Item 7. Management’s Discussion and Analysis
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 37
The majority of our contracts are terminable by the client on short notice with little or no termination penalties, and some without notice. Only the non-cancelable portion of these contracts is included in our remaining performance obligations disclosed in Note 2 (Revenues) to our Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data.” Accordingly, a significant portion of what we consider contract bookings is not included in our remaining performance obligations.
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.
Revenue Recognition
Determining the method and amount of revenue to recognize requires us to make judgments and estimates. Specifically, complex arrangements with nonstandard terms and conditions may require contract interpretation to determine the appropriate accounting, including whether promised goods and services specified in an arrangement are distinct performance obligations and should be accounted for separately. Other judgments include determining whether performance obligations are satisfied over time or at a point in time and the selection of the method to measure progress towards completion.
We measure progress towards completion for technology integration consulting services and some non-technology consulting services using costs incurred to date relative to total estimated costs at completion. Revenues, including estimated fees, are recorded proportionally as costs are incurred. The amount of revenue recognized for these contracts in a period is dependent on our ability to estimate total contract costs. We continually evaluate our estimates of total contract costs based on available information and experience.
Additionally, the nature of our contracts gives rise to several types of variable consideration, including incentive fees. Many contracts include incentives or penalties 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 reviews prior to signing such contracts to evaluate whether these incentives are reasonably achievable. Our estimates are monitored over the lives of our contracts and are based on an assessment of our anticipated performance, historical experience and other information available at the time.
For additional information, see Note 2 (Revenues) to our Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data.”
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. 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. We release stranded tax effects from Accumulated other comprehensive loss using the specific identification approach for our defined benefit plans and the portfolio approach for other items.
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ACCENTURE 2023 FORM 10-K
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 38
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 indefinitely reinvested earnings. For additional information, see Note 11 (Income Taxes) to our Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data.”
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 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 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 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 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 these positions.
Revenues by Segment/Geographic Market
Our three reportable operating segments are our geographic markets, North America, Europe and Growth Markets. In addition to reporting revenues by geographic market and industry group, we also report revenues by two types of work: consulting and managed services, which represent the services sold by our geographic markets. Consulting revenues, which include strategy, management and technology consulting and technology integration consulting, reflect a finite, distinct project or set of projects with a defined outcome and typically a defined set of specific deliverables. Managed services 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 geographic markets work together to sell and implement certain contracts. The resulting revenues and costs from these contracts may be apportioned among the participating geographic markets. Generally, operating expenses for each geographic market 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 geographic markets affect revenues and operating expenses within our geographic markets to differing degrees. The mix between consulting and managed services is not uniform among our geographic markets. Local currency fluctuations also tend to affect our geographic markets 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.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 39
Results of Operations for Fiscal 2023 Compared to Fiscal 2022
Revenues by geographic market, industry group and type of work are as follows:
Fiscal Percent
Increase (Decrease)
U.S.
Dollars Percent
Increase (Decrease)
Local
Currency Percent of Total
Revenues
for Fiscal
(in millions of U.S. dollars) 2023 2022 2023 2022
Geographic Markets (1)
North America $ 30,296 $ 29,121 4 % 4 % 47 % 47 %
Europe 21,285 20,264 5 11 33 33
Growth Markets 12,531 12,209 3 12 20 20
Total Revenues $ 64,112 $ 61,594 4 % 8 % 100 % 100 %
Industry Groups
Communications, Media & Technology $ 11,453 $ 12,200 (6) % (3) % 18 % 20 %
Financial Services 12,132 11,811 3 7 19 19
Health & Public Service 12,560 11,226 12 14 20 18
Products 19,104 18,275 5 9 30 30
Resources 8,863 8,082 10 15 14 13
Total Revenues $ 64,112 $ 61,594 4 % 8 % 100 % 100 %
Type of Work
Consulting $ 33,613 $ 34,076 (1) % 3 % 52 % 55 %
Managed Services (2) 30,499 27,518 11 14 48 45
Total Revenues $ 64,112 $ 61,594 4 % 8 % 100 % 100 %
Amounts in table may not total due to rounding.
(1) In the first quarter of fiscal 2024, our Middle East and Africa market units will move from Growth Markets to Europe, and the Europe market will be referred to as our Europe, Middle East and Africa (EMEA) geographic market.
(2) Previously referred to as our outsourcing business.
Revenues
The following revenues commentary discusses local currency revenue changes for fiscal 2023 compared to fiscal 2022:
Geographic Markets
• North America revenues increased 4% in local currency, led by growth in Public Service for our U.S. federal business, Health and Utilities. These increases were partially offset by declines in Communications & Media, High Tech, Banking & Capital Markets and Software & Platforms. Revenue growth was driven by the United States.
• Europe revenues increased 11% in local currency, led by growth in Industrial, Banking & Capital Markets and Public Service. Revenue growth was driven by Germany, Italy and France.
• Growth Markets revenues increased 12% in local currency, led by growth in Chemicals & Natural Resources, Public Service and Banking & Capital Markets. Revenue growth was driven by Japan.
Operating Expenses
Operating expenses for fiscal 2023 increased $3,075 million, or 6%, over fiscal 2022, and increased as a percentage of revenues to 86.3% compared to 84.8% during this period. The increase as a percentage of revenues is primarily due to business optimization costs of $1,063 million recorded during fiscal 2023.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 40
Operating expenses by category are as follows:
Fiscal
(in millions of U.S. dollars) 2023 2022 Increase
(Decrease)
Operating Expenses $ 55,302 86.3 % $ 52,227 84.8 % $ 3,075
Cost of services 43,380 67.7 41,893 68.0 1,487
Sales and marketing 6,583 10.3 6,108 9.9 474
General and administrative costs 4,276 6.7 4,226 6.9 50
Business optimization costs 1,063 1.7 — — 1,063
Amounts in table may not total due to rounding.
Cost of Services
Cost of services for fiscal 2023 increased $1,487 million, or 4%, over fiscal 2022, and decreased as a percentage of revenues to 67.7% from 68.0% during this period. Gross margin for fiscal 2023 increased to 32.3% compared to 32.0% in fiscal 2022. The increase in gross margin for fiscal 2023 was primarily due to lower labor costs, including lower subcontractor costs, partially offset by higher non-payroll costs, primarily for travel compared to fiscal 2022.
Sales and Marketing
Sales and marketing expense for fiscal 2023 increased $474 million, or 8%, over fiscal 2022, and increased as a percentage of revenues to 10.3% over 9.9% during this period due to higher selling and other business development costs as a percentage of revenues.
General and Administrative Costs
General and administrative costs for fiscal 2023 increased $50 million, or 1%, over fiscal 2022, and decreased as a percentage of revenues to 6.7% from 6.9% during this period.
Business Optimization Costs
During fiscal 2023, we recorded business optimization costs of $1,063 million, primarily for employee severance. For additional information, see Note 1 (Summary of Significant Accounting Policies) to our Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data.”
Operating Income and Operating Margin
Operating income for fiscal 2023 decreased $557 million, or 6%, from fiscal 2022. Operating margin for fiscal 2023 was 13.7%, compared with 15.2% for fiscal 2022. The business optimization costs reduced operating margin by 170 basis points. Excluding these costs, operating margin for fiscal 2023 increased 20 basis points to 15.4%.
Operating income and operating margin for each of the geographic markets are as follows:
Fiscal
2023 2022
(in millions of U.S. dollars) Operating
Income Operating
Margin Operating
Income Operating
Margin Increase
(Decrease)
North America $ 4,474 15 % $ 4,977 17 % $ (503)
Europe 2,333 11 2,437 12 (105)
Growth Markets 2,004 16 1,953 16 51
Total $ 8,810 13.7 % $ 9,367 15.2 % $ (557)
Amounts in table may not total due to rounding.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 41
Operating Income and Operating Margin Excluding Business Optimization Costs (Non-GAAP)
Fiscal
2023 2022
(in millions of U.S. dollars) Operating
Income (GAAP) Business
Optimization (1) Operating
Income (Non-GAAP) Operating
Margin
(Non-GAAP) Operating
Income (GAAP) Operating
Margin (GAAP) Increase
(Decrease)
North America $ 4,474 $ 465 $ 4,939 16 % $ 4,977 17 % $ (38)
Europe 2,333 433 2,766 13 2,437 12 328
Growth Markets 2,004 165 2,169 17 1,953 16 216
Total $ 8,810 $ 1,063 $ 9,873 15.4 % $ 9,367 15.2 % $ 506
Amounts in table may not total due to rounding.
(1) Costs recorded in connection with our business optimization initiatives, primarily for employee severance.
We estimate that the aggregate percentage impact of foreign currency exchange rates on our operating income during fiscal 2023 was similar to that disclosed for revenue for each geographic market. In addition, during fiscal 2023 each geographic market’s operating income was unfavorably impacted by business optimization costs. The commentary below provides insight into other factors affecting geographic market performance and operating income, including the impact of foreign currency exchange rates where significant for fiscal 2023 compared with fiscal 2022:
• North America operating income decreased as revenue growth was more than offset by higher labor costs, including an increase in selling and other business development costs as a percentage of revenues.
• Europe operating income increased due to revenue growth in local currency, partially offset by the negative impact of foreign currency exchange rates.
• Growth Markets operating income increased primarily due to higher contract profitability and revenue growth in local currency, partially offset by the negative impact of foreign currency exchange rates.
Interest Income
Interest income for fiscal 2023 was $280 million, an increase of $235 million over fiscal 2022. The increase was primarily due to higher interest rates.
Other Income (Expense), net
Other income (expense), net primarily consists of foreign currency gains and losses, non-operating components of pension expense, as well as gains and losses associated with our investments. During fiscal 2023, Other income (expense) increased $169 million over fiscal 2022, primarily due to higher gains on investments, partially offset by foreign currency exchange losses. For additional information on investments, see Note 1 (Summary of Significant Accounting Policies) to our Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data.”
Loss on Disposition of Russia Business
We recorded a loss from the disposal of our business in Russia of $96 million during fiscal 2022.
Income Tax Expense
The effective tax rate for fiscal 2023 was 23.4%, compared with 24.0% for fiscal 2022. Absent the business optimization costs of $1,063 million and related reduction in tax expense of $247 million, and the investment gain of $253 million and related tax expense of $9 million, our effective tax rate for fiscal 2023 was 23.9%.The slightly lower effective tax rate for fiscal 2023 was primarily due to lower tax expense from the geographic distribution of earnings, partially offset by lower tax benefits from share-based payments. For additional information, see Note 11 (Income Taxes) to our Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data.”
Net Income Attributable to Noncontrolling Interests
Net income attributable to noncontrolling interests reflects the income earned or expense incurred attributable to the equity interest that some current and former members of Accenture Leadership and their permitted transferees have in our Accenture Canada Holdings Inc. subsidiary. See “Business—Organizational Structure.” Noncontrolling interests also includes amounts primarily attributable to noncontrolling shareholders in our Avanade Inc. subsidiary. Net income attributable to Accenture plc represents the income attributable to the shareholders of Accenture plc.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 42
Earnings Per Share
Diluted earnings per share were $10.77 for fiscal 2023, compared with $10.71 for fiscal 2022. The $816 million of business optimization costs, net of related taxes, decreased diluted earnings per share by $1.28 and the $244 million investment gain, net of related taxes, increased diluted earnings per share by $0.38 for fiscal 2023. Excluding these impacts, diluted earnings per share were $11.67 for fiscal 2023. For information regarding our earnings per share calculations, see Note 3 (Earnings Per Share) to our Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data.”
The increase in diluted earnings per share is due to the following factors:
Earnings Per Share Fiscal 2023
FY22 As Reported $ 10.71
Higher revenue and operating results 0.60
Higher non-operating income (excluding loss on disposition of Russia business) 0.18
Loss on disposition of Russia business recorded in fiscal 2022 0.15
Lower share count 0.08
Higher effective tax rate (excluding loss on disposition of Russia business) (0.02)
Higher net income attributable to noncontrolling interests (0.03)
FY23 As Adjusted $ 11.67
Gain on an investment, net of tax 0.38
Business optimization costs (1.28)
FY23 As Reported $ 10.77
Results of Operations for Fiscal 2022 Compared to Fiscal 2021
Our Annual Report on Form 10-K for the fiscal year ended August 31, 2022 includes a discussion and analysis of our financial condition and results of operations for the year ended August 31, 2021 in Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 43
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. We could raise additional funds through other 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, 2023, Cash and cash equivalents were $9.0 billion, compared with $7.9 billion as of August 31, 2022.
Cash flows from operating, investing and financing activities, as reflected in our Consolidated Cash Flows Statements, are summarized in the following table:
Fiscal Change
(in millions of U.S. dollars) 2023 2022
Net cash provided by (used in):
Operating activities $ 9,524 $ 9,541 $ (17)
Investing activities (2,622) (4,261) 1,638
Financing activities (5,645) (5,311) (334)
Effect of exchange rate changes on cash and cash equivalents (101) (248) 147
Net increase (decrease) in cash and cash equivalents $ 1,155 $ (278) $ 1,434
Amounts in table may not total due to rounding.
Operating activities: The $17 million decrease in operating cash flows were primarily due to higher spending on certain compensation payments, partially offset by higher collections on net client balances (receivables from clients, contract assets and deferred revenues).
Investing activities: The $1,638 million decrease in cash used was primarily due to lower spending on business acquisitions and higher proceeds from the sale of businesses and investments. For additional information, see Note 6 (Business Combinations and Dispositions) to our Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data.”
Financing activities: The $334 million increase in cash used was primarily due to an increase in cash dividends paid as well as an increase in the net purchase of shares, partially offset by increases in net proceeds from share issuances and net proceeds from borrowings. For additional information, see Note 14 (Shareholders’ Equity) to our Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data.”
We believe that our current and longer-term working capital, investments and other general corporate funding requirements will be satisfied for the next twelve months and thereafter through cash flows from operations and, to the extent necessary, from our borrowing facilities and future financial market activities.
Substantially all of our cash is held in jurisdictions where there are no regulatory restrictions or material tax effects on the free flow of funds. In addition, domestic cash inflows for our Irish parent, principally dividend distributions from lower-tier subsidiaries, have been sufficient to meet our historic cash requirements, and we expect this to continue into the future.
Share Purchases and Redemptions
We intend to continue to use a significant portion of cash generated from operations for share repurchases during fiscal 2024. 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 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. For additional information, see Note 14 (Shareholders’ Equity) to our Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data.”
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 44
Subsequent Events
See Note 14 (Shareholders’ Equity) to our Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data.”
Obligations and Commitments
As of August 31, 2023, we had commitments of $3.7 billion related to cloud hosting arrangements, software subscriptions, information technology services and 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. Payments under these commitments are estimated to be made as follows:
(in millions of U.S. dollars) Payments (1)
Less than 1 year $ 973
1-3 years 1,382
3-5 years 1,186
More than 5 years 137
Total $ 3,678
(1) Amounts do not include recourse that we may have to recover termination fees or penalties from clients.
For information about borrowing facilities and leases, see Note 10 (Borrowings and Indebtedness) and Note 8 (Leases) to our Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data.”
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. To date, we have not been required to make any significant payment under any of these arrangements. For further discussion of these transactions, see Note 15 (Commitments and Contingencies) to our Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data.”
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk 45