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EXCEL - IDEA: XBRL DOCUMENT - CERNER Corp | Financial_Report.xls |
EX-32.1 - EX-32.1 - CERNER Corp | c60360exv32w1.htm |
EX-32.2 - EX-32.2 - CERNER Corp | c60360exv32w2.htm |
EX-31.2 - EX-31.2 - CERNER Corp | c60360exv31w2.htm |
EX-31.1 - EX-31.1 - CERNER Corp | c60360exv31w1.htm |
EX-10.A - EX-10.A - CERNER Corp | c60360exv10wa.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X)
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended October 2, 2010 | ||
OR | ||
( ) |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from to |
Commission File Number 0-15386
CERNER CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 43-1196944 | |
(State or other jurisdiction of | (I.R.S. Employer Identification | |
incorporation or organization) | Number) |
2800 Rockcreek Parkway
North Kansas City, Missouri 64117
(816) 201-1024
North Kansas City, Missouri 64117
(816) 201-1024
(Address of Principal Executive Offices, including zip code;
registrants telephone number, including area code)
registrants telephone number, including area code)
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 [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
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 and post such files).
Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer [X] | Accelerated filer [ ] | Non-accelerated filer [ ] (Do not check if a smaller reporting company) |
Smaller reporting company [ ] |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes [ ] No [X]
There were 82,852,501 shares of Common Stock, $.01 par value, outstanding at October 21, 2010.
CERNER CORPORATION AND SUBSIDIARIES
I N D E X
Part I.
|
Financial Information: | |||||||
Item 1.
|
Financial Statements: | |||||||
Condensed Consolidated Balance Sheets as of October 2, 2010 (unaudited) and January 2, 2010 |
1 | |||||||
Condensed Consolidated Statements of Operations for the three and nine months ended October 2, 2010 and October 3, 2009 (unaudited) |
2 | |||||||
Condensed Consolidated Statements of Cash Flows for the three and nine months ended October 2, 2010 and October 3, 2009 (unaudited) |
3 | |||||||
Notes to Condensed Consolidated Financial Statements (unaudited) | 4 | |||||||
Item 2.
|
Managements Discussion and Analysis of Financial Condition and Results of Operations |
12 | ||||||
Item 3.
|
Quantitative and Qualitative Disclosures about Market Risk | 26 | ||||||
Item 4.
|
Controls and Procedures | 26 | ||||||
Part II.
|
Other Information: | 27 | ||||||
Item 6.
|
Exhibits | 27 |
Part I. Financial Information
Item 1. Financial Statements
CERNER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
As of October 2, 2010 (unaudited) and January 2, 2010
(In thousands, except share data) | 2010 | 2009 | ||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 211,747 | $ | 241,723 | ||||
Short-term investments |
353,516 | 317,113 | ||||||
Receivables, net |
463,368 | 461,411 | ||||||
Inventory |
8,058 | 11,242 | ||||||
Prepaid expenses and other |
98,741 | 106,791 | ||||||
Deferred income taxes |
2,285 | 8,055 | ||||||
Total current assets |
1,137,715 | 1,146,335 | ||||||
Property and equipment, net |
500,667 | 509,178 | ||||||
Software development costs, net |
244,852 | 233,265 | ||||||
Goodwill |
161,974 | 151,479 | ||||||
Intangible assets, net |
38,340 | 33,719 | ||||||
Long-term investments |
205,323 | - | ||||||
Other assets |
69,512 | 74,591 | ||||||
Total assets |
$ | 2,358,383 | $ | 2,148,567 | ||||
Liabilities and Stockholders Equity |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 56,671 | $ | 36,893 | ||||
Current installments of long-term debt |
25,751 | 25,014 | ||||||
Deferred revenue |
117,847 | 137,095 | ||||||
Accrued payroll and tax withholdings |
78,072 | 80,093 | ||||||
Other accrued expenses |
46,593 | 79,008 | ||||||
Total current liabilities |
324,934 | 358,103 | ||||||
Long-term debt |
93,282 | 95,506 | ||||||
Deferred income taxes and other liabilities |
112,228 | 98,372 | ||||||
Deferred revenue |
18,578 | 15,788 | ||||||
Total liabilities |
549,022 | 567,769 | ||||||
Stockholders Equity: |
||||||||
Cerner Corporation stockholders equity: |
||||||||
Common stock, $.01 par value, 150,000,000 shares
authorized, 83,598,209 shares issued at October 2,
2010 and 82,564,708 shares issued at January 2, 2010 |
836 | 826 | ||||||
Additional paid-in capital |
618,318 | 557,545 | ||||||
Retained earnings |
1,220,198 | 1,053,563 | ||||||
Treasury stock |
(28,002 | ) | (28,002 | ) | ||||
Accumulated other comprehensive loss, net |
(2,109 | ) | (3,254 | ) | ||||
Total Cerner Corporation stockholders equity |
1,809,241 | 1,580,678 | ||||||
Noncontrolling interest |
120 | 120 | ||||||
Total stockholders equity |
1,809,361 | 1,580,798 | ||||||
Total liabilities and stockholders equity |
$ | 2,358,383 | $ | 2,148,567 | ||||
See notes to condensed consolidated financial statements (unaudited).
1
CERNER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and nine months ended October 2, 2010 and October 3, 2009
(unaudited)
For the three and nine months ended October 2, 2010 and October 3, 2009
(unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
(In thousands, except per share data) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Revenues: |
||||||||||||||||
System sales |
$ | 133,439 | $ | 118,325 | $ | 386,292 | $ | 332,816 | ||||||||
Support, maintenance and services |
321,289 | 284,189 | 939,909 | 849,461 | ||||||||||||
Reimbursed travel |
7,955 | 6,901 | 23,820 | 23,266 | ||||||||||||
Total revenues |
462,683 | 409,415 | 1,350,021 | 1,205,543 | ||||||||||||
Costs and expenses: |
||||||||||||||||
Cost of system sales |
57,396 | 47,934 | 155,087 | 132,127 | ||||||||||||
Cost of support, maintenance and services |
13,797 | 14,644 | 46,536 | 46,506 | ||||||||||||
Cost of reimbursed travel |
7,955 | 6,901 | 23,820 | 23,266 | ||||||||||||
Sales and client service |
189,320 | 171,415 | 566,943 | 516,401 | ||||||||||||
Software development (includes amortization of $17,756
and $50,015 for the three and nine months ended
October 2, 2010; and $16,922 and $45,801 for the
three and nine months ended October 3, 2009.) |
67,257 | 66,752 | 202,024 | 196,578 | ||||||||||||
General and administrative |
32,966 | 31,059 | 99,611 | 91,819 | ||||||||||||
Total costs and expenses |
368,691 | 338,705 | 1,094,021 | 1,006,697 | ||||||||||||
Operating earnings |
93,992 | 70,710 | 256,000 | 198,846 | ||||||||||||
Other income (expense): |
||||||||||||||||
Interest income (expense), net |
87 | 180 | 2,291 | (287 | ) | |||||||||||
Other income (expense), net |
5 | (3 | ) | (566 | ) | 414 | ||||||||||
Total other income (expense), net |
92 | 177 | 1,725 | 127 | ||||||||||||
Earnings before income taxes |
94,084 | 70,887 | 257,725 | 198,973 | ||||||||||||
Income taxes |
(33,212 | ) | (22,493 | ) | (91,090 | ) | (66,004 | ) | ||||||||
Net earnings |
$ | 60,872 | $ | 48,394 | $ | 166,635 | $ | 132,969 | ||||||||
Basic earnings per share |
$ | 0.74 | $ | 0.60 | $ | 2.03 | $ | 1.65 | ||||||||
Diluted earnings per share |
$ | 0.71 | $ | 0.57 | $ | 1.95 | $ | 1.59 | ||||||||
Basic weighted average shares outstanding |
82,547 | 81,225 | 82,279 | 80,750 | ||||||||||||
Diluted weighted average shares outstanding |
85,360 | 84,172 | 85,273 | 83,576 |
See notes to condensed consolidated financial statements (unaudited).
2
CERNER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended October 2, 2010 and October 3, 2009
(unaudited)
For the nine months ended October 2, 2010 and October 3, 2009
(unaudited)
Nine Months Ended | ||||||||
(In thousands) | 2010 | 2009 | ||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net earnings |
$ | 166,635 | $ | 132,969 | ||||
Adjustments to reconcile net earnings to net cash provided by
operating activities: |
||||||||
Depreciation and amortization |
140,871 | 137,620 | ||||||
Share-based compensation expense |
17,050 | 11,491 | ||||||
Provision for deferred income taxes |
18,802 | 7,864 | ||||||
Changes in assets and liabilities (net of businesses acquired): |
||||||||
Receivables, net |
(2,915 | ) | 7,432 | |||||
Inventory |
3,174 | (1,010 | ) | |||||
Prepaid expenses and other |
16,675 | (13,081 | ) | |||||
Accounts payable |
24,455 | (46,264 | ) | |||||
Accrued income taxes |
(21,393 | ) | (1,962 | ) | ||||
Deferred revenue |
(14,780 | ) | (8,966 | ) | ||||
Other accrued liabilities |
(13,877 | ) | 13,065 | |||||
Net cash provided by operating activities |
334,697 | 239,158 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Capital purchases |
(75,341 | ) | (89,863 | ) | ||||
Capitalized software development costs |
(61,783 | ) | (58,698 | ) | ||||
Purchases of investments |
(627,904 | ) | (89,176 | ) | ||||
Maturities of investments |
379,705 | 75,449 | ||||||
Purchase of other intangibles |
(8,034 | ) | (8,916 | ) | ||||
Acquisition of businesses, net of cash acquired |
(14,486 | ) | (3,529 | ) | ||||
Net cash used in investing activities |
(407,843 | ) | (174,733 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Proceeds from sale of future receivables |
1,516 | 1,888 | ||||||
Long-term debt repayments |
(2,404 | ) | (7,065 | ) | ||||
Proceeds from excess tax benefits from stock compensation |
17,884 | 13,583 | ||||||
Proceeds from exercise of options |
23,266 | 24,637 | ||||||
Net cash provided by financing activities |
40,262 | 33,043 | ||||||
Effect of exchange rate changes on cash |
2,908 | 10 | ||||||
Net (decrease) increase in cash and cash equivalents |
(29,976 | ) | 97,478 | |||||
Cash and cash equivalents at beginning of period |
241,723 | 270,494 | ||||||
Cash and cash equivalents at end of period |
$ | 211,747 | $ | 367,972 | ||||
Supplemental disclosures of cash flow information: |
||||||||
Cash paid during the year for: |
||||||||
Interest |
$ | 3,483 | $ | 4,317 | ||||
Income taxes, net of refund |
88,238 | 40,179 | ||||||
Summary of acquisition transactions: |
||||||||
Fair value of tangible assets acquired |
$ | 2,126 | $ | - | ||||
Fair value of intangible assets acquired |
5,076 | - | ||||||
Fair value of goodwill |
11,290 | 3,529 | ||||||
Fair value of current liabilities assumed |
(1,057 | ) | - | |||||
Fair value of contingent liability payable |
(1,725 | ) | - | |||||
Cash paid for acquisition |
15,710 | 3,529 | ||||||
Cash acquired |
(1,224 | ) | - | |||||
Net cash used |
$ | 14,486 | $ | 3,529 | ||||
See notes to condensed consolidated financial statements (unaudited).
3
CERNER CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) Interim Statement Presentation
The condensed consolidated financial statements included herein have been prepared by the Company
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 have been condensed or omitted pursuant to such rules and regulations, although
we believe that the disclosures are adequate to make the information presented not misleading.
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 our opinion, the accompanying unaudited condensed consolidated financial statements include all
adjustments (consisting of only normal recurring accruals) 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 accounting principles generally
accepted in the United States (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.
Certain prior year amounts in the condensed consolidated financial statements have been
reclassified to conform to the current year presentation. These reclassifications had no effect on
the results of operations or stockholders equity as previously reported.
Our third fiscal quarter ends on the Saturday closest to September 30. The 2010 and 2009 third
quarters ended on October 2, 2010 and October 3, 2009, respectively. All references to years in
these notes to condensed consolidated financial statements represent the three or nine months ended
of the third fiscal quarters, respectively, unless otherwise noted.
Recent Accounting Pronouncements
In July 2010, Accounting Standards Update (ASU) 2010-20, Disclosures about the Credit Quality of
Financing Receivables and the Allowance for Credit Losses, was issued and amends ASC 310,
Receivables. ASU 2010-20 requires increased disclosures about the credit quality of financing
receivables and allowances for credit losses, including disclosure about credit quality indicators,
past due information and modifications of financing receivables. Trade accounts receivable with
maturities of one year or less are excluded from the disclosure requirements. The guidance is
generally effective for reporting periods ending after December 15, 2010. We are currently
evaluating the impact the adoption of ASU 2010-20 will have on our consolidated financial
statements.
(2) Acquisitions
On January 4, 2010, we completed the purchase of 100% of the outstanding common shares of IMC
Health Care, Inc. (IMC), a provider of employer sponsored on-site health centers. The acquisition
of IMC expanded our employer health initiatives, such as on-site employer health centers,
occupational health services and wellness programs. Consideration for this transaction was $15.7
million in cash plus additional contingent consideration, which is payable if we achieve certain
revenue milestones during the fiscal year 2010 from the clients acquired from IMC. We valued the
contingent consideration at $1.7 million based on a probability-weighted assessment of potential
contingent consideration payment scenarios ranging up to $2.5 million. Based on the third quarter
2010 assessment, we reduced the contingent consideration liability to $0.9 million and recognized a
gain of $0.8 million within the Condensed Consolidated Statements of Operations as a component of
general and administrative expenses. The allocation of the purchase price to the estimated fair
values of the identified tangible and intangible assets acquired, net of liabilities assumed, is
summarized below:
4
(in thousands) | ||||
Allocation Amount | ||||
Tangible assets and liabilities |
||||
Current assets |
$ | 1,862 | ||
Property and equipment |
264 | |||
Current liabilities |
(1,057 | ) | ||
Total net tangible assets acquired |
1,069 | |||
Intangible assets |
||||
Customer relationships |
4,073 | |||
Non-compete agreements |
1,003 | |||
Total intangible assets acquired |
5,076 | |||
Goodwill |
11,290 | |||
Total purchase price |
$ | 17,435 | ||
The fair values of the acquired intangible assets and the contingent consideration were
estimated by applying the income approach. Such estimations required the use of inputs that were
unobservable in the market place (Level 3), including a discount rate that we estimated would be
used by a market participant in valuing these assets, projections of revenues and cash flows,
probability weighting factors and client attrition rates. See Note 3 for further information about
the fair value level hierarchy.
The goodwill was allocated to our Domestic operating segment and is expected to be deductible for
tax purposes. The other identifiable intangible assets are being amortized over five years. The
operating results of IMC were combined with our operating results subsequent to the purchase date
of January 4, 2010. Pro-forma results of operations have not been presented because the effect of
this acquisition was not material to our results.
(3) Fair Value Measurements
We determine fair value measurements used in our condensed 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 entitys 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. |
5
The following table details our financial assets measured at fair value within the fair value
hierarchy:
(In thousands) | October 2, 2010 | January 2, 2010 | ||||||||||||||||||||||||
Balance Sheet | Fair Value Measurements Using | Fair Value Measurements Using | ||||||||||||||||||||||||
Description | Classification | Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | |||||||||||||||||||
Money market funds |
Cash equivalents | $ | 20,541 | $ | - | $ | - | $ | 80,242 | $ | - | $ | - | |||||||||||||
Time deposits |
Cash equivalents | 200 | - | - | 8,523 | - | ||||||||||||||||||||
Corporate bonds |
Cash equivalents | - | 7,200 | - | - | 8,194 | - | |||||||||||||||||||
Time deposits |
Short-term investments | - | 33,817 | - | - | 37,784 | - | |||||||||||||||||||
Commercial paper |
Short-term investments | - | 58,500 | - | - | 19,987 | - | |||||||||||||||||||
Government and
corporate bonds |
Short-term investments | - | 239,949 | - | - | 164,792 | - | |||||||||||||||||||
Auction rate securities |
Short-term investments | - | - | 18,465 | - | - | 85,203 | |||||||||||||||||||
Put-like feature |
Short-term investments | - | - | 2,785 | - | - | 9,347 | |||||||||||||||||||
Government and
corporate bonds |
Long-term investments | - | 205,323 | - | - | - | - |
Our auction rate securities have been classified as Level 3 assets within the fair value
hierarchy, as their valuation requires substantial judgment and estimation of factors that are not
currently observable in the market due to the lack of trading in the securities. If different
assumptions were used for the various inputs to the valuation, including, but not limited to,
assumptions involving the estimated holding periods for the auction rate securities, the estimated
cash flows over those estimated lives, and the estimated discount rates, including the liquidity
discount rate, applied to those cash flows, the estimated fair value of these investments could be
significantly higher or lower than the fair value we determined.
The table below presents the activity of our assets measured at fair value on a recurring basis
using significant unobservable inputs (Level 3):
Three Months Ended | Nine Months Ended | |||||||||||||||
(In thousands) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Beginning balance |
$ | 30,850 | $ | 99,150 | $ | 94,550 | $ | 105,300 | ||||||||
Redemptions at par |
(9,600 | ) | (3,900 | ) | (73,300 | ) | (10,050 | ) | ||||||||
Unrealized gain on auction rate securities included in earnings |
1,179 | 1,924 | 6,866 | 11,757 | ||||||||||||
Unrealized loss on put-like feature included in earnings |
(1,179 | ) | (1,924 | ) | (6,866 | ) | (11,757 | ) | ||||||||
Ending balance |
$ | 21,250 | $ | 95,250 | $ | 21,250 | $ | 95,250 | ||||||||
We classify our long-term, fixed rate debt as a long-term liability on the balance sheet and
estimate the fair value using a Level 3 discounted cash flow analysis based on our current
borrowing rates for debt with similar maturities. The fair value of our long-term debt, including
current maturities, was approximately $130.6 million at October 2, 2010.
(4) Receivables
Receivables consist of accounts receivable and contracts receivable. Accounts receivable represent
recorded revenues that have been billed. Contracts receivable represent recorded revenues that are
billable by us at future dates under the terms of a contract with a client. Billings and other
consideration received on contracts in excess of related revenues recognized are recorded as
deferred revenue. Substantially all receivables are derived from sales and related support and
maintenance and professional services of our clinical, administrative and financial information
systems and solutions to healthcare providers located throughout the United States and in certain
non-U.S. countries.
We perform ongoing credit evaluations of our clients and generally do not require collateral from
our clients. We provide an allowance for estimated uncollectible accounts based on specific
identification, historical experience and our judgment. Provisions for losses on uncollectible
accounts for the first nine months of 2010 and 2009 totaled $7.5 million and $2.6 million,
respectively. A summary of net receivables is as follows:
6
(In thousands) | October 2, 2010 | January 2, 2010 | ||||||
Gross accounts receivable |
$ | 345,464 | $ | 342,992 | ||||
Less: Allowance for doubtful accounts |
18,858 | 16,895 | ||||||
Accounts receivable, net of allowance |
326,606 | 326,097 | ||||||
Contracts receivable |
136,762 | 135,314 | ||||||
Total receivables, net |
$ | 463,368 | $ | 461,411 | ||||
During the second quarter of 2008, Fujitsu Services Limiteds (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 are in dispute with
Fujitsu regarding Fujitsus 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 resolution
of disputes between Fujitsu and the NHS regarding the contract termination. As of October 2, 2010,
it remains unlikely that the matter will be resolved in the next 12 months. Therefore these
receivables have been classified as long-term and represent the significant majority of other
long-term assets as of the third quarter ended October 2, 2010. 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.
During the first nine months of 2010 and 2009, we received total client cash collections of
$1,402.6 million and $1,304.3 million, respectively, of which $45.8 million and $54.0 million were
received from third party arrangements with non-recourse payment assignments.
(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. We classify interest and penalties associated with
unrecognized tax benefits as income tax expense in our Condensed Consolidated Statements of
Operations.
Our effective tax rate was 35.3% and 33.2% for the first nine months of 2010 and 2009,
respectively. This increase is primarily due to the research and development tax credit not being
extended for the 2010 tax year and a decrease in unrecognized tax benefits in the third quarter of
2009 as a result of the Internal Revenue Service completion of the 2007 income tax return and
refund claim related to the foreign tax credit for the 2004, 2005 and 2006 income tax returns.
During the first quarter of 2010, the Internal Revenue Service commenced its examination of the
2008 income tax return. We do not believe this examination will have a material effect on our
financial position, results of operations or liquidity.
Other than the aforementioned matter, we do not anticipate any settlements of the remaining
unrecognized tax benefits within the next 12 months.
(6) Earnings Per Share
Basic earnings per share (EPS) excludes dilution and is computed by dividing income available to
common shareholders by the weighted-average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur if securities or other contracts to
issue stock were exercised or converted into common stock or resulted in the issuance of common
stock that then shared in our earnings. A reconciliation of the numerators and the denominators of
the basic and diluted per share computations are as follows:
7
Three Months Ended | ||||||||||||||||||||||||
2010 | 2009 | |||||||||||||||||||||||
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
stockholders |
$ | 60,872 | 82,547 | $ | 0.74 | $ | 48,394 | 81,225 | $ | 0.60 | ||||||||||||||
Effect of dilutive securities: |
||||||||||||||||||||||||
Stock options |
- | 2,813 | - | 2,947 | ||||||||||||||||||||
Diluted earnings per share: |
||||||||||||||||||||||||
Income available to common stockholders
including assumed conversions |
$ | 60,872 | 85,360 | $ | 0.71 | $ | 48,394 | 84,172 | $ | 0.57 | ||||||||||||||
Options to purchase 0.7 million and 1.2 million shares of common stock at per share prices
ranging from $58.21 to $86.70 and $42.92 to $136.86 were outstanding for the three months ended
October 2, 2010 and October 3, 2009, respectively, but were not included in the computation of
diluted earnings per share because the options were anti-dilutive. In addition, the computation of
diluted earnings per share does not include 118,000 performance based non-vested stock awards, as
all necessary conditions of such contingently issuable shares have not been satisfied.
Nine Months Ended | ||||||||||||||||||||||||
2010 | 2009 | |||||||||||||||||||||||
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
stockholders |
$ | 166,635 | 82,279 | $ | 2.03 | $ | 132,969 | 80,750 | $ | 1.65 | ||||||||||||||
Effect of dilutive securities: |
||||||||||||||||||||||||
Stock options |
- | 2,994 | - | 2,826 | ||||||||||||||||||||
Diluted earnings per share: |
||||||||||||||||||||||||
Income available to common stockholders
including assumed conversions |
$ | 166,635 | 85,273 | $ | 1.95 | $ | 132,969 | 83,576 | $ | 1.59 | ||||||||||||||
Options to purchase 0.5 million and 2.1 million shares of common stock at per share prices
ranging from $58.21 to $86.70 and $36.72 to $136.86 were outstanding for the nine months ended
October 2, 2010 and October 3, 2009, respectively, but were not included in the computation of
diluted earnings per share because the options were anti-dilutive. In addition, the computation of
diluted earnings per share does not include 118,000 performance based non-vested stock awards, as
all necessary conditions of such contingently issuable shares have not been satisfied.
(7) Share-Based Compensation
On March 12, 2010 approximately 115,000 stock options were granted to executive officers and other
executive level associates under our Long-Term Incentive Plan F. These awards will vest 40% on
March 12, 2012, and 20% will vest on March 12, 2013, 2014 and 2015. The fair value of each of these
awards was $44.89 per award. Total compensation expense related to these awards is $5.1 million,
which is expected to be recognized over a period of 5 years.
On June 1, 2010 we granted approximately 118,000 shares of performance-based non-vested stock to
certain executive officers, pursuant to our Long-Term Incentive Plan F. The fair value of each of
these awards was $81.90 based on the closing price of our common stock on the date of grant. These
awards will vest according to the following schedule, contingent upon a relative adjusted GAAP
earnings growth percentage over 2009 for each respective year and subjective performance criteria
for certain shares, as defined in the award agreements:
Vesting Dates | Number of Shares | |||
June 1, 2011 |
14,000 | |||
June 1, 2012 |
15,500 | |||
June 1, 2013 |
88,500 | |||
Total Shares |
118,000 | |||
8
Approximately 21% of the total shares related to this award were forfeited due to the
resignation of an executive officer in the third quarter of 2010. The amount of compensation
expense recognized is based on managements estimate of the most likely outcome and will be
reassessed at each reporting date through the final vesting date, which may result in adjustments
to compensation cost. Based on a current period vesting probability assessment, total compensation
cost related to these awards is $7.6 million, net of forfeitures, and is expected to be recognized
over a period of 3 years.
The following table presents the total compensation expense recognized in the condensed
consolidated statements of operations with respect to stock options, non-vested shares and
Associate Stock Purchase Plan shares:
Three Months Ended | Nine Months Ended | |||||||||||||||
(In thousands) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Stock option and non-vested share compensation expense |
$ | 6,244 | $ | 4,523 | $ | 17,050 | $ | 11,485 | ||||||||
Associate stock purchase plan expense |
424 | 248 | 1,229 | 913 | ||||||||||||
Amounts capitalized in software development costs, net of amortization |
(118 | ) | (66 | ) | (376 | ) | (187 | ) | ||||||||
Amounts charged against earnings, before income tax benefit |
$ | 6,550 | $ | 4,705 | $ | 17,903 | $ | 12,211 | ||||||||
Amount of related income tax benefit recognized in earnings |
$ | 2,440 | $ | 1,753 | $ | 6,669 | $ | 4,549 | ||||||||
As of October 2, 2010, there was $55.0 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 3.15 years.
(8) Comprehensive Income
Total comprehensive income, which includes net earnings, foreign currency translation adjustments
and gains and losses from a hedge of our net investment in the United Kingdom (U.K.), amounted to
$80.7 million and $52.8 million for the three months ended October 2, 2010 and October 3, 2009,
respectively, and $167.8 million and $142.0 million for the nine months ended October 2, 2010 and
October 3, 2009, respectively. None of the items within comprehensive income, including net
earnings, relate to non-controlling interests.
As of October 2, 2010, we designated all of our Great Britain Pound (GBP) denominated long-term
debt as a net investment hedge of our U.K. operations. The objective of the hedge is to reduce our
foreign currency exposure in the U.K. subsidiary investment. Changes in the exchange rate between
the United States Dollar (USD) and GBP, related to the notional amount of the hedge, are recognized
as a component of accumulated other comprehensive income (loss), to the extent the hedge is
effective.
The following tables represent the fair value of the net investment hedge included within the
Condensed Consolidated Balance Sheets and the related unrealized gain or loss, net of related
income tax effects:
(In thousands) | ||||||||||
Balance Sheet | Fair Value | |||||||||
Derivatives designated | Classification | October 2, 2010 | January 2, 2010 | |||||||
Net investment hedge |
Short-term (S/T) liabilities | $ | 14,689 | $ | 15,015 | |||||
Net investment hedge |
Long-term (L/T) liabilities | 73,445 | 75,075 | |||||||
Total net investment hedge |
$ | 88,134 | $ | 90,090 | ||||||
(In thousands) | ||||||||||||||||
Net Unrealized Gain (Loss) | Net Unrealized Gain (Loss) | |||||||||||||||
Derivatives designated | For the Three Months Ended | For the Nine Months Ended | ||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net investment hedge - S/T |
$ | (361 | ) | $ | 226 | $ | 204 | $ | (815 | ) | ||||||
Net investment hedge - L/T |
(1,803 | ) | 1,356 | 1,023 | (4,887 | ) | ||||||||||
Total net investment hedge |
$ | (2,164 | ) | $ | 1,582 | $ | 1,227 | $ | (5,702 | ) | ||||||
We recognize foreign currency transaction gains and losses within the Condensed Consolidated
Statements of Operations as a component of general and administrative expenses. We realized a
foreign currency loss of $0.9 million and a gain of $0.03 million during the three months ended
October 2, 2010 and October 3, 2009, respectively, and a loss of $0.3 million and a gain of $4.0
million during the nine months ended October 2, 2010 and October 3, 2009, respectively.
9
(9) Contingencies
The terms of our software license agreements with our clients generally provide for a limited
indemnification of such intellectual property 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 losses related to these
indemnification provisions pertaining to third party intellectual property infringement claims.
For several reasons, including the lack 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.
From time to time we are involved in routine litigation incidental to the conduct of our business,
including for example, employment disputes and litigation alleging solution defects, intellectual
property infringement, violations of law and breaches of contract and warranties. We believe that
no such routine litigation currently pending against us, if adversely determined, would have a
material adverse effect on our consolidated financial position, results of operations or cash
flows.
(10) 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 and sublicensed software
purchased from computer and software 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, communications expenses and
unreimbursed travel expenses. Performance of the segments is assessed at the operating earnings
level and, therefore, the segment operations have been presented as such. Other includes
expenses such as software development, marketing, general and administrative, share-based
compensation expense and depreciation that have not been allocated to the operating segments. It
is impractical for us to track assets by geographical business segment.
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 the operating information for the
three and nine months ended October 2, 2010 and October 3, 2009.
Operating Segments | ||||||||||||||||
(In thousands) | Domestic | Global | Other | Total | ||||||||||||
Three months ended 2010 |
||||||||||||||||
Revenues |
$ | 394,052 | $ | 68,631 | $ | | $ | 462,683 | ||||||||
Cost of revenues |
64,150 | 14,998 | | 79,148 | ||||||||||||
Operating expenses |
102,605 | 29,482 | 157,456 | 289,543 | ||||||||||||
Total costs and expenses |
166,755 | 44,480 | 157,456 | 368,691 | ||||||||||||
Operating earnings (loss) |
$ | 227,297 | $ | 24,151 | $ | (157,456 | ) | $ | 93,992 | |||||||
Operating Segments | ||||||||||||||||
(In thousands) | Domestic | Global | Other | Total | ||||||||||||
Three months ended 2009 |
||||||||||||||||
Revenues |
$ | 338,508 | $ | 70,907 | $ | | $ | 409,415 | ||||||||
Cost of revenues |
57,759 | 11,720 | | 69,479 | ||||||||||||
Operating expenses |
90,093 | 32,658 | 146,475 | 269,226 | ||||||||||||
Total costs and expenses |
147,852 | 44,378 | 146,475 | 338,705 | ||||||||||||
Operating earnings (loss) |
$ | 190,656 | $ | 26,529 | $ | (146,475 | ) | $ | 70,710 | |||||||
10
Operating Segments | |||||||||||||||||
(In thousands) | Domestic | Global | Other | Total | |||||||||||||
Nine months ended 2010 |
|||||||||||||||||
Revenues |
$ | 1,130,384 | $ | 219,637 | $ | | $ | 1,350,021 | |||||||||
Cost of revenues |
189,540 | 35,903 | | 225,443 | |||||||||||||
Operating expenses |
311,663 | 93,577 | 463,338 | 868,578 | |||||||||||||
Total costs and expenses |
501,203 | 129,480 | 463,338 | 1,094,021 | |||||||||||||
Operating earnings (loss) |
$ | 629,181 | $ | 90,157 | $ | (463,338 | ) | $ | 256,000 | ||||||||
Operating Segments | |||||||||||||||||
(In thousands) | Domestic | Global | Other | Total | |||||||||||||
Nine months ended 2009 |
|||||||||||||||||
Revenues |
$ | 997,441 | $ | 208,102 | $ | | $ | 1,205,543 | |||||||||
Cost of revenues |
169,567 | 32,333 | | 201,899 | |||||||||||||
Operating expenses |
272,552 | 97,179 | 435,067 | 804,798 | |||||||||||||
Total costs and expenses |
442,119 | 129,512 | 435,067 | 1,006,697 | |||||||||||||
Operating earnings (loss) |
$ | 555,322 | $ | 78,590 | $ | (435,067 | ) | $ | 198,846 | ||||||||
11
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
The following Management Discussion and Analysis (MD&A) is intended to help the reader understand
the results of operations and financial condition of Cerner Corporation (Cerner, the Company, we,
us or our). This MD&A is provided as a supplement to, and should be read in conjunction with, our
condensed consolidated financial statements and the accompanying notes to the financial statements
(Notes) found above.
Our third fiscal quarter ends on the Saturday closest to September 30. The 2010 and 2009 third
quarters ended on October 2, 2010 and October 3, 2009, respectively. All references to years in the
MD&A represent the respective three or nine months ended of the third fiscal quarters, unless
otherwise noted.
Except for the historical information and discussions contained herein, statements contained in
this Form 10-Q may constitute forward looking statements within the meaning of Section 21E of the
Securities and Exchange Act of 1934, as amended (the Act). Forward-looking statements can often be
identified by the use of forward-looking terminology, such as could, should, will,
intended, continue, believe, may, expect, hope, anticipate, goal, forecast,
plan, guidance or estimate or the negative of these words, variations thereof or similar
expressions. These statements involve a number of risks, uncertainties and other factors that
could cause actual results to differ materially, including: the possibility of product-related
liabilities; potential claims for system errors and warranties; the possibility of interruption at
our data centers or client support facilities; our proprietary technology may be subject to claims
for infringement or misappropriation of intellectual property rights of others, or may be infringed
or misappropriated by others; risks associated with our non-U.S. operations; risks associated with
our ability to effectively hedge exposure to fluctuations in foreign currency exchange rates; the
potential for tax legislation initiatives that could adversely affect our tax position and/or
challenges to our tax positions in the United States and non-U.S. countries; risks associated with
our recruitment and retention of key personnel; risks related to our reliance on third party
suppliers; risks inherent with business acquisitions; changing political, economic and regulatory
influences; government regulation; significant competition and market changes; risks associated
with the ongoing adverse financial market environment and uncertainty in global economic
conditions; variations in our quarterly operating results; potential inconsistencies in our sales
forecasts compared to actual sales; volatility in the trading price of our common stock; the
authority of our Board of Directors to issue preferred stock and anti-takeover provisions contained
in our corporate governance documents; and, other risks, uncertainties and factors discussed
elsewhere in this Form 10-Q, in our other filings with the Securities and Exchange Commission or in
materials incorporated therein by reference. Forward looking statements are not guarantees of
future performance or results. We undertake no obligation to update or revise forward-looking
statements to reflect changed assumptions, the occurrence of unanticipated events or changes in
future operating results, financial condition or business over time.
Management Overview
Our revenues are primarily derived by selling, implementing and supporting software solutions,
clinical content, hardware, healthcare devices and services that give healthcare providers secure
access to clinical, administrative and financial data in real time, allowing them to improve the
quality, safety and efficiency in the delivery of healthcare. We implement the healthcare solutions
as stand-alone, combined or enterprise-wide systems. Cerner Millennium® software solutions can be
managed by our clients or in our data centers via a managed services model.
Our fundamental strategy centers on creating organic growth by investing in research and
development (R&D) to create solutions and services for the healthcare industry. This strategy has
driven strong growth over the long-term, as reflected in five- and ten-year compound annual revenue
growth rates of 13% or more. This growth has also created a very strategic footprint in
healthcare, with Cerner® solutions licensed by over 8,500 facilities, including approximately 2,300
hospitals; 3,400 physician practices with over 30,000 physicians; 600 ambulatory facilities, such
as laboratories, ambulatory centers, cardiac facilities, radiology clinics and surgery centers; 700
home health facilities; and 1,500 retail pharmacies. Selling additional solutions back into this
client base is an important element of our future revenue growth. We are also focused on driving
growth through market share expansion by replacing competitors in healthcare settings that are
looking to replace their current healthcare information technology (HIT) partners or those who have
not yet strategically aligned with a supplier.
12
We expect to drive growth through new initiatives and services that reflect our ongoing ability to
innovate and expand our reach into healthcare. Examples of these include our CareAware® healthcare
device architecture and devices, Cerner Healthe employer services, Cerner ITWorksSM
services, Cerner RevWorksSM services, physician practice solutions and solutions and
services for the pharmaceutical market. Finally, we are focused on selling our solutions and
services outside of the United States. Many non-U.S. markets have a low penetration of HIT
solutions and their governing bodies are in many cases focused on HIT as part of their strategy to
improve the quality and lower the cost of healthcare.
Beyond our strategy for driving revenue growth, we are also focused on earnings growth. Similar to
our history of growing revenue, our net earnings have increased at more than 20% compound annual
rates over five- and ten-year periods. We believe we can continue driving strong levels of
earnings growth while also leveraging key areas to create operating margin expansion. The primary
areas of opportunity for margin expansion include:
| becoming more efficient at implementing our software by leveraging implementation tools
and methodologies we have developed that can reduce the amount of effort required to
implement our software; |
||
| leveraging our investments in R&D by addressing new markets that do not require
significant incremental R&D but can contribute significantly to revenue growth; and |
||
| leveraging our scalable business infrastructure to reduce the rate of increase in
general and administrative spending to below our revenue growth rate. |
We are also focused on increasing cash flow by growing earnings, reducing the use of working
capital and controlling capital expenditures.
Healthcare Information Technology Market
Overall, while the weak global economy has impacted and could continue to impact our business, we
believe there are several factors that are favorable for the HIT industry. Because HIT solutions
play an important role in healthcare by improving safety, efficiency and reducing cost, they are
often viewed as more strategic than other potential purchases. Most United States healthcare
providers also recognize that they must invest in HIT to meet regulatory, compliance and government
reimbursement requirements. In addition, with the Centers for Medicare and Medicaid Services
estimating United States healthcare spending at $2.5 trillion or 17.3 percent of 2009 Gross
Domestic Product, politicians and policymakers agree that the growing cost of our healthcare system
is unsustainable. Leaders of both parties say the intelligent use of information systems will
improve health outcomes and, correspondingly, drive down costs. They cite a 2005 study by RAND
Corp., which estimated that the widespread adoption of HIT in the United States could cut
healthcare costs by $162 billion annually.
In 2009, the broad recognition that HIT is essential to helping control healthcare costs
contributed to the inclusion of HIT incentives in the American Recovery and Reinvestment Act
(ARRA). The Health Information Technology for Economic and Clinical Health (HITECH) provisions
within ARRA include more than $35 billion to incent healthcare organizations to modernize
operations through meaningful use of HIT. We believe these incentives will create a period of
increased demand for HIT solutions and services in the United States and that Cerner is well
positioned to benefit due to our large footprint in United States hospitals and physician practices
and our proven ability to deliver value.
Another dynamic in the United States marketplace is the recently passed healthcare reform
legislation. We believe the legislation, which promises to drive insurance coverage to an
estimated 32 million additional consumers, will have many second order effects on our clients. For
example, healthcare providers may face increased volumes that could create capacity constraints,
and they may find it challenging to profitably provide care at the rates reimbursed under the
expanded coverage models. There will also be additional compliance and reporting challenges for
our clients in the area of pay-for-quality and waste, fraud, and abuse measures. We believe these
challenges are strong incentives for providers to maximize efficiency and create the need for our
clients to further leverage HIT investments, all of which represent a long-term positive for HIT.
Outside of the United States, the economy has impacted and could continue to impact our results in
almost all regions. However, we believe long-term revenue growth opportunities outside the United
States remain significant because other countries are also grappling with increased healthcare
spending, safety concerns and inefficient care, and many of these countries recognize HIT as an
important part of the solution to these issues.
13
In summary, while the current economic environment has impacted our business, the fundamental value
proposition of HIT remains strong. The HIT industry will likely benefit as healthcare providers and
governments continue to recognize that these solutions and services contribute to safer, more
efficient healthcare.
Results Overview
The Company delivered strong levels of bookings, revenues, earnings and cash flows in the third
quarter of 2010. New business bookings revenue, which reflects the value of executed contracts for
software, hardware and professional services and managed services, was $495.7 million in the third
quarter of 2010, which was an increase of 17% compared to $424.3 million in the third quarter of
2009. Revenues for the third quarter of 2010 increased 13% to $462.7 million compared to $409.4
million in the year-ago quarter. The year-over-year increase in revenue in the third quarter
reflects improved economic conditions and demand driven by the stimulus incentives.
Third quarter 2010 net earnings were $60.9 million and diluted earnings per share were $0.71.
Third quarter 2009 net earnings were $48.4 million and diluted earnings per share were $0.57. Third
quarter 2010 and 2009 net earnings and diluted earnings per share reflect the impact of
shared-based compensation expense. Share-based compensation expense reduced third quarter 2010 net
earnings and diluted earnings per share by $4.1 million and $0.05, respectively, and third quarter
2009 earnings and diluted earnings per share by $3.0 million and $0.04, respectively.
The growth in net earnings and diluted earnings per share was driven primarily by strong revenue
growth and continued progress with our margin expansion initiatives, particularly leveraging R&D
investments and controlling general and administrative expenses. Our third quarter 2010 operating
margin was 20.3%, which is 300 basis points higher than the year-ago quarter and reflects the
achievement of our long-term goal of achieving 20% operating margins.
We had strong cash collections of receivables of $471.8 million in the third quarter of 2010
compared to $410.6 million in the third quarter of 2009. Days sales outstanding was 91 days in the
third quarter of 2010 compared to 88 days in the second quarter of 2010 and 105 days in the third
quarter of 2009. The majority of the year-over-year decline is driven by the reclassification of
our Fujitsu receivable to other long term assets during the fourth quarter of 2009, which is not
included in our days sales outstanding calculation. Operating cash flows for the third quarter of
2010 were strong at $119.0 million compared to $73.4 million in the third quarter of 2009.
14
Results of Operations
Three Months Ended October 2, 2010 Compared to Three Months Ended October 3, 2009
The following table presents a summary of the operating information for the third quarters of 2010
and 2009:
% of | % of | |||||||||||||||||||
(in thousands) | 2010 | Revenue | 2009 | Revenue | % Change | |||||||||||||||
Revenues |
||||||||||||||||||||
System sales |
$ | 133,439 | 29 % | $ | 118,325 | 29 % | 13 % | |||||||||||||
Support and maintenance |
130,199 | 28 % | 122,067 | 30 % | 7 % | |||||||||||||||
Services |
191,090 | 41 % | 162,122 | 40 % | 18 % | |||||||||||||||
Reimbursed travel |
7,955 | 2 % | 6,901 | 2 % | 15 % | |||||||||||||||
Total revenues |
462,683 | 100 % | 409,415 | 100 % | 13 % | |||||||||||||||
Costs of revenue |
||||||||||||||||||||
Costs of revenue |
79,148 | 17 % | 69,479 | 17 % | 14 % | |||||||||||||||
Total margin |
383,535 | 83 % | 339,936 | 83 % | 13 % | |||||||||||||||
Operating expenses |
||||||||||||||||||||
Sales and client service |
189,320 | 41 % | 171,415 | 42 % | 10 % | |||||||||||||||
Software development |
67,257 | 15 % | 66,752 | 16 % | 1 % | |||||||||||||||
General and administrative |
32,966 | 7 % | 31,059 | 8 % | 6 % | |||||||||||||||
Total operating expenses |
289,543 | 63 % | 269,226 | 66 % | 8 % | |||||||||||||||
Total costs and expenses |
368,691 | 80 % | 338,705 | 83 % | 9 % | |||||||||||||||
Operating earnings |
93,992 | 20.3 % | 70,710 | 17.3 % | 33 % | |||||||||||||||
Interest income (expense), net |
87 | 180 | ||||||||||||||||||
Other income (expense), net |
5 | (3 | ) | |||||||||||||||||
Income taxes |
(33,212 | ) | (22,493 | ) | ||||||||||||||||
Net earnings |
$ | 60,872 | $ | 48,394 | 26 % | |||||||||||||||
Revenues & Backlog
Revenues increased 13% to $462.7 million for the third quarter 2010 from $409.4 million for the
same period in 2009.
| System sales, which include revenues from the sale of software, technology resale
(hardware and sublicensed software), deployment period licensed software upgrade rights,
installation fees, transaction processing and subscriptions, increased 13% to $133.4
million for the third quarter of 2010 from $118.3 million for the same period in 2009. The
increase in system sales was driven by a strong increase in licensed software and
technology resale. |
||
| Support and maintenance revenues increased 7% to $130.2 million during the third quarter
of 2010 from $122.1 million during the same period in 2009. The increase is attributable
to growth in Cerner Millennium applications for which support billing has been initiated. |
||
| Services revenue, which includes professional services excluding installation, and
managed services, increased 18% to $191.1 million from $162.1 million for the same period
in 2009. This increase is driven by growth in CernerWorksSM managed services as
a result of continued demand for our hosting services and an increase in professional
services due to increased implementation activities. |
Contract backlog, which reflects new business bookings that have not yet been recognized as
revenue, increased 24% in the third quarter of 2010 compared to the same period in 2009. This
increase was driven by growth in new business bookings during the past four quarters, including
continued strong levels of managed services bookings that typically have longer contract terms. A
summary of our total backlog follows:
15
(In thousands) | October 2, 2010 | October 3, 2009 | ||||||
Contract backlog |
$ | 4,018,475 | $ | 3,246,797 | ||||
Support and maintenance backlog |
642,436 | 604,389 | ||||||
Total backlog |
$ | 4,660,911 | $ | 3,851,186 | ||||
Costs of Revenue
Cost of revenues remained flat at 17% of total revenues in the third quarter of 2010 and 2009. The
cost of revenues includes the cost of reimbursed travel expense, third party consulting services
and subscription content, computer hardware and sublicensed software purchased from hardware and
software manufacturers for delivery to clients. It also includes the cost of hardware maintenance
and sublicensed software support subcontracted to the manufacturers. Such costs, as a percent of
revenues, typically have varied as the mix of revenue (software, hardware, maintenance, support,
services and reimbursed travel) carrying different margin rates changes from period to period.
Costs of revenues does not include the costs of our client service personnel who are responsible
for delivering our service offerings, such costs are included in sales and client service expense.
Operating Expenses
Total operating expenses increased 8% to $289.5 million in the third quarter of 2010, compared with
$269.2 million for the same period in 2009. Share-based compensation expense recognized impacted
expenses as indicated below:
Three Months Ended | ||||||||
(In thousands) | 2010 | 2009 | ||||||
Sales and client service expenses |
$ | 2,944 | $ | 2,315 | ||||
Software development expense |
1,861 | 1,132 | ||||||
General and administrative expenses |
1,745 | 1,258 | ||||||
Total stock-based compensation expense |
$ | 6,550 | $ | 4,705 | ||||
| Sales and client service expenses as a percent of total revenues were 41% in the
third quarter of 2010 as compared to 42% in the same period of 2009. These expenses
increased 10% to $189.3 million in the third quarter of 2010, from $171.4 million in the
same period of 2009. Sales and client service expenses include salaries of sales and client
service personnel, depreciation and other expenses associated with our CernerWorks managed
service business, communications expenses, unreimbursed travel expenses, expense for
share-based payments, sales and marketing salaries and trade show and advertising costs.
The increase was primarily attributable to growth in the managed services business and an
increase in bad debt expense. |
||
| Software development expense increased 1% to $67.3 million for the third quarter of 2010
compared to $66.8 million for the same period in 2009. The small amount of the increase
reflects our ongoing efforts to control spending growth relative to revenue growth. A
summary of our total software development expense is as follows: |
Three Months Ended | ||||||||
(In thousands) | 2010 | 2009 | ||||||
Software development costs |
$ | 70,037 | $ | 69,940 | ||||
Capitalized software costs |
(20,199 | ) | (19,878 | ) | ||||
Capitalized costs related to share-based payments |
(337 | ) | (232 | ) | ||||
Amortization of capitalized software costs |
17,756 | 16,922 | ||||||
Total software development expense |
$ | 67,257 | $ | 66,752 | ||||
16
| General and administrative expenses as a percent of total revenues were 7%, in the
third quarter of 2010, as compared to 8% for the same period in 2009. These expenses
increased 6% to $33.0 million in the third quarter of 2010, from $31.1 million for the same
period in 2009. General and administrative expenses include salaries for corporate,
financial and administrative staffs, utilities, communications expenses, professional fees,
transaction gains or losses on foreign currency and expense for share based payments. We
recorded a net transaction loss on foreign currency of $0.9 million and a net transaction
gain on foreign currency of $0.03 million in the third quarters of 2010 and 2009,
respectively, which, along with a slight increase in other corporate expenses, accounted
for the majority of the overall increase in general and administrative expenses. |
Non-Operating Items
| Net interest income was $0.09 million in the third quarter of 2010 compared to net
interest income of $0.2 million in the third quarter of 2009. Interest income decreased to
$1.8 million in the third quarter of 2010 from $2.4 million for the same period in 2009.
Interest expense decreased to $1.7 million in the third quarter of 2010 from $2.2 million
for the same period in 2009, due primarily to long-term debt payments made in the fourth
quarter of 2009. |
||
| Other income was $0.01 million in the third quarter of 2010, compared to other expense
of $0.03 million for the same period in 2009. Other income and expense in the third
quarters 2010 and 2009 includes offsetting unrealized gains and losses included in earnings
related to our auction rate securities and put-like settlement feature in the amounts of
$1.2 million and $1.9 million, respectively. Refer to Liquidity and Capital Resources
within this MD&A and Note 3 of the notes to condensed consolidated financial statements for
additional information on our auction rate securities. |
||
| Our effective tax rate was 35% for the third quarter of 2010 and 32% for the third
quarter of 2009. This increase is primarily due to the research and development tax credit
not being extended for the 2010 tax year and a decrease in unrecognized tax benefits in the
third quarter of 2009 as a result of the Internal Revenue Service completion of the 2007
income tax return and refund claim related to the foreign tax credit for the 2004, 2005 and
2006 income tax returns. |
Operations by Segment
We have two operating segments, Domestic and Global. The Domestic segment includes revenue
contributions and expenditures associated with business activity in the United States. The Global
segment includes revenue contributions and expenditures linked to business activity in Aruba,
Australia, Austria, Belgium, Canada, Cayman Islands, Chile, China (Hong Kong), Egypt, England,
France, Germany, India, Ireland, Malaysia, Puerto Rico, Saudi Arabia, Singapore, Spain, Sweden,
Switzerland and the United Arab Emirates.
The following table presents a summary of the operating information for the third quarters of 2010
and 2009:
17
(in thousands) | 2010 | % of Revenue | 2009 | % of Revenue | % Change | |||||||||||||||
Domestic Segment |
||||||||||||||||||||
Revenues |
$ | 394,052 | 100% | $ | 338,508 | 100% | 16% | |||||||||||||
Costs of revenue |
64,150 | 16% | 57,759 | 17% | 11% | |||||||||||||||
Operating expenses |
102,605 | 26% | 90,093 | 27% | 14% | |||||||||||||||
Total costs and expenses |
166,755 | 42% | 147,852 | 44% | 13% | |||||||||||||||
Domestic operating earnings |
227,297 | 58% | 190,656 | 56% | 19% | |||||||||||||||
Global Segment |
||||||||||||||||||||
Revenues |
68,631 | 100% | 70,907 | 100% | -3% | |||||||||||||||
Costs of revenue |
14,998 | 22% | 11,720 | 17% | 28% | |||||||||||||||
Operating expenses |
29,482 | 43% | 32,658 | 46% | -10% | |||||||||||||||
Total costs and expenses |
44,480 | 65% | 44,378 | 63% | 0% | |||||||||||||||
Global operating earnings |
24,151 | 35% | 26,529 | 37% | -9% | |||||||||||||||
Other, net |
(157,456 | ) | (146,475 | ) | 7% | |||||||||||||||
Consolidated operating earnings |
$ | 93,992 | $ | 70,710 | 33% | |||||||||||||||
18
Domestic Segment
| Revenues increased 16% to $394.1 million in the third quarter of 2010 from $338.5
million in the same period in 2009. This increase was driven primarily by growth in
licensed software, managed services and professional services. |
||
| Cost of revenues was 16% of revenues in the third quarter of 2010, compared to 17% of
revenues in the same period in 2009. The decrease reflects the typically higher margins of
licensed software, managed services and professional services. |
||
| Operating expenses increased 14% to $102.6 million in the third quarter of 2010, from
$90.1 million in the same period in 2009, due primarily to growth in managed services and
professional services expense. |
Global Segment
| Revenues decreased 3% to $68.6 million in the third quarter of 2010 from $70.9 million
in the same period in 2009. This decrease was driven by decline in licensed software and
professional services revenue, largely from our operations in France, partially offset by
an increase in technology resale and support revenue. |
||
| Cost of revenues was 22% of revenues in the third quarter of 2010, compared with 17% in
the same period of 2009. The higher cost of revenues in the third quarter of 2010 was
driven by the increase in technology resale, which carries a higher cost of revenue. |
||
| Operating expenses decreased 10% to $29.5 million for the third quarter of 2010, from
$32.7 million in the same period in 2009, primarily due to a decrease in personnel-related
professional services expense, partially offset by an increase in bad debt expense. |
Other, net
Operating results not attributed to an operating segment include expenses, such as software
development, marketing, general and administrative, stock-based compensation and depreciation.
These expenses increased 7% to $157.5 million in the third quarter of 2010 from $146.5 million in
the same period in 2009. This increase was primarily due to growth in corporate personnel costs,
somewhat offset by the previously discussed impact of foreign currency transaction gains and
losses.
19
Nine Months Ended October 2, 2010 Compared to Nine Months Ended October 3, 2009
The following table presents a summary of the operating information for the first nine months of
2010 and 2009:
% of | % of | |||||||||||||||||||
(in thousands) | 2010 | Revenue | 2009 | Revenue | % Change | |||||||||||||||
Revenues |
||||||||||||||||||||
System sales |
$ | 386,292 | 29 | % | $ | 332,816 | 28 | % | 16 | % | ||||||||||
Support and maintenance |
385,304 | 29 | % | 370,210 | 31 | % | 4 | % | ||||||||||||
Services |
554,605 | 41 | % | 479,251 | 40 | % | 16 | % | ||||||||||||
Reimbursed travel |
23,820 | 2 | % | 23,266 | 2 | % | 2 | % | ||||||||||||
Total revenues |
1,350,021 | 100 | % | 1,205,543 | 100 | % | 12 | % | ||||||||||||
Costs of revenue |
||||||||||||||||||||
Costs of revenue |
225,443 | 17 | % | 201,899 | 17 | % | 12 | % | ||||||||||||
Total margin |
1,124,578 | 83 | % | 1,003,644 | 83 | % | 12 | % | ||||||||||||
Operating expenses |
||||||||||||||||||||
Sales and client service |
566,943 | 42 | % | 516,401 | 43 | % | 10 | % | ||||||||||||
Software development |
202,024 | 15 | % | 196,578 | 16 | % | 3 | % | ||||||||||||
General and administrative |
99,611 | 7 | % | 91,819 | 8 | % | 8 | % | ||||||||||||
Total operating expenses |
868,578 | 64 | % | 804,798 | 67 | % | 8 | % | ||||||||||||
Total costs and expenses |
1,094,021 | 81 | % | 1,006,697 | 84 | % | 9 | % | ||||||||||||
Operating earnings |
256,000 | 19.0 | % | 198,846 | 16.5 | % | 29 | % | ||||||||||||
Interest income (expense), net |
2,291 | (287 | ) | |||||||||||||||||
Other income (expense), net |
(566 | ) | 414 | |||||||||||||||||
Income taxes |
(91,090 | ) | (66,004 | ) | ||||||||||||||||
Net earnings |
$ | 166,635 | $ | 132,969 | 25 | % | ||||||||||||||
Revenues & Backlog
Revenues increased 12% to $1,350.0 million for the first nine months of 2010 from $1,205.5 million
for the same period in 2009.
| System sales, which include revenues from the sale of software, technology resale
(hardware and sublicensed software), deployment period licensed software upgrade rights,
installation fees, transaction processing and subscriptions, increased 16% to $386.3
million for the first nine months of 2010 from $332.8 million for the same period in 2009.
The increase in system sales was driven by a strong increase in licensed software and
technology resale. |
||
| Support and maintenance revenues increased 4% to $385.3 million during the first nine
months of 2010 from $370.2 million during the same period in 2009. The increase is
attributable to growth in Cerner Millennium applications for which support billing has been
initiated. |
||
| Services revenue, which includes professional services excluding installation, and
managed services, increased 16% to $554.6 million from $479.3 million for the same period
in 2009. This increase is driven by growth in CernerWorks managed services as a result of
continued demand for our hosting services and an increase in professional services due to
increased implementation activities. |
Contract backlog, which reflects new business bookings that have not yet been recognized as
revenue, increased 24% in the first nine months of 2010 compared to the same period in 2009. This
increase was driven by growth in new business bookings during the past four quarters, including
continued strong levels of managed services bookings that typically have longer contract terms. A
summary of our total backlog follows:
(In thousands) | October 2, 2010 | October 3, 2009 | ||||||
Contract backlog |
$ | 4,018,475 | $ | 3,246,797 | ||||
Support and maintenance backlog |
642,436 | 604,389 | ||||||
Total backlog |
$ | 4,660,911 | $ | 3,851,186 | ||||
20
Costs of Revenue
Cost of revenues remained flat at 17% of total revenues in the first nine months of 2010 and 2009.
The cost of revenues includes the cost of reimbursed travel expense, third party consulting
services and subscription content, computer hardware and sublicensed software purchased from
hardware and software manufacturers for delivery to clients. It also includes the cost of hardware
maintenance and sublicensed software support subcontracted to the manufacturers. Such costs, as a
percent of revenues, typically have varied as the mix of revenue (software, hardware, maintenance,
support, services and reimbursed travel) carrying different margin rates changes from period to
period. Costs of revenues does not include the costs of our client service personnel who are
responsible for delivering our service offerings, such costs are included in sales and client
service expense.
Operating Expenses
Total operating expenses increased 8% to $868.6 million in the first nine months of 2010, compared
with $804.8 million for the same period in 2009. Share-based compensation expense recognized
impacted expenses as indicated below:
Nine Months Ended | ||||||||
(In thousands) | 2010 | 2009 | ||||||
Sales and client service expenses |
$ | 7,723 | $ | 5,401 | ||||
Software development expense |
4,903 | 3,134 | ||||||
General and administrative expenses |
5,277 | 3,676 | ||||||
Total stock-based compensation expense |
$ | 17,903 | $ | 12,211 | ||||
| Sales and client service expenses as a percent of total revenues were 42% in the
first nine months of 2010 as compared to 43% in the same period of 2009. These expenses
increased 10% to $566.9 million in the first nine months of 2010, from $516.4 million in
the same period of 2009. Sales and client service expenses include salaries of sales and
client service personnel, depreciation and other expenses associated with our CernerWorks
managed service business, communications expenses, unreimbursed travel expenses, expense
for share-based payments, sales and marketing salaries and trade show and advertising
costs. The increase was primarily attributable to growth in the managed services business,
a higher level of professional services expenses and an increase in bad debt expense. |
||
| Software development expense increased 3% to $202.0 million for the first nine months of
2010 compared to $196.6 million for the same period in 2009. The increase in software
development costs is related to increased development activity on Cerner Millennium and
related solutions. The small amount of increase reflects our ongoing efforts to
control spending growth relative to revenue growth. A summary of our total software
development expense is as follows: |
Nine Months Ended | ||||||||
(In thousands) | 2010 | 2009 | ||||||
Software development costs |
$ | 213,793 | $ | 209,476 | ||||
Capitalized software costs |
(60,802 | ) | (58,081 | ) | ||||
Capitalized costs related to share-based payments |
(982 | ) | (618 | ) | ||||
Amortization of capitalized software costs |
50,015 | 45,801 | ||||||
Total software development expense |
$ | 202,024 | $ | 196,578 | ||||
| General and administrative expenses as a percent of total revenues were 7%, in the
third quarter of 2010, as compared to 8% for the same period in 2009. These expenses
increased 8% to $99.6 million in the first nine months of 2010, from $91.8 million for the
same period in 2009. General and administrative expenses include salaries for corporate,
financial and administrative staffs, utilities, communications expenses, professional fees,
transaction gains or losses on foreign currency and expense for share based payments. We
recorded a net transaction loss on foreign currency of $0.3 million and a gain of $4.0
million in the first nine months of 2010 and 2009, respectively, which along with an
increase in corporate personnel costs, accounted for the majority of the overall increase
in general and administrative expenses. |
21
Non-Operating Items
| Net interest income was $2.3 million in the first nine months of 2010 compared to net
interest expense of $0.3 million in the first nine months of 2009. Interest income
increased to $7.6 million in the first nine months of 2010 from $6.0 million for the same
period in 2009, due primarily to growth in investments and an increase in investment
returns. Interest expense decreased to $5.3 million in the first nine months of 2010 from
$6.3 million for the same period in 2009, due primarily to long-term debt payments made in
the fourth quarter of 2009. |
||
| Other expense was $0.6 million in the first nine months of 2010, compared to other
income of $0.4 million for the same period in 2009. Other income and expense in the first
nine months of 2010 and 2009 includes offsetting unrealized gains and losses included in
earnings related to our auction rate securities and put-like settlement feature in the
amounts of $6.9 million and $11.8 million, respectively. Refer to Liquidity and Capital
Resources within this MD&A and Note 3 of the notes to condensed consolidated financial
statements for additional information on our auction rate securities. |
||
| Our effective tax rate was 35% for the first nine months of 2010 and 33% for the first
nine months of 2009. This increase is primarily due to the research and development tax
credit not being extended for the 2010 tax year and a decrease in unrecognized tax benefits
in the third quarter of 2009 as a result of the Internal Revenue Service completion of the
2007 income tax return and refund claim related to the foreign tax credit for the 2004,
2005 and 2006 income tax returns. |
Operations by Segment
We have two operating segments, Domestic and Global. The Domestic segment includes revenue
contributions and expenditures associated with business activity in the United States. The Global
segment includes revenue contributions and expenditures linked to business activity in Aruba,
Australia, Austria, Belgium, Canada, Cayman Islands, Chile, China (Hong Kong), Egypt, England,
France, Germany, India, Ireland, Malaysia, Puerto Rico, Saudi Arabia, Singapore, Spain, Sweden,
Switzerland and the United Arab Emirates.
The following table presents a summary of the operating information for the first nine months of
2010 and 2009:
(in thousands) | 2010 | % of Revenue | 2009 | % of Revenue | % Change | |||||||||||||||
Domestic Segment |
||||||||||||||||||||
Revenues |
$ | 1,130,384 | 100% | $ | 997,441 | 100% | 13% | |||||||||||||
Costs of revenue |
189,540 | 17% | 169,567 | 17% | 12% | |||||||||||||||
Operating expenses |
311,663 | 28% | 272,552 | 27% | 14% | |||||||||||||||
Total costs and expenses |
501,203 | 44% | 442,119 | 44% | 13% | |||||||||||||||
Domestic operating earnings |
629,181 | 56% | 555,322 | 56% | 13% | |||||||||||||||
Global Segment |
||||||||||||||||||||
Revenues |
219,637 | 100% | 208,102 | 100% | 6% | |||||||||||||||
Costs of revenue |
35,903 | 16% | 32,333 | 16% | 11% | |||||||||||||||
Operating expenses |
93,577 | 43% | 97,179 | 47% | -4% | |||||||||||||||
Total costs and expenses |
129,480 | 59% | 129,512 | 62% | 0% | |||||||||||||||
Global operating earnings |
90,157 | 41% | 78,590 | 38% | 15% | |||||||||||||||
Other, net |
(463,338 | ) | (435,067 | ) | 6% | |||||||||||||||
Consolidated operating earnings |
$ | 256,000 | $ | 198,846 | 29% | |||||||||||||||
Domestic Segment
| Revenues increased 13% to $1,130.4 million in the first nine months of 2010 from $997.4
million the same period in 2009. This increase was driven by growth in licensed software,
managed services and professional services. |
||
| Cost of revenues remained flat at 17% of revenues in the first nine months of 2010,
compared to the same period in 2009. |
22
| Operating expenses increased 14% to $311.7 million in the first nine months of 2010,
from $272.6 million in the same period in 2009, due primarily to growth in managed services
expense, professional services expense and bad debt expense. |
Global Segment
| Revenues increased 6% to $219.6 million in the first nine months of 2010 from $208.1
million in the same period in 2009. This increase was driven by a change in estimates for
certain contracts that rely on estimates as part of contract accounting and improved
licensed software and support revenue, mostly from United Kingdom and the Middle East
region, slightly offset by a decline from France. |
||
| Cost of revenues remained flat at 16% of revenues in the first nine months of 2010,
compared to the same period in 2009. |
||
| Operating expenses decreased 4% to $93.6 million for the first nine months of 2010, from
$97.2 million in the same period in 2009, primarily due to a decrease in personnel-related
professional services expense, partially offset by an increase in bad debt expense. |
Other, net
Operating results not attributed to an operating segment include expenses, such as software
development, marketing, general and administrative, stock-based compensation and depreciation.
These expenses increased 6% to $463.3 million in the first nine months of 2010 from $435.1 million
in the same period in 2009. This increase was primarily due to growth in corporate personnel costs
and by the previously discussed impact of foreign currency transaction gains and losses.
Liquidity and Capital Resources
Our liquidity is influenced by many factors, including the amount and timing of our revenues, our
cash collections from our clients and the amounts we invest in software development, acquisitions
and capital expenditures.
Our principal sources of liquidity are our cash, cash equivalents, which consist of money market
funds, time deposits, and bonds with original maturities of less than 90 days, and short-term
investments. At October 2, 2010, we had cash of $183.8 million, cash equivalents of $28.0 million
and short-term investments of $353.5 million compared to cash of $144.8 million, cash equivalents
of $97.0 million and short-term investments of $317.1 million at January 2, 2010.
Additionally, we maintain a $90 million, multi-year revolving credit facility, which provides an
unsecured revolving line of credit for working capital purposes. Interest is payable at a rate
based on prime or LIBOR plus a spread that varies depending on the net worth ratios maintained. The
agreement contains certain net worth, current ratio and fixed charge coverage covenants and
provides certain restrictions on our ability to borrow, incur liens, sell assets and pay dividends.
The current agreement expires on May 31, 2013. As of October 2, 2010, we had no outstanding
borrowings under this agreement and we are not aware of any violations of the covenants.
We believe that our present cash position, together with cash generated from operations, short-term
investments and, if necessary, our available lines of credit, will be sufficient to meet
anticipated cash requirements during 2010.
During the second quarter of 2008, Fujitsu Services Limiteds (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 are in dispute with
Fujitsu regarding Fujitsus 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 resolution
of disputes between Fujitsu and the NHS regarding the contract termination. As of October 2, 2010,
it remains unlikely that the matter will be resolved in the next 12 months. Therefore these
receivables have been classified as long-term and represent the significant majority of other
long-term assets as of the third quarter ended October 2, 2010. 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.
In February and March 2008, liquidity issues in the global credit markets resulted in the
progressive failure of auctions representing all the auction rate securities held by us. During
the fourth quarter of 2008, we entered into a settlement
23
agreement with the investment firm that
sold us the auction rate securities. Under the terms of the settlement agreement, we received the
right to redeem the securities at par value during a period from mid-2010 through mid-
2012. The settlement is in effect a put-like instrument with a fair value generally equal to the
difference between the auction rate securities fair value and par value. In the fourth quarter of
2009, these securities were reclassified to short term investments based on our intention to
exercise the put-like settlement feature and redeem the securities within the next year. At October
2, 2010, we held auction rate securities with a par value of $21.3 million and an estimated fair
value of $18.5 million.
We anticipate that any future changes in the fair value of the put-like feature will be offset by
the changes in the fair value of the related auction rate securities with no material net impact to
the Condensed Consolidated Statements of Operations. We do not expect the auction failures to
impact our ability to fund our working capital needs, capital expenditures or other business
requirements.
The following table summarizes our cash flows in the first nine months of 2010 and 2009:
Nine Months Ended | ||||||||
(In thousands) | 2010 | 2009 | ||||||
Cash flows from operating activities |
$ | 334,697 | $ | 239,158 | ||||
Cash flows from investing activities |
(407,843 | ) | (174,733 | ) | ||||
Cash flows from financing activities |
40,262 | 33,043 | ||||||
Effect of exchange rate changes on cash |
2,908 | 10 | ||||||
Total change in cash and cash equivalents |
$ | (29,976 | ) | $ | 97,478 | |||
Free cash flow (non-GAAP) |
$ | 197,573 | $ | 90,597 | ||||
Cash from Operating Activities
Cash flow from operations increased in the first nine months of 2010 as compared to the same period
of 2009 due primarily to the increase in cash impacting earnings and cash provided by working
capital. During the first nine months of 2010 and 2009, we received total client cash collections
of $1,402.6 million and $1,304.3 million, respectively, of which 3% and 4%, respectively, were
received from third party client financing arrangements and non-recourse payment assignments. Days
sales outstanding was 91 days for the third quarter of 2010 compared to 88 days in the second
quarter of 2010 and 105 days in the third quarter of 2009. The majority of this year-over-year
decline is driven by the reclassification of our Fujitsu receivable to other long-term assets
during the fourth quarter of 2009, which is not included in our days sales outstanding calculation.
Revenues provided under support and maintenance agreements represent recurring cash flows. Support
and maintenance revenues increased 4% in the first nine months of 2010 compared to the first nine
months of 2009. We expect these revenues to continue to grow as the base of installed Cerner
Millennium systems grows.
Cash from Investing Activities
Nine Months Ended | ||||||||
(In thousands) | 2010 | 2009 | ||||||
Capital purchases |
$ | (75,341 | ) | $ | (89,863 | ) | ||
Capitalized software development costs |
(61,783 | ) | (58,698 | ) | ||||
Purchases of investments, net of maturities |
(248,199 | ) | (13,727 | ) | ||||
Acquisition of businesses, net of cash acquired |
(14,486 | ) | (3,529 | ) | ||||
Other, net |
(8,034 | ) | (8,916 | ) | ||||
Total cash flows from investing activities |
$ | (407,843 | ) | $ | (174,733 | ) | ||
Cash flows from investing activities consist primarily of capital spending and our short-term
investment activities. Capital spending consists of capitalized equipment purchases primarily to
support growth in our CernerWorks managed services business, capitalized land, building and
improvement purchases to support our facilities requirements and capitalized spending to support
our ongoing software development initiatives. Capital spending in 2010 is expected to approximate
our 2009 levels.
In addition, during the first quarter 2010, we completed our acquisition of IMC Health Care, Inc.
for approximately $14.5 million, net of the cash acquired.
24
Cash from Financing Activities
Nine Months Ended | ||||||||
(In thousands) | 2010 | 2009 | ||||||
Long-term debt repayments |
$ | (2,404 | ) | $ | (7,065 | ) | ||
Cash from option exercises (including excess tax benefits) |
41,150 | 38,220 | ||||||
Other, net |
1,516 | 1,888 | ||||||
Total cash flows from financing activities |
$ | 40,262 | $ | 33,043 | ||||
Our primary financing obligations are long-term debt repayments. In the fourth quarter of
2009, we commenced payment on the first of seven equal annual installments on our 5.54% Great
Britain Pound denominated Note Agreement as well as on the first of four equal annual installments
on our 6.42% Series B Senior Notes. Based on debts currently outstanding and current exchange
rates, we expect our debt repayments to approximate $25 million per year through 2012 and
approximately $15 million per year from 2013 through 2016.
Free Cash Flow
Three Months Ended | Nine Months Ended | |||||||||||||||
(In thousands) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Cash flows from operating activities |
$ | 118,956 | $ | 73,402 | $ | 334,697 | $ | 239,158 | ||||||||
Capital purchases |
(19,330 | ) | (24,140 | ) | (75,341 | ) | (89,863 | ) | ||||||||
Capitalized software development costs |
(20,535 | ) | (20,110 | ) | (61,783 | ) | (58,698 | ) | ||||||||
Free cash flow (non-GAAP) |
$ | 79,091 | $ | 29,152 | $ | 197,573 | $ | 90,597 | ||||||||
Free Cash Flow increased $50 million in the third quarter of 2010 and increased $107 million
in the first nine months of 2010, as compared to the same respective periods in 2009, which we
believe reflects continued strengthening of our earnings quality. Free Cash Flow is a non-GAAP
financial measure used by management along with GAAP results to analyze its earnings quality and
overall cash generation of the business. The presentation of Free Cash Flow is not meant to be
considered in isolation, as a substitute for, or superior to, GAAP results and investors should be
aware that non-GAAP measures have inherent limitations and should be read only in conjunction with
our consolidated financial statements prepared in accordance with GAAP. Free Cash Flow may also be
different from similar non-GAAP financial measures used by other companies and may not be
comparable to similarly titled captions of other companies due to potential inconsistencies in the
method of calculation. We believe Free Cash Flow is important to enable investors to better
understand and evaluate our ongoing operating results and allows for greater transparency in the
review of our overall financial, operational and economic performance.
Recent Accounting Pronouncements
In July 2010, Accounting Standards Update (ASU) 2010-20, Disclosures about the Credit Quality of
Financing Receivables and the Allowance for Credit Losses, was issued and amends ASC 310,
Receivables. ASU 2010-20 requires increased disclosures about the credit quality of financing
receivables and allowances for credit losses, including disclosure about credit quality indicators,
past due information and modifications of financing receivables. Trade accounts receivable with
maturities of one year or less are excluded from the disclosure requirements. The guidance is
generally effective for reporting periods ending after December 15, 2010. We are currently
evaluating the impact the adoption of ASU 2010-20 will have on our consolidated financial
statements.
25
Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
No material changes.
Item 4. | Controls and Procedures |
a) | Evaluation of disclosure controls and procedures. The Companys Chief Executive
Officer (CEO) and Chief Financial Officer (CFO) have evaluated the effectiveness of the
Companys disclosure controls and procedures (as defined in the Exchange Act Rules
13a-15(e) and 15d-15(e)) as of the end of the period covered by the Quarterly Report (the
Evaluation Date). They have concluded that, as of the Evaluation Date, these disclosure
controls and procedures were effective to ensure that material information relating to the
Company and its consolidated subsidiaries would be made known to them by others within
those entities and would be disclosed on a timely basis. The CEO and CFO have concluded
that the Companys disclosure controls and procedures are designed, and are effective, to
give reasonable assurance that the information required to be disclosed by the Company in
reports that it files under the Exchange Act is recorded, processed, summarized and
reported within the time period specified in the rules and forms of the SEC. They have
also concluded that the Companys disclosure controls and procedures are effective to
ensure that information required to be disclosed in the reports that are filed or submitted
under the Exchange Act are accumulated and communicated to the Companys management,
including the CEO and CFO, to allow timely decisions regarding required disclosure. |
||
b) | There were no changes in the Companys internal controls over financial reporting
during the three months ended October 2, 2010 that have materially affected, or are
reasonably likely to materially affect, its internal controls over financial reporting. |
||
c) | The Companys management, including its CEO and CFO, has concluded that our disclosure
controls and procedures and internal control over financial reporting are designed to
provide reasonable assurance of achieving their objectives and are effective at that
reasonable assurance level. However, the Companys management can provide no assurance
that our disclosure controls and procedures or our internal control over financial
reporting can prevent all errors and all fraud under all circumstances. A control system,
no matter how well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the design of a
control system must reflect the fact that there are resource constraints, and the benefits
of controls must be considered relative to their costs. Because of the inherent limitations
in all control systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within the Company have been or will be
detected. The design of any system of controls also is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future conditions;
over time, controls may become inadequate because of changes in conditions, or the degree
of compliance with policies or procedures may deteriorate. Because of the inherent
limitations in a cost-effective control system, misstatements due to error or fraud may
occur and not be detected. |
26
Part II. Other Information
Item 6. | Exhibits |
(a) | Exhibits |
10(a)
|
Cerner Corporation 2005 Enhanced Severance Pay Plan as Amended and Restated August 15, 2010. | |
31.1
|
Certification of Neal L. Patterson, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2
|
Certification of Marc G. Naughton, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
101.INS
|
XBRL Instance Document | |
101.SCH
|
XBRL Taxonomy Extension Schema Document | |
101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase Document | |
101.LAB
|
XBRL Taxonomy Extension Labels Linkbase Document | |
101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase Document |
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
CERNER CORPORATION Registrant |
||||
October 29, 2010 | By: | /s/Marc G. Naughton | ||
Date | Marc G. Naughton | |||
Chief Financial Officer (duly authorized officer and principal financial officer) |
||||
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