10-Q 1 acn-20180228x10q.htm 10-Q Document

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
February 28, 2018
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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  þ
Accelerated filer ¨
Non-accelerated filer  ¨
Smaller reporting company  ¨
Emerging growth company  ¨
(Do not check if a smaller reporting company)
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
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 March 14, 2018 was 672,353,051 (which number includes 29,265,823 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 March 14, 2018 was 664,761.



ACCENTURE PLC
INDEX
 
 
 
Page

2


PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ACCENTURE PLC
CONSOLIDATED BALANCE SHEETS
February 28, 2018 and August 31, 2017
(In thousands of U.S. dollars, except share and per share amounts)
 
February 28,
2018
 
August 31,
2017
 
(Unaudited)
 
 
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
3,595,079

 
$
4,126,860

Short-term investments
3,418

 
3,011

Receivables from clients, net
5,030,698

 
4,569,214

Unbilled services, net
2,480,603

 
2,316,043

Other current assets
1,175,150

 
1,082,161

Total current assets
12,284,948

 
12,097,289

NON-CURRENT ASSETS:
 
 
 
Unbilled services, net
35,786

 
40,938

Investments
218,509

 
211,610

Property and equipment, net
1,196,195

 
1,140,598

Goodwill
5,286,197

 
5,002,352

Deferred contract costs
753,910

 
755,871

Deferred income taxes, net
2,125,608

 
2,214,901

Other non-current assets
1,231,826

 
1,226,331

Total non-current assets
10,848,031

 
10,592,601

TOTAL ASSETS
$
23,132,979

 
$
22,689,890

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Current portion of long-term debt and bank borrowings
$
2,914

 
$
2,907

Accounts payable
1,367,464

 
1,525,065

Deferred revenues
2,930,645

 
2,669,520

Accrued payroll and related benefits
3,570,698

 
4,060,364

Accrued consumption taxes
397,238

 
383,391

Income taxes payable
602,950

 
708,485

Other accrued liabilities
496,003

 
474,547

Total current liabilities
9,367,912

 
9,824,279

NON-CURRENT LIABILITIES:
 
 
 
Long-term debt
25,923

 
22,163

Deferred revenues
656,638

 
663,248

Retirement obligation
1,446,277

 
1,408,759

Deferred income taxes, net
126,056

 
137,098

Income taxes payable
682,162

 
574,780

Other non-current liabilities
389,585

 
349,363

Total non-current liabilities
3,326,641

 
3,155,411

COMMITMENTS AND CONTINGENCIES

 

SHAREHOLDERS’ EQUITY:
 
 
 
Ordinary shares, par value 1.00 euros per share, 40,000 shares authorized and issued as of February 28, 2018 and August 31, 2017
57

 
57

Class A ordinary shares, par value $0.0000225 per share, 20,000,000,000 shares authorized, 646,633,971 and 638,965,789 shares issued as of February 28, 2018 and August 31, 2017, respectively
14

 
14

Class X ordinary shares, par value $0.0000225 per share, 1,000,000,000 shares authorized, 19,718,762 and 20,531,383 shares issued and outstanding as of February 28, 2018 and August 31, 2017, respectively

 

Restricted share units
884,982

 
1,095,026

Additional paid-in capital
4,266,838

 
3,516,399

Treasury shares, at cost: Ordinary, 40,000 shares as of February 28, 2018 and August 31, 2017; Class A ordinary, 28,872,914 and 23,408,811 shares as of February 28, 2018 and August 31, 2017, respectively
(2,552,028
)
 
(1,649,090
)
Retained earnings
8,149,090

 
7,081,855

Accumulated other comprehensive loss
(1,066,266
)
 
(1,094,784
)
Total Accenture plc shareholders’ equity
9,682,687

 
8,949,477

Noncontrolling interests
755,739

 
760,723

Total shareholders’ equity
10,438,426

 
9,710,200

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
23,132,979

 
$
22,689,890


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

3


ACCENTURE PLC
CONSOLIDATED INCOME STATEMENTS
For the Three and Six Months Ended February 28, 2018 and 2017
(In thousands of U.S. dollars, except share and per share amounts)
(Unaudited)
 
Three Months Ended
 
Six Months Ended
 
February 28, 2018
 
February 28, 2017
 
February 28, 2018
 
February 28, 2017
REVENUES:
 
 
 
 
 
 
 
Revenues before reimbursements (“Net revenues”)
$
9,585,442

 
$
8,317,671

 
$
19,108,664

 
$
16,833,188

Reimbursements
482,390

 
444,511

 
1,013,661

 
934,597

Revenues
10,067,832

 
8,762,182

 
20,122,325

 
17,767,785

OPERATING EXPENSES:
 
 
 
 
 
 
 
Cost of services:
 
 
 
 
 
 
 
Cost of services before reimbursable expenses
6,737,048

 
5,813,515

 
13,208,010

 
11,599,000

Reimbursable expenses
482,390

 
444,511

 
1,013,661

 
934,597

Cost of services
7,219,438

 
6,258,026

 
14,221,671

 
12,533,597

Sales and marketing
999,389

 
871,489

 
2,001,178

 
1,760,316

General and administrative costs
566,241

 
494,014

 
1,130,832

 
1,003,260

Total operating expenses
8,785,068

 
7,623,529

 
17,353,681

 
15,297,173

OPERATING INCOME
1,282,764

 
1,138,653

 
2,768,644

 
2,470,612

Interest income
9,459

 
8,728

 
20,895

 
17,025

Interest expense
(3,840
)
 
(3,976
)
 
(8,547
)
 
(7,024
)
Other income (expense), net
(43,586
)
 
(12,546
)
 
(42,071
)
 
(18,633
)
Gain (loss) on sale of businesses

 
(12,349
)
 

 
(12,349
)
INCOME BEFORE INCOME TAXES
1,244,797

 
1,118,510

 
2,738,921

 
2,449,631

Provision for income taxes
325,257

 
231,302

 
630,839

 
502,674

NET INCOME
919,540

 
887,208

 
2,108,082

 
1,946,957

Net income attributable to noncontrolling interests in Accenture Holdings plc and Accenture Canada Holdings Inc.
(37,401
)
 
(37,961
)
 
(86,534
)
 
(84,413
)
Net income attributable to noncontrolling interests – other
(18,436
)
 
(10,495
)
 
(34,185
)
 
(19,316
)
NET INCOME ATTRIBUTABLE TO ACCENTURE PLC
$
863,703

 
$
838,752

 
$
1,987,363

 
$
1,843,228

Weighted average Class A ordinary shares:
 
 
 
 
 
 
 
Basic
617,854,667

 
621,999,948

 
616,838,561

 
621,787,252

Diluted
656,118,796

 
661,079,375

 
656,381,177

 
662,446,680

Earnings per Class A ordinary share:
 
 
 
 
 
 
 
Basic
$
1.40

 
$
1.35

 
$
3.22

 
$
2.96

Diluted
$
1.37

 
$
1.33

 
$
3.16

 
$
2.91

Cash dividends per share
$

 
$

 
$
1.33

 
$
1.21

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

4


ACCENTURE PLC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Three and Six Months Ended February 28, 2018 and 2017
(In thousands of U.S. dollars)
(Unaudited)
 
Three Months Ended
 
Six Months Ended
 
February 28, 2018
 
February 28, 2017
 
February 28, 2018
 
February 28, 2017
NET INCOME
$
919,540

 
$
887,208

 
$
2,108,082

 
$
1,946,957

OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
 
 
 
 
 
 
 
Foreign currency translation
121,623

 
82,772

 
94,291

 
(107,919
)
Defined benefit plans
7,889

 
(6,897
)
 
14,119

 
4,535

Cash flow hedges
(63,727
)
 
39,992

 
(80,994
)
 
25,489

Marketable securities
1,102

 

 
1,102

 
264

OTHER COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO ACCENTURE PLC
66,887

 
115,867

 
28,518

 
(77,631
)
Other comprehensive income (loss) attributable to noncontrolling interests
9,100

 
1,728

 
6,266

 
(10,581
)
COMPREHENSIVE INCOME
$
995,527

 
$
1,004,803

 
$
2,142,866

 
$
1,858,745




 


 
 
 
 
COMPREHENSIVE INCOME ATTRIBUTABLE TO ACCENTURE PLC
$
930,590

 
$
954,619

 
$
2,015,881

 
$
1,765,597

Comprehensive income attributable to noncontrolling interests
64,937

 
50,184

 
126,985

 
93,148

COMPREHENSIVE INCOME
$
995,527

 
$
1,004,803

 
$
2,142,866

 
$
1,858,745


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


5


ACCENTURE PLC
CONSOLIDATED SHAREHOLDERS’ EQUITY STATEMENT
For the Six Months Ended February 28, 2018
(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, 2017
$
57

 
40

 
$
14

 
638,966

 
$

 
20,531

 
$
1,095,026

 
$
3,516,399

 
$
(1,649,090
)
 
(23,449
)
 
$
7,081,855

 
$
(1,094,784
)
 
$
8,949,477

 
$
760,723

 
$
9,710,200

Net income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1,987,363

 
 
 
1,987,363

 
120,719

 
2,108,082

Other comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
28,518

 
28,518

 
6,266

 
34,784

Purchases of Class A ordinary shares
 
 
 
 
 
 
 
 
 
 
 
 
 
 
48,064

 
(1,284,241
)
 
(8,650
)
 
 
 
 
 
(1,236,177
)
 
(48,064
)
 
(1,284,241
)
Share-based compensation expense
 
 
 
 
 
 
 
 
 
 
 
 
476,980

 
28,946

 
 
 
 
 
 
 
 
 
505,926

 
 
 
505,926

Purchases/redemptions of Accenture Holdings plc ordinary shares, Accenture Canada Holdings Inc. exchangeable shares and Class X ordinary shares
 
 
 
 
 
 
 
 
 
 
(812
)
 
 
 
(78,006
)
 
 
 
 
 
 
 
 
 
(78,006
)
 
(4,838
)
 
(82,844
)
Issuances of Class A ordinary shares:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Employee share programs
 
 
 
 
 
 
7,316

 
 
 
 
 
(713,863
)
 
770,228

 
381,303

 
3,186

 
(68,656
)
 
 
 
369,012

 
14,213

 
383,225

Upon redemption of Accenture Holdings plc ordinary shares
 
 
 
 
 
 
352

 
 
 
 
 
 
 
3,741

 
 
 
 
 
 
 
 
 
3,741

 
(3,741
)
 

Dividends
 
 
 
 
 
 
 
 
 
 
 
 
26,839

 
 
 
 
 
 
 
(844,080
)
 
 
 
(817,241
)
 
(36,373
)
 
(853,614
)
Other, net
 
 
 
 
 
 
 
 
 
 
 
 


 
(22,534
)
 
 
 
 
 
(7,392
)
 
 
 
(29,926
)
 
(53,166
)
 
(83,092
)
Balance as of February 28, 2018
$
57

 
40

 
$
14

 
646,634

 
$

 
19,719

 
$
884,982

 
$
4,266,838

 
$
(2,552,028
)
 
(28,913
)
 
$
8,149,090

 
$
(1,066,266
)
 
$
9,682,687

 
$
755,739

 
$
10,438,426

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


6


ACCENTURE PLC
CONSOLIDATED CASH FLOWS STATEMENTS
For the Six Months Ended February 28, 2018 and 2017
(In thousands of U.S. dollars)
(Unaudited)
 
February 28, 2018
 
February 28, 2017
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
2,108,082

 
$
1,946,957

Adjustments to reconcile Net income to Net cash provided by operating activities —
 
 
 
Depreciation, amortization and asset impairments
453,297

 
375,240

Share-based compensation expense
505,926

 
402,323

(Gain) loss on sale of business

 
12,349

Deferred income taxes, net
58,562

 
(60,273
)
Other, net
61,615

 
(124,788
)
Change in assets and liabilities, net of acquisitions —
 
 
 
Receivables from clients, net
(372,392
)
 
(362,416
)
Unbilled services, current and non-current, net
(95,070
)
 
58,006

Other current and non-current assets
(287,588
)
 
(263,458
)
Accounts payable
(179,438
)
 
(73,976
)
Deferred revenues, current and non-current
139,545

 
110,105

Accrued payroll and related benefits
(543,604
)
 
(716,926
)
Income taxes payable, current and non-current
(27,485
)
 
(2,658
)
Other current and non-current liabilities
108,445

 
(61,900
)
Net cash provided by (used in) operating activities
1,929,895

 
1,238,585

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchases of property and equipment
(266,248
)
 
(188,962
)
Purchases of businesses and investments, net of cash acquired
(344,104
)
 
(829,198
)
Proceeds from sales of businesses and investments, net of cash transferred
(398
)
 
(22,921
)
Proceeds from sales of property and equipment
6,115

 
7,293

Net cash provided by (used in) investing activities
(604,635
)
 
(1,033,788
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Proceeds from issuance of ordinary shares
383,225

 
350,901

Purchases of shares
(1,367,085
)
 
(1,403,583
)
Proceeds from (repayments of) long-term debt, net
264

 
361

Cash dividends paid
(853,614
)
 
(785,127
)
Other, net
(45,014
)
 
(6,647
)
Net cash provided by (used in) financing activities
(1,882,224
)
 
(1,844,095
)
Effect of exchange rate changes on cash and cash equivalents
25,183

 
(27,449
)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(531,781
)
 
(1,666,747
)
CASH AND CASH EQUIVALENTS, beginning of period
4,126,860

 
4,905,609

CASH AND CASH EQUIVALENTS, end of period
$
3,595,079

 
$
3,238,862

SUPPLEMENTAL CASH FLOW INFORMATION:
 
 
 
Income taxes paid
$
666,387

 
$
610,544

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 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. We use the terms “Accenture,” “we” and “our” in the Notes to Consolidated Financial Statements to refer to Accenture plc and its subsidiaries. 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, 2017 included in our Annual Report on Form 10-K filed with the SEC on October 26, 2017.
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 we 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 six months ended February 28, 2018 are not necessarily indicative of the results that may be expected for the fiscal year ending August 31, 2018.
Allowances for Client Receivables and Unbilled Services
As of February 28, 2018 and August 31, 2017, total allowances recorded for client receivables and unbilled services were $52,236 and $74,450, respectively.
Depreciation and Amortization
Depreciation expense was $107,445 and $213,596 for the three and six months ended February 28, 2018, respectively, and $84,639 and $169,659 for the three and six months ended February 28, 2017, respectively. As of February 28, 2018 and August 31, 2017, total accumulated depreciation was $2,042,405 and $1,912,146, respectively. Deferred transition amortization expense was $71,288 and $153,142 for the three and six months ended February 28, 2018, respectively, and $69,844 and $139,129 for the three and six months ended February 28, 2017, respectively. See Note 5 (Goodwill and Intangible Assets) for intangible asset amortization balances.


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)


New Accounting Pronouncements
The following standards, issued by the Financial Accounting Standards Board (“FASB”), will, or are expected to, result in a change in practice and/or have a financial impact to our Consolidated Financial Statements:
Standard
 
Description
 
Accenture Adoption Date
 
Impact on the Financial Statements or Other Significant Matters
2016-16: Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory
 
The guidance requires an entity to recognize the income tax consequences of intra-entity transfers, other than inventory, when the transfer occurs. Under current guidance in U.S. GAAP, in the case of depreciable or amortizable assets, the income tax consequences are deferred at the time of the intra-entity transfer and recognized as the assets are depreciated or amortized. The guidance requires modified retrospective transition with a cumulative catch-up adjustment to opening retained earnings in the period of adoption.
 
September 1, 2018
 
The adoption of this Accounting Standards Update (“ASU”) will require that we record deferred tax assets on our Consolidated Balance Sheet at the beginning of fiscal 2019. The deferred tax assets, which could be up to $2.1 billion, represent income tax consequences of prior intra-entity transfers of assets, which are currently recognized over the expected life of the assets. Beginning in fiscal 2019, we will recognize incremental income tax expense as these deferred tax assets are utilized. Initially, this could represent approximately a 3.5 percentage point increase in the annual effective tax rate. However, the actual impact of adoption will depend on numerous factors, including activity for fiscal 2018 and management’s expectations regarding recoverability of the related deferred taxes. Adoption will not have any impact on cash flows.
2016-02: Leases
 
The guidance amends existing guidance to require lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by leases and to disclose additional quantitative and qualitative information about leasing arrangements. The guidance requires a modified retrospective method upon adoption.
 
September 1, 2019
 
While we are continuing to assess the potential impact of this ASU, we currently believe the most significant impact relates to our accounting for office space operating leases.  We anticipate this ASU will have a material impact on our Consolidated Balance Sheets but will not have a material impact on our other Consolidated Financial Statements or footnotes.
2014-09: (Accounting Standard Codification 606), Revenue from Contracts with Customers
and related updates
 
The guidance replaces 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 guidance allows for both retrospective and modified retrospective methods of adoption.
 
September 1, 2018
 
We performed an initial assessment of the impact of the ASU and developed a transition plan, including necessary changes to policies, processes, and internal controls as well as system enhancements to generate the information necessary for the new disclosures. The project is on schedule for adoption on September 1, 2018 and we will apply the modified retrospective method. We expect revenue recognition across our portfolio of services to remain largely unchanged. However, we expect to recognize revenue earlier than we do under current guidance in a few areas, including accounting for variable fees and for certain consulting services, which will be recognized over time rather than at a point in time. While we have not finalized our assessment of the impact of the ASU, based on the analysis completed to date, we do not currently anticipate that the ASU will have a material impact on our Consolidated Financial Statements.

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)


2. EARNINGS PER SHARE
Basic and diluted earnings per share were calculated as follows:
 
Three Months Ended
 
Six Months Ended
 
February 28, 2018
 
February 28, 2017
 
February 28, 2018
 
February 28, 2017
Basic Earnings per share
 
 
 
 
 
 
 
Net income attributable to Accenture plc
$
863,703

 
$
838,752

 
$
1,987,363

 
$
1,843,228

Basic weighted average Class A ordinary shares
617,854,667

 
621,999,948

 
616,838,561

 
621,787,252

Basic earnings per share
$
1.40

 
$
1.35

 
$
3.22

 
$
2.96

Diluted Earnings per share
 
 
 
 
 
 
 
Net income attributable to Accenture plc
$
863,703

 
$
838,752

 
$
1,987,363

 
$
1,843,228

Net income attributable to noncontrolling interests in Accenture Holdings plc and Accenture Canada Holdings Inc. (1)
37,401

 
37,961

 
86,534

 
84,413

Net income for diluted earnings per share calculation
$
901,104

 
$
876,713

 
$
2,073,897

 
$
1,927,641

Basic weighted average Class A ordinary shares
617,854,667

 
621,999,948

 
616,838,561

 
621,787,252

Class A ordinary shares issuable upon redemption/exchange of noncontrolling interests (1)
26,754,491

 
28,180,804

 
27,010,093

 
28,451,331

Diluted effect of employee compensation related to Class A ordinary shares
11,250,825

 
10,732,934

 
12,279,965

 
11,966,080

Diluted effect of share purchase plans related to Class A ordinary shares
258,813

 
165,689

 
252,558

 
242,017

Diluted weighted average Class A ordinary shares
656,118,796

 
661,079,375

 
656,381,177

 
662,446,680

Diluted earnings per share
$
1.37

 
$
1.33

 
$
3.16

 
$
2.91

_______________
(1)
Diluted earnings per share assumes the redemption of all Accenture Holdings plc ordinary 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. See Note 11 (Subsequent Event) for additional information on Accenture Holdings plc.

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)


3. 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
 
Six Months Ended
 
February 28, 2018
 
February 28, 2017
 
February 28, 2018
 
February 28, 2017
Foreign currency translation
 
 
 
 
 
 
 
    Beginning balance
$
(797,375
)
 
$
(1,110,654
)
 
$
(770,043
)
 
$
(919,963
)
             Foreign currency translation
134,318

 
84,249

 
103,561

 
(119,476
)
             Income tax benefit (expense)
(1,257
)
 
(1,247
)
 
(183
)
 
(395
)
             Portion attributable to noncontrolling interests
(11,438
)
 
(230
)
 
(9,087
)
 
11,952

             Foreign currency translation, net of tax
121,623

 
82,772

 
94,291

 
(107,919
)
    Ending balance
(675,752
)
 
(1,027,882
)
 
(675,752
)
 
(1,027,882
)
 
 
 
 
 
 
 
 
Defined benefit plans
 
 
 
 
 
 
 
    Beginning balance
(434,389
)
 
(798,072
)
 
(440,619
)
 
(809,504
)
             Pension settlement
2,119

 

 
2,119

 

             Reclassifications into net periodic pension and
post-retirement expense (1)
9,036

 
(6,794
)
 
18,797

 
11,030

             Income tax benefit (expense)
(2,933
)
 
(427
)
 
(6,192
)
 
(6,290
)
             Portion attributable to noncontrolling interests
(333
)
 
324

 
(605
)
 
(205
)
             Defined benefit plans, net of tax
7,889

 
(6,897
)
 
14,119

 
4,535

    Ending balance
(426,500
)
 
(804,969
)
 
(426,500
)
 
(804,969
)
 
 
 
 
 
 
 
 
Cash flow hedges
 
 
 
 
 
 
 
    Beginning balance
97,368

 
53,508

 
114,635

 
68,011

             Unrealized gain (loss)
(53,710
)
 
89,886

 
(45,385
)
 
83,780

             Reclassification adjustments into Cost of services
(32,105
)
 
(25,319
)
 
(60,721
)
 
(47,468
)
             Income tax benefit (expense)
19,370

 
(22,753
)
 
21,639

 
(9,672
)
             Portion attributable to noncontrolling interests
2,718

 
(1,822
)
 
3,473

 
(1,151
)
             Cash flow hedges, net of tax
(63,727
)
 
39,992

 
(80,994
)
 
25,489

    Ending balance (2)
33,641

 
93,500

 
33,641

 
93,500

 
 
 
 
 
 
 
 
Marketable securities
 
 
 
 
 
 
 
    Beginning balance
1,243

 

 
1,243

 
(264
)
             Unrealized gain (loss)
1,454

 

 
1,454

 
462

             Income tax benefit (expense)
(305
)
 

 
(305
)
 
(183
)
             Portion attributable to noncontrolling interests
(47
)
 

 
(47
)
 
(15
)
             Marketable securities, net of tax
1,102

 

 
1,102

 
264

    Ending balance
2,345

 

 
2,345

 

 
 
 
 
 
 
 
 
Accumulated other comprehensive loss
$
(1,066,266
)
 
$
(1,739,351
)
 
$
(1,066,266
)
 
$
(1,739,351
)
_______________
(1)
Reclassifications into net periodic pension and post-retirement expense are recognized in Cost of services, Sales and marketing and General and administrative costs.
(2)
As of February 28, 2018, $67,482 of net unrealized gains related to derivatives designated as cash flow hedges is expected to be reclassified into Cost of services in the next 12 months.

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)


4. BUSINESS COMBINATIONS
During the six months ended February 28, 2018, we completed individually immaterial acquisitions for total consideration of $313,814, net of cash acquired. The pro forma effects of these acquisitions on our operations were not material.
5. GOODWILL AND INTANGIBLE ASSETS
Goodwill
The changes in the carrying amount of goodwill by reportable operating segment were as follows:
 
August 31,
2017
 
Additions/
Adjustments
 
Foreign
Currency
Translation
 
February 28,
2018
Communications, Media & Technology
$
775,802

 
$
69,428

 
$
14,257

 
$
859,487

Financial Services
1,151,024

 
12,723

 
9,480

 
1,173,227

Health & Public Service
934,374

 
2,279

 
2,987

 
939,640

Products
1,698,140

 
142,141

 
22,817

 
1,863,098

Resources
443,012

 
3,527

 
4,206

 
450,745

Total
$
5,002,352

 
$
230,098

 
$
53,747

 
$
5,286,197

Goodwill includes immaterial adjustments related to prior period acquisitions.
Intangible Assets
Our definite-lived intangible assets by major asset class were as follows:
 
 
February 28, 2018
 
August 31, 2017
Intangible Asset Class
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Customer-related
 
$
856,784

 
$
(271,743
)
 
$
585,041

 
$
809,683

 
$
(235,315
)
 
$
574,368

Technology
 
110,587

 
(54,541
)
 
56,046

 
108,929

 
(65,453
)
 
43,476

Patents
 
126,891

 
(64,898
)
 
61,993

 
124,669

 
(62,543
)
 
62,126

Other
 
49,755

 
(24,010
)
 
25,745

 
52,342

 
(21,930
)
 
30,412

Total
 
$
1,144,017

 
$
(415,192
)
 
$
728,825

 
$
1,095,623

 
$
(385,241
)
 
$
710,382

Total amortization related to our intangible assets was $41,931 and 86,559 for the three and six months ended February 28, 2018, respectively. Total amortization related to our intangible assets was $33,324 and $66,452 for the three and six months ended February 28, 2017, respectively. Estimated future amortization related to intangible assets held as of February 28, 2018 is as follows:
Fiscal Year
 
Estimated Amortization
Remainder of 2018
 
$
82,332

2019
 
128,144

2020
 
112,325

2021
 
103,207

2022
 
87,273

Thereafter
 
215,544

Total
 
$
728,825


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)


6. MATERIAL TRANSACTIONS AFFECTING SHAREHOLDERS’ EQUITY
Dividends
Our dividend activity during the six months ended February 28, 2018 was as follows:
 
 
Dividend Per
Share
 
Accenture plc Class A
Ordinary Shares
 
Accenture Holdings plc Ordinary
Shares and Accenture Canada Holdings
Inc. Exchangeable Shares
 
Total Cash
Outlay
Dividend Payment Date
 
 
Record Date
 
Cash Outlay
 
Record Date
 
Cash Outlay
 
November 15, 2017
 
$
1.33

 
October 19, 2017
 
$
817,241

 
October 17, 2017
 
$
36,373

 
$
853,614

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.
Subsequent Event
On March 21, 2018, the Board of Directors of Accenture plc declared a semi-annual cash dividend of $1.33 per share on its Class A ordinary shares for shareholders of record at the close of business on April 12, 2018 payable on May 15, 2018. The payment of the cash dividend will result in the issuance of an immaterial number of additional restricted share units to holders of restricted share units.
7. DERIVATIVE FINANCIAL INSTRUMENTS
In the normal course of business, we use derivative financial instruments to manage foreign currency exchange rate risk. Our 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. For information related to derivatives designated as cash flow hedges that were reclassified into Cost of services during the three and six months ended February 28, 2018 and 2017, as well as those expected to be reclassified into Cost of services in the next 12 months, see Note 3 (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 net gains of $56,316 and $46,783 for the three and six months ended February 28, 2018, respectively, and a net gain of $19,780 and a net loss of $118,313 for the three and six months ended February 28, 2017, respectively. Gains and losses on these contracts are recorded in Other income (expense), net in the Consolidated Income Statements and are offset by gains and losses on the related hedged items.

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)


Fair Value of Derivative Instruments
The notional and fair values of all derivative instruments were as follows:
 
February 28,
2018
 
August 31,
2017
Assets
 
 
 
Cash Flow Hedges
 
 
 
Other current assets
$
94,232

 
$
133,935

Other non-current assets
31,722

 
82,770

Other Derivatives
 
 
 
Other current assets
16,461

 
11,470

Total assets
$
142,415

 
$
228,175

Liabilities
 
 
 
Cash Flow Hedges
 
 
 
Other accrued liabilities
$
26,750

 
$
21,632

Other non-current liabilities
27,182

 
17,244

Other Derivatives
 
 
 
Other accrued liabilities
20,855

 
12,242

Total liabilities
$
74,787

 
$
51,118

Total fair value
$
67,628

 
$
177,057

Total notional value
$
9,147,399

 
$
9,290,345

We utilize 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, we record 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:
 
February 28,
2018
 
August 31,
2017
Net derivative assets
$
101,776

 
$
189,066

Net derivative liabilities
34,148

 
12,009

Total fair value
$
67,628

 
$
177,057

8. INCOME TAXES
On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “Tax Act”), which significantly changed U.S. tax law. The Tax Act lowered the U.S. statutory federal income tax rate from 35% to 21%, effective January 1, 2018, resulting in a blended U.S. statutory federal income tax rate of 25.7% for our fiscal year ended August 31, 2018. The Tax Act could modestly impact our ongoing effective tax rate by imposing taxes on our intercompany transactions and limiting our ability to deduct certain expenses. 
Due to the timing of the enactment and the complexity involved in applying the provisions of the Tax Act, we have recorded provisional amounts in our financial statements as of February 28, 2018. We recognized a provisional tax expense of $136,724 primarily to remeasure our net deferred tax assets at the new, lower rates. As we collect and analyze data, including our forecast of when we expect to realize certain deferred tax amounts, we may adjust the provisional amounts. In addition, we have not yet made an accounting policy election to consider the taxes on our intercompany transactions in determining the amount of our valuation allowance. Those adjustments and the election may materially impact our provision for income taxes and effective tax rate in the period in which the adjustments are made. 
We apply an estimated annual effective tax rate to our year-to-date operating results to determine the interim provision for income tax expense. In addition, we recognize taxes related to unusual or infrequent items or resulting

14

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)


from a change in judgment regarding a position taken in a prior year as discrete items in the interim period in which the event occurs.
Our effective tax rates for the three months ended February 28, 2018 and 2017 were 26.1% and 20.7%, respectively. Our effective tax rates for the six months ended February 28, 2018 and 2017 were 23.0% and 20.5%, respectively. Excluding the provisional tax expense, described above, the effective tax rates would have been 15.1% and 18.0% for the three and six months ended February 28, 2018, respectively. The effective tax rates for the three and six months ended February 28, 2018 benefited from lower expenses for adjustments to prior year tax liabilities in fiscal 2018, partially offset by lower benefits from final determinations of prior year U.S. taxes in fiscal 2018.
9. COMMITMENTS AND CONTINGENCIES
Commitments
We have either the right to purchase at fair value or, if certain events occur, may be required to purchase at fair value outstanding shares of our Avanade Inc. and SinnerSchrader AG subsidiaries. As of February 28, 2018 and August 31, 2017, we have reflected the fair value of $93,358 and $52,996, respectively, related to redeemable common stock and the intrinsic value of the options on redeemable common stock of these subsidiaries 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, we have entered into contractual arrangements through which it may be obligated to indemnify clients with respect to certain matters.
As of February 28, 2018 and August 31, 2017, our aggregate potential liability to our clients for expressly limited guarantees involving the performance of third parties was approximately $872,000 and $697,000, respectively, of which all but approximately $154,000 and $149,000, respectively, may be recovered from the other third parties if we are 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, we 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, we have not been required to make any significant payment under any of the arrangements described above. We have assessed the current status of performance/payment risk related to arrangements with limited guarantees, warranty obligations, unspecified limitations and/or indemnification provisions and believe that any potential payments would be immaterial to the Consolidated Financial Statements, as a whole.
Legal Contingencies
As of February 28, 2018, we or our present personnel had been named as a defendant in various litigation matters. We and/or our personnel also from time to time are involved in investigations by various regulatory or legal authorities concerning matters arising in the course of our 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 our results of operations or financial condition.

15

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)


10. SEGMENT REPORTING
Our reportable operating segments are our five operating groups, which are Communications, Media & Technology; Financial Services; Health & Public Service; Products; and Resources. Information regarding our reportable operating segments is as follows:
 
Three Months Ended
 
February 28, 2018
 
February 28, 2017
 
Net
Revenues
 
Operating
Income
 
Net
Revenues
 
Operating
Income
Communications, Media & Technology
$
1,934,823

 
$
315,603

 
$
1,620,728

 
$
214,738

Financial Services
2,024,927

 
307,926

 
1,769,611

 
268,164

Health & Public Service
1,642,368

 
155,420

 
1,511,564

 
189,115

Products
2,631,305

 
374,114

 
2,264,828

 
363,762

Resources
1,337,320

 
129,701

 
1,144,725

 
102,874

Other
14,699

 

 
6,215

 

Total
$
9,585,442

 
$
1,282,764

 
$
8,317,671

 
$
1,138,653

 
Six Months Ended
 
February 28, 2018
 
February 28, 2017
 
Net
Revenues
 
Operating
Income
 
Net
Revenues
 
Operating
Income
Communications, Media & Technology
$
3,804,593

 
$
610,528

 
$
3,306,924

 
$
472,582

Financial Services
4,084,041

 
677,179

 
3,579,380

 
587,653

Health & Public Service
3,276,479

 
378,610

 
3,012,338

 
388,342

Products
5,215,361

 
784,503

 
4,584,997

 
772,461

Resources
2,670,214

 
317,824

 
2,339,583

 
249,574

Other
57,976

 

 
9,966

 

Total
$
19,108,664

 
$
2,768,644

 
$
16,833,188

 
$
2,470,612


11. SUBSEQUENT EVENT
On March 13, 2018, Accenture Holdings plc merged with and into Accenture plc. Accenture Holdings plc dissolved and all assets and liabilities were transferred to Accenture plc. Each ordinary shareholder of Accenture Holdings plc (other than Accenture plc and Accenture Holdings plc) received one Class A ordinary share of Accenture plc for every ordinary share in Accenture Holdings plc that they owned, and Accenture plc redeemed all Class X ordinary shares of Accenture plc held by such shareholders. The Consolidated Financial Statements reflect the ownership interests in Accenture Holdings plc and Accenture Canada Holdings Inc. held by certain current and former members of Accenture Leadership as noncontrolling interests. Prior to the merger, a 4% non-controlling ownership interest percentage was held by Accenture Holdings plc and Accenture Canada Holdings Inc. and subsequent to the merger, the non-controlling ownership percentage is less than 1% held by only Accenture Canada Holdings Inc.

16


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, 2017, 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, 2017.
We use the terms “Accenture,” “we,” “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 2018” means the 12-month period that will end on August 31, 2018. 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 and political 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, including through the adaptation and expansion of our services and solutions in response to ongoing changes in technology and offerings, and a significant reduction in such demand or an inability to respond to the evolving technological environment 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.
We could have liability or our reputation could be damaged if we fail to protect client and/or Accenture data from security breaches or cyberattacks.
The markets in which we operate are highly competitive, and we might not be able to compete effectively.
Our profitability could materially suffer if we are unable to obtain favorable pricing for our services and solutions, if we are unable to remain competitive, if our cost-management strategies are unsuccessful or if we experience delivery inefficiencies.
Changes in our level of taxes, as well as audits, investigations and tax proceedings, or changes in tax laws or in their interpretation or enforcement, could have a material adverse effect on our effective tax rate, results of operations, cash flows and financial condition.
Our results of operations could be materially adversely affected by fluctuations in foreign currency exchange rates.
Our business could be materially adversely affected if we incur legal liability.

17


Our work with government clients exposes us to additional risks inherent in the government contracting environment.
We might not be successful at identifying, acquiring, investing in or integrating businesses, entering into joint ventures or divesting businesses.
Our global delivery capability is increasingly concentrated in India and the Philippines, which may expose us to operational risks.
As a result of our geographically diverse operations and our growth strategy to continue geographic expansion, we are more susceptible to certain risks.
Adverse changes to our relationships with key alliance partners or in the business of our key alliance partners could adversely affect our results of operations.
If we are unable to protect or enforce our intellectual property rights, or if our services or solutions infringe upon the intellectual property rights of others or we lose our ability to utilize the intellectual property of others, our business could be adversely affected.
Our ability to attract and retain business and employees may depend on our reputation in the marketplace.
If we are unable to manage the organizational challenges associated with our size, we might be unable to achieve our business objectives.
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.
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.
Our results of operations and share price could be adversely affected if we are unable to maintain effective internal controls.
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.
We are incorporated in Ireland and a significant portion of our assets is 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.
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, 2017. Our forward-looking statements speak only as of the date of this report or as of the date they are made, and we undertake no obligation to update any forward-looking statements.

18


Overview
Revenues are driven by the ability of our executives to secure new contracts and to deliver services and solutions 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 services and solutions 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 significant volatility and economic and geopolitical uncertainty in many markets around the world, 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. There also continues to be volatility in foreign currency exchange rates. The majority of our net revenues are denominated in currencies other than the U.S. dollar, including the Euro and the U.K. pound. Unfavorable fluctuations in foreign currency exchange rates have had and could have in the future a material effect on our financial results.
Revenues before reimbursements (“net revenues”) for the second quarter of fiscal 2018 increased 15% in U.S. dollars and 10% in local currency compared to the second quarter of fiscal 2017. Net revenues for the six months ended February 28, 2018 increased 14% in U.S. dollars and 10% in local currency compared to the six months ended February 28, 2017. Demand for our services and solutions continued to be strong, resulting in growth across all areas of our business. During the second quarter of fiscal 2018, revenue growth in local currency was very strong in Communication, Media & Technology, Resources and Products and strong in Financial Services and Health & Public Service. We experienced very strong growth in Growth Markets and Europe and strong growth in North America. Revenue growth in local currency was very strong in consulting and strong in outsourcing during the second quarter of fiscal 2018. While the business environment remained competitive, pricing was relatively stable. We use the term “pricing” to mean the contract profitability or margin on the work that we sell.
In our consulting business, net revenues for the second quarter of fiscal 2018 increased 17% in U.S. dollars and 11% in local currency compared to the second quarter of fiscal 2017. Net consulting revenues for the six months ended February 28, 2018 increased 15% in U.S. dollars and 11% in local currency compared to the six months ended February 28, 2017. Consulting revenue growth in local currency in the second quarter of fiscal 2018 was led by very strong growth in Communications, Media & Technology, Financial Services and Resources as well as strong growth in Products and solid growth in Health & Public Service. Our consulting revenue growth continues to be driven by strong demand for digital-, cloud- and security-related services and assisting clients with the adoption of new technologies. In addition, clients continue 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.
In our outsourcing business, net revenues for the second quarter of fiscal 2018 increased 13% in U.S. dollars and 8% in local currency compared to the second quarter of fiscal 2017. Net outsourcing revenues for the six months ended February 28, 2018 increased 12% in U.S. dollars and 9% in local currency compared to the six months ended February 28, 2017. Outsourcing revenue growth in local currency in the second quarter of fiscal 2018 was led by very strong growth in Communications, Media & Technology, Products and Resources, as well as strong growth in Health & Public Service and slight growth in Financial Services. We continue to experience growing demand to assist clients with cloud enablement and the operation and maintenance of digital-related services. In addition, clients continue to be focused on transforming their operations to improve effectiveness and cost efficiency.
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, revenue growth and results of operations in U.S. dollars may be higher. If the U.S. dollar strengthens against other currencies, resulting in unfavorable currency translation, our revenues, revenue growth and results of operations in U.S. dollars may be lower. The U.S. dollar weakened against various currencies during the three and six months ended February 28, 2018 compared to the three and six months ended February 28, 2017, resulting in favorable currency translation and U.S. dollar revenue growth that was approximately 6% and 4% higher, respectively, than our revenue growth in local currency. Assuming that exchange rates stay within recent ranges for the remainder of fiscal 2018, we estimate that our full fiscal 2018 revenue growth in U.S. dollars will be approximately 4.0% higher in U.S. dollars than our revenue 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 costs on outsourcing contracts. Cost of services includes a variety of activities such as: contract delivery; recruiting and training; software development; and integration of acquisitions. Sales and marketing costs are driven primarily by: compensation costs for business development activities; marketing- and advertising-related activities; and certain acquisition-related costs. General

19


and administrative costs primarily include costs for non-client-facing personnel, information systems, office space and certain acquisition-related costs.
Utilization for the second quarter of fiscal 2018 was 91%, flat with the second quarter of fiscal 2017. We continue to hire to meet current and projected future demand. 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 and solutions, 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 approximately 442,000 as of February 28, 2018, compared to approximately 401,000 as of February 28, 2017. The year-over-year increase in our headcount reflects an overall increase in demand for our services and solutions, as well as headcount added in connection with acquisitions. Attrition, excluding involuntary terminations, for the second quarter of fiscal 2018 was 13%, up from 12% in the second quarter of fiscal 2017. 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. For the majority of our personnel, compensation increases become effective December 1st of each fiscal year. 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 margin 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 and solutions clients are demanding; 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 second quarter of fiscal 2018 was 29.7%, compared with 30.1% for the second quarter of fiscal 2017. Gross margin for the six months ended February 28, 2018 was 30.9%, compared with 31.1% for the six months ended February 28, 2017. The decrease in gross margin for three and six months ended February 28, 2018 was principally due to lower consulting contract profitability as well as higher acquisition-related costs, partially offset by cost efficiencies.
Sales and marketing and General and administrative costs as a percentage of net revenues were 16.3% for the second quarter of fiscal 2018 and 16.4% for the six months ended February 28, 2018, compared with 16.4% for both the second quarter of fiscal 2017 and six months ended February 28, 2017. We continuously monitor these costs and implement cost-management actions, as appropriate. For the three and six months ended February 28, 2018 compared to the same periods in fiscal 2017, Sales and marketing costs as a percentage of net revenues decreased 10 basis points and were flat, respectively, and General and administrative costs as a percentage of net revenues were flat and decreased 10 basis points, respectively.
Operating margin (Operating income as a percentage of Net revenues) for the second quarter of fiscal 2018 was 13.4%, compared with 13.7% for the second quarter of fiscal 2017. Operating margin for the six months ended February 28, 2018 was 14.5%, compared with 14.7% for the six months ended February 28, 2017.
The effective tax rates for the three and six months ended February 28, 2018 were 26.1% and 23.0%, respectively. The effective tax rates for the three and six months ended February 28, 2017 were 20.7% and 20.5%, respectively. In the second quarter of fiscal 2018, we recorded a $137 million charge associated with the enactment of the U.S. Tax Cuts and Jobs Act (the “Tax Act”). Absent this charge, our effective tax rates for the three and six months ended February 28, 2018 would have been 15.1% and 18.0%, respectively. For additional information see Note 8 (Income Taxes) to our Consolidated Financial Statements under Item 1, “Financial Statements”.
Diluted earnings per share were $1.37 for the second quarter of fiscal 2018, compared with $1.33 for the second quarter of fiscal 2017. Diluted earnings per share were $3.16 for the six months ended February 28, 2018, compared with $2.91 for the six months ended February 28, 2017. The $137 million charge associated with the Tax Act decreased diluted earnings per share by $0.21 in both the second quarter of fiscal 2018 and six months ended February 28, 2018. Excluding the impact of this charge, diluted earnings per share would have been $1.58 for the second quarter of fiscal 2018 and $3.37 for the six months ended February 28, 2018.
New Bookings
New bookings for the second quarter of fiscal 2018 were $10.25 billion, with consulting bookings of $5.65 billion and outsourcing bookings of $4.60 billion. New bookings for the six months ended February 28, 2018 were $20.23 billion, with consulting bookings of $11.59 billion and outsourcing bookings of $8.65 billion.

20


Results of Operations for the Three Months Ended February 28, 2018 Compared to the Three Months Ended February 28, 2017
Our five reportable operating segments are our operating groups, which are Communications, Media & Technology; Financial Services; Health & Public Service; Products; and Resources. Net revenues (by operating group, geographic region and type of work) and reimbursements were as follows:
  
Three Months Ended
 
Percent
Increase
U.S. Dollars
 
Percent
Increase
Local
Currency
 
Percent of Total Net Revenues
for the Three Months Ended
  
February 28, 2018
 
February 28, 2017
 
 
 
February 28, 2018
 
February 28, 2017
 
(in millions of U.S. dollars)
 
 
 
 
 
 
 
 
OPERATING GROUPS
 
 
 
 
 
 
 
 
 
 
 
Communications, Media & Technology
$
1,935

 
$
1,621

 
19
%
 
15
%
 
20
%
 
20
%
Financial Services
2,025

 
1,770

 
14

 
7

 
21

 
21

Health & Public Service
1,642

 
1,512

 
9

 
6

 
17

 
18

Products
2,631

 
2,265

 
16

 
10

 
28

 
27

Resources
1,337

 
1,145

 
17

 
11

 
14

 
14

Other
15

 
6

 
n/m

 
n/m

 

 

TOTAL NET REVENUES
9,585

 
8,318

 
15
%
 
10
%
 
100
%
 
100
%
Reimbursements
482

 
445

 
9

 
 
 
 
 
 
TOTAL REVENUES
$
10,068

 
$
8,762

 
15
%
 
 
 
 
 
 
GEOGRAPHIC REGIONS (1)
 
 
 
 
 
 
 
 
 
 
 
North America
$
4,277

 
$
3,956

 
8
%
 
8
%
 
45
%
 
48
%
Europe
3,485

 
2,842

 
23

 
10

 
36

 
34

Growth Markets
1,823

 
1,519

 
20

 
15

 
19

 
18

TOTAL NET REVENUES
$
9,585

 
$
8,318

 
15
%
 
10
%
 
100
%
 
100
%
TYPE OF WORK
 
 
 
 
 
 
 
 
 
 
 
Consulting
$
5,159

 
$
4,406

 
17
%
 
11
%
 
54
%
 
53
%
Outsourcing
4,426

 
3,912

 
13

 
8

 
46

 
47

TOTAL NET REVENUES
$
9,585

 
$
8,318

 
15
%
 
10
%
 
100
%
 
100
%
_______________ 
n/m = not meaningful
Amounts in table may not total due to rounding.
(1)
Effective September 1, 2017, we revised the reporting of our geographic regions as follows: North America (the United States and Canada), Europe and Growth Markets (Asia Pacific, Latin America, Africa, the Middle East and Turkey). Four countries, including Russia, were previously in Growth Markets, but are now included in Europe. Prior period amounts have been reclassified to conform to the current period presentation.
Net Revenues
The following net revenues commentary discusses local currency net revenue changes for the second quarter of fiscal 2018 compared to the second quarter of fiscal 2017:
Operating Groups
Communications, Media & Technology net revenues increased 15% in local currency, driven by growth across all geographic regions in Software & Platforms and Communications & Media, led by Software & Platforms in North America. These increases were partially offset by a decline in High Tech in North America.
Financial Services net revenues increased 7% in local currency, driven by growth across all industry groups and geographic regions, led by Banking & Capital Markets in Europe.
Health & Public Service net revenues increased 6% in local currency, driven by growth in both Public Service and Health industry groups across all geographic regions.
Products net revenues increased 10% in local currency, driven by growth across all geographic regions in Consumer Goods, Retail & Travel Services and Industrial, partially offset by a decline in Life Sciences in North America.

21


Resources net revenues increased 11% in local currency, led by growth in Chemicals & Natural Resources across all geographic regions, as well as Energy in North America and Europe and Utilities in Europe.
Geographic Regions
North America net revenues increased 8% in local currency, driven by the United States.
Europe net revenues increased 10% in local currency, driven by Germany, Italy, France and Spain.
Growth Markets net revenues increased 15% in local currency, led by Japan, as well as Australia, Brazil and Singapore.
Operating Expenses
Operating expenses for the second quarter of fiscal 2018 increased $1,162 million, or 15%, over the second quarter of fiscal 2017, and increased as a percentage of revenues to 87.3% from 87.0% during this period. Operating expenses before reimbursable expenses for the second quarter of fiscal 2018 increased $1,124 million, or 16%, over the second quarter of fiscal 2017, and increased as a percentage of net revenues to 86.6% from 86.3% during this period.
Cost of Services
Cost of services for the second quarter of fiscal 2018 increased $961 million, or 15%, over the second quarter of fiscal 2017, and increased as a percentage of revenues to 71.7% from 71.4% during this period. Cost of services before reimbursable expenses for the second quarter of fiscal 2018 increased $924 million, or 16%, over the second quarter of fiscal 2017, and increased as a percentage of net revenues to 70.3% from 69.9% during this period. Gross margin for the second quarter of fiscal 2018 decreased to 29.7% from 30.1% during the second quarter of fiscal 2017. The decrease in gross margin was principally due to lower consulting contract profitability as well as higher acquisition-related costs, partially offset by cost efficiencies.
Sales and Marketing
Sales and marketing expense for the second quarter of fiscal 2018 increased $128 million, or 15%, over the second quarter of fiscal 2017, and decreased as a percentage of net revenues to 10.4% from 10.5% during this period.
General and Administrative Costs
General and administrative costs for the second quarter of fiscal 2018 increased $72 million, or 15%, over the second quarter of fiscal 2017, and remained flat as a percentage of net revenues at 5.9% during this period.
Operating Income and Operating Margin
Operating income for the second quarter of fiscal 2018 increased $144 million, or 13%, over the second quarter of fiscal 2017.
Operating income and operating margin for each of the operating groups were as follows:
 
Three Months Ended
 
 
  
February 28, 2018
 
February 28, 2017
 
 
  
Operating
Income
 
Operating
Margin
 
Operating
Income
 
Operating
Margin
 
Increase
(Decrease)
 
 (in millions of U.S. dollars)
 

Communications, Media & Technology
$
316

 
16
%
 
$
215

 
13
%
 
$
101

Financial Services
308

 
15

 
268

 
15

 
40

Health & Public Service
155

 
9

 
189

 
13

 
(34
)
Products
374

 
14

 
364

 
16

 
10

Resources
130

 
10

 
103

 
9

 
27

Total
$
1,283

 
13.4
%
 
$
1,139

 
13.7
%
 
$
144

 
We estimate that the aggregate percentage impact of foreign currency exchange rates on our operating income during the second quarter of fiscal 2018 was similar to that disclosed for net revenue. In addition, during the second quarter of fiscal 2018, we experienced higher acquisition-related costs compared to the second quarter of fiscal 2017. The commentary below provides insight into other factors affecting operating group performance and operating margin for the second quarter of fiscal 2018 compared with the second quarter of fiscal 2017:
Communications, Media & Technology operating income increased primarily due to revenue growth.

22


Financial Services operating income increased primarily due to consulting revenue growth, partially offset by lower consulting contract profitability.
Health & Public Service operating income decreased primarily due to lower consulting contract profitability.
Products operating income increased primarily due to revenue growth, partially offset by lower consulting contract profitability and higher sales and marketing costs as a percentage of net revenues.
Resources operating income increased primarily due to revenue growth, partially offset by lower contract profitability.
Other Income (Expense), net
Other income (expense), net primarily consists of foreign currency gains and losses as well as gains and losses associated with our investments in privately held companies. For the second quarter of fiscal 2018, other expense increased $31 million over the second quarter of fiscal 2017, primarily due to higher net foreign exchange losses.
Provision for Income Taxes
The effective tax rate for the second quarter of fiscal 2018 was 26.1%, compared with 20.7% for the second quarter of fiscal 2017. In the second quarter of fiscal 2018, we recorded a $137 million charge associated with the enactment of the Tax Act. Absent this charge, our effective tax rate for the second quarter of fiscal 2018 would have been 15.1%. The effective tax rate for the three months ended February 28, 2018 benefited from lower expenses for adjustments to prior year tax liabilities in fiscal 2018, partially offset by lower benefits from final determinations of prior year U.S. taxes in fiscal 2018. For additional information see Note 8 (Income Taxes) to our Consolidated Financial Statements under Item 1, “Financial Statements”.
In addition, as described in Note 1 (Basis of Presentation), beginning in fiscal 2019 we will recognize incremental income tax expense as a result of adoption of ASU 2016-16.
Net Income Attributable to Noncontrolling Interests
Net income attributable to noncontrolling interests for the second quarter of fiscal 2018 increased $7 million, or 15%, over the second quarter of fiscal 2017.
Earnings Per Share
Diluted earnings per share were $1.37 for the second quarter of fiscal 2018, compared with $1.33 for the second quarter of fiscal 2017. The $0.04 increase in our diluted earnings per share included the impact of the $137 million charge associated with the Tax Act, which decreased diluted earnings per share for the second quarter of fiscal 2018 by $0.21. Excluding the impact of this charge, diluted earnings per share for the second quarter of fiscal 2018 increased $0.25 compared with the second quarter of fiscal 2017, due to increases of $0.17 from higher revenues and operating results, $0.10 from a lower effective tax rate and $0.01 from lower weighted average shares outstanding. These increases were partially offset by decreases of $0.02 from higher non-operating expense and $0.01 from higher net income attributable to other non-controlling interests. 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 Six Months Ended February 28, 2018 Compared to the Six Months Ended February 28, 2017
Our five reportable operating segments are our operating groups, which are Communications, Media & Technology; Financial Services; Health & Public Service; Products; and Resources. Net revenues (by operating group, geographic region and type of work) and reimbursements were as follows:
  
Six Months Ended
 
Percent
Increase
U.S. dollars
 
Percent
Increase
Local
Currency
 
Percent of Total Net Revenues
for the Six Months Ended
  
February 28, 2018
 
February 28, 2017
 
 
 
February 28, 2018
 
February 28, 2017
 
(in millions of U.S. dollars)
 
 
 
 
 
 
 
 
OPERATING GROUPS
 
 
 
 
 
 
 
 
 
 
 
Communications, Media & Technology
$
3,805

 
$
3,307

 
15
%
 
12
%
 
20
%
 
20
%
Financial Services
4,084

 
3,579

 
14

 
9

 
22

 
21

Health & Public Service
3,276

 
3,012

 
9

 
7

 
17

 
18

Products
5,215

 
4,585

 
14

 
10

 
27

 
27

Resources
2,670

 
2,340

 
14

 
10

 
14

 
14

Other
58

 
10

 
n/m

 
n/m

 

 

TOTAL NET REVENUES
19,109

 
16,833

 
14
%
 
10
%
 
100
%
 
100
%
Reimbursements
1,014

 
935

 
8

 
 
 
 
 
 
TOTAL REVENUES
$
20,122

 
$
17,768

 
13
%
 
 
 
 
 
 
GEOGRAPHIC REGIONS (1)
 
 
 
 
 
 
 
 
 
 
 
North America
$
8,562

 
$
7,937

 
8
%
 
7
%
 
45
%
 
47
%
Europe
6,934

 
5,800

 
20

 
10

 
36

 
35

Growth Markets
3,613

 
3,096

 
17

 
16

 
19

 
18

TOTAL NET REVENUES
$
19,109

 
$
16,833

 
14
%
 
10
%
 
100
%
 
100
%
TYPE OF WORK
 
 
 
 
 
 
 
 
 
 
 
Consulting
$
10,343

 
$
8,999

 
15
%
 
11
%
 
54
%
 
53
%
Outsourcing
8,765

 
7,834

 
12

 
9

 
46

 
47

TOTAL NET REVENUES
$
19,109

 
$
16,833

 
14
%
 
10
%
 
100
%
 
100
%
_______________ 
n/m = not meaningful
Amounts in table may not total due to rounding.
(1)
Effective September 1, 2017, we revised the reporting of our geographic regions as follows: North America (the United States and Canada), Europe and Growth Markets (Asia Pacific, Latin America, Africa, the Middle East and Turkey). Four countries, including Russia, were previously in Growth Markets, but are now included in Europe. Prior period amounts have been reclassified to conform to the current period presentation.
Net Revenues
The following net revenues commentary discusses local currency net revenue changes for the six months ended February 28, 2018 compared to the six months ended February 28, 2017:
Operating Groups
Communications, Media & Technology net revenues increased 12% in local currency, driven by growth across all geographic regions in Software & Platforms and Communications & Media, led by Software & Platforms in North America. These increases were partially offset by a decline in High Tech in North America.
Financial Services net revenues increased 9% in local currency, driven by growth across all industry groups and geographic regions, led by Banking & Capital Markets in Europe.
Health & Public Service net revenues increased 7% in local currency, driven by growth in both Public Service and Health industry groups across all geographic regions.

24


Products net revenues increased 10% in local currency, driven by growth across all geographic regions in Consumer Goods, Retail & Travel Services and Industrial, partially offset by a decline in Life Sciences in North America.
Resources net revenues increased