Accenture plc — Q3 FY2015 Form 10-Q
Reporting period: Unaudited quarter and nine months ended May 31, 2015; fiscal year ends August 31. Accenture provides consulting and outsourcing services through five operating groups. Comparisons are with the corresponding FY2014 periods unless noted.
Financial performance
| Metric | Q3 FY2015 | Nine months FY2015 |
|---|---|---|
| Net revenues, before reimbursements | $7.770 billion; approximately flat in U.S. dollars and up 10% in local currency | $23.159 billion; up 4% in U.S. dollars and 11% in local currency |
| Total revenues, including reimbursements | $8.275 billion, versus $8.240 billion | $24.550 billion, versus $23.607 billion |
| Operating income / margin | $1.134 billion / 14.6%, versus $1.179 billion / 15.2% | $3.342 billion / 14.4%, versus $3.221 billion / 14.5% |
| Net income attributable to Accenture plc | $794 million, versus $817 million | $2.316 billion, versus $2.240 billion |
| Diluted EPS | $1.24, versus $1.26 | $3.61, versus $3.44 |
| Operating cash flow | Not separately reported for the quarter | $2.588 billion, versus $1.837 billion |
Q3 gross margin was 32.5%, down from 32.8%; nine-month gross margin was 31.5%, down from 32.5%. Management attributed the decline principally to higher labor costs and greater subcontractor use. Excluding the $64 million pension settlement charge, operating margin was 15.4% in Q3 and 14.7% for nine months, each 20 basis points above the respective prior-year period. Excluding that charge, diluted EPS was $1.30 for Q3 and $3.67 for nine months.
For the nine months, investing cash use was $676 million and financing cash use was $2.594 billion; cash decreased $895 million to $4.026 billion. Financing included $1.789 billion of share purchases and $1.353 billion of dividends. Cash dividends per share were $1.02 in Q3 and $2.04 for nine months.
At May 31, cash and cash equivalents were $4.026 billion, compared with $4.921 billion at August 31, 2014. Long-term debt was $27 million, with essentially no current debt. The company reported $1.670 billion of borrowing facilities with no borrowings and $159 million 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.
Changes, business trends, and management commentary
- Foreign exchange was a major reporting headwind: the U.S. dollar’s strength reduced reported revenue growth by approximately 10 percentage points in Q3 and 7 points for nine months versus local-currency growth. Assuming exchange rates remained within recent ranges, management estimated FY2015 U.S.-dollar revenue growth would be about 7.5 percentage points below local-currency growth.
- All five operating groups grew in local currency in Q3. North America led reported regional growth; Europe’s net revenues fell 10% in U.S. dollars but rose 7% in local currency. Consulting and outsourcing each rose 11% and 10%, respectively, in Q3 local currency.
- Q3 bookings were $8.53 billion ($4.51 billion consulting; $4.02 billion outsourcing). Nine-month bookings were $25.55 billion ($12.62 billion consulting; $12.93 billion outsourcing).
- Headcount exceeded 336,000 at May 31, up from more than 293,000 a year earlier; Q3 utilization was 90%, versus 91% in the prior quarter. Annualized voluntary attrition was 15%, compared with 14% in both comparison quarters.
- Q3 operating income declined 4% despite higher local-currency revenue. Before the pension charge, management cited margin improvement overall, but Resources profitability weakened, principally from lower contract profitability. Management noted energy clients’ shift toward outsourcing and cost savings could continue to weigh on Resources consulting growth in the near term.
Outlook, unusual items, and risks
- Management expected the FY2015 annual effective tax rate to be 26%–27%; FY2014’s rate was 26.1%.
- The $64.4 million non-cash pension settlement charge followed a voluntary lump-sum offer accepted by more than 4,800 former U.S. plan participants; $279.6 million was paid from plan assets. The plan’s funded status after remeasurement was 104%.
- The nine-month tax rate reflected a $239.5 million estimated deferred tax liability for withholding taxes on certain undistributed U.S. subsidiary earnings, partly offset by a $169.8 million benefit from final settlement of U.S. tax audits for fiscal 2010 and 2011.
- Foreign-currency forward contracts not designated as hedges generated net losses of $239.6 million for nine months, recorded in other expense and stated to be offset by gains and losses on related hedged items. Management also cited losses from devaluation of the Venezuelan bolivar.
- Accenture acquired Agilex Technologies for $263.8 million, net of cash acquired, adding about 730 employees and digital capabilities for U.S. federal agencies; acquisition pro forma effects were not material. Other individually immaterial acquisitions totaled $173.4 million, net of cash acquired.
- Management intended to use a significant portion of operating cash generated for share repurchases during the remainder of FY2015. Aggregate authorization available at May 31 was $3.153 billion.
- Key disclosed risks include economic and geopolitical uncertainty, currency volatility, competition and pricing, labor supply and compensation costs, contract delivery and collection risks, cybersecurity and data protection, government contracting, acquisitions, and tax matters. Management reported no material changes to the prior annual report’s risk factors and believed reasonably possible additional legal losses would not materially affect results or financial condition.
Important facts for investors to verify
- Whether local-currency demand growth can translate into reported U.S.-dollar growth if currency headwinds persist.
- Whether gross-margin pressure from labor costs and subcontractors stabilizes, and whether Resources contract profitability recovers.
- How much of the Q3 and year-to-date EPS comparison reflects the one-time pension charge and tax items.
- Whether operating cash flow remains strong enough to fund acquisitions, dividends, and planned repurchases as cash balances decline.
- The eventual tax and financial-reporting effects of repatriation-related deferred taxes and adoption of the new revenue-recognition standard, which the company was still assessing.