Human resources consulting and outsourcing services provider Hewitt Associates, Inc. (HEW), Monday, reported an increase in first quarter net profit, helped by lower operating costs and a slight increase in revenues. However, earnings per share missed Street view by three cents. The company also maintained its full year revenue and earnings guidance. Separately, Hewitt said it has closed on a partial divestiture of its North American executive compensation consulting business. Hewitt shares are currently trading down more than 6% on the NYSE.
For the first quarter of fiscal 2010, the company's net earnings rose 5.6% to $68.40 million or $0.71 per share from $64.77 million or $0.68 per share in the prior-year period. Underlying net earnings for the period were $68.40 million or $0.71 per share versus $64.63 million or $0.68 per share a year earlier.
On average, 10 analysts polled by Thomson Reuters expected the company to earn $0.74 per share for the quarter. Analysts' estimates typically exclude special items.
Total revenues for the quarter edged up 0.2% to $795.54 million from $793.97 million in the first quarter of fiscal 2009. Analysts expected Hewitt to generate revenues of $763.04 million for the quarter.
Net revenues, or revenues before reimbursements, were $770.15 million versus $770.76 million last year. Net revenues for the quarter included $11.2 million of third-party supplier revenues as compared with $10.3 million in the previous-year quarter. After adjusting for foreign currency translation, acquisitions and divestitures and third-party revenues, first quarter net revenues dropped 2%. Revenues for the period from reimbursements rose to $25.39 million from $23.21 million in the same quarter last year.
The Lincolnshire, Illinois-based company operates mainly in three segments: Benefits Outsourcing, Consulting and HR BPO.
In benefits outsourcing division, revenues were $404.03 million versus $391.57 million reported in the same period last year. After adjusting for $1.6 million of favorable foreign currency translation, revenues grew 3%. The company noted that the increase in adjusted revenues was primarily due to higher revenues with regard to growth in all businesses and lower adjustments for client service issues, which was partially offset by impact of lost clients, client renewals at lower price points and lower project revenues.
Consulting revenues increased 1% to $260.83 million from $259.16 million in the comparable period prior year. After adjusting for a contribution of $9.7 million from an acquisition and favorable foreign currency translation of $8.1 million, revenues from consulting slipped 6% due to revenue decreases related to talent and organizational consulting services globally and communication services in North America.
However revenues from HR BPO slumped 13% to $114.08 million from $130.69 million a year ago. Revenues declined 11% after excluding third-party supplier revenues and adjusting for a contribution of $7.2 million last year from divested businesses and $2.7 million of favorable foreign currency translation. Hewitt attributed the decline in adjusted revenues to client terminations and liquidations.
During the three-month period, total operating costs declined to $670.66 million from $681.62 million in the prior-year quarter. Compensation and related expenses totaled $473.45 million compared to $480.91 million in the previous year, and selling, general and administrative costs dropped to $36.02 million from $40.88 million in the year-ago period. Meanwhile, reimbursable costs for the period rose to $25.39 million from $23.21 million in the prior year, and other operating expenses were $135.81 million as compared with $134.01 million in the same quarter last year. Total other expenses increased to $11.64 million from $5.10 million in the same period a year earlier.
Commenting on the results, chairman and chief executive officer Russ Fradin said, "Hewitt delivered another quarter of solid operating income growth and margin expansion that was in line with our expectations."
In the preceding fourth quarter of fiscal 2009, the company's net income was $64.42 million or $0.68 per share compared with $31.55 million or $0.32 per share in the prior-year quarter. Quarterly net revenues declined 6% to $757.74 million from $806.69 million last year. Total revenues were $774.04 million versus $824.53 million in the 2008 fourth quarter.
During the 2010 first quarter, Hewitt repurchased 323 thousand of its outstanding common shares at an average price of $39.56 per share for a total of $12.8 million. From January 1, 2010 through January 29, the company repurchased an additional 249 thousand shares at an average price of $41.20 per share for a total of $10.3 million. As at January 29, 2010, the company had about $203 million remaining under its current $300 million authorization.
Looking ahead to fiscal 2010, Hewitt said it sees low- to mid-single digit total company net revenue growth on an underlying basis, with solid growth in consulting, a flat performance in benefits outsourcing, and a decrease in HR BPO.
The company also maintained its full year underlying earnings range of $2.85 to $2.95 per share, with operating income growth moderately exceeding earnings per share growth, an effective tax rate in the range of 37% to 38%, and continued execution against its share repurchase authorization. Analysts expect Hewitt to earn $2.93 per share on revenues of $3.08 billion for the year.
Commenting on the guidance, chief financial officer Rob Schriesheim said, "We are maintaining our full-year earnings guidance as we continue to plan for a soft environment consistent with our previous view." Hewitt stated that the guidance reflects its expectations for fiscal 2010 on an underlying basis, which excluded the impact of unusual items in the previous year, and is consistent with fiscal 2010 guidance provided in November 2009.
The company also added that its current guidance includes the absorption of what it sees to be some modest earnings per share dilution over the balance of the fiscal year in connection with the divestiture announced today.
In a separate release, Hewitt announced that it has closed on a partial divestiture of its Executive Compensation Consulting business in North America. According to the transaction, a select number of Hewitt principals and consultants will leave Hewitt to form Meridian Compensation Partners LLC, which will operate as an independent executive compensation consulting firm. Hewitt noted that the terms of the transaction were undisclosed.
Under the agreement, Meridian Compensation will operate under the leadership of managing partners Michael Powers and Jim Wolf, who have been executive compensation practice leaders at Hewitt. Hewitt stated that based on their client alignments, a select number of Hewitt principals and consultants will be moving to Meridian in two phases between February 2010 and October 2010.
Hewitt said it will continue to serve board clients who are comfortable with the comprehensive controls already put in place to ensure the independence of its executive compensation advice or where fee disclosures are not a material issue, and also focus on growing its robust executive compensation advisory business for management.
"The independence of executive compensation consultants who serve Compensation Committees has become a politically charged issue over the past few years. While Hewitt has established substantial safeguards to ensure that our consultants provide purely objective advice and counsel, the recent SEC fee disclosure rules and political environment are pressuring some clients to avoid the issue entirely by moving to completely independent advisors," Fradin added.
Commenting on the news, president of Hewitt's global consulting business Eric Fiedler said, "This partial spin-off simply allows us to address the changing landscape in North America while continuing to pursue our growth plans worldwide."
HEW is currently trading on the New York Stock Exchange at $36.75 per share, down $2.73 or 6.91%, on a volume of 196,097 shares. In the past 52-week period, the stock has been trading in a range of $25.45 to $43.85.
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