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ACCENTURE PLC - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements and related Notes included elsewhere in this Annual Report on Form 10-K. This discussion and analysis also contains forward-looking statements and should also be read in conjunction with the disclosures and information contained in "Disclosure Regarding Forward-Looking Statements" and "Risk Factors" in this Annual Report on Form 10-K. 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 ended 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. 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 fourth quarter of fiscal 2014 were $7.78 billion, compared with $7.09 billion for the fourth quarter of fiscal 2013, an increase of 10% in U.S. dollars and 8% in local currency. Net revenues for fiscal 2014 were $30.00 billion, compared with $28.56 billion for fiscal 2013, an increase of 5% in both U.S. dollars and local currency. During the fourth quarter of fiscal 2014, Communications, Media & Technology, Products, Health & Public Service and Financial Services experienced year-over-year revenue growth in local currency, while Resources was flat year-over-year in local currency. Revenue growth in local currency was very strong in outsourcing and modest in consulting during the fourth 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 remains competitive and, in the first half of fiscal 2014, we experienced pricing pressures. 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 fourth quarter of fiscal 2014 were $4.02 billion, compared with $3.80 billion for the fourth quarter of fiscal 2013, an increase of 6% in U.S. dollars and 4% in local currency. Net consulting revenues for fiscal 2014 were $15.74 billion, compared with $15.38 billion for fiscal 2013, an increase of 2% in U.S. dollars and 3% 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 fourth quarter of fiscal 2014 were $3.76 billion, compared with $3.28 billion for the fourth quarter of fiscal 2013, an increase of 15% in U.S. dollars and 13% in local currency. Net outsourcing revenues for fiscal 2014 were $14.26 billion, compared with $13.18 billion for fiscal 2013, an increase of 8% in both U.S. dollars and 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 strengthens against other currencies, resulting in unfavorable currency translation, our revenues and revenue growth in U.S. dollars may be lower. 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. When compared to the fourth quarter of fiscal 2013, the U.S. dollar weakened against many currencies during the fourth quarter of fiscal 2014, resulting in favorable currency translation and U.S. dollar revenue growth that was approximately 1% higher than our revenue growth in 28-------------------------------------------------------------------------------- Table of Contents local currency. When compared to fiscal 2013, there was no aggregate foreign currency translation impact during fiscal 2014, resulting in U.S. dollar revenue growth that was the same as 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 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 chargeable work. Utilization for the fourth quarter of fiscal 2014 was approximately 88%, flat with the third quarter of fiscal 2014 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. 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 305,000 as of August 31, 2014, compared with approximately 293,000 as of May 31, 2014 and approximately 275,000 as of August 31, 2013. The year-over-year increase in our headcount reflects an overall increase in demand for our services, primarily 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 fourth quarter of fiscal 2014 was 15%, up from 14% in the third quarter of fiscal 2014 and 12% in the fourth 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 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 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 fourth quarter of fiscal 2014 was 31.7%, compared with 33.2% for the fourth quarter of fiscal 2013. Gross margin for fiscal 2014 was 32.3%, compared with 32.9% for fiscal 2013. There were several factors affecting cost of services and gross margin during fiscal 2014. We experienced lower consulting and outsourcing contract profitability compared to fiscal 2013, primarily due to pricing pressures in the first half of fiscal 2014 and higher payroll costs as we did not fully absorb the impact of compensation increases and/or rebalance the mix of resources. In addition, we experienced lower margins in the early stages of a few large contracts. While we accrued significant variable compensation during fiscal 2014, the amounts accrued are lower than fiscal 2013 and partially offset the impacts noted above. Sales and marketing and general and administrative costs as a percentage of net revenues were 17.9% for the fourth quarter of fiscal 2014, compared with 19.3% for the fourth quarter of fiscal 2013. Sales and marketing and general and administrative costs as a percentage of net revenues were 18.0% for fiscal 2014, compared with 18.6% for fiscal 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 fiscal 2014 compared to fiscal 2013, sales and marketing and general and administrative costs each decreased 30 basis points as a percentage of net revenues. Operating income for the fourth quarter of fiscal 2014 was $1,079 million, compared with $984 million for the fourth quarter of fiscal 2013. Operating income for fiscal 2014 was $4,301 million, compared with $4,339 million for fiscal 2013. Operating margin (Operating income as a percentage of Net revenues) for the fourth quarter of fiscal 2014 was 13.9%, flat with the fourth quarter of fiscal 2013. Operating margin for fiscal 2014 was 14.3%, compared with 15.2% for fiscal 2013. We recorded reorganization benefits of $274 million during fiscal 2013 which increased operating margin by 100 basis points. Excluding the effects of the reorganization benefits, operating margin for fiscal 2013 would have been 14.2%. The effective tax rate for fiscal 2014 was 26.1%, compared with 18.1% for fiscal 2013. The above noted reorganization benefits recorded during fiscal 2013 increased income before income taxes without any increase in income tax expense. In addition, during 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 rate for fiscal 2013 would have been 25.3%. Diluted earnings per share were $4.52 for fiscal 2014, compared with $4.93 for fiscal 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 fiscal 2013 would have been $4.21. 29-------------------------------------------------------------------------------- Table of Contents 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. For more information on our hedging programs, see Note 8 (Derivative Financial Instruments) to our Consolidated Financial Statements under Item 8, "Financial Statements and Supplementary Data." Bookings and Backlog New bookings for the fourth quarter of fiscal 2014 were $8.33 billion, with consulting bookings of $3.95 billion and outsourcing bookings of $4.38 billion. New bookings for fiscal 2014 were $35.88 billion, with consulting bookings of $17.15 billion and outsourcing bookings of $18.73 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 over a longer period of time 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. Critical Accounting Policies and Estimates The preparation of our Consolidated Financial Statements in conformity with U.S. generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenues and expenses. We continually evaluate our estimates, judgments and assumptions based on available information and experience. Because the use of estimates is inherent in the financial reporting process, actual results could differ from those estimates. Certain of our accounting policies require higher degrees of judgment than others in their application. These include certain aspects of accounting for revenue recognition and income taxes. 30-------------------------------------------------------------------------------- Table of Contents Revenue Recognition Our contracts have different terms based on the scope, deliverables and complexity of the engagement, the terms of which frequently require us to make judgments and estimates in recognizing revenues. We have many types of contracts, including time-and-materials contracts, fixed-price contracts and contracts with features of both of these contract types. In addition, some contracts include incentives related to costs incurred, benefits produced or adherence to schedules that may increase the variability in revenues and margins earned on such contracts. We conduct rigorous reviews prior to signing such contracts to evaluate whether these incentives are reasonably achievable. We recognize revenues from technology integration consulting contracts using the percentage-of-completion method of accounting, which involves calculating the percentage of services provided during the reporting period compared with the total estimated services to be provided over the duration of the contract. Our contracts for technology integration consulting services generally span six months to two years. Estimated revenues used in applying the percentage-of-completion method include estimated incentives for which achievement of defined goals is deemed probable. This method is followed where reasonably dependable estimates of revenues and costs can be made. Estimates of total contract revenues and costs are continuously monitored during the term of the contract, and recorded revenues and estimated costs are subject to revision as the contract progresses. Such revisions may result in increases or decreases to revenues and income and are reflected in the Consolidated Financial Statements in the periods in which they are first identified. If our estimates indicate that a contract loss will occur, a loss provision is recorded in the period in which the loss first becomes probable and reasonably estimable. Contract losses are determined to be the amount by which the estimated total direct and indirect costs of the contract exceed the estimated total revenues that will be generated by the contract and are included in Cost of services and classified in Other accrued liabilities. Revenues from contracts for non-technology integration consulting services with fees based on time and materials or cost-plus are recognized as the services are performed and amounts are earned. We consider amounts to be earned once evidence of an arrangement has been obtained, services are delivered, fees are fixed or determinable, and collectibility is reasonably assured. In such contracts, our efforts, measured by time incurred, typically are provided in less than a year and represent the contractual milestones or output measure, which is the contractual earnings pattern. For non-technology integration consulting contracts with fixed fees, we recognize revenues as amounts become billable in accordance with contract terms, provided the billable amounts are not contingent, are consistent with the services delivered and are earned. Contingent or incentive revenues relating to non-technology integration consulting contracts are recognized when the contingency is satisfied and we conclude the amounts are earned. Outsourcing contracts typically span several years and involve complex delivery, often through multiple workforces in different countries. In a number of these arrangements, we hire client employees and become responsible for certain client obligations. Revenues are recognized on outsourcing contracts as amounts become billable in accordance with contract terms, unless the amounts are billed in advance of performance of services, in which case revenues are recognized when the services are performed and amounts are earned. Revenues from time-and-materials or cost-plus contracts are recognized as the services are performed. In such contracts, our effort, measured by time incurred, represents the contractual milestones or output measure, which is the contractual earnings pattern. Revenues from unit-priced contracts are recognized as transactions are processed based on objective measures of output. Revenues from fixed-price contracts are recognized on a straight-line basis, unless revenues are earned and obligations are fulfilled in a different pattern. Outsourcing contracts can also include incentive payments for benefits delivered to clients. Revenues relating to such incentive payments are recorded when the contingency is satisfied and we conclude the amounts are earned. We continuously review and reassess our estimates of contract profitability. Circumstances that potentially affect profitability over the life of the contract include decreases in volumes of transactions or other inputs/outputs on which we are paid, failure to deliver agreed benefits, variances from planned internal/external costs to deliver our services and other factors affecting revenues and costs. Costs related to delivering outsourcing services are expensed as incurred, with the exception of certain transition costs related to the set-up of processes, personnel and systems, which are deferred during the transition period and expensed evenly over the period outsourcing services are provided. The deferred costs are specific internal costs or incremental external costs directly related to transition or set-up activities necessary to enable the outsourced services. Generally, deferred amounts are protected in the event of early termination of the contract and are monitored regularly for impairment. Impairment losses are recorded when projected remaining undiscounted operating cash flows of the related contract are not sufficient to recover the carrying amount of contract assets. Amounts billable to the client for transition or set-up activities are deferred and recognized as revenue evenly over the period outsourcing services are provided. Contract acquisition and origination costs are expensed as incurred. We enter into contracts that may consist of multiple elements. These contracts may include any combination of technology integration consulting services, non-technology integration consulting services or outsourcing services described above. Revenues for contracts with multiple elements are allocated based on the lesser of the element's relative selling price or the amount that is not contingent on future delivery of another element. The selling price of each element is determined by obtaining third party evidence of fair value of each element and is based on the price charged when the element is sold separately by the Company on a regular basis and not as part of a contract with multiple elements. If the amount of non-contingent revenues allocated to a delivered 31-------------------------------------------------------------------------------- Table of Contents element accounted for under the percentage-of-completion method of accounting is less than the costs to deliver such services, then such costs are deferred and recognized in future periods when the revenues become non-contingent. Revenues are recognized in accordance with our accounting policies for the separate elements when the services have value on a stand-alone basis, selling price of the separate elements exists and, in arrangements that include a general right of refund relative to the delivered element, performance of the undelivered element is considered probable and substantially in our control. While determining fair value and identifying separate elements require judgment, generally fair value and the separate elements are readily identifiable as we also sell those elements unaccompanied by other elements. Revenues recognized in excess of billings are recorded as Unbilled services. Billings in excess of revenues recognized are recorded as Deferred revenues until revenue recognition criteria are met. Client prepayments (even if nonrefundable) are deferred and recognized over future periods as services are delivered or performed. Our consulting revenues are affected by the number of work days in a fiscal quarter, which in turn is affected by the level of vacation days and holidays. Consequently, since our first and third quarters typically have approximately 5-10% more work days than our second and fourth quarters, our consulting revenues are typically higher in our first and third quarters than in our second and fourth quarters. Net revenues include the margin earned on computer hardware, software and related services resale contracts, as well as revenues from alliance agreements, neither of which is material to us. Reimbursements include billings for travel and other out-of-pocket expenses and third-party costs, such as the cost of hardware, software and related services resales. In addition, Reimbursements may include allocations from gross billings to record an amount equivalent to reimbursable costs, where billings do not specifically identify reimbursable expenses. We report revenues net of any revenue-based taxes assessed by governmental authorities that are imposed on and concurrent with specific revenue-producing transactions. Income Taxes Determining the consolidated provision for income tax expense, income tax liabilities and deferred tax assets and liabilities involves judgment. Deferred tax assets and liabilities, measured using enacted tax rates, are recognized for the future tax consequences of temporary differences between the tax and financial statement bases of assets and liabilities. As a global company, we calculate and provide for income taxes in each of the tax jurisdictions in which we operate. This involves estimating current tax exposures in each jurisdiction as well as making judgments regarding the recoverability of deferred tax assets. Tax exposures can involve complex issues and may require an extended period to resolve. In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized and adjust the valuation allowances accordingly. Factors considered in making this determination include the period of expiration of the tax asset, planned use of the tax asset, tax planning strategies and historical and projected taxable income as well as tax liabilities for the tax jurisdiction in which the tax asset is located. Valuation allowances will be subject to change in each future reporting period as a result of changes in one or more of these factors. Changes in the geographic mix or estimated level of annual income before taxes can affect the overall effective tax rate. We apply an estimated annual effective tax rate to our quarterly operating results to determine the interim provision for income tax expense. In accordance with FASB guidance on uncertainty in income taxes, a change in judgment that impacts the measurement of a tax position taken in a prior year is recognized as a discrete item in the interim period in which the change occurs. In the event there is a significant unusual or infrequent item recognized in our quarterly operating results, the tax attributable to that item is recorded in the interim period in which it occurs. No taxes have been provided on undistributed foreign earnings that are planned to be indefinitely reinvested. If future events, including material changes in estimates of cash, working capital and long-term investment requirements, necessitate that these earnings be distributed, an additional provision for taxes may apply, which could materially affect our future effective tax rate. We currently do not foresee any event that would require us to distribute these earnings. As a matter of course, we are regularly audited by various taxing authorities, and sometimes these audits result in proposed assessments where the ultimate resolution may result in us owing additional taxes. We establish tax liabilities or reduce tax assets for uncertain tax positions when, despite our belief that our tax return positions are appropriate and supportable under local tax law, we believe we may not succeed in realizing the tax benefit of certain positions if challenged. In evaluating a tax position, we determine whether it is more likely than not that the position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Our estimate of the ultimate tax liability contains assumptions based on past experiences, judgments about potential actions by taxing jurisdictions as well as judgments about the likely outcome of issues that have been raised by taxing jurisdictions. The tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon settlement. We evaluate these uncertain tax positions each quarter and adjust the related tax liabilities or assets in light of changing facts and circumstances, such as the progress of a tax audit or the expiration of a statute of limitations. We believe the estimates and assumptions used to support our evaluation of uncertain tax positions are reasonable. However, final determinations of prior-year tax liabilities, either by settlement with tax authorities or expiration of statutes of limitations, could be materially different from estimates reflected in assets and liabilities 32-------------------------------------------------------------------------------- Table of Contents and historical income tax provisions. The outcome of these final determinations could have a material effect on our income tax provision, net income, or cash flows in the period in which that determination is made. We believe our tax positions comply with applicable tax law and that we have adequately accounted for uncertain tax positions. 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. Revenue for our services is a function of the nature of each service to be provided, the skills required and the outcome sought, as well as estimated cost, risk, contract terms and other factors. 33-------------------------------------------------------------------------------- Table of Contents Results of Operations for Fiscal 2014 Compared to Fiscal 2013 Net revenues (by operating group, geographic region and type of work) and reimbursements were as follows: Percent Increase Percent Percent of Total (Decrease) Increase Net Revenues Fiscal U.S. Local for Fiscal 2014 2013 Dollars Currency 2014 2013 (in millions of U.S. dollars) OPERATING GROUPS Communications, Media & Technology $ 5,924 $ 5,686 4 % 5 % 20 % 20 % Financial Services 6,511 6,166 6 5 22 21 Health & Public Service 5,022 4,739 6 7 17 17 Products 7,395 6,807 9 8 24 24 Resources 5,135 5,143 - 1 17 18 Other 15 22 n/m n/m - - TOTAL NET REVENUES 30,002 28,563 5 % 5 % 100 % 100 % Reimbursements 1,872 1,831 2 TOTAL REVENUES $ 31,875 $ 30,394 5 % GEOGRAPHIC REGIONS Americas $ 14,201 $ 13,519 5 % 6 % 47 % 47 % EMEA (1) 11,915 11,047 8 4 40 39 Asia Pacific 3,886 3,997 (3 ) 4 13 14 TOTAL NET REVENUES $ 30,002 $ 28,563 5 % 5 % 100 % 100 % TYPE OF WORK Consulting $ 15,738 $ 15,383 2 % 3 % 52 % 54 % Outsourcing 14,265 13,179 8 8 48 46 TOTAL NET REVENUES $ 30,002 $ 28,563 5 % 5 % 100 % 100 % _______________ n/m = not meaningful Amounts in table may not total due to rounding. (1) EMEA includes Europe, the Middle East and Africa. Our business in the United States represented 40%, 39% and 36% of our consolidated net revenues during fiscal 2014, 2013 and 2012, respectively. No other country individually comprised 10% or more of our consolidated net revenues during these periods. Net Revenues The following net revenues commentary discusses local currency net revenue changes for fiscal 2014 compared to fiscal 2013: Operating Groups • Communications, Media & Technology net revenues increased 5% in local currency. Outsourcing revenue growth was driven by all industry groups in Americas and Electronics & High Tech in Asia Pacific. This growth was partially offset by a decline in Electronics & High Tech in EMEA. Consulting revenues reflected modest growth, led by Electronics & High Tech in Americas and EMEA, partially offset by declines in Communications across all geographic regions. • 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 a decline in Insurance in Americas. Consulting revenues reflected a slight decline, due to declines in Insurance in EMEA and Americas, partially offset by growth in Banking in EMEA and Asia Pacific. While fiscal 2014 consulting net revenues reflected a slight decline, year-over-year growth in the second half of fiscal 2014 partially offset revenue declines in the first half of fiscal 2014. 34-------------------------------------------------------------------------------- Table of Contents • Health & Public Service net revenues increased 7% 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 modest growth, driven by Public Service and Health in Americas and Public Service in Asia Pacific, partially offset by a decline in Public Service in EMEA. • Products net revenues increased 8% in local currency. Outsourcing revenues reflected strong growth, driven by growth across all geographic regions in most industry groups, led by Air, Freight & Travel Services and Life Sciences in Americas and Retail in EMEA. These increases were partially offset by declines in Retail in Americas, and Consumer Goods & Services and Air, Freight & Travel Services in EMEA. Consulting revenues reflected strong growth, driven by most industry groups in EMEA, led by Retail, Consumer Goods & Services and Auto, and in Americas, led by Consumer Goods & Services and Air, Freight & Travel Services. This growth was partially offset by declines in Retail in Asia Pacific and Americas. • Resources net revenues increased 1% in local currency. Outsourcing revenues reflected modest growth, driven by Energy in Americas and Utilities in EMEA, partially offset by a decline in Utilities in Americas. 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 in Asia Pacific and EMEA, Utilities in EMEA and Chemicals in Americas. 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 6% in local currency, driven by the United States, partially offset by a decline in Canada. • EMEA net revenues increased 4% in local currency, driven by France, Italy, the United Kingdom, Switzerland, Germany and Norway. These increases were partially offset by declines in Spain, South Africa and Finland. • Asia Pacific net revenues increased 4% in local currency, driven by Japan and to a lesser extent India, partially offset by declines in Singapore and South Korea. In fiscal 2015, we will begin reporting our geographic regions as follows: North America (the United States and Canada); Europe; and Growth Markets (Asia Pacific, Latin America, Africa, the Middle East, Russia and Turkey). See Item 9B, "Other Information" for fiscal 2014 and 2013 net revenues aligned with these revised geographic regions. Operating Expenses Operating expenses for fiscal 2014 were $27,574 million, an increase of $1,519 million, or 6%, over fiscal 2013, and increased as a percentage of revenues to 86.5% from 85.7% during this period. Operating expenses before reimbursable expenses for fiscal 2014 were $25,702 million, an increase of $1,478 million, or 6%, over fiscal 2013, and increased as a percentage of net revenues to 85.7% from 84.8% during this period. Operating expenses for fiscal 2013 included reorganization benefits of $274 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 fiscal 2014 was $22,190 million, an increase of $1,180 million, or 6%, over fiscal 2013, and increased as a percentage of revenues to 69.6% from 69.1% during this period. Cost of services before reimbursable expenses for fiscal 2014 was $20,318 million, an increase of $1,139 million, or 6%, over fiscal 2013, and increased as a percentage of net revenues to 67.7% from 67.1% during this period. Gross margin for fiscal 2014 decreased to 32.3% from 32.9% during this period. There were several factors affecting cost of services and gross margin during fiscal 2014. We experienced lower consulting and outsourcing contract profitability compared to fiscal 2013, primarily due to pricing pressures in the first half of fiscal 2014 and higher payroll costs as we did not fully absorb the impact of compensation increases and/or rebalance the mix of resources. In addition, we experienced lower margins in the early stages of a few large contracts. While we accrued significant variable compensation during fiscal 2014, the amounts accrued are lower than fiscal 2013 and partially offset the impacts noted above. Sales and Marketing Sales and marketing expense for fiscal 2014 was $3,583 million, an increase of $101 million, or 3%, over fiscal 2013, and decreased as a percentage of net revenues to 11.9% from 12.2% during this period. General and Administrative Costs General and administrative costs for fiscal 2014 were $1,819 million, a decrease of $17 million, or 1%, from fiscal 2013, and decreased as a percentage of net revenues to 6.1% from 6.4% during this period. 35-------------------------------------------------------------------------------- Table of Contents Reorganization (Benefits) Costs, net We recorded net reorganization benefits of $272 million ($274 million in reorganization benefits less $1.9 million in interest expense accrued) during fiscal 2013 as a result of final determinations of certain reorganization liabilities established in connection with our transition to a corporate structure in 2001. For additional information, refer to Note 3 (Reorganization (Benefits) Costs, Net) to our Consolidated Financial Statements under Item 8, "Financial Statements and Supplementary Data." Operating Income and Operating Margin Operating income for fiscal 2014 was $4,301 million, a decrease of $38 million, or 1%, from fiscal 2013, and decreased as a percentage of net revenues to 14.3% from 15.2% during this period. During fiscal 2013, we recorded reorganization benefits of $274 million, which increased operating margin by 100 basis points. Excluding the effects of the fiscal 2013 reorganization benefits, operating margin for fiscal 2014 increased 10 basis points compared to fiscal 2013. Operating income and operating margin for each of the operating groups were as follows: Fiscal 2014 2013 Operating Operating Operating Operating Income Margin Income Margin (in millions of U.S. dollars)Communications, Media & Technology $ 770 13 % $ 786 14 % Financial Services 957 15 1,003 16 Health & Public Service 679 14 594 13 Products 992 13 985 14 Resources 902 18 971 19 Total $ 4,301 14.3 % $ 4,339 15.2 % _______________Amounts in table may not total due to rounding. Operating Income and Operating Margin Excluding Fiscal 2013 Reorganization Benefits (Non-GAAP) Fiscal 2014 2013 Operating Income and Operating Income and Operating Margin Operating Margin as Reported Excluding Reorganization Benefits (GAAP) (Non-GAAP) Operating Operating Operating Income Reorganization Operating Operating Increase Income Margin (GAAP) Benefits (1) Income (2) Margin (2) (Decrease) (in millions of U.S. dollars) Communications, Media & Technology $ 770 13 % $ 786 $ 53 $ 733 13 % $ 37 Financial Services 957 15 1,003 59 944 15 13 Health & Public Service 679 14 594 48 546 12 132 Products 992 13 985 65 921 14 71 Resources 902 18 971 49 921 18 (19 ) Total $ 4,301 14.3 % $ 4,339 $ 274 $ 4,065 14.2 % $ 236 _______________ 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. 36-------------------------------------------------------------------------------- Table of Contents During fiscal 2014, the financial results of each operating group benefited from a reduction in variable compensation compared to fiscal 2013. The commentary below provides additional insight into other factors affecting operating group performance and operating margin for fiscal 2014 compared to fiscal 2013, exclusive of the reorganization benefit recorded in fiscal 2013: • Communications, Media & Technology operating income was impacted by lower contract profitability, including early-stage work at lower margins on a few large contracts. Operating income was favorably impacted by revenue growth. • Financial Services operating income was impacted by lower contract profitability, including early-stage work at lower margins on a few large outsourcing contracts. Operating income was favorably impacted by outsourcing revenue growth. • Health & Public Service operating income increased due to revenue growth. • Products operating income was impacted by lower consulting contract profitability, including delivery inefficiencies on a few contracts. Operating income was favorably impacted by revenue growth. • Resources operating income was impacted by lower consulting contract profitability and higher sales and marketing costs as a percentage of net revenues. Operating income was favorably impacted by higher outsourcing contract profitability. Provision for Income Taxes The effective tax rate for fiscal 2014 was 26.1%, compared with 18.1% for fiscal 2013. During fiscal 2013, we recorded reorganization benefits of $274 million, which increased income before income taxes without any increase in income tax expense. In addition, during 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 rate for fiscal 2013 would have been 25.3%. The higher effective tax rate during fiscal 2014 is primarily due to lower benefits related to final determinations of prior year tax liabilities. Net Income Attributable to Noncontrolling Interests Net income attributable to noncontrolling interests eliminates the income earned or expense incurred attributable to the equity interest that some of our current and former members of Accenture Leadership and their permitted transferees have in our Accenture SCA and Accenture Canada Holdings Inc. subsidiaries. See "Business-Organizational Structure." The resulting Net income attributable to Accenture plc represents the income attributable to the shareholders of Accenture plc. Since January 2002, noncontrolling interests has also included immaterial amounts primarily attributable to noncontrolling shareholders in our Avanade Inc. subsidiary. Net income attributable to noncontrolling interests for fiscal 2014 was $234 million, a decrease of $38 million, or 14%, from fiscal 2013. The decrease was due to lower Net income of $379 million and a reduction in the Accenture SCA Class I common shares and Accenture Canada Holdings Inc. exchangeable shares average noncontrolling ownership interest to 6% for fiscal 2014 from 7% for fiscal 2013. Earnings Per Share Diluted earnings per share were $4.52 for fiscal 2014, compared with $4.93 for fiscal 2013. The $0.41 decrease in our earnings per share included the impact of the reorganization benefits of $274 million, which increased earnings per share for fiscal 2013 by $0.38, and the $243 million tax benefit related to settlements of U.S. federal tax audits, which increased earnings per share for fiscal 2013 by $0.34. Excluding the impact of these benefits, earnings per share for fiscal 2014 increased $0.31 compared with earnings per share for fiscal 2013, due to increases of $0.25 from higher revenues and operating results and $0.12 from lower weighted average shares outstanding. These increases were partially offset by a decrease of $0.06 from a higher effective tax rate, excluding the impact of the tax benefit related to settlements of U.S. federal tax audits and reorganization benefits. For information regarding our earnings per share calculations, see Note 2 (Earnings Per Share) to our Consolidated Financial Statements under Item 8, "Financial Statements and Supplementary Data." 37-------------------------------------------------------------------------------- Table of Contents Results of Operations for Fiscal 2013 Compared to Fiscal 2012 Net revenues (by operating group, geographic region and type of work) and reimbursements were as follows: Percent Percent Increase Increase Percent of Total (Decrease) (Decrease) Net Revenues Fiscal U.S. Local for Fiscal 2013 2012 Dollars Currency 2013 2012 (in millions of U.S. dollars) OPERATING GROUPS Communications, Media & Technology $ 5,686 $ 5,907 (4 )% (2 )% 20 % 21 % Financial Services 6,166 5,843 6 7 21 21 Health & Public Service 4,739 4,256 11 12 17 15 Products 6,807 6,563 4 5 24 24 Resources 5,143 5,275 (2 ) (1 ) 18 19 Other 22 19 n/m n/m - - TOTAL NET REVENUES 28,563 27,862 3 % 4 % 100 % 100 % Reimbursements 1,831 1,916 (4 ) TOTAL REVENUES $ 30,394 $ 29,778 2 % GEOGRAPHIC REGIONS Americas $ 13,519 $ 12,523 8 % 9 % 47 % 45 % EMEA (1) 11,047 11,296 (2 ) - 39 41 Asia Pacific 3,997 4,043 (1 ) 3 14 14 TOTAL NET REVENUES $ 28,563 $ 27,862 3 % 4 % 100 % 100 % TYPE OF WORK Consulting $ 15,383 $ 15,562 (1 )% 1 % 54 % 56 % Outsourcing 13,179 12,300 7 9 46 44 TOTAL NET REVENUES $ 28,563 $ 27,862 3 % 4 % 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 Outsourcing revenue growth in local currency moderated during the second half of fiscal 2013 compared to the first half of fiscal 2013. Financial Services, Products and Health & Public Service experienced strong growth in outsourcing revenues in local currency during fiscal 2013. Outsourcing revenue growth in local currency during fiscal 2013 was slight in Resources and declined in Communications, Media & Technology. Consulting revenues were flat in local currency during fiscal 2013. Health & Public Service experienced strong growth in consulting revenues in local currency during fiscal 2013. Consulting revenue growth in local currency during fiscal 2013 was slight in Financial Services and declined in Communications, Media & Technology, Resources and Products. The following net revenues commentary discusses local currency net revenue changes for fiscal 2013 compared to fiscal 2012: Operating Groups • Communications, Media & Technology net revenues decreased 2% in local currency. Outsourcing revenues reflected slight growth, driven by growth in Americas across all industry groups and Media & Entertainment in EMEA, partially offset by a significant decline in Electronics & High Tech in EMEA, principally due to an expected year-over-year revenue decline from one contract. In addition, outsourcing revenue growth was impacted by a decline in Electronics & High Tech in Asia Pacific. Consulting revenues reflected a modest decline, due to declines in Communications and Media & Entertainment in Americas and Electronics & High Tech in EMEA and Asia Pacific, partially offset by strong growth in Electronics & High Tech in Americas. Some of our clients continued to reduce and/or defer their investment in consulting, which had a negative impact on our consulting revenues during fiscal 2013. 38-------------------------------------------------------------------------------- Table of Contents • Financial Services net revenues increased 7% in local currency. Outsourcing revenues reflected very strong growth, driven by all industry groups in Americas and Banking in EMEA, including the impact of an acquisition in Banking during fiscal 2012. Consulting revenues reflected slight growth, with very strong growth driven by Insurance in Americas and Asia Pacific and Capital Markets in EMEA. These increases were partially offset by declines in Insurance and Banking in EMEA and Banking in Americas. Changes in the banking and capital markets industries continued to influence the business needs of our clients. This resulted in higher demand for outsourcing services, including transformational projects, and lower demand for short-term consulting services. • Health & Public Service net revenues increased 12% in local currency. Consulting revenues reflected strong growth, led by Public Service in Americas and Asia Pacific and Health in Americas and EMEA. This growth was partially offset by a decline in Public Service in EMEA and Health in Asia Pacific. Outsourcing revenues also reflected strong growth, led by Public Service in Americas and Health in Americas and Asia Pacific. • Products net revenues increased 5% in local currency. Outsourcing revenues reflected strong growth, driven by growth across all geographic regions and industry groups, led by Life Sciences, Retail and Industrial Equipment. Consulting revenues reflected a slight decline, due to declines in Asia Pacific across most industry groups, Americas and EMEA in Retail, and Americas in Consumer Goods & Services. These decreases were largely offset by growth in Americas and EMEA in Life Sciences, Americas in Industrial Equipment and EMEA in Consumer Goods & Services. During fiscal 2013, several large systems integration projects ended, transitioned to smaller phases or to outsourcing services. We also had higher demand for outsourcing services, including transformational projects, and lower demand for short-term consulting services. • Resources net revenues decreased 1% in local currency. Outsourcing revenues reflected modest growth, driven by all industry groups in EMEA and Utilities and Energy in Asia Pacific, partially offset by a decline in Utilities in Americas. Consulting revenues reflected a modest decline, as growth in Chemicals across all geographic regions was more than offset by declines in Natural Resources in Asia Pacific and Americas, Utilities in EMEA and Energy in Americas. Some of our clients, primarily in Natural Resources and Utilities, reduced their level of consulting investments. In addition, several large systems integration projects ended or transitioned to smaller phases and demand for our outsourcing services moderated. Geographic Regions • Americas net revenues increased 9% in local currency, driven by growth in the United States. • EMEA net revenues were flat in local currency. We experienced a significant decline in Finland, principally due to an expected year-over-year decline from one contract in Communications, Media & Technology, as well as declines in Spain, Sweden and the United Kingdom. These declines were offset by growth in Switzerland, the Netherlands, Germany, Ireland, South Africa and Italy. • Asia Pacific net revenues increased 3% in local currency, driven by China, India, Singapore and Australia, partially offset by declines in Japan, South Korea and Malaysia. Operating Expenses Operating expenses for fiscal 2013 were $26,056 million, an increase of $149 million, or 1%, over fiscal 2012, and decreased as a percentage of revenues to 85.7% from 87.0% during this period. Operating expenses before reimbursable expenses for fiscal 2013 were $24,224 million, an increase of $233 million, or 1%, over fiscal 2012, and decreased as a percentage of net revenues to 84.8% from 86.1% during this period. Cost of Services Cost of services for fiscal 2013 was $21,010 million, an increase of $220 million, or 1%, over fiscal 2012, and decreased as a percentage of revenues to 69.1% from 69.8% during this period. Cost of services before reimbursable expenses for fiscal 2013 was $19,179 million, an increase of $304 million, or 2%, over fiscal 2012, and decreased as a percentage of net revenues to 67.1% from 67.7% during this period. Gross margin for fiscal 2013 increased to 32.9% from 32.3% during this period, principally due to higher outsourcing contract profitability, partially offset by higher costs associated with investments in offerings. Sales and Marketing Sales and marketing expense for fiscal 2013 was $3,482 million, an increase of $178 million, or 5%, over fiscal 2012, and increased as a percentage of net revenues to 12.2% from 11.9% during this period. The increase as a percentage of net revenues was primarily driven by higher selling and other business development costs associated with generating new contract bookings and expanding our pipeline of business opportunities, as well as acquisition-related costs. 39-------------------------------------------------------------------------------- Table of Contents General and Administrative Costs General and administrative costs for fiscal 2013 were $1,836 million, an increase of $25 million, or 1%, from fiscal 2012, and decreased as a percentage of net revenues to 6.4% from 6.5% during this period. Reorganization (Benefits) Costs, net We recorded net reorganization benefits of $272 million ($274 million in reorganization benefits less $1.9 million in interest expense accrued) during fiscal 2013 as a result of final determinations of certain reorganization liabilities established in connection with our transition to a corporate structure in 2001. For additional information, refer to Note 3 (Reorganization (Benefits) Costs, Net) to our Consolidated Financial Statements under Item 8, "Financial Statements and Supplementary Data." Operating Income and Operating Margin Operating income for fiscal 2013 was $4,339 million, an increase of $467 million, or 12%, over fiscal 2012, and increased as a percentage of net revenues to 15.2% from 13.9% during this period. The reorganization benefits of $274 million recorded during fiscal 2013 increased operating margin by 100 basis points. Excluding the effects of the reorganization benefits, operating margin for fiscal 2013 increased 30 basis points compared to fiscal 2012. Operating income and operating margin for each of the operating groups were as follows: Fiscal 2013 2012 Operating Operating Operating Operating Income Margin Income Margin (in millions of U.S. dollars)Communications, Media & Technology $ 786 14 % $ 845 14 % Financial Services 1,003 16 810 14 Health & Public Service 594 13 376 9 Products 985 14 864 13 Resources 971 19 977 19 Total $ 4,339 15.2 % $ 3,872 13.9 % Operating Income and Operating Margin Excluding Fiscal 2013 Reorganization Benefits (Non-GAAP) Fiscal 2013 2012 Operating Income and Operating Margin Operating Income and Excluding Reorganization Benefits Operating Margin as Reported (Non-GAAP) (GAAP) Operating Income Reorganization Operating Operating Operating Operating Increase (GAAP) Benefits (1) Income (2) Margin (2) Income Margin (Decrease) (in millions of U.S. dollars) Communications, Media & Technology $ 786 $ 53 $ 733 13 % $ 845 14 % $ (113 ) Financial Services 1,003 59 944 15 810 14 134 Health & Public Service 594 48 546 12 376 9 170 Products 985 65 921 14 864 13 57 Resources 971 49 921 18 977 19 (55 ) Total $ 4,339 $ 274 $ 4,065 14.2 % $ 3,872 13.9 % $ 193 _______________ 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 quantifying 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. 40-------------------------------------------------------------------------------- Table of Contents During fiscal 2013, each operating group recorded a portion of the $274 million reorganization benefits. The commentary below provides additional insight into operating group performance and operating margin for fiscal 2013, exclusive of the reorganization benefits, compared with fiscal 2012. See "Reorganization (Benefits), Costs, net." • Communications, Media & Technology operating income decreased, primarily due to a decline in consulting revenue and higher sales and marketing costs as a percentage of net revenues. Operating income was also impacted by an expected significant year-over-year revenue decline from one outsourcing contract. • Financial Services operating income increased, primarily due to strong outsourcing revenue growth and improved outsourcing and consulting contract profitability. Operating income for fiscal 2012 included the impact of costs related to acquisitions. • Health & Public Service operating income increased, primarily due to revenue growth and improved outsourcing contract profitability. • Products operating income increased, primarily due to strong outsourcing revenue growth and improved outsourcing contract profitability, partially offset by a decline in consulting revenues. • Resources operating income decreased, primarily due to a decline in consulting revenue and higher sales and marketing costs as a percentage of net revenues. Interest Income Interest income for fiscal 2013 was $33 million, a decrease of $10 million, or 23%, from fiscal 2012. The decrease was primarily due to lower cash balances. Other (Expense) Income, net Other (expense) income, net for fiscal 2013 was $18 million, a decrease of $23 million from fiscal 2012. The change was primarily driven by net foreign exchange losses during fiscal 2013, compared to net foreign exchange gains during fiscal 2012. Provision for Income Taxes The effective tax rate for fiscal 2013 was 18.1%, compared with 27.6% for fiscal 2012. During fiscal 2013, we recorded reorganization benefits of $274 million, which increased income before taxes without any increase in income tax expense. The effective tax rate was also impacted by a benefit of $243 million related to settlements of U.S. federal tax audits for fiscal years 2006 through 2009 recorded during fiscal 2013. Absent these items, the effective tax rate for fiscal 2013 would have been 25.3%, which is lower than fiscal 2012 primarily due to lower additions to tax reserves. Net Income Attributable to Noncontrolling Interests Net income attributable to noncontrolling interests eliminates the income earned or expense incurred attributable to the equity interest that some of our current and former members of Accenture Leadership and their permitted transferees have in our Accenture SCA and Accenture Canada Holdings Inc. subsidiaries. See "Business-Organizational Structure." The resulting Net income attributable to Accenture plc represents the income attributable to the shareholders of Accenture plc. Since January 2002, noncontrolling interests has also included immaterial amounts primarily attributable to noncontrolling shareholders in our Avanade Inc. subsidiary. Net income attributable to noncontrolling interests for fiscal 2013 was $273 million, an increase of $1 million over fiscal 2012. The increase was due to higher Net income of $730 million, offset by a reduction in the Accenture SCA Class I common shares and Accenture Canada Holdings Inc. exchangeable shares average noncontrolling ownership interest to 7% for fiscal 2013 from 9% for fiscal 2012. Earnings Per Share Diluted earnings per share were $4.93 for fiscal 2013, compared with $3.84 for fiscal 2012. The $1.09 increase in our earnings per share included the impact of the reorganization benefits of $274 million, which increased earnings per share by $0.38, and the $243 million tax benefit related to settlements of U.S. federal tax audits, which increased earnings per share by $0.34. Excluding the impact of these benefits, earnings per share increased $0.37 compared with earnings per share for fiscal 2012, due to increases of $0.19 from higher revenues and operating results, $0.13 from a lower effective tax rate, excluding the impact of the tax benefit related to settlements of U.S. federal tax audits and reorganization benefits, and $0.08 from lower weighted average shares outstanding. These increases were partially offset by a decrease of $0.03 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 8, "Financial Statements and Supplementary Data." 41-------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources Our primary sources of liquidity are cash flows from operations, available cash reserves and debt capacity available under various credit facilities. In addition, we could raise additional funds through public or private debt or equity financings. We may use our available or additional funds to, among other things: • facilitate purchases, redemptions and exchanges of shares and pay dividends; • acquire complementary businesses or technologies; • take advantage of opportunities, including more rapid expansion; or • develop new services and solutions. As of August 31, 2014, Cash and cash equivalents was $4.9 billion, compared with $5.6 billion as of August 31, 2013. Cash flows from operating, investing and financing activities, as reflected in our Consolidated Cash Flows Statements, are summarized in the following table: Fiscal 2014 2013 2012 2014 to 2013 Change (in millions of U.S. dollars) Net cash provided by (used in): Operating activities $ 3,486 $ 3,303 $ 4,257 $ 183 Investing activities (1,056 ) (1,156 ) (535 ) 100 Financing activities (3,165 ) (3,066 ) (2,559 ) (100 ) Effect of exchange rate changes on cash and cash equivalents 25 (90 ) (223 ) 115 Net (decrease) increase in cash and cash equivalents $ (711 ) $ (1,009 ) $ 939 $ 298 _______________ Amounts in table may not total due to rounding. Operating activities: The year-over-year improvement in operating cash flow was primarily due to a discretionary cash contribution of $500 million made to our U.S. defined benefit pension plan in fiscal 2013, which had a net impact of $350 million, after tax. This increase was partially offset by lower collections on net client balances (receivables from clients, current and non-current unbilled services and deferred revenues) and higher current year operational spending. Investing activities: The $100 million decrease in cash used was primarily due to lower spending on business acquisitions and property and equipment. For additional information, see Note 6 (Business Combinations) to our Consolidated Financial Statements under Item 8, "Financial Statements and Supplementary Data." Financing activities: The $100 million increase in cash used was primarily due to an increase in cash dividends paid, partially offset by an increase in net proceeds from share issuances. For additional information, see Note 14 (Material Transactions Affecting Shareholders' Equity) to our Consolidated Financial Statements under Item 8, "Financial Statements and Supplementary Data." We believe that our available cash balances and the cash flows expected to be generated from operations will be sufficient to satisfy our current and planned working capital and investment needs for the next twelve months. We also believe that our longer-term working capital and other general corporate funding requirements will be satisfied through cash flows from operations and, to the extent necessary, from our borrowing facilities and future financial market activities. 42-------------------------------------------------------------------------------- Table of Contents Borrowing Facilities As of August 31, 2014, we had the following borrowing facilities, including the issuance of letters of credit, to support general working capital purposes: Borrowings Facility Under Amount Facilities (in millions of U.S. dollars) Syndicated loan facility (1) $ 1,000 $ - Separate, uncommitted, unsecured multicurrency revolving credit facilities (2) 563 - Local guaranteed and non-guaranteed lines of credit (3) 170 - Total $ 1,733 $ - _______________(1) This facility, which matures on October 31, 2016, provides unsecured, revolving borrowing capacity for general working capital purposes, including the issuance of letters of credit. Financing is provided under this facility at the prime rate or at the London Interbank Offered Rate plus a spread. We continue to be in compliance with relevant covenant terms. The facility is subject to annual commitment fees. As of August 31, 2014 and 2013, we had no borrowings under the facility. (2) We maintain separate, uncommitted and unsecured multicurrency revolving credit facilities. These facilities provide local-currency financing for the majority of our operations. Interest rate terms on the revolving facilities are at market rates prevailing in the relevant local markets. As of August 31, 2014 and 2013, we had no borrowings under these facilities. (3) We also maintain local guaranteed and non-guaranteed lines of credit for those locations that cannot access our global facilities. As of August 31, 2014 and 2013, we had no borrowings under these various facilities. Under the borrowing facilities described above, we had an aggregate of $170 million and $179 million of letters of credit outstanding as of August 31, 2014 and 2013, respectively. In addition, we had total outstanding debt of $27 million and $26 million as of August 31, 2014 and 2013, respectively. Share Purchases and Redemptions The Board of Directors of Accenture plc has authorized funding for our publicly announced open-market share purchase program for acquiring Accenture plc Class A ordinary shares and for purchases and redemptions of Accenture plc Class A ordinary shares, Accenture SCA Class I common shares and Accenture Canada Holdings Inc. exchangeable shares held by our current and former members of Accenture Leadership and their permitted transferees. As of August 31, 2014, our aggregate available authorization was $4,746 million for our publicly announced open-market share purchase and these other share purchase programs. Our share purchase activity during fiscal 2014 was as follows: Accenture SCA Class I Accenture plc Class A Common Shares and Accenture Canada Ordinary Shares Holdings Inc. Exchangeable Shares Shares Amount Shares Amount (in millions of U.S. dollars, except share amounts) Open-market share purchases (1) 26,217,214 $ 2,062 - $ - Other share purchase programs - - 1,969,382 156 Other purchases (2) 4,411,320 342 - - Total 30,628,534 $ 2,403 1,969,382 $ 156 _______________Amounts in table may not total due to rounding. (1) We conduct a publicly announced, open-market share purchase program for Accenture plc Class A ordinary shares. These shares are held as treasury shares by Accenture plc and may be utilized to provide for select employee benefits, such as equity awards to our employees. (2) During fiscal 2014, as authorized under our various employee equity share plans, we acquired Accenture plc Class A ordinary shares primarily via share withholding for payroll tax obligations due from employees and former employees in connection with the delivery of Accenture plc Class A ordinary shares under those plans. These purchases of shares in connection with employee share plans do not affect our aggregate available authorization for our publicly announced open-market share purchase and the other share purchase programs. 43-------------------------------------------------------------------------------- Table of Contents We intend to continue to use a significant portion of cash generated from operations for share repurchases during fiscal 2015. The number of shares ultimately repurchased under our open-market share purchase program may vary depending on numerous factors, including, without limitation, share price and other market conditions, our ongoing capital allocation planning, the levels of cash and debt balances, other demands for cash, such as acquisition activity, general economic and/or business conditions, and board and management discretion. Additionally, as these factors may change over the course of the year, the amount of share repurchase activity during any particular period cannot be predicted and may fluctuate from time to time. Share repurchases may be made from time to time through open-market purchases, in respect of purchases and redemptions of Accenture SCA Class I common shares and Accenture Canada Holdings Inc. exchangeable shares, through the use of Rule 10b5-1 plans and/or by other means. The repurchase program may be accelerated, suspended, delayed or discontinued at any time, without notice. Other Share Redemptions During fiscal 2014, we issued 1,242,209 Accenture plc Class A ordinary shares upon redemptions of an equivalent number of Accenture SCA Class I common shares pursuant to our registration statement on Form S-3 (the "registration statement"). The registration statement allows us, at our option, to issue freely tradable Accenture plc Class A ordinary shares in lieu of cash upon redemptions of Accenture SCA Class I common shares held by current and former members of Accenture Leadership and their permitted transferees. Subsequent Development On September 23, 2014, the Board of Directors of Accenture plc declared a semi-annual cash dividend of $1.02 per share on our Class A ordinary shares for shareholders of record at the close of business on October 17, 2014. Accenture plc will cause Accenture SCA to declare a semi-annual cash dividend of $1.02 per share on its Class I common shares for shareholders of record at the close of business on October 14, 2014. Both dividends are payable on November 17, 2014. 44-------------------------------------------------------------------------------- Table of Contents Obligations and Commitments As of August 31, 2014, we had the following obligations and commitments to make future payments under contracts, contractual obligations and commercial commitments: Payments due by period Less than More than Contractual Cash Obligations (1) Total 1 year 1-3 years 3-5 years 5 years (in millions of U.S. dollars) Long-term debt $ 33 $ - $ 5 $ 6 $ 21 Operating leases 2,164 482 686 388 608 Retirement obligations (2) 107 11 22 22 52 Purchase obligations and other commitments (3) 199 138 61 - - Total $ 2,503 $ 631 $ 774 $ 417 $ 681 _______________ Amounts in table may not total due to rounding. (1) The liability related to unrecognized tax benefits has been excluded from the contractual obligations table because a reasonable estimate of the timing and amount of cash outflows from future tax settlements cannot be determined. For additional information, refer to Note 10 (Income Taxes) to our Consolidated Financial Statements under Item 8, "Financial Statements and Supplementary Data." (2) Amounts represent projected payments under certain unfunded retirement plans for former pre-incorporation partners. Given these plans are unfunded, we pay these benefits directly. These plans were eliminated for active partners after May 15, 2001. (3) Other commitments include, among other things, information technology, software support and maintenance obligations, as well as other obligations in the ordinary course of business that we cannot cancel or where we would be required to pay a termination fee in the event of cancellation. Amounts shown do not include recourse that we may have to recover termination fees or penalties from clients. Off-Balance Sheet Arrangements In the normal course of business and in conjunction with some client engagements, we have entered into contractual arrangements through which we may be obligated to indemnify clients with respect to certain matters. These arrangements with clients can include provisions whereby we have 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, our consulting arrangements may include warranty provisions that our solutions will substantially operate in accordance with the applicable system requirements. Indemnification provisions are also included in arrangements under which we agree 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, we have contractual recourse against third parties for certain payments made by us in connection with arrangements where third party nonperformance has given rise to the client's claim. Payments by us under any of the arrangements described above are generally conditioned on the client making a claim which may be disputed by us 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. 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. For further discussion of these transactions, see Note 16 (Commitments and Contingencies) to our Consolidated Financial Statements under Item 8, "Financial Statements and Supplementary Data." 45-------------------------------------------------------------------------------- Table of Contents Recently Adopted Accounting Pronouncement In September 2013, we 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 our Consolidated Financial Statements. For additional information related to master netting arrangements, see Note 8 (Derivative Financial Instruments) to our Consolidated Financial Statements under Item 8, "Financial Statements and Supplementary Data." 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 us beginning September 1, 2017, including interim periods in our fiscal year 2018, and allows for both retrospective and prospective methods of adoption. We are in the process of determining the method of adoption and assessing the impact of this ASU on our Consolidated Financial Statements. |