Big Charges, Shrinking HRO Profits Clip Hewitt's 2006

November 10, 2006 ( - Outsourcing and consulting giant Hewitt Associates closed out a tough fiscal year on a disappointing note.

A combination of big charges and deteriorating profits in its human resources business process outsourcing unit (HRBPO) added up to a financial loss for the firm’s fiscal year ending September 30, 2006, its first since it went public four years ago.

Russell Fradin, Hewitt’s new chairman and chief executive officer, acknowledged in a statement that Hewitt “significantly under-delivered” on its financial objectives, with “deterioration in the expected profitability of some of our HR BPO contracts.”   Fradin had been named chairman and CEO in mid-August (see  Hewitt Names BISYS Leader as CEO and Chairman ), just ahead of last quarter’s painful revelations (see  Hewitt’s “Learning” Experience Weighs on Earnings ).   The stock closed at $25.26/share on Friday, a drop of 1.71%.  

The firm reported that that net revenues (revenues before reimbursements) declined 1% and 2% in the fourth quarter and 2006 fiscal year, respectively, including the respective planned impact of a $43 million and $129 million decline in third-party supplier revenues.   Reported net income in the quarter was just $23.0 million, roughly half the $40.5 million reported in the prior-year quarter.   The net loss for the year was $115.9 million (including $264 million of charges related to the HR BPO business), a near mirror image of the net income of $134.7 million in fiscal 2005.

HR BPO Charges

Among the pretax non-cash charges of $264 million related to the firm’s HR BPO business were:

  • $172 million of previously disclosed goodwill impairment,
  • $73 million of aggregate contract loss provisions reflecting the company’s revised profitability expectations for several existing contracts,
  • $10 million related to the first quarter termination of an HR BPO contract, and
  • $9 million of asset impairments.

Additionally, Hewitt reported higher performance-based compensation as compared to the prior year of $79 million, and higher stock-based compensation of $27 million, reflecting expense for stock options and restricted stock.   The firm also reported severance-related expense of $7 million related to selected staffing reductions completed early in the year.

Hewitt noted that the prior year included a non-cash pretax charge for the impairment of customer relationship intangible assets of approximately $10 million resulting from the termination of two HR BPO contracts, and severance-related expense of $9 million primarily related to the realignment of the firm’s client development group.

Outsourcing segment revenues declined 2% in Q4, to $504.5 million, from $517.2 million in the prior-year quarter.   However, Hewitt noted that, after adjusting for the “planned significant decline in third-party supplier revenues of $43 million”, and the favorable effects of acquisitions and foreign currency translation of approximately $2 million each, Outsourcing revenues increased 6%.   Outsourcing segment revenues declined 3% in fiscal 2006, to $1.98 billion, from $2.05 billion in the prior year, but after adjustments, rose 3%.   Hewitt said the growth was driven primarily by increased services to existing HR BPO clients, organic growth of existing benefits outsourcing clients, and one-time project work in benefits outsourcing, though it was partially offset by a decrease in direct revenues resulting from a prior-year contract termination.

Consulting segment revenues increased 5% in the fourth quarter, to $220.1 million, from $208.9 million in the prior-year quarter, and were up by an identical 5% in fiscal 2006, to $842.6 million, from $802.8 million in the prior year.

“Looking ahead, we’re refocusing on the areas that will drive greater value and more consistent, predictable results,” Fradin said in a press release.   “Our attention in the near-term will be on accelerating the growth of the Benefits Outsourcing and Consulting businesses, and redefining our approach to the HR BPO business,” he added.   As of September 30, 2006, Hewitt was live with 18.9 million end-user benefits participants and approximately 739,000 client employees with HR BPO services.