Accenture plc — Form 10-Q Summary
Business context and period: Accenture provides consulting and outsourcing services. This unaudited filing covers the fiscal second quarter and six months ended February 28, 2015; comparisons are with the corresponding 2014 periods. Dollar amounts below are U.S. dollars.
Financial performance
| Metric | Q2 FY2015 | Q2 FY2014 | Six months FY2015 | Six months FY2014 |
|---|---|---|---|---|
| Net revenues, excluding reimbursements | $7.493bn; +5% reported, +12% local currency | $7.131bn | $15.389bn; +6% reported, +11% local currency | $14.489bn |
| Total revenues | $7.932bn | $7.567bn | $16.275bn | $15.367bn |
| Operating income / margin | $1.021bn / 13.6% | $951m / 13.3% | $2.209bn / 14.4% | $2.042bn / 14.1% |
| Gross margin | 29.9% | 31.3% | 31.1% | 32.3% |
| Net income attributable to Accenture plc | $691m | $671m | $1.522bn | $1.423bn |
| Diluted EPS | $1.08 | $1.03 | $2.37 | $2.18 |
| Operating cash flow | Six-month figure: $1.174bn | Prior-year six-month figure: $474m |
Q2 growth was broad-based across all operating groups in local currency. Outsourcing net revenue grew 13% locally in the quarter, versus 11% for consulting. Products and Health & Public Service had the strongest Q2 local-currency group growth, each at 15%; Resources grew 6% locally but reported a 1% decline in U.S. dollars. New bookings were $9.36bn in Q2 and $17.02bn for the six-month period.
Financial position and cash
- Cash and cash equivalents were $4.061bn at February 28, 2015, down from $4.921bn at August 31, 2014. The six-month net cash decrease was $860m, including a $192m adverse currency effect.
- Six-month investing cash outflow was $251m, versus $743m in the prior-year period, mainly reflecting lower acquisition spending. Financing cash outflow was $1.591bn, including $1.271bn of share purchases and $679m of dividends paid.
- Total current assets were $11.008bn and current liabilities $7.494bn. Debt and bank borrowings were approximately $27m, including current and long-term amounts.
- Available borrowing facilities totaled $1.680bn, with no borrowings outstanding; $158m of letters of credit were outstanding.
Changes, outlook, and notable items
- Margins: Operating margin improved year over year, while gross margin fell 1.4 percentage points in Q2 and 1.2 points for the first half. Management attributed the gross-margin pressure mainly to higher labor costs and increased subcontractor use. Lower sales and marketing and general and administrative costs as a share of net revenue partly offset this.
- Currency: The stronger U.S. dollar reduced reported revenue growth versus local-currency growth by about 7 percentage points in Q2 and 5 points for the first half. Assuming exchange rates remained within recent ranges, management estimated full-year FY2015 revenue growth in U.S. dollars would be about 8 percentage points below local-currency growth.
- Tax: The effective tax rate was 26.0% for Q2 and 25.6% for the first half, compared with 24.0% and 24.6%, respectively, a year earlier. Management expected a 26%–27% FY2015 annual rate. Q2 included an estimated $171m deferred tax liability for withholding taxes on certain U.S. subsidiary earnings no longer treated as permanently reinvested, partly offset by a $170m benefit from final settlement of U.S. tax audits for fiscal 2010 and 2011.
- Management commentary: Demand improved, with growth in consulting and outsourcing and continuing demand for digital, analytics, mobility, and cloud services. Q2 utilization was 91%. Headcount exceeded 323,000, while annualized attrition excluding involuntary terminations rose to 14% from 12% a year earlier. Management noted that Energy clients’ greater emphasis on outsourcing and cost savings may weigh on Resources consulting growth near term.
- Capital allocation: Management intended to use a significant portion of operating cash flow for share repurchases during the remainder of FY2015. Remaining authorization was $3.655bn at quarter-end. The board declared a subsequent semi-annual dividend of $1.02 per share, payable May 15, 2015.
- Unusual and subsequent items: Other expense included losses related to the Venezuelan bolivar devaluation and investment losses. Accenture expected a non-cash, pre-tax pension settlement charge of approximately $60m in Q3 FY2015, subject to participant elections. It acquired Agilex Technologies on March 25, 2015; acquisition accounting was incomplete when the filing was issued.
- Risks and contingencies: Management cited foreign-exchange volatility, uncertain economic conditions, labor and skill availability, competition, cybersecurity, contract delivery and pricing, and government-contracting risks. Management did not expect reasonably possible additional legal losses, net of insurance and amounts accrued, to materially affect results or financial condition. It also assessed potential payments under client guarantees and indemnities as immaterial, while noting that maximum exposure for some unspecified-limit arrangements could not be estimated.
Important facts for investors to verify
- Whether local-currency growth translates into reported results under continuing foreign-exchange pressure.
- Whether higher labor and subcontractor costs continue to constrain gross margins, and whether Resources consulting weakness persists.
- The actual pension lump-sum election rate and resulting Q3 settlement charge.
- The sustainability of operating cash flow alongside planned repurchases, dividends, and acquisitions.
- The final tax impact of the U.S. earnings repatriation decision and the FY2015 effective tax rate.