CERNER CORPORATION
The following Management Discussion and Analysis ("MD&A") is intended to help
the reader understand our results of operations and financial condition. This
MD&A is provided as a supplement to, and should be read in conjunction with, our
financial statements and the accompanying notes to the financial statements.
All references to years in this MD&A represent fiscal years unless otherwise
noted. Refer to Note (1) of the notes to consolidated financial statements for
information regarding our fiscal year end.
Information regarding our 2017 results of operations, including a year-to-year
comparison against 2018, may be found in Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations in our annual report
on Form 10-K for the period ended December 29, 2018 , which was filed with the
Securities and Exchange Commission on February 8, 2019 .
Management Overview
Our revenues are primarily derived by selling, implementing, operating and
supporting software solutions, clinical content, hardware, devices and services
that give health care 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 health care.
Our core strategy is to create organic growth by investing in research and
development ("R&D") to create solutions and tech-enabled services for the health
care industry. We may also supplement organic growth with acquisitions or
strategic investments.
Cerner 's long history of growth has created an important strategic footprint in
health care, with Cerner holding more than 25 percent market share in the U.S.
acute care 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 large U.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
enables Cerner to become a strategic partner with health care stakeholders and
help them improve performance under value-based contracting. The platform, along
with our CareAware platform, also supports offerings in areas such 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 adoptions, Cerner implemented a
new operating structure and introduced other initiatives focused on cost
optimization and process improvement in 2019. To assist in these efforts, we
engaged an outside consulting firm to conduct a review of our operations and
cost structure. We made good progress in 2019 and expect this progress to be
reflected in improved profitability in 2020 and beyond. 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. We expect to use future cash flow and debt, as appropriate, to
meet our capital allocation objectives, which include investing in our business,
potential acquisitions or other strategic investments to drive profitable
growth, and returning capital to shareholders through share repurchases and
dividends.
Results Overview
Bookings, which reflects the value of executed contracts for software, hardware, professional services and managed services, was$5.99 billion in 2019, which is a decrease of 11% compared to$6.72 billion in 2018, with the decrease primarily reflecting a more selective approach to low-margin, long-term contracts that typically represent large booking values. 26
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Revenues for 2019 increased 6% to$5.69 billion , compared to$5.37 billion in 2018. The increase in revenue reflects ongoing demand from new and existing clients forCerner 's solutions and tech-enabled services driven by their needs to keep up with regulatory requirements, adapt to changing reimbursement models, and deliver safer and more efficient care. Net earnings for 2019 decreased 16% to$529 million , compared to$630 million in 2018. Diluted earnings per share decreased 13% to$1.65 in 2019, compared to$1.89 in 2018. The overall decrease in net earnings and diluted earnings per share was primarily a result of increased operating expenses, including expenses incurred in connection with our operational improvement initiatives discussed below, partially offset by increased revenues. We had cash collections of receivables of$5.79 billion in 2019, compared to$5.49 billion in 2018. Days sales outstanding was 72 days for the 2019 fourth quarter, compared to 74 days for the 2019 third quarter and 79 days for the 2018 fourth quarter. Operating cash flows for 2019 were$1.31 billion , compared to$1.45 billion in 2018.
Operational Improvement Initiatives
We transitioned to a new operating structure in the first quarter of 2019. The Company has been focused on leveraging the impact of this reorganization and identifying additional efficiencies. Currently, we are focused on reducing operating expenses and generating other efficiencies that are expected to provide longer-term operating margin expansion. We are also considering exiting certain low-margin businesses and being more selective as we consider new business opportunities. To assist in these efforts, we have engaged an outside consulting firm to conduct a review of our operations and cost structure. 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. In the near term, we expect to incur expenses in connection with these efforts. Such expenses may include, but are not limited to, consultant and other professional services fees, employee separation costs, contract termination costs, and other such related expenses. We recognized$221 million of expenses related to these efforts in 2019, which are included in operating expenses in our consolidated statements of operations and discussed further below. We expect to incur additional expenses in connection with these initiatives in future periods, which may be material.
Health Care Information Technology Market Outlook
We have provided an assessment of the health care information technology market
under "Health Care and Health Care IT Industry" in Part I, Item 1 "Business,"
which is incorporated herein by reference.
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Results of Operations
Fiscal Year 2019 Compared to Fiscal Year 2018
% of % of
(In thousands) 2019 Revenue 2018 Revenue % Change
Revenues $ 5,692,598 100 % $ 5,366,325 100 % 6 %
Costs of revenue 1,071,041 19 % 937,348 17 % 14 %
Margin 4,621,557 81 % 4,428,977 83 % 4 %
Operating expenses
Sales and client service 2,675,337 47 % 2,493,696 46 % 7 %
Software development 737,136 13 % 683,663 13 % 8 %
General and administrative 520,598 9 % 389,469 7 % 34 %
Amortization of acquisition-related
intangibles 87,817 2 % 87,364 2 % 1 %
Total operating expenses 4,020,888 71 % 3,654,192 68 % 10 %
Total costs and expenses 5,091,929 89 % 4,591,540 86 % 11 %
Operating earnings 600,669 11 % 774,785 14 % (22 )%
Other income, net 53,843 26,066
Income taxes (125,058 ) (170,792 )
Net earnings $ 529,454 $ 630,059 (16 )%
Revenues & Backlog
Revenues increased 6% to $5.69 billion in 2019, as compared to $5.37 billion in
2018. This increase was primarily driven by a $181 million increase in
professional services revenue due to growth in implementation activity; growth
in licensed software revenue of $67 million as a result of continued demand for
our solutions; and growth in managed services revenue of $59 million as a result
of increased hosting services. Refer to Note (2) of the notes to consolidated
financial statements for further information regarding revenues disaggregated by
our business models.
Backlog, which reflects contracted revenue that has not yet been recognized as
revenue, was $13.71 billion at the end of 2019, compared to $15.25 billion at
the end of 2018. This decrease was primarily driven by the termination of
certain client contracts, discussed further below. We expect to recognize 30% 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 such cancellation provisions are
rarely exercised. We expect to recognize $760 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 19% in 2019, compared to 17% in
2018. The higher costs of revenue as a percent of revenues was primarily driven
by higher third-party costs associated with professional services revenue.
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 increased 10% to $4.02 billion in 2019, compared to
$3.65 billion in 2018.
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• Sales and client service expenses as a percent of revenues were 47% in
2019, compared to 46% in 2018. These expenses increased 7% to
billion in 2019, from
expenses include salaries and benefits of sales, marketing, support, and
services personnel, depreciation and other expenses associated with ourmanaged services business, communications expenses, unreimbursed travel
expenses, expense for share-based payments, and trade show and advertising
costs. The increase in sales and client service expenses was primarily
driven by a
higher associate benefits costs; a
expense related to client receivables;
in 2019 in connection with the termination of certain client contracts
prior to the end of their stated terms; and a $30 million charge in
connection with a client dispute recognized in 2019. We expect the
termination of such client contracts to reduce future revenues by
approximately $170 million on an annualized basis. We do not expect a
significant impact to future operating earnings, as the terminated
contacts related to lower margin business. Refer to Note (12) of the notesto consolidated financial statements for further information regarding the
client dispute. The 2018 amount includes a pre-tax charge of
to provide an allowance against certain client receivables with Fujitsu
Services Limited ("Fujitsu"), as further discussed in Note (12) of the notes to consolidated financial statements. • Software development expenses as a percent of revenues were 13% in both 2019 and 2018. Expenditures for software development include ongoing
development and enhancement of the
platforms, with a focus on supporting key initiatives to enhance physician
experience, revenue cycle, population health management, and health
network solutions. In addition, 2019 includes costs incurred in connection
with our efforts to modernize our platforms, with a focus on development
of a software as a service platform. A summary of our total software
development expense in 2019 and 2018 is as follows:
For the Years Ended
(In thousands) 2019 2018
Software development costs $ 783,593 $ 747,128
Capitalized software costs (270,948 ) (271,787 )
Capitalized costs related to share-based payments (2,923 ) (1,906 ) Amortization of capitalized software costs 227,414 210,228
Total software development expense$ 737,136 $ 683,663
• General and administrative expenses as a percent of revenues were 9% in
2019, compared to 7% in 2018. These expenses increased 34% to
in 2019, from
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 increase in general and
administrative expenses is primarily driven by expenses incurred in 2019
in connection with our operational improvement initiatives discussed
above; inclusive of $86 million of charges associated with employee
separation benefits, as further discussed in Note (1) of the notes toconsolidated financial statements. We expect to incur additional expenses
in connection with these efforts in future periods, which may be material.
• Amortization of acquisition-related intangibles as a percent of revenues
was 2% in both 2019 and 2018. These expenses increased 1% to
in 2019, from
intangibles includes the amortization of customer relationships, acquired
technology, trade names, and non-compete agreements recorded in connection
with our business acquisitions. The increase in amortization of
acquisition-related intangibles includes the impact of intangibles
recognized in connection with our acquisition of AbleVets, LLC
("AbleVets") in 2019. Refer to Note (8) of the notes to consolidatedfinancial statements for further information regarding our acquisition of
AbleVets.
Non-Operating Items
• Other income, net was
2018. The 2019 period includes a
disposition of one of our equity investments and a
gain recognized on another one of our equity investments. Refer to Note
(13) of the notes to consolidated financial statements for further
information regarding the components of other income, net.
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• Our effective tax rate was 19% in 2019, compared to 21% in 2018. The
decrease in the effective tax rate in 2019 is primarily due to increased
excess tax benefits recognized as a component of income tax expense due to
elevated stock option exercise activity. Refer to Note (14) of the notes
to consolidated financial statements for further information regarding our
effective tax rate. We do not expect significant changes to our overall
effective tax rate in 2020, from what is reported for 2019.
Operations by Segment We have two operating segments: Domestic and International (formerly referred to as Global). 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 (19) of the notes to consolidated financial statements for further information regarding our reportable segments.
The following table presents a summary of our operating segment information for the years ended 2019 and 2018:
% of % of
Segment Segment
(In thousands) 2019 Revenue 2018 Revenue % Change
Domestic Segment
Revenues $ 5,038,127 100% $ 4,730,266 100% 7%
Costs of revenue 967,035 19% 827,904 18% 17%
Operating expenses 2,398,422 48% 2,164,465 46% 11%
Total costs and expenses 3,365,457 67% 2,992,369 63% 12%
Domestic operating earnings 1,672,670 33% 1,737,897 37% (4)%
International Segment
Revenues 654,471 100% 636,059 100% 3%
Costs of revenue 104,006 16% 109,444 17% (5)%
Operating expenses 276,914 42% 321,116 50% (14)%
Total costs and expenses 380,920 58% 430,560 68% (12)%
International operating earnings 273,551 42% 205,499
32% 33%
Other, net (1,345,552 ) (1,168,611 ) 15%
Consolidated operating earnings $ 600,669 $ 774,785 (22)%
Domestic Segment
• Revenues increased 7% to $5.04 billion in 2019, from $4.73 billion in
2018. This increase was primarily driven by a $186 million increase inprofessional services revenue due to growth in implementation activity;
growth in licensed software revenue of
continued demand for our solutions; and growth in managed services revenue
of $39 million as a result of increased hosting services. Refer to Note
(2) of the notes to consolidated financial statements for further
information regarding revenues disaggregated by our business models.
• Costs of revenue as a percent of revenues were 19% in 2019, compared to
18% in 2018. The higher costs of revenue as a percent of revenues was
primarily driven by higher third-party costs associated with professional
services revenue.
• Operating expenses as a percent of revenues were 48% in 2019, compared to
46% in 2018. The higher operating expenses as a percent of revenues was
primarily driven by $66 million of charges in connection with client
contract terminations and the $30 million charge in connection with a
client dispute, both recognized in 2019 and discussed above.
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International Segment
• Revenues increased 3% to
This increase was primarily driven by a
services revenue due to increased hosting services and growth in licensed
software revenue of
solutions; partially offset by a
revenues. Refer to Note (2) of the notes to consolidated financial
statements for further information regarding revenues disaggregated by our
business models.
• Costs of revenue as a percent of revenues were 16% in 2019, compared to
17% in 2018. The lower costs of revenue as a percent of revenues was
primarily driven by a lower mix of technology resale revenue, which
carries a higher cost of revenue.
• Operating expenses as a percent of revenues were 42% in 2019, compared to
50% in 2018. The decrease as a percent of revenues is primarily due to a
pre-tax charge of
certain client receivables with Fujitsu, as further discussed in Note (12)
of the notes to consolidated financial statements.
Other, net Operating results 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 15% to$1.35 billion in 2019, from$1.17 billion in 2018. The increase is primarily due to expenses incurred in 2019 in connection with our operational improvement initiatives discussed above; inclusive of$86 million of charges associated with employee separation benefits, as further discussed in Note (1) of the notes to consolidated financial statements.
The effects of inflation on our business during 2019 and 2018 were not significant.
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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, capital expenditures, and our share repurchase and dividend programs. Our principal sources of liquidity are our cash, cash equivalents, which primarily consist of money market funds and time deposits with original maturities of less than 90 days, short-term investments, and borrowings under our Credit Agreement. At the end of 2019, we had cash and cash equivalents of$442 million and short-term investments of$100 million , as compared to cash and cash equivalents of$374 million and short-term investments of$401 million at the end of 2018. We have entered into a Credit Agreement with a syndicate of lenders that provides for an unsecured$1.00 billion revolving credit loan facility, along with a letter of credit facility up to$100 million (which is a sub-facility of the$1.00 billion revolving credit loan facility). We have the ability to increase the maximum capacity to$1.20 billion at any time during the Credit Agreement's term, subject to lender participation and the satisfaction of specified conditions. The Credit Agreement expires inMay 2024 . As of the end of 2019, we had outstanding revolving credit loans and letters of credit of$600 million and$30 million , respectively; which reduced our available borrowing capacity to$370 million under the Credit Agreement. Refer to Note (10) of the notes to consolidated financial statements for additional information regarding our Credit Agreement and other sources of debt financing. We believe that our present cash position, together with cash generated from operations, short-term investments and, as appropriate, remaining availability under our Credit Agreement and other sources of debt financing, will be sufficient to meet anticipated cash requirements during 2020. The following table summarizes our cash flows in 2019 and 2018: For the Years Ended (In thousands) 2019 2018 Cash flows from operating activities$ 1,313,099 $
1,454,009
Cash flows from investing activities (640,408 ) (828,937 ) Cash flows from financing activities (601,380 ) (609,787 ) Effect of exchange rate changes on cash (3,594 ) (12,082 ) Total change in cash and cash equivalents 67,717
3,203
Cash and cash equivalents at beginning of period 374,126 370,923
Cash and cash equivalents at end of period$ 441,843 $ 374,126 Free cash flow (non-GAAP)$ 567,710 $ 733,388
Cash from Operating Activities
For the Years Ended
(In thousands) 2019 2018
Cash collections from clients $ 5,787,180 $ 5,486,654 Cash paid to employees and suppliers and other (4,348,438 ) (4,032,498 ) Cash paid for interest
(25,639 ) (15,707 )
Cash paid for taxes, net of refunds (100,004 ) 15,560
Total cash from operations $ 1,313,099 $ 1,454,009
Cash flows from operations decreased $141 million in 2019 compared to 2018, due
primarily to net refunds of taxes in 2018 along with cash payments in 2019
associated with our operational improvement initiatives discussed above. Days
sales outstanding was 72 days in the fourth quarter of 2019, compared to 74 days
for the third quarter of 2019 and 79 days for the fourth quarter of 2018.
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Cash from Investing Activities
For the Years Ended
(In thousands) 2019 2018
Capital purchases $ (471,518 ) $ (446,928 )
Capitalized software development costs (273,871 ) (273,693 )
Sales and maturities of investments, net of purchases 215,107 (71,497 )
Purchase of other intangibles (35,587 ) (36,819 )
Acquisition of business, net of cash acquired (74,539 ) -
Total cash flows from investing activities$ (640,408 ) $
(828,937 )
Cash flows from investing activities consist primarily of capital spending, investment, and acquisition activities. Our capital spending in 2019 was driven by capitalized equipment purchases primarily to support growth in our managed services business, investments in a cloud infrastructure to support cloud-based solutions, building and improvement purchases to support our facilities requirements and capitalized spending to support our ongoing software development initiatives. Total capital spending in 2019 exceeded 2018 levels, primarily driven by spending to support our facilities requirements, including the continued construction of our Innovations Campus (office space development located inKansas City, Missouri ). Capital purchases are expected to decrease in 2020, primarily driven by the expected completion of construction on the current phases of our Innovations Campus in the first half of 2020. Short-term investment activity historically consists of the investment of cash generated by our business in excess of what is necessary to fund operations. The 2019 and 2018 activity is impacted by excess cash being used to execute on our capital allocation strategy, including the share repurchases and cash dividends discussed below. Additionally, our investment mix has changed such that our funds are more heavily held in cash and cash equivalents versus short-term and long-term investments, primarily due to interest rates currently available on cash deposits. OnJuly 27, 2018 , we acquired a minority interest inEssence Group Holdings Corporation for cash consideration of$266 million . Refer to Note (4) of the notes to consolidated financial statements for further information regarding this investment. InOctober 2019 , we acquired all of the issued and outstanding membership interests ofAbleVets, LLC , aVirginia limited liability company ("AbleVets"). AbleVets is a health IT engineering and consulting company specializing in cybersecurity, cloud and system development solutions for federal organizations. Consideration for the acquisition was cash of$75 million . Refer to Note (8) of the notes to consolidated financial statements for further information regarding this business acquisition. We expect to continue seeking and completing strategic business acquisitions, investments, and relationships that are complementary to our business. Cash from Financing Activities For the Years Ended (In thousands) 2019 2018 Long-term debt issuance$ 600,000 $ - Repayment of long-term debt
- (75,000 ) Cash from option exercises (net of taxes paid in connection with shares surrendered by associates)
241,435 81,476 Treasury stock purchases (1,320,542 ) (623,127 ) Dividends paid (113,823 ) - Other (8,450 ) 6,864 Total cash flows from financing activities $
(601,380 )
InMay 2019 , we borrowed$600 million of revolving credit loans under the Credit Agreement. InMarch 2018 , we repaid our$75 million floating rate Series 2015-C Notes dueFebruary 15, 2022 . Refer to Note (10) of the notes to consolidated financial statements for further information regarding our outstanding indebtedness. 33
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We expect to incur additional indebtedness in the next 12 months, for which the amount and timing is yet to be determined. The proceeds from such indebtedness are expected to be deployed in accordance with our current capital allocation strategy, which may include share repurchases and dividend payments (as discussed further below), as well as for general corporate purposes, including acquisitions and investments. The terms and availability of such debt financing may be impacted by economic and financial market conditions, as well as our financial condition and results of operations at the time we seek such financing, and there can be no assurances that we will be able to obtain such financing on terms that will be acceptable or advantageous to us. Cash inflows from stock option exercises are dependent on a number of factors, including the price of our common stock, grant activity under our stock option and equity plans, and overall market volatility. We expect net cash inflows from stock option exercises to continue in 2020 based on the number of exercisable options at the end of 2019 and our current stock price. Refer to Note (16) of the notes to consolidated financial statements for additional information regarding our stock option and equity plans. During 2019 and 2018, we repurchased 18.8 million and 11.2 million shares, respectively, of our common stock for total consideration of$1.30 billion and$644 million , respectively. As ofDecember 28, 2019 ,$1.68 billion remains available for repurchase under our current repurchase program. We expect to continue to repurchase shares under this program in the next 12 months, but such repurchases will be dependent on a number of factors, including the price of our common stock and other cash flow needs. Although we expect to continue to repurchase shares, there is no assurance that we will repurchase up to the full amount remaining under the program. In 2019, our Board of Directors declared three separate cash dividends of$0.18 per share on our issued and outstanding common stock. Subject to declaration by our Board of Directors, we expect to continue paying quarterly cash dividends as a part of our current capital allocation strategy. Future dividends will be subject to the determination, declaration and discretion of our Board of Directors and compliance with covenants under our outstanding debt agreements.
The source of funds for such repurchases and dividends may include cash generated from operations, liquidation of investment holdings, and the incurrence of indebtedness. Refer to Note (16) of the notes to consolidated financial statements for further information regarding our share repurchase and dividend programs.
Free Cash Flow (Non-GAAP)
For the Years Ended
(In thousands) 2019 2018
Cash flows from operating activities (GAAP)
(471,518 ) (446,928 )
Capitalized software development costs (273,871 ) (273,693 )
Free cash flow (non-GAAP)$ 567,710 $ 733,388 Free cash flow decreased$166 million in 2019, compared to 2018, primarily due to a decrease in cash from operations along with increased capital expenditures. Free cash flow is a non-GAAP financial measure used by management, along with GAAP results, to analyze our earnings quality and overall cash generation of the business, and for management compensation purposes. We define free cash flow as cash flows from operating activities reduced by capital purchases and capitalized software development costs. The table above sets forth a reconciliation of free cash flow to cash flows from operating activities, which we believe is the GAAP financial measure most directly comparable to free cash flow. The presentation of free cash flow is not meant to be considered in isolation, nor 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 and understanding of our overall financial, operational and economic performance, because free cash flow takes into account certain capital expenditures necessary to operate our business. 34
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Contractual Obligations, Commitments and Off Balance Sheet Arrangements
The following table represents a summary of our contractual obligations and commercial commitments at the end of 2019, except short-term purchase order commitments arising in the ordinary course of business.
Payments Due by Period
2025 and
(In thousands) 2020 2021 2022 2023 2024 thereafter Total
Balance sheet
obligations(a):
Long-term debt
obligations $ - $ - $ 225,000 $ - $ 600,000 $ 214,162 $ 1,039,162
Interest on long-term
debt obligations 28,843 27,927 24,488 21,382 13,262 3,580 119,482
Other obligations:
Operating lease
obligations 33,845 29,604 23,903 16,850 8,250 43,238 155,690
Purchase obligations 151,950 95,933 34,501 37,237 30,462 560,925 911,008
Total $ 214,638 $ 153,464 $ 307,892 $ 75,469 $ 651,974 $ 821,905 $ 2,225,342 (a) At the end of 2019, liabilities for unrecognized tax benefits were
Off-Balance Sheet Arrangements
Refer to Note (10) of the notes to consolidated financial statements for information regarding our interest rate swap agreement, which is accounted for as a cash flow hedge in accordance with ASC Topic 815, Derivatives and Hedging. LIBOR is scheduled to be phased out by the end of 2021. When LIBOR ceases to exist, we will need to agree upon a replacement index with the lenders under our Credit Agreement at the time, and such new rates may not be as favorable to us as those in effect prior to any LIBOR phase-out. If the swap and the Credit Agreement replacement rates are not identical, our hedge could be less effective.
Recent Accounting Pronouncements
Refer to Note (1) of the notes to consolidated financial statements for information regarding recently issued accounting pronouncements.
Critical Accounting Policies
We believe that there are several accounting policies that are critical to
understanding our historical and future performance, as these policies affect
the reported amount of revenue and other significant areas involving our
judgments and estimates. These significant accounting policies relate to revenue
recognition, software development, and income taxes. These accounting policies
and our procedures related to these accounting policies are described in detail
below and under specific areas within this MD&A. In addition, Note (1), Note
(2), and Note (14) of the notes to consolidated financial statements expands
upon discussion of our accounting policies for these areas.
Revenue Recognition
In the first quarter of 2018, we adopted Accounting Standards Update ("ASU")
2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09, as
amended, replaced most existing revenue recognition guidance in U.S. GAAP. This
guidance requires a significant amount of judgments and estimates in
implementing its five-step process to be followed in determining the amount and
timing of revenue recognition and related disclosures. Refer to Note (2) of the
notes to consolidated financial statements for further discussion regarding
significant judgments involved in our application of ASU 2014-09.
Software Development Costs
Costs incurred internally in creating computer software solutions and
enhancements to those solutions are expensed until completion of a detailed
program design, which is when we determine that technological feasibility has
been established. Thereafter, all software development costs are capitalized
until such time as the software solutions and enhancements are available for
general release, and the capitalized costs subsequently are reported at the
lower of amortized cost or net realizable value.
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Net realizable value is computed as the estimated gross future revenues from each software solution less the amount of estimated future costs of completing and disposing of that product. Because the development of projected net future revenues related to our software solutions used in our net realizable value computation is based on estimates, a significant reduction in our future revenues could impact the recovery of our capitalized software development costs. If we missed our estimates of net future revenues by 10%, the amount of our capitalized software development costs would not be impaired. Capitalized costs are amortized based on current and expected net future revenue for each software solution with minimum annual amortization equal to the straight-line amortization over the estimated economic life of the software solution. We are amortizing capitalized costs over five years. The five-year period over which capitalized software development costs are amortized is an estimate based upon our forecast of a reasonable useful life for the capitalized costs. Historically, use of our software programs by our clients has exceeded five years and is capable of being used a decade or more. We expect that major software information systems companies, large information technology consulting service providers and systems integrators and others specializing in the health care industry may offer competitive products or services. The pace of change in the HCIT market is rapid and there are frequent new product introductions, product enhancements and evolving industry standards and requirements. As a result, the capitalized software solutions may become less valuable or obsolete and could be subject to impairment. Income Taxes We make a number of assumptions and estimates in determining the appropriate amount of expense to record for income taxes. These assumptions and estimates consider the taxing jurisdictions in which we operate as well as current tax regulations. Accruals are established for estimates of tax effects for certain transactions, business structures and future projected profitability of our businesses based on our interpretation of existing facts and circumstances. If these assumptions and estimates were to change as a result of new evidence or changes in circumstances, the change in estimate could result in a material adjustment to the consolidated financial statements.
We have discussed the development and selection of these critical accounting estimates with the Audit Committee of our Board of Directors and the Audit Committee has reviewed our disclosure contained herein.
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