TEXT-S&P summary: Accenture PLC
With annual revenues in excess of $29 billion, Accenture's "strong" business profile is attributable to its recognized leadership in consulting and IT services, and its established client relationships with the largest global corporations. Growth in new contract signings was strong in the first half of fiscal 2012 across Accenture's operating groups and geographic regions. Standard & Poor's Ratings Services expects continuing strength in Accenture's outsourcing business-primarily focused on business transformation and application outsourcing-to offset the potential for greater volatility in consulting and system integration revenues. Outsourcing revenues, which represent about 42% of net revenue, enhance visibility through contractually recurring revenues. The company's focus on higher end services, a highly variable cost base, and moderate capital intensity has allowed it to maintain solid adjusted EBITDA margins in the mid-teen area.
Accenture has maintained a strong balance sheet, with negligible funded debt levels. Adjusted (for capitalized operating leases and post-retirement obligations) debt to EBITDA was 0.4x as of February 2012, and is expected to remain below 1x. The current rating and outlook incorporate the expectation of modest acquisition activity, and ongoing net share repurchases funded by discretionary cash flow.
Accenture has "strong" liquidity, with sources of cash likely to substantially exceed uses for the next 12 to 24 months. Cash sources include cash and short-term investment balances in excess of $5 billion as of Feb. 29, 2012, and expected annual free operating cash flow (FOCF) in excess of $2.5 billion. We expect near-term uses to include capital expenditures of about $450 million, and annual dividends of about $950 million.
Relevant aspects of Accenture's liquidity, in our view, are as follows:
-- We see coverage of uses to be in excess of 2x for the next two years, in part reflecting minimal debt maturities.
-- We expect that net sources would be positive in the near term, even with a 30% decline in EBITDA from fiscal 2011 levels.
-- Potential acquisitions are likely to be moderate in size and not materially impact Accenture's leverage profile.
-- Additional liquidity is provided by availability under Accenture's $1 billion credit facility, expiring in October 2016.
-- Shareholder returns are supported by consistently strong FOCF.
The outlook is stable, reflecting our expectation that Accenture will maintain its solid operating performance, will generate growth primarily organically, and will continue to manage credit protection measures at levels that are strong for the rating. Highly competitive industry conditions and a business profile somewhat narrower than its major competitors limit a possible upgrade. Erosion of the company's business position and profitability, or sustained leverage approaching 1.5x because of acquisitions or aggressive share repurchase activity, could lead to a negative rating action.
Related Criteria And Research
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-- U.S. Technology Companies' Liquidity Is Higher, For Now, Jan. 18, 2012
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