Accenture plc — Q1 FY2010 10-Q
Reporting period: Three months ended November 30, 2009; financial statements are unaudited. Comparisons are with the three months ended November 30, 2008 unless noted. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 FY2010 | Prior period | Change |
|---|---|---|---|
| Net revenues, before reimbursements | $5.383 billion | $6.019 billion | Down 11% in U.S. dollars; down 12% in local currency |
| Total revenues | $5.748 billion | $6.471 billion | Down 11% |
| Operating income | $746 million | $815 million | Down 8% |
| Operating margin on net revenues | 13.9% | 13.5% | Up 0.4 percentage points |
| Net income attributable to Accenture plc | $445 million | $480 million | Down 7% |
| Diluted earnings per share | $0.67 | $0.74 | Down $0.07 |
| Operating cash flow | $219 million | $468 million | Down $249 million |
Gross margin was 33.1%, versus 31.4%. The filing attributes the improvement partly to redirecting staff capacity from cost-of-services activities to sales and marketing; the company did not reclassify the prior-year presentation. Sales and marketing expense rose 10% to $622 million, while general and administrative expense fell 19% to $412 million, partly because the prior period included a $72 million bad-debt provision.
Consulting net revenues fell 15% in U.S. dollars (16% in local currency) to $3.12 billion; outsourcing fell 4% (5% in local currency) to $2.26 billion. Net revenues declined in most operating groups. Health & Public Service was approximately flat in local currency, while Asia Pacific revenue increased 6% in U.S. dollars but declined 2% in local currency.
Cash, debt and liquidity
Cash and cash equivalents were $4.00 billion at November 30, down from $4.54 billion at August 31, 2009. Current assets were $8.93 billion and current liabilities were $6.18 billion. Total debt was approximately $3 million. The company reported $1.743 billion of borrowing facilities with no borrowings outstanding, and $171 million of letters of credit.
Operating cash flow was $219 million; investing activities used $29 million, including $35 million of property and equipment purchases. Financing activities used $832 million, including $551 million of cash dividends and $451 million of share purchases. Cash declined by $542 million during the quarter, after a favorable $100 million currency translation effect. Management said available cash and expected operating cash flows should meet working-capital and investment needs for the next 12 months.
Material changes and management outlook
- Management said the economic downturn and cautious client spending continued to pressure demand, particularly consulting, new projects and expansions of existing contracts. Some areas of consulting demand had recently improved; management expected moderation of adverse effects in certain areas.
- Outsourcing growth remained affected by contract terminations and restructuring, lower volumes and client cost-reduction efforts; management expected these trends to continue affecting near-term year-over-year comparisons.
- First-quarter bookings were $5.53 billion: $3.51 billion consulting and $2.02 billion outsourcing. Bookings are estimates, can fluctuate substantially, and are not equivalent to backlog; many client contracts are terminable on short notice.
- Utilization was approximately 88%, above the company’s target range and up from 83% a year earlier. Headcount was approximately 176,000 at quarter-end, versus 177,000 at August 31.
- Management forecast a fiscal 2010 effective tax rate of 30%–32%, compared with 27.6% for fiscal 2009. Assuming exchange rates remained within recent ranges, it estimated currency would make fiscal 2010 revenue growth in U.S. dollars approximately five percentage points higher than growth in local currency.
- The company authorized an additional $4.0 billion for share purchases, bringing total outstanding authorization to approximately $4.9 billion; approximately $4.46 billion remained available at quarter-end.
Unusual items, contingencies and risks
- Other income included a $73 million net gain on non-designated foreign-currency derivatives. Derivatives are used for currency risk management, not trading; management reported no material change in overall market-risk exposure during the quarter.
- Reorganization-related liabilities were $316 million at quarter-end. The company noted that final resolution of related tax audits or proceedings could result in payments exceeding recorded amounts; one jurisdiction remained significant, with disputes that may lead to litigation.
- A U.S. Department of Justice-intervened False Claims Act and Anti-Kickback Act case concerning technology-vendor alliance arrangements seeks remedies that could be significant and could lead to related proceedings, including possible suspension or debarment. Accenture said it would defend the matter and did not expect a material effect; the DOJ said an additional investigation had been closed.
- Potential liability under expressly limited third-party performance guarantees was approximately $570 million, of which all but approximately $25 million was potentially recoverable from other parties. The company said potential payments were expected to be immaterial and it had made no significant payments under these arrangements.
- Management said ordinary-course litigation and investigations were not expected to have a material effect. Disclosure controls were deemed effective, and no material change in internal control was reported.
Investor verification points
- Whether consulting demand, outsourcing contract volumes and bookings convert into sustainable revenue growth.
- Cash conversion and working-capital movements, particularly receivables, unbilled services and deferred revenues.
- How the shift of payroll costs into sales and marketing affects comparability of margins and expenses.
- Whether the 30%–32% tax-rate outlook and expected currency benefit are realized.
- Developments in the reorganization tax disputes and the DOJ case, including any change in potential exposure.
- The pace of dividends and share repurchases relative to operating cash flow and liquidity needs.