14. Commitments and Contingencies

Legal Proceedings

The Company is involved in disputes arising in the ordinary course of its business relating to outsourcing and consulting agreements, professional liability claims, vendors and service providers and employment claims. The Company is also routinely audited and subject to inquiries by governmental and regulatory agencies. 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 of outcomes, 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. Insurance and other recoveries of losses are separately evaluated and recognized only if such recoveries are also probable and reasonably estimable.

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.

In the normal course of business, the Company also enters into contracts in which it makes representations, warranties, guarantees and indemnities that relate to the performance of the Company’s services and products. The Company does not expect any material losses related to such representations, warranties, guarantees and indemnities.

Refer to Note 18 under the caption “Transaction with Aon” for more information regarding legal proceedings related to the transaction.

 

23


Table of Contents

15. Other Comprehensive (Loss) Income

The following table presents the after-tax components of the Company’s other comprehensive (loss) income for the periods presented (in thousands):

 

     Three Months Ended
June 30,
    Nine Months Ended
June 30,
 
     2010     2009     2010     2009  

Net income

   $ 77,942      $ 68,397      $ 203,743      $ 200,701   

Other comprehensive (loss) income:

        

Foreign currency translation adjustments

     (15,711     38,698        (27,403     (41,067

Unrealized losses on investments

     618        1,188        850        1,312   

Net unrealized (loss) gain on hedging transactions

     (5,804     9,629        (3,846     4,750   

Retirement plans

     429        (81     1,310        (2,992
                                

Total comprehensive income

   $ 57,474      $ 117,831      $ 174,654      $ 162,704   
                                

The foreign currency translation adjustments during the nine months ended June 30, 2010 and 2009 primarily related to the unfavorable changes in the value of the British pound sterling relative to the U.S. dollar.

16. Income Taxes

The Company’s consolidated effective income tax rate was (10.6)% and 34.3% for the three months ended June 30, 2010 and 2009, respectively, and 27.0% and 35.6% for the nine months ended June 30, 2010 and 2009, respectively. 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 pretax 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 recorded 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 Company had a number of discrete events during the three and nine months ended June 30, 2010 that materially impacted the effective income tax rate. The lower income tax rate for the three months ended June 30, 2010 was primarily attributable to net tax benefits and net interest benefits of $29.6 million and $6.2 million, respectively, from the reversal of previously established tax reserves related to prior years’ tax filings. These benefits primarily resulted from the current quarter settlement of various federal, state and foreign audits and statute closure for fiscal years 2003 through 2008. These benefits also impacted the income tax rate for the nine months ended June 30, 2010. The Company also had a number of discrete events in the three and nine months ended June 30, 2009 which materially reduced the prior year’s quarterly and nine month consolidated effective income tax rate.

Income tax-related interest expense and income tax-related penalties are reported as a component of the provision for income taxes in the consolidated statements of operations. The Company included interest and penalties of $0.1 million and $0.4 million for the three months ended June 30, 2010 and 2009, respectively, and $0.7 million and $1.4 million for the nine months ended June 30, 2010 and 2009, respectively, in the provision for income taxes in the consolidated statements of operations. As of June 30, 2010 and September 30, 2009, the total amount of accrued income tax-related interest and penalties included in the consolidated balance sheets was $3.5 million and $13.0 million, respectively.

The U.S. federal tax examination for the tax years ending September 30, 2003 through September 30, 2008 have been completed, but the statutes of limitations for tax years 2003, 2004, 2007 and 2008 have not yet expired. The Company is also subject to examination in a number of state and foreign jurisdictions for tax years ending after September 30, 2002, for which no individually material unrecognized tax benefits exist. During the current quarter, the Company settled an appeal with the IRS for the tax years ended September 30, 2003 and September 30, 2004. As a result of this settlement, all federal tax issues relating to these tax years have been resolved. The Company believes appropriate provisions for all outstanding income tax matters have been made for all jurisdictions and all open years.

 

24


Table of Contents

As of June 30, 2010 and September 30, 2009, the total amount of unrecognized tax benefits was $23.1 million and $49.4 million, respectively. If tax matters for the 2007 and 2008 tax years are effectively settled with the relevant federal, state and foreign jurisdictions within the next 12 months, that settlement could increase earnings by zero to $5.1 million based on current estimates. Audit outcomes and the timing of audit settlements are subject to significant uncertainty.

During the second quarter of fiscal 2010, the Company reclassified amounts between current taxes payable (included in accrued expenses) and current deferred income taxes in the consolidated balance sheets related to performance-based compensation as a result of recently issued IRS guidance. There was no impact to the Company’s effective income tax rate or net income as a result of this balance sheet reclassification.

17. Segment Results

The Company has three reportable segments – 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 human resources, information technology services, management, corporate relations, finance, general counsel, real estate management, supplier management and other supporting services. Many of these costs, such as information technology services, real estate management and other support services, are assigned to the business segments based on usage and consumption factors. Certain costs within human resources, 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 following table summarizes the Company’s reportable segment results (in thousands):

 

     Three Months Ended
June 30,
    Nine Months Ended
June 30,
 
     2010     2009     2010     2009  

Benefits Outsourcing

        

Segment net revenues

   $ 369,282      $ 377,581      $ 1,169,205      $ 1,161,326   

Segment income

     72,020        99,970        280,053        299,963   

HR BPO

        

Segment net revenues

   $ 110,458      $ 115,678      $ 334,071      $ 365,861   

Segment income (loss)

     3,044        2,212        10,569        (3,157

Consulting

        

Segment net revenues

   $ 258,195      $ 244,288      $ 781,367      $ 746,604   

Segment income

     28,459        30,249        84,455        100,048   

Total Company

        

Segment net revenues

   $ 737,935      $ 737,547      $ 2,284,643      $ 2,273,791   

Intersegment revenues

     (7,359     (8,538     (23,457     (27,766
                                

Revenues before reimbursements

     730,576        729,009        2,261,186        2,246,025   

Reimbursements

     16,019        14,710        56,880        53,499   
                                

Total revenues

   $ 746,595      $ 743,719      $ 2,318,066      $ 2,299,524   
                                

Segment income

   $ 103,523      $ 132,431      $ 375,077      $ 396,854   
                                

Charges not recorded at the segment level:

        

Unallocated shared service costs

     24,292        23,374        67,591        68,534   
                                

Operating income

   $ 79,231      $ 109,057      $ 307,486      $ 328,320   
                                

 

25


Table of Contents

18. Subsequent Events

Transaction with Aon

On July 11, 2010, Hewitt entered into an Agreement and Plan of Merger with Aon Corporation (“Aon”), Alps Merger Corp., a wholly owned subsidiary of Aon (“Merger Sub”), and Alps Merger LLC, a wholly owned subsidiary of Aon (“Merger LLC”). The merger agreement provides, among other things, that, upon the terms and subject to the conditions set forth in the merger agreement, (i) Merger Sub will merge with and into Hewitt, with Hewitt surviving as a wholly owned subsidiary of Aon, and (ii) following the completion of the merger, the surviving corporation from the merger will merge with and into Merger LLC, with Merger LLC surviving the subsequent merger and continuing as a wholly owned subsidiary of Aon. Subject to the terms and conditions of the merger agreement, which has been approved and adopted by the boards of directors of each of Aon and Hewitt, at the effective time of the merger, each share of Class A common stock of Hewitt outstanding immediately prior to the effective time will convert into, at the election of each of the holders of Hewitt common stock, (i) 0.6362 of a share of common stock of Aon and $25.61 in cash, (ii) the amount of cash equal to the sum of (a) $25.61 and (b) the product obtained by multiplying 0.6362 by the Closing Volume-Weighted Average Price (as defined in the merger agreement) per share of Aon common stock, or (iii) the number of shares of Aon common stock equal to the sum of (a) 0.6362 and (b) the quotient obtained by dividing $25.61 by the Closing Volume-Weighted Average Price per share of Aon common stock.

The transaction is expected to close during the fourth calendar quarter of 2010. The completion of the transaction is subject to customary closing conditions, including obtaining the approval of Hewitt’s and Aon’s stockholders, receiving certain regulatory approvals (including approval under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and certain approvals by foreign governmental entities). Each of Aon and Hewitt has made customary representations, warranties and covenants in the merger agreement.

The merger agreement contains specified termination rights for both Aon and Hewitt. If the merger agreement is terminated under certain specified circumstances, Hewitt must pay Aon a termination fee of $85 million or $190 million, as applicable. If the merger agreement is terminated under certain other specified circumstances, Aon must pay Hewitt a termination fee of $190 million or, if the merger agreement is terminated under certain specified circumstances relating to Aon’s failure to obtain the requisite financing for the transaction, a termination fee of $225 million.

Following the announcement of the merger with Aon, various putative class action complaints were filed against Hewitt, its board of directors and Aon. Hewitt is currently aware of four such complaints filed in Delaware Chancery Court, Cook County, Illinois Chancery Court and the Circuit Court of the Nineteenth Judicial Circuit in Lake County, Illinois. These complaints allege generally that defendants breached their fiduciary duties, or aided and abetted others’ breaches of fiduciary duties, in connection with the proposed transaction with Aon by, among other things, authorizing the transaction for what plaintiffs claim to be inadequate consideration and pursuant to what plaintiffs claim to be an inadequate process. The relief sought by the various complaints includes, among other things, enjoining the proposed transaction, rescinding it to the extent it has already been implemented, and directing defendants to account for damages sustained by the putative class. Defendants believe the claims are without merit and intend to vigorously defend against the suits.

Acquisition of EnnisKnupp

On July 2, 2010, the Company entered into a definitive agreement to acquire Ennis, Knupp & Associates, Inc., a provider of investment advisory services to large, complex institutional investors. This acquisition will increase the Company’s existing investment consulting capabilities in the U.S. and support its global growth plans. The transaction, which is subject to customary closing conditions including regulatory approval, is expected to close during the Company’s fiscal 2010 fourth quarter. Results of operations will be included in the Consulting segment from the date of acquisition.

 

26


Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following information should be read in conjunction with the information contained in our consolidated financial statements and related notes presented earlier in this Quarterly Report on Form 10-Q. Please also refer to our consolidated financial statements and related notes and the information under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission for additional information. In addition to historical information, this Quarterly Report on Form 10-Q may contain forward-looking statements that involve risks, uncertainties and assumptions, which could cause actual results to differ materially from management’s expectations. Some of the risks and uncertainties are described below and in the “Note Regarding Forward-Looking Statements” which appears later in this section, in Part II, Item 1A of this 10-Q under the heading “Risk Factors” and in our Annual Report on Form 10-K, in Item 1A under the heading “Risk Factors.”

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 “2010” or “fiscal 2010” means the twelve-month period that ends September 30, 2010. 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.

Overview

Transaction with Aon

On July 11, 2010, Hewitt entered into an Agreement and Plan of Merger with Aon Corporation (“Aon”), Alps Merger Corp., a wholly owned subsidiary of Aon (“Merger Sub”), and Alps Merger LLC, a wholly owned subsidiary of Aon (“Merger LLC”). The merger agreement provides, among other things, that, upon the terms and subject to the conditions set forth in the merger agreement, (i) Merger Sub will merge with and into Hewitt, with Hewitt surviving as a wholly owned subsidiary of Aon, and (ii) following the completion of the merger, the surviving corporation from the merger will merge with and into Merger LLC, with Merger LLC surviving the subsequent merger and continuing as a wholly owned subsidiary of Aon. Subject to the terms and conditions of the merger agreement, which has been approved and adopted by the boards of directors of each of Aon and Hewitt, at the effective time of the merger, each share of Class A common stock of Hewitt outstanding immediately prior to the effective time will convert into, at the election of each of the holders of Hewitt common stock, (i) 0.6362 of a share of common stock of Aon and $25.61 in cash, (ii) the amount of cash equal to the sum of (a) $25.61 and (b) the product obtained by multiplying 0.6362 by the Closing Volume-Weighted Average Price (as defined in the merger agreement) per share of Aon common stock, or (iii) the number of shares of Aon common stock equal to the sum of (a) 0.6362 and (b) the quotient obtained by dividing $25.61 by the Closing Volume-Weighted Average Price per share of Aon common stock.

The transaction is expected to close during the fourth calendar quarter of 2010. The completion of the transaction is subject to customary closing conditions, including obtaining the approval of Hewitt’s and Aon’s stockholders, receiving certain regulatory approvals (including approval under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and certain approvals by foreign governmental entities).

This communication does not constitute an offer to sell or the solicitation of an offer to buy our securities or the solicitation of any vote or approval. The proposed transaction involving Hewitt and Aon will be submitted to their respective stockholders for their consideration. In connection with the proposed transaction, on July 26, 2010, Aon filed with the Securities and Exchange Commission (the “SEC”) a registration statement on Form S-4, which included a preliminary joint proxy statement of Aon and Hewitt that also constitutes a preliminary prospectus of Aon, and each of the companies may be filing with the SEC other documents regarding the proposed transaction. Aon and Hewitt will each mail the definitive joint proxy statement/prospectus to its stockholders. Before making any voting or investment decision, investors and stockholders are urged to read carefully in their entirety the definitive joint proxy statement/prospectus when it becomes available, because it will contain important information regarding the proposed transaction. You may obtain a free copy of the joint proxy statement/prospectus, as well as all other documents filed with the SEC regarding the transaction, without charge, at the SEC’s website (www.sec.gov), by accessing Aon’s website at www.aon.com under the heading “Investor Relations” and then under the link “SEC Filings” and from Aon by directing a request to Aon at Aon Corporation, 200 E. Randolph Street, Chicago, Illinois 60601, Attention: Investor Relations, and by accessing Hewitt’s website at www.hewitt.com under the heading “Investor Relations,” and then under the link “Reports & SEC Filings” and from Hewitt by directing a request to Hewitt at Hewitt Associates, Inc., 100 Half Day Road, Lincolnshire, Illinois 60069, Attention: Investor Relations.

 

27


Table of Contents

Following the announcement of the merger with Aon, various putative class action complaints were filed against Hewitt, its board of directors and Aon. Hewitt is currently aware of four such complaints filed in Delaware Chancery Court, Cook County, Illinois Chancery Court and the Circuit Court of the Nineteenth Judicial Circuit in Lake County, Illinois. These complaints allege generally that defendants breached their fiduciary duties, or aided and abetted others’ breaches of fiduciary duties, in connection with the proposed transaction with Aon by, among other things, authorizing the transaction for what plaintiffs claim to be inadequate consideration and pursuant to what plaintiffs claim to be an inadequate process. The relief sought by the various complaints includes, among other things, enjoining the proposed transaction, rescinding it to the extent it has already been implemented, and directing defendants to account for damages sustained by the putative class. Defendants believe the claims are without merit and intend to vigorously defend against the suits.

Third Quarter Overview

Third quarter revenues before reimbursements (“net revenues”) were approximately unchanged as compared to the prior-year quarter. Excluding third-party supplier revenues and adjusting for the favorable effects of foreign currency translation of $1.9 million and the net favorable impact of acquisitions and divestitures of $4.8 million, net revenues decreased 0.7%. This decrease was the result of lower revenues in Benefits Outsourcing and HR BPO, which was mostly offset by an increase in Consulting. The lower Benefits Outsourcing revenues principally reflect the impact of lower project revenues due to the recent recessionary environment. The lower HR BPO revenues were mostly due to the impact of contractual adjustments and client terminations and liquidations. The higher Consulting revenues were primarily due to an increase in Retirement and Financial Management consulting services, mostly in Europe and North America, and Health Management consulting services in North America. Segment results are discussed in greater detail later in this section.

Third quarter operating income decreased $29.8 million, or 27.3%, compared to the prior-year quarter. This decrease was mostly the result of higher staffing costs, real estate exit charges, an impairment of capitalized software of $4.6 million and increased professional services fees. The current quarter effective income tax rate was (10.6)% and was primarily impacted by tax benefits related to the reversal of previously established tax reserves mostly due to the settlement of various tax audits related to tax filings from prior years. Refer to Note 16 in the Notes to the Consolidated Financial Statements for additional information on income taxes. Consolidated results of operations are discussed in greater detail later in this section.

We continue to maintain a strong balance sheet with significant liquidity. Cash and cash equivalents were $686.5 million at June 30, 2010 and included investments in highly-rated money market funds and similar investments. At June 30, 2010, we had available credit facilities with domestic and foreign banks for various corporate purposes. The amount of unused credit facilities as of June 30, 2010 was approximately $280.8 million.

 

28


Table of Contents

During the third quarter, we repurchased approximately 1.6 million of our outstanding shares at an average price of $37.35 per share for a total of $59.5 million. At June 30, 2010, we had approximately $98.6 million remaining under our current $300.0 million share repurchase authorization.

On May 5, 2010, we acquired certain net assets of HRAdvance, Inc., a dependent eligibility audit and ongoing verification service firm, for cash of $11.2 million. The acquisition enhances our existing dependent audit capabilities by providing a focused, proprietary technology platform and domain expertise that can be leveraged across our existing client base. Results of operations have been included in the Benefits Outsourcing segment from the date of acquisition.

On July 2, 2010, we entered into a definitive agreement to acquire Ennis, Knupp & Associates, Inc., a provider of investment advisory services to large, complex institutional investors. This acquisition will increase our existing investment consulting capabilities in the U.S. and support our global growth plans. The transaction, which is subject to customary closing conditions including regulatory approval, is expected to close during our fiscal 2010 fourth quarter. Results of operations will be included in the Consulting segment from the date of acquisition.

For further discussion of our results, please see our discussion of consolidated and segment results in the following section.

CONSOLIDATED RESULTS

The following table sets forth our historical results of operations.

Three Months Ended June 30, 2010 and 2009

Unaudited

 

     Three Months Ended                    
     June 30,           % of Net Revenues  
($ in thousands)    2010     2009     %
Change
    2010     2009  

Revenues:

          

Net revenues (1)

   $ 730,576      $ 729,009      0.2    

Reimbursements

     16,019        14,710      8.9    
                      

Total revenues

     746,595        743,719      0.4    
                      

Operating expenses:

          

Compensation and related expenses

     460,800        451,432      2.1   63.1   61.9

Other operating expenses (1)

     145,062        137,500      5.5   19.8      18.9   

Selling, general and administrative expenses

     40,912        30,262      35.2   5.6      4.2   

Reimbursable expenses

     16,019        14,710      8.9   2.2      2.0   

Goodwill and asset impairment

     4,571        758      n/m      0.6      0.1   
                              

Total operating expenses

     667,364        634,662      5.2   91.3      87.1   
                              

Operating income

     79,231        109,057      (27.3 )%    10.8      15.0   

Other (expense) income, net:

          

Interest expense

     (9,646     (9,620   0.3   (1.3   (1.3

Interest income

     2,187        1,375      59.1   0.3      0.2   

Other (expense) income, net

     (1,310     3,305      n/m      (0.2   0.4   
                              

Total other expense, net

     (8,769     (4,940   77.5   (1.2   (0.7
                              

Income before income taxes

     70,462        104,117      (32.3 )%    9.6      14.3   

(Benefit) provision for income taxes

     (7,480     35,720      n/m      (1.1   4.9   
                              

Net income

   $ 77,942      $ 68,397      14.0   10.7   9.4
                              

 

(1)

Net revenues include $10.7 million and $10.8 million of third-party supplier revenues for the three months ended June 30, 2010 and 2009, respectively. Generally, the third-party supplier arrangements are marginally profitable. The related third-party supplier expenses are included in other operating expenses.

 

29


Table of Contents

Net Revenues

Net revenues were approximately unchanged as compared to the prior-year quarter. Excluding third-party supplier revenues and adjusting for the favorable effects of foreign currency translation of $1.9 million and the net favorable impact of acquisitions and divestitures of $4.8 million, net revenues decreased 0.7%. This decrease was the result of lower revenues in Benefits Outsourcing and HR BPO, which was mostly offset by an increase in Consulting. The lower Benefits Outsourcing revenues principally reflect the impact of lower project revenues due to the recent recessionary environment. The lower HR BPO revenues were mostly due to the impact of contractual adjustments and client terminations and liquidations. The higher Consulting revenues were primarily due to an increase in Retirement and Financial Management consulting services, mostly in Europe and North America, and Health Management consulting services in North America. Segment results are discussed in greater detail later in this section.

Compensation and Related Expenses

Compensation and related expenses increased $9.4 million, or 2.1%. The increased cost to support new clients and higher performance based compensation expense were partially offset by lower severance costs.

Other Operating Expenses

The increase in other operating expenses of $7.6 million, or 5.5%, was primarily due to higher real estate exit charges and client service delivery costs, partially offset by a decrease in rental expense resulting from prior-year real estate exit actions.

Selling, General and Administrative (“SG&A”) Expenses

The increase in SG&A expenses of $10.7 million, or 35.2%, was mostly due to higher professional services fees, an increase in travel expenses and higher provision for doubtful accounts.

Goodwill and Asset Impairment

The current-quarter impairment charge of $4.6 million resulted from the write-off of capitalized software. The prior-year quarter impairment charge of $0.8 million resulted from the write-off of deferred set-up costs associated with a client contract.

Total Other Expense, Net

Total other expense, net, increased $3.8 million and resulted from higher losses on foreign currency transactions.

Provision for Income Taxes

The Company’s consolidated effective income tax rate was (10.6)% and 34.3% for the three months ended June 30, 2010 and 2009, respectively. The Company had a number of discrete events in the three months ended June 30, 2010 which materially reduced the quarterly consolidated effective income tax rate. The lower income tax rate for the three months ended June 30, 2010 is primarily attributable to net tax benefits and net interest benefits of $29.6 million and $6.2 million, respectively, from the reversal of previously established tax reserves related to prior years’ tax filings. These benefits primarily resulted from the current quarter settlement of various federal, state and foreign tax audits and statute closure for the fiscal years 2003 through 2008.

 

30


Table of Contents

Nine Months Ended June 30, 2010 and 2009

Unaudited

 

     Nine Months Ended
June 30,
          % of Net Revenues  
($ in thousands)    2010     2009     %
Change
    2010     2009  

Revenues:

          

Net revenues (1)

   $ 2,261,186      $ 2,246,025      0.7    

Reimbursements

     56,880        53,499      6.3    
                      

Total revenues

     2,318,066        2,299,524      0.8    
                      

Operating expenses:

          

Compensation and related expenses

     1,401,440        1,403,191      (0.1 )%    62.0   62.5

Other operating expenses (1)

     412,474        412,809      (0.1 )%    18.2      18.3   

Selling, general and administrative expenses

     115,830        106,925      8.3   5.1      4.8   

Reimbursable expenses

     56,880        53,499      6.3   2.5      2.4   

Goodwill and asset impairment

     21,597        4,159      n/m      1.0      0.2   

Loss (gain) on sale of businesses

     2,359        (9,379   n/m      0.1      (0.4
                              

Total operating expenses

     2,010,580        1,971,204      2.0   88.9      87.8   
                              

Operating income

     307,486        328,320      (6.3 )%    13.6      14.6   

Other (expense) income, net:

          

Interest expense

     (28,881     (30,159   (4.2 )%    (1.3   (1.3

Interest income

     5,025        7,240      (30.6 )%    0.2      0.3   

Other (expense) income, net

     (4,399     6,125      n/m      (0.2   0.3   
                              

Total other expense, net

     (28,255     (16,794   68.2   (1.3   (0.7
                              

Income before income taxes

     279,231        311,526      (10.4 )%    12.3      13.9   

Provision for income taxes

     75,488        110,825      (31.9 )%    3.3      5.0   
                              

Net income

   $ 203,743      $ 200,701      1.5   9.0   8.9
                              

 

(1)

Net revenues include $32.8 million and $30.8 million of third-party supplier revenues for the nine months ended June 30, 2010 and 2009, 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 increased 0.7% as compared to the prior-year period. Excluding third-party supplier revenues and adjusting for the favorable effects of foreign currency translation of $31.6 million and the net favorable impact of acquisitions and divestitures of $9.5 million, net revenues decreased 1.2%. This decrease was the result of lower revenues in HR BPO, mostly due to client terminations and liquidations and the impact of contractual adjustments, and Consulting, principally due to lower demand in discretionary services, which was mostly offset by increased revenues in Benefits Outsourcing. Higher Benefits Outsourcing revenues associated with net participant count growth and lower adjustments for client service issues were offset by the impact of lost clients, lower project revenues and client renewals at lower price points. The current-year period Benefits Outsourcing revenues include $14.8 million of previously deferred revenues that were recognized under new accounting guidance and were related to the material modification of two existing contracts. The prior-year period Benefits Outsourcing revenues included $20.1 million of previously deferred revenues that were recognized due to the fiscal 2009 second quarter settlement of a contract dispute. Segment results are discussed in greater detail later in this section.

Compensation and Related Expenses

Compensation and related expenses decreased $1.8 million, or 0.1%. The current-year period reflects $7.1 million of previously deferred costs that were recognized under new accounting guidance and were related to the material modification of two existing contracts. The prior-year period reflected $15.2 million of previously deferred costs that were recognized due to the fiscal 2009 second quarter settlement of a contract dispute. Staffing leverage and lower severance expenses were mostly offset by higher staffing costs to support new clients, the unfavorable impacts of foreign currency translation related to global operations and an increase in performance-based compensation.

 

31


Table of Contents

Other Operating Expenses

The decrease in other operating expenses of $0.3 million, or 0.1%, was primarily due to a decrease in rental and related expenses resulting from prior-year real estate exit actions, mostly offset by an increase in real estate exit charges and the unfavorable impacts of foreign currency translation related to global operations.

SG&A Expenses

The increase in SG&A expenses of $8.9 million, or 8.3%, was mostly due to higher professional services costs and an increase in travel and marketing expenses.

Goodwill and Asset Impairment

As a result of the divestiture of a portion of our North America EC Consulting business, we were required to test the reporting unit impacted by the partial divestiture for impairment as of January 28, 2010 pursuant to ASC 350, Intangibles—Goodwill and Other. This goodwill impairment test was based upon a comparison of the estimated fair value of the reporting unit to its carrying value. The fair value of the reporting unit was estimated using the expected present value of future cash flows, and included estimates, judgments and assumptions that management believes were appropriate in the circumstances. The estimates and judgments that most significantly affected the fair value calculations were assumptions related to revenue growth, compensation levels and discount rates. This analysis resulted in a pretax non-cash impairment charge of $17.0 million related to the Consulting segment recorded as a component of operating results in the accompanying consolidated statements of operations.

The current-year period impairment charge also includes the write-off of capitalized software of $4.6 million.

The prior-year period impairment charge of $4.2 million resulted from the write-off of deferred set-up costs associated with certain client contracts, in addition to the impairment of customer relationship intangible assets.

Loss (Gain) on Sale of Businesses

The current-year period loss on sale of business of $2.4 million relates to the divestiture of a portion of our North America EC Consulting business. We recorded a pretax loss of $1.8 million as a result of the first phase of the sale. We also recorded an estimated pretax loss of $0.6 million related to the second phase of this transaction since we expect to incur a loss when we complete the second phase of this transaction.

The prior-year period gain on sale of businesses of $9.4 million related to our fiscal 2009 divestiture of two HR BPO businesses. In February 2009, we closed on the sale of the net assets and stock related to our Latin America HR BPO business. Additionally, in March 2009, we closed on the sale of the net assets related to our HR BPO mobility services business. Both divestitures were part of our efforts to streamline our HR BPO service offerings. We recorded a pretax gain of $9.1 million primarily related to the recognition of cumulative currency translation adjustments during the quarter ended March 31, 2009 as a result of the sale of our Latin America HR BPO business. We recorded a pretax gain of $0.3 million during the quarter ended March 31, 2009 as a result of the sale of our HR BPO mobility services business.

Total Other Expense, Net

Total other expense, net, increased $11.5 million and resulted from higher losses on foreign currency transactions and lower interest income, mostly a result of lower average interest rates as compared to the prior-year period.

Provision for Income Taxes

The Company’s consolidated effective income tax rate was 27.0% and 35.6% for the nine months ended June 30, 2010 and 2009, respectively. The Company had a number of discrete events in the nine months ended June 30, 2010 which materially reduced the quarterly consolidated effective income tax rate. The lower income tax rate for the nine months ended June 30, 2010 is primarily attributable to net tax benefits and net interest benefits of $29.6 million and $6.2 million, respectively, from the reversal of previously established tax reserves related to prior years’ tax filings. These benefits primarily resulted from the current quarter settlement of various federal, state and foreign tax audits and statute closures for the fiscal years 2003 through 2008.

 

32


Table of Contents

Segment Results

Operating income before unallocated shared service costs is referred to as “segment income” throughout the discussion.

Reconciliation of Segment Results to Total Company Results

Three Months Ended June 30, 2010 and 2009

Unaudited

 

     Three Months Ended
June 30,
    %
Change
 
($ in thousands)    2010     2009    

Benefits Outsourcing

      

Segment net revenues

   $ 369,282      $ 377,581      (2.2 )% 

Segment income

     72,020        99,970      (28.0 )% 

Segment income as a percentage of segment revenues

     19.5     26.5  

HR BPO

      

Segment net revenues (1)

   $ 110,458      $ 115,678      (4.5 )% 

Segment income

     3,044        2,212      37.6

Segment income as a percentage of segment revenues

     2.8     1.9  

Consulting

      

Segment net revenues

   $ 258,195      $ 244,288      5.7

Segment income

     28,459        30,249      (5.9 )% 

Segment income as a percentage of segment revenues

     11.0     12.4  

Total Company

      

Segment net revenues (1)

   $ 737,935      $ 737,547      0.1

Intersegment revenues

     (7,359     (8,538   (13.8 )% 
                  

Net revenues

     730,576        729,009      0.2

Reimbursements

     16,019        14,710      8.9
                  

Total revenues

   $ 746,595      $ 743,719      0.4
                  

Segment income

   $ 103,523      $ 132,431      (21.8 )% 

Unallocated shared service costs

     24,292        23,374      3.9
                  

Operating income

   $ 79,231      $ 109,057      (27.3 )% 
                  

 

(1)

HR BPO net revenues include $10.7 million and $10.8 million of third-party supplier revenues for the three months ended June 30, 2010 and 2009, respectively. Generally, the third-party supplier arrangements are marginally profitable. The related third-party supplier expenses are included in other operating expenses.

 

33


Table of Contents

Benefits Outsourcing

Benefits Outsourcing net revenues decreased 2.2% compared to the prior-year quarter. Adjusting for the favorable impact of acquisitions of $1.5 million, net revenues decreased 2.6% and reflected no impact of foreign currency translation. The lower revenues principally reflect the impact of lower project revenues due to the recent recessionary environment. In addition, client losses, higher adjustments for client service issues and renewed clients at lower price points were offset by higher revenues associated with net participant count growth.

Benefits Outsourcing segment income decreased 28.0% compared to the prior-year quarter. The decrease was due to lower project revenues, the impact of client losses, increased severance related to ongoing productivity initiatives, higher adjustments for client service issues and higher real estate exit charges. This decrease was partially offset by the impact of compensation and cost management efforts.

HR BPO

HR BPO net revenues decreased 4.5% compared to the prior-year quarter. Excluding third-party supplier revenues and adjusting for the favorable effect of foreign currency translation of $2.3 million, net revenues decreased 6.8%. This decrease was primarily due to the impact of contractual adjustments and client terminations and liquidations.

HR BPO segment income increased 37.6% compared to the prior-year quarter. The increase was primarily the result of lower costs due to infrastructure and cost management efforts and staffing leverage, partially offset by lower revenues.

Consulting

Consulting net revenues increased 5.7% compared to the prior-year quarter. Adjusting for the unfavorable effect of foreign currency translation of $0.4 million and the net favorable impact of a fiscal 2009 acquisition and a fiscal 2010 divestiture of $3.3 million, net revenues increased 4.5%. The higher Consulting revenues were primarily due to an increase in Retirement and Financial Management consulting services, mostly in Europe and North America, and Health Management consulting services in North America.

Consulting segment income decreased 5.9% compared to the prior-year quarter. The decrease was due to the write-off of capitalized software of $4.6 million, the impact of a prior-year performance-based compensation adjustment and an increase in real estate exit charges. This was partially offset by revenue growth and lower severance costs.

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 human resources, finance, general counsel, management, client and market leadership and corporate relations.

Unallocated costs increased $0.9 million, or 3.9%. The increase was primarily due to higher infrastructure costs and professional services fees, offset by lower performance-based compensation.

 

34


Table of Contents

Nine Months Ended June 30, 2010 and 2009

Unaudited

 

     Nine Months Ended
June 30,
    %
Change
 
($ in thousands)    2010     2009    

Benefits Outsourcing

      

Segment net revenues

   $ 1,169,205      $ 1,161,326      0.7

Segment income

     280,053        299,963      (6.6 )% 

Segment income as a percentage of segment revenues

     24.0     25.8  

HR BPO

      

Segment net revenues (1)

   $ 334,071      $ 365,861      (8.7 )% 

Segment income (loss)

     10,569        (3,157   n/m   

Segment income (loss) as a percentage of segment revenues

     3.2     (0.9 )%   

Consulting

      

Segment net revenues

   $ 781,367      $ 746,604      4.7

Segment income

     84,455        100,048      (15.6 )% 

Segment income as a percentage of segment revenues

     10.8     13.4  

Total Company

      

Segment net revenues (1)

   $ 2,284,643      $ 2,273,791      0.5

Intersegment revenues

     (23,457     (27,766   (15.5 )% 
                  

Net revenues

     2,261,186        2,246,025      0.7

Reimbursements

     56,880        53,499      6.3
                  

Total revenues

   $ 2,318,066      $ 2,299,524      0.8
                  

Segment income

   $ 375,077      $ 396,854      (5.5 )% 

Unallocated shared service costs

     67,591        68,534      (1.4 )% 
                  

Operating income

   $ 307,486      $ 328,320      (6.3 )% 
                  

 

(1)

HR BPO net revenues include $32.8 million and $30.8 million of third-party supplier revenues for the nine months ended June 30, 2010 and 2009, respectively. Generally, the third-party supplier arrangements are marginally profitable. The related third-party supplier expenses are included in other operating expenses.

 

35


Table of Contents

Benefits Outsourcing

Benefits Outsourcing net revenues increased 0.7% compared to the prior-year period. Adjusting for the favorable effect of foreign currency translation of $3.5 million and the favorable impact of acquisitions of $1.7 million, net revenues were approximately unchanged. Higher revenues associated with net participant count growth and lower adjustments for client service issues were offset by the impact of lost clients, lower project revenues and client renewals at lower price points. The current-year period Benefits Outsourcing revenues include $14.8 million of previously deferred revenues that were recognized under new accounting guidance and were related to the material modification of two existing contracts. The prior-year period Benefits Outsourcing revenues included $20.1 million of previously deferred revenues that were recognized due to the fiscal 2009 second quarter settlement of a contract dispute.

Benefits Outsourcing segment income decreased 6.6% compared to the prior-year period. The decrease was due to lower project revenues, the impact of lost clients and client renewals at lower price points, in addition to higher severance costs and real estate exit charges. This was partially offset by the impact of cost management efforts, lower adjustments for client service issues, the favorable impacts of foreign currency translation related to global operations and the impact of net participant count growth. The current-year period includes a net benefit of $6.9 million that was recognized under new accounting guidance and was related to the material modification of two existing contracts. The prior-year period included a benefit of $2.8 million related to the fiscal 2009 second quarter settlement of a contract dispute.

HR BPO

HR BPO net revenues decreased 8.7% compared to the prior-year period. Excluding third-party supplier revenues and adjusting for the prior-year benefit of $10.6 million related to two divested businesses and the favorable effect of foreign currency translation of $9.0 million, net revenues decreased 9.7%. This decrease was primarily due to client terminations and liquidations and the impact of contractual adjustments.

HR BPO segment income was $10.6 million in the current-year period as compared to a segment loss of $3.2 million in the prior-year period. The improvement was primarily the result of staffing leverage, infrastructure cost management efforts and the favorable impacts of foreign currency translation related to global operations. This improvement was offset by lower revenues. The prior-year period also reflected gains on the sale of two divested businesses of $9.4 million.

Consulting

Consulting net revenues increased 4.7% compared to the prior-year period. Adjusting for the favorable effect of foreign currency translation of $19.1 million and the net favorable impact of a fiscal 2009 acquisition and a fiscal 2010 divestiture of $18.4 million, net revenues decreased 0.4%. This decrease was due to lower revenues from Talent and Organization Consulting services in most regions and Communication services in North America, both a result of a continued adverse economic environment. This was offset by higher revenues from an increase in Retirement and Financial Management consulting services.

Consulting segment income decreased 15.6% compared to the prior-year period. The current-year period includes a pretax non-cash goodwill impairment charge of $17.0 million resulting from goodwill impairment testing of the reporting unit impacted by the partial divestiture of our North America EC Consulting business. The current-year period also includes the loss of $2.4 million related to the partial divestiture of our North America EC Consulting business. The prior-year period included a $4.0 million addition to a legal reserve. Higher revenues and lower severance costs were partially offset by higher staffing costs and performance-based compensation, the current-year quarter impairment of capitalized software of $4.6 million and higher real estate exit charges.

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 human resources, finance, general counsel, management, client and market leadership and corporate relations.

Unallocated costs decreased $0.9 million, or 1.4%. The decrease was primarily due to lower performance-based compensation and other compensation cost management efforts, offset by an increase in infrastructure costs.

 

36


Table of Contents

Critical Accounting Policies and Estimates

For a description of our critical accounting policies and estimates, see our Annual Report on Form 10-K for the fiscal year ended September 30, 2009. Refer to Note 2 in the Notes to the Consolidated Financial Statements for an update to our accounting policy for Revenue Recognition related to the adoption of Accounting Standards Update No. 2009-13, Revenue Recognition—Multiple Deliverable Revenue Arrangements.

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 the capital markets.

 

Summary of Cash Flows    Nine Months Ended
June 30,
 
(in thousands)    2010     2009  

Cash provided by operating activities

   $ 335,756      $ 286,284   

Cash used in investing activities

     (102,442     (150,125

Cash used in financing activities

     (120,337     (166,822

Effect of exchange rates on cash and cash equivalents

     (8,156     (6,892
                

Net increase (decrease) in cash and cash equivalents

     104,821        (37,555

Cash and cash equivalents at beginning of period

     581,642        541,494   
                

Cash and cash equivalents at end of period

   $ 686,463      $ 503,939   
                

Cash and cash equivalents were $686.5 million and $581.6 million as of June 30, 2010 and September 30, 2009, 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 increased $49.5 million in the current-year period compared to the prior-year period, mostly due to the impact of improved operating performance and lower client and vendor settlement payments. The collection of receivables provided a greater benefit to operating cash flows in the prior-year period, partially offsetting the improved operating performance.

Investing activities

Cash used in investing activities decreased $47.7 million in the current-year period. The decrease was primarily due to a decrease in cash paid for acquisitions as well as an increase in the cash received from the sale of investments. The decrease was offset by an increase in the purchase of short-term investments.

Financing activities

Cash used in financing activities decreased $46.5 million in the current-year period. The decrease was principally due to the prior-year repayment of the Company’s $110.0 million convertible debt. The Company also received more cash in the current-year period due to the higher proceeds from the exercise of stock options. The decrease was partially offset by higher share repurchases in the current-year and higher proceeds from short-term borrowings in the prior-year period.

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 next twelve months and the foreseeable future.

At June 30, 2010, the Company had available credit facilities with domestic and foreign banks for various corporate purposes. During the first quarter of fiscal 2010, the Company increased its available credit by $50.0 million when it replaced an existing $200.0 million credit facility with a new three-year, $250.0 million credit facility. The amount of unused credit facilities as of June 30, 2010 was approximately $280.8 million.

 

37


Table of Contents

Commitments

Significant ongoing commitments consist primarily of leases, debt, purchase commitments and certain other long-term liabilities. For a summary and description of our ongoing commitments and contractual obligations, see our Annual Report on Form 10-K for the fiscal year ended September 30, 2009 and the “Commitments” section of the Liquidity and Capital Resources section of Management’s Discussion and Analysis of Financial Condition and Results of Operations. There were no material changes in these commitments during the nine months ended June 30, 2010.

Note 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. Important factors known to us that could cause such material differences are identified and discussed from time to time in our filings with the Securities and Exchange Commission, including those factors discussed in Part II, Item 1A of this 10-Q under the heading “Risk Factors” and Part I, Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the year ended September 30, 2009. Such important factors include:

 

 

The risks and contingencies relating to the Company’s pending acquisition by Aon Corporation could significantly adversely impact our business, financial results and stock price.

 

 

The outsourcing and consulting markets are highly competitive, and if we are not able to compete effectively, our revenues and profit margins may be adversely affected.

 

 

A significant or prolonged economic downturn could have a material adverse effect on our revenues, financial condition and 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 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.

 

 

We might not be able to achieve the cost savings required to sustain and increase our profit margins.

 

 

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.

 

 

The loss of a significantly large client or several clients could have a material adverse effect on our revenues and profitability.

 

 

We may have difficulty integrating or managing acquired businesses, which may harm our financial results or reputation in the marketplace.

 

 

If we are unable to satisfy regulatory requirements relating to internal controls over financial reporting, our business could suffer.

 

 

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.

 

 

If our clients or third parties are not satisfied with our services, we may face damage to our professional reputation or legal liability.

 

 

Improper disclosure of personal data could result in liability and harm our reputation.

 

 

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 global operations and expansion strategy pose complex management, foreign currency, legal, tax and economic risks, which we may not adequately address.

 

 

The demand for our services may not grow at rates we anticipate.

 

 

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.

 

38


Table of Contents
 

We rely on third parties to provide services and their failure to perform the service could do 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.

 

 

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.

 

 

Our quarterly revenues, operating results and profitability will vary from quarter to quarter, which may result in volatility of our stock price.

 

 

We may not be able to liquidate our auction rate securities 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.

 

 

There are significant limitations under the merger agreement with Aon Corporation on the ability of any person or company to buy Hewitt, which may delay, defer or prevent a transaction that our stockholders might consider to be in their best interests.

You should carefully consider each cautionary factor and all of the other information in this report. 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. You are advised, however, to consult any future disclosure we make on related subjects in future reports to the Securities and Exchange Commission.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risk primarily from changes in foreign currency exchange rates and interest rates. As discussed below, in December 2007, we initiated a foreign currency risk management program involving the use of financial derivatives. In August 2008, we initiated an interest rate risk management program involving interest rate swaps. For analysis of the interest rate risk management program, refer to our Form 10-K for the fiscal year ended September 30, 2009. We do not hold or issue derivative financial instruments for trading purposes.

Foreign exchange risk

The Company has a substantial operation in India for the development and deployment of technology solutions as well as for client and business 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 up to 75% of future exposures. As of June 30, 2010, the Company was a party to foreign currency derivative instruments related to exposures to the Indian rupee for approximately 57% of forecasted transactions of approximately $279.3 million over the next 27 months. A 10% change in the exchange rate on the related exposure would result in an increase or decrease in related expenses of approximately $27.9 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 $16.0 million on settlement of the derivative instruments.

 

Item 4. 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 quarterly 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 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.

Changes in Internal Control over Financial Reporting

There has been no significant change in our internal control over financial reporting that occurred during the three months ended June 30, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

39


Table of Contents

Part II. Other Information

 

Item 1. Legal Proceedings

The Company is involved in disputes arising in the ordinary course of its business relating to outsourcing and consulting agreements, professional liability claims, vendors and service providers and employment claims. The Company is also routinely audited and subject to inquiries by governmental and regulatory agencies. 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 of outcomes, 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. Insurance and other recoveries of losses are separately evaluated and recognized only if such recoveries are also probable and reasonably estimable.

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.

In the normal course of business, the Company also enters into contracts in which it makes representations, warranties, guarantees and indemnities that relate to the performance of the Company’s services and products. The Company does not expect any material losses related to such representations, warranties, guarantees and indemnities.

Refer to Note 18 in the Notes to the Consolidated Financial Statements under the caption “Transaction with Aon” for more information regarding legal proceedings related to the transaction.

 

Item 1A. Risk Factors

There have been no material changes from the Risk Factors described in our Annual Report on Form 10-K for the year ended September 30, 2009 (“2009 Form 10-K”), with the exception of the additional risk factors below relating to our pending transaction with Aon, as described in Note 18 in Part I above, and also to recently adopted health care reform legislation. The risk factors described below should be read in conjunction with the Risk Factors and information disclosed in our 2009 Form 10-K and the preliminary Joint Proxy Statement/Prospectus on Form S-4 filed by Aon on July 26, 2010.

Pending Transaction with Aon

The risks and contingencies relating to the Company’s pending acquisition by Aon Corporation could significantly adversely impact our business, financial results and stock price.

On July 11, 2010, Hewitt entered into an Agreement and Plan of Merger with Aon Corporation (“Aon”), Alps Merger Corp., a wholly owned subsidiary of Aon, and Alps Merger LLC, a wholly owned subsidiary of Aon, pursuant to which Aon has agreed to acquire Hewitt. The completion of the transaction is subject to customary closing conditions, including obtaining the approval of Hewitt’s and Aon’s stockholders, receiving certain regulatory approvals (including approval under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and certain approvals by foreign governmental entities). There are no assurances that those conditions will be satisfied and that the proposed transaction will be completed. If the proposed transaction is not completed, our ongoing business may be adversely affected and Hewitt will be subject to several risks and consequences, including the following:

 

   

under the merger agreement, Hewitt may be required, under certain circumstances, to pay Aon a termination fee and/or reimburse Aon for its out-of-pocket expenses;

 

   

under the merger agreement, Hewitt is subject to certain restrictions on the conduct of its business prior to completing the transaction, which may adversely affect its ability to execute certain of its business strategies; and

 

   

Hewitt has incurred and will continue to incur significant costs and fees associated with the proposed transaction.

In addition, if the transaction is not completed, Hewitt may experience negative reactions from the financial markets and could also be subject to litigation related to any failure to complete the transaction or to enforcement proceedings commenced against Hewitt to perform its obligations under the merger agreement. If the transaction is not completed, Hewitt cannot assure its stockholders that the risks described above will not materialize and will not materially affect its business, financial results and stock price.

 

40


Table of Contents

This communication does not constitute an offer to sell or the solicitation of an offer to buy our securities or the solicitation of any vote or approval. The proposed transaction involving Hewitt and Aon will be submitted to their respective stockholders for their consideration. In connection with the proposed transaction, on July 26, 2010, Aon filed with the Securities and Exchange Commission (the “SEC”) a registration statement on Form S-4, which included a preliminary joint proxy statement of Aon and Hewitt that also constitutes a preliminary prospectus of Aon, and each of the companies may be filing with the SEC other documents regarding the proposed transaction. Aon and Hewitt will each mail the definitive joint proxy statement/prospectus to its stockholders. Before making any voting or investment decision, investors and stockholders are urged to read carefully in their entirety the definitive joint proxy statement/prospectus when it becomes available, because it will contain important information regarding the proposed transaction. You may obtain a free copy of the joint proxy statement/prospectus, as well as all other documents filed with the SEC regarding the transaction, without charge, at the SEC’s website (www.sec.gov), by accessing Aon’s website at www.aon.com under the heading “Investor Relations” and then under the link “SEC Filings” and from Aon by directing a request to Aon at Aon Corporation, 200 E. Randolph Street, Chicago, Illinois 60601, Attention: Investor Relations, and by accessing Hewitt’s website at www.hewitt.com under the heading “Investor Relations,” and then under the link “Reports & SEC Filings” and from Hewitt by directing a request to Hewitt at Hewitt Associates, Inc., 100 Half Day Road, Lincolnshire, Illinois 60069, Attention: Investor Relations.

Health Care Reform Initiatives

Our business will be negatively affected if we are not able to adapt to changes resulting from the recently adopted U.S. health care reform initiatives.

In March 2010, the United States government enacted health reform legislation that will impact how our clients offer health care to their employees. While we are currently addressing the impact of the legislation to the services we offer, if we are unable to adapt our services to changes resulting from these laws and any subsequent regulations, our ability to grow our business or to provide effective outsourcing and consulting services in these areas will be negatively impacted. Furthermore, if our clients reduce the role or extent of employer-sponsored health care in response to the newly enacted legislation, our results of operations could be adversely impacted.

 

41


Table of Contents
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(c) Issuer Purchases of Equity Securities

The following table provides information about Hewitt’s share repurchase activity for the three months ended June 30, 2010:

 

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)
(in thousands)

April 1 – 30, 2010(1)

           

Class A

   281,679    $ 40.52    269,061    $ 147,206

May 1 – 31, 2010 (1)

           

Class A

   705,432    $ 37.48    705,432    $ 120,766

June 1 – 30, 2010 (1)

           

Class A

   618,115    $ 35.79    618,115    $ 98,646

Total Shares Purchased:

           
               

Class A

   1,605,226    $ 37.36    1,592,608   
               

 

(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 April 1, 2010 through June 30, 2010 represents a weighted average of the closing stock prices on the dates the shares were repurchased or withheld.

(2)

During the first quarter of fiscal 2009, the Board of Directors authorized the Company to repurchase up to $300 million of its outstanding common shares through November 12, 2010.

 

Item 6. Exhibits

a. Exhibits.

 

  2.1   Agreement and Plan of Merger, dated as of July 11, 2010, among Aon, Alps Merger Corp., Alps Merger LLC and Hewitt (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed July 12, 2010).
10.1*   Amended and Restated Change-in-Control Executive Severance Plan (filed herewith).
31.1   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).
31.2   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).
32.1   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).
32.2   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).
101.INS   XBRL Instance Document
101.SCH   XBEL Taxonomy Extension Schema Document
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB   XBRL Taxonomy Extension Label Linkbase Document
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document

 

* Represents a management contract or compensatory plan or arrangement.

ITEMS 3, 4 and 5 are not applicable and have been omitted.

 

42


Table of Contents

SIGNATURES

Pursuant to the requirements 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.

 

    HEWITT ASSOCIATES, INC.
    (Registrant)
Date: August 5, 2010   By:  

/s/ JOSEPH A. TAUTGES

    Joseph A. Tautges
    Corporate Controller
    (principal accounting officer and duly authorized officer)

 

43