Accenture plc — Q3 FY2018 Form 10-Q
Reporting period: Fiscal quarter and nine months ended May 31, 2018. Accenture provides consulting and outsourcing services, including digital, cloud and security-related work. Financial statements are unaudited; amounts below are U.S. dollars.
Financial performance
| Metric | Q3 FY2018 | Prior-year comparison | Nine months FY2018 | Prior-year comparison |
|---|---|---|---|---|
| Net revenues (before reimbursements) | $10.315 billion | +16% in U.S. dollars; +11% local currency | $29.424 billion | +14% in U.S. dollars; +10% local currency |
| Operating income | $1.620 billion | $865 million reported in Q3 FY2017; prior period included $510 million pension settlement charge | $4.388 billion | $3.336 billion reported; prior period included the pension settlement charge |
| Operating margin | 15.7% | 9.8% reported; 15.5% excluding prior-year pension charge | 14.9% | 13.0% reported; 15.0% excluding prior-year pension charge |
| Net income attributable to Accenture plc | $1.043 billion | $669 million | $3.030 billion | $2.513 billion |
| Diluted EPS | $1.60 | $1.05 | $4.76 | $3.96 |
| Operating cash flow | Not presented separately for the quarter | $3.917 billion | $3.031 billion |
Q3 gross margin was 32.2%, down from 32.8%; nine-month gross margin was 31.3%, down from 31.7%. Management attributed the nine-month decline mainly to higher labor and acquisition-related costs, partly offset by efficiencies and improved contract profitability in Q3. Sales and marketing and general and administrative costs together were 16.5% of net revenues in Q3, versus 17.3%.
Cash and cash equivalents were $3.929 billion at May 31, 2018, compared with $4.127 billion at August 31, 2017. Total debt was approximately $28.8 million, including $2.8 million current and $26.0 million long-term. Cash used in investing was $875 million and cash used in financing was $3.177 billion for the nine months. Financing uses included $2.087 billion of share purchases and $1.709 billion of dividends. The company reported $1.897 billion of borrowing facilities with no borrowings outstanding; $267 million of letters of credit were outstanding.
Changes and business trends
- Growth was broad-based: Q3 local-currency net revenue growth was 18% in Communications, Media & Technology, 12% in Resources, 11% in Products, 8% in Financial Services and 7% in Health & Public Service.
- Q3 consulting net revenues grew 12% in local currency; outsourcing grew 10%. Growth Markets grew 17%, North America 11% and Europe 9% in local currency.
- Q3 bookings were $11.75 billion ($5.91 billion consulting; $5.84 billion outsourcing). Nine-month bookings were $31.98 billion.
- Headcount was approximately 449,000, versus 411,000 a year earlier. Q3 utilization was 91%, flat year over year; attrition excluding involuntary terminations was 17%, compared with 15%.
- Operating cash flow increased year over year, which management attributed to higher net income and changes in working capital, including improved client collections. Investing cash outflow declined mainly due to lower acquisition spending.
Outlook, commentary and notable items
- Management expected fiscal 2018 annual effective tax rate of 27%–28%, or 22.5%–23.5% excluding tax law changes. Q3 and nine-month reported rates were 34.4% and 27.2%, respectively.
- Assuming exchange rates remained within recent ranges, management estimated full-year U.S.-dollar revenue growth would be about 3 percentage points higher than local-currency growth. The filing gives no specific full-year revenue growth rate in the supplied text.
- Management said current and longer-term funding needs should be met by operating cash flows and, if needed, borrowing facilities or future market activity. It intended to continue using a significant portion of operating cash generation for share repurchases during the rest of FY2018; actual repurchases may vary.
- The U.S. Tax Cuts and Jobs Act and a non-U.S. tax law change increased FY2018 tax expense. Management reported a $258 million nine-month charge associated with tax law changes; tax law changes reduced nine-month diluted EPS by $0.40. Tax estimates remained provisional and could be adjusted.
- Beginning in FY2019, adoption of an accounting standard for intra-entity asset transfers could create deferred tax assets of up to $2.1 billion and initially increase the annual effective tax rate by approximately 3.5 percentage points as those assets are used; management said adoption would not affect cash flows. The new lease standard is expected to materially affect the balance sheet. Revenue-standard adoption was scheduled for September 1, 2018; management expected revenue recognition to remain largely unchanged and did not then anticipate a material financial-statement impact.
- Accenture Holdings plc merged into Accenture plc on March 13, 2018, an internal administrative transaction that converted eligible holdings into Accenture plc Class A shares and eliminated the related Class X shares.
- Management cited economic and geopolitical uncertainty, foreign-exchange volatility, competition, pricing and labor costs, talent availability and attrition, cybersecurity, client demand, government contracting, acquisitions and legal and tax matters among business risks. It reported no material changes to the prior annual report’s risk factors and no material expected effect from current litigation based on its assessment.
- Management concluded disclosure controls were effective at a reasonable assurance level; it reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether local-currency demand and bookings translate into sustained revenue growth, and how currency movements affect reported results.
- Whether labor costs, attrition and acquisition costs continue to pressure gross margin, and whether recent contract profitability and cost efficiencies persist.
- The final tax impact of the U.S. and non-U.S. tax changes, the FY2018 effective tax rate, and the FY2019 effect of the intra-entity transfer standard.
- Cash generation relative to ongoing dividends, acquisitions and substantial share repurchases; confirm the level of repurchases and remaining authorization.
- Developments in client indemnities, guarantees, litigation and regulatory matters. Management stated potential payments under guarantees and reasonably possible additional legal losses were not expected to be material, but some guarantees have unspecified limits.