UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended: September 30, 2021
or
For the transition period from ___________ to ___________
Commission File Number: 0-15386
(Exact name of registrant as specified in its charter)
 | |||||||||||||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||||||||||||||
| (Address of principal executive offices) | (Zip Code) | ||||||||||||||||
(816 ) 221-1024
(Registrant's telephone number, including area code)
_________________________________________________________________
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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.
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 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 ☒
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
| Class | Outstanding at October 25, 2021 | |||||||
| Common Stock, $0.01 par value per share | ||||||||
CERNER CORPORATION
TABLE OF CONTENTS
| Part I. | Financial Information: | |||||||
| Item 1. | Financial Statements: | |||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Part II. | Other Information: | |||||||
| Item 1. | ||||||||
| Item 2. | ||||||||
| Item 6. | ||||||||
| Signatures | ||||||||
Part I. Financial Information
Item 1. Financial Statements
CERNER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
As of September 30, 2021 (unaudited) and December 31, 2020
| (In thousands, except share data) | 2021 | 2020 | |||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Short-term investments | |||||||||||
| Receivables, net | |||||||||||
| Inventory | |||||||||||
| Prepaid expenses and other | |||||||||||
| Total current assets | |||||||||||
| Property and equipment, net | |||||||||||
| Right-of-use assets | |||||||||||
| Software development costs, net | |||||||||||
| Goodwill | |||||||||||
| Intangible assets, net | |||||||||||
| Long-term investments | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and Shareholders' Equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Current installments of long-term debt | |||||||||||
| Deferred revenue | |||||||||||
| Accrued payroll and tax withholdings | |||||||||||
| Other current liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Long-term debt | |||||||||||
| Deferred income taxes | |||||||||||
| Other liabilities | |||||||||||
| Total liabilities | |||||||||||
| Shareholders' Equity: | |||||||||||
Common stock, $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Retained earnings | |||||||||||
Treasury stock, | ( | ( | |||||||||
| Accumulated other comprehensive loss, net | ( | ( | |||||||||
| Total shareholders' equity | |||||||||||
| Total liabilities and shareholders' equity | $ | $ | |||||||||
See notes to condensed consolidated financial statements (unaudited).
1
CERNER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and nine months ended September 30, 2021 and September 30, 2020
(unaudited)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| (In thousands, except per share data) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Revenues | $ | $ | $ | $ | |||||||||||||||||||
| Costs and expenses: | |||||||||||||||||||||||
| Costs of revenue | |||||||||||||||||||||||
| Sales and client service | |||||||||||||||||||||||
Software development (Includes amortization of $ | |||||||||||||||||||||||
| General and administrative | |||||||||||||||||||||||
| Amortization of acquisition-related intangibles | |||||||||||||||||||||||
| Total costs and expenses | |||||||||||||||||||||||
| Gain on sale of businesses | |||||||||||||||||||||||
| Operating earnings | |||||||||||||||||||||||
| Other income (loss), net | ( | ( | |||||||||||||||||||||
| Earnings before income taxes | |||||||||||||||||||||||
| Income taxes | ( | ( | ( | ( | |||||||||||||||||||
| Net earnings | $ | $ | $ | $ | |||||||||||||||||||
| Basic earnings per share | $ | $ | $ | $ | |||||||||||||||||||
| Diluted earnings per share | $ | $ | $ | $ | |||||||||||||||||||
| Basic weighted average shares outstanding | |||||||||||||||||||||||
| Diluted weighted average shares outstanding | |||||||||||||||||||||||
See notes to condensed consolidated financial statements (unaudited).
2
CERNER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the three and nine months ended September 30, 2021 and September 30, 2020
(unaudited)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| (In thousands) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Net earnings | $ | $ | $ | $ | |||||||||||||||||||
Foreign currency translation adjustment and other (net of taxes (benefit) of $( | ( | ( | ( | ||||||||||||||||||||
Unrealized gain (loss) on cash flow hedge (net of taxes (benefit) of $ | ( | ||||||||||||||||||||||
Unrealized holding gain (loss) on available-for-sale investments (net of taxes (benefit) of $ | ( | ( | |||||||||||||||||||||
| Comprehensive income | $ | $ | $ | $ | |||||||||||||||||||
See notes to condensed consolidated financial statements (unaudited).
3
CERNER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 2021 and September 30, 2020
(unaudited)
| Nine Months Ended | |||||||||||
| (In thousands) | 2021 | 2020 | |||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||||||
| Net earnings | $ | $ | |||||||||
| Adjustments to reconcile net earnings to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Share-based compensation expense | |||||||||||
| Provision for deferred income taxes | |||||||||||
| Gain on sale of businesses | ( | ||||||||||
| Investment gains | ( | ||||||||||
| Asset impairments | |||||||||||
| Changes in assets and liabilities (net of businesses acquired): | |||||||||||
| Receivables, net | ( | ( | |||||||||
| Inventory | ( | ||||||||||
| Prepaid expenses and other | ( | ( | |||||||||
| Accounts payable | ( | ||||||||||
| Accrued income taxes | |||||||||||
| Deferred revenue | ( | ||||||||||
| Other accrued liabilities | |||||||||||
| Net cash provided by operating activities | |||||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||||||
| Capital purchases | ( | ( | |||||||||
| Capitalized software development costs | ( | ( | |||||||||
| Purchases of investments | ( | ( | |||||||||
| Sales and maturities of investments | |||||||||||
| Purchase of other intangibles | ( | ( | |||||||||
| Acquisition of businesses, net of cash acquired | ( | ( | |||||||||
| Sale of businesses | |||||||||||
| Disposition of assets held for sale | |||||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||||||
| Long-term debt issuance | |||||||||||
| Repayment of long-term debt | ( | ||||||||||
| Proceeds from exercise of stock options | |||||||||||
| Payments to taxing authorities in connection with shares directly withheld from associates | ( | ( | |||||||||
| Treasury stock purchases | ( | ( | |||||||||
| Dividends paid | ( | ( | |||||||||
| Other | ( | ( | |||||||||
| Net cash used in financing activities | ( | ( | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | ( | ( | |||||||||
| Net decrease in cash and cash equivalents | ( | ( | |||||||||
| Cash and cash equivalents at beginning of period | |||||||||||
| Cash and cash equivalents at end of period | $ | $ | |||||||||
See notes to condensed consolidated financial statements (unaudited).
4
CERNER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the three and nine months ended September 30, 2021 and September 30, 2020
(unaudited)
| Common Stock | Additional Paid-in Capital | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Loss, Net | |||||||||||||||||||||||||||||||
| (In thousands) | Shares | Amount | |||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | $ | $ | $ | $ | ( | $ | ( | ||||||||||||||||||||||||||||
| Exercise of stock options and vests of restricted shares and share units | — | — | — | ||||||||||||||||||||||||||||||||
| Employee share-based compensation expense | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | — | ( | |||||||||||||||||||||||||||||
| Treasury stock purchases | — | — | — | — | ( | — | |||||||||||||||||||||||||||||
| Cash dividends declared ($0.22 per share) | — | — | — | ( | — | — | |||||||||||||||||||||||||||||
| Net earnings | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Balance at March 31, 2021 | ( | ( | |||||||||||||||||||||||||||||||||
| Exercise of stock options and vests of restricted shares and share units | — | — | — | ||||||||||||||||||||||||||||||||
| Employee share-based compensation expense | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Treasury stock purchases | — | — | — | — | ( | — | |||||||||||||||||||||||||||||
| Cash dividends declared ($0.22 per share) | — | — | — | ( | — | — | |||||||||||||||||||||||||||||
| Net earnings | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Balance at June 30, 2021 | ( | ( | |||||||||||||||||||||||||||||||||
| Exercise of stock options and vests of restricted shares and share units | — | — | — | ||||||||||||||||||||||||||||||||
| Employee share-based compensation expense | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | — | ( | |||||||||||||||||||||||||||||
| Treasury stock purchases | — | — | — | — | ( | — | |||||||||||||||||||||||||||||
| Cash dividends declared ($0.22 per share) | — | — | — | ( | — | — | |||||||||||||||||||||||||||||
| Net earnings | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Balance at September 30, 2021 | ( | ( | |||||||||||||||||||||||||||||||||
See notes to condensed consolidated financial statements (unaudited).
5
CERNER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (continued)
For the three and nine months ended September 30, 2021 and September 30, 2020
(unaudited)
| Common Stock | Additional Paid-in Capital | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Loss, Net | |||||||||||||||||||||||||||||||
| (In thousands) | Shares | Amount | |||||||||||||||||||||||||||||||||
| Balance at December 28, 2019 | $ | $ | $ | $ | ( | $ | ( | ||||||||||||||||||||||||||||
| Exercise of stock options and vests of restricted shares and share units | — | — | — | ||||||||||||||||||||||||||||||||
| Employee share-based compensation expense | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Cumulative effect of accounting change (ASU 2016-13) | — | — | — | ( | — | — | |||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | — | ( | |||||||||||||||||||||||||||||
| Treasury stock purchases | — | — | — | — | ( | — | |||||||||||||||||||||||||||||
| Cash dividends declared ($0.18 per share) | — | — | — | ( | — | — | |||||||||||||||||||||||||||||
| Net earnings | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Balance at March 31, 2020 | ( | ( | |||||||||||||||||||||||||||||||||
| Exercise of stock options and vests of restricted shares and share units | — | — | — | ||||||||||||||||||||||||||||||||
| Employee share-based compensation expense | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Cash dividends declared ($0.18 per share) | — | — | — | ( | — | — | |||||||||||||||||||||||||||||
| Net earnings | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Balance at June 30, 2020 | ( | ( | |||||||||||||||||||||||||||||||||
| Exercise of stock options and vests of restricted shares and share units | — | — | — | ||||||||||||||||||||||||||||||||
| Employee share-based compensation expense | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Cash dividends declared ($0.18 per share) | — | — | — | ( | — | — | |||||||||||||||||||||||||||||
| Net earnings | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Balance at September 30, 2020 | $ | $ | $ | $ | ( | $ | ( | ||||||||||||||||||||||||||||
See notes to condensed consolidated financial statements (unaudited).
6
CERNER CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) Interim Statement Presentation
Basis of Presentation
The condensed consolidated financial statements included herein have been prepared by Cerner Corporation ("Cerner," the "Company," "we," "us" or "our") without audit, pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in our latest annual report on Form 10-K.
In management's opinion, the accompanying unaudited condensed consolidated financial statements include all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position and the results of operations and cash flows for the periods presented. Our interim results as presented in this quarterly report on Form 10-Q are not necessarily indicative of the operating results for the entire year.
All references to quarters or nine month periods ended 2021 and 2020 in these notes to condensed consolidated financial statements refer to the respective three and nine month periods ended September 30, 2021 and September 30, 2020, unless otherwise noted.
Employee Separation Costs
In connection with involuntary separation benefits, we recognized less than $1 million and $6 million of expenses in the third quarters of 2021 and 2020, respectively; and $46 million and $21 million of expenses during the first nine months of 2021 and 2020, respectively.
In connection with voluntary separation benefits, we recognized $24 million and $2 million of expenses in the third quarters of 2021 and 2020, respectively; and $51 million and $18 million of expenses during the first nine months of 2021 and 2020, respectively.
Such employee separation costs are included in "General and administrative" expense in our condensed consolidated statements of operations.
At September 30, 2021, a liability of $19 million for such obligations is included in "Accrued payroll and tax withholdings" in our condensed consolidated balance sheets.
Real Estate Held For Sale
In connection with our operational improvement initiatives, during the nine months ended September 30, 2021, we made certain decisions regarding the continued use of certain of our owned real estate. As a result of those decisions, on July 9, 2021, we sold office space located in Kansas City, Missouri (known as our Oaks Campus), in April 2021 began the process of marketing office space located in Kansas City, Missouri (known as our Riverport Campus), in June 2021 began the process of marketing office space located in Kansas City, Kansas (known as our Continuous Campus), and in September 2021 began the process of marketing a portion of our office space located in Malvern, Pennsylvania. At September 30, 2021, these long-lived assets aggregating $101 million were held for sale and presented within our condensed consolidated balance sheets in "Property and equipment, net." In connection with the designation as held for sale, during the second quarter of 2021, we recorded a pre-tax charge of $68 million to reduce the amount of such long-lived assets to fair value, less estimated costs to sell. Such charge is included in "Sales and client service" expense in our condensed consolidated statements of operations.
7
Software Development Costs
In the second and third quarters of 2021, we recorded pre-tax charges of $48 million and $2 million, respectively, to reduce the carrying amount of certain capitalized software development costs to estimated net realizable value. Such charges are included in "Software development" expense in our condensed consolidated statements of operations.
| Nine Months Ended | |||||||||||||||||
| (In thousands) | 2021 | 2020 | |||||||||||||||
| Cash paid during the period for: | |||||||||||||||||
Interest (including amounts capitalized of $ | $ | $ | |||||||||||||||
| Income taxes, net of refunds | |||||||||||||||||
| Non-cash items: | |||||||||||||||||
| Lease liabilities recorded upon the commencement of operating leases | |||||||||||||||||
| Financed capital purchases | |||||||||||||||||
Recently Issued Accounting Pronouncements
Reference Rate Reform. The Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting in March 2020 and ASU 2021-01, Reference Rate Reform (Topic 848): Scope in January 2021. Such guidance provides optional financial reporting alternatives to reduce the cost and complexity associated with the accounting for contracts and hedging relationships affected by reference rate reform, such as the upcoming discontinuance of the London Interbank Offered Rate ("LIBOR"). The accommodations within this guidance may be applied prospectively from the beginning of our 2020 first quarter through December 31, 2022. We are currently evaluating the effect that this guidance may have on our contracts that reference LIBOR, specifically, our Third Amended and Restated Credit Agreement (as amended, the "Credit Agreement") and related interest rate swap. As of the date of this filing, we have not elected to apply any of the provisions of this guidance.
8
(2) Business Acquisition
On April 1, 2021 , we acquired Kantar Health, a division of Kantar Group. Kantar Health provides data, analytics, commercial research, and consulting services to the life sciences industry. We believe this acquisition complements our existing Data-as-a-Service efforts as it provides a meaningful entry into the pharmaceutical market through Kantar Health's existing clients and their leadership team with important industry experience and relationships. These factors, combined with the synergies and economies of scale expected, are the basis for the acquisition and comprise the resulting goodwill recorded.
Consideration for the acquisition was a base cash purchase price of $375 million. The base purchase price is subject to post-closing adjustments for working capital and certain other adjustments, as specified in the Securities Purchase Agreement dated December 16, 2020 , as amended.
| (In thousands) | Allocation Amount | |||||||
| Cash and cash equivalents | $ | |||||||
| Receivables, net | ||||||||
| Prepaid expenses and other | ||||||||
| Property and equipment, net | ||||||||
| Right-of-use assets | ||||||||
| Goodwill | ||||||||
| Intangible assets, net: | ||||||||
| Customer relationships | ||||||||
| Existing technologies | ||||||||
| Trade names | ||||||||
| Other assets | ||||||||
| Accounts payable | ( | |||||||
| Deferred revenue | ( | |||||||
| Accrued payroll and tax withholdings | ( | |||||||
| Other current liabilities | ( | |||||||
| Deferred income taxes | ( | |||||||
| Other liabilities | ( | |||||||
| Total purchase price | $ | |||||||
The fair values of the acquired intangible assets were estimated by applying the income approach. Such estimations required the use of inputs that were unobservable in the marketplace (Level 3), including a discount rate that we estimated would be used by a market participant in valuing these assets, projections of revenues and cash flows, and client attrition rates, among others. The acquired intangible assets are being amortized over a weighted-average period of 13 years. Refer to Note (7) for further information about the fair value level hierarchy.
The goodwill of $218 million was allocated among our Domestic and International operating segments, as shown below, with approximately $160 million of such goodwill expected to be deductible for tax purposes.
9
The changes in the carrying amounts of goodwill for the nine months ended September 30, 2021 were as follows:
| (In thousands) | Domestic | International | Total | ||||||||||||||
| Beginning balance at December 31, 2020 | $ | $ | $ | ||||||||||||||
| Goodwill recorded in connection with the Kantar Health acquisition | |||||||||||||||||
| Foreign currency translation adjustment and other | ( | ( | |||||||||||||||
| Ending balance at September 30, 2021 | $ | $ | $ | ||||||||||||||
Our condensed consolidated statements of operations for the three and nine months ended September 30, 2021 include revenues of $45 million and $90 million, respectively, attributable to the acquired business since the April 1, 2021 acquisition date. The earnings contribution from the acquired business for the three and nine months ended September 30, 2021 was not material to our condensed consolidated financial statements. Pro forma results of operations, assuming the acquisition was made at the beginning of the earliest period presented, have not been presented because the effect of this acquisition was not material to our results.
(3) Revenue Recognition
Disaggregation of Revenue
The following tables present revenues disaggregated by our business models:
| Three Months Ended | |||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||
| (In thousands) | Domestic Segment | International Segment | Total | Domestic Segment | International Segment | Total | |||||||||||||||||
| Licensed software | $ | $ | $ | $ | $ | $ | |||||||||||||||||
| Technology resale | |||||||||||||||||||||||
| Subscriptions | |||||||||||||||||||||||
| Professional services | |||||||||||||||||||||||
| Managed services | |||||||||||||||||||||||
| Support and maintenance | |||||||||||||||||||||||
| Reimbursed travel | |||||||||||||||||||||||
| Total revenues | $ | $ | $ | $ | $ | $ | |||||||||||||||||
| Nine Months Ended | |||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||
| (In thousands) | Domestic Segment | International Segment | Total | Domestic Segment | International Segment | Total | |||||||||||||||||
| Licensed software | $ | $ | $ | $ | $ | $ | |||||||||||||||||
| Technology resale | |||||||||||||||||||||||
| Subscriptions | |||||||||||||||||||||||
| Professional services | |||||||||||||||||||||||
| Managed services | |||||||||||||||||||||||
| Support and maintenance | |||||||||||||||||||||||
| Reimbursed travel | ( | ||||||||||||||||||||||
| Total revenues | $ | $ | $ | $ | $ | $ | |||||||||||||||||
10
The following tables present our revenues disaggregated by timing of revenue recognition:
| Three Months Ended | |||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||
| (In thousands) | Domestic Segment | International Segment | Total | Domestic Segment | International Segment | Total | |||||||||||||||||
| Revenue recognized over time | $ | $ | $ | $ | $ | $ | |||||||||||||||||
| Revenue recognized at a point in time | |||||||||||||||||||||||
| Total revenues | $ | $ | $ | $ | $ | $ | |||||||||||||||||
| Nine Months Ended | |||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||
| (In thousands) | Domestic Segment | International Segment | Total | Domestic Segment | International Segment | Total | |||||||||||||||||
| Revenue recognized over time | $ | $ | $ | $ | $ | $ | |||||||||||||||||
| Revenue recognized at a point in time | |||||||||||||||||||||||
| Total revenues | $ | $ | $ | $ | $ | $ | |||||||||||||||||
Transaction Price Allocated to Remaining Performance Obligations
As of September 30, 2021, the aggregate amount of transaction price allocated to performance obligations that are unsatisfied (or partially unsatisfied) for executed contracts approximates $13.12 billion of which we expect to recognize approximately 30% of the revenue over the next 12 months and the remainder thereafter .
Contract Liabilities
Customer payments received in advance of satisfaction of the related performance obligations are deferred as contract liabilities. Such amounts are classified in our condensed consolidated balance sheets as "Deferred revenue". During the nine months ended September 30, 2021, we recognized $340 million of revenues that were included in our contract liability balance at the beginning of such period.
Significant Customers
Revenues attributable to our relationships (as the prime contractor or a subcontractor) with U.S. government agencies, within our Domestic segment, comprised 21 % and 19 % of our consolidated revenues for the third quarters of 2021 and 2020, respectively; and 20 % and 17 % for the first nine months of 2021 and 2020, respectively. Amounts due in connection with these relationships comprised 17 % and 13 % of client receivables as of September 30, 2021 and December 31, 2020, respectively.
11
(4) Receivables
| (In thousands) | September 30, 2021 | December 31, 2020 | |||||||||
| Client receivables | $ | $ | |||||||||
| Less: Provision for expected credit losses | |||||||||||
| Total receivables, net | $ | $ | |||||||||
In addition to the client receivables presented above, at September 30, 2021 and December 31, 2020, we had $19 million and $17 million of non-current net client receivables, respectively, which are presented in "Other assets" in our condensed consolidated balance sheets.
A reconciliation of the beginning and ending amount of our provision for expected credit losses is as follows:
| (In thousands) | Current | Non-current | Total | ||||||||||||||
| Provision for expected credit losses - balance at December 31, 2020 | $ | $ | $ | ||||||||||||||
| Additions charged to costs and expenses | |||||||||||||||||
| Deductions, foreign currency and other | |||||||||||||||||
| Provision for expected credit losses - balance at March 31, 2021 | |||||||||||||||||
| Additions charged to costs and expenses | |||||||||||||||||
| Reclassifications to non-current | ( | ||||||||||||||||
| Deductions, foreign currency and other | ( | ( | |||||||||||||||
| Provision for expected credit losses - balance at June 30, 2021 | |||||||||||||||||
| Additions charged to costs and expenses | |||||||||||||||||
| Deductions, foreign currency and other | ( | ( | ( | ||||||||||||||
| Provision for expected credit losses - balance at September 30, 2021 | $ | $ | $ | ||||||||||||||
Our estimates of expected credit losses for client receivables at both September 30, 2021 and December 31, 2020, were primarily based on historical credit loss experience and adjustments for certain asset-specific risk characteristics (i.e. known client financial hardship or bankruptcy). Exposure to credit losses may increase if our clients are adversely affected by changes in healthcare laws; changes in reimbursement or payor models; economic pressures or uncertainty associated with local or global economic recessions; disruption associated with the COVID-19 pandemic; or other client-specific factors. Although we have historically not experienced significant credit losses, it is possible that there could be an adverse impact from potential adjustments to the carrying amount of client receivables as clients' cash flows are impacted by the COVID-19 pandemic and related economic uncertainty, which may be material.
During the first nine months of 2021 and 2020, we received total client cash collections of $4.46 billion and $4.09 billion, respectively.
12
(5) Investments
Available-for-sale investments at September 30, 2021 were as follows:
| (In thousands) | Adjusted Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||||||||||||
| Cash equivalents: | ||||||||||||||||||||||||||
| Money market funds | $ | $ | — | $ | — | $ | ||||||||||||||||||||
| Time deposits | — | — | ||||||||||||||||||||||||
| Total cash equivalents | — | — | ||||||||||||||||||||||||
| Short-term investments: | ||||||||||||||||||||||||||
| Time deposits | — | — | ||||||||||||||||||||||||
| Commercial paper | ( | |||||||||||||||||||||||||
| Government and corporate bonds | ( | |||||||||||||||||||||||||
| Total short-term investments | ( | |||||||||||||||||||||||||
| Long-term investments: | ||||||||||||||||||||||||||
| Government and corporate bonds | — | ( | ||||||||||||||||||||||||
| Total available-for-sale investments | $ | $ | $ | ( | $ | |||||||||||||||||||||
Available-for-sale investments at December 31, 2020 were as follows:
| (In thousands) | Adjusted Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||||||||||||
| Cash equivalents: | ||||||||||||||||||||||||||
| Money market funds | $ | $ | — | $ | — | $ | ||||||||||||||||||||
| Time deposits | — | — | ||||||||||||||||||||||||
| Commercial Paper | — | — | ||||||||||||||||||||||||
| Total cash equivalents | — | — | ||||||||||||||||||||||||
| Short-term investments: | ||||||||||||||||||||||||||
| Time deposits | — | — | ||||||||||||||||||||||||
| Commercial Paper | ( | |||||||||||||||||||||||||
| Government and corporate bonds | ( | |||||||||||||||||||||||||
| Total short-term investments | ( | |||||||||||||||||||||||||
| Long-term investments: | ||||||||||||||||||||||||||
| Government and corporate bonds | ( | |||||||||||||||||||||||||
| Total available-for-sale investments | $ | $ | $ | ( | $ | |||||||||||||||||||||
We sold available-for-sale investments for proceeds of $400 million and $5 million during the nine months ended September 30, 2021 and September 30, 2020, respectively, resulting in insignificant losses in each period.
Other Investments
At September 30, 2021 and December 31, 2020, we had investments in equity securities that do not have readily determinable fair values of $406 million and $361 million, respectively, accounted for in accordance with ASC 321, Investments-Equity Securities. Such investments are included in "Long-term investments" in our condensed consolidated balance sheets. We did not record any changes in the measurement of such investments during the nine months ended September 30, 2021 and September 30, 2020, respectively.
13
(6) Long-term Debt
| (In thousands) | September 30, 2021 | December 31, 2020 | |||||||||
Credit agreement loans due | $ | $ | |||||||||
| Senior notes: | |||||||||||
Series 2021-A due | |||||||||||
Series 2021-B due | |||||||||||
Series 2020-A due | |||||||||||
Series 2015-A due | |||||||||||
Series 2015-B due | |||||||||||
| Other | |||||||||||
| Total indebtedness | |||||||||||
| Less: debt issuance costs | ( | ( | |||||||||
| Indebtedness, net | |||||||||||
| Less: current installments of long-term debt | ( | ||||||||||
| Long-term debt | $ | $ | |||||||||
Credit Agreement
As of September 30, 2021, the interest rate on revolving credit loans outstanding under our Credit Agreement was 0.88 % based on LIBOR plus the applicable spread.
Series 2021 Senior Notes
We entered into a Master Note Agreement on November 11, 2019, and subsequently amended on October 8, 2020 (collectively and as amended, the "2019 Shelf Agreement"), pursuant to which we may issue and sell up to an aggregate principal amount of $1.80 billion of unsecured senior promissory notes. In March 2021, we issued $500 100 2.00 % Series 2021-A Notes due March 24, 2026 and $400 million of 2.59 % Series 2021-B Notes due March 24, 2031 . Interest on the Series 2021 Senior Notes is payable semiannually on each March 24 and September 24, commencing September 24, 2021 , and the principal balance is due at maturity. The Company may prepay at any time all, or any part of, the outstanding principal amount of the Series 2021 Senior Notes, subject to the payment of a make-whole amount. The Series 2021 Senior Notes are subject to the terms of the 2019 Shelf Agreement, which contains customary events of default and covenants related to limitations on indebtedness and transactions with affiliates and the maintenance of certain financial ratios. As of the date of this filing, $1.00 billion remains available for sale under the 2019 Shelf Agreement, which is uncommitted and subject to participation by the purchasers.
14
(7) Fair Value Measurements
We determine fair value measurements used in our consolidated financial statements based upon the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity's own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:
•Level 1 – Valuations based on quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.
•Level 2 – Valuations based on quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities.
•Level 3 – Valuations based on inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The following table details our investments in available-for-sale debt securities measured and recorded at fair value on a recurring basis at September 30, 2021:
| (In thousands) | Fair Value Measurements Using | |||||||||||||||||||||||||
| Description | Balance Sheet Classification | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||
| Money market funds | Cash equivalents | $ | $ | — | $ | |||||||||||||||||||||
| Time deposits | Cash equivalents | — | ||||||||||||||||||||||||
| Time deposits | Short-term investments | — | ||||||||||||||||||||||||
| Commercial paper | Short-term investments | — | ||||||||||||||||||||||||
| Government and corporate bonds | Short-term investments | — | ||||||||||||||||||||||||
| Government and corporate bonds | Long-term investments | — | ||||||||||||||||||||||||
The following table details our investments in available-for-sale debt securities measured and recorded at fair value on a recurring basis at December 31, 2020:
| (In thousands) | Fair Value Measurements Using | |||||||||||||||||||||||||
| Description | Balance Sheet Classification | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||
| Money market funds | Cash equivalents | $ | $ | — | $ | |||||||||||||||||||||
| Time deposits | Cash equivalents | — | ||||||||||||||||||||||||
| Commercial paper | Cash equivalents | — | — | |||||||||||||||||||||||
| Time deposits | Short-term investments | — | ||||||||||||||||||||||||
| Commercial paper | Short-term investments | — | — | |||||||||||||||||||||||
| Government and corporate bonds | Short-term investments | — | ||||||||||||||||||||||||
| Government and corporate bonds | Long-term investments | — | ||||||||||||||||||||||||
Our interest rate swap agreement is measured and recorded at fair value on a recurring basis using a Level 2 valuation. The fair value of such agreement is based on the market standard methodology of netting the discounted expected future variable cash receipts and the discounted future fixed cash payments. The variable cash receipts are based on an expectation of future interest rates derived from observed market interest rate forward curves. Since these inputs are observable in active markets over the terms that the instrument is held, the derivative is classified as Level 2 in the hierarchy.
15
(8) Income Taxes
(9) Earnings Per Share
A reconciliation of the numerators and the denominators of the basic and diluted per share computations are as follows:
| Three Months Ended | |||||||||||||||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||||||||||||||
| Earnings | Shares | Per-Share | Earnings | Shares | Per-Share | ||||||||||||||||||||||||||||||
| (In thousands, except per share data) | (Numerator) | (Denominator) | Amount | (Numerator) | (Denominator) | Amount | |||||||||||||||||||||||||||||
| Basic earnings per share: | |||||||||||||||||||||||||||||||||||
Income available to common shareholders | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
| Effect of dilutive securities: | |||||||||||||||||||||||||||||||||||
| Stock options, non-vested shares and share units | — | — | |||||||||||||||||||||||||||||||||
| Diluted earnings per share: | |||||||||||||||||||||||||||||||||||
Income available to common shareholders including assumed conversions | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
For the three months ended September 30, 2021 and September 30, 2020, options to purchase 0.3 million and 3.9 million shares of common stock at per share prices ranging from $52.32 to $76.49 and $55.24 to $76.49 , respectively, were outstanding but were not included in the computation of diluted earnings per share because they were anti-dilutive.
| Nine Months Ended | |||||||||||||||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||||||||||||||
| Earnings | Shares | Per-Share | Earnings | Shares | Per-Share | ||||||||||||||||||||||||||||||
| (In thousands, except per share data) | (Numerator) | (Denominator) | Amount | (Numerator) | (Denominator) | Amount | |||||||||||||||||||||||||||||
| Basic earnings per share: | |||||||||||||||||||||||||||||||||||
Income available to common shareholders | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
| Effect of dilutive securities: | |||||||||||||||||||||||||||||||||||
| Stock options, non-vested shares and share units | — | — | |||||||||||||||||||||||||||||||||
| Diluted earnings per share: | |||||||||||||||||||||||||||||||||||
Income available to common shareholders including assumed conversions | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
For the nine months ended September 30, 2021 and September 30, 2020, options to purchase 0.4 million and 4.4 million shares of common stock at per share prices ranging from $52.32 to $76.49 and $52.32 to $76.49 , respectively, were outstanding but were not included in the computation of diluted earnings per share because they were anti-dilutive.
16
(10) Share-Based Compensation and Equity
Stock Options
Stock option activity for the nine months ended September 30, 2021 was as follows:
| (In thousands, except per share and term data) | Number of Shares | Weighted- Average Exercise Price (Per Share) | Aggregate Intrinsic Value | Weighted-Average Remaining Contractual Term (Yrs) | |||||||||||||||||||
| Outstanding at beginning of year | $ | ||||||||||||||||||||||
| Exercised | ( | ||||||||||||||||||||||
| Forfeited and expired | ( | ||||||||||||||||||||||
| Outstanding as of September 30, 2021 | $ | $ | |||||||||||||||||||||
| Exercisable as of September 30, 2021 | $ | $ | |||||||||||||||||||||
As of September 30, 2021, there was $20 million of total unrecognized compensation cost related to stock options granted under all plans. That cost is expected to be recognized over a weighted-average period of 1.39 years.
Non-vested Shares and Share Units
Non-vested share and share unit activity for the nine months ended September 30, 2021 was as follows:
| (In thousands, except per share data) | Number of Shares | Weighted-Average Grant Date Fair Value Per Share | |||||||||
| Outstanding at beginning of year | $ | ||||||||||
| Granted | |||||||||||
| Vested | ( | ||||||||||
| Forfeited | ( | ||||||||||
| Outstanding as of September 30, 2021 | $ | ||||||||||
As of September 30, 2021, there was $195 million of total unrecognized compensation cost related to non-vested share and share unit awards granted under all plans. That cost is expected to be recognized over a weighted-average period of 2.13 years.
Share-Based Compensation Cost
The following table presents total compensation expense recognized with respect to stock options, non-vested shares and share units, and our associate stock purchase plan:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| (In thousands) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Stock option and non-vested share and share unit compensation expense | $ | $ | $ | $ | |||||||||||||||||||
| Associate stock purchase plan expense | |||||||||||||||||||||||
Amounts capitalized in software development costs, net of amortization | ( | ( | ( | ( | |||||||||||||||||||
| Amounts charged against earnings, before income tax benefit | $ | $ | $ | $ | |||||||||||||||||||
| Amount of related income tax benefit recognized in earnings | $ | $ | $ | $ | |||||||||||||||||||
17
Treasury Stock
Under one of our share repurchase programs, which was initially approved by our Board of Directors on May 23, 2017, and most recently amended on December 12, 2019 (the "2017 Share Repurchase Program"), the Company was authorized to repurchase up to $3.70 billion of shares of our common stock, excluding transaction costs. The repurchases were to be effectuated in the open market, by block purchase, in privately negotiated transactions, or through other transactions managed by broker-dealers, or any combination thereof.
On April 23, 2021, our Board of Directors approved a new share repurchase program (the "2021 Share Repurchase Program"), which authorizes the Company to repurchase up to $3.75 billion in the aggregate of shares of our common stock, excluding transaction costs. The 2021 Share Repurchase Program is incremental to our 2017 Share Repurchase Program. The repurchases are to be effectuated in the open market, by block purchase, in privately negotiated transactions, or through other transactions managed by broker-dealers, or any combination thereof. The 2021 Share Repurchase Program will expire on December 31, 2023 .
During the nine months ended September 30, 2021, we repurchased 14.8 million shares for total consideration of $1.12 billion under our share repurchase programs. The shares were recorded as treasury stock and accounted for under the cost method. No repurchased shares have been retired. The 2017 Share Repurchase Program was completed during the third quarter of 2021. As of September 30, 2021, an aggregate of $3.55 billion remained available for repurchase under the 2021 Share Repurchase Program.
Dividends
On March 25, 2021 , our Board of Directors declared a cash dividend of $0.22 per share on our issued and outstanding common stock, which was paid on April 20, 2021 to shareholders of record as of April 6, 2021 . On May 19, 2021 , our Board of Directors declared a cash dividend of $0.22 per share on our issued and outstanding common stock, which was paid on July 13, 2021 to shareholders of record as of June 28, 2021 . On September 9, 2021 , our Board of Directors declared a cash dividend of $0.22 per share on our issued and outstanding common stock, which was paid on October 12, 2021 to shareholders of record as of September 27, 2021 . In connection with the declaration of such dividends, our non-vested shares and share units are entitled to dividend equivalents, which will be payable to the holder subject to, and upon vesting of, the underlying awards. Our outstanding stock options are not entitled to dividend or dividend equivalents. At September 30, 2021 and December 31, 2020, our condensed consolidated balance sheets included liabilities for dividends payable of $67 million and $69 million, respectively, which are included in "Other current liabilities".
Accumulated Other Comprehensive Loss, Net (AOCI)
The components of AOCI, net of tax, were as follows:
| Foreign currency translation adjustment and other | Unrealized loss on cash flow hedge | Unrealized holding gain (loss) on available-for-sale investments | Total | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Balance at December 31, 2020 | $ | ( | $ | ( | $ | $ | ( | ||||||||||||||||
| Other comprehensive income (loss) before reclassifications | ( | ( | ( | ||||||||||||||||||||
Amounts reclassified from AOCI | |||||||||||||||||||||||
| Balance at March 31, 2021 | ( | ( | ( | ||||||||||||||||||||
| Other comprehensive income (loss) before reclassifications | ( | ( | |||||||||||||||||||||
| Amounts reclassified from AOCI | ( | ||||||||||||||||||||||
| Balance at June 30, 2021 | ( | ( | ( | ||||||||||||||||||||
| Other comprehensive income (loss) before reclassifications | ( | ( | ( | ( | |||||||||||||||||||
| Amounts reclassified from AOCI | |||||||||||||||||||||||
| Balance at September 30, 2021 | $ | ( | $ | ( | $ | $ | ( | ||||||||||||||||
18
| Foreign currency translation adjustment and other | Unrealized loss on cash flow hedge | Unrealized holding gain (loss) on available-for-sale investments | Total | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Balance at December 28, 2019 | $ | ( | $ | ( | $ | $ | ( | ||||||||||||||||
| Other comprehensive income (loss) before reclassifications | ( | ( | ( | ( | |||||||||||||||||||
| Amounts reclassified from AOCI | |||||||||||||||||||||||
| Balance at March 31, 2020 | ( | ( | ( | ( | |||||||||||||||||||
| Other comprehensive income (loss) before reclassifications | ( | ||||||||||||||||||||||
| Amounts reclassified from AOCI | |||||||||||||||||||||||
| Balance at June 30, 2020 | ( | ( | ( | ||||||||||||||||||||
| Other comprehensive income (loss) before reclassifications | ( | ( | |||||||||||||||||||||
| Amounts reclassified from AOCI | |||||||||||||||||||||||
| Balance at September 30, 2020 | $ | ( | $ | ( | $ | $ | ( | ||||||||||||||||
The effects on net earnings of amounts reclassified from AOCI were as follows:
| (In thousands) | Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||
| AOCI Component | Location | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||||
| Unrealized loss on cash flow hedge | Other income, net | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||||
| Income taxes | ||||||||||||||||||||||||||||||||
| Net of tax | ( | ( | ( | ( | ||||||||||||||||||||||||||||
| Unrealized holding gain (loss) on available-for-sale investments | Other income, net | ( | ( | |||||||||||||||||||||||||||||
| Income taxes | ||||||||||||||||||||||||||||||||
| Net of tax | ( | ( | ||||||||||||||||||||||||||||||
| Total amount reclassified, net of tax | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||||||||
(11) Contingencies
We accrue estimates for resolution of any legal and other contingencies when losses are probable and reasonably estimable in accordance with ASC 450, Contingencies ("ASC 450"). No less than quarterly, and as facts and circumstances change, we review the status of each significant matter underlying a legal proceeding or claim and assess our potential financial exposure. We accrue a liability for an estimated loss if the potential loss from any legal proceeding or claim is considered probable and the amount can be reasonably estimated. Significant judgment is required in both the determination of probability and the determination as to whether the amount of an exposure is reasonably estimable, and accruals are based only on the information available to our management at the time the judgment is made, which may prove to be incomplete or inaccurate or unanticipated events and circumstances may occur that might cause us to change those estimates and assumptions. Furthermore, the outcome of legal proceedings is inherently uncertain, and we may incur substantial defense costs and expenses defending any of these matters. Should any one or a combination of more than one of these proceedings be successful, or should we determine to settle any one or a combination of these matters, we may be required to pay substantial sums, become subject to the entry of an injunction or be forced to change the manner in which we operate our business, which could have a material adverse impact on our business, results of operations, cash flows or financial condition.
19
The terms of our agreements with our clients generally provide for limited indemnification of such clients against losses, expenses and liabilities arising from third party or other claims based on, among other things, alleged infringement by our solutions of an intellectual property right of third parties or damages caused by data privacy breaches or system interruptions. The terms of such indemnification often limit the scope of and remedies for such indemnification obligations and generally include, as applicable, a right to replace or modify an infringing solution. For several reasons, including the lack of a sufficient number of prior indemnification claims relating to intellectual property infringement, data privacy breaches or system interruptions, the inherent uncertainty stemming from such claims, and the lack of a monetary liability limit for such claims under the terms of the corresponding agreements with our clients, we cannot determine the maximum amount of potential future payments, if any, related to such indemnification provisions.
In addition to commitments and obligations in the ordinary course of business, we are involved in various other legal proceedings and claims that arise in the ordinary course of business, including for example, employment and client disputes and litigation alleging solution and implementation defects, personal injury, intellectual property infringement, violations of law, breaches of contract and warranties, and compliance audits by various government agencies. Many of these proceedings are at preliminary stages and many seek an indeterminate amount of damages. At this time, we do not believe the range of potential losses under any claims to be material to our consolidated financial statements.
(12) Segment Reporting
20
The following table presents a summary of our operating segments and other expense for the three and nine months ended September 30, 2021 and September 30, 2020:
| (In thousands) | Domestic | International | Other | Total | |||||||||||||||||||
| Three Months Ended 2021 | |||||||||||||||||||||||
| Revenues | $ | $ | $ | — | $ | ||||||||||||||||||
| Costs of revenue | — | ||||||||||||||||||||||
| Operating expenses | |||||||||||||||||||||||
Total costs and expenses | |||||||||||||||||||||||
| Operating earnings (loss) | $ | $ | $ | ( | $ | ||||||||||||||||||
| (In thousands) | Domestic | International | Other | Total | |||||||||||||||||||
| Three Months Ended 2020 | |||||||||||||||||||||||
| Revenues | $ | $ | $ | — | $ | ||||||||||||||||||
| Costs of revenue | — | ||||||||||||||||||||||
| Operating expenses | |||||||||||||||||||||||
Total costs and expenses | |||||||||||||||||||||||
| Gain on sale of businesses | |||||||||||||||||||||||
| Operating earnings (loss) | $ | $ | $ | ( | $ | ||||||||||||||||||
| (In thousands) | Domestic | International | Other | Total | |||||||||||||||||||
| Nine Months Ended 2021 | |||||||||||||||||||||||
| Revenues | $ | $ | $ | — | $ | ||||||||||||||||||
| Costs of revenue | — | ||||||||||||||||||||||
| Operating expenses | |||||||||||||||||||||||
Total costs and expenses | |||||||||||||||||||||||
| Operating earnings (loss) | $ | $ | $ | ( | $ | ||||||||||||||||||
| (In thousands) | Domestic | International | Other | Total | |||||||||||||||||||
| Nine Months Ended 2020 | |||||||||||||||||||||||
| Revenues | $ | $ | $ | — | $ | ||||||||||||||||||
| Costs of revenue | — | ||||||||||||||||||||||
| Operating expenses | |||||||||||||||||||||||
Total costs and expenses | |||||||||||||||||||||||
| Gain on sale of businesses | |||||||||||||||||||||||
| Operating earnings (loss) | $ | $ | $ | ( | $ | ||||||||||||||||||
21
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following Management Discussion and Analysis ("MD&A") is intended to help the reader understand the results of operations and financial condition of Cerner Corporation ("Cerner," the "Company," "we," "us" or "our"). This MD&A is provided as a supplement to, and should be read in conjunction with, our condensed consolidated financial statements and the accompanying notes to condensed consolidated financial statements ("Notes") found above. Certain statements in this quarterly report on Form 10-Q contain forward-looking statements within the meanings of the Private Securities Litigation Reform Act of 1995, as amended, regarding our future plans, objectives, beliefs, expectations, representations and projections. See the end of this MD&A for more information on our forward-looking statements, including a discussion of the most significant factors that could cause actual results to differ materially from those in the forward-looking statements.
All references to quarters or nine month periods ended 2021 and 2020 in this MD&A represent the respective three and nine month periods ended September 30, 2021 and September 30, 2020, unless otherwise noted.
Management Overview
Our revenues are primarily derived by selling, implementing, operating and supporting software solutions, clinical content, hardware, devices and services that give healthcare providers and other stakeholders secure access to clinical, administrative and financial data in real or near-real time, helping them to improve quality, safety and efficiency in the delivery of healthcare.
Our core strategy is to create organic growth by investing in research and development to create solutions and tech-enabled services for the healthcare industry. We expect to also supplement organic growth with acquisitions or strategic investments and collaborations.
Cerner's long history of growth has created an important strategic footprint in healthcare, with Cerner holding approximately 25 percent market share in the U.S. acute care electronic health record ("EHR") market and a leading market share in several non-U.S. regions. Foundational to our growth going forward is delivering value to this core client base, including executing effectively on our large U.S. federal contracts and cross-selling key solutions and services in areas such as revenue cycle. We are also investing in platform modernization, with a focus on delivering a software as a service platform that we expect to lower total cost of ownership, improve clinician experience and patient outcomes, and enable clients to accelerate adoption of new functionality and better leverage third-party innovations.
We also expect to continue driving growth by leveraging our HealtheIntent® platform, which is the foundation for established and new offerings for both provider and non-provider markets. The EHR-agnostic HealtheIntent platform enables Cerner to become a strategic partner with healthcare stakeholders and help them improve performance under both fee-for-service and value-based contracting. The platform, along with our CareAware® platform, also supports offerings in areas such as long-term care, home care and hospice, rehabilitation, behavioral health, community care, care team communications, health systems operations, consumer and employer, and data-as-a-service.
Beyond our strategy for driving revenue growth, we are also focused on earnings growth. After several years of margin compression related to slowing revenue growth, increased mix of low-margin services, and lower software demand due to the end of direct government incentives for EHR adoption, Cerner implemented a new operating structure and introduced other initiatives focused on cost optimization and process improvement. We have made good progress since we kicked off our transformation in 2019 and expect this progress to be reflected in improved profitability going forward. We are focused on ongoing identification of opportunities to operate more efficiently and on achieving the efficiencies without impacting the quality of our solutions and services and commitments to our clients.
We are also focused on delivering strong levels of cash flow which we expect to accomplish by continuing to grow earnings and prudently managing capital expenditures. We expect to use future cash flow and debt, as appropriate, to meet our capital allocation objectives, which include investing in our business, entering into acquisitions or other strategic investments to drive profitable growth, and returning capital to shareholders through share repurchases and dividends.
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COVID-19
Our business and results of operations for the first nine months of both 2021 and 2020 were impacted by the ongoing COVID-19 pandemic. It has caused us to modify certain of our business practices, including requiring most of our associates to work remotely; restricting associate travel; mandating vaccines for associates; developing social distancing plans for our associates; and canceling or postponing in person participation in certain meetings, events and conferences. It is not possible to quantify the full financial impact that the COVID-19 pandemic has had on our results of operations, cash flows, or financial condition, due to the uncertainty surrounding the pandemic, the difficulty inherent in identifying and measuring the various impacts that have or may stem from such an event and the fact that there are no comparable recent events that provide guidance as to how to measure or predict the effect the COVID-19 pandemic may have on our business. However, we believe COVID-19 has impacted, and could continue in the near-term to impact, our business results, primarily, but not limited to, in the following areas:
•Bookings, backlog and revenues – A decline in new business bookings as certain client purchasing decisions and projects are delayed to focus on treating patients, procuring necessary medical supplies, administering vaccines, and managing their own organizations through this crisis. A sustained decline in bookings could reduce backlog and lower subsequent revenues.
•Associate productivity – A decline in associate productivity, primarily for our services personnel, as a large amount of work is typically done at client sites, which is being impacted by travel restrictions, vaccine mandates and our clients' focus on the pandemic. Our clients' focus on the pandemic has also led to pauses on existing projects and postponed start dates for others, which translates into lower professional services revenues and a lower operating margin percentage. We are mitigating this by doing more work remotely than we have in the past, but we cannot fully offset the negative impact.
•Travel – Associate travel restrictions reduce client-related travel, which reduces reimbursed travel revenues and lowers our costs of revenue as a percent of revenues. Such restrictions also reduce non-reimbursable travel, which lowers operating expenses.
•Cash collections – A delay in client cash collections due to COVID-19's impact on national reimbursement processes, and client focus on managing their own organizations' liquidity during this time. This translates to lower cash flows from operating activities, and a higher days sales outstanding metric. Lower cash flows from operating activities may impact how we execute under our capital allocation strategy.
•Capital expenditures – A decline in capital spending as certain capital projects are delayed or strategies evolve.
We believe the impact of COVID-19 on our results of operations for the first quarter of 2020 was limited, due to the mid-March 2020 timing of when we implemented changes to our business practices in response to COVID-19, and the nature of the industry in which we operate. We believe the most significant impact of COVID-19 on our business was in the second quarter of 2020, with the impact beginning to moderate in subsequent periods but still persisting into 2021 due to some ongoing restrictive measures and certain regions dealing with resurgences of cases.
While we expect a negative financial impact to continue for the rest of 2021, we do not expect it to be as significant as 2020. The impact will continue to be difficult to quantify as there are many factors that continue to be outside of our control, so any forward looking statements that we make regarding our projections of future financial performance; new solutions and services; capital allocation plans; cost optimization and operational improvement initiatives; and the expected benefits of our acquisitions, divestitures or other collaborations are all subject to increased risks.
Operational Improvement Initiatives
The Company has continued to focus on leveraging the impact of our new operating structure and identifying additional efficiencies in our business. We continue to be focused on reducing operating expenses and generating other efficiencies that are expected to provide longer-term operating margin expansion. We are continuing our portfolio management, which includes ongoing evaluation of our offerings, exiting certain low-margin businesses, and being more selective as we consider new business opportunities. As part of our portfolio management, we closed on the sale of certain of our business operations, primarily conducted in Germany and Spain, in July 2020, and the sale of certain of our revenue cycle outsourcing business operations in August 2020. We have also made the decision to sell certain of our owned real estate. We expect to continue to evaluate and potentially complete divestiture transactions that are strategic to our operational
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improvement initiatives. We continue to be focused on ongoing identification of opportunities to operate more efficiently and on achieving the efficiencies without impacting the quality of our solutions and services and commitments to our clients.
In the near term, we expect to incur expenses in connection with these efforts. Such expenses may include, but are not limited to, consultant and other professional services fees, employee separation costs, contract termination costs, asset impairment charges, and other such related expenses. Expenses recognized in the first nine months of 2021 and 2020 primarily related to professional services fees, employee separation costs, and asset impairment charges which are included in operating expenses in our condensed consolidated statements of operations. We expect to incur additional expenses in connection with these initiatives in future periods, which may be material.
Results Overview
Bookings, which reflects the value of executed contracts for software, hardware, professional services and managed services, was $1.81 billion in the third quarter of 2021, which is an increase of 23% compared to $1.47 billion in the third quarter of 2020.
Revenues for the third quarter of 2021 increased 7% to $1.47 billion, compared to $1.37 billion in the third quarter of 2020.
Net earnings for the third quarter of 2021 decreased 51% to $176 million, compared to $357 million in the third quarter of 2020. Diluted earnings per share decreased 49% to $0.59, compared to $1.16 in the third quarter of 2020.
We had cash collections of receivables of $1.56 billion in the third quarter of 2021, compared to $1.43 billion in the third quarter of 2020. Days sales outstanding was 76 days in the third quarter of 2021, compared to 77 days for the second quarter of 2021 and 81 days for the third quarter of 2020. Operating cash flows for the third quarter of 2021 were $435 million, compared to $382 million in the third quarter of 2020.
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Results of Operations
Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020
The following table presents a summary of our operating information for the third quarters of 2021 and 2020:
| (In thousands) | 2021 | % of Revenue | 2020 | % of Revenue | % Change | ||||||||||||||||||||||||
| Revenues | $ | 1,467,976 | 100 | % | $ | 1,368,673 | 100 | % | 7 | % | |||||||||||||||||||
| Costs of revenue | 251,111 | 17 | % | 231,889 | 17 | % | 8 | % | |||||||||||||||||||||
| Margin | 1,216,865 | 83 | % | 1,136,784 | 83 | % | 7 | % | |||||||||||||||||||||
| Operating expenses | |||||||||||||||||||||||||||||
| Sales and client service | 651,010 | 44 | % | 625,402 | 46 | % | 4 | % | |||||||||||||||||||||
| Software development | 202,663 | 14 | % | 186,826 | 14 | % | 8 | % | |||||||||||||||||||||
| General and administrative | 121,395 | 8 | % | 116,816 | 9 | % | 4 | % | |||||||||||||||||||||
| Amortization of acquisition-related intangibles | 16,874 | 1 | % | 12,789 | 1 | % | 32 | % | |||||||||||||||||||||
| Total operating expenses | 991,942 | 68 | % | 941,833 | 69 | % | 5 | % | |||||||||||||||||||||
| Total costs and expenses | 1,243,053 | 85 | % | 1,173,722 | 86 | % | 6 | % | |||||||||||||||||||||
| Gain on sale of businesses | — | — | % | 216,869 | 16 | % | |||||||||||||||||||||||
| Operating earnings | 224,923 | 15 | % | 411,820 | 30 | % | (45) | % | |||||||||||||||||||||
| Other income (loss), net | (5,070) | 48,020 | |||||||||||||||||||||||||||
| Income taxes | (44,058) | (103,164) | |||||||||||||||||||||||||||
| Net earnings | $ | 175,795 | $ | 356,676 | (51) | % | |||||||||||||||||||||||
Revenues & Backlog
Revenues increased 7% to $1.47 billion in the third quarter of 2021, as compared to $1.37 billion in the same period of 2020. The following factors impacted the year-over-year change in revenues:
•Increased implementation activity during the third quarter of 2021 within our federal business, inclusive of ongoing projects with the U.S. Department of Defense and the U.S. Department of Veterans Affairs. In the third quarter of 2021, 21% of our total revenues were attributable to our relationships (as the prime contractor or a subcontractor) with U.S. government agencies, compared to 19% in the same period of 2020.
•The third quarter of 2021 includes a $45 million increase in revenues due to contributions from our April 1, 2021 acquisition of the Kantar Health business. We expect the acquired business to contribute approximately $50 million of additional revenues over the remainder of 2021. Refer to Note (2) of the Notes for further information regarding the Kantar Health acquisition.
Refer to Note (3) of the Notes for further information regarding revenues disaggregated by our business models.
Backlog, which reflects contracted revenue that has not yet been recognized as revenue, was $13.12 billion at September 30, 2021, compared to $13.04 billion at December 31, 2020. We expect to recognize 30% of our backlog as revenue over the next 12 months.
We believe that backlog may not necessarily be a comprehensive indicator of future revenue as certain of our arrangements may be canceled (or conversely renewed) at our clients' option; thus contract consideration related to such cancellable periods has been excluded from our calculation of backlog. However, historically our experience has been that such cancellation provisions are rarely exercised. We expect to recognize approximately $1.27 billion of revenue over the next 12 months under currently executed contracts related to such cancellable periods, which is not included in our calculation of backlog.
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Costs of Revenue
Costs of revenue as a percent of revenues were 17% in the third quarter of both 2021 and 2020.
Costs of revenue include the cost of reimbursed travel expense, sales commissions, third-party consulting services and subscription content and computer hardware, devices and sublicensed software purchased from manufacturers for delivery to clients. It also includes the cost of hardware maintenance and sublicensed software support subcontracted to the manufacturers. Such costs, as a percent of revenues, typically have varied as the mix of revenue (software, hardware, devices, maintenance, support, and services) carrying different margin rates changes from period to period. Costs of revenue does not include the costs of our client service personnel who are responsible for delivering our service offerings. Such costs are included in sales and client service expense.
Operating Expenses
Total operating expenses increased 5% to $992 million in the third quarter of 2021, compared to $942 million in the same period of 2020.
•Sales and client service expenses as a percent of revenues were 44% in the third quarter of 2021, compared to 46% in the same period of 2020. These expenses increased 4% to $651 million in the third quarter of 2021, from $625 million in the same period of 2020. Sales and client service expenses include salaries and benefits of sales, marketing, support, and services personnel, depreciation and other expenses associated with our managed services business, communications expenses, unreimbursed travel expenses, expense for share-based payments, and trade show and advertising costs. The increase in sales and client service expenses was primarily driven by expense contributions from the Kantar Health business, which was acquired on April 1, 2021.
•Software development expenses as a percent of revenues were 14% in the third quarter of both 2021 and 2020. Expenditures for software development include ongoing development and enhancement of the Cerner Millennium® and HealtheIntent platforms, as well as other key initiatives such as platform modernization, with a focus on development of a software as a service platform. A summary of our total software development expense in the third quarters of 2021 and 2020 is as follows:
| Three Months Ended | |||||||||||
| (In thousands) | 2021 | 2020 | |||||||||
| Software development costs | $ | 210,082 | $ | 198,565 | |||||||
| Capitalized software costs | (73,773) | (71,525) | |||||||||
| Capitalized costs related to share-based payments | (1,796) | (1,792) | |||||||||
| Amortization of capitalized software costs | 66,222 | 61,578 | |||||||||
| Net realizable value charges (see Note (1) of the Notes) | 1,928 | — | |||||||||
| Total software development expense | $ | 202,663 | $ | 186,826 | |||||||
•General and administrative expenses as a percent of revenues were 8% in the third quarter of 2021, compared to 9% in the same period of 2020. These expenses increased 4% to $121 million in the third quarter of 2021, from $117 million in the same period of 2020. General and administrative expenses include salaries and benefits for corporate, financial and administrative staffs, utilities, communications expenses, professional fees, depreciation and amortization, transaction gains or losses on foreign currency, expense for share-based payments, certain organizational restructuring and other expense. The increase in general and administrative expenses was primarily driven by increased employee separation costs, as further discussed in Note (1) of the Notes.
•Amortization of acquisition-related intangibles as a percent of revenues was 1% in the third quarter of both 2021 and 2020. These expenses increased 32% to $17 million in the third quarter of 2021, from $13 million in the same period in 2020. Amortization of acquisition-related intangibles includes the amortization of customer relationships, acquired technology, trade names, and non-compete agreements recorded in connection with our business acquisitions. The increase in amortization of acquisition-related intangibles is primarily due to amortization of
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intangibles acquired in our April 1, 2021 acquisition of the Kantar Health business. Refer to Note (2) of the Notes for further information regarding the Kantar Health acquisition.
Gain on Sale of Businesses
On July 1, 2020, we sold certain of our business operations, primarily conducted in Germany and Spain, to affiliates of CompuGroup Medical SE & Co. KGaA ("CGM"), as a part of our portfolio management strategy. Such operations included the associates, intellectual property, client contracts, other assets, and liabilities related to our medico®, Selene®, Soarian Health Archive®, and Soarian® Integrated Care solution offerings.
On August 3, 2020, we sold certain of our revenue cycle outsourcing business operations to affiliates of R1 RCM Inc., as a part of our portfolio management strategy. Such operations included the associates, client contracts, certain other assets, and certain liabilities related to our commercial revenue cycle outsourcing services business.
In the third quarter of 2020, we recognized a $217 million gain in connection with these divestiture transactions.
Non-Operating Items
•Other income (loss), net was a net loss of $5 million in the third quarter of 2021, compared to $48 million of income in the same period of 2020. The decrease in 2021 is primarily attributable to the third quarter of 2020 including a $49 million gain recognized on the disposition of one of our equity investments.
•Our effective tax rate was 20.0% for the third quarter of 2021, compared to 22.4% for the same period of 2020. The decrease in the effective tax rate is primarily due to the third quarter of 2020 including taxes associated with the divestiture transactions discussed above. Refer to Note (8) of the Notes for further discussion regarding our effective tax rate.
Operations by Segment
We have two operating segments: Domestic and International. The Domestic segment includes revenue contributions and expenditures associated with business activity in the United States. The International segment includes revenue contributions and expenditures linked to business activity outside the United States, primarily from Australia, Canada, Europe, and the Middle East. Refer to Note (12) of the Notes for further information regarding our reportable segments.
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The following table presents a summary of our operating segment information for the third quarters of 2021 and 2020:
| (In thousands) | 2021 | % of Revenue | 2020 | % of Revenue | % Change | ||||||||||||||||||||||||
| Domestic Segment | |||||||||||||||||||||||||||||
| Revenues | $ | 1,285,488 | 100% | $ | 1,230,769 | 100% | 4% | ||||||||||||||||||||||
| Costs of revenue | 222,665 | 17% | 219,938 | 18% | 1% | ||||||||||||||||||||||||
| Operating expenses | 580,535 | 45% | 566,777 | 46% | 2% | ||||||||||||||||||||||||
| Total costs and expenses | 803,200 | 62% | 786,715 | 64% | 2% | ||||||||||||||||||||||||
| Domestic operating earnings | 482,288 | 38% | 444,054 | 36% | 9% | ||||||||||||||||||||||||
| International Segment | |||||||||||||||||||||||||||||
| Revenues | 182,488 | 100% | 137,904 | 100% | 32% | ||||||||||||||||||||||||
| Costs of revenue | 28,446 | 16% | 11,951 | 9% | 138% | ||||||||||||||||||||||||
| Operating expenses | 70,472 | 39% | 58,626 | 43% | 20% | ||||||||||||||||||||||||
| Total costs and expenses | 98,918 | 54% | 70,577 | 51% | 40% | ||||||||||||||||||||||||
| International operating earnings | 83,570 | 46% | 67,327 | 49% | 24% | ||||||||||||||||||||||||
| Other costs and expenses, net | (340,935) | (316,430) | 8% | ||||||||||||||||||||||||||
| Gain on sale of businesses | — | 216,869 | |||||||||||||||||||||||||||
| Consolidated operating earnings | $ | 224,923 | $ | 411,820 | (45)% | ||||||||||||||||||||||||
Domestic Segment
•Revenues increased 4% to $1.29 billion in the third quarter of 2021, from $1.23 billion in the same period of 2020. The following factors impacted the year-over-year change in Domestic revenues:
◦Increased implementation activity during the third quarter of 2021 within our federal business, inclusive of ongoing projects with the U.S. Department of Defense and the U.S. Department of Veterans Affairs.
◦The third quarter of 2021 includes a $21 million increase in revenues due to contributions from our April 1, 2021 acquisition of the Kantar Health business.
Refer to Note (3) of the Notes for further information regarding revenues disaggregated by our business models.
•Costs of revenue as a percent of revenues were 17% in the third quarter of 2021, compared to 18% in the same period of 2020. The lower costs of revenue as a percent of revenues was primarily driven by the mix of revenues for the quarters, inclusive of the third quarter of 2021 containing a higher percentage of licensed software revenues, which caries a lower cost of revenue.
•Operating expenses as a percent of revenues were 45% in the third quarter of 2021, compared to 46% in the same period of 2020. These expenses increased 2% to $581 million in the third quarter of 2021, from $567 million in the same period of 2020. The increase in operating expenses was primarily driven by expense contributions from the Kantar Health business, which was acquired on April 1, 2021.
International Segment
•Revenues increased 32% to $182 million in the third quarter of 2021, compared to $138 million in the same period of 2020. The increase in revenues is primarily due to a $24 million increase in revenues due to contributions from our April 1, 2021 acquisition of the Kantar Health business. The remaining increase is attributable to 2021 revenue growth across the majority of our remaining International Segment operations. Refer to Note (3) of the Notes for further information regarding revenues disaggregated by our business models.
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•Costs of revenue as a percent of revenues were 16% in the third quarter of 2021, compared to 9% in the same period of 2020. The higher costs of revenue as a percent of revenues was primarily driven by the impact of the Kantar Health business acquired on April 1, 2021.
•Operating expenses as a percent of revenues were 39% in the third quarter of 2021, compared to 43% in the same period of 2020. These expenses increased 20% to $70 million in the third quarter of 2021, from $59 million in the same period of 2020. The increase in operating expenses is primarily due to the April 1, 2021 acquisition of the Kantar Health business.
Other Costs and Expenses, Net
Operating costs and expenses not attributed to an operating segment include expenses such as software development, general and administrative expenses, share-based compensation expense, certain amortization and depreciation, certain organizational restructuring and other expense. These expenses increased 8% to $341 million in the third quarter of 2021, from $316 million in the same period of 2020. The increase is primarily due to increased employee separation costs, as further discussed in Note (1) of the Notes.
Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020
The following table presents a summary of our operating information for the first nine months of 2021 and 2020:
| (In thousands) | 2021 | % of Revenue | 2020 | % of Revenue | % Change | ||||||||||||||||||||||||
| Revenues | $ | 4,312,509 | 100 | % | $ | 4,110,763 | 100 | % | 5 | % | |||||||||||||||||||
| Costs of revenue | 743,092 | 17 | % | 698,268 | 17 | % | 6 | % | |||||||||||||||||||||
| Margin | 3,569,417 | 83 | % | 3,412,495 | 83 | % | 5 | % | |||||||||||||||||||||
| Operating expenses | |||||||||||||||||||||||||||||
| Sales and client service | 2,004,263 | 46 | % | 1,907,138 | 46 | % | 5 | % | |||||||||||||||||||||
| Software development | 636,590 | 15 | % | 551,101 | 13 | % | 16 | % | |||||||||||||||||||||
| General and administrative | 390,067 | 9 | % | 391,000 | 10 | % | — | % | |||||||||||||||||||||
| Amortization of acquisition-related intangibles | 45,956 | 1 | % | 43,031 | 1 | % | 7 | % | |||||||||||||||||||||
| Total operating expenses | 3,076,876 | 71 | % | 2,892,270 | 70 | % | 6 | % | |||||||||||||||||||||
| Total costs and expenses | 3,819,968 | 89 | % | 3,590,538 | 87 | % | 6 | % | |||||||||||||||||||||
| Gain on sale of businesses | — | — | % | 216,869 | 5 | % | |||||||||||||||||||||||
| Operating earnings | 492,541 | 11 | % | 737,094 | 18 | % | (33) | % | |||||||||||||||||||||
| Other income (loss), net | (5,542) | 78,247 | |||||||||||||||||||||||||||
| Income taxes | (106,245) | (176,758) | |||||||||||||||||||||||||||
| Net earnings | $ | 380,754 | $ | 638,583 | (40) | % | |||||||||||||||||||||||
Revenues & Backlog
Revenues increased 5% to $4.31 billion in the first nine months of 2021, as compared to $4.11 billion in the same period of 2020. The following factors impacted the year-over-year change in revenues:
•Increased implementation activity during the first nine months of 2021 within our federal business, inclusive of ongoing projects with the U.S. Department of Defense and the U.S. Department of Veterans Affairs. In the first nine months of 2021, 20% of our total revenues were attributable to our relationships (as the prime contractor or a subcontractor) with U.S. government agencies, compared to 17% in the same period of 2020.
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•The first nine months of 2021 includes a $90 million increase in revenues due to contributions from our April 1, 2021 acquisition of the Kantar Health business. Refer to Note (2) of the Notes for further information regarding the Kantar Health acquisition.
•The first nine months of 2021 includes a $44 million reduction in revenues due to the sale of certain of our revenue cycle outsourcing business operations to affiliates of R1 RCM Inc., on August 3, 2020.
•The first nine months of 2021 includes a $40 million reduction in revenues due to the sale of certain of our business operations primarily conducted in Germany and Spain to affiliates of CompuGroup Medical SE & Co. KGaA on July 1, 2020.
Refer to Note (3) of the Notes for further information regarding revenues disaggregated by our business models.
Costs of Revenue
Costs of revenue as a percent of revenues were 17% in the first nine months of both 2021 and 2020.
Operating Expenses
Total operating expenses increased 6% to $3.08 billion in the first nine months of 2021, compared to $2.89 billion in the same period of 2020.
•Sales and client service expenses as a percent of revenues were 46% in the first nine months of both 2021 and 2020. These expenses increased 5% to $2.00 billion in the first nine months of 2021, from $1.91 billion in the same period of 2020. The increase in sales and client service expenses was primarily driven by a $68 million pre-tax charge recorded in the first nine months of 2021 in connection with the designation of certain real estate assets as held for sale. The remaining increase was was primarily driven by expense contributions from the Kantar Health business, which was acquired on April 1, 2021. Refer to Note (1) and Note (2) of the Notes for further information.
•Software development expenses as a percent of revenues were 15% in the first nine months of 2021, compared to 13% in the same period of 2020. Expenditures for software development include ongoing development and enhancement of the Cerner Millennium and HealtheIntent platforms, as well as other key initiatives such as platform modernization, with a focus on development of a software as a service platform. A summary of our total software development expense in the first nine months of 2021 and 2020 is as follows:
| Nine Months Ended | |||||||||||
| (In thousands) | 2021 | 2020 | |||||||||
| Software development costs | $ | 633,367 | $ | 592,025 | |||||||
| Capitalized software costs | (236,234) | (219,879) | |||||||||
| Capitalized costs related to share-based payments | (6,443) | (4,831) | |||||||||
| Amortization of capitalized software costs | 196,319 | 183,786 | |||||||||
| Net realizable value charges (see Note (1) of the Notes) | 49,581 | — | |||||||||
| Total software development expense | $ | 636,590 | $ | 551,101 | |||||||
•General and administrative expenses as a percent of revenues were 9% in the first nine months of 2021, compared to 10% in the same period of 2020. These expenses were relatively flat at $390 million in the first nine months of 2021, compared to $391 million in the same period of 2020. General and administrative expenses include certain charges incurred in connection with our operational improvement initiatives, as further discussed above, and in the Notes. We expect to incur additional expenses in connection with these efforts in future periods, which may be material.
•Amortization of acquisition-related intangibles as a percent of revenues was 1% in the first nine months of both 2021 and 2020. These expenses increased 7% to $46 million in the first nine months of 2021, from $43 million in the same period in 2020. The increase in amortization of acquisition-related intangibles is primarily due to
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amortization of intangibles acquired in our April 1, 2021 acquisition of the Kantar Health business. Refer to Note (2) of the Notes for further information regarding the Kantar Health acquisition.
Gain on Sale of Businesses
The first nine months of 2020 includes a $217 million gain recognized in connection with the divestiture transactions described above.
Non-Operating Items
•Other income (loss), net was a net loss of $6 million in the first nine months of 2021, compared to $78 million of income in the same period of 2020. The decrease in 2021 is primarily attributable to the first nine months of 2020 including a $76 million gain recognized on the disposition of one of our equity investments. The remaining difference is primarily attributable to increased interest expense in the first nine months of 2021 from the $300 million of Series 2020-A Notes we issued in March 2020 and the $500 million of Series 2021 Senior Notes we issued in March 2021.
•Our effective tax rate was relatively flat at 21.8% for the first nine months of 2021, compared to 21.7% for the same period of 2020. Refer to Note (8) of the Notes for further discussion regarding our effective tax rate.
Operations by Segment
The following table presents a summary of our operating segment information for the first nine months of 2021 and 2020:
| (In thousands) | 2021 | % of Revenue | 2020 | % of Revenue | % Change | ||||||||||||||||||||||||
| Domestic Segment | |||||||||||||||||||||||||||||
| Revenues | $ | 3,774,507 | 100% | $ | 3,645,397 | 100% | 4% | ||||||||||||||||||||||
| Costs of revenue | 660,584 | 18% | 638,284 | 18% | 3% | ||||||||||||||||||||||||
| Operating expenses | 1,797,466 | 48% | 1,724,545 | 47% | 4% | ||||||||||||||||||||||||
| Total costs and expenses | 2,458,050 | 65% | 2,362,829 | 65% | 4% | ||||||||||||||||||||||||
| Domestic operating earnings | 1,316,457 | 35% | 1,282,568 | 35% | 3% | ||||||||||||||||||||||||
| International Segment | |||||||||||||||||||||||||||||
| Revenues | 538,002 | 100% | 465,366 | 100% | 16% | ||||||||||||||||||||||||
| Costs of revenue | 82,508 | 15% | 59,984 | 13% | 38% | ||||||||||||||||||||||||
| Operating expenses | 206,794 | 38% | 182,594 | 39% | 13% | ||||||||||||||||||||||||
| Total costs and expenses | 289,302 | 54% | 242,578 | 52% | 19% | ||||||||||||||||||||||||
| International operating earnings | 248,700 | 46% | 222,788 | 48% | 12% | ||||||||||||||||||||||||
| Other costs and expenses, net | (1,072,616) | (985,131) | 9% | ||||||||||||||||||||||||||
| Gain on sale of businesses | — | 216,869 | |||||||||||||||||||||||||||
| Consolidated operating earnings | $ | 492,541 | $ | 737,094 | (33)% | ||||||||||||||||||||||||
Domestic Segment
•Revenues increased 4% to $3.77 billion in the first nine months of 2021, from $3.65 billion in the same period of 2020. The following factors impacted the year-over-year change in Domestic revenues:
◦Increased implementation activity during the first nine months of 2021 within our federal business, inclusive of ongoing projects with the U.S. Department of Defense and the U.S. Department of Veterans Affairs.
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◦The first nine months of 2021 includes a $42 million increase in revenues due to contributions from our April 1, 2021 acquisition of the Kantar Health business.
◦The first nine months of 2021 includes a $44 million reduction in revenues due to the sale of certain of our revenue cycle outsourcing business operations to affiliates of R1 RCM Inc., on August 3, 2020.
Refer to Note (3) of the Notes for further information regarding revenues disaggregated by our business models.
•Costs of revenue as a percent of revenues were 18% in the first nine months of both 2021 and 2020.
•Operating expenses as a percent of revenues were 48% in the first nine months of 2021, compared to 47% in the same period of 2020. These expenses increased 4% to $1.80 billion in the first nine months of 2021, from $1.72 billion in the same period of 2020. The increase in operating expenses was primarily driven by a $68 million pre-tax charge recorded in the first nine months of 2021 in connection with the designation of certain real estate assets as held for sale. The remaining increase was was primarily driven by expense contributions from the Kantar Health business, which was acquired on April 1, 2021. Refer to Note (1) and Note (2) of the Notes for further information.
International Segment
•Revenues increased 16% to $538 million in the first nine months of 2021, from $465 million in the same period of 2020. The following factors impacted the year-over-year change in International revenues:
◦The first nine months of 2021 includes a $48 million increase in revenues due to contributions from our April 1, 2021 acquisition of the Kantar Health business.
◦The first nine months of 2021 includes a $40 million reduction in revenues due to the sale of certain of our business operations primarily conducted in Germany and Spain to affiliates of CompuGroup Medical SE & Co. KGaA on July 1, 2020.
◦The remaining difference is attributable to 2021 revenue growth across the majority of our remaining International Segment operations.
Refer to Note (3) of the Notes for further information regarding revenues disaggregated by our business models.
•Costs of revenue as a percent of revenues were 15% in the first nine months of 2021, compared to 13% in the same period of 2020. The higher costs of revenue as a percent of revenues was primarily driven by the impact of the Kantar Health business acquired on April 1, 2021.
•Operating expenses as a percent of revenues were 38% in the first nine months of 2021, compared to 39% in the same period of 2020. These expenses increased 13% to $207 million in the first nine months of 2021, from $183 million in the same period of 2020. The increase in operating expenses is primarily due to the April 1, 2021 acquisition of the Kantar Health business.
Other Costs and Expenses, Net
These expenses increased 9% to $1.07 billion in the first nine months of 2021, from $985 million in the same period of 2020. The increase is primarily due to pre-tax charges of $50 million recorded in the first nine months of 2021 to reduce the carrying amount of certain capitalized software development costs to estimated net realizable value, as further discussed in Note (1) of the Notes.
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Liquidity and Capital Resources
Our liquidity is influenced by many factors, including the amount and timing of our revenues, our cash collections from our clients and the amount we invest in software development, acquisitions, collaborations, capital expenditures, and our share repurchase and dividend programs.
Our principal sources of liquidity are our cash, cash equivalents (which primarily consist of money market funds, time deposits and commercial paper with original maturities of less than 90 days), short-term investments, borrowings under our Credit Agreement and other sources of debt financing. At September 30, 2021, we had cash and cash equivalents of $460 million and short-term investments of $323 million, as compared to cash and cash equivalents of $616 million and short-term investments of $442 million at December 31, 2020.
We have entered into a Credit Agreement with a syndicate of lenders that provides for an unsecured $1.00 billion revolving credit loan facility, along with a letter of credit facility up to $100 million (which is a sub-facility of the $1.00 billion revolving credit loan facility). We have the ability to increase the maximum capacity to $1.20 billion at any time during the Credit Agreement's term, subject to lender participation and the satisfaction of specified conditions. The Credit Agreement expires in May 2024. As of September 30, 2021, we had outstanding revolving credit loans and letters of credit of $600 million and $30 million, respectively; which reduced our available borrowing capacity to $370 million under the Credit Agreement.
We have also entered into note purchase agreements pursuant to which we may issue and sell unsecured senior promissory notes to those purchasers electing to purchase. See Note (6) of the Notes for further information.
We believe that our present cash position, together with cash generated from operations, short-term investments and, as appropriate, remaining availability under our Credit Agreement and other sources of debt financing, will be sufficient to meet anticipated cash requirements for the next 12 months.
The following table summarizes our cash flows in the first nine months of 2021 and 2020:
| Nine Months Ended | |||||||||||
| (In thousands) | 2021 | 2020 | |||||||||
| Cash flows from operating activities | $ | 1,254,390 | $ | 924,045 | |||||||
| Cash flows from investing activities | (705,560) | (596,825) | |||||||||
| Cash flows from financing activities | (693,077) | (345,527) | |||||||||
| Effect of exchange rate changes on cash | (11,828) | (4,382) | |||||||||
| Total change in cash and cash equivalents | (156,075) | (22,689) | |||||||||
| Cash and cash equivalents at beginning of period | 615,615 | 441,843 | |||||||||
| Cash and cash equivalents at end of period | $ | 459,540 | $ | 419,154 | |||||||
| Free cash flow (non-GAAP) | $ | 764,900 | $ | 461,282 | |||||||
Cash from Operating Activities
| Nine Months Ended | |||||||||||
| (In thousands) | 2021 | 2020 | |||||||||
| Cash collections from clients | $ | 4,464,651 | $ | 4,085,527 | |||||||
| Cash paid to employees and suppliers and other | (3,073,278) | (3,051,302) | |||||||||
| Cash paid for interest | (41,918) | (31,661) | |||||||||
| Cash paid for taxes, net of refunds | (95,065) | (78,519) | |||||||||
| Total cash from operations | $ | 1,254,390 | $ | 924,045 | |||||||
Cash flows from operations increased $330 million in the first nine months of 2021 when compared to the same period of 2020, due primarily to increased collections of client receivables. Days sales outstanding was 76 days in the third quarter of 2021, compared to 77 days for the second quarter of 2021 and 81 days for the third quarter of 2020.
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Cash from Investing Activities
| Nine Months Ended | |||||||||||
| (In thousands) | 2021 | 2020 | |||||||||
| Capital purchases | $ | (246,813) | $ | (238,053) | |||||||
| Capitalized software development costs | (242,677) | (224,710) | |||||||||
| Sales and maturities of investments, net of purchases | 145,957 | (298,069) | |||||||||
| Purchases of other intangibles | (23,197) | (29,698) | |||||||||
| Acquisition of businesses, net of cash acquired | (348,179) | (35,766) | |||||||||
| Sale of businesses | — | 229,471 | |||||||||
| Disposition of assets held for sale | 9,349 | — | |||||||||
| Total cash flows from investing activities | $ | (705,560) | $ | (596,825) | |||||||
Cash flows from investing activities consist primarily of capital spending, investment, acquisition, and divestiture activities.
Our capital spending in the first nine months of 2021 was driven by capitalized equipment purchases primarily to support growth in our managed services business and capitalized spending to support our ongoing software development initiatives. Capital purchases for the full year 2021 are expected to approximate 2020 levels.
Short-term investment activity historically consists of the investment of cash generated by our business in excess of what is necessary to fund operations. Both the 2021 and 2020 activity is impacted by excess cash primarily being used to execute on our capital allocation strategy, including the acquisition of businesses, share repurchases and cash dividends, as discussed below. The 2020 activity includes the investment of proceeds from the sale of certain business operations in the third quarter of 2020, as discussed below.
During the first nine months of 2021, we paid $363 million of purchase price consideration in connection with our acquisition of Kantar Health, as further discussed in Note (2) of the Notes. We expect to continue seeking and completing strategic business acquisitions, investments, and relationships that are complementary to our business.
During the first nine months of 2020, we received proceeds of $229 million in connection with certain business divestitures discussed above. We expect to continue to evaluate and complete divestiture transactions that are strategic to our operational improvement initiatives discussed above.
During the first nine months of 2021, we received proceeds of $9 million in connection with the sale of our Oaks Campus. We expect future proceeds from the disposition of real estate held for sale, however, the amount and timing of such proceeds are dependent upon economic and market conditions which are not within our control. Refer to Note (1) of the Notes for further information regarding real estate held for sale.
Cash from Financing Activities
| Nine Months Ended | |||||||||||
| (In thousands) | 2021 | 2020 | |||||||||
| Long-term debt issuance | $ | 500,000 | $ | 300,000 | |||||||
| Repayment of long-term debt | — | (2,500) | |||||||||
| Cash from option exercises (net of taxes paid in connection with shares surrendered by associates) | 152,418 | 180,057 | |||||||||
| Treasury stock purchases | (1,125,000) | (650,000) | |||||||||
| Dividends paid | (202,054) | (166,277) | |||||||||
| Other | (18,441) | (6,807) | |||||||||
| Total cash flows from financing activities | $ | (693,077) | $ | (345,527) | |||||||
In March 2021, we issued $500 million aggregate principal amount of Series 2021 Senior Notes. In March 2020, we issued $300 million aggregate principal amount of Series 2020-A notes. Refer to Note (6) of the Notes for further information regarding these, as well as our other debt obligations.
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We may incur additional indebtedness in the next 12 months, which will primarily be dependent on cash flows from operations, market interest rates, and the timing of business acquisition and capital allocation activity. The proceeds from such indebtedness would be deployed in accordance with our capital allocation strategy, which may include share repurchases and dividend payments (as discussed further below), as well as for general corporate purposes, including acquisitions and investments. The terms and availability of any such debt financing may be impacted by economic and financial market conditions, as well as our financial condition and results of operations at the time we seek such financing, and there can be no assurances that we would be able to obtain such financing on terms that will be acceptable or advantageous to us.
Cash inflows from stock option exercises are dependent on a number of factors, including the price of our common stock, grant activity under our stock option and equity plans, and overall market volatility. We expect net cash inflows from stock option exercises to continue throughout 2021 based on the number of exercisable options as of September 30, 2021 and our current stock price.
During the first nine months of 2021 and 2020, we repurchased 14.8 million shares of our common stock for total consideration of $1.12 billion and 9.2 million shares of our common stock for total consideration of $650 million, respectively. As of September 30, 2021, an aggregate of $3.55 billion remained available for repurchase under our share repurchase program. We will continue to repurchase shares under our share repurchase program, but the amount and timing of such repurchases will be dependent on a number of factors, including the price of our common stock and other cash flow needs. There is no assurance that we will repurchase up to the full amount remaining under our program. Refer to Note (10) of the Notes for further information regarding our share repurchase program.
During the first nine months of both 2021 and 2020, we declared and paid quarterly cash dividends. Subject to declaration by our Board of Directors, we expect to continue paying quarterly cash dividends as a part of our current capital allocation strategy. Future dividends will be subject to the determination, declaration and discretion of our Board of Directors and compliance with covenants under our outstanding debt agreements. Refer to Note (10) of the Notes for further information regarding our cash dividend activity.
The source of funds for such repurchases and dividends may include cash generated from operations, liquidation of investment holdings and other dispositions of assets, and the incurrence of indebtedness.
Free Cash Flow (Non-GAAP)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| (In thousands) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Cash flows from operating activities (GAAP) | $ | 434,821 | $ | 381,949 | $ | 1,254,390 | $ | 924,045 | |||||||||||||||
| Capital purchases | (47,532) | (71,757) | (246,813) | (238,053) | |||||||||||||||||||
| Capitalized software development costs | (75,569) | (73,317) | (242,677) | (224,710) | |||||||||||||||||||
| Free cash flow (non-GAAP) | $ | 311,720 | $ | 236,875 | $ | 764,900 | $ | 461,282 | |||||||||||||||
Free cash flow increased $304 million in the first nine months of 2021 compared to the same period in 2020, primarily due to increased cash from operations, partially offset by an increase in capital spending. Free cash flow is a non-GAAP financial measure used by management, along with GAAP results, to analyze our earnings quality and overall cash generation of the business, and for management compensation purposes. We define free cash flow as cash flows from operating activities reduced by capital purchases and capitalized software development costs. The table above sets forth a reconciliation of free cash flow to cash flows from operating activities, which we believe is the GAAP financial measure most directly comparable to free cash flow. The presentation of free cash flow is not meant to be considered in isolation, nor as a substitute for, or superior to, GAAP results, and investors should be aware that non-GAAP measures have inherent limitations and should be read only in conjunction with our consolidated financial statements prepared in accordance with GAAP. Free cash flow may also be different from similar non-GAAP financial measures used by other companies and may not be comparable to similarly titled captions of other companies due to potential inconsistencies in the method of calculation. We believe free cash flow is important to enable investors to better understand and evaluate our ongoing operating results and allows for greater transparency in the review and understanding of our overall financial, operational and economic performance, because free cash flow takes into account certain capital expenditures necessary to operate our business.
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Forward-Looking Statements
All statements contained in this quarterly report on Form 10-Q that do not directly and exclusively relate to historical facts constitute forward-looking statements. Forward-looking statements are based on the current beliefs, expectations and assumptions of Cerner's management with respect to future events and are subject to a number of significant risks and uncertainties. It is important to note that Cerner's performance, and actual results, financial condition or business could differ materially from those expressed in such forward-looking statements. The words "will," "believe," "plans," "may," "expect," "expected," "anticipated," "strategy," "opportunities," "future," "estimated," "objectives", or the negative of these words, variations thereof or similar expressions are intended to identify such forward-looking statements. For example, our forward-looking statements include statements regarding our expectations, opportunities or plans for growth; our operational improvement initiatives and the results expected to be realized from those initiatives; our expectations with respect to realizing revenue from backlog; our anticipated expenses, cash requirements and sources of liquidity; the expected impact of the COVID-19 pandemic on our results of operations, financial condition, business and operations; the expected revenue contributions of acquired businesses; and our capital allocation strategies and plans. These statements involve a number of risks, uncertainties and other factors that could cause or contribute to actual results differing materially, including without limitation: the extent to which the COVID-19 pandemic and measures taken in response thereto could adversely affect our financial condition, future bookings and results of operations; the possibility of interruption at our data centers or client support facilities, or those of third parties with whom we have contracted (such as public cloud providers), that could expose us to significant costs and reputational harm; the possibility of increased expenses, exposure to legal claims and regulatory actions and reputational harm associated with a cyberattack or other breach in our IT security or the IT security of third parties on which we rely; potential claims for system errors and warranties or significant costs and reputational harm related to product and service-related liabilities; our proprietary technology may be subject to claims for infringement or misappropriation of intellectual property rights of others, or may be infringed or misappropriated by others, or subject to claims related to open source licenses; material adverse resolution of legal proceedings or other claims or reputational harm stemming from negative publicity related to such claims or legal proceedings; risks associated with our global operations, including without limitation greater difficulty in collecting accounts receivable; significant competition and our ability to anticipate or respond quickly to market changes, changing technologies and evolving pricing and deployment methods and to bring competitive new solutions, devices, features and services to market in a timely fashion; risks inherent with business acquisitions, strategic investments, collaborations and the failure to achieve projected synergies, or divestitures; managing growth in the new markets in which we offer solutions, healthcare devices or services; long sales cycles for our solutions and services; risks related to our dependence on strategic relationships and third party suppliers, including any impact to such supplier’s business resulting from the COVID-19 pandemic; risks associated with the loss or recruitment and retention of key personnel or the failure to successfully develop and execute succession planning to assure transitions of key associates and their knowledge, relationships and expertise; inability to achieve expected operating efficiencies and sustain or improve operating expense reductions or business disruptions or adverse tax consequences associated with restructuring, realignment and costs reduction activities; changing political, economic and regulatory influences, which could impact the purchasing practices and operations of our clients and increase costs to deliver compliant solutions and services; non-compliance with laws, regulations or certain industry initiatives or failure to deliver solutions or services that enable our clients to comply with laws or regulations applicable to their businesses; risks inherent in contracting with government clients, including without limitation, complying with strict compliance and disclosure obligations, navigating complex procurement rules and processes, and defending against bid protests; volatility and disruption resulting from global economic or market conditions, including the impact from the COVID-19 pandemic; risks associated with our outstanding and future indebtedness, such as compliance with restrictive covenants, which may limit our flexibility to operate our business; risk that our capital allocation strategy will not be fully implemented or enhance long-term shareholder value; changes in tax laws, regulations or guidance that could adversely affect our tax position and/or challenges to our tax positions in the U.S. and non-U.S. countries; the potential for losses resulting from asset impairment charges; potential variations in our sales forecasts compared to actual sales; risks that our revenue growth may be lower than anticipated and/or that the mix of revenue shifts to low margin revenue; variations in our quarterly operating results; volatility in the trading price of our common stock and the timing and volume of market activity; risks associated with fluctuations in foreign currency exchange rates; and our directors’ authority to issue preferred stock and the anti-takeover provisions in our corporate governance documents. Additional discussion of these and other risks, uncertainties and factors affecting Cerner's business is contained in our filings with the Securities and Exchange Commission, including those under the caption "Risk Factors" in our latest annual report on Form 10-K, or in materials incorporated herein or therein by reference. Forward-looking statements are not guarantees of future performance or results. The reader should not place undue reliance on forward-looking statements since the statements speak only as of the date that they are made. Except as required by law, we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in our business, results of operations or financial condition over time.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
No material changes.
Item 4. Controls and Procedures
a)Evaluation of Disclosure Controls and Procedures.
We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities and Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this quarterly report on Form 10-Q (the "Evaluation Date"). Based upon that evaluation, our CEO and CFO have concluded that, as of the Evaluation Date, our disclosure controls and procedures were designed, and were effective, to provide reasonable assurance that the information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time period specified in SEC rules and forms and is accumulated and communicated to our management, including our CEO and CFO, to allow timely decisions regarding required disclosure.
b)Changes in Internal Control over Financial Reporting.
There were no changes in our internal controls over financial reporting during the fiscal quarter ended September 30, 2021, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. On April 1, 2021, we completed the acquisition of Kantar Health. As permitted by Securities and Exchange Commission staff interpretative guidance that an assessment of a recently acquired business may be omitted from the scope of an assessment for a period not to exceed one year from the date of acquisition, the scope of our assessment of our internal controls over financial reporting at September 30, 2021 does not include Kantar Health.
c)Limitations on Controls.
Our management can provide no assurance that our disclosure controls and procedures or our internal control over financial reporting can prevent all errors and all fraud under all circumstances. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been or will be detected. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Part II. Other Information
Item 1. Legal Proceedings
From time to time, we are involved in litigation which is incidental to our business. In our opinion, no litigation to which we are currently a party is likely to have a material adverse effect on our consolidated financial condition, results of operations, or cash flows.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) Issuer Purchases of Equity Securities
The table below provides information with respect to Common Stock purchases by the Company during the third fiscal quarter of 2021.
| Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (a) | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs (a) | |||||||||||||||||||||||
| Period | ||||||||||||||||||||||||||
| July 1, 2021 - July 31, 2021 | 4,760,503 | $ | 78.75 | 4,760,503 | $ | 3,552,109,673 | ||||||||||||||||||||
| August 1, 2021 - August 31, 2021 | — | — | — | 3,552,109,673 | ||||||||||||||||||||||
| September 1, 2021 - September 30, 2021 | — | — | — | 3,552,109,673 | ||||||||||||||||||||||
| Total | 4,760,503 | $ | 78.75 | 4,760,503 | ||||||||||||||||||||||
(a) Under our share repurchase program, which was initially approved by our Board of Directors on May 23, 2017 (and announced May 25, 2017) and most recently amended on December 12, 2019 (as announced on December 13, 2019), (the "2017 Share Repurchase Program") the Company was authorized to repurchase up to $3.70 billion of shares of our common stock, excluding transaction costs. The repurchases were to be effectuated in the open market, by block purchase, in privately negotiated transactions, or through other transactions managed by broker-dealers, or any combination thereof. This program was completed in the third quarter of 2021.
On April 23, 2021, our Board of Directors approved (and announced on May 5, 2021) a new share repurchase program (as amended, the "2021 Share Repurchase Program"), which authorizes the Company to repurchase up to $3.75 billion in the aggregate of shares of our common stock, excluding transaction costs. The 2021 Share Repurchase Program is incremental to our 2017 Share Repurchase Program. The repurchases are to be effectuated in the open market, by block purchase, in privately negotiated transactions, or through other transactions managed by broker-dealers, or any combination thereof. The 2021 Share Repurchase Program will expire on December 31, 2023.
During the nine months ended September 30, 2021, we repurchased 14.8 million shares for total consideration of $1.12 billion under our share repurchase programs pursuant to Rule 10b5-1 plans. As of September 30, 2021, an aggregate of $3.55 billion remained available for repurchase under the 2021 Share Repurchase Program.
During the nine months ended September 30, 2021, we repurchased 14.8 million shares for total consideration of $1.12 billion under our share repurchase programs pursuant to Rule 10b5-1 plans. As of September 30, 2021, an aggregate of $3.55 billion remained available for repurchase under the 2021 Share Repurchase Program.
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Item 6. Exhibits
| (a) | Exhibits | |||||||
| 10.1* | ||||||||
| 10.2* | ||||||||
| 10.3* | ||||||||
| 31.1 | ||||||||
| 31.2 | ||||||||
| 32.1 | ||||||||
| 32.2 | ||||||||
| 101.INS | Inline XBRL Instance Document - the instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document. | |||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | |||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |||||||
| 101.LAB | Inline XBRL Taxonomy Extension Labels Linkbase Document | |||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |||||||
| 104 | Cover Page Interactive Data File - formatted in Inline XBRL and contained in Exhibit 101. | |||||||
| *Indicates a management contract or compensatory plan or arrangement. | ||||||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| CERNER CORPORATION | |||||||||||
| Registrant | |||||||||||
| Date: October 29, 2021 | By: | /s/ Mark J. Erceg | |||||||||
| Mark J. Erceg | |||||||||||
| Executive Vice President and Chief | |||||||||||
| Financial Officer (duly authorized | |||||||||||
| officer and principal financial officer) | |||||||||||
