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Cerner Reports Second Quarter 2018 Results

KANSAS CITY, Mo., Aug. 02, 2018 (GLOBE NEWSWIRE) -- Cerner Corporation (Nasdaq: CERN) today announced results for the 2018 second quarter that ended June 30, 2018.

Bookings in the second quarter of 2018 were $1.775 billion, an increase of 9 percent compared to $1.636 billion in the second quarter of 2017.

Second quarter revenue was $1.368 billion, an increase of 6 percent compared to $1.292 billion in the second quarter of 2017.

On a U.S. Generally Accepted Accounting Principles (GAAP) basis, second quarter 2018 net earnings were $169.4 million and diluted earnings per share were $0.51.  Second quarter 2017 GAAP net earnings were $179.7 million and diluted earnings per share were $0.53.

Adjusted Net Earnings for second quarter 2018 were $207.0 million, compared to $205.5 million of Adjusted Net Earnings in the second quarter of 2017.  Adjusted Diluted Earnings Per Share (EPS) were $0.62 in the second quarter of 2018 compared to $0.61 of Adjusted Diluted EPS in the year-ago quarter.  Analysts’ consensus estimate for second quarter 2018 Adjusted Diluted EPS was $0.60.

Adjusted Net Earnings and Adjusted Diluted Earnings Per Share are not recognized terms under GAAP.  These non-GAAP financial measures should not be substituted for GAAP net earnings or GAAP diluted earnings per share, respectively, as measures of Cerner’s performance, but instead should be utilized as supplemental measures of financial performance in evaluating our business.  Please see the accompanying schedule, titled “Reconciliation of GAAP Results to Non-GAAP Results,” where our non-GAAP financial measures are defined and reconciled to the most comparable GAAP measures.

Other Highlights:

  • Second quarter operating cash flow of $299.7 million.
  • Second quarter Free Cash Flow of $121.1 million.  Free Cash Flow is a non-GAAP financial measure defined as GAAP cash flows from operating activities less capital purchases and capitalized software development costs.  Please see the accompanying schedule, titled “Reconciliation of GAAP Results to Non-GAAP Results.”
  • Second quarter days sales outstanding of 77 days, up from 73 days in the year-ago period.
  • Total backlog of $14.79 billion

“I am pleased with our second quarter results, which included all key metrics being at or above expected levels,” said Zane Burke, President.  “Our results were solid across all of our major solution and services categories and included good contributions from U.S. and non-U.S. regions.  Looking ahead, we believe our solutions and tech-enabled services are well aligned with the challenges providers and other health care stakeholders are facing, and we have a significant opportunity to grow as we help them with their transition to value-based care in coming years.”

Future Period Guidance
Cerner currently expects:

  • Third quarter 2018 revenue between $1.335 billion and $1.385 billion.
  • Full year 2018 revenue between $5.325 billion and $5.450 billion, consistent with previously provided full year guidance.
  • Third quarter 2018 Adjusted Diluted Earnings Per Share between $0.62 and $0.64
  • Full year 2018 Adjusted Diluted Earnings Per Share between $2.45 and $2.55, consistent with previously provided guidance.
  • Third quarter 2018 new business bookings between $1.450 billion and $1.650 billion.

Earnings Conference Call 
Cerner will host an earnings conference call to provide additional detail on the Company’s results and outlook at 3:30 p.m. CT on August 2, 2018.  On the call, Cerner will discuss its second quarter 2018 results and answer questions from the investment community.  The call may also include discussion of Cerner developments, and forward-looking and other material information about business and financial matters.  The dial-in number for the conference call is (678)-509-7542; the passcode is Cerner.  Cerner recommends joining the call 15 minutes early for registration.  The re-broadcast of the call will be available from 6:30 p.m. CT, August 2, 2018 through 10:59 p.m. CT, August 5, 2018.  The dial-in number for the re-broadcast is (855) 859-2056; the passcode is 1189716.

An audio webcast will be available live and archived on Cerner’s website at www.cerner.com under the About Us section (click Investor Relations, then Presentations and Webcasts).

About Cerner
Cerner’s health technologies connect people and information systems at more than 27,000 contracted provider facilities worldwide dedicated to creating smarter and better care for individuals and communities. Recognized globally for innovation, Cerner assists clinicians in making care decisions and assists organizations in managing the health of their populations. The company also offers an integrated clinical and financial system to help manage day-to-day revenue functions, as well as a wide range of services to support clinical, financial and operational needs, focused on people. For more information, visit Cerner.com, The Cerner Blog or connect on Facebook, Instagram, LinkedIn, Twitter or The Cerner Podcast. Nasdaq: CERN. Smarter Care. Better Outcomes. Healthier You.

Certain trademarks, service marks and logos set forth herein are property of Cerner Corporation and/or its subsidiaries.

All statements in this press release that do not directly and exclusively relate to historical facts constitute forward-looking statements.  These forward-looking statements are based on the current beliefs, expectations and assumptions of Cerner's management with respect to future events and are subject to a number of significant risks and uncertainties.  It is important to note that Cerner's performance, and actual results, financial condition or business could differ materially from those expressed in such forward-looking statements. The words “expect”, “expectations”, “guidance”, “positioned”, “believe”, “will”, “opportunity”, “forecasted”, “estimate”, “outlook” or the negative of these words, variations thereof or similar expressions are intended to identify such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to: possibility of significant costs and reputational harm related to product-related liabilities; potential claims for system errors and warranties; the possibility of interruption at our data centers or client support facilities that could expose us to significant costs and reputational harm; the possibility of increased expenses, exposure to legal claims and regulatory actions and reputational harm associated with a cyberattack or other breach in our IT security; our proprietary technology may be subject to claims for infringement or misappropriation of intellectual property rights of others, or may be infringed or misappropriated by others; potential claims or other risks associated with relying on open source software in our proprietary software, solutions or services; material adverse resolution of legal proceedings; risks associated with our global operations, including without limitation greater difficulty in collecting accounts receivable; risks associated with fluctuations in foreign currency exchange rates; changes in tax laws, regulations or guidance that could adversely affect our tax position and/or challenges to our tax positions in the U.S. and non-U.S. countries;the uncertainty surrounding the impact of the United Kingdom’s vote to leave the European Union (commonly referred to as Brexit) on our global business; risks associated with the unexpected loss or recruitment and retention of key personnel or the failure to successfully develop and execute succession planning to assure transitions of key associates and their knowledge, relationships and expertise; risks related to our dependence on strategic relationships and third party suppliers; risks inherent with business acquisitions and combinations and the integration thereof into our business; risks associated with volatility and disruption resulting from global economic or market conditions; significant competition and our ability to quickly respond to market changes and changing technologies and to bring competitive new solutions, devices, features and services to market in a timely fashion; managing growth in the new markets in which we offer solutions, health care devices or services; long sales cycles for our solutions and services; risks inherent in contracting with government clients, including without limitation, complying with strict compliance and disclosure obligations, navigating complex procurement rules and processes and defending against bid protests; risks associated with our outstanding and future indebtedness, such as compliance with restrictive covenants, which may limit our flexibility to operate our business; changes in accounting standards issued by the Financial Accounting Standards Board or other standard-setting bodies may adversely affect our financial statements; the potential for losses resulting from asset impairment charges; changing political, economic, regulatory and judicial influences, which could impact the purchasing practices and operations of our clients and increase costs to deliver compliant solutions and services; non-compliance with laws, government regulation or certain industry initiatives; variations in our quarterly operating results; potential variations in our sales forecasts compared to actual sales; volatility in the trading price of our common stock and the timing and volume of market activity; and our directors’ authority to issue preferred stock and the anti-takeover provisions in our corporate governance documents. Additional discussion of these and other risks, uncertainties and factors affecting Cerner's business is contained in Cerner's filings with the Securities and Exchange Commission. The reader should not place undue reliance on forward-looking statements, since the statements speak only as of the date that they are made. Except as required by law, Cerner undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events, or changes in our business, results of operations or financial condition over time.

Investor Contact:  Allan Kells, (816) 201-2445, akells@cerner.com
Media Contact:  Dan Smith, (913) 304-3991, dan.smith1@cerner.com  
Cerner’s Internet Home Page:  www.cerner.com


CERNER CORPORATION AND SUBSIDIARIES 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS 
For the three and six months ended June 30, 2018 and July 1, 2017 
(unaudited)            
             
(In thousands, except per share data)   Three Months Ended   Six Months Ended
     2018   2017     2018   2017 
             
Revenues   $   1,367,727   $   1,291,994     $   2,660,588   $   2,552,480  
Costs of revenue      238,783      223,063        470,061      422,056  
Margin      1,128,944      1,068,931        2,190,527      2,130,424  
             
Operating expenses            
Sales and client service      635,105      563,387        1,225,053      1,123,587  
Software development      168,278      142,835        329,895      288,736  
General and administrative      95,464      90,633        187,758      179,025  
Amortization of acquisition-related intangibles      21,810      22,688        44,319      45,562  
Total operating expenses      920,657      819,543        1,787,025      1,636,910  
             
Operating earnings      208,287      249,388        403,502      493,514  
             
Other income, net      6,597      2,661        11,461      1,545  
             
Earnings before income taxes      214,884      252,049        414,963      495,059  
Income taxes      (45,527 )    (72,366 )      (85,605 )    (142,163 )
Net earnings   $   169,357   $   179,683     $   329,358   $   352,896  
             
Basic earnings per share   $   0.51   $   0.54     $   0.99   $   1.07  
             
Basic weighted average shares outstanding      330,206      331,056        331,479      330,607  
             
Diluted earnings per share   $   0.51   $   0.53     $   0.98   $   1.05  
             
Diluted weighted average shares outstanding      333,562      337,898        335,223      337,116  
             
Note 1: Our revenues by business model for the three and six months ended June 30, 2018 and July 1, 2017 were as follows:
             
(In thousands)   Three Months Ended   Six Months Ended
     2018   2017     2018   2017 
             
Licensed software   $   172,388   $   155,886     $   307,207   $   298,214  
Technology resale      75,257      73,132        138,633      137,239  
Subscriptions      82,951      118,790        159,587      232,211  
Professional services      447,318      396,163        888,586      792,478  
Managed services      285,552      261,679        553,857      521,498  
Support and maintenance      278,956      259,574        563,520      521,678  
Reimbursed travel      25,305      26,770        49,198      49,162  
Total revenues   $   1,367,727   $   1,291,994     $   2,660,588   $   2,552,480  
             

 

CERNER CORPORATION AND SUBSIDIARIES  
RECONCILIATION OF GAAP RESULTS TO NON-GAAP RESULTS  
For the three and six months ended June 30, 2018 and July 1, 2017 
(unaudited)            
             
ADJUSTED OPERATING EARNINGS
             
(In thousands)   Three Months Ended   Six Months Ended
     2018   2017     2018   2017 
             
Operating earnings (GAAP)   $   208,287   $   249,388     $   403,502   $   493,514  
             
Share-based compensation expense      26,281      23,154        52,738      42,009  
Health Services acquisition-related amortization      20,940      20,845        42,148      41,873  
Acquisition-related deferred revenue adjustment      —      4,288        —      8,772  
Other acquisition-related adjustments      —      10        —      40  
             
Adjusted Operating Earnings (non-GAAP)   $   255,508   $   297,685     $   498,388   $   586,208  
             
ADJUSTED NET EARNINGS AND ADJUSTED DILUTED EARNINGS PER SHARE
             
(In thousands, except per share data)   Three Months Ended   Six Months Ended
     2018   2017     2018   2017 
             
Net earnings (GAAP)   $   169,357   $   179,683     $   329,358   $   352,896  
             
Pre-tax adjustments for Adjusted Net Earnings:            
Share-based compensation expense      26,281      23,154        52,738      42,009  
Health Services acquisition-related amortization      20,940      20,845        42,148      41,873  
Acquisition-related deferred revenue adjustment      —      4,288        —      8,772  
Other acquisition-related adjustments      —      10        —      40  
             
After-tax adjustments for Adjusted Net Earnings:            
Income tax effect of pre-tax adjustments      (10,005 )    (13,867 )      (19,553 )    (26,618 )
Share-based compensation permanent tax items      453      (8,598 )      (3,736 )    (15,660 )
             
Adjusted Net Earnings (non-GAAP)   $   207,026   $   205,515     $   400,955   $   403,312  
             
Diluted weighted average shares outstanding       333,562       337,898         335,223       337,116  
             
Adjusted Diluted Earnings Per Share (non-GAAP)   $   0.62   $   0.61     $   1.20   $   1.20  
             
FREE CASH FLOW      
             
(In thousands)   Three Months Ended   Six Months Ended
     2018   2017     2018   2017 
             
Cash flows from operating activities (GAAP)   $   299,701   $   292,243     $   708,666   $   595,828  
Capital purchases      (109,283 )    (101,307 )      (188,994 )    (189,372 )
Capitalized software development costs      (69,349 )    (71,874 )      (142,951 )    (142,966 )
Free Cash Flow (non-GAAP)   $   121,069   $   119,062     $   376,721   $   263,490  
             
Cash flows from investing activities (GAAP)   $   316   $   (237,651 )   $   (211,182 ) $   (341,503 )
             
Cash flows from financing activities (GAAP)   $   (195,969 ) $   23,281     $   (350,280 ) $   27,650  
             
Explanation of Non-GAAP Financial Measures 
             
We report our financial results in accordance with accounting principles generally accepted in the United States of America ("GAAP"). However, we supplement our GAAP results with certain non-GAAP financial measures, which we believe enable investors to better understand and evaluate our ongoing operating results and allows for greater transparency in the review and understanding of our overall financial, operational and economic performance. These non-GAAP financial measures are not meant to be considered in isolation, as a substitute for, or superior to GAAP results and investors should be aware that non-GAAP measures have inherent limitations and should be read only in conjunction with Cerner's consolidated financial statements prepared in accordance with GAAP. These non-GAAP measures may also be different from similar non-GAAP financial measures used by other companies and may not be comparable to similarly titled captions of other companies due to potential inconsistencies in the method of calculations. We provide the measures of Adjusted Operating Earnings, Adjusted Net Earnings and Adjusted Diluted Earnings Per Share as such measures are used by management, along with GAAP results, to analyze Cerner's business, make strategic decisions, assess long-term trends on a comparable basis, and for management compensation purposes. We provide the measure of Free Cash Flow as such measure takes into account certain capital expenditures necessary to operate our business. Free Cash Flow is used by management, along with GAAP results, to analyze our earnings quality and overall cash generation of the business.
             
We calculate each of our non-GAAP financial measures as follows: 
             
Adjusted Operating Earnings - Consists of GAAP operating earnings adjusted for: (i) share-based compensation expense, (ii) Health Services acquisition-related amortization, (iii) acquisition-related deferred revenue adjustment, and (iv) other acquisition-related adjustments.
             
Adjusted Net Earnings - Consists of GAAP net earnings adjusted for: (i) share-based compensation expense, (ii) Health Services acquisition-related amortization, (iii) acquisition-related deferred revenue adjustment, (iv) other acquisition-related adjustments, (v) the income tax effect of the aforementioned items, and (vi) share-based compensation permanent tax items.
             
Adjusted Diluted Earnings Per Share - Consists of Adjusted Net Earnings, as defined above, divided by diluted weighted average shares outstanding, in the applicable period.
             
Free Cash Flow - Consists of cash flows from operating activities, less capital purchases and capitalized software development costs.
             
Adjustments included in the calculations of Adjusted Operating Earnings and Adjusted Net Earnings are described below: 
             
Share-based compensation expense - Non-cash expense arising from our equity compensation and stock purchase plans available to our associates and directors. We exclude share-based compensation expense as we believe the amount of such non-cash expenses in any specific period may not directly correlate to the underlying performance of our business operations. Share-based compensation expense is included in our Condensed Consolidated Statements of Operations as follows:
             
(In thousands)   Three Months Ended   Six Months Ended
     2018   2017     2018   2017 
             
Sales and client service   $   13,207   $   12,666     $   25,786   $   22,337  
Software development      5,736      4,636        11,161      8,863  
General and administrative      7,338      5,852        15,791      10,809  
Total share-based compensation expense   $   26,281   $   23,154     $   52,738   $   42,009  
             
Health Services acquisition-related amortization - Non-cash expense consisting of the amortization of customer relationships, acquired technology, and trade name intangible assets recorded in connection with our acquisition of the Health Services business in February 2015. We exclude Health Services acquisition-related amortization as we believe the amount of such non-cash expenses in any specific period may not directly correlate to the underlying performance of our business operations. Such amount is included in our Condensed Consolidated Statements of Operations in the caption "Amortization of acquisition-related intangibles."
             
Acquisition-related deferred revenue adjustment - Consists of acquisition-related deferred revenue adjustments in connection with our acquisition of the Health Services business in February 2015. Accounting guidance requires that deferred revenue acquired in a business combination be written-down to an estimate of fulfillment cost, plus a normal profit margin, as a part of the allocation of purchase price to assets acquired and liabilities assumed. We add back the amount of the write-down applicable to the period as we believe such amount directly correlates to the underlying performance of our business operations.
             
Other acquisition-related adjustments - Consists of acquisition, employee separation, and other costs associated with our acquisition of the Health Services business in February 2015. We exclude other acquisition-related adjustments as they are non-recurring charges, and we believe the amount of such expenses in any specific period may not directly correlate to the underlying performance of our business operations. Such amount is included in our Condensed Consolidated Statements of Operations in the caption "General and administrative" expense.
             
Income tax effect of pre-tax adjustments - The GAAP effective income tax rate for the applicable quarterly period is applied to pre-tax adjustments for Adjusted Net Earnings.
             
Share-based compensation permanent tax items - Consists of permanent items impacting the Company's income tax provision related to our share-based compensation arrangements, including net excess tax benefits recognized upon the exercise of stock options. We exclude such items as we believe the amount of such items in any specific period may not directly correlate to the underlying performance of our business operations. Such amount is included in our Condensed Consolidated Statements of Operations in the caption "Income taxes."
             
Cerner's future period guidance in this release includes adjustments for items not indicative of our core operations, which may include without limitation share-based compensation expense and acquisition-related expenses, such as integration expenses, and may be affected by changes in ongoing assumptions and judgments relating to the Company's acquired businesses, and may also be affected by nonrecurring, unusual or unanticipated charges, expenses or gains, all of which are excluded in the calculation of non-GAAP Adjusted Operating Earnings, Adjusted Net Earnings and Adjusted Diluted Earnings Per Share as described above. The exact amount of these adjustments are not currently determinable, but may be significant. It is therefore not practicable to reconcile this non-GAAP guidance to the most comparable GAAP measures.
 

 

CERNER CORPORATION AND SUBSIDIARIES 
CONDENSED CONSOLIDATED BALANCE SHEETS 
As of June 30, 2018 and December 30, 2017 
(unaudited)    
     
(In thousands)  2018   2017 
     
Assets    
Current assets:    
Cash and cash equivalents $   510,968   $   370,923  
Short-term investments    374,596      434,844  
Receivables, net    1,151,860      1,042,781  
Inventory    15,345      15,749  
Prepaid expenses and other    326,623      515,930  
Total current assets    2,379,392      2,380,227  
     
Property and equipment, net    1,666,309      1,603,319  
Software development costs, net    867,284      822,159  
Goodwill    849,455      853,005  
Intangible assets, net    439,999      479,753  
Long-term investments    118,286      196,837  
Other assets    208,274      134,011  
Total assets $   6,528,999   $   6,469,311  
     
Liabilities and Shareholders’ Equity    
Current liabilities:    
Accounts payable $   284,203   $   218,996  
Current installments of long-term debt and capital lease obligations    2,155      11,585  
Deferred revenue    278,668      311,337  
Accrued payroll and tax withholdings    205,337      183,770  
Other accrued expenses    65,324      63,907  
Total current liabilities    835,687      789,595  
     
Long-term debt and capital lease obligations    438,760      515,130  
Deferred income taxes and other liabilities    371,381      365,674  
Deferred revenue    4,317      13,564  
Total liabilities    1,650,145      1,683,963  
     
Shareholders’ Equity:    
Common stock    3,605      3,592  
Additional paid-in capital    1,443,803      1,380,371  
Retained earnings    5,275,824      4,938,866  
Treasury stock    (1,751,723 )    (1,464,099 )
Accumulated other comprehensive loss, net    (92,655 )    (73,382 )
Total shareholders’ equity    4,878,854      4,785,348  
Total liabilities and shareholders’ equity $   6,528,999   $   6,469,311  
     

 

CERNER CORPORATION AND SUBSIDIARIES  
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  
For the three and six months ended June 30, 2018 and July 1, 2017 
(unaudited)            
             
    Three Months Ended   Six Months Ended
(In thousands)    2018   2017     2018   2017 
             
CASH FLOWS FROM OPERATING ACTIVITIES:            
Net earnings   $   169,357   $   179,683     $   329,358   $   352,896  
Adjustments to reconcile net earnings to net cash provided by operating activities:            
Depreciation and amortization      160,053      144,056        312,645      278,889  
Share-based compensation expense      24,204      21,859        49,139      39,359  
Provision for deferred income taxes      4,783      14,635        1,736      25,849  
Changes in assets and liabilities:            
Receivables, net      (115,431 )    (45,487 )      (186,039 )    (79,723 )
Inventory      (1,055 )    4,477        390      211  
Prepaid expenses and other      55,485      (27,164 )      181,035      106  
Accounts payable      35,756      55,555        43,364      33,647  
Accrued income taxes      724      (4,614 )      7,919      (3,846 )
Deferred revenue      (32,927 )    (11,933 )      (40,132 )    12,336  
Other accrued liabilities      (1,248 )    (38,824 )      9,251      (63,896 )
             
Net cash provided by operating activities      299,701      292,243        708,666      595,828  
             
CASH FLOWS FROM INVESTING ACTIVITIES:            
Capital purchases      (109,283 )    (101,307 )      (188,994 )    (189,372 )
Capitalized software development costs      (69,349 )    (71,874 )      (142,951 )    (142,966 )
Purchases of investments      (43,205 )    (129,144 )      (194,592 )    (182,484 )
Sales and maturities of investments      230,054      72,325        331,728      187,355  
Purchase of other intangibles      (7,901 )    (7,651 )      (16,373 )    (14,036 )
             
Net cash provided by (used in) investing activities      316      (237,651 )      (211,182 )    (341,503 )
             
CASH FLOWS FROM FINANCING ACTIVITIES:            
Repayment of long-term debt      —      —        (75,000 )    —  
Proceeds from exercises of stock options      11,307      27,610        21,343      38,293  
Payments to taxing authorities in connection with shares directly withheld from associates      (5,585 )    (2,658 )      (7,308 )    (7,972 )
Treasury stock purchases      (200,000 )    —        (287,624 )    —  
Contingent consideration payments for acquisition of businesses      (1,691 )    (1,671 )      (1,691 )    (2,671 )
             
Net cash provided by (used in) financing activities      (195,969 )    23,281        (350,280 )    27,650  
             
Effect of exchange rate changes on cash and cash equivalents      (6,479 )    4,105        (7,159 )    7,594  
             
Net increase in cash and cash equivalents      97,569      81,978        140,045      289,569  
Cash and cash equivalents at beginning of period      413,399      378,452        370,923      170,861  
             
Cash and cash equivalents at end of period   $   510,968   $   460,430     $   510,968   $   460,430  
             


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Source: Cerner Corporation