ACCENTURE PLC The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements and related Notes included elsewhere in this Annual Report on Form 10-K. This discussion and analysis also contains forward-looking statements and should also be read in conjunction with the disclosures and information contained in "Disclosure Regarding Forward-Looking Statements" and "Risk Factors" in this Annual Report on Form 10-K. We use the terms "Accenture," "we," the "Company," "our" and "us" in this report to refer toAccenture plc and its subsidiaries. All references to years, unless otherwise noted, refer to our fiscal year, which ends onAugust 31 . For example, a reference to "fiscal 2020" means the 12-month period that ended onAugust 31, 2020 . 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 intoU.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 theU.S. dollar. Change in Reportable Segments EffectiveMarch 1, 2020 , we began managing our business under a new growth model through our three geographic markets,North America ,Europe and Growth Markets, which became our reportable segments in the third quarter of fiscal 2020. Prior to this change, our reportable segments were our five industry groups, Communications, Media & Technology, Financial Services, Health & Public Service, Products and Resources. For additional information, see our Form 8-K filed onJanuary 13, 2020 . Overview The COVID-19 pandemic has caused a significant loss of life, disrupted businesses and restricted travel worldwide, causing significant economic disruption and uncertainty. This disruption and uncertainty has had and continues to have a significant adverse impact on our business, operations and financial results. For fiscal 2020, our revenues grew 3% inU.S. dollars and 4% in local currency, a decrease compared to the revenue growth experienced in fiscal 2019. Revenues for the first half of fiscal 2020 grew 7% inU.S. dollars and 8% in local currency compared to the same period in fiscal 2019. OnMarch 11, 2020 , theWorld Health Organization declared COVID-19 a pandemic, and during the second half of fiscal 2020, our revenues declined 1% inU.S. dollars and were flat in local currency compared to the same period in fiscal 2019. The pandemic impacted almost all aspects of our business and forced us to quickly adapt the way we operate. As described below, we took actions to shift the majority of our workforce to a remote working environment to ensure the continuity of our business, including the sales and delivery of services to our clients, and to respond to a rapidly changing demand environment from our clients. As a result of the COVID-19 pandemic, we enabled approximately 95% of our global workforce to work from home and suspended substantially all business travel. We continue to develop and implement our comprehensive plan to return to our and our clients' offices where permissible, with our people's safety and the needs of our clients guiding how we manage our phased transition. We experienced reduced demand for our services during the second half of fiscal 2020 as some clients reprioritized and delayed certain work as a result of the pandemic, particularly in the Travel, Retail, Energy, High Tech and Industrial industries and primarily for our consulting services. We also experienced increased demand in the Public Service, Software & Platforms and Life Sciences industries and from clients across all of our industry groups in connection with their digital transformations, the adoption of cloud technologies and security-related services. In this current market, the level of revenues we achieve is based on our ability to deliver market-leading services while deploying skilled teams of professionals effectively.
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Item 7. Management's Discussion and Analysis of Financial
ACCENTURE 2020 FORM 10-K Condition and Results of Operations 29
For further information on the impact to our results for fiscal 2020, please see
"Summary of Results" below. For a discussion of risks related to the COVID-19
pandemic, see "Our results of operations have been significantly adversely
affected and could in the future be materially adversely impacted by the
COVID-19 pandemic." under Item 1A, "Risk Factors."
Summary of Results
Revenues for fiscal 2020 increased 3% in U.S. dollars and 4% in local currency
compared to fiscal 2019. This included the impact of a decline in reimbursable
travel costs, which reduced revenues approximately 1%. During fiscal 2020,
revenue growth in local currency was strong in Growth Markets, solid in North
America and flat in Europe . We experienced local currency revenue growth that
was very strong in Health & Public Service, modest in Products, Communications,
Media & Technology and Financial Services and flat in Resources. Revenue growth
in local currency was strong in outsourcing and modest in consulting during
fiscal 2020. The business environment remained competitive, and the changes in
demand have led to increased pricing pressure, particularly for our consulting
services. We use the term "pricing" to mean the contract profitability or margin
on the work that we sell.
In our consulting business, revenues for fiscal 2020 were flat in U.S. dollars
and increased 2% in local currency compared to fiscal 2019. This included the
impact of a decline in reimbursable travel costs, which reduced consulting
revenues approximately 2%. Consulting revenue growth in local currency in fiscal
2020 was led by strong growth in Growth Markets and modest growth in North
America , partially offset by a modest decline in Europe . Our consulting revenue
continues to be driven by 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, revenues for fiscal 2020 increased 6% in U.S.
dollars and 7% in local currency compared to fiscal 2019. Outsourcing revenue
growth in local currency in fiscal 2020 was led by strong growth across all
geographic markets. We continue to experience growing demand to assist clients
with the operation and maintenance of digital-related services and cloud
enablement. 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. The
majority of our revenues are denominated in currencies other than the U.S.
dollar, including the Euro, Japanese yen, and U.K. pound. There continues to be
volatility in foreign currency exchange rates. Unfavorable fluctuations in
foreign currency exchange rates have had and could have in the future a material
effect on our financial results. If the U.S. dollar weakens against other
currencies, resulting in favorable currency translation, our revenues, revenue
growth and results of operations in U.S. dollars may be higher. If the U.S.
dollar strengthens against other currencies, resulting in unfavorable currency
translation, our revenues, revenue growth and results of operations in U.S.
dollars may be lower. The U.S. dollar strengthened against various currencies
during fiscal 2020, resulting in unfavorable currency translation and U.S.
dollar revenue growth that was approximately 1% lower than our revenue growth in
local currency for the year. Assuming that exchange rates stay within recent
ranges, we estimate that our fiscal 2021 revenue growth in U.S. dollars will be
approximately 2% higher than our revenue growth in local currency.
The primary categories of operating expenses include Cost of services, Sales and
marketing and General and administrative costs. Cost of services is primarily
driven by the cost of client-service personnel, which consists mainly of
compensation, subcontractor and other personnel costs, and non-payroll costs on
outsourcing contracts. Cost of services includes a variety of activities such
as: contract delivery; recruiting and training; software development; and
integration of acquisitions. Sales and marketing costs are driven primarily by:
compensation costs for business development activities; marketing- and
advertising-related activities; and certain acquisition-related costs. General
and administrative costs primarily include costs for non-client-facing
personnel, information systems, office space and certain acquisition-related
costs.
Utilization for fiscal 2020 was 90%, down from 91% in fiscal 2019. We 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.
Our headcount, the majority of which serve our clients, increased to
approximately 506,000 as of August 31, 2020 , compared to approximately 492,000
as of August 31, 2019 . The year-over-year increase in our headcount reflects an
overall increase in demand for our services and solutions, as well as headcount
added in connection with acquisitions. Attrition, excluding involuntary
terminations, for fiscal 2020 was 12%, down from 17% in fiscal 2019. 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 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.
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Item 7. Management's Discussion and Analysis of Financial
ACCENTURE 2020 FORM 10-K Condition and Results of Operations 30
Gross margin (Revenues less Cost of services as a percentage of Revenues) for
fiscal 2020 was 31.5%, compared with 30.8% for fiscal 2019. The increase in
gross margin for fiscal 2020 was due to lower non-payroll costs, primarily for
travel, partially offset by an increase in labor costs as a percentage of
revenues compared to fiscal 2019.
Sales and marketing and General and administrative costs as a percentage of
revenues were 16.8% for fiscal 2020, compared with 16.2% for fiscal 2019. For
fiscal 2020 compared to fiscal 2019, Sales and marketing costs as a percentage
of revenues increased 10 basis points and General and administrative costs as a
percentage of revenues increased 50 basis points, primarily due to higher
technology and facilities costs.
Operating margin (Operating income as a percentage of revenues) for fiscal 2020
was 14.7%, compared with 14.6% for fiscal 2019.
During fiscal 2020, we recorded gains of $332 million and $52 million in tax
expense related to our investment in Duck Creek Technologies. For additional
information, see Note 1 (Summary of Significant Accounting Policies) to our
Consolidated Financial Statements under Item 8, "Financial Statements and
Supplementary Data."
The effective tax rate for fiscal 2020 was 23.5%, compared with 22.5% for fiscal
2019. Absent the $332 million gains on an investment and related $52 million in
tax expense, our effective tax rate for fiscal 2020 would have been 23.9%.
Diluted earnings per share were $7.89 for fiscal 2020, compared with $7.36 for
fiscal 2019. The $280 million gains on an investment, net of taxes, increased
diluted earnings per share by $0.43 in fiscal 2020. Excluding the impact of
these gains, diluted earnings per share would have been $7.46 for fiscal 2020.
We have presented our effective tax rate and diluted earnings per share
excluding the impact of gains related to an investment in fiscal 2020, as we
believe doing so facilitates understanding as to the impact of this item and our
performance in comparison to the prior period.
Our operating income and diluted earnings per share are affected by currency
exchange rate fluctuations on revenues and costs. Most of our costs are incurred
in the same currency as the related revenues. Where practical, we seek to manage
foreign currency exposure for costs not incurred in the same currency as the
related revenues, such as the costs associated with our global delivery model,
by using currency protection provisions in our customer contracts and through
our hedging programs. For more information on our hedging programs, see Note 9
(Financial Instruments) to our Consolidated Financial Statements under Item 8,
"Financial Statements and Supplementary Data."
Bookings
New bookings for fiscal 2020 were $49.6 billion , with consulting bookings of
$25.8 billion and outsourcing bookings of $23.7 billion , compared to $45.5
billion in fiscal 2019, with consulting bookings of $24.7 billion and
outsourcing bookings of $20.8 billion .
We provide information regarding our new bookings, which include new contracts,
including those acquired through acquisitions, as well as renewals, extensions
and changes to existing contracts, because we believe doing so provides useful
trend information regarding changes in the volume of our new business over time.
New bookings can vary significantly quarter to quarter depending in part on the
timing of the signing of a small number of large outsourcing contracts. The
types of services and solutions clients are demanding and the pace and level of
their spending may impact the conversion of new bookings to revenues. For
example, outsourcing bookings, which are typically for multi-year contracts,
generally convert to revenue over a longer period of time compared to consulting
bookings.
Information regarding our new bookings is not comparable to, nor should it be
substituted for, an analysis of our revenues over time. New bookings involve
estimates and judgments. There are no third-party standards or requirements
governing the calculation of bookings. We do not update our new bookings for
material subsequent terminations or reductions related to bookings originally
recorded in prior fiscal years. New bookings are recorded using then-existing
foreign currency exchange rates and are not subsequently adjusted for foreign
currency exchange rate fluctuations.
The majority of our contracts are terminable by the client on short notice with
little or no termination penalties, and some without notice. Only the
non-cancelable portion of these contracts is included in the 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.
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Item 7. Management's Discussion and Analysis of Financial
ACCENTURE 2020 FORM 10-K Condition and Results of Operations 31
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 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
On December 22, 2017 , the U.S. enacted the Tax Cuts and Jobs Act (the "Tax
Act"), which significantly changed U.S. tax law. The Tax Act lowered the U.S.
statutory federal income tax rate from 35% to 21%, effective January 1, 2018 ,
resulting in a blended U.S. statutory federal income tax rate of 25.7% for our
fiscal year ended August 31, 2018 and a U.S. statutory federal income tax rate
of 21.0% for our fiscal year ended August 31, 2019 . The Tax Act's "base erosion
and anti-abuse tax" provision, and regulations issued thereunder, adversely
impact our effective tax rate by limiting our ability to deduct certain
expenses.
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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Item 7. Management's Discussion and Analysis of Financial
ACCENTURE 2020 FORM 10-K Condition and Results of Operations 32
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
Effective March 1, 2020 , we began managing our business under a new growth model
through our three geographic markets, North America , Europe and Growth Markets,
which became our reportable segments in the third quarter of fiscal 2020. Prior
to this change, our reportable segments were our five industry groups,
Communications, Media & Technology, Financial Services, Health & Public Service,
Products and Resources. See Note 7 (Goodwill and Intangible Assets) and Note 16
(Segment Reporting) to our Consolidated Financial Statements under Item 8,
"Financial Statements and Supplementary Data" for further details regarding the
change in our reportable segments.
In addition to reporting revenues by geographic markets, we also report revenues
by two types of work: consulting and outsourcing, 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. Outsourcing 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 outsourcing 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
ACCENTURE 2020 FORM 10-K Condition and Results of Operations 33
Results of Operations for Fiscal 2020 Compared to Fiscal 2019
Effective March 1, 2020 , we began managing our business under a new growth model
through our three geographic markets, North America , Europe and Growth Markets,
which became our reportable segments in the third quarter of fiscal 2020. Prior
to this change, our reportable segments were our five operating groups,
Communications, Media & Technology, Financial Services, Health & Public Service,
Products and Resources, which we now refer to as our industry groups.
Revenues by geographic market, industry group and type of work are as follows:
Percent
Increase Percent Percent of Total
(Decrease) Increase Revenues
Fiscal U.S. Local for Fiscal
(in millions of U.S. dollars) 2020 2019 (1) Dollars Currency 2020 2019 (1)
GEOGRAPHIC MARKETS
North America $ 20,982 $ 19,986 5 % 5 % 47 % 46 %
Europe 14,402 14,696 (2) - 32 34
Growth Markets 8,943 8,533 5 8 20 20
TOTAL REVENUES $ 44,327 $ 43,215 3 % 4 % 100 % 100 %
INDUSTRY GROUPS
Communications, Media & Technology $ 8,883 $ 8,757 1 % 3 % 20 % 20 %
Financial Services 8,518 8,494 - 2 19 20
Health & Public Service 8,023 7,161 12 13 18 17
Products 12,272 12,005 2 3 28 28
Resources 6,612 6,772 (2) - 15 16
Other 19 26 n/m n/m - -
TOTAL REVENUES $ 44,327 $ 43,215 3 % 4 % 100 % 100 %
TYPE OF WORK
Consulting $ 24,227 $ 24,177 - % 2 % 55 % 56 %
Outsourcing 20,100 19,038 6 7 45 44
TOTAL REVENUES $ 44,327 $ 43,215 3 % 4 % 100 % 100 %
n/m = not meaningful
Amounts in table may not total due to rounding
(1)Effective September 1, 2019 we revised the reporting of our geographic
markets for the movement of one country from Growth Markets to Europe . Prior
period amounts have been reclassified to conform with the current period
presentation.
Revenues
Revenues were impacted by a reduction of approximately 1% from a decline in
revenues from reimbursable travel costs in fiscal 2020 across all markets. The
following revenues commentary discusses local currency revenue changes for
fiscal 2020 compared to fiscal 2019:
Geographic Markets
•North America revenues increased 5% in local currency, led by growth in Public
Service, Life Sciences, Software & Platforms, Health and Banking & Capital
Markets. These increases were partially offset by declines in Chemicals &
Natural Resources and High Tech. Revenue growth was driven by the United States .
•Europe revenues were flat in local currency, led by growth in Life Sciences,
Software & Platforms, Chemicals & Natural Resources and Health. These increases
were partially offset by declines in Banking & Capital Markets, Consumer Goods,
Retail & Travel Services and High Tech. Revenues were led by growth in Italy and
Germany , partially offset by declines in the United Kingdom , Spain and France .
•Growth Markets revenues increased 8% in local currency, led by growth in
Software & Platforms, Banking & Capital Markets, Public Service, Chemicals &
Natural Resources, Industrial and Life Sciences. Revenue growth was driven by
Japan , as well as Brazil .
Operating Expenses
Operating expenses for fiscal 2020 increased $903 million , or 2%, over fiscal
2019, and decreased as a percentage of revenues to 85.3% from 85.4% during this
period.
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Item 7. Management's Discussion and Analysis of Financial
ACCENTURE 2020 FORM 10-K Condition and Results of Operations 34
Operating expenses by category are as follows:
Fiscal
Increase
(in millions of U.S. dollars) 2020 2019 (Decrease)
Operating Expenses $ 37,813 85.3 % $ 36,910 85.4 % $ 903
Cost of services 30,351 68.5 % 29,900 69.2 % 451
Sales and marketing 4,626 10.4 % 4,447 10.3 % 178
General and administrative costs 2,837 6.4 % 2,562 5.9 % 274
Amounts in table may not total due to rounding.
Cost of Services Cost of services for fiscal 2020 increased$451 million , or 2%, over fiscal 2019, and decreased as a percentage of revenues to 68.5% from 69.2% during this period. Gross margin for fiscal 2020 increased to 31.5% from 30.8% in fiscal 2019. The increase in gross margin for fiscal 2020 was primarily due to lower non-payroll costs, primarily for travel, partially offset by an increase in labor costs as a percentage of revenues compared to fiscal 2019. Sales and Marketing Sales and marketing expense for fiscal 2020 increased$178 million , or 4%, over fiscal 2019, and increased as a percentage of revenues to 10.4% from 10.3% during this period. General and Administrative Costs General and administrative costs for fiscal 2020 increased$274 million , or 11%, over fiscal 2019, and increased as a percentage of revenues to 6.4% from 5.9% during this period. The increase as a percentage of revenues was primarily due to higher technology and facilities costs compared to fiscal 2019. Operating Income and Operating Margin Operating income for fiscal 2020 increased$209 million , or 3%, over fiscal 2019. EffectiveMarch 1, 2020 , we began managing our business under a new growth model through our three geographic markets,North America ,Europe and Growth Markets, which became our reportable segments in the third quarter of fiscal 2020. Prior to this change, our reportable segments were our five industry groups, Communications, Media & Technology, Financial Services, Health & Public Service, Products and Resources. Operating income and operating margin for each of the geographic markets are as follows: Fiscal 2020 2019 Operating Operating Operating Operating Increase (in millions of U.S. dollars) Income Margin Income Margin (Decrease) North America$ 3,170 15 %$ 3,107 16 %$ 62 Europe 1,799 12 % 2,013 14 (214) Growth Markets 1,545 17 % 1,184 14 360 TOTAL$ 6,514 14.7 %$ 6,305 14.6 %$ 209 Amounts in table may not total due to rounding. We estimate that the aggregate percentage impact of foreign currency exchange rates on our operating income during fiscal 2020 was similar to that disclosed for revenue for each geographic market. The reduction in travel costs during fiscal 2020 had a favorable impact on operating income. The commentary below provides insight into other factors affecting geographic market performance and operating income for fiscal 2020 compared with fiscal 2019: •North America operating income increased primarily due to revenue growth, partially offset by lower outsourcing contract profitability and higher sales and marketing costs as a percentage of revenues. •Europe operating income decreased due to lower consulting contract profitability and higher sales and marketing costs as a percentage of revenues. •Growth Markets operating income increased primarily due to revenue growth and higher contract profitability.
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Item 7. Management's Discussion and Analysis of Financial
ACCENTURE 2020 FORM 10-K Condition and Results of Operations 35
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 2020, other income (expense)
increased $342 million over fiscal 2019, primarily due to gains of $332 million
related to our investment in Duck Creek Technologies. For additional
information, see Note 1 (Summary of Significant Accounting Policies) to our
Consolidated Financial Statements under Item 8, "Financial Statements and
Supplementary Data."
Income Tax Expense
The effective tax rate for fiscal 2020 was 23.5%, compared with 22.5% for fiscal
2019. Absent the $332 million gains on an investment and related $52 million in
tax expense, our effective tax rate for fiscal 2020 would have been 23.9%. The
higher effective tax rate for fiscal 2020 was primarily due to lower benefits
from final determinations of prior year taxes and the phased-in effects of U.S.
tax reform, partially offset by higher 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 .
Earnings Per Share
Diluted earnings per share were $7.89 for fiscal 2020, compared with $7.36 for
fiscal 2019. The $280 million gains on an investment, net of taxes, increased
diluted earnings per share by $0.43 in fiscal 2020. Excluding the impact of
these gains, diluted earnings per share would have been $7.46 for fiscal 2020.
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 2020
FY19 As Reported $ 7.36
Gains on an investment, net of tax 0.43
Revenue and operating results 0.24
Lower share count 0.03
Net Income attributable to non-controlling interest (0.01)
Non-operating income (0.02)
Higher effective tax rate (0.14)
FY20 As Reported $ 7.89 Results of Operations for Fiscal 2019 Compared to Fiscal 2018
Our Annual Report on Form 10-K for the fiscal year ended
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Item 7. Management's Discussion and Analysis of Financial
ACCENTURE 2020 FORM 10-K Condition and Results of Operations 36
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, 2020 , Cash and cash equivalents were $8.4 billion , compared
with $6.1 billion as of August 31, 2019 .
Cash flows from operating, investing and financing activities, as reflected in
our Consolidated Cash Flows Statements, are summarized in the following table:
Fiscal
(in millions of U.S. dollars) 2020 2019 Change
Net cash provided by (used in):
Operating activities $ 8,215 $ 6,627 $ 1,588
Investing activities (1,895) (1,756) (139)
Financing activities (4,049) (3,767) (282)
Effect of exchange rate changes on cash and cash
equivalents 17 (39) 56
Net increase (decrease) in cash and cash equivalents
Operating activities: The$1,588 million increase in operating cash flows was due to higher net income and changes in operating assets and liabilities, including higher collections on net client balances (receivables from clients, contract assets and deferred revenues). Investing activities: The$139 million increase in cash used was due to higher spending on business acquisitions, partially offset by increased proceeds from investments. For additional information, see Note 6 (Business Combinations) to our Consolidated Financial Statements under Item 8, "Financial Statements and Supplementary Data." Financing activities: The$282 million increase in cash used was primarily due to an increase in the net purchases of shares as well as an increase in cash dividends paid, partially offset by an increase in net proceeds from share issuances. 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. Borrowing Facilities See Note 10 (Borrowings and Indebtedness) to our Consolidated Financial Statements under Item 8, "Financial Statements and Supplementary Data." Share Purchases and Redemptions We intend to continue to use a significant portion of cash generated from operations for share repurchases during fiscal 2021. 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 ofAccenture Canada Holdings Inc. exchangeable shares, through the use of Rule 10b5-1 plans and/or by
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Item 7. Management's Discussion and Analysis of Financial
ACCENTURE 2020 FORM 10-K Condition and Results of Operations 37
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."
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, 2020 , we had the following obligations and commitments to make
future payments under contracts, contractual obligations and commercial
commitments:
Payments due by period
Contractual Cash Obligations (1) Less than More than
(in millions of U.S. dollars) Total 1 year 1-3 years 3-5 years 5 years
Long-term debt and related interest $ 75 $ 8 $ 17 $ 8 $ 43
Operating leases 3,949 771 1,202 828 1,149
Retirement obligations (2) 91 10 20 19 42
Purchase obligations and other commitments
(3) 348 203 100 40 5
Total $ 4,463 $ 992 $ 1,339 $ 895 $ 1,239
Amounts in table may not total due to rounding.
(1)The liability related to unrecognized tax benefits has been excluded from the
contractual obligations table because a reasonable estimate of the timing and
amount of cash outflows from future tax settlements cannot be determined. For
additional information, see Note 11 (Income Taxes) to our Consolidated Financial
Statements under Item 8, "Financial Statements and Supplementary Data."
(2)Amounts represent projected payments under certain unfunded retirement plans
for former pre-incorporation partners. Given these plans are unfunded, we pay
these benefits directly. These plans were eliminated for active partners after
May 15, 2001 .
(3)Other commitments include, among other things, information technology,
software support and maintenance obligations, as well as other obligations in
the ordinary course of business that we cannot cancel or where we would be
required to pay a termination fee in the event of cancellation. Amounts shown do
not include recourse that we may have to recover termination fees or penalties
from clients.
Off-Balance Sheet Arrangements
In the normal course of business and in conjunction with some client
engagements, we have entered into contractual arrangements through which we may
be obligated to indemnify clients with respect to certain matters. 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."
New Accounting Pronouncements
See Note 1 (Summary of Significant Accounting Policies) to our Consolidated
Financial Statements under Item 8, "Financial Statements and Supplementary
Data."
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