Accenture plc — Q3 FY2016 Form 10-Q
Reporting period: Quarter and nine months ended May 31, 2016; fiscal year ends August 31. Unaudited results are in U.S. dollars.
Business context and results
Accenture provides consulting and outsourcing services through five operating groups. Management reported strong demand, especially for digital-related work, with growth across all operating groups in Q3 in local currency. Consulting grew faster than outsourcing.
| Metric | Q3 FY2016 | Q3 FY2015 | Nine months FY2016 | Nine months FY2015 |
|---|---|---|---|---|
| Net revenues, before reimbursements | $8.435B (+9% USD; +10% local currency) | $7.770B | $24.393B (+5% USD; +11% local currency) | $23.159B |
| Total revenues | $8.969B | $8.275B | $25.832B | $24.550B |
| Operating income | $1.306B (+15%) | $1.134B | $3.615B (+8%) | $3.342B |
| Operating margin | 15.5% | 14.6% (15.4% excluding pension charge) | 14.8% | 14.4% (14.7% excluding pension charge) |
| Gross margin | 31.9% | 32.5% | 31.2% | 31.5% |
| Net income attributable to Accenture plc | $897M | $794M | $3.043B | $2.316B |
| Diluted EPS | $1.41 | $1.24 | $4.77 | $3.61 |
| Operating cash flow | Nine-month period: $2.520B | Prior-year nine-month period: $2.588B |
Cash, debt and liquidity
- Cash and cash equivalents were $3.498B at May 31, 2016, down from $4.361B at August 31, 2015. Nine-month cash decreased $863M.
- Nine-month investing cash outflow was $548M; financing cash outflow was $2.809B, including $1.965B of share purchases and $1.438B of dividends paid.
- Reported debt and bank borrowings totaled about $29M at May 31, 2016. Accenture had $1.648B of borrowing facilities, with no borrowings outstanding and $157M of letters of credit.
- Management said available cash and expected operating cash flows should meet working-capital and investment needs for the next 12 months.
Material changes and unusual items
- The January 2016 Navitaire sale generated $833M in net proceeds and a $554M pre-tax gain. The gain increased nine-month diluted EPS by $0.74; $214.5M of proceeds was deferred revenue for services to the buyer, principally infrastructure outsourcing over five years.
- Excluding the Navitaire gain and the prior-year pension settlement charge, nine-month diluted EPS was $4.03 versus $3.67, approximately 10% growth. Q3 FY2015 included a $64M pension settlement charge, which reduced that quarter’s EPS by $0.06.
- Q3 gross margin fell 0.6 percentage point year over year, principally due to higher labor and acquisition-related costs. Sales and marketing and general and administrative costs declined as a share of net revenues.
- Accenture acquired Cloud Sherpas for approximately $409M net of cash acquired and completed other acquisitions for $323M net of cash acquired during the nine-month period.
- The company agreed to form a Duck Creek Technologies joint venture in which Apax would acquire 60% and Accenture retain 40%; closing remained subject to regulatory approvals.
Outlook, management commentary and risks
- Accenture estimated full-year FY2016 U.S.-dollar revenue growth would be approximately 4%–5% below local-currency growth if exchange rates remained within recent ranges. Currency translation had reduced reported growth versus local-currency growth by about 2 percentage points in Q3 and 6 points year to date.
- Management expected a FY2016 annual effective tax rate of 24%–25%. The nine-month reported rate was 22.3%, or 24.2% excluding the Navitaire gain and related tax.
- Management said it intended to use a significant portion of operating cash generated for share repurchases during the remainder of FY2016; timing and amount could vary.
- Utilization was 91%; headcount was approximately 375,000, up from 336,000 a year earlier. Annualized voluntary attrition was 15%, compared with 13% in the prior quarter.
- The U.S. pension plan termination was expected to settle in 12–18 months, subject to approvals. Accenture anticipated additional expense at settlement, including approximately $337M of unrecognized actuarial losses as of August 31, 2015, adjusted for settlement differences; it did not expect a material cash impact.
- Key risks cited include economic and geopolitical uncertainty, client demand and pricing, competition, foreign-exchange volatility, attracting and retaining skilled staff, contract delivery and third-party performance, cybersecurity and data protection, acquisitions and joint ventures, taxes, and collection of receivables and unbilled services. Management reported no material changes to the prior annual report’s risk factors and believed reasonably possible legal losses beyond accruals would not materially affect results or financial condition.
Important facts for investors to verify
- Underlying revenue, margin and EPS trends excluding the Navitaire gain and prior-year pension charge.
- Whether currency movements, labor costs and acquisition-related expenses continue to affect growth and margins.
- Cash conversion and working-capital movements, particularly client collections and compensation payments.
- Progress and final settlement cost of the U.S. pension plan, and closing of the Duck Creek joint venture.
- Future share repurchases, dividends and liquidity needs relative to acquisitions and other investment plans.