Accenture plc — Q3 FY2013 Form 10-Q
Reporting period: Three and nine months ended May 31, 2013. Accenture provides consulting and outsourcing services. Financial statements are unaudited; dollar amounts below are rounded.
Key financial results
| Metric | Q3 FY2013 | Q3 FY2012 | Nine months FY2013 | Nine months FY2012 |
|---|---|---|---|---|
| Net revenues | $7.20bn | $7.15bn | $21.48bn | $21.03bn |
| Operating income | $1.14bn | $1.06bn | $3.36bn | $2.93bn |
| Operating margin | 15.9% | 14.8% | 15.6% | 13.9% |
| Net income attributable to Accenture plc | $810m | $689m | $2.61bn | $1.98bn |
| Diluted EPS | $1.21 | $1.03 | $3.92 | $2.96 |
| Gross margin | 33.9% | 33.1% | 32.8% | 32.0% |
- Net revenue growth was 1% in U.S. dollars and 3% in local currency for Q3; year-to-date growth was 2% and 4%, respectively. Currency translation reduced reported growth.
- Q3 consulting revenue was $3.87bn, flat in local currency; outsourcing revenue was $3.33bn, up 7% in local currency. Year-to-date, consulting was flat in local currency and outsourcing grew 10%.
- Excluding reorganization benefits, operating margin was 15.2% for Q3 and 14.3% year to date, each 40 basis points above the comparable prior-year period. The reported margin increase therefore partly reflects the unusual benefit described below.
- Q3 diluted EPS included approximately $0.07 from reorganization benefits. Year-to-date EPS included approximately $0.38 from those benefits and $0.34 from a U.S. federal tax-audit settlement; excluding both, EPS was $3.20.
Cash flow, balance sheet and capital allocation
- Operating cash flow was $2.03bn for the nine months, down from $2.55bn. The company cited a $500m discretionary U.S. pension contribution ($350m after tax) and working-capital movements, including higher net client balances.
- Investing cash outflow was $624m, including $369m for acquisitions and $267m for property and equipment. Financing cash outflow was $2.04bn, including $1.45bn of share purchases and $1.12bn of dividends.
- Cash and cash equivalents were $5.94bn at May 31, 2013, down from $6.64bn at August 31, 2012. Current assets were $12.08bn and current liabilities $7.63bn.
- Accenture reported no long-term debt or current borrowings at period-end. Available borrowing facilities totaled $1.64bn, with no borrowings and $174m of letters of credit outstanding.
- The company paid dividends of $0.81 per share on each of two payment dates during the nine-month period. It had $2.98bn of remaining authorization for share purchases and redemptions and said it intended to use a significant portion of remaining FY2013 operating cash flow for repurchases.
Changes, outlook and management commentary
- Growth was uneven: Q3 local-currency net revenue rose 11% in Health & Public Service, 8% in Financial Services and 4% in Products, while Communications, Media & Technology and Resources each declined 3%. Americas grew 8%; EMEA declined 1%; Asia Pacific was flat.
- Management described cautious client spending, lower demand for short-term consulting projects, slower conversion of longer-duration contracts to revenue, and competitive and pricing pressures. Demand remained stronger for outsourcing, cost-saving work, and analytics, cloud and mobility services.
- For Q4 FY2013, management expected local-currency revenue growth to moderate further: outsourcing growth to moderate slightly, and consulting revenue to range from a modest decline to a slight increase. Assuming exchange rates remained within recent ranges, full-year U.S.-dollar revenue growth was estimated to be about 1.7 percentage points below local-currency growth.
- Management expected a FY2013 annual effective tax rate of 18.5%–19.5%, reflecting the reorganization benefits and tax-audit settlement. Without those items, the nine-month effective rate would have been 25.5%.
- Management said available cash and expected operating cash flows should cover working-capital and investment needs for the next 12 months. New bookings were $8.29bn in Q3 and $24.88bn year to date; management cautioned that bookings vary and are not equivalent to backlog.
- Acquity Group acquisition agreement was announced in May, with closing expected in Q4 FY2013. The filing also reports completed acquisitions costing $369m year to date; their pro forma effects were not material.
Unusual items, risks and contingencies
- Reorganization benefits of $50m in Q3 and $274m year to date arose from final determinations of liabilities associated with Accenture’s 2001 corporate restructuring. The remaining liability was $18m.
- A $243m benefit from settlements of U.S. federal tax audits for fiscal years 2006–2009 was recorded in Q2. These items materially lowered the reported year-to-date tax rate and increased EPS.
- Management cited risks including uncertain economic conditions and client demand, talent and utilization management, competition and pricing, foreign exchange, data security, contract delivery and performance obligations, tax matters, and acquisition integration.
- Client guarantees and indemnities include approximately $767m of potential exposure for expressly limited third-party performance guarantees, most of which the company said may be recoverable from third parties. Management considered potential payments immaterial; it could not estimate maximum exposure under arrangements with unspecified limits.
- Accenture reported ordinary-course litigation and investigations and did not expect them, individually or collectively, to materially affect results or financial condition. It reported no material changes to previously disclosed risk factors or market-risk exposures.
Important facts for investors to verify
- How much reported margin and EPS growth reflects sustainable operating improvement versus the reorganization and tax-settlement benefits.
- Whether the forecast moderation in Q4 consulting and outsourcing demand, and the stated foreign-exchange impact, materialized.
- Whether lower operating cash flow and client-balance movements reverse, given the pension contribution and continued shareholder distributions.
- How acquisition spending, including the proposed Acquity deal, affects growth, goodwill and capital allocation.
- Whether client guarantees, legal matters, tax exposures or currency movements develop beyond management’s current assessments.