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 first fiscal quarter ends on the Saturday closest to March 31. The 2017 and 2016 first quarters ended on April 1, 2017 and April 2, 2016, respectively. All references to years in these notes to condensed consolidated financial statements represent the respective three months ended on such dates, unless otherwise noted.
Accounting Pronouncements Adopted in 2017
Share-Based Compensation.
In March 2016, the
Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-09,
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
.
ASU 2016-09 impacts several aspects of the accounting for share-based payment award transactions, including: (1) accounting and cash flow classification for excess tax benefits and deficiencies, (2) forfeitures, and (3) tax withholding requirements and cash flow classification
. ASU 2016-09 was effective for the Company in the first quarter of 2017. This new guidance impacts our condensed consolidated financial statements as follows:
|
|
•
|
Prior to the adoption of ASU 2016-09, when associates exercised stock options, or upon the vesting of restricted stock awards, we recognized any related excess tax benefits or deficiencies (the difference between the deduction for tax purposes and the cumulative compensation cost recognized in the consolidated financial statements) in additional paid-in capital ("APIC"). We recognized net excess tax benefits of
$9 million
in APIC during the three months ended April 2, 2016.
|
Under the new guidance, all excess tax benefits and tax deficiencies are recognized as a component of income tax expense. They are not estimated when determining the annual estimated effective tax rate; instead, they are recorded as discrete items in the reporting period they occur. During the three months ended April 1, 2017 we recognized
$8 million
of net excess tax benefits as discrete items, which are included in income taxes in our condensed consolidated statements of operations. These net excess tax benefits recognized during the three months ended April 1, 2017 resulted in a
$0.02
favorable impact on diluted earnings per share.
This provision of the new guidance may have a significant impact on our future income tax expense, including increased variability in our quarterly effective tax rates. The impact will be dependent on a number of factors, including the price of our common stock, grant activity under our stock and equity plans, and the timing of option exercises by our associates. This provision of the new guidance was required to be applied prospectively. Prior periods have not been retrospectively adjusted.
|
|
•
|
We utilize the treasury stock method for calculating diluted earnings per share. Prior to the adoption of ASU 2016-09, this method assumed that any net excess tax benefits generated from the hypothetical exercise of dilutive options were used to repurchase outstanding shares. Assumed share repurchases for net excess tax benefits included in our calculation of diluted earnings per share for the three months ended April 2, 2016 were
2.2 million
shares.
|
Under the new guidance, excess tax benefits generated from the hypothetical exercise of dilutive options are excluded from the calculation of diluted earnings per share. Therefore, the denominator in our diluted earnings per share calculation has increased (comparatively). We estimate that this provision of the new guidance will reduce our calculation of diluted earnings per share by approximately
$0.01
to
$0.02
for our fiscal year ended December 30, 2017. This provision of the new guidance was required to be applied prospectively. Prior periods have not been retrospectively adjusted.
|
|
•
|
Prior to the adoption of ASU 2016-09, we presented net excess tax benefits in our condensed consolidated statements of cash flows as a cash inflow from financing activities. Under the new guidance, net excess tax benefits are presented within operating activities. We have elected to apply this provision of the new guidance retrospectively. Prior periods have been retrospectively adjusted.
|
|
|
•
|
Prior to the adoption of ASU 2016-09, we presented cash payments to taxing authorities in connection with shares directly withheld from associates upon the exercise of stock options, or upon the vesting of restricted stock awards, to meet statutory tax withholding requirements (employee withholdings) as a cash outflow from operating activities. Under the new guidance, such payments are presented within financing activities. This provision of the new guidance was required to be applied retrospectively. Prior periods have been retrospectively adjusted.
|
|
|
•
|
Under the new guidance, an entity is permitted to make an entity-wide accounting policy election (at adoption) either to estimate the number of forfeitures expected to occur or to account for forfeitures as a reduction to compensation cost when they occur. Upon adoption of ASU 2016-09, we did not change our policy of estimating participant forfeitures as a part of our calculations of share-based compensation cost.
|
Income Taxes.
In October 2016, the FASB issued
ASU 2016-16,
Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory
, which
provides new guidance regarding when an entity should recognize the income tax consequences of certain intra-entity asset transfers. Prior to the adoption of ASU 2016-16, U.S. GAAP prohibited entities from recognizing the income tax consequences of intercompany asset transfers, including transfers of intellectual property. The seller deferred any net tax effect, and the buyer was prohibited from recognizing a deferred tax asset on the difference between the newly created tax basis of the asset in its tax jurisdiction and its financial statement carrying amount as reported in the consolidated financial statements. ASU 2016-16 requires entities to recognize these tax consequences in the period in which the transfer takes place, with the exception of inventory transfers
.
ASU 2016-16 is effective for the Company in the first quarter of 2018, with early adoption permitted in the first quarter of 2017. The standard requires the use of the modified retrospective (cumulative effect) transition approach. The Company adopted the standard early, in the first quarter of 2017. In connection with such adoption, we recorded a cumulative effect adjustment reducing prepaid expenses and other, other assets, and retained earnings within our condensed consolidated balance sheets by
$8 million
,
$14 million
, and
$22 million
, respectively. This cumulative effect adjustment includes recognition of the income tax consequences of intra-entity transfers of assets other than inventory that occurred prior to the adoption date. Prior periods were not retrospectively adjusted.
Recently Issued Accounting Pronouncements
Revenue Recognition.
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers (Topic 606)
, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP. The new standard introduces a five-step process to be followed in determining the amount and timing of revenue recognition. It also provides guidance on accounting for costs incurred to obtain or fulfill contracts with customers, and establishes disclosure requirements which are more extensive than those required under existing U.S. GAAP
.
The FASB has issued the following amendments to ASU 2014-09 from August 2015 through March 2017:
|
|
•
|
ASU 2015-14,
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date
|
|
|
•
|
ASU 2016-08,
Revenue from Contracts with Customers (Topic 606): Principal versus Agent Consideration (Reporting Revenue Gross versus Net)
|
|
|
•
|
ASU 2016-10,
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing
|
|
|
•
|
ASU 2016-12,
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients
|
|
|
•
|
ASU 2016-20,
Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers
|
Such amendments provide supplemental and clarifying guidance, as well as amend the effective date of the new standard.
ASU 2014-09, as amended, is effective for the Company in the first quarter of 2018, with early adoption permitted in the first quarter of 2017. The standard permits the use of either the retrospective or modified retrospective (cumulative effect) transition method.
In 2015, we formed a cross-functional implementation team and began our analysis of this new guidance. Such analysis includes assessment of the impact of the new guidance on our consolidated financial statements and related disclosures, as well as related impacts on processes, accounting systems, and internal controls. Based on our analysis to-date, we have reached the following tentative conclusions regarding this new guidance and how we expect it to impact our consolidated financial statements and related disclosures:
|
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•
|
We expect to adopt this new guidance effective with our first quarter of 2018; we will not early adopt.
|
|
|
•
|
We expect to use the cumulative effect transition method. Such method provides that the cumulative effect from prior periods upon applying the new guidance is recognized in our consolidated balance sheets as of the date of adoption, including an adjustment to retained earnings. Prior periods will not be retrospectively adjusted.
|
|
|
•
|
We believe substantially all of our revenue falls within the scope of ASU 2014-09, as amended; substantially all of our revenue is contractual.
|
|
|
•
|
Generally, our subscription and content fees revenue is recognized ratably over the respective contract terms ("over time"). Upon adoption of the new guidance, we expect to recognize a license component of certain subscription and content fees revenue upon delivery to the customer ("point in time") and a non-license component (i.e. support) of such revenues over the respective contract terms ("over time"). At the date of adoption of this new guidance, we expect to record a cumulative adjustment to our consolidated balance sheet, including an adjustment to retained earnings, to adjust for the impact of certain prior period subscription and content fees revenue, as calculated under the new guidance.
|
|
|
•
|
We have determined the only significant incremental costs incurred to obtain contracts with customers within the scope of ASU 2014-09, as amended, are sales commissions paid to associates. Under current U.S. GAAP we recognize sales commissions as earned, and record such amounts as a component of total costs and expenses in our consolidated statements of operations. We recognized sales commission expense of
$44 million
,
$45 million
and
$35 million
in the 2016, 2015, and 2014 annual periods, respectively. Under the new guidance, we expect to record sales commissions as an asset, and amortize to expense over the related contract performance period. At the date of adoption of this new guidance, we expect to record an asset in our consolidated balance sheets for the amount of unamortized sales commissions for prior periods, as calculated under the new guidance. Such amount will subsequently be amortized to expense over the remaining performance periods of the related contracts with remaining performance obligations.
|
Our analysis and evaluation of the new standard will continue through the effective date in the first quarter of 2018. A significant amount of work remains, due to the complexity of revenue recognition within our industry, the increased number of judgments and estimates required by this new guidance, and the volume of our contract portfolio which must be examined. We must quantify all impacts of this new guidance, including the topics discussed above, which may be material to our consolidated financial statements and related disclosures. We must also implement any necessary changes/modifications to processes, accounting systems, and internal controls.
Financial Instruments.
In January 2016, the FASB issued ASU 2016-01,
Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
, which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. ASU 2016-01 is effective for the Company in the first quarter of 2018, with early adoption permitted. We are currently evaluating the effect that ASU 2016-01 will have on our consolidated financial statements and related disclosures, and we have determined that we will not early adopt.
Leases.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
, which introduces a new model that requires most leases to be reported on the balance sheet and aligns many of the underlying principles of the new lessor model with those in the new revenue recognition standard. ASU 2016-02 is effective for the Company in the first quarter of 2019, with early adoption permitted. We are currently evaluating the effect that ASU 2016-02 will have on our consolidated financial statements and related disclosures, and we have not determined if we will early adopt.
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 have not determined if we will early adopt
.
Callable Debt Securities.
In March 2017, the FASB issued ASU 2017-08,
Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities
, which shortens the amortization period for certain investments in callable debt securities purchased at a premium by requiring the premium be amortized to the earliest call date. Such guidance will impact how premiums are amortized on our available-for-sale investments. ASU 2017-08 is effective for the Company in the first quarter of 2019, with early adoption permitted. The standard requires the use of the modified retrospective (cumulative effect) transition approach. We are currently evaluating the effect that ASU 2017-08 will have on our consolidated financial statements and related disclosures, and have not determined if we will early adopt
.
(2) 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:
|
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•
|
Level 1 – Valuations based on quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.
|
|
|
•
|
Level 2 – Valuations based on quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities.
|
|
|
•
|
Level 3 – Valuations based on inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
|
The following table details our financial assets measured and recorded at fair value on a recurring basis at
April 1, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
Description
|
|
Balance Sheet Classification
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
Cash equivalents
|
|
$
|
94,689
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Time deposits
|
|
Cash equivalents
|
|
—
|
|
|
8,067
|
|
|
—
|
|
Commercial paper
|
|
Cash equivalents
|
|
—
|
|
|
44,800
|
|
|
—
|
|
Government and corporate bonds
|
|
Cash equivalents
|
|
—
|
|
|
500
|
|
|
—
|
|
Time deposits
|
|
Short-term investments
|
|
—
|
|
|
29,538
|
|
|
—
|
|
Commercial paper
|
|
Short-term investments
|
|
—
|
|
|
23,140
|
|
|
—
|
|
Government and corporate bonds
|
|
Short-term investments
|
|
—
|
|
|
100,780
|
|
|
—
|
|
Government and corporate bonds
|
|
Long-term investments
|
|
—
|
|
|
65,255
|
|
|
—
|
|
The following table details our financial assets measured and recorded at fair value on a recurring basis at
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
Description
|
|
Balance Sheet Classification
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
Cash equivalents
|
|
$
|
23,110
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Time deposits
|
|
Cash equivalents
|
|
—
|
|
|
11,477
|
|
|
—
|
|
Time deposits
|
|
Short-term investments
|
|
—
|
|
|
40,639
|
|
|
—
|
|
Commercial paper
|
|
Short-term investments
|
|
—
|
|
|
22,301
|
|
|
—
|
|
Government and corporate bonds
|
|
Short-term investments
|
|
—
|
|
|
122,648
|
|
|
—
|
|
Government and corporate bonds
|
|
Long-term investments
|
|
—
|
|
|
95,368
|
|
|
—
|
|
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
April 1, 2017
and
December 31, 2016
was approximately
$512 million
and
$515 million
, respectively. The carrying amount of such debt at both
April 1, 2017
and
December 31, 2016
was
$500 million
.
(3) Available-for-sale Investments
Available-for-sale investments at
April 1, 2017
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Adjusted Cost
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
94,689
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
94,689
|
|
Time deposits
|
|
8,067
|
|
|
—
|
|
|
—
|
|
|
8,067
|
|
Commercial paper
|
|
44,800
|
|
|
—
|
|
|
—
|
|
|
44,800
|
|
Government and corporate bonds
|
|
500
|
|
|
—
|
|
|
—
|
|
|
500
|
|
Total cash equivalents
|
|
148,056
|
|
|
—
|
|
|
—
|
|
|
148,056
|
|
|
|
|
|
|
|
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
Time deposits
|
|
29,538
|
|
|
—
|
|
|
—
|
|
|
29,538
|
|
Commercial paper
|
|
23,175
|
|
|
—
|
|
|
(35
|
)
|
|
23,140
|
|
Government and corporate bonds
|
|
100,892
|
|
|
7
|
|
|
(119
|
)
|
|
100,780
|
|
Total short-term investments
|
|
153,605
|
|
|
7
|
|
|
(154
|
)
|
|
153,458
|
|
|
|
|
|
|
|
|
|
|
Long-term investments:
|
|
|
|
|
|
|
|
|
Government and corporate bonds
|
|
65,472
|
|
|
—
|
|
|
(217
|
)
|
|
65,255
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale investments
|
|
$
|
367,133
|
|
|
$
|
7
|
|
|
$
|
(371
|
)
|
|
$
|
366,769
|
|
Available-for-sale investments at
December 31, 2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Adjusted Cost
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
23,110
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
23,110
|
|
Time deposits
|
|
11,477
|
|
|
—
|
|
|
—
|
|
|
11,477
|
|
Total cash equivalents
|
|
34,587
|
|
|
—
|
|
|
—
|
|
|
34,587
|
|
|
|
|
|
|
|
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
Time deposits
|
|
40,639
|
|
|
—
|
|
|
—
|
|
|
40,639
|
|
Commercial paper
|
|
22,325
|
|
|
—
|
|
|
(24
|
)
|
|
22,301
|
|
Government and corporate bonds
|
|
122,729
|
|
|
3
|
|
|
(84
|
)
|
|
122,648
|
|
Total short-term investments
|
|
185,693
|
|
|
3
|
|
|
(108
|
)
|
|
185,588
|
|
|
|
|
|
|
|
|
|
|
Long-term investments:
|
|
|
|
|
|
|
|
|
Government and corporate bonds
|
|
95,806
|
|
|
—
|
|
|
(438
|
)
|
|
95,368
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale investments
|
|
$
|
316,086
|
|
|
$
|
3
|
|
|
$
|
(546
|
)
|
|
$
|
315,543
|
|
We sold available-for-sale investments for proceeds of
$20 million
during both the
three months ended
April 1, 2017
and
April 2, 2016
, resulting in insignificant gains or losses.
(4) Receivables
A summary of net receivables is as follows:
|
|
|
|
|
|
|
|
|
(In thousands)
|
April 1, 2017
|
|
December 31, 2016
|
|
|
|
|
Gross accounts receivable
|
$
|
1,015,120
|
|
|
$
|
958,843
|
|
Less: Allowance for doubtful accounts
|
48,641
|
|
|
43,028
|
|
|
|
|
|
Accounts receivable, net of allowance
|
966,479
|
|
|
915,815
|
|
|
|
|
|
Current portion of lease receivables
|
19,875
|
|
|
29,128
|
|
|
|
|
|
Total receivables, net
|
$
|
986,354
|
|
|
$
|
944,943
|
|
During the second quarter of 2008, Fujitsu Services Limited’s ("Fujitsu") contract as the prime contractor in the National Health Service ("NHS") initiative to automate clinical processes and digitize medical records in the Southern region of England was terminated by the NHS. This had the effect of automatically terminating our subcontract for the project. We continue to be in dispute with Fujitsu regarding Fujitsu’s obligation to pay the amounts comprised of accounts receivable and contracts receivable related to that subcontract, and we are working with Fujitsu to resolve these issues based on processes provided for in the contract. Part of that process requires final resolution of disputes between Fujitsu and the NHS regarding the contract termination. As of
April 1, 2017
, it remains unlikely that our matter with Fujitsu will be resolved in the next 12 months. Therefore, these receivables have been classified as long-term and represent less than the majority of other long-term assets at
April 1, 2017
and
December 31, 2016
. While the ultimate collectability of the receivables pursuant to this process is uncertain, we believe that we have valid and equitable grounds for recovery of such amounts and that collection of recorded amounts is probable. Nevertheless, it is reasonably possible that our estimates regarding collectability of such amounts might materially change in the near term, considering that we do not have complete knowledge of the status of the proceedings between Fujitsu and NHS and their effect on our claim.
During the first
three
months of both
2017
and
2016
, we received total client cash collections of
$1.3 billion
.
(5) 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
28.7%
and
30.8%
for the first
three
months of
2017
and
2016
, respectively. The decrease in the effective tax rate in 2017 is a result of the inclusion of net excess tax benefits as a discrete item within the tax provision, upon our adoption of ASU 2016-09 in the first quarter of 2017. Refer to Note (1) for further discussion regarding our adoption of ASU 2016-09 and its impact on our condensed consolidated financial statements.
(6) 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
|
|
2017
|
|
2016
|
|
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
|
$
|
173,213
|
|
|
329,973
|
|
|
$
|
0.52
|
|
|
$
|
150,360
|
|
|
339,518
|
|
|
$
|
0.44
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and non-vested shares
|
—
|
|
|
6,217
|
|
|
|
|
—
|
|
|
6,382
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common shareholders including assumed conversions
|
$
|
173,213
|
|
|
336,190
|
|
|
$
|
0.52
|
|
|
$
|
150,360
|
|
|
345,900
|
|
|
$
|
0.43
|
|
For the three months ended
April 1, 2017
and
April 2, 2016
, options to purchase
10.6 million
and
7.2 million
shares of common stock at per share prices ranging from
$44.05
to
$73.40
and
$44.05
to
$73.40
, respectively, were outstanding but were not included in the computation of diluted earnings per share because they were anti-dilutive.
(7) Share-Based Compensation
Stock Options
Stock option activity for the
three months ended
April 1, 2017
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
|
23,601
|
|
|
$
|
40.33
|
|
|
|
|
|
Granted
|
876
|
|
|
55.67
|
|
|
|
|
|
Exercised
|
(882
|
)
|
|
17.88
|
|
|
|
|
|
Forfeited and expired
|
(206
|
)
|
|
54.87
|
|
|
|
|
|
Outstanding as of April 1, 2017
|
23,389
|
|
|
41.62
|
|
|
$
|
431,649
|
|
|
6.06
|
|
|
|
|
|
|
|
|
Exercisable as of April 1, 2017
|
12,376
|
|
|
$
|
28.27
|
|
|
$
|
381,943
|
|
|
4.21
|
The weighted-average assumptions used to estimate the fair value, under the Black-Scholes-Merton pricing model, of stock options granted during the three months ended
April 1, 2017
were as follows:
|
|
|
|
|
|
Expected volatility (%)
|
|
27.0
|
%
|
Expected term (yrs)
|
|
7
|
|
Risk-free rate (%)
|
|
2.2
|
%
|
Fair value per option
|
|
$
|
18.31
|
|
As of
April 1, 2017
, there was
$147 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
3.21
years.
Non-vested Shares and Share Units
Non-vested share and share unit activity for the
three months ended
April 1, 2017
was as follows:
|
|
|
|
|
|
|
|
(In thousands, except per share data)
|
Number of Shares
|
|
Weighted-Average
Grant Date Fair Value
|
|
|
|
|
Outstanding at beginning of year
|
354
|
|
|
$
|
61.12
|
|
Granted
|
20
|
|
|
55.74
|
|
Vested
|
(12
|
)
|
|
61.75
|
|
Forfeited
|
(4
|
)
|
|
52.37
|
|
|
|
|
|
Outstanding as of April 1, 2017
|
358
|
|
|
$
|
60.88
|
|
As of
April 1, 2017
, there was
$7 million
of total unrecognized compensation cost related to non-vested share awards granted under all plans. That cost is expected to be recognized over a weighted-average period of
1.74
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)
|
2017
|
|
2016
|
|
|
|
|
Stock option and non-vested share and share unit compensation expense
|
$
|
17,500
|
|
|
$
|
17,811
|
|
Associate stock purchase plan expense
|
1,475
|
|
|
1,756
|
|
Amounts capitalized in software development costs, net of amortization
|
(120
|
)
|
|
(201
|
)
|
|
|
|
|
Amounts charged against earnings, before income tax benefit
|
$
|
18,855
|
|
|
$
|
19,366
|
|
|
|
|
|
Amount of related income tax benefit recognized in earnings
|
$
|
5,416
|
|
|
$
|
5,955
|
|
(8) Contingencies
We accrue estimates for resolution of any legal and other contingencies when losses are probable and estimable, in accordance with Accounting Standards Codification Topic 450,
Contingencies
.
The terms of our software license agreements with our clients generally provide for a limited indemnification of such clients against losses, expenses and liabilities arising from third party claims based on alleged infringement by our solutions of an intellectual property right of such third party. The terms of such indemnification often limit the scope of and remedies for such indemnification obligations and generally include a right to replace or modify an infringing solution. To date, we have not had to reimburse any of our clients for any judgments or settlements to third parties related to these indemnification provisions pertaining to intellectual property infringement claims. For several reasons, including the lack of a sufficient number of prior indemnification claims and the lack of a monetary liability limit for certain infringement cases under the terms of the corresponding agreements with our clients, we cannot determine the maximum amount of potential future payments, if any, related to such indemnification provisions.
In addition to commitments and obligations in the ordinary course of business, we are subject to various 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. In addition, we are a defendant in lawsuits filed in federal and state courts brought as putative class or collective actions on behalf of various groups of current and former associates in the U.S alleging that we misclassified associates as exempt from overtime pay under the Fair Labor Standards Act and state wage and hour laws. These proceedings are at various procedural stages (for example one case is newly filed while two cases have classes certified) and seek unspecified monetary damages, injunctive relief, costs and attorneys’ fees. Given the substantial uncertainties, such as the impact of discovery and the extent to which significant factual issues are resolved, the disposition of pre-trial motions, the extent of potential damages, which are often unspecified or indeterminate, and the status of settlement discussions (if any),
we cannot predict with any reasonable certainty the timing or outcome of such contingencies. At this time, we do not believe any material losses under these claims to be probable or estimable.
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.
(9) Segment Reporting
We have two operating segments, Domestic and Global. Revenues are derived primarily from the sale of clinical, financial and administrative information systems and solutions. 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, acquisition costs and related adjustments, 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
April 1, 2017
and
April 2, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Domestic
|
|
Global
|
|
Other
|
|
Total
|
|
|
|
|
|
|
|
|
Three Months Ended 2017
|
|
|
|
|
|
|
|
Revenues
|
$
|
1,131,804
|
|
|
$
|
128,682
|
|
|
$
|
—
|
|
|
$
|
1,260,486
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
176,361
|
|
|
22,632
|
|
|
—
|
|
|
198,993
|
|
Operating expenses
|
483,380
|
|
|
63,523
|
|
|
270,464
|
|
|
817,367
|
|
Total costs and expenses
|
659,741
|
|
|
86,155
|
|
|
270,464
|
|
|
1,016,360
|
|
|
|
|
|
|
|
|
|
Operating earnings (loss)
|
$
|
472,063
|
|
|
$
|
42,527
|
|
|
$
|
(270,464
|
)
|
|
$
|
244,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Domestic
|
|
Global
|
|
Other
|
|
Total
|
|
|
|
|
|
|
|
|
Three Months Ended 2016
|
|
|
|
|
|
|
|
Revenues
|
$
|
1,004,965
|
|
|
$
|
133,170
|
|
|
$
|
—
|
|
|
$
|
1,138,135
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
149,269
|
|
|
26,324
|
|
|
—
|
|
|
175,593
|
|
Operating expenses
|
425,559
|
|
|
58,871
|
|
|
262,664
|
|
|
747,094
|
|
Total costs and expenses
|
574,828
|
|
|
85,195
|
|
|
262,664
|
|
|
922,687
|
|
|
|
|
|
|
|
|
|
Operating earnings (loss)
|
$
|
430,137
|
|
|
$
|
47,975
|
|
|
$
|
(262,664
|
)
|
|
$
|
215,448
|
|