Accenture plc — Q1 FY2011 10-Q
Business context and period: Unaudited results for the three months ended November 30, 2010, compared with the three months ended November 30, 2009. Accenture provides consulting and outsourcing services; its fiscal year ends August 31. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 FY2011 | Q1 FY2010 | Change |
|---|---|---|---|
| Net revenues (before reimbursements) | $6.046 billion | $5.383 billion | +12% reported; +14% local currency |
| Total revenues | $6.478 billion | $5.748 billion | +13% |
| Operating income | $827 million | $746 million | +11% |
| Operating margin on net revenues | 13.7% | 13.9% | Down 0.2 percentage points |
| Gross margin on net revenues | 32.2% | 33.1% | Down 0.9 percentage points |
| Net income attributable to Accenture plc | $535 million | $445 million | +20% |
| Diluted EPS | $0.81 | $0.67 | +$0.14 |
| Cash provided by operating activities | $106 million | $219 million | Down $113 million |
Net income was $606 million, including $71 million attributable to noncontrolling interests. The effective tax rate was 28.3%, versus 30.5% a year earlier. The filing attributes the EPS increase mainly to stronger local-currency revenue and operating results, fewer weighted-average diluted shares, and a lower tax rate; unfavorable foreign exchange partially offset the increase.
Revenue and segment trends
- Consulting net revenues grew 14% in U.S. dollars and 16% in local currency to $3.568 billion; outsourcing grew 10% and 11%, respectively, to $2.478 billion.
- Local-currency net revenue growth was strongest in Financial Services (+21%), Resources (+18%), Products (+17%), and Communications & High Tech (+12%). Health & Public Service declined 1%.
- Americas, EMEA, and Asia Pacific net revenues grew 17%, 9%, and 19% in local currency, respectively. The U.S. dollar’s strength reduced reported revenue growth by about one percentage point relative to local-currency growth.
- Health & Public Service operating income fell to $58 million from $135 million, with margin declining to 6% from 14%; the filing cites lower contract profitability, mix, and higher selling costs. Other operating groups reported higher operating income.
Cash, liquidity, and capital
- Cash and cash equivalents were $4.160 billion at November 30, down $678 million from August 31. Operating cash flow was $106 million; investing used $135 million and financing used $704 million. The decline in operating cash flow primarily reflected higher net client balances, including receivables and unbilled services.
- Cash was also used for $620 million of share purchases and $321 million of dividends. The quarterly dividend was $0.45 per share; the prior-year quarter’s reported dividend was $0.75 per share. Management said the lower cash dividend outlay reflected the move to semi-annual payments.
- Reported debt was negligible: $332,000 current and no long-term debt at quarter-end. Available borrowing facilities totaled $1.889 billion, with no borrowings and $165 million of letters of credit outstanding.
- Current assets were $9.470 billion and current liabilities $6.447 billion. Management said cash and expected operating cash flows should meet working-capital and investment needs for the next 12 months.
- Accenture had $2.471 billion of remaining share-purchase authorization and intended to use a significant portion of fiscal 2011 operating cash generation for repurchases, subject to business and market conditions.
Outlook, commentary, and risks
- Management reported improving demand and expected growth to continue in most areas, while noting growth would vary by segment, geography, and service type. It cited continuing economic uncertainty, competitive pricing, and clients’ phased contracting and cost-reduction focus.
- Assuming exchange rates stayed within recent ranges, management estimated no foreign-exchange impact on full-year fiscal 2011 U.S.-dollar revenue growth versus local-currency growth. Expected fiscal 2011 effective tax rate: 28%–29%.
- Utilization was approximately 87%, within the company’s target range. Headcount was approximately 211,000, up from 176,000 a year earlier; annualized attrition was 15%. Higher hiring, subcontractor, training, and compensation costs contributed to lower gross margin.
- Reorganization liabilities were $282 million, mostly current. The company warned that eventual tax assessments, litigation, or other resolutions could cause payments to exceed recorded amounts; one jurisdiction remained significant.
- Accenture disclosed client indemnities and guarantees, including $612 million of potential liability under expressly limited third-party performance guarantees, most of which it said could be recovered from third parties. Management considered potential payments immaterial. It also described a DOJ-intervened False Claims Act/Anti-Kickback Act case involving government work and vendor alliances; the damages sought could be significant, though management did not expect a material impact.
- Other stated risks include economic and client-demand changes, competition and pricing, talent availability and retention, contract profitability, foreign exchange, data security, taxes, and legal or regulatory matters. The filing reported no material change in previously disclosed risk factors or market-risk exposure.
- The adoption of updated multiple-deliverable revenue-recognition guidance had no material financial-statement impact. The filing reported effective disclosure controls and no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether growth persists and whether the weakness in Health & Public Service profitability improves.
- Whether operating cash flow recovers as receivables and unbilled services rise, and how cash conversion compares with earnings.
- Whether higher compensation, recruiting, subcontractor, and training costs continue to pressure margins.
- Whether the 28%–29% full-year tax-rate expectation and management’s currency assumptions remain valid.
- Developments in the significant reorganization-tax matter and DOJ government-contracting litigation, including any change in exposure or recorded liabilities.
- The pace of share repurchases, dividend payments, and any resulting effects on cash balances and diluted share count.