Towers Watson Reports Strong Fourth Quarter Earnings

Towers Watson (NYSE, NASDAQ: TW), a leading global professional services company, today announced financial results for the fourth quarter of fiscal year 2014, which ended June 30, 2014.

Total revenues were $879 million for the quarter, an increase of 5% (4% increase constant currency) from $835 million for the fourth quarter of fiscal year 2013. On an organic basis, which excludes the impact of changes in foreign currency exchange rates, acquisitions and divestitures, revenues increased 3% from the prior year fourth quarter. For the fiscal year, revenues were $3.5 billion, an increase of 1% over the prior year.

Adjusted EBITDA for the fourth quarter of fiscal year 2014 was $169 million, or 19.2% of revenues, versus Adjusted EBITDA of $161 million, or 19.3% of revenues, for the prior year fourth quarter. For the fiscal year, Adjusted EBITDA was $670 million or 19.2% of revenues.

Income from continuing operations (attributable to common stockholders) for the fourth quarter of fiscal year 2014 was $82 million as compared to $80 million in the fourth quarter of fiscal year 2013. For the quarter, diluted earnings per share from continuing operations were $1.17, a 4% increase over the prior year, and adjusted diluted earnings per share from continuing operations were $1.34, a 2% increase over the prior year. The tax rate for continuing operations for the quarter was 34%.

“We were very pleased with the fourth quarter results and ending the fiscal year on such a strong note” said John Haley, chief executive officer. “We had three significant goals for fiscal year 2014: enhance the capabilities the OneExchange platform; re-align the Risk Consulting and Software business; and direct resources to long-term growth initiatives. While we experienced some pressure on revenues this past year, I’m pleased to say that we’ve accomplished our organizational goals in building the foundation for long-term growth. OneExchange is the only multi-carrier platform in the market today that can address all employee populations on a fully insured and self-insured basis, the Risk Consulting and Software business has returned to historical profitability, and the divestiture of the Brokerage business provided capital to refocus our resources for more strategic growth initiatives, particularly the enhancement of OneExchange through the acquisition of Liazon.”

Fourth Quarter Company Highlights

Benefits

For the quarter, the Benefits segment had revenues of $508 million, an increase of 3% (1% increase constant currency) from $494 million in the prior-year fourth quarter. Retirement revenues were roughly flat, as a moderate increase in de-risking activities in the Americas was offset by softness in the EMEA Region. Health and Group Benefits had mid-single digit constant currency revenue growth due to new consulting work. Technology and Administration Solutions had mid-single digit constant currency revenue growth due to new client work in the U.S. The Benefits segment had a Net Operating Income (“NOI”) margin of 31% in the fourth quarter of fiscal year 2014.

Risk and Financial Services

For the quarter, the Risk and Financial Services segment had revenues of $161 million, an increase of 10% (7% increase constant currency) from $146 million in the prior-year fourth quarter. Risk Consulting and Software had mid-single digit constant currency revenue growth, led by the EMEA region as a result of both increased consulting work and a significant increase in software-related revenues. Investment had low double digit constant currency revenue growth this quarter. The Risk and Financial Services segment had an NOI margin of 24% in the fourth quarter of fiscal year 2014.

Talent and Rewards

For the quarter, the Talent and Rewards segment had revenues of $131 million, a decrease of 1% (1% decrease constant currency) from $132 million in the prior-year fourth quarter. Executive Compensation had mid-single digit constant currency revenue growth and experienced growth in all regions. Rewards, Talent and Communication had a mid-single digit constant currency revenue decline, driven by a low double digit decline in the Americas. Data, Surveys and Technology had low single digit constant currency revenue growth. The Talent and Rewards segment had an NOI margin of 8% in the fourth quarter of fiscal year 2014. The second half of the year typically has lower margins due to the seasonality of the business.

Exchange Solutions

For the quarter, the Exchange Solutions segment had revenues of $51 million, an increase of 48% (48% increase constant currency) from $35 million in the prior year fourth quarter. OneExchange Retiree increased in the low 40% range. Liazon contributed approximately $2.5 million in revenues this quarter. The Exchange Solutions segment had an NOI margin of 37% in the fourth quarter of fiscal year 2014. The second half of the fiscal year is seasonally stronger due to the timing of enrollments.

Outlook for Fiscal Year 2015

For the first quarter of fiscal year 2015, the company expects to report revenues in the range of $840 million to $860 million, reflecting constant currency revenue growth in the range of 2% to 5%. The company expects adjusted diluted earnings per share in the range of $1.17 to $1.22. This guidance assumes an average exchange rate of 1.68 U.S. dollars to the British Pound and 1.34 U.S. dollars to the Euro for the first quarter of fiscal year 2015.

Full fiscal year 2015 guidance will be provided at Towers Watson’s Analyst Day on September 19, 2014.

Conference Call

The company will host a live webcast and conference call to discuss the financial results for the fourth quarter of fiscal year 2014. It will be held on Tuesday, August 12, 2014, beginning at 9:00 a.m. Eastern Time, and can be accessed via the Internet at www.towerswatson.com. The replay of the call will be available shortly after the live call for a period of three months. A telephonic replay will also be available for one week after the call by dialing 617-801-6888 and using confirmation number 92596640.

About Towers Watson

Towers Watson (NYSE, NASDAQ: TW) is a leading global professional services company that helps organizations improve performance through effective people, risk and financial management. The company offers consulting, technology and solutions in the areas of benefits, talent management, rewards, and risk and capital management. Towers Watson has more than 14,000 associates around the world and is located on the web at www.towerswatson.com.

Use of Non-GAAP Measures

In order to assist readers of our financial statements in understanding the core operating results that the Company’s management uses to evaluate the business and for financial planning, we present (1) Adjusted EBITDA, (2) Adjusted income from continuing operations (attributable to common stockholders), and (3) Adjusted Diluted Earnings Per Share from continuing operations (which are all non-U.S. GAAP measures), to eliminate the effect of acquisition-related expenses from the financial results of our operations. We use Adjusted income from continuing operations (attributable to common stockholders), the numerator, for the purpose of calculating Adjusted Diluted Earnings Per Share from continuing operations. The Company believes that Adjusted EBITDA and Adjusted Diluted Earnings Per Share from continuing operations and Free Cash Flow are relevant and useful information widely used by analysts, investors and other interested parties in our industry to provide a baseline for evaluating and comparing our operating results.

Since the Merger in January 2010, we have incurred significant acquisition-related expenses related to our merger and integration activities necessary to combine Watson Wyatt and Towers Perrin. These acquisition-related expenses include transaction and integration costs, severance costs, non-cash charges for amortization of intangible assets and merger-related stock-based compensation costs from the issuance of merger-related restricted shares. Included in our acquisition-related transaction and integration costs are integration consultant fees and legal, accounting, marketing and information technology integration expenses. We consider Adjusted EBITDA and Adjusted Diluted Earnings Per Share from continuing operations to be important financial measures, which we use to internally evaluate and assess our core operations, and benchmark our operating results against our competitors. We use Adjusted EBITDA to evaluate and measure our performance-based compensation plans. Adjusted EBITDA and Adjusted Diluted Earnings Per Share are important in illustrating what our operating results would have been had we not incurred these acquisition-related expenses.

The Company’s non-U.S. GAAP measures and their accompanying definitions are presented as follows:

• Adjusted EBITDA – net income (attributable to common stockholders) adjusted for discontinued operations, net of tax, provision for income taxes, interest, net, depreciation and amortization, transaction and integration expenses, stock-based compensation, and other non-operating income excluding income from variable interest entity.
• Adjusted income from continuing operations (attributable to common stockholders) – net income (attributable to common stockholders) adjusted for discontinued operations, net of tax, and adjusted for certain tax effected merger and acquisition related items of transaction and integration expenses, non-cash stock-based compensation, and amortization of intangible assets.
• Adjusted Diluted Earnings Per Share from continuing operations – diluted earnings per share from continuing operations adjusted for discontinued operations, net of tax, and adjusted for certain tax effected merger and acquisition related items of transaction and integration expenses, non-cash stock-based compensation, and amortization of intangible assets.
• Free Cash Flow - Cash Flows from Operating Activities less cash flows used for Fixed Assets and Software for Internal Use, each of which is presented on the GAAP Consolidated Statements of Cash Flows.

These non-U.S. GAAP measures are not defined in the same manner by all companies and may not be comparable to other similarly titled measures of other companies. Non-U.S. GAAP measures should be considered in addition to, and not as a substitute for, the information contained within our financial statements.

Reconciliation of Adjusted EBITDA to net income (attributable to common stockholders), Adjusted income from continuing operations to net income (attributable to common stockholders), Adjusted Diluted Earnings Per Share from continuing operations to diluted earnings per share from continuing operations and Free Cash Flow are included in the accompanying tables to today’s press release.

Forward-Looking Statements

This document contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. You can identify these statements and other forward-looking statements in this document by words such as “may”, “will”, “would”, “expect”, “anticipate”, “believe”, “estimate”, “plan”, “intend”, “continue”, or similar words, expressions or the negative of such terms or other comparable terminology. Such statements are based upon the current beliefs and expectations of Towers Watson's management and are subject to significant risks and uncertainties. Actual results may differ from those set forth in the forward-looking statements.

The following factors, among others, could cause actual results to differ from those set forth in the forward-looking statements: a decline in client demand (for example, resulting from the reduced use of defined benefit plans); the risk of a disclosure breach of company or client data; the ability to successfully make suitable acquisitions and divestitures; the risk that the acquisitions of Extend Health and Liazon are not profitable or are not otherwise successfully integrated; our ability to protect client data and our information systems; the risk that potential changes in federal and state health care regulations, or future interpretation of existing regulations, may have a material adverse impact on our business; the risk that our Exchange Solutions or OneExchange businesses fail to maintain good relationships with insurance carriers, become dependent upon a limited number of insurance carriers or fail to develop new insurance carrier relationships; the risk that changes and developments in the health insurance system in the United States could harm our business; our ability to respond to rapid technological changes; the ability to recruit and retain qualified employees and to retain client relationships; and the risk that a significant or prolonged economic downturn could have a material adverse effect on Towers Watson's business, financial condition and results of operations. Additional risks and factors are identified under “Risk Factors” in Towers Watson’s most recent Annual Report on Form 10-K filed with the SEC.

You should not rely upon forward-looking statements as predictions of future events because these statements are based on assumptions that may not come true and are speculative by their nature. Towers Watson does not undertake an obligation to update any of the forward-looking information included in this document, whether as a result of new information, future events, changed expectations or otherwise.