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| ACS > SEC Filings for ACS > Form 10-Q on 7-Nov-2008 | All Recent SEC Filings |
7-Nov-2008
Quarterly Report
programming and consulting engagements, product installation fees, and hardware
and software sales. However, if we add consulting or other services to enhance
the value delivered and offered to our clients that are primarily short-term in
nature, we may experience variations in our mix of recurring versus
non-recurring revenues.
New Business Pipeline
Management focuses on various metrics in analyzing our business and its
performance and outlook. One such metric is our sales pipeline, which was
approximately $2 billion of annual recurring revenues as of September 30, 2008.
Our sales pipeline includes potential business opportunities that will be
contracted within the next six months and excludes business opportunities with
estimated annual recurring revenue that are in excess of $100 million. Both the
Commercial and Government pipelines have significant, quality opportunities
within our vertical markets and horizontal solutions. As of September 30, 2008,
the Commercial segment comprised approximately 55% of our pipeline and the
Government segment comprised the remaining 45%. By service line, approximately
81% of our pipeline is business process outsourcing and approximately 19% of the
pipeline is information technology solutions as of September 30, 2008. The
Commercial segment pipeline includes opportunities in information technology
services, commercial healthcare, transactional business process outsourcing and
finance and accounting outsourcing. The Government segment pipeline includes
opportunities in our domestic and international transportation business, in the
state and local market for information technology and eligibility services, in
government healthcare and with the federal government.
While the magnitude of our sales pipeline is an important indicator of potential
new business signings and potential future internal revenue growth, actual new
business signings and internal revenue growth depend on a number of factors
including the effectiveness of our sales pursuit teams, competition for a deal,
deal pricing, cash flow generation qualities of each deal and are subject to
risks described further in Item 1A. Risk Factors of our Annual Report on Form
10-K for the fiscal year ended June 30, 2008.
New Business Signings
We define new business signings as estimated annual recurring revenue from new
contracts and the incremental portion of renewals that are signed during the
period, which represents the estimated first twelve months of revenue to be
recorded under the contracts after full implementation. We use new business
signings to forecast prospective revenues and to estimate capital commitments.
Revenues for new business signings are measured under generally accepted
accounting principles in the United States ("GAAP"). There are no third party
standards or requirements governing the calculation of new business signings and
our measure may not be comparable to similarly titled measures of other
companies. We define total contract value as the estimated total revenues from
contracts signed during the period. We use total contract value as an additional
measure of estimating total revenue represented by contractual commitments, both
to forecast prospective revenues and to estimate capital commitments. Revenues
for annual recurring revenue and total contract value are measured under GAAP.
During the three months ended September 30, 2008, we signed contracts with new
clients and incremental business with existing clients representing
$203.4 million of annual recurring revenue with an estimated $774.3 million in
total contract value. The Commercial segment contributed 45% of the new contract
signings (based on annual recurring revenues) including new contracts with
Ingersoll Rand for information technology services, Indiana Public Employees'
Retirement Fund for human resources outsourcing and Apple Computer, Inc. for
customer service call center support. The Government segment contributed 55% of
the new contract signings (based on annual recurring revenues) including new
contracts with the Department of Education for loan servicing under the Federal
Family Education Loan program and Montgomery County, Maryland for speed
enforcement services.
Internal Revenue Growth
We use internal revenue growth as a measure of the organic growth of our
business. Internal revenue growth is measured as total revenue growth less
revenues from acquisitions and revenues from divested operations. At the date of
an acquisition, we identify the trailing twelve months of revenue of the
acquired company as the "pre-acquisition revenue of acquired companies."
Pre-acquisition revenue of the acquired companies is considered "acquired
revenues" in our calculation, and actual revenues from the acquired company,
either above or below "acquired revenues" are components of "internal growth" in
our calculation. Revenues from divested operations are excluded from the
internal revenue growth calculation in the periods following the effective date
of the divestiture. We believe these adjustments to historical reported results
are necessary to accurately reflect our internal revenue growth. Prior period
internal revenue growth calculations are not restated for current period
divestitures. Our measure of internal revenue growth may not be comparable to
similarly titled measures of other companies. During the three months ended
September 30, 2008, total revenue grew 8% over the prior year period excluding
divestitures and internal revenue grew 5% over the prior year period.
Client Renewal Rates
We focus on the performance of our contractual obligations and continually
monitor client satisfaction. Renewal rates are the best indicator of client
satisfaction. We calculate our renewal rate based on the total annual recurring
revenue of renewals
won as a percentage of total annual recurring revenue of all renewals sought.
During the three months ended September 30, 2008, we renewed approximately 76%
of total renewals sought, totaling $304.3 million of annual recurring revenue
with a total contract value of approximately $1.1 billion. The decline of our
renewal rate during the three months ended September 30, 2008 is primarily due
to the non-renewal of the Georgia Medicaid contract, for which our protest of
the award to a competitor was denied during the quarter. We will continue to
earn revenue under our Georgia Medicaid contract until the end of fiscal year
2010. We do not expect a permanent drop in our renewal rates. Average contract
life for renewals varies between our government and commercial segments. The
average contract life of renewals in the government segment is often longer than
those in the commercial segment.
Capital Intensity
Management responds to technological advances and the rapid changes in the
requirements of our clients by committing substantial amounts of our resources
to the operation of multiple hardware platforms, the customization of products
and services that incorporate new technology on a timely basis and the
continuous training of our personnel. Management continually assesses the
capital intensity of these technological advances and client requirements,
addressing the challenge to stay ahead of the competition for innovative
solutions and provide a lower cost solution for clients.
We monitor the capital intensity, defined as the total of capital expenditures
and additions to intangible assets as a percentage of revenue, of new business
signings. Understanding the capital intensity of new business signings is
critical in determining the future free cash flow generating levels of our
business. Historically, the capital intensity in our business has ranged between
5% and 7% of revenue. During the three months ended September 30, 2008 and 2007,
the overall capital intensity of our business was approximately 5% of revenues.
We expect that as our new business signings ramp, we will incur capital
expenditures associated with the new business, which could result in increased
capital intensity over the fiscal year 2008 percentage, but we expect that the
capital intensity will remain within our historical range. We believe the
expected capital intensity range of our new business signings reflects a healthy
competitive environment and the related risks we are taking with respect to our
new business process outsourcing business and information technology services
business.
Employees
Attracting, retaining and training our employees has been a key component to our
historical success and will continue to be a major factor in our future success.
Because we operate in intensely competitive markets, our success depends to a
significant extent on our ability to attract, retain and motivate highly skilled
and qualified personnel. We review our employee retention rates on a regional
and global basis to ensure that we are competitive in hiring, retaining and
motivating our employees. We utilize activity based compensation as a means to
motivate certain of our employees in both segments of our business and believe
our use of activity based compensation is a competitive advantage for ACS.
Other
We identified a number of risk factors in Item 1A. Risk Factors of our Annual
Report on Form 10-K for the fiscal year ended June 30, 2008. Management monitors
the general economic conditions, changes in technology and other developments in
the markets we serve, competitive pricing trends and contractual terms for
future impact on the Company in order to be able to respond effectively and on a
timely basis to these developments.
We report our financial results in accordance with GAAP. However, we believe
that certain non-GAAP financial measures and ratios, used in managing our
business, may provide users of this financial information with additional
meaningful comparisons between current results and prior reported results.
Certain of the information set forth herein and certain of the information
presented by us from time to time (including free cash flow and internal revenue
growth) may constitute non-GAAP financial measures within the meaning of
Regulation G adopted by the SEC. We have presented herein and we will present in
other information we publish that contains any of these non-GAAP financial
measures a reconciliation of these measures to the most directly comparable GAAP
financial measure. The presentation of this non-GAAP information is not meant to
be considered in isolation or as a substitute for comparable amounts determined
in accordance with GAAP.
Significant Developments
Deason/Cerberus Proposal
Please see Note 3 to our Consolidated Financial Statements in our Annual Report
on Form 10-K for the fiscal year ended June 30, 2008 for a discussion of the
Deason/Cerberus proposal to purchase the Company.
During the three months ended September 30, 2008 and 2007, we recognized
approximately $0.1 million and $4.1 million, respectively, in legal and other
costs related to this potential transaction and $0.7 million and $0.8 million,
respectively, related to stockholder derivative lawsuits related to this
potential transaction as discussed in Note 11 to our Consolidated Financial
Statements.
Subsequent Events
On October 30, 2008, we announced that we intend to implement an off-shoring
initiative in order to lower future labor costs. Under this initiative,
approximately 4,200 full-time employee positions in the United States and
elsewhere are currently expected to be eliminated by the end of the first
quarter of fiscal year 2010 while additional employees are hired in other
locations outside the United States. The total pre-tax cost to eliminate these
employee positions under this initiative is currently estimated at $38 million
to $42 million, of which severance costs are currently estimated to be
$14 million to $16 million and transition and other expenses are currently
estimated to be $24 million to $26 million. We currently expect that almost all
of these expenses will be cash expenditures. Additionally, we will be required
to open additional facility sites and expand current facility sites outside of
the United States in order to accommodate the increased offshore headcount.
Capital expenditures related to these facilities are currently estimated at
$15 million to $20 million over the next four quarters. We currently expect to
incur a pre-tax charge for severance costs of $14 million to $16 million and
transition and other expenses of $7 million to $9 million during the three
months ended December 31, 2008 related to this initiative.
Revenue Growth
Internal revenue growth is measured as total revenue growth less acquired
revenue from acquisitions and revenues from divested operations. At the date of
acquisition, we identify the trailing twelve months of revenue of the acquired
company as the "pre-acquisition revenue of acquired companies." Pre-acquisition
revenue of the acquired companies is considered "acquired revenues" in our
calculation, and revenues from the acquired company, either above or below that
amount are components of "internal growth" in our calculation. We use the
calculation of internal revenue growth to measure revenue growth excluding the
impact of acquired revenues and the revenue associated with divested operations
and we believe these adjustments to historical reported results are necessary to
accurately reflect our internal revenue growth. Revenues from divested
operations are excluded from the internal revenue growth calculation in the
periods following the effective date of the divestiture. Internal revenue growth
calculations reported in prior periods are not restated for current period
divestitures. Our measure of internal revenue growth may not be comparable to
similarly titled measures of other companies. The following table sets forth the
calculation of internal revenue growth (in thousands):
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