Watson Wyatt & Company Holdings Reports Results for Third Quarter of F

Watson Wyatt & Company Holdings Reports Results for Third Quarter of Fiscal Year 2005

    Business Editors

    WASHINGTON--(BUSINESS WIRE)--May 5, 2005--Watson Wyatt & Company Holdings (NYSE:WW), a leading international human capital consulting firm, today announced financial results for the third quarter of fiscal year 2005, which ended on March 31, 2005.
    Revenues were $187.6 million for the quarter, as compared to $180.7 million in the prior-year third quarter. Revenues for the quarter increased 4% largely due to new clients in the retirement and health care practices, double-digit growth in the human capital consulting group and higher reimbursable expenses. Third-quarter income from continuing operations was $14.3 million, or $0.44 per diluted share, as compared to $14.0 million or $0.42 per diluted share in the third quarter of last year. Income from continuing operations of $14.3 million included a $2.2 million settlement related to a closed German joint venture and a $1.3 million loss in affiliate income related to the company's captive insurance company, PCIC. These two expenses were partially offset by a $1.4 million gain on a currency forward contract.
    "The marketplace is responding favorably to our messages around health care cost control, new compensation strategies and selective outsourcing, resulting in continued revenue growth," said John Haley, president and chief executive officer. "We are also looking forward to finalizing our business combination with Watson Wyatt LLP, which will further strengthen our global position."
    As of March 31, 2005, the company had cash and cash equivalents of $126.5 million. During the quarter the company contributed $10 million to its U.S. qualified pension plan and made a $2.4 million dividend payment.

    Quarterly Segment Highlights

--	Benefits Group revenues (representing 61% of total third-quarter revenues) were $114.5 million, up 4% from $110.0 million in the prior-year third quarter. The increase was largely due to strong growth in health care, as well as new client work in the retirement practice.
--	Technology Solutions Group revenues (representing 9% of total third-quarter revenues) were $17.0 million, versus prior-year third-quarter revenues of $20.3 million, which is consistent with expectations. However, this decrease includes time spent customizing administration systems. Related revenues will be recognized as these systems go into service. Fourth-quarter revenue growth is still expected, and the pipeline remains strong.
--	Human Capital Group revenues (representing 8% of total third-quarter revenues) totaled $14.6 million in the third quarter, up 26% over the prior-year third quarter. The revenue increase continues to be driven by strong demand for executive compensation work and by project work related to strategic rewards.

    Outlook for Fiscal Year 2005

    For the fourth quarter of fiscal year 2005, the company expects revenue to grow 4% to 6%, largely due to continued growth in new client revenues for retirement, additional project work for the health care practice and the continuing growth trend in the human capital consulting business. Technology Solutions Group revenues are also expected to grow in the fourth quarter on year-over-year comparison, reflecting the group's new business model for the first time in both periods. The company changed its business model in the fourth quarter of fiscal 2004, whereby no revenue is recognized related to the customization of administration systems. The company expects fully diluted earnings per share to be in the range of $0.43 to $0.45 for the fourth quarter of fiscal year 2005.
    For fiscal year 2005, the company is expecting revenue growth overall of 3% to 5% and fully diluted earnings per share from continuing operations in the range of $1.63 to $1.65.

    Conference Call

    The company will host a live webcast and conference call that can be accessed via the Internet on Thursday, May 5, 2005, to discuss the financial results for the third quarter of fiscal year 2005. It will begin at 9:00 a.m. Eastern Time. A replay of the webcast will be available two hours after the live call for a period of one year. To access the live webcast or replay, visit www.watsonwyatt.com, www.streetevents.com, or www.earnings.com.

    Additional Information

    On May 4, 2005, Watson Wyatt & Company Holdings filed with the Securities and Exchange Commission (the "SEC") a registration statement on Form S-4 that includes a proxy statement/prospectus and other relevant documents concerning the proposed transaction. YOU ARE URGED TO READ THE PROXY STATEMENT/PROSPECTUS AND THE OTHER RELEVANT DOCUMENTS FILED WITH THE SEC BEFORE MAKING ANY VOTING OR INVESTMENT DECISION REGARDING THE PROPOSED TRANSACTION BECAUSE THEY CONTAIN IMPORTANT INFORMATION ABOUT WATSON WYATT & COMPANY HOLDINGS, WATSON WYATT LLP AND THE PROPOSED TRANSACTION. The proxy statement/prospectus and the other documents filed with Commission may be obtained free of charge at the Commission's website, www.sec.gov. In addition, you may obtain free copies of the proxy statement/prospectus and the other documents filed by Watson Wyatt & Company Holdings with the Commission by requesting them in writing from Watson Wyatt & Company Holdings, 1717 H Street, NW, Washington, DC 20006 Attention: Investor Relations, or by telephone at 202-715-7000.
    Watson Wyatt & Company Holdings and its directors and executive officers may be deemed under the rules of the Commission to be participants in the solicitation of proxies from the stockholders of Watson Wyatt & Company Holdings. A list of the names of those directors and executive officers and descriptions of their interests in Watson Wyatt & Company Holdings is contained in the proxy statement/prospectus, which constitutes a part of the registration statement on Form S-4 filed by Watson Wyatt & Company Holdings with the Commission, as amended from time to time. Stockholders may obtain additional information about the interest of the directors and executive officers in the proposed transaction by reading the proxy statement/prospectus.

    Forward-Looking Statements

    Statements in this press release regarding projections and expectations of future earnings, revenues, operations, business trends and other such items are forward-looking statements. A number of risks and uncertainties exist which could cause actual results to differ materially from the results reflected in these forward-looking statements. Such factors include but are not limited to our ability to complete the acquisition of Watson Wyatt LLP, integrate its business into our own business, processes and systems, and achieve the anticipated results; our continued ability to recruit and retain qualified associates; the success of our marketing, client development and sales programs after the acquisition; our ability to maintain client relationships and to attract new clients after the acquisition; declines in demand for our services as a result of increased use of defined contribution plans rather than defined benefit plans; outcomes of litigation; the ability of the company to obtain professional liability insurance; a significant decrease in the demand for the consulting, actuarial and other services we offer as a result of changing economic conditions or other factors; actions by competitors offering human resources consulting services, including public accounting and consulting firms, technology consulting firms and Internet/intranet development firms; our ability to achieve cost reductions after the acquisition; foreign currency exchange and interest rate fluctuations; exposure to Watson Wyatt LLP liabilities that have not been expressly assumed; general economic and business conditions that adversely affect us or our clients after the acquisition; the level of capital resources required for future acquisitions; regulatory, legislative and technological developments that may affect the demand for or costs of our services and other factors discussed under "Risk Factors" in the company's Annual Report on Form 10-K dated August 17, 2004, and the registration statement on Form S-4 filed on May 4, 2005, as amended from time to time, both of which are on file with the Securities and Exchange Commission. These statements are based on assumptions that may not come true. All forward-looking disclosure is speculative by its nature. The company undertakes no obligation to update any of the forward-looking information included in this report, whether as a result of new information, future events, changed expectations or otherwise.

    About Watson Wyatt

    Watson Wyatt is an international human capital consulting firm that provides services in the areas of employee benefits, human capital strategies and related technology solutions. The firm is headquartered in Washington, D.C., and has 3,700 associates in 61 offices in the Americas and Asia-Pacific. Together with Watson Wyatt LLP, a leading Europe-based consulting partnership, the firm operates globally as Watson Wyatt Worldwide. Watson Wyatt Worldwide has approximately 5,800 associates in 88 offices in 31 countries.

WATSON WYATT & COMPANY HOLDINGS Consolidated Statements of Operations (Thousands of U.S. Dollars, Except Per Share Data)

Three Months Ended Nine Months Ended March 31, March 31, ------------------ ------------------- 2005 2004 2005 2004 -------- -------- -------- -------- (Unaudited) (Unaudited)

Revenue $187,560 $180,655 $538,800 $521,991 -------- -------- -------- --------

Costs of providing services: Salaries and employee benefits 101,730 100,231 294,000 299,678 Professional and subcontracted services 13,795 11,618 37,318 33,317 Occupancy, communications and other 27,110 28,422 79,111 77,861 General and administrative expenses 18,764 15,269 55,133 45,860 Depreciation and amortization 5,161 4,091 14,654 14,138 -------- -------- -------- -------- 166,560 159,631 480,216 470,854 -------- -------- -------- --------

Income from operations 21,000 21,024 58,584 51,137

Income from affiliates 889 2,261 5,819 5,099 Interest income, net 617 20 1,479 404 Other non-operating income (1,181) 45 (1,209) 6,197 -------- -------- -------- --------

Income from continuing operations before income taxes 21,325 23,350 64,673 62,837 Provision for income taxes 6,985 9,374 25,527 25,562 -------- -------- -------- --------

Income from continuing operations 14,340 13,976 39,146 37,275

Discontinued operations:

Adjustment to reduce estimated loss on disposal of discontinued operations, less applicable tax expense for the three and nine months ended March 31, 2005 and March 31, 2004 739 592 739 592

Sublease income from discontinued operations, less applicable income tax expense for the three and nine months ended March 31, 2005 and March 31, 2004 9 21 17 47 -------- -------- -------- --------

Net income $ 15,088 $ 14,589 $ 39,902 $ 37,914 ======== ======== ======== ========

Basic earnings per share: Income from continuing operations $ 0.44 $ 0.42 $ 1.20 $ 1.13 Income from discontinued operations 0.02 0.02 0.02 0.02 ======== ======== ======== ======== Net income $ 0.46 $ 0.44 $ 1.22 $ 1.15 ======== ======== ======== ========

Diluted earnings per share: Income from continuing operations $ 0.44 $ 0.42 $ 1.19 $ 1.12 Income from discontinued operations 0.02 0.02 0.02 0.02 ======== ======== ======== ======== Net income $ 0.46 $ 0.44 $ 1.21 $ 1.14 ======== ======== ======== ========

Weighted average shares of common stock, basic (000) 32,647 32,968 32,507 33,064 ======== ======== ======== ======== Weighted average shares of common stock, diluted (000) 32,936 33,288 32,814 33,401 ======== ======== ======== ========

WATSON WYATT & COMPANY HOLDINGS Supplemental Segment Data (Thousands of U.S. Dollars)

Three Months Ended Nine Months Ended March 31, March 31, ------------------ ------------------ 2005 2004 2005 2004 -------- -------- -------- -------- (Unaudited) (Unaudited) Revenue (net of reimbursable expenses) ----------------------- Benefits Group $114,488 $110,029 $319,208 $312,325 Technology Solutions Group 17,030 20,258 53,785 62,398 Human Capital Group 14,633 11,639 41,998 33,427 International 22,190 22,088 65,487 60,420 Other 9,082 9,562 31,811 32,197 -------- -------- -------- -------- Total segment revenue 177,423 173,576 512,289 500,767 Reimbursable expenses and other 10,137 7,079 26,511 21,224 -------- -------- -------- -------- Consolidated revenue $187,560 $180,655 $538,800 $521,991 ======== ======== ======== ========

Net operating income -------------------- Benefits Group $ 24,829 $ 26,541 $ 63,906 $ 65,304 Technology Solutions Group 874 2,729 8,975 8,184 Human Capital Group 3,622 2,085 10,589 3,973 International 263 1,713 2,074 466 Other (488) (319) 3,025 315 -------- -------- -------- -------- Total segment net operating income 29,100 32,749 88,569 78,242 Discretionary compensation (11,400) (9,700) (31,813) (29,170) Other income (expense), net 3,625 301 7,917 13,765 -------- -------- -------- -------- Income before income taxes $ 21,325 $ 23,350 $ 64,673 $ 62,837 ======== ======== ======== ========

March 31, ------------------ 2005 2004 -------- -------- (Unaudited) Associates (fiscal year end full-time equivalents) --------------------------- Benefits Group 1,600 1,635 Technology Solutions Group 300 330 Human Capital Group 165 150 International 900 965 Other 510 575 -------- -------- Total segment associates 3,475 3,655 Corporate 225 225 -------- -------- Total 3,700 3,880 ======== ========

WATSON WYATT & COMPANY HOLDINGS Consolidated Balance Sheets (Thousands of U.S. Dollars, Except Per Share Data)

March 31, June 30, -------- -------- 2005 2004 -------- -------- (Unaudited) -------- Assets ------ Cash and cash equivalents $126,465 $136,940 Marketable securities - 20,000 Receivables from clients: Billed, net of allowances of $3,131 and $1,241 100,760 86,726 Unbilled, net of allowances of $1,291 and $456 65,231 63,108 -------- -------- 165,991 149,834

Deferred income taxes 15,391 15,052 Other current assets 39,229 11,388 -------- -------- Total current assets 347,076 333,214

Investment in affiliates 32,367 30,235 Fixed assets, net 80,008 65,438 Deferred income taxes 47,590 55,240 Goodwill and intangible assets 22,042 20,909 Other assets 6,041 7,132 -------- --------

Total Assets $535,124 $512,168 ======== ========

Liabilities -----------

Accounts payable and accrued liabilities $97,062 $113,233 Income taxes payable 9,547 12,526 -------- -------- Total current liabilities 106,609 125,759

Accrued retirement benefits 97,723 97,984 Deferred rent and accrued lease losses 10,593 10,199 Deferred income taxes 346 628 Other noncurrent liabilities 31,209 32,414 -------- --------

Total Liabilities 246,480 266,984

Commitments and contingencies

Stockholders' Equity -------------------- Preferred Stock - No par value: 1,000,000 shares authorized; none issued and outstanding - - Class A Common Stock - $.01 par value: 99,000,000 shares authorized; 33,372,880 and 33,372,880 issued and 32,693,650 and 32,317,156 outstanding 334 334 Additional paid-in capital 148,304 149,508 Treasury stock, at cost - 679,230 and 1,055,724 shares (16,885) (26,149) Retained earnings 158,262 125,669 Accumulated other comprehensive loss (1,371) (4,178) -------- -------- Total Stockholders' Equity 288,644 245,184 -------- --------

Total Liabilities and Stockholders' Equity $535,124 $512,168 ======== ========

WATSON WYATT & COMPANY HOLDINGS Consolidated Statements of Cash Flows (Thousands of U.S. Dollars)

Nine months ended March 31 --------------------- 2005 2004 -------- -------- Cash flows from (used in) operating activities: Net income $ 39,902 $ 37,914 Adjustments to reconcile net income to net cash from (used in) operating activities: Other non-operating gain related to PCIC - (5,600) Income from discontinued operations, net of income tax expense (739) (592) Provision for doubtful receivables from clients 5,967 5,610 Depreciation 14,426 13,895 Amortization of intangible assets 228 243 Provision for deferred income taxes 7,029 (2,108) Income from affiliates (5,819) (5,099) Distributions from affiliates 4,624 4,404 Other, net 755 10 Changes in operating assets and liabilities (net of discontinued operations) Receivables from clients (22,124) (13,789) Other current assets (9,996) (2,315) Other assets 1,091 1,226 Accounts payable and accrued liabilities (11,351) (10,080) Income taxes payable (20,824) (4,477) Accrued retirement benefits (261) 5,089 Deferred rent and accrued lease losses 394 2,046 Other noncurrent liabilities (481) (1,694) -------- -------- Net cash from (used in) operating activities 2,821 24,683 -------- --------

Cash flows used in investing activities: Purchases of marketable securities (469,400) (257,600) Sales and maturities of marketable securities 489,400 286,300 Purchases of fixed assets (20,129) (12,334) Capitalized software costs (8,840) - Contingent payments from divestitures 28 598 Acquisitions and contingent consideration payments (517) (114) -------- -------- Net cash used in investing activities (9,458) 16,850 -------- --------

Cash flows used in financing activities: Issuances of common stock - exercise of options 1,711 1,632 Issuances of common stock - employee stock purchase plan 5,549 5,024 Dividends paid (7,309) - Repurchases of common stock (4,188) (12,161) -------- -------- Net cash used in financing activities (4,237) (5,505) -------- --------

Effect of exchange rates on cash 399 2,007 -------- --------

Decrease in cash and cash equivalents (10,475) 38,035

Cash and cash equivalents at beginning of period 136,940 115,674 -------- --------

Cash and cash equivalents at end of period $126,465 $153,709 ======== ========

--30--SJ/na*

CONTACT: Watson Wyatt, Washington Carl D. Mautz, 202-715-7056

KEYWORD: WASHINGTON INDUSTRY KEYWORD: HUMAN RESOURCES EARNINGS CONFERENCE CALLS SOURCE: Watson Wyatt & Company Holdings

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