Accenture plc — Form 10-Q Summary
Reporting period: Third quarter and nine months ended May 31, 2011; fiscal year ends August 31. Financial statements are unaudited. Accenture provides consulting and outsourcing services through five operating groups.
Financial performance
| Metric | Three months ended May 31, 2011 | Nine months ended May 31, 2011 |
|---|---|---|
| Net revenues (before reimbursements) | $6.720 billion; up 21% in U.S. dollars and 15% in local currency | $18.819 billion; up 17% in U.S. dollars and 16% in local currency |
| Total revenues, including reimbursements | $7.204 billion | $20.179 billion |
| Operating income / operating margin | $949 million / 14.1% | $2.548 billion / 13.5% |
| Net income attributable to Accenture plc | $628 million | $1.666 billion |
| Diluted earnings per share | $0.93, versus $0.73 | $2.49, versus $1.99 |
| Gross margin | 34.4%, versus 34.7% | 32.8%, versus 33.5% |
| Effective tax rate | 27.0%, versus 29.8% | 27.4%, versus 29.5% |
Cash flow and liquidity: For the nine months, operating cash flow was $2.060 billion, investing cash flow was negative $382 million, and financing cash flow was negative $1.507 billion. Cash increased $418 million to $5.257 billion at May 31, 2011, including a favorable $247 million foreign-exchange effect. Current assets were $11.147 billion and current liabilities $7.373 billion.
Debt and capital allocation: Total debt was approximately $5 million. The company had $1.844 billion of borrowing facilities with no borrowings, plus $179 million of outstanding letters of credit. Nine-month share purchases totaled $1.441 billion and cash dividends paid were $644 million. Remaining share-purchase authorization was $1.721 billion.
Material changes and operating trends
- Growth was broad-based: all operating groups increased Q3 net revenues in local currency. Resources and Financial Services led, up 22% and 19%, respectively; Health & Public Service grew 3%.
- Consulting grew 17% in local currency in Q3 and 18% for nine months; outsourcing grew 12% and 13%, respectively.
- Operating income rose 18% in Q3 and 16% for nine months, while operating margin edged down from 14.4% to 14.1% in Q3 and from 13.6% to 13.5% for nine months.
- Management attributed lower gross margins to higher compensation and subcontractor costs, recruiting and training costs, and contract profitability. It said profitability improved during Q3 as pricing and resource mix actions continued.
- Q3 general and administrative expense included a $75 million litigation provision. Nine-month G&A as a share of net revenues fell year over year, partly reflecting cost management and lower bad-debt reserves.
- Cash from operations increased by $220 million year over year. Investing outflows rose, mainly because of higher property and equipment spending and business acquisitions. Financing outflows were lower, mainly due to the shift to semiannual dividends.
Outlook, risks and contingencies
- Management described market demand as strong and expected growth to continue in most areas, but anticipated year-over-year growth to moderate and vary by segment, geography, and consulting versus outsourcing. It estimated foreign exchange could make fiscal 2011 U.S.-dollar revenue growth about 3 percentage points higher than local-currency growth, assuming exchange rates stayed within recent ranges.
- Management expected a fiscal 2011 annual effective tax rate of 27%–28%. It believed cash and expected operating cash flow would cover working-capital and investment needs for the next 12 months.
- Q3 bookings were $7.11 billion; nine-month bookings were $20.40 billion. The filing cautions that bookings can vary significantly, involve estimates, and are not comparable to revenue or necessarily backlog; most client contracts are terminable on short notice.
- Public-sector uncertainty, particularly in the U.S. and U.K., weighed on Health & Public Service demand and bookings; management expected this pressure to continue. Other stated risks include economic and geopolitical uncertainty, competition and pricing, staffing and compensation, client satisfaction and contract termination, foreign exchange, cybersecurity and data protection, and tax matters.
- Accenture recorded a $309.8 million reorganization liability for legacy tax exposures. The company said final payments could exceed recorded amounts; disputes and potential litigation remained in one significant jurisdiction.
- The company disclosed a U.S. Department of Justice-intervened False Claims Act and Anti-Kickback Act case concerning alleged vendor-alliance arrangements on federal work. The filing says potential remedies could be significant, while management stated it intended to defend the matter and did not expect a material effect. Management assessed other litigation and regulatory matters as not expected to materially affect results or financial condition.
- Potential client indemnification exposure for expressly limited third-party performance guarantees was approximately $776 million; most was expected to be recoverable from third parties. Management believed potential payments across guarantees and indemnifications would be immaterial overall. The filing reported no material change in market-risk exposure and no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether revenue growth can continue as management expects to moderate, and whether local-currency growth translates into U.S.-dollar results as forecast.
- Whether margins recover despite compensation, subcontractor, recruiting, training, and contract-profitability pressures.
- How the $75 million litigation provision and the federal-government case develop, including any additional accruals or proceedings.
- Whether the legacy reorganization-tax liability adequately reflects ultimate settlement exposure and timing.
- Whether operating cash flow remains sufficient alongside acquisitions, capital spending, dividends, and substantial share repurchases.
- Bookings trends, while accounting for their estimation limits and the short-notice termination rights in many contracts.