Accenture plc — Form 10-Q Summary
Reporting period: Third quarter and nine months ended May 31, 2014. Financial statements are unaudited; amounts below are in U.S. dollars.
Business context and performance
Accenture provides consulting and outsourcing services through five operating groups. Management cited demand for outsourcing and emerging-technology work, alongside a competitive environment and pricing pressure. All operating groups grew net revenue in local currency in the quarter; nine-month growth was slower, particularly in consulting.
Key financial metrics
| Metric | Three months ended May 31, 2014 | Nine months ended May 31, 2014 |
|---|---|---|
| Net revenues | $7.74 billion, up 7% year over year in U.S. dollars and local currency | $22.23 billion, up 3% in U.S. dollars and 4% in local currency |
| Operating income | $1.18 billion, up 3% | $3.22 billion, down 4% |
| Operating margin | 15.2%, versus 15.9% reported in prior year; unchanged excluding prior-year reorganization benefits | 14.5%, versus 15.6% reported; up 20 basis points excluding prior-year reorganization benefits |
| Net income attributable to Accenture plc | $817 million, versus $810 million | $2.24 billion, versus $2.61 billion |
| Diluted EPS | $1.26, versus $1.21; prior-year EPS excluding reorganization benefits was $1.14 | $3.44, versus $3.92; prior-year EPS excluding reorganization and tax-audit benefits was $3.20 |
| Gross margin | 32.8%, versus 33.9% | 32.5%, versus 32.8% |
| Operating cash flow | Not separately reported for the quarter | $1.84 billion, versus $2.03 billion |
| Cash and cash equivalents | $4.05 billion at May 31, 2014 | Down from $5.63 billion at August 31, 2013 |
| Debt | $26.7 million total long-term and current debt/bank borrowings at May 31, 2014 |
For the nine months, investing activities used $892 million and financing activities used $2.58 billion; cash declined by $1.58 billion. Financing outflows included $1.90 billion of share purchases and $1.25 billion of dividends. Current assets were $11.13 billion and current liabilities $7.62 billion. Available borrowing facilities totaled $1.74 billion, with no borrowings outstanding; $176 million of letters of credit were outstanding.
Material changes and drivers
- Quarterly outsourcing net revenue grew 9% in local currency, compared with 5% for consulting; for the nine months, outsourcing grew 7% and consulting 2%.
- Quarterly gross margin declined mainly due to pricing pressure, higher payroll costs and lower initial margins on some large contracts. Management also cited acquisition and offering investments for the nine-month period.
- Prior-year comparisons include $50 million of quarterly and $274 million of nine-month reorganization benefits. The nine-month 2013 comparison also includes a $243 million U.S. tax-audit settlement benefit. These items materially reduced reported prior-year tax rates and increased reported EPS.
- Operating cash flow declined year over year, primarily due to higher operating spending and lower collections on net client balances. Prior-year cash flow included a discretionary $500 million U.S. pension contribution, with a $350 million after-tax impact.
- Accenture acquired Procurian for $386 million, net of cash acquired, and completed other acquisitions for $259 million. Goodwill rose to $2.35 billion from $1.82 billion, largely reflecting acquisitions.
Outlook, risks and contingencies
- Management estimated foreign exchange would reduce full-year fiscal 2014 U.S.-dollar revenue growth by approximately 0.5 percentage points versus local-currency growth, assuming exchange rates remained within recent ranges.
- Management expected fiscal 2014’s annual effective tax rate to be 25.5%–26.5%, and said available cash and expected operating cash flows should meet working-capital and investment needs for the next 12 months.
- Management intended to use a significant portion of cash generated from operations for share repurchases during the remainder of fiscal 2014. Repurchase levels may vary and the program can be changed or suspended.
- Management said weaker Natural Resources consulting demand and completed or reduced systems-integration projects would continue to affect that operating group’s year-over-year growth in the near term.
- Other cited risks include uncertain economic conditions, competition and pricing, talent availability and attrition, contract delivery and profitability, foreign-exchange movements, client collections, cybersecurity, acquisitions and tax matters. Quarterly utilization was approximately 88%; annualized voluntary attrition was 14%.
- Management did not expect pending litigation or investigations to have a material effect on results or financial condition. It assessed potential payments under guarantees and indemnifications as immaterial; maximum liability for arrangements with unspecified limits could not be reasonably estimated. No significant payments had been required to date.
- The company was assessing the impact and adoption method for the new U.S. revenue-recognition standard, effective for Accenture beginning September 1, 2017. Management reported disclosure controls were effective and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether revenue growth, particularly outsourcing growth, persists and converts into profitable work amid pricing pressure.
- Whether gross margin and contract profitability recover as compensation costs, delivery mix and early-stage contract margins evolve.
- Whether cash generation and client collections improve, given lower nine-month operating cash flow and substantial shareholder distributions.
- How the fiscal 2014 tax rate compares with management’s 25.5%–26.5% estimate, separating recurring results from prior-year tax and reorganization benefits.
- Whether Natural Resources weakness, attrition, acquisition integration and foreign-exchange movements materially affect future growth or margins.