Business context and reporting period
Accenture plc’s unaudited Form 10-Q covers the quarter and nine months ended May 31, 2017 (fiscal 2017 Q3). The company provides consulting and outsourcing services across five operating groups. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 FY2017 | Q3 FY2016 | Nine months FY2017 | Nine months FY2016 |
|---|---|---|---|---|
| Net revenues (before reimbursements) | $8.87B | $8.43B | $25.70B | $24.39B |
| Total revenues | $9.36B | $8.97B | $27.12B | $25.83B |
| Operating income | $0.87B | $1.31B | $3.34B | $3.62B |
| Net income attributable to Accenture plc | $0.67B | $0.90B | $2.51B | $3.04B |
| Diluted EPS | $1.05 | $1.41 | $3.96 | $4.77 |
| Gross margin | 32.8% | 31.9% | 31.7% | 31.2% |
| Operating margin | 9.8% | 15.5% | 13.0% | 14.8% |
Net revenue grew 5% in U.S. dollars and 7% in local currency in both periods. Gross margin improved, which management attributed principally to lower payroll costs as a percentage of net revenue. Operating margin and EPS were reduced by the U.S. pension settlement described below. Excluding that charge, operating margin was 15.5% for Q3 and 15.0% year to date; adjusted diluted EPS was $1.52 for Q3 and $4.43 year to date. These are company-presented non-GAAP measures.
Cash flow and liquidity: Nine-month operating cash flow was $3.03B, versus $2.60B a year earlier; investing cash outflow was $1.58B, versus $0.55B; financing cash outflow was $2.97B, versus $2.89B. Cash declined from $4.91B at August 31, 2016 to $3.38B at May 31, 2017. Total debt was approximately $27.7M. The company reported no borrowings under $1.72B of available borrowing facilities, with $192M of letters of credit outstanding. Management said available cash and expected operating cash flows should meet working-capital and investment needs for the next 12 months.
Material changes and business trends
- Q3 local-currency growth was strongest in Products (15%), Growth Markets (13%) and Europe (9%); North America grew 3%. Products was also the strongest operating group year to date, with 16% local-currency growth.
- Consulting net revenue grew 6% in local currency in Q3 and 6% year to date; outsourcing grew 7% and 8%, respectively. Management cited demand for digital, cloud and security services, as well as clients’ cost-efficiency and transformation initiatives.
- New bookings were $9.77B in Q3 and $27.28B year to date. Q3 included $5.19B consulting and $4.58B outsourcing bookings.
- Headcount was approximately 411,000, up from approximately 375,000 a year earlier; Q3 utilization was 91%. Annualized attrition excluding involuntary terminations was 15%.
- Cash used for acquisitions and investments rose: purchases of businesses and investments, net of cash acquired, were $1.24B year to date. Goodwill increased to $4.61B from $3.61B at fiscal year-end.
Outlook, unusual items and risks
- Pension settlement: Accenture recorded a $510M charge in Q3 following settlement of its U.S. pension plan; the settlement relieved the company of further obligations under that plan. It contributed $0.47 to the reduction in diluted EPS after tax. The company also made a $118.5M cash contribution in connection with the settlement.
- Prior-year comparison: Fiscal 2016 nine-month results included a $554M gain on the Navitaire divestiture, which increased diluted EPS by $0.74 after tax.
- Tax: Q3 and nine-month effective tax rates were 19.4% and 20.2%; excluding the pension settlement and related tax effects, the company reported rates of 26.6% and 22.7%. Accenture said it resolved a Swiss tax matter in June 2017, agreed to back taxes and paid them in June; it did not expect further charges related to that resolution.
- Outlook: No specific overall fiscal 2017 revenue-growth or EPS guidance is stated in the supplied filing text. Assuming exchange rates remain within recent ranges, management estimated full-year U.S.-dollar revenue growth would be about one percentage point below local-currency growth. It expected to continue using a significant portion of operating cash flow for share repurchases during the rest of fiscal 2017.
- Risks and contingencies: Management highlighted economic and geopolitical uncertainty, foreign-exchange movements, competition and pricing, client demand, talent availability and retention, cybersecurity, taxes, acquisitions and government contracting. It reported litigation and investigations but believed reasonably possible losses beyond accruals would not materially affect results or financial condition. Potential liability under expressly limited third-party performance guarantees was approximately $606M, largely recoverable from third parties; management considered potential payments immaterial overall.
Important facts for investors to verify
- Assess operating performance using both reported results and the pension-settlement-adjusted comparisons; confirm the treatment of non-GAAP measures.
- Track the durability and mix of growth, particularly Products and Growth Markets, and the trend in North American growth.
- Monitor cash conversion, acquisition spending, share repurchases and dividends: year-to-date cash dividends were $1.57B and share purchases were approximately $1.99B.
- Review the Swiss tax settlement’s payment and any remaining tax exposures, as well as the status of litigation and guarantee obligations.
- Consider currency sensitivity: management estimated an approximately one-point full-year gap between local-currency and U.S.-dollar revenue growth if exchange rates stayed within recent ranges.