Accenture plc — Q3 FY2020 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and nine months ended May 31, 2020. Accenture provides consulting and outsourcing services. From March 1, 2020, it reported three geographic segments: North America, Europe and Growth Markets, replacing its five prior reportable industry groups.
Financial performance
Amounts below are in U.S. dollars; billions are rounded.
- Third-quarter revenue: $10.99 billion, down 1% in U.S. dollars year over year but up 1% in local currency. Consulting revenue fell 2% in local currency; outsourcing grew 5%.
- Third-quarter earnings and margins: Operating income was $1.71 billion, down slightly; operating margin was 15.6%, versus 15.5%. Net income attributable to Accenture was $1.23 billion, versus $1.25 billion; diluted EPS was $1.90, versus $1.93. Gross margin rose to 32.1% from 31.8%.
- Nine-month results: Revenue was $33.49 billion, up 4% in U.S. dollars and 6% in local currency. Operating income increased 5% to $4.97 billion; operating margin was 14.8%, versus 14.7%. Net income attributable to Accenture was $3.82 billion, versus $3.65 billion; diluted EPS was $5.90, versus $5.62.
- Cash flow: Nine-month operating cash flow was $5.06 billion, compared with $4.51 billion. Investing activities used $1.65 billion, including $1.33 billion for acquisitions and investments; financing activities used $3.04 billion. Cash increased $315 million to $6.44 billion.
- Liquidity and debt: Current assets were $16.15 billion and current liabilities $11.83 billion. Long-term debt was $60 million, with $9 million current; reported lease liabilities totaled $3.44 billion. At May 31, $2.10 billion of borrowing facilities had no borrowings outstanding, though $442 million of letters of credit were outstanding. On June 17, the company added a $1 billion 364-day facility.
- Capital returns and investment: Nine-month share purchases totaled $2.32 billion and cash dividends paid were $1.53 billion. The company said it intended to continue using a significant portion of operating cash for repurchases during the remainder of fiscal 2020. It completed individually immaterial acquisitions for $1.30 billion, net of cash acquired.
Material changes and management commentary
- COVID-19 reduced client demand and disrupted delivery. Clients delayed or reprioritized work, particularly in Travel, Retail, Energy, High Tech and Industrial, with consulting especially affected. Demand increased in Public Service, Software & Platforms, Life Sciences, cloud, digital transformation and security services.
- Approximately 95% of employees were enabled to work remotely during the quarter. As of June 22, about 35% of offices were partially open. The company reported lower utilization, 88% versus 91% a year earlier, and lower voluntary attrition, 11% versus 18%.
- Travel-cost reductions supported gross margin and operating income; management said higher labor costs as a percentage of revenue partly offset the benefit. General and administrative expense rose 11% in the quarter, primarily reflecting higher technology and facilities costs.
- In the quarter, North America revenue grew 2% and Growth Markets 5% in local currency; Europe declined 2%. Growth Markets’ operating income increased, while North America and Europe operating income declined year over year.
Outlook, risks and contingencies
- Management expected fiscal 2020’s annual effective tax rate to be 23.5%–24.5%. It estimated full-year U.S.-dollar revenue growth would be about 1.5 percentage points below local-currency growth if exchange rates remained within recent ranges. The filing gives no clear full-year revenue-growth target.
- Management said cash flows and available funding were expected to meet working-capital and general funding needs for the next 12 months and thereafter. It cited significant economic uncertainty and added the short-term credit facility to supplement liquidity.
- Management identified the pandemic’s duration, client demand, project delays or cancellations, clients’ ability to pay and the transition to remote work as material uncertainties. Other disclosed risks include economic and political conditions, competition and pricing, currency movements, talent supply, cybersecurity, taxes, acquisitions and contract performance.
- Accenture was named in a putative consumer class action concerning the Starwood reservation-database security incident. It said it believed the lawsuit was without merit, but could not reasonably estimate a possible loss. Management stated that reasonably possible losses from litigation and other contingencies, net of insurance, were not expected to materially affect results or financial condition.
- Lease accounting adoption added recognized lease assets and liabilities; the company said it did not materially affect the income statement. Future operating lease payments, net of sublease receipts and interest, were reported as $3.44 billion of lease liabilities.
Important facts for investors to verify
- Whether pandemic-related client delays, cancellations and industry demand shifts persist, and how they affect consulting versus outsourcing revenue.
- Whether margins remain resilient as travel-related savings change and labor, technology and facilities costs evolve.
- Cash conversion and liquidity, including tax-payment deferrals that contributed to higher operating cash flow, the new credit facility’s terms, and the scale of lease commitments.
- The pace of share repurchases and dividends relative to acquisition spending and cash generation.
- Developments in the Marriott/Starwood litigation and any change in management’s assessment of potential loss.