10-Q 1 acn-20140531x10q.htm 10-Q ACN-2014.05.31-10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED May 31, 2014
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM             TO   
Commission File Number: 001-34448
Accenture plc
(Exact name of registrant as specified in its charter)
 
Ireland
98-0627530
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
1 Grand Canal Square,
Grand Canal Harbour,
Dublin 2, Ireland
(Address of principal executive offices)
(353) (1) 646-2000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  þ
Accelerated filer ¨
Non-accelerated filer  ¨
Smaller reporting company  ¨
 
 
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
The number of shares of the registrant’s Class A ordinary shares, par value $0.0000225 per share, outstanding as of June 12, 2014 was 783,626,735 (which number includes 152,385,141 issued shares held by the registrant). The number of shares of the registrant’s Class X ordinary shares, par value $0.0000225 per share, outstanding as of June 12, 2014 was 28,700,062.



ACCENTURE PLC
INDEX
 
 
 
Page

2


PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ACCENTURE PLC
CONSOLIDATED BALANCE SHEETS
May 31, 2014 and August 31, 2013
(In thousands of U.S. dollars, except share and per share amounts)
 
May 31,
2014
 
August 31,
2013
 
(Unaudited)
 
 
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
4,048,859

 
$
5,631,885

Short-term investments
2,687

 
2,525

Receivables from clients, net
3,804,826

 
3,333,126

Unbilled services, net
1,765,235

 
1,513,448

Deferred income taxes, net
818,747

 
794,917

Other current assets
694,339

 
568,277

Total current assets
11,134,693

 
11,844,178

NON-CURRENT ASSETS:
 
 
 
Unbilled services, net
27,593

 
18,447

Investments
70,405

 
43,631

Property and equipment, net
786,599

 
779,675

Goodwill
2,354,811

 
1,818,586

Deferred contract costs
617,447

 
554,747

Deferred income taxes, net
1,096,287

 
1,018,567

Other non-current assets
914,549

 
789,218

Total non-current assets
5,867,691

 
5,022,871

TOTAL ASSETS
$
17,002,384

 
$
16,867,049

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Current portion of long-term debt and bank borrowings
$
139

 
$

Accounts payable
957,633

 
961,851

Deferred revenues
2,308,594

 
2,230,615

Accrued payroll and related benefits
3,015,460

 
3,460,393

Accrued consumption taxes
358,120

 
308,655

Income taxes payable
404,306

 
266,593

Deferred income taxes, net
19,511

 
24,031

Other accrued liabilities
552,405

 
908,852

Total current liabilities
7,616,168

 
8,160,990

NON-CURRENT LIABILITIES:
 
 
 
Long-term debt
26,534

 
25,600

Deferred revenues relating to contract costs
517,221

 
517,397

Retirement obligation
922,413

 
872,761

Deferred income taxes, net
158,404

 
174,818

Income taxes payable
1,299,129

 
1,224,251

Other non-current liabilities
317,217

 
463,403

Total non-current liabilities
3,240,918

 
3,278,230

COMMITMENTS AND CONTINGENCIES

 

SHAREHOLDERS’ EQUITY:
 
 
 
Ordinary shares, par value 1.00 euro per share, 40,000 shares authorized and issued as of May 31, 2014 and August 31, 2013
57

 
57

Class A ordinary shares, par value $0.0000225 per share, 20,000,000,000 shares authorized, 783,365,958 and 771,301,885 shares issued as of May 31, 2014 and August 31, 2013, respectively
18

 
17

Class X ordinary shares, par value $0.0000225 per share, 1,000,000,000 shares authorized, 28,700,062 and 30,312,244 shares issued and outstanding as of May 31, 2014 and August 31, 2013, respectively
1

 
1

Restricted share units
986,495

 
875,156

Additional paid-in capital
3,108,770

 
2,393,936

Treasury shares, at cost: Ordinary, 40,000 shares as of May 31, 2014 and August 31, 2013; Class A ordinary, 151,998,775 and 135,258,733 shares as of May 31, 2014 and August 31, 2013, respectively
(8,850,092
)
 
(7,326,079
)
Retained earnings
11,064,794

 
10,069,844

Accumulated other comprehensive loss
(706,412
)
 
(1,052,746
)
Total Accenture plc shareholders’ equity
5,603,631

 
4,960,186

Noncontrolling interests
541,667

 
467,643

Total shareholders’ equity
6,145,298

 
5,427,829

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
17,002,384

 
$
16,867,049

The accompanying Notes are an integral part of these Consolidated Financial Statements.

3


ACCENTURE PLC
CONSOLIDATED INCOME STATEMENTS
For the Three and Nine Months Ended May 31, 2014 and 2013
(In thousands of U.S. dollars, except share and per share amounts)
(Unaudited)
 
 
Three Months Ended May 31,
 
Nine Months Ended May 31,
 
2014
 
2013
 
2014
 
2013
REVENUES:
 
 
 
 
 
 
 
Revenues before reimbursements (“Net revenues”)
$
7,735,638

 
$
7,198,140

 
$
22,225,054

 
$
21,476,143

Reimbursements
504,542

 
509,795

 
1,382,305

 
1,393,148

Revenues
8,240,180

 
7,707,935

 
23,607,359

 
22,869,291

OPERATING EXPENSES:
 
 
 
 
 
 
 
Cost of services:
 
 
 
 
 
 
 
Cost of services before reimbursable expenses
5,199,281

 
4,760,121

 
15,009,208

 
14,441,568

Reimbursable expenses
504,542

 
509,795

 
1,382,305

 
1,393,148

Cost of services
5,703,823

 
5,269,916

 
16,391,513

 
15,834,716

Sales and marketing
899,250

 
886,641

 
2,664,715

 
2,588,890

General and administrative costs
458,341

 
458,631

 
1,347,999

 
1,363,034

Reorganization benefits, net

 
(49,224
)
 
(18,015
)
 
(272,526
)
Total operating expenses
7,061,414

 
6,565,964

 
20,386,212

 
19,514,114

OPERATING INCOME
1,178,766

 
1,141,971

 
3,221,147

 
3,355,177

Interest income
7,513

 
7,251

 
22,229

 
25,877

Interest expense
(4,290
)
 
(3,588
)
 
(12,296
)
 
(11,778
)
Other (expense) income, net
(6,051
)
 
951

 
(21,437
)
 
5,114

INCOME BEFORE INCOME TAXES
1,175,938

 
1,146,585

 
3,209,643

 
3,374,390

Provision for income taxes
294,125

 
272,522

 
793,853

 
547,198

NET INCOME
881,813

 
874,063

 
2,415,790

 
2,827,192

Net income attributable to noncontrolling interests in Accenture SCA and Accenture Canada Holdings Inc.
(51,523
)
 
(53,177
)
 
(143,470
)
 
(190,495
)
Net income attributable to noncontrolling interests – other
(12,954
)
 
(10,628
)
 
(31,838
)
 
(25,819
)
NET INCOME ATTRIBUTABLE TO ACCENTURE PLC
$
817,336

 
$
810,258

 
$
2,240,482

 
$
2,610,878

Weighted average Class A ordinary shares:
 
 
 
 
 
 
 
Basic
633,128,417

 
650,625,931

 
635,231,759

 
646,617,365

Diluted
691,038,145

 
715,628,354

 
693,943,009

 
715,542,879

Earnings per Class A ordinary share:
 
 
 
 
 
 
 
Basic
$
1.29

 
$
1.25

 
$
3.53

 
$
4.04

Diluted
$
1.26

 
$
1.21

 
$
3.44

 
$
3.92

Cash dividends per share
$
0.93

 
$
0.81

 
$
1.86

 
$
1.62

The accompanying Notes are an integral part of these Consolidated Financial Statements.

4


ACCENTURE PLC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Three and Nine Months Ended May 31, 2014 and 2013
(In thousands of U.S. dollars)
(Unaudited)

 
Three Months Ended May 31,
 
Nine Months Ended May 31,
 
2014
 
2013
 
2014
 
2013
NET INCOME
$
881,813

 
$
874,063

 
$
2,415,790

 
$
2,827,192

OTHER COMPREHENSIVE INCOME, NET OF TAX:
 
 
 
 
 
 
 
Foreign currency translation
63,690

 
(104,990
)
 
144,650

 
(127,379
)
Defined benefit plans
3,056

 
(7,428
)
 
11,024

 
(12,900
)
Cash flow hedges
93,343

 
(51,141
)
 
190,660

 
(33,725
)
OTHER COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO ACCENTURE PLC
160,089

 
(163,559
)
 
346,334

 
(174,004
)
Other comprehensive income (loss) attributable to noncontrolling interests
10,700

 
(11,588
)
 
21,693

 
(11,399
)
COMPREHENSIVE INCOME
$
1,052,602

 
$
698,916

 
$
2,783,817

 
$
2,641,789




 


 
 
 
 
COMPREHENSIVE INCOME ATTRIBUTABLE TO ACCENTURE PLC
$
977,425

 
$
646,700

 
$
2,586,816

 
$
2,436,874

Comprehensive income attributable to noncontrolling interests
75,177

 
52,216

 
197,001

 
204,915

COMPREHENSIVE INCOME
$
1,052,602

 
$
698,916

 
$
2,783,817

 
$
2,641,789

 The accompanying Notes are an integral part of these Consolidated Financial Statements.


5


ACCENTURE PLC
CONSOLIDATED SHAREHOLDERS’ EQUITY STATEMENT
For the Nine Months Ended May 31, 2014
(In thousands of U.S. dollars and share amounts)
(Unaudited)
 
Ordinary
Shares
 
Class A
Ordinary
Shares
 
Class X
Ordinary
Shares
 
Restricted
Share
Units
 
Additional
Paid-in
Capital
 
Treasury Shares
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Total
Accenture plc
Shareholders’
Equity
 
Noncontrolling
Interests
 
Total
Shareholders’
Equity
 
$
 
No.
Shares
 
$
 
No.
Shares
 
$
 
No.
Shares
 
 
 
$
 
No.
Shares
 
 
 
 
 
Balance as of August 31, 2013
$
57

 
40

 
$
17

 
771,302

 
$
1

 
30,312

 
$
875,156

 
$
2,393,936

 
$
(7,326,079
)
 
(135,299
)
 
$
10,069,844

 
$
(1,052,746
)
 
$
4,960,186

 
$
467,643

 
$
5,427,829

Net income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2,240,482

 
 
 
2,240,482

 
175,308

 
2,415,790

Other comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
346,334

 
346,334

 
21,693

 
368,027

Income tax benefit on share-based compensation plans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
77,940

 
 
 
 
 
 
 
 
 
77,940

 
 
 
77,940

Purchases of Class A ordinary shares
 
 
 
 
 
 
 
 
 
 
 
 
 
 
95,755

 
(1,771,765
)
 
(22,770
)
 
 
 
 
 
(1,676,010
)
 
(95,755
)
 
(1,771,765
)
Share-based compensation expense
 
 
 
 
 
 
 
 
 
 
 
 
485,194

 
34,795

 
 
 
 
 
 
 
 
 
519,989

 
 
 
519,989

Purchases/redemptions of Accenture SCA Class I common shares, Accenture Canada Holdings Inc. exchangeable shares and Class X ordinary shares
 
 
 
 
 
 
 
 
 
 
(1,612
)
 
 
 
(122,887
)
 
 
 
 
 
 
 
 
 
(122,887
)
 
(7,215
)
 
(130,102
)
Issuances of Class A ordinary shares:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Employee share programs
 
 
 
 
1

 
11,471

 
 
 
 
 
(427,633
)
 
642,277

 
247,752

 
6,030

 
 
 
 
 
462,397

 
25,371

 
487,768

Upon redemption of Accenture SCA Class I common shares
 
 
 
 
 
 
593

 
 
 
 
 
 
 
2,799

 
 
 
 
 
 
 
 
 
2,799

 
(2,799
)
 

Dividends
 
 
 
 
 
 
 
 
 
 
 
 
53,778

 
 
 
 
 
 
 
(1,232,668
)
 
 
 
(1,178,890
)
 
(76,026
)
 
(1,254,916
)
Other, net
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(15,845
)
 
 
 
 
 
(12,864
)
 
 
 
(28,709
)
 
33,447

 
4,738

Balance as of May 31, 2014
$
57

 
40

 
$
18

 
783,366

 
$
1

 
28,700

 
$
986,495

 
$
3,108,770

 
$
(8,850,092
)
 
(152,039
)
 
$
11,064,794

 
$
(706,412
)
 
$
5,603,631

 
$
541,667

 
$
6,145,298

The accompanying Notes are an integral part of these Consolidated Financial Statements.


6


ACCENTURE PLC
CONSOLIDATED CASH FLOWS STATEMENTS
For the Nine Months Ended May 31, 2014 and 2013
(In thousands of U.S. dollars)
(Unaudited)
 
2014
 
2013
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
2,415,790

 
$
2,827,192

Adjustments to reconcile Net income to Net cash provided by operating activities —
 
 
 
Depreciation, amortization and asset impairments
456,664

 
439,321

Reorganization benefits, net
(18,015
)
 
(272,526
)
Share-based compensation expense
519,989

 
473,317

Deferred income taxes, net
(203,605
)
 
(129,371
)
Other, net
133,014

 
(65,284
)
Change in assets and liabilities, net of acquisitions —
 
 
 
Receivables from clients, net
(331,649
)
 
(278,066
)
Unbilled services, current and non-current, net
(166,744
)
 
(75,626
)
Other current and non-current assets
(294,028
)
 
71,857

Accounts payable
(50,055
)
 
24,956

Deferred revenues, current and non-current
(64,010
)
 
(43,667
)
Accrued payroll and related benefits
(544,946
)
 
(169,412
)
Income taxes payable, current and non-current
158,555

 
(254,699
)
Other current and non-current liabilities
(174,087
)
 
(520,374
)
Net cash provided by operating activities
1,836,873

 
2,027,618

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Proceeds from sales of property and equipment
4,095

 
12,880

Purchases of property and equipment
(220,413
)
 
(267,364
)
Purchases of businesses and investments, net of cash acquired
(675,220
)
 
(369,145
)
Net cash used in investing activities
(891,538
)
 
(623,629
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Proceeds from issuance of ordinary shares
487,768

 
458,094

Purchases of shares
(1,901,867
)
 
(1,447,538
)
Proceeds from (repayments of) long-term debt, net
734

 
(34
)
Proceeds from short-term borrowings, net

 
69

Cash dividends paid
(1,254,916
)
 
(1,121,738
)
Excess tax benefits from share-based payment arrangements
103,066

 
95,121

Other, net
(15,360
)
 
(25,967
)
Net cash used in financing activities
(2,580,575
)
 
(2,041,993
)
Effect of exchange rate changes on cash and cash equivalents
52,214

 
(64,437
)
NET DECREASE IN CASH AND CASH EQUIVALENTS
(1,583,026
)
 
(702,441
)
CASH AND CASH EQUIVALENTS, beginning of period
5,631,885

 
6,640,526

CASH AND CASH EQUIVALENTS, end of period
$
4,048,859

 
$
5,938,085

The accompanying Notes are an integral part of these Consolidated Financial Statements.

7

ACCENTURE PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except share and per share amounts or as otherwise disclosed)
(Unaudited)



1. BASIS OF PRESENTATION
The accompanying unaudited interim Consolidated Financial Statements of Accenture plc and its controlled subsidiary companies (collectively, the “Company”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for quarterly reports on Form 10-Q and do not include all of the information and note disclosures required by U.S. generally accepted accounting principles (“U.S. GAAP”) for complete financial statements. These Consolidated Financial Statements should therefore be read in conjunction with the Consolidated Financial Statements and Notes thereto for the fiscal year ended August 31, 2013 included in the Company’s Annual Report on Form 10-K filed with the SEC on October 29, 2013.
The accompanying unaudited interim Consolidated Financial Statements have been prepared in accordance with U.S. GAAP, which requires management to make estimates and assumptions that affect amounts reported in the Consolidated Financial Statements and accompanying disclosures. Although these estimates are based on management’s best knowledge of current events and actions that the Company may undertake in the future, actual results may differ from those estimates. The Consolidated Financial Statements reflect all adjustments of a normal, recurring nature that are, in the opinion of management, necessary for a fair presentation of results for these interim periods. The results of operations for the three and nine months ended May 31, 2014 are not necessarily indicative of the results that may be expected for the fiscal year ending August 31, 2014.
Certain amounts that were reported in the previous year have been reclassified to conform to the current-period presentation.
Allowances for Client Receivables and Unbilled Services
As of May 31, 2014 and August 31, 2013, total allowances recorded for client receivables and unbilled services were $81,616 and $91,716, respectively.
Accumulated Depreciation
As of May 31, 2014 and August 31, 2013, total accumulated depreciation was $1,835,013 and $1,608,211, respectively.
Recently Adopted Accounting Pronouncement
In September 2013, the Company adopted guidance issued by the Financial Accounting Standards Board (“FASB”), which requires enhanced disclosures about certain financial instruments and derivative instruments that are offset in the Consolidated Balance Sheets or that are subject to enforceable master netting arrangements. The guidance also requires the disclosure of the gross amounts subject to rights of offset, amounts of offset and the related net exposure. The adoption of this guidance did not have a material impact on the Consolidated Financial Statements. For additional information related to master netting arrangements, see Note 7 (Derivative Financial Instruments) to these Consolidated Financial Statements.
New Accounting Pronouncement
On May 28, 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, which will replace most existing revenue recognition guidance in U.S. GAAP. The core principle of the ASU is that an entity should recognize revenue for the transfer of goods or services equal to the amount that it expects to be entitled to receive for those goods or services. The ASU requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments. The ASU will be effective for the Company beginning September 1, 2017, including interim periods in its fiscal year 2018, and allows for both retrospective and prospective methods of adoption. The Company is in the process of determining the method of adoption and assessing the impact of this ASU on its Consolidated Financial Statements.


8

ACCENTURE PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(In thousands of U.S. dollars, except share and per share amounts or as otherwise disclosed)
(Unaudited)


2. EARNINGS PER SHARE
Basic and diluted earnings per share were calculated as follows:
 
Three Months Ended May 31,
 
Nine Months Ended May 31,
 
2014
 
2013
 
2014
 
2013
Basic Earnings per share
 
 
 
 
 
 
 
Net income attributable to Accenture plc
$
817,336

 
$
810,258

 
$
2,240,482

 
$
2,610,878

Basic weighted average Class A ordinary shares
633,128,417

 
650,625,931

 
635,231,759

 
646,617,365

Basic earnings per share
$
1.29

 
$
1.25

 
$
3.53

 
$
4.04

Diluted Earnings per share
 
 
 
 
 
 
 
Net income attributable to Accenture plc
$
817,336

 
$
810,258

 
$
2,240,482

 
$
2,610,878

Net income attributable to noncontrolling interests in
Accenture SCA and Accenture Canada Holdings Inc. (1)
51,523

 
53,177

 
143,470

 
190,495

Net income for diluted earnings per share calculation
$
868,859

 
$
863,435

 
$
2,383,952

 
$
2,801,373

Basic weighted average Class A ordinary shares
633,128,417

 
650,625,931

 
635,231,759

 
646,617,365

Class A ordinary shares issuable upon redemption/exchange of noncontrolling interests (1)
39,902,188

 
42,735,065

 
40,694,983

 
47,612,585

Diluted effect of employee compensation related to Class A ordinary shares (2)
17,936,287

 
22,206,837

 
17,971,546

 
21,299,886

Diluted effect of share purchase plans related to Class A ordinary shares
71,253

 
60,521

 
44,721

 
13,043

Diluted weighted average Class A ordinary shares (2)
691,038,145

 
715,628,354

 
693,943,009

 
715,542,879

Diluted earnings per share (2)
$
1.26

 
$
1.21

 
$
3.44

 
$
3.92

_______________
(1)
Diluted earnings per share assumes the redemption of all Accenture SCA Class I common shares owned by holders of noncontrolling interests and the exchange of all Accenture Canada Holdings Inc. exchangeable shares for Accenture plc Class A ordinary shares on a one-for-one basis. The income effect does not take into account “Net income attributable to noncontrolling interests — other,” since those shares are not redeemable or exchangeable for Accenture plc Class A ordinary shares.
(2)
Diluted weighted average Accenture plc Class A ordinary shares and earnings per share amounts for the three and nine months ended May 31, 2013 have been restated to reflect the impact of the issuance of additional restricted share units to holders of restricted share units in connection with the payments of cash dividends during the first and third quarters of fiscal 2014. This did not result in a change to previously reported Diluted earnings per share.
3. INCOME TAXES
Effective Tax Rate
The Company’s effective tax rates for the three months ended May 31, 2014 and 2013 were 25.0% and 23.8%, respectively. The Company’s effective tax rates for the nine months ended May 31, 2014 and 2013 were 24.7% and 16.2%, respectively. During the three and nine months ended May 31, 2013, the Company recorded reorganization benefits of $49,690 and $273,945, respectively, which increased income before income taxes without any increase in income tax expense. In addition, during the three months ended February 28, 2013, the Company recorded a benefit of $242,938 related to settlements of U.S. federal tax audits for fiscal years 2006 through 2009. Absent these items, the effective tax rates would have been 24.8% and 25.5% for the three and nine months ended May 31, 2013, respectively.

9

ACCENTURE PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(In thousands of U.S. dollars, except share and per share amounts or as otherwise disclosed)
(Unaudited)


4. ACCUMULATED OTHER COMPREHENSIVE LOSS
The following table summarizes the changes in the accumulated balances for each component of accumulated other comprehensive loss attributable to Accenture plc:
 
Three Months Ended May 31,
 
Nine Months Ended May 31,
 
2014
 
2013
 
2014
 
2013
Foreign currency translation
 
 
 
 
 
 
 
    Beginning balance
$
(333,441
)
 
$
(178,399
)
 
$
(414,401
)
 
$
(156,010
)
             Foreign currency translation
66,568

 
(113,117
)
 
149,898

 
(135,839
)
             Income tax benefit
1,860

 
370

 
3,822

 
101

             Portion attributable to noncontrolling interests
(4,738
)
 
7,757

 
(9,070
)
 
8,359

             Foreign currency translation, net of tax
63,690

 
(104,990
)
 
144,650

 
(127,379
)
    Ending balance
(269,751
)
 
(283,389
)
 
(269,751
)
 
(283,389
)
 
 
 
 
 
 
 
 
Defined benefit plans
 
 
 
 
 
 
 
    Beginning balance
(417,436
)
 
(508,214
)
 
(425,404
)
 
(502,742
)
             Actuarial (losses) gains

 
(2,063
)
 

 
15,712

             Prior service costs arising during the period

 

 

 
(48,774
)
             Reclassifications into net periodic pension and
             post-retirement expense (1)
5,288

 
7,011

 
15,185

 
27,384

             Income tax expense
(2,046
)
 
(12,855
)
 
(3,471
)
 
(8,063
)
             Portion attributable to noncontrolling interests
(186
)
 
479

 
(690
)
 
841

             Defined benefit plans, net of tax
3,056

 
(7,428
)
 
11,024

 
(12,900
)
    Ending balance
(414,380
)
 
(515,642
)
 
(414,380
)
 
(515,642
)
 
 
 
 
 
 
 
 
Cash flow hedges
 
 
 
 
 
 
 
    Beginning balance
(115,624
)
 
(1,986
)
 
(212,941
)
 
(19,402
)
             Unrealized gains (losses)
130,182

 
(87,081
)
 
223,807

 
(76,092
)
             Reclassification adjustments into Cost of services
20,676

 
3,080

 
91,725

 
20,272

             Income tax (expense) benefit
(51,739
)
 
29,508

 
(112,939
)
 
19,896

             Portion attributable to noncontrolling interests
(5,776
)
 
3,352

 
(11,933
)
 
2,199

             Cash flow hedges, net of tax
93,343

 
(51,141
)
 
190,660

 
(33,725
)
    Ending balance
(22,281
)
 
(53,127
)
 
(22,281
)
 
(53,127
)
 
 
 
 
 
 
 
 
Marketable securities
 
 
 
 
 
 
 
    Beginning balance

 
6

 

 
6

    Ending balance

 
6

 

 
6

 
 
 
 
 
 
 
 
Accumulated other comprehensive loss
$
(706,412
)
 
$
(852,152
)
 
$
(706,412
)
 
$
(852,152
)
 _______________
(1)
Reclassifications into net periodic pension and post-retirement expense are recognized in Cost of services, Sales and marketing and General and administrative costs.


10

ACCENTURE PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(In thousands of U.S. dollars, except share and per share amounts or as otherwise disclosed)
(Unaudited)


5. BUSINESS COMBINATIONS AND GOODWILL
On December 4, 2013, the Company acquired Procurian Inc. (“Procurian”), a provider of procurement business process solutions, for $386,407, net of cash acquired. This acquisition enhanced Accenture’s capabilities in procurement business process outsourcing across a range of industries and resulted in approximately 780 Procurian employees joining Accenture. In connection with this acquisition, the Company recorded goodwill of $310,157, which was allocated to all five reportable operating segments, and intangible assets of $60,388, primarily related to customer relationships and technology. The goodwill is substantially non-deductible for U.S. federal income tax purposes. The intangible assets are being amortized over one to twelve years. The pro forma effects of this acquisition on the Company’s operations were not material.
During the nine months ended May 31, 2014, the Company also completed other individually immaterial acquisitions for total consideration of $258,715, net of cash acquired. These acquisitions were completed primarily to expand the Company’s products and services offerings. In connection with these acquisitions, the Company recorded goodwill of $199,205, which was allocated among the reportable operating segments, and intangible assets of $77,150, primarily related to customer relationships, customer backlog and technology related assets. The goodwill is partially deductible for U.S. federal income tax purposes. The intangible assets are being amortized over one to twelve years. The pro forma effects of these acquisitions on the Company’s operations were not material.
Goodwill also included immaterial adjustments related to prior period acquisitions. The changes in the carrying amount of goodwill by reportable operating segment were as follows:
 
August 31,
2013
 
Additions/
Adjustments
 
Foreign
Currency
Translation
 
May 31,
2014
Communications, Media & Technology
$
234,444

 
$
90,083

 
$
5,900

 
$
330,427

Financial Services
582,649

 
111,502

 
8,522

 
702,673

Health & Public Service
295,044

 
67,184

 
1,444

 
363,672

Products
617,008

 
203,799

 
7,873

 
828,680

Resources
89,441

 
36,823

 
3,095

 
129,359

Total
$
1,818,586

 
$
509,391

 
$
26,834

 
$
2,354,811

6. MATERIAL TRANSACTIONS AFFECTING SHAREHOLDERS’ EQUITY
Dividends
The Company’s dividend activity during the nine months ended May 31, 2014 was as follows:
 
 
Dividend Per
Share
 
Accenture plc Class A
Ordinary Shares
 
Accenture SCA Class I Common
Shares and Accenture Canada Holdings
Inc. Exchangeable Shares
 
Total Cash
Outlay
Dividend Payment Date
 
 
Record Date
 
Cash Outlay
 
Record Date
 
Cash Outlay
 
November 15, 2013
 
$
0.93

 
October 11, 2013
 
$
591,380

 
October 8, 2013
 
$
38,854

 
$
630,234

May 15, 2014
 
0.93

 
April 11, 2014
 
587,510

 
April 8, 2014
 
37,172

 
624,682

Total Dividends
 
 
 
 
 
$
1,178,890

 
 
 
$
76,026

 
$
1,254,916

The payment of the cash dividends also resulted in the issuance of an immaterial number of additional restricted share units to holders of restricted share units. Diluted weighted average Accenture plc Class A ordinary share amounts have been restated for all prior periods presented to reflect this issuance. For additional information, see Note 2 (Earnings Per Share).

11

ACCENTURE PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(In thousands of U.S. dollars, except share and per share amounts or as otherwise disclosed)
(Unaudited)


7. DERIVATIVE FINANCIAL INSTRUMENTS
In the normal course of business, the Company uses derivative financial instruments to manage foreign currency exchange rate risk. The Company’s derivative financial instruments consist of deliverable and non-deliverable foreign currency forward contracts.
Cash Flow Hedges
For a cash flow hedge, the effective portion of the change in estimated fair value of a hedging instrument is recorded in Accumulated other comprehensive loss as a separate component of Shareholders’ Equity and is reclassified into Cost of services in the Consolidated Income Statements during the period in which the hedged transaction is recognized. The amounts related to derivatives designated as cash flow hedges that were reclassified into Cost of services were a net loss of $20,676 and $3,080 for the three months ended May 31, 2014 and 2013, respectively. The amounts related to derivatives designated as cash flow hedges that were reclassified into Cost of services were a net loss of $91,725 and $20,272 for the nine months ended May 31, 2014 and 2013, respectively. The ineffective portion of the change in fair value of a cash flow hedge is recognized immediately in Other (expense) income, net in the Consolidated Income Statements and, for the three and nine months ended May 31, 2014, was not material. In addition, the Company did not discontinue any cash flow hedges during the three and nine months ended May 31, 2014. As of May 31, 2014, $22,270 of the amounts related to derivatives designated as cash flow hedges and recorded in Accumulated other comprehensive loss is expected to be reclassified into Cost of services in the next 12 months. For additional information related to the derivatives designated as cash flow hedges that were reclassified into Cost of services, see Note 4 (Accumulated Other Comprehensive Loss) to these Consolidated Financial Statements.
Other Derivatives
Realized gains or losses and changes in the estimated fair value of foreign currency forward contracts that have not been designated as hedges were a net gain of $21,039 and $119,515 for the three and nine months ended May 31, 2014, respectively. Realized gains or losses and changes in the estimated fair value of foreign currency forward contracts that have not been designated as hedges were a net loss of $59,586 and $38,662 for the three and nine months ended May 31, 2013, respectively. Gains and losses on these contracts are recorded in Other (expense) income, net in the Consolidated Income Statements and are offset by gains and losses on the related hedged items.
Fair Value of Derivative Instruments
The notional and fair values of all derivative instruments were as follows:
 
May 31, 2014
 
August 31, 2013
Assets
 
 
 
Cash Flow Hedges
 
 
 
Other current assets
$
23,221

 
$

Other non-current assets
22,782

 

Other Derivatives
 
 
 
Other current assets
13,904

 
4,805

Total assets
$
59,907

 
$
4,805

Liabilities
 
 
 
Cash Flow Hedges
 
 
 
Other accrued liabilities
$
45,491

 
$
187,525

Other non-current liabilities
31,661

 
159,155

Other Derivatives
 
 
 
Other accrued liabilities
12,646

 
72,017

Total liabilities
$
89,798

 
$
418,697

Total fair value
$
(29,891
)
 
$
(413,892
)
Total notional value
$
5,903,108

 
$
5,499,224


12

ACCENTURE PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(In thousands of U.S. dollars, except share and per share amounts or as otherwise disclosed)
(Unaudited)


The Company utilizes standard counterparty master agreements containing provisions for the netting of certain foreign currency transaction obligations and for the set-off of certain obligations in the event of an insolvency of one of the parties to the transaction. In the Consolidated Balance Sheets, the Company records derivative assets and liabilities at gross fair value. The potential effect of netting derivative assets against liabilities under the counterparty master agreements was as follows:
 
May 31, 2014
 
August 31, 2013
Net derivative assets
$
20,340

 
$
1,317

Net derivative liabilities
50,231

 
415,209

Total fair value
$
(29,891
)
 
$
(413,892
)
8. COMMITMENTS AND CONTINGENCIES
Commitments
The Company has the right to purchase or may also be required to purchase substantially all of the remaining outstanding shares of its Avanade Inc. subsidiary (“Avanade”) not owned by the Company at fair value if certain events occur. Certain holders of Avanade common stock and options to purchase the stock have put rights that, under certain circumstances and conditions, would require Avanade to redeem shares of its stock at fair value. As of May 31, 2014 and August 31, 2013, the Company has reflected the fair value of $95,988 and $94,310, respectively, related to Avanade’s redeemable common stock and the intrinsic value of the options on redeemable common stock in Other accrued liabilities in the Consolidated Balance Sheets.
Indemnifications and Guarantees
In the normal course of business and in conjunction with certain client engagements, the Company has entered into contractual arrangements through which it may be obligated to indemnify clients with respect to certain matters. These arrangements with clients can include provisions whereby the Company has joint and several liability in relation to the performance of certain contractual obligations along with third parties also providing services and products for a specific project. In addition, the Company’s consulting arrangements may include warranty provisions that the Company’s solutions will substantially operate in accordance with the applicable system requirements. Indemnification provisions are also included in arrangements under which the Company agrees to hold the indemnified party harmless with respect to third-party claims related to such matters as title to assets sold or licensed or certain intellectual property rights.
Typically, the Company has contractual recourse against third parties for certain payments made by the Company in connection with arrangements where third-party nonperformance has given rise to the client’s claim. Payments by the Company under any of the arrangements described above are generally conditioned on the client making a claim, which may be disputed by the Company typically under dispute resolution procedures specified in the particular arrangement. The limitations of liability under these arrangements may be expressly limited or may not be expressly specified in terms of time and/or amount.
As of May 31, 2014 and August 31, 2013, the Company’s aggregate potential liability to its clients for expressly limited guarantees involving the performance of third parties was approximately $715,000 and $748,000, respectively, of which all but approximately $14,000 and $15,000, respectively, may be recovered from the other third parties if the Company is obligated to make payments to the indemnified parties as a consequence of a performance default by the other third parties. For arrangements with unspecified limitations, the Company cannot reasonably estimate the aggregate maximum potential liability, as it is inherently difficult to predict the maximum potential amount of such payments, due to the conditional nature and unique facts of each particular arrangement.
To date, the Company has not been required to make any significant payment under any of the arrangements described above. The Company has assessed the current status of performance/payment risk related to arrangements with limited guarantees, warranty obligations, unspecified limitations and/or indemnification provisions and believes that any potential payments would be immaterial to the Consolidated Financial Statements, as a whole.

13

ACCENTURE PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(In thousands of U.S. dollars, except share and per share amounts or as otherwise disclosed)
(Unaudited)


Legal Contingencies
As of May 31, 2014, the Company or its present personnel had been named as a defendant in various litigation matters. The Company and/or its personnel also from time to time are involved in investigations by various regulatory or legal authorities concerning matters arising in the course of its business around the world. Based on the present status of these matters, management believes the range of reasonably possible losses in addition to amounts accrued, net of insurance recoveries, will not have a material effect on the Company’s results of operations or financial condition.
9. SEGMENT REPORTING
The Company’s reportable operating segments are the five operating groups, which are Communications, Media & Technology; Financial Services; Health & Public Service; Products; and Resources. Information regarding the Company’s reportable operating segments is as follows:
 
Three Months Ended May 31,
 
2014
 
2013
 
Net
Revenues
 
Operating
Income
 
Net
Revenues
 
Operating
Income
Communications, Media & Technology
$
1,524,898

 
$
222,957

 
$
1,425,655

 
$
213,359

Financial Services
1,677,066

 
252,928

 
1,574,479

 
275,730

Health & Public Service
1,313,840

 
213,099

 
1,191,070

 
167,524

Products
1,914,539

 
253,357

 
1,724,596

 
263,978

Resources
1,301,774

 
236,425

 
1,279,221

 
221,380

Other
3,521

 

 
3,119

 

Total
$
7,735,638

 
$
1,178,766

 
$
7,198,140

 
$
1,141,971


 
Nine Months Ended May 31,
 
2014
 
2013
 
Net
Revenues
 
Operating
Income
 
Net
Revenues
 
Operating
Income
Communications, Media & Technology
$
4,344,497

 
$
558,140

 
$
4,295,930

 
$
622,151

Financial Services
4,838,687

 
725,634

 
4,646,286

 
760,986

Health & Public Service
3,727,642

 
538,018

 
3,558,478

 
499,201

Products
5,461,116

 
706,270

 
5,103,858

 
763,904

Resources
3,841,678

 
693,085

 
3,852,560

 
708,935

Other
11,434

 

 
19,031

 

Total
$
22,225,054

 
$
3,221,147

 
$
21,476,143

 
$
3,355,177






14


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements and related Notes included elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended August 31, 2013, and with the information under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended August 31, 2013.
We use the terms “Accenture,” “we,” the “Company,” “our” and “us” in this report to refer to Accenture plc and its subsidiaries. All references to years, unless otherwise noted, refer to our fiscal year, which ends on August 31. For example, a reference to “fiscal 2014” means the 12-month period that will end on August 31, 2014. All references to quarters, unless otherwise noted, refer to the quarters of our fiscal year.
We use the term “in local currency” so that certain financial results may be viewed without the impact of foreign currency exchange rate fluctuations, thereby facilitating period-to-period comparisons of business performance. Financial results “in local currency” are calculated by restating current period activity into U.S. dollars using the comparable prior year period’s foreign currency exchange rates. This approach is used for all results where the functional currency is not the U.S. dollar.
Disclosure Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”) relating to our operations, results of operations and other matters that are based on our current expectations, estimates, assumptions and projections. Words such as “may,” “will,” “should,” “likely,” “anticipates,” “expects,” “intends,” “plans,” “projects,” “believes,” “estimates,” “positioned,” “outlook” and similar expressions are used to identify these forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Forward-looking statements are based upon assumptions as to future events that may not prove to be accurate. Actual outcomes and results may differ materially from what is expressed or forecast in these forward-looking statements. Risks, uncertainties and other factors that might cause such differences, some of which could be material, include, but are not limited to:
Our results of operations could be adversely affected by volatile, negative or uncertain economic conditions and the effects of these conditions on our clients’ businesses and levels of business activity.
Our business depends on generating and maintaining ongoing, profitable client demand for our services and solutions, and a significant reduction in such demand could materially affect our results of operations.
If we are unable to keep our supply of skills and resources in balance with client demand around the world and attract and retain professionals with strong leadership skills, our business, the utilization rate of our professionals and our results of operations may be materially adversely affected.
The markets in which we compete are highly competitive, and we might not be able to compete effectively.
Our profitability could suffer if our cost-management strategies are unsuccessful, and we may not be able to improve our profitability through improvements to cost-management to the degree we have done in the past.
Our results of operations could materially suffer if we are not able to obtain sufficient pricing to enable us to meet our profitability expectations.
If our pricing estimates do not accurately anticipate the cost, risk and complexity of performing our work or third parties upon whom we rely do not meet their commitments, then our contracts could have delivery inefficiencies and be unprofitable.
We could have liability or our reputation could be damaged if we fail to protect client and/or Accenture data or information systems as obligated by law or contract or if our information systems are breached.
Our results of operations and ability to grow could be materially negatively affected if we cannot adapt and expand our services and solutions in response to ongoing changes in technology and offerings by new entrants.
As a result of our geographically diverse operations and our growth strategy to continue geographic expansion, we are more susceptible to certain risks.
Our Global Delivery Network is increasingly concentrated in India and the Philippines, which may expose us to operational risks.

15


We might not be successful at identifying, acquiring or integrating businesses or entering into joint ventures.
Our work with government clients exposes us to additional risks inherent in the government contracting environment.
Our business could be materially adversely affected if we incur legal liability.
Our results of operations could be materially adversely affected by fluctuations in foreign currency exchange rates.
Our alliance relationships may not be successful or may change, which could adversely affect our results of operations.
Outsourcing services and the continued expansion of our other services and solutions into new areas subject us to different operational risks than our consulting and systems integration services.
Our services or solutions could infringe upon the intellectual property rights of others or we might lose our ability to utilize the intellectual property of others.
If we are unable to protect our intellectual property rights from unauthorized use or infringement by third parties, our business could be adversely affected.
Our ability to attract and retain business and employees may depend on our reputation in the marketplace.
Many of our contracts include payments that link some of our fees to the attainment of performance or business targets and/or require us to meet specific service levels. This could increase the variability of our revenues and impact our margins.
Changes in our level of taxes, and audits, investigations and tax proceedings, or changes in our treatment as an Irish company, could have a material adverse effect on our results of operations and financial condition.
If we are unable to manage the organizational challenges associated with our size, we might be unable to achieve our business objectives.
If we are unable to collect our receivables or unbilled services, our results of operations, financial condition and cash flows could be adversely affected.
Our share price and results of operations could fluctuate and be difficult to predict.
Our results of operations and share price could be adversely affected if we are unable to maintain effective internal controls.
We make estimates and assumptions in connection with the preparation of our consolidated financial statements, and any changes to those estimates and assumptions could adversely affect our financial results.
We are incorporated in Ireland and a significant portion of our assets are located outside the United States. As a result, it might not be possible for shareholders to enforce civil liability provisions of the federal or state securities laws of the United States. We may also be subject to criticism and negative publicity related to our incorporation in Ireland.
Irish law differs from the laws in effect in the United States and might afford less protection to shareholders.
We might be unable to access additional capital on favorable terms or at all. If we raise equity capital, it may dilute our shareholders’ ownership interest in us.
For a more detailed discussion of these factors, see the information under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended August 31, 2013. We undertake no obligation to update or revise any forward-looking statements.

16


Overview
Revenues are driven by the ability of our executives to secure new contracts and to deliver solutions and services that add value relevant to our clients’ current needs and challenges. The level of revenues we achieve is based on our ability to deliver market-leading service offerings and to deploy skilled teams of professionals quickly and on a global basis.
Our results of operations are affected by economic conditions, including macroeconomic conditions and levels of business confidence. There continues to be volatility and economic and geopolitical uncertainty in certain markets around the world, as well as lower levels of spending on some of the types of services we provide, all of which may impact our business. We continue to monitor the impact of this volatility and uncertainty and seek to manage our costs in order to respond to changing conditions.
Revenues before reimbursements (“net revenues”) for the third quarter of fiscal 2014 were $7.74 billion, compared with $7.20 billion for the third quarter of fiscal 2013, an increase of 7% in both U.S. dollars and local currency. Net revenues for the nine months ended May 31, 2014 were $22.23 billion, compared with $21.48 billion for the nine months ended May 31, 2013, an increase of 3% in U.S. dollars and 4% in local currency. During the third quarter of fiscal 2014, all of our operating groups experienced year-over-year revenue growth in local currency. Revenue growth in local currency was strong in outsourcing and solid in consulting during the third quarter of fiscal 2014. Clients continue to request a higher volume of outsourcing services, place a greater emphasis on cost savings initiatives and manage the pace and level of spending on existing consulting and outsourcing contracts. The business environment continues to be competitive and, in many areas, we are experiencing pricing pressures.
In our consulting business, net revenues for the third quarter of fiscal 2014 were $4.09 billion, compared with $3.87 billion for the third quarter of fiscal 2013, an increase of 6% in U.S. dollars and 5% in local currency. Net consulting revenues for the nine months ended May 31, 2014 were $11.72 billion, compared with $11.58 billion for the nine months ended May 31, 2013, an increase of 1% in U.S. dollars and 2% in local currency. Clients continued to be focused on initiatives designed to deliver cost savings and operational efficiency, as well as projects to integrate their global operations and grow and transform their businesses. We continue to experience growing demand for our services in emerging technologies, including digital services (digital marketing, analytics and mobility) and cloud computing. Compared to fiscal 2013, we continued to provide a greater proportion of systems integration consulting through use of lower-cost resources in our Global Delivery Network. This trend has resulted in work volume growing faster than revenue, and we expect this trend to continue.
In our outsourcing business, net revenues for the third quarter of fiscal 2014 were $3.65 billion, compared with $3.33 billion for the third quarter of fiscal 2013, an increase of 10% in U.S. dollars and 9% in local currency. Net outsourcing revenues for the nine months ended May 31, 2014 were $10.50 billion, compared with $9.90 billion for the nine months ended May 31, 2013, an increase of 6% in U.S. dollars and 7% in local currency. Clients continue to be focused on transforming their operations to improve effectiveness and save costs. Compared to fiscal 2013, we continued to provide a greater proportion of application outsourcing through use of lower-cost resources in our Global Delivery Network.
As we are a global company, our revenues are denominated in multiple currencies and may be significantly affected by currency exchange rate fluctuations. If the U.S. dollar weakens against other currencies, resulting in favorable currency translation, our revenues and revenue growth in U.S. dollars may be higher. If the U.S. dollar strengthens against other currencies, resulting in unfavorable currency translation, our revenues and revenue growth in U.S. dollars may be lower. When compared to the third quarter of fiscal 2013, in aggregate, there was minimal foreign currency translation impact during the third quarter of fiscal 2014, resulting in U.S. dollar revenue growth that was approximately the same as our revenue growth in local currency. When compared to the nine months ended May 31, 2013, the U.S. dollar strengthened against many currencies during the nine months ended May 31, 2014. This resulted in unfavorable currency translation and U.S. dollar revenue growth that was approximately 1% lower than our revenue growth in local currency for the nine months ended May 31, 2014. Assuming that exchange rates stay within recent ranges for the remainder of fiscal 2014, we estimate the foreign-exchange impact to our full fiscal 2014 revenue growth will be approximately 0.5% lower growth in U.S. dollars than our growth in local currency.
The primary categories of operating expenses include cost of services, sales and marketing and general and administrative costs. Cost of services is primarily driven by the cost of client-service personnel, which consists mainly of compensation, subcontractor and other personnel costs, and non-payroll outsourcing costs. Cost of services as a percentage of revenues is driven by the prices we obtain for our solutions and services, the utilization of our client-service personnel and the level of non-payroll costs associated with outsourcing contracts. Utilization primarily represents the percentage of our consulting professionals’ time spent on billable work. Utilization for the third quarter of fiscal 2014 was approximately 88%, up from 87% for the second quarter of fiscal 2014, flat with the third quarter of fiscal 2013 and within our target range. This level of utilization reflects continued strong demand for resources in our Global Delivery Network and in most countries. We continue to hire to meet current and projected future demand.

17


We proactively plan and manage the size and composition of our workforce and take actions as needed to address changes in the anticipated demand for our services, given that compensation costs are the most significant portion of our operating expenses. Based on current and projected future demand, we have increased our headcount, the majority of which serve our clients, to more than 293,000 as of May 31, 2014, compared with approximately 289,000 as of February 28, 2014 and approximately 266,000 as of May 31, 2013. The year-over-year increase in our headcount reflects an overall increase in demand for our services, including those delivered through our Global Delivery Network in lower-cost locations, as well as headcount added in connection with acquisitions. Annualized attrition, excluding involuntary terminations, for the third quarter of fiscal 2014 was 14%, up from 12% in both the second quarter of fiscal 2014 and the third quarter of fiscal 2013. We evaluate voluntary attrition, adjust levels of new hiring and use involuntary terminations as means to keep our supply of skills and resources in balance with changes in client demand. In addition, we adjust compensation in certain skill sets and geographies in order to attract and retain appropriate numbers of qualified employees, and we may need to continue to adjust compensation in the future. For the majority of our personnel, compensation increases for fiscal 2014 became effective September 1, 2013. We strive to adjust pricing and/or the mix of resources to reduce the impact of compensation increases on our gross margin. Our ability to grow our revenues and maintain or increase our margins could be adversely affected if we are unable to: keep our supply of skills and resources in balance with changes in the types or amounts of services clients are demanding, such as the increase in demand for various outsourcing and emerging technology services; recover increases in compensation; deploy our employees globally on a timely basis; manage attrition; and/or effectively assimilate and utilize new employees.
Gross margin (Net revenues less Cost of services before reimbursable expenses as a percentage of Net revenues) for the third quarter of fiscal 2014 was 32.8%, compared with 33.9% for the third quarter of fiscal 2013. Gross margin for the nine months ended May 31, 2014 was 32.5%, compared with 32.8% for the nine months ended May 31, 2013. There were several factors affecting cost of services and gross margin in the nine months ended May 31, 2014. We experienced lower consulting and outsourcing contract profitability compared to the same period in fiscal 2013, primarily due to pricing pressures and higher payroll costs and, to a lesser extent, lower margins in the early stages of a few large contracts. We expect to continue our efforts to adjust the mix of resources to reduce these impacts and to recover annual compensation increases that were effective September 1, 2013. In addition, we made higher investments associated with acquisitions and offerings. While we accrued significant variable compensation during the nine months ended May 31, 2014, the amounts accrued are lower than the same period in fiscal 2013 and largely offset the impacts noted above.
Sales and marketing and general and administrative costs as a percentage of net revenues were 17.5% for the third quarter of fiscal 2014 and 18.1% for the nine months ended May 31, 2014, compared with 18.7% for the third quarter of fiscal 2013 and 18.4% for the nine months ended May 31, 2013. Sales and marketing costs are driven primarily by: compensation costs for business development activities; investment in offerings; marketing- and advertising-related activities; and acquisition-related costs. General and administrative costs primarily include costs for non-client-facing personnel, information systems and office space. We continuously monitor these costs and implement cost-management actions, as appropriate. For the nine months ended May 31, 2014 compared to the nine months ended May 31, 2013, sales and marketing costs as a percentage of net revenues decreased 10 basis points, while general and administrative costs as a percentage of net revenues decreased 20 basis points. Our margins could be adversely affected if our cost-management actions are not sufficient to maintain sales and marketing and general and administrative costs at or below current levels as a percentage of net revenues.
Operating income for the third quarter of fiscal 2014 was $1,179 million, compared with $1,142 million for the third quarter of fiscal 2013. Operating income for the nine months ended May 31, 2014 was $3,221 million, compared with $3,355 million for the nine months ended May 31, 2013. Operating margin (Operating income as a percentage of Net revenues) for the third quarter of fiscal 2014 was 15.2%, compared with 15.9% for the third quarter of fiscal 2013. Operating margin for the nine months ended May 31, 2014 was 14.5%, compared with 15.6% for the nine months ended May 31, 2013. We recorded reorganization benefits of $50 million in the third quarter of fiscal 2013 and $274 million in the nine months ended May 31, 2013 which increased operating margin by 70 and 130 basis points, respectively. Excluding the effects of the reorganization benefits, operating margin for the third quarter of fiscal 2013 and the nine months ended May 31, 2013 would have been 15.2% and 14.3%, respectively.
The effective tax rates for the third quarter of fiscal 2014 and the nine months ended May 31, 2014 were 25.0% and 24.7%, respectively. The effective tax rates for the third quarter of fiscal 2013 and the nine months ended May 31, 2013 were 23.8% and 16.2%, respectively. The above noted reorganization benefits recorded in the third quarter of fiscal 2013 and in the nine months ended May 31, 2013 increased income before income taxes without any increase in income tax expense. In addition, during the second quarter of fiscal 2013, we recorded a benefit of $243 million related to settlements of U.S. federal tax audits for fiscal years 2006 through 2009. Absent these items, our effective tax rates for the third quarter of fiscal 2013 and the nine months ended May 31, 2013 would have been 24.8% and 25.5%, respectively.

18


Diluted earnings per share were $1.26 for the third quarter of fiscal 2014, compared with $1.21 for the third quarter of fiscal 2013, which included $0.07 in reorganization benefits. Absent these benefits, diluted earnings per share for the third quarter of fiscal 2013 would have been $1.14. Diluted earnings per share were $3.44 for the nine months ended May 31, 2014, compared with $3.92 for the nine months ended May 31, 2013, which included $0.72 in benefits from final determinations of prior-year tax liabilities and reductions in reorganization liabilities. Excluding these benefits, diluted earnings per share for the nine months ended May 31, 2013 would have been $3.20.
Our Operating income and Earnings per share are also affected by currency exchange rate fluctuations on revenues and costs. Most of our costs are incurred in the same currency as the related net revenues. Where practical, we also seek to manage foreign currency exposure for costs not incurred in the same currency as the related net revenues, such as the cost of our Global Delivery Network, by using currency protection provisions in our customer contracts and through our hedging programs. We seek to manage our costs, taking into consideration the residual positive and negative effects of changes in foreign exchange rates on those costs.
Bookings and Backlog
New bookings for the third quarter of fiscal 2014 were $8.77 billion, with consulting bookings of $4.31 billion and outsourcing bookings of $4.46 billion. New bookings for the nine months ended May 31, 2014 were $27.55 billion, with consulting bookings of $13.20 billion and outsourcing bookings of $14.35 billion.
We provide information regarding our new bookings, which include new contracts, including those acquired through acquisitions, as well as renewals, extensions and changes to existing contracts, because we believe doing so provides useful trend information regarding changes in the volume of our new business over time. New bookings can vary significantly quarter to quarter depending in part on the timing of the signing of a small number of large outsourcing contracts. The types of services clients are demanding and the pace and level of their spending may impact the conversion of new bookings to revenues. For example, outsourcing bookings, which are typically for multi-year contracts, generally convert to revenue at a slower pace compared to consulting bookings. Information regarding our new bookings is not comparable to, nor should it be substituted for, an analysis of our revenues over time. New bookings involve estimates and judgments. There are no third-party standards or requirements governing the calculation of bookings. We do not update our new bookings for material subsequent terminations or reductions related to bookings originally recorded in prior fiscal years. New bookings are recorded using then-existing foreign currency exchange rates and are not subsequently adjusted for foreign currency exchange rate fluctuations.
The majority of our contracts are terminable by the client on short notice, and some without notice. Accordingly, we do not believe it is appropriate to characterize bookings attributable to these contracts as backlog. Normally, if a client terminates a project, the client remains obligated to pay for commitments we have made to third parties in connection with the project, services performed and reimbursable expenses incurred by us through the date of termination.
Revenues by Segment/Operating Group
Our five reportable operating segments are our operating groups, which are Communications, Media & Technology; Financial Services; Health & Public Service; Products; and Resources. Operating groups are managed on the basis of net revenues because our management believes net revenues are a better indicator of operating group performance than revenues. In addition to reporting net revenues by operating group, we also report net revenues by two types of work: consulting and outsourcing, which represent the services sold by our operating groups. Consulting net revenues, which include management and technology consulting and systems integration, reflect a finite, distinct project or set of projects with a defined outcome and typically a defined set of specific deliverables. Outsourcing net revenues typically reflect ongoing, repeatable services or capabilities provided to transition, run and/or manage operations of client systems or business functions.
From time to time, our operating groups work together to sell and implement certain contracts. The resulting revenues and costs from these contracts may be apportioned among the participating operating groups. Generally, operating expenses for each operating group have similar characteristics and are subject to the same factors, pressures and challenges. However, the economic environment and its effects on the industries served by our operating groups affect revenues and operating expenses within our operating groups to differing degrees. The mix between consulting and outsourcing is not uniform among our operating groups. Local currency fluctuations also tend to affect our operating groups differently, depending on the geographic concentrations and locations of their businesses.
While we provide discussion about our results of operations below, we cannot measure how much of our revenue growth in a particular period is attributable to changes in price or volume. Management does not track standard measures of unit or rate volume. Instead, our measures of volume and price are extremely complex, as each of our services contracts is unique, reflecting a customized mix of specific services that does not fit into standard comparability measurements. Pricing for our services is a function of the nature of each service to be provided, the skills required and outcome sought, as well as estimated cost, risk, contract terms and other factors.

19


Results of Operations for the Three Months Ended May 31, 2014 Compared to the Three Months Ended May 31, 2013
Net revenues (by operating group, geographic region and type of work) and reimbursements were as follows:
  
Three Months Ended May 31,
 
Percent
Increase
(Decrease)
U.S. Dollars
 
Percent
Increase
(Decrease)
Local
Currency
 
Percent of Total Net Revenues
for the Three Months Ended May 31,
  
2014
 
2013
 
 
 
2014
 
2013
 
(in millions of U.S. dollars)
 
 
 
 
 
 
 
 
OPERATING GROUPS
 
 
 
 
 
 
 
 
 
 
 
Communications, Media & Technology
$
1,525

 
$
1,426

 
7
 %
 
7
%
 
20
%
 
20
%
Financial Services
1,677

 
1,574

 
7

 
5

 
21

 
22

Health & Public Service
1,314

 
1,191

 
10

 
11

 
17

 
16

Products
1,915

 
1,725

 
11

 
10

 
25

 
24

Resources
1,302

 
1,279

 
2

 
2

 
17

 
18

Other
4

 
3

 
n/m

 
n/m

 

 

TOTAL NET REVENUES
7,736

 
7,198

 
7
 %
 
7
%
 
100
%
 
100
%
Reimbursements
505

 
510

 
(1
)
 
 
 
 
 
 
TOTAL REVENUES
$
8,240

 
$
7,708

 
7
 %
 
 
 
 
 
 
GEOGRAPHIC REGIONS
 
 
 
 
 
 
 
 
 
 
 
Americas
$
3,637

 
$
3,444

 
6
 %
 
7
%
 
47
%
 
48
%
EMEA (1)
3,130

 
2,778

 
13

 
7

 
40

 
39

Asia Pacific
969

 
975

 
(1
)
 
6

 
13

 
13

TOTAL NET REVENUES
$
7,736

 
$
7,198

 
7
 %
 
7
%
 
100
%
 
100
%
TYPE OF WORK
 
 
 
 
 
 
 
 
 
 
 
Consulting
$
4,086

 
$
3,867

 
6
 %
 
5
%
 
53
%
 
54
%
Outsourcing
3,649

 
3,331

 
10

 
9

 
47

 
46

TOTAL NET REVENUES
$
7,736

 
$
7,198

 
7
 %
 
7
%
 
100
%
 
100
%
_______________ 
n/m = not meaningful
Amounts in table may not total due to rounding.
(1)
EMEA includes Europe, the Middle East and Africa.
Net Revenues
The following net revenues commentary discusses local currency net revenue changes for the third quarter of fiscal 2014 compared to the third quarter of fiscal 2013:
Operating Groups
Communications, Media & Technology net revenues increased 7% in local currency. Consulting revenues reflected strong growth, driven by Electronics & High Tech and Media & Entertainment across all geographic regions, partially offset by declines in Communications across all geographic regions. Outsourcing revenues reflected strong growth, driven by all industry groups in Americas, particularly in Electronics & High Tech, partially offset by a decline in Electronics & High Tech in EMEA.
Financial Services net revenues increased 5% in local currency. Outsourcing revenues reflected very strong growth, driven by all industry groups in EMEA and Asia Pacific and Capital Markets in Americas. These increases were partially offset by declines in Insurance and Banking in Americas. Consulting revenues were flat, as growth in Banking in EMEA and Asia Pacific was offset by declines in Insurance across all geographic regions. In certain industries we continued to experience higher demand for outsourcing services, including transformational projects, and lower demand for short-term consulting services.
Health & Public Service net revenues increased 11% in local currency. Outsourcing revenues reflected very strong growth, led by Health and Public Service in Americas, partially offset by a decline in Health in EMEA. Consulting revenues reflected strong growth, led by Health and Public Service in Americas and Public Service in Asia Pacific.


20


Products net revenues increased 10% in local currency. Consulting revenues reflected strong growth, driven by most industry groups in EMEA and Americas, led by Retail in EMEA and Consumer Goods & Services in Americas. Outsourcing revenues reflected strong growth, driven by most industry groups across all geographic regions, led by Air Freight & Travel Services in Americas and Retail in EMEA.
Resources net revenues increased 2% in local currency. Outsourcing revenues reflected strong growth, led by Energy in Americas, Utilities in EMEA and Natural Resources in Asia Pacific. Consulting revenues reflected a slight decline, due to declines in Natural Resources across all geographic regions and Energy in Americas, partially offset by growth in Energy and Chemicals in Asia Pacific and Utilities in EMEA. Some of our clients, primarily in Natural Resources, continued to reduce their level of consulting investments. In addition, several large systems integration projects have ended or have transitioned to smaller phases and demand for our services has moderated. We expect these trends will continue to impact Resources year-over-year net revenue growth in the near term.
Geographic Regions
Americas net revenues increased 7% in local currency, driven by the United States and Brazil, partially offset by a decline in Canada.
EMEA net revenues increased 7% in local currency, driven by France, Italy, the United Kingdom, Norway and Germany. These increases were partially offset by declines in South Africa and Spain.
Asia Pacific net revenues increased 6% in local currency, driven by Japan and to a lesser extent India, partially offset by declines in Singapore and South Korea.
Operating Expenses
Operating expenses for the third quarter of fiscal 2014 were $7,061 million, an increase of $495 million, or 8%, over the third quarter of fiscal 2013, and increased as a percentage of revenues to 85.7% from 85.2% during this period. Operating expenses before reimbursable expenses for the third quarter of fiscal 2014 were $6,557 million, an increase of $501 million, or 8%, over the third quarter of fiscal 2013, and increased as a percentage of net revenues to 84.8% from 84.1% during this period. Operating expenses in the third quarter of fiscal 2013 included reorganization benefits of $50 million as a result of final determinations of certain reorganization liabilities established in connection with our transition to a corporate structure in 2001.
Cost of Services
Cost of services for the third quarter of fiscal 2014 was $5,704 million, an increase of $434 million, or 8%, over the third quarter of fiscal 2013, and increased as a percentage of revenues to 69.2% from 68.4% during this period. Cost of services before reimbursable expenses for the third quarter of fiscal 2014 was $5,199 million, an increase of $439 million, or 9%, over the third quarter of fiscal 2013, and increased as a percentage of net revenues to 67.2% from 66.1% during this period. Gross margin for the third quarter of fiscal 2014 decreased to 32.8% from 33.9% for the third quarter of fiscal 2013. We experienced lower consulting and outsourcing contract profitability compared to the same period in fiscal 2013, primarily due to pricing pressures and higher payroll costs and, to a lesser extent, lower margins in the early stages of a few large contracts.
Sales and Marketing
Sales and marketing expense for the third quarter of fiscal 2014 was $899 million, an increase of $13 million, or 1%, over the third quarter of fiscal 2013, and decreased as a percentage of net revenues to 11.6% from 12.3%. The decrease as a percentage of net revenues was due to growth of selling and other business development costs at a rate lower than that of net revenues.
General and Administrative Costs
General and administrative costs for the third quarter of fiscal 2014 were $458 million, flat with the third quarter of fiscal 2013, and decreased as a percentage of net revenues to 5.9% from 6.4% during this period. The decrease as a percentage of net revenues was due to growth of general and administrative costs at a rate lower than that of net revenues.

21


Operating Income and Operating Margin
Operating income for the third quarter of fiscal 2014 was $1,179 million, an increase of $37 million, or 3%, over the third quarter of fiscal 2013. During the third quarter of fiscal 2013, we recorded reorganization benefits of $50 million, which increased operating margin by 70 basis points. Excluding the effects of the fiscal 2013 reorganization benefits, operating margin for the third quarter of fiscal 2014 was flat compared with the third quarter of fiscal 2013.
Operating income and operating margin for each of the operating groups were as follows:
  
Three Months Ended May 31,
  
2014
 
2013
  
Operating
Income
 
Operating
Margin
 
Operating
Income
 
Operating
Margin
 
 (in millions of U.S. dollars)
Communications, Media & Technology
$
223

 
15
%
 
$
213

 
15
%
Financial Services
253

 
15

 
276

 
18

Health & Public Service
213

 
16

 
168

 
14

Products
253

 
13

 
264

 
15

Resources
236

 
18

 
221

 
17

Total
$
1,179

 
15.2
%
 
$
1,142

 
15.9
%
_______________ 
Amounts in table may not total due to rounding.
Operating Income and Operating Margin Excluding Reorganization Benefits (Non-GAAP)
 
Three Months Ended May 31,
 
 
 
2014
 
2013
 
 
 
Operating Income and
Operating Margin as
Reported (GAAP)
 
 
 
Operating Income and Operating Margin
Excluding Reorganization Benefits
(Non-GAAP)
 
 
  
 
 
 
 
 
Operating
Income
 
Operating
Margin
 
Operating
Income
(GAAP)
 
Reorganization Benefits (1)
 
Operating Income (2)
 
Operating
Margin (2)
 
Increase
(Decrease)
 
 (in millions of U.S. dollars)
Communications, Media & Technology
$
223

 
15
%
 
$
213

 
$
10

 
$
204

 
14
%
 
$
19

Financial Services
253

 
15

 
276

 
11

 
265

 
17

 
(12
)
Health & Public Service
213

 
16

 
168

 
9

 
159

 
13

 
54

Products
253

 
13

 
264

 
12

 
252

 
15

 
1

Resources
236

 
18

 
221

 
9

 
212

 
17

 
24

Total
$
1,179

 
15.2
%
 
$
1,142

 
$
50

 
$
1,092

 
15.2
%
 
$
86

_______________ 
Amounts in table may not total due to rounding.

(1)
Represents reorganization benefits related to final determinations of certain reorganization liabilities established in connection with our transition to a corporate structure during 2001.
(2)
We have presented Operating income and operating margin excluding reorganization benefits, as we believe the effect of the reorganization benefits on Operating income and operating margin facilitates understanding as to both the impact of these benefits and our operating performance.

22


The commentary below provides additional insight into operating group performance and operating margin for the third quarter of fiscal 2014 compared with the third quarter of fiscal 2013, exclusive of reorganization benefits recorded in fiscal 2013:
Communications, Media & Technology operating income increased, primarily due to revenue growth and lower sales and marketing costs as a percentage of net revenues, partially offset by lower contract profitability, including early-stage work at lower margins on a few large contracts.
Financial Services operating income decreased, primarily due to lower contract profitability, including early-stage work at lower margins on a few large outsourcing contracts, partially offset by outsourcing revenue growth.
Health & Public Service operating income increased due to revenue growth and higher consulting contract profitability, including improved delivery efficiency.
Products operating income was flat, as revenue growth was offset by lower consulting contract profitability, including delivery inefficiencies on a few contracts.
Resources operating income increased, primarily due to higher outsourcing contract profitability and outsourcing revenue growth.
Provision for Income Taxes
The effective tax rate for the third quarter of fiscal 2014 was 25.0%, compared with 23.8% for the third quarter of fiscal 2013. During the third quarter of fiscal 2013, we recorded reorganization benefits of $50 million, which increased income before income taxes without any increase in income tax expense. Absent this item, our effective tax rate for the third quarter of fiscal 2013 would have been 24.8%.
Net Income Attributable to Noncontrolling Interests
Net income attributable to noncontrolling interests for the third quarter of fiscal 2014 was $64 million, an increase of $1 million, or 1%, over the third quarter of fiscal 2013. This increase was due to higher Net income of $8 million.
Earnings Per Share
Diluted earnings per share were $1.26 for the third quarter of fiscal 2014, compared with $1.21 for the third quarter of fiscal 2013. The $0.05 increase in our earnings per share included the impact of reorganization benefits of $50 million, which increased the third quarter of fiscal 2013 earnings per share by $0.07. Excluding these reorganization benefits, earnings per share increased $0.12 compared with the third quarter of fiscal 2013, due to increases of $0.09 from higher revenues and operating results and $0.04 from lower weighted average shares outstanding. These increases were partially offset by a decrease of $0.01 from lower non-operating income. For information regarding our earnings per share calculations, see Note 2 (Earnings Per Share) to our Consolidated Financial Statements under Item 1, “Financial Statements”.

23


Results of Operations for the Nine Months Ended May 31, 2014 Compared to the Nine Months Ended May 31, 2013
Net revenues (by operating group, geographic region and type of work) and reimbursements were as follows:
  
Nine Months Ended May 31,
 
Percent
Increase
(Decrease)
U.S. Dollars
 
Percent
Increase
(Decrease)
Local
Currency
 
Percent of Total Net Revenues
for the Nine Months Ended May 31,
  
2014
 
2013
 
 
 
2014
 
2013
 
(in millions of U.S. dollars)
 
 
 
 
 
 
 
OPERATING GROUPS
 
 
 
 
 
 
 
 
 
 
 
Communications, Media & Technology
$
4,344

 
$
4,296

 
1
 %
 
2
%
 
19
%
 
20
%
Financial Services
4,839

 
4,646

 
4

 
4

 
22

 
22

Health & Public Service
3,728

 
3,558

 
5

 
6

 
17

 
16

Products
5,461

 
5,104

 
7

 
7

 
25

 
24

Resources
3,842

 
3,853

 

 
1

 
17

 
18

Other
11

 
19

 
n/m

 
n/m

 

 

TOTAL NET REVENUES
22,225

 
21,476

 
3
 %
 
4
%
 
100
%
 
100
%
Reimbursements
1,382

 
1,393

 
(1
)
 
 
 
 
 
 
TOTAL REVENUES
$
23,607

 
$
22,869

 
3
 %
 
 
 
 
 
 
GEOGRAPHIC REGIONS
 
 
 
 
 
 
 
 
 
 
 
Americas
$
10,432

 
$
10,057

 
4
 %
 
5
%
 
47
%
 
47
%
EMEA (1)
8,914

 
8,404