CERNER CORPORATION

(CERN)
Delayed Nasdaq  -  04:00 2022-06-07 pm EDT
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CERNER CORP Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

05/03/2022 | 09:10am EDT
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, with Cerner holding approximately 25 percent market share in the
U.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 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 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


On December 20, 2021, we entered into the Merger Agreement with Oracle and
certain of its wholly owned subsidiaries. Pursuant to the Merger Agreement, on
January 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
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with and into Cerner 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 the SEC and other relevant
materials related to the transaction that we will file with the SEC.

Results of Operations

Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021

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 $934 million in the first quarter of 2022, compared to $939 million in the same period of 2021.


•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 the Cerner 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
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acquisitions. The increase in amortization of acquisition-related intangibles is
primarily due to amortization of intangibles acquired in our April 1, 2021
acquisition of the Kantar Health business.

Non-Operating Items

•Other income, net was less than $1 million in the first quarter of 2022, compared to $1 million in the same period of 2021. Other income, net for the periods presented is primarily comprised of investment earnings, offset by interest expense on our outstanding indebtedness.


•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 in the United States. The International segment includes revenue
contributions and expenditures linked to business activity outside the United
States, primarily from Australia, Canada, Europe, and the Middle 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 our April 1, 2021
acquisition of the Kantar 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 the U.S.
Department of Defense and the U.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)
with U.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 our April 1, 2021
acquisition of the Kantar 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 in Europe. 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 the Kantar Health
business acquired on April 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 the April 1,
2021 acquisition of the Kantar 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. At March 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 at December 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 in December 2026, with two
one-year extension options that are subject to lender approval. As of March 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:

© Edgar Online, source Glimpses

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