false--12-28Q32019000080475353429000155571000567860001690360000.010.01500000000500000000362212843366201300Our interest rate swap agreement is accounted for in accordance with ASC Topic 815, Derivatives and Hedging. Such agreement is designated as a cash flow hedge and considered to be highly effective under hedge accounting principles. Therefore, the swap agreement is recognized in our condensed consolidated balance sheets as either an asset or liability, measured at fair value. Changes in the fair value of the swap agreement are initially recorded in accumulated other comprehensive loss, net and then subsequently recognized in our condensed consolidated statements of operations in the 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 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(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.
As of September 28, 2019 (unaudited) and December 29, 2018
(In thousands, except share data)
2019
2018
Assets
Current assets:
Cash and cash equivalents
$
496,430
$
374,126
Short-term investments
136,266
401,285
Receivables, net
1,154,980
1,183,494
Inventory
23,155
25,029
Prepaid expenses and other
402,247
334,870
Total current assets
2,213,078
2,318,804
Property and equipment, net
1,865,924
1,743,575
Right-of-use assets
121,746
—
Software development costs, net
935,170
894,512
Goodwill
844,926
847,544
Intangible assets, net
347,376
405,305
Long-term investments
403,435
300,046
Other assets
205,775
198,850
Total assets
$
6,937,430
$
6,708,636
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable
$
275,916
$
293,534
Current installments of long-term debt and capital lease obligations
—
4,914
Deferred revenue
308,444
399,189
Accrued payroll and tax withholdings
264,049
195,931
Other current liabilities
153,187
69,122
Total current liabilities
1,001,596
962,690
Long-term debt
1,038,567
438,802
Deferred income taxes
353,711
336,379
Other liabilities
132,289
42,376
Total liabilities
2,526,163
1,780,247
Shareholders' Equity:
Common stock, $.01 par value, 500,000,000 shares authorized, 366,201,300 shares issued at September 28, 2019 and 362,212,843 shares issued at December 29, 2018
3,662
3,622
Additional paid-in capital
1,806,939
1,559,562
Retained earnings
5,836,984
5,576,525
Treasury stock, 52,282,997 shares at September 28, 2019 and 37,905,013 shares at December 29, 2018
(3,107,768
)
(2,107,768
)
Accumulated other comprehensive loss, net
(128,550
)
(103,552
)
Total shareholders' equity
4,411,267
4,928,389
Total liabilities and shareholders' equity
$
6,937,430
$
6,708,636
See notes to condensed consolidated financial statements (unaudited).
For the three and nine months endedSeptember 28, 2019 and September 29, 2018
(unaudited)
Three Months Ended
Nine Months Ended
(In thousands, except per share data)
2019
2018
2019
2018
Revenues
$
1,429,428
$
1,340,073
$
4,250,366
$
4,000,661
Costs and expenses:
Costs of revenue
271,778
230,332
793,655
700,393
Sales and client service
707,743
605,946
2,026,825
1,830,999
Software development (Includes amortization of $56,786 and $169,036 for the three and nine months ended September 28, 2019, respectively; and $53,429 and $155,571 for the three and nine months ended September 29, 2018, respectively)
187,526
172,297
548,934
502,192
General and administrative
152,321
102,789
398,305
290,547
Amortization of acquisition-related intangibles
21,283
21,553
64,809
65,872
Total costs and expenses
1,340,651
1,132,917
3,832,528
3,390,003
Operating earnings
88,777
207,156
417,838
610,658
Other income, net
13,535
6,943
44,973
18,404
Earnings before income taxes
102,312
214,099
462,811
629,062
Income taxes
(20,377
)
(44,718
)
(87,688
)
(130,323
)
Net earnings
$
81,935
$
169,381
$
375,123
$
498,739
Basic earnings per share
$
0.26
$
0.51
$
1.17
$
1.51
Diluted earnings per share
$
0.26
$
0.51
$
1.16
$
1.49
Basic weighted average shares outstanding
315,876
329,342
320,282
330,789
Diluted weighted average shares outstanding
319,113
332,937
323,361
334,493
See notes to condensed consolidated financial statements (unaudited).
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the three and nine months endedSeptember 28, 2019 and September 29, 2018
(unaudited)
Three Months Ended
Nine Months Ended
(In thousands)
2019
2018
2019
2018
Net earnings
$
81,935
$
169,381
$
375,123
$
498,739
Foreign currency translation adjustment and other (net of taxes (benefit) of $(409) and $(413) for the three and nine months ended September 28, 2019; and $(13) and $572 for the three and nine months ended September 29, 2018, respectively)
(11,679
)
(8,907
)
(9,458
)
(27,924
)
Unrealized loss on cash flow hedge (net of tax benefit of $1,327 and $5,396 for the three and nine months ended September 28, 2019, respectively)
(4,037
)
—
(16,407
)
—
Unrealized holding gain on available-for-sale investments (net of taxes of $5 and $286 for the three and nine months ended September 28, 2019; and $181 and $97 for the three and nine months ended September 29, 2018, respectively)
14
553
867
297
Comprehensive income
$
66,233
$
161,027
$
350,125
$
471,112
See notes to condensed consolidated financial statements (unaudited).
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 third fiscal quarter ends on the Saturday closest to September 30. The 2019 and 2018 third quarters ended on September 28, 2019 and September 29, 2018, respectively. All references to years in these notes to condensed consolidated financial statements represent the respective three or nine months ended on such dates, unless otherwise noted.
Supplemental Disclosures of Cash Flow Information
Nine Months Ended
(In thousands)
2019
2018
Cash paid during the period for:
Interest (including amounts capitalized of $12,575 and $9,318, respectively)
$
20,756
$
15,568
Income taxes, net of refunds
65,171
(47,462
)
Voluntary Separation Benefits
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.
In the third quarter of 2019, we offered voluntary separation benefits to certain associates primarily located outside the U.S. The irrevocable acceptance period for associates to accept such offers ended in September 2019. In the third quarter of 2019, we recorded corresponding pre-tax charges of $11 million. Such charges are included in general and administrative expense in our condensed consolidated statements of operations.
In the third quarter of 2019, we recorded pre-tax charges of $21 million in connection with the involuntary termination of approximately 250 U.S. associates. Such charges are included in general and administrative expense in our condensed consolidated statements of operations. Separation benefits for these associates include cash severance, contribution to a health reimbursement account, career transition assistance, and accelerated vesting of certain share-based payment awards. At September 28, 2019, a liability of $18 million for such obligations is included in accrued payroll and tax withholdings in our condensed consolidated balance sheets, which we expect to settle/pay in the fourth quarter of 2019.
Contract Termination Costs
In the third quarter of 2019, we recorded pre-tax charges of $60 million in connection with the termination of certain client contracts prior to end of their stated terms, the majority of which was paid in cash. Such charges are included in our domestic operating segment, and presented in sales and client service expense in our condensed consolidated statements of operations. At September 28, 2019, our condensed consolidated balance sheets do not include a liability for any obligations related to such contract terminations.
Purchase Obligations
In July 2019, we entered into an agreement with a certain vendor to purchase $650 million of cloud computing services over an initial 10-year period ending in 2029.
Accounting Pronouncements Adopted in 2019
Leases. In the first quarter of 2019, we adopted new lease accounting guidance. Refer to Note (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 impacts 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.
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:
