Accenture plc — Form 10-Q summary
Reporting period: Second quarter and six months ended February 28, 2018; fiscal year ends August 31. Unaudited interim results. Accenture provides consulting and outsourcing services and solutions.
Financial performance
| Metric | Three months ended Feb. 28, 2018 | Six months ended Feb. 28, 2018 | Comparable prior period |
|---|---|---|---|
| Net revenues, before reimbursements | $9.585 billion | $19.109 billion | $8.318 billion and $16.833 billion |
| Operating income | $1.283 billion | $2.769 billion | $1.139 billion and $2.471 billion |
| Net income attributable to Accenture plc | $864 million | $1.987 billion | $839 million and $1.843 billion |
| Diluted EPS | $1.37 | $3.16 | $1.33 and $2.91 |
| Operating margin | 13.4% | 14.5% | 13.7% and 14.7% |
| Gross margin | 29.7% | 30.9% | 30.1% and 31.1% |
| Operating cash flow | $1.930 billion | $1.239 billion for six months |
Second-quarter net revenue grew 15% in U.S. dollars and 10% in local currency; six-month growth was 14% and 10%, respectively. Favorable currency translation added approximately 6 percentage points to quarterly U.S.-dollar growth and 4 points to six-month growth. Consulting and outsourcing quarterly net revenue grew 11% and 8% in local currency, respectively.
Quarterly gross and operating margins declined year over year. Management attributed lower gross margin principally to lower consulting contract profitability and higher acquisition-related costs, partly offset by cost efficiencies. Operating income increased 13% in the quarter and 12% for the six months.
Cash, debt and capital allocation
- Cash and cash equivalents were $3.595 billion at February 28, 2018, down from $4.127 billion at August 31, 2017. Six-month investing cash outflow was $605 million and financing cash outflow was $1.882 billion.
- Current assets were $12.285 billion and current liabilities $9.368 billion. Long-term debt was $25.9 million, with $2.9 million current debt and bank borrowings.
- Borrowing facilities totaled $1.735 billion, with no borrowings; $246 million of letters of credit were outstanding. The filing also describes a commercial-paper program of up to $1 billion, backed by the syndicated facility.
- Six-month share purchases totaled $1.284 billion and cash dividends paid were $854 million. Management expected to continue using a significant portion of operating cash for repurchases during the remainder of fiscal 2018.
Outlook, commentary and material items
- Management expected fiscal 2018 annual effective tax rate of 24%–26%, or 22%–24% excluding the Tax Act charge. If exchange rates stayed within recent ranges, management estimated full-year U.S.-dollar revenue growth would exceed local-currency growth by approximately 4 percentage points.
- Quarterly bookings were $10.25 billion ($5.65 billion consulting; $4.60 billion outsourcing). Six-month bookings were $20.23 billion ($11.59 billion consulting; $8.65 billion outsourcing).
- Demand was described as strong across business areas, with particular strength in digital, cloud and security-related services. Management characterized pricing as relatively stable. Utilization was 91%, flat year over year; headcount was approximately 442,000 versus 401,000 a year earlier, and attrition was 13% versus 12%.
- The company recorded a provisional $137 million tax expense related primarily to remeasuring deferred tax assets after U.S. tax reform. It raised the quarterly effective tax rate to 26.1% from 20.7%; excluding the charge, the rate would have been 15.1%. The charge reduced diluted EPS by $0.21; excluding it, quarterly diluted EPS would have been $1.58 and six-month EPS $3.37.
- Accenture Holdings plc merged into Accenture plc on March 13, 2018, after quarter-end. Shareholders received Accenture plc Class A shares in exchange; the related noncontrolling ownership fell from 4% to less than 1%.
- Management said the fiscal 2019 adoption of the intra-entity asset-transfer tax standard could create deferred tax assets of up to $2.1 billion and initially add approximately 3.5 percentage points to the annual effective tax rate as those assets are used; no cash-flow impact was expected. The new lease standard was expected to materially increase balance-sheet assets and liabilities. Revenue-standard adoption was expected to leave revenue recognition largely unchanged and not materially affect the financial statements.
- Risks include economic and geopolitical uncertainty, foreign-exchange volatility, competition and pricing pressure, hiring and retention, cybersecurity, government contracting, acquisition integration, and tax-law changes. The filing reported no material change to previously disclosed risk factors. Management considered reasonably possible legal losses, net of accruals and insurance, not material; it also considered potential payments under guarantees and indemnifications immaterial, while noting that some maximum exposures cannot be estimated.
Most important facts for investors to verify
- Whether revenue growth, bookings and demand convert into sustained margin and cash-flow growth, given lower reported margins.
- The final impact of U.S. tax reform and the fiscal 2018 effective tax rate, including any revisions to provisional tax amounts.
- Foreign-exchange effects and management’s revenue-growth assumption if exchange rates move outside recent ranges.
- Cash deployed for repurchases, dividends and acquisitions, and the implications of the post-quarter merger and reduced noncontrolling interests.
- Future effects of the tax, lease and revenue accounting standards, as well as developments in legal contingencies and client guarantees.