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
Prior to fiscal year 2020, our first fiscal quarter ended on the Saturday closest to March 31. The first quarter of 2019 consisted of 91 days and ended on March 30, 2019.
In December 2019, our Board of Directors approved the change of our fiscal year to a calendar year, commencing with fiscal year 2020. Accordingly, our 2020 first fiscal quarter was extended and ran from December 29, 2019 to March 31, 2020; consisting of 94 days.
All references to periods in these notes to condensed consolidated financial statements represent the respective periods described above ending on March 31, 2020 and March 30, 2019, unless otherwise noted.
Supplemental Disclosures of Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
(In thousands)
|
|
|
2020
|
|
2019
|
Cash paid during the period for:
|
|
|
|
|
|
Interest (including amounts capitalized of $4,633 and $3,797, respectively)
|
|
|
$
|
11,811
|
|
|
$
|
7,288
|
|
Income taxes, net of refunds
|
|
|
2,869
|
|
|
22,511
|
|
Non-cash items:
|
|
|
|
|
|
|
|
Lease liabilities recorded upon the commencement of operating leases
|
|
|
17,762
|
|
|
15,627
|
|
Accounting Pronouncements Adopted in 2020
Credit Losses on Financial Instruments. In the first quarter of 2020, we adopted new guidance regarding impairment assessment for certain financial assets. Refer to Notes (3) and (4) for further details.
Collaborative Arrangements. In November 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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 recent revenue standard (Topic 606). Such guidance clarifies revenue recognition and financial statement presentation for transactions between collaboration participants. We adopted ASU 2018-18 in the first quarter of 2020. Such guidance did not have an impact on our consolidated financial statements and related disclosures.
Recently Issued Accounting Pronouncements
Reference Rate Reform. In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which 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 ASU 2020-04 may be applied prospectively from the beginning of our 2020 first quarter through December 31, 2022. We are currently evaluating the effect that ASU 2020-04 may have on our contracts that reference LIBOR, specifically, our Third Amended and Restated Credit Agreement (as amended, 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 standard.
(2) Revenue Recognition
Disaggregation of Revenue
The following table presents revenues disaggregated by our business models:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
2020
|
|
|
|
2019
|
|
|
(In thousands)
|
Domestic
Segment
|
International
Segment
|
Total
|
|
Domestic
Segment
|
International
Segment
|
Total
|
|
|
|
|
|
|
|
|
Licensed software
|
$
|
146,497
|
|
$
|
11,535
|
|
$
|
158,032
|
|
|
$
|
140,445
|
|
$
|
14,032
|
|
$
|
154,477
|
|
Technology resale
|
44,449
|
|
7,038
|
|
51,487
|
|
|
49,158
|
|
6,382
|
|
55,540
|
|
Subscriptions
|
86,936
|
|
7,449
|
|
94,385
|
|
|
77,702
|
|
6,589
|
|
84,291
|
|
Professional services
|
452,784
|
|
58,562
|
|
511,346
|
|
|
437,229
|
|
53,210
|
|
490,439
|
|
Managed services
|
279,736
|
|
29,618
|
|
309,354
|
|
|
277,325
|
|
27,068
|
|
304,393
|
|
Support and maintenance
|
223,416
|
|
50,265
|
|
273,681
|
|
|
226,481
|
|
50,482
|
|
276,963
|
|
Reimbursed travel
|
12,597
|
|
859
|
|
13,456
|
|
|
22,490
|
|
1,284
|
|
23,774
|
|
|
|
|
|
|
|
|
|
Total revenues
|
$
|
1,246,415
|
|
$
|
165,326
|
|
$
|
1,411,741
|
|
|
$
|
1,230,830
|
|
$
|
159,047
|
|
$
|
1,389,877
|
|
The following table presents our revenues disaggregated by timing of revenue recognition:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
2020
|
|
|
|
2019
|
|
|
(In thousands)
|
Domestic
Segment
|
International
Segment
|
Total
|
|
Domestic
Segment
|
International
Segment
|
Total
|
|
|
|
|
|
|
|
|
Revenue recognized over time
|
$
|
1,165,515
|
|
$
|
153,444
|
|
$
|
1,318,959
|
|
|
$
|
1,135,982
|
|
$
|
142,211
|
|
$
|
1,278,193
|
|
Revenue recognized at a point in time
|
80,900
|
|
11,882
|
|
92,782
|
|
|
94,848
|
|
16,836
|
|
111,684
|
|
|
|
|
|
|
|
|
|
Total revenues
|
$
|
1,246,415
|
|
$
|
165,326
|
|
$
|
1,411,741
|
|
|
$
|
1,230,830
|
|
$
|
159,047
|
|
$
|
1,389,877
|
|
Transaction Price Allocated to Remaining Performance Obligations
As of March 31, 2020, the aggregate amount of transaction price allocated to performance obligations that are unsatisfied (or partially unsatisfied) for executed contracts approximates $13.47 billion of which we expect to recognize approximately 30% 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, 2020, we recognized $128 million of revenues that were included in our contract liability balance at the beginning of such period.
Significant Customers
A certain customer within our Domestic segment comprised 17% and 10% of our consolidated revenues for the first three months of 2020 and 2019, respectively.
(3) Receivables
A summary of net receivables is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
March 31, 2020
|
|
December 28, 2019
|
|
|
|
|
Client receivables
|
$
|
1,274,158
|
|
|
$
|
1,245,670
|
|
Less: Allowance for doubtful accounts
|
123,130
|
|
|
106,075
|
|
|
|
|
|
Total receivables, net
|
$
|
1,151,028
|
|
|
$
|
1,139,595
|
|
A reconciliation of the beginning and ending amount of our allowance for doubtful accounts is as follows:
|
|
|
|
|
|
(In thousands)
|
|
|
|
Allowance for doubtful accounts - balance at December 28, 2019
|
$
|
106,075
|
|
Cumulative effect of accounting change (ASU 2016-13)
|
4,606
|
|
Additions charged to costs and expenses
|
15,678
|
|
Deductions
|
(3,229)
|
|
|
|
Allowance for doubtful accounts - balance at March 31, 2020
|
$
|
123,130
|
|
During the first three months of 2020 and 2019, we received total client cash collections of $1.37 billion and $1.36 billion, respectively.
Expected Credit Losses
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which provides a new impairment model for certain financial assets that is based on expected losses rather than incurred losses. Such guidance impacts how we determine our allowance for estimated uncollectible client receivables. The standard requires use of the modified retrospective (cumulative effect) transition approach as of the beginning of the first reporting period in which the guidance was effective, which for the Company was the first quarter of 2020. Under this transition method, the cumulative effect from prior periods upon applying this new guidance was recognized in our condensed consolidated balance sheets as of December 29, 2019. We did not recast comparative periods.
A summary of such cumulative effect adjustment is as follows:
|
|
|
|
|
|
(In thousands)
|
Increase/(Decrease)
|
|
|
Receivables, net
|
$
|
(4,606)
|
|
Retained earnings
|
(4,606)
|
|
The cumulative effect adjustment is the result of providing an allowance on unbilled client receivables, for which we have an unconditional right to invoice and receive payment in the future.
Our estimates of expected credit losses for client receivables at both December 29, 2019 and March 31, 2020, 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, 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 their response to the COVID-19 pandemic, which may be material.
(4) Investments
Available-for-sale investments at March 31, 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Adjusted Cost
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
149,756
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
149,756
|
|
Time deposits
|
|
60,614
|
|
|
—
|
|
|
—
|
|
|
60,614
|
|
Total cash equivalents
|
|
210,370
|
|
|
—
|
|
|
—
|
|
|
210,370
|
|
|
|
|
|
|
|
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
Time deposits
|
|
14,737
|
|
|
—
|
|
|
—
|
|
|
14,737
|
|
Commercial paper
|
|
5,000
|
|
|
—
|
|
|
(26)
|
|
|
4,974
|
|
Government and corporate bonds
|
|
79,298
|
|
|
69
|
|
|
(304)
|
|
|
79,063
|
|
Total short-term investments
|
|
99,035
|
|
|
69
|
|
|
(330)
|
|
|
98,774
|
|
|
|
|
|
|
|
|
|
|
Long-term investments:
|
|
|
|
|
|
|
|
|
Government and corporate bonds
|
|
86,192
|
|
|
50
|
|
|
(853)
|
|
|
85,389
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale investments
|
|
$
|
395,597
|
|
|
$
|
119
|
|
|
$
|
(1,183)
|
|
|
$
|
394,533
|
|
Available-for-sale investments at December 28, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Adjusted Cost
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
185,666
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
185,666
|
|
Time deposits
|
|
64,286
|
|
|
—
|
|
|
—
|
|
|
64,286
|
|
Total cash equivalents
|
|
249,952
|
|
|
—
|
|
|
—
|
|
|
249,952
|
|
|
|
|
|
|
|
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
Time deposits
|
|
2,506
|
|
|
—
|
|
|
—
|
|
|
2,506
|
|
Government and corporate bonds
|
|
83,272
|
|
|
52
|
|
|
(11)
|
|
|
83,313
|
|
Total short-term investments
|
|
85,778
|
|
|
52
|
|
|
(11)
|
|
|
85,819
|
|
|
|
|
|
|
|
|
|
|
Long-term investments:
|
|
|
|
|
|
|
|
|
Government and corporate bonds
|
|
96,186
|
|
|
91
|
|
|
(67)
|
|
|
96,210
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale investments
|
|
$
|
431,916
|
|
|
$
|
143
|
|
|
$
|
(78)
|
|
|
$
|
431,981
|
|
We sold available-for-sale investments for proceeds of $5 million during the three months ended March 31, 2020, resulting in insignificant losses in the period.
Other Investments
At March 31, 2020 and December 28, 2019, we had investments in equity securities that do not have readily determinable fair values of $315 million and $314 million, respectively, 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, 2020 and March 30, 2019, respectively.
Impairment Assessment
We adopted ASU 2016-13 in the first quarter of 2020, which made certain amendments to the model used to assess available-for-sale debt securities for impairment. Such guidance provides that an available-for-sale debt security is impaired if the fair value of the security is less than its amortized cost basis. A determination is made whether the decline in fair value below the amortized cost basis has resulted from a credit loss or other factors, such as market liquidity or changes in interest rates. Impairment related to credit losses is recognized in net earnings, whereas impairment related to other factors is recognized as a component of accumulated other comprehensive loss, net. During the three months ended March 31, 2020, we did not recognize any impairment on our available-for-sale debt securities through net earnings.
(5) Long-term Debt
The following is a summary of indebtedness outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
March 31, 2020
|
|
December 28, 2019
|
|
|
|
|
Credit agreement loans due May 5, 2024
|
$
|
600,000
|
|
|
$
|
600,000
|
|
Senior notes:
|
|
|
|
|
|
Series 2020-A due March 11, 2030
|
300,000
|
|
|
—
|
|
Series 2015-A due February 15, 2022
|
225,000
|
|
|
225,000
|
|
Series 2015-B due February 14, 2025
|
200,000
|
|
|
200,000
|
|
Other
|
14,162
|
|
|
14,162
|
|
|
|
|
|
Total indebtedness
|
1,339,162
|
|
|
1,039,162
|
|
Less: debt issuance costs
|
(745)
|
|
|
(780)
|
|
|
|
|
|
Long-term debt
|
$
|
1,338,417
|
|
|
$
|
1,038,382
|
|
Credit Agreement
As of March 31, 2020, the interest rate on revolving credit loans outstanding under our Credit Agreement was 1.60% 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, 2020 and December 28, 2019, this swap was in a net liability position with an aggregate fair value of $42 million and $17 million, respectively; which is presented in our condensed consolidated balance sheets in other current liabilities.
Series 2020-A Senior Notes
In March 2020, we issued $300 million aggregate principal amount of 2.50% senior unsecured Series 2020-A notes (the "Series 2020-A Notes") due March 11, 2030; pursuant to the Master Note Agreement (the "2019 Shelf Agreement") we entered into in November 2019. Interest on the Series 2020-A Notes is payable semiannually on each March 11 and September 11, commencing September 11, 2020, and the principal balance is due at maturity. The Company may prepay at any time all, or any part of, the outstanding principal amount of the Series 2020-A Notes, subject to the payment of a make-whole amount. The Series 2020-A Notes are subject to the terms of the 2019 Shelf Agreement, which contains customary events of default and covenants related to limitations on indebtedness and transactions with affiliates and the maintenance of certain financial ratios. As of March 31, 2020, $750 million remains available for sale under the 2019 Shelf Agreement, which is uncommitted and subject to participation by the Purchasers.
(6) Fair Value Measurements
We determine fair value measurements used in our consolidated financial statements based upon the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity's own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:
•Level 1 – Valuations based on quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.
•Level 2 – Valuations based on quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities.
•Level 3 – Valuations based on inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The following table details our financial assets measured and recorded at fair value on a recurring basis at March 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
Fair Value Measurements Using
|
|
|
|
|
Description
|
|
Balance Sheet Classification
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
Cash equivalents
|
|
$
|
149,756
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Time deposits
|
|
Cash equivalents
|
|
—
|
|
|
60,614
|
|
|
—
|
|
Time deposits
|
|
Short-term investments
|
|
—
|
|
|
14,737
|
|
|
—
|
|
Commercial paper
|
|
Short-term investments
|
|
—
|
|
|
4,974
|
|
|
—
|
|
Government and corporate bonds
|
|
Short-term investments
|
|
—
|
|
|
79,063
|
|
|
—
|
|
Government and corporate bonds
|
|
Long-term investments
|
|
—
|
|
|
85,389
|
|
|
—
|
|
The following table details our financial assets measured and recorded at fair value on a recurring basis at December 28, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
Fair Value Measurements Using
|
|
|
|
|
Description
|
|
Balance Sheet Classification
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
Cash equivalents
|
|
$
|
185,666
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Time deposits
|
|
Cash equivalents
|
|
—
|
|
|
64,286
|
|
|
—
|
|
Time deposits
|
|
Short-term investments
|
|
—
|
|
|
2,506
|
|
|
—
|
|
Government and corporate bonds
|
|
Short-term investments
|
|
—
|
|
|
83,313
|
|
|
—
|
|
Government and corporate bonds
|
|
Long-term investments
|
|
—
|
|
|
96,210
|
|
|
—
|
|
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, 2020 and December 28, 2019 was approximately $1.35 billion and $1.07 billion, respectively. The carrying amount of such debt at March 31, 2020 and December 28, 2019 was $1.33 billion and $1.03 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 20.0% and 19.5% for the first three months of 2020 and 2019, respectively.
(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
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
|
|
|
2019
|
|
|
|
|
|
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
|
$
|
147,159
|
|
|
309,657
|
|
|
$
|
0.48
|
|
|
$
|
166,219
|
|
|
324,573
|
|
|
$
|
0.51
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
Stock options, non-vested shares and share units
|
—
|
|
|
2,583
|
|
|
|
|
—
|
|
|
2,430
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common shareholders including assumed conversions
|
$
|
147,159
|
|
|
312,240
|
|
|
$
|
0.47
|
|
|
$
|
166,219
|
|
|
327,003
|
|
|
$
|
0.51
|
|
For the three months ended March 31, 2020 and March 30, 2019, options to purchase 4.1 million and 13.7 million shares of common stock at per share prices ranging from $56.76 to $76.49 and $47.99 to $73.40, respectively, were outstanding but were not included in the computation of diluted earnings per share because they were anti-dilutive.
(9) Share-Based Compensation and Equity
Stock Options
Stock option activity for the three months ended March 31, 2020 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
|
15,416
|
|
|
$
|
56.36
|
|
|
|
|
|
Granted
|
2
|
|
|
73.01
|
|
|
|
|
|
Exercised
|
(2,449)
|
|
|
48.43
|
|
|
|
|
|
Forfeited and expired
|
(152)
|
|
|
61.55
|
|
|
|
|
|
Outstanding as of March 31, 2020
|
12,817
|
|
|
57.82
|
|
|
$
|
83,254
|
|
|
6.08
|
|
|
|
|
|
|
|
|
Exercisable as of March 31, 2020
|
6,269
|
|
|
$
|
54.59
|
|
|
$
|
61,354
|
|
|
4.55
|
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 March 31, 2020 were as follows:
|
|
|
|
|
|
|
|
|
Expected volatility (%)
|
|
24.5
|
%
|
Expected dividend rate (%)
|
|
1
|
%
|
Expected term (yrs)
|
|
6
|
Risk-free rate (%)
|
|
1.5
|
%
|
Fair value per option
|
|
$
|
17.53
|
|
As of March 31, 2020, there was $79 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 2.52 years.
Non-vested Shares and Share Units
Non-vested share and share unit activity for the three months ended March 31, 2020 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
|
2,634
|
|
|
$
|
65.30
|
|
Granted
|
43
|
|
|
72.28
|
|
Vested
|
(157)
|
|
|
64.01
|
|
Forfeited
|
(22)
|
|
|
65.49
|
|
|
|
|
|
Outstanding as of March 31, 2020
|
2,498
|
|
|
$
|
65.50
|
|
As of March 31, 2020, there was $108 million of total unrecognized compensation cost related to non-vested share and share unit awards granted under all plans. That cost is expected to be recognized over a weighted-average period of 1.88 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)
|
2020
|
|
2019
|
|
|
|
|
Stock option and non-vested share and share unit compensation expense
|
$
|
35,031
|
|
|
$
|
19,860
|
|
Associate stock purchase plan expense
|
1,101
|
|
|
1,542
|
|
Amounts capitalized in software development costs, net of amortization
|
(745)
|
|
|
187
|
|
|
|
|
|
Amounts charged against earnings, before income tax benefit
|
$
|
35,387
|
|
|
$
|
21,589
|
|
|
|
|
|
Amount of related income tax benefit recognized in earnings
|
$
|
6,443
|
|
|
$
|
4,201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury Stock
Under our current share repurchase program, which was initially approved by our Board of Directors in May 2017 and most recently amended in December 2019, the Company is authorized to repurchase up to $3.70 billion of shares of our common stock, excluding transaction costs. The repurchases are to be effectuated in the open market, by block purchase, in privately negotiated transactions, or through other transactions managed by broker-dealers. No time limit was set for the completion of the program. During the three months ended March 31, 2020, we repurchased 9.2 million shares for total consideration of $650 million under the program. The shares were recorded as treasury stock and accounted for under the cost method. No repurchased shares have been retired. As of March 31, 2020, $1.03 billion remains available for repurchase under the program.
Dividends
On March 19, 2020, our Board of Directors declared a cash dividend of $0.18 per share on our issued and outstanding common stock, which was paid on April 17, 2020 to shareholders of record as of April 3, 2020. 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 March 31, 2020, our condensed consolidated balance sheet included a liability for dividends payable of $55 million, which is 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 28, 2019
|
$
|
(106,347)
|
|
|
$
|
(12,578)
|
|
|
$
|
265
|
|
|
$
|
(118,660)
|
|
Other comprehensive income (loss) before reclassifications
|
(20,546)
|
|
|
(20,430)
|
|
|
(849)
|
|
|
(41,825)
|
|
Amounts reclassified from AOCI
|
—
|
|
|
1,122
|
|
|
—
|
|
|
1,122
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2020
|
$
|
(126,893)
|
|
|
$
|
(31,886)
|
|
|
$
|
(584)
|
|
|
$
|
(159,363)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment and other
|
|
Unrealized loss on cash flow hedge
|
|
Unrealized holding gain (loss) on available-for-sale investments
|
|
Total
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 29, 2018
|
$
|
(102,939)
|
|
|
$
|
—
|
|
|
$
|
(613)
|
|
|
$
|
(103,552)
|
|
Other comprehensive income (loss) before reclassifications
|
2,321
|
|
|
—
|
|
|
637
|
|
|
2,958
|
|
Amounts reclassified from AOCI
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Balance at March 30, 2019
|
$
|
(100,618)
|
|
|
$
|
—
|
|
|
$
|
24
|
|
|
$
|
(100,594)
|
|
The effects on net earnings of amounts reclassified from AOCI were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
Three Months Ended
|
|
|
AOCI Component
|
|
Location
|
|
2020
|
|
2019
|
|
|
|
|
|
|
|
Unrealized loss on cash flow hedge
|
|
Other income, net
|
|
$
|
(1,372)
|
|
|
$
|
—
|
|
|
|
Income taxes
|
|
250
|
|
|
—
|
|
|
|
|
|
|
|
|
Total amount reclassified, net of tax
|
|
|
|
$
|
(1,122)
|
|
|
$
|
—
|
|
(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, 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.
As previously disclosed, we continue to be in dispute with Fujitsu Services Limited ("Fujitsu") regarding Fujitsu's obligation to pay amounts to us due upon the termination of a subcontract, including client receivables, in connection with Fujitsu's 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. The NHS terminated its contract with Fujitsu, which gave rise to the termination of our subcontract with Fujitsu. We filed a request for arbitration with the London Court of International Arbitration on April 22, 2019 seeking damages. On December 30, 2019, Fujitsu filed its Defense and Counterclaim (the "Counterclaim") in response. In its Counterclaim, Fujitsu defends against our claim in full and argues that we are liable to Fujitsu for: (i) £306 million in damages based on our alleged fraudulent misrepresentations inducing Fujitsu to enter into the subcontract; or (ii) alternatively, £173.8 million in damages based on our alleged breaches of the subcontract.
We believe that Fujitsu's claims are without merit and will vigorously defend against them, and we continue to believe that we have valid and equitable grounds for recovery of the disputed client receivables; however, there can be no assurances as to the outcome of the dispute. As previously disclosed, we recorded a pre-tax charge of $45 million in the fourth quarter of 2018 to provide an allowance against the disputed client receivables reflecting the uncertainty in collection of such receivables and related litigation risk resulting from the conclusion of the non-binding alternative dispute resolution procedures, which occurred before we filed our request for arbitration. We have not concluded that a loss related to the new claims raised by Fujitsu in the Counterclaim is probable, nor have we accrued a liability related to these claims beyond the previously reported pre-tax charge recorded in the fourth quarter of 2018. Although we believe a loss may 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 Counterclaim given that the dispute is in the early stages of the arbitration process.
Cerner Health Services, Inc. ("Cerner HS"), a wholly owned subsidiary of Cerner Corporation, filed a lawsuit in the Chester County, Pennsylvania, Court of Common Pleas against NextGen Healthcare Information Systems, LLC ("NextGen") relating to a dispute arising out of a supplier relationship initially established between Siemens Health Services, Inc. and NextGen prior to the acquisition of the assets of Siemens Health Services, Inc. by Cerner HS in 2015. In September 2017, the court issued a preliminary injunction to prevent NextGen from refusing to honor certain contractual obligations to support Cerner HS's clients who use NextGen ambulatory EHR solutions. In September 2018, NextGen filed a counterclaim alleging breach of contract and tortious interference but did not specify its damages. In August 2019, NextGen provided an expert report alleging profit disgorgement damages of $135 million or, alternatively, $30.5 million in lost profit damages, but the report did not discuss how our actions allegedly caused NextGen's damages. In December 2019, we deposed NextGen's expert, gaining additional clarity on categories of alleged damages but not on the alleged theories of liability. A jury trial is set to begin on January 25, 2021. We believe NextGen's claims are without merit and will vigorously defend against them; however, there can be no assurances as to the outcome of the dispute. We have not concluded that a loss related to the claims raised by NextGen in its counterclaim is probable, nor have we accrued a liability related to these claims. Although a loss may be reasonably possible (as defined in ASC 450), we do not have sufficient information to determine the amount or range of reasonably possible loss in light of the inherent difficulty of predicting the outcome of litigation generally, the wide range of damages presented by NextGen's expert, and the continued lack of clarity on the causal connection between Cerner Corporation's and Cerner HS's actions and any alleged damages.
On April 4, 2018, Ruby L. Lowe, Guardian ad Litem for Michael A. Taylor, filed a lawsuit against Cerner Corporation in the Circuit Court for Clarke County, Virginia. On November 4, 2019, the Court substituted Cerner HS in place of Cerner Corporation as the defendant in the lawsuit. Plaintiff asserts claims of negligent product liability, negligence, and violations of the Virginia Consumer Protection Act. Plaintiff alleges that Mr. Taylor suffered injuries following his medical treatment at Virginia Hospital Center, a client of Cerner HS. Specifically, plaintiff asserts a software defect contributed to an order to monitor pulse oxygen not starting until a day after it was ordered, allegedly contributing to Taylor's injury. Plaintiff seeks an award of $50 million. A jury trial is set to begin on September 8, 2020. Although a loss may be reasonably possible (as defined in ASC 450), we do not have sufficient information to determine the amount or range of reasonably possible loss
in light of the inherent difficulty of predicting the outcome of litigation generally, the wide range of damages presented by plaintiff, and the difficulty plaintiff will have proving that the solution was the proximate cause of plaintiff's harm.
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 IP 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 and breaches of contract and warranties. Many of these proceedings are at preliminary stages and many seek an indeterminate amount of damages. At this time, we do not believe the range of potential losses under such claims to be material to our 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, 2020 and March 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Domestic
|
|
International
|
|
Other
|
|
Total
|
|
|
|
|
|
|
|
|
Three Months Ended 2020
|
|
|
|
|
|
|
|
Revenues
|
$
|
1,246,415
|
|
|
$
|
165,326
|
|
|
$
|
—
|
|
|
$
|
1,411,741
|
|
|
|
|
|
|
|
|
|
Costs of revenue
|
228,567
|
|
|
25,849
|
|
|
—
|
|
|
254,416
|
|
Operating expenses
|
570,094
|
|
|
66,555
|
|
|
342,300
|
|
|
978,949
|
|
Total costs and expenses
|
798,661
|
|
|
92,404
|
|
|
342,300
|
|
|
1,233,365
|
|
|
|
|
|
|
|
|
|
Operating earnings (loss)
|
$
|
447,754
|
|
|
$
|
72,922
|
|
|
$
|
(342,300)
|
|
|
$
|
178,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Domestic
|
|
International
|
|
Other
|
|
Total
|
|
|
|
|
|
|
|
|
Three Months Ended 2019
|
|
|
|
|
|
|
|
Revenues
|
$
|
1,230,830
|
|
|
$
|
159,047
|
|
|
$
|
—
|
|
|
$
|
1,389,877
|
|
|
|
|
|
|
|
|
|
Costs of revenue
|
228,559
|
|
|
24,645
|
|
|
—
|
|
|
253,204
|
|
Operating expenses
|
572,018
|
|
|
68,169
|
|
|
298,542
|
|
|
938,729
|
|
Total costs and expenses
|
800,577
|
|
|
92,814
|
|
|
298,542
|
|
|
1,191,933
|
|
|
|
|
|
|
|
|
|
Operating earnings (loss)
|
$
|
430,253
|
|
|
$
|
66,233
|
|
|
$
|
(298,542)
|
|
|
$
|
197,944
|
|