Accenture plc — Q3 FY2010 Form 10-Q
Business context and period: Quarterly report for the three and nine months ended May 31, 2010; fiscal year ends August 31. Accenture provides consulting, systems integration and technology, and outsourcing services through five operating groups. Figures below are U.S. dollars unless noted.
Financial performance
| Metric | Three months ended May 31, 2010 | Nine months ended May 31, 2010 |
|---|---|---|
| Net revenues (before reimbursements) | $5.571 billion; up 8% in U.S. dollars and 4% in local currency year over year | $16.130 billion; down 2% in U.S. dollars and 6% in local currency |
| Operating income / margin | $804 million; 14.4%, versus $732 million and 14.2% | $2.201 billion; 13.6%, versus $2.224 billion and 13.5% |
| Gross margin | 34.7%, versus 32.5% | 33.5%, versus 31.5% |
| Net income attributable to Accenture plc | $491 million, versus $444 million | $1.335 billion, essentially unchanged from $1.335 billion |
| Diluted EPS | $0.73, versus $0.68 | $2.00, versus $2.05 |
| Operating cash flow | Not reported separately for the quarter | $1.840 billion, versus $2.113 billion |
Reported revenues, including reimbursements, were $5.975 billion for the quarter and $17.261 billion year to date. Consulting net revenues grew 4% in local currency in Q3; outsourcing grew 3%. For the nine-month period, consulting declined 8% and outsourcing declined 3% in local currency.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $4.312 billion at May 31, 2010, down from $4.542 billion at August 31, 2009. Nine-month cash flow from investing was negative $164 million and from financing negative $1.723 billion; cash declined $230 million overall.
- Total debt was approximately $0.8 million. The company reported $1.699 billion of borrowing facilities, with no borrowings and $135 million of letters of credit outstanding.
- Current assets were $8.843 billion and current liabilities $5.829 billion. The company said available cash and expected operating cash flows should meet working-capital and investment needs for the next 12 months.
- Cash dividends paid were $824 million in the first nine months. Share purchases and redemptions used $1.332 billion of cash; remaining aggregate authorization was approximately $3.625 billion.
Material changes and management commentary
- Q3 marked a recovery from weaker first-half trends: three operating groups—Financial Services, Products and Resources—returned to local-currency year-over-year revenue growth. Americas grew 8% and Asia Pacific 3% locally; EMEA was flat.
- Management cited improved demand and bookings, but said recovery varies by segment, geography and service line. Q3 bookings were $6.43 billion ($3.18 billion consulting; $3.25 billion outsourcing); nine-month bookings were $18.48 billion.
- Q3 utilization was approximately 88%, above the company’s target range and up from 83% a year earlier. Headcount was approximately 190,000, versus 177,000 at fiscal year-end; annualized attrition was 17%, versus 8% a year earlier.
- Higher gross margin reflected lower cost of services as a percentage of net revenues. Management also attributed the year-to-date margin improvement partly to directing more employee capacity to selling and business-development work. A September 2009 change in time-capture practices shifted some payroll costs from cost of services to sales and marketing; FY2009 was not reclassified, limiting comparability. Sales and marketing rose 36% in Q3 and 22% year to date.
- The U.S. dollar’s weakening versus many currencies benefited reported results. Assuming exchange rates remained within recent ranges, management estimated full-year FY2010 revenue growth would be about 2 percentage points higher in U.S. dollars than in local currency.
Outlook, risks and contingencies
- Management expected FY2010’s annual effective tax rate to be 29%–30%, versus 27.6% in FY2009. The Q3 rate was 29.8%; the nine-month rate was 29.5%.
- Risks highlighted include uncertain economic and public-sector demand, competitive pricing (particularly in parts of Europe), client contract terminations and scope changes, currency movements, utilization and hiring/retention, collections, delivery and subcontractor performance, and technology and data-security risks.
- Reorganization liabilities were $264.6 million at May 31, 2010. Certain unresolved tax disputes could result in payments exceeding recorded amounts; one jurisdiction was described as significant, with some litigation expected.
- The filing describes a U.S. government False Claims Act/Anti-Kickback Act lawsuit involving vendor alliances; the government’s claimed amount could be significant, although management said it did not expect a material impact. Other ordinary-course litigation and investigations were also disclosed, with no material impact expected by management.
- Client indemnities and guarantees include approximately $473 million of aggregate potential liability for expressly limited third-party performance guarantees; the company said most could be recovered from the relevant third parties and that it had made no significant payments to date.
Most important facts for investors to verify
- Whether the Q3 local-currency revenue recovery and bookings convert into sustained growth, especially in consulting and public-sector work.
- Whether improving operating margins persist after accounting for the sales-and-marketing cost reclassification and higher business-development spending.
- Cash conversion and working-capital trends, given the year-over-year decline in nine-month operating cash flow and increases in client receivables and unbilled services.
- Actual FY2010 tax rate and foreign-exchange effects compared with management’s stated expectations.
- Developments in the reorganization tax disputes and the U.S. government lawsuit, including any changes to exposure or recorded liabilities.