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 six month periods ended 2021 and 2020 in this MD&A
represent the respective three and six month periods ended June 30, 2021 and
June 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 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 in 2019. To assist in these efforts, we engaged an outside consulting firm to conduct a review of our operations and cost structure. 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. 21 -------------------------------------------------------------------------------- Table of Contents COVID-19 Our business and results of operations for the first six 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; 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. This decline in bookings flows through to reduced 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 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 in 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. To assist in these efforts, we engaged an outside consulting firm to conduct a review of our operations and cost structure. 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. 22 -------------------------------------------------------------------------------- Table of Contents We expect to continue to evaluate and potentially complete divestiture transactions that are strategic to our operational 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 six 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$1.36 billion in the second quarter of 2021, which is an increase of 2% compared to$1.34 billion in the second quarter of 2020.
Revenues for the second quarter of 2021 increased 10% to
Net earnings for the second quarter of 2021 decreased 76% to
We had cash collections of receivables of$1.46 billion in the second quarter of 2021, compared to$1.29 billion in the second quarter of 2020. Days sales outstanding was 77 days in the second quarter of 2021, compared to 77 days for the first quarter of 2021 and 81 days for the second quarter of 2020. Operating cash flows for the second quarter of 2021 were$369 million , compared to$259 million in the second quarter of 2020. 23 -------------------------------------------------------------------------------- Table of Contents Results of Operations
Three Months Ended
The following table presents a summary of our operating information for the second quarters of 2021 and 2020:
% of % of
(In thousands) 2021 Revenue 2020 Revenue % Change
Revenues $ 1,456,755 100 % $ 1,330,349 100 % 10 %
Costs of revenue 261,325 18 % 211,963 16 % 23 %
Margin 1,195,430 82 % 1,118,386 84 % 7 %
Operating expenses
Sales and client service 731,077 50 % 645,087 48 % 13 %
Software development 241,600 17 % 178,955 13 % 35 %
General and administrative 156,307 11 % 134,332 10 % 16 %
Amortization of acquisition-related intangibles 16,886 1 % 13,114 1 % 29 %
Total operating expenses 1,145,870 79 % 971,488 73 % 18 %
Total costs and expenses 1,407,195 97 % 1,183,451 89 % 19 %
Operating earnings 49,560 3 % 146,898 11 % (66) %
Other income (loss), net (1,678) 24,632
Income taxes (15,175) (36,782)
Net earnings $ 32,707 $ 134,748 (76) %
Revenues & Backlog
Revenues increased 10% to
•Increased implementation activity during the second quarter 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 second quarter 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. •The second quarter of 2021 includes a$45 million increase in revenues due to contributions from ourApril 1, 2021 acquisition of theKantar Health business. We expect the acquired business to contribute over$85 million of additional revenues over the remainder of 2021. Refer to Note (2) of the Notes for further information regarding theKantar Health acquisition. •Moderate recovery from the impact of the COVID-19 pandemic, which we believe had the most significant unfavorable impact to our business operations in the second quarter of 2020, as further discussed above. The largest impact was in the areas of licensed software, technology resale, professional services, and reimbursed travel revenues.
•The second quarter of 2021 includes a
•The second quarter of 2021 includes a$19 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.
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Backlog, which reflects contracted revenue that has not yet been recognized as
revenue, was $13.19 billion at June 30, 2021 , compared to $13.04 billion at
December 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 $1.07 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.
Costs of Revenue
Costs of revenue as a percent of revenues were 18% in the second quarter of 2021, compared to 16% in the same period of 2020. The higher costs of revenue as a percent of revenues was primarily driven by higher reimbursed travel revenue, which carries a 100% cost of revenue; a higher mix of technology resale revenue, which carries a high cost of revenue; and the impact of theKantar Health business acquired onApril 1, 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 increased 18% to
•Sales and client service expenses as a percent of revenues were 50% in the second quarter of 2021, compared to 48% in the same period of 2020. These expenses increased 13% to$731 million in the second quarter of 2021, from$645 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 a$68 million pre-tax charge recorded in the second quarter of 2021 in connection with the designation of certain real estate assets as held for sale. Refer to Note (1) of the Notes for further information. •Software development expenses as a percent of revenues were 17% in the second quarter of 2021, compared to 13% in the same period of 2020. Expenditures for software development include ongoing development and enhancement of theCerner Millennium® and HealtheIntent platforms, as well as other key initiatives such as platform modernization, with a focus on development of a software as a service platform. A summary of our total software development expense in the second quarters of 2021 and 2020 is as follows: Three Months Ended (In thousands) 2021 2020 Software development costs$ 212,258 $ 195,296 Capitalized software costs (81,306) (75,850) Capitalized costs related to share-based payments (2,252)
(1,688)
Amortization of capitalized software costs 65,247
61,197
Net realizable value charge (see Note (1) of the Notes) 47,653
-
Total software development expense$ 241,600 $ 178,955 25
-------------------------------------------------------------------------------- Table of Contents •General and administrative expenses as a percent of revenues were 11% in the second quarter of 2021, compared to 10% in the same period of 2020. These expenses increased 16% to$156 million in the second quarter of 2021, from$134 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 recognized in connection with our operational improvement initiatives, as further discussed in Note (1) of 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 second quarter of both 2021 and 2020. These expenses increased 29% to$17 million in the second 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 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.
Non-Operating Items
•Other income (loss), net was a net loss of$2 million in the second quarter of 2021, compared to$25 million of income in the same period of 2020. The decrease is primarily attributable to the second quarter of 2020 including a$26 million unrealized gain recognized in connection with the measurement of one of our equity investments. •Our effective tax rate was 31.7% for the second quarter of 2021, compared to 21.4% for the same period of 2020. The increase in the effective tax rate is primarily due to a$6 million valuation allowance recorded in the second quarter of 2021 against a deferred tax asset where it has become more likely than not that such deferred tax asset will not be realized. Refer to Note (8) of the Notes for further discussion regarding our effective tax rate.
Operations by Segment
We have two operating segments: Domestic and International. The Domestic segment includes revenue contributions and expenditures associated with business activity inthe United States . The International segment includes revenue contributions and expenditures linked to business activity outsidethe United States , primarily fromAustralia ,Canada ,Europe , and theMiddle East . Refer to Note (12) of the Notes for further information regarding our reportable segments. 26 -------------------------------------------------------------------------------- Table of Contents The following table presents a summary of our operating segment information for the second quarters of 2021 and 2020: (In thousands) 2021 % of Revenue 2020 % of Revenue % Change Domestic Segment Revenues$ 1,267,027 100%$ 1,168,213 100% 8% Costs of revenue 232,225 18% 189,779 16% 22% Operating expenses 656,369 52% 587,674 50% 12% Total costs and expenses 888,594 70% 777,453 67% 14% Domestic operating earnings 378,433 30% 390,760 33% (3)% International Segment Revenues 189,728 100% 162,136 100% 17% Costs of revenue 29,100 15% 22,184 14% 31% Operating expenses 74,708 39% 57,413 35% 30% Total costs and expenses 103,808 55% 79,597 49% 30% International operating earnings 85,920 45% 82,539 51%
4%
Other costs and expenses, net (414,793) (326,401)
27%
Consolidated operating earnings$ 49,560 $ 146,898 (66)% Domestic Segment •Revenues increased 8% to$1.27 billion in the second quarter of 2021, from$1.17 billion in the same period of 2020. The following factors impacted the year-over-year change in Domestic revenues:
•Increased implementation activity during the second quarter of 2021 within our
federal business, inclusive of ongoing projects with the
•The second quarter of 2021 includes a
•Moderate recovery from the impact of the COVID-19 pandemic, which we believe had the most significant unfavorable impact to our business operations in the second quarter of 2020, as further discussed above. The largest impact was in the areas of licensed software, technology resale, professional services, and reimbursed travel revenues.
•The second 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 18% in the second quarter of 2021, compared to 16% in the same period of 2020. The higher costs of revenue as a percent of revenues was primarily driven by higher reimbursed travel revenue, which carries a 100% cost of revenue; a higher mix of technology resale revenue, which carries a high cost of revenue; and the impact of theKantar Health business acquired onApril 1, 2021 . •Operating expenses as a percent of revenues were 52% in the second quarter of 2021, compared to 50% in the same period of 2020. These expenses increased 12% to$656 million in the second quarter of 2021, from$588 million in the same period of 2020. The increase in operating expenses was primarily driven by a$68 million pre-tax charge recorded in the second quarter of 2021 in connection with the designation of certain real estate assets as held for sale. Refer to Note (1) of the Notes for further information. 27 -------------------------------------------------------------------------------- Table of Contents International Segment •Revenues increased 17% to$190 million in the second quarter of 2021, compared to$162 million in the same period of 2020. The following factors impacted the year-over-year change in International revenues:
•The second quarter of 2021 includes a
•The second quarter of 2021 includes a$19 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 second quarter of 2021, compared to 14% 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 second quarter of 2021, compared to 35% in the same period of 2020. These expenses increased 30% to$75 million in the second quarter of 2021, from$57 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 27% to$415 million in the second quarter of 2021, from$326 million in the same period of 2020. The increase is primarily due to increased employee separation costs recognized in connection with our operational improvement initiatives, and a pre-tax charge of$48 million to reduce the carrying amount of certain capitalized software development costs to estimated net realizable value, both of which are further discussed in Note (1) of the Notes. 28 -------------------------------------------------------------------------------- Table of Contents Six Months EndedJune 30, 2021 Compared to Six Months EndedJune 30, 2020
The following table presents a summary of our operating information for the first six months of 2021 and 2020:
% of % of
(In thousands) 2021 Revenue 2020 Revenue % Change
Revenues $ 2,844,533 100 % $ 2,742,090 100 % 4 %
Costs of revenue 491,981 17 % 466,379 17 % 5 %
Margin 2,352,552 83 % 2,275,711 83 % 3 %
Operating expenses
Sales and client service 1,353,253 48 % 1,281,736 47 % 6 %
Software development 433,927 15 % 364,275 13 % 19 %
General and administrative 268,672 9 % 274,184 10 % (2) %
Amortization of acquisition-related intangibles 29,082 1 % 30,242 1 % (4) %
Total operating expenses 2,084,934 73 % 1,950,437 71 % 7 %
Total costs and expenses 2,576,915 91 % 2,416,816 88 % 7 %
Operating earnings 267,618 9 % 325,274 12 % (18) %
Other income (loss), net (472) 30,227
Income taxes (62,187) (73,594)
Net earnings $ 204,959 $ 281,907 (27) %
Revenues & Backlog
Revenues increased 4% to
•Increased implementation activity during the first six 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 six 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. •The first six months of 2021 includes a$45 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 six months of 2021 includes a$43 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 six 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 six months of both 2021 and 2020.
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Operating Expenses
Total operating expenses increased 7% to
•Sales and client service expenses as a percent of revenues were 48% in the first six months of 2021, compared to 47% in the same period of 2020. These expenses increased 6% to$1.35 billion in the first six months of 2021, from$1.28 billion in the same period of 2020. The increase in sales and client service expenses was primarily driven by a$68 million pre-tax charge recorded in the first six months of 2021 in connection with the designation of certain real estate assets as held for sale. Refer to Note (1) of the Notes for further information. •Software development expenses as a percent of revenues were 15% in the first six months of 2021, compared to 13% in the same period of 2020. Expenditures for software development include ongoing development and enhancement of theCerner Millennium and HealtheIntent platforms, as well as other key initiatives such as platform modernization, with a focus on development of a software as a service platform. A summary of our total software development expense in the first six months of 2021 and 2020 is as follows: Six Months Ended (In thousands) 2021 2020 Software development costs$ 423,285 $
393,460
Capitalized software costs (162,461)
(148,354)
Capitalized costs related to share-based payments (4,647)
(3,039)
Amortization of capitalized software costs 130,097
122,208
Net realizable value charge (see Note (1) of the Notes) 47,653
-
Total software development expense$ 433,927 $
364,275
•General and administrative expenses as a percent of revenues were 9% in the first six months of 2021, compared to 10% in the same period of 2020. These expenses decreased 2% to$269 million in the first six months of 2021, from$274 million in the same period of 2020. The slight decrease in general and administrative expenses was primarily driven by lower depreciation expenses associated with property and equipment. •Amortization of acquisition-related intangibles as a percent of revenues was 1% in the first six months of both 2021 and 2020. These expenses were relativity flat at$29 million in the first six months of 2021, compared to$30 million in the same period in 2020. Non-Operating Items •Other income (loss), net was a net loss of less than$1 million in the first six months of 2021, compared to$30 million of income in the same period of 2020. The first six months of 2020 includes a$26 million unrealized gain recognized in connection with the measurement of one of our equity investments. The remaining difference is primarily attributable to increased interest expense in the first six 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 23.3% for the first six months of 2021, compared to 20.7% for the same period of 2020. A$6 million valuation allowance was recorded in the first six months of 2021 against a deferred tax asset where it became more likely than not that such deferred tax asset will not be realized, while a valuation allowance of$3 million was recorded during first six months of 2020. The remainder of the increase in the effective tax rate is primarily related to unfavorability of permanent book-tax differences for share based compensation in 2021 compared to 2020. Refer to Note (8) of the Notes for further discussion regarding our effective tax rate. 30 -------------------------------------------------------------------------------- Table of Contents Operations by Segment
The following table presents a summary of our operating segment information for the first six months of 2021 and 2020:
(In thousands) 2021 % of Revenue 2020 % of Revenue % Change Domestic Segment Revenues$ 2,489,019 100%$ 2,414,628 100% 3% Costs of revenue 437,919 18% 418,346 17% 5% Operating expenses 1,216,931 49% 1,157,768 48% 5% Total costs and expenses 1,654,850 66% 1,576,114 65% 5% Domestic operating earnings 834,169 34% 838,514 35% (1)% International Segment Revenues 355,514 100% 327,462 100% 9% Costs of revenue 54,062 15% 48,033 15% 13% Operating expenses 136,322 38% 123,968 38% 10% Total costs and expenses 190,384 54% 172,001 53% 11% International operating earnings 165,130 46% 155,461 47%
6%
Other costs and expenses, net (731,681) (668,701)
9%
Consolidated operating earnings$ 267,618 $ 325,274 (18)% Domestic Segment •Revenues increased 3% to$2.49 billion in the first six months of 2021, from$2.41 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 six months of 2021 within our federal business, inclusive of ongoing projects with theU.S. Department of Defense and theU.S. Department of Veterans Affairs .
•The first six months of 2021 includes a
•The first six months of 2021 includes a$43 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 six months of 2021, compared to 17% in the same period of 2020. The higher costs of revenue as a percent of revenues was primarily driven by a higher mix of technology resale revenue, which carries a high cost of revenue; along with the impact of theKantar Health business acquired onApril 1, 2021 . •Operating expenses as a percent of revenues were 49% in the first six months of 2021, compared to 48% in the same period of 2020. These expenses increased 5% to$1.22 billion in the first six months of 2021, from$1.16 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 six months of 2021 in connection with the designation of certain real estate assets as held for sale. Refer to Note (1) of the Notes for further information. 31 -------------------------------------------------------------------------------- Table of Contents International Segment
•Revenues increased 9% to
•The first six months of 2021 includes a
•The first six 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 six months of both 2021 and 2020.
•Operating expenses as a percent of revenues were 38% in the first six months of both 2021 and 2020. These expenses increased 10% to$136 million in the first six months of 2021, from$124 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$732 million in the first six months of 2021, from$669 million in the same period of 2020. The increase is primarily due to a pre-tax charge of$48 million recorded in the first six 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. 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. AtJune 30, 2021 , we had cash and cash equivalents of$246 million and short-term investments of$638 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 ofJune 30, 2021 , we had outstanding revolving credit loans and letters of credit of$600 million and$31 million , respectively; which reduced our available borrowing capacity to$369 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.
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Table of Contents The following table summarizes our cash flows in the first six months of 2021 and 2020:
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