Table of Contents

 

 

 

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION****Washington, D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

 
| **x**      | ** ** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                   |
|------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                      |
|       |       | **For the quarterly period ended December 31, 2008**                                                                                                 |
|       |       |                                                                                                                                                      |
| **OR**     |
|       |       |                                                                                                                                                      |
| **o**      | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                  |
| ** ** | ** ** | ** **                                                                                                                                                |
| ** ** | ** ** | **For the transition period from             to         ** |

** **

**Commission File Number: 001-16159**

 

**WATSONWYATT WORLDWIDE, INC.**(Exact name of Registrant as specified in its charter)

 

| **Delaware**                                                    | ** ** | **52-2211537**                       |
|-----------------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |       | (I.R.S. Employer Identification No.) |
| ** **                                                      | ** ** | ** **                           |
| **901 N. Glebe Road**                                           | ** ** |                                 |
| **Arlington, VA**                                               |       | **22203**                            |
| (Address of principal executive offices)                        | ** ** | (zip code)                           |

** **

**(703) 258-8000**(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the Registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the Registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

 
|   | Yes | x |   | No | o |   |
|--------|-----|---|--------|----|---|--------|

 

Indicate by check mark whether the Registrant is a large acceleratedfiler, an accelerated filer, or a non-accelerated filer, or a smaller reportingcompany.  See definitions of “largeaccelerated filer” and “accelerated filer,” and “smaller reporting company” in Rule 12b-2of the Exchange Act.

 
| Large accelerated filer x |   | Accelerated filer o |   | Non-accelerated filer o    |   | Smaller reporting company o |
|---------------------------|--------|---------------------|--------|----------------------------|--------|-----------------------------|
|                      |   |                |   | (Do not check if a smaller |   |                        |
|                      |   |                |   | reporting company)         |   |                        |

 

Indicate bycheck mark whether the Registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).

 
|   | Yes | o |   | No | x |   |
|--------|-----|---|--------|----|---|--------|

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of January 31, 2009.

 
| **Class**                                           | ** ** | **Outstanding  at January 31, 2009** |
|-----------------------------------------------------|------------|-------------------------------------------|
| Class A Common Stock, $.01 par value per share |       | 42,594,415 shares                         |

 

 

 

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Table of Contents

 

**WATSON WYATT WORLDWIDE, INC.INDEX TO FORM 10-Q**

 

For the Three and Six Months Ended December 31,2008

 
| PART I.   | FINANCIAL INFORMATION                                                                                                  |   |
|----------------|------------------------------------------------------------------------------------------------------------------------|--------|
|           |                                                                                                                   |   |
| Item 1.        | Condensed Consolidated Financial Statements (Unaudited)                                                                |   |
|           |                                                                                                                   |   |
|           | Condensed  Consolidated Statements of Operations—Three and Six Months Ended  December 31, 2008 and 2007      | 1      |
|           |                                                                                                                   |   |
|           | Condensed  Consolidated Balance Sheets—December 31, 2008 and June 30, 2008                              | 2      |
|           |                                                                                                                   |   |
|           | Condensed  Consolidated Statements of Cash Flows—Six Months Ended December 31, 2008  and 2007                | 3      |
|           |                                                                                                                   |   |
|           | Condensed Consolidated Statement of Changes  in Stockholders’ Equity—Six Months Ended December 31, 2008 | 4      |
|           |                                                                                                                   |   |
|           | Notes to the Condensed Consolidated  Financial Statements                                                              | 5      |
|           |                                                                                                                   |   |
| Item 2.        | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                            | 20     |
|           |                                                                                                                   |   |
| 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                                                           | 40     |
|           |                                                                                                                   |   |
| Item 3.        | Defaults Upon Senior Securities                                                                                        | 41     |
|           |                                                                                                                   |   |
| Item 4.        | Submission of Matters to a Vote of Security  Holders                                                                   | 41     |
|           |                                                                                                                   |   |
| Item 5.        | Other Information                                                                                                      | 43     |
|           |                                                                                                                   |   |
| Item 6.        | Exhibits                                                                                                               | 44     |
|           |                                                                                                                   |   |
| Signatures     |                                                                                                                   | 45     |
|           |                                                                                                                   |   |
| Certifications |                                                                                                                   |   |

 

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**WATSON WYATT WORLDWIDE, INC.**

**Condensed Consolidated Statements of Operations**

(Thousandsof U.S. Dollars, Except Per Share Data)

(Unaudited)

 
| ** **                                              | ** ** | **Three months ended December 31,** | ** ** | **Six months ended December 31,** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                              | ** ** | **2008**                                                | ** ** | **2007**                                              | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                    |       |                                                    |       |                                                  |       |   |   |   |   |
| Revenue                                                 |       | $                                                       | 436,389    |                                                  | $          | 447,032 |   | $ | 862,515 |   | $ | 848,719 |   |
|                                                    |       |                                                    |       |                                                  |       |   |   |   |   |
| Costs of  providing services:                           |       |                                                    |       |                                                  |       |   |   |   |   |
| Salaries and  employee benefits                         |       | 246,648                                                 |       | 249,073                                               |       | 482,527 |   | 468,436 |   |
| Professional  and subcontracted services                |       | 25,564                                                  |       | 29,293                                                |       | 51,879 |   | 54,820 |   |
| Occupancy,  communications and other                    |       | 46,316                                                  |       | 49,307                                                |       | 96,313 |   | 93,232 |   |
| General and  administrative expenses                    |       | 43,206                                                  |       | 41,791                                                |       | 87,093 |   | 86,096 |   |
| Depreciation  and amortization                          |       | 18,870                                                  |       | 17,626                                                |       | 37,734 |   | 34,960 |   |
|                                                    |       | 380,604                                                 |       | 387,090                                               |       | 755,546 |   | 737,544 |   |
|                                                    |       |                                                    |       |                                                  |       |   |   |   |   |
| Income from  operations                                 |       | 55,785                                                  |       | 59,942                                                |       | 106,969 |   | 111,175 |   |
|                                                    |       |                                                    |       |                                                  |       |   |   |   |   |
| Income  (Loss) from affiliates                          |       | 1,070                                                   |       | (1,499                                                | )          | 2,765 |   | (574 | ) |
| Interest  expense                                       |       | (1,059                                                  | )          | (1,969                                                | )          | (1,628 | ) | (4,227 | ) |
| Interest  income                                        |       | 322                                                     |       | 927                                                   |       | 1,353 |   | 2,771 |   |
| Other  non-operating income                             |       | 1,699                                                   |       | 186                                                   |       | 1,680 |   | 275 |   |
|                                                    |       |                                                    |       |                                                  |       |   |   |   |   |
| Income  before income taxes                             |       | 57,817                                                  |       | 57,587                                                |       | 111,139 |   | 109,420 |   |
|                                                    |       |                                                    |       |                                                  |       |   |   |   |   |
| Provision  for income taxes                             |       | 18,266                                                  |       | 20,806                                                |       | 36,428 |   | 38,195 |   |
|                                                    |       |                                                    |       |                                                  |       |   |   |   |   |
| Net income                                              |       | $                                                       | 39,551     |                                                  | $          | 36,781 |   | $ | 74,711 |   | $ | 71,225 |   |
|                                                    |       |                                                    |       |                                                  |       |   |   |   |   |
| Earnings per  share:                                    |       |                                                    |       |                                                  |       |   |   |   |   |
| Net income -  Basic                                     |       | $                                                       | 0.93       |                                                  | $          | 0.87 |   | $ | 1.75 |   | $ | 1.68 |   |
| Net income -  Diluted                                   |       | $                                                       | 0.93       |                                                  | $          | 0.82 |   | $ | 1.75 |   | $ | 1.60 |   |
|                                                    |       |                                                    |       |                                                  |       |   |   |   |   |
| Weighted  average shares of common stock, basic (000)   |       | 42,571                                                  |       | 42,338                                                |       | 42,753 |   | 42,313 |   |
| Weighted  average shares of common stock, diluted (000) |       | 42,616                                                  |       | 44,649                                                |       | 42,804 |   | 44,652 |   |

 

See accompanying notes to thecondensed consolidated financial statements

 

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**WATSON WYATT WORLDWIDE, INC.**

**CondensedConsolidated Balance Sheets**

(Thousandsof U.S. Dollars, Except Share Data)

(Unaudited)
| ** **                                                                                                                                             | ** ** | **December 31,** | ** ** | **June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                                                                                                                                             | ** ** | **2008**              | ** ** | **2008**          | ** ** |
| **Assets**                                                                                                                                             | ** ** | ** **            | ** ** | ** **        | ** ** |
| Cash and cash equivalents                                                                                                                              |       | $                     | 73,878     |              | $          | 124,632 |   |
| Receivables from clients:                                                                                                                              |       |                  |       |              |       |
| Billed, net of allowances of $8,965 and  $8,544                                                                                                        |       | 231,660               |       | 239,593           |       |
| Unbilled, at estimated net realizable value                                                                                                            |       | 114,368               |       | 126,163           |       |
|                                                                                                                                                   |       | 346,028               |       | 365,756           |       |
| Deferred income taxes                                                                                                                                  |       | 19,324                |       | 18,576            |       |
| Other current assets                                                                                                                                   |       | 59,845                |       | 48,523            |       |
| Total current assets                                                                                                                                   |       | 499,075               |       | 557,487           |       |
| Investment in affiliates                                                                                                                               |       | 17,430                |       | 8,526             |       |
| Fixed assets, net                                                                                                                                      |       | 176,347               |       | 184,684           |       |
| Deferred income taxes                                                                                                                                  |       | 71,768                |       | 72,572            |       |
| Goodwill                                                                                                                                               |       | 504,164               |       | 634,176           |       |
| Intangible assets, net                                                                                                                                 |       | 175,742               |       | 236,767           |       |
| Other assets                                                                                                                                           |       | 13,688                |       | 21,764            |       |
|                                                                                                                                                   |       |                  |       |              |       |
| **Total Assets**                                                                                                                                       |       | $                     | 1,458,214  |              | $          | 1,715,976 |   |
| ** **                                                                                                                                             | ** ** | ** **            | ** ** | ** **        | ** ** |
| **Liabilities**                                                                                                                                        | ** ** | ** **            | ** ** | ** **        | ** ** |
| Accounts payable and accrued liabilities,  including discretionary compensation                                                                        |       | $                     | 275,236    |              | $          | 381,784 |   |
| Income taxes payable and deferred                                                                                                                      |       | 3,251                 |       | 3,462             |       |
| Total current liabilities                                                                                                                              |       | 278,487               |       | 385,246           |       |
|                                                                                                                                                   |       |                  |       |              |       |
| Revolving credit facility                                                                                                                              |       | 60,641                |       | —            |       |
| Accrued retirement benefits                                                                                                                            |       | 201,669               |       | 209,168           |       |
| Deferred rent and accrued lease losses                                                                                                                 |       | 29,298                |       | 29,239            |       |
| Deferred income taxes and other long term  tax liabilities                                                                                             |       | 11,714                |       | 13,430            |       |
| Other noncurrent liabilities                                                                                                                           |       | 74,273                |       | 94,498            |       |
|                                                                                                                                                   |       |                  |       |              |       |
| **Total Liabilities**                                                                                                                                  |       | 656,082               |       | 731,581           |       |
|                                                                                                                                                   |       |                  |       |              |       |
| 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; 43,813,451 and 43,813,451 issued and 42,584,049  and 43,578,268 outstanding |       | 438                   |       | 438               |       |
| Additional paid-in capital                                                                                                                             |       | 453,630               |       | 456,681           |       |
| Treasury stock, at cost - 1,229,402 and  235,183 shares                                                                                                |       | (67,290               | )          | (13,222           | )          |
| Retained earnings                                                                                                                                      |       | 543,283               |       | 474,961           |       |
| Accumulated other comprehensive  (loss)/income                                                                                                         |       | (127,929              | )          | 65,537            |       |
| **Total Stockholders’ Equity**                                                                                                                    |       | 802,132               |       | 984,395           |       |
|                                                                                                                                                   |       |                  |       |              |       |
| **Total Liabilities and Stockholders’ Equity**                                                                                                    |       | $                     | 1,458,214  |              | $          | 1,715,976 |   |

 

See accompanying notes to thecondensed consolidated financial statements

 

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**WATSON WYATT WORLDWIDE, INC.**

**CondensedConsolidated Statements of Cash Flows**

(Thousandsof U.S. Dollars)

(Unaudited)

 
| ** **                                                                            | ** ** | **Six months ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                                                            | ** ** | **2008**                                              | ** ** | **2007** | ** ** |
|                                                                                  |       |                                                  |       |   |   |
| Cash flows from operating activities:                                                 |       |                                                  |       |   |   |
| Net income                                                                            |       | $                                                     | 74,711     |   | $ | 71,225 |   |
| Adjustments to reconcile net income to net  cash (used in)/from operating activities: |       |                                                  |       |   |   |
| Provision for doubtful receivables from  clients                                      |       | 3,481                                                 |       | 7,706 |   |
| Depreciation                                                                          |       | 30,329                                                |       | 26,948 |   |
| Amortization of intangible assets                                                     |       | 7,405                                                 |       | 8,012 |   |
| Provision for (benefit from) deferred  income taxes                                   |       | 56                                                    |       | 2,024 |   |
| (Income)/loss from affiliates                                                         |       | (2,765                                                | )          | 574 |   |
| Other, net                                                                            |       | 2,485                                                 |       | 1,379 |   |
| Changes in operating assets and liabilities,  net of business acquisitions            |       |                                                  |       |   |   |
| Receivables from clients                                                              |       | 16,247                                                |       | (29,215 | ) |
| Other current assets                                                                  |       | (11,322                                               | )          | (13,921 | ) |
| Other assets                                                                          |       | 4,831                                                 |       | 727 |   |
| Accounts payable and accrued liabilities                                              |       | (92,291                                               | )          | (26,682 | ) |
| Income taxes payable                                                                  |       | 214                                                   |       | 1,431 |   |
| Accrued retirement benefits                                                           |       | (7,500                                                | )          | 4,308 |   |
| Deferred rent and accrued lease losses                                                |       | 59                                                    |       | (2,320 | ) |
| Other noncurrent liabilities                                                          |       | (22,238                                               | )          | (3,924 | ) |
| Cash flows from operating activities:                                                 |       | 3,702                                                 |       | 48,272 |   |
| Cash flows used in investing activities:                                              |       |                                                  |       |   |   |
| Business acquisitions and contingent  consideration payments                          |       | (518                                                  | )          | (134,748 | ) |
| Purchases of fixed assets                                                             |       | (19,045                                               | )          | (12,844 | ) |
| Capitalized software costs                                                            |       | (10,322                                               | )          | (12,256 | ) |
| Investment in affiliates                                                              |       | (2,041                                                | )          | (1,914 | ) |
| Distribution from affiliates                                                          |       | 118                                                   |       | — |   |
| Contingent proceeds from divestitures                                                 |       | 1,680                                                 |       | 275 |   |
| Cash flows used in investing activities:                                              |       | (30,128                                               | )          | (161,487 | ) |
| Cash flows used in financing activities                                               |       |                                                  |       |   |   |
| Borrowings under Credit Facility                                                      |       | 60,641                                                |       | 2,000 |   |
| Dividends paid                                                                        |       | (6,389                                                | )          | (6,360 | ) |
| Repurchases of common stock                                                           |       | (77,442                                               | )          | (28,282 | ) |
| Issuances of common stock and excess tax  benefit                                     |       | 3,439                                                 |       | 7,504 |   |
| Cash flows used in financing activities                                               |       | (19,751                                               | )          | (25,138 | ) |
| Effect of exchange rates on cash                                                      |       | (4,577                                                | )          | (6,250 | ) |
| Decrease in cash and cash equivalents                                                 |       | (50,754                                               | )          | (144,603 | ) |
| Cash and cash equivalents at beginning of  period                                     |       | 124,632                                               |       | 248,186 |   |
| Cash and cash equivalents at end of period                                            |       | $                                                     | 73,878     |   | $ | 103,583 |   |
| Supplemental disclosures:                                                             |       |                                                  |       |   |   |
| Cash paid for interest                                                                |       | $                                                     | 1,650      |   | $ | 4,227 |   |
| Cash paid for income taxes, net of refunds                                            |       | $                                                     | 31,411     |   | $ | 33,808 |   |

 

See accompanying notes to thecondensed consolidated financial statements

 

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**WATSON WYATT WORLDWIDE, INC.**

**Condensed Consolidated Statement of Changesin Stockholders’ Equity**

(Thousands of U.S. Dollars, Except Share Data)

(Unaudited)

 
| ** **                                           | ** ** | **Class A   Common   Stock   Outstanding** | ** ** | **Class A** | ** ** | **Additional** | ** ** | **Treasury**     | ** ** | ** **   | ** ** | **Accumulated   Other** | ** ** | ** ** | ** ** |
|------------------------------------------------------|------------|----------------------------------------------------------------|------------|------------------|------------|----------------|------------|------------------|------------|--------------|------------|------------------------------|------------|------------|------------|
| ** **                                           | ** ** | **(number of shares,**                               | ** ** | **Common**       | ** ** | **Paid-in**    | ** ** | **Stock,**       | ** ** | **Retained** | ** ** | **Comprehensive**            | ** ** | ** ** | ** ** |
| ** **                                           | ** ** | **in thousands)**                                         | ** ** | **Stock**        | ** ** | **Capital**    | ** ** | **at Cost** | ** ** | **Earnings** | ** ** | **Income/(loss)**            | ** ** | **Total**  | ** ** |
| ** **                                           | ** ** | ** **                                                     | ** ** | ** **       | ** ** | ** **     | ** ** | ** **       | ** ** | ** **   | ** ** | ** **                   | ** ** | ** ** | ** ** |
| Balance at  June 30, 2008                       |       | 43,578                                                         |       | $                | 438        |           | $          | 456,681          |       | $            | (13,222    | )                            | $          | 474,961    |       | $ | 65,537 |   | $ | 984,395 |   |
| Comprehensive  loss:                                 |       |                                                           |       |             |       |           |       |             |       |         |       |                         |       |       |       |
| Net income                                           |       | —                                                         |       | —           |       | —         |       | —           |       | 74,711       |       | —                       |       | 74,711     |       |
| Foreign currency  translation adjustment, net of tax |       | —                                                         |       | —           |       | —         |       | —           |       | —       |       | (193,466                     | )          | (193,466   | )          |
| Total  comprehensive loss                            |       |                                                           |       |             |       |           |       |             |       |         |       |                         |       | (118,755   | )          |
| Cash dividends  declared                             |       | —                                                         |       | —           |       | —         |       | —           |       | (6,389       | )          | —                       |       | (6,389     | )          |
| Repurchases of  common stock                         |       | (1,418                                                         | )          | —           |       | —         |       | (77,442          | )          | —       |       | —                       |       | (77,442    | )          |
| Issuances of  common stock and excess tax benefit    |       | 424                                                            |       | —           |       | (3,051         | )          | 23,374           |       | —       |       | —                       |       | 20,323     |       |
|                                                 |       |                                                           |       |             |       |           |       |             |       |         |       |                         |       |       |       |
| Balance at  December 31, 2008                   |       | 42,584                                                         |       | $                | 438        |           | $          | 453,630          |       | $            | (67,290    | )                            | $          | 543,283    |       | $ | (127,929 | ) | $ | 802,132 |   |

 

Seeaccompanying notes to thecondensed consolidated financial statements

 

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**WATSON WYATT WORLDWIDE, INC.**

 

**Notes to the CondensedConsolidated Financial Statements**(Tabular amounts are in thousands, except per share data)

(Unaudited)

 

**Note 1 –Basis of Presentation.**

 

The accompanyingunaudited quarterly condensed consolidated financial statements of Watson WyattWorldwide, Inc. and our subsidiaries (collectively referred to as “we,” “WatsonWyatt,” “Watson Wyatt Worldwide” or the “company”) are presented in accordancewith the rules and regulations of the Securities and Exchange Commission (“SEC”)for quarterly reports on Form 10-Q and therefore do not include all of theinformation and footnotes required by U.S. generally accepted accountingprinciples. In the opinion of management, these condensed consolidatedfinancial statements reflect all adjustments, consisting only of normalrecurring adjustments, which are necessary for a fair presentation of thecondensed consolidated financial statements and results for the interimperiods.  All intercompany accounts andtransactions have been eliminated in consolidation. The condensed consolidatedfinancial statements should be read together with the audited consolidatedfinancial statements and notes thereto contained in the company’s Annual Reporton Form 10-K for the fiscal year ended June 30, 2008, which is filedwith the SEC and may be accessed via EDGAR on the SEC’s web site atwww.sec.gov.  The year-end balance sheetdata was derived from audited financial statements.

 

Our fiscal year2009 began July 1, 2008 and ends June 30, 2009.

 

The results ofoperations for the six months ended December 31, 2008 are not necessarilyindicative of the results that can be expected for the entire fiscal year endingJune 30, 2009.  The results reflectcertain estimates and assumptions made by management including estimatedbonuses and anticipated tax liabilities that affect the amounts reported in thecondensed consolidated financial statements and related notes.

 

**Note 2 –Business Acquisitions.**

 

The company’s acquisitionstrategy identifies potential acquisitions that strengthen our geographicdelivery of services to clients or enhance practices in various parts of theworld. Acquisition candidates are evaluated on their cultural consistency withWatson Wyatt values within the company’s strategy. When those conditions aremet, the company values potential acquisitions so as to be accretive toearnings.

 

Assets acquired andliabilities assumed as a result of our acquisitions are recorded at theirrespective fair values as of the business combination date.  The determination of estimated fair valuerequires management to make significant estimates and assumptions.

 

Acquisitions that we havecompleted include the following:

 

*Dr. Dr. HeissmannGmbH*

 

On July 20,2007, the company acquired the outstanding stock of Dr. Dr. HeissmannGmbH (“Heissmann”) for approximately $136 million (€99 million) in cash plusapproximately $1.4 million in transaction costs.  Heissmann was an actuarial, benefits, andhuman resources consulting firm based in Germany with subsidiaries in Ireland,Netherlands, Austria, and France.  As of July 20,2007, Heissmann employed approximately 360 associates. The financial results ofHeissmann have been consolidated into the company’s financial statements sincethe date of acquisition.

 

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*WisdomNet*

 

OnJuly 2, 2007, the company acquired the net assets of WisdomNet for $6.9million in cash and stock, including the payoff of $0.5 million of debt.  WisdomNet was a Denver-based talentmanagement software and consulting firm that was founded in 2001.  WisdomNet offered a proprietary line ofbusiness software products, including an end-to-end solution for managingorganizations’ talent management processes. The acquisition of WisdomNet strengthens our existing talent managementbusiness and provides strategic software that will be used to service ourclients on an ongoing basis. As of the date of the acquisition, WisdomNetemployed 15 associates. The company recorded $2.6 million of goodwillassociated with this acquisition.

 

*Marcu &Asociados S.A.*

 

OnJune 16, 2008, the company acquired the outstanding stock of Marcu &Asociados S.A. (Marcu) for $2.8 million in cash.  Marcu is a human resource, risk and financialmanagement consulting firm based in Buenos Aires, Argentina.  As of the date of acquisition, Marcu employed37 associates and had annual revenues of approximately $2.5 million.  The financial results of Marcu are includedin the company’s consolidated financial statements effective July 1, 2008.The company recorded $1.6million of goodwill associated with this acquisition.

 

*Watson Wyatt Netherlands*

 

On February 1, 2007,Watson Wyatt B.V., an indirect wholly-owned subsidiary of the company, acquiredthe net assets of Watson Wyatt Netherlands (“WWN”), its long-time alliancepartner in the Netherlands.  Thefinancial results of WWN have been consolidated into the company’s financialstatements since February 1, 2007.

 

The contingenciesassociated with the payment of an additional 218,089 Class A shares weremet and the contingent shares were issued to the former partners of WWN on June 27,2008.

 

*Watson Wyatt LLP*

 

On July 31, 2005,the company acquired substantially all of the assets and assumed mostliabilities of Watson Wyatt LLP (“WWLLP”) (the “WWLLP business combination”), aleading United Kingdom-based actuarial, benefits and human resources consultingpartnership. The financial results of WWLLP have been consolidated into thecompany’s financial statements since August 1, 2005.

 

In addition to theinitial purchase price, the terms of the purchase agreement called for anadditional 1,950,000 shares to be paid to the former partners of WWLLP,contingent upon the achievement by the acquired business of certain agreed-uponfinancial performance goals.  Theagreed-upon financial performance goals were met at the end of fiscal year 2007and the contingent shares were issued to the former partners of WWLLP on April 15,2008 for payment of $94.2 million.

 

**Note 3 –Segment Information.**

 

We have fivereportable operating segments or practice areas as follows:

 
|   | (1)    | Benefits  Group                                |
|--------|--------|------------------------------------------------|
|   |   |                                           |
|   | (2)    | Human  Capital Group                           |
|   |   |                                           |
|   | (3)    | Technology  and Administration Solutions Group |
|   |   |                                           |
|   | (4)    | Investment  Consulting Group                   |
|   |   |                                           |
|   | (5)    | Insurance &  Financial Services Group |

 

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Managementevaluates the performance of its segments and allocates resources to them basedon net operating income on a pre-bonus, pre-tax basis.

 

The table belowpresents specified information about reported segments as of and for the threemonths ended December 31, 2008:

 
| ** **                              | ** ** | **Benefits  Group** | ** **    | **Human  Capital  Group** | ** ** | **Technology  and  Administration  Solutions  Group** | ** ** | **Investment  Consulting  Group** | ** ** | **Insurance  and  Financial  Services  Group** | ** ** | **Total** | ** ** |
|-----------------------------------------|------------|---------------------|---------------|---------------------------|------------|-------------------------------------------------------|------------|-----------------------------------|------------|------------------------------------------------|------------|-----------|------------|
| Revenue (net of  reimbursable expenses) |       | $                   |  239,984 |                      | $          | 51,454                                                |       | $                                 | 50,992     |                                           | $          | 37,492    |       | $ | 34,486 |   | $ | 414,408 |   |
| Net operating income                    |       | 71,606              |          | 10,110                    |       | 14,419                                                |       | 8,411                             |       | 10,065                                         |       | 114,611   |       |
| Receivables                             |       | 233,279             |          | 44,426                    |       | 22,180                                                |       | 24,301                            |       | 32,758                                         |       | 356,944   |       |
|                                         |            |                     |               |                           |            |                                                       |            |                                   |            |                                                |            |           |            |  |  |  |  |  |  |

 

The table belowpresents specified information about reported segments as of and for the threemonths ended December 31, 2007:

 
| ** **                              | ** ** | **Benefits  Group** | ** ** | **Human  Capital  Group** | ** ** | **Technology  and  Administration  Solutions  Group** | ** ** | **Investment  Consulting  Group** | ** ** | **Insurance  and  Financial  Services  Group** | ** ** | **Total** | ** ** |
|-----------------------------------------|------------|---------------------|------------|---------------------------|------------|-------------------------------------------------------|------------|-----------------------------------|------------|------------------------------------------------|------------|-----------|------------|
| Revenue (net of  reimbursable expenses) |       | $                   | 244,096    |                      | $          | 53,450                                                |       | $                                 | 49,570     |                                           | $          | 42,362    |       | $ | 30,331 |   | $ | 419,809 |   |
| Net operating income                    |       | 63,883              |       | 12,538                    |       | 16,431                                                |       | 14,613                            |       | (296                                           | )          | 107,169   |       |
| Receivables                             |       | 254,893             |       | 51,140                    |       | 22,557                                                |       | 27,881                            |       | 30,301                                         |       | 386,772   |       |
|                                         |            |                     |            |                           |            |                                                       |            |                                   |            |                                                |            |           |            |  |  |  |  |  |  |

 

The table below presents specified information about reported segmentsas of and for the six months ended December 31, 2008:

 
| ** **                              | ** ** | **Benefits  Group** | ** ** | **Human  Capital  Group** | ** ** | **Technology  and  Administration  Solutions  Group** | ** ** | **Investment  Consulting  Group** | ** ** | **Insurance  and  Financial  Services  Group** | ** ** | **Total** | ** ** |
|-----------------------------------------|------------|---------------------|------------|---------------------------|------------|-------------------------------------------------------|------------|-----------------------------------|------------|------------------------------------------------|------------|-----------|------------|
| Revenue (net of  reimbursable expenses) |       | $                   | 477,797    |                      | $          | 101,056                                               |       | $                                 | 98,902     |                                           | $          | 79,599    |       | $ | 62,293 |   | $ | 819,647 |   |
| Net operating income                    |       | 134,796             |       | 16,952                    |       | 27,279                                                |       | 20,930                            |       | 10,899                                         |       | 210,856   |       |
| Receivables                             |       | 233,279             |       | 44,426                    |       | 22,180                                                |       | 24,301                            |       | 32,758                                         |       | 356,944   |       |
|                                         |            |                     |            |                           |            |                                                       |            |                                   |            |                                                |            |           |            |  |  |  |  |  |  |

 

The table belowpresents specified information about reported segments as of and for the sixmonths ended December 31, 2007:

 
| ** **                              | ** ** | **Benefits  Group** | ** ** | **Human  Capital  Group** | ** ** | **Technology  and  Administration  Solutions  Group** | ** ** | **Investment  Consulting  Group** | ** ** | **Insurance  and  Financial  Services  Group** | ** ** | **Total** | ** ** |
|-----------------------------------------|------------|---------------------|------------|---------------------------|------------|-------------------------------------------------------|------------|-----------------------------------|------------|------------------------------------------------|------------|-----------|------------|
| Revenue (net of  reimbursable expenses) |       | $                   | 470,665    |                      | $          | 96,164                                                |       | $                                 | 90,047     |                                           | $          | 82,306    |       | $ | 58,332 |   | $ | 797,514 |   |
| Net operating income                    |       | 120,933             |       | 18,125                    |       | 24,810                                                |       | 28,734                            |       | 1,154                                          |       | 193,756   |       |
| Receivables                             |       | 254,893             |       | 51,140                    |       | 22,557                                                |       | 27,881                            |       | 30,301                                         |       | 386,772   |       |
|                                         |            |                     |            |                           |            |                                                       |            |                                   |            |                                                |            |           |            |  |  |  |  |  |  |

 

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Information aboutinterest income and tax expense is not presented as a segment expense becausesuch items are not considered a responsibility of the segments’ operating management.

 

Reconciliations ofthe information reported by segment to the historical consolidated amountsfollow for the three and six month periods ended December 31, 2008 and2007:

 
| ** **                                                             | ** ** | **Three Months Ended December 31,** | ** ** | **Six Months Ended December 31,** | ** ** |
|------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                                             | ** ** | **2008**                                                | ** ** | **2007**                                              | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                                   |       |                                                    |       |                                                  |       |   |   |   |   |
| Revenue:                                                               |       |                                                    |       |                                                  |       |   |   |   |   |
| Total segment revenue                                                  |       | $                                                       | 414,408    |                                                  | $          | 419,809 |   | $ | 819,647 |   | $ | 797,514 |   |
| Reimbursable expenses  and other not included in total segment revenue |       | 11,153                                                  |       | 15,687                                                |       | 20,394 |   | 28,246 |   |
| All other segments                                                     |       | 10,828                                                  |       | 11,536                                                |       | 22,474 |   | 22,959 |   |
| Consolidated fees                                                      |       | $                                                       | 436,389    |                                                  | $          | 447,032 |   | $ | 862,515 |   | $ | 848,719 |   |
|                                                                   |       |                                                    |       |                                                  |       |   |   |   |   |
| Net Operating  Income:                                                 |       |                                                    |       |                                                  |       |   |   |   |   |
| Total segment net  operating income                                    |       | $                                                       | 114,611    |                                                  | $          | 107,169 |   | $ | 210,856 |   | $ | 193,756 |   |
| Income from affiliates                                                 |       | 1,070                                                   |       | (1,499                                                | )          | 2,765 |   | (574 | ) |
| Differences in  allocation methods(1)                                  |       | (3,486                                                  | )          | (3,120                                                | )          | (6,446 | ) | (3,585 | ) |
| Discretionary  compensation                                            |       | (56,415                                                 | )          | (52,490                                               | )          | (98,673 | ) | (93,880 | ) |
| All other segments                                                     |       | 1,323                                                   |       | 3,171                                                 |       | 4,653 |   | 6,611 |   |
| Other, net                                                             |       | 714                                                     |       | 4,356                                                 |       | (2,016 | ) | 7,092 |   |
| Consolidated pretax  income                                            |       | $                                                       | 57,817     |                                                  | $          | 57,587 |   | $ | 111,139 |   | $ | 109,420 |   |
|                                                                   |       |                                                    |       |                                                  |       |   |   |   |   |
| Receivables:                                                           |       |                                                    |       |                                                  |       |   |   |   |   |
| Total segment  receivables - billed and unbilled(2)                    |       | $                                                       | 356,945    |                                                  | $          | 386,772 |   | $ | 356,945 |   | $ | 386,772 |   |
| All other segments                                                     |       | 6,733                                                   |       | 6,672                                                 |       | 6,733 |   | 6,672 |   |
| Net valuation  differences                                             |       | (17,650                                                 | )          | (16,142                                               | )          | (17,650 | ) | (16,142 | ) |
| Total billed and  unbilled receivables                                 |       | 346,028                                                 |       | 377,302                                               |       | 346,028 |   | 377,302 |   |
| Assets not reported by  segment (3)                                    |       | 1,112,186                                               |       | 1,332,504                                             |       | 1,112,186 |   | 1,332,504 |   |
| Consolidated assets                                                    |       | $                                                       | 1,458,214  |                                                  | $          | 1,709,806 |   | $ | 1,458,214 |   | $ | 1,709,806 |   |

 

----

(1) General and administrative, pension, and medical costs areallocated to our segments based on budgeted expenses determined at thebeginning of the fiscal year as management believes that these costs arelargely uncontrollable to the segment. To the extent that the actual expense base upon which allocations aremade differs from the forecast/budget amount, a reconciling item will becreated between internally allocated expenses and the actual expense that wereport for U.S. GAAP purposes.

 

 (2) Total segment receivables, which reflects the receivablebalances used by management to make business decisions, are included formanagement reporting purposes net of deferred revenues – cash collections andinvoices generated in excess of revenue recognized in the segment revenues.

 

(3) Assets not reported by segment for management reportingpurposes include goodwill and intangible assets of $680 million and $844million, as of December 31, 2008 and 2007, respectively.

 

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**Note 4 –Share-based Compensation.**

 

The company has four share-based compensation plans, which aredescribed below.  These compensationplans include the 2001 Employee Stock Purchase Plan, 2001 Deferred Stock UnitPlan for Selected Employees, Amended Compensation Plan for Outside Directorsand the 2000 Long-Term Incentive Plan. All four plans have been approved by stockholders.

 

##### *2001 Deferred Stock UnitPlan for Selected Employees*

##### * *

Deferred Stock Units - The 2001 Deferred Stock Unit Plan for Selected Employees is intendedto provide selected associates of the company with additional incentives bypermitting the company to grant them an equity interest in the company in theform of restricted stock units, in lieu of a portion of their annual fiscalyear end bonus.  Shares under this planare awarded during the first quarter of each fiscal year.  During the first quarter of fiscal year 2009,295,775 shares of common stock were awarded at an average market price of$53.92 for a total fair value of $15.9 million. During the first quarter of fiscal year 2008, 349,118 shares of commonstock were awarded at an average market price of $47.63 for a total fair valueof $16.6 million.

 

SBI Program  – The Performance Share BonusIncentive Program (the “SBI Program”), as approved by the company’s Board ofDirectors pursuant to the company’s 2001 Deferred Stock Unit Plan for SelectedEmployees, is a long-term stock bonus arrangement for senior executives of thecompany and its affiliates. The SBI program is designed to strengthenincentives and align behaviors to grow the business in a way that is consistentwith the strategic goals of the company.

 

Incentives under the SBI Program are providedthrough grants of deferred stock units pursuant to the company’s 2001 DeferredStock Unit Plan for Selected Employees.  Grants of deferred stock unitsare based on either salary or on the value of the cash portion of the eligibleparticipant’s fiscal year-end bonus target and a multiplier, which is thenconverted into a target number of deferred stock units based upon the company’sstock price as of the quarter end prior to grant.  Participants may vestbetween zero and 170% of the target number of deferred stock units or betweenzero and 100% based on the extent to which financial and strategic performancemetrics are achieved over a three fiscal year period.  The financial andstrategic performance metrics are established at the beginning of eachperformance period. For the performance periods covering fiscal years 2007through 2009, 2008 through 2010, and 2009 through 2011, the vesting criteriaare based upon growth specific metrics such as earnings per share, NOI andrevenue. During the first quarter of fiscal year 2009, 44,061 shares wereawarded to certain senior executive officers under the SBI 2006 plan, whichrepresented vesting at 170% of the target number of deferred stock units.

 

Approximately $0.6 million of compensation expense was recordedrelative to this plan during the second quarter of fiscal year 2009 compared to$0.6 million in the second quarter of fiscal year 2008.

 

##### *Amended Compensation Planfor Outside Directors*

##### * *

In November 2001, the Board of Directors approved the AmendedCompensation Plan for Outside Directors (the “Outside Director’s Plan”) whichprovides for the cash and stock compensation of outside Directors.  Under the Outside Director’s Plan, outsideDirectors are initially paid in shares of the company’s common stock, or in acombination of cash and shares, quarterly, at the completed quarter-end shareprice (which approximates fair value), for services provided during thepreceding quarter.  The total number ofshares reserved for issuance under the Outside Director’s Plan is 150,000.

 

Approximately $0.5 million of compensation expense was recordedrelative to this plan during the first six months of fiscal year 2009 comparedto $0.3 million in the first six months of fiscal year 2008.

 

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*2001 Employee Stock Purchase Plan*

 

The 2001 Employee Stock Purchase Plan (the “Stock Purchase Plan”)enables employees to purchase shares of the company’s stock at a discount.  The Stock Purchase Plan is a non-compensatoryplan under FAS 123(R).  As a result, nocompensation expense was recognized during the first six months of fiscal years2009 or 2008.

 

##### *2000 Long-Term IncentivePlan*

##### * *

The company issued non-qualified stock options under the 2000 Long-TermIncentive Plan (the “Stock Option Plan”) in conjunction with its initial publicoffering in fiscal year 2001.  No optionshave been granted under the stock option plan since March 2002 and thecompany does not currently intend to issue further stock options under theStock Option Plan.

 

**Note 5 –Retirement Benefits.**

 

*DefinedBenefit Plans*

 

We sponsor both qualified and non-qualified, non-contributory definedbenefit pension plans in North America and the U.K. that account forapproximately 85% of our pension liability. Under our plans in North America, benefits are based on the number ofyears of service and the associate’s compensation during the five highest paidconsecutive years of service.  BeginningJanuary 2008, we made changes to our plan in the U.K. related to years ofservice used in calculating benefits for associates.  Benefits earned prior to January 2008are based on the number of years of service and the associate’s compensationduring the three years before leaving the plan and benefits earned after January 2008are based on the number of years of service and the associate’s averagecompensation during the associate’s term of service since that date.  Thenon-qualified plan in North America provides for pension benefits that would becovered under the qualified plan but are limited by the Internal RevenueCode.  The non-qualified plan has noassets and therefore is an unfunded arrangement, the liability for which isreflected in the balance sheet.  The U.K.does not have a non-qualified plan.  Themeasurement date for all plans is June 30.

 

*Componentsof Net Periodic Benefit Cost for Defined Benefit Pension Plans*

 

The followingtable sets forth the components of net periodic benefit cost for the company’sdefined benefit pension plan for North America and the U.K. for the three andsix month periods ended December 31, 2008 and 2007:

 
| ** **                             | ** ** | **Three  Months Ended December 31,** | ** ** |
|----------------------------------------|------------|--------------------------------------|------------|
| ** **                             | ** ** | **2008**                             | ** ** | **2007** | ** ** |
| ** **                             | ** ** | **North  America**                   | ** ** | **U.K.** | ** ** | **North  America** | ** ** | **U.K.** | ** ** |
| Service Cost                           |       | $                                    | 6,409      |   | $ | 1,851 |   | $ | 7,515 |   | $ | 2,750 |   |
| Interest Cost                          |       | 12,305                               |       | 6,200 |   | 11,271 |   | 5,307 |   |
| Expected Return on Plan  Assets        |       | (12,822                              | )          | (6,314 | ) | (13,846 | ) | (5,959 | ) |
| Amortization of  Transition Obligation |       | —                               |       | — |   | (17 | ) | — |   |
| Amortization of Net  Loss/(Gain)       |       | 2,222                                |       | (100 | ) | 1,678 |   | (726 | ) |
| Amortization of Prior  Service Cost    |       | (565                                 | )          | 13 |   | (663 | ) | 4 |   |
| Net Periodic Benefit  Cost             |       | $                                    | 7,549      |   | $ | 1,650 |   | $ | 5,938 |   | $ | 1,376 |   |

 

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| ** **                             | ** ** | **Six Months Ended December 31,** | ** ** |
|----------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                             | ** ** | **2008**                                              | ** ** | **2007** | ** ** |
| ** **                             | ** ** | **North  America**                                    | ** ** | **U.K.** | ** ** | **North  America** | ** ** | **U.K.** | ** ** |
| Service Cost                           |       | $                                                     | 13,569     |   | $ | 3,702 |   | $ | 14,882 |   | $ | 5,484 |   |
| Interest Cost                          |       | 24,371                                                |       | 12,400 |   | 22,392 |   | 10,581 |   |
| Expected Return on Plan  Assets        |       | (25,648                                               | )          | (12,628 | ) | (27,629 | ) | (11,882 | ) |
| Amortization of  Transition Obligation |       | —                                                |       | — |   | (32 | ) | — |   |
| Amortization of Net  Loss/(Gain)       |       | 4,089                                                 |       | (200 | ) | 3,064 |   | (1,447 | ) |
| Amortization of Prior  Service Cost    |       | (1,129                                                | )          | 26 |   | (1,297 | ) | 8 |   |
| Net Periodic Benefit  Cost             |       | $                                                     | 15,252     |   | $ | 3,300 |   | $ | 11,380 |   | $ | 2,744 |   |

 

The fiscal year2009 net periodic benefit cost is based, in part, on the following rateassumptions as of June 30, 2008 for the North America and U.K. plans:

 
| ** **                                   | ** ** | **North America** | ** ** | **U.K.** | ** ** |
|----------------------------------------------|------------|------------------------|------------|----------|------------|
| Discount rate                                |       | 7.00                   | %          | 6.50     | %          |
|                                         |       |                   |       |     |       |
| Expected long-term rate  of return on assets |       | 8.75                   | %          | 6.46     | %          |
|                                         |       |                   |       |     |       |
| Rate of increase in  compensation levels     |       | 4.09                   | %          | 5.65     | %          |

 

*EmployerContributions*

 

The company made$700,000 in contributions to North American plans during the first six monthsof fiscal year 2009.  An additionalpension contribution of $15 million was made in January 2009.  We anticipate that $15.6 million will becontributed by the company to the North American pension plans over theremainder of the fiscal year.

 

The company made$7.1 million in contributions to the U.K. plans during the first six months offiscal year 2009 and anticipates making $5.9 million in contributions over theremainder of the fiscal year.

 

*DefinedContribution Plans*

 

Inthe U.S., we sponsor a savings plan that provides benefits to substantially allU.S. associates. The company matches employee contributions at a rate of 50% ofthe first 6% up to $60,000 of associates’ eligible compensation.  The company will also make an annual profitsharing contribution to the plan in an amount that is dependant upon thecompany’s financial performance during the fiscal year.

 

The U.K. pension plan has a money purchase section to which the companymakes core contributions plus additional contributions matching those of theparticipating employees up to a maximum rate. Contribution rates are dependant upon the age of the participant and onwhether or not they arise from salary sacrifice arrangements through which anindividual has taken a reduction in salary and the company has paid anequivalent amount as pension contributions. Core contributions amount to 2-6% of pensionable salary with additionalmatching contributions of a further 2-6%.

 

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*HealthCare Benefits*

 

In the U.S., wesponsor a contributory health care plan that provides hospitalization, medicaland dental benefits to substantially all U.S. associates.  We accrue a liability for estimated incurredbut unreported claims based on projected use of the plan as well as prior planhistory.

 

*PostretirementBenefits*

 

We provide certain health care and life insurance benefits for retiredassociates.  The principal plans coverassociates in the U.S. and Canada who have met certain eligibilityrequirements. Our principal post-retirement benefit plans are unfunded.  We accrue a liability for these benefits.

 

*Componentsof Net Periodic Benefit Cost for Other Postretirement Plans*

 

The followingtable sets forth the components of net periodic benefit cost for the company’shealthcare and post-retirement plans for the three and six months ended December 31,2008 and 2007:

 
| ** **                             | ** ** | **Three Months Ended December 31,** | ** ** | **Six Months Ended December 31,** | ** ** |
|----------------------------------------|------------|---------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                             | ** ** | **2008**                                                | ** ** | **2007**                                              | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                   |       |                                                    |       |                                                  |       |   |   |   |   |
| Service cost                           |       | $                                                       | 324        |                                                  | $          | 385 |   | $ | 653 |   | $ | 770 |   |
| Interest cost                          |       | 687                                                     |       | 681                                                   |       | 1,411 |   | 1,363 |   |
| Expected return on plan  assets        |       | —                                                  |       | —                                                |       | — |   | — |   |
| Amortization of  transition obligation |       | —                                                  |       | —                                                |       | — |   | — |   |
| Amortization of net  gain              |       | (231                                                    | )          | (113                                                  | )          | (433 | ) | (226 | ) |
| Amortization of prior  service cost    |       | (166                                                    | )          | (166                                                  | )          | (332 | ) | (332 | ) |
| Net periodic benefit  cost             |       | $                                                       | 614        |                                                  | $          | 787 |   | $ | 1,299 |   | $ | 1,575 |   |

 

*EmployerContributions*

 

The company madecontributions in the form of premiums and medical claim payments to itshealthcare and post-retirement plans of $1.1 million and $900,000 in the threemonths ended December 31, 2008 and 2007, respectively and contributions of$2.1 million and $1.6 million in the six months ended December 31, 2008and 2007, respectively.  We plan to makeadditional payments of approximately $3 million through the remainder of thefiscal year.

 

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** **

**Note 6 –Goodwill and Intangible Assets.**

** **

Goodwill andintangible assets are largely denominated in the British pound and Euro andhave declined in value in line with the strengthening of the US dollar.  The components of goodwill and intangibleassets are outlined below for the six months ended December 31, 2008:

 
| ** **                            | ** ** | **Benefits  Group** | ** ** | **Human  Capital  Group** | ** ** | **Technology  and  Administration  Solutions  Group** | ** ** | **Investment  Consulting  Group** | ** ** | **Insurance  and  Financial  Services  Group** | ** ** | **All Other   Segments** | ** ** | **Total** | ** ** |
|---------------------------------------|------------|---------------------|------------|---------------------------|------------|-------------------------------------------------------|------------|-----------------------------------|------------|------------------------------------------------|------------|------------------------------------|------------|-----------|------------|
|                                  |       |                |       |                      |       |                                                  |       |                              |       |                                           |       |                               |       |      |       |
| Balance as of  June 30, 2008     |       | $                   | 397,721    |                      | $          | 35,056                                                |       | $                                 | 61,709     |                                           | $          | 61,977                             |       | $         | 76,499     |   | $ | 1,214 |   | $ | 634,176 |   |
|                                  |       |                |       |                      |       |                                                  |       |                              |       |                                           |       |                               |       |      |       |
| Goodwill acquired                     |       | 176                 |       | 293                       |       | —                                                |       | —                            |       | 49                                             |       | —                             |       | 518       |       |
|                                  |       |                |       |                      |       |                                                  |       |                              |       |                                           |       |                               |       |      |       |
| Translation adjustment and  other     |       | (72,969             | )          | (7,755                    | )          | (15,249                                               | )          | (14,690                           | )          | (19,867                                        | )          | —                             |       | (130,530  | )          |
|                                  |       |                |       |                      |       |                                                  |       |                              |       |                                           |       |                               |       |      |       |
| Balance as of  December 31, 2008 |       | $                   | 324,928    |                      | $          | 27,594                                                |       | $                                 | 46,460     |                                           | $          | 47,287                             |       | $         | 56,681     |   | $ | 1,214 |   | $ | 504,164 |   |

 

The followingtable reflects changes in the net carrying amount of the components ofintangible assets for the six months ended December 31, 2008:

 
| ** **                                    | ** ** | **Trademark  & trade  name** | ** ** | **Customer  related  intangible** | ** ** | **Core/developed  technology** | ** ** | **Non-compete  agreements** | ** ** | **Total** | ** ** |
|-----------------------------------------------|------------|---------------------------------------|------------|-----------------------------------|------------|--------------------------------|------------|-----------------------------|------------|-----------|------------|
| Balance as of  June 30, 2008             |       | $                                     | 121,885    |                              | $          | 101,592                        |       | $                           | 12,604     |      | $          | 686 |   | $ | 236,767 |   |
| Intangible assets  acquired during the period |       | —                                |       | —                            |       | —                         |       | —                      |       | —    |       |
|                                          |       |                                  |       |                              |       |                           |       |                        |       |      |       |
| Amortization expense                          |       | (101                                  | )          | (4,723                            | )          | (2,313                         | )          | (268                        | )          | (7,405    | )          |
|                                          |       |                                  |       |                              |       |                           |       |                        |       |      |       |
| Translation adjustment                        |       | (32,552                               | )          | (18,979                           | )          | (2,010                         | )          | (79                         | )          | (53,620   | )          |
|                                          |       |                                  |       |                              |       |                           |       |                        |       |      |       |
| Balance as of  December 31, 2008         |       | $                                     | 89,232     |                              | $          | 77,890                         |       | $                           | 8,281      |      | $          | 339 |   | $ | 175,742 |   |

 

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The followingtable reflects the carrying value of intangible assets at December 31,2008 and June 30, 2008:

 
| ** **                      | ** ** | **December 31, 2008** | ** ** | **June 30, 2008**   | ** ** |
|---------------------------------|------------|---------------------------------|------------|-------------------------------|------------|
| ** **                      | ** ** | **Gross  Carrying  Amount**     | ** ** | **Accumulated  Amortization** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated Amortization** | ** ** |
| Intangible assets:              |       |                            |       |                          |       |   |   |   |   |
| Trademark & trade name |       | $                               | 89,537     |                          | $          | 305 |   | $ | 122,089 |   | $ | 204 |   |
| Customer related intangibles    |       | 103,827                         |       | 25,938                        |       | 122,807 |   | 21,215 |   |
| Core/developed technology       |       | 22,955                          |       | 14,674                        |       | 24,965 |   | 12,361 |   |
| Non-compete                     |       | 1,237                           |       | 898                           |       | 1,316 |   | 630 |   |
| Total intangible assets         |       | $                               | 217,556    |                          | $          | 41,815 |   | $ | 271,177 |   | $ | 34,410 |   |

 

Acomponent of the change in the gross carrying amount of intangible assets reflectstranslation adjustments between June 30, 2008 and December 31,2008.  These intangible assets aredenominated in the currencies of our subsidiaries outside the United States,and are translated into our reporting currency, the U.S. dollar, based onexchange rates at the balance sheet date.

 

The weightedaverage remaining life of amortizable intangible assets at December 31,2008, was 8.8 years.  Estimatedamortization expense for the remainder of fiscal year 2009 and subsequentfiscal years is as follows:

 

 

| **Fiscal year ending June 30:** | ** ** | **Amount** | ** ** |
|-----------------------------------------------------|------------|------------|------------|
| 2009                                                |       | $          | 6,443      |   |
| 2010                                                |       | 12,259     |       |
| 2011                                                |       | 9,550      |       |
| 2012                                                |       | 9,313      |       |
| 2013                                                |       | 8,229      |       |
| Thereafter                                          |       | 40,331     |       |
| Total                                               |       | $          | 86,125     |   |

 

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** **

**Note 7 – Earnings Per Share.**

** **

Basic earnings pershare are calculated on the basis of the weighted average number of commonshares outstanding during the three and six month periods ended December 31,2008 and 2007.  Diluted earnings pershare is calculated by dividing net income by the weighted average number ofcommon shares outstanding, plus the dilutive effect of stock-based compensationplans and employee stock purchase plan shares using the “treasury stock” methodover the same measurement period.  Thecomponents of basic and diluted earnings per share are as follows:

 
| ** **                                                                                 | ** ** | **Three Months Ended December 31,** | ** ** | **Six Months Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                                                                 | ** ** | **2008**                                                | ** ** | **2007**                                              | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                                                       |       |                                                    |       |                                                  |       |   |   |   |   |
| Net income                                                                                 |       | $                                                       | 39,551     |                                                  | $          | 36,781 |   | $ | 74,711 |   | $ | 71,225 |   |
|                                                                                       |       |                                                    |       |                                                  |       |   |   |   |   |
| Weighted average  outstanding shares of common stock                                       |       | 42,571                                                  |       | 42,338                                                |       | 42,753 |   | 42,313 |   |
|                                                                                       |       |                                                    |       |                                                  |       |   |   |   |   |
| Dilutive effect of  stock-based compensation plans and employee stock purchase plan shares |       | 45                                                      |       | 2,311                                                 |       | 51 |   | 2,339 |   |
|                                                                                       |       |                                                    |       |                                                  |       |   |   |   |   |
| Common stock and stock  equivalents                                                        |       | 42,616                                                  |       | 44,649                                                |       | 42,804 |   | 44,652 |   |
|                                                                                       |       |                                                    |       |                                                  |       |   |   |   |   |
| Earnings per share:                                                                        |       |                                                    |       |                                                  |       |   |   |   |   |
|                                                                                       |       |                                                    |       |                                                  |       |   |   |   |   |
| Net income-Basic                                                                           |       | $                                                       | 0.93       |                                                  | $          | 0.87 |   | $ | 1.75 |   | $ | 1.68 |   |
|                                                                                       |       |                                                    |       |                                                  |       |   |   |   |   |
| Net income- Diluted                                                                        |       | $                                                       | 0.93       |                                                  | $          | 0.82 |   | $ | 1.75 |   | $ | 1.60 |   |

 

**Note 8 –Investments in Affiliates.**

** **

The company has anequity investment in Professional Consultants Insurance Company, Inc.(PCIC).  As defined by FASBInterpretation No. 46R, Consolidation of Variable Interest Entities, PCICis a variable interest entity.  Based onthe legal, financial and operating structure of PCIC, the company has concludedthat it is not the primary beneficiary of PCIC. Accordingly, the company does not consolidate the results of PCIC intoits consolidated financial statements.

 

PCIC was organized in 1987 as a captive insurance company under thelaws of the State of Vermont.  PCICprovides professional liability insurance on a claims-made basis to threeactuarial and management consulting firms, all of which participate in theprogram as both policyholders and stockholders.

 

Capital contributions to PCIC are required when approved by a majorityof its stockholders.  In July 2007,the shareholders of PCIC approved a requirement for an additional capitalcontribution.  As a result, the companycontributed an additional $1.9 million of capital to PCIC and increased theamount of the letter of credit provided to PCIC by $2.6 million in lieu of ahigher cash capital contribution.  Fromthe time PCIC was organized through December 31, 2008, we have providedcapital contributions to PCIC through cash contributions totaling $7.3 millionand through issuance of letters of credit totaling $10.6 million. Our ownershipinterest in PCIC as of December 31, 2008 and 2007 was 36.43 percent.

 

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Management believes that the company’s maximum financial statementexposure regarding its investment in PCIC as of December 31, 2008 islimited to the carrying value of the company’s investment in PCIC of $9.5million, combined with letters of credit totaling $10.6 million, for a totalmaximum exposure of $20.1 million.

 

The company acquired a 20 percent investment in Fifth Quadrant Actuaries &Consultants (Pty) Ltd (Fifth Quadrant) in June 2008.  Fifth Quadrant is an independent SouthAfrican firm of actuaries and employee benefits consultants established in1998.  Its core business is to provideindependent, high quality advice to institutional clients, which includeretirement funds, medical schemes, charitable trusts and corporate and publicsector clients.  The company has a $3.4million investment in Fifth Quadrant as of December 31, 2008.

 

The company established a partnership with the Knowledge and HumanDevelopment Authority in Dubai in January 2008. The partnership is aimedat supporting public and private sector organizations across the Gulf in theirpursuit for reaching international standards of excellence in human capital strategiesand programs. As of December 31, 2008, the company has a $2.1 millioninvestment in Dubai.

 

The company acquired a 20percent investment in Gesellschaft fur Finanz-und Aktuarwissenschaften mbH, orIFA, in the second quarter of fiscal year 2009. IFA is an insurance and financial services company based inGermany.  As of December 31, 2008, thecompany has a $2.4 million investment in IFA.

 

The companyapplies the equity method of accounting for all of its investments inaffiliates.

 

**Note 9 –Comprehensive (Loss)/Income.**

** **

Comprehensiveincome includes net income and changes in the cumulative translation adjustmentgain or loss.  For the three months endedDecember 31, 2008, comprehensive loss totaled $64.6 million compared withcomprehensive income of $24.0 million for the three months ended December 31,2007.  For the six months ended December 31,2008, comprehensive loss totaled $118.8 million, compared with comprehensiveincome of $79.2 million for the six months ended December 31, 2007.

 

**Note 10 –Restricted Shares.**

** **

In conjunctionwith our WWLLP business combination on July 31, 2005, we issued 9,090,571 Class Acommon shares, 4,749,797 of which were subject to contractual transferrestrictions.  Transfer restrictionsexpired on 2,339,761 of these shares on July 31, 2006 and expired on theremaining 2,410,036 shares on July 31, 2007.  The contingencies associated with the paymentof an additional 1,950,000 Class A shares were met and the contingentshares were issued to the former partners of WWLLP on April 15, 2008.

 

In conjunctionwith our acquisition of WWN on February 1, 2007, we issued 252,285 Class Acommon shares which were subject to contractual transfer restrictions.  Transfer restrictions on 50% of these sharesexpired on February 1, 2008.  Transferrestrictions on the remaining shares expired on February 1, 2009.  The contingencies associated with the paymentof an additional 218,089 Class A shares were met and the contingent shareswere issued to the former partners of WWN on June 27, 2008. Sale of theseshares, are also subject to contractual transfer restrictions that will expireon 50% of these shares on each of the first and second anniversaries ofissuance of the shares.

 

**Note 11 –Commitments and Contingent Liabilities.**

** **

The company hashistorically provided guarantees on an infrequent basis to third parties in theordinary course of business.  Theguarantees described below are currently in effect and could require thecompany to make payments to third parties under certain circumstances.

 

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*Lettersof Credit*.  At December 31,2008, the company has letters of credittotaling $10.6 million under our existing credit facility to guarantee paymentto beneficiaries in the event that the company fails to meet its financialobligations to these beneficiaries. These letters of credit will remain outstanding as long as we retain anownership share of our affiliated captive insurance company, PCIC.

 

The company has also provided a $5.0 million Australiandollar-denominated letter of credit (US $3.6 million) to an Australiangovernmental agency as required by local regulations.  The estimated fair market value of theseletters of credit is immaterial because they have never been used, and thecompany believes that probability of future usage is remote.

 

*IndemnificationAgreements*.  Thecompany has various agreements that provide that it may be obligated to indemnifythe other party with respect to certain matters.  Generally, these indemnification clauses areincluded in contracts arising in the normal course of business and inconnection with the purchase and sale of certain businesses.  Although it is not possible to predict themaximum potential amount of future payments under these indemnificationagreements due to the conditional nature of the company’s obligations and theunique facts of each particular agreement, the company does not believe thatany potential liability that might arise from such indemnity provisions isprobable or material.  There are noprovisions for recourse to third parties, nor are any assets held by any thirdparties that any guarantor can liquidate to recover amounts paid under suchindemnities.

 

*Legal Proceedings*:  From time to time, we are a party tovarious lawsuits, arbitrations or mediations that arise in the ordinary courseof business. The matters reported on below involve the most significant pendingor potential claims against us.  We also have received subpoenas andrequests for information in connection with government investigations.

 

We carry substantial professional liability insurancewith a self-insured retention of $1 million per occurrence, which providescoverage for professional liability claims including the cost of defending suchclaims. We reserve for contingent liabilities based on Statement of FinancialAccounting Standards No. 5, “Accounting for Contingencies” (FAS 5) when itis determined that a liability, inclusive of defense costs, is probable andreasonably estimable. Management believes, based on currently availableinformation including the existence of professional liability insurance, thatthe results of all pending claims against the company will not have a materialadverse effect on the results of operations, financial position, or statementof cash flows but litigation is subject to many factors which are difficult topredict so there can be no assurance that in the event of a materialunfavorable result in one or more of such matters, we will not incur materialcosts.

 

*Watson Wyatt v. SBC Holdings, Inc. (Stroh BreweryCompany): *  On July 23, 2004, we received a demandletter from Stroh’s counsel alleging that errors in valuations for 2001 andsubsequent years understated the liabilities of its pension plan and overstatedthe company’s net worth.  As a result, Stroh claimed it did not annuitizeits defined benefit plan and redeemed its stock at an inflated price.  On April 15,2005, Watson Wyatt filed a petition in federal court to compel arbitration ofthe matter. Subsequently, Stroh filed an answer and counterclaim, allegingdamages in excess of $46 million.  In January 2008, the Sixth CircuitCourt of Appeals held that the entire claim is subject to arbitration.  Stroh has filed a demand for arbitration on April 16,2008 and Watson Wyatt filed a response. We anticipate arbitration hearings to be held in 2009.

 

*Government Subpoenas andInvestigations:* We also have received subpoenas and requests for informationin connection with the following government investigation:

* *

*Department of Labor Investigation:*  On November 17,2006, Watson Wyatt Investment Consulting Inc. (“WWIC”) received a subpoena fromthe United States Department of Labor (“DOL”) in connection with itsinvestigation into the compensation of consultants and other investmentadvisers.  WWIC has responded to the subpoena and continues to cooperatewith the DOL.

 

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** **

**Note 12 – Recent AccountingPronouncements**.

 

In September 2006, the Financial Accounting Standards Board (“FASB”)published Statement of Financial Accounting Standards No.157, “Fair Value Measurements”(“FAS 157”).  FAS 157 defines fair value,establishes a framework for measuring fair value in generally acceptedaccounting principles and expands disclosures about fair valuemeasurements.  The company adopted FAS157 on July 1, 2008 and determined that the adoption of FAS 157 does nothave a material impact on its consolidated financial statements.

 

In June 2006, the FASB issued FASB Interpretation No. 48 (“FIN48”), “Accounting for Uncertainty in Income Taxes - an interpretation of FASBStatement No. 109” (“FAS 109”), which clarifies the accounting foruncertainty in income taxes recognized in an enterprise’s financial statementsin accordance with FAS 109, “Accounting for Income Taxes.”  FIN 48prescribes a recognition threshold and measurement attribute for the financialstatement recognition and measurement of a tax position taken or expected to betaken in a tax return.  This Interpretation also provides guidance onderecognition, classification, interest and penalties, accounting in interim periods,disclosure, and transition.  The company adopted this standard on July 1,2007.

 

In February 2007, the FASB published Statement of FinancialAccounting Standards No.159, “The Fair Value Option for Financial Assets andFinancial Liabilities - including an amendment of FASB Statement No. 115”(“FAS 159”).  FAS 159 allows entities tochoose to measure eligible financial assets and liabilities at fair value thatare not otherwise required to be measured at fair value. If a company electsthe fair value option for an eligible item, changes in that item’s fair valuein subsequent reporting periods must be recognized in current earnings. FAS 159is effective for fiscal years beginning after November 15, 2007,provided the entity also elects to apply theprovisions of FAS 157, “Fair Value Measurements”. The company adopted FAS 159on July 1, 2008 and did not choose to elect the fair value option.

 

In December 2007, the FASB issued Statement of FinancialAccounting Standards No. 141 (revised 2007), “Business Combinations” (“FAS141(R)”) which is a revision of FAS 141, “Business Combinations”.  FAS 141(R) changes the application ofthe acquisition method in a number of significant aspects.  Acquisition costs will generally be expensedas incurred; noncontrolling interests will be valued at fair value at theacquisition date; restructuring costs associated with a business combinationwill generally be expensed subsequent to the acquisition date; contingentconsideration will be recognized at its fair value on the acquisition date and,for certain arrangements, changes in fair value will be recognized in earningsuntil settled, and changes in deferred tax asset valuation allowances andincome tax uncertainties after the acquisition date generally will affect incometax expense. We will be required to comply with the provisions of FAS 141(R) foracquisitions that occur on or after July 1, 2009. The Statement wouldapply prospectively to any future business combinations and therefore theimpact would be determined when a business combination occurs.

 

In December 2007, the FASB issued Statement of FinancialAccounting Standards No.160, “Noncontrolling Interests in ConsolidatedFinancial Statements - an amendment of ARB No.51” (“FAS 160”).  This statement is effective for fiscal years,and interim periods within those fiscal years, beginning on or after December 15,2008, with earlier adoption prohibited. This statement requires the recognition of a noncontrolling interest(minority interest) as equity in the consolidated financial statements andseparate from the parent’s equity.  Theamount of net income attributable to the noncontrolling interest will beincluded in consolidated net income.  Italso amends certain of ARB No. 51’s consolidation procedures forconsistency with the requirements of FAS 141(R).  This statement also includes expandeddisclosure requirements regarding the interests of the parent and itsnoncontrolling interest.  The company iscurrently evaluating the effects, if any, that FAS 160 may have on itsfinancial statements.

 

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In April 2008, the FASB issued FASBStaff Position No. 142-3, “Determination of the Useful Life of IntangibleAssets” (“FSP 142-3”).  FSP 142-3 amendsthe factors that should be considered in developing renewal or extensionassumptions used to determine the useful life of recognized intangible assetsunder Statement of Financial Accounting Standards No.142, “Goodwill and OtherIntangible Assets.”  FSP 142-3 iseffective on a prospective basis to all intangible assets acquired and fordisclosures on all intangible assets recognized on or after the beginning ofthe first annual period subsequent to December 15, 2008. Early adoption isprohibited.  The effects of FSP 142-3will depend on future acquisitions of intangible assets.

 

**Note 13 - IncomeTaxes.**

** **

At December 31, 2008, the gross liability for income taxesassociated with uncertain tax positions, determined in accordance with FASBInterpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in IncomeTaxes - an interpretation of FASB Statement No. 109” (“FAS 109”),  was $9.2 million.  This liability can be reduced by $0.9 millionof offsetting deferred tax benefits associated with foreign tax credits and thefederal tax benefit of state income taxes. The net difference of $8.3 million, if recognized, would have an $8.0million favorable impact on the company’s effective tax rate and would increaseother comprehensive income by $0.3 million. The gross tax liability for uncertain tax positions decreased by $1.0million and $1.8 million for the three month and six month periods ended December 31,2008, respectively.

 

Interest and penalties related to income tax liabilities are includedin income tax expense.  At December 31,2008 the company had accrued interest of $1.8 million and penalties of $0.3million, totaling $2.1 million.

 

The company believes it is reasonably possible that there will be a$1.9 million decrease in the gross tax liability for uncertain tax positionswithin the next 12 months based upon potential settlements and the expirationof statutes of limitations in various tax jurisdictions.

 

The company and its subsidiaries conduct business globally and aresubject to income tax in the US and in many states and foreignjurisdictions.  The company is currentlyunder examination in several tax jurisdictions. A summary of the tax years that remain subject to examination in the company’smajor tax jurisdictions are:

 

| ** **                      | ** ** | **Open Tax Years  (fiscal year ending)** | ** ** |
|---------------------------------|------------|--------------------------------------------------------------|------------|
| United States - Federal         |       | 2005 and forward                                             |       |
|                            |       |                                                         |       |
| United States - Various  States |       | 2003 and forward                                             |       |
|                            |       |                                                         |       |
| Canada - Federal                |       | 2004 and forward                                             |       |
|                            |       |                                                         |       |
| Germany                         |       | 2003 and forward                                             |       |
|                            |       |                                                         |       |
| United Kingdom                  |       | 2005 and forward                                             |       |

 

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**ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.**

 

**Executive Overview**

 

**General**

 

Watson Wyatt is a globalconsulting firm focusing on providing human capital and financial consultingservices. We provide services in five principal practice areas: Benefits, HumanCapital Consulting, Technology and Administration Solutions, InvestmentConsulting, and Insurance and Financial Services operating from 106 offices in32 countries throughout North America, Europe, Asia-Pacific and Latin America.The company employed approximately 7,730 and 7,510 associates as of December 31,2008 and June 30, 2008 respectively, in the following practice areas:

 

| ** **                                             | ** ** | **December 31,** | ** ** | **June 30,** | ** ** |
|--------------------------------------------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                                             | ** ** | **2008**              | ** ** | **2008**          | ** ** |
| Benefits Group                                         |       | 3,360                 |       | 3,290             |       |
| Human Capital  Group                                   |       | 920                   |       | 900               |       |
| Technology and  Administration Solutions Group         |       | 890                   |       | 850               |       |
| Investment  Consulting Group                           |       | 560                   |       | 500               |       |
| Insurance &  Financial Services Group         |       | 420                   |       | 420               |       |
| Other (incl.  Communication)                           |       | 460                   |       | 450               |       |
| Business  Services (incl. Corporate and field support) |       | 1,120                 |       | 1,100             |       |
| Total                                                  |       | 7,730                 |       | 7,510             |       |

 

We help our clientsenhance business performance by improving their ability to attract, retain, andmotivate qualified employees. We focus on delivering consulting services thathelp our clients anticipate, identify and capitalize on emerging opportunitiesin human capital management.  We alsoprovide independent financial advice regarding all aspects of life assuranceand general insurance, as well as investment advice to assist our clients indeveloping disciplined and efficient investment strategies to meet theirinvestment goals.  Our target marketclients include those companies in the *FORTUNE* 1000,Pension & Investments (P&I) 1000, FTSE 100, and equivalentorganizations in markets around the world. As leading economies worldwide become more services-oriented, humancapital and financial management has become increasingly important to companiesand other organizations. The heightened competition for skilled employees,unprecedented changes in workforce demographics, regulatory changes related tocompensation and retiree benefits and rising employee-related costs haveincreased the importance of effective human capital management. Insurance andinvestment decisions become increasingly complex and important in the face ofchanging economies and dynamic financial markets.  We help our clients address these issues bycombining our expertise in human capital and financial management withconsulting and technology, to improve the design and implementation of varioushuman resources and financial programs, including compensation, retirement,health care, insurance and investment plans.

 

The human resourcesconsulting industry, although highly fragmented, is highly competitive and iscomprised of major human capital consulting firms, specialist firms, consultingarms of accounting firms and information technology consulting firms.

 

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In the short term, ourrevenues are driven by many factors including the continuing regulatorycompliance requirements of our clients, changes in investment markets, thegeneral state of the global economy and the resulting level of discretionaryspending, the ability of our consultants to attract new clients or provideadditional services to existing clients, and the impact of new regulations inthe legal and accounting fields that most recently increased demand for ourexecutive compensation and benefits practices. In the long term, we expect that the company’s financial results willdepend in large part upon how well we succeed in deepening our existing clientrelationships through thought leadership and focus on cross-practice solutions,actively pursuing new clients in our target markets, cross selling andstrategic acquisitions.  We believe thatthe highly fragmented industry in which we operate represents tremendous growthopportunities for us, because we offer a unique business combination ofbenefits and human capital consulting as well as strategic technologysolutions.

 

**Principal Services**

 

We design, developand implement human resource and risk management strategies and programsthrough the following closely-interrelated practice areas:

 

**BenefitsGroup -**TheBenefits Group, accounting for 55 percent of our total second quarter fiscalyear 2009 revenues, is the foundation of our business.  Approximately 50 percent of those revenuesoriginate from outside of the Unites States and are thus subject to translationexposure resulting from foreign exchange rate fluctuations.  Retirement, the core of our Benefits Groupbusiness, lags reduction in discretionary spending compared to our othersegments, mainly due to the recurring nature of client relationships.  Our corporate client retention rate withinour target market has remained very high. Revenue for our retirement practiceis seasonal, with the second and third quarters of each fiscal year being thebusier periods.  Major revenue growthdrivers in this practice include changes in regulations, economic uncertaintyleverage from other practices, increased global demand and increased marketshare.   Services provided through theBenefits Group include the following:

 

·                  Designand management of benefit programs

·       Actuarial services includingdevelopment of funding and risk management strategies

·                  Expatriateand international human resource strategies

·                  Mergersand acquisitions

·                  Strategicworkforce planning

·                  Complianceand governance

 

**Human Capital Group** - Our**Human Capital Group (HCG), accounting for 12 percent of ourtotal second quarter fiscal year 2009 revenues, generally encompassesshort-term projects. Approximately 65 percent of those revenues originate from outside of the Unites States and are thussubject to translation exposure resulting from foreign exchange ratefluctuations.  Although thepercentage of recurring projects has grown in the U.S. as a result of newregulations in the legal and accounting field, discretionary project work couldbe affected by the strength of the economy. As a result, sensitivity of this segment to cyclical economicfluctuations may diminish.  Services providedthrough HCG include the following:

 

·                  Adviceconcerning compensation plans, including broad-based and executivecompensation, stock and other long-term incentive programs

·                  Strategiesto align workforce performancewith business objectives

·                  Organizationeffectiveness consulting,including talent management

·                  Strategiesfor attracting, retaining andmotivating employees

·                  Dataservices

 

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**Technologyand Administration Solutions Group -**Our Technology andAdministration Solutions Group (TAS), accounting for 12 percent of our totalsecond quarter fiscal year 2009 revenues, provides information technologyservices to our clients.  Revenue for TASis relatively stable, compared to what it had historically experienced in aneconomic downturn, because of its long term contracts associated with theadministration business.  However, TASremains partially subject to the impact of the economy on discretionaryspending.  Income in this segment is slightlygreater in the first half of the fiscal year because of the timing of thetypical enrollment season for benefits. Approximately 40 percent of thoserevenues originate from outside of the Unites States and are thus subject totranslation exposure resulting from foreign exchange rate fluctuations.  Services provided through the TAS Groupinclude the following:

 

·                  Web-basedapplications for health and welfare, pension and compensation administration

·                  Administrationoutsourcing solutions for health and welfare and pension benefits

·                  Callcenter strategy, design and tools

·                  Strategichuman resource technology and service delivery consulting

·                  Targetedonline compensation and benefits statements, content management and call centercase management solutions

·                  Integratedtalent management suite

 

**InvestmentConsulting Group -**Our Investment Consulting Groupaccounts for 9 percent of our total second quarter fiscal year 2009revenues.  Approximately 85 percent of those revenues originate from outside of theUnites States and are thus subject to translation exposure resulting fromforeign exchange rate fluctuations. This business, although relationship based, can be affected by anincreasingly complex investment landscape as well as by volatility ininvestment returns, particularly as clients look to us for assistance inmanaging that volatility.  Servicesprovided through our Investment Consulting Group include the following:

 

·                  Investmentconsulting services to pension plans and other institutional funds

·                  Inputon governance and regulatory issues

·                  Analysisof asset allocation and investment strategies

·                  Investmentstructure analysis, selection and evaluation of managers and performancemonitoring

·                  Implementation/fiduciaryservices for defined benefit and defined contribution investment programs viaour Advanced Investment Solutions (AIS) services

 

**Insurance &Financial Services Group** - Our Insurance &Financial Services Group (I&FS) accounts for 7 percent of our total secondquarter fiscal year 2009 revenues. Approximately 95 percent of those revenues originate from outside of theUnites States and are thus subject to translation exposure resulting fromforeign exchange rate fluctuations.  Thisbusiness is largely a project-based business and therefore could becyclical.  Services provided throughI&FS include the following:

 

·                  Independentactuarial and strategic advice

·                  Assessmentand advice regarding financialcondition and risk management

·                  Financialmodeling software tools forproduct design and pricing, planning and projections, reporting, valuations andrisk management

 

While we focus ourconsulting services in the areas described above, management believes that oneof our primary strengths is our ability to draw upon consultants from ourdifferent practices to deliver integrated services to meet the needs of ourclients.  This capability includescommunication and change management implementation support services.

 

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**Financial Statement Overview**

 

Watson Wyatt’s fiscalyear ends June 30. The financial statements contained in this quarterlyreport reflect Condensed Consolidated Balance Sheets as of the end of thesecond quarter of fiscal year 2009 (December 31, 2008) and as of the endof fiscal year 2008 (June 30, 2008), Condensed Consolidated Statements ofOperations for the three and six month periods ended December 31, 2008 and2007, Condensed Consolidated Statements of Cash Flows for the six month periodsended December 31, 2008 and 2007 and a Condensed Consolidated Statement ofChanges in Stockholders’ Equity for the six month period ended December 31,2008.

 

Wederive the majority of our revenue from fees for consulting services, whichgenerally are billed based on time and materials or on a fixed-fee basis.  Clients are typically invoiced on a monthlybasis with revenue generally recognized as services are performed.  No single client accounted for more than 1percent of our consolidated revenue for any of the most recent three fiscalyears.

 

Forthe six months ended December 31, 2008 and fiscal years ended June 30,2008 and 2007, the company’s top six markets based on percentage ofconsolidated revenue were as follows:

 

| ** **                 | ** ** | **Six Months** | ** ** | **Fiscal Year** | ** ** |
|----------------------------|------------|---------------------|------------|----------------------|------------|
| **Geographic Region** | ** ** | **2009**            | ** ** | **2008**             | ** ** | **2007** | ** ** |
| United States              |       | 44                  | %          | 41                   | %          | 44 | % |
| United Kingdom             |       | 29                  |       | 32                   |       | 31 |   |
| Germany                    |       | 4                   |       | 5                    |       | 1 |   |
| Canada                     |       | 3                   |       | 4                    |       | 4 |   |
| Netherlands                |       | 3                   |       | 4                    |       | 1 |   |
| Greater China              |       | 3                   |       | 2                    |       | 2 |   |

 

In delivering consultingservices, our principal direct expenses relate to compensation of personnel.Salaries and employee benefits are comprised of wages paid to associates,related taxes, benefit expenses such as pension, medical and insurance costs,and fiscal year-end incentive bonuses.

 

Professional and subcontracted services represent fees paid to externalservice providers for employment, marketing and other services.  For the most recent three fiscal years,approximately 50 to 60 percent of these professional and subcontracted serviceswere directly incurred on behalf of our clients and were reimbursed by them,with such reimbursements being included in revenue.  For the second quarter of fiscal year 2009,approximately 58 percent of professional and subcontracted services representthese reimbursable services.

 

Occupancy, communicationsand other expenses represent expenses for rent, utilities, supplies andtelephone to operate office locations as well as non-client-reimbursed travelby associates, publications and professional development. This line item alsoincludes miscellaneous expenses, including gains and losses on foreign currencytransactions.

 

General andadministrative expenses include the operational costs, professional fees andinsurance paid by corporate management, general counsel, marketing, humanresources, finance, research and technology support.

 

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**Critical Accounting Policies and Estimates**

 

Thepreparation of condensed consolidated financial statements in conformity withaccounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities, disclosures of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenue and expenses during the reporting period. Our estimates, judgments andassumptions are continually evaluated based on available information andexperience. Because of the use of estimates inherent in the financial reportingprocess, actual results could differ from those estimates. The areas that webelieve are critical accounting policies include revenue recognition, valuationof billed and unbilled receivables from clients, discretionary compensation,income taxes, pension assumptions, incurred but not reported claims, andgoodwill and intangible assets. The critical accounting policies discussedbelow involve making difficult, subjective or complex accounting estimates thatcould have a material effect on our financial condition and results ofoperations. These critical accounting policies require us to make assumptionsabout matters that are highly uncertain at the time of the estimate orassumption. Different estimates that we could have used, or changes in anestimate that are reasonably likely to occur, may have a material impact on ourfinancial statements and results of operations.

 

***RevenueRecognition***

 

Revenue includes feesprimarily generated from consulting services provided.  We recognize revenue from these consultingengagements when hours are worked, either on a time-and-materials basis or on afixed-fee basis, depending on the terms and conditions defined at the inceptionof an engagement with a client.  We haveengagement letters with our clients that specify the terms and conditions uponwhich our engagements are based.  Theseterms and conditions can only be changed upon agreement by both parties. Individual consultants’ billing ratesare principally based on a multiple of salary and compensation costs.

 

Revenue for fixed-feearrangements, which span multiple months, is based upon the percentage ofcompletion method.* *Thecompany typically has three types of fixed-fee arrangements:  annual recurring projects, projects of ashort duration, and non-recurring system projects.  Annual recurring projects and the projects ofshort duration are typically straightforward and highly predictable in nature.  As a result, the project manager andfinancial staff are able to identify, as the project status is reviewed andbills are prepared monthly, the occasions when cost overruns could lead to therecording of a loss accrual.

 

Our non-recurring systemprojects are typically found in our Technology and Administration SolutionsGroup.  They tend to be projects that arelonger in duration and subject to more changes in scope as the projectprogresses than projects undertaken in other segments. We evaluate at leastquarterly, and more often as needed, project managers’ estimates-to-complete toassure that the projects’ current status is accounted for properly.  Our Technology and Administration SolutionsGroup contracts generallyprovide that if the client terminates a contract, the company is entitled topayment for services performed through termination.

 

Revenue recognition forfixed-fee engagements is affected by a number of factors that change theestimated amount of work required to complete the project such as changes inscope, the staffing on the engagement and/or the level of clientparticipation.  The periodic engagementevaluations require us to make judgments and estimates regarding the overallprofitability and stage of project completion that, in turn, affect how werecognize revenue.  The company recognizesa loss on an engagement when estimated revenue to be received for thatengagement is less than the total estimated direct and indirect costsassociated with the engagement.  Lossesare recognized in the period in which the loss becomes probable and the amountof the loss is reasonably estimable.  Thecompany has experiencedcertain costs in excess of estimates from time to time.  Management believes that it is rare, however,for these excess costs to result in overall project losses.

 

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The company has developed various software programsand technologies that we provide to clients in connection with consulting services.  In most instances, such software is hostedand maintained by the company and ownership of the technology and rights to therelated code remain with the company. Software developed to be utilized in providing services to a client, butfor which the client does not have the contractual right to take possession, iscapitalized in accordance with the AICPA’s Statement of Position 98-1 “Accountingfor the Costs of Computer Software Developed or Obtained for Internal Use.”  Revenue associated with the related contract,together with amortization of the related capitalized software, is recognizedover the service period.  As a result, wedo not recognize revenue during the implementation phase of an engagement.

 

Revenue recognized in excess of billings is recordedas unbilled accounts receivable.  Cashcollections and invoices generated in excess of revenue recognized are recordedas deferred revenue until the revenue recognition criteria are met.  Client reimbursable expenses, including thoserelating to travel, other out-of-pocket expenses and any third-party costs, areincluded in revenue, and an equivalent amount of reimbursable expenses areincluded in professional and subcontracted services as a cost of revenue.

 

***Valuation of Billed and UnbilledReceivables from Clients***

 

We maintain allowancesfor doubtful accounts to reflect estimated losses resulting from our clients’failure to pay for our services after the services have been rendered,including allowances when customer disputes may exist.  The related provision is recorded as areduction to revenue.  Our allowancepolicy is based on the aging of our billed and unbilled client receivables andhas been developed based on our write-off history.  Facts and circumstances such as the averagelength of time the receivables are past due, general market conditions, currenteconomic trends and our clients’ ability to pay may cause fluctuations in ourvaluation of billed and unbilled receivables.

 

***DiscretionaryCompensation***

 

The company’scompensation program includes a discretionary annual bonus that is determinedby management and paid once per fiscal year in the form of cash and/or deferredstock units after the company’s annual operating results are finalized.

 

An estimated annual bonusamount is initially developed at the beginning of each fiscal year inconjunction with our budgeting process. Quarterly, estimated annual operating performance is reviewed by thecompany and the discretionary annual bonus amount is then adjusted, ifnecessary, by management to reflect changes in the forecast of pre-bonusprofitability for the year.  In thosequarters where the estimated annual bonus level changes, the remainingestimated annual bonus is accrued over the remaining quarters as a constantpercentage of estimated future net income. Annual bonus levels may vary from current expectations as a result ofchanges in the company’s forecast of net income and competitive employmentmarket conditions.

 

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***IncomeTaxes***

 

The company accounts forincome taxes in accordance with SFAS No. 109, “Accounting for Income Taxes”,which prescribes the use of the asset and liability method whereby deferred taxasset or liability account balances are calculated at the balance sheet dateusing current tax laws and rates in effect. Valuation allowances areestablished, when necessary, to reduce deferred tax assets when it is morelikely than not that a portion or all of a given deferred tax asset will not berealized. In accordance with SFAS No. 109, income tax expense includes (i) deferredtax expense, which generally represents the net change in the deferred taxasset or liability balance during the year plus any change in valuationallowances and (ii) current tax expense, which represents the amount oftax currently payable to or receivable from a taxing authority plus amountsaccrued for expected tax contingencies (including both tax and interest).Reserves for income tax-related uncertainties are based on estimates ofwhether, and the extent to which, additional taxes will be due. These reservesare established when we believe that certain positions might be challengeddespite our belief that our tax return positions are fully supportable. Weadjust these reserves in light of changing facts and circumstances, such as theoutcome of tax audits. The provision for income taxes includes the impact ofreserve provisions and changes to reserves that are considered appropriate.Accruals for tax contingencies are provided for in accordance with therequirements of FIN 48.

 

***PensionAssumptions***

 

Wesponsor both qualified and non-qualified, non-contributory defined benefitpension plans in North America and the U.K. that cover approximately 85% of ourliability.  Under our plans in NorthAmerica, benefits are based on the number of years of service and the associate’scompensation during the five highest paid consecutive years of service.  Beginning January 2008, we madechanges to our plan in the U.K. related to years of service used in calculatingbenefits for associates.  Benefits earnedprior to January 2008 are based on the number of years of service and theassociate’s compensation during the three years before leaving the plan andbenefits earned after January 2008 are based on the number of years ofservice and the associate’s average compensation during the associate’s term ofservice since that date.  The non-qualified plan, included only in NorthAmerica, provides for pension benefits that would be covered under thequalified plan but are limited by the Internal Revenue Code.  The non-qualified plan has no assets andtherefore is an unfunded arrangement. The benefit liability is reflected on the balance sheet.  The measurement date for each of the plans isJune 30.

 

Determinationof our obligations and annual expense under the plans is based on a number ofassumptions that, given the longevity of the plans, are long-term infocus.  A change in one or a combinationof these assumptions could have a material impact on our pension benefitobligation and related expense.  For thisreason, management employs a long-term view so that assumptions do not changefrequently in response to short-term volatility in the economy.  Any difference between actual and assumedresults is amortized into our pension expense over the average remainingservice period of participating employees. We consider several factors prior to the start of each fiscal year whendetermining the appropriate annual assumptions, including economic forecasts,relevant benchmarks, historical trends, portfolio composition and peercomparisons.

 

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*NorthAmerica*

 

The followingassumptions were used at the end of the past three fiscal years in thevaluation of our North American plans:

 
| ** **                                   | ** ** | **Year Ended June 30** | ** ** |
|----------------------------------------------|------------|---------------------------------------|------------|
| ** **                                   | ** ** | **2008**                              | ** ** | **2007** | ** ** | **2006** | ** ** |
| Discount rate                                |       | 7.00                                  | %          | 6.25 | % | 6.25 | % |
| Expected  long-term rate of return on assets |       | 8.75                                  | %          | 8.75 | % | 8.75 | % |
| Rate of increase  in compensation levels     |       | 4.09                                  | %          | 3.84 | % | 3.84 | % |

 

The 7.00 percent discount rate assumption used at the end of fiscalyear 2008 represents a 75 basis point increase from the 6.25 percent discountrate used at the end of fiscal year 2007 and fiscal year 2006.  The company’s discount rate assumptions weredetermined by matching future pension benefit payments with expected futureU.S. AA corporate bond yields for the same periods.

 

The expected long-term rate of return on assets assumption remained at8.75 percent per annum, unchanged from fiscal years 2007 and 2006. Selection ofthe return assumption at 8.75 percent per annum was supported by an analysisperformed by the company of the weighted average yield expected to be achievedwith the anticipated makeup of investments. The investment makeup is heavily weighted towards equities.

 

The following information illustrates thesensitivity to a change in certain assumptions for the U.S. pension plans:

 
| **Change in Assumption**                    | ** ** | **Effect on FY2009  Pre-Tax Pension Expense** | ** ** |
|-------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| 25 basis point  decrease in discount rate             |       | +$3.3 million                                                     |       |
| 25 basis point  increase in discount rate             |       | -$3.1 million                                                     |       |
| 25 basis point  decrease in expected return on assets |       | +$1.4 million                                                     |       |
| 25 basis point  increase in expected return on assets |       | -$1.4 million                                                     |       |

 

Theabove sensitivities reflect the impact of changing one assumption at a time. Itshould be noted that economic factors and conditions often affect multipleassumptions simultaneously and the effects of changes in key assumptions arenot necessarily linear. The company’s U.S. Other Postretirement EmployeeBenefits Plan is relatively insensitive to discount rate changes due to theplan provisions that have been established to control costs and as such nosensitivity results are shown in the table above.

 

*UnitedKingdom*

 

The following assumptions were used in the valuation of our U.K. planat June 30, 2008, 2007 and 2006:

 
| ** **                                   | ** ** | **Year Ended June 30** | ** ** |
|----------------------------------------------|------------|---------------------------------------|------------|
| ** **                                   | ** ** | **2008**                              | ** ** | **2007** | ** ** | **2006** | ** ** |
| Discount rate                                |       | 6.50                                  | %          | 5.80 | % | 5.10 | % |
| Expected  long-term rate of return on assets |       | 6.46                                  | %          | 5.69 | % | 5.63 | % |
| Rate of increase  in compensation levels     |       | 5.65                                  | %          | 4.95 | % | 4.75 | % |

 

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The 6.50 percent discount rate assumption used at the end of fiscalyear 2008 represents a 70 basis point increase over the rate used at June 30,2007 and a 140 basis point increase over the discount rate at June 30,2006. The discount rate is set having regard to yields on European AA corporatebonds at the measurement date and this increase reflects the change in yieldsbetween these dates.

 

The expected long-term rate of return on assets assumption increased to6.46 percent per annum for fiscal year 2008 from 5.69 percent per annum forfiscal year 2007.  The rate of return wassupported by an analysis performed by the company of the weighted averagereturn expected to be achieved with the anticipated makeup of investments whichis heavily weighted towards bonds.

 

The following information illustrates the sensitivity to a change incertain assumptions for the U.K. pension plans:

 
| **Change in Assumption**                    | ** ** | **Effect on FY2009  Pre-Tax Pension Expense** | ** ** |
|-------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| 25 basis point  decrease in discount rate             |       | +$1.3 million                                                     |       |
| 25 basis point  increase in discount rate             |       | -$1.2 million                                                     |       |
| 25 basis point  decrease in expected return on assets |       | +$0.5 million                                                     |       |
| 25 basis point  increase in expected return on assets |       | -$0.5 million                                                     |       |

 

The differences in the discount rate andcompensation level assumption used for the North American and U.K. plans abovecan be attributed to the differing interest rate environments associated withthe currencies and economies to which the plans are subject.  The differences in the expected return onassets are primarily driven by the respective asset allocation in each plan,coupled with the return expectations for assets in the respective currencies.  The North American plans are approximately 60percent invested in equities, which on average provide a higher return thanbonds, which is the favored investment for the U.K. plans.

 

***IncurredBut Not Reported Claims***

 

Thecompany uses actuarial assumptions to estimate and record a liability forincurred but not reported (IBNR) professional liability claims.  Our estimated IBNR liability is based onlong-term trends and averages, and considers a number of factors, includingchanges in claim reporting patterns, claim settlement patterns, judicialdecisions, and legislation and economic decisions, but excludes the effect ofclaims data for large cases due to the insufficiency of actual experience withsuch cases.  Management does notcurrently expect significant fluctuations in the IBNR liability, based on thecompany’s historical claims experience. However, our estimated IBNR liability will fluctuate if claimsexperience changes over time.

 

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***Goodwill and Intangible Assets***

 

In applying the purchasemethod of accounting for our business combinations, amounts assigned toidentifiable assets and liabilities acquired have been based on estimated fairvalues as of the date of the acquisitions, with the remainder recorded asgoodwill. Intangible assets are initially valued at fair market value usinggenerally accepted valuation methods appropriate for the type of intangibleasset. We evaluate our goodwill for impairment annually and whenever indicatorsof impairment exist. The evaluation is based upon a comparison of the estimatedfair value of the reporting unit to which the goodwill has been assigned to thesum of the carrying value of the net assets for that reporting unit. The fairvalues used in this evaluation are estimated based upon a multiple of revenuefor the reporting unit. This revenue multiple is based on our experience andknowledge of our own and other transactions in the marketplace. Intangibleassets with definite lives are amortized over their estimated useful lives andare reviewed for impairment if indicators of impairment arise. The evaluationof impairment would be based upon a comparison of the carrying amount of theintangible asset to the estimated future undiscounted net cash flows expectedto be generated by the asset. If estimated future undiscounted net cash flowsare less than the carrying amount of the asset, the asset would be consideredimpaired. The impairment expense would be determined by comparing the estimatedfair value of the intangible asset to its carrying value, with any shortfallfrom fair value recognized as an expense in the current period.

 

**Results of Operations**

 

The table below setsforth our historical Condensed Consolidated Statements of Operations data as apercentage of change between periods indicated:

 

**Condensed Consolidated Statements of Operations**

(in thousands)

 
| ** **                             | ** ** | **Three Months Ended December 31,** | ** ** | **Six Months Ended December 31,** | ** ** |
|----------------------------------------|------------|---------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                             | ** ** | ** **                                              | ** ** | ** **                                            | ** ** | **%** | ** ** | ** ** | ** ** | ** ** | ** ** | **%** | ** ** |
| ** **                             | ** ** | **2008**                                                | ** ** | **2007**                                              | ** ** | **Change** | ** ** | **2008** | ** ** | **2007** | ** ** | **Change** | ** ** |
| ** **                             | ** ** | **(Unaudited)**                                         | ** ** | ** **                                            | ** ** | **(Unaudited)** | ** ** | ** ** | ** ** |
|                                   |       |                                                    |       |                                                  |       |   |   |   |   |   |   |   |   |
| Revenue                                |       | $                                                       | 436,389    |                                                  | $          | 447,032 |   | (2.4 | )% | $ | 862,515 |   | $ | 848,719 |   | 1.6 | % |
|                                   |       |                                                    |       |                                                  |       |   |   |   |   |   |   |   |   |
| Costs of providing services:           |       |                                                    |       |                                                  |       |   |   |   |   |   |   |   |   |
| Salaries and employee benefits         |       | 246,648                                                 |       | 249,073                                               |       | (1.0 | ) | 482,527 |   | 468,436 |   | 3.0 |   |
| Professional and subcontractedservices |       | 25,564                                                  |       | 29,293                                                |       | (12.7 | ) | 51,879 |   | 54,820 |   | (5.4 | ) |
| Occupancy, communications andother     |       | 46,316                                                  |       | 49,307                                                |       | (6.1 | ) | 96,313 |   | 93,232 |   | 3.3 |   |
| General and administrative expenses    |       | 43,206                                                  |       | 41,791                                                |       | 3.4 |   | 87,093 |   | 86,096 |   | 1.2 |   |
| Depreciation and amortization          |       | 18,870                                                  |       | 17,626                                                |       | 7.1 |   | 37,734 |   | 34,960 |   | 7.9 |   |
|                                   |       | 380,604                                                 |       | 387,090                                               |       | (1.7 | ) | 755,546 |   | 737,544 |   | 2.4 |   |
|                                   |       |                                                    |       |                                                  |       |   |   |   |   |   |   |   |   |
| Income from operations                 |       | 55,785                                                  |       | 59,942                                                |       | (6.9 | ) | 106,969 |   | 111,175 |   | (3.8 | ) |
|                                   |       |                                                    |       |                                                  |       |   |   |   |   |   |   |   |   |
| Income/(Loss) from affiliates          |       | 1,070                                                   |       | (1,499                                                | )          | (171.4 | ) | 2,765 |   | (574 | ) | (581.7 | ) |
| Interest expense                       |       | (1,059                                                  | )          | (1,969                                                | )          | (46.2 | ) | (1,628 | ) | (4,227 | ) | (61.5 | ) |
| Interest income                        |       | 322                                                     |       | 927                                                   |       | (65.3 | ) | 1,353 |   | 2,771 |   | (51.2 | ) |
| Other non-operating income             |       | 1,699                                                   |       | 186                                                   |       | 813.4 |   | 1,680 |   | 275 |   | 510.9 |   |
|                                   |       |                                                    |       |                                                  |       |   |   |   |   |   |   |   |   |
| Income before income taxes             |       | 57,817                                                  |       | 57,587                                                |       | 0.4 |   | 111,139 |   | 109,420 |   | 1.6 |   |
|                                   |       |                                                    |       |                                                  |       |   |   |   |   |   |   |   |   |
| Provision for income taxes             |       | 18,266                                                  |       | 20,806                                                |       | (12.2 | ) | 36,428 |   | 38,195 |   | (4.6 | ) |
|                                   |       |                                                    |       |                                                  |       |   |   |   |   |   |   |   |   |
| Net Income                             |       | $                                                       | 39,511     |                                                  | $          | 36,781 |   | 7.4 | % | $ | 74,711 |   | $ | 71,225 |   | 4.9 | % |

 

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**Three and Six Months Ended December 31,2008 Compared to the Three and Six Months Ended December 31, 2007**

 

***Revenue.***

 

Revenuesfor the second quarter of fiscal year 2009 were $436.4 million, a decrease of$10.6 million, or 2 percent, from $447.0 million in the second quarter offiscal year 2008.  The overall decreasein revenues is due to the strengthening of the U.S. dollar which causesforeign-based revenues to translate to fewer U.S. dollars.  On a constant currency basis, revenuesincreased 6 percent over the second quarter of fiscal year 2008.

 

Theaverage exchange rate used to translate our revenues earned in British poundssterling decreased to 1.5969 for the second quarter of fiscal year 2009 from2.0421 for the second quarter of fiscal year 2008, and the average exchangerate used to translate our revenues earned in Euros decreased to 1.3373 for thesecond quarter of fiscal year 2009 from 1.4493 for the second quarter of fiscalyear 2008.  The depreciation of theBritish pound and the Euro resulted in a $34 million decrease in revenues inthe second quarter of fiscal year 2009 as compared to the second quarter offiscal year 2008.  Changes in the valueof other foreign currencies relative to the U.S. dollar resulted in a $5million decrease in revenues in the second quarter of fiscal year 2009 ascompared to the second quarter of fiscal year 2008.

 

Thechanges in our segment revenue for the second quarter of fiscal year 2009 ascompared to the second quarter of fiscal year 2008 are as follows.  Constant currency is calculated bytranslating prior year revenues at the current year average exchange rate.

 

·                  Benefits decreased revenues $4.1 million, or2 percent, over the second quarter of fiscal year 2008 due to the strengtheningof the U.S. dollar.  On a constantcurrency basis, revenues increased $16.7 million, or 7 percent, over the secondquarter of fiscal year 2008 due to increased demand for our services in allgeographic regions, as plan sponsors evaluate the impact of current marketconditions on the funded status of their plans.

 

·                  Technology and Administration Solutionsincreased revenues $1.4 million, or 3 percent, over the second quarter offiscal year 2008, due to increases in both North America and Europe.  On a constant currency basis, Technology andAdministration Solutions revenues increased 12 percent over the second quarterof fiscal year 2008.  In Europe, revenuesincreased due primarily to new clients. In North America, revenues increased due to additional project work atexisting clients as well as an increase in the number of clients that are nowreceiving on-going administrative services.

 

·                  Human Capital Group decreased revenues $2.0million, or 4 percent, over the second quarter of fiscal year 2008 due to thestrengthening of the U.S. dollar.  On aconstant currency basis, revenues increased 1 percent over the second quarterof fiscal year 2008 due primarily to increases in demand in Latin America.

 

·                  Investment Consulting decreased revenues $4.9million, or 11 percent, over the second quarter of fiscal year 2008 due to thestrengthening of the U.S. dollar.  On aconstant currency basis, revenues increased 5 percent over the second quarterof fiscal year 2008 due primarily to increased demand for investment strategyadvice.

 

·                  Insurance and Financial Services increasedrevenues $4.2 million, or 14 percent, over the second quarter of fiscal year2008.  On a constant currency basis,revenues increased 28 percent over the second quarter of fiscal year 2008 dueprimarily to a significant merger and acquisition project that occurred in thequarter ended December 31, 2008.

 

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Revenuesfor the six months ended December 31, 2008 were $862.5 million, anincrease of $13.8 million, or 2 percent, from $848.7 million in the six monthsended December 31, 2007.

 

Theaverage exchange rate used to translate our revenues earned in British poundssterling decreased to 1.7377 for the six months ended December 31, 2008from 2.0325 for the six months ended December 31, 2007, and the averageexchange rate used to translate our revenues earned in Euros increased to1.4206 for the six months ended December 31, 2008 from 1.4116 for thesecond quarter of fiscal 2008.  The netimpact of the depreciation of the British pound and the appreciation of Eurowas a $37 million decrease in revenues in the six months ended December 31,2008 as compared to the six months ended December 31, 2007.  Changes in the value of other foreigncurrencies relative to the U.S. dollar resulted in a $4 million decrease inrevenues in the six months ended December 31, 2008 as compared to the sixmonths ended December 31, 2007.

 

Thechanges in our segment revenue for the six months ended December 31, 2008as compared to the six months ended December 31, 2007 are as follows.  Constant currency is calculated bytranslating prior year revenues at the current year average exchange rate.

 

·                  Benefits increased revenues $7.1 million, or2 percent, over the six months ended December 31, 2007.  On a constant currency basis, revenuesincreased $28.5 million, or 6 percent, over the six months ended December 31,2007 due to increased demand for our services.

 

·                  Technology and Administration Solutionsincreased revenues $8.9 million, or 10 percent, over the six months ended December 31,2007, due to increases in both North America and Europe.  On a constant currency basis, Technology andAdministration Solutions revenues increased 16 percent over the six monthsended December 31, 2007.  In Europe,revenues increased due primarily to new clients.  In North America, revenues increased due toadditional project work at existing clients as well as an increase in thenumber of clients that are now receiving on-going administrative services.

 

·                  Human Capital Group increased revenues $4.9million, or 5 percent, over the six months ended December 31, 2007.  On a constant currency basis, revenuesincreased 6 percent over the six months ended December 31, 2007 dueprimarily to increases in demand.

 

·                  Investment Consulting decreased revenues $2.7million, or 3 percent, over the six months ended December 31, 2007 due tothe strengthening of the U.S. dollar.  Ona constant currency basis, revenues increased 7 percent over the six monthsended December 31, 2007 due primarily to increased demand for investmentstrategy advice.

 

·                  Insurance and Financial Services increasedrevenues $4.0 million, or 7 percent, over the six months ended December 31,2007.  On a constant currency basis,revenues increased 15 percent over the six months ended December 31, 2007due primarily to a significant merger and acquisition project that occurred inthe quarter ended December 31, 2008.

 

***Salariesand Employee Benefits*.**

 

Salaries and employeebenefit expenses for the second quarter of fiscal year 2009 were $246.6 millioncompared to $249.0 million for the second quarter of fiscal year 2008, adecrease of $2.4 million or 1.0 percent. The decrease results primarily fromthe change in the average exchange rates used to translate our expensesincurred in British pounds and the Euro. The change in exchange rates has affected each expense category insimilar fashion. On a constant currency basis, salaries and employee benefitsincreased 11 percent, principally due to increases in salary and discretionarycompensation expense.  As a percentage ofrevenue, salaries and employee benefits increased to 56.5 percent from 55.7percent.

 

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Salaries and employeebenefit expenses for the first six months of fiscal year 2009 were $482.5million compared to $468.4 million for the first six months of fiscal year2008, an increase of $14.1 million or 3.0 percent.  On a constant currency basis, salaries andemployee benefits increased 11 percent, principally due to increases in salary,pension and discretionary compensation expenses.  As a percentage of revenue, salaries andemployee benefits increased to 55.9 percent from 55.0 percent.

 

***Professionaland Subcontracted Services*.**

 

Professional andsubcontracted services expenses for the second quarter of fiscal year 2009 were$25.6 million compared to $29.3 million for the second quarter of fiscal year2008, a decrease of $3.7 million or 12.7 percent. On a constant currency basis,professional and subcontracted services increased 0.2 percent, principally dueto an increase in reimbursable expenses incurred on behalf of clients. As apercentage of revenue, professional and subcontracted services decreased to 5.9percent from 6.6 percent.

 

Professional andsubcontracted services used in consulting operations for the first six monthsof fiscal year 2009 were $51.9 million, compared to $54.8 million for the firstsix months of fiscal year 2008, a decrease of $2.9 million or 5.4 percent.  On a constant currency basis, professionaland subcontracted services increased 1 percent, principally due to an increasein reimbursable expenses incurred on behalf of clients.  As a percentage of revenue, professional andsubcontracted services decreased to 6.0 percent from 6.4 percent.

 

***Occupancy,Communications and Other.***

 

Occupancy, communicationsand other expenses for the second quarter of fiscal year 2009 were $46.3million compared to $49.3 million for the second quarter of fiscal year 2008, adecrease of $3.0 million or 6.1 percent. On a constant currency basis, occupancy, communications and otherincreased 4 percent, principally due to increases in general officeexpenses.  As a percentage of revenue,occupancy, communications and other decreased to 10.6 percent from 11.0percent.

 

Occupancy, communicationsand other expenses for the first six months of fiscal year 2009 were $96.3million compared to $93.2 million for the first six months of fiscal year 2008,an increase of $3.1 million or 3.3 percent. On a constant currency basis, occupancy, communications and otherincreased 11 percent, principally due to increases in general office expenses.  As a percentage of revenue, occupancy,communications and other increased to 11.2 percent from 11.0 percent.

 

***Generaland Administrative Expenses.***

 

General andadministrative expenses for the second quarter of fiscal year 2009 were $43.2million, compared to $41.8 million for the second quarter of fiscal year 2008,an increase of $1.4 million or 3.4 percent. On a constant currency basis,general and administrative expenses increased 15 percent, principally due toincreases in salary expense.  As a percentageof revenue, general and administrative expense increased to 9.9 percent from9.3 percent.

 

General andadministrative expenses for the first six months of fiscal year 2009 were $87.1million, compared to $86.1 million for the first six months of fiscal year2008, an increase of $1.0 million or 1.2 percent.  On a constant currency basis, general andadministrative expenses increased 8 percent, principally due to increases insalary expense.  As a percentage ofrevenue, general and administrative expense remained at 10.1 percent for bothperiods.

 

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***Depreciationand Amortization.***

 

Depreciation andamortization for the second quarter of fiscal year 2009 was $18.9 million,compared to $17.6 million for the second quarter of fiscal year 2008, anincrease of $1.3 million or 7.4 percent. On a constant currency basis, depreciation and amortization increased 17percent, principally due to increases in depreciation of internally developedsoftware used to support our Benefits and Technology and AdministrationSolutions Groups.  As a percentage ofrevenue, depreciation and amortization increased to 4.3 percent from 3.9percent.

 

Depreciation andamortization for the first six months of fiscal year 2009 was $37.7 million,compared to $35.0 million for the first six months of fiscal year 2008, anincrease of $2.7 million or 7.7 percent. On a constant currency basis, depreciation and amortization increased 15percent, principally due to increases in depreciation of internally developedsoftware used to support our Benefits and Technology and AdministrationSolutions Groups.  As a percentage ofrevenue, depreciation and amortization increased to 4.4 percent from 4.1percent.

 

***Income(Loss) From Affiliates.***

 

Income from affiliatesfor the second quarter of fiscal year 2009 was $1.1 million compared to a lossof $1.5 million for the second quarter of fiscal year 2008, an increase of $2.6million.  These amounts reflect ourportion of PCIC’s, Fifth Quadrant’s, Dubai’s and IFA’s operating results forthe second quarter of fiscal year 2009 while the second quarter fiscal year2008 only included PCIC’s operating results.

 

Income from affiliatesfor the first six months of fiscal year 2009 was $2.8 million compared to aloss of $0.6 million for the first six months of fiscal year 2008, an increaseof $3.4 million.  These amounts reflectour portion of PCIC’s, Fifth Quadrant’s, Dubai’s and IFA’s operating resultsfor the first six months of fiscal year 2009 while the first six months fiscalyear 2008 only included PCIC’s operating results.

 

***InterestExpense.***

 

Interest expense for thesecond quarter of fiscal year 2009 was $1.1 million, compared to $2.0 millionfor the second quarter of fiscal year 2008. Interest expense for the first six months of fiscal year 2009 was $1.6million, compared to $4.2 million for the first six months of fiscal year2008.  The decrease in both periods wasdue to a lower average debt balance and lower short-term interest rates.

 

***InterestIncome.***

 

Interest income for thesecond quarter of fiscal year 2009 was $0.3 million, compared to $0.9 millionfor the second quarter of fiscal year 2008. Interest income for the first sixmonths of fiscal year 2009 was $1.4 million, compared to $2.8 million for thefirst six months of fiscal year 2008. The decrease is mainly due to a lower average cash balance in thecurrent period compared to the prior period, combined with lower short-terminterest rates in the United States and Europe.

 

***Provisionfor Income Taxes.***

 

Provision for incometaxes for the first six months of fiscal year 2009 was $36.4 million, comparedto $38.2 million for the first six months of fiscal year 2008. Our effectivetax rate was 32.8 percent for the first six months of fiscal year 2009 and 34.9percent for the first six months of fiscal year 2008.  The tax rate decrease is due to thegeographic mix of income and the release of tax reserves.  The company has not provided U.S. deferredtaxes on cumulative earnings of foreign subsidiaries that have been reinvestedindefinitely, which also includes foreign subsidiaries affiliated with ourrecent acquisitions.  We record a taxbenefit on foreign net operating loss carryovers and foreign deferred expensesonly if it is more likely than not that a benefit will be realized.

 

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***NetIncome.***

 

Net income for the secondquarter of fiscal year 2009 was $39.6 million, compared to $36.8 million forthe second quarter of fiscal year 2008. As a percentage of revenue, net income increased to 9.1 percent from 8.2percent. Net income for the first six months of fiscal year 2009 was $74.7million, compared to $71.2 million for the first six months of fiscal year2008.  As a percentage of revenue, incomefrom operations increased to 8.7 percent from 8.4 percent.

 

***EarningsPer Share.***

 

Diluted earnings pershare, income from operations for the second quarter of fiscal year 2009 was$0.93, compared to $0.82 for the second quarter of fiscal year 2008.  Diluted earnings per share, income fromoperations for the first six months of fiscal year 2009 was $1.75, compared to$1.60 for the first six months of fiscal year 2008.

 

**Liquidityand Capital Resources**

 

Our cash and cashequivalents at December 31, 2008 totaled $73.9 million, compared to $124.6million at June 30, 2008.  Thedecrease in cash from June 30, 2008 to December 31, 2008 wasprincipally attributable to the payment during the first quarter of fiscal year2009 of $166 million of previously accrued discretionary compensation.  We also paid $31.4 million in corporatetaxes, $19.0 million in capital expenditures and $6.4 million in dividendsduring the first six months of fiscal year 2009.  These outflows of cash were funded by cashfrom operations, from existing cash balances and from borrowings under ourrevolving credit facility.  Consistentwith the company’s liquidity position, management considers various alternativestrategic uses of cash reserves including acquisitions, dividends and stockbuybacks, or any combination of these options. The company believes that it hassufficient resources to fund operations beyond the next twelve months.

 

Our non-U.S. operationsare substantially self-sufficient for their working capital needs.  At December 31, 2008, $59.2 million ofthe total cash balance of $73.9 million was held outside of North America,which we have the ability to utilize, if necessary. There are no significantrepatriation restrictions other than local or U.S. taxes associated withrepatriation.

 

Underthe terms of the WWLLP business combination, we are required under certaincircumstances to place funds into an insurance trust designed to satisfypotential litigation settlement related to the former partners of WWLLP.  If the assets of the trust are not used by2017, they will be returned to the company. As of December 31, 2008, wemaintained $5.0 million of restricted cash related to this obligation. Thisrestricted cash balance was included in Other Assets on our consolidatedbalance sheet.

 

Assets and liabilitiesassociated with non-U.S. entities have been translated into U.S. dollars as of December 31,2008, at appreciated U.S. dollar rates compared to historical periods.  As a result, cash flows derived from changesin the Company’s consolidated balance sheets include the impact of the changein foreign exchange translation rates.

 

***CashFrom Operating Activities.***

 

Cash from operatingactivities for the first six months of fiscal year 2009 was $3.7 million,compared to cash from operating activities of $48.3 million for the first sixmonths of fiscal year 2008.  Thedifference is primarily attributable to a decrease in billed and unbilledreceivables primarily due to exchange rates, as well as to the relative size ofaccruals and payments associated with discretionary compensation in the periodspresented.

 

The allowance fordoubtful accounts increased $0.4 million from June 30, 2008 to December 31,2008. The number of days of accounts receivable and work in process outstandingalso benefited from exchange rates and this decreased to 69 at December 31,2008 compared to 71 at June 30, 2008.

 

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***CashUsed in Investing Activities.***

 

Cash used ininvesting activities for the first six months of fiscal year 2009 was $30.1million, compared to $161.5 million used in investing activities for the firstsix months of fiscal year 2008.  Thedifference can be attributed to acquisition and contingent considerationpayments of $134.7 million in the first six months of fiscal year 2008, whichwas primarily attributable to the Heissmann acquisition.

 

Expenditures ofcapital funds were $19.0 million for the first six months of fiscal year2009.  Anticipated commitments of capitalfunds are estimated at $25.0 million for the remainder of fiscal year 2009. Weexpect cash from operations to adequately provide for these cash needs.

 

***CashUsed in Financing Activities.***

 

Cash used infinancing activities for the first six months of fiscal year 2009 was $19.8million, compared to cash used in financing activities of $25.1 million for thefirst six months of fiscal year 2008. This change is primarily attributable to activity under our creditfacility which included net borrowings of $60.6 million in the first six monthsof fiscal year 2009 compared to $2.0 million in the first six months of fiscalyear 2008.  This is offset by the companyrepurchase of $77.4 million of common stock in the first six months of fiscalyear 2009, compared to $28.3 million of common stock during the same period in fiscalyear 2008.

 

**Off-BalanceSheet Arrangements and Contractual Obligations**

 
| ** **                                                            | ** ** | **Remaining payments due by fiscal year as of December 31, 2008** | ** ** |
|-----------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------|------------|
| **Contractual Cash   Obligations (in thousands)** | ** ** | **Total**                                                                                                           | ** ** | **Remaining   2009** | ** ** | **2010   through   2011** | ** ** | **2012   through   2013** | ** ** | **Thereafter** | ** ** |
| Lease commitments                                                     |       | $                                                                                                                   | 303,544    |   | 29,671 |   | 103,155 |   | 77,392 |   | 93,326 |   |
| Revolving Credit  Facility                                            |       | 62,351                                                                                                              |       | 61,084 |   | 1,267 |   | — |   | — |   |
| Total                                                                 |       | $                                                                                                                   | 365,895    |   | 90,755 |   | 104,422 |   | 77,392 |   | 93,326 |   |

 

***OperatingLeases.***  We leaseoffice space, furniture and selected computer equipment under operating leaseagreements with terms ranging from one to ten years. Management has determinedthat there is not a large concentration of leases that will expire in any onefiscal year.  Consequently, managementanticipates that any increase in future rent expense will be mainly marketdriven.

 

***CreditAgreement. ***The company has a credit facility provided bya syndicate of banks in an aggregate principal amount of $300 million.  Interest rates associated with this facilityvary with LIBOR and/or the Prime Rate and are based on our leverage ratio, asdefined by the credit agreement.  We arecharged a quarterly commitment fee, currently 0.125 percent of the facility,which varies with our financial leverage and is paid on the unused portion ofthe credit facility.  Borrowings underthis facility were $60.6 million compared to $107.0 million as of December 31,2007.  Credit under the facility isavailable upon demand, although the credit facility requires us to observecertain covenants (including requirements relating to our leverage ratio andfixed coverage charge ratio) and is collateralized with a pledge of stock ofmaterial subsidiaries.  We were incompliance with all covenants under the credit facility as of December 31,2008. This facility is scheduled to mature on June 30, 2010.

 

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Aportion of the revolving facility is used to support a required letter ofcredit.  As a result, $10.6 million ofthe facility was unavailable for operating needs as of December 31,2008.  We are also charged a fee for theoutstanding letter of credit that also fluctuates based on our leverage ratio.

 

The company has alsoprovided a $5.0 million Australian dollar-denominated letter of credit (US $3.6million) to an Australian governmental agency as required by the localregulations.  The estimated fair marketvalue of these letters of credit is immaterial because they have never been used,and the company believes that future usage is remote.

 

***PensionContributions.*** Remaining contributions to our various pension plans for fiscal year2009 are projected to be approximately $21.5 million.

 

**RiskManagement**

 

As a part of our overall risk management program, we carry customarycommercial insurance policies, including commercial general liability andclaims-made professional liability insurance with a self-insured retention of$1 million per claim, which provides coverage for professional liability claimsof the company and its subsidiaries, including the cost of defending suchclaims.  Our professional liabilityinsurance coverage beyond our self-insured retention amount is written by anaffiliated captive insurance company (PCIC) owned by us and two otherprofessional services firms, and by various commercial insurance carriers.

 

In formulating its premium structure, PCIC estimates the amount itexpects to pay for losses (and loss expenses) for all the members as a wholeand then allocates that amount to the member firms based on the individualmember’s expected losses.  PCIC basespremium calculations, which are determined annually based on experience throughMarch of each year, on relative risk of the various lines of businessperformed by each of the owner companies, past claim experience of each ownercompany, growth of each of those companies, industry risk profiles in generaland the overall insurance markets.

 

As of July 1, 2008, the captive insurance company carriesreinsurance for losses it insures above $25 million.  Since losses incurred by PCIC below thislevel are not covered by reinsurance, but are direct expenses of PCIC, reserveadjustments and actual outcomes of specific claims of any PCIC member firmcarry through into Watson Wyatt’s financial results as income or loss fromaffiliates through our 36.43% ownership of PCIC.  Thus, from time to time, the impacts of PCIC’sreserve development may result in fluctuations in Watson Wyatt’s earnings.

 

Our agreements with PCIC could require additional payments to PCIC inthe event that the company decided to exit PCIC and adverse claimssignificantly exceed prior expectations. If these circumstances were to occur, the company would record aliability at the time it becomes probable and reasonably estimable.

 

The company will continue to provide for the self-insured retentionwhere specific estimated losses and loss expenses for known claims in excess of$1 million are considered probable and reasonably estimable.  Although the company maintains professionalliability insurance coverage, this insurance does not cover claims made afterexpiration of our current insurance contracts. Generally accepted accounting principles require that we record a liabilityfor incurred but not reported (IBNR) professional liability claims if they areprobable and reasonably estimable, and for which we have not yet contracted forinsurance coverage.  The company usesactuarial assumptions to estimate and record its IBNR liability and has a $33.7million IBNR liability recorded as of December 31, 2008.

 

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Insurance market conditions for our industry and the company includeheightened overall premium cost.  Inaddition, in 2005, PCIC raised the reinsurance attachment point from $15million to $25 million. Trends toward higher self-insured retentions,constraints on aggregate excess coverage for this class of insurance coverageand financial difficulties which are presently faced by several longstandingE&O carriers are anticipated to continue or to recur periodically, and tobe reflected in our future annual insurance renewals.  As a result, we will continue to assess ourability to secure future insurance coverage and we cannot assure that suchcoverage will continue to be available indefinitely in the event of specificadverse claims experience, adverse loss trends, market capacity constraints orother factors. In anticipation of the possibility of future reductions in risktransfer from PCIC to re-insurers, as well as the hardening insurance marketconditions in recent years, the firms that own PCIC, including the company,have increased PCIC’s capital in the past and we will continue to re-assesscapital requirements on a regular basis.

 

In light of increasing worldwide litigation, including litigationagainst professionals, the company has a policy that all client relationshipsbe documented by engagement letters containing specific risk mitigation clausesthat were not included in all historical client agreements.  Certain contractual provisions designed to mitigate risk may not be legallypractical or enforceable in litigation involving breaches of fiduciary duty orcertain other alleged errors or omissions, or in certain jurisdictions. Wemay incur significant legal expenses in defending against litigation. Nearly100 percent of the company’s U.S.****and U.K.****corporateclients have signed engagement letters including some if not all of ourpreferred mitigation clauses, and initiatives to maintain that process in theUnited States and the United Kingdom and complete it elsewhere are underway.

 

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**Disclaimer RegardingForward-looking Statements**

 

This filingcontains a number of “forward-looking statements” within the meaning of thePrivate Securities Litigation Reform Act of 1995, including, but not limited tothe following: Note 5 -  RetirementBenefits; Note 6 – Goodwill and Intangible Assets; Note 10 – Restricted Shares;Note 11 – Commitments and Contingent Liabilities; Note 13 – Income Taxes; theExecutive Overview; Critical Accounting Policies and Estimates; the discussionof our capital expenditures; Off-Balance Sheet Arrangements and ContractualObligations; Risk Management; and Part II, Item 1 “Legal Proceedings”.  You can identify these statements and otherforward-looking statements in this filing by words such as “may”, “will”, “expect”,“anticipate”, “believe”, “estimate”, “plan”, “intend”, “continue”, or similarwords, expressions or the negative of such terms or other comparableterminology. You should read these statements carefully because they containprojections of our future results of operations or financial condition, orstate other “forward-looking” information. A number of risks and uncertaintiesexist which could cause actual results to differ materially from the resultsreflected in these forward-looking statements. Such factors include but are not limited to:

 

·                  our ability to integrate acquired businessesinto our own business, processes and systems, and achieve the anticipatedresults;

·                  foreigncurrency exchange and interest rate fluctuations;

·                  generaleconomic and business conditions that adversely affect us or our clients;

·                  our continued ability to recruit and retainqualified associates;

·                  the success of our marketing, clientdevelopment and sales programs after our acquisitions;

·                  our ability to maintain client relationshipsand to attract new clients after our acquisitions;

·                  declines in demand for our services;

·                  outcomes of pending or future professionalliability cases and the availability and capacity of professional liabilityinsurance to fund the outcome of pending cases or future judgments orsettlements;

·                  ourability to obtain professional liability insurance;

·                  asignificant decrease in the demand for the consulting, actuarial and otherservices we offer as a result of changing economic conditions or other factors;

·                  actionsby competitors offering human resources consulting services, including publicaccounting and consulting firms, technology consulting firms andInternet/intranet development firms;

·                  ourability to achieve cost reductions after our recent acquisitions;

·                  exposureto liabilities that have not been expressly assumed in our acquisitiontransactions;

·                  thelevel of capital resources required for future acquisitions and businessopportunities;

·                  regulatorydevelopments abroad and domestically that impact our business practice;

·                  legislativeand technological developments that may affect the demand for or costs of ourservices;

 

and other factorsdiscussed under “Risk Factors” in the company’s 2008 Annual Report on Form 10-Kfiled with the SEC on August 15, 2008. These statements are based on assumptions that may not come true.  All forward-looking disclosure is speculativeby its nature.  The company undertakes noobligation to update any of the forward-looking information included in thisreport, whether as a result of new information, future events, changedexpectations or otherwise.

 

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**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

 

Weare exposed to market risks in the ordinary course of business.  These risks include interest rate risk,foreign currency exchange and translation risk.

 

**InterestRate Risk**

 

Theprimary objective of our investment activities is to preserve principal whileat the same time maximizing yields without significantly increasing risk. Toachieve this objective, we maintain our portfolio in mainly short termsecurities that are recorded on the balance sheet at fair value.

 

**Foreign Currency Risk**

 

Internationalnet revenues result from transactions by our foreign operations and aretypically denominated in the local currency of each country. These operations alsoincur most of their expenses in the local currency. Accordingly, our foreignoperations use the local currency as their functional currency and our primaryinternational operations use the British Pound, and to a lesser extent, theEuro. Our international operations are subject to risks typical ofinternational operations, including, but not limited to, differing economicconditions, changes in political climate, differing tax structures, otherregulations and restrictions, and foreign exchange rate volatility.  Accordingly, our future results could beadversely impacted by changes in these or other factors.

 

**Translation Exposure**

 

Foreignexchange rate fluctuations may adversely impact our consolidated financialposition as well as our consolidated results of operations and may adverselyimpact our financial position as the assets and liabilities of our foreignoperations are translated into U.S. dollars in preparing our condensedconsolidated balance sheet. Additionally, foreign exchange rate fluctuationsmay adversely impact our condensed consolidated results of operations asexchange rate fluctuations on transactions denominated in currencies other thanour functional currencies result in gains and losses that are reflected in ourcondensed consolidated statement of income.

 

Theforeign currency and translation exposure risks have been heightened as aresult of the current global economic environment.

 

Weconsolidate our international subsidiaries by converting them into U.S. dollarsin accordance with Statement of Financial Accounting Standards No. 52, “ForeignCurrency Translation” (“FAS 52”). The results of operations and our financialposition will fluctuate when there is a change in foreign currency exchangerates.

 

**ITEM 4. CONTROLS AND PROCEDURES.**

 

**Evaluationof Disclosure Controls and Procedures**

 

Anevaluation was performed under the supervision and with the participation ofour management, including the chief executive officer, or CEO, and chieffinancial officer, or CFO, of the effectiveness of the design and operation ofour disclosure controls and procedures. Based on that evaluation, ourmanagement, including the CEO and CFO, concluded that our disclosure controlsand procedures were effective as of December 31, 2008.

 

**Changesin Internal Control Over Financial Reporting**

 

There were nosignificant changes in our internal control over financial reporting in thequarter ended December 31, 2008 that materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

 

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**Limitations on the Effectiveness of Controls**

 

Our management, including the CEO and CFO, does not expect that our disclosure controls and procedures will necessarily prevent all error and all fraud.  However, our management does expect that the control system provides reasonable assurance that its objectives will be met.  A control system, no matter how well designed and operated, cannot provide absolute assurance that the control system’s objectives will be met.   In addition, the design of such internal controls must take into account the costs of designing and maintaining such a control system.  Certain inherent limitations exist in control systems to make absolute assurances difficult, including the realities that judgments in decision-making can be faulty, that breakdowns can occur because of a simple error or mistake, and that individuals can circumvent controls.  The design of any control system is based in part upon existing business conditions and risk assessments. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.  Over time, controls may become inadequate because of changes in business conditions or deterioration in the degree of compliance with policies or procedures.  As a result, they may require change or revision.  Because of the inherent limitations in a control system, misstatements due to error or fraud may occur and may not be detected.  Nevertheless, the disclosure controls and procedures are designed to provide reasonable assurance of achieving their stated objectives, and the CEO and CFO have concluded that the disclosure controls and procedures are effective at a reasonable assurance level.

 

**PART II. OTHER INFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS.**

 

From time to time, we area party to various lawsuits, arbitrations or mediations that arise in theordinary course of business. The disclosure called for by Part II, Item 1,regarding our legal proceedings is incorporated by reference herein from Note11 “Commitments and Contingent Liabilities,” of the Notes to the CondensedConsolidated Financial Statements in this Form 10-Q for the quarter endedDecember 31, 2008.

 

**ITEM 1A. RISK FACTORS.**

 

There are no material changes from risk factorsas previously disclosed in our 2008 Annual Report on Form 10-K (File No. 001-16159)filed on August 15, 2008.

 

**ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.**

 

None.

 

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**Issuer Purchases of Equity Securities**

 

The company periodicallyrepurchases shares of common stock, one purpose of which is to offset potentialdilution from shares issued in connection with the company’s benefit plans. Thetable below presents specified information about the company’s stockrepurchases and repurchase plans:

 
| **Period**                                            | ** ** | **Total Number of   Shares   Purchased** | ** ** | **Average Price   Paid per Share** | ** ** | **Total Number of   Shares Purchased   as Part of Publicly   Announced Plans   or Programs** | ** ** | **Maximum Number of   Shares that May Yet   Be Purchased Under   the Plans or Programs** | ** ** |
|-------------------------------------------------------|------------|--------------------------------------------------------------|------------|--------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| October 1, 2008  through October 31, 2008   |       | 77,082                                                       |       | $                                                      | 49.43      |                                                                                                                                                     | 77,082     |                                                                                                                                                      |       |   |
| November 1, 2008  through November 30, 2008 |       | —                                                       |       | —                                                 |       | —                                                                                                                                                   |       |                                                                                                                                                      |       |
| December 1, 2008  through December 31, 2008 |       | —                                                       |       | —                                                 |       | —                                                                                                                                                   |       |                                                                                                                                                      |       |
| Total                                                 |       | 77,082                                                       |       |                                                   |       | 77,082                                                                                                                                                   |       | 468,023                                                                                                                                                   |       |
|                                                       |            |                                                              |            |                                                        |            |                                                                                                                                                          |            |                                                                                                                                                           |            |  |

 

During the first quarter of fiscal year 2007, the company’s Board ofDirectors approved the repurchase of up to 1,500,000 shares of our Class ACommon Stock.  The maximum number ofshares remaining to be repurchased under this plan is 468,023.

 

**ITEM 3. DEFAULTS UPON SENIOR SECURITIES.**

 

**None.**

** **

**ITEM4.  SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS.**

** **

Atthe ninth annual meeting of the stockholders of the Company, held on November 14,2008, the following matters were submitted to a vote of stockholders: (1) theelection of seven members of the Board of Directors; (2) the ratificationof the selection of Deloitte & Touche LLP as the company’s independentregistered public accounting firm for the fiscal year ending June 30,2009; and (3) the approval of the2001 Deferred Stock Unit Plan For Selected Employees as Amended in order tosatisfy Internal Revenue Code Section 162(m).

 

Proxiesrepresenting 36,651,770 shares were received (total shares outstanding as ofthe Record Date were 42,673,708) and the results of the meeting are asfollows with respect to each matter submitted to a vote of stockholders.

 

*Election of Directors*

 

Sevennominees stood for election to serve a one-year term expiring at the 2009Annual Meeting of Stockholders, or until his or her successor shall have beenelected and qualified.

 

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Ofthe proxies received, the votes were as follows:

 

**Nominees for Directors**

 

Term expiring at theannual meeting of stockholders in 2009:

 
| ** **              | ** ** | **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** |
|-------------------------|------------|------------|------------|-------------|------------|-------------|------------|
| John J. Gabarro         |       | 36,379,021 |       | 254,531     |       | 18,216      |       |
| John J. Haley           |       | 35,806,277 |       | 752,917     |       | 92,575      |       |
| R. Michael McCullough   |       | 35,892,411 |       | 715,980     |       | 43,378      |       |
| Brendan R. O’Neill |       | 35,903,054 |       | 698,039     |       | 50,676      |       |
| Linda D. Rabbitt        |       | 36,521,931 |       | 87,108      |       | 42,730      |       |
| Gilbert T. Ray          |       | 36,493,889 |       | 142,344     |       | 15,537      |       |
| John C. Wright          |       | 36,503,143 |       | 107,692     |       | 40,934      |       |

 

*Ratification of the selection of Deloitte & Touche LLP as thecompany’s independent registered public accounting firm for the fiscal yearending June 30, 2009.*

 

The Audit Committee selected Deloitte & Touche LLP to serve asthe company’s independent registered public accounting firm for the fiscal yearending June 30, 2009.  Althoughratification by the Company’s shareholders is not required under the company’sBylaws or otherwise, the Board submitted the selection of Deloitte &Touche LLP to our stockholders for ratification because we value ourstockholders’ views on the company’s independent registered public accountingfirm - and as a matter of good corporate governance.

 

Ofthe proxies received, the votes were as follows:

 
| **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** |
|------------|------------|-------------|------------|-------------|------------|
| 36,471,368 |       | 145,342     |       | 35,059      |       |

 

*Approvalof amendments to the 2001 Deferred Stock Unit Plan For Selected Employees, asAmended in order to satisfy Internal Revenue Code Section 162(m).*

 

On November 14, 2008, the stockholders approvedthe amendments to the 2001 DeferredStock Unit Plan for Selected Employees****(“DSUPlan”), permitting amounts awarded under arrangements granted orestablished prior to our 2013 stockholders’ meeting to qualify asperformance-based compensation.

 

OurDSU Plan was established and approved by our stockholders in 2001. In 2006,stockholders approved an amendment to the DSU Plan to increase the maximumnumber of shares of common stock that may be issued under the DSU Plan to2,700,000, subject to adjustment in the Compensation Committee’s discretion forstock splits, dividends and similar transactions as well as changes incapitalization of the Company.  The DSUPlan is intended to provide senior employees of the Company with additionalincentives by permitting the Company to grant them common stock units inpayment of all or a portion of annual or long-term bonus arrangements. Eachstock unit represents the Company’s obligation to issue one share of commonstock, either immediately or upon a deferred basis as established by the DSUPlan administrator.  The DSU Plan isadministered by the Compensation Committee of the Board of Directors.

 

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At the recommendation of the Compensation Committee,the Board amended the DSU Plan on July 25, 2008 to add provisions so thatshares paid under it can qualify as performance-based compensation that istax-deductible under Section 162(m) of the Internal Revenue Code of1986, as amended (the “Code”).  Under Section 162(m) ofthe Code, compensation above $1,000,000 that is paid within a fiscal year toour CEO and our three other most highly compensated executive officers (otherthan the CFO) is not deductible unless material terms of the plan under whichthe compensation is paid are approved by stockholders and the arrangementotherwise qualifies as performance-based compensation as defined under Section 162(m) regulations.  For purposes of Section 162(m), thematerial terms of a performance-based compensation plan include the employeeseligible to receive compensation under the plan, a description of the businesscriteria on which the performance goal is based and the maximum amount ofcompensation that can be paid to any employee under the plan. The DSU Plan asamended is designed to provide for this type of performance-based compensation.

 

Ofthe proxies received, the votes were as follows:

 
| **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker Non-Vote** | ** ** |
|------------|------------|-------------|------------|-------------|------------|--------------------------|------------|
| 28,700,161 |       | 531,106     |       | 1,385,115   |       | 6,035,388                |       |

 

**ITEM 5.OTHER INFORMATION.**

 

None.

 

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**ITEM 6.EXHIBITS.**

 
| 10.1   |   | 2008 Long-Term  Incentive Program for Selected Associates(1)                                                                                                                                     |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                             |
| 10.2   |   | Amended 2001 Deferred  Stock Unit Plan for Selected Employees(1)                                                                                                                                 |
|   |   |                                                                                                                                                                                             |
| 10.3   |   | Performance Share Bonus  Incentive Program FY09(1)                                                                                                                                               |
|   |   |                                                                                                                                                                                             |
| 21     |   | Subsidiaries of Watson  Wyatt Worldwide, Inc.(1)                                                                                                                                            |
|   |   |                                                                                                                                                                                             |
| 31.1   |   | Certification of Chief  Executive Officer Pursuant to Securities Exchange Act Rules 13a-14 and  15d-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of  2002(1)       |
|   |   |                                                                                                                                                                                             |
| 31.2   |   | Certification of Chief  Financial Officer Pursuant to Securities Exchange Act Rules 13a-14 and  15d-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of  2002(1)       |
|   |   |                                                                                                                                                                                             |
| 32     |   | Certification of Chief  Executive Officer and Chief Financial Officer Pursuant to Title 18, U.S.C. Section 1350,  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(1) |

 

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(1)   Filed with this Form 10-Q

 

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**Signatures**

 

Pursuant to therequirements of the Securities and Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

Watson WyattWorldwide, Inc.(Registrant)

 
| /s/  John J. Haley   |                     | February 6,  2009 |
|----------------------|--------------------------|------------------------|
| Name:                | John  J. Haley           | Date                   |
| Title:               | President  and           |                   |
|                 | Chief  Executive Officer |                   |
|                 |                     |                   |
| /s/  Roger F. Millay |                     | February 6,  2009 |
| Name:                | Roger  F. Millay         | Date                   |
| Title:               | Vice  President and      |                   |
|                 | Chief  Financial Officer |                   |
|                 |                     |                   |
| /s/  Peter L. Childs |                     | February 6,  2009 |
| Name:                | Peter  L. Childs         | Date                   |
| Title:               | Controller               |                   |
|                      |                          |                        |  |  |  |

 

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