CERNER (CERN) 10-Q 2019 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: June 29, 2019

or

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to ___________

Commission File Number: 0-15386

CERNER CORPORATION

(Exact name of registrant as specified in its charter)

Delaware				43-1196944
(State or other jurisdiction of incorporation or organization)				(I.R.S. Employer Identification No.)
2800 Rockcreek Parkway
	North Kansas City,	MO		64117
(Address of principal executive offices)				(Zip Code)

(816) 221-1024

(Registrant's telephone number, including area code)

_________________________________________________________________

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 par value per share	CERN	The 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 ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒    No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer ☒ Accelerated Filer ☐ Non-accelerated Filer ☐ Smaller Reporting Company ☐ Emerging Growth Company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐    No ☒

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Class	Outstanding at July 17, 2019
Common Stock, $0.01 par value per share	318,393,949 shares

CERNER CORPORATION

TABLE OF CONTENTS

 

Part I.	Financial Information:
Item 1.	Financial Statements:
	Condensed Consolidated Balance Sheets as of June 29, 2019 (unaudited) and December 29, 2018	1
	Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 29, 2019 and June 30, 2018 (unaudited)	2
	Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 29, 2019 and June 30, 2018 (unaudited)	3
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 29, 2019 and June 30, 2018 (unaudited)	4
	Condensed Consolidated Statements of Changes in Shareholders' Equity for the Three and Six Months Ended June 29, 2019 and June 30, 2018 (unaudited)	5
	Notes to Condensed Consolidated Financial Statements (unaudited)	6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	32
Item 4.	Controls and Procedures	33
Part II.	Other Information:
Item 1A.	Risk Factors	33
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35
Item 6.	Exhibits	36
Signatures

Part I. Financial Information

Item 1. Financial Statements

CERNER CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

As of June 29, 2019 (unaudited) and December 29, 2018

(In thousands, except share data)	2019			2018
Assets
Current assets:
Cash and cash equivalents	$	702,924		$	374,126
Short-term investments	250,595			401,285
Receivables, net	1,228,985			1,183,494
Inventory	23,163			25,029
Prepaid expenses and other	396,803			334,870
Total current assets	2,602,470			2,318,804
Property and equipment, net	1,866,142			1,743,575
Right-of-use assets	132,102			—
Software development costs, net	932,035			894,512
Goodwill	847,673			847,544
Intangible assets, net	366,337			405,305
Long-term investments	320,616			300,046
Other assets	208,934			198,850
Total assets	$	7,276,309		$	6,708,636
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable	$	328,405		$	293,534
Current installments of long-term debt and capital lease obligations	—			4,914
Deferred revenue	320,916			399,189
Accrued payroll and tax withholdings	208,994			195,931
Other current liabilities	173,051			69,122
Total current liabilities	1,031,366			962,690
Long-term debt	1,038,530			438,802
Deferred income taxes	347,658			336,379
Other liabilities	141,486			42,376
Total liabilities	2,559,040			1,780,247
Shareholders' Equity:
Common stock, $.01 par value, 500,000,000 shares authorized, 364,695,561 shares issued at June 29, 2019 and 362,212,843 shares issued at December 29, 2018	3,647			3,622
Additional paid-in capital	1,722,207			1,559,562
Retained earnings	5,812,031			5,576,525
Treasury stock, 46,609,355 shares at June 29, 2019 and 37,905,013 shares at December 29, 2018	(2,707,768		)	(2,107,768		)
Accumulated other comprehensive loss, net	(112,848		)	(103,552		)
Total shareholders' equity	4,717,269			4,928,389
Total liabilities and shareholders' equity	$	7,276,309		$	6,708,636

See notes to condensed consolidated financial statements (unaudited).

1

CERNER CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

For the three and six months ended June 29, 2019 and June 30, 2018

(unaudited)

	Three Months Ended						Six Months Ended
(In thousands, except per share data)	2019			2018			2019			2018
Revenues	$	1,431,061		$	1,367,727		$	2,820,938		$	2,660,588
Costs and expenses:
Costs of revenue	268,673			238,783			521,877			470,061
Sales and client service	678,895			635,105			1,319,082			1,225,053
Software development (Includes amortization of $56,005 and $112,250 for the three and six months ended June 29, 2019, respectively; and $52,141 and $102,142 for the three and six months ended June 30, 2018, respectively)	181,047			168,278			361,408			329,895
General and administrative	149,788			95,464			245,984			187,758
Amortization of acquisition-related intangibles	21,541			21,810			43,526			44,319
Total costs and expenses	1,299,944			1,159,440			2,491,877			2,257,086
Operating earnings	131,117			208,287			329,061			403,502
Other income, net	23,006			6,597			31,438			11,461
Earnings before income taxes	154,123			214,884			360,499			414,963
Income taxes	(27,154		)	(45,527		)	(67,311		)	(85,605		)
Net earnings	$	126,969		$	169,357		$	293,188		$	329,358
Basic earnings per share	$	0.40		$	0.51		$	0.91		$	0.99
Diluted earnings per share	$	0.39		$	0.51		$	0.90		$	0.98
Basic weighted average shares outstanding	321,280			330,206			322,485			331,479
Diluted weighted average shares outstanding	324,662			333,562			325,498			335,223

See notes to condensed consolidated financial statements (unaudited).

2

CERNER CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the three and six months ended June 29, 2019 and June 30, 2018

(unaudited)

 

	Three Months Ended						Six Months Ended
(In thousands)	2019			2018			2019			2018
Net earnings	$	126,969		$	169,357		$	293,188		$	329,358
Foreign currency translation adjustment and other (net of taxes (benefit) of $179 and $(4) for the three and six months ended June 29, 2019; and $(335) and $585 for the three and six months ended June 30, 2018, respectively)	(100		)	(21,811		)	2,221			(19,017		)
Unrealized loss on cash flow hedge (net of tax benefit of $4,069 for both the three and six months ended June 29, 2019)	(12,370		)	—			(12,370		)	—
Unrealized holding gain (loss) on available-for-sale investments (net of taxes (benefit) of $71 and $281 for the three and six months ended June 29, 2019; and $209 and $(84) for the three and six months ended June 30, 2018, respectively)	216			642			853			(256		)
Comprehensive income	$	114,715		$	148,188		$	283,892		$	310,085

See notes to condensed consolidated financial statements (unaudited).

3

CERNER CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the six months ended June 29, 2019 and June 30, 2018

(unaudited)

	Six Months Ended
(In thousands)	2019			2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings	$	293,188		$	329,358
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization	336,486			312,645
Share-based compensation expense	42,884			49,139
Provision for deferred income taxes	15,154			1,736
Gain on sale of investment	(15,509		)	—
Changes in assets and liabilities:
Receivables, net	(47,839		)	(186,039		)
Inventory	1,875			390
Prepaid expenses and other	(76,048		)	181,035
Accounts payable	24,980			43,364
Accrued income taxes	(1,569		)	7,919
Deferred revenue	(78,090		)	(40,132		)
Other accrued liabilities	28,564			9,251
Net cash provided by operating activities	524,076			708,666
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital purchases	(277,874		)	(188,994		)
Capitalized software development costs	(144,902		)	(142,951		)
Purchases of investments	(140,723		)	(194,592		)
Sales and maturities of investments	289,669			331,728
Purchase of other intangibles	(17,457		)	(16,373		)
Net cash used in investing activities	(291,287		)	(211,182		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt issuance	600,000			—
Repayment of long-term debt	—			(75,000		)
Proceeds from exercise of stock options	125,000			21,343
Payments to taxing authorities in connection with shares directly withheld from associates	(4,860		)	(7,308		)
Treasury stock purchases	(620,542		)	(287,624		)
Other	(4,450		)	(1,691		)
Net cash provided by (used in) financing activities	95,148			(350,280		)
Effect of exchange rate changes on cash and cash equivalents	861			(7,159		)
Net increase in cash and cash equivalents	328,798			140,045
Cash and cash equivalents at beginning of period	374,126			370,923
Cash and cash equivalents at end of period	$	702,924		$	510,968

See notes to condensed consolidated financial statements (unaudited).

4

CERNER CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

For the three and six months ended June 29, 2019 and June 30, 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, 2017	359,205	$	3,592	$	1,380,371	$	4,938,866		$	(1,464,099	)	$	(73,382	)
Exercise of stock options and vests of restricted shares and share units	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, 2018	359,872	3,599		1,413,637		5,106,467			(1,551,723		)	(71,486		)
Exercise of stock options and vests of restricted shares and share units	629	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, 2018	360,501	$	3,605	$	1,443,803	$	5,275,824		$	(1,751,723	)	$	(92,655	)
Balance at December 29, 2018	362,213	$	3,622	$	1,559,562	$	5,576,525		$	(2,107,768	)	$	(103,552	)
Exercise of stock options and vests of restricted shares and share units	706	7		11,716		—			—			—
Employee share-based compensation expense	—	—		19,860		—			—			—
Other comprehensive income (loss)	—	—		—		—			—			2,958
Net earnings	—	—		—		166,219			—			—
Balance at March 30, 2019	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 units	1,777	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, 2019	364,696	$	3,647	$	1,722,207	$	5,812,031		$	(2,707,768	)	$	(112,848	)

See notes to condensed consolidated financial statements (unaudited).

5

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. These principles require us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. Actual results could differ from those estimates.

Fiscal Period End

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

Supplemental Disclosures of Cash Flow Information

	Six Months Ended
(In thousands)	2019		2018
Cash paid during the period for:
Interest (including amounts capitalized of $8,164 and $5,874, respectively)	$	8,907	$	8,333
Income taxes, net of refunds	47,877		(86,825		)

Voluntary Separation Plan

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 April 2019. In the second quarter of 2019, we recorded pre-tax charges for the 2019 VSP of $41 million. Such charges are included in general and administrative expense in our condensed consolidated statements of operations.

Accounting Pronouncements Adopted in 2019

Leases. In the first quarter of 2019, we adopted new lease accounting guidance. Refer to Note (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 impact 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.

6

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.

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.

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.

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.

(2) Revenue Recognition

Disaggregation of Revenue

The following tables present revenues disaggregated by our business models:

	Three Months Ended
	2019						2018
(In thousands)	Domestic Segment		International Segment		Total		Domestic Segment		International Segment		Total
Licensed software	$	181,061	$	16,052	$	197,113	$	161,220	$	11,168	$	172,388
Technology resale	54,851		5,884		60,735		61,789		13,468		75,257
Subscriptions	83,573		6,197		89,770		76,419		6,532		82,951
Professional services	429,910		55,397		485,307		387,540		59,778		447,318
Managed services	268,560		29,091		297,651		261,787		23,765		285,552
Support and maintenance	225,602		50,809		276,411		229,779		49,177		278,956
Reimbursed travel	22,555		1,519		24,074		23,530		1,775		25,305
Total revenues	$	1,266,112	$	164,949	$	1,431,061	$	1,202,064	$	165,663	$	1,367,727

7

	Six Months Ended
	2019						2018
(In thousands)	Domestic Segment		International Segment		Total		Domestic Segment		International Segment		Total
Licensed software	$	321,506	$	30,084	$	351,590	$	285,314	$	21,893	$	307,207
Technology resale	104,009		12,266		116,275		120,038		18,595		138,633
Subscriptions	161,275		12,786		174,061		146,271		13,316		159,587
Professional services	867,139		108,607		975,746		767,384		121,202		888,586
Managed services	545,885		56,159		602,044		507,932		45,925		553,857
Support and maintenance	452,083		101,291		553,374		464,015		99,505		563,520
Reimbursed travel	45,045		2,803		47,848		46,206		2,992		49,198
Total revenues	$	2,496,942	$	323,996	$	2,820,938	$	2,337,160	$	323,428	$	2,660,588

The following tables 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	$	1,124,513	$	148,092	$	1,272,605	$	1,062,878	$	144,262	$	1,207,140
Revenue recognized at a point in time	141,599		16,857		158,456		139,186		21,401		160,587
Total revenues	$	1,266,112	$	164,949	$	1,431,061	$	1,202,064	$	165,663	$	1,367,727

	Six Months Ended
	2019						2018
(In thousands)	Domestic Segment		International Segment		Total		Domestic Segment		International Segment		Total
Revenue recognized over time	$	2,260,495	$	290,303	$	2,550,798	$	2,091,373	$	288,397	$	2,379,770
Revenue recognized at a point in time	236,447		33,693		270,140		245,787		35,031		280,818
Total revenues	$	2,496,942	$	323,996	$	2,820,938	$	2,337,160	$	323,428	$	2,660,588

Transaction Price Allocated to Remaining Performance Obligations

As of June 29, 2019, the aggregate amount of transaction price allocated to performance obligations that are unsatisfied (or partially unsatisfied) for executed contracts approximates $14.98 billion of which we expect to recognize approximately 29% of the revenue over the next 12 months and the remainder thereafter.

Contract Liabilities

Customer payments received in advance of satisfaction of the related performance obligations are deferred as contract liabilities. Such amounts are classified in our condensed consolidated balance sheets as deferred revenue. During the six months ended June 29, 2019, we recognized $266 million of revenues that were included in our contract liability balance at the beginning of such period.

8

(3) Receivables

A summary of net receivables is as follows:

(In thousands)	June 29, 2019		December 29, 2018
Client receivables	$	1,320,230	$	1,237,127
Less: Allowance for doubtful accounts	91,245		64,561
Client receivables, net of allowance	1,228,985		1,172,566
Current portion of lease receivables (under ASC Topic 840)	—		10,928
Total receivables, net	$	1,228,985	$	1,183,494

At June 29, 2019, a specific client comprised 14% of total receivables.

During the first six months of 2019 and 2018, we received total client cash collections of $2.74 billion and $2.59 billion, respectively.

(4) Investments

Available-for-sale investments at June 29, 2019 were as follows:

(In thousands)	Adjusted Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Cash equivalents:
Money market funds	$	239,105	$	—	$	—		$	239,105
Time deposits	72,184		—		—			72,184
Commercial paper	160,300		—		—			160,300
Total cash equivalents	471,589		—		—			471,589
Short-term investments:
Time deposits	15,126		—		—			15,126
Commercial paper	26,500		22		(27		)	26,495
Government and corporate bonds	208,936		110		(72		)	208,974
Total short-term investments	250,562		132		(99		)	250,595
Long-term investments:
Government and corporate bonds	1,003		—		(1		)	1,002
Total available-for-sale investments	$	723,154	$	132	$	(100	)	$	723,186

9

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

Other Investments

At June 29, 2019 and December 29, 2018, we had equity investments of $314 million and $277 million, respectively, accounted for in accordance with 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 six months ended June 29, 2019 and June 30, 2018, respectively.

(5) Long-term Debt

The following is a summary of indebtedness outstanding:

(In thousands)	June 29, 2019			December 29, 2018
Credit agreement loans	$	600,000		$	—
Senior notes	425,000			425,000
Capital lease obligations (under ASC Topic 840)	—			4,914
Other	14,162			14,162
Debt and capital lease obligations	1,039,162			444,076
Less: debt issuance costs	(632		)	(360		)
Debt and capital lease obligations, net	1,038,530			443,716
Less: current portion	—			(4,914		)
Long-term debt	$	1,038,530		$	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

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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 June 29, 2019, the interest rate on revolving credit loans outstanding was 3.21% based on LIBOR plus the applicable spread.

As of June 29, 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 June 29, 2019, this swap was in a net liability position with an aggregate fair value of $16 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 Accounting Standards Codification ("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 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.

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The following table details our financial assets measured and recorded at fair value on a recurring basis at June 29, 2019:

(In thousands)
		Fair Value Measurements Using
Description	Balance Sheet Classification	Level 1		Level 2		Level 3
Money market funds	Cash equivalents	$	239,105	$	—	$	—
Time deposits	Cash equivalents	—		72,184		—
Commercial paper	Cash equivalents	—		160,300		—
Time deposits	Short-term investments	—		15,126		—
Commercial paper	Short-term investments	—		26,495		—
Government and corporate bonds	Short-term investments	—		208,974		—
Government and corporate bonds	Long-term investments	—		1,002		—

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		—

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 June 29, 2019 and December 29, 2018 was approximately $1.05 billion and $431 million, respectively. The carrying amount of such debt at June 29, 2019 and December 29, 2018 was $1.03 billion and $425 million, respectively.

(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.

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A summary of such cumulative effect adjustment is as follows:

(In thousands)	Increase / (Decrease)
Right-of-use asset	$	129,652
Prepaid expenses and other	3,968
Other current liabilities	22,767
Other liabilities	110,853

Arrangements Containing Leases

The cumulative effect adjustment above, is primarily comprised of arrangements where we are the lessee under operating leases for real estate (office, data center, and warehouse space) and certain dedicated fiber optic lines within our infrastructure. The duration of these agreements ranges from several months to in excess of 20 years. Generally, variable lease payments under these operating lease agreements relate to amounts based on changes to an index or rate (i.e. percentage change in the consumer price index). We do not have any arrangements where we are the lessee, classified as finance leases in our 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 June 29, 2019, under operating lease arrangements where we are the lessee:

(In thousands)
Description	Balance Sheet Classification	June 29, 2019
Right-of-use asset	Right-of-use assets	$	132,102
Lease liability - current	Other current liabilities	30,790
Lease liability - non-current	Other liabilities	110,824

Lease liabilities recorded upon the commencement of operating leases during the six months ended June 29, 2019 were $23 million.

For the three and six months ended June 29, 2019, operating lease cost was $10 million and $19 million, respectively. Variable lease cost was less than $1 million for both the three and six months ended June 29, 2019.

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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	$	18,792
2020	32,481
2021	27,986
2022	22,232
2023	15,475
2024 and thereafter	47,451
Aggregate future payments	164,417
Impact of discounting	(22,803		)
Aggregate lease liability at June 29, 2019	$	141,614

At June 29, 2019, the weighted-average remaining lease term and weighted-average discount rate for our operating lease arrangements where we are the lessee were 7.04 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 six months ended June 30, 2018 was $8 million and $17 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

(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 18.7% and 20.6% for the first six months of 2019 and 2018, respectively. The decrease in the effective tax rate in the first six 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.

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(9) Earnings Per Share

A reconciliation of the numerators and the denominators of the basic and diluted per share computations are as follows:

	Three Months Ended
	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	$	126,969	321,280	$	0.40	$	169,357	330,206	$	0.51
Effect of dilutive securities:
Stock options and non-vested shares	—		3,382			—		3,356
Diluted earnings per share:
Income available to common shareholders including assumed conversions	$	126,969	324,662	$	0.39	$	169,357	333,562	$	0.51

For the three months ended June 29, 2019 and June 30, 2018, options to purchase 9.4 million and 14.0 million shares of common stock at per share prices ranging from $53.30 to $73.40 and $47.99 to $73.40, respectively, were outstanding but were not included in the computation of diluted earnings per share because they were anti-dilutive.

	Six 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	$	293,188	322,485	$	0.91	$	329,358	331,479	$	0.99
Effect of dilutive securities:
Stock options and non-vested shares	—		3,013			—		3,744
Diluted earnings per share:
Income available to common shareholders including assumed conversions	$	293,188	325,498	$	0.90	$	329,358	335,223	$	0.98

For the six months ended June 29, 2019 and June 30, 2018, options to purchase 12.5 million and 12.4 million shares of common stock at per share prices ranging from $51.46 to $73.40 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.

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(10) Share-Based Compensation and Equity

Stock Options

Stock option activity for the six months ended June 29, 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)
Outstanding at beginning of year	21,792		$	52.31
Granted	1,030		65.48
Exercised	(3,510	)	37.85
Forfeited and expired	(806	)	61.54
Outstanding as of June 29, 2019	18,506		55.38		$	331,632	6.35
Exercisable as of June 29, 2019	10,335		$	51.19	$	228,546	4.90

The weighted-average assumptions used to estimate the fair value, under the Black-Scholes-Merton pricing model, of stock options granted during the six months ended June 29, 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	$	17.59

As of June 29, 2019, there was $126 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 3.02 years.

Non-vested Shares and Share Units

Non-vested share and share unit activity for the six months ended June 29, 2019 was as follows:

(In thousands, except per share data)	Number of Shares		Weighted-Average Grant Date Fair Value
Outstanding at beginning of year	882		$	62.82
Granted	1,660		66.00
Vested	(48	)	60.19
Forfeited	(37	)	61.87
Outstanding as of June 29, 2019	2,457		$	65.04

As of June 29, 2019, there was $122 million of total unrecognized compensation cost related to non-vested share and share unit awards granted under all plans. That cost is expected to be recognized over a weighted-average period of 2.61 years.

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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					Six Months Ended
(In thousands)	2019			2018		2019		2018
Stock option and non-vested share and share unit compensation expense	$	23,024		$	24,204	$	42,884	$	49,139
Associate stock purchase plan expense	1,749			1,916		3,291		3,278
Amounts capitalized in software development costs, net of amortization	(41		)	161		146		321
Amounts charged against earnings, before income tax benefit	$	24,732		$	26,281	$	46,321	$	52,738
Amount of related income tax benefit recognized in earnings	$	4,357		$	5,568	$	8,558	$	10,868

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 six months ended June 29, 2019, we repurchased 8.7 million shares for total consideration of $600 million 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 June 29, 2019, $883 million remains available for repurchase under the amended program.

Dividend

On May 29, 2019, our Board of Directors declared a cash dividend of $0.18 per share on our issued and outstanding common stock, payable on July 26, 2019 to shareholders of record as of June 18, 2019. In connection with the declaration of such dividend, 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 reclassifications	2,321			—			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	)

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	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 reclassifications	2,794			—		(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	)

The effects on net earnings of amounts reclassified from AOCI were as follows:

(In thousands)		Three Months Ended						Six Months Ended
AOCI Component	Location	2019			2018			2019			2018
Unrealized loss on cash flow hedge	Other income, net	$	180		$	—		$	180		$	—
	Income taxes	(33		)	—			(33		)	—
	Net of tax	147			—			147			—
Unrealized holding gain (loss) on available-for-sale investments	Other income, net	—			(4		)	—			(4		)
	Income taxes	—			1			—			1
	Net of tax	—			(3		)	—			(3		)
Total amount reclassified, net of tax		$	147		$	(3	)	$	147		$	(3	)

(11) Contingencies

We accrue estimates for resolution of any legal and other contingencies when losses are probable and reasonably estimable in accordance with ASC 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 claims based on alleged infringement by our solutions of an intellectual property right of such third party. The terms of such indemnification often limit the scope of and remedies for such indemnification obligations and generally include a right to replace or modify an infringing solution. To date, we have not had to reimburse any of our clients for any judgments or settlements to third parties related to these indemnification provisions pertaining to intellectual property infringement claims. For several reasons, including the lack of a sufficient number of prior indemnification claims and the lack of a monetary liability limit for certain infringement cases under the terms of the corresponding agreements with our clients, we cannot determine the maximum amount of potential future payments, if any, related to such indemnification provisions.

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. Our evaluation of the dispute is in its early stages. We have not accrued a reserve for any additional damages or claims at this

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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 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.

(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-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, organizational restructuring and 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 six months ended June 29, 2019 and June 30, 2018:

(In thousands)	Domestic		International		Other			Total
Three Months Ended 2019
Revenues	$	1,266,112	$	164,949	$	—		$	1,431,061
Costs of revenue	243,926		24,747		—			268,673
Operating expenses	605,636		73,258		352,377			1,031,271
Total costs and expenses	849,562		98,005		352,377			1,299,944
Operating earnings (loss)	$	416,550	$	66,944	$	(352,377	)	$	131,117

(In thousands)	Domestic		International		Other			Total
Three Months Ended 2018
Revenues	$	1,202,064	$	165,663	$	—		$	1,367,727
Costs of revenue	208,185		30,598		—			238,783
Operating expenses	551,468		73,407		295,782			920,657
Total costs and expenses	759,653		104,005		295,782			1,159,440
Operating earnings (loss)	$	442,411	$	61,658	$	(295,782	)	$	208,287

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(In thousands)	Domestic		International		Other			Total
Six Months Ended 2019
Revenues	$	2,496,942	$	323,996	$	—		$	2,820,938
Costs of revenue	472,485		49,392		—			521,877
Operating expenses	1,177,654		141,427		650,919			1,970,000
Total costs and expenses	1,650,139		190,819		650,919			2,491,877
Operating earnings (loss)	$	846,803	$	133,177	$	(650,919	)	$	329,061

(In thousands)	Domestic		International		Other			Total
Six Months Ended 2018
Revenues	$	2,337,160	$	323,428	$	—		$	2,660,588
Costs of revenue	414,859		55,202		—			470,061
Operating expenses	1,071,339		142,551		573,135			1,787,025
Total costs and expenses	1,486,198		197,753		573,135			2,257,086
Operating earnings (loss)	$	850,962	$	125,675	$	(573,135	)	$	403,502

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

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

Our second fiscal quarter ends on the Saturday closest to June 30. The 2019 and 2018 second quarters ended on June 29, 2019 and June 30, 2018, respectively. All references to years in this MD&A represent the respective three or six 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, devices and 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 ITWorks^SM 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 $1.43 billion in the second quarter of 2019, which is a decrease of 19% compared to $1.78 billion in the second 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.

Revenues for the second quarter of 2019 increased 5% to $1.43 billion, compared to $1.37 billion in the second 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.

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Net earnings for the second quarter of 2019 decreased 25% to $127 million, compared to $169 million in the second quarter of 2018. Diluted earnings per share decreased 24% to $0.39, compared to $0.51 in the second quarter of 2018. The overall decrease in net earnings and diluted earnings per share was primarily a result of increased operating expenses, including expenses incurred in connection with our operational improvement initiatives discussed below, partially offset by increased revenues.

We had cash collections of receivables of $1.38 billion in the second quarter of 2019, compared to $1.32 billion in the second quarter of 2018. Days sales outstanding was 78 days for the 2019 second quarter, compared to 76 days for the 2019 first quarter and 77 days for the 2018 second quarter. Operating cash flows for the second quarter of 2019 were $207 million, compared to $300 million in the second 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. 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 identify opportunities to operate more efficiently and achieve and improve upon the efficiencies without impacting the quality of our solutions and services and commitments to our clients.

In the near term, we expect to incur expenses in connection with these efforts. Such expenses may include, but are not limited to, consultant and other professional services fees, employee separation costs, contract termination costs, and other such related expenses. For the six months ended June 29, 2019, we recognized $57 million of expenses related to these efforts, which are included in general and administrative expense in our condensed consolidated statements of operations. We expect to incur additional expenses in connection with these initiatives in future periods, which may be material.

Results of Operations

Three Months Ended June 29, 2019 Compared to Three Months Ended June 30, 2018

The following table presents a summary of the operating information for the second quarters of 2019 and 2018:

(In thousands)	2019			% of Revenue		2018			% of Revenue		% Change
Revenues	$	1,431,061		100	%	$	1,367,727		100	%	5	%
Costs of revenue	268,673			19	%	238,783			17	%	13	%
Margin	1,162,388			81	%	1,128,944			83	%	3	%
Operating expenses
Sales and client service	678,895			47	%	635,105			46	%	7	%
Software development	181,047			13	%	168,278			12	%	8	%
General and administrative	149,788			10	%	95,464			7	%	57	%
Amortization of acquisition-related intangibles	21,541			2	%	21,810			2	%	(1	)%
Total operating expenses	1,031,271			72	%	920,657			67	%	12	%
Total costs and expenses	1,299,944			91	%	1,159,440			85	%	12	%
Operating earnings	131,117			9	%	208,287			15	%	(37	)%
Other income, net	23,006					6,597
Income taxes	(27,154		)			(45,527		)
Net earnings	$	126,969				$	169,357				(25	)%

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Revenues & Backlog

Revenues increased 5% to $1.43 billion in the second quarter of 2019, as compared to $1.37 billion in the same period of 2018. This increase was primarily driven by a $38 million increase in professional services revenue due to growth in implementation activity, and growth in licensed software revenue of $25 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, was $14.98 billion in the second quarter of 2019, compared to $14.79 billion in the same period of 2018. This increase was driven by solid levels of new business bookings during the past four quarters, including strong levels of managed services bookings that typically have longer contract terms. We expect to recognize approximately 29% 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 $551 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 19% in the second 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.

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 12% to $1.03 billion in the second quarter of 2019, compared to $921 million in the same period of 2018.

• Sales and client service expenses as a percent of revenues were 47% in the second quarter of 2019, compared to 46% in the same period of 2018. These expenses increased 7% to $679 million in the second quarter of 2019, from $635 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 an $8 million increase in personnel expenses, inclusive of hiring personnel to support growth in professional services revenue; an $8 million increase in bad debt expense related to client receivables; and a $20 million charge in connection with a client dispute recognized in the second quarter of 2019. Refer to Note (11) of the notes to condensed consolidated financial statements for further information regarding such client dispute.

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• Software development expenses as a percent of revenues were 13% in the second quarter of 2019, compared to 12% in the same period of 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 second quarters of 2019 and 2018 is as follows:

	Three Months Ended
(In thousands)	2019			2018
Software development costs	$	195,393		$	185,486
Capitalized software costs	(69,675		)	(68,786		)
Capitalized costs related to share-based payments	(676		)	(563		)
Amortization of capitalized software costs	56,005			52,141
Total software development expense	$	181,047		$	168,278

• General and administrative expenses as a percent of revenues were 10% in the second quarter of 2019, compared to 7% in the same period of 2018. These expenses increased 57% to $150 million in the second quarter of 2019, from $95 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, organizational restructuring and other expense. The increase in general and administrative expenses includes $55 million of expenses incurred in the second quarter of 2019 in connection with our operational improvement initiatives discussed above; inclusive of $41 million of charges associated with the 2019 VSP, 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 in 2019, which may be material.

• Amortization of acquisition-related intangibles as a percent of revenues was 2% in the second quarter of both 2019 and 2018. These expenses remained flat at $22 million in the second quarter of both 2019 and 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.

Non-Operating Items

• Other income, net was $23 million in the second quarter of 2019, compared to $7 million in the same period of 2018. The second quarter of 2019 includes a $16 million gain recognized on the disposition of one of our equity investments.

• Our effective tax rate was 17.6% for the second quarter of 2019, compared to 21.2% in the same period of 2018. The decrease in the effective tax rate in the second quarter of 2019 is primarily due to increased excess tax benefits recognized as a component of income tax expense during the quarter 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

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 (12) of the notes to condensed consolidated financial statements for further information regarding our reportable segments.

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The following table presents a summary of our operating segment information for the second quarters of 2019 and 2018:

(In thousands)	2019			% of Revenue	2018			% of Revenue	% Change
Domestic Segment
Revenues	$	1,266,112		100%	$	1,202,064		100%	5%
Costs of revenue	243,926			19%	208,185			17%	17%
Operating expenses	605,636			48%	551,468			46%	10%
Total costs and expenses	849,562			67%	759,653			63%	12%
Domestic operating earnings	416,550			33%	442,411			37%	(6)%
International Segment
Revenues	164,949			100%	165,663			100%	—%
Costs of revenue	24,747			15%	30,598			18%	(19)%
Operating expenses	73,258			44%	73,407			44%	—%
Total costs and expenses	98,005			59%	104,005			63%	(6)%
International operating earnings	66,944			41%	61,658			37%	9%
Other, net	(352,377		)		(295,782		)		19%
Consolidated operating earnings	$	131,117			$	208,287			(37)%

Domestic Segment

• Revenues increased 5% to $1.27 billion in the second quarter of 2019, from $1.20 billion in the same period of 2018. This increase was primarily driven by a $42 million increase in professional services revenue due to growth in implementation activity, and growth in licensed software revenue of $20 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 second 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 48% in the second quarter 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 $20 million charge in connection with a client dispute discussed above.

International Segment

• Revenues remained relatively flat at $165 million in the second quarter of 2019, and $166 million 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.

• Costs of revenue as a percent of revenues were 15% in the second 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 flat at $73 million in the second quarter 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, share-based compensation expense, certain amortization and depreciation, organizational restructuring and other expense. These expenses increased 19% to $352 million in the second quarter of 2019, from $296

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million in the same period of 2018. The increase is primarily due to $55 million of expenses incurred in the second quarter of 2019 in connection with our operational improvement initiatives discussed above; inclusive of $41 million of charges associated with the 2019 VSP, as further discussed in Note (1) of the notes to condensed consolidated financial statements.

Six Months Ended June 29, 2019 Compared to Six Months Ended June 30, 2018

The following table presents a summary of our operating information for the first six months of 2019 and 2018:

(In thousands)	2019			% of Revenue		2018			% of Revenue		% Change
Revenues	$	2,820,938		100	%	$	2,660,588		100	%	6	%
Costs of revenue	521,877			19	%	470,061			18	%	11	%
Margin	2,299,061			81	%	2,190,527			82	%	5	%
Operating expenses
Sales and client service	1,319,082			47	%	1,225,053			46	%	8	%
Software development	361,408			13	%	329,895			12	%	10	%
General and administrative	245,984			9	%	187,758			7	%	31	%
Amortization of acquisition-related intangibles	43,526			2	%	44,319			2	%	(2	)%
Total operating expenses	1,970,000			70	%	1,787,025			67	%	10	%
Total costs and expenses	2,491,877			88	%	2,257,086			85	%	10	%
Operating earnings	329,061			12	%	403,502			15	%	(18	)%
Other income, net	31,438					11,461
Income taxes	(67,311		)			(85,605		)
Net earnings	$	293,188				$	329,358				(11	)%

Revenues

Revenues increased 6% to $2.82 billion in the first six months of 2019, as compared to $2.66 billion in the same period of 2018. This increase was primarily driven by an $87 million increase in professional services revenue due to growth in implementation activity, and growth in managed services revenue of $48 million as a result of continued demand for our hosting services. 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 six 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

Total operating expenses increased 10% to $1.97 billion in the first six months of 2019, as compared to $1.79 billion in the same period of 2018.

• Sales and client service expenses as a percent of revenues were 47% in the first six months of 2019, compared to 46% in the same period of 2018. These expenses increased 8% to $1.32 billion in the first six months of 2019, from $1.23 billion in the same period of 2018. The increase in sales and client service expenses was primarily driven by a $48 million increase in personnel expenses, inclusive of hiring of personnel to support growth in professional services revenue; a $14 million increase in bad debt expense related to client receivables; and a $20 million charge in connection with a client dispute recognized in the first six months of 2019. Refer to Note (11) of the notes to condensed consolidated financial statements for further information regarding such client dispute.

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• Software development expenses as a percent of revenues were 13% in the first six months of 2019, compared to 12% in the same period of 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 six months of 2019 and 2018 is as follows:

	Six Months Ended
(In thousands)	2019			2018
Software development costs	$	394,060		$	370,704
Capitalized software costs	(143,774		)	(141,857		)
Capitalized costs related to share-based payments	(1,128		)	(1,094		)
Amortization of capitalized software costs	112,250			102,142
Total software development expense	$	361,408		$	329,895

• General and administrative expenses as a percent of revenues were 9% in the first six months 2019, compared to 7% in the same period of 2018. These expenses increased 31% to $246 million in the first six months of 2019, from $188 million in the same period of 2018. The increase in general and administrative expenses includes $57 million of expenses incurred in the first six months of 2019 in connection with our operational improvement initiatives discussed above; inclusive of $41 million of charges associated with the 2019 VSP, 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 in 2019, which may be material.

• Amortization of acquisition-related intangibles as a percent of revenues was 2% in the first six months of both 2019 and 2018. These expenses remained flat at $44 million in the first six months of both 2019 and 2018.

Non-Operating Items

• Other income, net was $31 million in the first six months of 2019, compared to $11 million in the same period of 2018. The first six months of 2019 includes a $16 million gain recognized on the disposition of one of our equity investments.

• Our effective tax rate was 18.7% for the first six months of 2019, compared to 20.6% in the same period of 2018. The decrease in the effective tax rate in the first six 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.

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Operations by Segment

The following table presents a summary of our operating segment information for the first six months of 2019 and 2018:

(In thousands)	2019			% of Revenue	2018			% of Revenue	% Change
Domestic Segment
Revenues	$	2,496,942		100%	$	2,337,160		100%	7%
Costs of revenue	472,485			19%	414,859			18%	14%
Operating expenses	1,177,654			47%	1,071,339			46%	10%
Total costs and expenses	1,650,139			66%	1,486,198			64%	11%
Domestic operating earnings	846,803			34%	850,962			36%	—%
International Segment
Revenues	323,996			100%	323,428			100%	—%
Costs of revenue	49,392			15%	55,202			17%	(11)%
Operating expenses	141,427			44%	142,551			44%	(1)%
Total costs and expenses	190,819			59%	197,753			61%	(4)%
International operating earnings	133,177			41%	125,675			39%	6%
Other, net	(650,919		)		(573,135		)		14%
Consolidated operating earnings	$	329,061			$	403,502			(18)%

Domestic Segment

• Revenues increased 7% to $2.50 billion in the first six months of 2019, from $2.34 billion in the same period of 2018. This increase was primarily driven by a $100 million increase in professional services revenue due to growth in implementation activity, and growth in managed services revenue of $38 million as a result of continued demand for our hosting services. 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 six 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 47% in the first six 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 $20 million charge in connection with a client dispute discussed above.

International Segment

• Revenues remained relatively flat at $324 million in the first six months of 2019, and $323 million 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.

• Costs of revenue as a percent of revenues were 15% in the first six 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 as a percent of revenues were 44% in the first six months of both 2019 and 2018.

Other, net

These expenses increased 14% to $651 million in the first six months of 2019, from $573 million in the same period of 2018. The increase is primarily due to $57 million of expenses incurred in the first six months of 2019 in connection with our operational improvement initiatives discussed above; inclusive of $41 million of charges associated with the 2019 VSP, as further discussed in Note (1) of the notes to condensed consolidated financial statements.

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Liquidity and Capital Resources

Our liquidity is influenced by many factors, including the amount and timing of our revenues, our cash collections from our clients and the amount we invest in software development, acquisitions, capital expenditures, and in recent years, the amount we use for our share repurchase programs and dividends.

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 borrowings under our Credit Agreement. At June 29, 2019, we had cash and cash equivalents of $703 million and short-term investments of $251 million, as compared to cash and cash equivalents of $374 million and short-term investments of $401 million at December 29, 2018.

We maintain a $700.0 million Credit Agreement, which expires in May 2024. The Credit Agreement provides an unsecured revolving line of credit, along with a letter of credit facility. We have the ability to increase the maximum capacity to $1 billion at any time during the Credit Agreement's term, subject to lender participation and the satisfaction of specified conditions. As of June 29, 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. 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 Credit Agreement and other sources of debt financing, will be sufficient to meet anticipated cash requirements for the next 12 months.

The following table summarizes our cash flows in the first six months of 2019 and 2018:

	Six Months Ended
(In thousands)	2019			2018
Cash flows from operating activities	$	524,076		$	708,666
Cash flows from investing activities	(291,287		)	(211,182		)
Cash flows from financing activities	95,148			(350,280		)
Effect of exchange rate changes on cash	861			(7,159		)
Total change in cash and cash equivalents	328,798			140,045
Cash and cash equivalents at beginning of period	374,126			370,923
Cash and cash equivalents at end of period	$	702,924		$	510,968
Free cash flow (non-GAAP)	$	101,300		$	376,721

Cash from Operating Activities

	Six Months Ended
(In thousands)	2019			2018
Cash collections from clients	$	2,738,223		$	2,592,826
Cash paid to employees and suppliers and other	(2,157,363		)	(1,962,652		)
Cash paid for interest	(8,907		)	(8,333		)
Cash paid for taxes, net of refunds	(47,877		)	86,825
Total cash from operations	$	524,076		$	708,666

Cash flows from operations decreased $185 million in the first six months of 2019 when compared to the same period of 2018, due primarily to net refunds of taxes in 2018 along with cash payments in 2019 associated with our operational improvement initiatives discussed above. Days sales outstanding was 78 days in the second quarter of 2019, compared to 76 days for the first quarter of 2019 and 77 days for the second quarter of 2018.

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Cash from Investing Activities

	Six Months Ended
(In thousands)	2019			2018
Capital purchases	$	(277,874	)	$	(188,994	)
Capitalized software development costs	(144,902		)	(142,951		)
Sales and maturities of investments, net of purchases	148,946			137,136
Purchases of other intangibles	(17,457		)	(16,373		)
Total cash flows from investing activities	$	(291,287	)	$	(211,182	)

Cash flows from investing activities consist primarily of capital spending and short-term investment activities.

Our capital spending in the first six months 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 is impacted by excess cash being used to execute on our capital allocation strategy, including share repurchases discussed below. Additionally, our investment mix has changed whereas our funds are 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.

Cash from Financing Activities

	Six Months Ended
(In thousands)	2019			2018
Long-term debt issuance	$	600,000		$	—
Repayment of long-term debt	—			(75,000		)
Cash from option exercises (net of taxes paid in connection with shares surrendered by associates)	120,140			14,035
Treasury stock purchases	(620,542		)	(287,624		)
Other	(4,450		)	(1,691		)
Total cash flows from financing activities	$	95,148		$	(350,280	)

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, 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 and dividend payments (as discussed further below), as well as for general corporate purposes, including acquisitions. 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 June 29, 2019 and our current stock price.

During the first six months of 2019 and 2018, we repurchased 8.7 million shares of our common stock for total consideration of $600 million and 4.8 million shares of our common stock for total consideration of $288 million, respectively. As of June 29,

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2019, $883 million remains available for repurchase under our current repurchase program. We expect to continue to repurchase shares under this program in 2019, 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 May 29, 2019, our Board of Directors declared a cash dividend of $0.18 per share on our issued and outstanding common stock, payable on July 26, 2019 to shareholders of record as of June 18, 2019. We expect to distribute $57 million of cash to our shareholders in the third quarter of 2019 in connection with such dividend. 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 (10) of the notes to condensed consolidated financial statements for further information regarding our share repurchase and dividend programs.

Free Cash Flow (Non-GAAP)

	Three Months Ended						Six Months Ended
(In thousands)	2019			2018			2019			2018
Cash flows from operating activities (GAAP)	$	206,810		$	299,701		$	524,076		$	708,666
Capital purchases	(158,613		)	(109,283		)	(277,874		)	(188,994		)
Capitalized software development costs	(70,351		)	(69,349		)	(144,902		)	(142,951		)
Free cash flow (non-GAAP)	$	(22,154	)	$	121,069		$	101,300		$	376,721

Free cash flow decreased $275 million in the first six months 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.

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," "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

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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; impact of the phase-out of the London Interbank Offered Rate (LIBOR) on the interest rates under our Credit Agreement and related interest rate swap; changes in accounting standards issued by the Financial Accounting Standards Board or other standard-setting bodies may adversely affect our financial statements; 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 program will not be fully implemented or enhance long-term shareholder value; 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. 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 About Market Risk.

We are exposed to interest rate risk, primarily changes in LIBOR, related to outstanding revolving credit loans under our Credit Agreement. As of June 29, 2019, the interest rate on revolving credit loans outstanding was 3.21% 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 June 29, 2019 have not had a material impact on our financial position

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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 Procedures.

a) Evaluation of Disclosure Controls and Procedures.

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of our disclosure controls and procedures (as defined in 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.

There were no changes in our internal controls over financial reporting during the fiscal quarter ended June 29, 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 Factors.

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,

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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.

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

(c) Issuer Purchases of Equity Securities

The table below provides information with respect to Common Stock purchases by the Company during the second 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
March 31, 2019 - April 27, 2019	—	$	—	—	$	1,483,172,767
April 28, 2019 - May 25, 2019	6,271,513	68.42		6,271,097	1,054,084,597
May 26, 2019 - June 29, 2019	2,435,463	70.17		2,433,245	883,346,876
Total	8,706,976	$	68.91	8,704,342

(a) Of the 8,706,976 shares of common stock, par value $0.01 per share, presented in the table above, 2,634 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 2,634 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, authorizing the Company 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 six months ended June 29, 2019, we repurchased 8.7 million shares for total consideration of $600 million under the program pursuant to Rule 10b5-1 plans. As of June 29, 2019, $883 million remains available for repurchase under the amended program. Refer to Note (10) of the notes to condensed consolidated financial statements for further information regarding our share repurchase program.

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Item 6. Exhibits

(a)	Exhibits
10.1	First Amendment to Third Amended and Restated Credit Agreement dated May 6, 2019 among Cerner Corporation, U.S. Bank National Association, Commerce Bank N.A., and Bank of America, N.A., is incorporated by reference from Exhibit 10.1 to Form 8-K filed May 7, 2019
10.2	Cerner Corporation 2011 Omnibus Equity Incentive Plan (As Amended and Restated May 30, 2019) is incorporated by reference from Exhibit 10.1 to Form 8-K filed June 3, 2019
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	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Labels Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	CERNER CORPORATION
	Registrant
Date: July 25, 2019	By:	/s/ Marc G. Naughton
		Marc G. Naughton
		Executive Vice President and Chief
		Financial Officer (duly authorized
		officer and principal financial officer)