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 nine month periods ended 2021 and 2020 in this
MD&A represent the respective three and nine month periods ended September 30,
2021 and September 30, 2020 , 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. We expect to use future cash flow and debt, as appropriate, to meet our capital allocation objectives, which include investing in our business, entering into acquisitions or other strategic investments to drive profitable growth, and returning capital to shareholders through share repurchases and dividends. 22 -------------------------------------------------------------------------------- Table of Contents COVID-19 Our business and results of operations for the first nine months of both 2021 and 2020 were impacted by the ongoing COVID-19 pandemic. It has caused us to modify certain of our business practices, including requiring most of our associates to work remotely; restricting associate travel; mandating vaccines for associates; developing social distancing plans for our associates; and canceling or postponing in person participation in certain meetings, events and conferences. It is not possible to quantify the full financial impact that the COVID-19 pandemic has had on our results of operations, cash flows, or financial condition, due to the uncertainty surrounding the pandemic, the difficulty inherent in identifying and measuring the various impacts that have or may stem from such an event and the fact that there are no comparable recent events that provide guidance as to how to measure or predict the effect the COVID-19 pandemic may have on our business. However, we believe COVID-19 has impacted, and could continue in the near-term to impact, our business results, primarily, but not limited to, in the following areas: •Bookings, backlog and revenues - A decline in new business bookings as certain client purchasing decisions and projects are delayed to focus on treating patients, procuring necessary medical supplies, administering vaccines, and managing their own organizations through this crisis. A sustained decline in bookings could reduce backlog and lower subsequent revenues. •Associate productivity - A decline in associate productivity, primarily for our services personnel, as a large amount of work is typically done at client sites, which is being impacted by travel restrictions, vaccine mandates and our clients' focus on the pandemic. Our clients' focus on the pandemic has also led to pauses on existing projects and postponed start dates for others, which translates into lower professional services revenues and a lower operating margin percentage. We are mitigating this by doing more work remotely than we have in the past, but we cannot fully offset the negative impact. •Travel - Associate travel restrictions reduce client-related travel, which reduces reimbursed travel revenues and lowers our costs of revenue as a percent of revenues. Such restrictions also reduce non-reimbursable travel, which lowers operating expenses. •Cash collections - A delay in client cash collections due to COVID-19's impact on national reimbursement processes, and client focus on managing their own organizations' liquidity during this time. This translates to lower cash flows from operating activities, and a higher days sales outstanding metric. Lower cash flows from operating activities may impact how we execute under our capital allocation strategy.
•Capital expenditures - A decline in capital spending as certain capital projects are delayed or strategies evolve.
We believe the impact of COVID-19 on our results of operations for the first quarter of 2020 was limited, due to themid-March 2020 timing of when we implemented changes to our business practices in response to COVID-19, and the nature of the industry in which we operate. We believe the most significant impact of COVID-19 on our business was in the second quarter of 2020, with the impact beginning to moderate in subsequent periods but still persisting into 2021 due to some ongoing restrictive measures and certain regions dealing with resurgences of cases. While we expect a negative financial impact to continue for the rest of 2021, we do not expect it to be as significant as 2020. The impact will continue to be difficult to quantify as there are many factors that continue to be outside of our control, so any forward looking statements that we make regarding our projections of future financial performance; new solutions and services; capital allocation plans; cost optimization and operational improvement initiatives; and the expected benefits of our acquisitions, divestitures or other collaborations are all subject to increased risks.
Operational Improvement Initiatives
The Company has continued to focus on leveraging the impact of our new operating structure and identifying additional efficiencies in our business. We continue to be focused on reducing operating expenses and generating other efficiencies that are expected to provide longer-term operating margin expansion. We are continuing our portfolio management, which includes ongoing evaluation of our offerings, exiting certain low-margin businesses, and being more selective as we consider new business opportunities. As part of our portfolio management, we closed on the sale of certain of our business operations, primarily conducted inGermany andSpain , inJuly 2020 , and the sale of certain of our revenue cycle outsourcing business operations inAugust 2020 . We have also made the decision to sell certain of our owned real estate. We expect to continue to evaluate and potentially complete divestiture transactions that are strategic to our operational 23 -------------------------------------------------------------------------------- Table of Contents improvement initiatives. We continue to be 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, asset impairment charges, and other such related expenses. Expenses recognized in the first nine months of 2021 and 2020 primarily related to professional services fees, employee separation costs, and asset impairment charges which are included in operating expenses in our condensed consolidated statements of operations. We expect to incur additional expenses in connection with these initiatives in future periods, which may be material.
Results Overview
Bookings, which reflects the value of executed contracts for software, hardware, professional services and managed services, was$1.81 billion in the third quarter of 2021, which is an increase of 23% compared to$1.47 billion in the third quarter of 2020.
Revenues for the third quarter of 2021 increased 7% to
Net earnings for the third quarter of 2021 decreased 51% to
We had cash collections of receivables of$1.56 billion in the third quarter of 2021, compared to$1.43 billion in the third quarter of 2020. Days sales outstanding was 76 days in the third quarter of 2021, compared to 77 days for the second quarter of 2021 and 81 days for the third quarter of 2020. Operating cash flows for the third quarter of 2021 were$435 million , compared to$382 million in the third quarter of 2020. 24 -------------------------------------------------------------------------------- Table of Contents Results of Operations
Three Months Ended
The following table presents a summary of our operating information for the third quarters of 2021 and 2020:
% of % of
(In thousands) 2021 Revenue 2020 Revenue % Change
Revenues $ 1,467,976 100 % $ 1,368,673 100 % 7 %
Costs of revenue 251,111 17 % 231,889 17 % 8 %
Margin 1,216,865 83 % 1,136,784 83 % 7 %
Operating expenses
Sales and client service 651,010 44 % 625,402 46 % 4 %
Software development 202,663 14 % 186,826 14 % 8 %
General and administrative 121,395 8 % 116,816 9 % 4 %
Amortization of acquisition-related intangibles 16,874 1 % 12,789 1 % 32 %
Total operating expenses 991,942 68 % 941,833 69 % 5 %
Total costs and expenses 1,243,053 85 % 1,173,722 86 % 6 %
Gain on sale of businesses - - % 216,869 16 %
Operating earnings 224,923 15 % 411,820 30 % (45) %
Other income (loss), net (5,070) 48,020
Income taxes (44,058) (103,164)
Net earnings $ 175,795 $ 356,676 (51) %
Revenues & Backlog
Revenues increased 7% to $1.47 billion in the third quarter of 2021, as compared
to $1.37 billion in the same period of 2020. The following factors impacted the
year-over-year change in revenues:
•Increased implementation activity during the third quarter of 2021 within our
federal business, inclusive of ongoing projects with the U.S. Department of
Defense and the U.S. Department of Veterans Affairs . In the third quarter of
2021, 21% of our total revenues were attributable to our relationships (as the
prime contractor or a subcontractor) with U.S. government agencies, compared to
19% in the same period of 2020.
•The third quarter of 2021 includes a $45 million increase in revenues due to
contributions from our April 1, 2021 acquisition of the Kantar Health business.
We expect the acquired business to contribute approximately $50 million of
additional revenues over the remainder of 2021. Refer to Note (2) of the Notes
for further information regarding the Kantar Health acquisition.
Refer to Note (3) 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$13.12 billion atSeptember 30, 2021 , compared to$13.04 billion atDecember 31, 2020 . 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 approximately$1.27 billion 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. 25
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Table of Contents
Costs of Revenue
Costs of revenue as a percent of revenues were 17% in the third quarter of both 2021 and 2020.
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 5% to
•Sales and client service expenses as a percent of revenues were 44% in the third quarter of 2021, compared to 46% in the same period of 2020. These expenses increased 4% to$651 million in the third quarter of 2021, from$625 million in the same period of 2020. Sales and client service expenses include salaries and benefits of sales, marketing, support, and services personnel, depreciation and other expenses associated with our managed services business, communications expenses, unreimbursed travel expenses, expense for share-based payments, and trade show and advertising costs. The increase in sales and client service expenses was primarily driven by expense contributions from theKantar Health business, which was acquired onApril 1, 2021 . •Software development expenses as a percent of revenues were 14% in the third quarter of both 2021 and 2020. Expenditures for software development include ongoing development and enhancement of theCerner Millennium® and HealtheIntent platforms, as well as other key initiatives such as platform modernization, with a focus on development of a software as a service platform. A summary of our total software development expense in the third quarters of 2021 and 2020 is as follows: Three Months Ended (In thousands) 2021 2020 Software development costs$ 210,082 $ 198,565 Capitalized software costs (73,773) (71,525) Capitalized costs related to share-based payments (1,796)
(1,792)
Amortization of capitalized software costs 66,222
61,578
Net realizable value charges (see Note (1) of the Notes) 1,928
-
Total software development expense$ 202,663 $
186,826
•General and administrative expenses as a percent of revenues were 8% in the third quarter of 2021, compared to 9% in the same period of 2020. These expenses increased 4% to$121 million in the third quarter of 2021, from$117 million in the same period of 2020. 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 increase in general and administrative expenses was primarily driven by increased employee separation costs, as further discussed in Note (1) of the Notes. •Amortization of acquisition-related intangibles as a percent of revenues was 1% in the third quarter of both 2021 and 2020. These expenses increased 32% to$17 million in the third quarter of 2021, from$13 million in the same period in 2020. 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 acquisitions. The increase in amortization of acquisition-related intangibles is primarily due to amortization of 26 -------------------------------------------------------------------------------- Table of Contents intangibles acquired in ourApril 1, 2021 acquisition of theKantar Health business. Refer to Note (2) of the Notes for further information regarding theKantar Health acquisition. Gain on Sale of Businesses OnJuly 1, 2020 , we sold certain of our business operations, primarily conducted inGermany andSpain , to affiliates of CompuGroup Medical SE & Co. KGaA ("CGM"), as a part of our portfolio management strategy. Such operations included the associates, intellectual property, client contracts, other assets, and liabilities related to our medico®, Selene®, Soarian Health Archive®, and Soarian® Integrated Care solution offerings. OnAugust 3, 2020 , we sold certain of our revenue cycle outsourcing business operations to affiliates of R1 RCM Inc., as a part of our portfolio management strategy. Such operations included the associates, client contracts, certain other assets, and certain liabilities related to our commercial revenue cycle outsourcing services business.
In the third quarter of 2020, we recognized a
Non-Operating Items
•Other income (loss), net was a net loss of$5 million in the third quarter of 2021, compared to$48 million of income in the same period of 2020. The decrease in 2021 is primarily attributable to the third quarter of 2020 including a$49 million gain recognized on the disposition of one of our equity investments. •Our effective tax rate was 20.0% for the third quarter of 2021, compared to 22.4% for the same period of 2020. The decrease in the effective tax rate is primarily due to the third quarter of 2020 including taxes associated with the divestiture transactions discussed above. Refer to Note (8) of the Notes for further discussion regarding our effective tax rate.
Operations by Segment
We have two operating segments: Domestic and International. The Domestic segment includes revenue contributions and expenditures associated with business activity inthe United States . The International segment includes revenue contributions and expenditures linked to business activity outsidethe United States , primarily fromAustralia ,Canada ,Europe , and theMiddle East . Refer to Note (12) of the Notes for further information regarding our reportable segments. 27 -------------------------------------------------------------------------------- Table of Contents The following table presents a summary of our operating segment information for the third quarters of 2021 and 2020: (In thousands) 2021 % of Revenue 2020 % of Revenue % Change Domestic Segment Revenues$ 1,285,488 100%$ 1,230,769 100% 4% Costs of revenue 222,665 17% 219,938 18% 1% Operating expenses 580,535 45% 566,777 46% 2% Total costs and expenses 803,200 62% 786,715 64% 2% Domestic operating earnings 482,288 38% 444,054 36% 9% International Segment Revenues 182,488 100% 137,904 100% 32% Costs of revenue 28,446 16% 11,951 9% 138% Operating expenses 70,472 39% 58,626 43% 20% Total costs and expenses 98,918 54% 70,577 51% 40% International operating earnings 83,570 46% 67,327 49%
24%
Other costs and expenses, net (340,935) (316,430) 8% Gain on sale of businesses - 216,869 Consolidated operating earnings$ 224,923 $ 411,820 (45)% Domestic Segment
•Revenues increased 4% to
•Increased implementation activity during the third quarter of 2021 within our
federal business, inclusive of ongoing projects with the
•The third quarter of 2021 includes a
Refer to Note (3) 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 third quarter of 2021, compared to 18% in the same period of 2020. The lower costs of revenue as a percent of revenues was primarily driven by the mix of revenues for the quarters, inclusive of the third quarter of 2021 containing a higher percentage of licensed software revenues, which caries a lower cost of revenue. •Operating expenses as a percent of revenues were 45% in the third quarter of 2021, compared to 46% in the same period of 2020. These expenses increased 2% to$581 million in the third quarter of 2021, from$567 million in the same period of 2020. The increase in operating expenses was primarily driven by expense contributions from theKantar Health business, which was acquired onApril 1, 2021 . International Segment •Revenues increased 32% to$182 million in the third quarter of 2021, compared to$138 million in the same period of 2020. The increase in revenues is primarily due to a$24 million increase in revenues due to contributions from ourApril 1, 2021 acquisition of theKantar Health business. The remaining increase is attributable to 2021 revenue growth across the majority of our remaining International Segment operations. Refer to Note (3) of the Notes for further information regarding revenues disaggregated by our business models. 28 -------------------------------------------------------------------------------- Table of Contents •Costs of revenue as a percent of revenues were 16% in the third quarter of 2021, compared to 9% in the same period of 2020. 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 39% in the third quarter of 2021, compared to 43% in the same period of 2020. These expenses increased 20% to$70 million in the third quarter of 2021, from$59 million in the same period of 2020. 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 8% to$341 million in the third quarter of 2021, from$316 million in the same period of 2020. The increase is primarily due to increased employee separation costs, as further discussed in Note (1) of the Notes.
Nine Months Ended
The following table presents a summary of our operating information for the first nine months of 2021 and 2020:
% of % of
(In thousands) 2021 Revenue 2020 Revenue % Change
Revenues $ 4,312,509 100 % $ 4,110,763 100 % 5 %
Costs of revenue 743,092 17 % 698,268 17 % 6 %
Margin 3,569,417 83 % 3,412,495 83 % 5 %
Operating expenses
Sales and client service 2,004,263 46 % 1,907,138 46 % 5 %
Software development 636,590 15 % 551,101 13 % 16 %
General and administrative 390,067 9 % 391,000 10 % - %
Amortization of acquisition-related intangibles 45,956 1 % 43,031 1 % 7 %
Total operating expenses 3,076,876 71 % 2,892,270 70 % 6 %
Total costs and expenses 3,819,968 89 % 3,590,538 87 % 6 %
Gain on sale of businesses - - % 216,869 5 %
Operating earnings 492,541 11 % 737,094 18 % (33) %
Other income (loss), net (5,542) 78,247
Income taxes (106,245) (176,758)
Net earnings $ 380,754 $ 638,583 (40) %
Revenues & Backlog
Revenues increased 5% to
•Increased implementation activity during the first nine months of 2021 within our federal business, inclusive of ongoing projects with theU.S. Department of Defense and theU.S. Department of Veterans Affairs . In the first nine months of 2021, 20% of our total revenues were attributable to our relationships (as the prime contractor or a subcontractor) withU.S. government agencies, compared to 17% in the same period of 2020. 29 -------------------------------------------------------------------------------- Table of Contents •The first nine months of 2021 includes a$90 million increase in revenues due to contributions from ourApril 1, 2021 acquisition of theKantar Health business. Refer to Note (2) of the Notes for further information regarding theKantar Health acquisition. •The first nine months of 2021 includes a$44 million reduction in revenues due to the sale of certain of our revenue cycle outsourcing business operations to affiliates of R1 RCM Inc., onAugust 3, 2020 . •The first nine months of 2021 includes a$40 million reduction in revenues due to the sale of certain of our business operations primarily conducted inGermany andSpain to affiliates of CompuGroup Medical SE & Co. KGaA onJuly 1, 2020 .
Refer to Note (3) of the Notes for further information regarding revenues disaggregated by our business models.
Costs of Revenue
Costs of revenue as a percent of revenues were 17% in the first nine months of both 2021 and 2020.
Operating Expenses
Total operating expenses increased 6% to
•Sales and client service expenses as a percent of revenues were 46% in the first nine months of both 2021 and 2020. These expenses increased 5% to$2.00 billion in the first nine months of 2021, from$1.91 billion in the same period of 2020. The increase in sales and client service expenses was primarily driven by a$68 million pre-tax charge recorded in the first nine months of 2021 in connection with the designation of certain real estate assets as held for sale. The remaining increase was was primarily driven by expense contributions from theKantar Health business, which was acquired onApril 1, 2021 . Refer to Note (1) and Note (2) of the Notes for further information. •Software development expenses as a percent of revenues were 15% in the first nine months of 2021, compared to 13% in the same period of 2020. Expenditures for software development include ongoing development and enhancement of theCerner Millennium and HealtheIntent platforms, as well as other key initiatives such as platform modernization, with a focus on development of a software as a service platform. A summary of our total software development expense in the first nine months of 2021 and 2020 is as follows: Nine Months Ended (In thousands) 2021 2020 Software development costs$ 633,367 $ 592,025 Capitalized software costs (236,234) (219,879) Capitalized costs related to share-based payments (6,443)
(4,831)
Amortization of capitalized software costs 196,319
183,786
Net realizable value charges (see Note (1) of the Notes) 49,581
-
Total software development expense$ 636,590 $
551,101
•General and administrative expenses as a percent of revenues were 9% in the first nine months of 2021, compared to 10% in the same period of 2020. These expenses were relatively flat at$390 million in the first nine months of 2021, compared to$391 million in the same period of 2020. General and administrative expenses include certain charges incurred in connection with our operational improvement initiatives, as further discussed above, and in the Notes. 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 1% in the first nine months of both 2021 and 2020. These expenses increased 7% to$46 million in the first nine months of 2021, from$43 million in the same period in 2020. The increase in amortization of acquisition-related intangibles is primarily due to 30 -------------------------------------------------------------------------------- Table of Contents amortization of intangibles acquired in ourApril 1, 2021 acquisition of theKantar Health business. Refer to Note (2) of the Notes for further information regarding theKantar Health acquisition.
Gain on Sale of Businesses
The first nine months of 2020 includes a
Non-Operating Items
•Other income (loss), net was a net loss of$6 million in the first nine months of 2021, compared to$78 million of income in the same period of 2020. The decrease in 2021 is primarily attributable to the first nine months of 2020 including a$76 million gain recognized on the disposition of one of our equity investments. The remaining difference is primarily attributable to increased interest expense in the first nine months of 2021 from the$300 million of Series 2020-A Notes we issued inMarch 2020 and the$500 million of Series 2021 Senior Notes we issued inMarch 2021 . •Our effective tax rate was relatively flat at 21.8% for the first nine months of 2021, compared to 21.7% for the same period of 2020. Refer to Note (8) of the Notes for further discussion regarding our effective tax rate.
Operations by Segment
The following table presents a summary of our operating segment information for the first nine months of 2021 and 2020:
(In thousands) 2021 % of Revenue 2020 % of Revenue % Change Domestic Segment Revenues$ 3,774,507 100%$ 3,645,397 100% 4% Costs of revenue 660,584 18% 638,284 18% 3% Operating expenses 1,797,466 48% 1,724,545 47% 4% Total costs and expenses 2,458,050 65% 2,362,829 65% 4% Domestic operating earnings 1,316,457 35% 1,282,568 35% 3% International Segment Revenues 538,002 100% 465,366 100% 16% Costs of revenue 82,508 15% 59,984 13% 38% Operating expenses 206,794 38% 182,594 39% 13% Total costs and expenses 289,302 54% 242,578 52% 19% International operating earnings 248,700 46% 222,788 48%
12%
Other costs and expenses, net (1,072,616) (985,131) 9% Gain on sale of businesses - 216,869 Consolidated operating earnings$ 492,541 $ 737,094 (33)% Domestic Segment •Revenues increased 4% to$3.77 billion in the first nine months of 2021, from$3.65 billion in the same period of 2020. The following factors impacted the year-over-year change in Domestic revenues: •Increased implementation activity during the first nine months of 2021 within our federal business, inclusive of ongoing projects with theU.S. Department of Defense and theU.S. Department of Veterans Affairs . 31 -------------------------------------------------------------------------------- Table of Contents •The first nine months of 2021 includes a$42 million increase in revenues due to contributions from ourApril 1, 2021 acquisition of theKantar Health business. •The first nine months of 2021 includes a$44 million reduction in revenues due to the sale of certain of our revenue cycle outsourcing business operations to affiliates of R1 RCM Inc., onAugust 3, 2020 .
Refer to Note (3) of the Notes for further information regarding revenues disaggregated by our business models.
•Costs of revenue as a percent of revenues were 18% in the first nine months of both 2021 and 2020.
•Operating expenses as a percent of revenues were 48% in the first nine months of 2021, compared to 47% in the same period of 2020. These expenses increased 4% to$1.80 billion in the first nine months of 2021, from$1.72 billion in the same period of 2020. The increase in operating expenses was primarily driven by a$68 million pre-tax charge recorded in the first nine months of 2021 in connection with the designation of certain real estate assets as held for sale. The remaining increase was was primarily driven by expense contributions from theKantar Health business, which was acquired onApril 1, 2021 . Refer to Note (1) and Note (2) of the Notes for further information.
International Segment
•Revenues increased 16% to
•The first nine months of 2021 includes a
•The first nine months of 2021 includes a$40 million reduction in revenues due to the sale of certain of our business operations primarily conducted inGermany andSpain to affiliates of CompuGroup Medical SE & Co. KGaA onJuly 1, 2020 .
•The remaining difference is attributable to 2021 revenue growth across the majority of our remaining International Segment operations.
Refer to Note (3) of the Notes for further information regarding revenues disaggregated by our business models.
•Costs of revenue as a percent of revenues were 15% in the first nine months of 2021, compared to 13% in the same period of 2020. 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 38% in the first nine months of 2021, compared to 39% in the same period of 2020. These expenses increased 13% to$207 million in the first nine months of 2021, from$183 million in the same period of 2020. The increase in operating expenses is primarily due to theApril 1, 2021 acquisition of theKantar Health business.
Other Costs and Expenses, Net
These expenses increased 9% to$1.07 billion in the first nine months of 2021, from$985 million in the same period of 2020. The increase is primarily due to pre-tax charges of$50 million recorded in the first nine months of 2021 to reduce the carrying amount of certain capitalized software development costs to estimated net realizable value, as further discussed in Note (1) of the Notes. 32 -------------------------------------------------------------------------------- Table of Contents 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. 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. AtSeptember 30, 2021 , we had cash and cash equivalents of$460 million and short-term investments of$323 million , as compared to cash and cash equivalents of$616 million and short-term investments of$442 million atDecember 31, 2020 . 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 ofSeptember 30, 2021 , 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.
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. See Note (6) of the Notes for further information.
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 nine months of 2021 and 2020:
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