Accenture plc — Q1 FY2017 Form 10-Q
Reporting period: Three months ended November 30, 2016; comparisons are with the three months ended November 30, 2015 unless otherwise noted. Figures below are U.S. dollars.
Business context and results
Accenture provides consulting and outsourcing services and solutions. Management cited strong demand across most businesses, including digital, cloud and security work, alongside continued economic and foreign-exchange volatility.
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Net revenues (before reimbursements) | $8.516 billion | $8.013 billion | +6% reported; +7% local currency |
| Total revenues, including reimbursements | $9.006 billion | $8.466 billion | +6% |
| Operating income | $1.332 billion | $1.221 billion | +9% |
| Net income | $1.060 billion | $869 million | +22% |
| Net income attributable to Accenture plc | $1.004 billion | $819 million | +23% |
| Diluted EPS | $1.58 | $1.28 | +$0.30 |
| Operating margin on net revenues | 15.6% | 15.2% | +0.4 percentage points |
| Gross margin | 32.1% | 32.0% | +0.1 percentage points |
Consulting net revenues grew 6% in U.S. dollars and 7% in local currency; outsourcing grew 7% in both. By operating group, local-currency growth was strongest in Products (+17%); Financial Services grew 6%, Health & Public Service 5%, and Communications, Media & Technology 4%. Resources declined 2%.
Cash flow, liquidity and capital
- Operating cash flow was $1.084 billion, versus $643 million a year earlier. Investing activities used $690 million, including $599 million for acquisitions and investments; financing activities used $1.163 billion.
- Cash and cash equivalents were $4.077 billion at November 30, down from $4.906 billion at August 31, 2016. Cash declined $829 million during the quarter, including $785 million of dividends paid and $588 million of share purchases.
- Current assets were $11.368 billion and current liabilities $9.170 billion. Total debt was approximately $27 million ($2.8 million current and $24.6 million long-term). The company reported $1.658 billion of borrowing facilities with no borrowings and $168 million of letters of credit outstanding.
- Accenture paid a $1.21-per-share dividend. It said it expected to use a significant portion of operating cash for share repurchases during the remainder of FY2017 and believed cash and expected operating flows would meet working-capital and investment needs for the next 12 months.
Material changes, outlook and notable items
- The effective tax rate fell to 20.4% from 29.3%. Management attributed the decrease mainly to prior-year tax adjustments and excess share-based-payment tax benefits following early adoption of ASU 2016-09. The adoption reduced Q1 tax expense by about $31 million. Management expected a FY2017 annual effective tax rate of 22%–24%, while noting quarterly rates may vary.
- The U.S. dollar’s strengthening reduced Q1 U.S.-dollar revenue growth by about 1 percentage point versus local-currency growth. Assuming exchange rates remained within recent ranges, management estimated FY2017 U.S.-dollar revenue growth would be about 2 percentage points below local-currency growth.
- New bookings were $8.32 billion: $4.88 billion consulting and $3.44 billion outsourcing. Utilization was 92%, versus 90% a year earlier; headcount was approximately 394,000, up from 373,000. Annualized attrition was 12%, down from 13% a year earlier.
- Several individually immaterial acquisitions were completed for $540 million net of cash acquired. Goodwill increased to $4.009 billion, including acquisition additions and adjustments.
- A U.S. pension plan termination and settlement is expected, subject to regulatory approvals. Accenture anticipated recognizing additional expense on settlement, reflecting approximately $467 million of unrecognized actuarial losses reported at August 31, 2016, adjusted for the final settlement obligation. Management did not expect settlement to materially affect cash.
- On December 8, 2016, Swiss tax authorities notified a subsidiary of an investigation into the tax treatment of a 2010 intellectual-property transfer, asserting unpaid taxes, interest and possible penalties. Accenture disputed the assertions and said an adverse outcome could be material.
- Management cited risks including uncertain economic conditions, client demand, competition and pricing, talent availability and retention, cybersecurity, foreign-exchange movements, taxes, government contracting, acquisitions and legal matters. It said risk factors had not materially changed from the FY2016 Form 10-K.
Most important facts for investors to verify
- Whether revenue momentum—particularly Products growth—continues and whether weakness in Resources and parts of Communications persists.
- Whether operating-margin improvement and cash conversion are sustainable, given acquisition spending, working-capital movements, dividends and repurchases.
- How the 22%–24% expected annual tax rate compares with actual results, and how much of Q1 EPS growth came from tax benefits versus operations.
- The outcome and potential financial exposure of the Swiss tax investigation, and the timing and expense of the U.S. pension-plan settlement.
- Whether foreign-exchange conditions, client demand, pricing and workforce costs affect management’s revenue and margin expectations.