Accenture plc — Q2 FY2016 Form 10-Q
Reporting period: Quarter and six months ended February 29, 2016. Accenture provides consulting and outsourcing services across five operating groups. Financial statements are unaudited; fiscal year ends August 31.
Financial performance
| Metric | Q2 FY2016 | Six months FY2016 |
|---|---|---|
| Net revenues | $7.95 billion; up 6% reported and 12% in local currency | $15.96 billion; up 4% reported and 11% in local currency |
| Operating income / margin | $1.09 billion / 13.7%, versus $1.02 billion / 13.6% | $2.31 billion / 14.5%, versus $2.21 billion / 14.4% |
| Net income attributable to Accenture plc | $1.33 billion, versus $691 million | $2.15 billion, versus $1.52 billion |
| Diluted EPS | $2.08, versus $1.08; $1.34 excluding the Navitaire gain | $3.36, versus $2.37; $2.62 excluding the Navitaire gain |
| Operating cash flow | $929 million for the six months, versus $1.17 billion |
Q2 gross margin was 29.8%, compared with 29.9%; first-half gross margin was 30.9%, compared with 31.1%. Management attributed the first-half decline primarily to acquisition-related costs and higher labor costs relative to net revenues. The reported Q2 and first-half results include a $554 million pre-tax gain on the Navitaire sale; the gain added $0.74 to diluted EPS in each period.
Cash, debt and capital allocation
- Cash and cash equivalents were $3.03 billion at February 29, down from $4.36 billion at August 31, 2015. First-half cash decreased $1.33 billion.
- Investing cash outflow was $371 million, including $748 million of net acquisition and investment purchases, partly offset by $618 million of net proceeds from the Navitaire sale. Property and equipment purchases were $243 million.
- Financing cash outflow was $1.84 billion, including $1.49 billion of share purchases and $721 million of dividends paid.
- Total current and long-term debt was approximately $29 million. Accenture reported $1.64 billion of borrowing facilities with no borrowings; $164 million of letters of credit were outstanding.
- Management expected cash and operating cash flows to meet working-capital and investment needs for the next 12 months, and intended to continue using a significant portion of operating cash for share repurchases during the rest of FY2016.
Changes, outlook and notable items
- Consulting grew 18% in local currency in Q2; outsourcing was flat in U.S. dollars and up 6% in local currency. Across all operating groups, local-currency Q2 net revenue increased; Resources growth was modest.
- The stronger U.S. dollar reduced reported revenue growth relative to local-currency growth by approximately 6 percentage points in Q2 and 7 points in the first half. Assuming exchange rates remained within recent ranges, management estimated full-year FY2016 revenue growth would be about 5 percentage points lower in U.S. dollars than in local currency.
- Management expected an FY2016 annual effective tax rate of 24%–25%; reported first-half tax rate was 20.4%, or 22.8% excluding the Navitaire gain and related tax effect.
- Bookings were $9.55 billion in Q2 and $17.29 billion in the first half. Management described demand as strong, including demand for digital, cloud, cost-efficiency and business-transformation work. Q2 utilization was 90%, versus 91% a year earlier; headcount was approximately 373,000.
- Accenture acquired Cloud Sherpas for approximately $407 million net of cash acquired and completed other acquisitions for approximately $323 million net. Navitaire was sold for $833 million net of transaction costs and cash divested; $215 million of proceeds was deferred revenue for services to Amadeus, principally infrastructure outsourcing over five years.
- After quarter-end, the board approved termination of most of the U.S. pension plan, subject to regulatory approvals. Settlement was expected in 12–18 months; additional expense is expected, while management did not expect settlement to materially affect cash.
Risks and contingencies
Management highlighted foreign-exchange volatility, uncertain economic conditions, client demand and pricing, competition, hiring and retention, delivery and third-party performance, cybersecurity and data protection, acquisitions and integration, tax matters, and legal liability among relevant risks. It reported no material changes to the prior annual report’s risk factors. Potential client guarantee liabilities were approximately $634 million, largely recoverable from third parties; management said potential payments were not expected to be material. Management also believed reasonably possible litigation losses beyond accruals, net of insurance, would not materially affect results or financial condition. Disclosure controls were judged effective.
Most important facts for investors to verify
- How much of earnings and EPS growth reflects the one-time Navitaire gain; compare reported results with the disclosed adjusted figures.
- Whether cash conversion recovers after the year-over-year decline in operating cash flow, including collection trends and compensation-related payments.
- Whether local-currency growth and management’s currency assumptions translate into the expected U.S.-dollar revenue growth.
- Whether the 24%–25% full-year tax-rate expectation and pension termination costs develop as described.
- How acquisition spending, repurchases, dividends and the Amadeus service arrangements affect future cash balances and margins.