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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: March 31, 2022
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 Rock Creek 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 April 26, 2022 |
Common Stock, $0.01 par value per share | | 294,098,094 shares |
CERNER CORPORATION
TABLE OF CONTENTS
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Part I. | Financial Information: | |
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Item 1. | Financial Statements: | |
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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Part II. | Other Information: | |
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Item 1. | | |
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Item 6. | | |
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Signatures | |
Part I. Financial Information
Item 1. Financial Statements
CERNER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
As of March 31, 2022 (unaudited) and December 31, 2021
| | | | | | | | | | | |
(In thousands, except share data) | 2022 | | 2021 |
| | | |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 709,532 | | | $ | 589,847 | |
Short-term investments | 171,180 | | | 252,622 | |
Receivables, net | 1,178,037 | | | 1,161,361 | |
Inventory | 27,704 | | | 28,159 | |
Prepaid expenses and other | 381,404 | | | 417,465 | |
Total current assets | 2,467,857 | | | 2,449,454 | |
| | | |
Property and equipment, net | 1,610,496 | | | 1,656,171 | |
Right-of-use assets | 76,474 | | | 82,940 | |
Software development costs, net | 1,003,806 | | | 1,000,357 | |
Goodwill | 1,129,539 | | | 1,131,121 | |
Intangible assets, net | 434,900 | | | 458,482 | |
Long-term investments | 456,398 | | | 461,984 | |
Other assets | 194,761 | | | 193,649 | |
| | | |
Total assets | $ | 7,374,231 | | | $ | 7,434,158 | |
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Liabilities and Shareholders' Equity | | | |
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Current liabilities: | | | |
Accounts payable | $ | 359,562 | | | $ | 329,582 | |
Current installments of long-term debt | — | | | 225,000 | |
Deferred revenue | 456,929 | | | 531,234 | |
Accrued payroll and tax withholdings | 284,145 | | | 317,092 | |
Other current liabilities | 278,236 | | | 223,350 | |
Total current liabilities | 1,378,872 | | | 1,626,258 | |
| | | |
Long-term debt | 1,611,303 | | | 1,611,256 | |
Deferred income taxes | 362,236 | | | 395,177 | |
Other liabilities | 113,301 | | | 121,005 | |
Total liabilities | 3,465,712 | | | 3,753,696 | |
| | | |
Shareholders' Equity: | | | |
Common stock, $0.01 par value, 500,000,000 shares authorized, 381,357,862 shares issued at March 31, 2022 and 380,232,975 shares issued at December 31, 2021 | 3,814 | | | 3,802 | |
Additional paid-in capital | 2,811,612 | | | 2,717,244 | |
Retained earnings | 6,877,111 | | | 6,751,692 | |
Treasury stock, 87,383,166 shares at March 31, 2022 and December 31, 2021 | (5,664,718) | | | (5,664,718) | |
Accumulated other comprehensive loss, net | (119,300) | | | (127,558) | |
Total shareholders' equity | 3,908,519 | | | 3,680,462 | |
| | | |
Total liabilities and shareholders' equity | $ | 7,374,231 | | | $ | 7,434,158 | |
See notes to condensed consolidated financial statements (unaudited).
CERNER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended March 31, 2022 and March 31, 2021
(unaudited)
| | | | | | | | | | | |
| Three Months Ended |
(In thousands, except per share data) | 2022 | | 2021 |
| | | |
Revenues | $ | 1,429,801 | | | $ | 1,387,778 | |
Costs and expenses: | | | |
Costs of revenue | 243,848 | | | 230,656 | |
Sales and client service | 612,997 | | | 622,176 | |
Software development (Includes amortization of $65,206 and $64,850, respectively) | 195,091 | | | 192,327 | |
General and administrative | 109,279 | | | 112,365 | |
Amortization of acquisition-related intangibles | 16,602 | | | 12,196 | |
| | | |
Total costs and expenses | 1,177,817 | | | 1,169,720 | |
| | | |
Operating earnings | 251,984 | | | 218,058 | |
| | | |
Other income, net | 26 | | | 1,206 | |
| | | |
Earnings before income taxes | 252,010 | | | 219,264 | |
Income taxes | (45,881) | | | (47,012) | |
| | | |
Net earnings | $ | 206,129 | | | $ | 172,252 | |
| | | |
Basic earnings per share | $ | 0.70 | | | $ | 0.57 | |
Diluted earnings per share | $ | 0.70 | | | $ | 0.56 | |
Basic weighted average shares outstanding | 293,412 | | | 304,731 | |
Diluted weighted average shares outstanding | 296,336 | | | 308,031 | |
See notes to condensed consolidated financial statements (unaudited).
CERNER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the three months ended March 31, 2022 and March 31, 2021
(unaudited)
| | | | | | | | | | | |
| Three Months Ended |
(In thousands) | 2022 | | 2021 |
| | | |
Net earnings | $ | 206,129 | | | $ | 172,252 | |
Foreign currency translation adjustment and other (net of tax benefit of $237 and $679, respectively) | (3,424) | | | (8,991) | |
Unrealized gain (loss) on cash flow hedge (net of taxes of $3,906 and $1,509, respectively) | 12,060 | | | 4,588 | |
Unrealized holding gain (loss) on available-for-sale investments (net of tax benefit of $125 and $71, respectively) | (378) | | | (217) | |
| | | |
Comprehensive income | $ | 214,387 | | | $ | 167,632 | |
See notes to condensed consolidated financial statements (unaudited).
CERNER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended March 31, 2022 and March 31, 2021
(unaudited) | | | | | | | | | | | |
| Three Months Ended |
(In thousands) | 2022 | | 2021 |
| | | |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | |
Net earnings | $ | 206,129 | | | $ | 172,252 | |
Adjustments to reconcile net earnings to net cash provided by operating activities: | | | |
Depreciation and amortization | 175,223 | | | 175,313 | |
Share-based compensation expense | 33,332 | | | 47,950 | |
Provision for deferred income taxes | (36,301) | | | (2,829) | |
Changes in assets and liabilities: | | | |
Receivables, net | (16,712) | | | (12,301) | |
Inventory | 461 | | | (7,411) | |
Prepaid expenses and other | 13,600 | | | 24,173 | |
Accounts payable | 35,730 | | | 30,118 | |
Accrued income taxes | 75,323 | | | 21,378 | |
Deferred revenue | (72,800) | | | 14,768 | |
Other accrued liabilities | (38,922) | | | (12,977) | |
| | | |
Net cash provided by operating activities | 375,063 | | | 450,434 | |
| | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | |
Capital purchases | (42,393) | | | (75,925) | |
Capitalized software development costs | (56,300) | | | (83,550) | |
Purchases of investments | (8,439) | | | (321,670) | |
Sales and maturities of investments | 99,638 | | | 306,935 | |
Purchase of other intangibles | (4,703) | | | (7,975) | |
| | | |
Net cash used in investing activities | (12,197) | | | (182,185) | |
| | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | |
Long-term debt issuance | — | | | 500,000 | |
Repayment of long-term debt | (225,000) | | | — | |
Proceeds from exercise of stock options | 63,394 | | | 36,514 | |
Payments to taxing authorities in connection with shares directly withheld from associates | (1,583) | | | (4,897) | |
Treasury stock purchases | — | | | (341,715) | |
Dividends paid | (79,183) | | | (67,477) | |
Other | 1,038 | | | (5,310) | |
| | | |
Net cash provided by (used in) financing activities | (241,334) | | | 117,115 | |
| | | |
Effect of exchange rate changes on cash and cash equivalents | (1,847) | | | (3,118) | |
| | | |
Net increase in cash and cash equivalents | 119,685 | | | 382,246 | |
Cash and cash equivalents at beginning of period | 589,847 | | | 615,615 | |
| | | |
Cash and cash equivalents at end of period | $ | 709,532 | | | $ | 997,861 | |
See notes to condensed consolidated financial statements (unaudited).
CERNER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the three months ended March 31, 2022 and March 31, 2021
(unaudited) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Loss, Net |
(In thousands) | Shares | | Amount | | | | |
| | | | | | | | | | | |
Balance at December 31, 2020 | 373,225 | | | $ | 3,732 | | | $ | 2,288,806 | | | $ | 6,475,551 | | | $ | (4,164,718) | | | $ | (120,804) | |
| | | | | | | | | | | |
Exercise of stock options and vests of restricted shares and share units | 824 | | | 8 | | | 31,471 | | | — | | | — | | | — | |
| | | | | | | | | | | |
Employee share-based compensation expense | — | | | — | | | 47,950 | | | — | | | — | | | — | |
| | | | | | | | | | | |
Other comprehensive income (loss) | — | | | — | | | — | | | — | | | — | | | (4,620) | |
| | | | | | | | | | | |
Treasury stock purchases | — | | | — | | | — | | | — | | | (350,000) | | | — | |
| | | | | | | | | | | |
Cash dividends declared ($0.22 per share) | — | | | — | | | — | | | (67,191) | | | — | | | — | |
| | | | | | | | | | | |
Net earnings | — | | | — | | | — | | | 172,252 | | | — | | | — |
| | | | | | | | | | | |
Balance at March 31, 2021 | 374,049 | | | 3,740 | | | 2,368,227 | | | 6,580,612 | | | (4,514,718) | | | (125,424) | |
| | | | | | | | | | | |
Balance at December 31, 2021 | 380,233 | | | $ | 3,802 | | | $ | 2,717,244 | | | $ | 6,751,692 | | | $ | (5,664,718) | | | $ | (127,558) | |
| | | | | | | | | | | |
Exercise of stock options and vests of restricted shares and share units | 1,125 | | | 12 | | | 61,036 | | | — | | | — | | | — | |
| | | | | | | | | | | |
Employee share-based compensation expense | — | | | — | | | 33,332 | | | — | | | — | | | — | |
| | | | | | | | | | | |
Other comprehensive income (loss) | — | | | — | | | — | | | — | | | — | | | 8,258 | |
| | | | | | | | | | | |
Cash dividends declared ($0.27 per share) | — | | | — | | | — | | | (80,710) | | | — | | | — | |
| | | | | | | | | | | |
Net earnings | — | | | — | | | — | | | 206,129 | | | — | | | — |
| | | | | | | | | | | |
Balance at March 31, 2022 | 381,358 | | | $ | 3,814 | | | $ | 2,811,612 | | | $ | 6,877,111 | | | $ | (5,664,718) | | | $ | (119,300) | |
See notes to condensed consolidated financial statements (unaudited).
CERNER CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) Interim Statement Presentation
Basis of Presentation
The condensed consolidated financial statements included herein have been prepared by Cerner Corporation ("Cerner," the "Company," "we," "us" or "our") without audit, pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in our latest annual report on Form 10-K.
In management's opinion, the accompanying unaudited condensed consolidated financial statements include all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position and the results of operations and cash flows for the periods presented. Our interim results as presented in this quarterly report on 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.
All references to quarters or three month periods ended 2022 and 2021 in these notes to condensed consolidated financial statements refer to the respective three month periods ended March 31, 2022 and March 31, 2021, unless otherwise noted.
Oracle Merger Agreement
On December 20, 2021, we entered into an Agreement and Plan of Merger (as it may be amended or supplemented from time to time, the "Merger Agreement") with Cedar Acquisition Corporation ("Merger Subsidiary"), which is a wholly owned subsidiary of OC Acquisition LLC ("Parent"), Parent, which is a wholly owned subsidiary of Oracle Corporation ("Oracle"), and (solely with respect to performance of its obligations set forth in certain specified sections thereof) Oracle. Pursuant to the Merger Agreement, on January 19, 2022, Oracle commenced a cash tender offer (the "Offer") to acquire all of the issued and outstanding shares of our common stock for a purchase price of $95.00 per share, net to the holders thereof in cash, without interest and subject to any required tax withholding. If the Offer is completed, Merger Subsidiary will merge with and into Cerner (the "Merger") and we will become a wholly owned indirect subsidiary of Oracle. As a result of the Merger, the shares of our common stock will cease to be publicly held. Completion of the Merger remains subject to certain closing conditions, including receipt of certain regulatory approvals, shareholders holding a majority of the outstanding shares of our common stock tendering their shares in the Offer, and other customary closing conditions. We have agreed to various customary covenants and agreements in the Merger Agreement, including with respect to the operation of our business prior to the closing of the transaction, such as restrictions on making certain acquisitions and divestitures, entering into certain contracts, incurring certain indebtedness and making certain capital expenditures, paying dividends in excess of our regular quarterly dividend, issuing or repurchasing stock and taking other specified actions.
Supplemental Disclosures of Cash Flow Information
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended |
(In thousands) | | | 2022 | | 2021 |
Cash paid during the period for: | | | | | |
Interest (including amounts capitalized of $2,763 and $2,692, respectively) | | | $ | 21,667 | | | $ | 15,549 | |
Income taxes, net of refunds | | | (2,063) | | | 19,216 | |
Non-cash items: | | | | | |
Lease liabilities recorded upon the commencement of operating leases | | | 292 | | | 7,745 | |
Financed capital purchases | | | — | | | 1,361 | |
Recently Issued Accounting Pronouncements
Reference Rate Reform. The Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting in March 2020 and ASU 2021-01, Reference Rate Reform (Topic 848): Scope in January 2021. Such guidance provides optional financial reporting alternatives to reduce the cost and complexity associated with the accounting for contracts and hedging relationships affected by reference rate reform, such as the upcoming discontinuance of the London Interbank Offered Rate ("LIBOR"). The accommodations within this guidance may be applied prospectively from the beginning of our 2020 first quarter through December 31, 2022. We are currently evaluating the effect that this guidance may have on our contracts that reference LIBOR, specifically, our Fourth Amended and Restated Credit Agreement (the "Credit Agreement") and related interest rate swap. As of the date of this filing, we have not elected to apply any of the provisions of this guidance.
Business Combinations. The FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers in October 2021. Such guidance amends the recognition and measurement principles that apply to business combinations to require that an entity recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. ASU 2021-08 is effective for the Company in the first quarter of 2023, with early adoption permitted. The standard requires prospective application to business combinations occurring on or after the date of adoption. As of the date of this filing, we have not determined if we will early adopt.
(2) Revenue Recognition
Disaggregation of Revenue
The following table presents revenues disaggregated by our business models:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended |
| 2022 | | 2021 |
(In thousands) | Domestic Segment | International Segment | Total | | Domestic Segment | International Segment | Total |
| | | | | | | |
Licensed software | $ | 178,913 | | $ | 10,508 | | $ | 189,421 | | | $ | 148,833 | | $ | 12,828 | | $ | 161,661 | |
Technology resale | 42,764 | | 4,719 | | 47,483 | | | 37,891 | | 7,781 | | 45,672 | |
Subscriptions | 90,553 | | 3,870 | | 94,423 | | | 95,383 | | 4,429 | | 99,812 | |
Professional services | 452,238 | | 73,022 | | 525,260 | | | 434,162 | | 60,260 | | 494,422 | |
Managed services | 287,975 | | 36,651 | | 324,626 | | | 282,076 | | 35,300 | | 317,376 | |
Support and maintenance | 200,667 | | 42,213 | | 242,880 | | | 217,499 | | 45,825 | | 263,324 | |
Reimbursed travel | 5,346 | | 362 | | 5,708 | | | 6,148 | | (637) | | 5,511 | |
| | | | | | | |
Total revenues | $ | 1,258,456 | | $ | 171,345 | | $ | 1,429,801 | | | $ | 1,221,992 | | $ | 165,786 | | $ | 1,387,778 | |
The following table presents our revenues disaggregated by timing of revenue recognition:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended |
| 2022 | | 2021 |
(In thousands) | Domestic Segment | International Segment | Total | | Domestic Segment | International Segment | Total |
| | | | | | | |
Revenue recognized over time | $ | 1,182,210 | | $ | 160,615 | | $ | 1,342,825 | | | $ | 1,152,849 | | $ | 153,868 | | $ | 1,306,717 | |
Revenue recognized at a point in time | 76,246 | | 10,730 | | 86,976 | | | 69,143 | | 11,918 | | 81,061 | |
| | | | | | | |
Total revenues | $ | 1,258,456 | | $ | 171,345 | | $ | 1,429,801 | | | $ | 1,221,992 | | $ | 165,786 | | $ | 1,387,778 | |
Transaction Price Allocated to Remaining Performance Obligations
As of March 31, 2022, the aggregate amount of transaction price allocated to performance obligations that are unsatisfied (or partially unsatisfied) for executed contracts approximates $13.21 billion of which we expect to recognize approximately 31% 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 three months ended March 31, 2022, we recognized $151 million of revenues that were included in our contract liability balance at the beginning of such period.
Significant Customers
Revenues attributable to our relationships (as the prime contractor or a subcontractor) with U.S. government agencies, within our Domestic segment, comprised 20% of our consolidated revenues for the first three months of both 2022 and 2021. Amounts due in connection with these relationships comprised 15% of client receivables as of both March 31, 2022 and December 31, 2021.
(3) Receivables
A summary of net receivables is as follows:
| | | | | | | | | | | |
(In thousands) | March 31, 2022 | | December 31, 2021 |
| | | |
Client receivables | $ | 1,291,556 | | | $ | 1,307,167 | |
Less: Provision for expected credit losses | 113,519 | | | 145,806 | |
| | | |
Total receivables, net | $ | 1,178,037 | | | $ | 1,161,361 | |
In addition to the client receivables presented above, at March 31, 2022 and December 31, 2021, we had $12 million and $16 million, respectively, of non-current net client receivables, which are presented in "Other assets" in our condensed consolidated balance sheets.
A reconciliation of the beginning and ending amount of our provision for expected credit losses is as follows:
| | | | | | | | | | | | | | | | | |
(In thousands) | Current | | Non-current | | Total |
| | | | | |
Provision for expected credit losses - balance at December 31, 2021 | $ | 145,806 | | | $ | 61,106 | | | $ | 206,912 | |
Additions (reductions) charged to costs and expenses | (7,011) | | | — | | | (7,011) | |
Deductions, foreign currency and other | (25,276) | | | — | | | (25,276) | |
| | | | | |
Provision for expected credit losses - balance at March 31, 2022 | $ | 113,519 | | | $ | 61,106 | | | $ | 174,625 | |
Our estimates of expected credit losses for client receivables at both March 31, 2022 and December 31, 2021, were primarily based on historical credit loss experience and adjustments for certain asset-specific risk characteristics (i.e. known client financial hardship or bankruptcy). Exposure to credit losses may increase if our clients are adversely affected by changes in healthcare laws; changes in reimbursement or payor models; economic pressures or uncertainty associated with local or global economic recessions; disruption associated with the COVID-19 pandemic; or other client-specific factors. Although we have historically not experienced significant credit losses, it is possible that there could be an adverse impact from potential adjustments to the carrying amount of client receivables as clients' cash flows are impacted by the COVID-19 pandemic and related economic uncertainty, which may be material.
During the first three months of 2022 and 2021, we received total client cash collections of $1.40 billion and $1.44 billion, respectively.
(4) Investments
Available-for-sale investments at March 31, 2022 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | | Adjusted Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| | | | | | | | |
Cash equivalents: | | | | | | | | |
Money market funds | | $ | 63,290 | | | $ | — | | | $ | — | | | $ | 63,290 | |
Time deposits | | 45,501 | | | — | | | — | | | 45,501 | |
Commercial Paper | | 115,500 | | | — | | | — | | | 115,500 | |
Total cash equivalents | | 224,291 | | | — | | | — | | | 224,291 | |
| | | | | | | | |
Short-term investments: | | | | | | | | |
Time deposits | | 19,994 | | | — | | | — | | | 19,994 | |
Commercial paper | | 34,000 | | | — | | | (10) | | | 33,990 | |
Government and corporate bonds | | 117,576 | | | 3 | | | (383) | | | 117,196 | |
Total short-term investments | | 171,570 | | | 3 | | | (393) | | | 171,180 | |
| | | | | | | | |
Long-term investments: | | | | | | | | |
Government and corporate bonds | | 19,642 | | | — | | | (361) | | | 19,281 | |
| | | | | | | | |
Total available-for-sale investments | | $ | 415,503 | | | $ | 3 | | | $ | (754) | | | $ | 414,752 | |
Available-for-sale investments at December 31, 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | | Adjusted Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| | | | | | | | |
Cash equivalents: | | | | | | | | |
Money market funds | | $ | 149,429 | | | $ | — | | | $ | — | | | $ | 149,429 | |
Time deposits | | 35,342 | | | — | | | — | | | 35,342 | |
Commercial Paper | | 77,850 | | | — | | | — | | | 77,850 | |
Government and corporate bonds | | 5,000 | | | — | | | — | | | 5,000 | |
Total cash equivalents | | 267,621 | | | — | | | — | | | 267,621 | |
| | | | | | | | |
Short-term investments: | | | | | | | | |
Time deposits | | 25,598 | | | — | | | — | | | 25,598 | |
Commercial Paper | | 57,000 | | | — | | | (14) | | | 56,986 | |
Government and corporate bonds | | 170,123 | | | 18 | | | (103) | | | 170,038 | |
Total short-term investments | | 252,721 | | | 18 | | | (117) | | | 252,622 | |
| | | | | | | | |
Long-term investments: | | | | | | | | |
Government and corporate bonds | | 31,167 | | | — | | | (149) | | | 31,018 | |
| | | | | | | | |
Total available-for-sale investments | | $ | 551,509 | | | $ | 18 | | | $ | (266) | | | $ | 551,261 | |
We sold available-for-sale investments for proceeds of $133 million during the three months ended March 31, 2022, resulting in insignificant losses in the period.
Other Investments
At both March 31, 2022 and December 31, 2021, we had investments in equity securities that do not have readily determinable fair values of $406 million, accounted for in accordance with Accounting Standards Codification Topic ("ASC") 321, Investments-Equity Securities. Such investments are included in "Long-term investments" in our condensed consolidated balance sheets. We did not record any changes in the measurement of such investments during the three months ended March 31, 2022 and March 31, 2021, respectively.
At March 31, 2022 and December 31, 2021, we had investments in equity securities reported under the equity method of accounting of $31 million and $25 million, respectively. Such investments are included in "Long-term investments" in our condensed consolidated balance sheets.
(5) Long-term Debt
The following is a summary of indebtedness outstanding: | | | | | | | | | | | |
(In thousands) | March 31, 2022 | | December 31, 2021 |
| | | |
Credit agreement loans due December 30, 2026 | $ | 600,000 | | | $ | 600,000 | |
Senior notes: | | | |
Series 2021-A due March 24, 2026 | 100,000 | | | 100,000 | |
Series 2021-B due March 24, 2031 | 400,000 | | | 400,000 | |
Series 2020-A due March 11, 2030 | 300,000 | | | 300,000 | |
Series 2015-A due February 15, 2022 | — | | | 225,000 | |
Series 2015-B due February 14, 2025 | 200,000 | | | 200,000 | |
Other | 11,662 | | | 11,662 | |
| | | |
Total indebtedness | 1,611,662 | | | 1,836,662 | |
Less: debt issuance costs | (359) | | | (406) | |
| | | |
Indebtedness, net | 1,611,303 | | | 1,836,256 | |
Less: current installments of long-term debt | — | | | (225,000) | |
| | | |
Long-term debt | $ | 1,611,303 | | | $ | 1,611,256 | |
Credit Agreement
As of March 31, 2022, the interest rate on revolving credit loans outstanding under our Credit Agreement was 1.14% based on LIBOR plus the applicable spread.
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 to hedge the variability of cash flows associated with such interest obligations. The interest rate swap is designated as a cash flow hedge, which effectively fixes the interest rate on the hedged indebtedness under our Credit Agreement at 3.06%. At March 31, 2022 and December 31, 2021, this swap was in a net liability position with an aggregate fair value of $1 million and $17 million, respectively; which is presented in our condensed consolidated balance sheets in "Other current liabilities".
Series 2015-A Senior Notes
On February 15, 2022, we repaid our $225 million of Series 2015-A notes due February 15, 2022.
(6) Fair Value Measurements
We determine fair value measurements used in our consolidated financial statements based upon the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity's own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:
•Level 1 – Valuations based on quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.
•Level 2 – Valuations based on quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities.
•Level 3 – Valuations based on inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The following table details our investments in available-for-sale debt securities measured and recorded at fair value on a recurring basis at March 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | | | | Fair Value Measurements Using |
Description | | Balance Sheet Classification | | Level 1 | | Level 2 | | Level 3 |
| | | | | | | | |
Money market funds | | Cash equivalents | | $ | 63,290 | | | $ | — | | | $ | — | |
Time deposits | | Cash equivalents | | — | | | 45,501 | | | — | |
Commercial paper | | Cash equivalents | | — | | | 115,500 | | | — | |
Time deposits | | Short-term investments | | — | | | 19,994 | | | — | |
Commercial paper | | Short-term investments | | — | | | 33,990 | | | — | |
Government and corporate bonds | | Short-term investments | | — | | | 117,196 | | | — | |
Government and corporate bonds | | Long-term investments | | — | | | 19,281 | | | — | |
The following table details our investments in available-for-sale debt securities measured and recorded at fair value on a recurring basis at December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | | | | Fair Value Measurements Using |
Description | | Balance Sheet Classification | | Level 1 | | Level 2 | | Level 3 |
| | | | | | | | |
Money market funds | | Cash equivalents | | $ | 149,429 | | | $ | — | | | $ | — | |
Time deposits | | Cash equivalents | | — | | | 35,342 | | | — | |
Commercial paper | | Cash equivalents | | — | | | 77,850 | | | — | |
Government and corporate bonds | | Cash equivalents | | — | | | 5,000 | | | — | |
Time deposits | | Short-term investments | | — | | | 25,598 | | | — | |
Commercial paper | | Short-term investments | | — | | | 56,986 | | | — | |
Government and corporate bonds | | Short-term investments | | — | | | 170,038 | | | — | |
Government and corporate bonds | | Long-term investments | | — | | | 31,018 | | | — | |
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 at March 31, 2022 and December 31, 2021 was approximately $1.59 billion and $1.87 billion, respectively. The carrying amount of such debt at March 31, 2022 and December 31, 2021 was $1.60 billion and $1.83 billion, respectively.
(7) 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 18.2% and 21.4% for the first three months of 2022 and 2021, respectively. The decrease in the effective tax rate in the first quarter of 2022 is primarily due to favorability of permanent book-tax differences for share-based compensation in 2022 compared to 2021.
(8) 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 |
| 2022 | | 2021 |
| 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 | $ | 206,129 | | | 293,412 | | | $ | 0.70 | | | $ | 172,252 | | | 304,731 | | | $ | 0.57 | |
Effect of dilutive securities: | | | | | | | | | | | |
Stock options, non-vested shares and share units | — | | | 2,924 | | | | | — | | | 3,300 | | | |
Diluted earnings per share: | | | | | | | | | | | |
Income available to common shareholders including assumed conversions | $ | 206,129 | | | 296,336 | | | $ | 0.70 | | | $ | 172,252 | | | 308,031 | | | $ | 0.56 | |
For the three months ended March 31, 2021, options to purchase 1.1 million shares of common stock at per share prices ranging from $52.32 to $76.49, were outstanding but were not included in the computation of diluted earnings per share because they were anti-dilutive. For the three months ended March 31, 2022, an inconsequential number of outstanding securities were not included in the computation of diluted earnings per share because they were anti-dilutive.
(9) Share-Based Compensation and Equity
Stock Options
Stock option activity for the three months ended March 31, 2022 was as follows: | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands, except per share and term data) | Number of Shares | | Weighted- Average Exercise Price (Per Share) | | Aggregate Intrinsic Value | | Weighted-Average Remaining Contractual Term (Yrs) |
| | | | | | | |
Outstanding at beginning of year | 4,670 | | | $ | 59.61 | | | | | |
Exercised | (1,093) | | | 57.27 | | | | | |
Forfeited and expired | (74) | | | 62.77 | | | | | |
Outstanding as of March 31, 2022 | 3,503 | | | $ | 60.27 | | | $ | 116,608 | | | 4.74 |
| | | | | | | |
Exercisable as of March 31, 2022 | 2,322 | | | $ | 59.59 | | | $ | 78,862 | | | 4.11 |
As of March 31, 2022, there was $10 million of total unrecognized compensation cost related to stock options granted under all plans. That cost is expected to be recognized over a weighted-average period of 1.05 years.
Non-vested Shares and Share Units
Non-vested share and share unit activity for the three months ended March 31, 2022 was as follows:
| | | | | | | | | | | |
(In thousands, except per share data) | Number of Shares | | Weighted-Average Grant Date Fair Value Per Share |
| | | |
Outstanding at beginning of year | 3,644 | | | $ | 73.35 | |
Granted | 2,016 | | | 93.39 | |
Vested | (48) | | | 73.50 | |
Forfeited | (186) | | | 74.16 | |
| | | |
Outstanding as of March 31, 2022 | 5,426 | | | $ | 80.77 | |
As of March 31, 2022, there was $340 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 2.40 years.
Share-Based Compensation Cost
The following table presents total compensation expense recognized with respect to stock options, non-vested shares and share units, and our associate stock purchase plan:
| | | | | | | | | | | |
| Three Months Ended |
(In thousands) | 2022 | | 2021 |
| | | |
Stock option and non-vested share and share unit compensation expense | $ | 33,332 | | | $ | 47,950 | |
Associate stock purchase plan expense | 1,477 | | | 1,548 | |
Amounts capitalized in software development costs, net of amortization | (90) | | | (1,663) | |
| | | |
Amounts charged against earnings, before income tax benefit | $ | 34,719 | | | $ | 47,835 | |
| | | |
Amount of related income tax benefit recognized in earnings | $ | 6,321 | | | $ | 10,256 | |
| | | |
| | | |
| | | |
Dividends
On March 14, 2022, our Board of Directors declared a cash dividend of $0.27 per share on our issued and outstanding common stock, which was paid on April 19, 2022 to shareholders of record as of March 28, 2022. In connection with the declaration of such dividend, our non-vested shares and share units are entitled to dividend equivalents, which will be payable to the holder subject to, and upon vesting of, the underlying awards. Our outstanding stock options are not entitled to dividend or dividend equivalents. At both March 31, 2022 and December 31, 2021, our condensed consolidated balance sheets included liabilities for dividends payable of $81 million, which are included in "Other current liabilities".
Accumulated Other Comprehensive Loss, Net (AOCI)
The components of AOCI, net of tax, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Foreign currency translation adjustment and other | | Unrealized loss on cash flow hedge | | Unrealized holding gain (loss) on available-for-sale investments | | Total |
(In thousands) | | | |
| | | | | | | |
Balance at December 31, 2021 | $ | (114,630) | | | $ | (12,961) | | | $ | 33 | | | $ | (127,558) | |
Other comprehensive income (loss) before reclassifications | (3,424) | | | 9,542 | | | (389) | | | 5,729 | |
Amounts reclassified from AOCI | — | | | 2,518 | | | 11 | | | 2,529 | |
| | | | | | | |
Balance at March 31, 2022 | $ | (118,054) | | | $ | (901) | | | $ | (345) | | | $ | (119,300) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Foreign currency translation adjustment and other | | Unrealized loss on cash flow hedge | | Unrealized holding gain (loss) on available-for-sale investments | | Total |
(In thousands) | | | |
| | | | | | | |
Balance at December 31, 2020 | $ | (93,450) | | | $ | (27,788) | | | $ | 434 | | | $ | (120,804) | |
Other comprehensive income (loss) before reclassifications | (8,991) | | | 2,061 | | | (217) | | | (7,147) | |
Amounts reclassified from AOCI | — | | | 2,527 | | | — | | | 2,527 | |
| | | | | | | |
Balance at March 31, 2021 | $ | (102,441) | | | $ | (23,200) | | | $ | 217 | | | $ | (125,424) | |
The effects on net earnings of amounts reclassified from AOCI were as follows:
| | | | | | | | | | | | | | | | | | | | |
(In thousands) | | | | Three Months Ended |
AOCI Component | | Location | | 2022 | | 2021 |
| | | | | | |
Unrealized loss on cash flow hedge | | Other income, net | | $ | (3,079) | | | $ | (3,217) | |
| | Income taxes | | 561 | | | 690 | |
| | | | | | |
| | Net of tax | | (2,518) | | | (2,527) | |
| | | | | | |
Unrealized holding gain (loss) on available-for-sale investments | | Other income, net | | (13) | | | — | |
| | Income taxes | | 2 | | | — | |
| | | | | | |
| | Net of tax | | (11) | | | — | |
| | | | | | |
Total amount reclassified, net of tax | | | | $ | (2,529) | | | $ | (2,527) | |
(10) Contingencies
We accrue estimates for resolution of any legal and other contingencies when losses are probable and reasonably estimable in accordance with ASC 450, Contingencies ("ASC 450"). No less than quarterly, and as facts and circumstances change, we review the status of each significant matter underlying a legal proceeding or claim and assess our potential financial exposure. We accrue a liability for an estimated loss if the potential loss from any legal proceeding or claim is considered probable and the amount can be reasonably estimated. Significant judgment is required in both the determination of probability and the determination as to whether the amount of an exposure is reasonably estimable, and accruals are based only on the information available to our management at the time the judgment is made, which may prove to be incomplete or inaccurate or unanticipated events and circumstances may occur that might cause us to change those estimates and assumptions. Furthermore, the outcome of legal proceedings is inherently uncertain, and we may incur substantial defense costs and expenses defending any of these matters. Should any one or a combination of more than one of these proceedings be successful, or should we determine to settle any one or a combination of these matters, we may be required to pay substantial sums, become subject to the entry of an injunction or be forced to change the manner in which we operate our business, which could have a material adverse impact on our business, results of operations, cash flows or financial condition.
On May 16, 2019, Steward Health Care System LLC ("Steward") filed a lawsuit in the Chancery Court for Davidson County, Tennessee against the Company. The Company believes Steward's allegations arise out of Steward's disinterest in following the contract between the Company and Steward's predecessor for clinical and financial software and services after Steward closed on its acquisition of the predecessor. The Company has filed a counterclaim against Steward seeking recovery of more than $42 million in unpaid invoices owed to the Company. The Company believes the dispute is in the ordinary course of business and the damages Steward asserts lack both factual and causal support. Steward has recently asserted that its damages are $300 million and advised the Company that it will seek to treble the damages. We have not concluded that a material loss related to the Steward allegations is probable, nor have we accrued a liability related to these claims. Although we believe a loss could be reasonably possible (as defined in ASC 450), we do not have sufficient information to determine the amount or range of reasonably possible loss with respect to the potential damages given that the dispute is in the discovery process. We will continue to vigorously defend against these claims, and we continue to believe that we have valid grounds for recovery of the disputed client receivables. However, there can be no assurances as to the outcome of the dispute.
On March 22, 2021, Astria Health ("Astria") filed an adversary proceeding in the United States Bankruptcy Court, Eastern District of Washington against the Company. Astria's allegations largely arise out of the Company's provision of revenue cycle services in 2018 and 2019. The Company believes the dispute is in the ordinary course of business and the factual allegations and the damages asserted lack both factual and causal support. Astria has recently claimed damages of $96 million. We have not concluded that a material loss related to the Astria allegations is probable, nor have we accrued a liability related to these claims beyond reserving certain bankruptcy-related outstanding invoices. Although we believe a loss could be reasonably possible (as defined in ASC 450), we do not have sufficient information to determine the amount or range of reasonably possible loss with respect to the potential damages given that expert discovery is not yet complete. We will continue to vigorously defend against this claim. However, there can be no assurances as to the outcome of the dispute.
The terms of our agreements with our clients generally provide for limited indemnification of such clients against losses, expenses and liabilities arising from third party or other claims based on, among other things, alleged infringement by our solutions of an intellectual property right of third parties or damages caused by data privacy breaches or system interruptions. The terms of such indemnification often limit the scope of and remedies for such indemnification obligations and generally include, as applicable, a right to replace or modify an infringing solution. For several reasons, including the lack of a sufficient number of prior indemnification claims relating to intellectual property infringement, data privacy breaches or system interruptions, the inherent uncertainty stemming from such claims, and the lack of a monetary liability limit for such claims under the terms of the corresponding agreements with our clients, we cannot determine the maximum amount of potential future payments, if any, related to such indemnification provisions.
In addition to commitments and obligations in the ordinary course of business, we are involved in various other legal proceedings and claims that arise in the ordinary course of business, including for example, employment and client disputes and litigation alleging solution and implementation defects, personal injury, intellectual property infringement, violations of law, breaches of contract and warranties, and compliance audits by various government agencies. Many of these proceedings are at preliminary stages and many seek an indeterminate amount of damages. At this time, we do not believe the range of potential losses under any claims to be material to our condensed consolidated financial statements.
(11) Segment Reporting
We have two operating segments, Domestic and International. Revenues are derived primarily from the sale of clinical, financial and administrative information solutions and services. The cost of revenues includes the cost of third-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, certain 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 months ended March 31, 2022 and March 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | Domestic | | International | | Other | | Total |
| | | | | | | |
Three Months Ended 2022 | | | | | | | |
Revenues | $ | 1,258,456 | | | $ | 171,345 | | | $ | — | | | $ | 1,429,801 | |
| | | | | | | |
Costs of revenue | 215,241 | | | 28,607 | | | — | | | 243,848 | |
Operating expenses | 541,575 | | | 71,422 | | | 320,972 | | | 933,969 | |
Total costs and expenses | 756,816 | | | 100,029 | | | 320,972 | | | 1,177,817 | |
| | | | | | | |
Operating earnings (loss) | $ | 501,640 | | | $ | 71,316 | | | $ | (320,972) | | | $ | 251,984 | |
| | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | Domestic | | International | | Other | | Total |
| | | | | | | |
Three Months Ended 2021 | | | | | | | |
Revenues | $ | 1,221,992 | | | $ | 165,786 | | | $ | — | | | $ | 1,387,778 | |
| | | | | | | |
Costs of revenue | 205,694 | | | 24,962 | | | — | | | 230,656 | |
Operating expenses | 560,562 | | | 61,614 | | | 316,888 | | | 939,064 | |
Total costs and expenses | 766,256 | | | 86,576 | | | 316,888 | | | 1,169,720 | |
| | | | | | | |
Operating earnings (loss) | $ | |