Table of Contents


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X)    ☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 30,September 28, 2019
ORor
( )    ☐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)
CERNER CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
cernerlogocolora03.jpg
43-1196944
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer Identification
Number)
No.)
  
2800 Rockcreek Parkway

North Kansas City,MO64117
(Address of principal executive offices)(Zip Code)


(816) (816)221-1024
(Registrant's telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.01 par value per shareCERNThe Nasdaq Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yes☒    No ☐
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 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 [  ]Filer☒ Accelerated Filer ☐ Non-accelerated filer [  ]Filer ☐ Smaller reporting company [  ]Reporting Company ☐ Emerging growth company [  ]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 is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [  ]☐    No [X]☒
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class  Outstanding at April 17,October 16, 2019
Common Stock, $0.01 par value per share  325,420,595314,097,410 shares

CERNER CORPORATION


TABLE OF CONTENTS
Part I.Financial Information: 
   
Item 1.Financial Statements: 
   
 
Condensed Consolidated Balance Sheets as of March 30,September 28, 2019 (unaudited) and December 29, 2018
1
   
 
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended March 30,September 28, 2019 and March 31,September 29, 2018 (unaudited)
2
   
 
Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended March 30,September 28, 2019 and March 31,September 29, 2018 (unaudited)
3
   
 
Condensed Consolidated Statements of Cash Flows for the ThreeNine Months Ended March 30,September 28, 2019 and March 31,September 29, 2018 (unaudited)
4
   
 
Condensed Consolidated Statements of Changes in Shareholders' Equity for the Three and Nine Months Ended March 30,September 28, 2019 and March 31,September 29, 2018 (unaudited)
5
   
 
Notes to Condensed Consolidated Financial Statements (unaudited)
67
   
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
1623
   
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
2435
   
Item 4.
Controls and Procedures
2435
   
Part II.Other Information: 
   
Item 1A.
Risk Factors
2536
   
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
2637
   
Item 6.
Exhibits
2738
   
Signatures 



Part I. Financial Information


Item 1. Financial Statements


CERNER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
As of March 30,September 28, 2019 (unaudited) and December 29, 2018
(In thousands, except share data)2019 20182019 2018
      
Assets      
Current assets:      
Cash and cash equivalents$503,161
 $374,126
$496,430
 $374,126
Short-term investments400,509
 401,285
136,266
 401,285
Receivables, net1,159,215
 1,183,494
1,154,980
 1,183,494
Inventory24,104
 25,029
23,155
 25,029
Prepaid expenses and other336,817
 334,870
402,247
 334,870
Total current assets2,423,806
 2,318,804
2,213,078
 2,318,804
      
Property and equipment, net1,790,116
 1,743,575
1,865,924
 1,743,575
Right-of-use assets134,137
 —
121,746
 —
Software development costs, net915,149
 894,512
935,170
 894,512
Goodwill846,740
 847,544
844,926
 847,544
Intangible assets, net385,128
 405,305
347,376
 405,305
Long-term investments283,596
 300,046
403,435
 300,046
Other assets219,840
 198,850
205,775
 198,850
      
Total assets$6,998,512
 $6,708,636
$6,937,430
 $6,708,636
      
Liabilities and Shareholders' Equity      
      
Current liabilities:      
Accounts payable$290,947
 $293,534
$275,916
 $293,534
Current installments of long-term debt and capital lease obligations—
 4,914
—
 4,914
Deferred revenue337,811
 399,189
308,444
 399,189
Accrued payroll and tax withholdings230,407
 195,931
264,049
 195,931
Other current liabilities81,459
 69,122
153,187
 69,122
Total current liabilities940,624
 962,690
1,001,596
 962,690
      
Long-term debt and capital lease obligations438,823
 438,802
Long-term debt1,038,567
 438,802
Deferred income taxes343,788
 336,379
353,711
 336,379
Other liabilities146,128
 42,376
132,289
 42,376
Total liabilities1,869,363
 1,780,247
2,526,163
 1,780,247
      
Shareholders' Equity:      
Common stock, $.01 par value, 500,000,000 shares authorized, 362,919,192 shares issued at March 30, 2019 and 362,212,843 shares issued at December 29, 20183,629
 3,622
Common stock, $.01 par value, 500,000,000 shares authorized, 366,201,300 shares issued at September 28, 2019 and 362,212,843 shares issued at December 29, 20183,662
 3,622
Additional paid-in capital1,591,138
 1,559,562
1,806,939
 1,559,562
Retained earnings5,742,744
 5,576,525
5,836,984
 5,576,525
Treasury stock, 37,905,013 shares at March 30, 2019 and December 29, 2018(2,107,768) (2,107,768)
Treasury stock, 52,282,997 shares at September 28, 2019 and 37,905,013 shares at December 29, 2018(3,107,768) (2,107,768)
Accumulated other comprehensive loss, net(100,594) (103,552)(128,550) (103,552)
Total shareholders' equity5,129,149
 4,928,389
4,411,267
 4,928,389
      
Total liabilities and shareholders' equity$6,998,512
 $6,708,636
$6,937,430
 $6,708,636


See notes to condensed consolidated financial statements (unaudited).

CERNER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and nine months endedMarch 30,September 28, 2019 and March 31,September 29, 2018
(unaudited)
 
Three Months EndedThree Months Ended Nine Months Ended
(In thousands, except per share data)2019 20182019 2018 2019 2018
          
Revenues$1,389,877
 $1,292,861
$1,429,428
 $1,340,073
 $4,250,366
 $4,000,661
Costs and expenses:          
Costs of revenue253,204
 231,278
271,778
 230,332
 793,655
 700,393
Sales and client service640,187
 589,948
707,743
 605,946
 2,026,825
 1,830,999
Software development (Includes amortization of $56,245 and $50,001, respectively)180,361
 161,617
Software development (Includes amortization of $56,786 and $169,036 for the three and nine months ended September 28, 2019, respectively; and $53,429 and $155,571 for the three and nine months ended September 29, 2018, respectively)187,526
 172,297
 548,934
 502,192
General and administrative96,196
 92,294
152,321
 102,789
 398,305
 290,547
Amortization of acquisition-related intangibles21,985
 22,509
21,283
 21,553
 64,809
 65,872
          
Total costs and expenses1,191,933
 1,097,646
1,340,651
 1,132,917

3,832,528

3,390,003
          
Operating earnings197,944
 195,215
88,777
 207,156

417,838

610,658
          
Other income, net8,432
 4,864
13,535
 6,943
 44,973
 18,404
          
Earnings before income taxes206,376
 200,079
102,312
 214,099

462,811

629,062
Income taxes(40,157) (40,078)(20,377) (44,718) (87,688) (130,323)
          
Net earnings$166,219
 $160,001
$81,935
 $169,381

$375,123

$498,739
          
Basic earnings per share$0.51
 $0.48
$0.26
 $0.51
 $1.17
 $1.51
Diluted earnings per share$0.51
 $0.48
$0.26
 $0.51
 $1.16
 $1.49
Basic weighted average shares outstanding324,573
 332,395
315,876
 329,342
 320,282
 330,789
Diluted weighted average shares outstanding327,003
 336,534
319,113
 332,937
 323,361
 334,493
See notes to condensed consolidated financial statements (unaudited).



CERNER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the three and nine months endedMarch 30,September 28, 2019 and March 31,September 29, 2018
(unaudited)
Three Months EndedThree Months Ended Nine Months Ended
(In thousands)2019 20182019 2018 2019 2018
          
Net earnings$166,219
 $160,001
$81,935
 $169,381
 $375,123
 $498,739
Foreign currency translation adjustment and other (net of taxes (benefit) of $(183) and $920, respectively)2,321
 2,794
Unrealized holding gain (loss) on available-for-sale investments (net of taxes (benefit) of $210 and $(293), respectively)637
 (898)
Foreign currency translation adjustment and other (net of taxes (benefit) of $(409) and $(413) for the three and nine months ended September 28, 2019; and $(13) and $572 for the three and nine months ended September 29, 2018, respectively)(11,679) (8,907) (9,458) (27,924)
Unrealized loss on cash flow hedge (net of tax benefit of $1,327 and $5,396 for the three and nine months ended September 28, 2019, respectively)(4,037) —
 (16,407) —
Unrealized holding gain on available-for-sale investments (net of taxes of $5 and $286 for the three and nine months ended September 28, 2019; and $181 and $97 for the three and nine months ended September 29, 2018, respectively)14
 553
 867
 297
          
Comprehensive income$169,177
 $161,897
$66,233
 $161,027

$350,125

$471,112


See notes to condensed consolidated financial statements (unaudited).



CERNER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the threenine months endedMarch 30,September 28, 2019 and March 31,September 29, 2018
(unaudited)
Three Months EndedNine Months Ended
(In thousands)2019 20182019 2018
      
CASH FLOWS FROM OPERATING ACTIVITIES:      
Net earnings$166,219
 $160,001
$375,123
 $498,739
Adjustments to reconcile net earnings to net cash provided by operating activities:      
Depreciation and amortization166,671
 152,592
509,559
 473,748
Share-based compensation expense19,860
 24,935
73,421
 74,348
Provision for deferred income taxes3,998
 (3,047)22,793
 16,412
Investment gains(24,231) —
Changes in assets and liabilities:      
Receivables, net13,789
 (70,608)24,558
 (250,042)
Inventory928
 1,445
1,877
 (9,006)
Prepaid expenses and other(13,318) 125,550
(75,191) 162,053
Accounts payable(10,891) 7,608
(3,346) 21,762
Accrued income taxes4,256
 7,195
(795) (9,150)
Deferred revenue(61,547) (7,205)(89,400) 34,316
Other accrued liabilities27,301
 10,499
61,156
 33,940
      
Net cash provided by operating activities317,266
 408,965
875,524
 1,047,120
      
CASH FLOWS FROM INVESTING ACTIVITIES:      
Capital purchases(119,261) (79,711)(388,588) (305,951)
Capitalized software development costs(74,551) (73,602)(211,284) (209,122)
Purchases of investments(90,953) (151,387)(317,979) (477,156)
Sales and maturities of investments110,104
 101,674
507,258
 454,439
Purchase of other intangibles(8,994) (8,472)(25,794) (24,304)
      
Net cash used in investing activities(183,655) (211,498)(436,387) (562,094)
      
CASH FLOWS FROM FINANCING ACTIVITIES:      
Long-term debt issuance600,000
 —
Repayment of long-term debt—
 (75,000)—
 (75,000)
Proceeds from exercise of stock options15,281
 10,036
188,474
 82,001
Payments to taxing authorities in connection with shares directly withheld from associates(1,730) (1,723)(14,994) (9,749)
Treasury stock purchases(20,542) (87,624)(1,020,542) (345,210)
Dividends paid(57,293) —
Other(8,450) 2,254
      
Net cash used in financing activities(6,991)
(154,311)(312,805)
(345,704)
      
Effect of exchange rate changes on cash and cash equivalents2,415
 (680)(4,028) (11,631)
      
Net increase in cash and cash equivalents129,035
 42,476
122,304
 127,691
Cash and cash equivalents at beginning of period374,126
 370,923
374,126
 370,923
      
Cash and cash equivalents at end of period$503,161
 $413,399
$496,430
 $498,614
See notes to condensed consolidated financial statements (unaudited).

CERNER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the three and nine months ended March 30, September 28, 2019 and March 31,September 29, 2018
(unaudited)
Common Stock Additional Paid-in Capital Retained Earnings Treasury Stock Accumulated Other Comprehensive Loss, NetCommon Stock Additional Paid-in Capital Retained Earnings Treasury Stock Accumulated Other Comprehensive Loss, Net
(In thousands)Shares Amount Shares Amount 
                      
Balance at December 30, 2017359,205
 $3,592
 $1,380,371
 $4,938,866
 $(1,464,099) $(73,382)
           
Exercise of stock options (including net-settled option exercises)667
 7
 8,331
 —
 —
 —
           
Employee share-based compensation expense—
 —
 24,935
 —
 —
 —
           
Cumulative effect of accounting change (ASU 2014-09)—
 —
 —
 7,600
 —
 —
           
Other comprehensive income (loss)—
 —
 —
 —
 —
 1,896
           
Treasury stock purchases—
 —
 —
 —
 (87,624) —
           
Net earnings—
 —
 —
 160,001
 —
 —
           
Balance at March 31, 2018359,872
 $3,599
 $1,413,637
 $5,106,467
 $(1,551,723) $(71,486)
           
Balance at December 29, 2018362,213
 $3,622
 $1,559,562
 $5,576,525
 $(2,107,768) $(103,552)362,213
 $3,622
 $1,559,562
 $5,576,525
 $(2,107,768) $(103,552)
                      
Exercise of stock options (including net-settled option exercises)706
 7
 11,716
 —
 —
 —
Exercise of stock options and vests of restricted shares and share units706
 7
 11,716
 —
 —
 —
                      
Employee share-based compensation expense—
 —
 19,860
 —
 —
 —
—
 —
 19,860
 —
 —
 —
                      
Other comprehensive income (loss)—
 —
 —
 —
 —
 2,958
—
 —
 —
 —
 —
 2,958
                      
Net earnings—
 —
 —
 166,219
 —
 —
—
 —
 —
 166,219
 —
 —
                      
Balance at March 30, 2019362,919
 $3,629
 $1,591,138
 $5,742,744
 $(2,107,768) $(100,594)362,919

3,629

1,591,138

5,742,744

(2,107,768)
(100,594)
           
Exercise of stock options and vests of restricted shares and share units1,777
 18
 108,045
 —
 —
 —
           
Employee share-based compensation expense—
 —
 23,024
 —
 —
 —
           
Other comprehensive income (loss)—
 —
 —
 —
 —
 (12,254)
           
Treasury stock purchases—
 —
 —
 —
 (600,000) —
           
Cash dividends declared ($0.18 per share)—
 —
 —
 (57,682) —
 —
           
Net earnings—
 —
 —
 126,969
 —
 —
           
Balance at June 29, 2019364,696

$3,647

$1,722,207

$5,812,031

$(2,707,768)
$(112,848)
           
Exercise of stock options and vests of restricted shares and share units1,505
 15
 54,195
 —
 —
 —
           
Employee share-based compensation expense—
 —
 30,537
 —
 —
 —
           
Other comprehensive income (loss)—
 —
 —
 —
 —
 (15,702)
           
Treasury stock purchases—
 —
 —
 —
 (400,000) —
           
Cash dividends declared ($0.18 per share)—
 —
 —
 (56,982) —
 —
           
Net earnings—
 —
 —
 81,935
 —
 —
           
Balance at September 28, 2019366,201

3,662

1,806,939

5,836,984

(3,107,768)
(128,550)
See notes to condensed consolidated financial statements (unaudited).









CERNER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (continued)
For the three and nine months ended September 28, 2019 and September 29, 2018
(unaudited)
 Common Stock Additional Paid-in Capital Retained Earnings Treasury Stock Accumulated Other Comprehensive Loss, Net
(In thousands)Shares Amount    
            
Balance at December 30, 2017359,205
 $3,592
 $1,380,371
 $4,938,866
 $(1,464,099) $(73,382)
            
Exercise of stock options and vests of restricted shares and share units667
 7
 8,331
 —
 —
 —
            
Employee share-based compensation expense—
 —
 24,935
 —
 —
 —
            
Cumulative effect of accounting change (ASU 2014-09)—
 —
 —
 7,600
 —
 —
            
Other comprehensive income (loss)—
 —
 —
 —
 —
 1,896
            
Treasury stock purchases—
 —
 —
 —
 (87,624) —
            
Net earnings—
 —
 —
 160,001
 —
 —
            
Balance at March 31, 2018359,872
 3,599
 1,413,637
 5,106,467
 (1,551,723) (71,486)
            
Exercise of stock options and vests of restricted shares and share units629
 6
 5,962
 —
 —
 —
            
Employee share-based compensation expense—
 —
 24,204
 —
 —
 —
            
Other comprehensive income (loss)—
 —
 —
 —
 —
 (21,169)
            
Treasury stock purchases—
 —
 —
 —
 (200,000) —
            
Net earnings—
 —
 —
 169,357
 —
 —
            
Balance at June 30, 2018360,501
 $3,605
 $1,443,803
 $5,275,824
 $(1,751,723) $(92,655)
            
Exercise of stock options and vests of restricted shares and share units1,366
 14
 58,212
 —
 —
 —
            
Employee share-based compensation expense—
 —
 25,209
 —
 —
 —
            
Other comprehensive income (loss)—
 —
 —
 —
 —
 (8,354)
            
Treasury stock purchases—
 —
 —
 —
 (57,586) —
            
Net earnings—
 —
 —
 169,381
 —
 —
            
Balance at September 29, 2018361,867
 $3,619
 $1,527,224
 $5,445,205
 $(1,809,309) $(101,009)
See notes to condensed consolidated financial statements (unaudited).

CERNER CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
(1) Interim Statement Presentation


Basis of Presentation


The condensed consolidated financial statements included herein have been prepared by Cerner Corporation ("Cerner," the "Company," "we," "us" or "our") without audit, pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in our latest annual report on Form 10-K.
 
In management's opinion, the accompanying unaudited condensed consolidated financial statements include all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position and the results of operations and cash flows for the periods presented. Our interim results as presented in this Form 10-Q are not necessarily indicative of the operating results for the entire year.


The condensed consolidated financial statements were prepared using GAAP. 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.expenses. Actual results could differ from those estimates.


Fiscal Period End


Our firstthird fiscal quarter ends on the Saturday closest to March 31.September 30. The 2019 and 2018 firstthird quarters ended on March 30,September 28, 2019 and March 31,September 29, 2018, respectively. All references to years in these notes to condensed consolidated financial statements represent the respective three or nine months ended on such dates, unless otherwise noted.noted.


Supplemental Disclosures of Cash Flow Information
   Nine Months Ended
(In thousands)  2019 2018
Cash paid during the period for:     
Interest (including amounts capitalized of $12,575 and $9,318, respectively)  $20,756
 $15,568
Income taxes, net of refunds  65,171
 (47,462)

   Three Months Ended
(In thousands)  2019 2018
Cash paid during the period for:     
Interest (including amounts capitalized of $3,797 and $2,811, respectively)  $7,288
 $8,199
Income taxes, net of refunds  22,511
 (97,506)


Voluntary Separation PlanBenefits


In January 2019, we adopted a voluntary separation plan ("2019 VSP") for eligible associates. Generally, the 2019 VSP was available to U.S. associates who met a minimum level of combined age and tenure, excluding, among others, our executive officers. Associates who elected to participate in the 2019 VSP received financial benefits commensurate with their tenure and position, along with vacation payout, medical benefits, and accelerated vesting of certain share-based payment awards. The irrevocable acceptance period for associates electing to participate in the 2019 VSP ended in early April 2019. We expect the resulting pre-tax charge inIn the second quarter of 2019, to approximatewe recorded pre-tax charges for the 2019 VSP of $41 million. Such charge will becharges are included in general and administrative expense in our condensed consolidated statements of operations.

In the third quarter of 2019, we offered voluntary separation benefits to certain associates primarily located outside the U.S. The irrevocable acceptance period for associates to accept such offers ended in September 2019. In the third quarter of 2019, we recorded corresponding pre-tax charges of $11 million. Such charges are included in general and administrative expense in our condensed consolidated statements of operations.


Involuntary Separation Benefits

In the third quarter of 2019, we recorded pre-tax charges of $21 million in connection with the involuntary termination of approximately 250 U.S. associates. Such charges are included in general and administrative expense in our condensed consolidated statements of operations. Separation benefits for these associates include cash severance, contribution to a health reimbursement account, career transition assistance, and accelerated vesting of certain share-based payment awards. At September 28, 2019, a liability of $18 million for such obligations is included in accrued payroll and tax withholdings in our condensed consolidated balance sheets, which we expect to settle/pay in the fourth quarter of 2019.

Contract Termination Costs

In the third quarter of 2019, we recorded pre-tax charges of $60 million in connection with the termination of certain client contracts prior to end of their stated terms, the majority of which was paid in cash. Such charges are included in our domestic operating segment, and presented in sales and client service expense in our condensed consolidated statements of operations. At September 28, 2019, our condensed consolidated balance sheets do not include a liability for any obligations related to such contract terminations.

Purchase Obligations

In July 2019, we entered into an agreement with a certain vendor to purchase $650 million of cloud computing services over an initial 10-year period ending in 2029.

Accounting Pronouncements Adopted in 2019


Leases. In the first quarter of 2019, we adopted new lease accounting guidance. Refer to Note (6)(7) for further details.


Callable Debt Securities.In March 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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 would impactimpacts how premiums are amortized on our available-for-sale investments. We adopted ASU 2017-08 in the first quarter of 2019. Such guidance did not have an impact on our condensed consolidated financial statements and related disclosures.disclosures.


Accumulated Other Comprehensive Income.In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification 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. We adopted ASU 2018-02 in the first quarter of 2019, and did not elect to reclassify "stranded tax effects" from AOCI to retained earnings.earnings.


Shareholders' Equity.In August 2018, the SEC issued Final Rule Release No. 33-10532, Disclosure Update and Simplification. Such guidance, among other things, extends to interim periods the annual requirement in SEC Regulation S-X, Rule 3-04 to disclose changes in shareholders' equity. Under the requirements in SEC Regulation S-X, Rules 8-03(a)(5) and 10-01(a)(7), as amended by this new guidance, registrants must now analyze changes in shareholders' equity, in the form of a reconciliation, for the current and comparative year-to-date interim periods, with subtotals for each interim period. This guidance is effective for filings submitted on or after November 5, 2018. We have presented a separate condensed consolidated statement of changes in shareholders' equity in this Form 10-Q in order to satisfy this new disclosure requirement.requirement.


Recently Issued Accounting Pronouncements


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 did not early adopt.adopt.

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, and we do not expect to early adopt.adopt.


(2) Revenue Recognition


Disaggregation of Revenue


The following table presentstables present revenues disaggregated by our business models:
Three Months EndedThree Months Ended
2019 20182019 2018
(In thousands)
Domestic
Segment
International
Segment
Total 
Domestic
Segment
International
Segment
Total
Domestic
Segment
International
Segment
Total 
Domestic
Segment
International
Segment
Total
      
Licensed software$140,445
$14,032
$154,477
 $124,094
$10,725
$134,819
$144,599
$9,934
$154,533
 $132,447
$7,441
$139,888
Technology resale49,158
6,382
55,540
 58,249
5,127
63,376
65,103
5,072
70,175
 51,097
9,281
60,378
Subscriptions77,702
6,589
84,291
 69,852
6,784
76,636
85,230
6,674
91,904
 73,792
5,323
79,115
Professional services437,229
53,210
490,439
 379,844
61,424
441,268
446,562
60,893
507,455
 400,695
56,030
456,725
Managed services277,325
27,068
304,393
 246,145
22,160
268,305
272,933
29,502
302,435
 278,019
23,981
302,000
Support and maintenance226,481
50,482
276,963
 234,236
50,328
284,564
227,131
50,163
277,294
 229,202
48,578
277,780
Reimbursed travel22,490
1,284
23,774
 22,676
1,217
23,893
23,705
1,927
25,632
 22,902
1,285
24,187
      
Total revenues$1,230,830
$159,047
$1,389,877
 $1,135,096
$157,765
$1,292,861
$1,265,263
$164,165
$1,429,428
 $1,188,154
$151,919
$1,340,073



 Nine Months Ended
 2019 2018
(In thousands)
Domestic
Segment
International
Segment
Total 
Domestic
Segment
International
Segment
Total
        
Licensed software$466,105
$40,018
$506,123
 $417,761
$29,334
$447,095
Technology resale169,112
17,338
186,450
 171,135
27,876
199,011
Subscriptions246,505
19,460
265,965
 220,063
18,639
238,702
Professional services1,313,701
169,500
1,483,201
 1,168,079
177,232
1,345,311
Managed services818,818
85,661
904,479
 785,951
69,906
855,857
Support and maintenance679,214
151,454
830,668
 693,217
148,083
841,300
Reimbursed travel68,750
4,730
73,480
 69,108
4,277
73,385
        
Total revenues$3,762,205
$488,161
$4,250,366
 $3,525,314
$475,347
$4,000,661


The following table presentstables present our revenues disaggregated by timing of revenue recognition:
 Three Months Ended
 2019 2018
(In thousands)Domestic
Segment		International
Segment		Total 
Domestic
Segment
International
Segment		Total
        
Revenue recognized over time$1,143,470
$155,017
$1,298,487
 $1,078,029
$137,594
$1,215,623
Revenue recognized at a point in time121,793
9,148
130,941
 110,125
14,325
124,450
        
Total revenues$1,265,263
$164,165
$1,429,428
 $1,188,154
$151,919
$1,340,073

 Three Months Ended
 2019 2018
(In thousands)Domestic
Segment		International
Segment		Total 
Domestic
Segment
International
Segment		Total
        
Revenue recognized over time$1,135,982
$142,211
$1,278,193
 $1,028,495
$144,135
$1,172,630
Revenue recognized at a point in time94,848
16,836
111,684
 106,601
13,630
120,231
        
Total revenues$1,230,830
$159,047
$1,389,877
 $1,135,096
$157,765
$1,292,861


 Nine Months Ended
 2019 2018
(In thousands)Domestic
Segment		International
Segment		Total 
Domestic
Segment
International
Segment		Total
        
Revenue recognized over time$3,403,965
$445,320
$3,849,285
 $3,169,402
$425,991
$3,595,393
Revenue recognized at a point in time358,240
42,841
401,081
 355,912
49,356
405,268
        
Total revenues$3,762,205
$488,161
$4,250,366

$3,525,314
$475,347
$4,000,661



Transaction Price Allocated to Remaining Performance Obligations


As of March 30,September 28, 2019, the aggregate amount of transaction price allocated to performance obligations that are unsatisfied (or partially unsatisfied) for executed contracts approximates $14.87$13.31 billion of which we expect to recognize approximately 29%31% of the revenue over the next 12 months and the remainder thereafter.thereafter.


Contract Liabilities


Customer payments received in advance of satisfaction of the related performance obligations are deferred as contract liabilities. Such amounts are classified in our condensed consolidated balance sheets as deferred revenue. During the threenine months ended March 30, September 28, 2019, we recognized $150$342 million of revenues that were included in our contract liability balance at the beginning of such period.


(3) Receivables


A summary of net receivables is as follows:
(In thousands)September 28, 2019 December 29, 2018
    
Client receivables$1,259,584
 $1,237,127
Less: Allowance for doubtful accounts104,604
 64,561
    
Client receivables, net of allowance1,154,980
 1,172,566
    
Current portion of lease receivables (under ASC Topic 840)—
 10,928
    
Total receivables, net$1,154,980
 $1,183,494

(In thousands)March 30, 2019 December 29, 2018
    
Client receivables$1,233,419
 $1,237,127
Less: Allowance for doubtful accounts74,204
 64,561
    
Client receivables, net of allowance1,159,215
 1,172,566
    
Current portion of lease receivables (under ASC Topic 840)—
 10,928
    
Total receivables, net$1,159,215
 $1,183,494


During the first threenine months of 2019 and 2018, we received total client cash collections of $1.36$4.23 billion and $1.27$3.99 billion, respectively.
 

(4) Investments


Available-for-sale investments at March 30,September 28, 2019 were as follows:
(In thousands) Adjusted Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Adjusted Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value
                
Cash equivalents:                
Money market funds $77,709
 $—
 $—
 $77,709
 $140,504
 $—
 $—
 $140,504
Time deposits 63,300
 —
 —
 63,300
 59,585
 —
 —
 59,585
Commercial paper 72,965
 —
 —
 72,965
 27,400
 —
 —
 27,400
Total cash equivalents 213,974
 —
 —
 213,974
 227,489
 —
 —
 227,489
                
Short-term investments:                
Time deposits 35,011
 —
 —
 35,011
 5,690
 —
 —
 5,690
Commercial paper 85,631
 17
 (30) 85,618
 17,750
 13
 (10) 17,753
Government and corporate bonds 280,119
 84
 (323) 279,880
 104,077
 53
 (29) 104,101
Total short-term investments 400,761
 101
 (353) 400,509
 127,517
 66
 (39) 127,544
                
Long-term investments:                
Government and corporate bonds 1,319
 —
 (2) 1,317
 81,431
 78
 (54) 81,455
                
Total available-for-sale investments $616,054

$101

$(355)
$615,800
 $436,437

$144

$(93)
$436,488


Available-for-sale investments at December 29, 2018 were as follows:
(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

(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


We sold available-for-sale investments for proceeds of $181 million and $45 million during the nine months ended September 28, 2019 and September 29, 2018, respectively, resulting in insignificant gains/losses in each period.

Other Investments


At March 30,September 28, 2019 and December 29, 2018, we had cost methodequity investments that do not have readily determinable fair values of $314 million and $277 million.million, respectively, accounted for in accordance with Accounting Standards Codification ("ASC") Topic 321, Investments-Equity Securities. Such investments are included in long-term investments in our condensed consolidated balance sheets. We did not record any changes in the measurement of such investments for the threenine months ended ended March 30, September 28, 2019 and March 31,September 29, 2018, respectively.

(5) Long-term Debt

The following is a summary of indebtedness outstanding:
(In thousands)September 28, 2019 December 29, 2018
    
Credit agreement loans$600,000
 $—
Senior notes425,000
 425,000
Capital lease obligations (under ASC Topic 840)—
 4,914
Other14,162
 14,162
    
  Debt and capital lease obligations1,039,162
 444,076
Less: debt issuance costs(595) (360)
    
  Debt and capital lease obligations, net1,038,567
 443,716
Less: current portion—
 (4,914)
    
  Long-term debt$1,038,567
 $438,802


Credit Agreement

In May 2019, we entered into a First Amendment to our Third Amended and Restated Credit Agreement (as amended, the "Credit Agreement") with a syndicate of lenders. The Credit Agreement provides for an unsecured revolving credit facility expiring in May 2024, and includes: (a) a revolving credit loan facility of up to $700 million at any time outstanding, and (b) a letter of credit facility of up to $100 million at any time outstanding (which is a sub-facility of the $700 million revolving credit loan facility). The Credit Agreement also includes an accordion feature allowing an increase of the credit facility of up to an additional $300 million ($1 billion in the aggregate) at any time outstanding, subject to lender participation and the satisfaction of specified conditions. Borrowings outstanding under the Credit Agreement are due in May 2024, with prepayment 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. As of September 28, 2019, the interest rate on revolving credit loans outstanding was 2.84% based on LIBOR plus the applicable spread.

As of September 28, 2019, we had outstanding revolving credit loans and letters of credit of $600 million and $30 million, respectively; which reduced our available borrowing capacity to $70 million.

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%. As of September 28, 2019, this swap was in a net liability position with an aggregate fair value of $22 million, which is presented in our condensed 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 (6).

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 swap agreement is recognized in our condensed consolidated balance sheets as either an asset or liability, measured at fair value. Changes in the fair value of the swap agreement are initially recorded in accumulated other comprehensive loss, net and then subsequently recognized in our condensed consolidated statements of operations in the

(5)periods in which earnings are affected by the hedged item. All cash flows associated with the swap agreement are classified as operating activities in our condensed consolidated statements of cash flows.

(6) 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 assets measured and recorded at fair value on a recurring basis at March 30,September 28, 2019:
(In thousands)    
  
 Fair Value Measurements Using
Description Balance Sheet Classification Level 1 Level 2 Level 3
         
Money market funds Cash equivalents $140,504
 $—
 $—
Time deposits Cash equivalents —
 59,585
 —
Commercial paper Cash equivalents —
 27,400
 —
Time deposits Short-term investments —
 5,690
 —
Commercial paper Short-term investments —
 17,753
 —
Government and corporate bonds Short-term investments —
 104,101
 —
Government and corporate bonds Long-term investments —
 81,455
 —

(In thousands)    
  
 Fair Value Measurements Using
Description Balance Sheet Classification Level 1 Level 2 Level 3
         
Money market funds Cash equivalents $77,709
 $—
 $—
Time deposits Cash equivalents —
 63,300
 —
Commercial paper Cash equivalents —
 72,965
 —
Time deposits Short-term investments —
 35,011
 —
Commercial paper Short-term investments —
 85,618
 —
Government and corporate bonds Short-term investments —
 279,880
 —
Government and corporate bonds Long-term investments —
 1,317
 —


The following table details our financial assets measured and recorded at fair value on a recurring basis at December 29, 2018:
(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
 —

(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
 —
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 March 30,September 28, 2019 and December 29, 2018 was approximately $438 million$1.07 billion and $431 million, respectively. The carrying amount of such debt at both March 30,September 28, 2019 and December 29, 2018 was $1.03 billion and $425 million.million, respectively.



(6)(7) Leases


In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which introduces a new accounting model that requires most leases to be reported on the balance sheet. It also establishes disclosure requirements, which are more extensive than those required under prior U.S. GAAP. The standard requires 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 condensed consolidated balance sheets as of December 30, 2018. We did not recast comparative periods.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

(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.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 condensed consolidated financial statements.


In addition to the items described above, we also procure hotel stays and rental cars related to 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 condensed 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 condensed consolidated financial statements.


Amounts Included in the Condensed Consolidated Financial Statements


The following table presents a summary of lease liability and right-of-use asset amounts included in our condensed consolidated balance sheets as of March 30,September 28, 2019, under operating lease arrangements where we are the lessee:
(In thousands)    
Description Balance Sheet Classification September 28, 2019
     
Right-of-use asset Right-of-use assets $121,746
Lease liability - current Other current liabilities 30,080
Lease liability - non-current Other liabilities 103,177


(In thousands)    
Description Balance Sheet Classification March 30, 2019
     
Right-of-use asset Right-of-use assets $134,137
Lease liability - current Other current liabilities 29,746
Lease liability - non-current Other liabilities 112,606

Lease liabilities recorded upon the commencement of operating leases during the threenine months endedMarch 30, September 28, 2019 were $16$23 million.


For the three and nine months ended March 30,September 28, 2019, operating lease cost was $9 million and variable$28 million, respectively. Variable lease cost was less than $1 million.million for both the three and nine months ended September 28, 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
    
Remainder of 2019  $10,164
2020  32,170
2021  27,677
2022  22,185
2023  15,511
2024 and thereafter  47,394
    
Aggregate future payments  155,101
Impact of discounting  (21,844)
    
Aggregate lease liability at September 28, 2019  $133,257

(In thousands)  Operating Lease Obligations
    
Remainder of 2019  $26,506
2020  31,186
2021  26,576
2022  20,890
2023  14,092
2024 and thereafter  46,689
    
Aggregate future payments  165,939
Impact of discounting  (23,587)
    
Aggregate lease liability at March 30, 2019  $142,352


At March 30,September 28, 2019, the weighted-average remaining lease term and weighted-average discount rate for our operating lease arrangements where we are the lessee were 7.157.05 years and 3.7%, respectively.


Prior Periods

Prior to the adoption of Topic 842, we accounted for arrangements where we were the lessee under operating leases in accordance with ASC Topic 840, Leases. Rent expense for office and warehouse space for our regional and global offices for the three and nine months ended September 29, 2018 was $8 million and $25 million, respectively. Aggregate minimum future payments under these non-cancelable operating leases as of December 29, 2018, were 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


(7)(8) Income Taxes


We determine the tax provision for interim periods using an estimate of our annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter we update our estimate of the annual effective tax rate, and if our estimated tax rate changes, we make a cumulative adjustment. Our effective tax rate was 19.5%18.9% and 20.0%20.7% for the first threenine months of 2019 and 2018, respectively. The decrease in the effective tax rate in the first nine months of 2019 is primarily due to increased excess tax benefits recognized as a component of income tax expense due to elevated stock option exercise activity.


(8)(9) Earnings Per Share


A reconciliation of the numerators and the denominators of the basic and diluted per share computations are as follows:
Three Months EndedThree Months Ended
2019 20182019 2018
Earnings Shares Per-Share Earnings Shares Per-ShareEarnings Shares Per-Share Earnings Shares Per-Share
(In thousands, except per share data)(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
                      
Basic earnings per share:                      
Income available to common shareholders$166,219
 324,573
 $0.51
 $160,001
 332,395
 $0.48
$81,935
 315,876
 $0.26
 $169,381
 329,342
 $0.51
Effect of dilutive securities:                      
Stock options and non-vested shares—
 2,430
   —
 4,139
  —
 3,237
   —
 3,595
  
Diluted earnings per share:                      
Income available to common shareholders including assumed conversions$166,219
 327,003
 $0.51
 $160,001
 336,534
 $0.48
$81,935
 319,113
 $0.26
 $169,381
 332,937
 $0.51


For the three months ended March 30,September 28, 2019 and March 31,September 29, 2018,, options to purchase 13.77.7 million and 11.213.0 million shares of common stock at per share prices ranging from $47.99$54.87 to $73.40$75.83 and $51.19$50.04 to $73.40, respectively, were outstanding but were not included in the computation of diluted earnings per share because they were anti-dilutive.


 Nine Months Ended
 2019 2018
 Earnings Shares Per-Share Earnings Shares Per-Share
(In thousands, except per share data)(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
            
Basic earnings per share:           
Income available to common shareholders$375,123
 320,282
 $1.17
 $498,739
 330,789
 $1.51
Effect of dilutive securities:           
Stock options and non-vested shares—
 3,079
   —
 3,704
  
Diluted earnings per share:           
Income available to common shareholders including assumed conversions$375,123
 323,361
 $1.16
 $498,739
 334,493
 $1.49

(9)
For the nine months ended September 28, 2019 and September 29, 2018, options to purchase 10.1 million and 12.7 million shares of common stock at per share prices ranging from $51.87 to $75.83 and $50.04 to $73.40, respectively, were outstanding but were not included in the computation of diluted earnings per share because they were anti-dilutive.

(10) Share-Based Compensation and Equity


Stock Options


Stock option activity for the threenine months endedMarch 30,September 28, 2019 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)      
(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 year21,792
 $52.31
   21,792
 $52.31
   
Granted39
 55.28
   1,045
 65.53
   
Exercised(750) 19.16
   (4,821) 40.91
   
Forfeited and expired(329) 62.92
   (946) 61.39
   
Outstanding as of March 30, 201920,752
 53.34
 $138,631
 6.12
Outstanding as of September 28, 201917,070
 55.83
 $215,557
 6.24
            
Exercisable as of March 30, 201910,663
 $46.77
 $131,285
 4.40
Exercisable as of September 28, 20199,181
 $51.62
 $154,997
 4.76


The weighted-average assumptions used to estimate the fair value, under the Black-Scholes-Merton pricing model, of stock options granted during the threenine months ended March 30, September 28, 2019 were as follows:


Expected volatility (%) 25.1%
Expected dividend rate (%) 1%
Expected term (yrs) 7
Risk-free rate (%) 2.4%
Fair value per option $17.58

Expected volatility (%) 26.1%
Expected dividend rate (%) 1%
Expected term (yrs) 7
Risk-free rate (%) 2.6%
Fair value per option $15.62


As of March 30,September 28, 2019, there was $132$112 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 3.082.83 years.


Non-vested Shares and Share Units


Non-vested share and share unit activity for the threenine months ended March 30, September 28, 2019 was as follows:
(In thousands, except per share data)Number of Shares 
Weighted-Average
Grant Date Fair Value
Per Share
    
Outstanding at beginning of year882
 $62.82
Granted2,262
 66.47
Vested(394) 67.01
Forfeited(64) 63.01
    
Outstanding as of September 28, 20192,686
 $65.27

(In thousands, except per share data)Number of Shares 
Weighted-Average
Grant Date Fair Value
    
Outstanding at beginning of year882
 $62.82
Granted10
 54.47
Vested(4) 59.22
Forfeited(6) 59.62
    
Outstanding as of March 30, 2019882
 $62.76
As of March 30,September 28, 2019, there was $26$144 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 1.842.30 years.


Share-Based Compensation Cost


The following table presents total compensation expense recognized with respect to stock options, non-vested shares and share units, and our associate stock purchase plan:
 Three Months Ended Nine Months Ended
(In thousands)2019 2018 2019 2018
        
Stock option and non-vested share and share unit compensation expense$30,537
 $25,209
 $73,421
 $74,348
Associate stock purchase plan expense1,321
 1,407
 4,612
 4,685
Amounts capitalized in software development costs, net of amortization(76) 266
 70
 587
        
Amounts charged against earnings, before income tax benefit$31,782
 $26,882

$78,103

$79,620
        
Amount of related income tax benefit recognized in earnings$6,330
 $5,615
 $14,888
 $16,483

 Three Months Ended
(In thousands)2019 2018
    
Stock option and non-vested share and share unit compensation expense$19,860
 $24,935
Associate stock purchase plan expense1,542
 1,362
Amounts capitalized in software development costs, net of amortization187
 160
    
Amounts charged against earnings, before income tax benefit$21,589
 $26,457
    
Amount of related income tax benefit recognized in earnings$4,201
 $5,300


Treasury Stock


In May 2018, our Board of Directors approved an amendment to our share repurchase program that allowed for the Company to repurchase up to an aggregate $1.0 billion of shares of our common stock, excluding transaction costs. In April 2019, our Board of Directors approved a further amendment to this share repurchase program. Under this new amendment, the Company is authorized to repurchase up to an additional $1.2 billion of shares of our common stock, for an aggregate of $2.2 billion, excluding transaction costs. The repurchases are to be effected 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 the nine months ended September 28, 2019, we repurchased 14.4 million shares for total consideration of $1.0 billion under the program. The shares were recorded as treasury stock and accounted for under the cost method. No repurchased shares have been retired. As of the date of this filing, $1.5 billionSeptember 28, 2019, $483 million remains available for repurchase under the amended program.

Dividends
On September 10, 2019, our Board of Directors declared a cash dividend of $0.18 per share on our issued and outstanding common stock, which was paid on October 9, 2019 to shareholders of record as of September 25, 2019. On May 29, 2019, our Board of Directors declared a cash dividend of $0.18 per share on our issued and outstanding common stock, which was paid on July 26, 2019 to shareholders of record as of June 18, 2019. In connection with the declaration of such dividends, our non-vested share 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.


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 reclassifications2,321
 —
 637
 2,958
Amounts reclassified from AOCI—
 —
 —
 —
        
Balance at March 30, 2019(100,618) —
 24
 (100,594)
        
Other comprehensive income (loss) before reclassifications(100) (12,223) 216
 (12,107)
Amounts reclassified from AOCI—
 (147) —
 (147)
        
Balance at June 29, 2019(100,718) (12,370) 240
 (112,848)
        
Other comprehensive income (loss) before reclassifications(11,679) (4,135) 17
 (15,797)
Amounts reclassified from AOCI—
 98
 (3) 95
        
Balance at September 28, 2019$(112,397) $(16,407) $254
 $(128,550)

 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 30, 2017$(72,365) $—
 $(1,017) $(73,382)
Other comprehensive income (loss) before reclassifications2,794
 —
 (898) 1,896
Amounts reclassified from AOCI—
 —
 —
 —
        
Balance at March 31, 2018(69,571) —
 (1,915) (71,486)
        
Other comprehensive income (loss) before reclassifications(21,811) —
 639
 (21,172)
Amounts reclassified from AOCI—
 —
 3
 3
        
Balance at June 30, 2018(91,382) —
 (1,273) (92,655)
        
Other comprehensive income (loss) before reclassifications(8,907) —
 553
 (8,354)
Amounts reclassified from AOCI—
 —
 —
 —
        
Balance at September 29, 2018$(100,289) $—
 $(720) $(101,009)



The effects on net earnings of amounts reclassified from AOCI were as follows:
(In thousands)   Three Months Ended Nine Months Ended
AOCI Component Location 2019 2018 2019 2018
           
Unrealized loss on cash flow hedge Other income, net $(122) $—
 $58
 $—
  Income taxes 24
 —
 (9) —
           
  Net of tax (98) —
 49
 —
           
Unrealized holding gain (loss) on available-for-sale investments

 Other income, net 4
 —
 4
 (4)
  Income taxes (1) —
 (1) 1
           
  Net of tax 3
 —
 3
 (3)
           
Total amount reclassified, net of tax   $(95) $—
 $52
 $(3)


(10)(11) Contingencies


We accrue estimates for resolution of any legal and other contingencies when losses are probable and reasonably estimable in accordance with Accounting Standards CodificationASC Topic 450, Contingencies.


The terms of our software license agreements with our clients generally provide for limited indemnification of such clients against losses, expenses and liabilities arising from third party or other claims based on, among other things, alleged infringement by our solutions of an intellectual property right of such third party.parties or damages caused by data privacy breaches or system interruptions. The terms of such indemnification often limit the scope of and remedies for such indemnification obligations and generally include, as applicable, a right to replace or modify an infringing solution. 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 relating to IP infringement,data privacy breaches or system interruptions, the inherent uncertainty stemming from such claims, and the lack of a monetary liability limit for certain infringement casessuch claims under the terms of the corresponding agreements with our clients, we cannot determine the maximum amount of potential future payments, if any, related to such indemnification provisions.


In addition to commitments and obligations in the ordinary course of business, we are involved in various other legal proceedings and claims that arise in the ordinary course of business, including for example, employment and client disputes and litigation alleging solution and implementation defects, personal injury, intellectual property infringement, violations of law 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 condensed consolidated financial statements.


During the three months ended June 29, 2019, we incurred a $20 million pre-tax charge in connection with a client dispute that arose during the same period. The client is continuing to assess the potential for additional damages and claims, and our evaluation of the dispute continues. We have not accrued a reserve for any additional damages or claims at this time because we cannot reasonably determine the probability of a loss and we cannot reasonably estimate the amount of loss, if any. While we can provide no assurances as to the ultimate outcome of this dispute, we believe the amount, if any, we will be required to pay to fully settle this dispute will not have a material adverse impact on our business, results of operations, cash flows or financial condition.

No less than quarterly, 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. 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)(12) Segment Reporting


We have two operating segments, Domestic and International (formerly referred to as Global). 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. 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 the three and nine months endedMarch 30,September 28, 2019 and March 31,September 29, 2018:
(In thousands)Domestic International Other     Total    
        
Three Months Ended 2019       
Revenues$1,265,263
 $164,165
 $—
 $1,429,428
        
Costs of revenue246,634
 25,144
 —
 271,778
Operating expenses639,590
 68,153
 361,130
 1,068,873
Total costs and expenses886,224
 93,297

361,130
 1,340,651
        
Operating earnings (loss)$379,039
 $70,868
 $(361,130) $88,777

(In thousands)Domestic International Other     Total    
        
Three Months Ended 2018       
Revenues$1,188,154
 $151,919
 $—
 $1,340,073
        
Costs of revenue202,980
 27,352
 —
 230,332
Operating expenses532,958
 67,220
 302,407
 902,585
Total costs and expenses735,938
 94,572
 302,407
 1,132,917
        
Operating earnings (loss)$452,216
 $57,347
 $(302,407) $207,156

(In thousands)Domestic International Other     Total    
        
Three Months Ended 2019       
Revenues$1,230,830
 $159,047
 $—
 $1,389,877
        
Costs of revenue228,559
 24,645
 —
 253,204
Operating expenses572,018
 68,169
 298,542
 938,729
Total costs and expenses800,577
 92,814

298,542
 1,191,933
        
Operating earnings (loss)$430,253
 $66,233
 $(298,542) $197,944
(In thousands)Domestic International Other     Total    Domestic International Other     Total    
              
Three Months Ended 2018       
Nine Months Ended 2019       
Revenues$1,135,096
 $157,765
 $—
 $1,292,861
$3,762,205
 $488,161
 $—
 $4,250,366
              
Costs of revenue206,674
 24,604
 —
 231,278
719,119
 74,536
 —
 793,655
Operating expenses519,871
 69,144
 277,353
 866,368
1,817,244
 209,580
 1,012,049
 3,038,873
Total costs and expenses726,545
 93,748
 277,353
 1,097,646
2,536,363
 284,116
 1,012,049
 3,832,528
              
Operating earnings (loss)$408,551
 $64,017
 $(277,353) $195,215
$1,225,842
 $204,045
 $(1,012,049) $417,838

(In thousands)Domestic International Other     Total    
        
Nine Months Ended 2018       
Revenues$3,525,314
 $475,347
 $—
 $4,000,661
        
Costs of revenue617,839
 82,554
 —
 700,393
Operating expenses1,604,297
 209,771
 875,542
 2,689,610
Total costs and expenses2,222,136
 292,325
 875,542
 3,390,003
        
Operating earnings (loss)$1,303,178
 $183,022
 $(875,542) $610,658




Item 2. Management's Discussion and Analysis of Financial Condition and Results of OperationsOperations.


The following Management Discussion and Analysis ("MD&A") is intended to help the reader understand the results of operations and financial condition of Cerner Corporation ("Cerner," the "Company," "we," "us" or "our"). This MD&A is provided as a supplement to, and should be read in conjunction with, our condensed consolidated financial statements and the accompanying notes to condensed consolidated financial statements ("Notes") found above. Certain statements in this quarterly report on Form 10-Q contain forward-looking statements within the meanings of the Private Securities Litigation Reform Act of 1995, as amended, regarding our future plans, objectives, beliefs, expectations, representations and projections. See the end of this MD&A for more information on our forward-looking statements, including a discussion of the most significant factors that could cause actual results to differ materially from those in the forward-looking statements.


Our firstthird fiscal quarter ends on the Saturday closest to March 31.September 30. The 2019 and 2018firstthird quarters ended on March 30,September 28, 2019 and March 31,September 29, 2018, respectively. All references to years in this MD&A represent the respective three or nine months ended on such dates, unless otherwise noted.


Management Overview
Our revenues are primarily derived by selling, implementing and supporting software solutions, clinical content, hardware and devices and providing services that give health care 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.


Our core strategy is to create organic growth by investing in research and development ("R&D") to create solutions and tech- enabled services for the health care 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 looking to replace their current suppliers. We may also supplement organic growth with acquisitions or strategic investments.


We expect to drive growth through solutions 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 cycle solutions and services, and HealtheIntent® population health solutions and services. Finally, we continue 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 the cost of health care.


Beyond our strategy for driving revenue growth, we are also focused on earnings growth. Similar 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 believe we have opportunities to expand our operating margins over time, as discussed further below.


We are also focused on continuing to deliver strong levels of cash flow, which we expect to accomplish by continuing to grow earnings and prudently managing capital expenditures.


Results Overview
Bookings, which reflects the value of executed contracts for software, hardware, professional services and managed services, was $1.24$1.65 billion in the firstthird quarter of 2019, which is a decreasean increase of 11%4% compared to $1.40$1.59 billion in the firstthird quarter of 2018, with the decrease primarily reflecting a decline in long-term contracts, which tend to be larger but have little impact on near-term revenue.2018.


Revenues for the firstthird quarter of 2019 increased 8%7% to $1.39$1.43 billion, compared to $1.29$1.34 billion in the firstthird quarter of 2018. The increase in revenue reflects ongoing demand from new and existing clients for Cerner's solutions and tech-enabled services driven by their needs to keep up with regulatory requirements, adapt to changing reimbursement models, and deliver safer and more efficient care.



Net earnings for the firstthird quarter of 2019 increased 4%decreased 52% to $166$82 million, compared to $160$169 million in the firstthird quarter of 2018. Diluted earnings per share increased 6%decreased 49% to $0.26, compared to $0.51 compared to $0.48 in the firstthird quarter of 2018. The overall increasedecrease in net earnings and diluted earnings per share was primarily a result of increased revenues,operating expenses, including expenses incurred in connection with our operational improvement initiatives discussed below, partially offset by a lower operating margin, which reflects the hiring of personnel to support revenue growth.increased revenues.


We had cash collections of receivables of $1.36$1.50 billion in the firstthird quarter of 2019, compared to $1.27$1.40 billion in the firstthird quarter of 2018. Days sales outstanding was 7674 days for the 2019 firstthird quarter, compared to 7978 days for the 2019 second quarter and 82 days for the 2018 fourth quarter and 73 days for the 2018 firstthird quarter. Operating cash flows for the firstthird quarter of 2019 were $317$351 million, compared to $409$338 million in the firstthird quarter of 2018.


Operational Improvement Initiatives


We transitioned to a new operating structure in the first quarter of 2019. The Company has been focused on leveraging the impact of this reorganization and identifying additional efficiencies. Currently, we are focused on reducing operating expenses and generating other efficiencies that are expected to provide longer-term operating margin expansion. We are also considering exiting certain low-margin businesses and being more selective as we consider new business opportunities. To assist in these efforts, we have engaged an outside consulting firm to conduct a review of our operations and cost structure. Our goal is to identifyWe are focused on ongoing identification of opportunities to operate more efficiently and achieve and improve uponon 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, which may be material.efforts. Such expenses may include, but are not limited to, consultant and other professional services fees, employee separation costs, contract termination costs, and other such related expenses. For the threenine months ended March 30, September 28, 2019, we recognized $2$174 million of expenses related to these efforts, which isare included in general and administrative expenseoperating expenses in our condensed consolidated statements of operations. Additionaloperations, and discussed further below. We expect to incur additional expenses in the second quarter of 2019 will include charges associatedconnection with the 2019 VSP, as further discussedthese initiatives in Note (1) of the notes to condensed consolidated financial statements, as well as consultant and other professional services fees, and other related costs.future periods, which may be material.


Results of Operations


Three Months Ended March 30,September 28, 2019 Compared to Three Months EndedMarch 31,September 29, 2018


The following table presents a summary of the operating information for the firstthird quarters of 2019 and 2018:
(In thousands)2019 
% of
Revenue
 2018 
% of
Revenue
 % Change  2019 
% of
Revenue
 2018 
% of
Revenue
 % Change  
                  
Revenues$1,389,877
 100% $1,292,861
 100% 8 %$1,429,428
 100% $1,340,073
 100% 7 %
Costs of revenue253,204
 18% 231,278
 18% 9 %271,778
 19% 230,332
 17% 18 %
                  
Margin1,136,673
 82% 1,061,583
 82% 7 %1,157,650
 81% 1,109,741
 83% 4 %
                  
Operating expenses                  
Sales and client service640,187
 46% 589,948
 46% 9 %707,743
 50% 605,946
 45% 17 %
Software development180,361
 13% 161,617
 13% 12 %187,526
 13% 172,297
 13% 9 %
General and administrative96,196
 7% 92,294
 7% 4 %152,321
 11% 102,789
 8% 48 %
Amortization of acquisition-related intangibles21,985
 2% 22,509
 2% (2)%21,283
 1% 21,553
 2% (1)%
                  
Total operating expenses938,729
 68% 866,368
 67% 8 %1,068,873
 75% 902,585
 67% 18 %
                  
Total costs and expenses1,191,933
 86% 1,097,646
 85% 9 %1,340,651
 94% 1,132,917
 85% 18 %
                  
Operating earnings197,944
 14% 195,215
 15% 1 %88,777
 6% 207,156
 15% (57)%
                  
Other income, net8,432
   4,864
    13,535
   6,943
    
Income taxes(40,157)   (40,078)    (20,377)   (44,718)    
                  
Net earnings$166,219
   $160,001
   4 %$81,935
   $169,381
   (52)%


Revenues & Backlog


Revenues increased 8%7% to $1.39$1.43 billion in the firstthird quarter of 2019, as compared to $1.29$1.34 billion in the same period of 2018. The growth in revenues includesThis increase was primarily driven by a $49$51 million increase in professional services revenue driven by increaseddue to growth in implementation activity.activity, and growth in licensed software revenue of $15 million as a result of continued demand for our solutions. Refer to Note (2) of the notes to condensed consolidated financial statements for further information regarding revenues disaggregated by our business models.


Backlog, which reflects contracted revenue that has not yet been recognized as revenue, increased 2% to $14.87was $13.31 billion in the firstthird quarter of 2019, compared to $14.63$14.70 billion in the same period of 2018. This increasedecrease was primarily driven by solid levelsthe termination of new business bookings during the past four quarters, including strong levels of managed services bookings that typically have longer contract terms.certain client contracts, discussed further below. We expect to recognize approximately 29%31% of our backlog as revenue over the next 12 months.


We believe that backlog may not necessarily be a comprehensive indicator of future revenue as certain of our arrangements may be canceled (or conversely renewed) at our clients' option, thus contract consideration related to such cancellable periods has been excluded from our calculation of backlog. However, historically our experience has been that such cancellation provisions are rarely exercised. We expect to recognize approximately $640$882 million 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 18%19% in the firstthird quarter of both 2019, andcompared to 17% in the same period of 2018. The higher costs of revenue as a percent of revenues was primarily driven by higher third-party costs associated with professional services revenue.


Costs of revenue include the cost of reimbursed travel expense, sales commissions, third party consulting services and subscription content and computer hardware, devices and sublicensed software purchased from manufacturers for delivery to clients. It also includes the cost of hardware maintenance and sublicensed software support subcontracted to the manufacturers. Such costs, as a percent of revenues, typically have varied as the mix of revenue (software, hardware, devices, maintenance, support, and services) carrying different margin rates changes from period to period. Costs of revenue does not include the costs of our client service personnel who are responsible for delivering our service offerings. Such costs are included in sales and client service expense.


Operating Expenses


Total operating expenses increased 8%18% to $939 million$1.07 billion in the firstthird quarter of 2019, compared to $866$903 million in the same period of 2018.
 
•
Sales and client service expenses as a percent of revenues were 50% in the third quarter of 2019, compared to 45% in the same period of 2018. These expenses increased 17% to $708 million in the third quarter of 2019, from $606 million in the same period of 2018. Sales and client service expenses include salaries and benefits of sales, marketing, support, and services personnel, depreciation and other expenses associated with our managed services business, communications expenses, unreimbursed travel expenses, expense for share-based payments, and trade show and advertising costs. The increase in sales and client service expenses was primarily driven by a $15 million increase in personnel expenses, inclusive of higher associate benefits costs; and a $60 million charge recognized in the third quarter of 2019 in connection with the termination of certain client contracts prior to the end of their stated terms. We expect the termination of such client contracts to reduce future revenues by approximately $170 million on an annualized basis. We do not expect a significant impact to future operating earnings, as the terminated contacts related to lower margin business.
Sales and client service expenses as a percent of revenues were 46% in the first quarter of both 2019 and 2018. These expenses increased 9% to $640 million in the first quarter of 2019, from $590 million in the same period of 2018. 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 growth in sales and client service expenses 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 the firstthird quarter of both 2019 and 2018. 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 the firstthird quarters of 2019 and 2018 is as follows:
Three Months EndedThree Months Ended
(In thousands)2019 20182019 2018
      
Software development costs$198,667
 $185,218
$197,122
 $185,039
Capitalized software costs(74,099) (73,071)(65,684) (65,682)
Capitalized costs related to share-based payments(452) (531)(698) (489)
Amortization of capitalized software costs56,245
 50,001
56,786
 53,429
      
Total software development expense$180,361
 $161,617
$187,526
 $172,297
 
•
General and administrative expenses as a percent of revenues were 11% in the third quarter of 2019, compared to 8% in the same period of 2018. These expenses increased 48% to $152 million in the third quarter of 2019, from $103 million in the same period in 2018. General and administrative expenses include salaries and benefits for corporate, financial and administrative staffs, utilities, communications expenses, professional fees, depreciation and amortization, transaction gains or losses on foreign currency, expense for share-based payments, certain organizational restructuring and other expense. The increase in general and administrative expenses is primarily driven by expenses incurred in the third quarter of 2019 in connection with our operational improvement initiatives discussed above; inclusive of $32 million of charges associated with employee separation benefits, as further discussed in Note (1) of the notes to condensed consolidated financial statements. We expect to incur additional expenses in connection with these efforts in future periods, which may be material.

•
Amortization of acquisition-related intangibles as a percent of revenues was 1% in the third quarter of 2019, compared to 2% in the same period of 2018. These expenses remained relatively flat at $21 million in the third quarter of 2019, and $22 million in the same period of 2018. 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.
General and administrative expenses as a percent of revenues were 7% in the first quarter of both 2019 and 2018. These expenses increased 4% to $96 million in the first quarter of 2019, from $92 million in the same period in 2018. 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 costs and related adjustments. The increase in general and administrative expenses includes $2 million of expenses incurred in the first quarter of 2019 in connection with our operational improvement initiatives discussed above. We expect to incur additional expenses in connection with these efforts in future periods in 2019, which may be material. Such additional expenses include charges associated with the 2019 VSP, as further discussed in Note (1) of the notes to condensed consolidated financial statements.

Amortization of acquisition-related intangibles as a percent of revenues was 2% in the first quarter of both 2019 and 2018. These expenses remained relatively flat at $22 million in the first quarter of 2019, and $23 million in the same period in2018. 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.


Non-Operating Items
 
•
Other income, net was $14 million in the third quarter of 2019, compared to $7 million in the same period of 2018. The third quarter of 2019 includes a $9 million unrealized gain recognized on one of our equity investments.

•
Our effective tax rate was 19.9% for the third quarter of 2019, compared to 20.9% in the same period of 2018. The decrease in the effective tax rate in the third quarter of 2019 is primarily due to a reduction in unfavorable permanent book versus tax differences in 2019. Refer to Note (8) of the notes to condensed consolidated financial statements for further discussion regarding our effective tax rate.
Other income, net was $8 million in the first quarter of 2019, compared to $5 million in the same period of 2018. The increase is primarily attributable to increased interest income on our cash and investment balances, due to rising interest rates.

Our effective tax rate remained relatively flat at 19.5% for the first quarter of 2019, and 20.0% in the same period of 2018. Refer to Note (7) of the notes to condensed consolidated financial statements for further discussion regarding our effective tax rate.


Operations by Segment


We have two operating segments: Domestic and International (formerly referred to as Global). The Domestic segment includes revenue contributions and expenditures associated with business activity in the United States. The International segment includes revenue contributions and expenditures linked to business activity outside the United States, primarily from Australia, Canada, Europe, and the Middle East. Refer to Note (11)(12) of the notes to condensed consolidated financial statements for further information regarding our reportable segments.



The following table presents a summary of our operating segment information for the firstthird quarters of 2019 and 2018:
(In thousands)2019 % of Revenue 2018 % of Revenue % Change  2019 % of Revenue 2018 % of Revenue % Change  
        
Domestic Segment        
Revenues$1,230,830
 100% $1,135,096
 100% 8%$1,265,263
 100% $1,188,154
 100% 6%
        
Costs of revenue228,559
 19% 206,674
 18% 11%246,634
 19% 202,980
 17% 22%
Operating expenses572,018
 46% 519,871
 46% 10%639,590
 51% 532,958
 45% 20%
Total costs and expenses800,577
 65% 726,545
 64% 10%886,224
 70% 735,938
 62% 20%
        
Domestic operating earnings430,253
 35%
408,551
 36% 5%379,039
 30%
452,216
 38% (16)%
        
International Segment        
Revenues159,047
 100% 157,765
 100% 1%164,165
 100% 151,919
 100% 8%
        
Costs of revenue24,645
 15% 24,604
 16% —%25,144
 15% 27,352
 18% (8)%
Operating expenses68,169
 43% 69,144
 44% (1)%68,153
 42% 67,220
 44% 1%
Total costs and expenses92,814
 58% 93,748
 59% (1)%93,297
 57% 94,572
 62% (1)%
        
International operating earnings66,233
 42% 64,017
 41% 3%70,868
 43% 57,347
 38% 24%
        
Other, net(298,542) (277,353) 8%(361,130) (302,407) 19%
        
Consolidated operating earnings$197,944
 $195,215
 1%$88,777
 $207,156
 (57)%


Domestic Segment


•
Revenues increased 6% to $1.27 billion in the third quarter of 2019, from $1.19 billion in the same period of 2018. This increase was primarily driven by a $46 million increase in professional services revenue due to growth in implementation activity. Refer to Note (2) of the notes to condensed consolidated financial statements for further information regarding revenues disaggregated by our business models.

•
Costs of revenue as a percent of revenues were 19% in the third quarter of 2019, compared to 17% in the same period of 2018. The higher costs of revenue as a percent of revenues was primarily driven by higher third-party costs associated with professional services revenue.

•
Operating expenses as a percent of revenues were 51% in the third quarter of 2019, compared to 45% in the same period of 2018. The higher operating expenses as a percent of revenues was primarily driven by the $60 million charge in connection with client contract terminations discussed above.

International Segment

•
Revenues increased 8% to $164 million in the third quarter of 2019, from $152 million in the same period of 2018. This increase was primarily driven by growth in managed services revenue. Refer to Note (2) of the notes to condensed consolidated financial statements for further information regarding revenues disaggregated by our business models.

•
Costs of revenue as a percent of revenues were 15% in the third quarter of 2019, compared to 18% in the same period of 2018. The lower costs of revenue as a percent of revenues was primarily driven by a lower mix of technology resale revenue, which carries a higher cost of revenue.

•
Operating expenses remained relatively flat at $68 million in the third quarter of 2019, and $67 million in the same period of 2018.

Other, net

Operating results not attributed to an operating segment include expenses such as software development, general and administrative expenses, share-based compensation expense, certain amortization and depreciation, certain organizational restructuring and other expense. These expenses increased 8%19% to $1.23 billion$361 million in the firstthird quarter of 2019, from $1.14$302

million in the same period of 2018. The increase is primarily due to expenses incurred in the third quarter of 2019 in connection with our operational improvement initiatives discussed above; inclusive of $32 million of charges associated with employee separation benefits, as further discussed in Note (1) of the notes to condensed consolidated financial statements.

Nine Months Ended September 28, 2019 Compared to Nine Months EndedSeptember 29, 2018
The following table presents a summary of our operating information for the first nine months of 2019 and 2018:
(In thousands)2019 
% of
Revenue
 2018 
% of
Revenue
 % Change  
          
Revenues$4,250,366
 100% $4,000,661
 100% 6 %
Costs of revenue793,655
 19% 700,393
 18% 13 %
          
Margin3,456,711
 81% 3,300,268
 82% 5 %
          
Operating expenses         
Sales and client service2,026,825
 48% 1,830,999
 46% 11 %
Software development548,934
 13% 502,192
 13% 9 %
General and administrative398,305
 9% 290,547
 7% 37 %
Amortization of acquisition-related intangibles64,809
 2% 65,872
 2% (2)%
          
Total operating expenses3,038,873
 71% 2,689,610
 67% 13 %
          
Total costs and expenses3,832,528
 90% 3,390,003
 85% 13 %
          
Operating earnings417,838
 10% 610,658
 15% (32)%
          
Other income, net44,973
   18,404
    
Income taxes(87,688)   (130,323)    
          
Net earnings$375,123
   $498,739
   (25)%
Revenues
Revenues increased 6% to $4.25 billion in the first nine months of 2019, as compared to $4.00 billion in the same period of 2018. The growth in revenues includesThis increase was primarily driven by a $57$138 million increase in professional services revenue driven by increaseddue to growth in implementation activity.activity, and growth in licensed software revenue of $59 million as a result of continued demand for our solutions. Refer to Note (2) of the notes to condensed consolidated financial statements for further information regarding revenues disaggregated by our business models.

Costs of Revenue
Costs of revenue as a percent of revenues were 19% in the first quarternine months of 2019, compared to 18% in the same period of 2018. The marginally higher costs of revenue as a percent of revenues is impactedwas primarily driven by the mix of technology resale revenue, whereashigher third-party costs associated with professional services revenue.

Operating Expenses
Total operating expenses increased 13% to $3.04 billion in the first quarternine months of 2019, included a higher mix of hardware and devices, which carry a higher cost of revenue than sublicensed software.

Operating expenses as a percent of revenues were 46% in the first quarter of both 2019 and 2018.

International Segment

Revenues remained relatively flat at $159 million in the first quarter of 2019, and $158 millioncompared to $2.69 billion in the same period of 2018. Refer to Note (2) of the notes to condensed consolidated financial statements for further information regarding revenues disaggregated by our business models.
•
Sales and client service expenses as a percent of revenues were 48% in the first nine months of 2019, compared to 46% in the same period of 2018. These expenses increased 11% to $2.03 billion in the first nine months of 2019, from $1.83 billion in the same period of 2018. The increase in sales and client service expenses was primarily driven by a $64 million increase in personnel expenses, inclusive of hiring of personnel to support growth in professional services revenue; a $21 million increase in bad debt expense related to client receivables; a $60 million charge recognized in the first nine months of 2019 in connection with the termination of certain client contracts prior to the end of their stated terms; and a $20 million charge in connection with a client dispute recognized in the first nine months of 2019. Refer to Note (11) of the notes to condensed consolidated financial statements for further information regarding such client dispute.

•
Software development expenses as a percent of revenues were 13% in the first nine months of both 2019 and 2018. 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 the first nine months of 2019 and 2018 is as follows:
 Nine Months Ended
(In thousands)2019 2018
    
Software development costs$591,182
 $555,743
Capitalized software costs(209,458) (207,539)
Capitalized costs related to share-based payments(1,826) (1,583)
Amortization of capitalized software costs169,036
 155,571
    
Total software development expense$548,934
 $502,192
•
General and administrative expenses as a percent of revenues were 9% in the first nine months 2019, compared to 7% in the same period of 2018. These expenses increased 37% to $398 million in the first nine months of 2019, from $291 million in the same period of 2018. The increase in general and administrative expenses is primarily driven by expenses incurred in the first nine months of 2019 in connection with our operational improvement initiatives discussed above; inclusive of $73 million of charges associated with employee separation benefits, as further discussed in Note (1) of the notes to condensed consolidated financial statements. 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% in the first nine months of both 2019 and 2018. These expenses remained relatively flat at $65 million in the first nine months of 2019, and $66 million in the same period of 2018.

Non-Operating Items
•
Other income, net was $45 million in the first nine months of 2019, compared to $18 million in the same period of 2018. The first nine months of 2019 includes a $16 million gain recognized on the disposition of one of our equity investments and a $9 million unrealized gain recognized on another one of our equity investments.

•
Our effective tax rate was 18.9% for the first nine months of 2019, compared to 20.7% in the same period of 2018. The decrease in the effective tax rate in the first nine months of 2019 is primarily due to increased excess tax benefits recognized as a component of income tax expense due to elevated stock option exercise activity. Refer to Note (8) of the notes to condensed consolidated financial statements for further discussion regarding our effective tax rate.



Operations by Segment
Costs
The following table presents a summary of revenue remained flat at $25 million inour operating segment information for the first quarter of both 2019 and 2018.

Operating expenses remained relatively flat at $68 million in the first quarternine months of 2019 and $69 million in the same period of 2018.2018:

(In thousands)2019 % of Revenue 2018 % of Revenue % Change  
          
Domestic Segment         
Revenues$3,762,205
 100% $3,525,314
 100% 7%
          
Costs of revenue719,119
 19% 617,839
 18% 16%
Operating expenses1,817,244
 48% 1,604,297
 46% 13%
Total costs and expenses2,536,363
 67% 2,222,136
 63% 14%
          
Domestic operating earnings1,225,842
 33% 1,303,178
 37% (6)%
          
International Segment         
Revenues488,161
 100% 475,347
 100% 3%
          
Costs of revenue74,536
 15% 82,554
 17% (10)%
Operating expenses209,580
 43% 209,771
 44% —%
Total costs and expenses284,116
 58% 292,325
 61% (3)%
          
International operating earnings204,045
 42% 183,022
 39% 11%
          
Other, net(1,012,049)   (875,542)   16%
          
Consolidated operating earnings$417,838
   $610,658
   (32)%
Domestic Segment
•
Revenues increased 7% to $3.76 billion in the first nine months of 2019, from $3.53 billion in the same period of 2018. This increase was primarily driven by a $146 million increase in professional services revenue due to growth in implementation activity, and growth in licensed software revenue of $48 million as a result of continued demand for our solutions. Refer to Note (2) of the notes to condensed consolidated financial statements for further information regarding revenues disaggregated by our business models.
•
Costs of revenue as a percent of revenues were 19% in the first nine months of 2019, compared to 18% in the same period of 2018. The higher costs of revenue as a percent of revenues was primarily driven by higher third-party costs associated with professional services revenue.
•
Operating expenses as a percent of revenues were 48% in the first nine months of 2019, compared to 46% in the same period of 2018. The higher operating expenses as a percent of revenues was primarily driven by the $60 million charge in connection with client contract terminations and the $20 million charge in connection with a client dispute, both recognized in the first nine months of 2019 and discussed above.

International Segment
•
Revenues increased 3% to $488 million in the first nine months of 2019, from $475 million in the same period of 2018. This increase was primarily driven by growth in managed services revenue. Refer to Note (2) of the notes to condensed consolidated financial statements for further information regarding revenues disaggregated by our business models.
•
Costs of revenue as a percent of revenues were 15% in the first nine months of 2019, compared to 17% in the same period of 2018. The lower costs of revenue as a percent of revenues was primarily driven by a lower mix of technology resale revenue, which carries a higher cost of revenue.
•
Operating expenses were flat at $210 million in the first nine months of both 2019 and 2018.

Other, net

Operating results 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. These expenses increased 8%16% to $299 million$1.01 billion in the first quarternine months of 2019, from $277$876 million in the same period of 2018. The increase is primarily due to increased software development expenses including increased amortizationincurred in the first nine months of capitalized software costs resulting from releases of new and enhanced solutions over the last four quarters.2019 in connection with our operational


improvement initiatives discussed above; inclusive of $73 million of charges associated with employee separation benefits, as further discussed in Note (1) of the notes to condensed consolidated financial statements.

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, capital expenditures, and in recent years, our share repurchase programs and future dividends.dividend programs.
Our principal sources of liquidity are our cash, cash equivalents, which consist of money market funds, commercial paper and time deposits with original maturities of less than 90 days, short-term investments, and short-term investments.borrowings under our Credit Agreement. At March 30,September 28, 2019, we had cash and cash equivalents of $503$496 million and short-term investments of $401$136 million, as compared to cash and cash equivalents of $374 million and short-term investments of $401$401 million at December 29, 2018.2018.


We maintain a $100.0$700 million multi-year revolving credit facility,Credit Agreement, which expires in October 2020.May 2024. The facilityCredit Agreement provides an unsecured revolving line of credit, for working capital purposes, along with a letter of credit facility. We have the ability to increase the maximum capacity to $200 million$1 billion at any time during the facility'sCredit Agreement's term, subject to lender participation.participation and the satisfaction of specified conditions. As of March 30,September 28, 2019, we had no outstanding borrowings under this facility; however, we hadrevolving credit loans and letters of credit of $600 million and $30 million, of outstanding letters of credit,respectively; which reduced our available borrowing capacity to $70 million. Refer to Note (5) of the notes to condensed consolidated financial statements for additional information regarding our Credit Agreement.


We believe that our present cash position, together with cash generated from operations, short-term investments and, if necessary, remaining availability under our available line of creditCredit Agreement and other sources of debt financing, will be sufficient to meet anticipated cash requirements for the next 12 months.
The following table summarizes our cash flows in the first threeninemonths of 2019 and 2018:
Three Months EndedNine Months Ended
(In thousands)2019 20182019 2018
      
Cash flows from operating activities$317,266
 $408,965
$875,524
 $1,047,120
Cash flows from investing activities(183,655) (211,498)(436,387) (562,094)
Cash flows from financing activities(6,991) (154,311)(312,805) (345,704)
Effect of exchange rate changes on cash2,415
 (680)(4,028) (11,631)
Total change in cash and cash equivalents129,035
 42,476
122,304
 127,691
      
Cash and cash equivalents at beginning of period374,126
 370,923
374,126
 370,923
      
Cash and cash equivalents at end of period$503,161
 $413,399
$496,430
 $498,614
      
Free cash flow (non-GAAP)$123,454
 $255,652
$275,652
 $532,047


Cash from Operating Activities
Three Months EndedNine Months Ended
(In thousands)2019 20182019 2018
      
Cash collections from clients$1,357,139
 $1,274,497
$4,233,269
 $3,992,200
Cash paid to employees and suppliers and other(1,010,074) (954,839)(3,271,818) (2,976,974)
Cash paid for interest(7,288) (8,199)(20,756) (15,568)
Cash paid for taxes, net of refunds(22,511) 97,506
(65,171) 47,462
      
Total cash from operations$317,266
 $408,965
$875,524
 $1,047,120
Cash flows from operations decreased $92$172 million in the first threeninemonths of 2019 when compared to the same period of 2018, due primarily to net refunds of taxes in 2018.2018 along with cash payments in 2019 associated with our operational improvement initiatives discussed above. Days sales outstanding was 7674 days in the firstthird quarter of 2019, compared to 7978 days for the fourthsecond quarter of 20182019 and 7382 days for the firstthird quarter of 2018.

Cash from Investing Activities
Three Months EndedNine Months Ended
(In thousands)2019 20182019 2018
      
Capital purchases$(119,261) $(79,711)$(388,588) $(305,951)
Capitalized software development costs(74,551) (73,602)(211,284) (209,122)
Sales and maturities of investments, net of purchases19,151
 (49,713)189,279
 (22,717)
Purchases of other intangibles(8,994) (8,472)(25,794) (24,304)
      
Total cash flows from investing activities$(183,655) $(211,498)$(436,387) $(562,094)
Cash flows from investing activities consist primarily of capital spending and short-term investment activities.


Our capital spending in the first threeninemonths of 2019 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. Total capital spending for 2019 is expected to exceed 2018 levels, primarily driven by spending to support our facilities requirements, including the continued construction of our Innovations Campus.


Short-term investment activity historically consists of the investment of cash generated by our business in excess of what is necessary to fund operations. The 2019 and 2018 activity wasis impacted by a change inexcess cash being used to execute on our capital allocation strategy, including share repurchases discussed below. Additionally, our investment mix wherehas changed such that our funds wereare more heavily held in cash and cash equivalents versus short-term and long-term investments, primarily due to interest rates currently available on cash deposits.


On October 17, 2019, we entered into a Purchase Agreement to acquire all of the issued and outstanding membership interests of AbleVets, LLC, a Virginia limited liability company ("AbleVets"). AbleVets is a health IT engineering and consulting company specializing in cybersecurity, cloud and system development solutions for federal organizations. Consideration for this acquisition is expected to total $75 million in cash, subject to working capital and certain other adjustments. We expect our acquisition of AbleVets to close in the fourth quarter of 2019, subject to satisfaction of customary closing conditions.

We expect to continue seeking and completing strategic business acquisitions, investments, and relationships that are complementary to our business.

Cash from Financing Activities
Three Months EndedNine Months Ended
(In thousands)2019 20182019 2018
      
Long-term debt issuance$600,000
 $—
Repayment of long-term debt$—
 $(75,000)—
 (75,000)
Cash from option exercises (net of taxes paid in connection with shares surrendered by associates)13,551
 8,313
173,480
 72,252
Treasury stock purchases(20,542) (87,624)(1,020,542) (345,210)
Dividends paid(57,293) —
Other(8,450) 2,254
      
Total cash flows from financing activities$(6,991) $(154,311)$(312,805) $(345,704)
In May 2019, we borrowed $600 million of revolving credit loans. Refer to Note (5) of the notes to condensed consolidated financial statements for additional information regarding our Credit Agreement.

In March 2018, we repaid our $75 million floating rate Series 2015-C Notes due February 15, 2022.


We expect to incur additional indebtedness in 2019,the next 12 months, for which the amount and timing is yet to be determined. The proceeds from such indebtedness are expected to be deployed in accordance with our current capital allocation strategy, which may include share repurchases asand dividend payments (as discussed further below.below), as well as for general corporate purposes, including acquisitions and investments. The terms and availability of such debt financing may be impacted by

economic and financial market conditions, as well as our financial condition and results of operations at the time we seek such financing, and there can be no assurances that we will be able to obtain such financing on terms that will be acceptable or advantageous to us.


Cash inflows from stock option exercises are dependent on a number of factors, including the price of our common stock, grant activity under our stock option and equity plans, and overall market volatility. We expect net cash inflows from stock option exercises to continue throughout 2019 based on the number of exercisable options as of March 30,September 28, 2019 and our current stock price.


During the first nine months of 2019 and 2018, we repurchased 14.4 million shares of our common stock for total consideration of $1.0 billion and 5.7 million shares of our common stock for total consideration of $345 million, respectively. As of the date of this filing, $1.5 billionSeptember 28, 2019, $483 million remains available for repurchase under our current share repurchase program. We expect to continue to repurchase shares under this program in 2019,the next 12 months, which will be dependent on a number of factors, including the price of our common stock. Although we expect to continue to repurchase shares, there is no assurance that we will repurchase up to the full amount remaining under the program.

On September 10, 2019, our Board of Directors declared a cash dividend of $0.18 per share on our issued and outstanding common stock, which was paid on October 9, 2019 to shareholders of record as of September 25, 2019. On May 29, 2019, our Board of Directors declared a cash dividend of $0.18 per share on our issued and outstanding common stock, which was paid July 26, 2019 to shareholders of record as of June 18, 2019. Subject to declaration by our Board of Directors, we expect to continue paying quarterly cash dividends as a part of our current capital allocation strategy. Future dividends will be subject to the determination, declaration and discretion of our Board of Directors and compliance with covenants under our outstanding debt agreements.

The source of funds for such repurchases and dividends may include cash generated from operations, liquidation of investment holdings, and the incurrence of indebtedness. Refer to Note (9)(10) of the notes to condensed consolidated financial statements for further information regarding our share repurchase program.and dividend programs.


Subject to declaration by the Board of Directors, the Company plans to initiate a quarterly cash dividend of $0.15 per share, with the first payment expected in the third quarter of 2019. Future dividends will be subject to the determination, declaration and discretion of the Board of Directors and compliance with our covenants under our credit facility.


Free Cash Flow (Non-GAAP)
Three Months EndedThree Months Ended Nine Months Ended
(In thousands)2019 20182019 2018 2019 2018
          
Cash flows from operating activities (GAAP)$317,266
 $408,965
$351,448
 $338,454
 $875,524
 $1,047,120
Capital purchases(119,261) (79,711)(110,714) (116,957) (388,588) (305,951)
Capitalized software development costs(74,551) (73,602)(66,382) (66,171) (211,284) (209,122)
          
Free cash flow (non-GAAP)$123,454
 $255,652
$174,352
 $155,326
 $275,652
 $532,047


Free cash flow decreased $132$256 million in the first threeninemonths of 2019 compared to the same period in 2018, primarily due to a decrease in cash from operations along with increased capital expenditures. Free cash flow is a non-GAAP financial measure used by management, along with GAAP results, to analyze our earnings quality and overall cash generation of the business, and for management compensation purposes. We define free cash flow as cash flows from operating activities reduced by capital purchases and capitalized software development costs. The table above sets forth a reconciliation of free cash flow to cash flows from operating activities, which we believe is the GAAP financial measure most directly comparable to free cash flow. The presentation of free cash flow is not meant to be considered in isolation, nor as a substitute for, or superior to, GAAP results, and investors should be aware that non-GAAP measures have inherent limitations and should be read only in conjunction with our consolidated financial statements prepared in accordance with GAAP. Free cash flow may also be different from similar non-GAAP financial measures used by other companies and may not be comparable to similarly titled captions of other companies due to potential inconsistencies in the method of calculation. We believe free cash flow is important to enable investors to better understand and evaluate our ongoing operating results and allows for greater transparency in the review and understanding of our overall financial, operational and economic performance, because free cash flow takes into account certain capital expenditures necessary to operate our business.


New Disclosure GuidanceContractual Obligations, Commitments and Off Balance Sheet Arrangements


In MarchJuly 2019 the Securities and Exchange Commission ("SEC") issued SEC Final Rule Release No. 33-10618, FAST Act Modernization and Simplificationwe entered into an agreement with a certain vendor to purchase $650 million of Regulation S-K. Such guidance revises certain disclosure requirementscloud computing services over an initial 10-year period ending in SEC Regulation S-K, with the intent of improving the readability of filed documents and simplifying registrants' compliance efforts. This guidance is generally effective for filings submitted on or after May 2, 2019. We are currently evaluating the impact that this new guidance will have on our disclosures in future filings.2029.

Forward Looking Statements


All statements contained in this quarterly report on Form 10-Q that do not directly and exclusively relate to historical facts constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements are based on the current beliefs, expectations and assumptions of Cerner's management with respect to future events and are subject to a number of significant risks and uncertainties. It is important to note that Cerner's performance, and actual results, financial condition or business could differ materially from those expressed in such forward-looking statements. The words "should," "will," "believe," "plans," "may," "expect," "expected," "position," "anticipated," "strategy," "continue," "opportunity,"opportunities," "future" or "estimate" or the negative of these words, variations thereof or similar expressions are intended to identify such forward-looking statements. For example, our forward-looking statements include statements regarding our expectations, opportunities or plans for growth; our operational improvement initiatives and the results expected to be realized from those initiatives; our expectations with respect to realizing revenue from backlog; our anticipated expenses, cash requirements and sources of liquidity; and our capital allocation strategies and plans. These statements involve a number of risks, uncertainties and other factors that could cause or contribute to actual results differing materially, including without limitation: the possibility of significant costs and reputational harm related to product-related liabilities; potential claims for system errors and warranties; the possibility of interruption at our data centers or client support facilities, or those of third parties with whom we have contracted (such as public cloud providers), that could expose us to significant costs and reputational harm; the possibility of increased expenses, exposure to legal claims and regulatory actions and reputational harm associated with a cyberattack or other breach in our IT security or the IT security of third parties on which we rely; our

proprietary technology may be subject to claims for infringement or misappropriation of intellectual property rights of others, or may be infringed or misappropriated by others; potential claims or other risks associated with relying on open source software in our proprietary software solutions or technology-enabled services; material adverse resolution of legal proceedings or other claims; risks associated with our international operations, including without limitation, greater difficulty in collecting accounts receivable; risks associated with fluctuations in foreign currency exchange rates; changes in tax laws, regulations or guidance that could adversely affect our tax position and/or challenges to our tax positions in the U.S. and non-U.S. countries; the uncertainty surrounding the impact of the United Kingdom's vote to leave the European Union (commonly referred to as Brexit) on our international business; risks associated with the unexpected loss or recruitment and retention of key personnel or the failure to successfully develop and execute succession planning to assure transitions of key associates and their knowledge, relationships and expertise; risks associated with failure to timely or effectively manage publicity related to harassment or discrimination claims and legal proceedings if such claims are raised against key personnel; risks related to our dependence on strategic relationships and third party suppliers; risks inherent with business acquisitions and combinations and the integration thereof into our business or relating to disputes involving such acquisitions or combinations; risks associated with volatility and disruption resulting from global economic or market conditions; significant competition and our ability to quickly respond to market changes, changing technologies and evolving pricing and deployment methods and to bring competitive new solutions, devices, features and services to market in a timely fashion; managing growth in the new markets in which we offer solutions, health care devices or services; long sales cycles for our solutions and services; risks inherent in contracting with government clients, including without limitation, complying with strict compliance and disclosure obligations, navigating complex procurement rules and processes and defending against bid protests; risks associated with our outstanding and future indebtedness, such as compliance with restrictive covenants, which may limit our flexibility to operate our business; changes in accounting standards issued by the Financial Accounting Standards Board or other standard-setting bodies may adversely affect our financial statements;standards; the potential for losses resulting from asset impairment charges; changing political, economic, regulatory and judicial influences, which could impact the purchasing practices and operations of our clients and increase costs to deliver compliant solutions and services; non-compliance with laws, government regulation or certain industry initiatives or failure to deliver solutions or services that enable our clients to comply with laws or regulations applicable to their businesses; variations in our quarterly operating results; potential variations in our sales forecasts compared to actual sales; volatility in the trading price of our common stock and the timing and volume of market activity; inability to manage organizational change and reduce expenses and costs to the extent currently anticipated; risks that Cerner’s revenue growth may be lower than anticipated and/or that the mix of revenue shifts to low margin revenue; risks that our stock repurchase program or quarterly dividend programcapital allocation programs will not be fully implemented or enhance long-term shareholder value; and risks that Cerner's business may be negatively affected as a result of future proxy fights or the actions of activist shareholders; and our directors' authority to issue preferred stock and the anti-takeover provisions in our corporate governance documents.shareholders. Additional discussion of these and other risks, uncertainties and factors affecting Cerner's business is contained in our filings with the Securities and Exchange Commission, including those under the caption "Risk Factors" in our latest annual report on Form 10-K and in this quarterly report on Form 10-Q, or in materials incorporated herein or therein by reference. Forward-looking statements are not guarantees of future performance or results. The reader should not place undue reliance on forward-looking statements since the statements speak only as of the date that they are made. Except as required by law, we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in our business, results of operations or financial condition over time.


Item 3. Quantitative and Qualitative Disclosures aboutAbout Market RiskRisk.


NoWe are exposed to interest rate risk, primarily changes in LIBOR, related to outstanding revolving credit loans under our Credit Agreement. As of September 28, 2019, the interest rate on revolving credit loans outstanding was 2.84% 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 (5) of the notes to condensed consolidated financial statements 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 September 28, 2019 have not had a material changes.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 4. Controls and ProceduresProcedures.


a)Evaluation of Disclosure Controls and Procedures.


We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of our disclosure controls and procedures (as defined in the Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this quarterly report on Form 10-Q (the "Evaluation Date"). Based upon that evaluation, our CEO and CFO have concluded that, as of the Evaluation Date, our disclosure controls and procedures were designed, and were effective, to provide reasonable assurance that the information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time period specified in SEC rules and forms and is accumulated and communicated to our management, including our CEO and CFO, to allow timely decisions regarding required disclosure.




b)Changes in Internal Control over Financial Reporting.


During the fiscal quarter ended March 30, 2019, we adopted ASU 2016-02, Leases (Topic 842), as amended. In connection with the adoption of this new guidance, material modifications and enhancements were made to our internal controls over financial reporting. Specifically, we implemented/modified internal controls to address:

•The calculation and presentation of transition adjustments (cumulative effect adjustments);
•Recognition and measurement of lease liabilities and right-of-use assets;
•Related new disclosure requirements; and
•Monitoring of the adoption process.

Except as disclosed above, thereThere were no other changes in our internal controls over financial reporting during the fiscal quarter ended March 30,September 28, 2019, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.


c)Limitations on Controls.


Our management can provide no assurance that our disclosure controls and procedures or our internal control over financial reporting can prevent all errors and all fraud under all circumstances. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been or will be detected. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.



Part II. Other Information


Item 1A. Risk FactorsFactors.


Other than the risk factors below, there were no material changes during the quarter from the risk factors previously discussed in Item 1A. Risk Factors in our latest annual report on Form 10-K.

Our business results depend on our ability to successfully manage ongoing organizational change and achieve cost savings and operating efficiency initiatives. Our Board of Directors has implemented and plans to continue to implement 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. Our financial goals assume a level of productivity improvement and cost reduction. If we are unable to deliver these expected productivity improvements and reduction in expenses, 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 business success. Any failure to do so, which could result from our inability to successfully execute organizational change, cost-cutting initiatives and productivity improvement plans, changes in global or regional economic conditions, competition, changes in the industries in which we compete, unanticipated costs or charges, loss of key personnel and other factors described herein, could have a material adverse effect on our businesses, financial condition and results of operations.


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 number of factors, including timing of contracts signing, changes in the 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 period. Our operating results could be harmed by changes in revenue mix and costs, together with numerous other factors, including rapid growth in lower margin services business, declines in software, and growth in non-cash expenses, such as amortization and depreciation. Any one of these factors or the cumulative effects of certain of these factors may result in significant fluctuations in our results of operations. This variability and unpredictability could result in our failure to meet internal expectations or those of securities analysts or investors for a particular period. If we fail to meet or exceed such expectations for these or any other reasons, the market price of our shares could decline.


Our business could be negatively affected as a result of any future proxy fight or the actions of activist shareholders. Although our engagement with activist shareholder Starboard Value LP and certain of its affiliates (collectively, "Starboard") was settled as a result of our entry into a cooperation agreement, future proxy contests or related activist activities with Starboard or other activist shareholders could adversely affect our business for a number of reasons, including, but not limited to, the fact that responding to proxy contests and other actions by activist shareholders can be costly and time-consuming and can create perceived uncertainties as to our future direction and governance that may result in the loss of potential business opportunities and may make it more difficult to attract and retain qualified personnel, business partners, customers and others important to our success. Any future proxy contest or activist activities could also cause our stock price to experience periods of volatility. Further, if a proxy contest or a related settlement results in a change in the composition of our Board of Directors it could, in certain circumstances, give third parties certain rights under our existing contractual obligations, which could adversely affect our business.

The interest rates under our Credit Agreement and related interest rate swap may be impacted by the phase-out of the London Interbank Offered Rate ("LIBOR"). LIBOR is the basic rate of interest used in lending between banks on the London interbank market and is widely used as a reference for setting the interest rates on loans globally. We generally use LIBOR as a reference rate to calculate interest rates under our Credit Agreement. In 2017, the United Kingdom's Financial Conduct Authority, which regulates LIBOR, announced that it intends to phase out LIBOR by the end of 2021. It is unclear if LIBOR will cease to exist at that time or if new methods of calculating LIBOR will be established such that it continues to exist after 2021. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, is considering replacing U.S. dollar LIBOR with a new index, the Secured Overnight Financing Rate ("SOFR"), calculated using short-term repurchase agreements backed by Treasury securities. Whether or not SOFR, or another alternative reference rate, attains market traction as a LIBOR replacement tool remains in question. If LIBOR ceases to exist, we will need to agree upon a replacement index with the banks under our Credit Agreement and related interest rate swap, and certain of the interest rates under our Credit Agreement may change. The new rates may not be as favorable to us as those in effect prior to any LIBOR phase-out.


Item 2. Unregistered Sales of Equity Securities and Use of ProceedsProceeds.


(c) Issuer Purchases of Equity Securities


The table below provides information with respect to Common Stock purchases by the Company during the firstthird fiscal quarter of 2019.
  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    
December 30, 2018 - January 26, 2019 —
 $—
 —
 $283,172,767
January 27, 2019 - February 23, 2019 59
 54.95
 —
 283,172,767
February 24, 2019 - March 30, 2019 246
 57.14
 —
 283,172,767
         
Total 305
 $56.72
 —
  
  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    
June 30, 2019 - July 27, 2019 —
 $—
 —
 $883,346,876
July 28, 2019 - August 24,2019 4,762,581
 70.86
 4,762,581
 545,886,829
August 25, 2019 - September 28, 2019 911,061
 68.52
 911,061
 483,460,421
         
Total 5,673,642
 $70.48
 5,673,642
  

(a)Of the 305 shares of common stock, par value $0.01 per share, presented in the table above, all 305 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 tax obligations due upon the vesting of restricted stock. Pursuant to the Omnibus Plan, the 305 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 21, 2018, our Board of Directors approved an amendment to our repurchase program that allowed for the Company to repurchase up to an aggregate of $1.0 billion of shares of our common stock, excluding transaction costs. As announced on April 9, 2019, our Board of Directors approved a further amendment to this share repurchase program. Underprogram, authorizing the amendment, the Company is authorized to repurchase up to an additional $1.2 billion of shares of our common stock, for an aggregate of $2.2 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 the nine months ended September 28, 2019, we repurchased 14.4 million shares for total consideration of $1.0 billion under the program pursuant to Rule 10b5-1 plans. As of the date of this filing, $1.5 billionSeptember 28, 2019, $483 million remains available for repurchase under the amended program. Refer to Note (9)(10) of the notes to condensed consolidated financial statements for further information regarding our share repurchase program.





Item 6. Exhibits
(a) Exhibits
   
10.1
Cooperation Agreement, dated April 8, 2019, by and among Cerner Corporation and Starboard Value LP and certain of its affiliates filed as Exhibit 10.1 to Form 8-K filed April 9, 2019, is incorporated herein by reference
10.2
Form 2019 Executive Performance Agreement - Section 16 Officer
10.3
2011 Omnibus Equity Incentive Plan - Form of Time Based Restricted Stock Agreement
10.4
2011 Omnibus Equity Incentive Plan - Form of Performance Based Restricted Stock Agreement
10.5
2011 Omnibus Equity Incentive Plan - Form of Director Restricted Stock Agreement
31.1 
Certification of Brent Shafer pursuant to Section 302 of Sarbanes-Oxley Act of 2002
   
31.2 
Certification of Marc G. Naughton pursuant to Section 302 of Sarbanes-Oxley Act of 2002
   
32.1 
Certification of Brent Shafer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002
   
32.2 
Certification of Marc G. Naughton pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002
   
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.
   
101.SCH Inline XBRL Taxonomy Extension Schema Document
   
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document
   
101.DEFInline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB Inline XBRL Taxonomy Extension Labels Linkbase Document
   
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document
   
101.DEF104 Cover Page Interactive Data File - formatted in Inline XBRL Taxonomy Extension Definition Linkbase Documentand contained in Exhibit 101.


SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
    
  CERNER CORPORATION
  Registrant
    
Date: April 26,October 25, 2019 By:/s/ Marc G. Naughton
    Marc G. Naughton
    Executive Vice President and Chief
    Financial Officer (duly authorized
   officer and principal financial officer)