UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(X)☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 29, 201831, 2021
or
( )☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number: 0-15386
CERNER CORPORATION
(Exact name of registrant as specified in its charter)
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CERNER CORPORATION |
(Exact name of registrant as specified in its charter) |
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Delaware | | 43-1196944 |
(State or other jurisdiction of incorporation or organization)
| (I.R.S. Employer Identification No.) |
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2800 RockcreekRock Creek Parkway
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| North Kansas City, MO | MO | | 64117 |
(Address of principal executive offices) | (Zip Code) |
(816) 221-1024
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, $0.01 par value per share | CERN | The Nasdaq Stock Market LLC (Nasdaq Global Select Market)
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Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [X]☒ No [ ]☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes [ ]☐ No [X]☒
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 [X]☒ 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 [X]☒ No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]☐
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.
Large accelerated filer [X]☒ Accelerated filer [ ]☐
Non-accelerated filer [ ]
☐ Smaller reporting company [ ] ☐ Emerging growth company [ ]☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of the Exchange Act. [ ]☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C.7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] ☐ No [X]☒
As of June 29, 2018,30, 2021, the aggregate market value of the registrant's common stock held by non-affiliates of the registrant was $18.8$20.9 billion based on the closing sale price as reported on the Nasdaq Global Select Market. Shares of common stock held by each executive officer, director and holder of 10% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status for purposes of this calculation is not intended as a conclusive determination of affiliate status for other purposes.
Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date.
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Class | | Outstanding at January 28, 2019February 10, 2022 |
Common Stock, $0.01 par value per share | | 324,360,908293,344,090 shares |
DOCUMENTS INCORPORATED BY REFERENCE
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Document | | Parts into Which Incorporated |
Portions of the registrant's Proxy Statement for the 2022 Annual Shareholders' Meeting to be held May 30, 2019 | | Part III |
CERNER CORPORATION
TABLE OF CONTENTS
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Part I | | |
Item 1. | Business | |
Item 1A. | Risk Factors | |
Item 1B. | Unresolved Staff Comments | |
Item 2. | Properties | |
Item 3. | Legal Proceedings | |
Item 4. | Mine Safety Disclosures | |
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Part III | | |
Item 1. | Business | |
Item 1A. | Risk Factors | |
Item 1B. | Unresolved Staff Comments | |
Item 2. | Properties | |
Item 3. | Legal Proceedings | |
Item 4. | Mine Safety Disclosures | |
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Part II | | |
Item 5. | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | |
Item 6. | Selected Financial Data[Reserved] | |
Item 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations | |
Item 7A. | Quantitative and Qualitative Disclosures About Market Risk | |
Item 8. | Financial Statements and Supplementary Data | |
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | |
Item 9A. | Controls and Procedures | |
Item 9B. | Other Information | |
Item 9C. | Disclosure Regarding Foreign Jurisdictions that Prevent Inspections | |
Part III | | |
Part III | | |
Item 10. | Directors, Executive Officers and Corporate Governance | |
Item 11. | Executive Compensation | |
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | |
Item 13. | Certain Relationships and Related Transactions, and Director Independence | |
Item 14. | Principal Accountant Fees and Services | |
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Part IV | | |
Item 15. | Exhibits, Financial Statement Schedules | |
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Item 16. | Form 10-K Summary | |
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Signatures | |
PART I.
This annual report on Form 10-K and the documents incorporated herein by reference contain forward-looking statements based on expectations, estimates, and projections as of the date of this filing. Actual results may differ materially from those expressed in forward-looking statements. See Item 1A of Part I — "Risk Factors."
Item 1. Business.
Overview
Cerner Corporation started doing business as a Missouri corporation in 1980 and was merged into a Delaware corporation in 1986. Unless the context otherwise requires, references in this report to "Cerner," the "Company," "we," "us" or "our" mean Cerner Corporation and its subsidiaries.
Our corporate world headquarters is located in a Company-owned office park in North Kansas City, Missouri, with our principal place of business located at 2800 RockcreekRock Creek Parkway, North Kansas City, Missouri 64117. Our telephone number is 816.221.1024. Our Web site, which we use to communicate important business information, can be accessed at: www.cerner.com. We make our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports available free of charge on or through this Web site as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission ("SEC"). We do not intend for information contained in our website to be part of this annual report on Form 10-K.
Cerner is a leading supplier of health carehealthcare information technology ("HCIT") solutions and tech-enabled services. Our mission is to relentlessly seek breakthrough innovation that will shape health care of tomorrow. We offer a wide range of intelligent solutions and tech-enabled services that support the clinical, financial and operational needs of organizations of all sizes. Cerner® solutions and services help clinicians make care decisions and assist organizations in managing the health of their populations. We also offer integrated clinical and financial systems to help manage day-to-day revenue functions, as well as a wide range of services to support clinical, financial and operational needs. We have systemsalso expanded our presence in more than 27,500 facilities worldwide, including hospitals, physician practices, laboratories, ambulatory centers, behavioral health centers, cardiac facilities, radiology clinics, surgery centers, extended care facilities, retail pharmacies,the life sciences industry, where we work with healthcare stakeholders to improve the safety, efficiency, and employer sites.efficacy of clinical research.
Cerner® solutions are primarily offered on the unified Cerner Millennium® architecture and on the HealtheIntent® cloud-based platform. Cerner Millennium is a person-centric computing framework, which includes integrated clinical, financial and management information systems. This architecture allows providers to securely access an individual's electronic health record ("EHR") at the point of care, and it organizes and proactively delivers information to meet the specific needs of physicians, nurses, laboratory technicians, pharmacists, front- and back-office professionals and consumers. Our HealtheIntent platform is a cloud-based platform designed to scale at a population level while facilitating health and care at a person and provider level. On the our HealtheIntent platform, we offer solutions that aggregate, transform and reconcile data across the continuum of care, enabling key stakeholders to manage the health of populations, improve outcomes, enhance clinical research and lower costs. Cerner also has an EHR agnostic platform, CareAware®, that facilitates connectivity of health carehealthcare devices to EHRs and helps improve hospital operations, allowing for more efficient and effective care.
On February 2, 2015, Cerner acquired the Health Services business from Siemens AG, which offered a portfolio of enterprise-level clinical and financial health carehealthcare information technology solutions, as well as departmental connectivity, population health, and care coordination solutions globally. Refer to Notes (8) and (9) of the notes to consolidated financial statements ("Notes") for information on our acquisitions and dispositions.
We offer a broad range of tech-enabled services, including implementation and training, remote hosting, operationalapplication management services, revenue cycle services, support and maintenance, health carehealthcare data analysis, real-world evidence, clinical process optimization, transaction processing, employer health centers, employee wellness programs and third-party administratordata-driven services for employer-based health plans.that help life sciences companies with the discovery, development and deployment of therapies.
In addition to software and services, we offer a wide range of complementary hardware and devices, both directly from Cerner andprimarily as a reseller for third parties.
The following table presents consolidated revenues by our business models and by segment, as a percentage of total revenues:
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| For the Years Ended |
| 2021 | 2020 | 2019 |
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Revenues by Business Models | | | |
Licensed software | 12 | % | 12 | % | 12 | % |
Technology resale | 3 | % | 3 | % | 4 | % |
Subscriptions | 7 | % | 7 | % | 6 | % |
Professional services | 37 | % | 35 | % | 35 | % |
Managed services | 22 | % | 23 | % | 21 | % |
Support and maintenance | 18 | % | 19 | % | 20 | % |
Reimbursed travel | 1 | % | 1 | % | 2 | % |
| 100 | % | 100 | % | 100 | % |
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Revenues by Segment | | | |
Domestic | 88 | % | 89 | % | 89 | % |
International | 12 | % | 11 | % | 11 | % |
| 100 | % | 100 | % | 100 | % |
A description of our business models is as follows:
•Licensed software - We develop and license intellectual property ("IP") (our architectures, application software, executable and referential knowledge, data and algorithms) to our clients. Our licensed software business model includes revenues from IP delivered via perpetual license and software as a service, where functionality is delivered via "the cloud".
•Technology resale - We bundle licensed software with other companies' IP in the form of sublicenses to create complete technology solutions for our clients. We also resell bundled computer equipment (hardware) from technology companies to create a completely functional system. Additionally, we resell medical devices for medical device companies.
•Subscriptions - Another method by which we provide IP is on a time-based subscription model that has a periodic usage charge. This is the primary way we package and provide medical knowledge, which changes frequently based on research and can be updated independently from the software in which it is embedded. Also included in this category of revenue is our Electronic Data Interchange ("EDI") transaction revenue. EDI is the electronic transfer of data between healthcare providers and payers.
•Professional services - We provide a wide range of professional services to assist our clients in the implementation of our information systems in their organizations. These services are in the form of project management, technical and application expertise, clinical process optimization, regulatory consulting and education and training of our clients' workforce to assist in the design and implementation of our systems. This business model also includes certain outsourcing services utilized by healthcare organizations as well as services provided to the life sciences industry through our Cerner EnvizaSM offerings.
•Managed services - Our managed services business model includes revenues from remote hosting, operational management services, and disaster recovery. Remote hosting is the largest of these offerings, and it involves Cerner buying the necessary equipment, installing it in one of our data centers, and operating the entire system on the client's behalf.
•Support and maintenance - This business model is comprised of the ongoing support and maintenance services we provide our clients. Almost all of our clients contract for these services. Clients with support contracts get 24x7 access to our immediate response center, which serves as our "emergency room," as well as access to our SolutionWorks organization for less urgent issues. In addition, our clients' support payments give them ongoing
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| For the Years Ended |
| 2018 | 2017 | 2016 |
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Revenues by Business Models | | | |
Licensed software | 11 | % | 12 | % | 11 | % |
Technology resale | 5 | % | 5 | % | 6 | % |
Subscriptions | 6 | % | 9 | % | 9 | % |
Professional services | 34 | % | 31 | % | 30 | % |
Managed services | 21 | % | 21 | % | 21 | % |
Support and maintenance | 21 | % | 20 | % | 21 | % |
Reimbursed travel | 2 | % | 2 | % | 2 | % |
| 100 | % | 100 | % | 100 | % |
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Revenues by Segment | | | |
Domestic | 88 | % | 89 | % | 89 | % |
Global | 12 | % | 11 | % | 11 | % |
| 100 | % | 100 | % | 100 | % |
access to the latest releases of our IP. We also provide support for sublicensed software and maintenance for third party hardware.
Health Care•Reimbursed travel - Includes reimbursable out-of-pocket expenses (primarily travel) incurred in connection with our client service activities.
Healthcare and Health CareHealthcare IT Industry
Health care expenditures
There are several major forces shaping healthcare worldwide.
•Rising Healthcare Costs - Healthcare costs continue to consume angrow faster than the economy, with total healthcare expenditures increasing portion of most economies. In the U.S., health care spending increased 3.9 percent4.5% to $3.5$3.8 trillion in 2017,2019 and now represents 17.9 percent9.7% to $4.1 trillion in 2020, representing 19.7% of the U.S.' Gross Domestic Product ("GDP"). An aging populationHealth expenditures are expected to grow over 5% annually through 2028, which would bring them to approximately 20% of GDP. Similar growth trends exist in most major non-U.S. markets as well.
We believe the trajectory of healthcare expenditure growth is unsustainable, and high levelswe believe information technology can play an important role in addressing the key drivers of this growth by driving efficiencies, reducing waste, and improving management of chronic conditions are contributing to expectations that health care expenditures will continue growing faster thanand helping prevent them in the economy. The Centers for Medicare and Medicaid Services ("CMS") estimates annual U.S. health care spending will grow at an average rate of 5.5 percent through 2026 and reach $5.7 trillion, or 19.7 percent of GDP by 2026. We believe this trajectory is unsustainable and that health carefirst place. In summary, IT can play an importanta key role in facilitating a shift from a high-cost health carehealthcare system that incents volume to a proactive system that incents health, quality and efficiency.
For this change•Evolving Reimbursement - With the full enactment of The Patient Protection and Affordable Care Act ("ACA"), Medicaid expansion, and the aging population driving Medicare growth, the government is playing an increasingly material role in U.S. healthcare economics. The implications for providers include increased regulatory requirements for payment at less favorable terms than commercial payers. This reality has exacerbated an already tough margin profile and is expected to occur, we believe traditional fee-for-service ("FFS") reimbursement models must continuebe the new normal for the years to come. Provider organizations are also dealing with an ongoing shift to value-based approachesreimbursement models that are more aligned with quality, outcomes, and efficiency. The shift away from traditional FFS is evident in growth of lives covered under Accountable Care Organizations ("ACOs"). ACOs are groups of hospitals and providers that focus on providing coordinated, high quality carereward clinicians for value over volume. These changes, over time, could materially change provider economics, but also represent an opportunity for the industry to Medicare, Medicaid, or commercially insured populations and then share in savings created by lowering the cost of care. According to Leavitt Partners, lives covered under ACOs grew from approximately 5 million in 2011 to more than 32 million in 2018.
In addition to the increasing number of lives covered under ACOs, the structure of ACOs is evolvingmove to where providers are expectedmore incented to assume more risk. Currently, most ACO contracts are upside only, which means providers can receive bonuses for good performance, but they assume no downside for underperformance. In 2018, CMS released a rule called "Pathways to Success" that accelerateskeep people healthy than based on the timeframe during which providers need to move to ACOs that include both upside bonusesvolume of visits and downside penalties. We believe this shift is important as assumption of risk by providers creates a strong incentive for them to improve care coordination and deliver high quality care at a lower cost.procedures.
Another step towards a value-based model occurred with the passage of The Medicare Access and CHIP Reauthorization Act ("MACRA"), which enacts significant reforms to the payment programs under the Medicare Physician Fee Schedule and consolidated three current value-based programs into one.
While each of the different approaches to aligning reimbursement with value will•Aging Population - As Baby Boomers continue to evolve, we believereach retirement age, they are putting stress on our healthcare system. The first Boomer turned 65 in 2011, and the trend away from traditional FFSlast will continue. We believe this growthturn 65 in government 2029. Their healthcare needs—and private models aligning payment with value, quality and outcomes will drive major changes in the way health care is provided in the next decade, and we expect a much greater focus on patient engagement, wellness and prevention. As health care providers become accountable for proactively managing the health of the populations they serve, we expect them to need ongoing investment in sophisticated information technology solutions that will enable them to predict when intervention is needed so they can improve outcomes and lower the cost of providing care.
The increasingly complex and more clinical outcomes-based reimbursement environment is also contributing to a heightened demand for revenue cycle solutions and services and a desire for these solutions and services to be closely aligned with clinical solutions. We believe this trend is positive for Cerner because our Cerner Millennium revenue cycle solutions and services Medicare costs—are integrated with our clinical solutions, creating a clinically driven revenue cycle solution that has had significant adoption in recent years.
Over the past several years, we have also seen a shift in the U.S. marketplace towards a preference for a single platform across inpatient and ambulatory settings. The number of physicians employed by hospitals has increased as hospitals have acquired physician groups, and health systems are recognizing the benefit of having a single patient recordincreasing at the hospital and the physician office. We are benefiting from this trend duesame time their contributions to our unified Cerner Millennium platform, which spans multiple venues, and ongoing enhancements we have made to our physician solutions.
While health care providers are showing a preference for a single platform across multiple venues, there is also an increased push for interoperability across disparate systems to address the reality that no patient's record will only have information from a single health care IT system. We believe health information should be shareable and accessible among primary care physicians, specialists, and hospital physicians.
As a result, Cerner has led or been a key participant in nearly every major industry effort to advance interoperability and system openness. One example is Cerner's role as a founding member of the CommonWell Health Alliance, an open, not-for-profit industry consortium that brought health care IT firms together for the purpose of enabling safe nationwide interoperability. The vision of CommonWell is for a patient to be able to visit a new doctor, give their consent, and, within moments, have his or her lifetime record available from all the prior places he or she has visited.
In 2018, CommonWell announced general availability of its connection to CareQuality, another national interoperability framework. This connection allows CommonWell and CareQuality enabled health care providers to connect and bilaterally exchange health data to improve care coordination and delivery. This is a significant milestoneMedicare decline, placing additional pressure on the pathhealthcare industry to achieving true nationwide interoperability and making health data available to individuals and providers regardless of where care occurs.
Outside the United States, we believe Cerner's growth opportunities are good, as most countries are also dealing with health care expenditures growing faster than their economies, which is leading to a focus on controllingrein in costs while also improving quality and ability to manage chronic conditions.
•Consumer Expectations - Increased out-of-pocket expense and technology utilization outside healthcare have contributed to rising consumer expectations on cost, convenience and service. This growing consumerism has increased the political focus on rising drug prices, surprise medical bills, and escalating premiums, highlighting the importance of care.having comprehensive strategies for engaging consumers.
•Cognitive Computing - Today, healthcare is principally digitized across the core clinical, operational and financial settings. However, while workflows have been digitized, business processes remain largely unautomated and the industry has yet to realize the benefits of digitization achieved in other industries. Cognitive computing represents a meaningful opportunity to leverage the digitization that now exists in healthcare to improve efficiency and quality, and we believe Cerner is well positioned to play a key role in helping the healthcare industry achieve this potential.
•Coronavirus ("COVID-19") Pandemic - The healthcare and life sciences industries are at the forefront of the pandemic with heroic efforts by healthcare providers on the frontlines and advances in technology and science enabling vaccines to get to market in an unprecedented timeframe. Longer term, we believe the pandemic could lead to an acceleration of macro trends already playing out. Examples of this include the likelihood the pandemic accelerates the role of the Federal government as the top regulator and payor for healthcare; ongoing health system consolidation; and increased consumer expectations, particularly around the convenience of telehealth.
For the core provider market, many of these forces are contributing to an overall challenging macro environment. Providers are simultaneously seeking to grow key service lines, drive operational efficiencies to make money at Medicare rates, and build out the competencies required to take and effectively manage risk and participate in value-based reimbursement models. Information technology is seen as an enabler of these efforts, which represents an opportunity for Cerner. At the same time, the low-margin nature of provider businesses can make it difficult to fund required investment, making it important for solutions and services to have a clear return on investment.
Cerner Vision and Growth Strategy
For nearly four decades,
Throughout our history, Cerner has focused on creating innovation at the intersection of health carehealthcare and information technology. Together with our clients, we are creating a future where the health care system works to improve the well-being of individuals and communities. Our vision has always guidedlong been to create a Health Network Architecture ("HNA") for providers of care in every community. HNA has four core pillars: automate the care process; connect the person; structure, store and study the data; and then 'close the loop' by pushing analytic insights back into the care process. The base digitization that now exists in healthcare is foundational to achieving this vision, and we continue to believe it can be achieved in the decade to come.
Our framework for growth as we work towards achieving our long-term vision includes three core areas.
First, we are focused on delivering in our core market, including executing effectively on our large investmentsU.S. federal contracts, continuing to enhance key solution areas, such as revenue cycle, that are important to existing clients and represent revenue growth opportunities, and aligning with our provider clients to help them increase revenue in researchkey service lines, tackle margin compression and development ("R&D"), which have created strong levelsoptimize their reimbursement dollars. In addition, we are investing in our core products and platforms with a focus on delivering software as a service that we expect to improve clinician experience and patient outcomes, lower total cost of organicownership, enable clients to accelerate adoption of new functionality, and better leverage third-party innovations. These efforts can differentiate Cerner and position our installed client base to better manage the forces of change playing out in healthcare.
Second, we are continuing work towards advancing the HNA vision that has driven Cerner almost since its inception. We believe that through the creation of a cohesive architecture for healthcare, the walls between care centers will become transparent as information travels seamlessly among care settings. Data collected at one setting will be available to others across the country, ensuring every individual in every part of the care process is connected to the right knowledge, resources and persons at the appropriate time and place. We believe the coming decade is the window when the confluence of technology, data liquidity and business model shifts can make this vision a reality. Health systems are increasingly building network strategies within specific regions to enhance contracting power, increase patient stickiness and move closer to the premium dollar. Cerner has an opportunity to become a strategic partner and assist with network design, provide services in areas such as cybersecurity and operational reporting, and improve performance under value-based contracting.
Third, Cerner has an opportunity to harness data to drive growth throughoutin new areas, including using real-world evidence to improve clinical research. Cerner has natural points of differentiation, including our history. Ourtrusted relationships with healthcare providers and access to data given our technology is in place in approximately a quarter of U.S. healthcare facilities, and our proven ability to innovate has ledaggregate and normalize multiple sources of data through our HealtheIntent platform, which contains data from more than 300 million longitudinal records.
To focus on this opportunity, we launched Cerner Enviza in 2021. Cerner Enviza combines the expertise of Cerner and Kantar Health, which we acquired in April 2021. Kantar Health's leading data, analytics, real-world evidence and commercial research consultancy, combined with Cerner's real-world data, positions Cerner Enviza to whathelp accelerate discovery, development and deployment of therapies and advance clinical research and the life sciences industry to improve everyday health.
Importantly, Cerner's health data strategy is based on curating data from a willing and engaged network of providers with an emphasis on clear boundaries around the usage of patient data and based on clearly defined use cases with clarity and transparency around data rights.
In summary, we believe Cerner's core value proposition remains strong and there is ample opportunity to grow both organically and inorganically through the areas discussed above.
Oracle Merger Agreement
On December 20, 2021, we entered into an Agreement and Plan of Merger (as it may be amended or supplemented from time to time, the "Merger Agreement") with Cedar Acquisition Corporation ("Merger Subsidiary"), which is a wholly owned subsidiary of OC Acquisition LLC ("Parent"), Parent, which is a wholly owned subsidiary of Oracle Corporation ("Oracle"), and (solely with respect to performance of its obligations set forth in certain specified sections thereof) Oracle. Pursuant to the Merger Agreement, on January 19, 2022, Oracle commenced a cash tender offer (the "Offer") to acquire all of the issued and outstanding shares of our common stock for a purchase price of $95.00 per share, net to the holders thereof in cash, without interest and subject to any required tax withholding. Following the completion of the Offer, Merger Subsidiary will merge with and into Cerner (the "Merger"), with Cerner continuing as the surviving corporation and as a wholly owned indirect subsidiary of Oracle, at which time the shares of our common stock would cease to be industry-leading architectures and an unmatched breadth and depthpublicly held. Completion of solutions and services. The strengththe Merger is subject to certain conditions, including but not limited to, a) shareholders holding a majority of the outstanding shares of our solutionscommon stock tendering their shares in the Offer, and services has contributedb) receipt of certain regulatory approvals, including the expiration or termination of the waiting periods or the obtaining of the required affirmative approvals applicable to the transaction under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and certain foreign antitrust and foreign direct investment laws. We have agreed to various customary covenants and agreements in the Merger Agreement, including with respect to the operation of our business prior to the closing of the transaction, such as restrictions on making certain acquisitions and divestitures, entering into certain contracts, incurring certain indebtedness and making certain capital expenditures, paying dividends in excess of our regular quarterly dividend, issuing or repurchasing stock and taking other specified actions. We do not believe these restrictions will prevent us from meeting our debt service obligations, ongoing costs of operations, working capital needs, or capital expenditure requirements. Additional information about the Offer and Merger and the Merger Agreement is set forth in our filings with the SEC.
Contracting with the Government
As we grow our federal business, revenue attributable to prime contracts or to subcontracts with other contractors engaged in work for the U.S. government is becoming a bigger contributor to our growth. We believe we are positioned to continue growing in coming years as regulatory requirements and industry shifts continue to pressure health care providers to improve quality while lowering costs, which we believe will require having more sophisticated information technology than many of our competitors provide.
A key area of growth for Cerner in recent years has been inoverall revenue. Within the U.S. Federal government, sector. As part ofour revenues are diversified across various agencies, including the Leidos Partnership for Defense Health, Cerner has played a key role in the U.S. Department of Defense's ("DoD") EHR rollout, which achieved completion of its fourth pilot site in 2018. Broader deployment has kicked off with implementations beginning at four additional sites in the second half of 2018. Also, Cerner was selected in 2018 byDefense and the U.S. Department of Veterans Affairs ("VA")Affairs. During 2021 and 2020, approximately 20% and 18%, respectively, of our total revenues were attributable to replace their existing EHR systemour relationships (as the prime contractor or a subcontractor) with one based onU.S. government agencies. Contracting with the EHR being deployed acrossU.S. government subjects us to substantial regulation and unique risks, including the DoD health system. WithU.S. government's ability to cancel any contract at any time through a termination for the VA managing oneconvenience of the largest health systems inU.S. government. Government cancellation terms typically permit the world, this opportunity is expected to contribute to Cerner's growth for several years. In addition, we believe there is potential for this project to have broad industry impact. At the corerecovery of this project, Cerner aims to enable seamless care throughall or a single system that links both veteran and military populations, totaling more than 18 million people, while also delivering national interoperability to the commercial market. This will allow patient data to be shared between VA, DoD, and community providers through a secure system.
In addition to growing our client base, we believe we have an opportunity to grow revenues by expanding our solution footprint with existing clients. For example, less than halfportion of our Cerner Millennium EHR clients have implemented Cerner revenue cycle solutions. This penetration has been growingincurred costs and fees for work performed prior to termination when the U.S. government issues a termination for convenience. These regulations and risks are described in recent years and we expect it to continue because of the preference for having EHR and revenue cycle systems provided on the same platform. There is also opportunity to expand penetration
of other solutions, such as women's health, anesthesiology, imaging, clinical process optimization, critical care, health care devices, device connectivity, emergency department and surgery.
We also have an opportunity to grow by expanding our services that are targeted at capturing a larger percentage of our clients' existing IT spending. These services leverage our proven operational capabilities and the success of our CernerWorksSM managed services business, where we have demonstrated the ability to improve our clients' service levels at a cost that is at ormore detail below amounts they were previously spending. One of these services is Cerner ITWorksSM, a suite of solutions and services that improves the ability of hospital IT departments to meet their organization's needs while also creating a closer alignment between Cerner and our clients. A second example is Cerner RevWorksSM, which includes solutions and services to help health care organizations improve their revenue cycle functions.
Another area in which we continue to have success is our CommunityWorksSM offering, which leverages a shared instance of the Cerner Millennium platform across multiple clients, allowing us to offer low-cost, high-value solutions and services to smaller community hospitals and critical access hospitals. We believe there continues to be a good opportunity to grow in the small hospital market given many of the existing suppliersunder "Risk Factors" in this market have struggled to keep up with ongoing regulatory requirements and marketplace expectations.annual report on Form 10-K.
We also expect to drive growth over the course of the next decade through initiatives outside the core HCIT market. For example, we offer clinic, pharmacy, wellness and third-party administration services directly to employers. In 2019, we're expanding our onsite services to include a multi-employer tenant clinic model, serving employers who would not normally be able to support their own onsite clinic. These offerings have been shaped by what we have learned from changes we have implemented at Cerner. We have removed our third-party administrator and become self-administered, launched an on-site clinic and pharmacy, incorporated biometric measurements for our associate population, realigned the economic incentives for associates in our health plan, and implemented a data-driven wellness management program. These changes have had a positive impact on the health of our associates while also keeping our health care costs below industry averages.
As discussed below, another significant opportunity for future growth, and a large area of investment for Cerner, is leveraging the vast amounts of data being created as the health care industry is digitized and using this data to help providers and employers manage the health of populations.
Population Health
Population Health Management involves a shift from solely automating health systems to managing a person's health. Getting there requires complete and accurate patient data and meaningfully using that data to engage individuals, exchange information between providers and ultimately drive better outcomes at a lower cost. We believe this shift will shape the future of health care and enable a system driven by accountability, transparency and value.
Cerner's approach to population health is to enable organizations to:
KNOW what is happening and predict what will happen within their population through solutions for data exchange, longitudinal record, enterprise data warehouse, analytics and quality and regulatory reporting;
ENGAGE providers and patients in health and care delivery through personal health portals and solutions for care management, home care, long-term care, and retail pharmacy; and
MANAGE health and improve care with capacity and workforce management, clinical research, predictive modeling, health registries, and contract and network management.
These solutions are enabled by Cerner's HealtheIntent platform, which is a multi-purpose, programmable platform designed to scale at a population level while facilitating health and care at a person and provider level. This cloud-based platform enables organizations to aggregate, transform and reconcile data across the continuum of care, and helps improve outcomes and lower costs.
HealtheIntent is scalable, secure and can be accessed anywhere, anytime. It is able to receive data from any clinical or revenue cycle system and also incorporate other data, such as pharmacy, claims, patient satisfaction, socioeconomic, genomic and dozens of open data sources. HealtheIntent collects the data from these disparate sources in near real-time, providing clarity to millions of data points in an actionable and programmable workflow. It enables organizations to identify, score and predict the risks of individual patients, allowing them to match the right care programs to the right individuals. The EHR-agnostic nature of our HealtheIntent platform allows us to offer our solutions to the entire marketplace, not just existing Cerner clients.
We have created a series of solutions on the HealtheIntent platform, including the following solutions:
Longitudinal Record - provides clinicians and the patient a view of their consolidated clinical record, gathered and normalized from multiple sources.
Registries and Scorecards - identifies and automatically segments patients by disease, guides interventions according to clinical best practice, provides visibility to quality measures for provider's population, produces client-defined performance scorecards, and tracks their health and their interventions according to clinical best practice.
Enterprise and Population Health Analytics - allows the integrated data to be analyzed for the purpose of population health management and research.
Provider Performance Management - creates visibility for providers on their performance against key clinical and operation metrics and can be aligned with payment models that incentivize high quality and efficient care.
Patient/Member Engagement - an enhanced patient portal complemented by engagement services to help health care organizations create more meaningful interactions and engagement with the members they serve, and provides the ability to target individuals at risk of becoming chronically ill.
Community Care Management - provides a person-centric approach of proactive surveillance, coordination and facilitation of health services across the care continuum to achieve optimal health status, quality and costs.
Population Health Programs - leverages evidence-based guidelines and the contextual information within HealtheIntent to provide identification, prediction and management of a condition at the population, provider and person level and facilitates a personalized plan of care for each member.
Contract and Network Management - for managing provider networks, modeling to inform payer negotiations, determining appropriate business models, and managing contract performance in near real-time.
In less than five years since the first HealtheIntent solution went live at our alpha client, more than 155 clients have purchased HealtheIntent solutions. The broad addressable market for population health solutions is reflected in the diversity of these clients, which include health systems, physician groups, employers, health plans, state governments, and accountable care organizations. The initial adoption by a large number of clients is encouraging and positions us for larger contributions to revenue from HealtheIntent solutions as these initial clients and others transition away from FFS models to value-based and at-risk models that require population health solutions and services. The data variety and scalability of the HealtheIntent platform has also grown quickly, as reflected in its over 1,025 data connections, including over 60 EHR systems and 140 claims and payer systems, and records for more than 218 million people.
In 2018, we announced a collaboration with Lumeris Healthcare Outcomes, LLC ("Lumeris") that we believe will strengthen our ability to help health systems succeed in a value-based care market. Lumeris is a company with a consistently highly rated Medicare Advantage plan, a proven methodology to help leading health systems advance value-based care strategies, and the subject matter expertise required to support those efforts. Cerner and Lumeris are launching an EHR-agnostic offering called Maestro AdvantageTM that is designed to help health systems set up and manage Medicare Advantage Plans and provider-sponsored health plans. As part of the collaboration, Lumeris is adopting HealtheIntent as the platform for its clinical methodology and advanced analytics. With this relationship, we gain a partner with a 4.5-Star Medicare Advantage plan to build out the end-to-end capabilities required to run a provider-sponsored health plan within HealtheIntent. We also gain an opportunity to be a larger participant in the economics of the provider-sponsored health plan market by being able to offer additional services as part of the Maestro Advantage offering, such as care management and provider engagement, along with the solutions on the HealtheIntent platform.
In summary, we believe our comprehensive approach to population health is differentiated in the marketplace. We expect population health to be a large contributor to our long-term growth as health care continues to evolve towards a model that incents keeping people healthy.
Software Development
We commit significant resources to developing new health information system solutions and services. As of the end of 2018,2021, approximately 7,3006,150 associates were engaged in research and development activities. Total expenditures for the development and enhancement of our software solutions were $747$829 million, $706$797 million and $705$784 million during the 2018, 20172021, 2020 and 2016 fiscal years,2019, respectively. These figures include both capitalized and non-capitalized portions and exclude amounts amortized for financial reporting purposes.
As discussed above, continued investment in research and development ("R&D&D") remains a core element of our strategy. This will include ongoing enhancement of our core solutions and development of new solutions and services.
Intellectual Property
We have a broad portfolio of intellectual property rights to protect the proprietary interests in our solutions, services, devices and brands. Our solutions constitute works of authorship protected by copyrights in the U.S.United States and globally. We own valuable trade secrets embodied in, or related to, our solutions, services and devices and protect these rights through a number of technical and legal measures. We have registered or applied to register certain trademarks and service marks in a number of countries with particular emphasis on the Cerner branding elements. We continue to develop our patent portfolio and own more than 440650 issued patents with hundreds of patent applications pending. We do not consider any of our businesses to be dependent upon any one patent, copyright, trademark, or trade secret, or any family or families of the same.
Our solutions, devices and services incorporate or rely on intellectual property rights licensed from third parties, including software subject to open source software licenses. Certain technologies licensed to Cerner are also important for internal use in running our business and supporting our clients. Although replacing any existing licenses could be inconvenient, based on our experiences, existing contractual relationships, and the incentives of our technology suppliers, we believe that Cerner will continue to obtain these technologies or suitable alternatives for commercially reasonable prices on commercially reasonable terms or under open source software licenses acceptable to Cerner.
Managing Cybersecurity Risks
Our business operations, including the provision of the solutions and services described above, involve the compilation, hosting and transmission of confidential information, including patient health information. We have included security features in our solutions and services that are intended to protect the privacy and integrity of this information, but our solutions and services may be vulnerable to security breaches, viruses, programming errors and other similar disruptive problems. Cerner maintains documented information privacy, security and risk management programs with clearly defined roles, responsibilities, policies, and procedures which are designed to secure the information maintained on Cerner's platforms.
In addition, all of our associates are required to complete annual cybersecurity education and training, which includes identifying suspicious emails, Internet threats, telecommunication threats and ransomware. Cerner regularly reviews and modifies its security program to reflect changing technology, regulatory environment, laws, risk, industry and security practices and other business needs. We believe our policies and procedures are adequate to ensure that relevant information about cybersecurity risks and incidents is appropriately reported and disclosed.
Sales and Marketing
The markets for Cerner HCIT solutions, health carehealthcare devices and services include integrated delivery networks, physician groups and networks, managed care organizations, hospitals, medical centers, free-standing reference laboratories, home health agencies, blood banks, imaging centers, pharmacies, pharmaceutical manufacturers, employers, governments and public health organizations. The majority of our sales are clinical and revenue cycle solutions and services to hospitals and health systems, but our solutions and services are highly scalable and sold to organizations ranging from physician practices, to community hospitals, to complex integrated delivery networks, to local, regional and national government agencies. Sales to large health systems typically take approximately nine to 18 months, while the sales cycle is often shorter when selling to smaller hospitals and physician practices.
Our executive marketing management is located at our world headquarters in North Kansas City, Missouri, while our client representatives are deployed across the United States and globally. In addition to the United States, through our subsidiaries, we have sales associates and/or offices giving us a presence primarily in more than 35 countries.Europe, the Middle East, Australia, Canada, and India.
We support our sales force with technical personnel who perform demonstrations of Cerner solutions and services and assist clients in determining the proper hardware and software configurations. Our primary direct marketing strategy is to generate sales contacts from our existing client base and, in years when COVID-19 was not a concern, through presentations at industry seminars and tradeshows. We market our ambulatory solutions, offered on a subscription basis, directly to the physician practice market using lead generation activities and through existing acute care clients that are looking to extend Cerner solutions to affiliated physicians. WeNormally, we attend a number of major tradeshows each year and sponsor executive user conferences, which feature industry experts who address the HCIT needs of large health carehealthcare organizations.
Client Services
Substantially all of Cerner's clients that buy software solutions also enter into software support agreements with us for maintenance and support of their Cerner systems. In addition to immediate software support in the event of problems, these agreements allow clients to access new releases of the Cerner solutions covered by support agreements. Each client has 24-hour access to the applicable client support teams, including those located at our world headquarters in North Kansas
City, Missouri, our Continuous Campus in Kansas City, Kansas, our campus in Malvern, Pennsylvania, and our global support organizations in Germany, England and Ireland.
Most clients who buy hardware through Cerner also enter into hardware maintenance agreements with us. These arrangements normally provide for a fixed monthly fee for specified services. In the majority of cases, we utilize subcontractors to meet our hardware maintenance obligations. We also offer a set of managed services that include remote hosting, operational management services and disaster recovery.
Backlog
Backlog, which reflects contracted revenue that has not yet been recognized as revenue, was $15.25$13.26 billion as of December 29, 2018,31, 2021, of which we expect to recognize approximately 29%31% as revenue over the next 12 months. In the first quarter of 2018, we adopted new revenue recognition guidance as further discussed in Note (2) of the notes to consolidated financial statements. In connection with the adoption of such guidance, we modified our calculation of backlog as previously determined under Regulation S-K to represent the aggregate amount of transaction price allocated to performance obligations that are unsatisfied (or partially satisfied) to conform to the new revenue recognition guidance. Backlog amounts disclosed prior to the adoption of the new revenue recognition guidance have not been adjusted, and are not comparable to, the current period presentation.
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,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 $525 million$1.22 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.
Competition
The market for HCIT solutions, devices and services is intensely competitive, rapidly evolving and subject to rapid technological change. We offer a suite of intelligent solutions and services that support the clinical, financial and operational needs of organizations of all sizes. The principle markets in which we compete include, without limitation, health carehealthcare software solutions, HCIT services, ambulatory, health carehealthcare device and technology resale, health carehealthcare revenue cycle and transaction services, value-based care technologies, analytics systems, care management solutions, population health management, and post-acute care. Our principal existing competitors, including their affiliates, in these markets include, but are not limited to:
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Ÿ Allscripts Healthcare Solutions, Inc.
| Ÿ InterSystemsEpic Systems Corporation
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Ÿ athenahealth, Inc.Arcadia Solutions, LLC
| Ÿ MEDHOST,Health Catalyst, Inc.
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Ÿ athenahealth, Inc.
| InterSystems Corporation |
Capsule Technologies, Inc. | Innovaccer, Inc. |
Computer Programs and Systems, Inc. | Ÿ Medical Information Technology, Inc. (MEDITECH)
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Ÿ eClinicalWorks, LLC
| Ÿ Optum, Inc.
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Ÿ Epic Systems Corporation
| |
In addition, we expect that major software information systems companies, large information technology consulting service providers and system integrators, start-up companies, managed care companies, healthcare insurance companies, accountable care organizations and others specializing in the health carehealthcare industry may offer competitive software solutions, devices or services. The pace of change in the HCIT market is rapid and there are frequent new software solutions, devices or services introductions, enhancements and evolving industry standards and requirements. We believe that the principal competitive factors in our markets include the breadth and quality of solution and service offerings, the stability of the solution provider, the features and capabilities of the information systems and devices, the ongoing support for the systems and devices and the potential for enhancements and future compatible software solutions and devices. We believe that we compete favorably with our competitors on the basis of these factors and that we are the leader- or among the leaders- in each of our main offerings. Our brand recognition and reputation for innovative technology and service delivery, combined with our breadth of solution and services offerings, global distribution channels and client relationships position us as a strong competitor going forward.
NumberHuman Capital Management
Cerner believes that attracting, engaging and retaining employees is vital to the Company's continued success. Our Chief Human Resources Officer, reporting directly to our Chief Executive Officer, oversees our human capital management strategies. In addition, our Board of Employees (Associates)Directors is actively involved in our human capital management in its oversight of our long-term strategy and through its committees and engagement with management.
At Cerner, we're collectively working to create a culture and a community where our employees, who we refer to as our associates, feel their voice is heard in our ongoing efforts to make a difference in the endfuture of 2018, wehealthcare. Our efforts have earned Cerner recognition over the years as one of Forbes' Best Employers, Best Employers for Diversity, Best Employers for LGBTQ Equality and a perfect score on the Human Right Campaign Equality Index.
The Company employed approximately 29,20025,150 associates worldwide.worldwide as of December 31, 2021. Of that total population, approximately 70% of our associates were employed in the United States and the remaining associates were employed outside the United States. Approximately 39% of our associates work in professional services (implementation, training, consulting and other services), 24% of our associates work in development (coding and engineering), 10% of our associates work in managed services (hosting), and the remaining associates work in other areas with no such area making up 10% or more of our associate base.
Our human capital management operating model focuses on the following strategic areas:
Talent Acquisition: We continue to actively hire talent and are primarily focused on recruiting talent in support of our strategic growth initiatives. We strive for the attraction, retention and development of skilled, engaged teams of diverse associates.
Learning and Leadership Development: Associate training is also an important component of our human capital management. We have programs designed specifically to support early career talent, as well as management development. The Company continues to explore solutions that provide training material and support to all levels in the organization.
Total Rewards: We believe Cerner offers a competitive portfolio of rewards offerings to our associates around the globe to attract, engage and retain our talented associates. We have a global job architecture which underpins our pay structure that includes a combination of base pay, cash incentives and equity awards. Compensation awards are based on performance, and determined by the results associates achieve, as well as how they achieve those results in a manner consistent with our associate behaviors.
Consistent with our strong commitment to associate well-being, our global rewards portfolio includes a full suite of healthcare and retirement benefits in addition to other well-being programs, many of which are also offered virtually, including: fitness classes, wellness coaching, mental health support, bariatric care, financial planning resources, musculoskeletal health coaching, as well as on-site child care, fitness centers, health clinics and pharmacies.
Associate Experience and Engagement: We strive to create an environment in which associates are fully engaged, feel safe, have a sense of belonging and are empowered to make a difference. We focus on an inclusive culture to retain talent. These ongoing efforts are shaped by the action planning from our annual employee engagement census survey.
Talent Management: Cerner has an ongoing approach to performance and career management that is grounded in behaviors embedded in every day experiences that encourage the continual development of associates. Associates work with their managers to align goals and ask for feedback to enable achievement of outcomes that we believe matter most to Cerner clients.
Organization Design and Effectiveness: This area focuses on organizational design consulting, the integration of new associates from our business acquisitions, and coaching.
Associate Relations and Employment Practices: This area focuses on compliance with applicable employment laws, associate relations and resolving associate employment-related disputes, as well as on managing the process for departing associates, including the provision of outplacement services. In addition, this area provides proactive performance coaching for our associates. Associates are encouraged to report ethics, safety, or grievances through multiple channels including a company provided confidential hotline.
Diversity, Equity and Inclusion ("DE&I"): This area focuses on education, embedding DE&I into our talent processes and programs, associate community building, market outreach, fostering a culture of inclusion and developing enterprise diversity strategies. We have an enterprise-wide DE&I strategy to achieve holistic transformation in collaboration with executives, leaders and associates. We focus on inclusive solutions and supporting diversity within all stakeholder groups.
Global Community and Philanthropy: This area focuses on philanthropy, associate volunteerism, community relations, corporate social responsibility and sustainability.
Information about our Executive Officers of the Registrant
The following table sets forth the names, ages, positions and certain other information regarding the Company's executive officers as of January 28, 2019.February 10, 2022. Officers are elected annually and serve at the discretion of the Board of Directors.
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Name | | Age | | Positions |
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NameDavid T. Feinberg | | Age59 | | Positions |
Brent Shafer | | 61 | | Chairman of the Board of DirectorsPresident and Chief Executive Officer |
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Marc G. NaughtonMark J. Erceg | | 6352 | | Executive Vice President and Chief Financial Officer |
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Michael R. NillNasim Afsarmanesh | | 5444 | | Executive Vice President and Chief OperatingHealth Officer |
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John PeterzalekTravis S. Dalton | | 5851 | | Executive Vice President, and Chief Client & Services Officer and President, Cerner Government Services |
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Randy D. SimsDaniel P. Devers | | 5849 | | Executive Vice President, Chief Legal Officer and Secretary |
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Jeffrey A. TownsendJerome Labat | | 5556 | | Executive Vice President and Chief of InnovationTechnology Officer |
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Donald TriggTracy L. Platt | | 4748 | | Executive Vice President, Strategic Growth |
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Julia M. Wilson | | 56 | | Executive Vice President and Chief PeopleHuman Resources Officer |
Brent Shafer was appointedDavid T. Feinberg, M.D., joined the Company in October 2021 as President and Chief Executive Officer and Chairmanas a member of the Board of Directors effectiveDirectors. Dr. Feinberg joined Cerner after serving since 2019 as Vice President of Google Health, where he led Google's worldwide health efforts, bringing together groups from across Google and Alphabet that used artificial intelligence, product expertise and hardware to take on big healthcare challenges. In this role, he was responsible for organizing and innovating Google's various healthcare initiatives. Prior to joining Google, from 2015 to 2019, Dr. Feinberg served as the President and Chief Executive Officer of Geisinger Health System, a physician-led health system. At Geisinger, Dr. Feinberg led an operational turnaround and pushed the use of new platforms and tools including an IT system called a Unified Data Architecture, which allowed the company to integrate big data into their existing data analytics and management systems. Prior to Geisinger, Dr. Feinberg worked at UCLA for more than 20 years and served in a number of leadership roles, including President, CEO and Associate Vice Chancellor of UCLA Health Sciences, Vice Chancellor and CEO for the UCLA Hospital System, and CEO of UCLA's Ronald Reagan Medical Center. Dr. Feinberg serves as a member of the board of directors of Emmett Douglas, Inc. (NYSE: DEI).
Mark J. Erceg joined the Company in February 1, 2018.2021 as Executive Vice President and Chief Financial Officer. Mr. Erceg joined Cerner after serving as Chief Financial Officer of Tiffany & Co. ("Tiffany"), from October 2016 to January 2021. In that position, Mr. Erceg served as the principal financial officer for Tiffany. Prior to joining Tiffany, Mr. Erceg held the role of Executive Vice President and Chief Financial Officer for Canadian Pacific Railway Limited, a transcontinental railway, from 2015 to 2016, and Masonite International Corporation, a global manufacturer of commercial and residential doors, from 2010 to 2015. Previously, Mr. Erceg held finance, market strategy, general management and global investor relations positions at The Procter & Gamble Company during his tenure there from 1992 to 2010.
Nasim Afsarmanesh, M.D., M.B.A., joined the Company in January 2022 as Executive Vice President and Chief Health Officer. Prior to joining the Company, Mr. ShaferDr. Afsar served as the Chief Operating Officer of UCI Health, Orange County, California's only academic health system, since October 2020, and as Executive for Population Health Management since March 2018. In these roles, she had oversight for more than 3,000 employees and oversaw inpatient and ambulatory operations, including ambulatory care, inpatient progression efforts, clinical support services, ancillary service, public safety, building and construction, and emergency management, and finance; was a key driver for advancing the future of healthcare through implementation of digital solutions; was a vital partner for institutional strategic growth and development; and established organizational population health strategy and operations. Dr. Afsar also served as Chief Operating Officer for Ambulatory Care at UCI Health from March 2018 until October 2020, where she managed a team of over 1,000 people and 80 cost centers, led organization and ambulatory strategy and ambulatory operations and finance, and established strategic direction for health plans, independent physician associates, Medicare and Medi-Cali; and as head of Health System Contracting from May 2018 to October 2020, where she also directed the health system's contracting. Prior to joining UCI Health, Dr. Afsar served as Chief Quality Officer for the Department of Medicine at UCLA Health, leading a large-scale population health initiative, from July 2014 until February 2018. In this role, Dr. Afsar developed and executed strategies for population health and value-based care in the Department of Medicine. Prior to that, Dr. Afsar also served as the Associate Chief Medical Officer at UCLA Health and Executive Director of Quality and Safety at UCLA Health Department of Neurosurgery.
Travis S. Dalton joined the Company in August 2001 as Practice Operations Manager and has held a variety of business and client senior leadership roles since that time, including Client Results Executive from February 2009 until he was promoted to Vice President and Client Results Executive, a title which he held from March 2011 to December 2012. Mr. Dalton's role was expanded in December 2012, and he served as the Vice President, Investor Owned and General Manager Federal from December 2012 until he was promoted to Senior Vice President, Investor Owned and General Manager Federal in March 2016 (which title was changed to Senior Vice President and General Manager, Federal Government in October 2017). His role was changed to Senior Vice President and President, Cerner Government Services in August 2018. He was promoted to Executive Vice President, Chief Client and Services Officer and President, Cerner Government Services in January 2021. In this role, Mr. Dalton oversees worldwide client relationship management, sales, services, consulting, support, hosting and client success. He also leads Cerner's work in implementing a new, interoperable electronic health record for the U.S. Departments of Philips North America,Defense (DOD) and Veterans Affairs (VA).
Daniel P. Devers was appointed as Executive Vice President, Chief Legal Officer and Secretary in January 2021 and prior to that had served as Senior Vice President and Chief Intellectual Property Officer since May 2013. As Cerner's Chief Legal Officer, Mr. Devers is responsible for overseeing Cerner's worldwide legal affairs including litigation, intellectual property and corporate matters. Prior to serving as Chief Legal Officer, Mr. Devers served as Senior Vice President – Cloud Strategy from February 2020 to January 2021, Senior Vice President and General Counsel from April 2018 to February 2020, Senior Corporate Counsel – Intellectual Property from 2003 to 2007 and Corporate Counsel – Intellectual Property from February 2002 to December 2003. He has been a healthmember of the Cerner Executive Committee since March 2020. Mr. Devers was an equity partner at Shook, Hardy & Bacon LLP prior to joining Cerner. He taught patent law at the University of Missouri and served a three-year gubernatorial appointment to the Missouri Technology Corporation's Board of Directors.
Jerome Labat joined the Company in June 2020 as Executive Vice President and Chief Technology Officer (CTO). As CTO, Mr. Labat has executive responsibility for client-facing software products and technology development, including platform and product development, modernization and security. Prior to joining the company, Mr. Labat served as Senior Vice President and Chief Technology Officer at Micro Focus International plc, a British multinational, pure-play enterprise software and information technology company, and the North American division of Koninklijke Philips N.V. ("Philips") since February 2014.from September 2017 until June 2020. In that position,this role, Mr. ShaferLabat led an organization of 17,000 employeesabout 500 people globally and, oversaw a healthamong other things was responsible for the company's product portfolio technology portfolio that included a broad range ofand strategy vision as to how Micro Focus' solutions would support its clients through their digital transformation, and services covering patient monitoring, imaging, clinical informatics, sleepdeveloped and respiratory care as well as a group of market-leading consumer-oriented brands. For 12 years, Mr. Shafer played a key role in helping Philips developimplemented technology and strengthen its health care focus, increase its profitability and grow its market share.solution strategies to support Micro Focus' digital transformation. Prior to joining Micro Focus, Mr. Labat spent five years with Hewlett Packard Enterprise Corporation (HPE), his most recent position,title being CTO HPE- Software Division, which he held from December 2013 to August 2017. In this role, Mr. ShaferLabat led HPE's cloud automation business. Prior to serving as CTO HPW-Software Division, Mr. Labat served as Chief Executive Officer of the global Philips' Home Healthcare Solutions business, a home healthcare services provider with 6,000 employees, from May 2010 until May 2014, as Chief Executive Officer of the North America regionVice President and General Manager, Cloud Automation and Management for Royal Philips Electronics from January 2009 until May 2010,HPE and as president and Chief Executive Officer of the Healthcare Sales and Service business for Philips North America from May 2005 until May 2010. Prior to joining Philips, Mr. Shafer served in various senior leadership positions with other companies, including Hill-Rom Company Inc., GE Medical Systems,Intuit Corporation and Hewlett-Packard.Oracle Corporation.
Marc G. NaughtonTracy L. Platt joined the Company in November 1992July 2019 as Manager of Taxes. In November 1995 he was named Chief Financial Officer and in February 1996 he was promoted to Vice President. He was promoted to Senior Vice President in March 2002 and promoted to Executive Vice President in March 2010.
Michael R. Nill joined the Company in November 1996. Since that time he has held several positions in the Technology, Intellectual Property and CernerWorks Client Hosting Organizations. He was promoted to Vice President in January 2000, promoted to Senior Vice President in April 2006 and promoted to Executive Vice President and named Chief Engineering Officer in February 2009. Mr. Nill was appointed Chief Operating Officer in May 2011.
John Peterzalek joined the Company in 2003 as President, Cerner South East and has held a variety of business and client leadership roles since that time, including Senior Vice President, East Region, a title which he held from 2007 to 2014 when he was named Senior Vice President, Client Relationships. He was promoted to Executive Vice President, Client Relationships in April 2017 and Executive Vice President, Worldwide Client Relationships in October 2017. He held the title of Executive Vice President, Worldwide Client Relationships until September 2018 when he was named Executive Vice President and Chief ClientHuman Resources Officer.As Chief Client Officer, Mr. Peterzalek focuses on driving value, innovation and results to Cerner's clients globally and leads the corporate direction for revenue generation, solution strategy, business development, and marketing.
Randy D. Sims joined the Company in March 1997 as Vice President and Chief Legal Officer, was promoted to Senior Vice President in March 2011, and Executive Vice President in April 2018. Prior to joining the Company, Mr. Sims workedMs. Platt spent nearly 10 years in executive HR roles at Farmland Industries, Inc. for three years where he last served as Associate General Counsel. Prior to Farmland, Mr. SimsMedtronic Plc, a global healthcare company that develops and distributes medical devices. More specifically, Ms. Platt was in-house legal counsel at The Marley Company for seven years, holding the position of Assistant General Counsel when he left to join Farmland.
Jeffrey A. Townsend joined the Company in June 1985. Since that time he has held several positions in the Intellectual Property Organization and was promoted to Vice President, Human Resources, Medtronic from September 2009 to July 2019. Ms. Platt brings healthcare experience from Medtronic and other key organizations, including Cardinal Health and GE Healthcare. Her most recent role at Medtronic included HR leadership for its global operations organization and driving an operating model transformation throughout the enterprise.
Market and Industry Data
This annual report on Form 10-K may contain market, industry and government data and forecasts that have been obtained from publicly available information, various industry publications and other published industry sources. We have not independently verified the information and cannot make any representation as to the accuracy or completeness of such information. None of the reports and other materials of third party sources referred to in February 1997. He was appointed Chief Engineering Officerthis annual report on Form 10-K were prepared for use in, or in connection with, this annual report.
in March 1998, promoted to Senior Vice President in March 2001, named Chief
Donald Trigg serves as Executive Vice President, Strategic Growth. He originally joined the Company in 2002 as Vice President, Corporate Positioning. He has held multiple roles during his time at the Company, including Chief Marketing Officer from 2003 to 2007, General Manager for the Kansas City region from 2006-2007, Managing Director for the United Kingdom and Ireland from 2008-2010 and Senior Vice President and President, Cerner Health Ventures from 2012-2018. From 2010-2012, Mr. Trigg served as Chief Revenue Officer at CodeRyte, Inc prior to its acquisition by 3M's healthcare division. Mr. Trigg also spent more than a decade serving in the public policy space as a senior advisor for the 2000 Bush for President campaign in Austin, TX, the Director of Policy at the U.S. Department of Commerce and in a series of senior policy roles in the U.S. House and U.S. Senate.
Julia M. Wilson first joined the Company in July 1990. Since that time, she has held several positions in the Functional Group Organization. She was promoted to Vice President and Chief People Officer in August 2003, to Senior Vice President in March 2007 and to Executive Vice President in March 2013.
Item 1A. Risk Factors.
Risks Related to the Acquisition of Cerner by Oracle
The announcement and pendency of the Merger may result in disruptions to our Businessbusiness. On December 20, 2021, we entered into the Merger Agreement with an affiliate of Oracle, pursuant to which we will be acquired by Oracle. The Merger Agreement generally requires us to operate our business in the ordinary course pending completion of the Merger and restricts us, without Oracle's consent, from taking certain specified actions until the Merger is completed. These restrictions may affect our ability to execute our business strategies and attain financial and other goals and may impact our financial condition, results of operations and cash flows. Further, in connection with the pending Merger, our current and prospective employees may experience uncertainty about their future roles with us following the Merger, which may materially adversely affect our ability to attract and retain key personnel while the Merger is pending. Employees may depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with us following the Merger and may depart prior to the completion of the Merger. Accordingly, no assurance can be given that we will be able to attract and retain employees to the same extent that we have been able to in the past. The proposed Merger further could cause disruptions to our business or business relationships, which could have an adverse impact on our results of operations. Parties with which we have business relationships may experience uncertainty as to the future of such relationships and may delay or defer certain business decisions, seek alternative relationships with third parties or seek to alter their present business relationships with us. Parties with whom we otherwise may have sought to establish business relationships may seek alternative relationships with third parties. The pursuit of the Merger may place a significant burden on management and internal resources. It may also divert management's time and attention from the day-to-day operation of our business and the execution of our other strategic initiatives. This could materially adversely affect our financial results. In addition, we have incurred and will continue to incur other significant costs, expenses and fees for professional services and other transaction costs in connection with the proposed Merger, and many of these fees and costs are payable regardless of whether or not the pending Merger is consummated. Any of the foregoing could adversely affect our business, our financial condition and our results of operations and prospects.
The Merger may not be completed within the expected timeframe, or at all, and the failure to complete the Merger could materially adversely affect our business, results of operations, financial condition, and the market price of our common stock. There can be no assurance that the Merger will be completed in the expected timeframe, or at all. The Merger Agreement contains conditions that must be satisfied or waived prior to the completion of the Merger, including, among others, the approval or clearance of the Merger under the antitrust and foreign investment laws of certain specified countries. There can be no assurance that all required approvals will be obtained, that the conditions to the completion of the Merger will otherwise be satisfied (or waived, if applicable) or that the Merger Agreement will not be terminated, and, even if all required approvals are obtained and conditions are satisfied (or waived, if applicable), we can provide no assurance as to the terms, conditions and timing of such approvals or that the Merger will be completed in a timely manner or at all. Certain conditions to completion of the Merger are not within our control, and we cannot predict when or if these conditions will be satisfied (or waived, as applicable). Even if required regulatory approvals are obtained, it is possible conditions will be imposed that could result in a material delay in, or the abandonment of, the Merger or otherwise have an adverse effect on us.
If the Merger is not completed within the expected timeframe or at all, we may be subject to a number of material risks. The price of our common stock may decline to the extent that current market prices reflect a market assumption that the Merger will be completed. In addition, some costs related to the Merger must be paid whether or not the Merger is completed, and we have incurred, and will continue to incur, significant costs, expenses and fees for professional services and other transaction costs in connection with the proposed transaction, as well as the diversion of management and resources towards the Merger, for which we will have received little or no benefit if completion of the Merger does not occur. We may also experience negative reactions from our investors, clients, suppliers, and associates. In addition, if the Merger Agreement is terminated under certain specified circumstances, we will be required to pay Parent a termination fee of $950 million. Additional information about the Offer and Merger and the Merger Agreement is set forth in our filings with the SEC.
Stockholder litigation could prevent or delay the closing of the Merger or otherwise negatively impact our business, operating results and financial condition. We may incur substantialadditional costs relatedin connection with current or any future stockholder litigation in connection with the Merger. Such litigation may adversely affect our ability to product-related liabilities. Manycomplete the Merger. We could incur significant costs in connection with any such litigation, including attorneys' fees and costs associated with the indemnification obligations to our directors.
COVID-19 Risks
The COVID-19 pandemic has affected how we and our customers are operating our respective businesses, and the duration and extent to which this will impact our future results of operations remains uncertain. Continuing efforts to control the spread of the COVID-19 pandemic or the resurgence thereof have significantly curtailed the movement of people, goods and services worldwide, including in most or all of the regions in which we sell our software, solutions, health carehealthcare devices, technology-enabled services or other services (collectively referred to as "Solutions"Products and Services") are intendedand conduct our business operations. The COVID-19 pandemic has caused us to modify certain of our business practices, including prolonging the requirement that most of our associates work remotely; restricting associate travel; mandating vaccines for useour associates; developing social distancing plans for our associates; and canceling or postponing in collecting, storingperson participation in certain meetings, events and displaying clinicalconferences, and health care-related information usedwe may take further actions as required by government authorities, our clients or as determined to be in the diagnosisbest interests of our associates, clients and treatment of patientsbusiness partners. These measures and our clients' focus on the pandemic have also resulted in related health care settings such as registration, schedulingdelays in marketing, selling and billing. We attemptimplementing our Products and Services. There is no certainty that these measures will be sufficient to limitmitigate the risks posed by contractthe virus and our liability; however, the limitations of liability set forth in the contracts may notability to perform critical functions could be enforceable or may not otherwise protect us from liability for damages. We may also be subject to claims that are not covered by contract. Although we maintain liability insurance coverage,harmed. Further, there can be no assuranceassurances that our mitigation measures, such coverageas mandating vaccines for our U.S.-based associates, will cover anynot have a negative impact on our business. The magnitude and duration of the disruption and potential ongoing impact on business activity is uncertain. In particular, claimwe have experienced and may continue to experience a negative financial impact due to a number of factors, including without limitation:
•Cerner's efforts and investments in assisting its clients in their response to the pandemic;
•Reduced new business bookings as our clients focus on helping their patients during the crisis, rather than making new or expanded purchasing decisions, and longer-term declines in bookings for new Products and Services to the extent that has been brought or that may be brought in the future, that such coverage will prove to be adequate or that such coveragepandemic will continue to remain availablecontribute to sustained global or U.S. economic downturns;
•Delays in implementing our Products and Services, including delays in the pace of completion of existing projects, while client resources are reallocated or dedicated to fighting the COVID-19 pandemic or the resurgence thereof, and supply chain interruptions;
•Financial pressures being put on acceptable terms, ifour clients, which may in turn result in a delay in collections or non-payment from our clients; and
•Financial pressures being put on our strategic investments for which we hold an equity interest increases the risk of asset impairment.
Although we experienced some ongoing challenges in connection with the COVID-19 pandemic during 2021, at all. A successfulthis time, we have not experienced a negative impact on our liquidity, access to capital or overall operations. While we generally expect continued impact from COVID-19 in 2022, we are unable to predict the ultimate impact of the COVID-19 pandemic, including the nature and timing of when full demand recovery may occur. Even after the COVID-19 pandemic has subsided, we may experience material claim or series of claims brought against us, if uninsured or under-insured, could materially harmadverse impacts to our business resultsas a result of operationsthe global and U.S. economic impact and any recession that has occurred or may occur in the future. To the extent the COVID-19 pandemic or our measures taken in response thereto adversely affects our business and financial condition. Product-related claims, even if not successful, could damage our reputation, cause us to lose existing clients, limit our ability to obtain new clients, divert management's attention from operations, result in significant revenue loss, create potential liabilities for our clientsresults, it may also have the effect of heightening many of the other risks described below.
Cybersecurity and us and increase insurance and other operational costs.Information Technology Risks
We may be subject to claims for system errors and warranties. Our Solutions and Services are very complex and may contain design, coding or other errors, especially when first introduced. It is not uncommon for HCIT providers to discover errors in Solutions and Services after their introduction to the market. Similarly, the installation of our Solutions and Services is very complex and errors in the implementation and configuration of our systems can occur. Our Solutions and Services are intended for use in collecting, storing, and displaying clinical and health care-related information used in the diagnosis and treatment of patients and in related health care settings such as registration, scheduling and billing. Therefore, users of our Solutions and Services are less tolerant of errors than the market for other types of technologies generally. Our client agreements typically provide warranties concerning material errors and other matters. If a client's Solutions and Services fail to meet these warranties or leads to faulty clinical decisions or injury to patients, it could 1) constitute a material breach under the client agreement, allowing the client to terminate the agreement and possibly obtain a refund or damages or both, or require us to incur additional expense in order to make the Solution or Service meet these criteria; or 2) subject us to claims or litigation by our clients or clinicians or directly by the patient. Additionally, such failures could damage our reputation and could negatively affect future sales. Our client agreements generally limit our liability arising from such claims but such limits may not be enforceable in certain jurisdictions or circumstances. Although we maintain liability insurance coverage, there can be no assurance that such coverage will cover any particular claim that has been brought or that may be brought in the future, that such coverage will prove to be adequate or that such coverage will continue to remain available on acceptable terms, if at all. A successful material claim or series of claims brought against us, if uninsured or under-insured, could materially harm our business, results of operations and financial condition.
We may experience interruptions at our data centers or client support facilities, which could interrupt clients' access to their data, exposing us to significant costs and reputational harm. We perform data center and/orand hosting services for certain clients, including the collection and storage of critical patient and administrative data and the provision of support services through various client support facilities. Our business reliesservices. We rely on the secure electronic transmission, data centerprocessing and storage and hosting of sensitive information, including protected health information; personally identifiable information;
financial information; and other sensitive information relating to our clients and their patients, our company and our third-party suppliers. We also use public cloud providers and certain billing information,other third parties in connection with hosting our company, our workforce and our third party suppliers. Completeown data. A catastrophic failure of all localour backup generators during a prolonged public utility power and backup generators;outage; an impairment of all telecommunications lines; a successful concerted denial of service attack; a significant system, network or data breach; damage, injury or impairment (environmental, accidental or intentional) to the buildings, the equipment, inside the buildings housing our data centers, the personnel operating such facilities or the client data contained therein; or errors by the personnel trained to operateoperating such facilities could cause a disruption in operations and negatively impact clients who depend on us for data center and system support services. We offer our clientsclients. System redundancy, disaster recovery services for additional fees to protect clients from isolated data center failures, leveraging our multiple data center facilities; however only a small percentageand other continuity measures may be inadequate. Any interruption, damage or breach of our hosted clients choose to contract for these services. Additionally, Cerner's core systems are disaster tolerantor with those of third parties on which we rely, such as we have implemented redundancy across physically diverse data centers. If any of these systems are interrupted, damaged or breached by an unforeseen event or actions of a Cerner associate or contractor or a third party or fail for any extended period of time, itour cloud service providers, could damage our reputation, cause us to lose existing clients, hurt
our ability to obtain new clients, result in significant revenue loss, create potential liabilities, forincrease our clients and us, increase insurance and other operating costs and have a material adverse impact on our results of operations. We use third party public cloud providers in connection with certain cloud-based offerings and third parties to host our own data, in which case we have to rely on such third parties to prevent service interruption and such reliance is
A security breach could subject to similar risks described above with respect to our own data center and hosting services.
If our IT security is breached, or if the IT security of third parties on which we rely is breached, we could be subjectus to increased expenses, exposure to legal claimsexposure and regulatory actions, and clients and prospective clients could be deterred from using our SolutionsProducts and Services. We are in the information technology business, and in providing our Solutions Our Products and Services werequire us to store, retrieve, process and manage our clients' information and data (and that of their patients), as well as our own data. We believe we have a reputation for securePersons with authorized access, both associates and reliable Solution and Service offerings, and we have invested a great deal of time and resources in protectingthird parties, may use such access to harm the security, confidentiality, integrity and availabilityCompany. Persons outside of our Solutions and Services and the internal and external data that we manage. Third partiesorganization may attempt to identify and exploit SolutionProduct and Service vulnerabilities, penetrate or bypass our security measures, and gain unauthorized access to our or our clients' and suppliers' software, hardware and cloud offerings, networks and systems, or those of our clients and suppliers, any of which could lead to disruptions in mission-critical systems or the unauthorized release or corruption of personalprotected health information, personally identifiable information, financial information or other sensitive information, or the confidential information or data of Cerner, our clients or their patients.
High-profile security breaches at other companies have increased in recent years, and security industry experts and government officials have warned about the risks of hackers and cyber-attacks targeting information technology products and businesses. Although this is an industry-wide problem that affects other software and hardware companies, wepatients, or our suppliers. We may be targeted by computer hackers because we are a prominent health carehealthcare IT company and have high profile clients, including government clients. Additionally, our clients and their employees may be targeted by hackers who compromise their credentials and lead to unauthorized access to their systems hosted in our data centers or third-party cloud service providers. These risks willmay increase as we continue to grow our cloud offerings, collect, store and process increasingly large amounts of our clients' confidential data, including personalprotected health information and sensitive personal data, and host or manage parts of our clients' businesses in cloud-based/multi-tenant IT environments. We also use third party public cloud providers in connection with certain client facing cloud-based offerings and third party providers to host our own data, in which case we have to rely on the processes, control and security such third parties have in place to protect the infrastructure, which are subject to similar risks described above with respect to our IT security.
We continue to invest in and improve our threat protection, detection and mitigation policies, procedures and controls. In addition, we work with other companies in the industry on increased awareness and enhanced protections against cybersecurity threats. Because of the evolving nature and sophistication of these security threats, which can be difficult to detect, theredata. There can be no assurance that our policies, procedures, and controls or those of third parties on which we rely will detect or prevent anyall of these threats and we cannot predict the full impact of any such past or future incident.
The costs we would incur to address and remediate these security incidents would increase our expenses, and ourexpenses. Our efforts to address these problems may not be successful and could result in interruptions, delays, cessation of service and loss of existing or potential clients that may impede our sales, development of solutions, provision of services or other critical functions. If a cyber-attack or other security incident described above were to allow unauthorized access to or modification of our clients' or suppliers' data, our own data or our IT systems, or if our SolutionsProducts or Services are perceived as having security vulnerabilities, we could suffer significant damage to our brand and reputation. This in turn could lead to fewer clients using our SolutionsProducts and Services and result in reduced revenue and earnings. These types of security incidents could also lead to lawsuits, regulatory investigations and claims and, increased legal liability, including regulatory actions by state and federal government authorities and non-US authorities and, in some cases, contractual costs related to notification and fraud monitoring of impacted persons.We maintainmonitoring. There can be no assurance that our cyber risk insurance but this insurance may not be sufficient towill adequately cover all of our losses from any future security breaches or remain available on acceptable terms, if at all.
Operating and Product Risks
We may be subject to claims for system errors and warranties or incur substantial costs related to product and service-related liabilities. Many of our ITProducts and Services are intended for use in collecting, storing and displaying clinical and healthcare-related information used in the diagnosis and treatment of patients and in related healthcare settings such as registration, scheduling and billing. Our Products and Services, or the third-party software products or services incorporated therein, may contain design, coding or other errors, especially when first introduced. Similarly, errors in the implementation and configuration can occur and have occurred in the past. These errors could affect the ability of our Products and Services to properly function, integrate or operate with other offerings, scale to meet the needs of our clients, create vulnerabilities and adversely affect market acceptance. If the timely delivery of medical care or other customer business requirements are impaired by data access, network or systems problems, we could be exposed to legal liability and reputational harm. Healthcare professionals delivering patient care tend to have heightened sensitivity to system and software errors and impairments of reliability and stability of systems. If our Products and Services are alleged to have contributed to faulty clinical decisions, injury to patients based on failure to provide reliable and stable uptime, or thosenegative financial impact to clients, we might be subject to claims or litigation by users of third partiesour Products and Services or their patients. Errors or failures might damage our reputation and negatively affect future sales. Any such problems might have a materially adverse impact on whichour business operations and our financial position or results of operations.
Our client agreements typically provide warranties concerning material errors and other matters. Our failure to meet these warranties could allow the client to terminate the agreement and possibly obtain a refund or damages or both, require us to incur additional expense to correct such failure, subject us to claims, damage our reputation and negatively affect future sales. We attempt to contractually limit our liability; however, these contractual limitations may not be enforceable or otherwise protect us from liability. We may also be subject to claims that are not covered by contract. There is no assurance that our liability insurance will adequately cover any claim or remain available on acceptable terms, if at all. If we rely.are uninsured or under-insured for any such claim, our business, results of operations and financial condition could be
materially harmed. Product and service-related claims, even if not successful, could damage our reputation, result in the loss of existing or potential clients, divert management's attention, result in significant revenue loss, create potential liabilities for our clients and us and increase our operational costs.
Our proprietary technology may be subject to claims for infringement or misappropriation of intellectual property rights of others, or our intellectual property rights may be infringed or misappropriated by others.others or our software may be subject to claims related to open source software licenses. We rely upon a combination of confidentiality practices and policies, license agreements, confidentiality provisions in employment agreements, confidentiality agreements with third partiescontractual arrangements and technical security measures to maintain the confidentiality exclusivity and trade secrecy of our proprietary information. We also rely on trademark, copyright and copyrightpatent laws to protect our intellectual property rights in the U.S. and abroad. We continue to develop our patent portfolio of U.S. and global patents, butrights. Despite these patents do not provide comprehensive protection for the wide range of Solutions and Services we offer. Despite our protective measures and intellectual property rights,efforts, we may not be able to adequately protect against theft, copying, reverse engineering, misappropriation, infringement or unauthorized use or disclosure of our intellectual property, which could have an adverse effect on our competitive position.
In addition, we are routinelyoccasionally involved in intellectual property infringement or misappropriation claims, and we expect this activity to continue or even increase as the number of competitors, patents and patent enforcement organizations in the HCIT and broader IT market increases, the functionality of our Solutions and Services expands, the use of open-source software increases and we enter new geographies and new market segments.claims. These claims, even if unmeritorious, are expensive to defend and are often incapable of prompt resolution. If we become liable to third parties for infringing or misappropriating their intellectual property rights,are unsuccessful in defending these claims, we could be required to pay a substantial damage award, develop alternative technology, obtain a license or cease using, selling, offering for sale, licensing, implementing or supporting the applicable SolutionsProducts and Services.
Many of our software solutions and technology-enabled services contain open source software that may pose particular risks to our proprietary software solutions and technology-enabled services in a manner that could have a negative effect on our business. We rely upon open source software in our software solutionsProducts and technology-enabled services. The licensing terms applicable for certain open source software have not been interpreted by U.S. or foreign courts and could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to provide and support our Solutions or Services.
Additionally, we We may encounter claims from third parties claiming ownership andalleging unauthorized use of the software purported to be licensed under the open source terms, demanding release of derivative works of open source software that could include our proprietary source code, or otherwise seeking to enforce the terms of the applicable open source licenses. These claims could result in litigation and, even if unmeritorious, could be expensive to defend and incapable of prompt resolution. If we become liable to third parties for such claims, weWe could also be required to make our software source code available under the applicable open source license, utilize or develop alternative technology, or cease using, selling offering for sale, licensing, implementing or supporting the applicable solutions or technology-enabled services. In addition, use of certain open source software may pose greater risks than use of third party commercial software, as most open source licensorsProducts and distributors do not provide commercial warranties or indemnities or controls on the origin of the software.Services if we are unsuccessful in defending such claims.
We may become involved in legal proceedings that could have a material adverse impact on our business, results of operations and financial condition.condition, and our inability or failure to effectively manage publicity related to such claims or legal proceedings could adversely impact our business. From time to time and in the ordinary course of our business, we and certain of our subsidiaries may become involved in various legal proceedings and claims, including for example, those relating to employment disputes and litigation; client disputes and litigation allegingpractices, solution and implementation defects, personal injury, torts, intellectual property infringement, violations of law and breaches of contract and warranties; and other third partywarranties. All disputes and litigation alleging personal injury, intellectual property infringement, violations of law, and breaches of contracts and warranties. All such legal proceedings are inherently unpredictable and,unpredictable. And, regardless of the merits of the claims, litigation may lead to negative publicity and may be expensive, time-consuming and disruptive to our operations and distracting to management. If resolved against us, such legal proceedings could result in excessive verdicts,judgments, injunctive relief or other equitable relief that may affect how we operate our business. Similarly, if we settle suchAny settlements of disputes or legal proceedings it may also affect how we operate our business. Future court decisions, alternative dispute resolution awards, business expansion or legislative activity may increase our exposure to litigation and regulatory investigations. In some cases, substantial non-economic remedies or punitive damages may be sought. Although we maintain liability insurance coverage, thereThere can be no assurance that such coverageour liability insurance will adequately cover any particular verdict, judgment or settlement that may be entered against us, that such coverage will prove to be adequate or that such coverage will continue to remain available on acceptable terms, if at all. If we incur liability that exceeds our insurance coverage or that is not within the scope of the coverage, in legal proceedings brought against us, it could have a material adverse effect on our business, results of operations and financial condition. Additionally, the dissemination of information via social media, including information about alleged harassment, discrimination or other claims, could harm our business, brand, reputation, financial condition, and results of operations, regardless of the information's accuracy.
We are subject to risks associated with our global operations. We market, sell and support our SolutionsProducts and Services globally. We have established offices aroundperiodically evaluate entering into new markets, whether organically or by acquisition, and adjusting our focus in certain existing markets. For example, in connection with the world, includingacquisition of the Kantar Health business, we acquired business in, the Americas, Europe, the Middle Eastamong other countries, new markets such as China and the Asia
Pacific region. We plan to continue to expand our non-U.S. operations and enter new global markets. This expansion will require significantTaiwan. Significant management attention and financial resources are required to develop successful directaddress the risks noted below associated with new market entry into non-U.S. markets, including the noted markets above, and indirect non-U.S. sales and support channels. Our business is generally transactedpotential disruptions if we chose to adjust our focus in the local functional currency. In some countries, our success will depend in part on our ability to form relationships with local partners. There is a risk that we may sometimes choose the wrong partner. For these and other reasons, we may not be able to maintain or increase non-U.S. market demand for our Solutions and Services.
given market. Non-U.S. operations are subject to inherent risks, and our business, results of operations and financial condition, including our revenue growth and profitability, could be adversely affected by a variety of uncontrollable and changing factors. These include, but are not limited to:
•Greater difficulty in collecting accounts receivable and longer collection periods;
•Difficulties and costs of staffing and managing non-U.S. operations;operations and labor disruptions;
The impact of global economic and political market conditions;
•Effects of sovereign debt conditions, including budgetary constraints;constraints, or health service provider or government spending patterns or government-imposed austerity measures;
Unfavorable or volatile foreign currency exchange rates;
•Legal compliance costs or business risks associated with our global operations, where:such as: i) local laws and customs differdiffering from, or are more stringent than those in the U.S.,United States, such as those relating to data protection and data security, ortrade protection measures and intellectual property rights, ii) heightened risk is heightened with respect to
laws prohibiting improper payments and bribery, including without limitation the U.S. Foreign Corrupt Practices Act, the U.K. Anti-Bribery Act and similar laws and regulations in foreign jurisdictions;
Certification,jurisdictions, iii) export control regulations, iv) different or additional functionality requirements or preferences, or v) certification (e.g. CE marking for medical device software), licensing or regulatory requirements and unexpected changes to those requirements;
Changes to or reduced protection•The United Kingdom's withdrawal of intellectual property rights in some countries;its membership from the European Union ("EU") (Brexit) and associated uncertainty and disruptions relating thereto;
Potentially adverse tax consequences as a result of changes in tax laws or otherwise, and difficulties associated with repatriating cash generated or held abroad in a tax-efficient manner;
Different or additional functionality requirements or preferences;
Trade protection measures;
Export control regulations;
Health service provider or government spending patterns or government-imposed austerity measures;
•Natural disasters, war, terrorist acts or terrorist acts;
Labor disruptions that may occur in a country; and
Politicalpolitical unrest which may impact sales or threaten the safety of associates or our continued presence in these countries and the related potential impact on global stability.stability;
Fluctuations in foreign currency exchange rates could materially affect our financial results. •Our consolidated financial statements are presented in U.S. dollars. In general, the functional currency of our subsidiaries is theability to form relationships with local currency where the subsidiary operates. For each subsidiary, assets and liabilities denominated in foreign currencies are translated into U.S. dollars at the exchange rates in effect at the balance sheet dates and revenues and expenses are translated at the average exchange rates prevailing during the month of the transaction. Therefore, increases or decreases in the value of the U.S. dollar against other major currencies affect our revenues, net earnings and the value of balance sheet items denominated in foreign currencies. Future fluctuations in foreign currency exchange rates, particularly the strengthening of the U.S. dollar against major currencies, could materially affect our financial results.
We are subject to tax legislation in numerous countries; changes in tax laws or challenges to our tax positions could adversely affect our business, results of operations and financial condition. We are a global corporation with a presence in more than 35 countries. As such, we are subject to tax laws, regulations and policies of the U.S. federal, state and local governments and of comparable taxing authorities in other country jurisdictions. Changes in tax laws, including for example the U.S. federal tax legislation commonly referred to as the Tax Cuts and Jobs Act of 2017 ("Tax Act"), as well as other factors, could causepartners, which help us to experience fluctuations inoffer our tax obligationsProducts and effective tax rates in 2018Services at scale, and thereafter and otherwise adversely affect our tax positions and/or our tax liabilities. Although our accounting for the effects of the enactment of the Tax Act is now complete, there could be additional regulations wereliance on these partners whose reputation may become subject to. The full impact of the Tax Act on us may change significantly as regulations, interpretations and rulings relating to the Tax Act are issued and additional changes in U.S. federal and state tax laws may be made in the future. There can be no assurance that our effective tax rates, tax payments, tax credits or incentives will not be adversely affected by these or other initiatives.
In addition, U.S. federal, state and local,regarded as well as other countries' tax laws and regulations, are extremely complex and subject to varying interpretations and requires significant judgment in determining our worldwide provision for income taxes and other tax liabilities. Longstanding international tax norms that determine each country's jurisdiction to tax cross-border
international trade are evolving as a result of the Base Erosion and Profit Shifting reporting requirements ("BEPS") recommended by the G8, G20 and Organization for Economic Cooperation and Development ("OECD"). Further, during 2018, the European Commission issued proposals and the OECD issued an interim report related to the taxation of the digital economy. As these and other tax laws and related regulations change, our financial results could be materially impacted. Given the unpredictability of these possible changes and their potential interdependency, it is very difficult to assess the overall effect of such potential tax changes, but such changes could adversely impact our financial results.
In the ordinary course of a global business, there are many intercompany transactions and calculations which could be subject to challenge by tax authorities. We are regularly under audit by tax authorities and those authorities often do not agree with positions taken by us on our tax returns. Our intercompany transfer pricing has been reviewed by the U.S. Internal Revenue Service ("IRS") and by foreign tax jurisdictions and will likely be subject to additional audits in the future. There can be no assurance that our tax positions will not be challenged by relevant tax authorities or that we would be successful in any such challenge, which could result in additional taxation, penalties and interest payments.
The vote byhighly outside the United Kingdom (UK) to leave the European Union (EU) could adversely affect our financial results. In June 2016, UK voters approved a referendumto withdraw the UK's membership from the EU, which is commonly referred to as "Brexit". In March 2017, the UK government initiated the exit process under Article 50 of the Treaty of the European Union, commencing a period of up to two years for the UKStates; and the other EU member states to negotiate the terms of the withdrawal, such period ending on March 29, 2019 unless extended. There has been limited progress so far in the negotiations and continued uncertainty in the UK government and Parliament, which increases the possibility of the UK exiting the EU on March 29, 2019 without a formal withdrawal agreement in place and of significant market and economic disruption. We have operations in the UK and the EU, and as a result, we face
•The increased risks, associated with the potential uncertainty and disruptions that may lead up to and follow Brexit, includingespecially with respect to volatilityperceived corruption, cybersecurity threats and IP protection rights, in exchange rates and interest rates and potential material changes to the regulatory regime applicable to our operations in the UK. Brexit could adversely affect European or worldwide political, regulatory, economic or market conditions and could contribute to instability in global political institutions, regulatory agencies and financial markets. For example, depending on the terms of Brexit, the UK could also lose access to the single EU market and to the global trade deals negotiated by the EU on behalf of its members. Disruptions and uncertainty caused by Brexit may also cause our clients to closely monitor their costs and reduce their spending budget on our Solutions and Services. Any of these effects of Brexit, and others we cannot anticipate or that may evolve over time, could adversely affect our business, results of operations and financial condition.
Our success depends upon the recruitment and retention of key personnel. To remain competitive in our industries, we must attract, motivate and retain highly skilled managerial, sales, marketing, consulting and technical personnel, including executives, consultants, programmers and systems architects skilled in the HCIT, health care devices, health care transactions, population health management and revenue cycle industries and the technical environments in which our Solutions and Services are offered. Competition for such personnel in our industries is intense in both the U.S. and abroad. We may also experience increased compensation costs that are not offset by either improved productivity or higher sales. Our failure to attract additional qualified personnel and to retain and motivate existing personnel to meet our needs could have a material adverse effect on our prospects for long-term growth. In addition, we invest significant time and expense in training our associates, which increases their value to clients and competitors who may seek to recruit them and increases the cost of replacing them. Our success is dependent to a significant degree on the continued contributions of key management, sales, marketing, consulting and technical personnel. Members of our senior management team have left over the years for a variety of reasons, and we cannot guarantee that there will not be additional departures. The unexpected loss of key personnel, or the failure to successfully develop and execute effective succession planning to assure smooth transitions of those key associates and their knowledge, relationships and expertise, could disrupt our business and have a material adverse impact on our results of operations and financial condition, and could potentially inhibit development and delivery of our Solutions and Services and market share advances.
We may be subject to harassment or discrimination claims and legal proceedings, and our inability or failure to respond to and effectively manage publicity related to such claims could adversely impact our business. Although our Global Code of Conduct and other employment policies prohibit harassment and discrimination in the workplace, in sexual or in any other form, we have ongoing programs for workplace training and compliance, and we investigate and take disciplinary action with respect to alleged violations, actions by our associates could violate those policies. And, with the increased use of social media platforms, including blogs, chat platforms, social media websites, and other forms of Internet-based communications that allow individuals access to a broad audience, there has been an increase in the speed and accessibility of information dissemination. The dissemination of information via social media, including information about alleged harassment, discrimination or other claims, could harm our business, brand, reputation, financial condition, and results of operations, regardless of the information's accuracy.
We depend on strategic relationships and third party suppliers and our revenue and operating earnings could suffer if we fail to manage these relationships properly. To be successful, we must continue to maintain our existing strategic relationships and establish additional strategic relationships as necessary with leaders in thecertain new markets in which we operate. We believe that these relationships contribute to our ability to further build our brand, extend the reach of our Solutions and Services and generate additional revenues and cash flows. If we were to lose critical strategic relationships, this could have a material adverse impact on our business, results of operations and financial condition.
We license or purchase certain intellectual property and technology (such as software, services, hardware and content) from third parties, including some competitors, and depend on such third party intellectual property and software, services, hardware and content in the operation and delivery of our Solutions and Services. Additionally, we sell or license third party intellectual property, services and software, hardware or content in conjunction with our Solutions and Services. For instance, we currently depend on Amazon Web Services, Microsoft, Cloudera, Oracle, VMWare and IBM technologies for portions of the operational capabilities of, among others, our Millennium and HealtheIntent solutions. Our remote hosting and cloud services businesses also rely on a limited number of software and services suppliers for certain functions of these businesses, such as Oracle, NetApp, Microsoft, Veritas, CITRIX, GTTChina and Equinix. Additionally, we rely on Dell/EMC, Hewlett-Packard Enterprise, Cisco, NetApp, IBM and others for our hardware technology platforms.Taiwan.
Most of our third party software license support contracts expire within one to five years, can be renewed only by mutual consent and may be terminated if we breach the terms of the license and fail to cure the breach within a specified period of time. Most of these third party software licenses are non-exclusive; therefore, our competitors may obtain the right to use any of the technology covered by these licenses and use the technology to compete directly with us.
If any of our third party suppliers were to change product offerings, cease actively supporting the technologies, fail to update and enhance the technologies to keep pace with changing industry standards, encounter technical difficulties in the continuing development of these technologies, significantly increase prices, change delivery models, terminate our licenses or supply contracts, suffer significant capacity or supply chain constraints or suffer significant disruptions, we may need to seek alternative suppliers and incur additional internal or external development costs to ensure continued performance of our Solutions and Services. Such alternatives may not be available on attractive terms, or may not be as widely accepted or as effective as the intellectual property or technology provided by our existing suppliers. If the cost of licensing, purchasing or maintaining our third party intellectual property or technology significantly increases, our operating earnings could significantly decrease. In addition, interruption in functionality of our Solutions and Services as a result of changes in third party suppliers could adversely affect our commitments to clients, future sales of Solutions and Services, and negatively affect our revenue and operating earnings.
We intend to continue strategic business acquisitions and other combinations, which are subject to inherent risks. In order to expand our Solutions and Services offerings and grow our market and client base, we may continue to seek and complete strategic business acquisitions and other combinations that we believe are complementary to our business. Acquisitions have inherent risks which may have a material adverse effect on our business, results of operations, financial condition or prospects, including, but not limited to: 1) failure to successfully integrate the business, culture and financial operations, services, intellectual property, solutions or personnel of an acquired business and to maintain uniform standard controls, policies, procedures and information systems; 2) diversion of our management's attention from other business concerns; 3) management of a larger company and entry into markets in which we have little or no direct prior experience; 4) failure to achieve projected synergies and performance targets; 5) failure to commercialize "go forward" Solutions and Services under development and increase revenues from existing marketed Solutions and Services; 6) loss of clients, key personnel, supplier, research and development, distribution, marketing, promotion and other important relationships; 7) incurrence of debt or assumption of known and unknown liabilities; 8) write-off of software development costs, goodwill, client lists and amortization of expenses related to intangible assets; 9) dilutive issuances of equity securities; 10) accounting deficiencies that could arise in connection with, or as a result of, the acquisition of an acquired company, including issues related to internal control over financial reporting and the time and cost associated with remedying such deficiencies; and 11)litigation arising from claims or liabilities assumed from an acquired company or that are otherwise related to acquisition activity, such as claims from former employees, former stockholders or other third parties, all of which could require us to incur significant expenses and cause management distraction. If we fail to successfully integrate acquired businesses or fail to implement our business strategies with respect to these acquisitions, we may not be able to achieve projected results or support the amount of consideration paid for such acquired businesses.
Volatility and disruption resulting from global economic or market conditions could negatively affect our business, results of operations and financial condition. Our business, results of operations, financial condition and outlook may be impacted by the health of the global economy. Volatility and disruption in global capital and credit markets may lead to slowdowns or declines in client spending which could adversely affect our business and financial performance. Our business and financial performance, including new business bookings and collection of our accounts receivable, may be adversely affected by current and future economic conditions (including a reduction in the availability of credit, higher energy costs, rising interest rates, financial market volatility and lower than expected economic growth) that cause a slowdown or decline in client spending. Reduced purchases by our clients or changes in payment terms could adversely affect our revenue growth and cause a decrease in our cash flow from operations. Bankruptcies or similar events affecting clients may cause us to incur bad debt expense at levels higher than historically experienced. Further, volatility and disruption in global financial markets may also limit our ability to access the capital markets at a time when we would like, or need, to raise capital, which could have an impact on our ability to react to changing economic and business conditions. Accordingly, if global financial and economic volatility continues or worsens, our business, results of operations and financial condition could be materially and adversely affected.
We operate in intensely competitive and dynamic industries, and our ability to successfully compete and continue to grow our business depends on our ability to anticipate or respond quickly to market changes changing technologies and evolving pricing and deployment methods and to bring competitive new SolutionsProducts and Services and features to market in a timely fashion.The IT industry and the market for health care information systems, Solutionsour Products and Services to the health care industry isare intensely competitive, dynamically evolving and subject to rapid technological advances and innovative enhancements, changing delivery and pricing models, evolving standards in computer hardware and software development and communications infrastructure, and changing and increasingly sophisticated client needs. We compete on the basis of a number of factors, including breadth and depth of services, including our open architecture and the level of product integration across care settings; integrated platform; regulatory compliance; reputation; reliability, accuracy and security; client service; total cost of ownership; innovation; and industry acceptance, expertise and experience. Development of new proprietary SolutionsProducts or Services is complex, entails significant time and expense, may not be successful and often involves a long return on investment cycle. We cannot guarantee that the market for our SolutionsProducts and Services will develop as quickly as expected or at allcontinue to grow or that we will be able to successfully introduce new SolutionsProducts or Services on schedule or at all. Moreover, we cannot guarantee that errors will not be found in our new Solution releases before or after commercial release, which could result in Solution delivery redevelopment costs, harmServices. We provide solutions to our reputation, lost sales, license terminations or renegotiations, product liability claims, diversion of resources to remedy errorsclients via various deployment models, including client-server-based solutions and loss of, or delay in, market acceptance.We believe that we must continue to dedicate a significant amount of resources to our research and development efforts to maintain our competitive position; and oftentimes, successful investments require several years before generating significant revenue.cloud-based offerings.
In addition, we expect that major software information systems companies, highly capitalized consumer technology companies, large information technology consulting service providers and system integrators, start-up companies and others operating in the health carehealthcare industry may offer competitive SolutionsProducts and Services. As we continue to develop new SolutionsProducts and Services to address areas such as analytics, transaction services, device integration, revenue cycle andmachine learning ("ML"), artificial intelligence ("AI"), value-based care, consumer solutions, population health management and other health network solutions, we expect to face new competitors, and these competitors may have more experience in these markets, better brand recognition and/or more established relationships with prospective clients. Moreover, we expect that competition will continue to increase as a result of consolidation in both the IT and healthcare industries. We face strong competition and often face downward price pressure, which could adversely affect our results of operations or liquidity. For example, some of our competitors may bundle products for promotional purposes or as a long-term pricing strategy, commit to large deployments at prices that are unprofitable, or provide guarantees of prices and product implementations. These practices could, over time, significantly constrain the prices that we can charge for certain of our Solutions and Services. If we do not adapt our pricing models to reflect changes in use of our SolutionsProducts and Services or changes in client demand, our revenues could decrease.decrease.
Additionally, the pace of change in the health care information systems market is rapid and there are frequent new software solution introductions, new deployment models (such as via the cloud), software solution enhancements, device introductions, device enhancements and evolving industry standards and requirements. We provide our cloud and other offerings to clients globally via deployment models that best suit their needs, including via our cloud-based software as a services (SaaS) offering. As our business models continue to evolve, we may not be able to compete effectively, generate significant revenues or maintain the profitability of our cloud offerings. If we do not successfully execute our strategy or anticipate the needs of our clients, our reputation as a SaaS provider could be harmed and our revenues and profitability could decline. There are a limited number of hospitals and other health care providers in the U.S. market and in recent years, the health care industry has been subject to increasing consolidation. If we are unable to recognize the impact of industry consolidation, falling costs and technological advancements in a timely manner, or we are too inflexible to rapidly adjust our business models, our prospects and financial results could be negatively affected materially.
Our success also depends on our ability to maintain and expand our business with our existing clients and effectively transition existing clients to current SolutionsProducts and Services, as well as attracting additional clients. Certain clients originally purchased
one or a limited number of our SolutionsProducts and Services. These clients may choose not to expand their use of or purchase new SolutionsProducts and Services. Failure to retain and generate additional business from our current clients could materially and adversely impact our business, financial condition and operating results. In addition, there are a limited number of hospitals and other healthcare providers in the U.S. market, and the healthcare industry has been subject to increasing consolidation, which can cause fewer new footprint opportunities or lead to the replacement of our Products and Services in existing clients if the acquiror (or the group being acquired) has a relationship with a different Health Information Technology (HIT) provider. If we are unable to adapt to the impact of industry consolidation, falling costs and technological advancements in a timely manner, our prospects and financial results could be negatively affected.
We may continue complementary strategic business acquisitions and strategic investments to expand our Products and Services offerings and grow our market and client base. Acquisitions and strategic investments have inherent risks which may have a material adverse effect on our business, results of operations, financial condition or prospects, including, but not limited to: 1) diversion of our management's attention; 2) investment in or entry into markets in which we have little or no direct prior experience; 3) failure to achieve projected synergies; 4) failure to commercialize "go forward" Products and Services; 5) failure to successfully integrate the business; 6) loss of clients, key personnel, suppliers and other important relationships; 7) incurrence of debt or assumption of known and unknown liabilities; 8) write-off of software development costs, goodwill, client lists and amortization of expenses related to intangible assets; 9)
dilutive issuances of equity securities; 10) accounting deficiencies relating to the acquisition of an acquired company, including issues related to internal control over financial reporting and the time and cost associated with remedying such deficiencies; and 11) litigation related to acquisition activity. Further, when we make a strategic investment, we have to rely on third party management teams to drive the portfolio company's success and at times infuse additional capital or provide bridge loans to protect our investment. If we fail to successfully integrate acquired businesses or fail to implement our business strategies with respect to our acquisitions or investments, we may not be able to achieve projected results or support the amount of consideration paid for such acquired businesses or invested into a portfolio company.
If we are unable to manage our growth in the new markets in which we offer SolutionsProducts and Services, our business, results of operations and financial condition could suffer. Our future financial results will depend on our ability to profitably manage our business in the new markets that we enter. Over the past several years, we have pursuedWe expect to pursue growth and expansion opportunities in the areas of analytics, revenue cycleML, AI, value-based care, consumer solutions, population health and population health.other health network solutions. To achieve success in those areas, we will need to, among other things, recruit, train, retain and effectively manage associates, manage changing business conditions and implement and improve our technical, administrative, financial control and reporting systems for offerings in those areas. Difficulties in managing future growth in new markets could have a material adverse impact on our business, results of operations and financial condition.
Long sales cycles for our SolutionsProducts and Services could have a material adverse impact on our future results of operations. Some of our SolutionsProducts and Services have long sales cycles, ranging from several months to eighteen months or more beginning at initial contact with the client through execution of a contract. How and when to implement, replace,Implementing, replacing, or expandexpanding an information system, or modify, addmodifying, adding or outsourceoutsourcing business processes, are major decisions for health carehealthcare organizations. Many of the SolutionsProducts and Services we provide require a substantial capital investment and time commitments by the client or prospective client. Any decision by our clients or prospective clients to delay a purchasing decision could have a material adverse impact on our results of operations.
Our workWe depend on strategic relationships and third-party suppliers and our revenue and operating earnings could suffer if we fail to manage these relationships properly. To be successful, we must continue to maintain our existing strategic relationships and establish additional strategic relationships as necessary with government clients exposes us to additional risks inherentleaders in the government contracting environment. Our clients include national, provincial, state, localmarkets in which we operate. As we decide to partner rather than directly provide certain Products and foreign governmental entities and their agencies. Our government work carries various risks inherent in contracting with such government entities and agencies. These risks include, but are not limitedServices, we will become more dependent on these strategic relationships to the following:
Government entities, particularly in the U.S., often reserve the rightmeet our clients' needs. We believe that these relationships contribute to audit our contracts and conduct inquiries and investigations of our business practices with respect to government contracts. U.S. government agencies conduct reviews and investigations and make inquiries regarding our systems in connection with our performance and business practices with respect to our government contracts. Negative findings from audits, investigations or inquiries could affect our future sales and profitability by preventing us, by operation of law or in practice, from receiving new government contracts for some period of time.
If a government client discovers improper or illegal activities during its audits or investigations, we may become subject to various civil and criminal penalties, including those under the civil U.S. False Claims Act, and administrative sanctions, which may include termination of contracts, suspension of payments, fines and suspensions or debarment from doing business with other agencies of that government. The inherent limitations of internal controls may not prevent or detect all improper or illegal activities.
U.S. government contracting regulations impose strict compliance and disclosure obligations. Disclosure is required if certain company personnel have knowledge of "credible evidence" of a violation of federal criminal laws involving fraud, conflict of interest, bribery or improper gratuity, a violation of the civil U.S. False Claims Act or receipt of a significant overpayment from the government. Failure to make required disclosures could be a basis for suspension and/or debarment from federal government contracting in addition to breach of the specific contract and could also impact contracting beyond the U.S. federal level. Reported matters also could lead to audits or investigations and other civil, criminal or administrative sanctions.
Government contracts are subject to heightened reputational and contractual risks compared to contracts with commercial clients. For example, government contracts and the proceedings surrounding them are often subject to more extensive scrutiny and publicity. Negative publicity, including allegations of improper or illegal activity, poor contract performance, deficiencies in services or other deliverables, or information security breaches, regardless of accuracy, may adversely affect our reputation.
Terms and conditions of government contracts also tend to be more onerous and are often more difficult to negotiate. Because government contracts are subject to specific procurement regulations and a variety of other socio-economic requirements, we must comply with such requirements. We must also comply with various statutes, regulations and requirements related to employment practices, recordkeeping and accounting. These regulations and requirements
affect how we transact business with our clients and suppliers, and in some instances, impose additional costs on our business operations.
Government entities typically fund projects through appropriated monies. While these projects are often planned and executed as multi-year projects, government entities usually reserve the right to change the scope of projects or terminate these projects at their convenience either for lack of approved funding or any other reason. Changes in government or political developments, including budget deficits, shortfalls or uncertainties, government spending reductions (e.g., U.S. Congressional sequestration of funds under the Budget Control Act of 2011) or other debt constraints could result in our projects being reduced in price or scope or terminated altogether, which also could limit our recovery of reimbursable expenses. Furthermore, if insufficient funding is appropriated to the government entity to cover termination costs, we may not be able to fully recover our investments.
Our failure to comply with a variety of complex procurement rules and regulations could result in our being liable for penalties, including termination of our government contracts, disqualification from bidding on future government contracts and suspension or debarment from government contracting. We must comply with laws and regulations relating to the formation, administration and performance of government contracts, which affect how we do business with our customers and may impose added costs on our business. Significant statutes and regulations in the U.S. that we must comply with include the Federal Acquisition Regulation and supplements, the Truth in Negotiations Act, the Procurement Integrity Act, and the Civil False Claims Act.
Government contracts may be protested by unsuccessful bidders. These protests could result in administrative procedures and litigation, could be expensive to defend and incapable of prompt resolution. Loss of a bid protest may result in loss of the award, contract modification, expense or delay.
The occurrences or conditions described above could affect not only our business with the particular government entities involved, but also our business with other entities of the same or other governmental bodies or with certain commercial clients and could have a material adverse effect on our business, results of operations and financial condition.
There are risks associated with our outstanding and future indebtedness. We have customary restrictive covenants in our current debt agreements, which may limit our flexibility to operate our business. Thesecovenants include limitations on priority debt, liens, mergers, asset dispositions, and transactions with affiliates, and require us to maintain certain leverage and interest coverage ratios. Failure to comply with these covenants could result in an event of default that, if not cured or waived, could result in reduced liquidity for the Company and could have a material adverse effect on our business, results of operations and financial condition. Additionally, our ability to pay interestfurther build our brand, extend the reach of our Products and repayServices, develop and deploy new products and services, and generate additional revenues and cash flows. The loss of a critical strategic relationship or failure to establish additional relationships, or the principal for our indebtedness is dependent upon our abilityfailure to manage our business operations, generate sufficient cash flows to service such debtrealize anticipated synergies and the other factors discussed in this section. There can be no assurance that we will be able to manage anybenefits of these risks successfully.
Changesstrategic relationships, including as a result of delays, shortages or increasing costs in accounting standards issued by the Financial Accounting Standards Board ("FASB") or other standard-setting bodies may adversely affect our financial statements. Our financial statements are subject to the application of U.S. GAAP, which is periodically revised and/or expanded. From time to time, we are required to adopt new or revised accounting standards issued by recognized authoritative bodies, including the FASB and the SEC. It is possible that future accounting standards we are required to adopt, such as amended guidance for lease accounting, may require changes to the current accounting treatment that we apply to our consolidated financial statements and may require us to make significant changes to our processes and systems. Refer to Note (1) of the notes to consolidated financial statements relating to summary of significant accounting policies and recently issued accounting pronouncements for more information. Such changessupply chain, could result inhave a material adverse impact on our business, results of operations and financial condition.
GoodwillWe license or purchase certain intellectual property and technology (such as software, services, hardware and content) from third parties, including some competitors, and depend on such intellectual property and technology in the operation and delivery of our Products and Services. Additionally, we sell or license third party intellectual property and technology in conjunction with our Products and Services. Our remote hosting and cloud services businesses also rely on a limited number of software and services suppliers for certain functions of these businesses. Most of our third-party software license support contracts expire within one to five years, can be renewed only by mutual consent and may be terminated if we breach the terms of the license and fail to cure the breach within a specified period of time. Most of these third-party software licenses are non-exclusive; therefore, our competitors may obtain the right to use the technology covered by these licenses to compete directly with us. If our third party suppliers were to change product offerings, cease actively supporting the technologies, fail to update and enhance the technologies, encounter technical difficulties in developing these technologies, significantly increase prices, change delivery models, terminate our licenses or supply contracts or suffer significant capacity or supply chain constraints or disruptions, we may need to seek alternative suppliers and incur additional internal or external development costs to ensure continued performance of our Products and Services. Such alternatives may not be available on attractive terms or may not be as widely accepted or as effective as the intellectual property or technology provided by our existing suppliers. In addition, interruption in functionality of our Products and Services as a result of changes in third party suppliers could adversely affect our commitments to clients, future sales of Products and Services, and negatively affect our revenue and operating earnings.
Our success depends upon the recruitment and retention of key personnel. Members of our senior management team and other intangible assets represent approximately 19%key personnel have departed the Company during the past few years for a variety of our total assetsreasons, and we cannot guarantee that there will not be additional departures. To remain competitive, we must attract, motivate and retain highly skilled managerial, sales, marketing, consulting and technical personnel, including key personnel skilled in the
industries and technical environments in which our Products and Services are offered. As we modernize our core platforms, it is important that we retain and attract experienced technical talent with cloud expertise to lead this transformation. Competition for such personnel in our industries is intense in both the United States and abroad. Our failure to attract additional qualified personnel and to retain and motivate existing personnel to meet our needs could suffer losses duehave a material adverse effect on our prospects for long-term growth. We may also experience increased compensation costs that are not offset by either improved productivity or higher sales. The unexpected loss of key personnel, or the failure to asset impairment charges. We assesssuccessfully develop and execute effective succession planning to assure smooth transitions of those key associates and their knowledge, relationships and expertise, could disrupt our goodwillbusiness and other intangible assets for impairment periodically in accordance with applicable authoritative accounting guidance. Declines in business performance or other factors could result inhave a non-cash impairment charge. This could materially and negatively affectmaterial adverse impact on our results of operations and financial condition.condition, and could potentially inhibit development and delivery of our Products and Services and market share advances.
Risks RelatedWe might not be successful in achieving expected operating efficiencies and sustaining or improving operating expense reductions and might experience business disruptions and adverse tax consequences associated with restructuring, realignment and cost reduction activities. Cerner has implemented and plans to continue to implement several restructuring and realignment initiatives to reduce costs and increase operating efficiencies. There can be no assurance that we will realize, in full or in part, the anticipated benefits of these initiatives. If we are unable to deliver on these initiatives, while continuing to invest in business growth, or if the volume and nature of change overwhelms available resources, our business operations and financial results could be materially and adversely impacted. Our ability to successfully manage and execute these initiatives and realize expected savings and benefits in the amounts and at the times anticipated is important to our Industriesbusiness success. Any failure to do so could have a material adverse effect on our businesses, financial condition and results of operations. Moreover, our ability to achieve our other strategic goals and business plans might be adversely affected and we could experience business disruptions with clients and elsewhere if our restructuring and realignment efforts and our cost reduction activities prove ineffective.
Regulatory Risks
The health carehealthcare industry is subject to changing political, economic and regulatory influences, which could impact the purchasing practices and operations of our clients and increase our costs to deliver compliant SolutionsProducts and Services that enable our clients to meet their compliance requirements. Many healthcare providers are consolidating to create integrated healthcare delivery systems with greater market power. These providers may try to use their market power to negotiate price reductions for our Products and Services. As the healthcare industry consolidates, our client base could be consolidated with fewer buyers, competition for clients could become more intense and the importance of maintaining and acquiring new client relationships becomes greater.
The last four years havedecade has been quite active legislatively with major statutes such as the Protecting Access to Medicare Act (PAMA) of 2014 establishing requirements for "Appropriate Use Criteria" in ordering high dollar diagnostic
imaging services, the Medicare and CHIP Reauthorization Act (MACRA) of 2015 which reformed how physicians are paid under Medicare and which established the Merit-basedMerit-based Incentive Payment System (MIPS),; the 21st Century Cures Act of 2016 (Cures Act), which laid the groundwork for a nationwide trusted health information exchange, established interoperability requirements for providers, payers and consumers, and which set the framework for information blocking regulations,regulations; and most recently the Substance Use Disorder Prevention that Promotes Opioid Recovery and Treatment for Patients and Communities (SUPPORT) Act of 2018 that includes significant policies for addressing the opioid crisis. These statutes are heavily laden with provisions that directly call for or describe roles for the use of health information technology to help providers comply with new federal requirements under Medicare and for state Medicaid programs.
Many health care providers are consolidating to create integrated health care delivery systems with greater market power. These providers may try to use their market power to negotiate price reductions for our Solutions and Services. As the health care industry consolidates, our client base could be consolidated with fewer buyers, competition for clients could become more intense and the importance of landing new client relationships becomes greater.
Reform of payment policies for Medicare and Medicaid continues to evolve. The Patient Protection and Affordable Care Act (the "ACA") became law in 2010; this comprehensive health carehealthcare reform legislation introduced value-based principles into federal health insurance payments systems, sought to improve health carehealthcare quality, and expanded access to affordable health insurance. MACRA built upon the value based policies introduced by the ACA. These legislative initiatives accelerated the adoption of "Alternative Payment Models" (APMs) as bundled payment models based on episodes of care or per capita payment for defined populations emerged as alternatives to traditional fee for service payments to providers. Subsequent legislative, regulatoryNew APMs continue to be developed under the authorities of the Centers for Medicare and judicial developmentsMedicaid Innovations, and value-based efforts such as the Medicare Shared Savings Program Accountable Care Organization (MSSP ACO) program have createdseen various iterations. APMs have evolved to usually require two-sided risk (shared saving and shared losses) and use of Certified EHR Technology (CEHRT) as a precondition for program participation. However, even after failed attempts to repeal the ACA, continuing challenges in the courts create uncertainty for the continued implementation of the ACAACA. Given a fractious and other health care-related legislation and, topolarized legislative environment at the extent that implementation continues, the way in which they are implemented. Examples include the Medicare Shared Savings Program for Accountable Care Organizations and the Bundled Payment for Care Improvement - Advanced model program under the Innovation Center of the Center for Medicare and Medicaid Services (CMS) which focuses on episode-based payment for hospital and ambulatory services. Together with ongoing statutory and budgetary policy developments at a federal level, the collective impact of this health care reformnear-term prospects for healthcare related legislation could include changes in Medicare and Medicaid payment policies and other health care delivery administrative reforms that could potentially negatively impact our business and the business of our clients.face uncertainty. Because of that uncertainty and because of ongoing federal fiscal budgetary pressures yet to be resolved for federal health
programs, we cannot predict the full effect of health carehealthcare legislation on our business at this time. The direction and pace of health carehealthcare reform initiatives may adversely impact either our operational results or the way we operate our business. Federal health insurance programs still routinely require adoption of certified HCIT as a program requirement or prerequisite, and we anticipate future adoption of new certification requirements. But we also anticipate possible significant impacts from information blocking provisions of the Cures Act andWe expect expanded surveillance by federal agencies of both certified HCITHIT and its use by our clients. CMS hasWe also mandated updatesanticipate newly expanded regulations under the federal Self-Referral and Anti-Kickback Laws that will contain expanded safe harbors for value based care, and that may promote expanded donation of certified HIT and of cybersecurity technologies in support of trusted health information exchange to the electronic prescribing standards and adoption of controlled substance electronic prescribing by hospitals in response to the opioid crisis which may drive upgrades of existing HCIT investments by hospitals and physicians rather than seeking replacement.support coordinated patient care within value based APMs. In response to this uncertainty, purchasers of HCITHIT may elect to update HIT already in use and postpone investment decisions in new or replacement HIT, including investments in our SolutionsProducts and Services. Future legislation and regulation together with future judicial decisions may ultimately impact the fiscal stability and sustainability of HCITHIT purchasers. Differences in demand related to new regulatory requirements and/orand near-term compliance deadlines that contribute to demand for our SolutionsProducts and Services could impact our financial results. There can be no certainty that any legislation that may be adopted or judicial decisions will be favorable to our business. We cannot predict whether or when future health carehealthcare reform initiatives at the federal or state level or other initiatives affecting our business will be proposed, enacted or implemented or what impact those initiatives may have on our business, results of operations and financial condition.
The health carehealthcare industry is highly regulated, and thus, we are subject to several laws, regulations and industry initiatives, non-compliance with certain of which could materially adversely affect our operations or otherwise adversely affect our business, results of operations and financial condition. As a participant in the health carehealthcare industry, our operations and relationships, and those of our clients, are regulated by several U.S. federal, state, local and foreign governmental entities. The impact of these regulations on us is both direct, to the extent that we are ourselves subject to these laws and regulations, and also indirect, in terms of government program requirements applicable to our clients for the use of HCIT and because, in a number of situations, evenHIT. Even though we may not be directly regulated by specific health carehealthcare laws and regulations, our SolutionsProducts and Services must be capable of being used by our clients in a way that complies with those laws and regulations. There isare a significant and wide-ranging number of regulations both within the U.S.United States and abroad, such as regulations in the areas of health carehealthcare fraud, information blocking,sharing, e-prescribing, claims processing and transmission, health carehealthcare devices, the security and privacy of patient data and interoperability standards, that may be directly or indirectly applicable to our operations and relationships or the business practices of our clients. Specific risks include, but are not limited to, the following:
Health CareHealthcare Fraud. U.S. federal and state governments continue to enhance regulation of and increase their scrutiny over practices involving health carehealthcare fraud, waste and abuse perpetuated by health carehealthcare providers and professionals whose services are reimbursed by Medicare, Medicaid and other government health carehealthcare programs. Our health carehealthcare provider clients, as well as our provision of SolutionsProducts and Services to government entities, subject our business to laws and regulations on fraud and abuse which, among other things, prohibit the direct or indirect payment or receipt of any remuneration for patient referrals, or arranging for or recommending referrals or other business paid for in whole or in part by these federal or state health carehealthcare programs. U.S. federal enforcement personnel have substantial funding, powers and remedies to pursue suspected or perceived fraud and abuse. The effect of this government regulation on our clients is difficult to predict. Many of the regulations applicable to our clients and that may be applicable to us, including those relating to marketing incentives offered in connection with health carehealthcare device sales and information blocking, are vague or indefinite and have not been interpreted by the courts. They may be interpreted or applied by a prosecutorial, regulatory or judicial authorityauthorities in a manner that could broaden their applicability to us or require our clients to make changes in their operations or the way in which they deal with us. If such laws and regulations are determined to be applicable to us and if we fail to comply with any applicable laws and regulations, we could be subject to civil and criminal penalties, sanctions or other liability, including exclusion from government health programs or from providing certain Products and Services to our clients who participate in such programs, which could have a material adverse effect on our business, results of operations and financial condition. Even an unsuccessful challenge by a regulatory or prosecutorial authority of our activities could result in adverse publicity, require a costly response from us and adversely affect our business, results of operations and financial condition.
Preparation, Transmission, Submission and Collection of Medical Claims for Reimbursement. Our SolutionsProducts and Services are capable of electronically transmitting claims for services and items rendered by a physician to many patients' payers for approval and reimbursement. We also provide revenue cycle management services to our clients that include the coding, preparation, submission and collection of claims for medical service to payers for reimbursement. Such claims are governed by U.S. federal and state laws. U.S. federal law provides civil liability to any persons that knowingly submit, or cause to be submitted, a claim to a payer, including Medicare, Medicaid and private health plans, seeking payment for any services or items that overbills or bills for services or items that have not been provided to the patient. U.S. federal law may also impose criminal penalties for intentionally submitting such false claims. In addition, federal and state law regulates the collection of debt and may impose monetary penalties for violating those regulations. We have policies and procedures in place that we believe result in the accurate and complete preparation, transmission, submission and collection of claims, provided that the information given to us by our clients is also accurate and complete. The HIPAAHealth Insurance Portability and Accountability Act of 1996 ("HIPAA") security, privacy
and transaction standards, as discussed below, also have a potentially significant effect on our claims preparation, transmission and submission services, sincebecause those services must be structured and provided in a way that supports our clients' HIPAA compliance obligations. In connection with these laws, we may be subjected to U.S. federal or state government investigations and possible penalties may be imposed upon us; false claims actions may have to be defended; private payers may file claims against us; and we may be excluded from Medicare, Medicaid or other government-funded health carehealthcare programs. Any investigation or proceeding related to these laws, even if unwarranted or without merit, may have a material adverse effect on our business, results of operations and financial condition.
Regulation of Health CareHealthcare Devices. The U.S. Food and Drug Administration ("FDA") has determined that certain of our SolutionsProducts and Services are covered medical devices that are actively regulated under the Federal Food, Drug and Cosmetic Act ("Act") and amendments to the Act. Other countries have similar regulations in place related to medical devices, that now or may in the future apply to certain of our SolutionsProducts and Services. The FDA has also expressed an intention to update its regulatory framework to address AI/ML-based Software as a Medical Device. If other of our SolutionsProducts and Services are deemed to be actively regulated medical devices by the FDA or similar regulatory agencies in countries where we do business, we could be subject to extensive requirements governing pre- and post-marketing activities including pre-market notification clearance. Complying with these medical device regulations globally is time consuming and expensive and could be subject to unanticipated and significant delays. Further, it is possible that these regulatory agencies may become more active in regulating software and devices that are used in health care.healthcare. If we are unable to obtain the required regulatory approvals for any such SolutionsProducts and Services, our short- and long-term business plans for these SolutionsProducts and Services could be delayed or canceled.
There Our sites have been ninepreviously subject to FDA inspections, at various Cerner sites since 2003. Inspections conducted at our Headquarters Campus, Realization Campus and Innovations Campus in 2010 and 2017 resulted in the issuance of an FDA Form 483 observation to which we responded promptly. The FDA has taken no further action with respect to the Form 483 observations that were issued in 2010 and 2017. The remaining FDA inspections, including inspections at our campuses in 2006, 2007 and 2014, resulted in no issuance of a Form 483. We remain subject to periodic FDA inspections and weinspections. We could be required to undertake additional actions to comply with the Act and any other applicable regulatory requirements. Our failure to comply with the Act and any other applicable regulatory requirements could have a material adverse effect on our ability to continue to manufacture, distribute and deliver our SolutionsProducts and Services. The FDA has many enforcement tools including recalls, device corrections, seizures, injunctions, refusal to grant pre-market clearance of products, civil fines and criminal
prosecutions. Any of the foregoing could have a material adverse effect on our business, results of operations and financial condition.
Security and Privacy. U.S. federal, state and local laws and foreign laws regulatelegislation govern the confidentiality of personal information, how that information may be used, and the circumstances under which such information may be released. These regulations govern both the disclosure and use of confidential personal and patient medical record information and require the users of such information to implement specified security and privacy measures. U.S. regulations currently in place governing electronic health data transmissions continue to evolve and are often unclear and difficult to apply.apply in light of the complexity of our client environments. Laws in non-U.S. jurisdictions are also evolving and mayoften have similar or even stricter requirements related to the treatment of personal or patient information.
Data protection regulations impact how businesses, including both us and our clients, can collect and process the personal data of individuals. The costs of compliance with, and other burdens imposed by, such laws, regulations and policies, or modifications thereto, that are applicable to us may limit the use and adoption of our Products and Services and could have a material adverse impact on our business, results of operations and financial condition. Furthermore, we incur development, resource, and capital costs in delivering, updating, and supporting Products and Services to enable our U.S. and non-U.S. clients to comply with these varying and evolving standards. U.S. federal, state, and non-U.S. governmental enforcement personnel have substantial powers and remedies, particularly in the EU, to pursue suspected or perceived violations. If we fail to comply with any applicable laws or regulations or fail to deliver compliant Products and Services, we could be subject to civil penalties, sanctions and contract liability and could otherwise damage our reputation. Enforcement investigations, even if meritless, could have a negative impact on our reputation, cause us to lose existing clients or limit our ability to attract new clients.
In the U.S., HIPAA regulations apply national standards for some types of electronic health information transactions and the data elements used in those transactions to ensure the integrity, security and confidentiality of health information and standards to protect the privacy of individually identifiable health information. Covered entities under HIPAA, which include health carehealthcare organizations such as our clients, and their business associates, many of our employer clinic business and our claims processing, transmission and submission services, are required to comply with HIPAA privacy standards, transaction regulations and security regulations. Moreover, the HITECH provisions of the American RecoveryWe and Reinvestment Act of 2009 ("ARRA"), and associated regulatory requirements, extend many of the HIPAA obligations, formerly imposed only upon covered entities,our U.S. clients are also subject to business associates as well. As a business associate of our clients who are covered entities, we were in most instances already contractually required to comply with the HIPAA regulations as they pertain to handling of covered client data. However, the extension of these HIPAA obligations to business associates by law has created additional liability risks related toevolving state laws regarding the privacy and security of individually identifiable health information.healthcare information and personal information generally.
Evolving HIPAA and HITECH-related laws and regulations in the U.S. and data privacy and security laws and regulations inIn non-U.S. jurisdictions, could restrict the ability of our clients to obtain, use or disseminate patient information. This could adversely affect demand for our Solutions and Services if they are not re-designed in a timely manner to meet the requirements of any new interpretations or regulations that seek to protect the privacy and security of patient data or enable our clients to execute new or modified health care transactions. We may need to expend additional capital, software development and other resources to modify our Solutions and Services to address these evolving data security and privacy issues. Furthermore, our failure to maintain confidentiality of sensitive personal information in accordance with the applicable regulatory requirements could damage our reputation and expose us to claims, fines and penalties.
In Europe, we are subject to EUtransnational, national and nationallocal data protection legislation, including, but not limited to, the 2016EU General Data Protection Regulation ("GDPR") which imposes, UK GDPR, Canadian Personal Information Protection and Electronic Documents Act and Canadian Provincial legislation. In addition to EU and Canadian federal legislation, certain European member states and Canadian provinces have adopted more stringent data protection standards, particularly for health data. These regulations may impose restrictions on the processing of personal data (including health
data) that, in some respects, are more stringent, and impose more significant burdens on subject businesses, than current privacy standards in the U.S. The EU regulation establishes several obligations that organizations must follow with respectUnited States.
In non-U.S. jurisdictions, we also are subject to use of personal data, including a prohibitionpotential restrictions on the transfer of personal information from the EU to other countries whose laws do not adequately protect the privacy and securitycross-border transfers of personal data to European standards. In additionthe United States as well as other countries where Cerner has business operations. A recent EU court decision regarding the adequacy of U.S. law to this EU-wide legislation, certain member states have adopted more stringentprotect EU personal data protection standards, particularly for health data. We havecreated additional uncertainty regarding the lawfulness of transfers of EU personal data to the United States and India. Cerner has addressed these requirements relativethrough the execution of Standard Contractual Clause Agreements and by designing our support services to data transfers, by self-certifying our compliance with the EU-U.S. Privacy Shield Frameworkminimize, to the U.S. Departmentextent feasible, transfers of Commerce International Trade Administration ("ITA"). The ITA has approved our self-certification. However, continued criticism of the Privacy Shield by officials in Europe casts uncertainty asEU client's patient data to the long-term effectivenessUnited States. However, the adoption of data privacy laws and court decisions that restrict cross border transfers or otherwise require data localization could have a material impact on our business. Furthermore, the Privacy Shield to support EU-U.S.perception by non-U.S. clients that we cannot provide adequate assurance for transfers of personal data. For that reason, we are also pursuing alternative methods of compliance (e.g. Standard Contractual Clauses), but those methods also may be subject to scrutiny by data protection authorities in European member states.
The GDPR impacts how businesses, including both us and our clients, can collect and process the personal data of EU individuals. We have incurred development costs in delivering Solutions and Services as we update our Solutions and Services to enable our European clients to comply with these varying and evolving standards. The costs of compliance with, and other burdens imposed by, such laws, regulations and policies, or modifications thereto, that are applicable to usinformation may limit the use and adoption of our SolutionsProducts and Services and could have a material adverse impact on our business, results of operations and financial condition.
Development and adoption of ML and AI technologies offer the potential to significantly improve the delivery of healthcare. The GDPR grants broad enforcement powersapplication of ML and AI technologies to regulatory agencies to investigatepersonal and enforcepatient information may be regulated under some privacy laws (e.g. GDPR). Furthermore, the lack of standards for measuring the accuracy and effectiveness of ML and AI can raise new or exacerbate existing technological, legal or other challenges that could impact our compliance with their data privacyreputation and security requirements. Governmental enforcement personnel, particularly in the EU, have substantial powers and remedies to pursue suspected or perceived violations. If we fail to comply with any applicable laws or regulations or fail to deliver compliant Solutions and Services, we could be subject to civil penalties, sanctions or contract liability. Enforcement investigations, even if meritless, could have a negativematerial adverse impact on our reputation, cause us to lose existing clients or limit our ability to attract new clients.results of operations.
Interoperability Standards. Our clients continue to be concerned and often require that our Solutions and Services be interoperable with other third party HCIT suppliers. Market forces and governmental/regulatory authorities create software interoperability standards that may apply to our Solutions and Services. If our Solutions and Services are not consistent with those standards, we could be forced to incur substantial additional development costs to conform. The Office of the National Coordinator for Health Information Technology (ONC) is charged under the Cures Act with developing a Trusted Exchange Framework that establishes governance requirements for trusted health information exchange in the U.S. ONC has developed the U.S. Common Data Set for Interoperability which may lay the groundwork for future data exchange requirements for trusted exchange. ONC continues to modify and refine these standards. We may incur increased software development and administrative expense and delays in delivering Solutions and Services if we need to update our Solutions and Services to conform to these varying and evolving requirements. In addition, delays in interpreting these standards may result in postponement or cancellation of our clients' decisions to purchase our Solutions and Services. If our Solutions and Services are not compliant with these evolving standards, our market position and sales could be impaired, and we may have to invest significantly in changes to our Solutions and Services.
Federal Requirements for Use of Interoperable and Certified Health Information Technology. Various U.S. federal, state and non-government agencies continue to generate requirements for the use of certified health information technology. In many cases, these requirements have become conditions for receiving payment for health care services to beneficiaries of federal health insurance programs.technology and interoperability standards. These requirements are expansions of the statutory ARRA HITECH program that began providing incentive payments in 2011 to hospitals and eligible providers for the "meaningful use of certified electronic health record technology ("CEHRT")." Although those incentive programs have expired, CEHRT continues to be a conditionrequirement of participation in federal healthcare programs in order to receive reimbursement for health care programs. In 2015, MACRA required the use of CEHRT as part of its Quality Payment Program for eligible providers under Medicare. CEHRT is also one of the areas measured under the Merit based Incentive Payment System (known as MIPS)items and services provided by which theour clients to Medicare Physician Fee Schedule was restructured.and Medicaid beneficiaries. In the last several years, participation in Medicare's "alternative payment models" to replace traditional "fee for service" payments with quality and risk-sharing payment models has been conditioned on CEHRT and this continues with the Trump Administration.adoption of CEHRT. The Cures Act has tied CEHRT to its policy goals of reducing barriers to the exchange of health information, data blocking, encouraging nationwide interoperability, consumer access to health information and improving health information availability between consumers and their care teams. The regulations establishing the certification and interoperability standards for CEHRT will continue to be updated to support these policy goals with greater emphasis on interoperability, consumer engagement, patient safety and health information privacy and security. The ONC is due
Along with recent CMS actions taken for Medicare and Medicaid, these regulations will also mandate adoption of updated and expanded certified capabilities of CEHRT that our clients must adopt to develop additional regulations underremain able to participate in the Cures Act to enforce the act’s policy directives relating to data blocking and interoperability.federal programs mentioned earlier. In addition, the ONC has increased its surveillance activities concerning vendor compliance relative to CEHRT.
We have completedCerner will be completing software development updates to its certified products and taking them through ONC's certification effortsprocess in 2022 to meet current CEHRTthe new certification requirements that becamewill become mandatory for certain Federal programs onunder the Cures Act and various CMS regulations. Given recent CMS regulations, these updates must become certified and adopted by our clients by January 1, 2019, and for many others that become mandatory during 2019. We will continue to address additional regulatory requirements as they evolve.2023. However, these standards and specifications are subject to interpretation by the entities designated to certify our electronic health carehealthcare technology as CEHRT compliant. Additionally, the Cures Act requires us to comply with conditions of certification such that if our business practices Solutionsor our Products and Services are not compliant with these evolving regulatory requirements, our market position and sales could be impaired, and we may have to invest significantly in changes to our SolutionsProducts and Services.Services, and our reputation could be damaged. Further, we bear potential financial risks where we are alleged to have not appropriately complied with these regulations. We also bear financial risk where we have entered into agreements with clients to warrant theirour ability to meet future federal program requirements that require use of CEHRT.provide certified Products and Services. While a client's ability to meet future federal health program related attestation requirements may be dependent on the client's ability to adopt, rollout and attain sufficient use of our certified SolutionsProducts and Services on a timely basis, we may face risks that come from issues in full adoption of our certified SolutionsProducts and Services, which in turn could lead to a client missing its attestation targets. These risks are enhanced when we are under agreements to provide application management services to our clients that place responsibilities on us for application configuration and implementation as a prerequisite to meaningful use attainment of quality measures ordinarily borne by the client.
The ONC has finalized additional regulations under the Cures Act to Our Common Stock
Our quarterly operating results may vary, which could adversely affect our stock price. Our quarterly operating results have variedenforce the Act's policy directives relating to data sharing and interoperability. The ONC is charged under the Cures Act with developing a Trusted Exchange Framework that establishes governance requirements for trusted health information exchange in the pastUnited States. In addition, the ONC certification criteria updated under the Cures Act require that Cerner enable its clients to capture, store and exchange the types of health information defined within the ONC developed U.S. Common Data Set for Interoperability (USCDI) which represents the essential health information data for the U.S. healthcare system. The USCDI is designed to be maintained on an iterative basis to account for new requirements and priorities for health information that may continueemerge such through the COVID-19 pandemic. ONC continues to varymodify and refine these standards. We may incur increased software development and administrative expense and delays in future periods, including variations from guidance, expectations or historical results or trends. Quarterly operating results may vary for a number of reasons including demand for our Solutionsdelivering Products and Services the financial conditionif we need to update our Products and Services to conform to these varying and evolving requirements and standards. In addition, delays in interpreting these standards may result in postponement or cancellation of our currentclients' decisions to purchase our Products and potential clients,Services. If our long sales cycle, potentially long installation and implementation cycles for larger, more complex systems, accounting policy changes and other factors described in this section and elsewhere in this report. As a result of health care industry trends and the market for our SolutionsProducts and Services a large percentage ofare not compliant with these evolving standards, our revenues are generated by the salemarket position and installation of larger, more complexsales could be impaired, we may have to invest significantly in changes to our Products and higher-priced
systems. The sales process for these systems is lengthy and involves a significant technical evaluation and commitment of capital and other resources by the client. SalesServices, we may be subject to delays duecontractual liability and our reputation could be damaged. If our Products and Services are not consistent with those requirements, we could be forced to changes in clients' internal budgets, procedures for approving large capital expenditures, competing needs for other capital expenditures, additions or amendmentsincur substantial additional development costs to U.S. federal, state or local regulations, availability of personnel resources or by actions taken by competitors. Delaysconform.
Our work with government clients exposes us to additional risks inherent in the expected sale, installationgovernment contracting environment. Our clients include national, provincial, state, local and foreign governmental entities and their agencies. Our government work carries various risks inherent in contracting with government entities. These risks include, but are not limited to, the following:
•Government entities, particularly in the United States, often reserve the right to audit our contracts and conduct reviews, inquiries and investigations of our business practices and performance with respect to government contracts. If a government client discovers improper conduct during its audits or implementationinvestigations, we may become subject to various civil and criminal penalties, including those under the civil U.S. False Claims Act, and administrative sanctions, which may include termination of contracts, suspension of payments, fines and civil money penalties, and suspensions or debarment from doing business with other government agencies.
•U.S. government contracting regulations impose strict compliance and disclosure obligations and our failure to comply with these large systemsobligations could be a basis for suspension or debarment, or both, from federal government contracting in addition to breach of the specific contract.
•Government contracts are subject to heightened reputational and contractual risks compared to contracts with commercial clients and often involve more extensive scrutiny and publicity. Negative publicity, including allegations of improper or illegal activity, poor contract performance, or information security breaches, regardless of accuracy, may adversely affect our reputation.
•Terms and conditions of government contracts also tend to be more onerous, are often more difficult to negotiate and involve additional costs. We must comply with specific procurement regulations and a variety of other socio-economic requirements, as well as various statutes, regulations and requirements related to employment practices, recordkeeping and accounting. Our failure to comply with a variety of complex procurement rules and regulations could result in our liability for penalties, including termination of our government contracts, disqualification from bidding on future government contracts and suspension or debarment from government contracting.
•Government entities typically fund projects through appropriated monies. Our VA Electronic Health Record Modernization and DOD MHS Genesis agreements are indefinite delivery, indefinite quantity contracts. The change in presidential administration may affect VA and DOD budget priorities for this ongoing work.
•Government entities reserve the right to change the scope of or terminate these projects at their convenience for lack of approved funding or other reasons, which could limit our recovery of reimbursable expenses or investments. In addition, government contracts may be protested, which could result in administrative procedures and litigation, result in delays in performance and payment, be expensive to defend and be incapable of prompt resolution.
•It is common in contracting with governments for there to be a prime contractor with privity of contract to the government client and one or more subcontractors. We serve in both capacities for different government clients. There are inherent risks in being a subcontractor, including without limitation, reliance on the performance of the prime contractor for the execution of the contract to the satisfaction of the client. Additionally, when we serve as the prime contractor, we rely on our subcontractors to fulfill certain contractual obligations under our agreements with government clients. A failure by the prime contractor to perform under an agreement under which we serve as a subcontractor, or a failure by a subcontractor to perform under an agreement under which we serve as a prime contractor, could have a significant negativematerial adverse impact on our anticipated quarterly revenuesbusiness, results of operations and consequentlyfinancial condition.
The occurrences or conditions described above could affect not only our earnings, since a significant percentage ofbusiness with the particular government entities involved, but also our expenses are relatively fixed. Becausebusiness with other entities of the complexity and value of our contracts, the loss of even a small number ofsame or other governmental bodies or with certain commercial clients could have a significant negative effect on our financial results.
Revenue recognized in any quarter may depend upon our or our clients' abilities to meet project milestones. Delays in meeting these milestone conditions or modification of the project plan could result in a shift of revenue recognition from one quarter to another and could have a material adverse effect on our business, results of operations forand financial condition.
Capital and Credit Risks
Volatility and disruption resulting from global economic or market conditions could negatively affect our business, results of operations and financial condition. Our business, results of operations, financial condition and outlook may be impacted by the health of the global economy. Our business and financial performance, including new business bookings and collection of our accounts receivable, may be adversely affected by current and future economic conditions that cause a particular quarter.
Weslowdown or decline in client spending. Reduced purchases by our clients or changes in payment terms could adversely affect our revenue growth and cause a decrease in our cash flow from operations. Bankruptcies or similar events affecting clients may cause us to incur bad debt expense at levels higher than historically experienced. Further, volatility and disruption in global financial markets may also experience seasonalitylimit our ability to access the capital markets at a time when we would like, or need, to raise capital, which could have an impact on our ability to react to changing economic and business conditions. Accordingly, if global financial and economic volatility continues or worsens, particularly in revenues. For example,light of the ongoing COVID-19 pandemic or the resurgence thereof, our revenues historically have been lowerbusiness, results of operations and financial condition could be materially and adversely affected.
There are risks associated with our outstanding and future indebtedness. As of December 31, 2021, we had $1.84 billion of total outstanding indebtedness, and we may incur additional indebtedness in the first quarterfuture. We have customary restrictive covenants in our current debt agreements, which may limit our flexibility to operate our business. Thesecovenants include limitations on priority debt, liens, mergers, asset dispositions, and transactions with affiliates, and require us to maintain certain leverage and interest coverage ratios. Failure to comply with these covenants could result in an event of default that, if not cured or waived, could have a material adverse effect on our business, results of operations and financial condition. Additionally, our ability to pay interest and repay the principal for our indebtedness is dependent upon our ability to manage our business operations, generate sufficient cash flows to service such debt and the other factors discussed in this section. There can be no assurance that we will be able to manage any of these risks successfully.
Our Fourth Amended and Restated Credit Agreement (as amended, the "Credit Agreement") bears interest at variable interest rates, primarily based on the London Interbank Offered Rate ("LIBOR"). LIBOR is currently in the process of being phased out. The Credit Agreement includes provisions intended to provide for the replacement of LIBOR with the Secured Overnight Financing Rate ("SOFR") or another widely-accepted alternative benchmark rate upon the cessation of LIBOR or the occurrence of other triggering events, with corresponding adjustments to the applicable interest rate margins. However, uncertainty as to the timing and nature of such modifications could cause the interest rate calculated for the Credit Agreement to be materially different than expected, and there is no guarantee that a transition from LIBOR to an alternative will not result in financial market disruptions, significant increases in benchmark rates, or borrowing costs to borrowers, any of which could have an adverse effect on our business, results of operations and financial condition. With respect to our Credit Agreement and the related interest rate swap, if the swap and the Credit Agreement replacement rates are not identical, our hedge could be less effective. Our failure to manage these risks effectively could adversely affect our financial condition and results of operations.
We cannot guarantee that our capital allocation strategy, which may include share repurchases and dividend payments, will be fully implemented or that it will enhance long-term shareholder value. As of December 31, 2021, $3.18 billion remains available for repurchase under our stock repurchase program, which expires on December 31, 2023. We are not obligated to repurchase a specified number or dollar value of shares and do not plan to repurchase shares in the near term. Additionally, while we expect to pay a cash dividend on a quarterly basis, future declarations of such dividends are subject to approval by the Board of Directors. Either or both of our repurchase or dividend programs may be suspended or terminated at any time and, even if fully implemented, may not enhance long-term shareholder value.
Tax, Finance and Accounting Related Risks
We are subject to tax legislation in numerous countries; changes in tax laws or challenges to our tax positions could adversely affect our business, results of operations and financial condition. We are a global corporation with a presence primarily in North America, Europe, the Middle East, Australia, and India. As such, we are subject to tax laws, regulations and policies of the yearU.S. federal, state and greaterlocal governments and comparable taxing authorities in the fourth quarterother
country jurisdictions. Changes in tax laws could cause us to make final capital expenditures for the then-current year. These seasonal variations may lead toexperience fluctuations in our annualtax obligations and quarterlyeffective tax rates in future periods and otherwise adversely affect our tax positions and our tax liabilities. Our effective tax rates, tax payments, tax credits or incentives could be adversely affected by changes in tax laws. In addition, U.S. federal, state and local, as well as other countries' tax laws and regulations, are extremely complex and subject to varying interpretations and require significant judgment in determining our worldwide provision for income taxes and other tax liabilities. As these and other tax laws and related regulations change, our financial results could be materially impacted. In the ordinary course of a global business, there are many intercompany transactions and calculations which could be subject to challenge by tax authorities. We are regularly under audit by tax authorities and those authorities often do not agree with positions taken by us on our tax returns. Our intercompany transfer pricing has been reviewed by the U.S. Internal Revenue Service ("IRS") and by foreign tax jurisdictions and will likely be subject to additional audits in the future. There can be no assurance that our tax positions will not be challenged by relevant tax authorities or that we would be successful in any such challenge, which could result in additional taxation, penalties and interest payments.
Our strategy to transition to a subscription based recurring revenue model and continued modernization of our technology may adversely affect our near-term revenue growth and results of operations. As we transition more of our offerings to leverage cloud technologies, we may incur disruption as we transition existing clients and be less competitive during the transition, which could impact revenue and profitability. We believe we must continue to dedicate a significant amount of resources to our research and development efforts to maintain our competitive position; and oftentimes, successful investments require several years before generating significant revenue. We expect our ongoing shift from a software license model to a subscription-based services revenue model to create a recurring revenue stream that is more predictable. The transition, however, creates changes related to the timing of revenue recognition compared to historical patterns. We also incur certain expenses associated with the infrastructures of our cloud-based offerings in advance of our ability to recognize the revenues associated with these offerings, which may adversely affect our near-term reported revenues, results of operations and operating results.cash flows. A decline in renewals of recurring revenue offerings in any period may not be immediately reflected in our results for that period but may result in a decline in our revenue and results of operations in future quarters.
Goodwill and other intangible assets represent approximately 21% of our total assets and we could suffer losses due to asset impairment charges. We assess our goodwill and other intangible assets for impairment periodically in accordance with applicable authoritative accounting guidance. Declines in business performance or other factors could result in a non-cash impairment charge. This could materially and negatively affect our results of operations and financial condition.
Our sales forecasts may vary from actual sales in a particular quarter. We use a "pipeline" system, a common industry practice, to forecast sales and trends in our business. Our sales associates monitor the status of all sales opportunities, such as the date when they estimate that a client will make a purchase decision and the potential dollar amount of the sale. These estimates are aggregated periodically to generate a sales pipeline. We compare this pipeline at various points in time to evaluate trends in our business. This analysis provides guidance in business planning and forecasting, but these pipeline estimates are by their nature speculative. Our pipeline estimates are not necessarily reliable predictors of revenues in a particular quarter or over a longer period of time, partially because of changes in the pipeline and in conversion rates of the pipeline into contracts that can be very difficult to estimate. A negative variation in the expected conversion rate or timing of the pipeline into contracts, or in the pipeline itself, could cause our plan or forecast to be inaccurate and thereby adversely affect business results. For example,
Lower than expected revenue growth or shifts in our revenue mix could adversely affect our results of operations. Our revenue growth and mix could vary over time due to a slowdownnumber of factors, including timing of contracts signing, changes in information technology spending, adverse economic conditions, new or changed U.S. federal, state or local regulations relatedthe health of our end markets, unexpected client attrition, and the mix of software, hardware, devices, maintenance, support and services revenues, which carry different margin rates which can vary from period to our industry or a variety ofperiod. Our operating results could be harmed by changes in revenue mix and costs, together with numerous other factors, can cause purchasing decisionsincluding rapid growth in lower margin services business, declines in software, and growth in non-cash expenses, such as amortization and depreciation.
General Risk Factors
Our quarterly operating results may vary, which could adversely affect our stock price. Our quarterly operating results have varied in the past and may continue to vary in future periods, including variations from guidance, expectations or historical results or trends. Quarterly operating results may vary for a number of reasons including demand for our Products and Services, the financial condition of our current and potential clients, our long sales cycle, potentially long
installation and implementation cycles for larger, more complex systems, accounting policy changes, our clients' abilities to meet project milestones, seasonality of revenue collection and other factors described in this section and elsewhere in this report. As a result of healthcare industry trends and the market for our Products and Services, a large percentage of our revenues are generated by the sale and installation of larger, more complex and higher-priced systems. The sales process for these systems is lengthy and involves a significant technical evaluation and commitment of capital and other resources by the client. Sales may be delayed, reducedsubject to delays due to changes in amountclients' internal budgets, procedures for approving large capital expenditures, competing needs for other capital expenditures, additions or cancelled, which would reduceamendments to applicable laws, availability of personnel resources or by actions taken by competitors. Revenue recognized in any quarter may also depend upon our clients' abilities to meet project milestones. Delays in the overall pipeline conversion rateexpected sale, installation or implementation of these large systems or in meeting project milestones may have a particular periodsignificant negative impact on our anticipated quarterly revenues and consequently our earnings, since a significant percentage of time.our expenses are relatively fixed. Because a substantial portionof the complexity and value of our contracts, are completedthe loss of even a small number of clients could have a significant negative effect on our financial results. We may also experience seasonality in the latter part of a quarter, we may not be able to adjust our cost structure quickly enough in response to a revenue shortfall resulting from a decrease in our pipeline conversion rate in any given fiscal quarter.revenues.
The trading price of our common stock may be volatile. The market for our common stock may experience significant price and volume fluctuations in response to a number of factors including actual or anticipated variations in operating results, articles or rumors about our performance or SolutionsProducts and Services, announcements of technological innovations or new services or products by our competitors or us, changes in expectations of future financial performance or estimates of securities analysts, governmental regulatory action, health carehealthcare reform measures, client relationship developments, economic conditions, our pending acquisition by Oracle and changes occurring in the securities markets in generalits affiliates, and other factors, many of which are beyond our control. For instance, our quarterly operating results have varied inFurthermore, broad market and industry fluctuations may also adversely affect the past and may continue to vary in future periods, due to a number of reasons including, but not limited to, demand for our Solutions and Services, the financial conditiontrading price of our current and potential clients, our long sales cycle, potentially long installation and implementation cycles for larger, more complex and higher-priced systems, key management changes, accounting policy changes and other factors described herein.common stock, regardless of actual operating performance. As a matter of policy, we do not generally comment on our stock price or rumors.
Furthermore,Fluctuations in foreign currency exchange rates could materially affect our financial results. Our consolidated financial statements are presented in U.S. dollars. In general, the stock market in general, and the markets for software, health care devices, other health care solutions and services and information technology companies in particular have experienced extreme volatility that often has been unrelated to the operating performance of particular companies. These broad market and industry fluctuations may adversely affect the trading pricefunctional currency of our common stock, regardless of actual operating performance.
We cannot guarantee that our stock repurchase program or our quarterly dividend program will be fully implemented or that either will enhance long-term stockholder value. Our Board of Directors has approved a stock repurchase program totaling $1.0 billion, of which $283 million remains available for purchasesubsidiaries is the local currency where the subsidiary operates. For each subsidiary, assets and liabilities denominated in foreign currencies are translated into U.S. dollars at the end of 2018. The repurchase program does not have an expiration dateexchange rates in effect at the balance sheet dates and werevenues and expenses are not obligated to repurchase a specified number or dollar value of shares. Additionally, our Board has approvedtranslated at the initiation of a quarterly cash dividend program and while we expect to pay a cash dividend on a quarterly basis, future declarations of such quarterly cash dividends are subject to approval byaverage exchange rates prevailing during the Board of Directors and the Board of Directors' determination that the declaration of dividends are in the best interests of Cerner and its shareholders.
Either or both of our repurchase or dividend programs may be suspended or terminated at any time and, even if fully implemented, may not enhance long-term stockholder value.
Our Directors have authority to issue preferred stock and our corporate governance documents contain anti-takeover provisions. Our Board of Directors has the authority to issue up to 1,000,000 shares of preferred stock and to determine the preferences, rights and privileges of those shares without any further vote or action by the shareholders. The rightsmonth of the holders of common stock may be harmed by rights granted totransaction. Therefore, future fluctuations in foreign currency exchange rates, particularly the holders of any preferred stock that may be issued in the future and issuances of preferred stock could be used to delay or hinder a change of controlstrengthening of the Company.U.S. dollar against major currencies, could materially affect our financial results.
In addition, some provisions of our Certificate of Incorporation and Bylaws could make it more difficult for a potential acquirer to acquire a majority of our outstanding voting stock or otherwise effect a change of control of the Company. These include provisions that provide for a classified board of directors, require advance notice of stockholder proposals at stockholder meetings, prohibit shareholders from taking action by written consent and restrict the ability of shareholders to call special meetings. We are also subject to provisions of Delaware law that prohibit us from engaging in any business combination with any interested shareholder for a period of three years from the date the person became an interested shareholder, unless certain conditions are met, which could have the effect of delaying or preventing a change of control.
Risks Relating to Forward-looking Statements
Statements made in this report, the Annual Report to Shareholders of which this report is made a part, other reports and proxy statements filed with the SEC, communications to shareholders, press releases and oral statements made by representatives of the Company that are not historical in nature, or that state the Company's or management’s intentions, hopes, beliefs, expectations, plans, goals or predictions of future events or performance, may constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements can often be identified by the use of forward-looking terminology, such as "could," "should," "will," "intended," "continue," "believe," "may," "expect," "hope," "anticipate," "goal," "forecast," "plan," "guidance," "opportunity," "prospects" or "estimate" or the negative of these words, variations thereof or similar expressions. Forward-looking statements are not guarantees of future performance or results. They involve risks, uncertainties and assumptions. It is important to note that any such performance and actual results, financial condition or business, could differ materially from those expressed in such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this Item 1A. Risk Factors and elsewhere herein or in other reports filed with the SEC. Other unforeseen factors not identified herein could also have such an effect. Any forward-looking statements made in this report speak only as of the date of this report. 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, financial condition or business over time.
Market and Industry Data
This Annual Report on Form 10-K may contain market, industry and government data and forecasts that have been obtained from publicly available information, various industry publications and other published industry sources. We have not independently verified the information and cannot make any representation as to the accuracy or completeness of such information. None of the reports and other materials of third party sources referred to in this Annual Report on Form 10-K were prepared for use in, or in connection with, this Annual Report.
Item 1B. Unresolved Staff Comments.
None
Item 2. Properties.
As of the end of 2018,2021, we owned approximately sixan aggregate of 6.5 million gross square feet of real estate located in the greater Kansas City metro area and Malvern, Pennsylvania. Such property primarily consists of office space, data center,datacenter, and warehouse facilities used primarily by our Domestic Segment.segment. An aggregate of 1.2 million gross square feet of this space is currently designated as held for sale. Refer to Note (5) of the Notes for further information regarding our real estate held for sale.
As of the end of 2018,2021, we leased additionalan aggregate of 355 thousand gross square feet of office space in the United States used primarily by our Domestic Segmentsegment, and an aggregate of 1.4 million gross square feet of office and datacenter space outside the United States, primarily in Australia, Europe, India, and the following locations:
|
| | |
Ÿ Arlington, Virginia
| Ÿ Franklin, Tennessee
| Ÿ New York, New York
|
Ÿ Brooklyn, New York
| Ÿ Jefferson City, Missouri
| Ÿ North Kansas City, Missouri
|
Ÿ Carlsbad, California
| Ÿ Kansas City, Missouri
| Ÿ Rochester, Minnesota
|
Ÿ Colchester, Vermont
| Ÿ Lakeland, Florida
| Ÿ Salt Lake City, Utah
|
Ÿ Columbia, Missouri
| Ÿ Mason, Ohio
| Ÿ Tempe, Arizona
|
Ÿ Costa Mesa, California
| Ÿ Minneapolis, Minnesota
| Ÿ Waltham, Massachusetts
|
Ÿ Denver, Colorado
| Ÿ Nevada, Missouri
| |
Ÿ Durham, North Carolina
| Ÿ New Concord, Ohio
| |
We also leased space primarilyMiddle East, which is used by our Global Segment in the following locations:International segment.
|
| | |
Ÿ Abu Dhabi, United Arab Emirates
| Ÿ Gothenburg, Sweden
| Ÿ Oslo, Norway
|
Ÿ Bangalore, India
| Ÿ Hamburg, Germany
| Ÿ Palma de Mallorca, Spain
|
Ÿ Berlin, Germany
| Ÿ Idstein, Germany
| Ÿ Paris, France
|
Ÿ Brasov, Romania
| Ÿ Kolkata, India
| Ÿ Riyadh, Saudi Arabia
|
Ÿ Brisbane, Australia
| Ÿ Kuala Lumpur, Malaysia
| Ÿ Sao Paulo, Brazil
|
Ÿ Cairo, Egypt
| Ÿ Las Palmas, Gran Canaria, Spain
| Ÿ Singapore
|
Ÿ Doha, Qatar
| Ÿ Lisbon, Portugal
| Ÿ St. Wolfgang, Germany
|
Ÿ Dubai, United Arab Emirates
| Ÿ London, England
| Ÿ Stockholm, Sweden
|
Ÿ Dublin, Ireland
| Ÿ Lund, Sweden
| Ÿ Sydney, Australia
|
Ÿ Erlangen, Germany
| Ÿ Madrid, Spain
| Ÿ The Hague, Netherlands
|
Ÿ Essen, Germany
| Ÿ Markham, Ontario, Canada
| Ÿ Vienna, Austria
|
Ÿ Gmund, Austria
| Ÿ Melbourne, Australia
| |
In general, we believe our facilities are suitable to meet our current and reasonably anticipated future needs.
Item 3. 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.
The disclosure relating to our dispute with Steward Health Care System LLC contained in Note (19) is incorporated herein by reference.
Item 4. Mine Safety Disclosures.
Not applicableapplicable.
Part II.
Item 5. Market for Registrant’sRegistrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stock trades on the Nasdaq Global Select MarketSM under the symbol CERN. The following table sets forth the high, low and last sales prices for the fiscal quarters of 2018 and 2017 as reported by the Nasdaq Global Select Market.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| 2018 | | 2017 |
| | | | | | | | | | | |
| High | | Low | | Last | | High | | Low | | Last |
| | | | | | | | | | | |
First Quarter | $ | 73.43 |
| | $ | 56.49 |
| | $ | 58.00 |
| | $ | 59.83 |
| | $ | 47.09 |
| | $ | 58.85 |
|
Second Quarter | 63.22 |
| | 52.05 |
| | 59.79 |
| | 69.28 |
| | 58.09 |
| | 66.47 |
|
Third Quarter | 67.57 |
| | 59.49 |
| | 64.41 |
| | 72.27 |
| | 61.53 |
| | 71.32 |
|
Fourth Quarter | 65.44 |
| | 48.78 |
| | 52.01 |
| | 73.86 |
| | 62.86 |
| | 67.39 |
|
At January 28, 2019,February 10, 2022, there were approximately 940920 owners of record. To date, we have paid no
Our Board of Directors declared cash dividends.dividends on our issued and outstanding common stock in 2021, 2020, and 2019. Subject to declaration by theour Board of Directors, the Company planswe expect to initiate acontinue paying quarterly cash dividenddividends as a part of $0.15 per share, with the first payment expected in the third quarter of 2019.our current capital allocation strategy. Future dividends will be subject to the determination, declaration and discretion of theour Board of Directors and compliance with our covenants under our credit facility.outstanding debt agreements and the Merger Agreement. Refer to Note (16) of the Notes for further information regarding our dividend program.
The table below provides information with respect to Common Stockcommon stock purchases by the Company during the fourth fiscal quarter of 2018:2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | | | | |
October 1, 2021 - October 31, 2021 | | 2,866,152 | | | $ | 70.98 | | | 2,866,152 | | | $ | 3,348,677,338 | |
November 1, 2021 - November 30, 2021 | | 2,300,941 | | | 74.53 | | | 2,300,941 | | | $ | 3,177,186,928 | |
December 1, 2021 - December 31, 2021 | | — | | | — | | | — | | | $ | 3,177,186,928 | |
Total | | 5,167,093 | | | $ | 72.56 | | | 5,167,093 | | | |
|
| | | | | | | | | | | | | | |
| | Total Number of Shares Purchased (a) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (b) | | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs (b) |
Period | | | | |
September 30, 2018 - October 27, 2018 | | — |
| | $ | — |
| | — |
| | $ | 581,522,399 |
|
October 28, 2018 - November 24, 2018 | | 1,722,734 |
| | 58.05 |
| | 1,722,124 |
| | 481,556,844 |
|
November 25, 2018 - December 29, 2018 | | 3,745,917 |
| | 52.96 |
| | 3,745,917 |
| | 283,172,767 |
|
Total | | 5,468,651 |
| | $ | 54.56 |
| | 5,468,041 |
| | |
(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.
| |
(a) | Of the 5,468,651 shares of common stock, par value $0.01 per share, presented in the table above, 610 shares were originally granted to employees as restricted stock pursuant to our 2011 Omnibus Equity Incentive Plan (the "Omnibus Plan"). The Omnibus Plan allows for the withholding of shares to satisfy the minimum tax obligations due upon the vesting of restricted stock. Pursuant to the Omnibus Plan, the 610 shares reflected above were relinquished by employees in exchange for our agreement to pay U.S. federal and state withholding obligations resulting from the vesting of the Company's restricted stock. |
| |
(b) | As announced on May 25, 2017, our Board of Directors authorized a share repurchase program that allows the Company to repurchase up to $500 million of shares of our common stock, excluding transaction costs. As announced on May 21, 2018, our Board of Directors approved an amendment to the repurchase program that was authorized in May 2017. Under the amendment, the Company was authorized to repurchase up to an additional $500 million of shares of our common stock, for an aggregate of $1 billion, excluding transaction costs. 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. No time limit was set for the completion of the program. During 2018, we repurchased 11.2 million shares for total consideration of $644 million under the program pursuant to Rule 10b5-1 plans. At December 29, 2018, $283 million remains available for repurchase under the outstanding program. Refer to Note (14) of the notes to consolidated financial statements for further information regarding our share repurchase program. |
On April 23, 2021, our Board of Directors approved (and announced on May 5, 2021) 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 was 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 2021, we repurchased 20.0 million shares for total consideration of $1.50 billion under our share repurchase programs pursuant to Rule 10b5-1 plans. As of December 31, 2021, $3.18 billion remained available for repurchase under the 2021 Share Repurchase Program. The Merger Agreement prohibits us from repurchasing our shares without Parent's consent.
See Part III, Item 12 for information relating to securities authorized for issuance under our equity compensation plans.
Item 6. Selected Financial Data.[Reserved]
|
| | | | | | | | | | | | | | | | | | | |
(In thousands, except per share data) | 2018(1) | | 2017(2) | | 2016 | | 2015(3) | | 2014 |
| | | | | | | | | |
Statement of Operations Data: | | | | | | | | | |
Revenues | $ | 5,366,325 |
| | $ | 5,142,272 |
| | $ | 4,796,473 |
| | $ | 4,425,267 |
| | $ | 3,402,703 |
|
Operating earnings | 774,785 |
| | 960,471 |
| | 911,013 |
| | 781,136 |
| | 763,084 |
|
Earnings before income taxes | 800,851 |
| | 967,129 |
| | 918,434 |
| | 781,380 |
| | 774,174 |
|
Net earnings | 630,059 |
| | 866,978 |
| | 636,484 |
| | 539,362 |
| | 525,433 |
|
| | | | | | | | | |
Earnings per share: | | | | | | | | | |
Basic | 1.91 |
| | 2.62 |
| | 1.88 |
| | 1.57 |
| | 1.54 |
|
Diluted | 1.89 |
| | 2.57 |
| | 1.85 |
| | 1.54 |
| | 1.50 |
|
| | | | | | | | | |
Weighted average shares outstanding: | | | | | | | | | |
Basic | 330,084 |
| | 331,373 |
| | 337,740 |
| | 343,178 |
| | 342,150 |
|
Diluted | 333,572 |
| | 337,999 |
| | 343,653 |
| | 350,908 |
| | 350,386 |
|
| | | | | | | | | |
Balance Sheet Data: | | | | | | | | | |
Working capital | $ | 1,356,114 |
| | $ | 1,590,632 |
| | $ | 773,960 |
| | $ | 1,049,967 |
| | $ | 1,714,471 |
|
Total assets | 6,708,636 |
| | 6,469,311 |
| | 5,629,963 |
| | 5,561,984 |
| | 4,530,565 |
|
Long-term debt and capital lease obligations, excl. current installments | 438,802 |
| | 515,130 |
| | 537,552 |
| | 563,353 |
| | 62,868 |
|
Shareholders' equity | 4,928,389 |
| | 4,785,348 |
| | 3,927,947 |
| | 3,870,384 |
| | 3,565,968 |
|
| |
(1) | In 2018, we adopted new revenue recognition guidance as further discussed in Note (2) of the notes to consolidated financial statements. |
| |
(2) | Includes the impact of certain U.S. income tax reform, as further described in Note (12) of the notes to consolidated financial statements. |
| |
(3) | In 2015, we acquired our Health Services business from Siemens AG. |
Item 7. 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 our results of operations and financial condition. This MD&A is provided as a supplement to, and should be read in conjunction with, our financial statements and the accompanying notes to the financial statements.Notes.
Our fiscal year ends on the Saturday closest to December 31. Fiscal years 2018, 2017 and 2016 each consisted of 52 weeks and ended on December 29, 2018, December 30, 2017, and December 31, 2016, respectively. All references to years in this MD&A represent fiscal years unless otherwise noted. Refer to Note (1) of the Notes for information regarding our fiscal year end.
Information regarding our 2019 results of operations, including a year-to-year comparison against 2020, may be found in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our annual report on Form 10-K for the period ended December 31, 2020, which was filed with the Securities and Exchange Commission on February 19, 2021.
Management Overview
Our revenues are primarily derived by selling, implementing, operating and supporting software solutions, clinical content, hardware, devices and services that give health carehealthcare 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 health care.healthcare.
Our core strategy is to create organic growth by investing in research and development ("R&D") to create solutions and tech enabledtech-enabled services for the health carehealthcare industry. This strategy has driven strong growth over the long-term, as reflected in five- and ten-year compound annual revenue growth rates of 13% and 12%, respectively. This growth has also created an important strategic footprint in health care, with Cerner® solutions in more than 27,500 contracted provider facilities worldwide, including hospitals, physician practices, laboratories, ambulatory centers, behavioral health centers, cardiac facilities, radiology clinics, surgery centers, extended care facilities, retail pharmacies, and employer sites. Selling additional solutions and services back into this client base is an important element of our future revenue growth. We are also focused on driving growth by strategically aligning with health care providers that have not yet selected a supplier and by displacing competitors in health care settings that are lookingexpect to replace their current suppliers. We may also supplement organic growth with acquisitions or strategic investments.investments and collaborations.
We expectCerner'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 driveour growth through solutionsgoing forward is delivering value to this core client base, including executing effectively on our large U.S. federal contracts and tech-enabled services that reflect our ongoing ability to innovate and expand our reach into health care. Examples of these include our CareAware® health care device architecture and devices, Cerner ITWorksSM services, revenue cyclecross-selling key solutions and services and HealtheIntent® population health solutions and services. Finally,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 continueexpect to believe there is significant opportunity for growth outside of the United States, with many non-U.S. markets focused on health care information technology as part of their strategy to improve the quality and lower thetotal 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, care.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. SimilarAfter 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 history of growing revenue, our net earnings have increased at compound annual rates of 10% and 13% over the most recent five- and ten-year periods, respectively. We expect to drive earnings growth as we continue to grow our revenue. We also have opportunities to expand our operating margins over time. In the near term, we expect growth in non-cash expenses, such as amortization and depreciation, and a mix of lower margin revenue associated with some of our rapidly growing services businesses will limit our margin expansion. Longer-term, we expect to generate margin expansion as the growth rate of non-cash expenses slows, we achieve economies of scale and efficiencies in our services businesses, control general and administrative expenses, and get more contributions to our growth from solutions on our HealtheIntent platform, which we expect to be accretive to our overall margins.clients.
We are also focused on continuing to deliverdelivering strong levels of cash flow which we expect to accomplish by continuing to grow earnings and prudently managing capital expenditures.
Oracle Merger Agreement
On December 20, 2021, we entered into the Merger Agreement with Oracle and certain of its wholly owned subsidiaries. Pursuant to the Merger Agreement, on January 19, 2022, Oracle commenced a cash tender offer to acquire all of the issued and outstanding shares of our common stock for a purchase price of $95.00 per share, net to the holders thereof in cash, without interest and subject to any required tax withholding. If the Offer is completed, Merger Subsidiary will merge with and into Cerner and we will become a wholly owned indirect subsidiary of Oracle. As a result of the Merger, the shares of our common stock will cease to be publicly held. We have agreed to various customary covenants and agreements in the Merger Agreement, including with respect to the operation of our business prior to the closing of the transaction, such as restrictions on making certain acquisitions and divestitures, entering into certain contracts, incurring certain indebtedness and making certain capital expenditures, paying dividends in excess of our regular quarterly dividend, issuing or repurchasing stock and taking other specified actions. We do not believe these restrictions will prevent us from meeting our debt service obligations, ongoing costs of operations, working capital needs, or capital expenditure requirements. If the Merger Agreement is terminated under certain specified circumstances, we will be required to pay Parent a termination fee of $950 million. The completion of the Merger remains subject to customary closing conditions,
including receipt of certain regulatory approvals and other customary closing conditions. The Merger is currently expected to close in calendar year 2022.
For additional information related to the Merger Agreement, please refer to the Schedule 14D-9 previously filed with the SEC and other relevant materials in connection with the transaction that we will file with the SEC and that will contain important information about the Merger.
COVID-19
Our business and results of operations in both 2021 and 2020 were impacted by the ongoing COVID-19 pandemic. It has caused us to modify certain of our business practices, including prolonging the requirement that most of our associates 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 ongoing 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 into 2022, we do not expect it to be as significant as either 2020 or 2021. 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 operating structure, that was implemented in the first quarter of 2019, and identifying additional efficiencies in our business. 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 improvement initiatives. We continue to be focused on reducing operating expenses and identifying opportunities that are expected to provide longer-term operating margin expansion 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 2021, 2020, and 2019 primarily related to professional services fees, employee separation costs, and asset impairment charges which are included in operating expenses in our 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 reflectsreflect the value of executed contracts for software, hardware, professional services and managed services, was $6.72$5.83 billion in 2018,2021, which is an increase of 6%4% compared to $6.32$5.58 billion in 2017.2020.
Revenues for 20182021 increased 4%5% to $5.37$5.76 billion, compared to $5.14$5.51 billion in 2017. The increase in revenue reflects ongoing demand from new and existing clients for Cerner's solutions and services driven by their needs to keep up with regulatory requirements, adapt to changing reimbursement models, and deliver safer and more efficient care.2020.
Net earnings for 20182021 decreased 27%29% to $630$556 million, compared to $867$780 million in 2017.2020. Diluted earnings per share decreased 26%27% to $1.89$1.84 in 2018,2021, compared to $2.57$2.52 in 2017. The overall decrease in net earnings and diluted earnings per share was2020.
primarily a result of increased operating expenses, which includes the hiring of personnel to support revenue growth and a $45 million pre-tax charge to provide an allowance against certain disputed client receivables. Additionally, we had a lower effective tax rate in 2017, stemming from certain U.S. income tax reform enacted in December 2017.
We had cash collections of receivables of $5.49$6.13 billion in 20182021, compared to $5.44$5.70 billion in 2017.2020. Days sales outstanding was 7973 days in the fourth quarter of 2021, compared to 76 days for both the 2018third quarter of 2021 and fourth quarter compared to 82 days for the 2018 third quarter and 72 days for the 2017 fourth quarter.of 2020. Operating cash flows for 20182021 were $1.45$1.77 billion, compared to $1.31$1.44 billion in 2017.2020.
Revenue Recognition
In the first quarter of 2018, we adopted new revenue recognition guidance as further discussed in Note (2) of the notes to consolidated financial statements. The impact of applying this new guidance (versus prior U.S. GAAP) increased 2018 revenues and earnings before income taxes by $207 million and $101 million, respectively. This impact is primarily driven by certain new contracts in 2018 where we made commitments for specified upgrades. Under the new revenue guidance, we are required to estimate stand-alone selling price when allocating transaction consideration to performance obligations, such as specified upgrades. Under prior U.S. GAAP, we could not establish vendor specific objective evidence of fair value for specified upgrades, which would have delayed the revenue recognition on the entire contract until the upgrades were delivered.
Health CareHealthcare Information Technology Market Outlook
We have provided an assessment of the health carehealthcare information technology market under "Health Care"Healthcare and Health CareHealthcare IT Industry" in Part I, Item 1 "Business," which is incorporated herein by reference.
Results of Operations
Fiscal Year 20182021 Compared to Fiscal Year 20172020
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | 2021 | % of Revenue | | 2020 | | % of Revenue | | % Change |
| | | | | | | | |
Revenues | $ | 5,764,824 | | 100 | % | | $ | 5,505,788 | | | 100 | % | | 5 | % |
Costs of revenue | 1,001,017 | | 17 | % | | 932,941 | | | 17 | % | | 7 | % |
| | | | | | | | |
Margin | 4,763,807 | | 83 | % | | 4,572,847 | | | 83 | % | | 4 | % |
| | | | | | | | |
Operating expenses | | | | | | | | |
Sales and client service | 2,636,205 | | 46 | % | | 2,582,615 | | | 47 | % | | 2 | % |
Software development | 835,995 | | 15 | % | | 749,007 | | | 14 | % | | 12 | % |
General and administrative | 520,667 | | 9 | % | | 491,586 | | | 9 | % | | 6 | % |
Amortization of acquisition-related intangibles | 62,664 | | 1 | % | | 55,595 | | | 1 | % | | 13 | % |
| | | | | | | | |
Total operating expenses | 4,055,531 | | 70 | % | | 3,878,803 | | | 70 | % | | 5 | % |
| | | | | | | | |
Total costs and expenses | 5,056,548 | | 88 | % | | 4,811,744 | | | 87 | % | | 5 | % |
| | | | | | | | |
Gain on sale of businesses | — | | — | % | | 220,523 | | | 4 | % | | |
| | | | | | | | |
Operating earnings | 708,276 | | 12 | % | | 914,567 | | | 17 | % | | (23) | % |
| | | | | | | | |
Other income (loss), net | (8,816) | | | | 76,906 | | | | | |
Income taxes | (143,864) | | | | (211,385) | | | | | |
| | | | | | | | |
Net earnings | $ | 555,596 | | | | $ | 780,088 | | | | | (29) | % |
|
| | | | | | | | | | | | | | | |
(In thousands) | 2018 | % of Revenue | | 2017 | | % of Revenue | | % Change |
| |
| | | | | | |
Revenues | $ | 5,366,325 |
| 100 | % | | $ | 5,142,272 |
| | 100 | % | | 4 | % |
Costs of revenue | 937,348 |
| 17 | % | | 854,091 |
| | 17 | % | | 10 | % |
| |
| | | | | | |
Margin | 4,428,977 |
| 83 | % | | 4,288,181 |
| | 83 | % | | 3 | % |
| | | | | | | | |
Operating expenses | | | | | | | | |
Sales and client service | 2,493,696 |
| 46 | % | | 2,276,821 |
| | 44 | % | | 10 | % |
Software development | 683,663 |
| 13 | % | | 605,046 |
| | 12 | % | | 13 | % |
General and administrative | 389,469 |
| 7 | % | | 355,267 |
| | 7 | % | | 10 | % |
Amortization of acquisition-related intangibles | 87,364 |
| 2 | % | | 90,576 |
| | 2 | % | | (4 | )% |
| | | | | |
|
| | |
Total operating expenses | 3,654,192 |
| 68 | % | | 3,327,710 |
| | 65 | % | | 10 | % |
| | | | | |
|
| | |
Total costs and expenses | 4,591,540 |
| 86 | % | | 4,181,801 |
| | 81 | % | | 10 | % |
| | | | | |
|
| | |
Operating earnings | 774,785 |
| 14 | % | | 960,471 |
| | 19 | % | | (19 | )% |
| | | | | | | | |
Other income, net | 26,066 |
| | | 6,658 |
| | | | |
Income taxes | (170,792 | ) | | | (100,151 | ) | | | | |
| | | | | | | | |
Net earnings | $ | 630,059 |
| | | $ | 866,978 |
| | | | (27 | )% |
Revenues & Backlog
Revenues increased 4%5% to $5.37$5.76 billion in 2018,2021, as compared to $5.14$5.51 billion in 2017.2020. The growthfollowing factors impacted the year-over-year change in revenues:
•Increased implementation activity during 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 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 18% in 2020.
•The 2021 period includes a $220$148 million increase in professional services revenue, driven by increasedrevenues due to contributions from Cerner ITWorks andour April 1, 2021 acquisition of the Kantar Health business. Refer to Note (8) of the Notes for further information regarding the Kantar Health acquisition.
•The 2021 period includes a $47 million reduction in revenues due to the sale of certain of our revenue cycle services. outsourcing business operations, as further discussed in Note (9) of the Notes.
•The 2021 period includes a $40 million reduction in revenues due to the sale of certain of our business operations primarily conducted in Germany and Spain, as further discussed in Note (9) of the Notes.
Refer to Note (2) of the notes to consolidated financial statementsNotes for further information regarding revenues disaggregated by our business models.
Backlog, which reflects contracted revenue that has not yet been recognized as revenue, was $15.25$13.26 billion asat the end of December 29, 2018,2021, compared to $13.04 billion at the end of which we2020. We expect to recognize approximately 29%31% of our backlog as revenue over the next 12 months. In the first quarter of 2018, we adopted new revenue recognition guidance as further discussed in Note (2) of the notes to consolidated financial statements. In connection with the adoption of such guidance, we modified our calculation of backlog as previously determined under Regulation S-K to represent the aggregate amount of transaction price allocated to performance obligations that are unsatisfied (or partially satisfied) to conform to the new revenue recognition guidance. Backlog amounts disclosed prior to the adoption of the new revenue recognition guidance have not been adjusted, and are not comparable to, the current period presentation.
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,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 $525 million$1.22 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.
Costs of Revenue
Costs of revenue as a percent of revenues were 17% in both 20182021 and 2017.2020.
Costs of revenue include the cost of reimbursed travel expense, sales commissions, third partythird-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 10%5% to $3.65$4.06 billion in 2018, as2021, compared to $3.33$3.88 billion in 2017.2020.
•Sales and client service expenses as a percent of revenues were 46% in 2018,2021, compared to 44%47% in 2017.2020. These expenses increased 10%2% to $2.49$2.64 billion in 2018,2021, from $2.28$2.58 billion in 2017.2020. 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 2018 amountfollowing factors impacted the year-over-year change in sales and client service expenses:
◦The 2021 period includes $78 million of pre-tax charges recorded in connection with the designation of certain real estate assets as held for sale, as further discussed in Note (5) of the Notes.
◦The 2021 period includes expense contributions from the Kantar Health business, which was acquired on April 1, 2021, as further discussed in Note (8) of the Notes.
◦The 2020 period includes $29 million of pre-tax charges incurred in connection with the termination of certain revenue cycle outsourcing contracts, as further discussed in Note (1) of the Notes.
◦The 2020 period includes a $21 million pre-tax charge of $45 million to provide an allowance against certain clientnon-current receivables with Fujitsu Services Limited ("Fujitsu"),from a former client. Refer to Note (3) of the Notes for further information regarding our provision for expected credit losses.
◦The 2020 period includes expense contributions from divested businesses, until their respective sale dates, as further discussed in Note (3)(9) of the notesNotes.
•Software development expenses as a percent of revenues were 15% in 2021, compared to consolidated financial statements. The remaining growth14% in sales2020. Expenditures for software development include ongoing development and clientenhancement 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 expensesplatform. A summary of our total software development expense in 2021 and 2020 is primarily due to the hiring of services personnel to support growth in services revenue.
| |
• | Software development expenses as a percent of revenues were 13% in 2018, compared to 12% in 2017. Expenditures for software development include ongoing development and enhancement of the Cerner Millennium® and HealtheIntent platforms, with a focus on supporting key initiatives to enhance physician experience, revenue cycle and population health solutions. A summary of our total software development expense in 2018 and 2017 is as follows:
|
| | | For the Years Ended | | For the Years Ended |
(In thousands) | 2018 | | 2017 | (In thousands) | 2021 | | 2020 |
| | | | | |
Software development costs | $ | 747,128 |
| | $ | 705,944 |
| Software development costs | $ | 828,502 | | | $ | 796,971 | |
Capitalized software costs | (271,787 | ) | | (271,411 | ) | Capitalized software costs | (300,446) | | | (287,869) | |
Capitalized costs related to share-based payments | (1,906 | ) | | (2,737 | ) | Capitalized costs related to share-based payments | (7,580) | | | (7,408) | |
Amortization of capitalized software costs | 210,228 |
| | 173,250 |
| Amortization of capitalized software costs | 261,798 | | | 247,313 | |
Net realizable value charges (see Note (7) of the Notes) | | Net realizable value charges (see Note (7) of the Notes) | 53,721 | | | — | |
| | | | | |
Total software development expense | $ | 683,663 |
| | $ | 605,046 |
| Total software development expense | $ | 835,995 | | | $ | 749,007 | |
•General and administrative expenses as a percent of revenues were 7%9% in both 20182021 and 2017.2020. These expenses increased 10%6% to $389$521 million in 2018,2021, from $355$492 million in 2017.2020. 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, acquisition costscertain organizational restructuring and related adjustments.other expense. The increase in general and administrative expenses is primarily due to increased expense associated with share-based payment awards.awards in connection with the departure, or planned departure, of certain executives. In 2021, general and administrative expenses include $139 million of expenses incurred in connection with our operational improvement initiatives, discussed above, compared to $137 million in 2020. 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 2%1% in both 20182021 and 2017.2020. These expenses decreased 4%increased 13% to $87$63 million in 2018,2021, from $91$56 million in 2017.2020. 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 decreaseincrease in amortization of acquisition-related intangibles includesis primarily due to amortization of intangibles acquired in our April 1, 2021 acquisition of the impactKantar Health business. Refer to Note (8) of certain intangible assets becoming fully amortized.the Notes for further information regarding the Kantar Health acquisition.
Gain on Sale of Businesses
In 2020, we recognized a $221 million gain on sale of businesses. Refer to Note (9) of the Notes for further information regarding divestiture transactions that closed during the third quarter of 2020. We expect to continue to evaluate and complete divestiture transactions that are strategic to our operational improvement initiatives discussed above.
Non-Operating Items
•Other income (loss), net was $26a net loss of $9 million in 2018,2021, compared to $7$77 million of income in 2017.2020. The increase2020 period includes a $76 million gain recognized on the disposition of one of our equity investments. The remaining difference is primarily attributable to increased interest on our cashexpense in 2021 from the $300 million of Series 2020-A Notes we issued in March 2020 and investment balances, duethe $500 million of Series 2021 Senior Notes we issued in March 2021. Refer to rising interest rates.Note (13) of the Notes for further information regarding the components of Other income (loss), net.
•Our effective tax rate was 21% in 2018, compared to 10% in 2017. The increase in the effective tax rate in 2018is primarily a result of impacts from certain U.S. income tax reform enacted in December 2017.both 2021 and 2020. Refer to Note (12)(14) of the notes to consolidated financial statementsNotes for further informationdiscussion regarding our effective tax rate. We do not expect significant changes to our overall effective tax rate in 2019,2022, from what is reported for 2018.2021.
Operations by Segment
We have two operating segments: Domestic and Global.International. The Domestic segment includes revenue contributions and expenditures associated with business activity in the United States. The GlobalInternational segment primarily includes revenue contributions and expenditures linked to business activity in Aruba,outside the United States, primarily from Australia, Austria, the Bahamas, Belgium, Bermuda, Brazil, Canada, Cayman Islands, Chile, Denmark, Egypt, England, Finland, France, Germany, India, Ireland, Kuwait, Luxembourg, Malaysia, Mexico, Netherlands, Norway, Portugal, Qatar, Romania, Saudi Arabia, Singapore, Slovakia, Spain, Sweden, SwitzerlandEurope, and the United Arab Emirates.Middle East. Refer to Note (17)(20) of the notes to consolidated financial statementsNotes for further information regarding our reportable segments.
The following table presents a summary of our operating segment information for the years ended 20182021 and 2017:2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | 2021 | | % of Segment Revenue | | 2020 | | % of Segment Revenue | | % Change |
| | | | | | | | | |
Domestic Segment | | | | | | | | | |
Revenues | $ | 5,044,629 | | | 100% | | $ | 4,879,769 | | | 100% | | 3% |
Costs of revenue | 887,343 | | | 18% | | 854,574 | | | 18% | | 4% |
Operating expenses | 2,358,897 | | | 47% | | 2,339,624 | | | 48% | | 1% |
Total costs and expenses | 3,246,240 | | | 64% | | 3,194,198 | | | 65% | | 2% |
| | | | | | | | | |
Domestic operating earnings | 1,798,389 | | | 36% | | 1,685,571 | | | 35% | | 7% |
| | | | | | | | | |
International Segment | | | | | | | | | |
Revenues | 720,195 | | | 100% | | 626,019 | | | 100% | | 15% |
Costs of revenue | 113,674 | | | 16% | | 78,367 | | | 13% | | 45% |
Operating expenses | 277,308 | | | 39% | | 242,991 | | | 39% | | 14% |
Total costs and expenses | 390,982 | | | 54% | | 321,358 | | | 51% | | 22% |
| | | | | | | | | |
International operating earnings | 329,213 | | | 46% | | 304,661 | | | 49% | | 8% |
| | | | | | | | | |
Other costs and expenses, net | (1,419,326) | | | | | (1,296,188) | | | | | 10% |
| | | | | | | | | |
Gain on sale of businesses | — | | | | | 220,523 | | | | | |
| | | | | | | | | |
Consolidated operating earnings | $ | 708,276 | | | | | $ | 914,567 | | | | | (23)% |
|
| | | | | | | | | | | | | |
(In thousands) | 2018 | | % of Segment Revenue | | 2017 | | % of Segment Revenue | | % Change |
| | | | | | | | | |
Domestic Segment | | | | | | | | | |
Revenues | $ | 4,730,266 |
| | 100% | | $ | 4,575,171 |
| | 100% | | 3% |
Costs of revenue | 827,904 |
| | 18% | | 755,729 |
| | 17% | | 10% |
Operating expenses | 2,164,465 |
| | 46% | | 1,998,544 |
| | 44% | | 8% |
Total costs and expenses | 2,992,369 |
| | 63% | | 2,754,273 |
| | 60% | | 9% |
| | | | | | |
| | |
Domestic operating earnings | 1,737,897 |
| | 37% |
| 1,820,898 |
| | 40% | | (5)% |
| | | | | | | | | |
Global Segment | | | | | | | | | |
Revenues | 636,059 |
| | 100% | | 567,101 |
| | 100% | | 12% |
Costs of revenue | 109,444 |
| | 17% | | 98,362 |
| | 17% | | 11% |
Operating expenses | 321,116 |
| | 50% | | 264,196 |
| | 47% | | 22% |
Total costs and expenses | 430,560 |
| | 68% | | 362,558 |
| | 64% | | 19% |
| | | | | | |
| | |
Global operating earnings | 205,499 |
| | 32% | | 204,543 |
| | 36% | | —% |
| | | | | | | | | |
Other, net | (1,168,611 | ) | | | | (1,064,970 | ) | | | | 10% |
| | | | | | | | | |
Consolidated operating earnings | $ | 774,785 |
| | | | $ | 960,471 |
| | | | (19)% |
Domestic Segment
•Revenues increased 3% to $4.73$5.04 billion in 2018,2021, from $4.58$4.88 billion in 2017.2020. The growthfollowing factors impacted the year-over-year change in revenuesDomestic revenues:
◦Increased implementation activity during 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 2021 period includes a $181$68 million increase in professional services revenue, driven by increasedrevenues due to contributions from Cerner ITWorks
our April 1, 2021 acquisition of the Kantar Health business.
and◦The 2021 period includes a $47 million reduction in revenues due to the sale of certain of our revenue cycle services. outsourcing business operations.
Refer to Note (2) of the notes to consolidated financial statementsNotes for further information regarding revenues disaggregated by our business models.
•Costs of revenue as a percent of revenues were 18% in 2018,both 2021 and 2020.
•Operating expenses as a percent of revenues were 47% in 2021, compared to 17%48% in 2017.2020. These expenses increased 1% to $2.36 billion in 2021, from $2.34 billion in 2020. The following factors impacted the year-over-year change in Domestic operating expenses:
◦The 2021 period includes $78 million of pre-tax charges recorded in connection with the designation of certain real estate assets as held for sale.
◦The 2021 period includes expense contributions from the Kantar Health business, which was acquired on April 1, 2021.
◦The 2020 period includes $29 million of pre-tax charges incurred in connection with the termination of certain revenue cycle outsourcing contracts.
◦The 2020 period includes a $21 million pre-tax charge to provide an allowance against certain non-current receivables from a former client.
International Segment
•Revenues increased 15% to $720 million in 2021, from $626 million in 2020. The following factors impacted the year-over-year change in International revenues:
◦The 2021 period includes an $80 million increase in revenues due to contributions from our April 1, 2021 acquisition of the Kantar Health business.
◦The 2021 period includes a $40 million reduction in revenues due to the sale of certain of our business operations primarily conducted in Germany and Spain.
◦The remaining difference is attributable to 2021 revenue growth across the majority of our remaining International Segment operations.
Refer to Note (2) of the Notes for further information regarding revenues disaggregated by our business models.
•Costs of revenue as a percent of revenues were 16% in 2021, compared to 13% in 2020. The higher costs of revenue as a percent of revenues was primarily driven by higher third-party costs associated with services revenue.the impact of the Kantar Health business acquired on April 1, 2021.
•Operating expenses as a percent of revenues were 46%39% in 2018, comparedboth 2021 and 2020. These expenses increased 14% to 44% in 2017. The higher operating expenses as a percent of revenues reflects the hiring of personnel to support revenue growth.
Global Segment
Revenues increased 12% to $636$277 million in 2018,2021, from $567$243 million in 2017. This increase was driven by growth across most of our business. Refer to Note (2) of the notes to consolidated financial statements for further information regarding revenues disaggregated by our business models.
Costs of revenue as a percent of revenues were 17% in both 2018 and 2017.
Operating expenses as a percent of revenues were 50% in 2018, compared to 47% in 2017.2020. The increase as a percent of revenuesin operating expenses is primarily due to a pre-tax charge of $45 million in 2018 to provide an allowance against certain client receivables with Fujitsu, as further discussed in Note (3)the April 1, 2021 acquisition of the notes to consolidated financial statements.Kantar Health business.
Other netCosts and Expenses, Net
Operating resultscosts and expenses not attributed to an operating segment include expenses such as software development, general and administrative expenses, acquisition costs and related adjustments, share-based compensation expense, and certain amortization and depreciation.depreciation, certain organizational restructuring and other expense. These expenses increased 10% to $1.42 billion in 2021, from 2017$1.30 billion in 2020. This increase includes the impacts of $54 million of pre-tax charges recorded in 2021 to 2018. The increase is primarily due to increasedreduce the carrying amount of certain capitalized software development expenses, includingcosts to estimated net realizable value; and increased amortizationexpense associated with share-based payment awards in connection with the departure, or planned departure, of capitalized software costs resulting from releasescertain executives.
The effects of new and enhanced solutions over the last four quarters.
Fiscal Year 2017 Compared to Fiscal Year 2016
|
| | | | | | | | | | | | | | | |
(In thousands) | 2017 | % of Revenue | | 2016 | | % of Revenue | | % Change |
| | | | | | | | |
Revenues | $ | 5,142,272 |
| 100 | % | | $ | 4,796,473 |
| | 100 | % | | 7 | % |
Costs of revenue | 854,091 |
| 17 | % | | 779,116 |
| | 16 | % | | 10 | % |
| | | | | | | | |
Margin | 4,288,181 |
| 83 | % | | 4,017,357 |
| | 84 | % | | 7 | % |
| | | | | | | | |
Operating expenses | | | | | | | | |
Sales and client service | 2,276,821 |
| 44 | % | | 2,071,926 |
| | 43 | % | | 10 | % |
Software development | 605,046 |
| 12 | % | | 551,418 |
| | 11 | % | | 10 | % |
General and administrative | 355,267 |
| 7 | % | | 392,454 |
| | 8 | % | | (9 | )% |
Amortization of acquisition-related intangibles | 90,576 |
| 2 | % | | 90,546 |
| | 2 | % | | — | % |
| | | | | | | | |
Total operating expenses | 3,327,710 |
| 65 | % | | 3,106,344 |
| | 65 | % | | 7 | % |
| | | | | | | | |
Total costs and expenses | 4,181,801 |
| 81 | % | | 3,885,460 |
| | 81 | % | | 8 | % |
| | | | | | | | |
Operating earnings | 960,471 |
| 19 | % | | 911,013 |
| | 19 | % | | 5 | % |
| | | | | | | | |
Other income, net | 6,658 |
| | | 7,421 |
| | | | |
Income taxes | (100,151 | ) | | | (281,950 | ) | | | | |
| | | | | | | | |
Net earnings | $ | 866,978 |
| | | $ | 636,484 |
| | | | 36 | % |
Revenues
Revenues increased 7% to $5.14 billion in 2017, as compared to $4.80 billion in 2016. The growth in revenues includes a $147 million increase in professional services revenue, driven by growth in implementation and consulting activities. Refer to Note (2) of the notes to consolidated financial statements for further information regarding revenues disaggregated byinflation on our business models.during 2021 and 2020 were not significant.
Costs of Revenue
Costs of revenue as a percent of revenues were 17% in 2017, compared to 16% in 2016. The marginally higher costs of revenue as a percent of revenues was primarily due to higher third-party costs associated with technology resale.
Operating Expenses
Total operating expenses increased 7% to $3.33 billion in 2017, as compared to $3.11 billion in 2016.
Sales and client service expenses as a percent33
| |
• | Software development expenses as a percent of revenues were 12% in 2017, compared to 11% in 2016. Expenditures for software development include ongoing development and enhancement of the Cerner Millennium® and HealtheIntent platforms, with a focus on supporting key initiatives to enhance physician experience, revenue cycle and population health solutions. A summary of our total software development expense in 2017 and 2016 is as follows:
|
|
| | | | | | | |
| For the Years Ended |
(In thousands) | 2017 | | 2016 |
| | | |
Software development costs | $ | 705,944 |
| | $ | 704,882 |
|
Capitalized software costs | (271,411 | ) | | (290,911 | ) |
Capitalized costs related to share-based payments | (2,737 | ) | | (2,785 | ) |
Amortization of capitalized software costs | 173,250 |
| | 140,232 |
|
| | | |
Total software development expense | $ | 605,046 |
| | $ | 551,418 |
|
General and administrative expenses as a percent of revenues were 7% in 2017, compared to 8% in 2016. These expenses decreased 9% to $355 million in 2017, from $392 million in 2016. The decrease in general and administrative expenses was primarily due to 2016 containing $36 million of expenses associated with a voluntary separation plan. Refer to Note (1) of the notes to consolidated financial statements for further detail regarding our 2016 voluntary separation plan.
Amortization of acquisition-related intangibles as a percent of revenues was 2% in both 2017 and 2016. These expenses remained flat at $91 million in both 2017 and 2016.
Non-Operating Items
Other income, net remained flat at $7 million in both 2017 and 2016.
Our effective tax rate was 10% in 2017, compared to 31% in 2016. The decrease in the effective tax rate in 2017 is primarily a result of impacts from certain U.S. income tax reform enacted in December 2017, and the inclusion of net excess tax benefits as discrete items within the tax provision, upon our adoption of ASU 2016-09 in the first quarter of 2017. Refer to Note (12) of the notes to consolidated financial statements for further information regarding our effective tax rate.
Operations by Segment
The following table presents a summary of our operating segment information for the years ended 2017 and 2016:
|
| | | | | | | | | | | | | |
(In thousands) | 2017 | | % of Segment Revenue | | 2016 | | % of Segment Revenue | | % Change |
| | | | | | | | | |
Domestic Segment | | | | | | | | | |
Revenues | $ | 4,575,171 |
| | 100% | | $ | 4,245,097 |
| | 100% | | 8% |
Costs of revenue | 755,729 |
| | 17% | | 676,437 |
| | 16% | | 12% |
Operating expenses | 1,998,544 |
| | 44% | | 1,774,146 |
| | 42% | | 13% |
Total costs and expenses | 2,754,273 |
| | 60% | | 2,450,583 |
| | 58% | | 12% |
| | | | | | | | | |
Domestic operating earnings | 1,820,898 |
| | 40% | | 1,794,514 |
| | 42% | | 1% |
| | | | | | | | | |
Global Segment | | | | | | | | | |
Revenues | 567,101 |
| | 100% | | 551,376 |
| | 100% | | 3% |
Costs of revenue | 98,362 |
| | 17% | | 102,679 |
| | 19% | | (4)% |
Operating expenses | 264,196 |
| | 47% | | 246,243 |
| | 45% | | 7% |
Total costs and expenses | 362,558 |
| | 64% | | 348,922 |
| | 63% | | 4% |
| | | | | | | | | |
Global operating earnings | 204,543 |
| | 36% | | 202,454 |
| | 37% | | 1% |
| | | | | | | | | |
Other, net | (1,064,970 | ) | | | | (1,085,955 | ) | | | | (2)% |
| | | | | | | | | |
Consolidated operating earnings | $ | 960,471 |
| | | | $ | 911,013 |
| | | | 5% |
Domestic Segment
Revenues increased 8% to $4.58 billion in 2017, from $4.25 billion in 2016. The growth in revenues includes a $141 million increase in professional services revenue, driven by growth in implementation and consulting activities. Refer to Note (2) of the notes to consolidated financial statements for further information regarding revenues disaggregated by our business models.
Costs of revenue as a percent of revenues were 17% in 2017, compared to 16% in 2016. The marginally higher costs of revenue as a percent of revenues was primarily due to higher third-party costs associated with technology resale.
Operating expenses as a percent of revenues were 44% in 2017, compared to 42% in 2016. The increase as a percent of revenues reflects hiring of services personnel to support the growth in services revenue.
Global Segment
Revenues increased 3% to $567 million in 2017, from $551 million in 2016. The growth in revenues includes a $13 million increase in support and maintenance revenue. Refer to Note (2) of the notes to consolidated financial statements for further information regarding revenues disaggregated by our business models.
Costs of revenue as a percent of revenues were 17% in 2017, compared to 19% in 2016. The lower costs of revenue as a percent of revenues was primarily driven by a lower mix of technology resale, which carries a higher cost of revenue.
Operating expenses as a percent of revenues were 47% in 2017, compared to 45% in 2016. The increase as a percent of revenues is primarily due to an increase in non-personnel expenses.
Other, net
These expenses decreased 2% from 2016 to 2017. The decrease was primarily due to 2016 containing $36 million of expenses associated with a voluntary separation plan. Refer to Note (1) of the notes to consolidated financial statements for further detail regarding our 2016 voluntary separation plan.
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 in recent years, our share repurchase and dividend programs. We have agreed to various customary covenants and agreements in the Merger Agreement, including with respect to the operation of our business prior to the closing of the transaction, such as restrictions on making certain acquisitions and divestitures, entering into certain contracts, incurring certain indebtedness and making certain capital expenditures, paying dividends in excess of our regular quarterly dividend, issuing or repurchasing stock and taking other specified actions.We do not believe these restrictions will prevent us from meeting our debt service obligations, ongoing costs of operations, working capital needs, or capital expenditure requirements.
Our principal sources of liquidity are our cash, cash equivalents which(which primarily consist of money market funds, time deposits and commercial paper and time deposits with original maturities of less than 90 days,days), short-term investments, borrowings under our Credit Agreement and short-term investments.other sources of debt financing. At the end of 2018,2021, we had cash and cash equivalents of $374$590 million and short-term investments of $401$253 million, as compared to cash and cash equivalents of $371$616 million and short-term investments of $435$442 million at the end of 2017.2020.
We maintainhave entered into a $100 million multi-yearCredit Agreement with a syndicate of lenders that provides for an unsecured $1.225 billion revolving credit loan facility, which expires in October 2020. The facility provides an unsecured revolving line of credit for working capital purposes, along with a letter of credit facility.facility up to $200 million (which is a sub-facility of the $1.225 billion revolving credit loan facility). We have the ability to increase the maximum capacity to $200 million$1.725 billion at any time during the facility'sCredit Agreement's term, subject to lender participation. Asparticipation and the satisfaction of specified conditions. The Credit Agreement expires in December 2026, with two one-year extension options that are subject to lender approval. At the end of 2018,2021, we had no outstanding borrowings under this facility; however, we had $30 million of outstandingrevolving credit loans and letters of credit of $600 million and $18 million, respectively; which reduced our available borrowing capacity to $70 million. Refer$607 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 (9)(11) of the notes to consolidated financial statementsNotes for additional information regarding our credit facility.further information.
We believe that our present cash position, together with cash generated from operations, short-term investments and, if necessary,as appropriate, remaining availability under our available lineCredit Agreement and other sources of credit,debt financing, will be sufficient to meet anticipated cash requirements during 2019.for the next 12 months.
The following table summarizes our cash flows in 2018, 20172021 and 2016:2020:
| | | | | | | | | | | |
| For the Years Ended |
(In thousands) | 2021 | | 2020 |
| | | |
Cash flows from operating activities | $ | 1,771,684 | | | $ | 1,436,705 | |
Cash flows from investing activities | (729,834) | | | (801,237) | |
Cash flows from financing activities | (1,054,845) | | | (461,497) | |
Effect of exchange rate changes on cash | (12,773) | | | (199) | |
Total change in cash and cash equivalents | (25,768) | | | 173,772 | |
| | | |
Cash and cash equivalents at beginning of period | 615,615 | | | 441,843 | |
| | | |
Cash and cash equivalents at end of period | $ | 589,847 | | | $ | 615,615 | |
| | | |
Free cash flow (non-GAAP) | $ | 1,173,964 | | | $ | 857,447 | |
|
| | | | | | | | | | | |
| For the Years Ended |
(In thousands) | 2018 | | 2017 | | 2016 |
| | | | | |
Cash flows from operating activities | $ | 1,454,009 |
| | $ | 1,307,675 |
| | $ | 1,245,637 |
|
Cash flows from investing activities | (828,937 | ) | | (1,005,851 | ) | | (789,774 | ) |
Cash flows from financing activities | (609,787 | ) | | (110,984 | ) | | (676,677 | ) |
Effect of exchange rate changes on cash | (12,082 | ) | | 9,222 |
| | (10,447 | ) |
Total change in cash and cash equivalents | 3,203 |
| | 200,062 |
| | (231,261 | ) |
| | | | | |
Cash and cash equivalents at beginning of period | 370,923 |
| | 170,861 |
| | 402,122 |
|
| | | | | |
Cash and cash equivalents at end of period | $ | 374,126 |
| | $ | 370,923 |
| | $ | 170,861 |
|
| | | | | |
Free cash flow (non-GAAP) | $ | 733,388 |
| | $ | 671,444 |
| | $ | 492,514 |
|
Cash from Operating Activities
| | | | | | | | | | | |
| For the Years Ended |
(In thousands) | 2021 | | 2020 |
| | | |
Cash collections from clients | $ | 6,128,808 | | | $ | 5,704,730 | |
Cash paid to employees and suppliers and other | (4,185,012) | | | (4,082,664) | |
Cash paid for interest | (46,559) | | | (36,302) | |
Cash paid for taxes, net of refunds | (125,553) | | | (149,059) | |
| | | |
Total cash from operations | $ | 1,771,684 | | | $ | 1,436,705 | |
| | | |
|
| | | | | | | | | | | |
| For the Years Ended |
(In thousands) | 2018 | | 2017 | | 2016 |
| | | | | |
Cash collections from clients | $ | 5,486,654 |
| | $ | 5,444,531 |
| | $ | 5,184,252 |
|
Cash paid to employees and suppliers and other | (4,032,498 | ) | | (3,932,398 | ) | | (3,665,592 | ) |
Cash paid for interest | (15,707 | ) | | (17,914 | ) | | (18,484 | ) |
Cash paid for taxes, net of refunds | 15,560 |
| | (186,544 | ) | | (254,539 | ) |
| | | | | |
Total cash from operations | $ | 1,454,009 |
| | $ | 1,307,675 |
| | $ | 1,245,637 |
|
Cash flowflows from operations increased $146$335 million in 20182021 compared to 2017,2020, due primarily to net refunds of taxes. Cash flow from operations increased $62 million in 2017 compared to 2016, due primarily to an increase in cash impacting earnings, partially offset by an increase in cash used to fund working capital requirements. During 2018, 2017 and 2016, we received total client cash collections of $5.49 billion, $5.44 billion and $5.18 billion, respectively.client receivables. Days sales outstanding was 7973 days in the fourth quarter of 2018,2021, compared to 8276 days for both the 2018 third quarter of 2021 and 72 daysfourth quarter of 2020. Cash flows from operations in 2021 and 2020 include the impact of certain federal payroll taxes related to pay cycles in the second through fourth quarters of 2020, for which we deferred remittance to the 2017 fourth quarter. Revenues providedtaxing authority as permitted under supportthe Coronavirus Aid, Relief, and maintenance agreements represent recurring cash flows.Economic Security Act (the "CARES Act"). We remitted $38 million of such amounts to the taxing authority in December 2021 and expect these revenues to continue to growremit $38 million of remaining deferrals in December 2022, as permitted by the base of installed systems grows.CARES Act.
Cash from Investing Activities
| | | | | | | | | | | |
| For the Years Ended |
(In thousands) | 2021 | | 2020 |
| | | |
Capital purchases | $ | (289,694) | | | $ | (283,981) | |
Capitalized software development costs | (308,026) | | | (295,277) | |
Sales and maturities of investments, net of purchases | 243,602 | | | (363,387) | |
Purchases of other intangibles | (29,561) | | | (38,243) | |
Acquisition of businesses, net of cash acquired | (355,504) | | | (49,820) | |
Sale of businesses | — | | | 229,471 | |
Disposition of assets held for sale | 9,349 | | | — | |
| | | |
Total cash flows from investing activities | $ | (729,834) | | | $ | (801,237) | |
|
| | | | | | | | | | | |
| For the Years Ended |
(In thousands) | 2018 | | 2017 | | 2016 |
| | | | | |
Capital purchases | $ | (446,928 | ) | | $ | (362,083 | ) | | $ | (459,427 | ) |
Capitalized software development costs | (273,693 | ) | | (274,148 | ) | | (293,696 | ) |
Purchases of investments, net of sales and maturities | (71,497 | ) | | (339,974 | ) | | (18,179 | ) |
Purchase of other intangibles | (36,819 | ) | | (29,646 | ) | | (18,472 | ) |
| | | | | |
Total cash flows from investing activities | $ | (828,937 | ) | | $ | (1,005,851 | ) | | $ | (789,774 | ) |
Cash flows from investing activities consist primarily of capital spending, investment, acquisition, and short-term investmentdivestiture activities.
Our capital spending in 20182021 was driven by capitalized equipment purchases primarily to support growth in our managed services business investments in a cloud infrastructure to support cloud-based solutions, building and improvement purchases to support our facilities requirements and capitalized spending to support our ongoing software development initiatives. Capital purchases in 2018 were higher than 2017 levels, primarily driven by an increase in spending to support our facilities requirements, including commencementIn 2022, we expect the aggregate of construction on the next two phases of our Innovations Campus (office space development located in Kansas City, Missouri); along with increased capital purchases and capitalized software development costs to support the growth in our managed services business. Total capital spending is expected to increase more than $75 million in 2019, primarily driven by spending to support our facilities requirements, including the continued construction of our Innovations Campus.approximate $686 million.
Short-term investment activity historically consists of the investment of cash generated by our business in excess of what is necessary to fund operations. Our 2016Both the 2021 and 20182020 activity is impacted by higher levels of excess cash primarily being used to repurchase sharesexecute 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.
Investment activity also includes the sale of one of our common stock, as discussed further below. Additionally, on July 27, 2018 we acquired a minority interestequity investments in Essence Group Holdings CorporationAugust 2020 for cash considerationproceeds of $266$90 million. Refer to Note (4) of the notes to consolidated financial statementsNotes for further information regarding this investment.
In 2021, we paid $371 million of purchase price consideration in connection with our acquisition of Kantar Health. In 2020, we completed certain business acquisitions of entities providing solutions to clients in the healthcare industry. Refer to Note (8) of the Notes for further information regarding our business acquisitions. We expect to continue seeking and completing strategic business acquisitions, or investments, and relationships that are complementary to our business.
Cash from Financing Activities
On July 1, 2020, we sold certain of our business operations, primarily conducted in Germany and Spain, for cash proceeds of $224 million. We also sold certain of our revenue cycle outsourcing business operations on August 3, 2020.
|
| | | | | | | | | | | |
| For the Years Ended |
(In thousands) | 2018 | | 2017 | | 2016 |
| | | | | |
Repayment of long-term debt | $ | (75,000 | ) | | $ | — |
| | $ | — |
|
Cash from option exercises (net of taxes paid in connection with shares surrendered by associates) | 81,476 |
| | 65,121 |
| | 25,672 |
|
Treasury stock purchases | (623,127 | ) | | (173,434 | ) | | (700,275 | ) |
Contingent consideration payments for acquisition of businesses | (1,691 | ) | | (2,671 | ) | | (2,074 | ) |
Other | 8,555 |
| | — |
| | — |
|
| | | | | |
Total cash flows from financing activities | $ | (609,787 | ) | | $ | (110,984 | ) | | $ | (676,677 | ) |
In March 2018, we repaid our $75 million floating rate Series 2015-C Notes due February 15, 2022. Refer to Note (9) of the notes to consolidated financial statementsNotes for further information regarding these sales. We expect to continue to evaluate and complete divestiture transactions that are strategic to our outstanding indebtedness.operational improvement initiatives discussed above.
We received proceeds of $9 million in connection with the sale of our Oaks Campus in 2021. 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 (5) of the Notes for further information regarding real estate held for sale.
Cash from Financing Activities
| | | | | | | | | | | |
| For the Years 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) | 232,241 | | | 229,933 | |
Treasury stock purchases | (1,500,000) | | | (756,950) | |
Dividends paid | (267,478) | | | (221,461) | |
Other | (19,608) | | | (10,519) | |
| | | |
Total cash flows from financing activities | $ | (1,054,845) | | | $ | (461,497) | |
In March 2021, we issued $100 million aggregate principal amount of Series 2021-A Notes and $400 million aggregate principal amount of Series 2021-B Notes. In March 2020, we issued $300 million aggregate principal amount of Series 2020-A notes. Refer to Note (11) of the Notes for further information regarding these, as well as our other debt obligations. We do not expect to incur additional indebtedness in the near-term.
On February 15, 2022, we repaid our $225 million of Series 2015-A Notes due February 15, 2022, using cash on hand.
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 in 20192022 based on the number of exercisable options at the end of 20182021 and our current stock price. Refer to Note (14)(16) of the notes to consolidated financial statementsNotes for additional information regarding our stock option and equity plans.
During 2018, 20172021 and 2016,2020, we repurchased 11.220.0 million and 10.6 million shares of our common stock for total consideration of $644 million, 2.7 million shares of our common stock for total consideration of $173 million,$1.50 billion and 13.7 million shares of our common stock for total consideration of $700$757 million, respectively. At the endAs of 2018, $283 millionDecember 31, 2021, $3.18 billion remains available for repurchase under our currentshare repurchase program. We may continuedo not expect to repurchase additional shares under this program in 2019, which will be dependent on a number of factors, including the price of our common stock. Although we may continue to repurchasenear-term as the Merger Agreement prohibits us from repurchasing additional shares there is no assurance that we will repurchase up to the full amount remaining under the program.without Parent's consent. Refer to Note (14)(16) of the notes to consolidated financial statementsNotes for further information regarding our share repurchase program.programs.
Refer to Note (16) of the Notes for a summary of cash dividend activity in 2021 and 2020. Subject to declaration by theour Board of Directors, the Company planswe expect to initiate acontinue paying quarterly cash dividenddividends as a part of $0.15 per share, with the first payment expected in the third quarter of 2019. our current capital allocation strategy. Future dividends will be subject to the determination, declaration and discretion of theour Board of Directors and compliance with our covenants under our credit facility. outstanding debt agreements. The Company anticipates that thesource of funds for such dividends may include cash used for future dividendsgenerated from operations, liquidation of investment holdings and share repurchases will come primarily from cash from operations.other dispositions of assets.
Free Cash Flow (Non-GAAP)
| | | | | | | | | | | | | |
| | For the Years Ended |
(In thousands) | | 2021 | | | 2020 |
| | | | | |
Cash flows from operating activities (GAAP) | | $ | 1,771,684 | | | | $ | 1,436,705 | |
Capital purchases | | (289,694) | | | | (283,981) | |
Capitalized software development costs | | (308,026) | | | | (295,277) | |
| | | | | |
Free cash flow (non-GAAP) | | $ | 1,173,964 | | | | $ | 857,447 | |
|
| | | | | | | | | | | |
| For the Years Ended |
(In thousands) | 2018 | | 2017 | | 2016 |
| | | | | |
Cash flows from operating activities (GAAP) | $ | 1,454,009 |
| | $ | 1,307,675 |
| | $ | 1,245,637 |
|
Capital purchases | (446,928 | ) | | (362,083 | ) | | (459,427 | ) |
Capitalized software development costs | (273,693 | ) | | (274,148 | ) | | (293,696 | ) |
| | | | | |
Free cash flow (non-GAAP) | $ | 733,388 |
| | $ | 671,444 |
| | $ | 492,514 |
|
Free cash flow increased $62$317 million in 2018,2021, compared to 2017. This increase was2020, primarily due to an increase inincreased cash from operations, partially offset by increased capital purchases. Free cash flow increased $179 million in 2017, compared to 2016. This increase was primarily due to an increase in cash from operations, along with reduced capital purchases.
operations. 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.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.
Contractual Obligations, Commitments and Off Balance Sheet Arrangements
The following table represents a summary of our contractual obligations and commercial commitments at the end of 2018,2021, except short-term purchase order commitments arising in the ordinary course of business.
| | | Payments Due by Period | | Payments Due by Period |
(In thousands) | 2019 | | 2020 | | 2021 | | 2022 | | 2023 | | 2024 and thereafter | | Total | (In thousands) | 2022 | | 2023 | | 2024 | | 2025 | | 2026 | | 2027 and thereafter | | Total |
| | | | | | | | | | | | | | | |
Balance sheet obligations(a): | | | | | | | | | | | | |
| Balance sheet obligations(a): | |
Long-term debt obligations | $ | — |
| | $ | 2,500 |
| | $ | — |
| | $ | 226,100 |
| | $ | 1,700 |
| | $ | 208,862 |
| | $ | 439,162 |
| Long-term debt obligations | $ | 225,000 | | | $ | — | | | $ | — | | | $ | 211,662 | | | $ | 700,000 | | | $ | 700,000 | | | $ | 1,836,662 | |
Interest on long-term debt obligations | 14,315 |
| | 14,315 |
| | 14,315 |
| | 10,738 |
| | 7,160 |
| | 10,740 |
| | 71,583 |
| Interest on long-term debt obligations | 39,193 | | | 41,265 | | | 42,412 | | | 38,718 | | | 34,388 | | | 72,870 | | | 268,846 | |
Capital lease obligations | 4,914 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 4,914 |
| |
Interest on capital lease obligations | 143 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 143 |
| |
| | | | | | | | | | | | | | |
Other obligations: | | | | | | | | | | | | |
| Other obligations: | |
Operating lease obligations | 29,739 |
| | 27,669 |
| | 22,904 |
| | 17,240 |
| | 10,166 |
| | 17,743 |
| | 125,461 |
| Operating lease obligations | 27,694 | | | 20,826 | | | 13,824 | | | 8,884 | | | 5,978 | | | 32,031 | | | 109,237 | |
Purchase obligations | 138,851 |
| | 102,773 |
| | 24,746 |
| | 15,517 |
| | 15,486 |
| | 26,924 |
| | 324,297 |
| Purchase obligations | 54,308 | | | 54,308 | | | 40,933 | | | 45,819 | | | 52,054 | | | 368,882 | | | 616,304 | |
| | | | | | | | | | | | | | | |
Total | $ | 187,962 |
| | $ | 147,257 |
| | $ | 61,965 |
| | $ | 269,595 |
| | $ | 34,512 |
| | $ | 264,269 |
| | $ | 965,560 |
| Total | $ | 346,195 | | | $ | 116,399 | | | $ | 97,169 | | | $ | 305,083 | | | $ | 792,420 | | | $ | 1,173,783 | | | $ | 2,831,049 | |
(a) At the end of 2018,2021, liabilities for unrecognized tax benefits were $19$34 million.
We have no off balance sheet arrangementsIf the Merger Agreement is terminated under certain specified circumstances, we will be required to pay to Parent a termination fee of $950 million.
Off-Balance Sheet Arrangements
Refer to Note (11) of the Notes for information regarding our interest rate swap agreement, which is accounted for as defineda cash flow hedge in Regulation S-K.accordance with ASC Topic 815, Derivatives and Hedging. LIBOR is scheduled to be phased out beginning in 2022. When LIBOR ceases to exist, references to LIBOR in our Credit Agreement and interest rate swap agreement will be replaced with a different benchmark rate and a spread adjustment in accordance with the terms of those agreements. The effects of inflation onnew benchmark rate together with the spread adjustment may not be as favorable to us as those in effect prior to any LIBOR phase-out. If the replacement benchmark rates and spread adjustment in the interest rate swap and the Credit Agreement are not identical, our business during 2018, 2017 and 2016 were not significant.hedge could be less effective.
Recent Accounting Pronouncements
Refer to Note (1) of the notes to consolidated financial statementsNotes for information regarding recently issued accounting pronouncements.
Critical Accounting PoliciesEstimates
We believe that there are several accounting policies that are critical to understanding our historical and future performance, as these policies affect the reported amount of revenue and other significant areas involving our judgments and estimates. These significant accounting policies relate to revenue recognition, software development, and income taxes. These accounting policies and our procedures related to these accounting policies are described in detail below
and under specific areas within this MD&A. In addition, Note (1)(2), Note (2)(7), and Note (12)(14) of the notes to consolidated financial statementsNotes expands upon discussion of our accounting policies for these areas.
Revenue Recognition
In
We recognize revenue in accordance with the first quarter of 2018, we adopted Accounting Standards Update ("ASU")guidance in ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09, as amended, replaced most existing revenue recognition guidance in U.S. GAAP. This new guidance, which requires a significantan entity to recognize the amount of judgments and estimates in implementing itsrevenue to which it expects to be entitled for the transfer of promised goods or services to customers. The standard contains a five-step process to be followed in determining the amount and timing of revenue recognition and related disclosures.recognition. Refer to Note (2) of the notes to consolidated financial statementsNotes for further discussion regarding significant judgments involved in our application of ASU 2014-09.
Software Development Costs
Costs incurred internally in creating computer software solutions and enhancements to those solutions are expensed until completion of a detailed program design, which is when we determine that technological feasibility has been established. Thereafter, all software development costs are capitalized until such time as the software solutions and enhancements are available for general release, and the capitalized costs subsequently are reported at the lower of amortized cost or net realizable value.
Net realizable value is computed as the estimated gross future revenues from each software solution less the amount of estimated future costs of completing and disposing of that product. Because the development of projected net future revenues related to our software solutions used in our net realizable value computation is based on estimates, a significant reduction
in our future revenues could impact the recovery of our capitalized software development costs. If we missed our estimates of net future revenues by 10%, the amount of our capitalized software development costs would not be impaired.
Capitalized costs are amortized based on current and expected net future revenue for each software solution with minimum annual amortization equal to the straight-line amortization over the estimated economic life of the software solution. We are amortizing capitalized costs over five years. The five-year period over which capitalized software development costs are amortized is an estimate based upon our forecast of a reasonable useful life for the capitalized costs. Historically, use of our software programs by our clients has exceeded five years and is capable of being used a decade or more.
We expect that major software information systems companies, large information technology consulting service providers and systems integrators and others specializing in the health carehealthcare industry may offer competitive products or services. The pace of change in the HCIT market is rapid and there are frequent new product introductions, product enhancements and evolving industry standards and requirements. As a result, the capitalized software solutions may become less valuable or obsolete and could be subject to impairment.
Income Taxes
We make a number of assumptions and estimates in determining the appropriate amount of expense to record for income taxes. These assumptions and estimates consider the taxing jurisdictions in which we operate as well as current tax regulations. Accruals are established for estimates of tax effects for certain transactions, business structures and future projected profitability of our businesses based on our interpretation of existing facts and circumstances. If these assumptions and estimates were to change as a result of new evidence or changes in circumstances, the change in estimate could result in a material adjustment to the consolidated financial statements.
We have discussed the development and selection of these critical accounting estimates with the Audit Committee of our Board of Directors and the Audit Committee has reviewed our disclosure contained herein.
Forward-Looking Statements
Statements made in this report, the annual report to shareholders of which this report is made a part, other reports and proxy statements filed with the SEC, communications to shareholders, press releases and oral statements made by representatives of the Company that are not historical in nature, or that state the Company's or management's intentions, hopes, beliefs, expectations, plans, goals or predictions of future events or performance, may constitute "forward-looking statements" within the meaning of Private Securities Litigation Reform Act of 1995. Forward-looking statements can often be identified by the use of forward-looking terminology, such as "could," "can," "should," "will," "intended," "continue," "believe," "may," "expect," "hope," "anticipate," "goal," "positioned", "forecast," "plan," "guidance," "opportunity,"
"prospects" or "estimate" or the negative of these words, variations thereof or similar expressions. Forward-looking statements are not guarantees of future performance or results. They involve risks, uncertainties and assumptions. It is important to note that any such performance and actual results, financial condition or business, could differ materially from those expressed in such forward-looking statements. Significant factors that could cause or contribute to such differences include, but are not limited to, those discussed in this Item 1A. Risk Factors and elsewhere herein or in other reports filed with the SEC. Other unforeseen factors not identified herein could also have such an effect. Any forward-looking statements made in this report speak only as of the date of this report. 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, financial condition or business over time.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
We are exposed to interest rate risk, primarily changes in LIBOR, related to outstanding revolving credit loans under our Credit Agreement. As of December 31, 2021, the interest rate on revolving credit loans outstanding was 0.90% based on LIBOR plus the applicable spread. In order to manage this exposure, we have entered into an interest rate swap agreement, to hedge the variability of cash flows associated with such interest obligations through May 2024. The interest rate swap effectively fixes the interest rate on the hedged indebtedness under our Credit Agreement at 3.06%. Refer to Note (11) of the Notes for further information regarding outstanding indebtedness and our interest rate swap agreement.
We have global operations, and as a result, we are exposed to market risk related to foreign currency exchange rate fluctuations. Foreign currency fluctuations through December 29, 201831, 2021 have not had a material impact on our financial position or operating results. We currently do not use currency hedging instruments, though we actively monitor our exposure to foreign currency fluctuations and may use hedging transactions in the future if management deems it appropriate. We believe most of our global operations are naturally hedged for foreign currency risk as our foreign subsidiaries invoice their clients and satisfy their obligations primarily in their local currencies. There can be no guarantee that the impact of foreign currency fluctuations in the future will not have a material impact on our financial position or operating results.
Item 8. Financial Statements and Supplementary Data.
The Financial Statements and notes to consolidated financial statements required by this Item are submitted as a separate part of this report. See Note (18) to the consolidated financial statements for supplementary financial information.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
N/A
Item 9A. Controls and Procedures.
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a) | Evaluation of Disclosure Controls and Procedures. |
Our management is responsible for maintaining disclosure controlsa)Evaluation of Disclosure Controls and procedures (as defined in the Exchange Act Rules 13a-15(e) and 15d-15(e)). 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 the Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Annual Reportannual report (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 our reports that 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) | Management's Report on Internal Control over Financial Reporting. |
Our management isb)Management's Report on Internal Control over Financial Reporting.
We are responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our managementWe assessed the effectiveness of our internal control over financial reporting as of December 29, 2018.31, 2021. In making this assessment, our managementwe used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in its Internal Control-Integrated Framework (2013).
In accordance with guidance issued by the SEC, companies are permitted to exclude acquisitions from their final assessment of internal control over financial reporting for the first fiscal year in which the acquisition occurred. Our assessment of internal control over financial reporting excluded the internal control activities of Kantar Health, which we acquired on April 1, 2021 (as discussed in Note (8) of the Notes), which accounted for $148 million of consolidated revenues and $104 million of consolidated total assets as of and for the year ended December 31, 2021.
Based on thisthe results of our assessment, our management haswe have concluded that, as of December 29, 2018,31, 2021, our internal control over financial reporting was effective based on these criteria. OurKPMG, LLP, our independent registered public accounting firm, that audited the consolidated financial statements included in this annual report has issued an audit report on the effectiveness of our internal control over financial reporting, which is included herein under "Report of Independent Registered Public Accounting Firm".
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c) | Changes in Internal Control over Financial Reporting. |
During the fourth fiscal quarter ended December 29, 2018, progress continued on a plan that calls for modifications and enhancements to our internal controlsc)Changes in Internal Control over financial reporting in relation to our upcoming adoption of the new lease standard effective in the first quarter of 2019. Such plan resulted in changes to certain processes and procedures during the quarter. Specifically, we implemented/modified internal controls to address:Financial Reporting.
•Monitoring of the adoption process; and
The gathering of information and evaluation of analysis used in the development of disclosures required prior to the new standard's adoption.
As we continue the implementation process, we expect that there will be additional changes in internal controls over financial reporting.
Except as disclosed above, thereThere were no other changes in our internal controls over financial reporting during the fiscal quarter ended December 29, 2018,31, 2021, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
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d) | Limitations on Controls. |
Our management, including our CEO and CFO, have concluded that our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives and are effective at that reasonable assurance level. However, our managementd)Limitations on Controls.
We 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.
Item 9B. Other Information.
N/ANone.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Not applicable.
PART III.
Item 10. Directors, Executive Officers and Corporate Governance.
The information under "Information Concerning Directors and Nominees," "Meetings of the Board and Committees," "Section 16(a) Beneficial Ownership Reporting Compliance," "Corporate Governance: Code of Business ConductGovernance and Ethics,Board Matters," "Consideration of Director Nominees," and "Committees of the Board: Audit Committee" and "Certain Transactions" as it relates to family relationships as set forth in the Company's definitive proxy statement related to its 20192022 annual meeting of stockholders (the "Proxy Statement"), which will be filed with the SEC not later than 120 days after the end of the Company's fiscal year pursuant to Regulation 14A, is incorporated herein by reference.
There have been no material changes to the procedures by which security holders may recommend nominees to our Board of Directors since our last disclosure thereof in our 20182021 proxy statement.
The information required by this Item 10 regarding our Executive Officers is set forth under the caption "Executive Officers of the Registrant""Information about our Executive Officers" in Part I above.
Delinquent Section 16(a) Reports
To the Company's knowledge, no director, executive officer or other greater than 10% beneficial owner of our Common Stock failed to file on a timely basis reports required by Section 16(a) of the Exchange Act, with the exception of an inadvertent failure to file a Form 4 for Gerald Bisbee, Jr. concerning his acquisition of 137 shares on July 24, 2019 from the reinvestment of dividends paid on the Company's common stock at that time.
Item 11. Executive Compensation.
The information under "Committees of the Board: Compensation Committee," "Director Compensation," "2018"2021 Director Compensation Table," "Compensation Committee Report," "Compensation Discussion and Analysis," "Summary Compensation Table," "2018"2021 Grants of Plan-Based Awards," "Outstanding Equity Awards at 20182021 Fiscal Year-End," "2018"2021 Option Exercises and Stock Vested," "Potential Payments Under Termination or Change in Control," "Pay Ratio"Ratio," "Board Leadership Structure and Role in Risk Oversight: Relationship between Compensation and Risk Management" and "Compensation Committee Interlocks and Insider Participation" set forth in the Proxy Statement, which will be filed with the SEC not later than 120 days after the end of the Company's fiscal year pursuant to Regulation 14A, is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table provides information about our common stock that may be issued under our equity compensation plans as of December 29, 2018:31, 2021:
| | | | | | | | | | | | | | | | | |
(In thousands, except per share data) | Securities to be issued upon exercise of outstanding options and rights (1) | | Weighted average exercise price per share (2) | | Securities available for future issuance(3) |
Plan category | | |
| | | | | |
Equity compensation plans approved by security holders (4) | 8,314 | | | $ | 59.61 | | | 12,497 | |
Equity compensation plans not approved by security holders | — | | | — | | | — | |
| | | | | |
Total | 8,314 | | | | | 12,497 | |
|
| | | | | | | | | |
(In thousands, except per share data) | Securities to be issued upon exercise of outstanding options and rights (1) | | Weighted average exercise price per share (2) | | Securities available for future issuance(3) |
Plan category | | |
| | | | | |
Equity compensation plans approved by security holders (4) | 22,674 |
| | $ | 52.31 |
| | 7,400 |
|
Equity compensation plans not approved by security holders | — |
| | — |
| | — |
|
| | | | | |
Total | 22,674 |
| | | | 7,400 |
|
(1) Includes grants of stock options, time-based and performance-based restricted stock and restricted stock units.
(2) Includes weighted-average exercise price of outstanding stock options only.
(3) Excludes securities to be issued upon exercise of outstanding options and rights.
(4) Includes the Stock Option Plan D, Stock Option Plan E 2001 Long-Term Incentive Plan F, 2004 Long-Term Incentive Plan G and 2011 Omnibus Equity Incentive Plan. All new grants are made under the 2011 Omnibus Equity Incentive Plan, as the previous plans are no longer active.
The information under "Security Ownership of Certain Beneficial Owners and Management" set forth in the Proxy Statement, which will be filed with the SEC not later than 120 days after the end of the Company's fiscal year pursuant to Regulation 14A, is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information under "Certain Transactions"Transactions," "Director Independence" and "Meetings"Committees of the Board and Committees"Board" set forth in the Proxy Statement, which will be filed with the SEC not later than 120 days after the end of the Company's fiscal year pursuant to Regulation 14A, is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services.
Our independent registered public accounting firm is KPMG LLP, Kansas City, Missouri, Auditor Firm ID: 185.
The information under "Relationship with Independent Registered Public Accounting Firm""Audit Related Matters" set forth in the Proxy Statement, which will be filed with the SEC not later than 120 days after the end of the Company's fiscal year pursuant to Regulation 14A, is incorporated herein by reference.
PART IV.
Item 15. Exhibits, Financial Statement Schedules.
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a) | Financial Statements and Exhibits |
a)Financial Statements and Exhibits
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(1) | Consolidated Financial Statements: |
(i)Consolidated Financial Statements:
| |
(2) | Financial Statement Schedules |
(ii)Financial Statement Schedules
All schedules are omitted because they are not required or the required information is shown in the financial statements or notes thereto.
b)Exhibits
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Incorporated by Reference | | |
Exhibit Number | | Exhibit Description | | Form | | Exhibit(s) | | Filing Date | | Filed Herewith |
| | | | | | | | | | |
2.1 | | | | 8-K | | 2.1 | | 12/22/2021 | | |
| | | | | | | | | | |
3.1 | | | | 10-K | | 3(a) | | 2/11/2015 | | |
| | | | | | | | | | |
3.2 | | | | 8-K | | 3.1 | | 5/28/2020 | | |
| | | | | | | | | | |
3.3 | | | | 8-K | | 3.2 | | 5/28/2020 | | |
| | | | | | | | | | |
4.1 | | | | 10-K | | 4(a) | | 2/28/2007 | | |
| | | | | | | | | | |
4.2 | | | | 10-K | | 4.2 | | 2/19/2021 | | |
| | | | | | | | | | |
10.1* | | | | 8-K | | 99.1 | | 6/3/2010
| | |
| | | | | | | | | | |
10.2* | | | | 10-K | | 10.3 | | 2/12/2018 | | |
| | | | | | | | | | |
10.3* | | | | 10-Q | | 10.2 | | 5/3/2018 | | |
| | | | | | | | | | |
10.4* | | | | 10-Q | | 10.1 | | 7/30/2021 | | |
| | | | | | | | | | |
10.5* | | | | 10-Q | | 10.1 | | 10/26/2018 | | |
| | | | | | | | | | |
10.6* | | | | 10-K | | 10.6 | | 2/19/2021 | | |
| | | | | | | | | | |
10.7* | | | | 10-K | | 10.7 | | 2/19/2021 | | |
| | | | | | | | | | |
10.8* | | | | 8-K | | 10.2 | | 1/19/2022 | | |
| | | | | | | | | | |
10.9* | | | | 10-K | | 10.8 | | 2/19/2021 | | |
| | | | | | | | | | |
10.10* | | | | 8-K | | 10.4 | | 9/11/2017 | | |
| | | | | | | | | | |
10.11* | | | | 10-K | | 10.13 | | 2/8/2019 | | |
| | | | | | | | | | |
10.12* | | | | 10-K | | 10.11 | | 2/19/2021 | | |
| | | | | | | | | | |
10.13* | | | | 10-K | | 10.13 | | 2/10/2020 | | |
| | | | | | | | | | |
10.14* | | | | 10-Q | | 10.3 | | 10/29/2021 | | |
| | | | | | | | | | |
10.15* | | | | 10-Q | | 10.3 | | 5/05/2021 | | |
| | | | | | | | | | |
10.16* | | | | 10-Q | | 10.2 | | 5/05/2021 | | |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
b)10.17* | Exhibits | | | 10-Q | | 10.1 | | 10/29/2021 | | |
| | | | | | | | | | |
10.18* | | | | 10-Q | | 10.2 | | 10/29/2021 | | |
| | | | | | | | | | |
10.19* | | | | 8-K | | 10.1 | | 1/19/2022 | | |
| | | | | | | | | | |
10.20* | | | | SC 14D-9 | | (e)(16) | | 1/19/2022 | | |
| | | | | | | | | | |
10.21* | | | | | | | | | | X |
| | | | | | | | | | |
10.22* | | | | SC 14D-9 | | (e)(18) | | 1/19/2022 | | |
| | | | | | | | | | |
10.23* | | | | | | | | | | X |
| | | | | | | | | | |
10.24* | | | | SC 14D-9 | | (e)(17) | | 1/19/2022 | | |
| | | | | | | | | | |
10.25* | | | | SC 14D-9 | | (e)(19) | | 1/19/2022 | | |
| | | | | | | | | | |
10.26* | | | | 8-K | | 10.2 | | 5/27/2015 | | |
| | | | | | | | | | |
10.27* | | | | 8-K | | 10.1 | | 6/3/2019 | | |
| | | | | | | | | | |
10.28* | | | | 10-Q | | 10.2 | | 5/6/2016 | | |
| | | | | | | | | | |
10.29* | | | | 10-Q | | 10.5 | | 4/26/2019 | | |
| | | | | | | | | | |
10.30* | | | | 10-K | | 10(u) | | 2/8/2013
| | |
| | | | | | | | | | |
10.31* | | | | 10-Q | | 10.3 | | 5/6/2016 | | |
| | | | | | | | | | |
10.32* | | | | 10-Q | | 10.4 | | 10/27/2017 | | |
| | | | | | | | | | |
10.33* | | | | 10-Q | | 10.4 | | 4/26/2019 | | |
| | | | | | | | | | |
10.34* | | | | 10-Q | | 10.4 | | 5/6/2016 | | |
| | | | | | | | | | |
10.35* | | | | 10-Q | | 10.3 | | 10/27/2017 | | |
| | | | | | | | | | |
10.36* | | | | 10-Q | | 10.3 | | 4/26/2019 | | |
| | | | | | | | | | |
10.37* | | | | 10-K | | 10(v) | | 2/8/2013
| | |
| | | | | | | | | | |
10.38* | | | | 10-Q | | 10.5 | | 5/6/2016 | | |
| | | | | | | | | | |
10.39* | | | | 10-Q | | 10.2 | | 8/3/2016 | | |
| | | | | | | | | | |
10.40* | | | | 10-Q | | 10.2 | | 10/27/2017 | | |
| | | | | | | | | | |
10.41* | | | | 10-Q | | 10.2 | | 4/28/2017 | | |
|
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| | | | Incorporated by Reference | | |
Exhibit Number | | Exhibit Description | | Form | | Exhibit(s) | | Filing Date SEC File No./Film No. | | Filed Herewith |
| | | | | | | | | | |
3.1 | | | | 10-K | | 3(a) | | 2/11/2015 | | |
| | | | | | | | | | |
3.2 | | | | 8-K | | 3.1 | | 3/6/2018 | | |
| | | | | | | | | | |
4 | | | | 10-K | | 4(a) | | 2/28/2007 000-15386/07658265 | | |
| | | | | | | | | | |
10.1* | | | | 10-K | | 10(a) | | 2/28/2007 000-15386/07658265 | | |
| | | | | | | | | | |
10.2* | | | | 8-K | | 99.1 | | 6/3/2010 000-15386/10875957 | | |
| | | | | | | | | | |
10.3* | | | | 10-K | | 10.3 | | 2/12/2018 | | |
| | | | | | | | | | |
10.4* | | | | 10-Q | | 10.2 | | 5/3/2018 | | |
| | | | | | | | | | |
10.5* | | | | 10-Q | | 10.1 | | 10/26/2018 | | |
| | | | | | | | | | |
10.6* | | | | 8-K/A | | 10.1 | | 8/17/2017 | | |
| | | | | | | | | | |
10.7* | | | | 8-K | | 10.1 | | 9/11/2017 | | |
| | | | | | | | | | |
10.8* | | | | 10-Q | | 10.2 | | 10/26/2018 | | |
| | | | | | | | | | |
10.9* | | | | 8-K | | 10.2 | | 9/11/2017 | | |
| | | | | | | | | | |
10.10* | | | | 8-K | | 10.3 | | 9/11/2017 | | |
| | | | | | | | | | |
10.11* | | | | 10-Q | | 10.10 | | 10/27/2017 | | |
| | | | | | | | | | |
10.12* | | | | 8-K | | 10.4 | | 9/11/2017 | | |
| | | | | | | | | | |
10.13* | | | | | | | | | | X |
| | | | | | | | | | |
10.14* | | | | 10-K | | 10(f) | | 3/30/2001 000-15386/1586224 | | |
| | | | | | | | | | |
10.15* | | | | 10-K | | 10(g) | | 3/30/2001 000-15386/1586224 | | |
| | | | | | | | | | |
10.16* | | | | | | | | | | X |
| | | | | | | | | | |
10.17* | | | | DEF 14A | | Annex I | | 4/16/2001 000-15386/1603080 | | |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
10.42* | | | | 10-Q | | 10.5 | | 10/27/2017 | | |
| | | | | | | | | | |
10.43* | | | | 10-Q | | 10.3 | | 4/28/2017 | | |
| | | | | | | | | | |
10.44* | | | | 10-Q | | 10.6 | | 10/27/2017 | | |
| | | | | | | | | | |
10.45* | | | | 10-K | | 10.32 | | 2/19/2021 | | |
| | | | | | | | | | |
10.46* | | | | 10-K | | 10.33 | | 2/19/2021 | | |
| | | | | | | | | | |
10.47* | | | | | | | | | | X |
| | | | | | | | | | |
10.48* | | | | 8-K | | 10.1 | | 3/6/2018 | | |
| | | | | | | | | | |
10.49* | | | | 10-Q | | 10.1 | | 4/29/2020 | | |
| | | | | | | | | | |
10.50* | | | | 10-Q | | 10.1 | | 5/5/2021 | | |
| | | | | | | | | | |
10.51* | | | | 10-K | | 10.38 | | 2/19/2021 | | |
| | | | | | | | | | |
10.52* | | | | | | | | | | X |
| | | | | | | | | | |
10.53 | | | | 8-K | | 10.1 | | 12/5/2014 | | |
| | | | | | | | | | |
10.54 | | Fourth Amended and Restated Credit Agreement, dated December 30, 2021, among Cerner Corporation, U.S. Bank National Association, Bank of America, N.A., PNC Bank, National Association, PNC Capital Markets LLC and Commerce Bank, N.A. | | 8-K | | 10.1 | | 1/4/2022 | | |
| | | | | | | | | | |
10.55 | | | | 8-K | | 10.4 | | 11/12/2019 | | |
| | | | | | | | | | |
10.56 | | | | 8-K | | 10.1 | | 10/9/2020 | | |
| | | | | | | | | | |
21 | | | | | | | | | | X |
| | | | | | | | | | |
23 | | | | | | | | | | X |
| | | | | | | | | | |
31.1 | | | | | | | | | | X |
| | | | | | | | | | |
31.2 | | | | | | | | | | X |
| | | | | | | | | | |
32.1 | | | | | | | | | | X |
| | | | | | | | | | |
32.2 | | | | | | | | | | X |
| | | | | | | | | | |
|
| | | | | | | | | | |
10.18* | | | | 10-K | | 10(v) | | 3/17/2005 000-15386/05688830 | | |
| | | | | | | | | | |
10.19* | | | | 10-Q | | 10(a) | | 11/10/2005 000-15386/051193974 | | |
| | | | | | | | | | |
10.20* | | | | 10-K | | 10(g) | | 2/27/2008 000-15386/08646565 | | |
| | | | | | | | | | |
10.21* | | | | 10-K | | 10(q) | | 2/27/2008 000-15386/08646565 | | |
| | | | | | | | | | |
10.22* | | | | 8-K | | 10.2 | | 5/27/2015 | | |
| | | | | | | | | | |
10.23* | | | | 10-Q | | 10.2 | | 5/6/2016 | | |
| | | | | | | | | | |
10.24* | | | | 10-K | | 10(u) | | 2/8/2013 000-15386/13586825 | | |
| | | | | | | | | | |
10.25* | | | | 10-Q | | 10.3 | | 5/6/2016 | | |
| | | | | | | | | | |
10.26* | | | | 10-Q | | 10.4 | | 10/27/2017 | | |
| | | | | | | | | | |
10.27* | | | | 10-Q | | 10.4 | | 5/6/2016 | | |
| | | | | | | | | | |
10.28* | | | | 10-Q | | 10.3 | | 10/27/2017 | | |
| | | | | | | | | | |
10.29* | | | | 10-K | | 10(v) | | 2/8/2013 000-15386/13586825 | | |
| | | | | | | | | | |
10.30* | | | | 10-Q | | 10.5 | | 5/6/2016 | | |
| | | | | | | | | | |
10.31* | | | | 10-Q | | 10.2 | | 8/3/2016 | | |
| | | | | | | | | | |
10.32* | | | | 10-Q | | 10.2 | | 10/27/2017 | | |
| | | | | | | | | | |
10.33* | | | | 10-Q | | 10.2 | | 4/28/2017 | | |
| | | | | | | | | | |
10.34* | | | | 10-Q | | 10.5 | | 10/27/2017 | | |
| | | | | | | | | | |
10.35* | | | | 10-Q | | 10.3 | | 4/28/2017 | | |
| | | | | | | | | | |
10.36* | | | | 10-Q | | 10.6 | | 10/27/2017 | | |
| | | | | | | | | | |
10.37* | | | | | | | | | | X |
| | | | | | | | | | |
10.38* | | | | 8-K | | 10.1 | | 3/6/2018 | | |
| | | | | | | | | | |
10.39* | | | | 8-K | | 10.2 | | 3/6/2018 | | |
| | | | | | | | | | |
10.40 | | | | 8-K | | 99.1 | | 1/25/2010 000-15386/10543089 | | |
| | | | | | | | | | |
|
| | | | | | | | | | |
10.41 | | | | 10-Q | | 2.1 | | 10/24/2014 000-15386/141172425 | | |
| | | | | | | | | | |
10.42 | | | | 8-K | | 10.1 | | 2/2/2015 | | |
| | | | | | | | | | |
10.43 | | | | 8-K | | 10.1 | | 12/5/2014 000-15386/141269611 | | |
| | | | | | | | | | |
10.44 | | | | 8-K | | 10.1 | | 11/3/2015 | | |
| | | | | | | | | | |
21 | | | | | | | | | | X |
| | | | | | | | | | |
23 | | | | | | | | | | X |
| | | | | | | | | | |
31.1 | | | | | | | | | | X |
| | | | | | | | | | |
31.2 | | | | | | | | | | X |
| | | | | | | | | | |
32.1 | | | | | | | | | | X |
| | | | | | | | | | |
32.2 | | | | | | | | | | X |
| | | | | | | | | | |
101.INS | | XBRL Instance Document | | | | | | | | X |
| | | | | | | | | | |
101.SCH | | XBRL Taxonomy Extension Schema Document | | | | | | | | X |
| | | | | | | | | | |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | | | | | | | | X |
| | | | | | | | | | |
101.LAB | | XBRL Taxonomy Extension Labels Linkbase Document | | | | | | | | X |
| | | | | | | | | | |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document | | | | | | | | X |
| | | | | | | | | | |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | | | | | | | | X |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
101.INS | | 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. | | | | | | | | X |
| | | | | | | | | | |
101.SCH | | Inline XBRL Taxonomy Extension Schema Document | | | | | | | | X |
| | | | | | | | | | |
101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document | | | | | | | | X |
| | | | | | | | | | |
101.LAB | | Inline XBRL Taxonomy Extension Labels Linkbase Document | | | | | | | | X |
| | | | | | | | | | |
101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document | | | | | | | | X |
| | | | | | | | | | |
101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document | | | | | | | | X |
| | | | | | | | | | |
104 | | Cover Page Interactive Data File - formatted in Inline XBRL and contained in Exhibit 101. | | | | | | | | X |
* Indicates a management contract or compensatory plan or arrangement required to be identified by Part IV, Item 15(a)(3).
PLEASE NOTE: Pursuant to the rules and regulations of the Securities and Exchange Commission, we have filed or incorporated by reference the agreements referenced above as exhibits to this annual report on Form 10-K. The agreements have been filed to provide investors with information regarding their respective terms. The agreements are not intended to provide any other factual information about the Company or its business or operations. In particular, the assertions embodied in any representations, warranties and covenants contained in the agreements may be subject to qualifications with respect to knowledge and materiality different from those applicable to investors and may be qualified by information in confidential disclosure schedules not included with the exhibits. These disclosure schedules may contain information that modifies, qualifies and creates exceptions to the representations, warranties and covenants set forth in the agreements. Moreover, certain representations, warranties and covenants in the agreements may have been used for the purpose of allocating risk between the parties, rather than establishing matters as facts. In addition, information concerning the subject matter of the representations, warranties and covenants may have changed after the date of the respective agreement, which subsequent information may or may not be fully reflected in the Company's public disclosures. Accordingly, investors
should not rely on the representations, warranties and covenants in the agreements as characterizations of the actual state of facts about the Company or its business or operations on the date hereof.
Item 16. Form 10-K Summary.
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 |
| | CERNER CORPORATION | |
Date: February 22, 2022 | | By: | /s/ David T. Feinberg |
Date: February 8, 2019 | | By: | /s/ Brent ShaferDavid T. Feinberg |
| | | D. Brent Shafer |
| | | Chairman of the BoardPresident and |
| | | Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
| | | | | | | | |
Signature and Title | | Date |
| | |
/s/ David T. Feinberg | | February 22, 2022 |
David T. Feinberg, President and Chief Executive Officer (Principal Executive Officer) and Director | | |
| | |
Signature and Title/s/ Mark J. Erceg | | DateFebruary 22, 2022 |
| | |
/s/ Brent Shafer | | February 8, 2019 |
Brent Shafer, Chairman of the Board and Chief Executive Officer (Principal Executive Officer) | | |
| | |
/s/ Marc G. Naughton | | February 8, 2019 |
Marc G. Naughton,Mark J. Erceg, Executive Vice President and Chief Financial Officer (Principal Financial Officer) | | |
| | |
/s/ Michael R. Battaglioli | | February 8, 201922, 2022 |
Michael R. Battaglioli, Senior Vice President and Chief Accounting Officer (Principal Accounting Officer)
| | |
| | |
/s/ Gerald E. Bisbee, Jr. | | February 8, 201922, 2022 |
Gerald E. Bisbee, Jr., Ph.D., Director | | |
| | |
/s/ Denis A. Cortese | | February 8, 2019 |
Denis A. Cortese, M.D., Director | | |
| | |
/s/ Mitchell E. Daniels | | February 8, 201922, 2022 |
Mitchell E. Daniels, Director | | |
| | |
/s/ Linda M. Dillman | | February 8, 2019 |
Linda M. Dillman, Director | | |
| | |
/s/ Julie L. Gerberding | | February 8, 201922, 2022 |
Julie L. Gerberding, M.D., Director | | |
| | |
/s/ Elder Granger | | February 22, 2022 |
Elder Granger, M.D., Director | | |
| | |
/s/ John J. Greisch | | February 22, 2022 |
John J. Greisch, Director | | |
| | |
/s/ Melinda J. Mount | | February 22, 2022 |
Melinda J. Mount, Director | | |
| | |
/s/ George A. Riedel | | February 22, 2022 |
George A. Riedel, Director | | |
| | |
/s/ R. Halsey Wise | | February 22, 2022 |
R. Halsey Wise, Director | | |
| | |
/s/ William D. Zollars | | February 8, 201922, 2022 |
William D. Zollars, DirectorChairman of the Board | | |
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Cerner Corporation:
Opinion on Internal Control Over Financial Reporting
We have audited Cerner Corporation and subsidiaries' (the "Company")Company) internal control over financial reporting as of December 29, 2018,31, 2021, based on criteria established in Internal Control -– Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 29, 2018,31, 2021, based on criteria established in Internal Control -– Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB")(PCAOB), the consolidated balance sheets of the Company as of December 29, 201831, 2021 and December 30, 2017,2020, the related consolidated statements of operations, comprehensive income, cash flows, and changes in shareholders' equity for each of the years in the three‑yearthree-year period ended December 29, 2018,31, 2021, and the related notes (collectively, the consolidated financial statements), and our report dated February 8, 201922, 2022 expressed an unqualified opinion on those consolidated financial statements.
The Company acquired Kantar Health during 2021, and management excluded from its assessment of the effectiveness of the Company's internal control over financial reporting as of December 31, 2021, Kantar Health's internal control over financial reporting associated with total assets of $104 million and total revenues of $148 million included in the consolidated financial statements of the Company as of and for the year ended December 31, 2021. Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of Kantar Health.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/KPMG LLP
Kansas City, Missouri
February 8, 201922, 2022
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Cerner Corporation:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Cerner Corporation and subsidiaries (the "Company")Company) as of December 29, 201831, 2021 and December 30, 2017,2020, the related consolidated statements of operations, comprehensive income, cash flows, and changes in shareholders' equity for each of the years in the three‑yearthree-year period ended December 29, 2018,31, 2021, and the related notes (collectively, the "consolidatedconsolidated financial statements")statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 29, 201831, 2021 and December 30, 2017,2020, and the results of its operations and its cash flows for each of the years in the three‑yearthree-year period ended December 29, 2018,31, 2021, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB")(PCAOB), the Company's internal control over financial reporting as of December 29, 2018,31, 2021, based on criteria established in Internal Control -– Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 8, 201922, 2022 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.
Changes in Accounting Principle
As discussed in note 2 to the consolidated financial statements, the Company changed its method of accounting for revenue transactions with customers in 2018 due to the adoption of Accounting Standards Update 2014-09, "Revenue from Contracts with Customers (Topic 606)". The Company also changed its method of accounting for certain share-based payment award transactions in 2017 due to the adoption of Accounting Standards Update 2016-09 "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting".
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Evaluation of contract modifications
As discussed in Note 2 to the consolidated financial statements, the Company executes modifications to existing arrangements with a significant customer, which may involve significant customization or development of software licenses. When a modification occurs, the Company evaluates the modification in order to determine if it should be accounted for (i) as a separate contract, (ii) as the termination of the original contract and creation of a new contract, (iii) through a cumulative catch up adjustment to the original contract, or a combination thereof. During 2021, the Company recognized $5.8 billion in total revenue, of which 20% related to this customer.
We identified the evaluation of contract modifications as a critical audit matter. Specifically, for certain contract modifications with the significant customer, determining whether the modification should be accounted for as a separate contract or part of the existing contract and whether promises in the contract modification represented separate or combined performance obligations required challenging auditor judgment. Certain of the existing arrangements and contract modifications involve customization and significant integration services. This evaluation required challenging auditor judgment due to the varying nature of the underlying promises and the number of contract modifications requiring assessment during the period.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of management’s internal control related to the determination of whether contract modifications should be accounted for as a separate contract or part of the existing contract, and whether promises in these arrangements are distinct or combined performance obligations. For a selection of contract modifications involving the significant customer, we:
•obtained and read the agreements and evaluated the terms and conditions therein
•assessed whether the modification should be accounted for as a separate contract or part of the existing contract
•evaluated the identification of performance obligations in each arrangement by considering the nature of the promises within the contract and the interrelationship of the promised goods and services.
/s/KPMG LLP
We have served as the Company's auditor since 1983.
Kansas City, Missouri
February 8, 201922, 2022
CERNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 29, 201831, 2021 and December 30, 201731, 2020
| | (In thousands, except share data) | 2018 | | 2017 | (In thousands, except share data) | 2021 | | 2020 |
| | | | | |
Assets | | | | Assets | |
Current assets: | | | | Current assets: | |
Cash and cash equivalents | $ | 374,126 |
| | $ | 370,923 |
| Cash and cash equivalents | $ | 589,847 | | | $ | 615,615 | |
Short-term investments | 401,285 |
| | 434,844 |
| Short-term investments | 252,622 | | | 442,473 | |
Receivables, net | 1,183,494 |
| | 1,042,781 |
| Receivables, net | 1,161,361 | | | 1,168,712 | |
Inventory | 25,029 |
| | 15,749 |
| Inventory | 28,159 | | | 23,027 | |
Prepaid expenses and other | 334,870 |
| | 515,930 |
| Prepaid expenses and other | 417,465 | | | 401,160 | |
Total current assets | 2,318,804 |
| | 2,380,227 |
| Total current assets | 2,449,454 | | | 2,650,987 | |
| | | | |
Property and equipment, net | 1,743,575 |
| | 1,603,319 |
| Property and equipment, net | 1,656,171 | | | 1,804,083 | |
Right-of-use assets | | Right-of-use assets | 82,940 | | | 104,536 | |
Software development costs, net | 894,512 |
| | 822,159 |
| Software development costs, net | 1,000,357 | | | 1,009,349 | |
Goodwill | 847,544 |
| | 853,005 |
| Goodwill | 1,131,121 | | | 914,520 | |
Intangible assets, net | 405,305 |
| | 479,753 |
| Intangible assets, net | 458,482 | | | 329,249 | |
Long-term investments | 300,046 |
| | 196,837 |
| Long-term investments | 461,984 | | | 510,220 | |
Other assets | 198,850 |
| | 134,011 |
| Other assets | 193,649 | | | 198,152 | |
| | | | | |
Total assets | $ | 6,708,636 |
| | $ | 6,469,311 |
| Total assets | $ | 7,434,158 | | | $ | 7,521,096 | |
| | | | | |
Liabilities and Shareholders’ Equity | | | | |
Liabilities and Shareholders' Equity | | Liabilities and Shareholders' Equity | |
| | | | |
Current liabilities: | | | | Current liabilities: | |
Accounts payable | $ | 293,534 |
| | $ | 218,996 |
| Accounts payable | $ | 329,582 | | | $ | 235,755 | |
Current installments of long-term debt and capital lease obligations | 4,914 |
| | 11,585 |
| |
Current installments of long-term debt | | Current installments of long-term debt | 225,000 | | | — | |
Deferred revenue | 399,189 |
| | 311,337 |
| Deferred revenue | 531,234 | | | 393,293 | |
Accrued payroll and tax withholdings | 195,931 |
| | 183,770 |
| Accrued payroll and tax withholdings | 317,092 | | | 309,814 | |
Other accrued expenses | 69,122 |
| | 63,907 |
| |
Other current liabilities | | Other current liabilities | 223,350 | | | 229,764 | |
Total current liabilities | 962,690 |
| | 789,595 |
| Total current liabilities | 1,626,258 | | | 1,168,626 | |
| | | | |
Long-term debt and capital lease obligations | 438,802 |
| | 515,130 |
| |
Long-term debt | | Long-term debt | 1,611,256 | | | 1,336,069 | |
Deferred income taxes | 336,379 |
| | 336,446 |
| Deferred income taxes | 395,177 | | | 376,035 | |
Other liabilities | 42,376 |
| | 42,792 |
| Other liabilities | 121,005 | | | 157,799 | |
Total liabilities | 1,780,247 |
| | 1,683,963 |
| Total liabilities | 3,753,696 | | | 3,038,529 | |
| | | | | |
Shareholders’ Equity: | | | | |
Common stock, $.01 par value, 500,000,000 shares authorized, 362,212,843 shares issued at December 29, 2018 and 359,204,864 shares issued at December 30, 2017 | 3,622 |
| | 3,592 |
| |
Shareholders' Equity: | | Shareholders' Equity: | |
Common stock, $0.01 par value, 500,000,000 shares authorized, 380,232,975 shares issued at December 31, 2021 and 373,224,832 shares issued at December 31, 2020 | | Common stock, $0.01 par value, 500,000,000 shares authorized, 380,232,975 shares issued at December 31, 2021 and 373,224,832 shares issued at December 31, 2020 | 3,802 | | | 3,732 | |
Additional paid-in capital | 1,559,562 |
| | 1,380,371 |
| Additional paid-in capital | 2,717,244 | | | 2,288,806 | |
Retained earnings | 5,576,525 |
| | 4,938,866 |
| Retained earnings | 6,751,692 | | | 6,475,551 | |
Treasury stock, 37,905,013 shares at December 29, 2018 and 26,743,517 shares at December 30, 2017 | (2,107,768 | ) | | (1,464,099 | ) | |
Treasury stock, 87,383,166 shares at December 31, 2021 and 67,371,686 shares at December 31, 2020 | | Treasury stock, 87,383,166 shares at December 31, 2021 and 67,371,686 shares at December 31, 2020 | (5,664,718) | | | (4,164,718) | |
Accumulated other comprehensive loss, net | (103,552 | ) | | (73,382 | ) | Accumulated other comprehensive loss, net | (127,558) | | | (120,804) | |
Total shareholders’ equity | 4,928,389 |
| | 4,785,348 |
| |
Total shareholders' equity | | Total shareholders' equity | 3,680,462 | | | 4,482,567 | |
| | | | | |
Total liabilities and shareholders’ equity | $ | 6,708,636 |
| | $ | 6,469,311 |
| |
Total liabilities and shareholders' equity | | Total liabilities and shareholders' equity | $ | 7,434,158 | | | $ | 7,521,096 | |
See notes to consolidated financial statements.
CERNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 29, 2018, December 30, 2017 and December 31, 20162021, December 31, 2020 and December 28, 2019
| | | For the Years Ended | | For the Years Ended |
(In thousands, except per share data) | 2018 | | 2017 | | 2016 | (In thousands, except per share data) | 2021 | | 2020 | | 2019 |
| | | | | | | |
Revenues | $ | 5,366,325 |
| | $ | 5,142,272 |
| | $ | 4,796,473 |
| Revenues | $ | 5,764,824 | | | $ | 5,505,788 | | | $ | 5,692,598 | |
Costs and expenses: | | | | | | Costs and expenses: | |
Costs of revenue | 937,348 |
| | 854,091 |
| | 779,116 |
| Costs of revenue | 1,001,017 | | | 932,941 | | | 1,071,041 | |
Sales and client service | 2,493,696 |
| | 2,276,821 |
| | 2,071,926 |
| Sales and client service | 2,636,205 | | | 2,582,615 | | | 2,675,337 | |
Software development (Includes amortization of $210,228, $173,250 and $140,232, respectively) | 683,663 |
| | 605,046 |
| | 551,418 |
| |
Software development (Includes amortization of $261,798, $247,313 and $227,414, respectively) | | Software development (Includes amortization of $261,798, $247,313 and $227,414, respectively) | 835,995 | | | 749,007 | | | 737,136 | |
General and administrative | 389,469 |
| | 355,267 |
| | 392,454 |
| General and administrative | 520,667 | | | 491,586 | | | 520,598 | |
Amortization of acquisition-related intangibles | 87,364 |
| | 90,576 |
| | 90,546 |
| Amortization of acquisition-related intangibles | 62,664 | | | 55,595 | | | 87,817 | |
| | | | | | | |
Total costs and expenses | 4,591,540 |
| | 4,181,801 |
| | 3,885,460 |
| Total costs and expenses | 5,056,548 | | | 4,811,744 | | | 5,091,929 | |
| | | | | | |
Gain on sale of businesses | | Gain on sale of businesses | — | | | 220,523 | | | — | |
| Operating earnings | 774,785 |
| | 960,471 |
| | 911,013 |
| Operating earnings | 708,276 | | | 914,567 | | | 600,669 | |
| | | | | | |
Other income, net | 26,066 |
| | 6,658 |
| | 7,421 |
| |
Other income (loss), net | | Other income (loss), net | (8,816) | | | 76,906 | | | 53,843 | |
| | | | | | | |
Earnings before income taxes | 800,851 |
| | 967,129 |
| | 918,434 |
| Earnings before income taxes | 699,460 | | | 991,473 | | | 654,512 | |
Income taxes | (170,792 | ) | | (100,151 | ) | | (281,950 | ) | Income taxes | (143,864) | | | (211,385) | | | (125,058) | |
| | | | | | | |
Net earnings | $ | 630,059 |
| | $ | 866,978 |
| | $ | 636,484 |
| Net earnings | $ | 555,596 | | | $ | 780,088 | | | $ | 529,454 | |
| | | | | | | |
Basic earnings per share | $ | 1.91 |
| | $ | 2.62 |
| | $ | 1.88 |
| Basic earnings per share | $ | 1.86 | | | $ | 2.54 | | | $ | 1.66 | |
Diluted earnings per share | $ | 1.89 |
| | $ | 2.57 |
| | $ | 1.85 |
| Diluted earnings per share | $ | 1.84 | | | $ | 2.52 | | | $ | 1.65 | |
Basic weighted average shares outstanding | 330,084 |
| | 331,373 |
| | 337,740 |
| Basic weighted average shares outstanding | 298,725 | | | 306,669 | | | 318,229 | |
Diluted weighted average shares outstanding | 333,572 |
| | 337,999 |
| | 343,653 |
| Diluted weighted average shares outstanding | 301,273 | | | 309,136 | | | 321,235 | |
See notes to consolidated financial statements.
CERNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the years ended December 29, 2018, December 30, 2017 and December 31, 20162021, December 31, 2020 and December 28, 2019
| | | | | | | | | | | | | | | | | |
| For the Years Ended |
(In thousands) | 2021 | | 2020 | | 2019 |
| | | | | |
Net earnings | $ | 555,596 | | | $ | 780,088 | | | $ | 529,454 | |
Foreign currency translation adjustment and other (net of taxes (benefit) of $(4,104), $3,250 and $(1,288), respectively) | (21,180) | | | 12,897 | | | (3,408) | |
Unrealized gain (loss) on cash flow hedge (net of taxes (benefit) of $4,945, $(5,003) and $(4,137), respectively) | 14,827 | | | (15,210) | | | (12,578) | |
Unrealized holding gain (loss) on available-for-sale investments (net of taxes (benefit) of $(137), $56 and $290, respectively) | (401) | | | 169 | | | 878 | |
| | | | | |
Comprehensive income | $ | 548,842 | | | $ | 777,944 | | | $ | 514,346 | |
|
| | | | | | | | | | | |
| For the Years Ended |
(In thousands) | 2018 | | 2017 | | 2016 |
| | | | | |
Net earnings | $ | 630,059 |
| | $ | 866,978 |
| | $ | 636,484 |
|
Foreign currency translation adjustment and other (net of taxes (benefit) of $(645), $4,909 and $2,092, respectively) | (30,575 | ) | | 37,463 |
| | (33,871 | ) |
Unrealized holding gain (loss) on available-for-sale investments (net of taxes (benefit) of $132, $(416) and $37, respectively) | 405 |
| | (680 | ) | | 60 |
|
| | | | | |
Comprehensive income | $ | 599,889 |
| | $ | 903,761 |
| | $ | 602,673 |
|
See notes to consolidated financial statements.
CERNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 29, 2018, December 30, 2017 and December 31, 20162021, December 31, 2020 and December 28, 2019
| | | For the Years Ended | | For the Years Ended |
(In thousands) | 2018 | | 2017 | | 2016 | (In thousands) | 2021 | | 2020 | | 2019 |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | CASH FLOWS FROM OPERATING ACTIVITIES: | |
Net earnings | $ | 630,059 |
| | $ | 866,978 |
| | $ | 636,484 |
| Net earnings | $ | 555,596 | | | $ | 780,088 | | | $ | 529,454 | |
Adjustments to reconcile net earnings to net cash provided by operating activities: | | | | | | Adjustments to reconcile net earnings to net cash provided by operating activities: | |
Depreciation and amortization | 642,591 |
| | 580,723 |
| | 504,236 |
| Depreciation and amortization | 718,854 | | | 697,423 | | | 687,966 | |
Share-based compensation expense | 95,423 |
| | 83,019 |
| | 74,536 |
| Share-based compensation expense | 195,654 | | | 153,449 | | | 103,641 | |
Provision for deferred income taxes | 34,428 |
| | 47,409 |
| | (11,517 | ) | Provision for deferred income taxes | 7,351 | | | 1,502 | | | 51,125 | |
Changes in assets and liabilities: | | | | | | |
Gain on sale of businesses | | Gain on sale of businesses | — | | | (220,523) | | | — | |
Investment gains | | Investment gains | — | | | (75,834) | | | (29,621) | |
Asset impairments | | Asset impairments | 133,851 | | | — | | | — | |
Changes in assets and liabilities (net of businesses acquired): | | Changes in assets and liabilities (net of businesses acquired): | |
Receivables, net | (207,785 | ) | | (32,836 | ) | | 78,258 |
| Receivables, net | 26,000 | | | 3,686 | | | 58,113 | |
Inventory | (9,307 | ) | | (972 | ) | | (666 | ) | Inventory | (5,131) | | | 960 | | | 1,855 | |
Prepaid expenses and other | 156,216 |
| | (191,369 | ) | | (66,658 | ) | Prepaid expenses and other | (4,560) | | | (51,442) | | | (76,748) | |
Accounts payable | 65,202 |
| | 6,960 |
| | (13,197 | ) | Accounts payable | 42,485 | | | (62,663) | | | (8,734) | |
Accrued income taxes | (27,849 | ) | | 18,358 |
| | 64,073 |
| Accrued income taxes | (4,431) | | | 19,995 | | | (4,599) | |
Deferred revenue | 81,538 |
| | (3,114 | ) | | 1,555 |
| Deferred revenue | 104,226 | | | 34,500 | | | (39,245) | |
Other accrued liabilities | (6,507 | ) | | (67,481 | ) | | (21,467 | ) | Other accrued liabilities | 1,789 | | | 155,564 | | | 39,892 | |
| | | | | | | |
Net cash provided by operating activities | 1,454,009 |
| | 1,307,675 |
| | 1,245,637 |
| Net cash provided by operating activities | 1,771,684 | | | 1,436,705 | | | 1,313,099 | |
| | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | CASH FLOWS FROM INVESTING ACTIVITIES: | |
Capital purchases | (446,928 | ) | | (362,083 | ) | | (459,427 | ) | Capital purchases | (289,694) | | | (283,981) | | | (471,518) | |
Capitalized software development costs | (273,693 | ) | | (274,148 | ) | | (293,696 | ) | Capitalized software development costs | (308,026) | | | (295,277) | | | (273,871) | |
Purchases of investments | (623,293 | ) | | (632,048 | ) | | (482,078 | ) | Purchases of investments | (615,330) | | | (696,548) | | | (364,648) | |
Sales and maturities of investments | 551,796 |
| | 292,074 |
| | 463,899 |
| Sales and maturities of investments | 858,932 | | | 333,161 | | | 579,755 | |
Purchase of other intangibles | (36,819 | ) | | (29,646 | ) | | (18,472 | ) | Purchase of other intangibles | (29,561) | | | (38,243) | | | (35,587) | |
Acquisition of businesses, net of cash acquired | | Acquisition of businesses, net of cash acquired | (355,504) | | | (49,820) | | | (74,539) | |
Sale of businesses | | Sale of businesses | — | | | 229,471 | | | — | |
Disposition of assets held for sale | | Disposition of assets held for sale | 9,349 | | | — | | | — | |
| | | | | | | |
Net cash used in investing activities | (828,937 | ) | | (1,005,851 | ) | | (789,774 | ) | Net cash used in investing activities | (729,834) | | | (801,237) | | | (640,408) | |
| | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | CASH FLOWS FROM FINANCING ACTIVITIES: | |
Long-term debt issuance | | Long-term debt issuance | 500,000 | | | 300,000 | | | 600,000 | |
Repayment of long-term debt | (75,000 | ) | | — |
| | — |
| Repayment of long-term debt | — | | | (2,500) | | | — | |
Proceeds from exercise of stock options | 91,349 |
| | 76,705 |
| | 63,794 |
| Proceeds from exercise of stock options | 304,078 | | | 253,605 | | | 258,036 | |
Payments to taxing authorities in connection with shares directly withheld from associates | (9,873 | ) | | (11,584 | ) | | (38,122 | ) | Payments to taxing authorities in connection with shares directly withheld from associates | (71,837) | | | (23,672) | | | (16,601) | |
Treasury stock purchases | (623,127 | ) | | (173,434 | ) | | (700,275 | ) | Treasury stock purchases | (1,500,000) | | | (756,950) | | | (1,320,542) | |
Contingent consideration payments for acquisition of businesses | (1,691 | ) | | (2,671 | ) | | (2,074 | ) | |
Dividends paid | | Dividends paid | (267,478) | | | (221,461) | | | (113,823) | |
Other | 8,555 |
| | — |
| | — |
| Other | (19,608) | | | (10,519) | | | (8,450) | |
| | | | | | | |
Net cash used in financing activities | (609,787 | ) |
| (110,984 | ) | | (676,677 | ) | Net cash used in financing activities | (1,054,845) | | | (461,497) | | | (601,380) | |
| | | | | | | |
Effect of exchange rate changes on cash and cash equivalents | (12,082 | ) | | 9,222 |
| | (10,447 | ) | Effect of exchange rate changes on cash and cash equivalents | (12,773) | | | (199) | | | (3,594) | |
| | | | | | | |
Net increase (decrease) in cash and cash equivalents | 3,203 |
| | 200,062 |
| | (231,261 | ) | Net increase (decrease) in cash and cash equivalents | (25,768) | | | 173,772 | | | 67,717 | |
Cash and cash equivalents at beginning of period | 370,923 |
| | 170,861 |
| | 402,122 |
| Cash and cash equivalents at beginning of period | 615,615 | | | 441,843 | | | 374,126 | |
| | | | | | | |
Cash and cash equivalents at end of period | $ | 374,126 |
| | $ | 370,923 |
| | $ | 170,861 |
| Cash and cash equivalents at end of period | $ | 589,847 | | | $ | 615,615 | | | $ | 441,843 | |
See notes to consolidated financial statements.
CERNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the years ended December 29, 2018, December 30, 2017 and December 31, 20162021, December 31, 2020 and December 28, 2019 |
| | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional | | Retained | | Treasury | | Accumulated Other |
(In thousands) | Shares | | Amount | | Paid-in Capital | | Earnings | | Stock | | Comprehensive Loss, Net |
| | | | | | | | | | | |
Balance at January 2, 2016 | 350,323 |
| | $ | 3,503 |
| | $ | 1,075,782 |
| | $ | 3,457,843 |
| | $ | (590,390 | ) | | $ | (76,354 | ) |
| | | | | | | | | | | |
Exercise of stock options (including net-settled option exercises) | 3,408 |
| | 34 |
| | 27,747 |
| | — |
| | — |
| | — |
|
| | | | | | | | | | | |
Employee share-based compensation expense | — |
| | — |
| | 74,536 |
| | — |
| | — |
| | — |
|
| | | | | | | | | | | |
Employee share-based compensation net excess tax benefit | — |
| | — |
| | 52,848 |
| | — |
| | — |
| | — |
|
| | | | | | | | | | | |
Other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | (33,811 | ) |
| | | | | | | | | | | |
Treasury stock purchases | — |
| | — |
| | — |
| | — |
| | (700,275 | ) | | — |
|
| | | | | | | | | | | |
Net earnings | — |
| | — |
| | — |
| | 636,484 |
| | — |
| | — |
|
| | | | | | | | | | | |
Balance at December 31, 2016 | 353,731 |
| | 3,537 |
| | 1,230,913 |
| | 4,094,327 |
| | (1,290,665 | ) | | (110,165 | ) |
| | | | | | | | | | | |
Exercise of stock options (including net-settled option exercises) | 5,474 |
| | 55 |
| | 66,439 |
| | — |
| | — |
| | — |
|
| | | | | | | | | | | |
Employee share-based compensation expense | — |
| | — |
| | 83,019 |
| | — |
| | — |
| | — |
|
| | | | | | | | | | | |
Cumulative effect of accounting change (ASU 2016-16) | — |
| | — |
| | — |
| | (22,439 | ) | | — |
| | — |
|
| | | | | | | | | | | |
Other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | 36,783 |
|
| | | | | | | | | | | |
Treasury stock purchases | — |
| | — |
| | — |
| | — |
| | (173,434 | ) | | — |
|
| | | | | | | | | | | |
Net earnings | — |
| | — |
| | — |
| | 866,978 |
| | — |
| | — |
|
| | | | | | | | | | | |
Balance at December 30, 2017 | 359,205 |
| | 3,592 |
| | 1,380,371 |
| | 4,938,866 |
| | (1,464,099 | ) | | (73,382 | ) |
| | | | | | | | | | | |
Exercise of stock options (including net-settled option exercises) | 3,008 |
| | 30 |
| | 83,768 |
| | — |
| | — |
| | — |
|
| | | | | | | | | | | |
Employee share-based compensation expense | — |
| | — |
| | 95,423 |
| | — |
| | — |
| | — |
|
| | | | | | | | | | | |
Cumulative effect of accounting change (ASU 2014-09) | — |
| | — |
| | — |
| | 7,600 |
| | — |
| | — |
|
| | | | | | | | | | | |
Other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | (30,170 | ) |
| | | | | | | | | | | |
Treasury stock purchases | — |
| | — |
| | — |
| | — |
| | (643,669 | ) | | — |
|
| | | | | | | | | | | |
Net earnings | — |
| | — |
| | — |
| | 630,059 |
| | — |
| | — |
|
| | | | | | | | | | | |
Balance at December 29, 2018 | 362,213 |
| | $ | 3,622 |
| | $ | 1,559,562 |
| | $ | 5,576,525 |
| | $ | (2,107,768 | ) |
| $ | (103,552 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Loss, Net |
(In thousands) | Shares | | Amount | | | | |
| | | | | | | | | | | |
Balance at December 29, 2018 | 362,213 | | | $ | 3,622 | | | $ | 1,559,562 | | | $ | 5,576,525 | | | $ | (2,107,768) | | | $ | (103,552) | |
| | | | | | | | | | | |
Exercise of stock options and vests of restricted shares and share units | 5,422 | | | 54 | | | 241,968 | | | — | | | — | | | — | |
| | | | | | | | | | | |
Employee share-based compensation expense | — | | | — | | | 103,641 | | | — | | | — | | | — | |
| | | | | | | | | | | |
Other comprehensive income (loss) | — | | | — | | | — | | | — | | | — | | | (15,108) | |
| | | | | | | | | | | |
Treasury stock purchases | — | | | — | | | — | | | — | | | (1,300,000) | | | — | |
| | | | | | | | | | | |
Cash dividends declared | — | | | — | | | — | | | (171,070) | | | — | | | — | |
| | | | | | | | | | | |
Net earnings | — | | | — | | | — | | | 529,454 | | | — | | | — | |
| | | | | | | | | | | |
Balance at December 28, 2019 | 367,635 | | | 3,676 | | | 1,905,171 | | | 5,934,909 | | | (3,407,768) | | | (118,660) | |
| | | | | | | | | | | |
Exercise of stock options and vests of restricted shares and share units | 5,590 | | | 56 | | | 230,186 | | | — | | | — | | | — | |
| | | | | | | | | | | |
Employee share-based compensation expense | — | | | — | | | 153,449 | | | — | | | — | | | — | |
| | | | | | | | | | | |
Cumulative effect of accounting change (ASU 2016-13) | — | | | — | | | — | | | (4,606) | | | — | | | — | |
| | | | | | | | | | | |
Other comprehensive income (loss) | — | | | — | | | — | | | — | | | — | | | (2,144) | |
| | | | | | | | | | | |
Treasury stock purchases | — | | | — | | | — | | | — | | | (756,950) | | | — | |
| | | | | | | | | | | |
Cash dividends declared | — | | | — | | | — | | | (234,840) | | | — | | | — | |
| | | | | | | | | | | |
Net earnings | — | | | — | | | — | | | 780,088 | | | — | | | — | |
| | | | | | | | | | | |
Balance at December 31, 2020 | 373,225 | | | 3,732 | | | 2,288,806 | | | 6,475,551 | | | (4,164,718) | | | (120,804) | |
| | | | | | | | | | | |
Exercise of stock options and vests of restricted shares and share units | 7,008 | | | 70 | | | 232,784 | | | — | | | — | | | — | |
| | | | | | | | | | | |
Employee share-based compensation expense | — | | | — | | | 195,654 | | | — | | | — | | | — | |
| | | | | | | | | | | |
Other comprehensive income (loss) | — | | | — | | | — | | | — | | | — | | | (6,754) | |
| | | | | | | | | | | |
Treasury stock purchases | — | | | — | | | — | | | — | | | (1,500,000) | | | — | |
| | | | | | | | | | | |
Cash dividends declared | — | | | — | | | — | | | (279,455) | | | — | | | — | |
| | | | | | | | | | | |
Net earnings | — | | | — | | | — | | | 555,596 | | | — | | | — | |
| | | | | | | | | | | |
Balance at December 31, 2021 | 380,233 | | | $ | 3,802 | | | $ | 2,717,244 | | | $ | 6,751,692 | | | $ | (5,664,718) | | | $ | (127,558) | |
See notes to consolidated financial statements.
CERNER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation, Nature of Operations and Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include all the accounts of Cerner Corporation ("Cerner," the "Company," "we," "us" or "our") and its subsidiaries. All significant intercompany transactions have been eliminated in consolidation.
The consolidated financial statements were prepared using accounting principles generally accepted in the United States of America ("GAAP"). These principles require us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. Actual results could differ from those estimates.
Our fiscal year ends on the Saturday closest to December 31. Fiscal years 2018, 2017 and 2016 each consisted of 52 weeks and ended on December 29, 2018, December 30, 2017 and December 31, 2016, respectively. All references to years in these notes to consolidated financial statements represent fiscal years unless otherwise noted.
Nature of Operations
We design, develop, market, install, host and support health carehealthcare information technology, health carehealthcare devices, hardware and content solutions for health carehealthcare organizations and consumers. We also provide a wide range of value-added services, including implementation and training, remote hosting, operational management services, revenue cycle services, support and maintenance, health carehealthcare data analysis, clinical process optimization, transaction processing, employer health centers, employee wellness programs and third party administratordata-driven services for employer-based health plans.that help life sciences companies with the discovery, development and deployment of therapies.
Factors Impacting ComparabilityOracle Merger Agreement
On December 20, 2021, we entered into an Agreement and Plan of Financial Statements
AsMerger (as it may be amended or supplemented from time to time, the "Merger Agreement") with Cedar Acquisition Corporation ("Merger Subsidiary"), which is a wholly owned subsidiary of December 29, 2018, we have separately presented deferred income taxesOC Acquisition LLC ("Parent"), Parent, which is a wholly owned subsidiary of Oracle Corporation ("Oracle"), and (solely with respect to performance of its obligations set forth in our consolidated balance sheets and reclassified other non-current liabilitiescertain specified sections thereof) Oracle. Pursuant to the caption "other liabilities". While this reporting change did not impactMerger Agreement, on January 19, 2022, Oracle commenced a cash tender offer (the "Offer") to acquire all of the issued and outstanding shares of our consolidated results, prior period reclassifications have been made to conformcommon stock for a purchase price of $95.00 per share, net to the current period presentation.holders thereof in cash, without interest and subject to any required tax withholding. If the Offer is completed, Merger Subsidiary will merge with and into Cerner (the "Merger") and we will become a wholly owned indirect subsidiary of Oracle.As a result of the Merger, the shares of our common stock will cease to be publicly held. Completion of the Merger is subject to certain conditions, including but not limited to, a) shareholders holding a majority of the outstanding shares of our common stock tendering their shares in the Offer, and b) receipt of certain regulatory approvals, including the expiration or termination of the waiting periods or the obtaining of the required affirmative approvals applicable to the transaction under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and certain foreign antitrust and foreign direct investment laws. We have agreed to various customary covenants and agreements in the Merger Agreement, including with respect to the operation of our business prior to the closing of the transaction, such as restrictions on making certain acquisitions and divestitures, entering into certain contracts, incurring certain indebtedness and making certain capital expenditures, paying dividends in excess of our regular quarterly dividend, issuing or repurchasing stock and taking other specified actions.
Voluntary Separation PlansFiscal Period End
Prior to fiscal year 2020, our fiscal year ended on the Saturday closest to December 31. Fiscal year 2019 consisted of 364 days and ended on December 28, 2019.
In December 2019, our Board of Directors approved the fourth quarterchange of 2016, we adoptedour fiscal year to a voluntary separation plancalendar year, commencing with fiscal year 2020. Accordingly, our 2020 fiscal year presented herein consisted of 369 days and ended on December 31, 2020. Fiscal years subsequent to 2020 begin on January 1 and end on December 31 of each year.
All references to years in these notes to consolidated financial statements ("2016 VSP"Notes") for eligible associates. This 2016 VSP was available to U.S. associates who met a minimum levelrepresent the respective periods described above, unless otherwise noted.
In January 2019, we adopted a new voluntary separation plan ("2019 VSP") for eligible associates. Generally, this 2019 VSP is available to U.S. associates who meet a minimum level of combined age and tenure, excluding, among others, or executive officers. Associates who elect to participate in the 2019 VSP will receive financial benefits commensurate with their tenure and position, along with vacation payout, medical benefits, and accelerated vesting of certain share-based payment awards. Eligible associates will have until February 13, 2019 to indicate interest in participation. For those associates approved to participate, their voluntary departure date will be in April 2019. We expect to record expense related to the 2019 VSP in 2019, once we know the level of associate participation.
Supplemental Disclosures of Cash Flow Information
| | | | | | | | | | | | | | | | | |
| For the Years Ended |
(In thousands) | 2021 | | 2020 | | 2019 |
Cash paid during the year for: | | | | | |
Interest (including amounts capitalized of $10,954, $14,855, and $17,190, respectively) | $ | 46,559 | | | $ | 36,302 | | | $ | 25,639 | |
Income taxes, net of refunds | 125,553 | | | 149,059 | | | 100,004 | |
Non-cash items: | | | | | |
Lease liabilities recorded upon the commencement of operating leases | 9,678 | | | 26,352 | | | 29,542 | |
Financed capital purchases | 7,255 | | | 22,218 | | | 12,673 | |
|
| | | | | | | | | | | |
| For the Years Ended |
(In thousands) | 2018 | | 2017 | | 2016 |
Cash paid during the year for: | | | | | |
Interest (including amounts capitalized of $12,710, $10,387, and $14,852, respectively) | $ | 15,707 |
| | $ | 17,914 |
| | $ | 18,484 |
|
Income taxes, net of refunds | (15,560 | ) | | 186,544 |
| | 254,539 |
|
CARES Act
Cash flows from operating activities in 2021 and 2020 include the impact of certain federal payroll taxes related to pay cycles in the second through fourth quarters of 2020, for which we deferred remittance to the taxing authority as permitted under the CARES Act. We remitted $38 million of such amounts to the taxing authority in December 2021 and expect to remit $38 million of remaining deferrals in December 2022, as permitted by the CARES Act. At both December 31, 2021 and December 31, 2020, $38 million of these deferred remittances were included in "Accrued payroll and tax withholdings" in our consolidated balance sheets. At December 31, 2020, an additional $38 million of deferred remittances were included in "Other liabilities" in our consolidated balance sheets.
Summary of Significant Accounting Policies
(a) Revenue Recognition - Refer to Note (2) for discussion regarding new revenue guidance adopted in the first quarter of 2018.
(b) Cash Equivalents - Cash equivalents consist of short-term marketabledebt securities with original maturities of less than 90 days.
(c) Available-for-sale(b) Investments in Debt Securities – Our short-termWe account for our investments in debt securities as available-for-sale investments in accordance with Accounting Standards Codification Topic ("ASC") 320, Investments-Debt Securities. Short-term available-for-sale investments are primarily invested in time deposits, commercial paper, government and corporate bonds, with maturities of less than one year. Our long-termLong-term available-for-sale investments are primarily invested in government and corporate bonds with maturities of less than two years.
Available-for-sale securitiesinvestments are recorded at fair value with the unrealized gains and losses reflected in accumulated other comprehensive loss until realized. Realized gains and losses from the sale of available-for-sale securities,investments, if any, are determined on a specific identification basis.
We regularly review investment securities for impairment based on both quantitative and qualitative criteria that include the extent to which cost exceeds fair value, the duration of any market decline, and the financial health of and specific prospects for the issuer. Unrealized losses that are other than temporary are recognized in earnings.
PremiumsGenerally, premiums are amortized and discounts are accreted over the life of the security as adjustments to interest income for our investments. For investments in callable debt securities, any premiums are amortized to the earliest call date. Interest income is recognized when earned.
Refer to Note (4) and Note (5)(12) for further description of these assets and their fair value.
(c) Investments in Equity Securities - We account for our investments in equity securities that give us the ability to exercise significant influence over the operating and financial policies of an investee under the equity method in accordance with ASC 323, Investments-Equity Method and Joint Ventures. Under the equity method, we recognize our share of the earnings or losses of an investee, generally on a three-month lag. Such share of the investee's earnings or losses are presented in "Other income (loss), net" in our consolidated statements of operations.
We account for our investments in equity securities that do not qualify for equity method accounting in accordance with ASC 321, Investments-Equity Securities ("ASC 321"). We measure these investments at fair value with changes in fair value recognized in "Other income (loss), net" in our consolidated statements of operations for such investments with readily determinable fair values. For these investments that do not have readily determinable fair values, we measure such investments at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer.
(d) Concentrations - The majority of our cash and cash equivalents are held at three major financial institutions. The majority of our cash equivalents consist of money market funds. Deposits held with banks may exceed the amount of insurance provided on such deposits. Generally these deposits may be redeemed upon demand.
(e) Inventory - Inventory consists primarily of computer hardware and sublicensed software, held for resale. Inventory is recorded at the lower of cost (first-in, first-out) or net realizable value.
(f)Property and Equipment - We account for property and equipment in accordance with Accounting Standards Codification Topic ("ASC")ASC 360, Property, Plant, and Equipment. Property, equipment and leasehold improvements are stated at cost. Depreciation of property and equipment is computed using the straight-line method over periods of one to 50 years. Amortization of leasehold improvements is computed using a straight-line method over the shorter of the lease terms or the useful lives, which range from periods of one to 15 years.
(g) Software Development Costs - Software development costs are accounted for in accordance with ASC 985-20, Costs of Software to be Sold, Leased or Marketed. Software development costs incurred internally in creating computer software products are expensed until technological feasibility has been established upon completion of a detailed program design. Thereafter, all software development costs incurred through the software's general release date are capitalized and subsequently reported at the lower of amortized cost or net realizable value. Capitalized costs are amortized based on current and expected future revenue for each software solution with minimum annual amortization equal to the straight-line amortization over the estimated economic life of the solution. We amortize capitalized software development costs over five years.
(h) Goodwill - We account for goodwill under the provisions of ASC 350, Intangibles – Goodwill and Other. Goodwill is not amortized but is evaluated for impairment annually or whenever there is an impairment indicator. All goodwill is assigned to a reporting unit, where it is subject to an annual impairment assessment. Based on these evaluations, there was no impairment of goodwill in 2018, 20172021, 2020 or 2016.2019. Refer to Note (7)(10) for more information on goodwill and other intangible assets.
(i)(h) Intangible Assets - We account for intangible assets in accordance with ASC 350, Intangibles – Goodwill and Other. Amortization of finite-lived intangible assets is computed using the straight-line method over periods of three to 30 years.
(j)(i) Income Taxes - Income taxes are accounted for in accordance with ASC 740, Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Refer to Note (12)(14) for additional information regarding income taxes.
(k)(j) Earnings per Common Share - Basic earnings per share ("EPS") excludes dilution and is computed, in accordance with ASC 260, Earnings Per Share, by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in our earnings. Refer to Note (13)(15) for additional details of our earnings per share computations.
(l)(k) Accounting for Share-based Payments - We recognize all share-based payments to associates, directors and consultants, including grants of stock options, restricted stock, restricted stock units and performance shares, in the financial statements as compensation cost based on their fair value on the date of grant, in accordance with ASC 718, Compensation-Stock Compensation. This compensation cost is recognized over the vesting period on a straight-line basis for the fair value of awards that actually vest. Refer to Note (14)(16) for a detailed discussion of share-based payments.
In 2017 we adopted Accounting Standards Update ("ASU") 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 impacted several aspects of our accounting for share-based payment award transactions, including: (1) accounting and cash flow classification for excess tax benefits and deficiencies, (2) forfeitures, and (3) tax withholding requirements and cash flow classification.
Prior to the adoption of ASU 2016-09, when associates exercised stock options, or upon the vesting of restricted stock awards, we recognized any related excess tax benefits or deficiencies (the difference between the deduction for tax purposes and the cumulative compensation cost recognized in the consolidated financial statements) in additional paid-in capital ("APIC"). During 2016 we recognized net excess tax benefits in APIC of $53 million. Under the new guidance, all excess tax benefits and tax deficiencies are recognized as a component of income tax expense. They are not estimated when determining the annual estimated effective tax rate; instead, they are recorded as discrete items in the reporting period they occur. This provision of the new guidance was required to be applied prospectively, and prior periods were not retrospectively adjusted.
We utilize the treasury stock method for calculating diluted earnings per share. Prior to the adoption of ASU 2016-09, this method assumed that any net excess tax benefits generated from the hypothetical exercise of dilutive options were used to repurchase outstanding shares. Assumed share repurchases for net excess tax benefits included in our calculation of diluted earnings per share for 2016 were 2.0 million shares. Under the new guidance, net excess tax benefits generated from the hypothetical exercise of dilutive options are excluded from the calculation of diluted earnings per share. Therefore, the denominator in our diluted earnings per share calculation has increased (comparatively). This provision of the new guidance was required to be applied prospectively, and prior periods were not retrospectively adjusted.
(m)(l) Voluntary Separation Benefits - We account for voluntary separation benefits in accordance with the provisions of ASC 712, Compensation-Nonretirement Postemployment Benefits. Voluntary separation benefits are recorded to expense when the associatesan associate irrevocably acceptaccepts the offer and the amount of the termination liability is reasonably estimable.
In 2021, 2020 and 2019, we recognized $53 million, $20 million and $52 million, respectively, of expenses in connection with voluntary separation benefits, which are included in "General and administrative" expense in our consolidated statements of operations.
(m) Exit or Disposal Cost Obligations - We account for involuntary employee separation benefits pursuant to one-time benefit arrangements and contract termination costs in accordance with ASC 420, Exit or Disposal Cost Obligations.
In 2021, 2020 and 2019, we recognized $56 million, $22 million and $34 million, respectively, of expenses in connection with involuntary associate termination events, which are included in "General and administrative" expense in our consolidated statements of operations.
In 2020 and 2019, we recognized $29 million and $66 million, respectively, of pre-tax charges within our Domestic segment in connection with the termination of certain contracts prior to the end of their stated terms. Such charges are included in "Sales and client service" expense in our consolidated statements of operations.
(n) Foreign Currency - In accordance with ASC 830, Foreign Currency Matters, assets and liabilities of non-U.S. subsidiaries whose functional currency is the local currency are translated into U.S. dollars at exchange rates prevailing at the balance sheet date. Revenues and expenses are translated at average exchange rates during the year. The net exchange differences resulting from these translations are reported in accumulated other comprehensive loss. Gains and losses resulting from foreign currency transactions are included in the consolidated statements of operations.
(o) Collaborative Arrangements - In accordance with ASC 808, Collaborative Arrangements, third party costs incurred and revenues generated by arrangements involving joint operating activities of two or more parties that are each actively involved and exposed to risks and rewards of the activities are classified in the consolidated statements of operations on a gross basis only if we are determined to be the principal participant in the arrangement. Otherwise, third party revenues and costs generated by collaborative arrangements are presented on a net basis. Payments between participants are recorded and classified based on the nature of the payments.
(p)Recently Issued Accounting Pronouncements Adopted in 2018
Revenue Recognition. In the first quarter of 2018, we adopted new revenue guidance. Refer to Note (2) for further details.
Financial Instruments. In January 2016, theReference 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 2016-01, Financial Instruments - Overall (Subtopic 825-10)2021-01, Reference Rate Reform (Topic 848): Recognition and Measurement of Financial Assets and Financial Liabilities, which was subsequently amendedScope in February 2018 by ASU 2018-03, Technical Corrections and Improvements to Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. This new guidance addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments.January 2021. Such guidance impacts how we account for our investments reported underprovides optional financial reporting alternatives to reduce the cost method ofand complexity associated with the accounting for contracts and hedging relationships affected by reference rate reform, such as follows:
Equity investments (except those accounted for under the equity method of accounting or those that result in consolidationupcoming discontinuance of the investee)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 required to be measured at fair value with changes in fair value recognized in net earnings. However, an entitycurrently evaluating the effect that this guidance may choose to measure equity investmentshave on our contracts that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investmentreference LIBOR, specifically, our Fourth Amended and Restated Credit Agreement and related interest rate swap. As of the same issuer.
The impairment assessmentdate of equity investments without readily determinable fair values will require a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value.
We adopted this new guidance effective for our first quarter of 2018. Provisions within the guidance applicable to the Company were required to be applied prospectively. Wefiling, we have not elected to measure our cost method investments that do not have readily determinable fair values at cost minus impairment, ifapply any plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. At December 29, 2018, we had cost method investmentsprovisions of $277 million, which do not have readily determinable fair values. Such investments are included in long-term investments in our consolidated balance sheets. We did not record any changes in the measurement of such investments during 2018.this guidance.
Internal-Use Software. In August 2018, theBusiness Combinations. The FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40)2021-08, Business Combinations (Topic 805): Customer's Accounting for Implementation Costs IncurredContract Assets and Contract Liabilities from Contracts with Customers in October 2021. Such guidance amends the recognition and measurement principles that apply to business combinations to require that an entity recognize and measure contract assets and contract liabilities acquired in a Cloud Computing Arrangement That is a Service Contract (a consensus of the FASB Emerging Issues Task Force). Such guidance aligns the requirements for capitalizing implementation costs incurredbusiness combination in a hosting arrangement that is a service contractaccordance with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software.Topic 606. ASU 2018-152021-08 is effective for the Company in the first quarter of 2020, with early adoption permitted, and either prospective or retrospective application accepted. The Company adopted the standard early, in the third quarter of 2018, and elected prospective application. The adoption of such guidance did not have a material impact on our consolidated financial statements and related disclosures.
(q) Recently Issued Accounting Pronouncements
Leases. In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which introduces a new model that requires most leases to be reported on the balance sheet and aligns many of the underlying principles of the new lessor model with those in the new revenue recognition standard. The standard requires the use of the modified retrospective (cumulative effect) transition approach. ASU 2016-02 is effective for the Company in the first quarter of 2019, with early adoption permitted. We are currently evaluating the effect that ASU 2016-02 will have on our consolidated financial statements and related disclosures.
In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which includes new transition guidance for the adoption of ASU 2016-02. Such guidance creates an additional transition method allowing entities to use the effective date of ASU 2016-02 as the date of initial application on transition. Under this method, entities will not be required to recast comparative periods when transitioning to the new guidance. Entities will also not be required to present comparative period disclosures under the new guidance in the period of adoption. We expect to select this new transition method upon our adoption in the first quarter of 2019.
In the fourth quarter of 2018, we continued our analysis of contractual arrangements that may qualify as leases under the new standard. We currently expect the most significant impact of this new guidance will be the recognition of right-of-use assets and lease liabilities for our operating leases of office space. Refer to Note (16) where we disclose aggregate minimum future payments under these arrangements of $125 million at the end of 2018.
Our analysis and evaluation of the new standard will continue through the effective date in the first quarter of 2019. We must complete our analysis of contractual arrangements, quantify all impacts of this new guidance, and evaluate related disclosures. We must also implement any necessary changes/modifications to processes, accounting systems, and internal controls.
Credit Losses on Financial Instruments. In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which provides new guidance regarding the measurement and recognition of credit impairment for certain financial assets. Such guidance will impact how we determine our allowance for estimated uncollectible receivables and evaluate our available-for-sale investments for impairment. ASU 2016-13 is effective for the Company in the first quarter of 2020, with early adoption permitted in the first quarter of 2019. We are currently evaluating the effect that ASU 2016-13 will have on our consolidated financial statements and related disclosures, and we do not expect to early adopt.
Callable Debt Securities. In March 2017, the FASB issued ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities, which shortens the amortization period for certain investments in callable debt securities purchased at a premium by requiring the premium be amortized to the earliest call date. Such guidance will impact how premiums are amortized on our available-for-sale investments. ASU 2017-08 is effective for the Company in the first quarter of 2019,2023, with early adoption permitted. The standard requires prospective application to business combinations occurring on or after the usedate of adoption. As of the modified retrospective (cumulative effect) transition approach. We do not expect ASU 2017-08 to have a material impact on our consolidated financial statements and related disclosures.
Accumulated Other Comprehensive Income. In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassificationdate of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows a reclassification from accumulated other comprehensive income ("AOCI") to retained earnings for "stranded tax effects" resulting from certain U.S. tax reform enacted in December 2017. Such "stranded tax effects" were created when deferred tax assets and liabilities related to items in AOCI were remeasured at the lower U.S. corporate tax rate in the period of enactment. ASU 2018-02 is effective for the Company in the first quarter of 2019, with early adoption permitted. The guidance in this ASU is to be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. corporate tax rate was recognized. We are currently evaluating the effect that ASU 2018-02 will have on our consolidated financial statements and related disclosures.
Collaborative Arrangements. In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606, which clarifies when transactions between participants in a collaborative arrangement are within the scope of the FASB's new revenue standard (Topic 606). Such guidance clarifies revenue recognition and financial statement presentation for transactions between collaboration participants. ASU 2018-18 is effective for the Company in the first quarter of 2020, with early adoption permitted. The standard requires retrospective application to the date we adopted Topic 606, December 31, 2017. We are currently evaluating the effect that ASU 2018-18 will have on our consolidated financial statements and related disclosures, andfiling, we have not determined if we will early adopt.
(2)Revenue Recognition
In May 2014,Revenue Recognition Policy
We recognize revenue in accordance with the FASB issuedguidance in ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 replaced most existing revenue recognition guidance in U.S. GAAP. The new standard introducescontains a five-step process to be followed in determining the amount and timing of revenue recognition. It also provides guidance on accounting for costs incurred to obtain or fulfill contracts with customers, and establishes disclosure requirements which are more extensive than those required under prior U.S. GAAP.
ASU 2014-09, as amended ("Topic 606"), was effective for the Company in the first quarter of 2018. We selected the modified retrospective (cumulative effect) transition method of adoption. Such method provides that the cumulative effect from prior periods upon applying the new guidance to contracts which were not complete as of the adoption date be recognized in our consolidated balance sheets as of December 31, 2017, including an adjustment to retained earnings. A summary of such cumulative effect adjustment is as follows:
|
| | | | | |
(In thousands) | | | Increase / (Decrease) |
| | | |
Receivables, net | | | $ | (79,492 | ) |
Prepaid expenses and other | | | (2,253 | ) |
Other assets | | | 81,157 |
|
Accounts payable | | | (9,361 | ) |
Deferred income taxes | | | 1,173 |
|
Retained earnings | | | 7,600 |
|
Prior periods were not retrospectively adjusted. The impact of applying Topic 606 (versus prior U.S. GAAP) increased 2018 revenues and earnings before income taxes by $207 million and $101 million, respectively. This impact is primarily driven by certain new contracts in 2018, which include certain specified upgrades for which we are required to estimate stand-alone selling price when allocating transaction consideration to performance obligations. Under prior U.S. GAAP, we would not have been able to establish vendor specific objective evidence ("VSOE") of fair value for such items, and thus would have delayed the timing of revenue recognition for such contracts.
The application of Topic 606 (versus prior U.S. GAAP) did not have a significant impact on other line items in our consolidated statements of operations, statements of comprehensive income, and statements of cash flows in 2018. Additionally, the application of Topic 606 did not have a significant impact on our consolidated balance sheet as of December 29, 2018.
Revenue Recognition Policy
We enter into contracts with customers that may include various combinations of our software solutions and related services, which are generally capable of being distinct and accounted for as separate performance obligations. Performance obligations that are not distinct at contract inception are combined. Contracts that include software customization may result in the combination of the customization services with the software license as one distinct performance obligation.
The predominant model of customer procurement involves multiple deliverables and includes a software license agreement, project-related implementation and consulting services, software support, hosting services, and computer hardware. We allocate revenues to each performance obligation within an arrangement based on estimated relative stand-alone selling price. Revenue is then recognized for each performance obligation upon transfer of control of the software solution or services to the customer in an amount that reflects the consideration we expect to receive.
Generally, we recognize revenue under Topic 606 for each of our performance obligations as follows:
•Perpetual software licenses - We recognize perpetual software license revenues when control of such licenses are transferred to the client ("point in time"). We determine the amount of consideration allocated to this performance obligation using the residual approach.approach.
•Software as a service - We recognize software as a service ratably over the related hosting period ("over time").
•Time-based software and content license fees - We recognize a license component of time-based software and content license fees upon delivery to the client ("point in time") and a non-license component (i.e. support) ratably over the respective contract term ("over time").
•Hosting - Remote hosting recurring services are recognized ratably over the hosting service period ("over time"). Certain of our hosting arrangements contain fees deemed to be a "material right" under Topic 606. We recognize such fees over the term that will likely affect the client's decision about whether to renew the related hosting service ("over time").
•Services - We recognize revenue for fixed fee services arrangements over time, utilizing a labor hours input method. For fee-for-service arrangements, we recognize revenue over time as hours are worked at the rates clients are
invoiced, utilizing the "as invoiced" practical expedient available in Topic 606. For stand-ready services arrangements, we recognize revenue ratably over the related service period.period.
•Support and maintenance - We recognize support and maintenance fees ratably over the related contract period ("over time").
•Hardware - We recognize hardware revenues when control of such hardware/devices is transferred to the client ("point in time").
•Transaction processing - We recognize transaction processing revenues ratably as we provide such services ("over time").
SuchCertain customer contracts require significant customization of the software to meet the particular requirements specified by each customer. The contract pricing is stated as a fixed amount and generally results in the transfer of control of the applicable performance obligation over time. We recognize revenue for such contracts based on the proportion of labor hours expended to the total hours expected to complete the performance obligation. The impact to revenues for changes in estimates of total hours expected to complete performance obligations are recognized in the period in which they occur, and were not material for the periods presented herein.
Revenues are recognized net of any taxes collected from customers and subsequently remitted to governmental authorities.
Disaggregation of Revenue
The following table presents revenues disaggregated by our business models:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Years Ended |
| 2021 | | 2020 | | 2019 |
(In thousands) | Domestic Segment | International Segment | Total | | Domestic Segment | International Segment | Total | | Domestic Segment | International Segment | Total |
| | | | | | | | | | | |
Licensed software | $ | 671,926 | | $ | 53,730 | | $ | 725,656 | | | $ | 604,707 | | $ | 51,512 | | $ | 656,219 | | | $ | 628,958 | | $ | 51,627 | | $ | 680,585 | |
Technology resale | 163,280 | | 21,392 | | 184,672 | | | 173,264 | | 23,327 | | 196,591 | | | 225,076 | | 21,809 | | 246,885 | |
Subscriptions | 365,936 | | 16,922 | | 382,858 | | | 354,023 | | 24,185 | | 378,208 | | | 333,298 | | 25,417 | | 358,715 | |
Professional services | 1,817,213 | | 299,278 | | 2,116,491 | | | 1,717,873 | | 212,572 | | 1,930,445 | | | 1,760,532 | | 231,946 | | 1,992,478 | |
Managed services | 1,143,188 | | 145,265 | | 1,288,453 | | | 1,120,939 | | 124,488 | | 1,245,427 | | | 1,098,695 | | 115,205 | | 1,213,900 | |
Support and maintenance | 849,428 | | 183,479 | | 1,032,907 | | | 881,778 | | 189,001 | | 1,070,779 | | | 904,204 | | 200,434 | | 1,104,638 | |
Reimbursed travel | 33,658 | | 129 | | 33,787 | | | 27,185 | | 934 | | 28,119 | | | 87,364 | | 8,033 | | 95,397 | |
| | | | | | | | | | | |
Total revenues | $ | 5,044,629 | | $ | 720,195 | | $ | 5,764,824 | | | $ | 4,879,769 | | $ | 626,019 | | $ | 5,505,788 | | | $ | 5,038,127 | | $ | 654,471 | | $ | 5,692,598 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Years Ended |
| 2018 | | 2017(1) | | 2016(1) |
(In thousands) | Domestic Segment | Global Segment | Total | | Domestic Segment | Global Segment | Total | | Domestic Segment | Global Segment | Total |
| | | | | | | | | | | |
Licensed software | $ | 573,034 |
| $ | 40,544 |
| $ | 613,578 |
| | $ | 563,524 |
| $ | 48,666 |
| $ | 612,190 |
| | $ | 499,422 |
| $ | 49,697 |
| $ | 549,119 |
|
Technology resale | 208,722 |
| 36,354 |
| 245,076 |
| | 248,524 |
| 25,069 |
| 273,593 |
| | 246,694 |
| 27,781 |
| 274,475 |
|
Subscriptions | 300,555 |
| 25,154 |
| 325,709 |
| | 446,426 |
| 22,963 |
| 469,389 |
| | 416,311 |
| 26,057 |
| 442,368 |
|
Professional services | 1,574,407 |
| 237,056 |
| 1,811,463 |
| | 1,393,056 |
| 198,793 |
| 1,591,849 |
| | 1,251,726 |
| 192,852 |
| 1,444,578 |
|
Managed services | 1,060,081 |
| 94,860 |
| 1,154,941 |
| | 970,609 |
| 76,523 |
| 1,047,132 |
| | 909,584 |
| 71,993 |
| 981,577 |
|
Support and maintenance | 921,336 |
| 196,780 |
| 1,118,116 |
| | 856,304 |
| 190,352 |
| 1,046,656 |
| | 838,745 |
| 177,066 |
| 1,015,811 |
|
Reimbursed travel | 92,131 |
| 5,311 |
| 97,442 |
| | 96,728 |
| 4,735 |
| 101,463 |
| | 82,615 |
| 5,930 |
| 88,545 |
|
| | | | | | | | | | | |
Total revenues | $ | 4,730,266 |
| $ | 636,059 |
| $ | 5,366,325 |
| | $ | 4,575,171 |
| $ | 567,101 |
| $ | 5,142,272 |
| | $ | 4,245,097 |
| $ | 551,376 |
| $ | 4,796,473 |
|
| | | | | | | | | | | |
(1)As noted above, prior period amounts were not adjusted upon our adoption of Topic 606. | | | | |
The following table presents our revenues disaggregated by timing of revenue recognition:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Years Ended |
| 2021 | | 2020 | | 2019 |
(In thousands) | Domestic Segment | International Segment | Total | | Domestic Segment | International Segment | Total | | Domestic Segment | International Segment | Total |
| | | | | | | | | | | |
Revenue recognized over time | $ | 4,736,395 | | $ | 680,557 | | $ | 5,416,952 | | | $ | 4,557,358 | | $ | 585,316 | | $ | 5,142,674 | | | $ | 4,565,172 | | $ | 600,953 | | $ | 5,166,125 | |
Revenue recognized at a point in time | 308,234 | | 39,638 | | 347,872 | | | 322,411 | | 40,703 | | 363,114 | | | 472,955 | | 53,518 | | 526,473 | |
| | | | | | | | | | | |
Total revenues | $ | 5,044,629 | | $ | 720,195 | | $ | 5,764,824 | | | $ | 4,879,769 | | $ | 626,019 | | $ | 5,505,788 | | | $ | 5,038,127 | | $ | 654,471 | | $ | 5,692,598 | |
|
| | | | | | | | | |
| For the Year Ended |
| 2018 |
(In thousands) | Domestic Segment | Global Segment | Total |
| | | |
Revenue recognized over time | $ | 4,271,934 |
| $ | 569,780 |
| $ | 4,841,714 |
|
Revenue recognized at a point in time | 458,332 |
| 66,279 |
| 524,611 |
|
| | | |
Total revenues | $ | 4,730,266 |
| $ | 636,059 |
| $ | 5,366,325 |
|
Significant Customers
Revenues attributable to our relationships (as the prime contractor or a subcontractor) with U.S. government agencies, within our Domestic segment, comprised 20%, 18% and 13% of our consolidated revenues for 2021, 2020 and 2019, respectively. Amounts due in connection with these relationships comprised 15% and 13% of client receivables as of December 31, 2021 and December 31, 2020, respectively.
Transaction Price Allocated to Remaining Performance Obligations
As of December 29, 2018,31, 2021, the aggregate amount of transaction price allocated to performance obligations that are unsatisfied (or partially unsatisfied) for executed contracts approximates $15.25$13.26 billion, of which we expect to recognize approximately 29%31% of the revenue over the next 12 months and the remainder thereafter. As of December 31, 2020, the aggregate amount of transaction price allocated to performance obligations that were unsatisfied (or partially unsatisfied) for executed contracts approximated $13.04 billion.
Contract Liabilities
Our payment arrangements with clients typically include an initial payment due upon contract signing and date-based licensed software payment terms and payments based upon delivery for services, hardware and sublicensed software. Customer payments received in advance of satisfaction of the related performance obligations are deferred as contract liabilities. Such amounts are classified in our consolidated balance sheets as deferred revenue."Deferred revenue". During 2018,2021 and 2020, substantially all of our contract liability balance at the beginning of such periodeach respective year was recognized in revenues.revenues during that year.
Costs to Obtain or Fulfill a Contract
We have determined the only significant incremental costs incurred to obtain contracts with clients within the scope of Topic 606 are sales commissions paid to our associates. We record sales commissions as an asset, and amortize to expense ratably over the remaining performance periods of the related contracts with remaining performance obligations. AtAs of December 29, 2018,31, 2021 and December 31, 2020, our consolidated balance sheet includes an $86sheets included assets of $91 million assetand $88 million, respectively, related to sales commissions to be expensed in future periods, which isare included in other assets."Other assets".
In 2018, weWe recognized $39 million, $38 million and $41 million of amortization related to thisthese sales commissions asset,assets in 2021, 2020 and 2019, respectively, which is included in costs"Costs of revenuerevenue" in our consolidated statements of operations.
Significant Judgments when Applying Topic 606
Our contracts with clients typically include various combinations of our software solutions and related services. Determining whether such software solutions and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. Specifically, judgment is required to determine whether software licenses are distinct from services and hosting included in an arrangement.
Contract transaction price is allocated to distinct performance obligations using estimated stand-alone selling price. Judgment is required in estimating stand-alone selling price for each distinct performance obligation. We determine stand-alone selling price maximizing observable inputs such as stand-alone sales when they exist or substantive renewal prices charged to clients. In instances where stand-alone selling price is not observable, we utilize an
estimate of stand-alone selling price. Such estimates are derived from various methods that include: cost plus margin, historical pricing practices, and the residual approach, whichapproach. Judgment may be required to determine standalone selling prices for each performance obligation and whether it depicts the amount we expect to receive in exchange for the related good or service.
Contract modifications occur when we and our customers agree to modify existing customer contracts to change the scope or price (or both) of the contract or when a customer terminates some, or all, of the existing services provided by us. When a contract modification occurs, it requires us to exercise judgment to determine if the modification should be accounted for as (i) a considerable amountseparate contract, (ii) the termination of judgment.the original contract and creation of a new contract, (iii) a cumulative catch up adjustment to the original contract, or a combination thereof.
The labor hours input method used for our fixed fee services performance obligation is dependent on our ability to reliably estimate the direct labor hours to complete a project, which may span several years. We utilize our historical project experience and detailed planning process as a basis for our future estimates to complete current projects.
Certain of our arrangements contain variable consideration. We do not believe our estimates of variable consideration to be significant to our determination of revenue recognition.
Practical Expedients
We have reflected the aggregate effect of all contract modifications occurring prior to the Topic 606 adoption date when (i) identifying the satisfied and unsatisfied performance obligations, (ii) determining the transaction price, and (iii) allocating the transaction price to the satisfied and unsatisfied performance obligations.
Revenue Recognition - 2017 and Prior
Prior to the adoption of Topic 606, we recognized software related revenue in accordance with the provisions of ASC 985-605, Software - Revenue Recognition and non-software related revenue in accordance with ASC 605, Revenue Recognition. In general, revenue was recognized when all of the following criteria were met:
Persuasive evidence of an arrangement existed;
Delivery had occurred or services had been rendered;
Our fee was fixed or determinable; and
Collection of the revenue was reasonably assured.
For multiple element arrangements that contained software and non-software elements, we allocated revenue to software and software-related elements as a group and any non-software element separately. After the arrangement consideration had been allocated to the non-software elements, revenue was recognized when the basic revenue recognition criteria were met for each element. For the group of software and software-related elements, revenue was recognized under the guidance applicable to software transactions.
Since we did not have VSOE of fair value on software licenses within our multiple element arrangements, we recognized revenue on our software and software-related elements using the residual method. Under the residual method, license revenue was recognized in a multiple-element arrangement when VSOE of fair value existed for all of the undelivered elements in the arrangement, when software was delivered, installed and all other conditions to revenue recognition were met. We allocated revenue to each undelivered element in a multiple-element arrangement based on the element's respective fair value, with the fair value determined by the price charged when that element was sold separately. Specifically, we determined the fair value of (i) the software support, hardware maintenance, sublicensed software support, remote hosting, subscriptions and software as a service portions of the arrangement based on the substantive renewal price for those services charged to clients; (ii) the professional services (including training and consulting) portion of the arrangement based on the hourly rates that we charged for these services when sold apart from a software license; and (iii) the sublicensed software based on its price when sold separately from the software. The residual amount of the fee after allocating revenue to the fair value of the undelivered elements was attributed to the licenses for software solutions. If evidence of the fair value could not be established for the undelivered elements of a license agreement using VSOE, the entire amount of revenue under the arrangement was deferred until those elements were delivered or VSOE of fair value was established.
We also entered into arrangements that included multiple non-software deliverables. For each element in a multiple element arrangement that did not contain software-related elements to be accounted for as a separate unit of accounting, the following were met: the delivered products or services had value to the client on a stand-alone basis; and for an arrangement that includes a general right of return relative to the delivered products or services, delivery or performance of the undelivered product or service was considered probable and is substantially controlled by the Company. We allocated the arrangement consideration to each element based on the selling price hierarchy of VSOE of fair value, if it existed, or third-party evidence ("TPE") of selling price. If neither VSOE nor TPE were available, we used estimated selling price.
For certain arrangements, revenue for software, implementation services and, in certain cases, support services for which VSOE of fair value could not be established were accounted for as a single unit of accounting. If VSOE of fair value could not be established for both the implementation services and the support services, the entire arrangement fee was recognized ratably over the period during which the implementation services were expected to be performed or the support period, whichever was longer, beginning with delivery of the software, provided that all other revenue recognition criteria were met.
(3) Receivables
Receivables consist of client receivables and the current portion of amounts due under sales-type leases.
Client receivables primarily represent recorded revenues that have either been billed, or for which we have an unconditional right to invoice and receive payment in the future. We periodically provide long-term financing options to creditworthy clients through extended payment terms. Generally, these extended payment terms provide for date-based payments over a fixed period, not to exceed the term of the overall arrangement. Thus, our portfolio of client contracts contains a financing component, which is recognized over time as a component of other"Other income net(loss), net" in our consolidated statements of operations.
Lease receivables represent our net investment in sales-type leases resulting from the sale of certain health care devices to our clients.
We perform ongoing credit evaluations of our clients and generally do not require collateral from our clients. We provide an allowance for estimated uncollectible accounts based on specific identification, historical experience and our judgment.
A summary of net receivables is as follows:
| | | | | | | | | | | |
(In thousands) | 2021 | | 2020 |
| | | |
Client receivables | $ | 1,307,167 | | | $ | 1,322,278 | |
Less: Provision for expected credit losses | 145,806 | | | 153,566 | |
| | | |
Total receivables, net | $ | 1,161,361 | | | $ | 1,168,712 | |
In addition to the client receivables presented above, at December 31, 2021 and December 31, 2020, we had $16 million and $17 million, respectively, of non-current net client receivables, which are presented in "Other assets" in our consolidated balance sheets.
|
| | | | | | | |
(In thousands) | 2018 | | 2017 |
| | | |
Client receivables | $ | 1,237,127 |
| | $ | 1,082,886 |
|
Less: Allowance for doubtful accounts | 64,561 |
| | 52,786 |
|
| | | |
Client receivables, net of allowance | 1,172,566 |
| | 1,030,100 |
|
| | | |
Current portion of lease receivables | 10,928 |
| | 12,681 |
|
| | | |
Total receivables, net | $ | 1,183,494 |
| | $ | 1,042,781 |
|
A reconciliation of the beginning and ending amount of our allowanceprovision for doubtful accountsexpected credit losses is as follows:
|
| | | | | | | | | | | |
(in thousands) | 2018 | | 2017 | | 2016 |
| | | | | |
Allowance for doubtful accounts - beginning balance | $ | 52,786 |
| | $ | 43,028 |
| | $ | 48,119 |
|
Additions charged to costs and expenses | 25,529 |
| | 29,248 |
| | 5,060 |
|
Deductions(a) | (13,754 | ) | | (19,490 | ) | | (10,151 | ) |
| | | | | |
Allowance for doubtful accounts - ending balance | $ | 64,561 |
| | $ | 52,786 |
| | $ | 43,028 |
|
| | | | | |
(a) Deductions in 2017 include a $13 million reclassification to other non-current assets. | | | | | |
| | | | | | | | | | | | | | | | | |
(In thousands) | Current | | Non-current | | Total |
| | | | | |
Provision for expected credit losses - balance at December 29, 2018 | $ | 64,561 | | | $ | 63,849 | | | $ | 128,410 | |
Additions charged to costs and expenses | 57,167 | | | — | | | 57,167 | |
Deductions, foreign currency and other | (15,653) | | | 1,490 | | | (14,163) | |
| | | | | |
Provision for expected credit losses - balance at December 28, 2019 | 106,075 | | | 65,339 | | | 171,414 | |
Cumulative effect of accounting change (ASU 2016-13) | 4,606 | | | — | | | 4,606 | |
Additions charged to costs and expenses | 65,099 | | | 20,703 | | | 85,802 | |
Deductions, foreign currency and other | (22,214) | | | (47,478) | | | (69,692) | |
| | | | | |
Provision for expected credit losses - balance at December 31, 2020 | 153,566 | | | 38,564 | | | 192,130 | |
Additions charged to costs and expenses | 39,791 | | | — | | | 39,791 | |
Reclassifications to non-current | (26,480) | | | 26,480 | | | — | |
Deductions, foreign currency and other | (21,071) | | | (3,938) | | | (25,009) | |
| | | | | |
Provision for expected credit losses - balance at December 31, 2021 | $ | 145,806 | | | $ | 61,106 | | | $ | 206,912 | |
Lease receivables represent our net investment in sales-type leases resulting from the sale of certain health care devices to our clients. The components of our net investment in sales-type leases are as follows:
|
| | | | | | | |
(In thousands) | 2018 | | 2017 |
| | | |
Minimum lease payments receivable | $ | 11,854 |
| | $ | 20,425 |
|
Less: Unearned income | 926 |
| | 1,447 |
|
| | | |
Total lease receivables | 10,928 |
| | 18,978 |
|
| | | |
Less: Long-term receivables included in other assets | — |
| | 6,297 |
|
| | | |
Current portion of lease receivables | $ | 10,928 |
| | $ | 12,681 |
|
During the second quarter of 2008, Fujitsu Services Limited's ("Fujitsu") contract as the prime contractor in the National Health Service ("NHS") initiative to automate clinical processes2021 and digitize medical records in the Southern region of England was terminated. This gave rise to the termination of our subcontract for the project. We continue to be in dispute with Fujitsu regarding Fujitsu's obligation to pay amounts due upon termination, including our client receivables and damages for pre-termination losses. Part of the process required final resolution of disputes between Fujitsu and the NHS regarding the prime contract termination, which has now occurred. In 2018 we initiated the formal dispute resolution procedure under the subcontract, with the non-binding alternative dispute resolution procedures concluding in the fourth quarter of 2018. The Company must now resolve the issues based on the formal processes provided for in the subcontract. In the fourth quarter of 2018 we recorded a pre-tax charge of $45 million to provide an allowance against the disputed client receivables, reflecting the uncertainty in collection of such receivables and related litigation risk resulting from the conclusion of the non-binding alternative dispute resolution procedures. Such pre-tax charge is included in sales and client service expense in our consolidated statements of operations. As of December 29, 2018, it remains unlikely that our matter with Fujitsu will be resolved in the next 12 months. Therefore, these client receivables remain classified in other long-term assets at December 29, 2018. While the ultimate collectability of the client receivables pursuant to this process is uncertain, we believe that we have valid and equitable grounds for recovery of such amounts. Nevertheless, it is possible that our estimates regarding collectability of such amounts might materially change as the parties proceed through the formal phases of the subcontract dispute resolution procedure.
During 2018 and 2017,2020, we received total client cash collections of $5.49$6.13 billion and $5.44$5.70 billion, respectively.
Expected Credit Losses
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which provides a new impairment model for certain financial assets that is based on expected losses rather than incurred losses. Such guidance impacts how we determine our allowance for estimated uncollectible client receivables. The standard requires use of the modified retrospective (cumulative effect) transition approach as of the beginning of the first reporting period in which the guidance was effective, which for the Company was the first quarter of 2020. Under this transition method, the cumulative effect from prior periods upon applying this new guidance was recognized in our consolidated balance sheets as of December 29, 2019. We did not recast comparative periods.
A summary of such cumulative effect adjustment is as follows: | | | | | |
(In thousands) | Increase/(Decrease) |
| |
Receivables, net | $ | (4,606) | |
Retained earnings | (4,606) | |
The cumulative effect adjustment is the result of providing an allowance on unbilled client receivables, for which we have an unconditional right to invoice and receive payment in the future.
Our estimates of expected credit losses for client receivables at both December 31, 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.
(4) Investments
Available-for-sale investments at the end of 20182021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | | Adjusted Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| | | | | | | | |
Cash equivalents: | | | | | | | | |
Money market funds | | $ | 149,429 | | | $ | — | | | $ | — | | | $ | 149,429 | |
Time deposits | | 35,342 | | | — | | | — | | | 35,342 | |
Commercial paper | | 77,850 | | | — | | | — | | | 77,850 | |
Government and corporate bonds | | 5,000 | | | — | | | — | | | 5,000 | |
Total cash equivalents | | 267,621 | | | — | | | — | | | 267,621 | |
| | | | | | | | |
Short-term investments: | | | | | | | | |
Time deposits | | 25,598 | | | — | | | — | | | 25,598 | |
Commercial paper | | 57,000 | | | — | | | (14) | | | 56,986 | |
Government and corporate bonds | | 170,123 | | | 18 | | | (103) | | | 170,038 | |
Total short-term investments | | 252,721 | | | 18 | | | (117) | | | 252,622 | |
| | | | | | | | |
Long-term investments: | | | | | | | | |
Government and corporate bonds | | 31,167 | | | — | | | (149) | | | 31,018 | |
| | | | | | | | |
Total available-for-sale investments | | $ | 551,509 | | | $ | 18 | | | $ | (266) | | | $ | 551,261 | |
|
| | | | | | | | | | | | | | | | |
(In thousands) | | Adjusted Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| | | | | | | | |
Cash equivalents: | | | | | | | | |
Money market funds | | $ | 76,471 |
| | $ | — |
| | $ | — |
| | $ | 76,471 |
|
Time deposits | | 71,461 |
| | — |
| | — |
| | 71,461 |
|
Commercial paper | | 10,000 |
| | — |
| | — |
| | 10,000 |
|
Total cash equivalents | | 157,932 |
| | — |
| | — |
| | 157,932 |
|
| | | | | | | | |
Short-term investments: | | | | | | | | |
Time deposits | | 31,947 |
| | — |
| | — |
| | 31,947 |
|
Commercial paper | | 75,445 |
| | — |
| | (91 | ) | | 75,354 |
|
Government and corporate bonds | | 294,941 |
| | 1 |
| | (958 | ) | | 293,984 |
|
Total short-term investments | | 402,333 |
| | 1 |
| | (1,049 | ) | | 401,285 |
|
| | | | | | | | |
Long-term investments: | | | | | | | | |
Government and corporate bonds | | 18,247 |
| | — |
| | (55 | ) | | 18,192 |
|
| | | | | | | | |
Total available-for-sale investments | | $ | 578,512 |
| | $ | 1 |
| | $ | (1,104 | ) | | $ | 577,409 |
|
Available-for-sale investments at the end of 20172020 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | | Adjusted Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| | | | | | | | |
Cash equivalents: | | | | | | | | |
Money market funds | | $ | 40,027 | | | $ | — | | | $ | — | | | $ | 40,027 | |
Time deposits | | 36,756 | | | — | | | — | | | 36,756 | |
Commercial Paper | | 61,000 | | | — | | | — | | | 61,000 | |
Total cash equivalents | | 137,783 | | | — | | | — | | | 137,783 | |
| | | | | | | | |
Short-term investments: | | | | | | | | |
Time deposits | | 28,302 | | | — | | | — | | | 28,302 | |
Commercial Paper | | 264,000 | | | 12 | | | (19) | | | 263,993 | |
Government and corporate bonds | | 149,975 | | | 247 | | | (44) | | | 150,178 | |
Total short-term investments | | 442,277 | | | 259 | | | (63) | | | 442,473 | |
| | | | | | | | |
Long-term investments: | | | | | | | | |
Government and corporate bonds | | 136,983 | | | 152 | | | (57) | | | 137,078 | |
| | | | | | | | |
Total available-for-sale investments | | $ | 717,043 | | | $ | 411 | | | $ | (120) | | | $ | 717,334 | |
|
| | | | | | | | | | | | | | | | |
(In thousands) | | Adjusted Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| | | | | | | | |
Cash equivalents: | | | | | | | | |
Money market funds | | $ | 99,472 |
| | $ | — |
| | $ | — |
| | $ | 99,472 |
|
Time deposits | | 60,226 |
| | — |
| | — |
| | 60,226 |
|
Government and corporate bonds | | 850 |
| | — |
| | — |
| | 850 |
|
Total cash equivalents | | 160,548 |
| | — |
| | — |
| | 160,548 |
|
| | | | | | | | |
Short-term investments: | | | | | | | | |
Time deposits | | 40,186 |
| | — |
| | — |
| | 40,186 |
|
Commercial paper | | 147,646 |
| | 2 |
| | (139 | ) | | 147,509 |
|
Government and corporate bonds | | 247,626 |
| | — |
| | (477 | ) | | 247,149 |
|
Total short-term investments | | 435,458 |
| | 2 |
| | (616 | ) | | 434,844 |
|
| | | | | | | | |
Long-term investments: | | | | | | | | |
Government and corporate bonds | | 185,478 |
| | — |
| | (1,026 | ) | | 184,452 |
|
| | | | | | | | |
Total available-for-sale investments | | $ | 781,484 |
| | $ | 2 |
| | $ | (1,642 | ) | | $ | 779,844 |
|
Investments reported under the cost method of accounting as of December 29, 2018 and December 30, 2017 were $277 million and $11 million, respectively. Investments reported under the equity method of accounting were $5 million and $2 million at December 29, 2018 and December 30, 2017, respectively.
We sold available-for-sale investments for proceeds of $45$420 million, $71 million and $29$233 million in 20182021, 2020 and 2017,2019, respectively, resulting in insignificant gains/losses in each period.
Other Investments
Essence Group Holdings Corporation
At December 31, 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 consolidated balance sheets. We did not record any changes in the measurement of such investments in 2021, 2020, or 2019, respectively.
At December 28, 2019, we acquired a minority interesthad investments in Essence Group Holdings Corporation ("Essence Group")equity securities with readily determinable fair values of $14 million, accounted for in accordance with ASC 321. Such investments were included in "Short-term investments" in our consolidated balance sheets. Changes in the measurement of such investments favorably impacted "Other income (loss), net" by $76 million and $14 million in 2020 and 2019, respectively. In August 2020, we sold these investments for cash considerationproceeds of $266$90 million.
At December 31, 2021 and December 31, 2020, we had investments in equity securities reported under the equity method of accounting of $25 million underand $12 million, respectively. Such investments are included in "Long-term investments" in our consolidated balance sheets.
Impairment Assessment
We adopted ASU 2016-13 in the first quarter of 2020, which made certain amendments to the model used to assess available-for-sale debt securities for impairment. Such guidance provides that an available-for-sale debt security is impaired if the fair value of the security is less than its amortized cost basis. A determination is made whether the decline in fair value below the amortized cost basis has resulted from a Stock Purchase Agreement ("SPA") datedcredit loss or other factors, such as market liquidity or changes in interest rates. Impairment related to credit losses is recognized in net earnings, whereas impairment related to other factors is recognized as a component of accumulated other comprehensive loss, net. We did not recognize any impairment on our available-for-sale debt securities through net earnings in 2021 or 2020.
(5) Property and Equipment
A summary of property, equipment and leasehold improvements stated at cost, less accumulated depreciation and amortization, is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | Depreciable Lives (Yrs) | | 2021 | | 2020 |
| | | | | | | |
Held and used: | | | | | | | |
Computer and communications equipment | 1 | — | 5 | | $ | 1,981,488 | | | $ | 1,939,517 | |
Land, buildings and improvements | 12 | — | 50 | | 1,180,042 | | | 1,403,835 | |
Leasehold improvements | 1 | — | 15 | | 202,283 | | | 208,496 | |
Furniture and fixtures | 5 | — | 12 | | 116,236 | | | 146,351 | |
Other equipment | 3 | — | 20 | | 20,444 | | | 1,025 | |
| | | | | | | |
| | | | | 3,500,493 | | | 3,699,224 | |
| | | | | | | |
Less accumulated depreciation and leasehold amortization | | | | | 1,933,623 | | | 1,895,141 | |
| | | | | | | |
Property and equipment held and used | | | | | 1,566,870 | | | 1,804,083 | |
| | | | | | | |
Assets held for sale | | | | | 89,301 | | | — | |
| | | | | | | |
Property and equipment, net | | | | | $ | 1,656,171 | | | $ | 1,804,083 | |
Depreciation Expense
Depreciation and leasehold amortization expense for 2021, 2020 and 2019 was $362 million, $365 million and $347 million, respectively.
Real Estate Held For Sale
In connection with our operational improvement initiatives, during 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, 2018.2021, 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 December 31, 2021, these long-lived assets aggregating $89 million were held for sale and presented within our consolidated balance sheets in "Property and equipment, net." In connection with the designation as held for sale, during 2021, we recorded pre-tax charges of $80 million to reduce the amount of such long-lived assets to fair value, less estimated costs to sell. Such investment is presentedcharges are included in long-term investmentsour consolidated statements of operations in "Sales and client service" expense and "General and administrative" expense at $78 million and $2 million, respectively.
(6) Leases
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which introduced a new accounting model that requires most leases to be reported on the balance sheet. It also established disclosure requirements, which are more extensive than those required under prior U.S. GAAP. The standard required use of the modified retrospective (cumulative effect) transition approach and was effective for the Company in the first quarter of 2019. We selected the effective date of ASU 2016-02 as the date of initial application on transition, as permitted by ASU 2016-02, as amended ("Topic 842"). Under this transition method, the cumulative effect from prior periods upon applying the new guidance to arrangements containing leases was recognized in our consolidated balance sheets as of December 30, 2018. We did not recast comparative periods.
A summary of such cumulative effect adjustment is as follows:
| | | | | | | | | | | |
(In thousands) | | | Increase / (Decrease) |
| | | |
Right-of-use asset | | | $ | 129,652 | |
Prepaid expenses and other | | | 3,968 | |
Other current liabilities | | | 22,767 | |
Other liabilities | | | 110,853 | |
Arrangements Containing Leases
The cumulative effect adjustment above, is primarily comprised of arrangements where we are the lessee under operating leases for real estate (office, data center, and warehouse space) and certain dedicated fiber optic lines within our infrastructure. The duration of these agreements ranges from several months to in excess of 20 years. Generally, variable lease payments under these operating lease agreements relate to amounts based on changes to an index or rate (i.e. percentage change in the consumer price index). We do not have any arrangements where we are the lessee, classified as finance leases in our consolidated financial statements.
In addition to the items described above, we also procure hotel stays and rental cars in connection with associate business travel, and the use of certain equipment for trade shows, client presentations, conferences, and internal meetings. We have made the policy election to classify such arrangements as short-term leases, as defined in Topic 842. As such, we have not recognized lease liabilities and right-of-use assets for such arrangements in our consolidated financial statements. The duration of these arrangements is less than one month. Therefore, we do not disclose any short-term lease expense, as permitted by Topic 842. Expense for such items is recognized on a straight-line basis over the term of such arrangements.
Arrangements in which we are the lessor are not significant to our consolidated financial statements.
Amounts Included in the Consolidated Financial Statements
The following table presents a summary of lease liability and right-of-use asset amounts included in our consolidated balance sheets at the end of 2021 and 2020, under operating lease arrangements where we are the lessee:
| | | | | | | | | | | | | | | | | |
(In thousands) | | | | | |
Description | | Balance Sheet Classification | 2021 | | 2020 |
| | | | | |
Right-of-use asset | | Right-of-use assets | $ | 82,940 | | | $ | 104,536 | |
Lease liability - current | | Other current liabilities | 27,694 | | | 29,913 | |
Lease liability - non-current | | Other liabilities | 67,160 | | | 90,106 | |
Operating lease cost for 2021, 2020 and 2019 was $31 million, $37 million, and $37 million, respectively. Variable lease cost was less than $1 million in each of 2021, 2020 and 2019.
Maturity Analysis
Aggregate future payments under operating lease arrangements where we are the lessee (by fiscal year) are as follows:
| | | | | | | | | | | |
(In thousands) | | | Operating Lease Obligations |
| | | |
2022 | | | $ | 27,694 | |
2023 | | | 20,826 | |
2024 | | | 13,824 | |
2025 | | | 8,884 | |
2026 | | | 5,978 | |
2027 and thereafter | | | 32,031 | |
| | | |
Aggregate future payments | | | 109,237 | |
Impact of discounting | | | (14,383) | |
| | | |
Aggregate lease liability at December 31, 2021 | | | $ | 94,854 | |
At December 31, 2021, the weighted-average remaining lease term and weighted-average discount rate for our operating lease arrangements where we are the lessee were 6.97 years and 3.3%, respectively.
(7) Software Development
Our software solutions are offered to our clients both through traditional licenses as well as software as a service delivery models. Development costs associated with the certain solutions offered exclusively through a software as a service model are accounted for in accordance with ASC 350-40, Internal-Use Software. All other client solution development costs, which represent a significant majority of development costs, are accounted for in accordance with ASC 985-20, Costs of Software to be Sold, Leased or Marketed.
Under ASC 985-20, software development costs incurred in creating computer software solutions are expensed until technological feasibility has been established upon completion of a detailed program design. Thereafter, all software development costs incurred through the software's general release date are capitalized and subsequently recorded at the lower of amortized cost or net realizable value. Capitalized costs are amortized based on current and expected future revenue for each software solution with minimum annual amortization equal to the straight-line amortization over the estimated economic life of the solution. We amortize capitalized costs over five years.
Under ASC 350-40, software development costs related to preliminary project activities and post-implementation and maintenance activities are expensed as incurred. We capitalize direct costs related to application development activities that are probable to result in additional functionality. Capitalized costs are amortized on a straight-line basis over five years. We test for impairment whenever events or changes in circumstances that could impact recoverability occur.
A summary of software development costs, net is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| 2021 | | 2020 |
(In thousands) | Gross Carrying Amount | | Accumulated Amortization | | Gross Carrying Amount | | Accumulated Amortization |
| | | | | | | |
Software to be sold, leased or marketed | $ | 2,751,960 | | | $ | 1,985,051 | | | $ | 2,610,476 | | | $ | 1,788,019 | |
Software delivered exclusively as a service | 474,712 | | | 241,264 | | | 385,168 | | | 198,276 | |
| | | | | | | |
Total | $ | 3,226,672 | | | $ | 2,226,315 | | | $ | 2,995,644 | | | $ | 1,986,295 | |
| | | | | | | |
Software development costs, net | | | $ | 1,000,357 | | | | | $ | 1,009,349 | |
Estimated aggregate amortization expense for each of the next five years is as follows:
| | | | | |
(In thousands) | |
| |
2022 | $ | 280,626 | |
2023 | 247,172 | |
2024 | 201,507 | |
2025 | 146,610 | |
2026 | 90,212 | |
Information regarding our software development costs is included in the following table:
| | | | | | | | | | | | | | | | | |
| For the Years Ended |
(In thousands) | 2021 | | 2020 | | 2019 |
| | | | | |
Software development costs | $ | 828,502 | | | $ | 796,971 | | | $ | 783,593 | |
Capitalized software development costs | (308,026) | | | (295,277) | | | (273,871) | |
Amortization of capitalized software development costs | 261,798 | | | 247,313 | | | 227,414 | |
Net realizable value charges | 53,721 | | | — | | | — | |
| | | | | |
Total software development expense | $ | 835,995 | | | $ | 749,007 | | | $ | 737,136 | |
In 2021, we recorded pre-tax charges of $54 million to reduce the carrying amount of certain capitalized software development costs to estimated net realizable value.
(8) Business Acquisitions
2021 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 was 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.
Our acquisition of Kantar Health was treated as a purchase in accordance with ASC 805, Business Combinations ("ASC 805"), which requires allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed in the transaction.
The final allocation of purchase price was as follows:
| | | | | | | | |
(In thousands) | | Allocation Amount |
| | |
Cash and cash equivalents | | $ | 15,311 | |
Receivables, net | | 32,616 | |
Prepaid expenses and other | | 8,881 | |
Property and equipment, net | | 1,198 | |
Right-of-use assets | | 1,939 | |
Goodwill | | 226,232 | |
Intangible assets, net: | | |
Customer relationships | | 143,100 | |
Existing technologies | | 39,700 | |
Trade names | | 10,200 | |
Other assets | | 428 | |
Accounts payable | | (36,748) | |
Deferred revenue | | (35,698) | |
Accrued payroll and tax withholdings | | (11,172) | |
Other current liabilities | | (3,189) | |
Deferred income taxes | | (11,733) | |
Other liabilities | | (10,250) | |
| | |
Total purchase price | | $ | 370,815 | |
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 (12) for further information about the fair value level hierarchy.
The goodwill of $226 million was allocated among our Domestic and International operating segments, as shown in Note (10), with approximately $170 million of such goodwill expected to be deductible for tax purposes.
Our consolidated statement of operations for the year ended December 31, 2021 includes revenues of $148 million attributable to the acquired business since the April 1, 2021 acquisition date. The earnings contribution from the acquired business for the year ended December 31, 2021 was not material to our 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.
2020 Acquisitions
On April 1, 2020, we acquired a consulting company specializing in providing cybersecurity solutions to clients in the healthcare industry, for cash consideration of $34 million. We believe this acquisition enhanced our resource capabilities and growth opportunities for our cybersecurity solution offerings. These factors, combined with the synergies and economies of scale expected, are the basis for the acquisition and comprise the resulting goodwill recorded.
On October 19, 2020, we acquired a software company that offered a patient referral management solution to clients within the healthcare industry, for cash consideration of $15 million. We believe this acquisition enhanced our portfolio of offerings on our HealtheIntent platform. This factor, combined with the synergies and economies of scale expected, are the basis for the acquisition and comprise the resulting goodwill recorded.
These acquisitions were treated as purchases in accordance with ASC 805, which requires allocation of the purchase price to the estimated fair values of assets and liabilities acquired in the transactions.
The aggregate final allocation of purchase price for our 2020 acquisitions was as follows:
| | | | | | | | |
(In thousands) | | Allocation Amount |
| | |
Receivables, net | | $ | 2,313 | |
Inventory | | 863 | |
Prepaid expenses and other | | 331 | |
Property and equipment, net | | 114 | |
Right-of-use assets | | 683 | |
Goodwill | | 33,709 | |
Intangible assets, net | | 16,510 | |
Other assets | | 179 | |
Accounts payable | | (880) | |
Deferred revenue | | (3,158) | |
Accrued payroll and tax withholdings | | (501) | |
Other current liabilities | | (713) | |
Deferred income taxes | | (374) | |
| | |
Total purchase price | | $ | 49,076 | |
The goodwill was allocated to our Domestic operating segment, with $4 million of such goodwill expected to be deductible for tax purposes. Identifiable intangible assets primarily consist of acquired technology intangible assets and are being amortized over a weighted-average period of 8 years. The operating results from of our 2020 acquisitions were combined with our operating results subsequent to the respective purchase dates. Pro-forma results of operations, assuming these acquisitions were made at the beginning of the earliest period presented, have not been presented because the effect of these acquisitions, both individually and in the aggregate, were not material to our results.
2019 Acquisition
On October 25, 2019, we acquired all of the issued and outstanding membership interests of AbleVets, LLC, a Virginia limited liability company ("AbleVets"), for cash consideration of $76 million. AbleVets is a health IT engineering and consulting company specializing in cybersecurity, cloud and system development solutions for federal organizations. We believe this acquisition enhanced our resource capabilities and growth opportunities within our federal business. These factors, combined with the synergies and economies of scale expected from combining the operations of AbleVets with Cerner, are the basis for the acquisition and comprise the resulting goodwill recorded.
The acquisition of AbleVets was treated as a purchase in accordance with ASC 805, which requires allocation of the purchase price to the estimated fair values of assets and liabilities acquired in the transaction.
The final allocation of purchase price was as follows:
| | | | | | | | |
(In thousands) | | Allocation Amount |
| | |
Cash and cash equivalents | | $ | 471 | |
Receivables, net | | 11,690 | |
Prepaid expenses and other | | 911 | |
Property and equipment, net | | 1,240 | |
Right-of-use assets | | 8,448 | |
Goodwill | | 37,815 | |
Intangible assets, net | | 37,402 | |
Accounts payable | | (5,244) | |
Deferred revenue | | (157) | |
Accrued payroll and tax withholdings | | (5,812) | |
Other current liabilities | | (2,994) | |
Other liabilities | | (8,016) | |
| | |
Total purchase price | | $ | 75,754 | |
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. Refer to Note (12) for further information about the fair value level hierarchy.
The goodwill was allocated to our Domestic operating segment and is expected to be deductible for tax purposes. Identifiable intangible assets primarily consist of customer relationship intangible assets and are being amortized over a weighted-average period of 8 years. The operating results of AbleVets were combined with our operating results subsequent to the purchase date of October 25, 2019. Pro-forma results of operations, assuming this 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.
(9) Gain on Sale of Businesses
Germany and Spain
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. We received a sale price of $230 million, which was subject to post-closing adjustments for working capital and certain other adjustments.
The following table presents a reconciliation of the sale price to the net gain recognized on the disposed business operations which is included in "Gain on sale of businesses" in our consolidated statements of operations:
| | | | | | | | | | | | | | |
(In thousands) | | | | |
| | | | |
Sale price | | | | $ | 230,316 | |
Net assets/liabilities removed | | | | (7,934) | |
Transaction expenses | | | | (5,583) | |
Foreign currency | | | | 1,550 | |
| | | | |
Gain on sale of businesses | | | | $ | 218,349 | |
The following table presents a reconciliation of the sale price to the cash proceeds received from CGM which are included in "Sale of businesses" in our consolidated statements of cash flows:
| | | | | | | | | | | |
(In thousands) | | | |
| | | |
Sale price | | | $ | 230,316 | |
Receivable due from CGM | | | (4,049) | |
VAT and other transaction taxes, net | | | (2,142) | |
Foreign currency | | | 356 | |
| | | |
Cash received from sale of businesses | | | $ | 224,481 | |
Amounts included in our consolidated balance sheets related to the disposed business operations immediately prior to the sale on July 1, 2020 were as follows:
| | | | | | | | | | | |
(In thousands) | | | Asset/(Liability) |
| | | |
Receivables, net | | | $ | 8,646 | |
Inventory | | | 65 | |
Prepaid expenses and other | | | 5,993 | |
Property and equipment, net | | | 340 | |
Right-of-use assets | | | 554 | |
Software development costs, net | | | 5,532 | |
Goodwill | | | 7,692 | |
Intangible assets, net | | | 3,687 | |
Accounts payable | | | (2,763) | |
Deferred revenue | | | (16,756) | |
Accrued payroll and tax withholdings | | | (4,545) | |
Other current liabilities | | | (511) | |
| | | |
Net assets/(liabilities) | | | $ | 7,934 | |
Revenue Cycle Outsourcing
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. A net gain of $2 million was recognized on the disposed business operations and is included in "Gain on sale of businesses" in our consolidated statements of operations. Amounts included in our consolidated balance sheets related to the disposed business operations immediately prior to the sale on August 3, 2020 were not material to our consolidated financial statements.
(10) Goodwill and Other Intangible Assets
The changes in the carrying amounts of goodwill by segment were as follows:
| | | | | | | | | | | | | | | | | |
(In thousands) | Domestic | | International | | Total |
| | | | | |
Balance at the end of 2019 | $ | 819,735 | | | $ | 63,423 | | | $ | 883,158 | |
Purchase price allocation adjustments for the AbleVets acquisition | 744 | | | — | | | 744 | |
Goodwill recorded in connection with 2020 business acquisitions | 33,709 | | | — | | | 33,709 | |
Goodwill reduction in connection with divestiture transactions | — | | | (7,692) | | | (7,692) | |
Foreign currency translation adjustment and other | — | | | 4,601 | | | 4,601 | |
| | | | | |
Balance at the end of 2020 | 854,188 | | | 60,332 | | | 914,520 | |
Goodwill recorded in connection with the Kantar Health acquisition | 119,709 | | | 106,523 | | | 226,232 | |
Foreign currency translation adjustment and other | — | | | (9,631) | | | (9,631) | |
| | | | | |
Balance at the end of 2021 | $ | 973,897 | | | $ | 157,224 | | | $ | 1,131,121 | |
A summary of net intangible assets is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| 2021 | | 2020 |
(In thousands) | Gross Carrying Amount | | Accumulated Amortization | | Gross Carrying Amount | | Accumulated Amortization |
| | | | | | | |
Customer lists | $ | 636,410 | | | $ | 360,598 | | | $ | 494,615 | | | $ | 312,044 | |
Purchased software | 396,508 | | | 346,381 | | | 354,228 | | | 337,811 | |
Internal use software | 233,438 | | | 150,356 | | | 207,696 | | | 123,280 | |
Trade names | 52,883 | | | 33,719 | | | 42,951 | | | 28,961 | |
Other | 52,179 | | | 21,882 | | | 50,535 | | | 18,680 | |
| | | | | | | |
Total | $ | 1,371,418 | | | $ | 912,936 | | | $ | 1,150,025 | | | $ | 820,776 | |
| | | | | | | |
Intangible assets, net | | | $ | 458,482 | | | | | $ | 329,249 | |
Amortization expense for 2021, 2020 and 2019 was $95 million, $85 million and $114 million, respectively.
Estimated aggregate amortization expense for each of the next five years is as follows:
| | | | | |
(In thousands) | |
| |
2022 | $ | 96,281 | |
2023 | 86,863 | |
2024 | 79,985 | |
2025 | 38,916 | |
2026 | 20,769 | |
(11) Long-term Debt
The following is a summary of indebtedness outstanding:
| | | | | | | | | | | |
(In thousands) | 2021 | | 2020 |
| | | |
Credit agreement loans due December 30, 2026 | $ | 600,000 | | | $ | 600,000 | |
Senior notes: | | | |
Series 2021-A due March 24, 2026 | 100,000 | | | — | |
Series 2021-B due March 24, 2031 | 400,000 | | | — | |
Series 2020-A due March 11, 2030 | 300,000 | | | 300,000 | |
Series 2015-A due February 15, 2022 | 225,000 | | | 225,000 | |
Series 2015-B due February 14, 2025 | 200,000 | | | 200,000 | |
Other | 11,662 | | | 11,662 | |
| | | |
Total indebtedness | 1,836,662 | | | 1,336,662 | |
Less: debt issuance costs | (406) | | | (593) | |
| | | |
Indebtedness, net | 1,836,256 | | | 1,336,069 | |
Less: current installments of long-term debt | (225,000) | | | — | |
| | | |
Long-term debt | $ | 1,611,256 | | | $ | 1,336,069 | |
Credit Agreement
On December 30, 2021, we amended and restated our revolving credit facility by entering into a Fourth Amended and Restated Credit Agreement (the "Credit Agreement") with a syndicate of lenders. The Credit Agreement is a five-year revolving credit facility expiring on December 30, 2026, with two one-year extension options that are subject to lender approval. The Credit Agreement includes: (a) a revolving credit loan facility of up to $1.225 billion at any time outstanding, and (b) a letter of credit facility of up to $200 million at any time outstanding (which is a sub-facility of the $1.225 billion revolving credit loan facility). The Credit Agreement also includes an accordion feature allowing an increase of the credit facility of up to an additional $500 million ($1.725 billion in the aggregate) at any time outstanding, subject to lender participation and the satisfaction of specified conditions. Prepayment of borrowings outstanding under the Credit Agreement is permitted at any time. Proceeds may be used for working capital and general corporate purposes, including but not limited to certain business acquisitions and purchases under our share repurchase programs. The Credit Agreement provides certain restrictions on our ability to borrow, incur liens, sell assets and pay dividends, and contains certain leverage and interest coverage covenants.
Generally, interest on revolving credit loans is payable at a variable rate based on LIBOR, prime, or the U.S. federal funds rate, plus a spread that varies depending on leverage ratios maintained. Unused commitment, letter of credit, and other fees are also payable under the Credit Agreement. At December 31, 2021 and December 31, 2020, the interest rate on revolving credit loans outstanding was 0.90% and 0.95%, respectively, based on LIBOR plus the applicable spread.
As of December 31, 2021, we had outstanding revolving credit loans and letters of credit of $600 million and $18 million, respectively; which reduced our available borrowing capacity to $607 million under the Credit Agreement.
Interest Rate Swap
We are exposed to market risk from fluctuations in the variable interest rates on outstanding indebtedness under our Credit Agreement. In order to manage this exposure, we have entered into an interest rate swap agreement, with an initial notional amount of $600 million, to hedge the variability of cash flows associated with such interest obligations through May 2024. The interest rate swap has an effective start date of May 13, 2019, and is designated as a cash flow hedge, which effectively fixes the interest rate on the hedged indebtedness under our Credit Agreement at 3.06% through May 2024. At December 31, 2021 and December 31, 2020, this swap was in a net liability position with an aggregate fair value of $17 million and $37 million, respectively; which is presented in our consolidated balance sheets in "Other current liabilities". We classify fair value measurements of our interest rate swap as Level 2, as further described in Note (12).
Our interest rate swap agreement is accounted for in accordance with ASC Topic 815, Derivatives and Hedging. Such agreement is designated as a cash flow hedge and considered to be highly effective under hedge accounting principles. Therefore, the cost methodswap agreement is recognized in our consolidated balance sheets as either an asset or liability, measured at fair value. Changes in the fair value of accounting.
Concurrentlythe swap agreement are initially recorded in accumulated other comprehensive loss, net and then subsequently recognized in our consolidated statements of operations in the periods in which earnings are affected by the hedged item. All cash flows associated with the executionswap agreement are classified as operating activities in our consolidated statements of cash flows.
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 SPA, we announced a strategic operating relationship with Lumeris Healthcare Outcomes, LLC ("Lumeris""2019 Shelf Agreement"), a subsidiary of Essence Group, pursuant to which we will collaboratemay issue and sell up to bring to market an EHR-agnostic offering, Maestro AdvantageTM, designed to help providers who participate in value-based arrangements, including Medicare Advantage and provider-sponsored health plans, control costs and improve outcomes. Additionally, we sold certain solutions to Lumeris for an aggregate contract valueprincipal amount of $28$1.80 billion of unsecured senior promissory notes. In March 2021, we issued $500 million aggregate principal amount of unsecured senior notes (the "Series 2021 Senior Notes"), pursuant to the 2019 Shelf Agreement. The issuance consisted of $100 million of 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.
2020 Senior Notes
In March 2020, we issued $300 million aggregate principal amount of 2.50% senior unsecured Series 2020-A notes (the "Series 2020-A Notes") due March 11, 2030, pursuant to the 2019 Shelf Agreement. Interest on the Series 2020-A Notes is payable semiannually on each March 11 and September 11, commencing September 11, 2020, 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 2020-A Notes, subject to the payment of a make-whole amount.
The Series 2021 Senior Notes and Series 2020-A 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.
2015 Senior Notes
On December 4, 2014, we entered into a Master Note Purchase Agreement (the "Master Note Purchase Agreement") with the Purchasers listed therein, pursuant to which we recognized $5may issue and sell up to an aggregate principal amount of $1.50 billion of unsecured senior promissory notes to those Purchasers electing to purchase. In January 2015, we issued $500 million aggregate principal amount of unsecured Senior Notes ("Senior Notes"), pursuant to the Master Note Purchase Agreement. The issuance consisted of $225 million of 3.18% Series 2015-A Notes due February 15, 2022, $200 million of 3.58% Series 2015-B Notes due February 14, 2025, and $75 million in floating rate Series 2015-C Notes due February 15, 2022. Interest is payable semiannually on February 15th and August 15th in each year, commencing on August 15, 2015 for the Series 2015-A Notes and Series 2015-B Notes. The Master Note Purchase Agreement contains certain leverage and interest coverage ratio covenants and provides certain restrictions on our ability to borrow, incur liens, sell assets, and other customary terms. Proceeds from the Senior Notes are available for general corporate purposes. As of the date of this filing, the remaining $1.00 billion available for sale is uncommitted and subject to participation by the Purchasers under the Master Note Purchase Agreement.
On February 15, 2022, we repaid our $225 million of Series 2015-A Notes due February 15, 2022.
In March 2018, we repaid our $75 million floating rate Series 2015-C Notes due February 15, 2022.
Other
Other indebtedness includes estimated amounts payable through September 1, 2025, under an agreement entered into in September 2015.
Covenant Compliance
As of December 31, 2021, we were in compliance with all debt covenants.
Maturities
Maturities of indebtedness outstanding at the end of 2021 are as revenue in 2018.follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | | Credit Agreement Loans | | Senior Notes | | Other | | Total |
| | | | | | | | |
2022 | | $ | — | | | $ | 225,000 | | | $ | — | | | $ | 225,000 | |
2023 | | — | | | — | | | — | | | — | |
2024 | | — | | | — | | | — | | | — | |
2025 | | — | | | 200,000 | | | 11,662 | | | 211,662 | |
2026 | | 600,000 | | | 100,000 | | | — | | | 700,000 | |
2027 and thereafter | | — | | | 700,000 | | | — | | | 700,000 | |
| | | | | | | | |
Total | | $ | 600,000 | | | $ | 1,225,000 | | | $ | 11,662 | | | $ | 1,836,662 | |
(5)
(12) 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 financial assetsinvestments in available-for-sale debt securities measured and recorded at fair value on a recurring basis at the end of 2018:2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | | | | |
| | | | Fair Value Measurements Using |
Description | | Balance Sheet Classification | | Level 1 | | Level 2 | | Level 3 |
| | | | | | | | |
Money market funds | | Cash equivalents | | $ | 149,429 | | | $ | — | | | $ | — | |
Time deposits | | Cash equivalents | | — | | | 35,342 | | | — | |
Commercial paper | | Cash equivalents | | — | | | 77,850 | | | — | |
Government and corporate bonds | | Cash equivalents | | — | | | 5,000 | | | — | |
Time deposits | | Short-term investments | | — | | | 25,598 | | | — | |
Commercial paper | | Short-term investments | | — | | | 56,986 | | | — | |
Government and corporate bonds | | Short-term investments | | — | | | 170,038 | | | — | |
Government and corporate bonds | | Long-term investments | | — | | | 31,018 | | | — | |
|
| | | | | | | | | | | | | | |
(In thousands) | | | | |
| |
| | Fair Value Measurements Using |
Description | | Balance Sheet Classification | | Level 1 | | Level 2 | | Level 3 |
| | | | | | | | |
Money market funds | | Cash equivalents | | $ | 76,471 |
| | $ | — |
| | $ | — |
|
Time deposits | | Cash equivalents | | — |
| | 71,461 |
| | — |
|
Commercial paper | | Cash equivalents | | — |
| | 10,000 |
| | — |
|
Time deposits | | Short-term investments | | — |
| | 31,947 |
| | — |
|
Commercial paper | | Short-term investments | | — |
| | 75,354 |
| | — |
|
Government and corporate bonds | | Short-term investments | | — |
| | 293,984 |
| | — |
|
Government and corporate bonds | | Long-term investments | | — |
| | 18,192 |
| | — |
|
The following table details our financial assetsinvestments in available-for-sale debt securities measured and recorded at fair value on a recurring basis at the end of 2017:2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | | | | |
| | | | Fair Value Measurements Using |
Description | | Balance Sheet Classification | | Level 1 | | Level 2 | | Level 3 |
| | | | | | | | |
Money market funds | | Cash equivalents | | $ | 40,027 | | | $ | — | | | $ | — | |
Time deposits | | Cash equivalents | | — | | | 36,756 | | | — | |
Commercial paper | | Cash equivalents | | — | | | 61,000 | | | — | |
Time deposits | | Short-term investments | | — | | | 28,302 | | | — | |
Commercial paper | | Short-term investments | | — | | | 263,993 | | | — | |
Government and corporate bonds | | Short-term investments | | — | | | 150,178 | | | — | |
Government and corporate bonds | | Long-term investments | | — | | | 137,078 | | | — | |
|
| | | | | | | | | | | | | | |
(In thousands) | | | | |
| | | | Fair Value Measurements Using |
Description | | Balance Sheet Classification | | Level 1 | | Level 2 | | Level 3 |
| | | | | | | | |
Money market funds | | Cash equivalents | | $ | 99,472 |
| | $ | — |
| | $ | — |
|
Time deposits | | Cash equivalents | | — |
| | 60,226 |
| | — |
|
Government and corporate bonds | | Cash equivalents | | — |
| | 850 |
| | — |
|
Time deposits | | Short-term investments | | — |
| | 40,186 |
| | — |
|
Commercial paper | | Short-term investments | | — |
| | 147,509 |
| | — |
|
Government and corporate bonds | | Short-term investments | | — |
| | 247,149 |
| | — |
|
Government and corporate bonds | | Long-term investments | | — |
| | 184,452 |
| | — |
|
Our investments in equity securities with readily determinable fair values accounted for in accordance with ASC 321 were measured and recorded at fair value on a recurring basis using a Level 2 valuation. The fair value of such arrangements was based on quoted prices in active markets, reduced by a percentage reflecting a discount for lack of marketability.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.
We estimate the fair value of our long-term, fixed rate debt using a Level 3 discounted cash flow analysis based on current borrowing rates for debt with similar maturities. We estimate the fair value of our long-term, variable rate debt using a Level 3 discounted cash flow analysis based on LIBOR rate forward curves. The fair value of our long-term debt, including current maturities, at the end of 20182021 and 20172020 was approximately $431 million$1.87 billion and $519 million,$1.36 billion, respectively. The carrying amount of such debt at the end of 20182021 and 20172020 was $425 million$1.83 billion and $500 million,$1.33 billion, respectively.
(6) Property and Equipment(13) Other Income (Loss)
A summary of property, equipmentnon-operating income and leasehold improvements stated at cost, less accumulated depreciation and amortization,expense is as follows:
| | | | | | | | | | | | | | | | | |
| For the Years Ended |
(In thousands) | 2021 | | 2020 | | 2019 |
| | | | | |
Interest income | $ | 25,975 | | | $ | 28,901 | | | $ | 38,227 | |
Interest expense | (43,474) | | | (29,080) | | | (14,469) | |
Gain on sale of equity investment | — | | | 75,834 | | | 15,509 | |
Unrealized gain on equity investment | — | | | — | | | 14,112 | |
Other | 8,683 | | | 1,251 | | | 464 | |
| | | | | |
Other income (loss), net | $ | (8,816) | | | $ | 76,906 | | | $ | 53,843 | |
|
| | | | | | | | | | | |
(In thousands) | Depreciable Lives (Yrs) | | 2018 | | 2017 |
| | | | | | | |
Computer and communications equipment | 1 | — | 5 | | $ | 1,686,747 |
| | $ | 1,511,445 |
|
Land, buildings and improvements | 12 | — | 50 | | 1,239,122 |
| | 1,051,658 |
|
Leasehold improvements | 1 | — | 15 | | 214,697 |
| | 216,586 |
|
Furniture and fixtures | 5 | — | 12 | | 132,180 |
| | 123,945 |
|
Capital lease equipment | 3 | — | 5 | | — |
| | 3,197 |
|
Other equipment | 3 | — | 20 | | 1,255 |
| | 1,161 |
|
| | | | | | | |
| | | | | 3,274,001 |
| | 2,907,992 |
|
| | | | | | | |
Less accumulated depreciation and leasehold amortization | | | | | 1,530,426 |
| | 1,304,673 |
|
| | | | | | | |
Total property and equipment, net | | | | | $ | 1,743,575 |
| | $ | 1,603,319 |
|
(14) Income Taxes
Depreciation
Income tax expense (benefit) for 2021, 2020 and leasehold amortization expense for 2018, 2017 and 2016 was $323 million, $290 million and $246 million, respectively.2019 consists of the following:
| | | | | | | | | | | | | | | | | |
| For the Years Ended |
(In thousands) | 2021 | | 2020 | | 2019 |
| | | | | |
Current: | | | | | |
Federal | $ | 95,526 | | | $ | 131,741 | | | $ | 45,575 | |
State | 20,968 | | | 30,565 | | | 13,429 | |
Foreign | 20,019 | | | 47,577 | | | 14,929 | |
Total current expense | 136,513 | | | 209,883 | | | 73,933 | |
Deferred: | | | | | |
Federal | (2,646) | | | (4,469) | | | 30,353 | |
State | 7,568 | | | (96) | | | 11,747 | |
Foreign | 2,429 | | | 6,067 | | | 9,025 | |
Total deferred expense | 7,351 | | | 1,502 | | | 51,125 | |
| | | | | |
Total income tax expense | $ | 143,864 | | | $ | 211,385 | | | $ | 125,058 | |
(7) Goodwill and Other Intangible Assets
The changes inTemporary differences between the financial statement carrying amounts and tax basis of goodwill were as follows:
|
| | | | | | | | | | | |
(In thousands) | Domestic | | Global | | Total |
| | | | | |
Balance at the end of 2016 | $ | 782,664 |
| | $ | 61,536 |
| | $ | 844,200 |
|
Foreign currency translation adjustment and other | — |
| | 8,805 |
| | 8,805 |
|
| | | | | |
Balance at the end of 2017 | 782,664 |
| | 70,341 |
| | 853,005 |
|
Foreign currency translation adjustment and other | — |
| | (5,461 | ) | | (5,461 | ) |
| | | | | |
Balance at the end of 2018 | $ | 782,664 |
| | $ | 64,880 |
| | $ | 847,544 |
|
A summaryassets and liabilities that give rise to significant portions of net intangible assets is as follows:
|
| | | | | | | | | | | | | | | |
| 2018 | | 2017 |
(In thousands) | Gross Carrying Amount | | Accumulated Amortization | | Gross Carrying Amount | | Accumulated Amortization |
| | | | | | | |
Customer lists | $ | 465,909 |
| | $ | 229,545 |
| | $ | 472,697 |
| | $ | 195,190 |
|
Purchased software | 361,964 |
| | 311,738 |
| | 369,728 |
| | 282,141 |
|
Internal use software | 143,520 |
| | 78,633 |
| | 114,574 |
| | 60,924 |
|
Trade names | 40,025 |
| | 21,275 |
| | 41,224 |
| | 16,961 |
|
Other | 47,905 |
| | 12,827 |
| | 46,581 |
| | 9,835 |
|
| | | | | | | |
Total | $ | 1,059,323 |
| | $ | 654,018 |
| | $ | 1,044,804 |
| | $ | 565,051 |
|
| | | | | | | |
Intangible assets, net | | | $ | 405,305 |
| | | | $ | 479,753 |
|
Amortization expense for 2018, 2017 and 2016 was $109 million, $118 million and $118 million, respectively.
Estimated aggregate amortization expense for each of the next five years is as follows:
|
| | | |
(In thousands) | |
| |
2019 | $ | 113,566 |
|
2020 | 65,184 |
|
2021 | 58,314 |
|
2022 | 53,071 |
|
2023 | 43,927 |
|
(8) Software Development
Information regarding our software development costs is included in the following table:
|
| | | | | | | | | | | |
| For the Years Ended |
(In thousands) | 2018 | | 2017 | | 2016 |
| | | | | |
Software development costs | $ | 747,128 |
| | $ | 705,944 |
| | $ | 704,882 |
|
Capitalized software development costs | (273,693 | ) | | (274,148 | ) | | (293,696 | ) |
Amortization of capitalized software development costs | 210,228 |
| | 173,250 |
| | 140,232 |
|
| | | | | |
Total software development expense | $ | 683,663 |
| | $ | 605,046 |
| | $ | 551,418 |
|
Accumulated amortization as ofdeferred income taxes at the end of 20182021 and 2017 was $1.5 billion and $1.3 billion, respectively.
(9) Long-term Debt and Capital Lease Obligations
The following is a summary of indebtedness outstanding:
|
| | | | | | | |
(In thousands) | 2018 | | 2017 |
| | | |
Senior Notes | $ | 425,000 |
| | $ | 500,000 |
|
Capital lease obligations | 4,914 |
| | 13,068 |
|
Other | 14,162 |
| | 14,162 |
|
| | | |
Debt and capital lease obligations | 444,076 |
| | 527,230 |
|
Less: debt issuance costs | (360 | ) | | (515 | ) |
| | | |
Debt and capital lease obligations, net | 443,716 |
| | 526,715 |
|
Less: current portion | (4,914 | ) | | (11,585 | ) |
| | | |
Long-term debt and capital lease obligations | $ | 438,802 |
| | $ | 515,130 |
|
Senior Notes
In January 2015, we issued $500 million aggregate principal amount of unsecured Senior Notes ("Senior Notes"), pursuant to a Master Note Purchase Agreement dated December 4, 2014. The issuance consisted of $225 million of 3.18% Series 2015-A Notes due February 15, 2022, $200 million of 3.58% Series 2015-B Notes due February 14, 2025, and $75 million in floating rate Series 2015-C Notes due February 15, 2022. Interest is payable semiannually on February 15th and August 15th in each year, commencing on August 15, 2015 for the Series 2015-A Notes and Series 2015-B Notes. The debt issuance costs in the table above2020 relate to the issuancefollowing:
| | | | | | | | | | | |
(In thousands) | 2021 | | 2020 |
| | | |
Deferred tax assets: | | | |
Accrued expenses | $ | 56,913 | | | $ | 63,080 | |
Tax credits and separate return net operating losses | 12,939 | | | 17,976 | |
Contract and service revenues and costs | 28,001 | | | 9,383 | |
Share-based compensation | 30,216 | | | 49,650 | |
Lease liability | 21,548 | | | 23,928 | |
Other | 15,070 | | | 17,554 | |
Gross deferred tax assets | 164,687 | | | 181,571 | |
Less: Valuation Allowance | (9,575) | | | (3,384) | |
Total deferred tax assets | 155,112 | | | 178,187 | |
| | | |
Deferred tax liabilities: | | | |
Software development costs | (265,384) | | | (270,041) | |
Property and equipment | (204,203) | | | (204,568) | |
Prepaid expenses | (39,499) | | | (37,547) | |
Lease right-of-use assets | (17,900) | | | (20,639) | |
Other | (11,253) | | | (9,260) | |
Total deferred tax liabilities | (538,239) | | | (542,055) | |
| | | |
Net deferred tax liability | $ | (383,127) | | | $ | (363,868) | |
At the end of these Senior Notes. The Master Note Purchase Agreement contains certain leverage and interest coverage ratio covenants and provides certain restrictions on our ability to borrow, incur liens, sell assets, and other customary terms. Proceeds2021, we had net operating loss carry-forwards from the Senior Notesforeign jurisdictions of $19 million that are available to offset future taxable income with no expiration. In addition, we had a state income tax credit carry-forward of $8 million available to offset income tax liabilities through December 31, 2030. During 2020, we recorded a valuation allowance of $3 million against the net operating loss carry-forward in a foreign jurisdiction due to a change in circumstances. During 2021, we recorded a valuation allowance of $6 million against the state income tax credit carry-forward due to a change in circumstances.
At the end of 2021, we had not provided tax on the cumulative undistributed earnings of certain foreign subsidiaries of approximately $115 million, because it is our intention to reinvest these earnings indefinitely. The unrecognized deferred tax liability relating to these earnings is approximately $6 million.
The effective income tax rates for general corporate purposes.
In March 2018, we repaid our $75 million floating rate Series 2015-C Notes due February 15, 2022.
Capital Leases
Our capital lease obligations are primarily related2021, 2020, and 2019 were 21%, 21%, and 19%, respectively. A reconciliation of the effective income tax rates to the procurement of hardware and health care devices.
Other
Other indebtedness includes estimated amounts payable through September 2025, under an agreement entered into in September 2015.
Credit Facility
In October 2015, we amended and restated our revolving credit facility. The amended facility provides a $100 million unsecured revolving line of credit for working capital purposes, which includes a letter of credit facility, expiring in October 2020. We have the ability to increase the maximum capacity to $200 million at any time during the facility's term, subject to lender participation. Interest is payable at a rate based on prime, LIBOR, or the U.S. federal fundsstatutory rate plus a spread that varies depending on the leverage ratios maintained. The agreement provides certain restrictions on our ability to borrow, incur liens, sell assets and pay dividends and contains certain cash flow and liquidity covenants. Asof 21% is follows:
| | | | | | | | | | | | | | | | | |
| For the Years Ended |
(In thousands) | 2021 | | 2020 | | 2019 |
| | | | | |
Tax expense at statutory rates | $ | 146,887 | | | $ | 208,209 | | | $ | 137,447 | |
State income tax, net of federal benefit | 15,938 | | | 24,234 | | | 18,561 | |
Tax credits | (19,739) | | | (21,254) | | | (22,750) | |
Foreign rate differential | (8,940) | | | 1,973 | | | (6,328) | |
Share-based compensation | 7,351 | | | (1,303) | | | (8,090) | |
Permanent differences | 1,053 | | | (6,534) | | | 3,278 | |
Other, net | 1,314 | | | 6,060 | | | 2,940 | |
| | | | | |
Total income tax expense | $ | 143,864 | | | $ | 211,385 | | | $ | 125,058 | |
A reconciliation of the endbeginning and ending amount of 2018, we had no outstanding borrowings under this facility; however, we had $30unrecognized tax benefit is presented below:
| | | | | | | | | | | | | | | | | |
(In thousands) | 2021 | | 2020 | | 2019 |
| | | | | |
Unrecognized tax benefit - beginning balance | $ | 22,204 | | | $ | 19,125 | | | $ | 18,688 | |
Gross decreases - tax positions in prior periods | (7,252) | | | (3,964) | | | (2,383) | |
Gross increases - tax positions in prior periods | 8,235 | | | 312 | | | 1,220 | |
Gross increases - tax positions in current year | 6,479 | | | 6,595 | | | 1,607 | |
Gross increases - acquisition of businesses | 5,112 | | | — | | | — | |
Currency translation | (439) | | | 136 | | | (7) | |
| | | | | |
Unrecognized tax benefit - ending balance | $ | 34,339 | | | $ | 22,204 | | | $ | 19,125 | |
If recognized, $29 million of outstanding lettersthe unrecognized tax benefit will favorably impact our effective tax rate. It is reasonably possible that our unrecognized tax benefits may decrease by up to $12 million within the next twelve months. Our federal returns have been examined by the Internal Revenue Service through 2016. Our federal returns are open for examination for 2017 and thereafter.We have various state and foreign returns under examination.
The ending amounts of credit, which reducedaccrued interest and penalties related to unrecognized tax benefits were $6 million in 2021 and $5 million in 2020. We classify interest and penalties as income tax expense in our available borrowing capacityconsolidated statement of operations, and our income tax expense for 2021, 2020, and 2019 each included $1 million of interest and penalties.
The foreign portion of our earnings before income taxes was $136 million, $208 million, and $109 million in 2021, 2020, and 2019 respectively, and the remaining portion was domestic.
(15) Earnings Per Share
A reconciliation of the numerators and the denominators of the basic and diluted per share computations are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
| Earnings | | Shares | | Per-Share | | Earnings | | Shares | | Per-Share | | Earnings | | Shares | | Per-Share |
(In thousands, except per share data) | (Numerator) | | (Denominator) | | Amount | | (Numerator) | | (Denominator) | | Amount | | (Numerator) | | (Denominator) | | Amount |
| | | | | | | | | | | | | | | | | |
Basic earnings per share: | | | | | | | | | | | | | | | | | |
Income available to common shareholders | $ | 555,596 | | | 298,725 | | | $ | 1.86 | | | $ | 780,088 | | | 306,669 | | | $ | 2.54 | | | $ | 529,454 | | | 318,229 | | | $ | 1.66 | |
Effect of dilutive securities: | | | | | | | | | | | | | | | | | |
Stock options, non-vested shares and share units | — | | | 2,548 | | | | | — | | | 2,467 | | | | | — | | | 3,006 | | | |
Diluted earnings per share: | | | | | | | | | | | | | | | | | |
Income available to common shareholders including assumed conversions | $ | 555,596 | | | 301,273 | | | $ | 1.84 | | | $ | 780,088 | | | 309,136 | | | $ | 2.52 | | | $ | 529,454 | | | 321,235 | | | $ | 1.65 | |
Options to $70 million.
Covenant Compliance
Aspurchase 0.4 million, 4.1 million and 9.6 million shares of December 29, 2018, wecommon stock at per share prices ranging from $52.32 to $76.49, $52.32 to $76.49 and $52.32 to $75.83, were in compliance with all debt covenants.
Minimum annual payments under existing capital lease obligations and maturities of indebtedness outstanding at the end of 20182021, 2020 and 2019, respectively, but were not included in the computation of diluted earnings per share because they were anti-dilutive.
(16) Share-Based Compensation and Equity
Stock Option and Equity Plans
At the end of 2021, we had two fixed stock option and equity plans in effect for associates and directors. This includes one plan from which we could issue grants, the Cerner Corporation 2011 Omnibus Equity Incentive Plan (the "Omnibus Plan"); and one plan from which no new grants are permitted, but some awards remain outstanding (Plan E).
Awards under the Omnibus Plan may consist of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, performance grants and bonus shares. At the end of 2021, 12.5 million shares remain available for awards. Stock options granted under the Omnibus Plan are exercisable at a price not less than fair market value on the date of grant. Stock options under the Omnibus Plan typically vest over a period of 4 or 5 years and are exercisable for periods of up to 10 years.
Stock Options
The fair market value of each stock option award granted in 2020 and 2019 was estimated on the date of grant using the Black-Scholes-Merton ("BSM") pricing model. The pricing model requires the use of the following estimates and assumptions:
•Expected volatilities under the BSM model are based on an equal weighting of implied volatilities from traded options on our common shares and historical volatility.
•The expected term of stock options granted is the period of time for which an option is expected to be outstanding beginning on the grant date. Our calculation of expected term takes into account the contractual term of the option, as well as the effects of employees' historical exercise patterns; groups of associates (executives and non-executives) that have similar historical behavior are considered separately for valuation purposes.
•The risk-free rate is based on the zero-coupon U.S. Treasury bond with a term consistent with the expected term of the awards.
The weighted-average assumptions used to estimate the fair market value of stock options were as follows:
| | | | | | | | | | | | | | |
| | For the Years Ended |
| | 2020 | | 2019 |
| | | | |
Expected volatility (%) | | 24.5 | % | | 25.0 | % |
Expected dividend rate (%) | | 1 | % | | 1 | % |
Expected term (yrs) | | 6 | | 7 |
Risk-free rate (%) | | 1.1 | % | | 2.4 | % |
Stock option activity for 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 | 10,204 | | | $ | 58.59 | | | | | |
Granted | — | | | — | | | | | |
Exercised | (5,276) | | | 57.75 | | | | | |
Forfeited and expired | (258) | | | 57.32 | | | | | |
Outstanding at end of year | 4,670 | | | 59.61 | | | $ | 155,331 | | | 4.64 |
| | | | | | | |
Exercisable at end of year | 3,365 | | | $ | 58.85 | | | $ | 114,503 | | | 4.02 |
| | | | | | | | | | | | | | | | | |
| For the Years Ended |
(In thousands, except for grant date fair values) | 2021 | | 2020 | | 2019 |
| | | | | |
Weighted-average grant date fair values | $ | — | | | $ | 16.64 | | | $ | 17.51 | |
| | | | | |
Total intrinsic value of options exercised | $ | 110,916 | | | $ | 115,607 | | | $ | 155,202 | |
| | | | | |
Cash received from exercise of stock options | 304,078 | | | 253,605 | | | 258,036 | |
| | | | | |
Tax benefit realized upon exercise of stock options | 24,791 | | | 27,103 | | | 36,629 | |
At the end of 2021, there was $14 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 1.20 years.
Non-vested Shares and Share Units
Non-vested shares and share units are valued at fair market value on the date of grant and will vest provided the recipient, if a member of the Board of Directors, has continuously served on the Board of Directors through such vesting date or, in the case of an associate, provided that service and/or performance measures are attained. The expense associated with these grants is recognized over the period from the date of grant to the vesting date.
Non-vested share and share unit activity for 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 | 4,131 | | | $ | 68.05 | |
Granted | 2,872 | | | 76.01 | |
Vested | (2,681) | | | 68.24 | |
Forfeited | (678) | | | 72.53 | |
| | | |
Outstanding at end of year | 3,644 | | | $ | 73.35 | |
| | | | | | | | | | | | | | | | | |
| For the Years Ended |
(In thousands, except for grant date fair values) | 2021 | | 2020 | | 2019 |
| | | | | |
Weighted average grant date fair values for shares granted during the year | $ | 76.01 | | | $ | 70.12 | | | $ | 66.49 | |
| | | | | |
Total fair value of shares vested during the year | $ | 202,543 | | | $ | 70,355 | | | $ | 30,558 | |
At the end of 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 1.99 years.
Associate Stock Purchase Plan
We maintain an associate stock purchase plan ("ASPP"), which qualifies under Section 423 of the Internal Revenue Code. Generally, the ASPP provides our U.S. based associates the opportunity to purchase shares of our common stock at a 15% discount. Purchases of shares are made on the open market and subsequently reissued to participants of the ASPP. The difference between the open market purchase price and the cost to the participants is recognized as compensation expense, as such difference is paid by Cerner, in cash.
Share-Based Compensation Cost
Our stock option and non-vested share and share unit awards qualify for equity classification. The costs of our ASPP, along with participant contributions, are recorded as a liability until open market purchases are completed. The amounts recognized in the consolidated statements of operations with respect to stock options, non-vested shares and share units and ASPP are as follows:
| | | | | | | | | | | | | | | | | |
| For the Years Ended |
(In thousands) | 2021 | | 2020 | | 2019 |
| | | | | |
Stock option and non-vested share and share unit compensation expense | $ | 195,654 | | | $ | 153,449 | | | $ | 103,641 | |
Associate stock purchase plan expense | 5,786 | | | 5,478 | | | 6,053 | |
Amounts capitalized in software development costs, net of amortization | (4,199) | | | (4,867) | | | (410) | |
| | | | | |
Amounts charged against earnings, before income tax benefit | $ | 197,241 | | | $ | 154,060 | | | $ | 109,284 | |
| | | | | |
Amount of related income tax benefit recognized in earnings | $ | 38,623 | | | $ | 30,775 | | | $ | 20,967 | |
| | | | | |
| | | | | |
| | | | | |
Preferred Stock
At the end of 2021 and 2020, we had 1.0 million shares of authorized but unissued preferred stock, $0.01 par value.
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
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Capital Lease Obligations | | | | | | |
(In thousands) | Minimum Lease Payments | | Less: Interest | | Principal | | Senior Notes | | Other | | Total |
| | | | | | | | | | | |
2019 | $ | 5,057 |
| | $ | 143 |
| | $ | 4,914 |
| | $ | — |
| | $ | — |
| | $ | 4,914 |
|
2020 | — |
| | — |
| | — |
| | — |
| | 2,500 |
| | 2,500 |
|
2021 | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
2022 | — |
| | — |
| | — |
| | 225,000 |
| | 1,100 |
| | 226,100 |
|
2023 | — |
| | — |
| | — |
| | — |
| | 1,700 |
| | 1,700 |
|
2024 and thereafter | — |
| | — |
| | — |
| | 200,000 |
| | 8,862 |
| | 208,862 |
|
| | | | | | | | | | | |
Total | $ | 5,057 |
| | $ | 143 |
| | $ | 4,914 |
| | $ | 425,000 |
| | $ | 14,162 |
| | $ | 444,076 |
|
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 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 was 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. (10)
During 2021, 2020, and 2019, we repurchased 20.0 million, 10.6 million, and 18.8 million shares for total consideration of $1.50 billion, $757 million, and $1.30 billion, respectively, 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. As of December 31, 2021, $3.18 billion remains available for repurchase under the 2021 Share Repurchase Program.
Dividends
Cash dividend activity in 2021, 2020, and 2019 was as follows:
| | | | | | | | | | | | | | | | | | | | |
Date Declared | | Date of Record | | Payment Date | | Amount per Share |
| | | | | | |
May 29, 2019 | | June 18, 2019 | | July 26, 2019 | | $0.18 |
September 10, 2019 | | September 25, 2019 | | October 9, 2019 | | $0.18 |
December 12, 2019 | | December 27, 2019 | | January 9, 2020 | | $0.18 |
March 19, 2020 | | April 3, 2020 | | April 17, 2020 | | $0.18 |
May 21, 2020 | | June 5, 2020 | | July 17, 2020 | | $0.18 |
September 10, 2020 | | September 25, 2020 | | October 13, 2020 | | $0.18 |
December 10, 2020 | | December 28, 2020 | | January 12, 2021 | | $0.22 |
March 25, 2021 | | April 6, 2021 | | April 20, 2021 | | $0.22 |
May 19, 2021 | | June 28, 2021 | | July 13, 2021 | | $0.22 |
September 9, 2021 | | September 27, 2021 | | October 12, 2021 | | $0.22 |
December 9, 2021 | | December 27, 2021 | | January 11, 2022 | | $0.27 |
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 December 31, 2021 and December 31, 2020, our consolidated balance sheets included liabilities for dividends payable of $81 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 29, 2018 | $ | (102,939) | | | $ | — | | | $ | (613) | | | $ | (103,552) | |
Other comprehensive income (loss) before reclassifications | (3,408) | | | (13,078) | | | 901 | | | (15,585) | |
Amounts reclassified from AOCI | — | | | 500 | | | (23) | | | 477 | |
| | | | | | | |
Balance at December 28, 2019 | (106,347) | | | (12,578) | | | 265 | | | (118,660) | |
| | | | | | | |
Other comprehensive income (loss) before reclassifications | 12,897 | | | (23,687) | | | 194 | | | (10,596) | |
Amounts reclassified from AOCI | — | | | 8,477 | | | (25) | | | 8,452 | |
| | | | | | | |
Balance at December 31, 2020 | (93,450) | | | (27,788) | | | 434 | | | (120,804) | |
| | | | | | | |
Other comprehensive income (loss) before reclassifications | (21,180) | | | 4,241 | | | (440) | | | (17,379) | |
Amounts reclassified from AOCI | — | | | 10,586 | | | 39 | | | 10,625 | |
| | | | | | | |
Balance at December 31, 2021 | $ | (114,630) | | | $ | (12,961) | | | $ | 33 | | | $ | (127,558) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
The effects on net earnings of amounts reclassified from AOCI were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | | | | Years Ended |
AOCI Component | | Location | | 2021 | | 2020 | | 2019 |
| | | | | | | | |
Unrealized loss on cash flow hedge | | Other income, net | | $ | (13,150) | | | $ | (10,622) | | | $ | (624) | |
| | Income taxes | | 2,564 | | | 2,145 | | | 124 | |
| | | | | | | | |
| | Net of tax | | (10,586) | | | (8,477) | | | (500) | |
| | | | | | | | |
Unrealized holding gain (loss) on available-for-sale investments
| | Other income, net | | (48) | | | 31 | | | 29 | |
| | Income taxes | | 9 | | | (6) | | | (6) | |
| | | | | | | | |
| | Net of tax | | (39) | | | 25 | | | 23 | |
| | | | | | | | |
Total amount reclassified, net of tax | | | | $ | (10,625) | | | $ | (8,452) | | | $ | (477) | |
(17) Defined Contribution Retirement Plans
We maintain certain defined contribution retirement plans (the "Plans"), which qualify under Section 401(k) of the Internal Revenue Code. Generally, the Plans allow our U.S. associates to make salary contributions to the Plans, subject to annual limitations determined by the Internal Revenue Service. The Plans provide for certain discretionary matches on behalf of the participants for which we recognized expenses of $38 million, $61 million and $59 million in 2021, 2020 and 2019, respectively.
(18) Purchase Obligations
We have purchase commitments with various vendors, under agreements through 2030. Aggregate future payments under these commitments are as follows:
| | | | | |
(In thousands) | Purchase Obligations |
| |
2022 | $ | 54,308 | |
2023 | 54,308 | |
2024 | 40,933 | |
2025 | 45,819 | |
2026 | 52,054 | |
2027 and thereafter | 368,882 | |
| |
| $ | 616,304 | |
(19) 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").
The terms of our software license agreements with our clients generally provide for a limited indemnification of such clients against losses, expenses and liabilities arising from third party claims based on alleged infringement by our solutions of an intellectual property right of such third party. The terms of such indemnification often limit the scope of and remedies for such indemnification obligations and generally include a right to replace or modify an infringing solution. To date, we have not had to reimburse any of our clients for any judgments or settlements to third parties related to these indemnification provisions pertaining to intellectual property infringement claims. For several reasons, including the lack of a sufficient number of prior indemnification claims and the lack of a monetary liability limit for certain infringement cases 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.
Refer to Note (3) with regard to our dispute with Fujitsu.
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 and breaches of contract and warranties. 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 such claims to be material to our consolidated financial statements.
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.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.
(11) Other Income
A summaryOn May 16, 2019, Steward Health Care System LLC ("Steward") filed a lawsuit in the Chancery Court for Davidson County, Tennessee against the Company. The Company believes Steward's allegations arise out of non-operating incomeSteward's disinterest in following the contract between the Company and expense is as follows:
|
| | | | | | | | | | | |
| For the Years Ended |
(In thousands) | 2018 | | 2017 | | 2016 |
| | | | | |
Interest income | $ | 34,211 |
| | $ | 18,933 |
| | $ | 15,252 |
|
Interest expense | (7,987 | ) | | (8,012 | ) | | (4,479 | ) |
Other | (158 | ) | | (4,263 | ) | | (3,352 | ) |
| | | | | |
Other income, net | $ | 26,066 |
| | $ | 6,658 |
| | $ | 7,421 |
|
(12) Income Taxes
Income tax expense (benefit)Steward's predecessor for 2018, 2017clinical and 2016 consistsfinancial software and services after Steward closed on its acquisition of the following:predecessor. The Company has filed a counterclaim against Steward seeking recovery of more than $42 million in unpaid invoices owed to the Company. The Company believes the dispute is in the ordinary course of business and the damages Steward asserts lack both factual and causal support. Steward has recently asserted that its damages are $300 million and advised the Company that it will seek to treble the damages. We have not concluded that a material loss related to the Steward allegations is probable, nor have we accrued a liability related to these claims. Although we believe a loss could be reasonably possible (as defined in ASC 450), we do not have sufficient information to determine the amount or range of reasonably possible loss with respect to the potential damages given that the dispute is in the discovery process. We will continue to vigorously defend against these claims, and we continue to believe that we have valid grounds for recovery of the disputed client receivables. However, there can be no assurances as to the outcome of the dispute.
On March 22, 2021, Astria Health ("Astria") filed an adversary proceeding in the United States Bankruptcy Court, Eastern District of Washington against the Company. Astria's allegations largely arise out of the Company's provision of revenue
|
| | | | | | | | | | | |
| For the Years Ended |
(In thousands) | 2018 | | 2017 | | 2016 |
| | | | | |
Current: | | | | | |
Federal | $ | 89,551 |
| | $ | 37,708 |
| | $ | 252,795 |
|
State | 24,804 |
| | 4,878 |
| | 31,642 |
|
Foreign | 22,009 |
| | 10,156 |
| | 9,030 |
|
Total current expense | 136,364 |
| | 52,742 |
| | 293,467 |
|
Deferred: | | | | | |
Federal | 31,129 |
| | 13,676 |
| | (18,014 | ) |
State | 8,144 |
| | 23,278 |
| | (2,103 | ) |
Foreign | (4,845 | ) | | 10,455 |
| | 8,600 |
|
Total deferred expense (benefit) | 34,428 |
| | 47,409 |
| | (11,517 | ) |
| | | | | |
Total income tax expense | $ | 170,792 |
| | $ | 100,151 |
| | $ | 281,950 |
|
cycle services in 2018 and 2019. The Company believes the dispute is in the ordinary course of business and the factual allegations and the damages asserted lack both factual and causal support. Astria has recently claimed damages of $96 million. We have not concluded that a material loss related to the Astria allegations is probable, nor have we accrued a liability related to these claims beyond reserving certain bankruptcy-related outstanding invoices. Although we believe a loss could be reasonably possible (as defined in ASC 450), we do not have sufficient information to determine the amount or range of reasonably possible loss with respect to the potential damages given that expert discovery is not yet complete. We will continue to vigorously defend against this claim. However, there can be no assurances as to the outcome of the dispute.
Temporary differences between the financial statement carrying amounts and tax basisThe terms of assetsour agreements with our clients generally provide for limited indemnification of such clients against losses, expenses and liabilities that give rise to significant portions of deferred income taxes at the end of 2018 and 2017 relate to the following:
|
| | | | | | | |
(In thousands) | 2018 | | 2017 |
| | | |
Deferred tax assets: | | | |
Accrued expenses | $ | 31,273 |
| | $ | 23,295 |
|
Tax credits and separate return net operating losses | 22,826 |
| | 26,304 |
|
Share-based compensation | 60,901 |
| | 56,263 |
|
Other | 14,951 |
| | 17,754 |
|
Gross deferred tax assets | 129,951 |
| | 123,616 |
|
Less: Valuation Allowance | (1,404 | ) | | — |
|
Total deferred tax assets | 128,547 |
| | 123,616 |
|
| | | |
Deferred tax liabilities: | | | |
Software development costs | (229,624 | ) | | (208,494 | ) |
Depreciation and amortization | (131,516 | ) | | (96,492 | ) |
Prepaid expenses | (39,154 | ) | | (21,214 | ) |
Contract and service revenues and costs | (35,933 | ) | | (65,043 | ) |
Other | (6,199 | ) | | (10,400 | ) |
Total deferred tax liabilities | (442,426 | ) | | (401,643 | ) |
| | | |
Net deferred tax liability | $ | (313,879 | ) | | $ | (278,027 | ) |
At the end of 2018, we had net operating loss carry-forwardsarising from foreign jurisdictions of $30 million that are available to offset future taxable income with no expiration. In addition, we had a state income tax credit carry-forward of $12 million available to offset income tax liabilities through 2030. We expect to fully utilize the net operating loss and tax credit carry-forwards in future periods.
At the end of 2018, we had not provided taxthird party or other claims based on, the cumulative undistributed earnings of certain foreign subsidiaries of approximately $69 million, because it is our intention to reinvest these earnings indefinitely. The unrecognized deferred tax liability relating to these earnings is approximately $15 million.
The effective income tax rates for 2018, 2017, and 2016 were 21%, 10%, and 31%, respectively. These effective rates differ from the U.S. federal statutory rate of 21% for 2018 and 35% for 2017 and 2016 as follows:
|
| | | | | | | | | | | |
| For the Years Ended |
(In thousands) | 2018 | | 2017 | | 2016 |
| | | | | |
Tax expense at statutory rates | $ | 168,179 |
| | $ | 338,495 |
| | $ | 321,452 |
|
State income tax, net of federal benefit | 25,321 |
| | 22,214 |
| | 22,644 |
|
Tax credits | (19,737 | ) | | (17,727 | ) | | (23,881 | ) |
Foreign rate differential | (4,851 | ) | | (26,379 | ) | | (16,468 | ) |
Share-based compensation | (1,696 | ) | | (62,501 | ) | | — |
|
Change in U.S. tax rate | — |
| | (170,999 | ) | | — |
|
Deemed mandatory repatriation | — |
| | 25,114 |
| | — |
|
Permanent differences | 6,224 |
| | (10,700 | ) | | (20,330 | ) |
Other, net | (2,648 | ) | | 2,634 |
| | (1,467 | ) |
| | | | | |
Total income tax expense | $ | 170,792 |
| | $ | 100,151 |
| | $ | 281,950 |
|
H.R. 1, An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018 ("U.S. Tax Reform"), was enacted on December 22, 2017. U.S. Tax reform provides for, 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 reductionscope 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 U.S. corporate tax rate from 35%corresponding agreements with our clients, we cannot determine the maximum amount of potential future payments, if any, related to 21%, effective January 1, 2018. The impact of U.S. Tax Reform on our 2017 taxsuch indemnification provisions.
rate includes the impact of the revaluation of our net deferred tax liabilityIn addition to the lower enacted tax rate,commitments and the impact of mandatory deemed repatriation. U.S. Tax Reform impacts our 2018 tax rate through the reduced federal statutory tax rate, partially offset by the repeal of the permanent domestic production deduction and increases to permanently nondeductible expenses, as well as a new global intangible low-taxed income ("GILTI") inclusion. We have elected to account for GILTIobligations in the periodordinary course of business, we are involved in which it is incurred,various other legal proceedings and therefore haveclaims 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 providedbelieve the range of potential losses under any deferred tax impacts of GILTI inclaims to be material to our consolidated financial statements for 2017 or 2018.statements.
Relevant accounting guidance provides that the impact of the enactment of U.S. Tax Reform may be provisionally recorded in 2017 and adjusted during a measurement period of up to one year. As of December 30, 2017, we provisionally recorded certain impacts of U.S. Tax Reform including the adjustment to our net deferred tax liability arising from the reduction in the federal tax rate as well as the impact of mandatory deemed repatriation. Adjustments to these provisional amounts that we recorded in 2018 did not have a significant impact on our consolidated financial statements. Our accounting for the effects of the enactment of U.S. Tax Reform is now complete.
A reconciliation of the beginning and ending amount of unrecognized tax benefit is presented below:
|
| | | | | | | | | | | |
(In thousands) | 2018 | | 2017 | | 2016 |
| | | | | |
Unrecognized tax benefit - beginning balance | $ | 15,287 |
| | $ | 9,769 |
| | $ | 4,878 |
|
Gross decreases - tax positions in prior periods | — |
| | (1,734 | ) | | — |
|
Gross increases - tax positions in prior periods | 1,591 |
| | 7,252 |
| | — |
|
Gross increases - tax positions in current year | 2,370 |
| | — |
| | 6,945 |
|
Settlements | (541 | ) | | — |
| | (1,859 | ) |
Currency translation | (19 | ) | | — |
| | (195 | ) |
| | | | | |
Unrecognized tax benefit - ending balance | $ | 18,688 |
| | $ | 15,287 |
| | $ | 9,769 |
|
The ending amounts of accrued interest and penalties related to unrecognized tax benefits were $3 million in 2018 and $2 million in 2017. We classify interest and penalties as income tax expense in our consolidated statement of operations, and our income tax expense for 2018 includes $1 million of interest and penalties.
The foreign portion of our earnings before income taxes was $89 million, $126 million, and $86 million in 2018, 2017, and 2016 respectively, and the remaining portion was domestic.
(13) Earnings Per Share
A reconciliation of the numerators and the denominators of the basic and diluted per share computations are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2018 | | 2017 | | 2016 |
| Earnings | | Shares | | Per-Share | | Earnings | | Shares | | Per-Share | | Earnings | | Shares | | Per-Share |
(In thousands, except per share data) | (Numerator) | | (Denominator) | | Amount | | (Numerator) | | (Denominator) | | Amount | | (Numerator) | | (Denominator) | | Amount |
| | | | | | | | | | | | | | | | | |
Basic earnings per share: | | | | | | | | | | | | | | | | | |
Income available to common shareholders | $ | 630,059 |
| | 330,084 |
| | $ | 1.91 |
| | $ | 866,978 |
| | 331,373 |
| | $ | 2.62 |
| | $ | 636,484 |
| | 337,740 |
| | $ | 1.88 |
|
Effect of dilutive securities: | | | | | | | | | | | | | | | | | |
Stock options and non-vested shares | — |
| | 3,488 |
| | | | — |
| | 6,626 |
| | | | — |
| | 5,913 |
| | |
Diluted earnings per share: | | | | | | | | | | | | | | | | | |
Income available to common shareholders including assumed conversions | $ | 630,059 |
| | 333,572 |
| | $ | 1.89 |
| | $ | 866,978 |
| | 337,999 |
| | $ | 2.57 |
| | $ | 636,484 |
| | 343,653 |
| | $ | 1.85 |
|
Options to purchase 12.9 million, 10.6 million and 9.4 million shares of common stock at per share prices ranging from $50.04 to $73.40, $50.04 to $73.40 and $47.38 to $73.40, were outstanding at the end of 2018, 2017 and 2016, respectively, but were not included in the computation of diluted earnings per share because they were anti-dilutive.
(14) Share-Based Compensation and Equity
Stock Option and Equity Plans
As of the end of 2018, we had five fixed stock option and equity plans in effect for associates and directors. This includes one plan from which we could issue grants, the Cerner Corporation 2011 Omnibus Equity Incentive Plan (the "Omnibus Plan"); and four plans from which no new grants are permitted, but some awards remain outstanding (Plans D, E, F, and G).
Awards under the Omnibus Plan may consist of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, performance grants and bonus shares. At the end of 2018, 7.4 million shares remain available for awards. Stock options granted under the Omnibus Plan are exercisable at a price not less than fair market value on the date of grant. Stock options under the Omnibus Plan typically vest over a period of five years and are exercisable for periods of up to 10 years.
Stock Options
The fair market value of each stock option award granted in 2018 is estimated on the date of grant using the Black-Scholes-Merton ("BSM") pricing model. The pricing model requires the use of the following estimates and assumptions:
Expected volatilities under the BSM model are based on an equal weighting of implied volatilities from traded options on our common shares and historical volatility.
The expected term of stock options granted is the period of time for which an option is expected to be outstanding beginning on the grant date. Our calculation of expected term takes into account the contractual term of the option, as well as the effects of employees' historical exercise patterns; groups of associates (executives and non-executives) that have similar historical behavior are considered separately for valuation purposes.
The risk-free rate is based on the zero-coupon U.S. Treasury bond with a term consistent with the expected term of the awards.
The weighted-average assumptions used to estimate the fair market value of stock options were as follows:
|
| | | | | | | | | |
| | For the Years Ended |
| | 2018 | | 2017 | | 2016 |
| | | | | | |
Expected volatility (%) | | 27.0 | % | | 26.7 | % | | 29.4 | % |
Expected term (yrs) | | 7 |
| | 7 |
| | 7 |
|
Risk-free rate (%) | | 2.8 | % | | 2.1 | % | | 1.5 | % |
Stock option activity for 2018 was as follows:
|
| | | | | | | | | | | | |
(In thousands, except per share data) | Number of Shares | | Weighted- Average Exercise Price | | Aggregate Intrinsic Value | | Weighted-Average Remaining Contractual Term (Yrs) |
Outstanding at beginning of year | 21,332 |
| | $ | 49.40 |
| | | | |
Granted | 3,598 |
| | 58.35 |
| | | | |
Exercised | (2,660 | ) | | 35.37 |
| | | | |
Forfeited and expired | (478 | ) | | 62.46 |
| | | | |
Outstanding at end of year | 21,792 |
| | 52.31 |
| | $ | 118,831 |
| | 6.28 |
| | | | | | | |
Exercisable at end of year | 11,045 |
| | $ | 44.60 |
| | $ | 118,054 |
| | 4.48 |
|
| | | | | | | | | | | |
| For the Years Ended |
(In thousands, except for grant date fair values) | 2018 | | 2017 | | 2016 |
| | | | | |
Weighted-average grant date fair values | $ | 20.13 |
| | $ | 20.50 |
| | $ | 18.31 |
|
| | | | | |
Total intrinsic value of options exercised | $ | 74,530 |
| | $ | 252,277 |
| | $ | 177,375 |
|
| | | | | |
Cash received from exercise of stock options | 91,349 |
| | 76,705 |
| | 63,794 |
|
| | | | | |
Tax benefit realized upon exercise of stock options | 17,233 |
| | 85,657 |
| | 64,347 |
|
As of the end of 2018, there was $148 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 3.23 years.
Non-vested Shares and Share Units
Non-vested shares and share units are valued at fair market value on the date of grant and will vest provided the recipient has continuously served on the Board of Directors through such vesting date or, in the case of an associate, provided that service and/or performance measures are attained. The expense associated with these grants is recognized over the period from the date of grant to the vesting date.
Non-vested share and share unit activity for 2018 was as follows:
|
| | | | | | |
(In thousands, except per share data) | Number of Shares | | Weighted-Average Grant Date Fair Value |
| | | |
Outstanding at beginning of year | 799 |
| | $ | 66.76 |
|
Granted | 537 |
| | 59.34 |
|
Vested | (432 | ) | | 65.77 |
|
Forfeited | (22 | ) | | 62.94 |
|
| | | |
Outstanding at end of year | 882 |
| | $ | 62.82 |
|
|
| | | | | | | | | | | |
| For the Years Ended |
(In thousands, except for grant date fair values) | 2018 | | 2017 | | 2016 |
| | | | | |
Weighted average grant date fair values for shares granted during the year | $ | 59.34 |
| | $ | 66.97 |
| | $ | 57.22 |
|
| | | | | |
Total fair value of shares vested during the year | $ | 26,264 |
| | $ | 11,050 |
| | $ | 12,221 |
|
As of the end of 2018, there was $32 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 1.94 years.
Associate Stock Purchase Plan
We established an Associate Stock Purchase Plan ("ASPP") in 2001, which qualifies under Section 423 of the Internal Revenue Code. Each individual employed by us and associates of our U.S. based subsidiaries, except as provided below, are eligible to participate in the ASPP ("Participants"). The following individuals are excluded from participation: (a) persons who, as of the beginning of a purchase period under the Plan, have been continuously employed by us or our domestic subsidiaries for less than two weeks; (b) persons who, as of the beginning of a purchase period, own directly or indirectly, or hold options or rights to acquire under any agreement or Company plan, an aggregate of 5% or more of the total combined voting power or value of all outstanding shares of all classes of Company common stock; and, (c) persons who are customarily employed by us for less than 20 hours per week or for less than five months in any calendar year. Participants may elect to make contributions from 1% to 20% of compensation to the ASPP, subject to annual limitations determined by the Internal Revenue Service. Participants may purchase Company common stock at a 15% discount on the last business day of the option period. The purchase of Company common stock is made through the ASPP on the open market and subsequently reissued to Participants. The difference between the open market purchase and the Participant's purchase price is recognized as compensation expense, as such difference is paid by Cerner, in cash.
Share-Based Compensation Cost
Our stock option and non-vested share and share unit awards qualify for equity classification. The costs of our ASPP, along with participant contributions, are recorded as a liability until open market purchases are completed. The amounts recognized in the consolidated statements of operations with respect to stock options, non-vested shares and share units and ASPP are as follows:
|
| | | | | | | | | | | |
| For the Years Ended |
(In thousands) | 2018 | | 2017 | | 2016 |
| | | | | |
Stock option and non-vested share and share unit compensation expense | $ | 95,423 |
| | $ | 83,019 |
| | $ | 74,536 |
|
Associate stock purchase plan expense | 6,082 |
| | 6,277 |
| | 6,537 |
|
Amounts capitalized in software development costs, net of amortization | 914 |
| | (327 | ) | | (482 | ) |
| | | | | |
Amounts charged against earnings, before income tax benefit | $ | 102,419 |
| | $ | 88,969 |
| | $ | 80,591 |
|
| | | | | |
Amount of related income tax benefit recognized in earnings | $ | 21,371 |
| | $ | 25,265 |
| | $ | 24,749 |
|
Preferred Stock
As of the end of 2018 and 2017, we had 1.0 million shares of authorized but unissued preferred stock, $0.01 par value.
Treasury Stock
In May 2017, our Board of Directors authorized a share repurchase program that allows the Company to repurchase up to $500 million of shares of our common stock, excluding transaction costs. In May 2018, our Board of Directors approved an amendment to the repurchase program that was authorized in May 2017. Under the amendment, the Company was authorized to repurchase up to an additional $500 million of shares of our common stock, for an aggregate of $1 billion, excluding transaction costs. 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. No time limit was set for the completion of the program. During 2018, we repurchased 11.2 million shares for total consideration of $644 million under the program. The shares were recorded as treasury stock and accounted for under the cost method. No repurchased shares have been retired. At December 29, 2018, $283 million remains available for repurchase under the outstanding program.
During 2017 and 2016, we repurchased 2.7 million and 13.7 million shares of our common stock for total consideration of $173 million and $700 million, respectively. These shares were recorded as treasury stock and accounted for under the cost method. No repurchased shares have been retired.
(15) Foundations Retirement Plan
The Cerner Corporation Foundations Retirement Plan (the "Plan") was established under Section 401(k) of the Internal Revenue Code. All associates age 18 and older and who are not a member of an excluded class are eligible to participate. Participants may elect to make pre-tax and Roth (post-tax) contributions from 1% to 80% of eligible compensation to the Plan, subject to annual limitations determined by the Internal Revenue Service. Participants may direct contributions into mutual funds, a stable value fund, a Company stock fund, or a self-directed brokerage account. The Plan has a first tier discretionary match that is made on behalf of participants in an amount equal to 33% of the first 6% of the participant's salary contribution. The Plan's first tier discretionary match expenses were $31 million, $29 million and $28 million for 2018, 2017 and 2016, respectively.
The Plan also provides for a second tier matching contribution that is purely discretionary, the payment of which will depend on overall Company performance and other conditions. If approved by the Compensation Committee, contributions by the Company will be tied to attainment of established financial metric goals, such as earnings per share for the year. Participants who defer 2% of their paid base salary, are actively employed as of the last day of the Plan year and are employed before October 1st of the Plan year are eligible to receive the second tier discretionary match contribution, if any such second tier matching contribution is approved by the Compensation Committee. For the years ended 2018 and 2016 we expensed $10 million and $8 million, respectively, for the second tier discretionary distributions.
(16) Commitments
Leases
We are committed under operating leases primarily for office and data center space through December 2029. Rent expense for office and warehouse space for our regional and global offices for 2018, 2017 and 2016 was $31 million, $31 million and $29 million, respectively. Aggregate minimum future payments under these non-cancelable operating leases are as follows:
|
| | | |
(In thousands) | Operating Lease Obligations |
| |
2019 | $ | 29,739 |
|
2020 | 27,669 |
|
2021 | 22,904 |
|
2022 | 17,240 |
|
2023 | 10,166 |
|
2024 and thereafter | 17,743 |
|
| |
| $ | 125,461 |
|
Other Obligations
We have purchase commitments with various vendors, and minimum funding commitments under collaboration agreements through 2037. Aggregate future payments under these commitments are as follows:
|
| | | |
(In thousands) | Purchase Obligations |
| |
2019 | $ | 138,851 |
|
2020 | 102,773 |
|
2021 | 24,746 |
|
2022 | 15,517 |
|
2023 | 15,486 |
|
2024 and thereafter | 26,924 |
|
| |
| $ | 324,297 |
|
(17)(20) Segment Reporting
We have two operating segments, Domestic and Global.International. Revenues are derived primarily from the sale of clinical, financial and administrative information solutions and services. The cost of revenues includes the cost of third partythird-party consulting services, 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. Operating expenses incurred by the geographic business segments consist of sales and client service expenses including salaries of sales and client service personnel, expenses associated with our managed services business, marketing expenses, communications expenses and unreimbursed travel expenses. "Other" includes expenses that have not been allocated to the operating segments, such as software development, general and administrative expenses, acquisition costscertain organizational restructuring and related adjustments,other expense, share-based compensation expense, and certain amortization and depreciation. "Other" also includes gains or losses recognized on the divestiture of businesses. Performance of the segments is assessed at the operating earnings level by our chief operating decision maker, who is our Chief Executive Officer. Items such as interest, income taxes, capital expenditures and total assets are managed at the consolidated level and thus are not included in our operating segment disclosures. Accounting policies for each of the reportable segments are the same as those used on a consolidated basis.
The following table presents a summary of our operating segments and other expense for 2018, 20172021, 2020 and 2016:2019:
| | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | Domestic | | International | | Other | | Total |
| | | | | | | |
2021 | | | | | | | |
Revenues | $ | 5,044,629 | | | $ | 720,195 | | | $ | — | | | $ | 5,764,824 | |
| | | | | | | |
Costs of revenue | 887,343 | | | 113,674 | | | — | | | 1,001,017 | |
Operating expenses | 2,358,897 | | | 277,308 | | | 1,419,326 | | | 4,055,531 | |
Total costs and expenses | 3,246,240 | | | 390,982 | | | 1,419,326 | | | 5,056,548 | |
| | | | | | | |
Operating earnings (loss) | $ | 1,798,389 | | | $ | 329,213 | | | $ | (1,419,326) | | | $ | 708,276 | |
|
| | | | | | | | | | | | | | | |
(In thousands) | Domestic | | Global | | Other | | Total |
| | | | | | | |
2018 | | | | | | | |
Revenues | $ | 4,730,266 |
| | $ | 636,059 |
| | $ | — |
| | $ | 5,366,325 |
|
| | | | | | | |
Costs of revenue | 827,904 |
| | 109,444 |
| | — |
| | 937,348 |
|
Operating expenses | 2,164,465 |
| | 321,116 |
| | 1,168,611 |
| | 3,654,192 |
|
Total costs and expenses | 2,992,369 |
| | 430,560 |
|
| 1,168,611 |
| | 4,591,540 |
|
| | | | | | | |
Operating earnings (loss) | $ | 1,737,897 |
| | $ | 205,499 |
| | $ | (1,168,611 | ) | | $ | 774,785 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | Domestic | | International | | Other | | Total |
| | | | | | | |
2020 | | | | | | | |
Revenues | $ | 4,879,769 | | | $ | 626,019 | | | $ | — | | | $ | 5,505,788 | |
| | | | | | | |
Costs of revenue | 854,574 | | | 78,367 | | | — | | | 932,941 | |
Operating expenses | 2,339,624 | | | 242,991 | | | 1,296,188 | | | 3,878,803 | |
Total costs and expenses | 3,194,198 | | | 321,358 | | | 1,296,188 | | | 4,811,744 | |
| | | | | | | |
Gain on sale of businesses | — | | | — | | | 220,523 | | | 220,523 | |
| | | | | | | |
Operating earnings (loss) | $ | 1,685,571 | | | $ | 304,661 | | | $ | (1,075,665) | | | $ | 914,567 | |
| | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | Domestic | | International | | Other | | Total |
| | | | | | | |
2019 | | | | | | | |
Revenues | $ | 5,038,127 | | | $ | 654,471 | | | $ | — | | | $ | 5,692,598 | |
| | | | | | | |
Costs of revenue | 967,035 | | | 104,006 | | | — | | | 1,071,041 | |
Operating expenses | 2,398,422 | | | 276,914 | | | 1,345,552 | | | 4,020,888 | |
Total costs and expenses | 3,365,457 | | | 380,920 | | | 1,345,552 | | | 5,091,929 | |
| | | | | | | |
Operating earnings (loss) | $ | 1,672,670 | | | $ | 273,551 | | | $ | (1,345,552) | | | $ | 600,669 | |
|
| | | | | | | | | | | | | | | |
(In thousands) | Domestic | | Global | | Other | | Total |
| | | | | | | |
2017 | | | | | | | |
Revenues | $ | 4,575,171 |
| | $ | 567,101 |
| | $ | — |
| | $ | 5,142,272 |
|
| | | | | | | |
Costs of revenue | 755,729 |
| | 98,362 |
| | — |
| | 854,091 |
|
Operating expenses | 1,998,544 |
| | 264,196 |
| | 1,064,970 |
| | 3,327,710 |
|
Total costs and expenses | 2,754,273 |
| | 362,558 |
| | 1,064,970 |
| | 4,181,801 |
|
| | | | | | | |
Operating earnings (loss) | $ | 1,820,898 |
| | $ | 204,543 |
| | $ | (1,064,970 | ) | | $ | 960,471 |
|
|
| | | | | | | | | | | | | | | |
(In thousands) | Domestic | | Global | | Other | | Total |
| | | | | | | |
2016 | | | | | | | |
Revenues | $ | 4,245,097 |
| | $ | 551,376 |
| | $ | — |
| | $ | 4,796,473 |
|
| | | | | | | |
Costs of revenue | 676,437 |
| | 102,679 |
| | — |
| | 779,116 |
|
Operating expenses | 1,774,146 |
| | 246,243 |
| | 1,085,955 |
| | 3,106,344 |
|
Total costs and expenses | 2,450,583 |
| | 348,922 |
| | 1,085,955 |
| | 3,885,460 |
|
| | | | | | | |
Operating earnings (loss) | $ | 1,794,514 |
| | $ | 202,454 |
| | $ | (1,085,955 | ) | | $ | 911,013 |
|
(18) Quarterly Results (unaudited)
Selected quarterly financial data for 2018 and 2017 is set forth below:
|
| | | | | | | | | | | | | | | | | | | |
(In thousands, except per share data) | Revenues | | Earnings Before Income Taxes | | Net Earnings | | Basic Earnings Per Share | | Diluted Earnings Per Share |
| | | | | | | | | |
2018 | | | | | | | | | |
| | | | | | | | | |
First Quarter | $ | 1,292,861 |
| | $ | 200,079 |
| | $ | 160,001 |
| | $ | 0.48 |
| | $ | 0.48 |
|
| | | | | | | | | |
Second Quarter | 1,367,727 |
| | 214,884 |
| | 169,357 |
| | 0.51 |
| | 0.51 |
|
| | | | | | | | | |
Third Quarter | 1,340,073 |
| | 214,099 |
| | 169,381 |
| | 0.51 |
| | 0.51 |
|
| | | | | | | | | |
Fourth Quarter(a) | 1,365,664 |
| | 171,789 |
| | 131,320 |
| | 0.40 |
| | 0.40 |
|
| | | | | | | | | |
Total | $ | 5,366,325 |
| | $ | 800,851 |
| | $ | 630,059 |
| | | | |
| | | | | | | | | |
(a) Fourth quarter results include a pre-tax charge of $45 million to provide an allowance against certain client receivables with Fujitsu, as further discussed in Note (3). |
|
| | | | | | | | | | | | | | | | | | | |
(In thousands, except per share data) | Revenues | | Earnings Before Income Taxes | | Net Earnings | | Basic Earnings Per Share | | Diluted Earnings Per Share |
| | | | | | | | | |
2017 | | | | | | | | | |
| | | | | | | | | |
First Quarter | $ | 1,260,486 |
| | $ | 243,010 |
| | $ | 173,213 |
| | $ | 0.52 |
| | $ | 0.52 |
|
| | | | | | | | | |
Second Quarter | 1,291,994 |
| | 252,049 |
| | 179,683 |
| | 0.54 |
| | 0.53 |
|
| | | | | | | | | |
Third Quarter | 1,276,007 |
| | 250,415 |
| | 177,424 |
| | 0.53 |
| | 0.52 |
|
| | | | | | | | | |
Fourth Quarter (b) | 1,313,785 |
| | 221,655 |
| | 336,658 |
| | 1.02 |
| | 1.00 |
|
| | | | | | | | | |
Total | $ | 5,142,272 |
| | $ | 967,129 |
| | $ | 866,978 |
| | | | |
| | | | | | | | | |
(b) Fourth quarter results include the impact of certain U.S. income tax reform enacted in December 2017 as further described in Note (12). |