CERNER CORPORATION
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
condensed consolidated financial statements ("Notes") found above. Certain
statements in this quarterly report on Form 10-Q contain forward-looking
statements within the meanings of the Private Securities Litigation Reform Act
of 1995, as amended, regarding our future plans, objectives, beliefs,
expectations, representations and projections. See the end of this MD&A for more
information on our forward-looking statements, including a discussion of the
most significant factors that could cause actual results to differ materially
from those in the forward-looking statements.
All references to quarters or the three month periods ended 2022 and 2021 in
this MD&A represent the respective three month periods ended March 31, 2022 and
March 31, 2021 , unless otherwise noted.
Management Overview
Our revenues are primarily derived by selling, implementing, operating and supporting software solutions, clinical content, hardware, devices and services that give healthcare providers and other stakeholders secure access to clinical, administrative and financial data in real or near-real time, helping them to improve quality, safety and efficiency in the delivery of healthcare.
Our core strategy is to create organic growth by investing in research and development to create solutions and tech-enabled services for the healthcare industry. We expect to also supplement organic growth with acquisitions or strategic investments and collaborations.
Cerner 's long history of growth has created an important strategic footprint in healthcare, withCerner holding approximately 25 percent market share in theU.S. acute care electronic health record ("EHR") market and a leading market share in several non-U.S. regions. Foundational to our growth going forward is delivering value to this core client base, including executing effectively on our largeU.S. federal contracts and cross-selling key solutions and services in areas such as revenue cycle. We are also investing in platform modernization, with a focus on delivering a software as a service platform that we expect to lower total cost of ownership, improve clinician experience and patient outcomes, and enable clients to accelerate adoption of new functionality and better leverage third-party innovations. We also expect to continue driving growth by leveraging our HealtheIntent® platform, which is the foundation for established and new offerings for both provider and non-provider markets. The EHR-agnostic HealtheIntent platform enablesCerner to become a strategic partner with healthcare stakeholders and help them improve performance under both fee-for-service and value-based contracting. The platform, along with our CareAware® platform, also supports offerings in areas such as long-term care, home care and hospice, rehabilitation, behavioral health, community care, care team communications, health systems operations, consumer and employer, and data-as-a-service. Beyond our strategy for driving revenue growth, we are also focused on earnings growth. After several years of margin compression related to slowing revenue growth, increased mix of low-margin services, and lower software demand due to the end of direct government incentives for EHR adoption,Cerner implemented a new operating structure and introduced other initiatives focused on cost optimization and process improvement. We have made good progress since we kicked off our transformation in 2019 and expect this progress to be reflected in improved profitability going forward. We are focused on ongoing identification of opportunities to operate more efficiently and on achieving the efficiencies without impacting the quality of our solutions and services and commitments to our clients.
We are also focused on delivering strong levels of cash flow, which we expect to accomplish by continuing to grow earnings and prudently managing capital expenditures.
Oracle Merger Agreement
OnDecember 20, 2021 , we entered into the Merger Agreement with Oracle and certain of its wholly owned subsidiaries. Pursuant to the Merger Agreement, onJanuary 19, 2022 , Oracle commenced a cash tender offer to acquire all of the issued and outstanding shares of our common stock for a purchase price of$95.00 per share, net to the holders thereof in cash, without interest and subject to any required tax withholding. If the Offer is completed, Merger Subsidiary will merge 18 -------------------------------------------------------------------------------- Table of Contents with and intoCerner and we will become a wholly owned indirect subsidiary of Oracle. As a result of the Merger, the shares of our common stock will cease to be publicly held. We have agreed to various customary covenants and agreements in the Merger Agreement, including with respect to the operation of our business prior to the closing of the transaction, such as restrictions on making certain acquisitions and divestitures, entering into certain contracts, incurring certain indebtedness and making certain capital expenditures, paying dividends in excess of our regular quarterly dividend, issuing or repurchasing stock and taking other specified actions. We do not believe these restrictions will prevent us from meeting our debt service obligations, ongoing costs of operations, working capital needs, or capital expenditure requirements. If the Merger Agreement is terminated under certain specified circumstances, we will be required to pay Parent a termination fee of$950 million . The completion of the Merger remains subject to customary closing conditions, including receipt of certain regulatory approvals and other customary closing conditions. The Merger is expected to close in calendar year 2022. For additional information related to the proposed transaction, please refer to the Schedule 14D-9, as amended, previously filed with theSEC and other relevant materials related to the transaction that we will file with theSEC .
Results of Operations
Three Months Ended
The following table presents a summary of our operating information for the first quarters of 2022 and 2021:
% of % of
(In thousands) 2022 Revenue 2021 Revenue % Change
Revenues $ 1,429,801 100 % $ 1,387,778 100 % 3 %
Costs of revenue 243,848 17 % 230,656 17 % 6 %
Margin 1,185,953 83 % 1,157,122 83 % 2 %
Operating expenses
Sales and client service 612,997 43 % 622,176 45 % (1) %
Software development 195,091 14 % 192,327 14 % 1 %
General and administrative 109,279 8 % 112,365 8 % (3) %
Amortization of acquisition-related intangibles 16,602 1 % 12,196 1 % 36 %
Total operating expenses 933,969 65 % 939,064 68 % (1) %
Total costs and expenses 1,177,817 82 % 1,169,720 84 % 1 %
Operating earnings 251,984 18 % 218,058 16 % 16 %
Other income, net 26 1,206
Income taxes (45,881) (47,012)
Net earnings $ 206,129 $ 172,252 20 %
Revenues & Backlog
Revenues increased 3% to $1.43 billion in the first quarter of 2022, as compared
to $1.39 billion in the same period of 2021. The first quarter of 2022 includes
a $47 million increase in revenues due to contributions from our April 1, 2021
acquisition of the Kantar Health business. Refer to Note (2) of the Notes for
further information regarding revenues disaggregated by our business models.
Backlog, which reflects contracted revenue that has not yet been recognized as
revenue, was $13.21 billion at March 31, 2022 , compared to $13.26 billion at
December 31, 2021 . We expect to recognize 31% of our backlog as revenue over the
next 12 months.
We believe that backlog may not necessarily be a comprehensive indicator of
future revenue as certain of our arrangements may be canceled (or conversely
renewed) at our clients' option; thus contract consideration related to such
cancellable periods has been excluded from our calculation of backlog. However,
historically our experience has been that
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such cancellation provisions are rarely exercised. We expect to recognize
approximately $993 million of revenue over the next 12 months under currently
executed contracts related to such cancellable periods, which is not included in
our calculation of backlog.
Costs of Revenue
Costs of revenue as a percent of revenues were 17% in the first quarter of both 2022 and 2021.
Costs of revenue include the cost of reimbursed travel expense, sales commissions, third-party consulting services and subscription content and computer hardware, devices and sublicensed software purchased from manufacturers for delivery to clients. It also includes the cost of hardware maintenance and sublicensed software support subcontracted to the manufacturers. Such costs, as a percent of revenues, typically have varied as the mix of revenue (software, hardware, devices, maintenance, support, and services) carrying different margin rates changes from period to period. Costs of revenue 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 decreased 1% to
•Sales and client service expenses as a percent of revenues were 43% in the first quarter of 2022, compared to 45% in the same period of 2021. These expenses decreased 1% to$613 million in the first quarter of 2022, from$622 million in the same period of 2021. Sales and client service expenses include salaries and benefits of sales, marketing, support, and services personnel, depreciation and other expenses associated with our managed services business, expenses for expected credit losses on client receivables, communications expenses, unreimbursed travel expenses, expense for share-based payments, and trade show and advertising costs. The decrease in sales and client service expenses was primarily driven by reductions in non-personnel costs. •Software development expenses as a percent of revenues were 14% in the first quarter of both 2022 and 2021. Expenditures for software development include ongoing development and enhancement of theCerner Millennium® and HealtheIntent platforms, as well as other key initiatives such as platform modernization, with a focus on development of a software as a service platform. A summary of our total software development expense in the first quarters of 2022 and 2021 is as follows: Three Months Ended (In thousands) 2022 2021 Software development costs$ 186,185 $ 211,027 Capitalized software costs (55,163) (81,155)
Capitalized costs related to share-based payments (1,137) (2,395) Amortization of capitalized software costs
65,206 64,850
Total software development expense$ 195,091 $
192,327
•General and administrative expenses as a percent of revenues were 8% in the first quarter of both 2022 and 2021. These expenses decreased 3% to$109 million in the first quarter of 2022, from$112 million in the same period of 2021. General and administrative expenses include salaries and benefits for corporate, financial and administrative staffs, utilities, communications expenses, professional fees, depreciation and amortization, transaction gains or losses on foreign currency, expense for share-based payments, certain organizational restructuring and other expense. The decrease in general and administrative expenses was primarily driven by a reduction in employee separation costs. •Amortization of acquisition-related intangibles as a percent of revenues was 1% in the first quarter of both 2022 and 2021. These expenses increased 36% to$17 million in the first quarter of 2022, from$12 million in the same period in 2021. Amortization of acquisition-related intangibles includes the amortization of customer relationships, acquired technology, trade names, and non-compete agreements recorded in connection with our business 20 -------------------------------------------------------------------------------- Table of Contents acquisitions. The increase in amortization of acquisition-related intangibles is primarily due to amortization of intangibles acquired in ourApril 1, 2021 acquisition of theKantar Health business.
Non-Operating Items
•Other income, net was less than
•Our effective tax rate was 18.2% for the first quarter of 2022, compared to 21.4% for the same period of 2021. The decrease in the effective tax rate in the first quarter of 2022 is primarily due to favorability of permanent book-tax differences for share-based compensation in 2022 compared to 2021. Refer to Note (7) of the Notes for further discussion regarding our effective tax rate.
Operations by Segment
We have two operating segments: Domestic and International. The Domestic segment includes revenue contributions and expenditures associated with business activity inthe United States . The International segment includes revenue contributions and expenditures linked to business activity outsidethe United States , primarily fromAustralia ,Canada ,Europe , and theMiddle East . Refer to Note (11) of the Notes for further information regarding our reportable segments.
The following table presents a summary of our operating segment information for the first quarters of 2022 and 2021:
(In thousands) 2022 % of Revenue 2021 % of Revenue % Change Domestic Segment Revenues$ 1,258,456 100%$ 1,221,992 100% 3% Costs of revenue 215,241 17% 205,694 17% 5% Operating expenses 541,575 43% 560,562 46% (3)% Total costs and expenses 756,816 60% 766,256 63% (1)% Domestic operating earnings 501,640 40% 455,736 37% 10% International Segment Revenues 171,345 100% 165,786 100% 3% Costs of revenue 28,607 17% 24,962 15% 15% Operating expenses 71,422 42% 61,614 37% 16% Total costs and expenses 100,029 58% 86,576 52% 16% International operating earnings 71,316 42% 79,210 48%
(10)%
Other costs and expenses, net (320,972) (316,888)
1%
Consolidated operating earnings$ 251,984 $ 218,058 16% Domestic Segment •Revenues increased 3% to$1.26 billion in the first quarter of 2022, from$1.22 billion in the same period of 2021. The first quarter of 2022 includes a$23 million increase in revenues due to contributions from ourApril 1, 2021 acquisition of theKantar Health business. The remaining increase is primarily attributable to increased implementation activity during the first quarter of 2022 within our federal business, inclusive of ongoing projects with theU.S. Department of Defense and theU.S. Department of Veterans Affairs . In the first quarter of both 2022 and 2021, 20% of our consolidated revenues were attributable to our relationships (as the prime contractor or a subcontractor) withU.S. government agencies. Refer to Note (2) of the Notes for further information regarding revenues disaggregated by our business models.
•Costs of revenue as a percent of revenues were 17% in the first quarter of both 2022 and 2021.
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•Operating expenses as a percent of revenues were 43% in the first quarter of 2022, compared to 46% in the same period of 2021. These expenses decreased 3% to$542 million in the first quarter of 2022, from$561 million in the same period of 2021. The decrease in operating expenses was primarily driven by reductions in non-personnel costs. International Segment •Revenues increased 3% to$171 million in the first quarter of 2022, from$166 million in the same period of 2021. The first quarter of 2022 includes a$24 million increase in revenues due to contributions from ourApril 1, 2021 acquisition of theKantar Health business. This increase was partially offset by a reduction in revenues in the first quarter of 2022 attributable to project delays in certain regions inEurope . Refer to Note (2) of the Notes for further information regarding revenues disaggregated by our business models. •Costs of revenue as a percent of revenues were 17% in the first quarter of 2022, compared to 15% in the same period of 2021. The higher costs of revenue as a percent of revenues was primarily driven by the impact of theKantar Health business acquired onApril 1, 2021 . •Operating expenses as a percent of revenues were 42% in the first quarter of 2022, compared to 37% in the same period of 2021. These expenses increased 16% to$71 million in the first quarter of 2022, from$62 million in the same period of 2021. The increase in operating expenses is primarily due to theApril 1, 2021 acquisition of theKantar Health business.
Other Costs and Expenses, Net
Operating costs and expenses not attributed to an operating segment include expenses such as software development, general and administrative expenses, share-based compensation expense, certain amortization and depreciation, certain organizational restructuring and other expense. These expenses increased 1% to$321 million in the first quarter of 2022, from$317 million in the same period of 2021. The increase is primarily due to a reduction in capitalized software costs in the first quarter of 2022.
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 amount we invest in software development, acquisitions, collaborations, capital expenditures, and our share repurchase and dividend programs. We have agreed to various customary covenants and agreements in the Merger Agreement, including with respect to the operation of our business prior to the closing of the transaction, such as restrictions on making certain acquisitions and divestitures, entering into certain contracts, incurring certain indebtedness and making certain capital expenditures, paying dividends in excess of our regular quarterly dividend, issuing or repurchasing stock and taking other specified actions. We do not believe these restrictions will prevent us from meeting our debt service obligations, ongoing costs of operations, working capital needs, or capital expenditure requirements. Our principal sources of liquidity are our cash, cash equivalents (which primarily consist of money market funds, time deposits and commercial paper with original maturities of less than 90 days), short-term investments, borrowings under our Credit Agreement and other sources of debt financing. AtMarch 31, 2022 , we had cash and cash equivalents of$710 million and short-term investments of$171 million , as compared to cash and cash equivalents of$590 million and short-term investments of$253 million atDecember 31, 2021 . We have entered into a Credit Agreement with a syndicate of lenders that provides for an unsecured$1.225 billion revolving credit loan facility, along with a letter of credit facility up to$200 million (which is a sub-facility of the$1.225 billion revolving credit loan facility). We have the ability to increase the maximum capacity to$1.725 billion at any time during the Credit Agreement's term, subject to lender participation and the satisfaction of specified conditions. The Credit Agreement expires inDecember 2026 , with two one-year extension options that are subject to lender approval. As ofMarch 31, 2022 , we had outstanding revolving credit loans and letters of credit of$600 million and$16 million , respectively; which reduced our available borrowing capacity to$609 million under the Credit Agreement.
We have also entered into note purchase agreements pursuant to which we may issue and sell unsecured senior promissory notes to those purchasers electing to purchase.
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We believe that our present cash position, together with cash generated from
operations, short-term investments and, as appropriate, remaining availability
under our Credit Agreement and other sources of debt financing, will be
sufficient to meet anticipated cash requirements for the next 12 months.
The following table summarizes our cash flows in the first three months of 2022 and 2021:
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