The Daily Magic Formula Stock for 12/19/2008 is Hewitt Associates Inc. According to the Magic Formula Investing Web Site, the ebit yield is 13% and the EBIT ROIC is 75-100%.
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Hewitt is a leading global provider of human resource benefits, outsourcing and consulting services, with approximately 23,000 employees based in 33 countries. We help our clients generate greater value from their employees by helping them address challenges presented by their people, workforce performance and human resources operations. Our business has evolved from our founding in 1940 as a provider of actuarial services for sponsors of retirement plans and executive compensation consulting. Over the last six decades, we have extended, expanded and created new human resources services that adapt to our clientsâ€™ changing workforce-related business needs and that help them with solutions to their challenges.
Our three business segments, Benefits Outsourcing, Human Resource Business Process Outsourcing (HR BPO) and Consulting, help clients develop, implement and deliver strategies and programs that ensure effective human resources business process design, administration and technologies as well as help manage the complex human elements necessary to acquire, develop, motivate and retain the talent required to meet business objectives.
Clients benefit from the global human capital management strategies, programs and process expertise we have developed over more than 65 years in this business. We employ this expertise in our Consulting segment to develop and implement human capital solutions within our clientsâ€™ environments, and in our Benefits Outsourcing and HR BPO segments to manage, streamline, automate and administer part or all of our clientsâ€™ human resources programs, processes, and functions. Of our $3.2 billion of net revenues in 2008, approximately 49% was generated by our Benefits Outsourcing business, approximately 34% was generated by our Consulting segment and approximately 17% was generated by our HR BPO segment. See Note 22 to the consolidated financial statements for additional information on Segments and Geographic Data.
A primary driver of our historical growth has been our deep, long-term client relationships. Our impressive client portfolio reflects our long-term success at providing quality services to exceptional companies, and serves as a catalyst for discussions with both prospective and existing clients about how we can deliver value in new or expanded ways. As a result, we believe that the quality of our relationships with more than 300 Benefits Outsourcing clients, 32 significant multi-service clients as well as a number of smaller single-service clients within HR BPO, and over 3,000 Consulting clients, many of which are Global 1000 companies, is a competitive advantage.
Hewitt Associates, Inc. was formed in 2002 in connection with the Companyâ€™s transition to a corporate structure and its related initial public offering. Hewitt Associates, Inc. is a Delaware corporation with no material assets other than its ownership interest in Hewitt Associates LLC, an Illinois limited liability company that serves as Hewittâ€™s operating entity in the U.S. and also holds ownership interests in the Companyâ€™s subsidiaries.
Benefits Outsourcing Segment
Benefits Outsourcing is the largest part of Hewittâ€™s business in terms of revenues and profits. As companies look for ways to control benefit costs while meeting employeesâ€™ expectations for enhanced benefit services, such as information and decision support tools, Hewitt helps them by providing management tools to make decisions that improve quality and reduce the cost of their health care and retirement benefits.
Hewittâ€™s industry-leading, proprietary Total Benefit Administration TM (TBA) system integrates the seamless administration of clientsâ€™ primary benefits programsâ€”defined benefits, defined contribution and health and welfare. The TBA system allows integrated, single-system administration with the flexibility of multiple access channels (call centers, interactive voice response and the internet). Using Hewittâ€™s web-enabled self-service center, Your Benefits Resources TM (YBR), client employees can execute transactions and manage their benefit programs using modeling tools and various support references. The Company provides TBA benefits administration services primarily to companies with more than 15,000 employees through contracts that average three to five years. These multi-year contracts combined with high client renewal rates yield significant annual revenue retention. Hewitt also has a service offering for defined benefit and defined contribution services for companies with 5,000 to 15,000 employees based on its TBA platform, and a new health and welfare service offering designed for companies with 3,000 or more employees on a new platform acquired through acquisition of RealLife HR in 2007.
Service Offering Detail
Health and Welfare Plan Administration: Administering health and welfare benefit programs is an important and complex task for clients who must manage both the rising cost of providing health insurance and employeesâ€™ demands for increased choice of health and welfare benefit options. Companies must provide employees with information explaining available health and welfare options, answer their questions regarding alternatives and provide them with mechanisms for making their choices and managing their plans. In addition, ongoing health and welfare administration requires managing payroll deductions and eligibility status data for health plans and providers.
Through the TBA system, Hewitt manages clientsâ€™ annual enrollment processes, communicates to employees their available options and supports employee health and welfare decision-making. Whether through web-based tools, an automated voice response system or call centers, employees can obtain information about available options and model health and welfare benefit costs under different assumptions. Additionally, Hewittâ€™s ProviderDirect tool helps employees select in-network medical providers by criteria such as specialty, location and gender, and the Participant Advocacy service assists employees in resolving health plan eligibility, access and claim issues. The Your Spending Accountâ„˘ flexible spending account administration service gives employees a paperless way to manage their health care spending accounts and file claims for reimbursement.
For ongoing health and welfare plan administration, Hewitt Associates Connectionsâ„˘ service connects with more than 230 insurance companies and other health plan providers in the United States, Canada and Puerto Rico to facilitate data transfer, resolve quality issues, validate participant eligibility and pay premiums. Additionally, Hewitt offers automatic payment of employeesâ€™ portion of program costs, providing clients with efficiencies and helping to ensure that contributions to health plans for inactive employees and retirees are appropriately credited.
Hewitt provides health and welfare administration services to mid-size companies, or those with fewer than 15,000 employees, via its Core Benefit Administration offering resulting from the acquisition of RealLife HR in September 2007. The RealLife HR technology platform provides mid-size companies with a robust, streamlined and cost-effective solution to maximize the return on their benefits investment. The Company believes this offering will enable it to increase its share of the middle market, thereby contributing to the overall growth of the Benefits Outsourcing segment.
Defined Contribution Plan Administration: Defined contribution administration requires management of participant, payroll and investment fund data and transactions; daily transaction data transmissions between companies and their defined contribution plan trustees and asset managers; and daily posting of investment results to individual defined contribution accounts. Hewitt provides defined contribution plan administration both to the mid-market (between 5,000 and 15,000 participants) and the large market (defined as 15,000 or more participants).
Unlike many of Hewittâ€™s competitors who provide defined contribution outsourcing services in order to accumulate plan assets in their proprietary investment funds, Hewitt does not manage investments. The Company believes its independence in providing these services is a strength, as Hewittâ€™s focus is to provide reliable administrative and consultative services to plan sponsors and effective and comprehensive retirement planning and decision support services to the employee, regardless of the funds that clients choose to include in their plans or their employeesâ€™ investment elections. Hewitt also works with researchers at leading academic institutions and other organizations to analyze the volumes of data accumulated in order to identify trends in participant behavior and leveraging our consulting expertise to develop superior solutions to help clients improve their strategies for addressing employeesâ€™ financial needs.
Defined Benefit Plan Administration: Defined benefit or pension plans are subject to numerous laws and regulations that can make administration of these programs complex and paper-intensive, and have created risks of significant adverse consequences for inaccurate or improper plan administration. Hewitt has re-engineered, streamlined and automated defined benefit plan administration to make plan administration more consistent and accurate, so that employees can model their retirement options, initiate and process retirement transactions through Hewittâ€™s internet-based tools or through its automated voice response system. Through Hewittâ€™s call centers, it provides access to pension counselors who are knowledgeable about employeesâ€™ pension programs and options and who can explain how their pension plans work. Because Hewitt also provides comprehensive actuarial and investment consulting services, we believe we can provide complete solutions for clients and deliver services more efficiently than many of our competitors. Similarly, because of our administration of health care, defined contribution, and pension programs, we can provide end-to-end integrated solutions for employees as well.
Point Solutions: Point Solutions was formed in 2006 (formerly known as Enhanced Shared Services) and focuses on providing standalone HR services to complement Hewittâ€™s current core Benefits Outsourcing offers. Examples of standalone solution offerings include, among others:
Flexible Spending Account Administration
Benefit Determination Review Team
Your Total Rewards
Hewittâ€™s new Absence Management service offering, acquired through the purchase of LCG in July 2008, helps employers improve financial and operational performance by minimizing the costs, productivity impact, and liabilities associated with all forms of absence. To do that, we integrate best-in-class competencies in disability management, technology and analysis, data integration, reporting, and effective return-to-work programs. The integration of these components allows Hewitt to provide excellent, measurable outcomes. This approach helps clients implement sustainable, long-term absence management strategies.
Hewitt expects to sell and deliver incremental standalone solutions to its existing base of Benefits Outsourcing and Consulting clients, sell standalone offerings to new prospects and identify new product solutions. We believe this will allow us to grow the business and expand our overall client base.
HR BPO Segment
Hewitt began delivering HR BPO services in the early 2000s, and was an early pioneer in the HR BPO industry.
Today, Hewitt provides clients with secure, market-leading solutions to manage employee data, administer benefits, payroll and other human resources processes, and record and manage transactions across talent management, workforce management and core process management.
More specifically, Hewitt provides web-based tools for self-management of a wide range of human resources programs by employees, managers and HR professionals. In addition, Hewitt provides call centers for those interactions and transactions that require personal assistance. Hewitt transmits and transfers data between the client and both their employees and outside parties, such as health plans, trustees and investment managers. Hewitt also provides clients with web-based tools that enable them to report on and analyze the effectiveness of, and the return on investments in, benefits, compensation and human resources programs, and to facilitate communication and project management.
Companies engage Hewitt for HR BPO services for reasons similar to outsourcing Benefits Administration: to reduce costs and focus on core business while gaining expertise, innovation and access to current technology and processes through the economies of scale created by using repeatable processes and standardized technologies.
Service Offering Detail
Talent Management: Hewitt offers the following services to help clients successfully build upon their most valuable asset, people:
Recruiting services, including need identification, sourcing and attraction, screening, interviewing and selection, offer management, reporting and compliance.
Learning and development services, including learning paths and certificates, course catalog administration, event scheduling and logistics, evaluation and assessments, accounting and content development and sourcing.
Performance management services, including planning and evaluation support, feedback collection and individual profile maintenance.
Succession planning services, including maintenance of succession trees, tracking and monitoring of high potential employees and development of incumbent and candidate profiles.
Workforce Management: Hewitt provides a portfolio of services that allows clients to manage their workforce more effectively and efficiently. The portfolio includes the following services:
Compensation administration services, including administration of salary, bonus and stock options, administration of salary surveys and total reward communications.
Total rewards services, including strategy, design, implementation and communication of benefits and compensation programs.
Workforce administration services, including employee records management, life events, employment events, reduction in force, organization structure changes and leave management.
Domestic relocation services, including relocation initiation, policy briefing and administration, expense processing and accounting and inventory management.
Leave and absence management services, including a comprehensive case management approach to leave initiation, leave tracking and management, and coordination with third parties for compliance with the Family and Medical Leave Act and disability and personal leave policies.
Global mobility services including assignment planning, candidate selection support, pre-departure planning and support, on-assignment support and repatriation planning and support.
Core Process Management: Day-to-day transactional processes related to employee events require solid procedures, knowledge of regulations and efficient systems. Hewitt helps its clients in this regard by offering the following services:
Payroll services, including time and attendance, on- and off-cycle pay, garnishments and taxes and accounting.
Benefits services, including program delivery and administration, recordkeeping and reconciliation, benefit accounting, invoice review and payment, and supplier sourcing and management for health and welfare, defined contribution and defined benefit programs.
Payments services, including accounts payable/receivable, travel and expense, fixed assets and general ledger, cash and banking/treasury.
Hewitt developed its human resources expertise over more than 65 years of helping clients develop strategies and design human resources programs to solve the challenges of acquiring, managing, motivating and retaining the pivotal talent needed to create and sustain a competitive advantage. Companies around the world work with our consultants to develop and implement people-related business strategies and program designs for retirement and health care benefits, compensation and total rewards, performance management and change management that will lower costs while increasing their ability to meet business objectives.
Service Offering Detail
Retirement and Financial Management (â€śRFMâ€ť) Consulting: This line of business assists clients in three primary activities:
Designing overall retirement program strategies aligned with the needs of companies and their employees;
Providing actuarial analysis and financial strategies to support clients in their management of pension issues; and
Consulting on asset allocation, investment policies and investment manager evaluation.
Health Care Consulting: This service offering helps clients design comprehensive health and welfare strategies, from the initial philosophical approach to specific benefit plan changes that support clientsâ€™ people-related business strategies. Health Care consultants assist clients in the selection of health plans that balance cost and value and improve employee satisfaction. Health Care consultants also help clients determine which funding approaches (i.e., insured, self-insured or risk-adjusted insured) and employee contribution strategies will best meet their objectives.
Talent and Organization Consulting: Talent and Organization Consulting provides clients with strategy and design advice for meeting their people- and workforce-related business challenges in the following areas:
Acquiring, managing and motivating talent needed to meet business objectives;
Recommending effective and competitive compensation and performance management programs that align leaders and the broader workforce with business objectives;
Resolving people-related issues that determine the success or failure of organizational changes and business restructurings, such as mergers, acquisitions, divestitures, initial public offerings and joint ventures; and
Analyzing the activities and costs of the human resources function in order to improve efficiencies, reduce costs and enhance effectiveness of the function.
Hewittâ€™s Consulting services are closely aligned with our Benefits Outsourcing services in order to offer clients total end-to-end solutions. In addition, the segment provides tailored communication services to enhance the success of client solutions in all of our service areas, including Benefits Outsourcing and HR BPO.
We operate in a highly competitive and rapidly changing global market and compete with a variety of organizations. In addition, a client may choose to use its own resources rather than engage an outside company for human resources solutions.
Benefits Outsourcing: The principal competitors to our Benefits Outsourcing segment are outsourcing divisions of large financial institutions such as ING Institutional Plan Services, Fidelity Investments, Merrill Lynch, T. Rowe Price and JP Morgan Chase, in addition to consulting firms or technology outsourcing and consulting firms such as Mercer, Affiliated Computer Services, EDS/ExcellerateHRO, Watson Wyatt Worldwide and Aon.
HR BPO: The principal competitors to our HR BPO segment are technology consultants and integrators such as Accenture, Affiliated Computer Services, EDS/ExcellerateHRO and IBM, and companies that have extended their services into human resources outsourcing such as Automatic Data Processing and Convergys.
Consulting: The principal competitors in our Consulting segment are consulting firms focused on broader human resources such as Mercer, Towers Perrin and Watson Wyatt Worldwide. We also face competition from smaller benefits and compensation firms, as well as from public accounting, consulting and insurance firms offering human resources services.
We believe the principal competitive advantage strengthening our Benefits Outsourcing, HR BPO and Consulting businesses is our ability to create total human resources solutions for clients by demonstrating the depth and value of our experience and expertise in the full range of integrated strategy, design, administration, communication and delivery of human resources services. Other important factors are our deep, long-term client relationships, our technology infrastructure, including underlying proprietary platforms, our ability to add value in a cost-effective manner, our employeesâ€™ technical and industry expertise and our professional reputation.
Seasonality and Inflation
Revenues and income vary over the fiscal year. Within our Benefits Outsourcing segment, we generally experience a seasonal increase in our fiscal first and fourth quarter revenues because our clientsâ€™ benefit enrollment processes typically occur during the fall. Within our Consulting segment, we typically experience a seasonal peak in the fiscal third and fourth quarters which reflects our clientsâ€™ business needs for these services as they design new programs in anticipation of annual enrollment processes. We believe inflation has had little effect on our results from operations during the past three years.
We believe that our technological capabilities are an essential component of our strategy to grow our Benefits Outsourcing and HR BPO businesses and create new service offerings. Our strategy is to develop proprietary, custom solutions through open industry standards when we believe we can develop a better solution than is available in the market, and to integrate existing best-in-class systems when we believe these solutions best meet our clientsâ€™ needs. Expenditures relating to the acquisition and internal development of software totaled approximately $93 million, $72 million and $96 million in fiscal years 2008, 2007 and 2006, respectively.
We develop systems that are adaptable across multiple delivery channels (internet, automated voice response and call center). It was this technology strategy that led us to innovations such as Total Benefit Administration â„˘, the first system for administering all three primary benefits programs through a single, integrated database and that enabled real-time interactions over multiple customer channels. Examples of other technology-based tools and service enhancements include:
myHR Â® , a comprehensive human resources portal presenting policies, resources and data personalized by role and by each individualâ€™s eligibility and participation in applicable compensation, benefits and other human resources programs;
AccessDirect â„˘, a personalized navigation system for the web or telephone that connects employees to benefits providers;
Your Benefits Resources â„˘, a web platform that uses dynamic personalization to provide employees with customized content and decision support tools and allows real-time management of health and welfare, defined contribution and defined benefit decisions and transactions;
Hewitt Plan Sponsor Sight , utilizing best-in-class portal, collaboration and data warehousing technologies, offers an on-line center allowing clients to collaborate and manage work with us, analyze and report on their benefits programs and interact with a community of their peers; and
Your Total Rewards and Your Total Rewards Executive , web platforms that present to employees or executives comprehensive information on the full value of the employment relationship, including base salary and bonuses, stock compensation, retirement plans, health care coverage, life and accident insurance, training and development opportunities, work/life benefits and other rewards.
Our success has resulted, in part, from our proprietary methodologies, tools, processes, databases and other intellectual property. We recognize the value of intellectual property in the marketplace and vigorously create, harvest and protect our intellectual property.
To protect our proprietary rights, we rely primarily on a combination of copyright, trade secret and trademark laws, confidentiality agreements with employees and third parties and protective contractual provisions such as those contained in licenses and other agreements with consultants, suppliers, strategic partners and clients.
We hold no patents and our licenses are ordinary course licenses of software and data. We also have a number of trademarks.
Contracts and Insurance
We have contracts with many of our clients that define our responsibilities and limit our liability. In addition, we maintain professional liability insurance that covers the services we provide, subject to applicable deductibles and policy limits.
William J. Conaty (age 62) serves as an executive coach and provides human resources consulting services and has served as a director since June 2008. Mr. Conaty spent his entire career with General Electric Company and served as the Senior Vice President of Corporate Human Resources from 1993 to 2007.
Michele M. Hunt (age 59) is Founder and President of Vision & Values, a leadership and organizational development firm in New York, New York, and has served as a director since July 2002. Since founding her firm in 1995, Ms. Hunt has worked with numerous senior leadership teams to align their culture, systems and processes with their vision and core strategies. In 1993, President Clinton appointed Ms. Hunt to lead the Federal Quality Institute in an initiative to improve government agencies. Prior to this appointment, Ms. Hunt served as Senior Vice President for People and Quality of Herman Miller, Inc. Ms. Hunt served on the Board of Directors of The ServiceMaster Company from 1996 to 2003. She is the author of DreamMakers: Putting Vision & Values to Work and a Fellow of the Aspen Institute.
Cary D. McMillan (age 50) is Chief Executive Officer of True Partners Consulting LLC, a professional services firm providing tax and other financial consulting services and has served as a director since July 2002. Prior to assuming his current role in 2005, Mr. McMillan served as Chief Executive Officer of Sara Lee Branded Apparel and Executive Vice President of Sara Lee Corporation, a branded consumer packaged goods company, from 2000 until 2004. Mr. McMillan joined Sara Lee in 1999 as Executive Vice President and Chief Financial Officer. From 1980 to 1999, Mr. McMillan held a number of positions of increasing responsibility at Arthur Andersen & Co., L.L.P., including managing partner of the Chicago office. Mr. McMillan also currently serves on the board of directors of McDonalds Corporation and American Eagle Outfitters, Inc., as well as the boards of several nonprofit organizations in the Chicago area.
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF EACH OF THE NOMINEES LISTED ABOVE.
Current Class I Director Not Continuing in Office
Julie S. Gordon (age 51) has been President of Hewittâ€™s Client and Market Leadership Group since June 1, 2007 and has served as a director since April 2002. Ms. Gordon served as Acting President of the HR Outsourcing Group from June 2006 until June 2007. From October 2005 until June 2006, she served as Chief Business Excellence Officer, and from May 2001 until October 2005, Ms. Gordon was the North American Market Leader for the Retirement and Financial Management line of business. Prior thereto, she served as a business leader in Hewittâ€™s Midwest actuarial practice. She joined the Company in 1978. Ms. Gordon is a Fellow of the Society of Actuaries and a member of the American Academy of Actuaries.
Class II Directors Continuing in Office
Steven A. Denning (age 60) is Chairman and a Managing Director of General Atlantic LLC, a global growth private equity firm, and has served as a director since October 2004. He has been with General Atlantic (or its predecessor) since 1980. Mr. Denning is a director of Genpact Limited, IHS Inc. and Thomson Reuters Corporation. Mr. Denning chairs the human resources committee of Thomson Reuters Corporation and serves on the compensation committees of Genpact and IHS, Inc. Mr. Denning was a director of Exult, Inc. until it was acquired by the Company on October 1, 2004.
Michael E. Greenlees (age 61) has served as Chief Executive Officer of Ebiquity plc, a provider of marketing and media analytics services, since October 2007 and as a director since January 2004. Mr. Greenlees provides consulting services to General Atlantic LLC in relation to potential investments in consumer media and marketing businesses. From January 2004 until November 2005, he served as Chief Executive Officer of FastChannel Network, an advertising services company. Prior to 2004, Mr. Greenlees served as Executive Vice President of Omnicom Group Inc., the holding company for a number of advertising and marketing services businesses, from 2001-2003. From 1998 to 2001, Mr. Greenlees served as President and CEO of TBWA Worldwide, a unit of Omnicom. From 1980-1998, Mr. Greenlees was Chairman and Chief Executive of GGT Group plc, a London-based advertising and marketing services group.
Steven P. Stanbrook (age 51) is President, Developing Markets, of S.C. Johnson & Son, Inc., a manufacturer of consumer products, and has served as a director since January 2004. Prior to his current role, Mr. Stanbrook served as President, Asia and the Americas from 2002 until 2006, and as President of S.C. Johnsonâ€™s business in Europe, Africa and Near East from 1996-2002. Prior to joining S.C. Johnson in 1996, Mr. Stanbrook was President â€“ International of CompuServe. Prior to that, he held various international management positions at Sara Lee Corporation from 1979-1995, and served as President and Chief Executive Officer of Sara Lee Bakery. Mr. Stanbrook also currently serves on the board of directors of Chiquita Brands International, Inc. Mr. Stanbrook serves on the Nominating and Governance and the Compensation committees of Chiquita Brands International.
Class III Directors Continuing in Office
Russell P. Fradin (age 53) joined the Company as Chairman of the Board of Directors and Chief Executive Officer in September 2006. Prior to joining the Company, he served as President and Chief Executive Officer of The BISYS Group, Inc., a provider of outsourcing services to companies in the financial services industry, from February 2004 until September 2006. Before joining BISYS, he served for seven years in various senior executive positions with ADP, a provider of payroll and computerized business services, most recently as Group President, Global Employer Services. Prior to joining ADP, Mr. Fradin was a senior partner at McKinsey & Company, a consulting firm. Mr. Fradin is a member of the Board of Directors of Gartner, Inc.
Cheryl A. Francis (age 54) served as Executive Vice President and Chief Financial Officer of R.R. Donnelley & Sons, a print media company, from 1995 until 2000 and has served as a director since July 2002. Since 2000, Ms. Francis has served as a business consultant and, since August 2008, she has served as Co-Chairman of the Corporate Leadership Center. From 2002 until August 2008, she served as Vice Chairman of the Corporate Leadership Center. Prior to her role at R.R. Donnelley & Sons, Ms. Francis served on the management team of FMC Corporation and its subsidiary, FMC Gold, including serving as Chief Financial Officer of FMC Gold from 1987-1991, and Treasurer of FMC Corporation from 1993-1995, and as an adjunct professor for the University of Chicago Graduate School of Business from 1991-1993. Ms. Francis also currently serves on the board of directors of HNI Corporation and Morningstar, Inc.
MANAGEMENT DISCUSSION FROM LATEST 10K
The following information should be read in conjunction with our consolidated financial statements and related notes, included elsewhere in this Annual Report on Form 10-K. In addition to historical information, this discussion and analysis may contain forward-looking statements that involve risks, uncertainties and assumptions, which could cause actual results to differ materially from managementâ€™s expectations. Please see additional risks and uncertainties described above, in â€śDisclosure Regarding Forward-Looking Statementsâ€ť which appears in Part 1 and in Item 1A.â€ťRisk Factorsâ€ť which appears elsewhere in this Annual Report.
We use the terms â€śHewittâ€ť, â€śthe Companyâ€ť, â€śweâ€ť, â€śusâ€ť, and â€śourâ€ť to refer to the business of Hewitt Associates, Inc. and its subsidiaries. All references to years, unless otherwise noted, refer to our fiscal years, which end on September 30. For example, a reference to â€ś2008â€ťor â€śfiscal 2008â€ť means the twelve-month period that ends September 30, 2008. References to and adjustments for â€śforeign currency translationâ€ť are made within our discussion of results so that the financial results can be viewed without the impact of fluctuating foreign currency exchange rates used in reporting results in one currency (U.S. dollar) and helps facilitate a comparative view of business results. Financial results described within this section, except for share and per share information, are stated in thousands of U.S. dollars unless otherwise noted. Certain prior-period amounts have been reclassified to conform to the current-year presentation.
Hewitt made significant progress during fiscal year 2008 on executing against the four key strategic priorities established in the prior year. We grew revenue and expanded margins while continuing to invest in our Benefits Outsourcing and Consulting segments. We focused on stabilizing the HR BPO business, restructuring two more contracts during the year. We raised $500 million from a debt offering during the fourth quarter and maintained a strong balance sheet with significant liquidity even as the broader economy endured the effects of the credit crisis and equity market volatility. We made three strategic acquisitions to broaden our service offerings to our clients and completed our existing share repurchase authorization prior to the January 31, 2009 expiration date.
Fiscal year 2008 net revenues, excluding third party supplier revenues and adjusting for the favorable effect of foreign currency translation of $40.9 million and the net favorable effect of acquisitions/divestiture of $9.5 million, increased 7.4% as compared to the prior-year period and was driven by growth across all segments, particularly in Consulting. Consulting revenue growth over the prior year, adjusting for the favorable effects of foreign currency translation of $26.0 million and acquisitions of $13.9 million, resulted principally from Retirement and Financial Management services as well as Talent and Organizational Consulting services. HR BPO reported revenue growth in the year, excluding third party revenue and adjusting for the favorable impact of foreign currency translation of $10.5 million and the impact of $21.1 million from the additional revenues generated by Cyborg in the prior fiscal year. The HR BPO revenue increase is primarily related to an increase in the number of clients who went live with contract services over the last twelve months and growth in revenue from existing clients, including an increase in project work and transactional volumes. This was partially offset by planned service reductions to certain current and former clients. Also contributing to the increase was the benefit of $14.1 million related to the resolution of two contract restructurings. Benefits Outsourcing also reported higher revenue during the year, adjusting for the favorable impact of foreign currency translation of $4.5 million and acquisitions of $16.7 million. Higher revenue related to Benefits Outsourcing was due to an increase in clients going live with contract services over the last twelve months, increased project work, and the benefit of $9.0 million of revenue related to the resolution of two contract restructurings, partially offset by lost clients.
Fiscal year 2008 operating income increased to $312.8 million, from an operating loss of $143.0 million in the prior year. The improvement was primarily due to the significant non-cash charges incurred in fiscal year 2007 for goodwill and asset impairment in the HR BPO segment. See Note 8 to the Consolidated Financial Statements for more information relating to these charges. Revenue growth in the Consulting and Benefits Outsourcing segments and continued improvement in the HR BPO operating results also contributed to the increase in operating income. Segment results are discussed in greater detail later in this section.
We announced three acquisitions during fiscal 2008: New Bridge Street Consultants, one of the leading specialist compensation consultancies in the United Kingdom; CSi â€“ The Remuneration Specialists, a specialist compensation consultancy that provides data, analytics and compensation consulting solutions to organizations in Australia and New Zealand; and LCG, which provides an array of integrated disability, leave and absence management solutions for mid- to large-sized employers. RealLife HR, which was acquired in fiscal year 2007 and provides health and welfare benefits services for middle market companies, has exceeded expectations for its first year. We also completed the sale of the Cyborg business, a licensed payroll and HR software services organization, to streamline our HR outsourcing offerings.
We continue to maintain an aggressive focus on our overall cost structure and continued several productivity initiatives across our business throughout the year. In conjunction with an ongoing review of our real estate portfolio, we announced our intention to consolidate facilities, and in some cases, exit certain properties. Accordingly, we recorded pre-tax charges of $44.8 million during the fiscal year.
At September 30, 2008, we had a total of $124.5 million in long-term investments, which are comprised of available-for-sale auction rate securities (â€śARSâ€ť). While the underlying securities generally have long-term nominal maturities that exceed one year, the interest rates on these investments reset periodically in scheduled auctions (generally every 7-35 days). We have the opportunity to sell these investments during such periodic auctions subject to buyer availability.
During February 2008, issues in the global credit and capital markets led to failed auctions with respect to our ARS. During the second, third and fourth quarter, all of our outstanding ARS were subject to failed auctions. During the third and fourth quarter, $8.0 million of our ARS issues were called at par. At September 30, 2008, our ARS portfolio had a fair value of $124.5 million and a par value of $131.5 million. We used a discounted cash flow model to determine the estimated fair value of our ARS at September 30, 2008. As a result, we determined that there was a reduction in the fair value of our ARS and recorded an unrealized loss of $6.9 million ($4.3 million net of tax) within other comprehensive income, a component of stockholdersâ€™ equity. Since the impairments in fair values have been relatively short in duration and considering the overall quality of the underlying investments and the anticipated future market for such investments, the impairment is considered to be temporary as of September 30, 2008.
We believe that the current lack of liquidity relating to our ARS investments will not materially affect our ability to fund our ongoing operations and growth initiatives. As of September 30, 2008, we have classified the entire ARS investment balance from short-term investments to long-term investments on the consolidated balance sheet reflecting our inability to determine when these investments in ARS will become liquid. At September 30, 2008, we have determined that we have the intent and ability to hold these securities until maturity and that the current reduction in fair value is temporary.
During fiscal year 2008, we continued to repurchase our outstanding common shares. During the year, we repurchased approximately 15.1 million of our outstanding shares at an average price of $37.54, for a total of approximately $566.4 million, completing our original $750 million share repurchase authorization announced during the second quarter of fiscal year 2007.
Fiscal Years Ended September 30, 2007 and 2006
(1) Net revenues include $69,842 and $117,964 of third party supplier revenues for the years ended September 30, 2007 and 2006, respectively. Generally, the third party supplier arrangements are marginally profitable. The related third party supplier expenses are included in other operating expenses.
The increase in net revenues was primarily driven by revenue growth in the Consulting segment. Revenue strength was attributed to an increased demand in Consulting for Retirement and Financial Management and Talent and Organizational Consulting services. HR BPO also contributed to the revenue growth due to an increase in the number of clients who went live with contract services over the last twelve months and growth in revenue from existing clients, including an increase in project work. Net revenues, excluding third party supplier revenues and the favorable effects of foreign currency translation and acquisitions of approximately $48.3 million and $10.3 million, respectively, increased 4.4% as compared to the prior-year. Segment results are discussed in greater detail later in this section.
Compensation and Related Expense
The increase in expense over the prior year included $60.4 million of increased performance-based compensation and $45.4 million of higher salaries and wages partially offset by $12.7 million of lower share-based compensation related to lower IPO restricted stock award expense and an increase in the forfeiture rate. The increase in performance-based compensation reflected an overall increase in the expected payout compared to the prior year due to the improvement in underlying performance in fiscal 2007. The increase in salaries and wages was primarily attributable to increases in compensation, higher labor costs related to servicing live clients, and an increase in severance expense. Partially offsetting the increase in salaries and wages was lower contractor expense due to the Companyâ€™s continued efforts to optimize resources.
Goodwill and Asset Impairment
During the year ended September 30, 2007, the Company evaluated certain intangible assets related to the HR BPO and Benefits Outsourcing segments for impairment. This review resulted in non-cash impairment charges of $326.6 million including $280 million of goodwill impairment and $47 million of asset impairment, which included capitalized software and core technology of $33 million, customer relationships of $6 million and $8 million of anticipated losses on certain contracts. During fiscal 2006, the Company recognized $256 million of impairment charges related to HR BPO. The non-cash charges consisted of $172 million of goodwill impairment, $62 million of asset impairment for certain existing contracts due to higher than expected costs to be incurred over the life of the contracts, $13 million of asset impairment resulting from the termination of a client contract and $9 million of long-lived asset impairment primarily due to lower than expected utilization of an acquired asset.
Other Operating Expenses
The decrease in other operating expense was due to a reduction in third party supplier costs of $47.8 million, offset by $29.3 million of real estate-related charges primarily due to recognition of the fair value of lease vacancy obligations and lease termination charges related to exit of certain locations, and related acceleration of depreciation of leasehold improvements and equipment and other charges. Also offsetting the decrease was an increase in client service delivery charges, net of deferrals, of $7.5 million primarily related to the increased number of HR BPO clients who were live with ongoing services.
Selling, General and Administrative (SG&A) Expense
The increase in SG&A expense was primarily due to a $15 million charge associated with the anticipated restructuring of an HR BPO contract and a $5 million charge, recorded within Benefits Outsourcing, associated with the resolution of a legal dispute with a vendor. Also contributing to the increase was higher amortization of intangible assets resulting from the shortening of the remaining useful life of a customer relationship and higher consulting charges related to the Companyâ€™s assessment of its longer-term strategy.
Total Other Income, Net
Total other income increased by $14 million over the prior year due to higher interest income derived from significantly higher average investment balances and rising interest rates yielding higher returns. In addition, in fiscal 2007, we sold an investment that was accounted for using the cost basis method of accounting and recognized a gain of $6 million. In fiscal 2006, we recognized a $7 million gain in connection with a contribution of our German Retirement and Financial Management business in exchange for an increased investment in a German actuarial business.
Provision for Income Taxes
Our consolidated effective income tax rate was 40.4% for the year ended September 30, 2007, as compared to 94.6% for the comparable prior-year period. We identify items which are not normal and recurring in nature and treat these as discrete events. The tax effect of discrete items is booked entirely in the period in which the discrete event occurs. Additionally, tax legislation and tax examinations in the jurisdictions in which we do business may change our effective tax rate in future periods. While such changes cannot be predicted, if they occur, the impact on our tax assets, obligations and liquidity will need to be measured and recognized in the financial statements.
In fiscal 2007 and 2006, a number of significant items, including a non-deductible goodwill impairment charge, as well as a reduction of deferred tax assets related to certain foreign entities, impacted the current year rate.
Effective October 1, 2007, we adopted FIN 48, which requires a more-likely-than-not threshold for financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. We record a liability for the difference between the benefit recognized and measured pursuant to FIN 48 and the tax position taken or expected to be taken on our tax return. To the extent that our assessment of such tax positions changes, the change in estimate is recorded in the period in which the determination is made. Prior to October 1, 2007, we established contingencies for income tax when, despite the belief that our tax positions were fully supportable, we believed that it was probable that our positions would be challenged and possibly disallowed by various authorities. The consolidated tax provision and related accruals included the impact of such reasonably estimable losses and related interest and penalties as deemed appropriate.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
The following information should be read in conjunction with the information contained in our consolidated financial statements and related notes presented earlier in this Quarterly Report on Form 10-Q. Please also refer to our consolidated financial statements and related notes and the information under the heading â€śManagementâ€™s Discussion and Analysis of Financial Condition and Results of Operationsâ€ť included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission for additional information. In addition to historical information, this Quarterly Report on Form 10-Q may contain forward-looking statements that involve risks, uncertainties and assumptions, which could cause actual results to differ materially from managementâ€™s expectations. Some of the risks and uncertainties are described below and in the â€śNote Regarding Forward-Looking Statementsâ€ť which appears later in this section and in our Annual Report on Form 10-K, in Item 1A under the heading â€śRisk Factors.â€ť
We use the terms â€śHewittâ€ť, â€śthe Companyâ€ť, â€śweâ€ť, â€śusâ€ť, and â€śourâ€ť to refer to the business of Hewitt Associates, Inc. and its subsidiaries. All references to years, unless otherwise noted, refer to our fiscal years, which end on September 30. For example, a reference to â€ś2008â€ť or â€śfiscal 2008â€ť means the twelve-month period that ends September 30, 2008. References to and adjustments for â€śforeign currency translationâ€ť are made within our discussion of results so that the financial results can be viewed without the impact of fluctuating foreign currency exchange rates used in reporting results in one currency (U.S. dollar) and helps facilitate a comparative view of business results. Financial results described within this section, except for share and per share information, are stated in thousands of U.S. dollars unless otherwise noted. Certain prior-period amounts have been reclassified to conform to the current-year presentation.
Third quarter net revenues, excluding third party supplier revenues and adjusting for the favorable effect of foreign currency translation of $10.7 million and the net favorable effect of acquisitions/divestiture of $1.4 million, increased 6.3% as compared to the prior-year period and was driven by growth across all segments, particularly in Consulting. Consulting revenue growth over the prior year, adjusting for the favorable effects of foreign currency translation of $7.2 million and acquisitions of $6.5 million, resulted principally from Retirement and Financial Management services as well as Talent and Organizational Consulting services. Benefits Outsourcing also reported higher revenue in the quarter, adjusting for the favorable impact of foreign currency translation of $1.2 million and acquisitions of $2.8 million, due to an increase in clients going live with contract services over the last twelve months and project work, partially offset by lost clients. Human Resource Business Process Outsourcing (â€śHR BPOâ€ť) reported revenue growth in the quarter, excluding third party revenue and adjusting for the favorable impact of foreign currency translation of $2.3 million and the impact of $7.9 million from the sale of Cyborg, primarily due to an increase in the number of clients who went live with contract services over the last twelve months, partially offset by planned service reductions to certain clients and favorable one-time adjustments in the prior year.
Operating income increased $8.8 million, or 12.2%, from the prior-year quarter. The increase was primarily due to a $52.3 million or 7.0% increase in revenue from the prior-year quarter. Higher revenues were accompanied by $43.5 million or a 6.5% increase in operating expenses from the prior-year quarter, mostly due to higher compensation and related expenses, resulting in higher net income.
At June 30, 2008, we had a total of $127.6 million in long-term investments, which are comprised of available-for-sale auction rate securities (â€śARSâ€ť). While the underlying securities generally have long-term nominal maturities that exceed one year, the interest rates on these investments reset periodically in scheduled auctions (generally every 7-35 days). We have the opportunity to sell these investments during such periodic auctions subject to buyer availability.
During February 2008, issues in the global credit and capital markets led to failed auctions with respect to our ARS. During the second and third quarter, all of our outstanding ARS were subject to failed auctions. In the third quarter, $6.5 million of our ARS issues were called at par. At June 30, 2008, our ARS portfolio had a fair value of $127.6 million and a par value of $132.9 million. We used a discounted cash flow model to determine the estimated fair value of our ARS at June 30, 2008. As a result, we determined that there was a reduction in the fair value of our ARS and recorded an unrealized loss of $5.3 million ($3.2 million net of tax) within other comprehensive income, a component of stockholdersâ€™ equity. We believe that the current lack of liquidity relating to our ARS investments will not materially affect our ability to fund our ongoing operations and growth initiatives. As of March 31, 2008, we reclassified the entire ARS investment balance from short-term investments to long-term investments on the consolidated balance sheet reflecting our inability to determine when these investments in ARS will become liquid. During the quarter, we continued to repurchase our outstanding common shares.
During the three months ended June 30, 2008, we repurchased approximately 0.3 million of our outstanding shares at an average price of $38.39, for a total of approximately $13.0 million. At June 30, 2008, we had approximately $155 million remaining under our current $750 million share repurchase authorization.
Good morning and thank you for joining us. On the call today are Russ Fradin, our Chairman and CEO, and John Park, our CFO.
Before we get started, let me highlight that when we discuss revenues we're referring to net revenues or revenues before reimbursements. And during this call we will discuss underlying operating income, net income, earnings per share and adjusted EBITDA amounts. These are non-GAAP financial measures that provide a better understanding of our underlying performance. Please refer to this mornings press release and the Investor Relations section of our website to obtain a reconciliation of U.S. GAAP to these measures.
On this call we may make forward-looking statements. Forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. Please refer to our most recent SEC filings for more information on risk factors that could cause actual results to differ. Hewitt disclaims any obligation to update or revise any forward-looking statements made on this call.
At the conclusion of the call we'll conduct a question-and-answer session. During the Q&A session we ask that, as a courtesy to others, you please limit yourself to one question.
Now I'll turn it over to Russ.
Russell P. Fradin
Thanks, Sean, and good morning, everyone. Thank you for joining us today.
I am pleased to be able to provide this update on Hewitt today. I am sure that all of you are anxious to hear how we are doing in light of the economic situation and we will do our best to cover all the relevant issues.
Fiscal 2008 was a strong year for Hewitt as we made great progress executing on each of our four strategic priorities - keeping clients first, creating a rewarding work experience, growing with intention, and getting lean. Specifically, I want to mention several noteworthy accomplishments over the past year.
First, we achieved healthy growth in our Consulting and Benefit Outsourcing business while investing for the future.
Our Consulting business delivered strong double-digit organic constant currency growth in fiscal 2008 with all practices and geographies contributing to the improvement. We saw particularly good demand for our retirement and financial management services in North America and in Europe, in addition to talent and organization consulting services in Asia-Pacific, North America and Europe.
After a flat 2007, Benefit Outsourcing showed modest growth by adding new clients, expanding into the mid-market with our new core benefits administration solution, and adding new services such as absence management.
To support this growth in 2008 we made investments in both Consulting and Benefit Outsourcing by making some acquisitions that leverage our sales force. We also invested in internal growth initiatives.
Second, we significant reduced the losses from the HR Business Process Outsourcing business. Through successful contract renegotiations and cost management efforts, we reduced the underlying operating loss by almost $70 million this year. The portfolio continues to stabilize nicely. Looking ahead, we are focused on continued reduction in the cost and, more importantly, delivering quality to our clients.
Third, we meaningfully lowered our overhead costs by restructuring our real estate portfolio and better aligning our work force for future growth. During fiscal 2008 we took $45 million in charges related to the real estate rationalization plan initially announced last year. We realized good savings in 2008 from our fiscal 2007 actions to exist and consolidate facilities and we expect to begin to see additional savings in fiscal 2009.
We also took steps to further lower overhead costs through targeted work force reductions. This year we achieved nice productivity gains in HR Outsourcing by leveraging our staffing levels on a global basis.
As we've said on our last earnings call, we absorbed significant severance in Q4 as part of our plan to improve our productivity across all of our businesses, leaving us well positioned to start the new fiscal year.
Fourth, we further strengthened our financial position by securing $500 million in new financing on attractive terms during the fourth quarter. This gives us a lot of flexibility and we intend to use it. A key priority will be to build on our strong strategic position to pursue our growth agenda through acquisitions, particularly if attractive valuations become apparent.
Our strong position also allows us to improve our capital structure, as evidenced by today's $300 million share repurchase announcement.
Before I turn the call over to John, I want to provide additional color on the quarter given the current business environment. In the fourth quarter we delivered a strong finish to an already very good year for Hewitt. We were able to consistently improve our performance against our guidance as the year progressed while absorbing sizeable severance charges due to restructuring actions across our businesses, actions now more important than ever in this challenging economic environment.
Despite the barrage of bad economic news globally, demand for our services in the fourth quarter was robust. We see good sales prospects in our outsourcing businesses and the demand in Consulting appears to continue.
We talk frequently to our clients and other business leaders as we are as anxious as anyone given the fear and uncertainty that is prevalent in the world economy. That said, we can only report on the results we see and the sales opportunities in front of us, and these trends remain positive. I will remind everyone once again that we could be a lagging indicator for the broader economy. Later in the call I'll provide some additional perspective on why our finish to the year was strong and why we are optimistic about fiscal 2009.
Now I'll turn the call over to John to discuss our detailed financial results and guidance for next year.
John J. Park
Thanks, Russ, and good morning, everyone. Let me start by highlighting our consolidated results for the fourth quarter.
Fourth quarter net revenues increased a solid 8% over the prior year quarter. Net revenues also grew 8% after excluding the effects of currency, third-party supplier revenues and acquisitions and divestitures. Reported operating income in the fourth quarter was $54 million compared with an operating loss in the prior year quarter of $281 million.
Our underlying operating income grew 8% to $87 million in the fourth quarter compared to $80 million last year. Our underlying results include $17 million in severance charges, but exclude the following one-time items: In the current quarter, a $34 million pre-tax charge related to the rationalization of our real estate portfolio and a favorable $2 million pre-tax adjustment related to a previous HR BPO contract restructuring. In last year's quarter there were $361 million in unusual items primarily related to goodwill and asset impairment and real estate restructuring. You can see the full detail in our earnings release.
Our reported effective tax rate for the current quarter was 34.5%. This relatively low rate is mostly due to discrete events which occurred during the quarter, such as a reversal of certain tax contingency reserves and return to provision adjustments. On an underlying basis, our normalized effective tax rate was approximately 39% in this period and last year.
Reported net income for the fourth quarter increased to $32 million or $0.32 per diluted share, impaired with a net loss of $266 million or a loss of $2.51 per diluted share last year. On an underlying basis, we recorded earnings of $0.50 per diluted share in the fourth quarter as compared to $0.47 per diluted share last year, an increase of 6%. This adjusts for the onetime items and normalizes the tax rates.
For the full fiscal year, net revenues grew a solid 8% over the prior year to $3.2 billion. Net revenues grew 7% after adjusting for third-party revenues, currency, acquisitions and divestitures, and the favorable impact of HR BPO contract settlements.
Reported operating income was $313 million compared with an operating loss in the prior period of $143 million. Our underlying operating income grew 30% to $334 million for fiscal 2008 compared to $257 million last year. These results include $31 million in severance charges but exclude the following one-time items: For fiscal 2008, a $45 million pre-tax charge related to the rationalization of our real estate portfolio, a pre-tax net gain of $35 million related to the divestiture of our Cyborg business, and pre-tax net charges of $12 million related to HR BPO contract restructurings. For fiscal 2007, unusual items totaled $400 million, primarily related to goodwill and asset impairment, severance and real estate restructuring. Again, full details are available in our earnings release.
Our reported effective tax rate was 40.5% for the year compared to 40.4% in 2007. On an underlying basis, our normalized effective tax rate was 39% in both periods. Reported net income for the year increased to $188 million or $1.85 per diluted share compared with a net loss of $175 million or a loss of $1.62 per diluted share last year. Adjusting for the one-time items and normalizing the tax rates, we recorded underlying earnings of $2.02 per diluted share for the year as compared to $1.48 per diluted share last year, an increase of 36%.
For the year, cash flow from operations was $328 million compared with $435 million in fiscal 2007. Free cash flow was $210 million compared with $347 million in fiscal 2007. This decrease in free cash flow was driven primarily by higher performance-based compensation paid in 2008 for 2007 performance and higher tax payments.
Capital expenditures were $118 million in fiscal 2008 compared with $88 million in the prior year. This higher level of CapEx reflects an increased level of investment in technology, particularly IT hardware for our outsourcing businesses and real estate relocations, renovations and upgrades related to our rationalization initiative. Recall that last year's spending was unusually low as we put a lot of major systems investments on hold while we sorted out our strategy and saw lower implementation activity related to our new HR BPO contracts. For 2009 we anticipate capital investment slightly above 2008 levels.
Adjusted EBITDA for the full year increased by $89 million over the prior year to $524 million due to improvements in our HR BPO business.
I'd like to make a few brief comments on our capital structure now. First, regarding our share repurchase program, during the fourth quarter we completed our existing $750 million share repurchase authorization by buying back 4.1 million shares for a total of $155 million. In fiscal 2008, we bought back 15.1 million shares for a total of $566 million.
Second, in conjunction with our $500 million in new debt financing in August, we executed interest rate swaps on most of the $270 million syndicated loan. This makes the financing 80% fixed and 20% floating, with a current pre-tax cost of debt below 6%.
This financing augmented an already strong balance sheet. We ended the fourth quarter with $541 million in cash and cash equivalents and no outstanding borrowings against our $200 million revolving credit facility.
Now let me give you a few highlights of the performance of each of the businesses. In order to leave plenty of time for your questions, I'll keep my comments to our performance in the fourth quarter and all of my remarks will be based on underlying results, adjusted for the charges that I detailed a moment ago.
In Benefit Outsourcing, reported fourth quarter segment revenues grew 5%. Revenues increased 3% when adjusting for acquisitions and currency. Growth was driven primarily by increased project work and higher participant counts, partially offset by client losses. End user participant counts increased by 7% to 19.7 million. Fourth quarter underlying Benefit Outsourcing margins declined 700 basis points to 20.8%. This was due to higher compensation and client service delivery expenses related to several large and complex clients that recently went live and included higher severance and performance-based compensation. Severance in the current quarter was $8 million.
In HR BPO, reported revenue declined 1%; however, segment revenues grew 11% when adjusting for one-time items, currency, and excluding third-party revenue. Growth was driven primarily by several contracts that went live over the past 12 months as well as project work. This growth more than offset planned service reductions to certain current and former clients. The underlying operating loss improved to $11 million compared to a loss of $38 million in the fourth quarter last year.
The improvement reflects staffing leverage and infrastructure savings related to our lean productivity program and the successful renegotiation of some contracts. This brought out full year loss to $90 million, a meaningful improvement over the loss of $158 million in fiscal 2007, reflecting a dramatic improvement in the stabilization of the business as well as cost reductions.
Let me make a few comments on our outsourcing sales prospects. In Benefit Outsourcing, we continue to see good activity in the large company marketplace across our health and welfare, defined contribution and defined benefits offerings, and our pipeline remains solid. As mentioned earlier on the call, our new middle market core benefits administration health and welfare offer has truly struck a cord and seems to be meeting a real need in the market. We continue to expect this business to grow nicely.
We're also seeing increased activity relative to our new absence management offering due to our LCG acquisition in FY '08. Our ability to offer solutions that show real cost savings by improving wellness and reducing employee absences is gaining ground in the market.
With respect to HR BPO, we have incorporated the many lessons we've learned as a first mover in this space. Today we have a solid set of core offers that we are confident will serve our clients well, but the market remains slow.
Now I'll look at Consulting. Consulting reported very strong top line growth in the fourth quarter, with net revenues increasing by 16% on both a reported and constant currency basis. This reflects organic growth of 14% and another 2% of growth from acquisitions. From a practice perspective, retirement and financial management and talent and organizational consulting grew in the mid-teens, health management and communications grew in the mid single digits.
Legislative and accounting changes in the U.S. and Europe, combined with market and economic volatility, have driven demand for retirement and financial management services. Asia-Pacific continues to grow nicely, driven by demand for our market-leading talent and organization consulting services.
The fourth quarter's underlying margin was 16.6% compared to 18.6% last year. This decline reflects higher compensation costs principally related to investments in the business, including $5 million in severance.
Unallocated shared service costs on an underlying basis were 3.9% of net revenues in the fourth quarter versus 4.3% of net revenues in the prior year quarter. The decrease as a percentage of net revenue is primarily a result of some one-time favorable items.
Looking ahead to fiscal 2009, we plan to build on last year's achievements to drive continued improvements in our financial performance. We anticipate the following for fiscal 2009:
Low single-digit total company net revenue growth comprised of mid to high single-digit growth in Consulting, modest growth in Benefit Outsourcing, and a high single-digit decline in HR BPO;
Operating income of $420 million to $435 million; Consulting and HR BPO are expected to be the most significant contributors to the improvement, with solid margin improvement anticipated for both on an underlying basis;
We anticipate roughly flat margins in Benefit Outsourcing on an underlying basis as we continue to invest in the business.
Regarding HR BPO, we've learned many lessons from the school of hard knocks. Today we're back in the market with a focused service offering and a sales and marketing strategy that will selectively look for growth opportunities. We expect a segment loss in the range of $50 to $60 million in fiscal 2009, which, by the way, is about the adjusted EBITDA breakeven point. Beyond 2009, we anticipate steady progress towards segment income breakeven over the follow two years as we invest in the business.
Finally, we anticipate diluted EPS of $2.35 to $2.45, with a normalized tax rate of 39.6%.
We anticipate fiscal 2009 free cash flow about in line with net income. We expect free cash flow to be impacted by cash payments related to severance and real estate restructuring actions taken in fiscal 2008 in addition to higher bonus payments related to fiscal 2008 performance. We're also expecting good growth in our adjusted EBITDA metric, but lagging diluted EPS growth, again, on an underlying basis.
As a reminder, I want to point out that last year's fiscal first quarter was a particularly strong one with unusually high margins in our benefits outsourcing business. Therefore, we expect Q1 to be our most challenging quarter from a year-over-year comparison.
Now I'd like to turn the call back to Russ.
Russell P. Fradin
Once again, I am pleased with our performance in fiscal year 2008 and very proud of our leaders and associates for keeping focused on our clients and delivering on our plan.
We are fully aware of the economic turmoil and the risks it poses to our business. We have taken decisive steps to offer services that help clients cope with the downturn. We have real knowledge and capability that can support them under these stressful conditions. We have been proactive in positioning Hewitt in the market, and we have been equally decisive in preparing our cost structure and capital structure for the new realities we face.
It is the quality of Team Hewitt that enabled us to navigate these difficult times. We have had setbacks, like everyone else, but the resourcefulness and knowledge of our associates has allowed us to continue to grow in the face of unprecedented events.
Furthermore, I want to highlight several aspects of Hewitt that give us some comfort that we will continue to build our strong market position given the current economic challenges.
First, we are a trusted name in the human capital space, with expertise in many areas that clients seek in times of great change and upheaval.
Second, our business model is resilient, with a high degree of year-to-year revenue retention.
Third, we remain very strong financially.
So despite the tough business environment, our metrics are holding up well. We are pleased to say that we expect another year of revenue and earnings growth.