Accenture plc — Form 10-Q summary
Reporting period: Second quarter and six months ended February 28, 2017; comparisons are to the corresponding 2016 periods. Financial statements are unaudited. Amounts below are U.S. dollars.
Business context and results
Accenture provides consulting and outsourcing services across five operating groups. Management reported continued strong demand, particularly for digital, cloud and security services, and for outsourcing. Net revenues exclude reimbursements.
| Metric | Q2 FY2017 | Q2 FY2016 | Six months FY2017 | Six months FY2016 |
|---|---|---|---|---|
| Net revenues | $8.318 billion | $7.946 billion | $16.833 billion | $15.959 billion |
| Operating income | $1.139 billion | $1.088 billion | $2.471 billion | $2.309 billion |
| Operating margin | 13.7% | 13.7% | 14.7% | 14.5% |
| Net income attributable to Accenture plc | $839 million | $1.327 billion | $1.843 billion | $2.145 billion |
| Diluted EPS | $1.33 | $2.08 | $2.91 | $3.36 |
Net revenues rose 5% in U.S. dollars and 6% in local currency in Q2; for the six-month period, they rose 5% and 7%, respectively. Q2 consulting revenue grew 5% in local currency and outsourcing grew 8%. Products was the fastest-growing operating group (15% local-currency growth in Q2); Resources declined 1%. Gross margin was 30.1% in Q2 versus 29.8%, and 31.1% for six months versus 30.9%.
Cash flow, balance sheet and capital allocation
- Six-month operating cash flow was $1.239 billion, compared with $1.007 billion a year earlier. Investing cash outflow was $1.034 billion; financing cash outflow was $1.844 billion.
- Cash and cash equivalents were $3.239 billion at February 28, down from $4.906 billion at August 31, 2016. Current assets were $10.764 billion and current liabilities $8.353 billion (approximately 1.29 current ratio).
- Long-term debt was $24.5 million and current debt and bank borrowings $2.9 million. Cash exceeded reported debt by approximately $3.21 billion.
- Six-month cash dividends paid were $785 million; share purchases were approximately $1.404 billion. The board declared a further $1.21-per-share semiannual dividend payable May 15, 2017. Management said it intended to continue significant share repurchases during the remainder of FY2017.
- Accenture reported $1.709 billion of borrowing facilities, with no borrowings under them; $177 million of letters of credit were outstanding.
Changes, outlook and notable items
- Reported EPS and net income fell year over year largely because the prior-year period included a $554 million gain on the Navitaire divestiture. That gain added $0.74 to prior-year diluted EPS. Excluding it, diluted EPS was $1.34 in Q2 FY2016 and $2.62 for the prior-year six months; FY2017 EPS was $1.33 and $2.91, respectively.
- Management estimated that currency translation reduced U.S.-dollar revenue growth by about 2 percentage points in Q2 and 1 point for the six months. Assuming exchange rates remained within recent ranges, it expected FY2017 revenue growth in U.S. dollars to be about 2 points below local-currency growth. No specific overall revenue-growth target was stated in the supplied filing text.
- Q2 bookings were $9.19 billion ($4.63 billion consulting; $4.56 billion outsourcing); six-month bookings were $17.51 billion. Management said available cash and expected operating cash flow should cover working-capital and investment needs for the next 12 months.
- Products’ growth and profitability improved; Resources faced ongoing weakness in Energy and Chemicals & Natural Resources, which management expected to continue near term. Communications, Media & Technology also faced continuing demand disruption in parts of Europe.
- Accenture completed several individually immaterial acquisitions for $806 million, net of acquired cash, during the six months. Goodwill increased to $4.224 billion, primarily reflecting acquisition additions.
- The company expects settlement of its U.S. pension plan in FY2017, subject to regulatory approvals. Settlement could cause additional expense; the company did not expect a material cash impact.
- A Swiss tax authority investigation concerns the 2010 transfer of intellectual property. Accenture disputes the authorities’ assertions; if they prevail, taxes, interest and possible penalties could be material.
- Early adoption of share-based payment accounting guidance reduced income tax expense by $88 million for the six months. The filing also identifies adoption of the new lease standard as expected to materially affect the balance sheet; the company did not expect a material income-statement impact. It expected the revenue-recognition standard to leave revenue recognition largely unchanged overall, with earlier recognition in some areas.
Risks and contingencies
Management highlighted economic and geopolitical uncertainty, foreign-exchange volatility, competition and pricing, client demand, talent supply and retention, delivery and utilization, cybersecurity, taxes, acquisitions and integration, and government-contracting exposures. It reported no material change to the risk factors in its 2016 Form 10-K. Management believed reasonably possible losses from other litigation, net of insurance and amounts accrued, would not materially affect results or financial condition. Potential client guarantee liabilities were disclosed, but the company said it had made no significant payments under the arrangements.
Important facts for investors to verify
- Assess underlying earnings growth using the prior-year Navitaire-adjusted EPS comparison, and note the FY2017 effective tax rate and share-based tax benefit.
- Monitor whether Products’ growth offsets continued weakness in Resources and European Communications, Media & Technology.
- Check cash conversion and working-capital trends, especially client collections, alongside planned acquisitions, dividends and repurchases.
- Track developments and potential financial exposure in the Swiss tax investigation and the U.S. pension-plan settlement.
- Compare actual currency movements and full-year results with management’s stated foreign-exchange assumption; the filing’s interim results are not necessarily indicative of the full fiscal year.