TWAV Trustwave Holdings (MM)

• Revenue increased 8% over prior year first quarter (7% constant currency)
• EBITDA Margin increased to 19.5%, from 18.0% for the prior year first quarter
• Adjusted Diluted Earnings per Share of $1.32
• Diluted Earnings per Share of $1.16

Towers Watson (NYSE, NASDAQ: TW), a leading global professional services company, today announced financial results for the first quarter of fiscal year 2015, which ended September 30, 2014.

The information contained in this press release reflects the expansion of the Exchange Solutions Segment which took effect as of July 1, 2014. Please refer to our 8-K filed on September 16, 2014 for information on the recast of our fiscal year 2014 segment results.

Total revenues were $878 million for the quarter, an increase of 8% (7% constant currency) from $810 million for the first quarter of fiscal 2014. On an organic basis, which excludes the impact of changes in foreign currency exchange rates, acquisitions and divestitures, revenues increased 7% from the prior-year first quarter.

EBITDA for the first quarter of fiscal 2015 was $171 million, or 19.5% of revenues, versus Adjusted EBITDA of $146 million, or 18.0% of revenues, for the prior-year first quarter.

Income from continuing operations for the first quarter of fiscal 2015 was $82 million, a decrease from $86 million for the prior-year first quarter. For the quarter, diluted earnings per share from continuing operations were $1.16 and adjusted diluted earnings per share from continuing operations were $1.32. The tax rate for the quarter for continuing operations was 35%. As a reminder, the tax rate in the first quarter of the prior fiscal year was 15% due to the impact of favorable tax settlements.

“We are very pleased with the first quarter results, especially with the strong results delivered by the Benefits and Exchange Solutions segments. Bulk lump sum, healthcare consulting and pension administration drove revenue growth in the Benefits segment. A strong off-cycle enrollment period and the excellent work delivered by the health and welfare administration group drove growth in Exchange Solutions,” said John Haley, chief executive officer. “There was also a significant item of note this past quarter. Towers Watson’s One Exchange was selected to be the retiree medical exchange provider for the Ohio Public Employee Retirement System (OPERS) Medicare Connector, effective January 2016. We are very excited by this announcement and look forward to the opportunity to serve OPERS’ retirees.”

First Quarter Company Highlights

Benefits

For the quarter, the Benefits segment had revenues of $466 million, an increase of 8% (7% increase constant currency) from $431 million in the prior-year first quarter. Retirement had mid-single digit constant currency revenue growth, primarily due to an increase of bulk lump sum work in the Americas region. Health and Group Benefits had mid-single digit constant currency revenue growth driven by new client work. Technology and Administration Solutions constant currency revenue grew by low double digits due to bulk lump sum and increased project activity across all regions. The Benefits segment had a Net Operating Income (“NOI”) margin of 33% in the first quarter of fiscal 2015.

Risk and Financial Services

For the quarter, the Risk and Financial Services segment had revenues of $148 million, an increase of 4% (1% increase constant currency) from $142 million in the prior-year first quarter. Risk Consulting and Software had constant currency revenue growth of mid-single digits due to support of software sales and project work. Investment constant currency revenues decreased by mid-single digits, reflecting strong comparables from the first quarter of fiscal year 2014. The Risk and Financial Services segment had an NOI margin of 24% in the first quarter of fiscal 2015.

Talent and Rewards

For the quarter, the Talent and Rewards segment had revenues of $153 million, flat as compared to prior year first quarter (flat constant currency). Executive Compensation constant currency revenue increased by low double digits with revenue growth in all regions. Rewards, Talent and Communication constant currency revenue had a low single digit decline due to deferred OneExchange revenue related projects. As planned, Data, Surveys and Technology had a mid-single digit constant currency revenue decline due to the timing of survey delivery. The Talent and Rewards segment had an NOI margin of 24% in the first quarter of fiscal 2015. The first half of the fiscal year typically has stronger margins due to the seasonality of the business.

Exchange Solutions

For the quarter, the Exchange Solutions segment had revenues of $86 million, an increase of 41% (41% increase constant currency) from $61 million in the prior-year first quarter. Our Retiree and Access Exchanges revenue increased around 50%. Health and Welfare Administration revenues grew by mid-teens. Active Exchanges revenues grew around $4 million. As a reminder, Active Exchange revenues were first recognized with the acquisition of Liazon in November 2013. The Exchange Solutions segment had an NOI margin of 16% in the first quarter of fiscal 2015. The second half of the fiscal year is seasonally stronger due to the timing of enrollments.

Outlook for Fiscal 2015

For fiscal 2015, the company expects to report revenues of around $3.6 billion and adjusted diluted earnings per share in the range of $5.85 to $5.97. This guidance assumes an average exchange rate of 1.62 U.S. dollars to the British Pound and 1.28 U.S. dollars to the Euro for fiscal 2015.

For the second quarter of fiscal 2015, the company expects to report revenues in the range of $910 million to $930 million, reflecting constant currency revenue growth in the mid-single digits, and adjusted diluted earnings per share in the range of $1.46 to $1.51.

Conference Call

The company will host a live webcast and conference call to discuss the financial results for the first quarter of fiscal 2015. It will be held on Wednesday, November 5, 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 two weeks after the call by dialing 617-801-6888 and using confirmation number 68008534.

About Towers Watson

Towers Watson is a leading global professional services company that helps organizations improve performance through effective people, risk and financial management. With 15,000 associates around the world, the company offers consulting, technology and solutions in the areas of benefits, talent management, rewards, and risk and capital management. Learn more at 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 the following non U.S. GAAP measures: (1) Adjusted EBITDA, (2) Adjusted Diluted Earnings Per Share from continuing operations, (3) Adjusted income from continuing operations (attributable to common stockholders) and (4) Free Cash Flow. The Company believes these measures are relevant and provide 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.

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. Adjusted Income from continuing operations (attributable to common stockholders) is used solely for the purpose of calculating Adjusted diluted earnings per share. Free Cash Flow is used to evaluate our core operating performance.

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 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.
• 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.
• 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 Net income (attributable to common stockholders) to Adjusted EBITDA, Net income (attributable to common stockholders) to Adjusted income from continuing operations, Diluted earnings per share from continuing operations to Adjusted 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.

  TOWERS WATSON & CO. Supplemental Segment Information (In Thousands of U.S. Dollars) (Unaudited)               Segment Revenue   Revenue for the Three Months Ended September 30, % Change Currency Acquisitions % Change 2014 2013 GAAP Impact Divestitures Organic   Benefits* $ 465,587 $ 431,255 8% 1% 0% 7% Risk & Financial Services 148,026 141,783 4% 3% 0% 1% Talent & Rewards 153,294 153,569 0% 0% 0% 0% Exchange Solutions*   86,282   61,164 41% 0% 4% 37% Reportable Segments $ 853,189 $ 787,771   *FY14 recast to reflect Exchange Solutions Segment expansion Reconciliation of Reportable Segment Revenues to Consolidated Revenues   Three Months Ended September 30, 2014 2013   Reportable Segments $ 853,189 $ 787,771 Reimbursable Expenses and Other   24,918     22,168   Consolidated Revenues $ 878,107 $ 809,939     Segment Net Operating Income   Three Months Ended September 30, 2014 2013   Benefits* $ 155,759 $ 129,538 Risk & Financial Services 35,561 22,487 Talent & Rewards 36,843 44,064 Exchange Solutions*   14,012     14,456   Reportable Segments $ 242,175 $ 210,545   *FY14 recast to reflect Exchange Solutions Segment expansion   Reconciliation of Reportable Segment Net Operating Income to Income from Operations   Three Months Ended September 30, 2014 2013   Reportable Segments $ 242,175 $ 210,545 Differences in Allocation Methods 15,712 9,986 Amortization of Intangible Assets (17,537 ) (18,892 ) Stock-Based Compensation (5,552 ) (3,563 ) Discretionary Compensation (92,364 ) (76,122 ) Payroll Tax on Discretionary Compensation (5,519 ) (4,568 ) Other, net   (10,917 )   (14,965 ) Income from Operations $ 125,998 $ 102,421       TOWERS WATSON & CO. Reconciliation of Non-GAAP Measures (In Thousands of U.S. Dollars, Except Per Share Data) (Unaudited)     Three Months Ended Three Months Ended September 30, 2014 September 30, 2013   Net Income (attributable to common stockholders) $ 81,558 $ 88,214 Less: Income from Discontinued Operations, net of tax   -     2,444   Income from Continuing Operations (attributable to common stockholders) 81,558 85,770 Adjusted for certain acquisition related items: Amortization of intangible assets   11,383     16,110   Adjusted Income from continuing operations $ 92,941 $ 101,880

 

Weighted average shares of common stock, diluted (000) 70,596 71,046   Diluted EPS from continuing operations $ 1.16 $ 1.21 Adjusted for certain acquisition related items: Amortization of intangible assets   0.16     0.22   Adjusted Diluted EPS from continuing operations $ 1.32 $ 1.43     Three Months Ended Three Months Ended September 30, 2014 September 30, 2013   Income from Continuing Operations (attributable to common stockholders) $ 81,558 $ 85,770 Provision for Income Taxes 44,062 14,808 Interest, net 1,265 1,907 Depreciation and Amortization 44,869 43,385 Other Non-Operating Income   (831 )   (38 ) EBITDA/Adjusted EBITDA and Margin 170,923 19.5 % 145,832 18.0 %       TOWERS WATSON & CO. Condensed Consolidated Statements of Operations (In Thousands of U.S. Dollars, Except Per Share Data) (Unaudited)   Three Months Ended September 30, 2014 2013   Revenue $ 878,107   $ 809,939     Costs of providing services: Salaries and employee benefits 533,528 500,419 Professional and subcontracted services 62,205 61,400 Occupancy 36,073 33,545 General and administrative expenses 75,434 68,769 Depreciation and amortization   44,869     43,385     752,109     707,518     Income from operations 125,998 102,421   Interest income 1,063 529 Interest expense (2,328 ) (2,436 ) Other non-operating income   831     38     INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 125,564 100,552   Provision for income taxes   44,062     14,808     INCOME FROM CONTINUING OPERATIONS 81,502 85,744   Income from discontinued operations, net of tax of $- and $2,551, respectively   -     2,444     NET INCOME BEFORE NON-CONTROLLING INTERESTS 81,502 88,188   Less: Loss attributable to non-controlling interests   (56 )   (26 )   NET INCOME (attributable to common stockholders) $ 81,558   $ 88,214       Basic earnings per share (attributable to common stockholders): Income from continuing operations $ 1.16 $ 1.21 Income from discontinued operations   -     0.04   Net income $ 1.16   $ 1.25     Diluted earnings per share (attributable to common stockholders): Income from continuing operations $ 1.16 $ 1.21 Income from discontinued operations   -     0.03   Net income $ 1.16   $ 1.24       Weighted average shares of common stock, basic (000)   70,182     70,801   Weighted average shares of common stock, diluted (000)   70,596     71,046     TOWERS WATSON & CO. Condensed Consolidated Balance Sheets (In Thousands of U.S. Dollars, Except Share Data) (Unaudited)     September 30,   June 30, 2014 2014   Assets Cash and cash equivalents $ 543,350 $ 727,849 Fiduciary Assets 15,665 12,010 Short-term investments 130,340 122,761 Receivables from clients:

 

Billed, net of allowances of $11,082 and $8,075 464,158 507,213 Unbilled, at estimated net realizable value   326,168     314,020   790,326 821,233   Other current assets   136,268     124,645   Total current assets 1,615,949 1,808,498   Fixed assets, net 373,699 374,444 Deferred income taxes 73,702 79,103 Goodwill 2,240,672 2,313,058 Intangible assets, net 629,026 657,293 Other assets   435,826     395,390   Total Assets $ 5,368,874   $ 5,627,786     Liabilities Accounts payable, accrued liabilities and deferred income $ 356,071 $ 404,760 Employee-related liabilities 330,234 518,532 Fiduciary liabilities 15,665 12,010 Term loan - current 25,000 25,000 Other current liabilities   29,940     74,297   Total current liabilities 756,910 1,034,599   Revolving credit facility 135,000 - Term loan 193,750 200,000 Accrued retirement benefits and other employee-related liabilities 717,497 768,024 Professional liability claims reserve 227,591 225,959 Other noncurrent liabilities   286,637     288,255   Total Liabilities   2,317,385     2,516,837     Commitments and contingencies   Stockholders' Equity Class A Common Stock -- $0.01 par value: 300,000,000 shares authorized; 74,552,661 issued, and 70,071,751 and 70,338,891 outstanding 746 746 Additional paid-in capital 1,855,365 1,849,119 Treasury stock, at cost -- 4,480,910 and 4,213,770 shares (321,104 ) (286,182 ) Retained earnings 1,793,977 1,722,927 Accumulated other comprehensive loss   (291,425 )   (189,702 ) Total Stockholders' Equity   3,037,559     3,096,908   Non-controlling interest   13,930     14,041   Total Equity   3,051,489     3,110,949     Total Liabilities and Total Equity $ 5,368,874   $ 5,627,786     TOWERS WATSON & CO. Condensed Consolidated Statements of Cash Flows (In Thousands of U.S. Dollars) (Unaudited)       Three Months Ended September 30, 2014   2013   Cash flows used in operating activities: Net income before non-controlling interests $ 81,502 $ 88,188 Adjustments to reconcile net income to net cash used in operating activities: Provision for doubtful receivables from clients 7,994 1,469 Depreciation 27,332 24,492 Amortization of intangible assets 17,537 19,330 Provision for deferred income taxes 25,893 48,796 Stock-based compensation 11,174 6,641 Other, net 975 797 Changes in operating assets and liabilities Receivables from clients (960 ) 40,636 Fiduciary assets (3,655 ) (1,913 ) Other current assets (24,418 ) (4,264 ) Other noncurrent assets (4,240 ) (567 ) Accounts payable, accrued liabilities and deferred income (59,649 ) (17,790 ) Employee-related liabilities (173,084 ) (233,084 ) Fiduciary liabilities 3,655 1,913 Accrued retirement benefits and other employee-related liabilities (65,744 ) (75,548 ) Professional liability claims reserves 4,995 (4,681 ) Other current liabilities 5,255 1,787 Other noncurrent liabilities (9,299 ) (638 ) Income tax related accounts   (50,445 )   (47,428 ) Cash flows used in operating activities   (205,182 )   (151,864 )   Cash flows (used in) from investing activities: Cash paid for business acquisitions (1,255 ) - Fixed assets and software for internal use (15,714 ) (25,760 ) Capitalized software costs (17,900 ) (10,408 ) Purchases of held-to-maturity investments (127,431 ) - Redemptions of held-to-maturity investments 107,330 - Purchases of available-for-sale securities (11 ) (326 ) Sales and redemptions of available-for-sale securities   11,721     54,580   Cash flows (used in) from investing activities   (43,260 )   18,086     Cash flows from financing activities: Borrowings under credit facility 145,000 30,000 Repayments under credit facility (10,000 ) - Repayments of notes payable (6,250 ) (6,250 ) Cash paid on retention liabilities (284 ) - Dividends paid (9,723 ) (613 ) Repurchases of common stock (37,350 ) (80 ) Payroll tax payments on vested shares (10,363 ) (6,965 ) Excess tax benefits   4,229     9,065   Cash flows from financing activities   75,259     25,157     Effect of exchange rates on cash   (11,316 )   638     Decrease in cash and cash equivalents (184,499 ) (107,983 )   Cash and cash equivalents at beginning of period   727,849     532,805     Cash and cash equivalents at end of period $ 543,350   $ 424,822  

Towers WatsonInvestor Contact:Aida Sukys, +1 703-258-8033aida.sukys@towerswatson.com