Accenture plc — Q2 Fiscal 2014 Form 10-Q
Reporting period: Quarter ended February 28, 2014; comparisons are with the quarter ended February 28, 2013. Six-month figures cover the first half of fiscal 2014. Financial statements are unaudited. Amounts below are U.S. dollars.
Financial performance and position
| Metric | Q2 FY2014 | Q2 FY2013 | First half FY2014 | First half FY2013 |
|---|---|---|---|---|
| Net revenues, before reimbursements | $7.13B | $7.06B | $14.49B | $14.28B |
| Operating income | $951M | $1.165B | $2.042B | $2.213B |
| Operating margin | 13.3% | 16.5% | 14.1% | 15.5% |
| Net income attributable to Accenture plc | $671M | $1.102B | $1.423B | $1.801B |
| Diluted earnings per share | $1.03 | $1.65 | $2.18 | $2.71 |
| Gross margin | 31.3% | 31.6% | 32.3% | 32.2% |
Net revenue increased 1% in U.S. dollars and 3% in local currency in both Q2 and the first half. Outsourcing grew 5% in local currency in Q2 and 6% in the first half; consulting was flat in local currency in both periods. Q2 operating margin was flat against the prior year excluding the prior-year reorganization benefit; first-half margin was up 20 basis points on that adjusted basis.
For the six months, net cash from operating activities was $474M, versus $525M a year earlier. Investing used $743M, including $610M net for business acquisitions; financing used $1.715B, principally reflecting share purchases and dividends. Cash and cash equivalents were $3.68B at February 28, down from $5.63B at August 31, 2013. Total debt was approximately $26.5M. The company had $1.725B of borrowing facilities, no borrowings under those facilities, and $168M of letters of credit outstanding. Management said cash and expected operating cash flows should meet working-capital and investment needs for the next 12 months.
Changes, drivers, and unusual items
- Reported Q2 and first-half earnings were lower year over year, but comparisons include prior-year benefits: a $224M reorganization benefit and a $243M U.S. tax-audit settlement benefit. Excluding these items, Q2 diluted EPS was $1.03 versus $1.00; first-half diluted EPS was $2.18 versus $2.06.
- Management cited pricing pressure, higher payroll costs, lower contract profitability, early-stage contract margins, and delivery inefficiencies on a few contracts as pressures on profitability. Lower variable compensation partly offset these factors. Utilization was 87%, down from 88% a year earlier and described as within target range.
- Q2 local-currency growth was strongest in Financial Services and Products (5% each); Resources was flat. In the first half, Products grew 6%, Financial Services and Health & Public Service each grew 4%, while Communications, Media & Technology and Resources were flat.
- Accenture acquired procurement-services provider Procurian for $386M net of cash and completed other individually immaterial acquisitions. Goodwill rose to $2.31B from $1.82B at August 31, 2013.
- During the first half, the company spent $1.373B on share purchases and $630M on dividends. The board declared a further $0.93-per-share semiannual dividend payable May 15, 2014.
Outlook, risks, and contingencies
- Management expects the fiscal 2014 annual effective tax rate to be 25.5%–26.5%. It estimated foreign exchange would reduce full-year U.S.-dollar revenue growth by about 0.5 percentage points versus local-currency growth, assuming exchange rates remained within recent ranges.
- Management expected weaker Resources year-over-year revenue growth to continue in the near term, citing reduced client consulting investment and completed or downsized systems-integration projects. It also described continued demand for outsourcing and emerging-technology services, including digital and cloud offerings. The filing provides no clear full-year revenue or earnings guidance.
- Risks discussed include uncertain economic conditions and client demand, competition and pricing, talent supply and retention, contract delivery and cost estimation, foreign exchange, cybersecurity and data protection, acquisitions and integration, and tax matters. Management reported no material changes to the prior 10-K risk factors.
- Legal proceedings and regulatory investigations arise in the ordinary course; management did not expect them to materially affect results or financial condition. Potential client guarantee liabilities were approximately $729M, with all but about $16M potentially recoverable from third parties; management considered potential payments immaterial. Some arrangements have unspecified liability limits that cannot be reasonably estimated.
Important facts for investors to verify
- Whether outsourcing growth can offset flat consulting revenue and subdued Resources demand.
- Whether pricing, payroll costs, and contract delivery issues continue to weigh on margins after the prior-year reorganization benefit is excluded.
- Cash conversion and working-capital movements, including the decline in cash and the impact of acquisitions, buybacks, and dividends.
- Whether the projected tax-rate range and foreign-exchange assumption remain appropriate for the rest of fiscal 2014.
- The acquisition contribution to growth and goodwill, and the company’s use of its remaining $5.753B share-purchase authorization.