Accenture plc — Q2 FY2012 Form 10-Q
Reporting period: Quarter ended February 29, 2012; comparisons are with the quarter ended February 28, 2011. Six-month figures cover the first half of fiscal 2012. Amounts below are U.S. dollars.
Financial performance
| Metric | Q2 FY2012 | Q2 FY2011 | Six months FY2012 | Six months FY2011 |
|---|---|---|---|---|
| Net revenues, before reimbursements | $6.80B | $6.05B | $13.87B | $12.10B |
| Total revenues, including reimbursements | $7.26B | $6.50B | $14.85B | $12.97B |
| Operating income | $889M | $772M | $1.87B | $1.60B |
| Operating margin on net revenues | 13.1% | 12.7% | 13.5% | 13.2% |
| Net income attributable to Accenture plc | $644M | $503M | $1.29B | $1.04B |
| Diluted earnings per share | $0.97 | $0.75 | $1.93 | $1.56 |
| Gross margin | 31.1% | 31.7% | 31.5% | 31.9% |
| Effective tax rate | 20.5% | 26.9% | 24.6% | 27.6% |
Q2 net revenues rose 12% in U.S. dollars and 13% in local currency; first-half net revenues rose 15% and 14%, respectively. Outsourcing grew faster than consulting: Q2 growth was 19% in U.S. dollars for outsourcing versus 8% for consulting; first-half growth was 20% versus 11%. Reimbursements are offset by related expenses and are not included in net revenues.
First-half operating cash flow was $1.33B, versus $708M a year earlier. Investing cash use was $327M, including $163M for acquisitions and investments; financing cash use was $966M, including $750M of share purchases and $475M of dividends paid. Cash declined by $132M to $5.57B, including a $172M unfavorable foreign-exchange effect.
Liquidity, debt and capital allocation
- At February 29, 2012, cash and cash equivalents were $5.57B; total debt was approximately $6M. The company reported no borrowings under its credit facilities.
- Available borrowing facilities totaled $1.68B; $155M of letters of credit was outstanding. The $1.0B syndicated revolving facility matures in October 2016, and Accenture reported compliance with its covenants.
- During the first half, the company repurchased or redeemed shares for approximately $750M and paid $475M in dividends. It stated that it intended to continue using a significant portion of operating cash for repurchases during the remainder of FY2012.
- On March 21, 2012, the board declared a subsequent semi-annual dividend of $0.675 per share, payable May 15, 2012.
Material changes and business developments
- Operating income increased 15% in Q2 and 17% in the first half. Operating margin expanded, while gross margin declined year over year, principally reflecting weaker contract profitability in Financial Services.
- Sales and marketing and general and administrative costs declined as a percentage of net revenues, reflecting expense growth below revenue growth. Management said cost leverage in general and administrative expense was expected to moderate in FY2012.
- All five operating groups posted first-half local-currency revenue growth. Asia Pacific grew 20% in local currency; Americas grew 15% and EMEA 10%.
- Financial Services operating income fell to $143M in Q2 from $204M and to $358M for the first half from $449M. Management cited acquisition costs, delivery inefficiencies on some outsourcing contracts and higher relative sales and marketing costs.
- First-half acquisitions cost $163M; acquired goodwill was $116M and acquired intangible assets were $51M. The largest acquisition was a mortgage-processing services provider; the pro forma effect was not material.
- The company recorded $148M of other comprehensive loss for the first half, largely due to foreign-currency translation adjustments.
Outlook, management commentary and risks
- Management expected overall growth to continue, based on recent bookings, but forecast year-over-year growth to moderate in the second half of FY2012, particularly in consulting, with variation by operating group and region.
- Assuming exchange rates remained within recent ranges, management estimated foreign exchange would reduce full-year U.S.-dollar revenue growth by approximately one percentage point versus local-currency growth.
- Management expected an FY2012 annual effective tax rate of 27%–28%. Lower interim tax rates reflected greater benefits from final determinations of prior-year tax liabilities, partly offset by increased tax reserves.
- Bookings were $7.94B in Q2 and $15.73B for the first half. Management cautioned that bookings can vary with the timing of large contracts, involve estimates, and should not be treated as backlog; many contracts can be terminated on short notice.
- Key stated risks include uncertain economic and geopolitical conditions, client demand, competition and pricing, foreign-exchange movements, recruiting and retaining skilled staff, contract delivery and profitability, public-sector budgets, cybersecurity and data protection, and acquisition integration.
- Reorganization-related tax liabilities were $288M at February 29, 2012, mostly current. The company noted that payments to resolve all proceedings could exceed recorded amounts; one jurisdiction remained significant, with disputes and expected litigation.
- Potential client guarantees involving expressly limited third-party performance totaled approximately $988M, much of which could be recovered from third parties. Management considered potential payments immaterial overall; no significant payments had been made to date. Management also said reasonably possible losses from litigation, net of accruals and insurance, were not expected to materially affect results or financial condition.
Most important facts for investors to verify
- Whether the expected moderation in second-half growth, particularly consulting, occurred, and how outsourcing demand and bookings converted into revenue.
- Whether gross-margin pressure and Financial Services contract and delivery issues persisted or improved.
- Whether FY2012 tax guidance of 27%–28% was achieved and how much interim earnings benefited from prior-year tax determinations.
- Whether operating cash generation remained sufficient to fund dividends, acquisitions and substantial share repurchases while maintaining liquidity.
- Developments in the significant reorganization tax dispute and whether related payments exceeded recorded liabilities.