Edgar Filing: Towers Watson & Co.

TW-2014.12.31-10Q

UNITED STATES

SECURITIES 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, 2014



¨	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: 001-34594

___________________________________________________

TOWERS WATSON & CO.

(Exact name of registrant as specified in its charter)

___________________________________________________



Delaware		27-0676603
(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 all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

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



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

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of January 30, 2015, there were 69,568,719 outstanding shares of Class A Common Stock at a par value of $0.01 per share.

TOWERS WATSON & CO.

INDEX TO FORM 10-Q

For the Three and Six Months Ended December 31, 2014



	Page
PART I. FINANCIAL INFORMATION	1
Item 1. Financial Statements (Unaudited)	1
Condensed Consolidated Statements of Operations — Three and Six Months Ended December 31, 2014 and 2013	1
Condensed Consolidated Statements of Comprehensive Income — Three and Six Months Ended December 31, 2014 and 2013	2
Condensed Consolidated Balance Sheets — December 31, 2014 and June 30, 2014	3
Condensed Consolidated Statements of Cash Flows — Six Months Ended December 31, 2014 and 2013	4
Condensed Consolidated Statements of Changes in Stockholders’ Equity — Six Months Ended December 31, 2013 and 2014	5
Notes to the Condensed Consolidated Financial Statements	6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3. Quantitative and Qualitative Disclosures About Market Risk	41
Item 4. Controls and Procedures	42
PART II. OTHER INFORMATION	42
Item 1. Legal Proceedings	42
Item 1A. Risk Factors	42
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	42
Item 3. Defaults Upon Senior Securities	43
Item 4. Mine Safety Disclosures	43
Item 5. Other Information	43
Item 6. Exhibits	44
Signatures	45
Certifications

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

TOWERS WATSON & CO.

Condensed Consolidated Statements of Operations

(In thousands of U.S. dollars, except per share data)

(Unaudited)



	Three Months Ended December 31,						Six Months Ended December 31,
	2014			2013			2014			2013
Revenue	$	957,922		$	888,155		$	1,836,029		$	1,698,094
Costs of providing services:
Salaries and employee benefits	556,319			526,731			1,089,847			1,027,150
Professional and subcontracted services	71,630			69,074			133,835			130,474
Occupancy	36,756			34,782			72,829			68,327
General and administrative expenses	82,100			85,038			157,534			153,807
Depreciation and amortization	44,107			43,296			88,976			86,681
Transaction and integration expenses	—			808			—			808
	790,912			759,729			1,543,021			1,467,247
Income from operations	167,010			128,426			293,008			230,847

Interest income	894			560			1,957			1,089
Interest expense	(2,186		)	(2,027		)	(4,514		)	(4,463		)
Other non-operating income	34			5,652			865			5,690
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	165,752			132,611			291,316			233,163
Provision for income taxes	55,372			42,283			99,434			57,091
INCOME FROM CONTINUING OPERATIONS	110,380			90,328			191,882			176,072
(Loss)/income from discontinued operations, net of tax of $0, $38,286, $0, and $40,837	—			(403		)	—			2,041
NET INCOME BEFORE NON-CONTROLLING INTERESTS	110,380			89,925			191,882			178,113
Less: Income attributable to non-controlling interests	204			3,737			148			3,711
NET INCOME (attributable to common stockholders)	$	110,176		$	86,188		$	191,734		$	174,402
Basic earnings per share (attributable to common stockholders):
Income from continuing operations	$	1.58		$	1.22		$	2.74		$	2.43
Income from discontinued operations	—			—			—			0.03
Net income	$	1.58		$	1.22		$	2.74		$	2.46
Diluted earnings per share (attributable to common stockholders):
Income from continuing operations	$	1.57		$	1.21		$	2.72		$	2.42
Income from discontinued operations	—			—			—			0.03
Net income	$	1.57		$	1.21		$	2.72		$	2.45

Dividends declared per share	$	0.15		$	0.14		$	0.30		$	0.14

Weighted average shares of common stock, basic (000)	69,875			70,809			70,029			70,805
Weighted average shares of common stock, diluted (000)	70,262			71,213			70,429			71,130

See accompanying notes to the condensed consolidated financial statements

TOWERS WATSON & CO.

Condensed Consolidated Statements of Comprehensive Income

(In thousands of U.S. dollars)

(Unaudited)



	Three Months Ended December 31,						Six Months Ended December 31,
	2014			2013			2014			2013
Net income before non-controlling interests	$	110,380		$	89,925		$	191,882		$	178,113
Other comprehensive (loss)/income, net of tax:
Foreign currency translation	(79,502		)	17,825			(184,833		)	88,735
Defined pension and post-retirement benefit costs	2,844			3,419			5,719			6,531
Hedge effectiveness	92			(12		)	898			(1,030		)
Available-for-sale securities	(107		)	36			(235		)	222
Other comprehensive (loss)/income before non-controlling interests	(76,673		)	21,268			(178,451		)	94,458
Comprehensive income before non-controlling interests	33,707			111,193			13,431			272,571
Comprehensive (loss)/income attributable to non-controlling interest	(288		)	3,321			(399		)	3,097
Comprehensive income (attributable to common stockholders)	$	33,995		$	107,872		$	13,830		$	269,474

See accompanying notes to the condensed consolidated financial statements

TOWERS WATSON & CO.

Condensed Consolidated Balance Sheets

(In thousands of U.S. dollars, except share data)

(Unaudited)



	December 31, 2014			June 30, 2014
Assets
Cash and cash equivalents	$	621,391		$	727,849
Fiduciary assets	19,793			12,010
Short-term investments	45,438			122,761
Receivables from clients:
Billed, net of allowances of $9,977 and $8,075	539,738			507,213
Unbilled, at estimated net realizable value	308,243			314,020
	847,981			821,233
Other current assets	126,833			124,645
Total current assets	1,661,436			1,808,498
Fixed assets, net	375,210			374,444
Deferred income taxes	63,439			79,103
Goodwill	2,192,431			2,313,058
Intangible assets, net	604,518			657,293
Other assets	439,852			395,390
Total Assets	$	5,336,886		$	5,627,786
Liabilities
Accounts payable, accrued liabilities and deferred income	$	378,502		$	404,760
Employee-related liabilities	386,450			518,532
Fiduciary liabilities	19,793			12,010
Term loan - current	25,000			25,000
Other current liabilities	39,996			74,297
Total current liabilities	849,741			1,034,599
Revolving credit facility	50,000			—
Term loan	187,500			200,000
Accrued retirement benefits and other employee-related liabilities	699,857			768,024
Professional liability claims reserve	235,554			225,959
Other noncurrent liabilities	271,008			288,255
Total Liabilities	2,293,660			2,516,837
Commitments and contingencies
Stockholders’ Equity
Class A Common Stock — $0.01 par value: 300,000,000 shares authorized; 74,552,661 issued and 69,699,937 and 70,338,891 outstanding	746			746
Additional paid-in capital	1,865,888			1,849,119
Treasury stock, at cost — 4,852,724 and 4,213,770 shares	(362,989		)	(286,182		)
Retained earnings	1,893,545			1,722,927
Accumulated other comprehensive loss	(367,606		)	(189,702		)
Total Stockholders’ Equity	3,029,584			3,096,908
Non-controlling interest	13,642			14,041
Total Equity	3,043,226			3,110,949
Total Liabilities and Total Equity	$	5,336,886		$	5,627,786

See accompanying notes to the condensed consolidated financial statements

TOWERS WATSON & CO.

Condensed Consolidated Statements of Cash Flows

(In thousands of U.S. dollars)

(Unaudited)



	Six Months Ended December 31,
	2014			2013
Cash flows from/(used in) operating activities:
Net income before non-controlling interests	$	191,882		$	178,113
Adjustments to reconcile net income to net cash from/(used in) operating activities:
Provision for doubtful receivables from clients	11,157			566
Depreciation	54,160			49,097
Amortization of intangible assets	34,816			38,022
Gain on sale of discontinued operations, pretax	—			(18,480		)
Provision for deferred income taxes	24,569			51,276
Stock-based compensation	18,414			11,509
Other, net	535			(1,619		)
Changes in operating assets and liabilities
Receivables from clients	(76,970		)	47,340
Fiduciary assets	(7,783		)	110,743
Other current assets	(15,117		)	(858		)
Other noncurrent assets	717			(5,139		)
Accounts payable, accrued liabilities and deferred income	(31,885		)	(44,160		)
Employee-related liabilities	(104,651		)	(224,683		)
Fiduciary liabilities	7,783			(110,743		)
Accrued retirement benefits and other employee-related liabilities	(78,919		)	(104,386		)
Professional liability claims reserves	15,427			2,887
Other current liabilities	14,682			(762		)
Other noncurrent liabilities	(18,528		)	(256		)
Income tax related accounts	(38,389		)	1,599
Cash flows from/(used) in operating activities	1,900			(19,934		)
Cash flows from/(used in) investing activities:
Cash paid for business acquisitions	(1,255		)	(210,814		)
Cash transferred with discontinued operations	—			(25,066		)
Proceeds from discontinued operations	—			256,953
Cash acquired from business acquisitions	—			3,949
Fixed assets and software for internal use	(33,113		)	(38,566		)
Capitalized software costs	(33,507		)	(23,327		)
Purchases of investments of consolidated variable interest entity	—			(50,510		)
Purchases of held-to-maturity investments	(155,927		)	—
Redemptions of held-to-maturity investments	214,510			—
Purchases of available-for-sale securities	(1,677		)	(31,779		)
Sales and redemptions of available-for-sale securities	11,734			56,580
Cash flows from/(used in) investing activities	765			(62,580		)
Cash flows (used in)/from financing activities:
Borrowings under credit facility	275,000			144,100
Repayments under credit facility	(225,000		)	(109,100		)
Repayments of notes payable	(12,500		)	(12,500		)
Cash received from consolidated variable interest entity	—			50,510
Contingent retention liability	—			21,746
Cash paid on retention liability	(10,338		)	(1,939		)
Dividends paid	(20,204		)	(613		)
Repurchases of common stock	(81,410		)	(40,533		)
Payroll tax payments on vested shares	(10,833		)	(7,457		)
Excess tax benefits	4,618			9,800
Cash flows (used in)/from financing activities	(80,667		)	54,014
Effect of exchange rates on cash	(28,456		)	7,638
Decrease in cash and cash equivalents	(106,458		)	(20,862		)
Cash and cash equivalents at beginning of period	727,849			532,805
Cash and cash equivalents at end of period	$	621,391		$	511,943



Supplemental disclosures:
Cash paid for interest	$	1,956	$	1,931
Cash paid for income taxes, net of refunds	$	104,927	$	40,814
Transfers into consolidated investment funds	$	—	$	223,212

See accompanying notes to the condensed consolidated financial statements

TOWERS WATSON & CO.

Condensed Consolidated Statements of Changes in Stockholders’ Equity

(In thousands of U.S. Dollars and numbers of shares in thousands)

(Unaudited)



	Class A Common Stock Outstanding	Class A Common Stock		Class B Common Stock Outstanding	Class B Common Stock		Additional Paid-in Capital			Treasury Stock, at Cost			Retained Earnings			Accumulated Other Comprehensive (Loss)/Income			Non- Controlling Interest			Total
Balance as of June 30, 2013	69,178	$	692	5,374	$	54	$	1,850,448		$	(221,643	)	$	1,394,407		$	(299,464	)	$	20,340		$	2,744,834
Net income/(loss)	—	—		—	—		—			—			174,402			—			3,711			178,113
Other comprehensive income/(loss)	—	—		—	—		—			—			—			95,072			(614		)	94,458
Repurchases of common stock	—	—		—	—		—			(40,533		)	—			—			—			(40,533		)
Shares received for employee taxes upon vesting of restricted stock units	—	—		—	—		—			(7,457		)	—			—			—			(7,457		)
Exercises of stock options	—	—		—	—		(3,443		)	3,908			—			—			—			465
Vesting of restricted stock units	—	—		—	—		(24,128		)	16,928			—			—			—			(7,200		)
Acquisitions	—	—		—	—		6,717			—			—			—			(6,297		)	420
Redeemable non-controlling interest from consolidated variable interest entity	—	—		—	—		—			—			—			—			273,722			273,722
Class A Common Stock:
Cash dividends declared	—	—		—	—		—			—			(10,499		)	—			—			(10,499		)
Excess tax benefits	—	—		—	—		9,800			—			—			—			—			9,800
Stock-based compensation	—	—		—	—		12,546			—			—			—			—			12,546
Balance as of December 31, 2013	69,178	$	692	5,374	$	54	$	1,851,940		$	(248,797	)	$	1,558,310		$	(204,392	)	$	290,862		$	3,248,669

Balance as of June 30, 2014	74,552	$	746	—	$	—	$	1,849,119		$	(286,182	)	$	1,722,927		$	(189,702	)	$	14,041		$	3,110,949
Net income	—	—		—	—		—			—			191,734			—			148			191,882
Other comprehensive loss	—	—		—	—		—			—			—			(177,904		)	(547		)	(178,451		)
Repurchases of common stock	—	—		—	—		—			(81,410		)	—			—			—			(81,410		)
Shares received for employee taxes upon vesting of restricted stock units	—	—		—	—		—			(6,675		)	—			—			—			(6,675		)
Exercises of stock options	—	—		—	—		(2,298		)	2,354			—			—			—			56
Vesting of restricted stock units	—	—		—	—		(3,965		)	8,924			—			—			—			4,959
Class A Common Stock:
Cash dividends declared	—	—		—	—		—			—			(21,116		)	—			—			(21,116		)
Excess tax benefits	—	—		—	—		4,618			—			—			—			—			4,618
Stock-based compensation	—	—		—	—		18,414			—			—			—			—			18,414
Balance as of December 31, 2014	74,552	$	746	—	$	—	$	1,865,888		$	(362,989	)	$	1,893,545		$	(367,606	)	$	13,642		$	3,043,226

See accompanying notes to the condensed consolidated financial statements

TOWERS WATSON & CO.

Notes to the Condensed Consolidated Financial Statements

(Tabular amounts are in thousands, except per share data)

(Unaudited)

Note 1 — Organization and Basis of Presentation.

The accompanying unaudited quarterly condensed consolidated financial statements of Towers Watson & Co. (“Towers Watson”, the “Company” or “we”) and our subsidiaries are presented in accordance with 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 the information and footnotes required by U.S. generally accepted accounting principles (“GAAP”). In the opinion of management, these condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair presentation of the condensed consolidated financial statements and results for the interim periods. All intercompany accounts and transactions have been eliminated in consolidation. The condensed consolidated financial statements should be read together with the Towers Watson audited consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2014, which was filed with the SEC on August 15, 2014, and may be accessed via EDGAR on the SEC’s web site at www.sec.gov. Balance sheet data as of June 30, 2014 was derived from Towers Watson’s audited financial statements.

Our fiscal year 2015 began July 1, 2014 and ends June 30, 2015.

The results of operations for the three and six months ended December 31, 2014 are not necessarily indicative of the results that can be expected for the entire fiscal year ending June 30, 2015. The results reflect certain estimates and assumptions made by management including those estimates used in calculating acquisition consideration and fair value of tangible and intangible assets and liabilities, professional liability claims, estimated bonuses, valuation of billed and unbilled receivables, and anticipated tax liabilities that affect the amounts reported in the condensed consolidated financial statements and related notes.

As discussed further in Note 2 – Acquisitions and Divestitures, we have classified the operating results of our reinsurance and property and casualty insurance brokerage business as discontinued operations for all periods presented in our condensed consolidated statements of operations. This business was sold in November 2013.

Recent Accounting Pronouncements.

Not yet adopted

On May 28, 2014, the Financial Accounting Standards Board ("FASB") and International Accounting Standards Board ("IASB") issued their final standard on revenue from contracts with customers. The standard, issued as Accounting Standards Update ("ASU") 2014-09 by the FASB, outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers, and supersedes most current revenue recognition guidance. The core principle of the revenue model is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU applies to all contracts with customers, except those that are within the scope of other topics in the FASB Accounting Standards Codification. Compared with current U.S. GAAP, the ASU also requires significantly expanded disclosures about revenue recognition. The ASU is effective for interim and annual reporting periods that begin after December 15, 2016, and early adoption is prohibited. The Company is currently evaluating the impact of adopting this provision.

On June 19, 2014, the FASB issued ASU 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide a Performance Target Could Be Achieved After the Requisite Service Period. The update is intended to resolve the diverse accounting treatment of these types of awards in practice. The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in "Compensation - Stock Compensation (Topic 718)" as it relates to awards with performance conditions that affect vesting to account for such awards. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved, and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The ASU is effective for interim and annual reporting periods that begin after December 15, 2015. The Company does not expect the adoption of this pronouncement to have an impact on our financial statements as this guidance mirrors our existing policy for such share-based awards.

Adopted

On June 7, 2013, the FASB issued ASU 2013-08, “Financial Services – Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements,” which amends the criteria an entity would need to meet to qualify as an investment company under Accounting Standards Codification ("ASC") 946. The ASU (1) introduces new disclosure requirements that apply to all investment companies and, (2) amends the measurement criteria for certain interests in other investment companies. The ASU also amends the requirements in ASC 810 related to qualifying for the “investment-company deferral” in ASU 2010-10, as well as the requirements in ASC 820 related to qualifying for the “net asset value practical expedient” in ASU 2009-12. We manage certain funds that are considered variable interest entities and for which our management fee is considered a variable interest. These funds qualify for the “investment-company deferral” in ASU 2010-10, and therefore are subject to the consolidation guidance prior to the issuance of ASU 2009-17. The ASU is effective for annual periods that begin after December 15, 2013 and interim periods within those annual periods. Early adoption is prohibited. The Company has evaluated whether these funds continued to qualify for the “investment-company deferral” based on the amended investment company criteria proscribed by ASU 2013-08 and concluded that there were no changes to the Company's original assessments. Therefore, there is no impact to the Company's financial statements or disclosures.

Note 2 — Acquisitions and Divestitures.

Acquisitions

Liazon Corporation Acquisition

On November 22, 2013, Towers Watson purchased Liazon Corporation (“Liazon”), a business focused on developing and delivering private benefit exchanges for active employees, for $204.3 million in cash and assumed equity awards valued at $8.0 million. See Note 11 for further information on the assumed equity awards. The Liazon business became a new line of business, which complements our existing OneExchange offerings under the Exchange Solutions segment. Together these solutions help organizations, both large and small, deliver self- and fully-insured benefits to both employees as well as pre- and post-65 retirees. We included the results of Liazon's operations since the acquisition date in both the Exchange Solutions segment and in our condensed consolidated financial statements.

We have recorded the tangible assets received, liabilities assumed, and the fair value of intangibles for Liazon. The intangibles included developed technology, valued at $34.3 million, and other intangibles that were collectively immaterial. Our estimate of fair value for the technology intangible was developed using the multi-period excess earnings method valuation model. Significant assumptions used in the valuation were estimated revenues and expenses, contributory asset charges, required rates of return, and discount rates. We also recorded a net deferred tax asset of $9.2 million. It was determined that total consideration was $212.3 million, and we recorded $172.9 million of goodwill related to the acquisition of Liazon.

Divestitures

Sale of our Brokerage business

On September 19, 2013, we entered into a definitive agreement to sell our Reinsurance and Property and Casualty Insurance Brokerage (“Brokerage”) business to Jardine Lloyd Thompson Group plc (“JLT”) for cash consideration of $250 million. The Brokerage business was a component of our Risk and Financial Services segment. The sale closed during our second quarter of fiscal year 2014. We divested this business as part of our strategy to focus on other areas of the business. We continue to focus on risk consulting, software and other services for the insurance industry. The business was branded for a transitional period of 10 months from the closing date as JLT Towers Re.

As part of the transaction, we entered into an Alliance Agreement with JLT that will ensure clients have continued access to our risk consulting and software services. This agreement will also provide JLT Towers Re with continued use of Towers Watson’s proprietary actuarial models and software.

The Company assessed the guidance under ASC 205 to determine if the Alliance Agreement or any other terms of the sale agreement constituted significant continuing direct cash flows or significant continuing involvement with the Brokerage business after the sale. The Company compared the cash flows expected to be recognized from the Brokerage business as a result of the continuation or migration of activities after the disposal transaction to the projected generation of cash flows by the Brokerage business that we could have expected absent the disposal transaction. Based on this analysis, the expected annual cash inflows or outflows related to the portion of revenues shared or commissions received or paid and software sales under the Alliance Agreement were each expected to represent approximately 1% or less of the annual revenues generated by our Brokerage business operations prior to the disposal. This was deemed not significant. Actual results have been within the original expectations and continue to be not significant.

The Company also calculated the expected cash flows associated with the placement of its insurance and reinsurance arrangements. The Company agreed to use JLT as its broker-of-record for all insurance and reinsurance transactions to which the Company’s wholly-owned captive insurance company, Stone Mountain Insurance Company, is a party through November 2018. These amounts were previously eliminated as intercompany transactions, and were $2.8 million for fiscal year 2014. Additionally, the Company agreed to a Transitional Services Agreement with JLT for a two-year period ending November 5, 2015. The Company expects to incur approximately $6.3 million each year in occupancy or other infrastructure costs, which were prepaid as part of deal consideration or will be repaid by JLT over the two-year period. The cash flows associated with these arrangements represented approximately 7.4% of the annual expenses generated by our Brokerage operations prior to the disposal, which was deemed not significant.

The Company noted that none of the aforementioned agreements or arrangements constituted significant continuing involvement because they do not afford the Company the ability to influence the financial or operating decisions of JLT. Accordingly, we concluded that the continuing cash flows expected after the sale of our Brokerage business did not preclude discontinued operations presentation, and the Company therefore classified the results of our Brokerage business’s operations as discontinued operations for all periods presented in our condensed consolidated statements of operations. There was no revenue or income from discontinued operations in the current fiscal year. The following selected financial information relates to the Brokerage business’s operations for the three and six months ended December 31, 2013:



	Three Months Ended December 31, 2013			Six Months Ended December 31, 2013
Revenue from discontinued operations	$	22,564		$	63,762

Income from discontinued operations before taxes	9,894			24,398
Tax expense on discontinued operations	3,692			8,801
Net income from discontinued operations	$	6,202		$	15,597

Gain from sale of discontinued operations	27,989			18,480
Tax expense on gain from sale of discontinued operations	34,594			32,036
Net loss from sale of discontinued operations	(6,605		)	(13,556		)
Total net (loss)/income from discontinued operations	$	(403	)	$	2,041

Only the fiduciary assets and liabilities associated with the European businesses were sold. North American fiduciary assets and liabilities were not disposed of during the sale due to certain legal restrictions which do not permit the transfer of these assets and liabilities. The subsequent settlement of the North American fiduciary assets and liabilities was presented within the operating section of our statement of cash flows for the year ended June 30, 2014.

In addition to the stated $250 million cash consideration stipulated in the sale agreement, a purchase price adjustment of $31.4 million was paid to the Company by JLT representing the value of net assets transferred in the sale.

As part of the sale, the Company agreed to repay JLT for retention payments made to certain employees of Brokerage if they remain with the business on the 30-day anniversary of the sale and the first and second anniversary of the sale. The value ascribed to this portion of the obligation is $21.7 million at the time of the sale. The remaining liability at December 31, 2014 is carried at fair value on the accompanying condensed consolidated balance sheets (see Note 5 – Fair Value Measurements). The total amount has been classified as current or non-current liabilities based on the expected payment dates.

The obligation for retention payments and certain other negotiated terms reduced total consideration received at close to $215.1 million. Total transaction and integration costs were approximately $6.4 million. We finalized the completion accounts and the purchase price adjustments during the third quarter of fiscal 2014. Our final pre-tax gain on the sale was $24.0 million. The sale of our Brokerage business resulted in a significant taxable gain since the disposal of the goodwill and intangible assets associated with the business was not tax-deductible.

Note 3 — Investments.

Held-to-maturity - Our held-to-maturity investments are comprised of term deposits, certificates of deposit, and certain bonds with original maturities greater than 90 days. As of December 31, 2014 and June 30, 2014, all held-to-maturity investments were included in short-term investments in the accompanying condensed consolidated balance sheet. Proceeds from maturities of held-to-maturity investments were $214.5 million during the six months ended December 31, 2014, resulting in immaterial realized gains. There were no proceeds from maturities of held-to-maturity investments during the six months ended December 31, 2013.

Available-for-sale - Our available-for-sale securities are comprised of equity securities and mutual funds / exchange-traded funds. Proceeds from sales and maturities of investments of available-for-sale securities during the six months ended December 31, 2014 were $11.7 million, resulting in immaterial gains. Proceeds from sales and maturities of investments of available-for-sale securities during the six months ended December 31, 2013 were $56.6 million, resulting in immaterial gains. Also during the six months ended December 31, 2013, the Company sold an available-for-sale security valued at $1.6 million as part of the divestiture of our Brokerage business.

Additional information on the Company's investments is provided in the following table as of December 31, 2014 and June 30, 2014:



	As of December 31, 2014									As of June 30, 2014
	Amortized Cost		Unrealized Gains		Unrealized Losses			Estimated Fair Value		Amortized Cost		Unrealized Gains		Unrealized Losses			Estimated Fair Value
Short Term Investments:
Held-to-maturity:
Term deposits & Certificates of deposits	$	18,623	$	—	$	—		$	18,623	$	107,556	$	—	$	—		$	107,556
Fixed income securities	21,840		—		(97		)	21,743		—		—		—			—
Available-for-sale:
Equity securities	102		—		(13		)	89		126		7		(3		)	130
Mutual funds and exchange-traded funds	4,999		2		(18		)	4,983		15,033		42		—			15,075
Total Short-Term Investments:	45,564		2		(128		)	45,438		122,715		49		(3		)	122,761
Other Assets:
Available-for-sale:
Mutual funds and exchange-traded funds	45,927		—		(718		)	45,209		42,147		451		—			42,598
Total Investments in Other Assets	$	45,927	$	—	$	(718	)	$	45,209	$	42,147	$	451	$	—		$	42,598

For all investments other than fixed income securities, amortized cost represents the cost basis of the investment as of the purchase date. There were no material investments that have been in a continuous loss position for more than twelve months, and there have been no other-than-temporary impairments recognized. The aggregate fair value of investments with unrealized losses as of December 31, 2014 was $70.3 million. The aggregate fair value of investments with unrealized losses as of June 30, 2014 was immaterial.

Note 4 — Goodwill and Intangible Assets.

The components of goodwill are outlined below for the six months ended December 31, 2014:



	Benefits			Risk and Financial Services			Talent and Rewards			Exchange Solutions			All Other		Total
Balance as of June 30, 2014	$	1,290,789		$	391,549		$	113,862		$	515,644		$	1,214	$	2,313,058
Goodwill related to acquisitions	—			—			—			(1,255		)	—		(1,255		)
Goodwill reallocated in segment restructuring	(54,052		)	—			—			54,052			—		—
Translation adjustment	(83,203		)	(28,816		)	(7,353		)	—			—		(119,372		)
Balance as of December 31, 2014	$	1,153,534		$	362,733		$	106,509		$	568,441		$	1,214	$	2,192,431

Included in the Benefits and Exchange Solutions information is a $54.1 million preliminary reclassification of goodwill related to the segment reorganization, which was effective on July 1, 2014. See Note 13 for additional information regarding the segment reorganization.

The following table reflects changes in the net carrying amount of the components of finite-lived intangible assets for the six months ended December 31, 2014:



	Customer related intangible			Core/ developed technology			Favorable lease agreements			Total
Balance as of June 30, 2014	$	198,855		$	75,827		$	2,617		$	277,299
Amortization	(22,741		)	(12,075		)	(474		)	(35,290		)
Translation adjustment	(7,612		)	(512		)	(17		)	(8,141		)
Balance as of December 31, 2014	$	168,502		$	63,240		$	2,126		$	233,868

We record amortization related to our intangible assets. Exclusive of the amortization of our favorable lease agreements, for the three and six months ended December 31, 2014, we recorded $17.3 million and $34.8 million, respectively, of amortization, and for the three and six months ended December 31, 2013, we recorded $18.7 million and $38.0 million, respectively, of amortization. These amounts include amortization that has been classified within income from discontinued operations on the accompanying condensed consolidated statements of operations.

Our indefinite-lived non-amortizable intangible assets consist of acquired trade names. The carrying value of these assets was $370.7 million and $380.0 million as of December 31, 2014 and June 30, 2014, respectively. The change during the period was due to foreign currency translation.

Our acquired unfavorable lease liabilities were $8.7 million and $10.2 million as of December 31, 2014 and June 30, 2014, respectively, and are recorded in the other noncurrent liabilities in the condensed consolidated balance sheet. The change for the six months ended December 31, 2014 was comprised primarily of a reduction to rent expense of $1.5 million.

The following table reflects the carrying value of finite-lived intangible assets and liabilities as of December 31, 2014 and June 30, 2014:



	As of December 31, 2014				As of June 30, 2014
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Finite-lived intangible assets and liabilities:
Trade name	$	520	$	520	$	520	$	520
Customer related intangibles	371,767		203,265		391,201		192,346
Core/developed technology	174,633		111,393		175,948		100,121
Favorable lease agreements	6,407		4,281		6,488		3,871
Total finite-lived intangible assets	$	553,327	$	319,459	$	574,157	$	296,858

Unfavorable lease agreements	24,004		15,347		24,818		14,588
Total finite-lived intangible liabilities	$	24,004	$	15,347	$	24,818	$	14,588

Certain trademark and trade-name intangible assets have indefinite useful lives and are not amortized. The weighted average remaining life of amortizable intangible assets and liabilities at December 31, 2014 was 4.7 years.

The table below reflects the following for the remainder of fiscal 2015 and for subsequent fiscal years:

1) Future estimated amortization expense for amortizable intangible assets consisting of customer related intangibles and core/developed technology, and

2) The rent offset resulting from the amortization of the net lease intangible assets and liabilities:



Fiscal year ending June 30,	Amortization		Rent (Offset) Expense
2015	$	34,758	$	(907	)
2016	55,319		(1,594		)
2017	51,123		(1,867		)
2018	41,175		(1,981		)
2019	26,661		(315		)
Thereafter	22,706		133
Total	$	231,742	$	(6,531	)

Note 5 — Fair Value Measurements.

We have categorized our financial instruments into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets and liabilities (Level 1) and lowest priority to unobservable inputs (Level 3). In some cases, the inputs used to measure fair value might fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety.

Financial assets and liabilities recorded in the accompanying condensed consolidated balance sheets are categorized based on the inputs in the valuation techniques as follows:

Level 1 — Financial assets and liabilities whose values are based on quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date.

Level 2 — Financial assets and liabilities whose values are based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

Level 3 — Financial assets and liabilities whose values are based on unobservable inputs for the asset or liability.

The following presents our assets and liabilities measured at fair value on a recurring basis at December 31, 2014 and June 30, 2014:



	Fair Value Measurements on a Recurring Basis at December 31, 2014
	Level 1		Level 2		Level 3		Total
Assets:
Available-for-sale securities:
Equity securities	$	89	$	—	$	—	$	89
Mutual funds / exchange traded funds	50,192		—		—		50,192
Derivatives:
Foreign exchange forwards (a)	—		2,000		—		2,000
Liabilities:
Derivatives:
Foreign exchange forwards (a)	—		906		—		906
Contingent Liabilities:
Retention bonus liability (b)	—		—		9,914		9,914



	Fair Value Measurements on a Recurring Basis at June 30, 2014
	Level 1		Level 2		Level 3		Total
Assets:
Available-for-sale securities:
Equity securities	$	130	$	—	$	—	$	130
Mutual funds / exchange traded funds	57,673		—		—		57,673
Derivatives:
Foreign exchange forwards (a)	—		639		—		639
Liabilities:
Derivatives:
Foreign exchange forwards (a)	—		550		—		550
Contingent Liabilities:
Retention bonus liability (b)	—		—		19,998		19,998

_________________________


(a)	These derivative investments are included in other current assets or accounts payable, accrued liabilities and deferred income on the accompanying condensed consolidated balance sheet. See Note 6 for further information on our derivative investments.


(b)	This liability is included in other current liabilities and other noncurrent liabilities at June 30, 2014, and other current liabilities at December 31, 2014, on the accompanying condensed consolidated balance sheet. The fair value was determined using a discounted cash flow model.

We record gains or losses related to the changes in the fair value of our financial instruments for foreign exchange forward contracts accounted for as foreign currency hedges in general and administrative expenses in the condensed consolidated statements of operations. For the three and six months ended December 31, 2014, we recorded gains of $0.5 million and $0.4 million, respectively, for instruments still held at December 31, 2014. For the three and six months ended December 31, 2013, we recorded gains of $0.3 million and $0.9 million, respectively, for instruments still held at December 31, 2013. There were no material gains or losses recorded in the condensed consolidated statements of operations for available-for-sale securities still held at December 31, 2014 or 2013.

We generally use third-party pricing services in determining the fair value of our investments. The pricing services use observable inputs when available. These values take into account recent market activity as well as other market observable data such as interest rate, spread and prepayment information. We perform various procedures to evaluate the accuracy of the fair values provided by the third-party service provider. These procedures include obtaining a detailed understanding of the models, inputs, and assumptions used in developing prices provided by the pricing services. This understanding includes a review of the vendors’ Service Organization Controls report and, as necessary, discussions with valuation resources at the pricing services. We obtain the information necessary to assess the model, inputs and assumptions used to comply with U.S. GAAP, including disclosure requirements. Additional information related to the Company’s fair valuation process is included in our financial statements and the notes thereto as filed in our 2014 Annual Report on Form 10-K on August 15, 2014.

Transfers in and out of Level 1 and 2

There were no securities transferred between Level 1 and Level 2 for the three and six months ended December 31, 2014 or the year ended June 30, 2014. The Company’s policy is to recognize transfers in and transfers out as of the beginning of the reporting period.

Level 3 Financial Instruments

The fair value of the retention bonus liability is determined using a discounted cash flows model. The significant unobservable inputs used in the discounted cash flows model are a credit-adjusted interest rate of 1.8% and an assumed forfeiture rate of 7.0%. Changes in each of these unobservable inputs would have adjusted the fair value as follows:


•	Interest rate - The lowest and highest interest rates that we could have used to value the bonus retention liability are 0.5% to 10.0%, which would have resulted in values of $10.0 million and $9.2 million, respectively.


•	Forfeiture rates - Changing the assumed forfeiture rate to either 5.0% or 10.0% would have resulted in values of $10.1 million and $9.6 million, respectively.



Fair Value Measurements using significant unobservable inputs (Level 3):
Beginning balance - June 30, 2014	$	(19,998	)
Payments	10,338
Unrealized gains/(losses)	(254		)
Ending balance - December 31, 2014	$	(9,914	)

Note 6 — Derivative Financial Instruments.

We are exposed to market risk from changes in foreign currency exchange rates. Where possible, we identify exposures in our business that can be offset internally. Where no natural offset is identified, we may choose to enter into various derivative transactions. These instruments have the effect of reducing our exposure to unfavorable changes in foreign currency rates. We do not enter into derivative transactions for trading purposes.

A number of our foreign subsidiaries receive revenues (through either internal or external billing) in currencies other than their functional currency. As a result, the foreign subsidiary’s functional currency revenue will fluctuate as the currency exchange rates change. To reduce this variability, we use foreign exchange forward contracts to hedge the foreign exchange risk of the forecasted collections. We have designated these derivatives as cash flow hedges of the forecasted foreign currency denominated collections. We also use derivative financial contracts, principally foreign exchange forward contracts, to hedge other non-functional currency obligations. These exposures primarily arise from intercompany lending and other liabilities denominated in foreign currencies. At December 31, 2014, the longest outstanding maturity was 15 months. As of December 31, 2014, a net $1.7 million pretax gain was deferred in accumulated other comprehensive income and is expected to be recognized in general and administrative expenses during the next 12 months when the hedged revenue is recognized.

As of December 31, 2014 and June 30, 2014, we had cash flow and economic hedges with a notional value of $62.2 million and $49.5 million, respectively, to hedge cash flow and balance sheet exposures. We determine the fair value of our foreign currency derivatives based on quoted prices received from the counterparty for each contract, which we evaluate using pricing models whose inputs are observable. The net fair value of all derivatives held as of December 31, 2014 and June 30, 2014 was an asset of $1.1 million and an asset of $0.1 million, respectively. See Note 5, Fair Value Measurements, for further information regarding the determination of fair value.

The fair value of our derivative instruments held as of December 31, 2014 and June 30, 2014 and their location in the condensed consolidated balance sheet are as follows:



	Derivative assets					Derivative liabilities
	Balance sheet location	Fair value				Balance sheet location	Fair value
		December 31, 2014		June 30, 2014			December 31, 2014			June 30, 2014
Derivatives designated as hedging instruments:
Foreign exchange forwards	Other current assets	$	1,937	$	618	Accounts payable, accrued liabilities and deferred income	$	(255	)	$	(513	)
Derivatives not designated as hedging instruments:
Foreign exchange forwards	Other current assets	63		21		Accounts payable, accrued liabilities and deferred income	(651		)	(37		)
Total derivative assets (liabilities)		$	2,000	$	639		$	(906	)	$	(550	)

The effects of derivative instruments that are designated as hedging instruments on the condensed consolidated statements of operations and the condensed consolidated statements of changes in stockholders’ equity for the three and six months ended December 31, 2014 and 2013 are as follows:



Three Months Ended December 31,	Gain/(loss) recognized in OCI (effective portion)					Location of gain/(loss) reclassified from OCI into income (effective portion)	Gain/(loss) reclassified from OCI into income (effective portion)					Location of gain recognized in income (ineffective portion and amount excluded from effectiveness testing)	Gain recognized in income (ineffective portion and amount excluded from effectiveness testing)
	2014		2013				2014		2013				2014		2013
Foreign exchange forwards	$	589	$	(431	)	General and administrative expenses	$	437	$	(394	)	General and administrative expenses	$	38	$	2
Total	$	589	$	(431	)		$	437	$	(394	)		$	38	$	2



Six Months Ended December 31,	Gain/(loss) recognized in OCI (effective portion)					Location of gain/(loss) reclassified from OCI into income (effective portion)	Gain/(loss) reclassified from OCI into income (effective portion)					Location of gain recognized in income (ineffective portion and amount excluded from effectiveness testing)	Gain recognized in income (ineffective portion and amount excluded from effectiveness testing)
	2014		2013				2014		2013				2014		2013
Foreign exchange forwards	$	1,774	$	(2,062	)	General and administrative expenses	$	281	$	(332	)	General and administrative expenses	$	13	$	3
Total	$	1,774	$	(2,062	)		$	281	$	(332	)		$	13	$	3

Included in the notional values above are $25.3 million and $24.2 million as of December 31, 2014 and June 30, 2014, respectively, of derivatives held as economic hedges primarily to hedge intercompany loans denominated in currencies other than the functional currency. The effects of derivatives that have not been designated as hedging instruments on the condensed consolidated statements of operations for the three and six months ended December 31, 2014 and 2013 are as follows:



		(Loss)/gain recognized in income
		Three Months Ended December 31,						Six Months Ended December 31,
Derivatives not designated as hedging instruments:	Location of (loss)/gain recognized in income	2014			2013			2014			2013
Foreign exchange forwards	General and administrative expenses	$	(796	)	$	(85	)	$	(2,691	)	$	520
Total		$	(796	)	$	(85	)	$	(2,691	)	$	520

Note 7 — Retirement Benefits.

Defined Benefit Plans

Towers Watson sponsors both qualified and non-qualified defined benefit pension plans and other post-retirement benefit plans in North America and Europe. As of June 30, 2014, these funded and unfunded plans represented 98 percent of Towers Watson’s pension and other post-retirement benefit obligations and are disclosed herein. Towers Watson also sponsors funded and unfunded defined benefit pension plans in certain other countries as well, representing the remaining two percent of the liability. All expenses and contributions presented in this note are inclusive of amounts classified as discontinued operations in the accompanying condensed consolidated statements of operations.

Components of Net Periodic Benefit Cost for Defined Benefit Pension Plans

The following table sets forth the components of net periodic benefit cost for the Company’s defined benefit pension plan for North America and Europe for the three and six months ended December 31, 2014 and 2013:



	Three Months Ended December 31,
	2014						2013
	North America			Europe			North America			Europe
Service cost	$	17,683		$	3,190		$	17,538		$	3,074
Interest cost	34,522			9,883			35,212			10,249
Expected return on plan assets	(53,078		)	(12,533		)	(47,181		)	(11,532		)
Amortization of net loss	4,573			3,123			5,475			2,250
Amortization of prior service (credit)/cost	(2,095		)	10			(2,095		)	11
Net periodic benefit cost	$	1,605		$	3,673		$	8,949		$	4,052



	Six Months Ended December 31,
	2014						2013
	North America			Europe			North America			Europe
Service cost	$	35,894		$	6,562		$	35,326		$	6,039
Interest cost	69,153			20,318			70,566			20,096
Expected return on plan assets	(106,368		)	(25,758		)	(94,407		)	(22,589		)
Amortization of net loss	8,951			6,425			11,124			4,419
Amortization of prior service (credit)/cost	(4,190		)	21			(4,189		)	21
Net periodic benefit cost	$	3,440		$	7,568		$	18,420		$	7,986

The decrease in our North American pension expense was primarily driven by an increase in the expected return on assets. This higher expected return in fiscal year 2015 relates to larger pension asset values at the beginning of the fiscal year caused by favorable investment returns in fiscal year 2014.

Components of Net Periodic Benefit Cost for Other Postretirement Plans

The following table sets forth the components of net periodic benefit cost for the Company’s post-retirement plans for the three and six months ended December 31, 2014 and 2013:



	Three Months Ended December 31,						Six Months Ended December 31,
	2014			2013			2014			2013
Service cost	$	320		$	366		$	641		$	734
Interest cost	2,042			2,220			4,094			4,442
Expected return on plan assets	(24		)	(28		)	(48		)	(56		)
Amortization of net gain	(440		)	(433		)	(880		)	(863		)
Amortization of prior service credit	(1,726		)	(1,751		)	(3,452		)	(3,503		)
Net periodic benefit cost	$	172		$	374		$	355		$	754

Employer Contributions to Defined Benefit Pension Plans

The Company made $31.1 million in contributions to the North American plans during the first six months of fiscal year 2015, and anticipates making $4.9 million in contributions over the remainder of the fiscal year. The Company made $31.3 million in contributions to European plans during the first six months of fiscal year 2015, and anticipates making $15.3 million in contributions over the remainder of the fiscal year.

Defined Contribution Plans

The cost of the Company's contributions to the various U.S. defined contribution plans amounted to $6.5 million and $7.5 million for the three months ended December 31, 2014 and 2013, respectively, and to $11.1 million and $13.5 million for the six months ended December 31, 2014 and 2013, respectively.

The cost of the Company's contributions to the various U.K. defined contribution plans amounted to $4.9 million and $4.1 million for the three months ended December 31, 2014 and 2013, respectively, and to $9.9 million for each of the six months ended December 31, 2014 and 2013.

Note 8 — Debt, Commitments and Contingent Liabilities.

The debt, commitments and contingencies described below are currently in effect and would require Towers Watson, or domestic subsidiaries, to make payments to third parties under certain circumstances. In addition to commitments and contingencies specifically described below, Towers Watson has historically provided guarantees on an infrequent basis to third parties in the ordinary course of business.

Towers Watson Senior Credit Facility

On November 7, 2011, Towers Watson and certain subsidiaries entered into a five-year, $500 million revolving credit facility, which amount may be increased by an aggregate amount of $250 million, subject to the satisfaction of customary terms and conditions, with a syndicate of banks (the “Senior Credit Facility”). Borrowings under the Senior Credit Facility bear interest at a spread to either LIBOR or the Prime Rate. During the six months ended December 31, 2014 and 2013, the weighted-average interest rate on borrowings under the Senior Credit Facility was 1.40% and 1.98%, respectively. We are charged a quarterly commitment fee, currently 0.175% of the Senior Credit Facility, which varies with our financial leverage and is paid on the unused portion of the Senior Credit Facility. Obligations under the Senior Credit Facility are guaranteed by Towers Watson and all of its domestic subsidiaries (other than Professional Consultants Insurance Company (“PCIC”), a majority-owned captive insurance company, and Stone Mountain Insurance Company (“SMIC”), a wholly-owned captive insurance company).

The Senior Credit Facility contains customary representations and warranties and affirmative and negative covenants. The Senior Credit Facility requires Towers Watson to maintain certain financial covenants that include a minimum Consolidated Interest Coverage Ratio and a maximum Consolidated Leverage Ratio (which terms in each case are defined in the Senior Credit Facility). In addition, the Senior Credit Facility contains restrictions on the ability of Towers Watson to, among other things, incur additional indebtedness; pay dividends; make distributions; create liens on assets; make acquisitions; dispose of property; engage in sale-leaseback transactions; engage in mergers or consolidations, liquidations and dissolutions; engage in certain transactions with affiliates; and make changes in lines of businesses. As of December 31, 2014, we were in compliance with our covenants.

As of December 31, 2014, Towers Watson had borrowings of $50.0 million outstanding under the Senior Credit Facility.

Letters of Credit under the Senior Credit Facility

As of December 31, 2014, Towers Watson had standby letters of credit totaling $21.4 million associated with our captive insurance companies in the event that we fail to meet our financial obligations. Additionally, Towers Watson had $0.8 million of standby letters of credit covering various other existing or potential business obligations. The aforementioned letters of credit are issued under the Senior Credit Facility, and therefore reduce the amount that can be borrowed under the Senior Credit Facility by the outstanding amount of these standby letters of credit.

Term Loan Agreement Due June 2017

On June 1, 2012, the Company entered into a five-year $250 million amortizing term loan facility (“the Term Loan”) with a consortium of banks. The interest rate on the term loan is based on the Company’s choice of one, three or six month LIBOR plus a spread of 1.25% to 1.75%, or alternatively the bank base rate plus 0.25% to 0.75%. The spread to each index is dependent on the Company’s consolidated leverage ratio. The weighted-average interest rate on the Term Loan during the six months ended December 31, 2014 and 2013 was 1.40% and 1.43%, respectively. The Term Loan amortizes at a rate of $6.3 million per quarter, beginning in September 2013, with a final maturity date of June 1, 2017. The Company has the right to prepay a portion or all of the outstanding Term Loan balance on any interest payment date without penalty. At December 31, 2014, the balance on the Term Loan was $212.5 million.

This agreement contains substantially the same terms and conditions as our Senior Credit Facility, including guarantees from all of the domestic subsidiaries of Towers Watson (other than PCIC and SMIC). The Company entered into the Term Loan as part of the financing of our acquisition of Extend Health on May 29, 2012.

Indemnification Agreements

Towers Watson has various agreements which provide that it may be obligated to indemnify the other party to the agreement with respect to certain matters. Generally, these indemnification provisions are included in contracts arising in the normal course of business and in connection with the purchase and sale of certain businesses. Although it is not possible to predict the maximum potential amount of future payments that may become due under these indemnification agreements because of the conditional nature of Towers Watson’s obligations and the unique facts of each particular agreement, Towers Watson does not believe any potential liability that might arise from such indemnity provisions is probable or material. There are no provisions for recourse to third parties, nor are any assets held by any third parties that any guarantor can liquidate to recover amounts paid under such indemnities.

Legal Proceedings

From time to time, Towers Watson and its subsidiaries are parties to various lawsuits, arbitrations or mediations that arise in the ordinary course of business. Towers Watson was formed on January 1, 2010, upon the merger (the “Merger”) of Watson Wyatt Worldwide, Inc. (“Watson Wyatt”) and Towers, Perrin, Forster & Crosby, Inc. (“Towers Perrin”), and its subsidiaries include both Watson Wyatt and Towers Perrin. The matters reported on below are the material pending claims against Towers Watson and its subsidiaries. We do not expect the impact of claims not described below to be material to Towers Watson’s financial statements. We also receive subpoenas in the ordinary course of business and, from time-to-time, receive requests for information in connection with governmental investigations.

Towers Watson carries substantial professional liability insurance which, effective July 1, 2010, has been provided by SMIC. For the policy period beginning July 1, 2011 certain changes were made to our professional liability insurance program. Our professional liability insurance for each annualized policy period commencing July 1, 2011, up to and including the policy period commencing July 1, 2014, includes a $10 million aggregate self-insured retention above the $1 million self-insured retention per claim, including the cost of defending such claims. SMIC provides us with $40 million of coverage per claim and in the aggregate, above the retentions, including the cost of defending such claims. SMIC secured $25 million of reinsurance from unaffiliated reinsurance companies in excess of the $15 million SMIC retained layer. Excess insurance attaching above the SMIC coverage is provided by various unaffiliated commercial insurance companies.

This structure effectively results in Towers Watson and SMIC bearing the first $25 million of loss per occurrence or in the aggregate above the $1 million per claim self-insured retention. As a wholly-owned captive insurance company, SMIC is consolidated into our financial statements.

Before the Merger, Watson Wyatt and Towers Perrin each obtained substantial professional liability insurance from PCIC. A limit of $50 million per claim and in the aggregate was provided by PCIC subject to a $1 million per claim self-insured retention. PCIC secured reinsurance of $25 million attaching above the $25 million PCIC retained layer from unaffiliated reinsurance companies. Our ownership interest in PCIC is 72.86%. As a consequence, PCIC’s results are consolidated in Towers Watson’s operating results. PCIC ceased issuing insurance policies effective July 1, 2010 and at that time entered into a run-off mode of operation. Our shareholder agreements with PCIC could require additional payments to PCIC if development of claims significantly exceeds prior expectations.

We provide for the self-insured retention where specific estimated losses and loss expenses for known claims are considered probable and reasonably estimable. Although we maintain professional liability insurance coverage, this insurance does not cover claims made after expiration of our current policies of insurance. Generally accepted accounting principles require that we record a liability for incurred but not reported (“IBNR”) professional liability claims if they are probable and reasonably estimable. We use actuarial assumptions to estimate and record our IBNR liability. As of December 31, 2014, we had a $181.2 million IBNR liability balance, net of estimated IBNR recoverable receivables of our captive insurance companies. This net liability was $173.8 million as of June 30, 2014. To the extent our captive insurance companies, PCIC and SMIC, expect losses to be covered by a third party, they record a receivable for the amount expected to be recovered. This receivable is classified in other current or other noncurrent assets in our condensed consolidated balance sheet.

We reserve for contingent liabilities based on ASC 450, Contingencies, when it is determined that a liability, inclusive of defense costs, is probable and reasonably estimable. The contingent liabilities recorded are primarily developed actuarially. Litigation is subject to many factors which are difficult to predict so there can be no assurance that in the event of a material unfavorable result in one or more claims, we will not incur material costs.

Current and Former Employees of Teck Metals, Ltd.

A class action is currently pending against the Company in the Supreme Court of British Columbia. On July 14, 2009, James Weldon, an employee of Teck Metals, Ltd. (“Teck”) commenced an action against Teck and Towers Perrin Inc. (now known as

Towers Watson Canada Inc.). On October 17, 2011, Leonard Bleier, a former employee of Teck, sued Teck and Towers Perrin. Aside from their employment status, the allegations in the action commenced by Bleier (retired from Teck in 2006) are substantively similar in all material respects to those in the action commenced by Weldon (employed by Teck at the time the action commenced). Both actions were brought in the Supreme Court of British Columbia, and that court consolidated the actions on June 21, 2012.

On October 1, 2012, the Company filed a response to the plaintiffs' consolidated and amended claim denying the legal and factual basis for the plaintiffs' claim. On December 21, 2012, the court certified the consolidated case as a class action.

At all times relevant to the plaintiffs’ claim, Towers Perrin acted as the actuarial advisor for Teck’s defined benefit pension plan. According to the plaintiffs' allegations, in 1992 and on Towers Perrin's advice, Teck offered its non-union, salaried employees a one-time option to continue participation in Teck’s defined benefit pension plan or to transfer to a newly established defined contribution plan. The plaintiffs also allege that Towers Perrin assisted Teck in preparing—and that Towers Perrin approved—informational materials and a computer-based modeling tool that Teck distributed to eligible employees prior to the employees electing whether to transfer. Several hundred employees elected to transfer from the defined benefit pension plan to the defined contribution plan on January 1, 1993.

The plaintiff class comprises current and former Teck employees who elected to transfer from the defined benefit pension plan to the defined contribution plan. As of October 23, 2014, the Company understands there to be 436 individuals in the class.

The plaintiffs, on behalf of the class, allege that Towers Perrin was professionally negligent and that Teck and Towers Perrin breached statutory and fiduciary duties and acted deceitfully by providing incomplete, inaccurate, and misleading information to participants in Teck’s defined benefit plan regarding the option to transfer to the defined contribution plan. Principally, the plaintiffs allege that the risks of the defined contribution plan—including investment risk and annuity risk—were downplayed, either negligently or with the specific intent of causing eligible employees to transfer to the defined contribution plan.

The plaintiffs seek assorted declaratory relief; an injunction reinstating them and all class members into the defined benefit plan with full rights and benefits as if they had not transferred; disgorgement against Teck; damages in the amount necessary to provide the plaintiffs and all class members with the pension and other benefits they would have accrued if they had not transferred; interest as allowed by law; and such further and other relief as to the court may seem just.

In a settlement agreement dated October 31, 2014, the Company, plaintiffs, and Teck agreed to resolve all claims in this litigation. The settlement agreement is subject to court approval. Based on all of the information to date, the Company believes that any loss beyond accrued amounts is unlikely.

City of Houston

On August 1, 2014, the City of Houston ("plaintiff") filed suit against the Company in the United States District Court for the Southern District of Texas, Houston Division.

In the complaint, plaintiff alleges various deficiencies in pension actuarial work-product and advice stated to have been provided by the Company's predecessor firm, Towers Perrin, in its capacity as principal actuary to the Houston Firefighters' Relief and Retirement Fund (the "Fund"). ‎Towers Perrin is stated to have acted in this capacity between "the early 1980s until 2002".

In particular, the complaint is critical of two reports allegedly issued by Towers Perrin — one in February 2000 and the other in April 2000 — containing actuarial valuations upon which plaintiff claims to have relied. Plaintiff claims that the reports indicated that the City’s minimum contribution percentages to the Fund would remain in place through at least 2018; and ‎that existing benefits under the Fund could be increased, and new benefits could be added, without increasing plaintiff's financial burden, and without increasing plaintiff's rate of annual contributions to the Fund. The complaint alleges that plaintiff relied on these reports when supporting a new benefit package for the Fund. These reports, and other advice, are alleged, among other things, to have been negligent, to have misrepresented the present and future financial condition of the Fund and the contributions required to be made by plaintiff to support those benefits, and to have constituted professional malpractice. Plaintiff asserts that, but for Towers Perrin's alleged negligence and misrepresentations, plaintiff would not have supported the benefit increase, and that such increased benefits would not and could not have been approved or enacted. It is further asserted that Towers Perrin's alleged "negligence and misrepresentations damaged the City to the tune of tens of millions of dollars in annual contributions."

Plaintiff seeks the award of actual damages, exemplary damages, special damages, attorney's fees and expenses, costs of suit, pre- and post- judgment interest at the maximum legal rate, and other unspecified legal and equitable relief. Plaintiff has not yet quantified fully its asserted damages. Given the stage of the proceedings, the Company is currently unable to provide an

estimate of the reasonably possible loss or range of loss. The Company disputes the allegations, and intends to defend the lawsuit vigorously.

On October 10, 2014, the Company filed a motion to dismiss plaintiff's entire complaint on the basis that the complaint fails to state a claim upon which relief can be granted. On November 21, 2014, the City filed its response in opposition to the Company's motion to dismiss. To date, no hearing on that motion has been scheduled.

British Coal Staff Superannuation Scheme

On September 4, 2014, Towers Watson Limited ("TWL"), a wholly-owned subsidiary of the Company, received a Letter of Claim (the "Demand Letter") on behalf of Coal Staff Superannuation Scheme Trustees Limited (the "Trustee"), trustee of the British Coal Staff Superannuation Scheme (the "Scheme"). The Demand Letter was sent under the Professional Negligence Pre-Action Protocol, a pre-action dispute resolution procedure which applies in England and Wales.

In the Demand Letter, it is asserted that the Trustee has a claim against TWL in respect of allegedly negligent investment consulting advice provided to it by Watson Wyatt Limited, in the United Kingdom, in particular with regard to a currency hedge that was implemented in connection with the Scheme’s investment of £250,000,000 in a Bluebay local currency emerging market debt fund in August 2008. It is alleged that the currency hedge has caused a substantial loss to the Scheme, quantified at £47,500,000, for the period August 2008 to October 2012.

TWL sent a Letter of Response on December 23, 2014.

Based on all of the information to date, and given the stage of the matter, TWL is currently unable to provide an estimate of the reasonably possible loss or range of loss. TWL disputes the allegations, and intends to defend the matter vigorously.

Meriter Health Services

On January 12, 2015, Towers Watson Delaware Inc. ("TWDE"), a wholly-owned subsidiary of the Company, was served with a Summons and Complaint (the "Complaint") on behalf of Meriter Health Services, Inc. ("Meriter"), plan sponsor of the Meriter Health Services Employee Retirement Plan (the “Plan”). The Complaint was filed in Wisconsin State Court in Dane County.

In the Complaint, among other allegations, it is asserted that Meriter has a claim against TWDE, and other entities, in respect of allegedly negligent benefits consulting advice provided to it by Towers, Perrin, Forster & Crosby, Inc. (“TPFC”) and Davis, Conder, Enderle & Sloan, Inc. (“DCES”), including TPFC’s involvement in the Plan design and drafting of the Plan document in 1987, DCES’ Plan review in 2001, and Plan redesign, Plan amendment and drafting of ERISA section 204(h) notices. Additionally, Meriter asserts that TPFC and DCES breached an alleged duty to advise Meriter regarding the competency of Meriter’s then ERISA counsel.

In 2010, a putative class action lawsuit related to the Plan was filed by Plan participants against Meriter alleging a number of claims involving ERISA. The lawsuit was settled in 2015 for $82 million. While the Complaint does not include a specific, quantified demand, it does refer to the $82 million paid out by Meriter in settlement of the class action, and other damages which are not specified in the Complaint.

Based on all of the information to date, and given the stage of the matter, TWDE is currently unable to provide an estimate of the reasonably possible loss or range of loss. TWDE disputes the allegations, and intends to defend the matter vigorously.

Note 9 — Variable Interest Entities.

We offer integrated solutions that include different combinations of investment management or consulting, pension administration, and actuarial services, through funding vehicles holding approximately $4.0 billion of assets in entities that are considered variable interest entities ("VIEs") and for which our management fee is considered a variable interest. In addition, some of the investments in these entities are held by the Company's retirement plans, which are considered related parties.

We have determined that some of the VIEs qualify for the deferral to certain provisions of ASC Subtopic 810-10, Consolidation – Overall, afforded by ASU 2010-10, Consolidation – Amendments for Certain Investment Funds. In accordance with this deferral, we determine whether we consolidate each VIE based on whether we absorb a majority of the VIE’s expected losses or receive a majority of the VIE’s expected returns. For VIEs that do not qualify for the deferral, we determine whether we consolidate based on whether we have both the power to direct the activities that most significantly impact the VIE and a variable interest that could potentially be significant to the VIE.

We are not the primary beneficiary and therefore do not consolidate any of the funds as of December 31, 2014 or June 30, 2014. Our maximum exposure to loss of these unconsolidated VIEs is limited to collection of any unpaid management fees

(which are not material) and any potential increase to pension funding obligation due to losses incurred by the funds in which the Company's retirement plans are invested. The Company has no obligation to provide financial or other support to these VIEs, other than guarantees to provide the minimum statutorily-mandated capital. The Company reassesses its initial evaluation of whether an entity is a VIE when certain reconsideration events occur. The Company reassesses its determination of whether it is the primary beneficiary on an ongoing basis based on current facts and circumstances.

Note 10 — Accumulated Other Comprehensive Income/(Loss).

Changes in accumulated other comprehensive income/(loss), net of non-controlling interests, are provided in the following table. The difference between the amounts presented in this table and the amounts presented in the condensed consolidated statements of comprehensive income are the corresponding components attributable to non-controlling interests, which are not material for further disclosure.



	Foreign currency translation (1)			Hedge effectiveness (1)									Available-for-sale securities (2)									Defined pension and post-retirement benefit costs (3)
	Foreign currency translation (1)			Before Tax			Tax			After Tax			Before Tax			Tax			After Tax			Before Tax			Tax			After Tax
As of June 30, 2014	$	2,271		$	144		$	(79	)	$	65		$	344		$	(114	)	$	230		$	(262,902	)	$	70,634		$	(192,268	)
Other comprehensive income/(loss) before reclassifications	(184,302		)	1,774			(707		)	1,067			(282		)	98			(184		)	—			—			—
Amounts reclassified from accumulated other comprehensive income	—			(281		)	112			(169		)	(35		)	—			(35		)	7,210			(1,491		)	5,719
Net current-period other comprehensive income/(loss)	(184,302		)	1,493			(595		)	898			(317		)	98			(219		)	7,210			(1,491		)	5,719
As of December 31, 2014	$	(182,031	)	$	1,637		$	(674	)	$	963		$	27		$	(16	)	$	11		$	(255,692	)	$	69,143		$	(186,549	)

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(1)	Reclassification adjustments from accumulated other comprehensive income are included in general and administrative expenses (see Note 6 – Derivative Financial Instruments for additional details regarding the reclassification adjustments for the hedge settlements)


(2)	Reclassification adjustments from accumulated other comprehensive income are included in general and administrative expenses


(3)	Reclassification adjustments from accumulated other comprehensive income are included in the computation of net periodic pension cost (see Note 7 – Retirement Benefits for additional details)

Note 11 — Share-Based Compensation.

Restricted Stock Units

Executives and Employees

The Compensation Committee of our Board of Directors approves performance-vested restricted stock unit awards pursuant to the Towers Watson & Co. 2009 Long Term Incentive Plan. RSUs are designed to provide us an opportunity to offer our long-term incentive program ("LTIP") and to provide key executives with a long-term stake in our success. RSUs are notional, non-voting units of measurement based on our common stock. Under the RSU agreement, participants become vested in a number of RSUs based on the achievement