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EX-32.2 - SECTION 906 CERTIFICATION OF THE CHIEF FINANCIAL OFFICER - Accenture plcacn-20170531xex322.htm
EX-32.1 - SECTION 906 CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER - Accenture plcacn-20170531xex321.htm
EX-31.2 - SECTION 302 CERTIFICATION OF THE CHIEF FINANCIAL OFFICER - Accenture plcacn-20170531xex312.htm
EX-31.1 - SECTION 302 CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER - Accenture plcacn-20170531xex311.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE QUARTERLY PERIOD ENDED
May 31, 2017
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 June 8, 2017 was 664,134,110 (which number includes 46,147,627 issued shares held by the registrant). The number of shares of the registrant’s Class X ordinary shares, par value $0.0000225 per share, outstanding as of June 8, 2017 was 20,794,696.



ACCENTURE PLC
INDEX
 
 
 
Page

2


PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ACCENTURE PLC
CONSOLIDATED BALANCE SHEETS
May 31, 2017 and August 31, 2016
(In thousands of U.S. dollars, except share and per share amounts)
 
May 31,
2017
 
August 31,
2016
 
(Unaudited)
 
 
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
3,382,208

 
$
4,905,609

Short-term investments
2,639

 
2,875

Receivables from clients, net
4,474,415

 
4,072,180

Unbilled services, net
2,267,310

 
2,150,219

Other current assets
1,079,163

 
845,339

Total current assets
11,205,735

 
11,976,222

NON-CURRENT ASSETS:
 
 
 
Unbilled services, net
50,914

 
68,145

Investments
199,465

 
198,633

Property and equipment, net
1,041,006

 
956,542

Goodwill
4,610,996

 
3,609,437

Deferred contract costs
756,799

 
733,219

Deferred income taxes, net
2,103,664

 
2,077,312

Other non-current assets
1,167,013

 
989,494

Total non-current assets
9,929,857

 
8,632,782

TOTAL ASSETS
$
21,135,592

 
$
20,609,004

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Current portion of long-term debt and bank borrowings
$
2,942

 
$
2,773

Accounts payable
1,291,138

 
1,280,821

Deferred revenues
2,550,233

 
2,364,728

Accrued payroll and related benefits
3,613,189

 
4,040,751

Accrued consumption taxes
383,571

 
358,359

Income taxes payable
914,058

 
362,963

Other accrued liabilities
399,194

 
468,529

Total current liabilities
9,154,325

 
8,878,924

NON-CURRENT LIABILITIES:
 
 
 
Long-term debt
24,732

 
24,457

Deferred revenues
692,621

 
754,812

Retirement obligation
1,476,430

 
1,494,789

Deferred income taxes, net
64,976

 
111,020

Income taxes payable
525,196

 
850,709

Other non-current liabilities
320,652

 
304,917

Total non-current liabilities
3,104,607

 
3,540,704

COMMITMENTS AND CONTINGENCIES

 

SHAREHOLDERS’ EQUITY:
 
 
 
Ordinary shares, par value 1.00 euros per share, 40,000 shares authorized and issued as of May 31, 2017 and August 31, 2016
57

 
57

Class A ordinary shares, par value $0.0000225 per share, 20,000,000,000 shares authorized, 663,944,811 and 654,202,813 shares issued as of May 31, 2017 and August 31, 2016, respectively
15

 
15

Class X ordinary shares, par value $0.0000225 per share, 1,000,000,000 shares authorized, 20,794,696 and 21,917,155 shares issued and outstanding as of May 31, 2017 and August 31, 2016, respectively

 

Restricted share units
1,085,272

 
1,004,128

Additional paid-in capital
3,682,138

 
2,924,729

Treasury shares, at cost: Ordinary, 40,000 shares as of May 31, 2017 and August 31, 2016; Class A ordinary, 46,036,965 and 33,529,739 shares as of May 31, 2017 and August 31, 2016, respectively
(4,109,376
)
 
(2,591,907
)
Retained earnings
8,844,773

 
7,879,960

Accumulated other comprehensive loss
(1,335,523
)
 
(1,661,720
)
Total Accenture plc shareholders’ equity
8,167,356

 
7,555,262

Noncontrolling interests
709,304

 
634,114

Total shareholders’ equity
8,876,660

 
8,189,376

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
21,135,592

 
$
20,609,004

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

3


ACCENTURE PLC
CONSOLIDATED INCOME STATEMENTS
For the Three and Nine Months Ended May 31, 2017 and 2016
(In thousands of U.S. dollars, except share and per share amounts)
(Unaudited)
 
Three Months Ended
 
Nine Months Ended
 
May 31, 2017
 
May 31, 2016
 
May 31, 2017
 
May 31, 2016
REVENUES:
 
 
 
 
 
 
 
Revenues before reimbursements (“Net revenues”)
$
8,867,036

 
$
8,434,757

 
$
25,700,224

 
$
24,393,485

Reimbursements
489,751

 
534,287

 
1,424,348

 
1,438,596

Revenues
9,356,787

 
8,969,044

 
27,124,572

 
25,832,081

OPERATING EXPENSES:
 
 
 
 
 
 
 
Cost of services:
 
 
 
 
 
 
 
Cost of services before reimbursable expenses
5,957,405

 
5,745,205

 
17,556,405

 
16,771,598

Reimbursable expenses
489,751

 
534,287

 
1,424,348

 
1,438,596

Cost of services
6,447,156

 
6,279,492

 
18,980,753

 
18,210,194

Sales and marketing
986,228

 
933,770

 
2,746,544

 
2,639,895

General and administrative costs
548,175

 
449,839

 
1,551,435

 
1,366,745

Pension settlement charge
509,793

 

 
509,793

 

Total operating expenses
8,491,352

 
7,663,101

 
23,788,525

 
22,216,834

OPERATING INCOME
865,435

 
1,305,943

 
3,336,047

 
3,615,247

Interest income
8,549

 
7,679

 
25,574

 
21,532

Interest expense
(3,613
)
 
(3,711
)
 
(10,637
)
 
(12,306
)
Other income (expense), net
(4,213
)
 
(16,207
)
 
(22,846
)
 
(33,391
)
Gain (loss) on sale of businesses
8,242

 

 
(4,107
)
 
553,577

INCOME BEFORE INCOME TAXES
874,400

 
1,293,704

 
3,324,031

 
4,144,659

Provision for income taxes
169,599

 
343,421

 
672,273

 
925,837

NET INCOME
704,801

 
950,283

 
2,651,758

 
3,218,822

Net income attributable to noncontrolling interests in Accenture Holdings plc and Accenture Canada Holdings Inc.
(23,024
)
 
(42,574
)
 
(107,437
)
 
(145,529
)
Net income attributable to noncontrolling interests – other
(12,309
)
 
(10,462
)
 
(31,625
)
 
(30,627
)
NET INCOME ATTRIBUTABLE TO ACCENTURE PLC
$
669,468

 
$
897,247

 
$
2,512,696

 
$
3,042,666

Weighted average Class A ordinary shares:
 
 
 
 
 
 
 
Basic
619,436,804

 
623,725,913

 
621,025,256

 
625,563,431

Diluted
658,770,425

 
666,403,323

 
661,130,306

 
668,525,906

Earnings per Class A ordinary share:
 
 
 
 
 
 
 
Basic
$
1.08

 
$
1.44

 
$
4.05

 
$
4.86

Diluted
$
1.05

 
$
1.41

 
$
3.96

 
$
4.77

Cash dividends per share
$
1.21

 
$
1.10

 
$
2.42

 
$
2.20

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

4


ACCENTURE PLC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Three and Nine Months Ended May 31, 2017 and 2016
(In thousands of U.S. dollars)
(Unaudited)
 
Three Months Ended
 
Nine Months Ended
 
May 31, 2017
 
May 31, 2016
 
May 31, 2017
 
May 31, 2016
NET INCOME
$
704,801

 
$
950,283

 
$
2,651,758

 
$
3,218,822

OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
 
 
 
 
 
 
 
Foreign currency translation
93,168

 
86,022

 
(14,751
)
 
(52,989
)
Defined benefit plans
277,764

 
5,557

 
282,299

 
13,203

Cash flow hedges
32,896

 
36,710

 
58,385

 
58,512

Marketable securities

 
738

 
264

 
640

OTHER COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO ACCENTURE PLC
403,828

 
129,027

 
326,197

 
19,366

Other comprehensive income (loss) attributable to noncontrolling interests
22,955

 
2,846

 
12,374

 
2,079

COMPREHENSIVE INCOME
$
1,131,584

 
$
1,082,156

 
$
2,990,329

 
$
3,240,267




 


 
 
 
 
COMPREHENSIVE INCOME ATTRIBUTABLE TO ACCENTURE PLC
$
1,073,296

 
$
1,026,274

 
$
2,838,893

 
$
3,062,032

Comprehensive income attributable to noncontrolling interests
58,288

 
55,882

 
151,436

 
178,235

COMPREHENSIVE INCOME
$
1,131,584

 
$
1,082,156

 
$
2,990,329

 
$
3,240,267

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


5


ACCENTURE PLC
CONSOLIDATED SHAREHOLDERS’ EQUITY STATEMENT
For the Nine Months Ended May 31, 2017
(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, 2016
$
57

 
40

 
$
15

 
654,203

 
$

 
21,917

 
$
1,004,128

 
$
2,924,729

 
$
(2,591,907
)
 
(33,570
)
 
$
7,879,960

 
$
(1,661,720
)
 
$
7,555,262

 
$
634,114

 
$
8,189,376

Net income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2,512,696

 
 
 
2,512,696

 
139,062

 
2,651,758

Other comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
326,197

 
326,197

 
12,374

 
338,571

Purchases of Class A ordinary shares
 
 
 
 
 
 
 
 
 
 
 
 
 
 
74,078

 
(1,922,500
)
 
(16,298
)
 
 
 
 
 
(1,848,422
)
 
(74,078
)
 
(1,922,500
)
Share-based compensation expense
 
 
 
 
 
 
 
 
 
 
 
 
566,347

 
45,590

 
 
 
 
 
 
 
 
 
611,937

 
 
 
611,937

Purchases/redemptions of Accenture Holdings plc ordinary shares, Accenture Canada Holdings Inc. exchangeable shares and Class X ordinary shares
 
 
 
 
 
 
 
 
 
 
(1,122
)
 
 
 
(67,421
)
 
 
 
 
 
 
 
 
 
(67,421
)
 
(2,284
)
 
(69,705
)
Issuances of Class A ordinary shares:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Employee share programs
 
 
 
 
 
 
9,113

 
 
 
 
 
(537,626
)
 
710,588

 
405,031

 
3,791

 
 
 
 
 
577,993

 
22,927

 
600,920

Upon redemption of Accenture Holdings plc ordinary shares
 
 
 
 
 
 
629

 
 
 
 
 
 
 
4,389

 
 
 
 
 
 
 
 
 
4,389

 
(4,389
)
 

Dividends
 
 
 
 
 
 
 
 
 
 
 
 
52,423

 
 
 
 
 
 
 
(1,551,157
)
 
 
 
(1,498,734
)
 
(68,844
)
 
(1,567,578
)
Other, net
 
 
 
 
 
 
 
 
 
 
 
 


 
(9,815
)
 
 
 
 
 
3,274

 
 
 
(6,541
)
 
50,422

 
43,881

Balance as of May 31, 2017
$
57

 
40

 
$
15

 
663,945

 
$

 
20,795

 
$
1,085,272

 
$
3,682,138

 
$
(4,109,376
)
 
(46,077
)
 
$
8,844,773

 
$
(1,335,523
)
 
$
8,167,356

 
$
709,304

 
$
8,876,660

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


6


ACCENTURE PLC
CONSOLIDATED CASH FLOWS STATEMENTS
For the Nine Months Ended May 31, 2017 and 2016
(In thousands of U.S. dollars)
(Unaudited)
 
May 31, 2017
 
May 31, 2016
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
2,651,758

 
$
3,218,822

Adjustments to reconcile Net income to Net cash provided by operating activities —
 
 
 
Depreciation, amortization and asset impairments
569,720

 
535,637

Share-based compensation expense
611,937

 
584,644

Pension settlement charge
460,908

 

(Gain) loss on sale of business
4,107

 
(553,577
)
Deferred income taxes, net
(328,015
)
 
(35,620
)
Other, net
(29,752
)
 
(45,985
)
Change in assets and liabilities, net of acquisitions —
 
 
 
Receivables from clients, net
(240,703
)
 
(429,085
)
Unbilled services, current and non-current, net
2,489

 
(166,228
)
Other current and non-current assets
(374,306
)
 
(449,271
)
Accounts payable
(29,697
)
 
(61,342
)
Deferred revenues, current and non-current
39,607

 
273,399

Accrued payroll and related benefits
(458,456
)
 
(254,433
)
Income taxes payable, current and non-current
217,034

 
(81,205
)
Other current and non-current liabilities
(65,474
)
 
65,685

Net cash provided by (used in) operating activities
3,031,157

 
2,601,441

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchases of property and equipment
(324,773
)
 
(336,500
)
Purchases of businesses and investments, net of cash acquired
(1,241,500
)
 
(832,548
)
Proceeds from the sale of businesses and investments, net of cash transferred
(24,189
)
 
618,310

Proceeds from sales of property and equipment
8,977

 
2,860

Net cash provided by (used in) investing activities
(1,581,485
)
 
(547,878
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Proceeds from issuance of ordinary shares
600,920

 
525,992

Purchases of shares
(1,992,205
)
 
(1,965,050
)
Proceeds from (repayments of) long-term debt, net
515

 
586

Cash dividends paid
(1,567,578
)
 
(1,438,138
)
Other, net
(9,323
)
 
(13,950
)
Net cash provided by (used in) financing activities
(2,967,671
)
 
(2,890,560
)
Effect of exchange rate changes on cash and cash equivalents
(5,402
)
 
(25,891
)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(1,523,401
)
 
(862,888
)
CASH AND CASH EQUIVALENTS, beginning of period
4,905,609

 
4,360,766

CASH AND CASH EQUIVALENTS, end of period
$
3,382,208

 
$
3,497,878

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,” the “Company” 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, 2016 included in the Company’s Annual Report on Form 10-K filed with the SEC on October 28, 2016.
The accompanying unaudited interim Consolidated Financial Statements have been prepared in accordance with U.S. GAAP, which requires management to make estimates and assumptions that affect amounts reported in the Consolidated Financial Statements and accompanying disclosures. Although these estimates are based on management’s best knowledge of current events and actions that the Company may undertake in the future, actual results may differ from those estimates. The Consolidated Financial Statements reflect all adjustments of a normal, recurring nature that are, in the opinion of management, necessary for a fair presentation of results for these interim periods. The results of operations for the three and nine months ended May 31, 2017 are not necessarily indicative of the results that may be expected for the fiscal year ending August 31, 2017.
Allowances for Client Receivables and Unbilled Services
As of May 31, 2017 and August 31, 2016, total allowances recorded for client receivables and unbilled services were $73,903 and $79,440, respectively.
Accumulated Depreciation
As of May 31, 2017 and August 31, 2016, total accumulated depreciation was $1,915,058 and $1,730,025, respectively.
Recently Adopted Accounting Pronouncement
On September 1, 2016, the Company early adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which simplifies the accounting for share-based payment transactions. The new guidance requires excess tax benefits and tax deficiencies to be recorded in the income statement when the awards vest or are settled. The standard clarifies that all cash payments made on an employee’s behalf for withheld shares should be presented as a financing activity on the Company’s cash flows statement and provides an accounting policy election to account for forfeitures as they occur. In addition, cash flows related to excess tax benefits will no longer be separately classified as a financing activity apart from other income tax cash flows.
The primary impact of the adoption of the ASU on the Company’s Consolidated Financial Statements was the recognition of excess tax benefits in the provision for income taxes rather than Additional paid-in capital, which increased income tax expense by $2,574 and reduced income tax expense by $85,513 for the three and nine months ended May 31, 2017, respectively. The Company elected to continue to estimate forfeitures expected to occur to determine the amount of compensation cost to be recognized in each period. The Company also elected to retrospectively apply the presentation requirements for cash flows related to excess tax benefits for all periods presented, which resulted in an increase to both net cash provided by operating activities and net cash used in financing activities of $81,765 for the nine months ended May 31, 2016. The presentation requirement for cash flows related to employee taxes paid for withheld shares had no impact to any of the periods presented in the Company’s consolidated cash flows statements since these cash flows have historically been presented as a financing activity.

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 FASB, will, or are expected to, result in a change in practice and/or have a financial impact to the Company’s 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 Company is assessing the impact of this ASU on its Consolidated Financial Statements.
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 the Company is continuing to assess the potential impact of this ASU, it currently believes the most significant impact relates to its accounting for office space operating leases.  The Company anticipates this ASU will have a material impact on its Consolidated Balance Sheets but will not have a material impact on its 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
 
The Company 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 the Company will apply the modified retrospective method. The Company expects revenue recognition across its portfolio of services to remain largely unchanged. However, the Company expects to recognize revenue earlier than it does 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 the Company has not finalized its assessment of the impact of the ASU, based on the analysis completed to date, the Company does not currently anticipate that the ASU will have a material impact on its 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
 
Nine Months Ended
 
May 31, 2017
 
May 31, 2016
 
May 31, 2017
 
May 31, 2016
Basic Earnings per share
 
 
 
 
 
 
 
Net income attributable to Accenture plc
$
669,468

 
$
897,247

 
$
2,512,696

 
$
3,042,666

Basic weighted average Class A ordinary shares
619,436,804

 
623,725,913

 
621,025,256

 
625,563,431

Basic earnings per share
$
1.08

 
$
1.44

 
$
4.05

 
$
4.86

Diluted Earnings per share
 
 
 
 
 
 
 
Net income attributable to Accenture plc
$
669,468

 
$
897,247

 
$
2,512,696

 
$
3,042,666

Net income attributable to noncontrolling interests in Accenture Holdings plc and Accenture Canada Holdings Inc. (1)
23,024

 
42,574

 
107,437

 
145,529

Net income for diluted earnings per share calculation
$
692,492

 
$
939,821

 
$
2,620,133

 
$
3,188,195

Basic weighted average Class A ordinary shares
619,436,804

 
623,725,913

 
621,025,256

 
625,563,431

Class A ordinary shares issuable upon redemption/exchange of noncontrolling interests (1)
27,926,781

 
29,561,512

 
28,274,559

 
29,908,025

Diluted effect of employee compensation related to Class A ordinary shares
11,329,345

 
13,053,727

 
11,721,416

 
12,970,542

Diluted effect of share purchase plans related to Class A ordinary shares
77,495

 
62,171

 
109,075

 
83,908

Diluted weighted average Class A ordinary shares
658,770,425

 
666,403,323

 
661,130,306

 
668,525,906

Diluted earnings per share
$
1.05

 
$
1.41

 
$
3.96

 
$
4.77

_______________
(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.

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
 
Nine Months Ended
 
May 31, 2017
 
May 31, 2016
 
May 31, 2017
 
May 31, 2016
Foreign currency translation
 
 
 
 
 
 
 
    Beginning balance
$
(1,027,882
)
 
$
(992,515
)
 
$
(919,963
)
 
$
(853,504
)
             Foreign currency translation
102,087

 
92,038

 
(17,389
)
 
(50,635
)
             Income tax benefit (expense)
102

 
(5,170
)
 
(293
)
 
(3,677
)
             Portion attributable to noncontrolling interests
(9,021
)
 
(846
)
 
2,931

 
1,323

             Foreign currency translation, net of tax
93,168

 
86,022

 
(14,751
)
 
(52,989
)
    Ending balance
(934,714
)
 
(906,493
)
 
(934,714
)
 
(906,493
)
 
 
 
 
 
 
 
 
Defined benefit plans
 
 
 
 
 
 
 
    Beginning balance
(804,969
)
 
(515,973
)
 
(809,504
)
 
(523,619
)
             Actuarial losses
(48,885
)
 

 
(48,885
)
 

             Pension settlement
509,793

 

 
509,793

 

             Reclassifications into net periodic pension and
post-retirement expense (1)
12,407

 
6,633

 
23,437

 
19,838

             Income tax benefit (expense)
(183,086
)
 
(820
)
 
(189,376
)
 
(6,014
)
             Portion attributable to noncontrolling interests
(12,465
)
 
(256
)
 
(12,670
)
 
(621
)
             Defined benefit plans, net of tax
277,764

 
5,557

 
282,299

 
13,203

    Ending balance
(527,205
)
 
(510,416
)
 
(527,205
)
 
(510,416
)
 
 
 
 
 
 
 
 
Cash flow hedges
 
 
 
 
 
 
 
    Beginning balance
93,500

 
(11,486
)
 
68,011

 
(33,288
)
             Unrealized gain (loss)
96,111

 
74,580

 
179,891

 
99,328

             Reclassification adjustments into Cost of services
(38,446
)
 
(9,607
)
 
(85,914
)
 
(5,628
)
             Income tax benefit (expense)
(23,300
)
 
(26,554
)
 
(32,972
)
 
(32,437
)
             Portion attributable to noncontrolling interests
(1,469
)
 
(1,709
)
 
(2,620
)
 
(2,751
)
             Cash flow hedges, net of tax
32,896

 
36,710

 
58,385

 
58,512

    Ending balance (2)
126,396

 
25,224

 
126,396

 
25,224

 
 
 
 
 
 
 
 
Marketable securities
 
 
 
 
 
 
 
    Beginning balance

 
(1,659
)
 
(264
)
 
(1,561
)
             Unrealized gain (loss)

 
1,264

 
462

 
1,094

             Income tax benefit (expense)

 
(491
)
 
(183
)
 
(424
)
             Portion attributable to noncontrolling interests

 
(35
)
 
(15
)
 
(30
)
             Marketable securities, net of tax

 
738

 
264

 
640

    Ending balance

 
(921
)
 

 
(921
)
 
 
 
 
 
 
 
 
Accumulated other comprehensive loss
$
(1,335,523
)
 
$
(1,392,606
)
 
$
(1,335,523
)
 
$
(1,392,606
)
_______________
(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 May 31, 2017, $116,176 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 nine months ended May 31, 2017, the Company completed several individually immaterial acquisitions for total consideration of $1,192,165, net of cash acquired. The pro forma effects of these acquisitions on the Company’s 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,
2016
 
Additions/
Adjustments
 
Foreign
Currency
Translation
 
May 31,
2017
Communications, Media & Technology
$
546,566

 
$
142,895

 
$
(1,350
)
 
$
688,111

Financial Services
854,376

 
231,305

 
2,941

 
1,088,622

Health & Public Service
715,849

 
113,476

 
(19
)
 
829,306

Products
1,112,991

 
466,103

 
(6,138
)
 
1,572,956

Resources
379,655

 
53,351

 
(1,005
)
 
432,001

Total
$
3,609,437

 
$
1,007,130

 
$
(5,571
)
 
$
4,610,996

Goodwill includes immaterial adjustments related to prior period acquisitions.
Intangible Assets
The Company’s definite-lived intangible assets by major asset class were as follows:
 
 
May 31, 2017
 
August 31, 2016
Intangible Asset Class
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Customer-related
 
$
719,108

 
$
(212,053
)
 
$
507,055

 
$
532,753

 
$
(159,774
)
 
$
372,979

Technology
 
107,320

 
(60,612
)
 
46,708

 
100,363

 
(48,270
)
 
52,093

Patents
 
122,868

 
(61,212
)
 
61,656

 
118,906

 
(57,951
)
 
60,955

Other
 
47,115

 
(19,782
)
 
27,333

 
43,804

 
(19,680
)
 
24,124

Total
 
$
996,411

 
$
(353,659
)
 
$
642,752

 
$
795,826

 
$
(285,675
)
 
$
510,151

Total amortization related to the Company’s intangible assets was $41,698 and $108,150 for the three and nine months ended May 31, 2017, respectively. Total amortization related to the Company’s intangible assets was $30,335 and $87,699 for the three and nine months ended May 31, 2016, respectively. Estimated future amortization related to intangible assets held as of May 31, 2017 is as follows:
Fiscal Year
 
Estimated Amortization
Remainder of 2017
 
$
45,361

2018
 
129,543

2019
 
100,322

2020
 
87,324

2021
 
78,433

Thereafter
 
201,769

Total
 
$
642,752


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
The Company’s dividend activity during the nine months ended May 31, 2017 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, 2016
 
$
1.21

 
October 21, 2016
 
$
750,137

 
October 18, 2016
 
$
34,990

 
$
785,127

May 15, 2017
 
$
1.21

 
April 13, 2017
 
$
748,597

 
April 10, 2017
 
$
33,854

 
$
782,451

Total Dividends
 
 
 
 
 
$
1,498,734

 
 
 
$
68,844

 
$
1,567,578

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.
7. DERIVATIVE FINANCIAL INSTRUMENTS
In the normal course of business, the Company uses derivative financial instruments to manage foreign currency exchange rate risk. The Company’s derivative financial instruments consist of deliverable and non-deliverable foreign currency forward contracts.
Cash Flow Hedges
For a cash flow hedge, the effective portion of the change in estimated fair value of a hedging instrument is recorded in Accumulated other comprehensive loss as a separate component of Shareholders’ Equity and is reclassified into Cost of services in the Consolidated Income Statements during the period in which the hedged transaction is recognized. For information related to derivatives designated as cash flow hedges that were reclassified into Cost of services during the three and nine months ended May 31, 2017 and 2016, 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 a net gain of $89,035 and a net loss of $29,279 for the three and nine months ended May 31, 2017, respectively, and a net gain of $16,242 and a net loss of $41,156 for the three and nine months ended May 31, 2016, 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:
 
May 31,
2017
 
August 31,
2016
Assets
 
 
 
Cash Flow Hedges
 
 
 
Other current assets
$
131,964

 
$
71,955

Other non-current assets
90,280

 
45,683

Other Derivatives
 
 
 
Other current assets
29,773

 
11,965

Total assets
$
252,017

 
$
129,603

Liabilities
 
 
 
Cash Flow Hedges
 
 
 
Other accrued liabilities
$
15,788

 
$
10,820

Other non-current liabilities
10,510

 
5,547

Other Derivatives
 
 
 
Other accrued liabilities
21,566

 
17,407

Total liabilities
$
47,864

 
$
33,774

Total fair value
$
204,153

 
$
95,829

Total notional value
$
8,410,659

 
$
7,604,486

The Company utilizes standard counterparty master agreements containing provisions for the netting of certain foreign currency transaction obligations and for the set-off of certain obligations in the event of an insolvency of one of the parties to the transaction. In the Consolidated Balance Sheets, the Company records derivative assets and liabilities at gross fair value. The potential effect of netting derivative assets against liabilities under the counterparty master agreements was as follows:
 
May 31,
2017
 
August 31,
2016
Net derivative assets
$
216,548

 
$
114,785

Net derivative liabilities
12,395

 
18,956

Total fair value
$
204,153

 
$
95,829

8. RETIREMENT AND PROFIT SHARING PLANS
On March 18, 2016, Accenture plc’s Board of Directors approved an amendment to terminate the Company’s U.S. pension plan, effective May 30, 2016, for all active and former employees who were no longer accruing benefits in the pension plan (approximately 16,200 people). The amendment also provided for the creation of a separate defined benefit plan with substantially the same terms for approximately 600 active employees who are currently eligible to accrue benefits.
In May 2017, the Company settled its U.S. pension plan obligations. Plan participants elected to receive either a lump-sum distribution or to transfer benefits to a third-party annuity provider. As a result of the settlement, the Company was relieved of any further obligation under its U.S. pension plan. During the three months ended May 31, 2017, the Company recorded a pension settlement charge of $509,793, and related income tax benefits of $198,219. The charge primarily consisted of unrecognized actuarial losses of $460,908 previously included in Accumulated other comprehensive loss. In connection with the settlement, the Company made a $118,500 cash contribution ($48,885 related to additional actuarial losses and $69,615 to fund previously recorded pension liabilities).

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)


9. INCOME TAXES
The Company applies an estimated annual effective tax rate to its year-to-date operating results to determine the interim provision for income tax expense. In addition, the Company recognizes taxes related to unusual or infrequent items or resulting 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.
The Company’s effective tax rates for the three months ended May 31, 2017 and 2016 were 19.4% and 26.5%, respectively. The Company’s effective tax rates for the nine months ended May 31, 2017 and 2016 were 20.2% and 22.3%, respectively. Absent the pension settlement charge (see Note 8 Retirement and Profit Sharing Plans) and related tax impact recorded during the three months ended May 31, 2017, the effective tax rates would have been 26.6% and 22.7% for the three and nine months ended May 31, 2017, respectively. Absent the gain on the Navitaire divestiture and related tax impact recorded during the second quarter of fiscal 2016, the effective tax rate would have been 24.2% for the nine months ended May 31, 2016. The effective tax rate for the nine months ended May 31, 2017 benefited from the final determination of prior year U.S. taxes and the recognition of excess tax benefits from share based payments as a result of the adoption of ASU No. 2016-09. This was partially offset by a net increase to prior year non-U.S. tax liabilities, primarily related to the Swiss tax matter more fully described below. The effective tax rate for the nine months ended May 31, 2016 also benefited from the final determination of prior year U.S. taxes.
As previously disclosed, on December 8, 2016, the Swiss Federal Tax Administration notified a subsidiary of Accenture that it had opened an investigation to examine the tax treatment of an August 2010 intercompany transfer of certain intellectual property. In June 2017, we resolved this matter with the Swiss tax authorities and, in connection with that resolution, agreed to an assessment of back taxes, which were paid in June. During the three and nine months ended May 31, 2017, we recorded income tax reserves with respect to this matter and do not expect additional charges in subsequent periods related to this resolution.
10. COMMITMENTS AND CONTINGENCIES
Commitments
The Company has the right to purchase or may also be required to purchase substantially all of the remaining outstanding shares of its Avanade Inc. subsidiary (“Avanade”) not owned by the Company at fair value if certain events occur. As of May 31, 2017 and August 31, 2016, the Company has reflected the fair value of $50,662 and $54,221, respectively, related to Avanade’s redeemable common stock and the intrinsic value of the options on redeemable common stock in Other accrued liabilities in the Consolidated Balance Sheets.
Indemnifications and Guarantees
In the normal course of business and in conjunction with certain client engagements, the Company has entered into contractual arrangements through which it may be obligated to indemnify clients with respect to certain matters.
As of May 31, 2017 and August 31, 2016, the Company’s aggregate potential liability to its clients for expressly limited guarantees involving the performance of third parties was approximately $606,000 and $749,000, respectively, of which all but approximately $96,000 and $113,000, respectively, may be recovered from the other third parties if the Company is obligated to make payments to the indemnified parties as a consequence of a performance default by the other third parties. For arrangements with unspecified limitations, the Company cannot reasonably estimate the aggregate maximum potential liability, as it is inherently difficult to predict the maximum potential amount of such payments, due to the conditional nature and unique facts of each particular arrangement.
To date, the Company has not been required to make any significant payment under any of the arrangements described above. The Company has assessed the current status of performance/payment risk related to arrangements with limited guarantees, warranty obligations, unspecified limitations and/or indemnification provisions and believes that any potential payments would be immaterial to the Consolidated Financial Statements, as a whole.

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)


Legal Contingencies
As of May 31, 2017, the Company or its present personnel had been named as a defendant in various litigation matters. The Company and/or its personnel also from time to time are involved in investigations by various regulatory or legal authorities concerning matters arising in the course of its business around the world. Based on the present status of these matters, management believes the range of reasonably possible losses in addition to amounts accrued, net of insurance recoveries, will not have a material effect on the Company’s results of operations or financial condition.
See also Note 9 (Income Taxes) to these Consolidated Financial Statements under Item 1, “Financial Statements.”
11. SEGMENT REPORTING
The Company’s reportable operating segments are the five operating groups, which are Communications, Media & Technology; Financial Services; Health & Public Service; Products; and Resources. Information regarding the Company’s reportable operating segments is as follows:
 
Three Months Ended
 
May 31, 2017
 
May 31, 2016
 
Net
Revenues
 
Operating
Income (1)
 
Net
Revenues
 
Operating
Income
Communications, Media & Technology
$
1,754,657

 
$
286,931

 
$
1,707,707

 
$
259,344

Financial Services
1,865,071

 
321,052

 
1,804,876

 
294,367

Health & Public Service
1,554,424

 
206,570

 
1,539,496

 
243,137

Products
2,429,140

 
402,558

 
2,158,070

 
346,165

Resources
1,245,875

 
158,117

 
1,220,809

 
162,930

Other
17,869

 
(509,793
)
 
3,799

 

Total
$
8,867,036

 
$
865,435

 
$
8,434,757

 
$
1,305,943


 
Nine Months Ended
 
May 31, 2017
 
May 31, 2016
 
Net
Revenues
 
Operating
Income (1)
 
Net
Revenues
 
Operating
Income
Communications, Media & Technology
$
5,061,581

 
$
759,513

 
$
4,919,046

 
$
749,729

Financial Services
5,444,451

 
908,705

 
5,234,821

 
847,686

Health & Public Service
4,566,762

 
594,912

 
4,445,627

 
625,510

Products
7,014,137

 
1,175,019

 
6,142,723

 
923,724

Resources
3,585,458

 
407,691

 
3,639,890

 
468,598

Other
27,835

 
(509,793
)
 
11,378

 

Total
$
25,700,224

 
$
3,336,047

 
$
24,393,485

 
$
3,615,247

_______________ 
(1)
Other Operating Income represents the pension settlement charge related to the termination of the Company’s U.S. pension plan.


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, 2016, 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, 2016.
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 2017” means the 12-month period that will end on August 31, 2017. All references to quarters, unless otherwise noted, refer to the quarters of our fiscal year.
We use the term “in local currency” so that certain financial results may be viewed without the impact of foreign currency exchange rate fluctuations, thereby facilitating period-to-period comparisons of business performance. Financial results “in local currency” are calculated by restating current period activity into U.S. dollars using the comparable prior year period’s foreign currency exchange rates. This approach is used for all results where the functional currency is not the U.S. dollar.
Disclosure Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”) relating to our operations, results of operations and other matters that are based on our current expectations, estimates, assumptions and projections. Words such as “may,” “will,” “should,” “likely,” “anticipates,” “expects,” “intends,” “plans,” “projects,” “believes,” “estimates,” “positioned,” “outlook” and similar expressions are used to identify these forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Forward-looking statements are based upon assumptions as to future events that may not prove to be accurate. Actual outcomes and results may differ materially from what is expressed or forecast in these forward-looking statements. Risks, uncertainties and other factors that might cause such differences, some of which could be material, include, but are not limited to:
Our results of operations could be adversely affected by volatile, negative or uncertain economic conditions and the effects of these conditions on our clients’ businesses and levels of business activity.
Our business depends on generating and maintaining ongoing, profitable client demand for our services and solutions, 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.
The markets in which we compete are highly competitive, and we might not be able to compete effectively.
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.
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 Network 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.
Our services or solutions could infringe upon the intellectual property rights of others or we might lose our ability to utilize the intellectual property of others.
If we are unable to protect our intellectual property rights from unauthorized use or infringement by third parties, our business could be adversely affected.
Our ability to attract and retain business and employees may depend on our reputation in the marketplace.
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 are incorporated in Ireland and a significant portion of our assets are located outside the United States. As a result, it might not be possible for shareholders to enforce civil liability provisions of the federal or state securities laws of the United States. We may also be subject to criticism and negative publicity related to our incorporation in Ireland.
Irish law differs from the laws in effect in the United States and might afford less protection to shareholders.
We might be unable to access additional capital on favorable terms or at all. If we raise equity capital, it may dilute our shareholders’ ownership interest in us.
For a more detailed discussion of these factors, see the information under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended August 31, 2016. 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 significant 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 third quarter of fiscal 2017 increased 5% in U.S. dollars and 7% in local currency compared to the third quarter of fiscal 2016. Net revenues for the nine months ended May 31, 2017 increased 5% in U.S. dollars and 7% in local currency compared to the nine months ended May 31, 2016. Demand for our services and solutions continued to be strong, resulting in growth across most areas of our business. During the third quarter of fiscal 2017, revenue growth in local currency was very strong in Products and strong in Financial Services, while there was modest growth in Resources, Communications, Media & Technology and Health & Public Service. We experienced strong growth in Growth Markets and Europe, while growth in North America continued to moderate. Revenue growth in local currency was strong in both outsourcing and consulting during the third quarter of fiscal 2017. While the business environment remained competitive, we continued to experience pricing improvement in several areas of our business. 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 third quarter of fiscal 2017 increased 4% in U.S. dollars and 6% in local currency compared to the third quarter of fiscal 2016. Net consulting revenues for the nine months ended May 31, 2017 increased 4% in U.S. dollars and 6% in local currency compared to the nine months ended May 31, 2016. Consulting revenue growth in local currency in the third quarter of fiscal 2017 was led by very strong growth in Products, as well as strong growth in Financial Services and modest growth in Resources and Communications, Media & Technology, while Health & Public Service had a slight decline. 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 third quarter of fiscal 2017 increased 6% in U.S. dollars and 7% in local currency compared to the third quarter of fiscal 2016. Net outsourcing revenues for the nine months ended May 31, 2017 increased 7% in U.S. dollars and 8% in local currency compared to the nine months ended May 31, 2016. Outsourcing revenue growth in local currency in the third quarter of fiscal 2017 was led by very strong growth in Products, as well as strong growth in Financial Services and solid growth in Communications, Media & Technology, Resources and Health & Public Service. 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 strengthens against other currencies, resulting in unfavorable currency translation, our revenues, revenue growth and results of operations in U.S. dollars may be lower. 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. When compared to the same periods in fiscal 2016, the U.S. dollar strengthened against many currencies during the three and nine months ended May 31, 2017, resulting in unfavorable currency translation and U.S. dollar revenue growth that was approximately 2% and 1% lower, respectively, than our revenue growth in local currency. Assuming that exchange rates stay within recent ranges for the remainder of fiscal 2017, we estimate that our full fiscal 2017 revenue growth will be approximately 1% lower in U.S. dollars than 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

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development activities; marketing- and advertising-related activities; and certain acquisition-related costs. General and administrative costs primarily include costs for non-client-facing personnel, information systems and office space.
Utilization for the third quarter of fiscal 2017 was 91%, in line with both the second quarter of fiscal 2017 and third quarter of fiscal 2016. 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 411,000 as of May 31, 2017, compared to approximately 375,000 as of May 31, 2016. 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. Annualized attrition, excluding involuntary terminations, for the third quarter of fiscal 2017 was 15%, up from 12% in the second quarter of fiscal 2017 and flat with the third quarter of fiscal 2016. 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 third quarter of fiscal 2017 was 32.8%, compared with 31.9% for the third quarter of fiscal 2016. Gross margin for the nine months ended May 31, 2017 was 31.7%, compared with 31.2% for the nine months ended May 31, 2016. The increase in gross margin for the third quarter and nine months ended May 31, 2017 was principally due to lower payroll costs as a percentage of net revenues compared to the same periods in fiscal 2016.
Sales and marketing and General and administrative costs as a percentage of net revenues were 17.3% for the third quarter of fiscal 2017 and 16.7% for the nine months ended May 31, 2017, compared with 16.4% for both the third quarter and the nine months ended May 31, 2016. We continuously monitor these costs and implement cost-management actions, as appropriate. For the third quarter and nine months ended May 31, 2017 compared to the same periods in fiscal 2016, Sales and marketing costs as a percentage of net revenues were flat and decreased 10 basis points, respectively, and General and administrative costs as a percentage of net revenues increased 90 and 40 basis points, respectively, principally due to higher technology and facilities costs, as well as higher acquisition-related costs.
During the third quarter of fiscal 2017, we recorded a $510 million pension settlement charge and related $198 million reduction in taxes for the U.S. pension plan termination. For additional information, see Note 8 (Retirement and Profit Sharing Plans) to our Consolidated Financial Statements under Item 1, “Financial Statements.”
Operating margin (Operating income as a percentage of Net revenues) for the third quarter of fiscal 2017 was 9.8%, compared with 15.5% in the third quarter of fiscal 2016. Operating margin for the nine months ended May 31, 2017 was 13.0%, compared with 14.8% for the nine months ended May 31, 2016. The pension settlement charge decreased operating margin by 570 and 200 basis points for the third quarter and nine months ended May 31, 2017, respectively. Excluding the effect of the pension settlement charge, operating margin for the third quarter of fiscal 2017 and nine months ended May 31, 2017 would have been 15.5% and 15.0%, respectively.
During the second quarter of fiscal 2016, we recorded a $554 million gain on sale of business and $58 million in taxes related to the divestiture of our Navitaire business.
The effective tax rates for the third quarter of fiscal 2017 and nine months ended May 31, 2017 were 19.4% and 20.2%, respectively. The effective tax rates for the third quarter of fiscal 2016 and nine months ended May 31, 2016 were 26.5% and 22.3%, respectively. Absent the pension settlement charge and related taxes, our effective tax rates for the third quarter of fiscal 2017 and nine months ended May 31, 2017 would have been 26.6% and 22.7%, respectively. Absent the gain on the Navitaire divestiture and related taxes, our effective tax rate for the nine months ended May 31, 2016 would have been 24.2%. For additional information see Note 9 (Income Taxes) to our Consolidated Financial Statements under Item 1, “Financial Statements.”
Diluted earnings per share were $1.05 for the third quarter of fiscal 2017, compared with $1.41 for the third quarter of fiscal 2016. Diluted earnings per share were $3.96 for the nine months ended May 31, 2017, compared with $4.77 for the nine months ended May 31, 2016. The pension settlement charge, net of taxes, decreased diluted earnings per share by $0.47 in both the third quarter of fiscal 2017 and nine months ended May 31, 2017. The gain on sale of

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business, net of taxes, from the Navitaire divestiture increased diluted earnings per share by $0.74 during the nine months ended May 31, 2016. Excluding these impacts, diluted earnings per share would have been $1.52 for the third quarter of fiscal 2017 and $4.43 and $4.03 for the nine months ended May 31, 2017 and 2016, respectively.
We have presented operating income, operating margin, effective tax rate and diluted earnings per share excluding the impacts of the fiscal 2017 pension settlement charge and the fiscal 2016 gain on sale of business from the Navitaire divestiture, as we believe doing so facilitates understanding as to both the impacts of these items and our operating performance in comparison to the prior period.
New Bookings
New bookings for the third quarter of fiscal 2017 were $9.77 billion, with consulting bookings of $5.19 billion and outsourcing bookings of $4.58 billion. New bookings for the nine months ended May 31, 2017 were $27.28 billion, with consulting bookings of $14.70 billion and outsourcing bookings of $12.58 billion.

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Results of Operations for the Three Months Ended May 31, 2017 Compared to the Three Months Ended May 31, 2016
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
(Decrease)
U.S. Dollars
 
Percent
Increase
(Decrease)
Local
Currency
 
Percent of Total Net Revenues
for the Three Months Ended
  
May 31, 2017
 
May 31, 2016
 
 
 
May 31, 2017
 
May 31, 2016
 
(in millions of U.S. dollars)
 
 
 
 
 
 
 
 
OPERATING GROUPS
 
 
 
 
 
 
 
 
 
 
 
Communications, Media & Technology
$
1,755

 
$
1,708

 
3
 %
 
4
%
 
20
%
 
20
%
Financial Services
1,865

 
1,805

 
3

 
6

 
21

 
21

Health & Public Service
1,554

 
1,539

 
1

 
2

 
18

 
18

Products
2,429

 
2,158

 
13

 
15

 
27

 
26

Resources
1,246

 
1,221

 
2

 
4

 
14

 
15

Other
18

 
4

 
n/m

 
n/m

 

 

TOTAL NET REVENUES
8,867

 
8,435

 
5
 %
 
7
%
 
100
%
 
100
%
Reimbursements
490

 
534

 
(8
)
 
 
 
 
 
 
TOTAL REVENUES
$
9,357

 
$
8,969

 
4
 %
 
 
 
 
 
 
GEOGRAPHIC REGIONS
 
 
 
 
 
 
 
 
 
 
 
North America
$
4,123

 
$
4,017

 
3
 %
 
3
%
 
47
%
 
48
%
Europe
3,043

 
2,946

 
3

 
9

 
34

 
35

Growth Markets
1,701

 
1,472

 
16

 
13

 
19

 
17

TOTAL NET REVENUES
$
8,867

 
$
8,435

 
5
 %
 
7
%
 
100
%
 
100
%
TYPE OF WORK
 
 
 
 
 
 
 
 
 
 
 
Consulting
$
4,820

 
$
4,621

 
4
 %
 
6
%
 
54
%
 
55
%
Outsourcing
4,047

 
3,813

 
6

 
7

 
46

 
45

TOTAL NET REVENUES
$
8,867

 
$
8,435

 
5
 %
 
7
%
 
100
%
 
100
%
_______________ 
n/m = not meaningful
Amounts in table may not total due to rounding.
Net Revenues
Effective December 1, 2016, we changed the structure of our Communications, Media & Technology operating group to reflect the continued convergence of the communications, media and entertainment industries, as well as the opportunity we are seeing in the software and platform sectors. The new structure includes the following industry groups: Communications & Media (Telecommunications, Cable, Broadcasting and Content & Publishing); Software & Platforms (Internet & Social and Software); and Electronics & High Tech (Network Equipment Providers, Aerospace & Defense, Consumer Technology, Semiconductor, Medical Equipment and Enterprise Markets). The following net revenues commentary discusses local currency net revenue changes for the third quarter of fiscal 2017 compared to the third quarter of fiscal 2016:
Operating Groups
Communications, Media & Technology net revenues increased 4% in local currency, led by Software & Platforms in North America, as well as growth across all industry groups in Growth Markets. This growth was partially offset by a decline in Communications & Media in Europe, as disruptions in the market continue to impact demand, and we expect this trend to continue.
Financial Services net revenues increased 6% in local currency, driven by Banking & Capital Markets across all geographic regions.
Health & Public Service net revenues increased 2% in local currency, driven by Public Service in Europe and Growth Markets, partially offset by declines in Public Service and Health in North America.

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Products net revenues increased 15% in local currency, driven by strong growth across all industry groups and geographic regions, led by Consumer Goods, Retail & Travel Services.
Resources net revenues increased 4% in local currency, driven by growth in Utilities in Europe and Chemicals & Natural Resources across all geographic regions. This growth was partially offset by declines in Energy across all geographic regions.
Geographic Regions
North America net revenues increased 3% in local currency, driven by the United States.
Europe net revenues increased 9% in local currency, driven by the United Kingdom, Germany and France.
Growth Markets net revenues increased 13% in local currency, led by Japan, as well as Australia and Singapore.
Operating Expenses
Operating expenses for the third quarter of fiscal 2017 increased $828 million, or 11%, over the third quarter of fiscal 2016, and increased as a percentage of revenues to 90.8% from 85.4% during this period. Operating expenses before reimbursable expenses for the third quarter of fiscal 2017 increased $873 million, or 12%, over the third quarter of fiscal 2016, and increased as a percentage of net revenues to 90.2% from 84.5%.
Cost of Services
Cost of services for the third quarter of fiscal 2017 increased $168 million, or 3%, over the third quarter of fiscal 2016, and decreased as a percentage of revenues to 68.9% from 70.0% during this period. Cost of services before reimbursable expenses for the third quarter of fiscal 2017 increased $212 million, or 4%, over the third quarter of fiscal 2016, and decreased as a percentage of net revenues to 67.2% from 68.1% during this period. Gross margin for the third quarter of fiscal 2017 increased to 32.8% from 31.9% during this period. The increase in gross margin for the third quarter of fiscal 2017 was principally due to lower payroll costs as a percentage of net revenues, compared to the third quarter of fiscal 2016.
Sales and Marketing
Sales and marketing expense for the third quarter of fiscal 2017 increased $52 million, or 6%, over the third quarter of fiscal 2016, and remained flat as a percentage of net revenues at 11.1%.
General and Administrative Costs
General and administrative costs for the third quarter of fiscal 2017 increased $98 million, or 22%, over the third quarter of fiscal 2016, and increased as a percentage of net revenues to 6.2% from 5.3% during this period. The increase as a percentage of net revenues was principally due to higher technology and facilities costs, as well as higher acquisition-related costs.
Pension Settlement Charge
We recorded a pension settlement charge of $510 million during the third quarter of fiscal 2017 as a result of the termination of our U.S. pension plan. For additional information, refer to Note 8 (Retirement and Profit Sharing Plans) to our Consolidated Financial Statements above under Item 1,“Financial Statements.”

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Operating Income and Operating Margin
Operating income for the third quarter of fiscal 2017 decreased $441 million, or 34%, from the third quarter of fiscal 2016. The pension settlement charge decreased operating margin by 570 basis points. Excluding the effect of this charge, operating margin for the third quarter of fiscal 2017 remained flat compared to the third quarter of fiscal 2016.
Operating income and operating margin for each of the operating groups were as follows:
 
Three Months Ended
 
 
  
May 31, 2017
 
May 31, 2016
 
 
  
Operating
Income
 
Operating
Margin
 
Operating
Income
 
Operating
Margin
 
Increase
(Decrease)
 
 (in millions of U.S. dollars)
 

Communications, Media & Technology
$
287

 
16
%
 
$
259

 
15
%
 
$
28

Financial Services
321

 
17

 
294

 
16

 
27

Health & Public Service
207

 
13

 
243

 
16

 
(37
)
Products
403

 
17

 
346

 
16

 
56

Resources
158

 
13

 
163

 
13

 
(5
)
Pension Settlement Charge (1)
(510
)
 

 

 

 
(510
)
Operating Income (GAAP)
$
865

 
9.8
%
 
$
1,306

 
15.5
%
 
$
(441
)
Pension Settlement Charge (1)
510

 


 

 


 
510

Adjusted Operating Income (non-GAAP)
$
1,375

 
15.5
%
 
$
1,306

 
15.5
%
 
$
69

 
_______________ 
Amounts in table may not total due to rounding.
(1)
Represents the pension settlement charge related to the termination of our U.S. pension plan.
We estimate that the aggregate percentage impact of foreign currency exchange rates on our operating income during the third quarter of fiscal 2017 was similar to that disclosed for net revenue. The commentary below provides insight into other factors affecting operating group performance and operating margin for the third quarter of fiscal 2017 compared with the third quarter of fiscal 2016:
Communications, Media & Technology operating income increased primarily due to outsourcing revenue growth.
Financial Services operating income increased primarily due to consulting revenue growth.
Health & Public Service operating income decreased primarily due to lower outsourcing contract profitability and a decline in consulting revenues.
Products operating income increased due to strong revenue growth.
Resources operating income was relatively flat year-over-year.
Provision for Income Taxes
The effective tax rate for the third quarter of fiscal 2017 was 19.4%, compared with 26.5% for the third quarter of fiscal 2016. Absent the pension settlement charge and related tax impact, the tax rate for the third quarter of fiscal 2017 would have been 26.6%. The effective tax rate for the third quarter of fiscal 2017 benefited from adjustments to prior year U.S. tax liabilities. This was offset by a net increase to prior year non-U.S. tax liabilities, primarily related to the Swiss tax matter. For more information, see Note 9 (Income Taxes) to our Consolidated Financial Statements under Item 1, “Financial Statements.” Our provision for income taxes is based on many factors and subject to volatility year to year. The effective tax rate for interim periods can vary because of the timing of when certain events occur during the year.
Net Income Attributable to Noncontrolling Interests
Net income attributable to noncontrolling interests for the third quarter of fiscal 2017 decreased $18 million, or 33%, from the third quarter of fiscal 2016. The decrease was due to lower net income of $245 million, primarily driven by the pension settlement charge recorded during the third quarter of fiscal 2017.

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Earnings Per Share
Diluted earnings per share were $1.05 for the third quarter of fiscal 2017, compared with $1.41 for the third quarter of fiscal 2016. The $0.36 decrease in our diluted earnings per share included the impact of the pension settlement charge, net of taxes, which decreased diluted earnings per share for the third quarter of fiscal 2017 by $0.47. Excluding the impact of this charge, diluted earnings per share for the third quarter of fiscal 2017 increased $0.11 compared with the third quarter of fiscal 2016, due to an increase of $0.07 from higher revenues and operating results, $0.02 from higher non-operating income and $0.02 from lower weighted average shares outstanding. For information regarding our earnings per share calculations, see Note 2 (Earnings Per Share) to our Consolidated Financial Statements under Item 1, “Financial Statements.”
Results of Operations for the Nine Months Ended May 31, 2017 Compared to the Nine Months Ended May 31, 2016
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:
  
Nine Months Ended
 
Percent
Increase(Decrease)
U.S. Dollars
 
Percent
Increase (Decrease)
Local
Currency
 
Percent of Total Net Revenues
for the Nine Months Ended
  
May 31, 2017
 
May 31, 2016
 
 
 
May 31, 2017
 
May 31, 2016
 
(in millions of U.S. dollars)
 
 
 
 
 
 
 
 
OPERATING GROUPS
 
 
 
 
 
 
 
 
 
 
 
Communications, Media & Technology
$
5,062

 
$
4,919

 
3
 %
 
3
%
 
20
%
 
20
%
Financial Services
5,444

 
5,235

 
4

 
7

 
21

 
22

Health & Public Service
4,567

 
4,446

 
3

 
3

 
18

 
18

Products
7,014