UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
For the fiscal year ended: December 31, 2021
or
For the transition period from ___________ to ___________
Commission file number: 0-15386
(Exact name of registrant as specified in its charter)
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| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||||||||||||||
| (Address of principal executive offices) | (Zip Code) | ||||||||||||||||
(816 ) 221-1024
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C.7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
As of June 30, 2021, the aggregate market value of the registrant's common stock held by non-affiliates of the registrant was $20.9 billion based on the closing sale price as reported on the Nasdaq Global Select Market. Shares of common stock held by each executive officer, director and holder of 10% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status for purposes of this calculation is not intended as a conclusive determination of affiliate status for other purposes.
Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date.
| Class | Outstanding at February 10, 2022 | |||||||
| Common Stock, $0.01 par value per share | ||||||||
DOCUMENTS INCORPORATED BY REFERENCE
| Document | Parts into Which Incorporated | |||||||
| Portions of the registrant's Proxy Statement for the 2022 Annual Shareholders' Meeting | Part III | |||||||
CERNER CORPORATION
TABLE OF CONTENTS
| Part I | ||||||||
| Item 1. | Business | |||||||
| Item 1A. | Risk Factors | |||||||
| Item 1B. | Unresolved Staff Comments | |||||||
| Item 2. | Properties | |||||||
| Item 3. | Legal Proceedings | |||||||
| Item 4. | Mine Safety Disclosures | |||||||
| Part II | ||||||||
| Item 5. | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | |||||||
| Item 6. | [Reserved] | |||||||
| Item 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations | |||||||
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk | |||||||
| Item 8. | Financial Statements and Supplementary Data | |||||||
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | |||||||
| Item 9A. | Controls and Procedures | |||||||
| Item 9B. | Other Information | |||||||
| Item 9C. | Disclosure Regarding Foreign Jurisdictions that Prevent Inspections | |||||||
| Part III | ||||||||
| Item 10. | Directors, Executive Officers and Corporate Governance | |||||||
| Item 11. | Executive Compensation | |||||||
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | |||||||
| Item 13. | Certain Relationships and Related Transactions, and Director Independence | |||||||
| Item 14. | Principal Accountant Fees and Services | |||||||
| Part IV | ||||||||
| Item 15. | Exhibits, Financial Statement Schedules | |||||||
| Item 16. | Form 10-K Summary | |||||||
| Signatures | ||||||||
PART I.
This annual report on Form 10-K and the documents incorporated herein by reference contain forward-looking statements based on expectations, estimates, and projections as of the date of this filing. Actual results may differ materially from those expressed in forward-looking statements. See Item 1A of Part I — "Risk Factors."
Item 1. Business.
Overview
Cerner Corporation started doing business as a Missouri corporation in 1980 and was merged into a Delaware corporation in 1986. Unless the context otherwise requires, references in this report to "Cerner," the "Company," "we," "us" or "our" mean Cerner Corporation and its subsidiaries.
Our corporate world headquarters is located in a Company-owned office park in North Kansas City, Missouri, with our principal place of business located at 2800 Rock Creek Parkway, North Kansas City, Missouri 64117. Our Web site, which we use to communicate important business information, can be accessed at: www.cerner.com. We make our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports available free of charge on or through this Web site as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission ("SEC"). We do not intend for information contained in our website to be part of this annual report on Form 10-K.
Cerner is a leading supplier of healthcare information technology ("HCIT") solutions and services. We offer a wide range of intelligent solutions and tech-enabled services that support the clinical, financial and operational needs of organizations of all sizes. Cerner® solutions and services help clinicians make care decisions and assist organizations in managing the health of their populations. We also offer integrated clinical and financial systems to help manage day-to-day revenue functions, as well as a wide range of services to support clinical, financial and operational needs. We have also expanded our presence in the life sciences industry, where we work with healthcare stakeholders to improve the safety, efficiency, and efficacy of clinical research.
Cerner solutions are primarily offered on the unified Cerner Millennium® architecture and on the HealtheIntent® cloud-based platform. Cerner Millennium is a person-centric computing framework, which includes integrated clinical, financial and management information systems. This architecture allows providers to securely access an individual's electronic health record ("EHR") at the point of care, and it organizes and proactively delivers information to meet the specific needs of physicians, nurses, laboratory technicians, pharmacists, front- and back-office professionals and consumers. On our HealtheIntent platform, we offer solutions that aggregate, transform and reconcile data across the continuum of care, enabling key stakeholders to manage the health of populations, improve outcomes, enhance clinical research and lower costs. Cerner also has an EHR agnostic platform, CareAware®, that facilitates connectivity of healthcare devices to EHRs and helps improve hospital operations, allowing for more efficient and effective care.
On February 2, 2015, Cerner acquired the Health Services business from Siemens AG, which offered a portfolio of enterprise-level clinical and financial healthcare information technology solutions, as well as departmental and care coordination solutions globally. Refer to Notes (8) and (9) of the notes to consolidated financial statements ("Notes") for information on our acquisitions and dispositions.
We offer a broad range of tech-enabled services, including implementation and training, remote hosting, application management services, revenue cycle services, support and maintenance, healthcare data analysis, real-world evidence, clinical process optimization, transaction processing, employer health centers, and data-driven services that help life sciences companies with the discovery, development and deployment of therapies.
In addition to software and services, we offer a wide range of complementary hardware and devices, primarily as a reseller for third parties.
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The following table presents consolidated revenues by our business models and by segment, as a percentage of total revenues:
| For the Years Ended | |||||||||||
| 2021 | 2020 | 2019 | |||||||||
| Revenues by Business Models | |||||||||||
| Licensed software | 12 | % | 12 | % | 12 | % | |||||
| Technology resale | 3 | % | 3 | % | 4 | % | |||||
| Subscriptions | 7 | % | 7 | % | 6 | % | |||||
| Professional services | 37 | % | 35 | % | 35 | % | |||||
| Managed services | 22 | % | 23 | % | 21 | % | |||||
| Support and maintenance | 18 | % | 19 | % | 20 | % | |||||
| Reimbursed travel | 1 | % | 1 | % | 2 | % | |||||
| 100 | % | 100 | % | 100 | % | ||||||
| Revenues by Segment | |||||||||||
| Domestic | 88 | % | 89 | % | 89 | % | |||||
| International | 12 | % | 11 | % | 11 | % | |||||
| 100 | % | 100 | % | 100 | % | ||||||
A description of our business models is as follows:
•Licensed software - We develop and license intellectual property ("IP") (our architectures, application software, executable and referential knowledge, data and algorithms) to our clients. Our licensed software business model includes revenues from IP delivered via perpetual license and software as a service, where functionality is delivered via "the cloud".
•Technology resale - We bundle licensed software with other companies' IP in the form of sublicenses to create complete technology solutions for our clients. We also resell bundled computer equipment (hardware) from technology companies to create a completely functional system. Additionally, we resell medical devices for medical device companies.
•Subscriptions - Another method by which we provide IP is on a time-based subscription model that has a periodic usage charge. This is the primary way we package and provide medical knowledge, which changes frequently based on research and can be updated independently from the software in which it is embedded. Also included in this category of revenue is our Electronic Data Interchange ("EDI") transaction revenue. EDI is the electronic transfer of data between healthcare providers and payers.
•Professional services - We provide a wide range of professional services to assist our clients in the implementation of our information systems in their organizations. These services are in the form of project management, technical and application expertise, clinical process optimization, regulatory consulting and education and training of our clients' workforce to assist in the design and implementation of our systems. This business model also includes certain outsourcing services utilized by healthcare organizations as well as services provided to the life sciences industry through our Cerner EnvizaSM offerings.
•Managed services - Our managed services business model includes revenues from remote hosting, operational management services, and disaster recovery. Remote hosting is the largest of these offerings, and it involves Cerner buying the necessary equipment, installing it in one of our data centers, and operating the entire system on the client's behalf.
•Support and maintenance - This business model is comprised of the ongoing support and maintenance services we provide our clients. Almost all of our clients contract for these services. Clients with support contracts get 24x7 access to our immediate response center, which serves as our "emergency room," as well as access to our SolutionWorks organization for less urgent issues. In addition, our clients' support payments give them ongoing
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access to the latest releases of our IP. We also provide support for sublicensed software and maintenance for third party hardware.
•Reimbursed travel - Includes reimbursable out-of-pocket expenses (primarily travel) incurred in connection with our client service activities.
Healthcare and Healthcare IT Industry
There are several major forces shaping healthcare worldwide.
•Rising Healthcare Costs - Healthcare costs continue to grow faster than the economy, with total healthcare expenditures increasing 4.5% to $3.8 trillion in 2019 and 9.7% to $4.1 trillion in 2020, representing 19.7% of the U.S. Gross Domestic Product ("GDP"). Health expenditures are expected to grow over 5% annually through 2028, which would bring them to approximately 20% of GDP. Similar growth trends exist in most major non-U.S. markets as well.
We believe the trajectory of healthcare expenditure growth is unsustainable, and we believe information technology can play an important role in addressing the key drivers of this growth by driving efficiencies, reducing waste, and improving management of chronic conditions and helping prevent them in the first place. In summary, IT can play a key role in facilitating a shift from a high-cost healthcare system that incents volume to a proactive system that incents health, quality and efficiency.
•Evolving Reimbursement - With the full enactment of The Patient Protection and Affordable Care Act ("ACA"), Medicaid expansion, and the aging population driving Medicare growth, the government is playing an increasingly material role in U.S. healthcare economics. The implications for providers include increased regulatory requirements for payment at less favorable terms than commercial payers. This reality has exacerbated an already tough margin profile and is expected to be the new normal for the years to come. Provider organizations are also dealing with an ongoing shift to value-based reimbursement models that reward clinicians for value over volume. These changes, over time, could materially change provider economics, but also represent an opportunity for the industry to move to where providers are more incented to keep people healthy than based on the volume of visits and procedures.
•Aging Population - As Baby Boomers continue to reach retirement age, they are putting stress on our healthcare system. The first Boomer turned 65 in 2011, and the last will turn 65 in 2029. Their healthcare needs—and Medicare costs—are increasing at the same time their contributions to Medicare decline, placing additional pressure on the healthcare industry to rein in costs while also improving quality and ability to manage chronic conditions.
•Consumer Expectations - Increased out-of-pocket expense and technology utilization outside healthcare have contributed to rising consumer expectations on cost, convenience and service. This growing consumerism has increased the political focus on rising drug prices, surprise medical bills, and escalating premiums, highlighting the importance of having comprehensive strategies for engaging consumers.
•Cognitive Computing - Today, healthcare is principally digitized across the core clinical, operational and financial settings. However, while workflows have been digitized, business processes remain largely unautomated and the industry has yet to realize the benefits of digitization achieved in other industries. Cognitive computing represents a meaningful opportunity to leverage the digitization that now exists in healthcare to improve efficiency and quality, and we believe Cerner is well positioned to play a key role in helping the healthcare industry achieve this potential.
•Coronavirus ("COVID-19") Pandemic - The healthcare and life sciences industries are at the forefront of the pandemic with heroic efforts by healthcare providers on the frontlines and advances in technology and science enabling vaccines to get to market in an unprecedented timeframe. Longer term, we believe the pandemic could lead to an acceleration of macro trends already playing out. Examples of this include the likelihood the pandemic accelerates the role of the Federal government as the top regulator and payor for healthcare; ongoing health system consolidation; and increased consumer expectations, particularly around the convenience of telehealth.
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For the core provider market, many of these forces are contributing to an overall challenging macro environment. Providers are simultaneously seeking to grow key service lines, drive operational efficiencies to make money at Medicare rates, and build out the competencies required to take and effectively manage risk and participate in value-based reimbursement models. Information technology is seen as an enabler of these efforts, which represents an opportunity for Cerner. At the same time, the low-margin nature of provider businesses can make it difficult to fund required investment, making it important for solutions and services to have a clear return on investment.
Cerner Vision and Growth Strategy
Throughout our history, Cerner has focused on creating innovation at the intersection of healthcare and information technology. Our vision has long been to create a Health Network Architecture ("HNA") for providers of care in every community. HNA has four core pillars: automate the care process; connect the person; structure, store and study the data; and then 'close the loop' by pushing analytic insights back into the care process. The base digitization that now exists in healthcare is foundational to achieving this vision, and we continue to believe it can be achieved in the decade to come.
Our framework for growth as we work towards achieving our long-term vision includes three core areas.
First, we are focused on delivering in our core market, including executing effectively on our large U.S. federal contracts, continuing to enhance key solution areas, such as revenue cycle, that are important to existing clients and represent revenue growth opportunities, and aligning with our provider clients to help them increase revenue in key service lines, tackle margin compression and optimize their reimbursement dollars. In addition, we are investing in our core products and platforms with a focus on delivering software as a service that we expect to improve clinician experience and patient outcomes, lower total cost of ownership, enable clients to accelerate adoption of new functionality, and better leverage third-party innovations. These efforts can differentiate Cerner and position our installed client base to better manage the forces of change playing out in healthcare.
Second, we are continuing work towards advancing the HNA vision that has driven Cerner almost since its inception. We believe that through the creation of a cohesive architecture for healthcare, the walls between care centers will become transparent as information travels seamlessly among care settings. Data collected at one setting will be available to others across the country, ensuring every individual in every part of the care process is connected to the right knowledge, resources and persons at the appropriate time and place. We believe the coming decade is the window when the confluence of technology, data liquidity and business model shifts can make this vision a reality. Health systems are increasingly building network strategies within specific regions to enhance contracting power, increase patient stickiness and move closer to the premium dollar. Cerner has an opportunity to become a strategic partner and assist with network design, provide services in areas such as cybersecurity and operational reporting, and improve performance under value-based contracting.
Third, Cerner has an opportunity to harness data to drive growth in new areas, including using real-world evidence to improve clinical research. Cerner has natural points of differentiation, including our trusted relationships with healthcare providers and access to data given our technology is in place in approximately a quarter of U.S. healthcare facilities, and our proven ability to aggregate and normalize multiple sources of data through our HealtheIntent platform, which contains data from more than 300 million longitudinal records.
To focus on this opportunity, we launched Cerner Enviza in 2021. Cerner Enviza combines the expertise of Cerner and Kantar Health, which we acquired in April 2021. Kantar Health's leading data, analytics, real-world evidence and commercial research consultancy, combined with Cerner's real-world data, positions Cerner Enviza to help accelerate discovery, development and deployment of therapies and advance clinical research and the life sciences industry to improve everyday health.
Importantly, Cerner's health data strategy is based on curating data from a willing and engaged network of providers with an emphasis on clear boundaries around the usage of patient data and based on clearly defined use cases with clarity and transparency around data rights.
In summary, we believe Cerner's core value proposition remains strong and there is ample opportunity to grow both organically and inorganically through the areas discussed above.
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Oracle Merger Agreement
On December 20, 2021, we entered into an Agreement and Plan of Merger (as it may be amended or supplemented from time to time, the "Merger Agreement") with Cedar Acquisition Corporation ("Merger Subsidiary"), which is a wholly owned subsidiary of OC Acquisition LLC ("Parent"), Parent, which is a wholly owned subsidiary of Oracle Corporation ("Oracle"), and (solely with respect to performance of its obligations set forth in certain specified sections thereof) Oracle. Pursuant to the Merger Agreement, on January 19, 2022, Oracle commenced a cash tender offer (the "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. Following the completion of the Offer, Merger Subsidiary will merge with and into Cerner (the "Merger"), with Cerner continuing as the surviving corporation and as a wholly owned indirect subsidiary of Oracle, at which time the shares of our common stock would cease to be publicly held. Completion of the Merger is subject to certain conditions, including but not limited to, a) shareholders holding a majority of the outstanding shares of our common stock tendering their shares in the Offer, and b) receipt of certain regulatory approvals, including the expiration or termination of the waiting periods or the obtaining of the required affirmative approvals applicable to the transaction under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and certain foreign antitrust and foreign direct investment laws. 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. Additional information about the Offer and Merger and the Merger Agreement is set forth in our filings with the SEC.
Contracting with the Government
As we grow our federal business, revenue attributable to prime contracts or to subcontracts with other contractors engaged in work for the U.S. government is becoming a bigger contributor to our overall revenue. Within the U.S. government, our revenues are diversified across various agencies, including the Department of Defense and the U.S. Department of Veterans Affairs. During 2021 and 2020, approximately 20% and 18%, respectively, of our total revenues were attributable to our relationships (as the prime contractor or a subcontractor) with U.S. government agencies. Contracting with the U.S. government subjects us to substantial regulation and unique risks, including the U.S. government's ability to cancel any contract at any time through a termination for the convenience of the U.S. government. Government cancellation terms typically permit the recovery of all or a portion of our incurred costs and fees for work performed prior to termination when the U.S. government issues a termination for convenience. These regulations and risks are described in more detail below under "Risk Factors" in this annual report on Form 10-K.
Software Development
We commit significant resources to developing new health information system solutions and services. As of the end of 2021, approximately 6,150 associates were engaged in research and development activities. Total expenditures for the development and enhancement of our software solutions were $829 million, $797 million and $784 million during 2021, 2020 and 2019, respectively. These figures include both capitalized and non-capitalized portions and exclude amounts amortized for financial reporting purposes.
As discussed above, continued investment in research and development ("R&D") remains a core element of our strategy. This will include ongoing enhancement of our core solutions and development of new solutions and services.
Intellectual Property
We have a broad portfolio of intellectual property rights to protect the proprietary interests in our solutions, services, devices and brands. Our solutions constitute works of authorship protected by copyrights in the United States and globally. We own valuable trade secrets embodied in, or related to, our solutions, services and devices and protect these rights through a number of technical and legal measures. We have registered or applied to register certain trademarks and service marks in a number of countries with particular emphasis on the Cerner branding elements. We continue to develop our patent portfolio and own more than 650 issued patents with hundreds of patent applications pending. We do not consider any of our businesses to be dependent upon any one patent, copyright, trademark, or trade secret, or any family or families of the same.
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Our solutions, devices and services incorporate or rely on intellectual property rights licensed from third parties, including software subject to open source software licenses. Certain technologies licensed to Cerner are also important for internal use in running our business and supporting our clients. Although replacing any existing licenses could be inconvenient, based on our experiences, existing contractual relationships, and the incentives of our technology suppliers, we believe that Cerner will continue to obtain these technologies or suitable alternatives for commercially reasonable prices on commercially reasonable terms or under open source software licenses acceptable to Cerner.
Managing Cybersecurity Risks
Our business operations, including the provision of the solutions and services described above, involve the compilation, hosting and transmission of confidential information, including patient health information. We have included security features in our solutions and services that are intended to protect the privacy and integrity of this information, but our solutions and services may be vulnerable to security breaches, viruses, programming errors and other similar disruptive problems. Cerner maintains documented information privacy, security and risk management programs with clearly defined roles, responsibilities, policies, and procedures which are designed to secure the information maintained on Cerner's platforms.
In addition, all of our associates are required to complete annual cybersecurity education and training, which includes identifying suspicious emails, Internet threats, telecommunication threats and ransomware. Cerner regularly reviews and modifies its security program to reflect changing technology, regulatory environment, laws, risk, industry and security practices and other business needs. We believe our policies and procedures are adequate to ensure that relevant information about cybersecurity risks and incidents is appropriately reported and disclosed.
Sales and Marketing
The markets for Cerner HCIT solutions, healthcare devices and services include integrated delivery networks, physician groups and networks, managed care organizations, hospitals, medical centers, free-standing reference laboratories, home health agencies, blood banks, imaging centers, pharmacies, pharmaceutical manufacturers, employers, governments and public health organizations. The majority of our sales are clinical and revenue cycle solutions and services to hospitals and health systems, but our solutions and services are highly scalable and sold to organizations ranging from physician practices, to community hospitals, to complex integrated delivery networks, to local, regional and national government agencies. Sales to large health systems typically take approximately nine to 18 months, while the sales cycle is often shorter when selling to smaller hospitals and physician practices.
Our executive marketing management is located at our world headquarters in North Kansas City, Missouri, while our client representatives are deployed across the United States and globally. In addition to the United States, through our subsidiaries, we have sales associates and/or offices giving us a presence primarily in Europe, the Middle East, Australia, Canada, and India.
We support our sales force with technical personnel who perform demonstrations of Cerner solutions and services and assist clients in determining the proper hardware and software configurations. Our primary direct marketing strategy is to generate sales contacts from our existing client base and, in years when COVID-19 was not a concern, through presentations at industry seminars and tradeshows. We market our ambulatory solutions, offered on a subscription basis, directly to the physician practice market using lead generation activities and through existing acute care clients that are looking to extend Cerner solutions to affiliated physicians. Normally, we attend a number of major tradeshows each year and sponsor executive user conferences, which feature industry experts who address the HCIT needs of large healthcare organizations.
Backlog
Backlog, which reflects contracted revenue that has not yet been recognized as revenue, was $13.26 billion as of December 31, 2021, of which we expect to recognize approximately 31% 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 $1.22 billion of revenue over the next 12
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months under currently executed contracts related to such cancellable periods, which is not included in our calculation of backlog.
Competition
The market for HCIT solutions, devices and services is intensely competitive, rapidly evolving and subject to rapid technological change. The principle markets in which we compete include, without limitation, healthcare software solutions, HCIT services, ambulatory, healthcare device and technology resale, healthcare revenue cycle and transaction services, value-based care technologies, analytics systems, care management solutions, population health management, and post-acute care. Our principal existing competitors, including their affiliates, in these markets include, but are not limited to:
Allscripts Healthcare Solutions, Inc. | Epic Systems Corporation | ||||
Arcadia Solutions, LLC | Health Catalyst, Inc. | ||||
athenahealth, Inc. | InterSystems Corporation | ||||
Capsule Technologies, Inc. | Innovaccer, Inc. | ||||
Computer Programs and Systems, Inc. | Medical Information Technology, Inc. (MEDITECH) | ||||
eClinicalWorks, LLC | Optum, Inc. | ||||
In addition, we expect that major software information systems companies, large information technology consulting service providers and system integrators, start-up companies, managed care companies, healthcare insurance companies, accountable care organizations and others specializing in the healthcare industry may offer competitive software solutions, devices or services. The pace of change in the HCIT market is rapid and there are frequent new software solutions, devices or services introductions, enhancements and evolving industry standards and requirements. We believe that the principal competitive factors in our markets include the breadth and quality of solution and service offerings, the stability of the solution provider, the features and capabilities of the information systems and devices, the ongoing support for the systems and devices and the potential for enhancements and future compatible software solutions and devices. We believe that we compete favorably with our competitors on the basis of these factors and that we are the leader- or among the leaders- in each of our main offerings. Our brand recognition and reputation for innovative technology and service delivery, combined with our breadth of solution and services offerings, global distribution channels and client relationships position us as a strong competitor going forward.
Human Capital Management
Cerner believes that attracting, engaging and retaining employees is vital to the Company's continued success. Our Chief Human Resources Officer, reporting directly to our Chief Executive Officer, oversees our human capital management strategies. In addition, our Board of Directors is actively involved in our human capital management in its oversight of our long-term strategy and through its committees and engagement with management.
At Cerner, we're collectively working to create a culture and a community where our employees, who we refer to as our associates, feel their voice is heard in our ongoing efforts to make a difference in the future of healthcare. Our efforts have earned Cerner recognition over the years as one of Forbes' Best Employers, Best Employers for Diversity, Best Employers for LGBTQ Equality and a perfect score on the Human Right Campaign Equality Index.
The Company employed approximately 25,150 associates worldwide as of December 31, 2021. Of that total population, approximately 70% of our associates were employed in the United States and the remaining associates were employed outside the United States. Approximately 39% of our associates work in professional services (implementation, training, consulting and other services), 24% of our associates work in development (coding and engineering), 10% of our associates work in managed services (hosting), and the remaining associates work in other areas with no such area making up 10% or more of our associate base.
Our human capital management operating model focuses on the following strategic areas:
Talent Acquisition: We continue to actively hire talent and are primarily focused on recruiting talent in support of our strategic growth initiatives. We strive for the attraction, retention and development of skilled, engaged teams of diverse associates.
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Learning and Leadership Development: Associate training is also an important component of our human capital management. We have programs designed specifically to support early career talent, as well as management development. The Company continues to explore solutions that provide training material and support to all levels in the organization.
Total Rewards: We believe Cerner offers a competitive portfolio of rewards offerings to our associates around the globe to attract, engage and retain our talented associates. We have a global job architecture which underpins our pay structure that includes a combination of base pay, cash incentives and equity awards. Compensation awards are based on performance, and determined by the results associates achieve, as well as how they achieve those results in a manner consistent with our associate behaviors.
Consistent with our strong commitment to associate well-being, our global rewards portfolio includes a full suite of healthcare and retirement benefits in addition to other well-being programs, many of which are also offered virtually, including: fitness classes, wellness coaching, mental health support, bariatric care, financial planning resources, musculoskeletal health coaching, as well as on-site child care, fitness centers, health clinics and pharmacies.
Associate Experience and Engagement: We strive to create an environment in which associates are fully engaged, feel safe, have a sense of belonging and are empowered to make a difference. We focus on an inclusive culture to retain talent. These ongoing efforts are shaped by the action planning from our annual employee engagement census survey.
Talent Management: Cerner has an ongoing approach to performance and career management that is grounded in behaviors embedded in every day experiences that encourage the continual development of associates. Associates work with their managers to align goals and ask for feedback to enable achievement of outcomes that we believe matter most to Cerner clients.
Organization Design and Effectiveness: This area focuses on organizational design consulting, the integration of new associates from our business acquisitions, and coaching.
Associate Relations and Employment Practices: This area focuses on compliance with applicable employment laws, associate relations and resolving associate employment-related disputes, as well as on managing the process for departing associates, including the provision of outplacement services. In addition, this area provides proactive performance coaching for our associates. Associates are encouraged to report ethics, safety, or grievances through multiple channels including a company provided confidential hotline.
Diversity, Equity and Inclusion ("DE&I"): This area focuses on education, embedding DE&I into our talent processes and programs, associate community building, market outreach, fostering a culture of inclusion and developing enterprise diversity strategies. We have an enterprise-wide DE&I strategy to achieve holistic transformation in collaboration with executives, leaders and associates. We focus on inclusive solutions and supporting diversity within all stakeholder groups.
Global Community and Philanthropy: This area focuses on philanthropy, associate volunteerism, community relations, corporate social responsibility and sustainability.
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Information about our Executive Officers
The following table sets forth the names, ages, positions and certain other information regarding the Company's executive officers as of February 10, 2022. Officers are elected annually and serve at the discretion of the Board of Directors.
| Name | Age | Positions | ||||||||||||
| David T. Feinberg | 59 | President and Chief Executive Officer | ||||||||||||
| Mark J. Erceg | 52 | Executive Vice President and Chief Financial Officer | ||||||||||||
| Nasim Afsarmanesh | 44 | Executive Vice President and Chief Health Officer | ||||||||||||
| Travis S. Dalton | 51 | Executive Vice President, Chief Client & Services Officer and President, Cerner Government Services | ||||||||||||
| Daniel P. Devers | 49 | Executive Vice President, Chief Legal Officer and Secretary | ||||||||||||
| Jerome Labat | 56 | Executive Vice President and Chief Technology Officer | ||||||||||||
| Tracy L. Platt | 48 | Executive Vice President and Chief Human Resources Officer | ||||||||||||
David T. Feinberg, M.D., joined the Company in October 2021 as President and Chief Executive Officer and as a member of the Board of Directors. Dr. Feinberg joined Cerner after serving since 2019 as Vice President of Google Health, where he led Google's worldwide health efforts, bringing together groups from across Google and Alphabet that used artificial intelligence, product expertise and hardware to take on big healthcare challenges. In this role, he was responsible for organizing and innovating Google's various healthcare initiatives. Prior to joining Google, from 2015 to 2019, Dr. Feinberg served as the President and Chief Executive Officer of Geisinger Health System, a physician-led health system. At Geisinger, Dr. Feinberg led an operational turnaround and pushed the use of new platforms and tools including an IT system called a Unified Data Architecture, which allowed the company to integrate big data into their existing data analytics and management systems. Prior to Geisinger, Dr. Feinberg worked at UCLA for more than 20 years and served in a number of leadership roles, including President, CEO and Associate Vice Chancellor of UCLA Health Sciences, Vice Chancellor and CEO for the UCLA Hospital System, and CEO of UCLA's Ronald Reagan Medical Center. Dr. Feinberg serves as a member of the board of directors of Emmett Douglas, Inc. (NYSE: DEI).
Mark J. Erceg joined the Company in February 2021 as Executive Vice President and Chief Financial Officer. Mr. Erceg joined Cerner after serving as Chief Financial Officer of Tiffany & Co. ("Tiffany"), from October 2016 to January 2021. In that position, Mr. Erceg served as the principal financial officer for Tiffany. Prior to joining Tiffany, Mr. Erceg held the role of Executive Vice President and Chief Financial Officer for Canadian Pacific Railway Limited, a transcontinental railway, from 2015 to 2016, and Masonite International Corporation, a global manufacturer of commercial and residential doors, from 2010 to 2015. Previously, Mr. Erceg held finance, market strategy, general management and global investor relations positions at The Procter & Gamble Company during his tenure there from 1992 to 2010.
Nasim Afsarmanesh, M.D., M.B.A., joined the Company in January 2022 as Executive Vice President and Chief Health Officer. Prior to joining the Company, Dr. Afsar served as the Chief Operating Officer of UCI Health, Orange County, California's only academic health system, since October 2020, and as Executive for Population Health Management since March 2018. In these roles, she had oversight for more than 3,000 employees and oversaw inpatient and ambulatory operations, including ambulatory care, inpatient progression efforts, clinical support services, ancillary service, public safety, building and construction, and emergency management, and finance; was a key driver for advancing the future of healthcare through implementation of digital solutions; was a vital partner for institutional strategic growth and development; and established organizational population health strategy and operations. Dr. Afsar also served as Chief Operating Officer for Ambulatory Care at UCI Health from March 2018 until October 2020, where she managed a team of over 1,000 people and 80 cost centers, led organization and ambulatory strategy and ambulatory operations and finance, and established strategic direction for health plans, independent physician associates, Medicare and Medi-Cali; and as head of Health System Contracting from May 2018 to October 2020, where she also directed the health system's contracting. Prior to joining UCI Health, Dr. Afsar served as Chief Quality Officer for the Department of Medicine at UCLA Health, leading a large-scale population health initiative, from July 2014 until February 2018. In this role, Dr. Afsar developed and executed strategies for population health and value-based care in the Department of Medicine. Prior to that, Dr. Afsar also served as the Associate Chief Medical Officer at UCLA Health and Executive Director of Quality and Safety at UCLA Health Department of Neurosurgery.
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Travis S. Dalton joined the Company in August 2001 as Practice Operations Manager and has held a variety of business and client senior leadership roles since that time, including Client Results Executive from February 2009 until he was promoted to Vice President and Client Results Executive, a title which he held from March 2011 to December 2012. Mr. Dalton's role was expanded in December 2012, and he served as the Vice President, Investor Owned and General Manager Federal from December 2012 until he was promoted to Senior Vice President, Investor Owned and General Manager Federal in March 2016 (which title was changed to Senior Vice President and General Manager, Federal Government in October 2017). His role was changed to Senior Vice President and President, Cerner Government Services in August 2018. He was promoted to Executive Vice President, Chief Client and Services Officer and President, Cerner Government Services in January 2021. In this role, Mr. Dalton oversees worldwide client relationship management, sales, services, consulting, support, hosting and client success. He also leads Cerner's work in implementing a new, interoperable electronic health record for the U.S. Departments of Defense (DOD) and Veterans Affairs (VA).
Daniel P. Devers was appointed as Executive Vice President, Chief Legal Officer and Secretary in January 2021 and prior to that had served as Senior Vice President and Chief Intellectual Property Officer since May 2013. As Cerner's Chief Legal Officer, Mr. Devers is responsible for overseeing Cerner's worldwide legal affairs including litigation, intellectual property and corporate matters. Prior to serving as Chief Legal Officer, Mr. Devers served as Senior Vice President – Cloud Strategy from February 2020 to January 2021, Senior Vice President and General Counsel from April 2018 to February 2020, Senior Corporate Counsel – Intellectual Property from 2003 to 2007 and Corporate Counsel – Intellectual Property from February 2002 to December 2003. He has been a member of the Cerner Executive Committee since March 2020. Mr. Devers was an equity partner at Shook, Hardy & Bacon LLP prior to joining Cerner. He taught patent law at the University of Missouri and served a three-year gubernatorial appointment to the Missouri Technology Corporation's Board of Directors.
Jerome Labat joined the Company in June 2020 as Executive Vice President and Chief Technology Officer (CTO). As CTO, Mr. Labat has executive responsibility for client-facing software products and technology development, including platform and product development, modernization and security. Prior to joining the company, Mr. Labat served as Senior Vice President and Chief Technology Officer at Micro Focus International plc, a British multinational, pure-play enterprise software and information technology company, from September 2017 until June 2020. In this role, Mr. Labat led an organization of about 500 people globally and, among other things was responsible for the company's product portfolio technology and strategy vision as to how Micro Focus' solutions would support its clients through their digital transformation, and developed and implemented technology and solution strategies to support Micro Focus' digital transformation. Prior to joining Micro Focus, Mr. Labat spent five years with Hewlett Packard Enterprise Corporation (HPE), his most recent title being CTO HPE- Software Division, which he held from December 2013 to August 2017. In this role, Mr. Labat led HPE's cloud automation business. Prior to serving as CTO HPW-Software Division, Mr. Labat served as Vice President and General Manager, Cloud Automation and Management for HPE and in various senior leadership positions with other companies, including Intuit Corporation and Oracle Corporation.
Tracy L. Platt joined the Company in July 2019 as Executive Vice President and Chief Human Resources Officer. Prior to joining the Company, Ms. Platt spent nearly 10 years in executive HR roles at Medtronic Plc, a global healthcare company that develops and distributes medical devices. More specifically, Ms. Platt was Vice President, Human Resources, Medtronic from September 2009 to July 2019. Ms. Platt brings healthcare experience from Medtronic and other key organizations, including Cardinal Health and GE Healthcare. Her most recent role at Medtronic included HR leadership for its global operations organization and driving an operating model transformation throughout the enterprise.
Market and Industry Data
This annual report on Form 10-K may contain market, industry and government data and forecasts that have been obtained from publicly available information, various industry publications and other published industry sources. We have not independently verified the information and cannot make any representation as to the accuracy or completeness of such information. None of the reports and other materials of third party sources referred to in this annual report on Form 10-K were prepared for use in, or in connection with, this annual report.
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Item 1A. Risk Factors.
Risks Related to the Acquisition of Cerner by Oracle
The announcement and pendency of the Merger may result in disruptions to our business. On December 20, 2021, we entered into the Merger Agreement with an affiliate of Oracle, pursuant to which we will be acquired by Oracle. The Merger Agreement generally requires us to operate our business in the ordinary course pending completion of the Merger and restricts us, without Oracle's consent, from taking certain specified actions until the Merger is completed. These restrictions may affect our ability to execute our business strategies and attain financial and other goals and may impact our financial condition, results of operations and cash flows. Further, in connection with the pending Merger, our current and prospective employees may experience uncertainty about their future roles with us following the Merger, which may materially adversely affect our ability to attract and retain key personnel while the Merger is pending. Employees may depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with us following the Merger and may depart prior to the completion of the Merger. Accordingly, no assurance can be given that we will be able to attract and retain employees to the same extent that we have been able to in the past. The proposed Merger further could cause disruptions to our business or business relationships, which could have an adverse impact on our results of operations. Parties with which we have business relationships may experience uncertainty as to the future of such relationships and may delay or defer certain business decisions, seek alternative relationships with third parties or seek to alter their present business relationships with us. Parties with whom we otherwise may have sought to establish business relationships may seek alternative relationships with third parties. The pursuit of the Merger may place a significant burden on management and internal resources. It may also divert management's time and attention from the day-to-day operation of our business and the execution of our other strategic initiatives. This could materially adversely affect our financial results. In addition, we have incurred and will continue to incur other significant costs, expenses and fees for professional services and other transaction costs in connection with the proposed Merger, and many of these fees and costs are payable regardless of whether or not the pending Merger is consummated. Any of the foregoing could adversely affect our business, our financial condition and our results of operations and prospects.
The Merger may not be completed within the expected timeframe, or at all, and the failure to complete the Merger could materially adversely affect our business, results of operations, financial condition, and the market price of our common stock. There can be no assurance that the Merger will be completed in the expected timeframe, or at all. The Merger Agreement contains conditions that must be satisfied or waived prior to the completion of the Merger, including, among others, the approval or clearance of the Merger under the antitrust and foreign investment laws of certain specified countries. There can be no assurance that all required approvals will be obtained, that the conditions to the completion of the Merger will otherwise be satisfied (or waived, if applicable) or that the Merger Agreement will not be terminated, and, even if all required approvals are obtained and conditions are satisfied (or waived, if applicable), we can provide no assurance as to the terms, conditions and timing of such approvals or that the Merger will be completed in a timely manner or at all. Certain conditions to completion of the Merger are not within our control, and we cannot predict when or if these conditions will be satisfied (or waived, as applicable). Even if required regulatory approvals are obtained, it is possible conditions will be imposed that could result in a material delay in, or the abandonment of, the Merger or otherwise have an adverse effect on us.
If the Merger is not completed within the expected timeframe or at all, we may be subject to a number of material risks. The price of our common stock may decline to the extent that current market prices reflect a market assumption that the Merger will be completed. In addition, some costs related to the Merger must be paid whether or not the Merger is completed, and we have incurred, and will continue to incur, significant costs, expenses and fees for professional services and other transaction costs in connection with the proposed transaction, as well as the diversion of management and resources towards the Merger, for which we will have received little or no benefit if completion of the Merger does not occur. We may also experience negative reactions from our investors, clients, suppliers, and associates. In addition, if the Merger Agreement is terminated under certain specified circumstances, we will be required to pay Parent a termination fee of $950 million. Additional information about the Offer and Merger and the Merger Agreement is set forth in our filings with the SEC.
Stockholder litigation could prevent or delay the closing of the Merger or otherwise negatively impact our business, operating results and financial condition. We may incur additional costs in connection with current or any future stockholder litigation in connection with the Merger. Such litigation may adversely affect our ability to complete the Merger. We could incur significant costs in connection with any such litigation, including attorneys' fees and costs associated with the indemnification obligations to our directors.
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COVID-19 Risks
The COVID-19 pandemic has affected how we and our customers are operating our respective businesses, and the duration and extent to which this will impact our future results of operations remains uncertain. Continuing efforts to control the spread of the COVID-19 pandemic or the resurgence thereof have significantly curtailed the movement of people, goods and services worldwide, including in most or all of the regions in which we sell our software, healthcare devices, technology-enabled services or other services (collectively referred to as "Products and Services") and conduct our business operations. The COVID-19 pandemic has caused us to modify certain of our business practices, including prolonging the requirement that most of our associates work remotely; restricting associate travel; mandating vaccines for our associates; developing social distancing plans for our associates; and canceling or postponing in person participation in certain meetings, events and conferences, and we may take further actions as required by government authorities, our clients or as determined to be in the best interests of our associates, clients and business partners. These measures and our clients' focus on the pandemic have also resulted in delays in marketing, selling and implementing our Products and Services. There is no certainty that these measures will be sufficient to mitigate the risks posed by the virus and our ability to perform critical functions could be harmed. Further, there can be no assurances that our mitigation measures, such as mandating vaccines for our U.S.-based associates, will not have a negative impact on our business. The magnitude and duration of the disruption and potential ongoing impact on business activity is uncertain. In particular, we have experienced and may continue to experience a negative financial impact due to a number of factors, including without limitation:
•Cerner's efforts and investments in assisting its clients in their response to the pandemic;
•Reduced new business bookings as our clients focus on helping their patients during the crisis, rather than making new or expanded purchasing decisions, and longer-term declines in bookings for new Products and Services to the extent that the pandemic will continue to contribute to sustained global or U.S. economic downturns;
•Delays in implementing our Products and Services, including delays in the pace of completion of existing projects, while client resources are reallocated or dedicated to fighting the COVID-19 pandemic or the resurgence thereof, and supply chain interruptions;
•Financial pressures being put on our clients, which may in turn result in a delay in collections or non-payment from our clients; and
•Financial pressures being put on our strategic investments for which we hold an equity interest increases the risk of asset impairment.
Although we experienced some ongoing challenges in connection with the COVID-19 pandemic during 2021, at this time, we have not experienced a negative impact on our liquidity, access to capital or overall operations. While we generally expect continued impact from COVID-19 in 2022, we are unable to predict the ultimate impact of the COVID-19 pandemic, including the nature and timing of when full demand recovery may occur. Even after the COVID-19 pandemic has subsided, we may experience material adverse impacts to our business as a result of the global and U.S. economic impact and any recession that has occurred or may occur in the future. To the extent the COVID-19 pandemic or our measures taken in response thereto adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described below.
Cybersecurity and Information Technology Risks
We may experience interruptions at our data centers or client support facilities, which could interrupt clients' access to their data, exposing us to significant costs and reputational harm. We perform data center and hosting services for certain clients, including the collection and storage of critical patient and administrative data and the provision of support services. We rely on the secure electronic transmission, processing and storage of sensitive information, including protected health information; personally identifiable information; financial information; and other sensitive information relating to our clients and their patients, our company and our third-party suppliers. We also use public cloud providers and other third parties in connection with hosting our own data. A catastrophic failure of our backup generators during a prolonged public utility power outage; an impairment of telecommunications lines; a successful concerted denial of service attack; a significant system, network or data breach; damage, injury or impairment to the buildings, equipment, personnel operating such facilities or the client data contained therein; or errors by the personnel operating such facilities could cause a disruption in operations and negatively impact our clients. System redundancy, disaster recovery and other continuity measures may be inadequate. Any interruption, damage or breach of our systems or with those of third parties on which we rely, such as our cloud service providers, could damage our reputation, cause us to lose existing clients, hurt
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our ability to obtain new clients, result in significant revenue loss, create potential liabilities, increase our operating costs and have a material adverse impact on our results of operations.
A security breach could subject us to increased expenses, legal exposure and regulatory actions, and clients and prospective clients could be deterred from using our Products and Services. Our Products and Services require us to store, retrieve, process and manage our clients' information and data (and that of their patients), as well as our own data. Persons with authorized access, both associates and third parties, may use such access to harm the Company. Persons outside of our organization may attempt to identify and exploit Product and Service vulnerabilities, penetrate or bypass our security measures, and gain unauthorized access to our software, hardware and cloud offerings, networks and systems, or those of our clients and suppliers, any of which could lead to disruptions in mission-critical systems or the unauthorized release or corruption of protected health information, personally identifiable information, financial information or other sensitive information, or the confidential information or data of Cerner, our clients or their patients, or our suppliers. We may be targeted by computer hackers because we are a prominent healthcare IT company and have high profile clients, including government clients. Additionally, our clients and their employees may be targeted by hackers who compromise their credentials and lead to unauthorized access to their systems hosted in our data centers or third-party cloud service providers. These risks may increase as we continue to grow our cloud offerings, collect, store and process increasingly large amounts of our clients' confidential data, including protected health information and sensitive personal data, and host or manage parts of our clients' businesses in cloud-based/multi-tenant IT environments. We also use third party public cloud providers in connection with certain client facing cloud-based offerings and to host our own data. There can be no assurance that our policies, procedures, and controls or those of third parties on which we rely will detect or prevent all of these threats and we cannot predict the full impact of any such past or future incident.
The costs we would incur to address and remediate these security incidents would increase our expenses. Our efforts to address these problems may not be successful and could result in interruptions, delays, cessation of service and loss of existing or potential clients that may impede our sales, development of solutions, provision of services or other critical functions. If a cyber-attack or other security incident were to allow unauthorized access to or modification of data or our IT systems, or if our Products or Services are perceived as having security vulnerabilities, we could suffer significant damage to our brand and reputation. This in turn could lead to fewer clients using our Products and Services and result in reduced revenue and earnings. These types of security incidents could also lead to lawsuits, regulatory investigations and claims and, in some cases, contractual costs related to notification and fraud monitoring. There can be no assurance that our cyber risk insurance will adequately cover all our losses from any future security breaches or remain available on acceptable terms, if at all.
Operating and Product Risks
We may be subject to claims for system errors and warranties or incur substantial costs related to product and service-related liabilities. Many of our Products and Services are intended for use in collecting, storing and displaying clinical and healthcare-related information used in the diagnosis and treatment of patients and in related healthcare settings such as registration, scheduling and billing. Our Products and Services, or the third-party software products or services incorporated therein, may contain design, coding or other errors, especially when first introduced. Similarly, errors in the implementation and configuration can occur and have occurred in the past. These errors could affect the ability of our Products and Services to properly function, integrate or operate with other offerings, scale to meet the needs of our clients, create vulnerabilities and adversely affect market acceptance. If the timely delivery of medical care or other customer business requirements are impaired by data access, network or systems problems, we could be exposed to legal liability and reputational harm. Healthcare professionals delivering patient care tend to have heightened sensitivity to system and software errors and impairments of reliability and stability of systems. If our Products and Services are alleged to have contributed to faulty clinical decisions, injury to patients based on failure to provide reliable and stable uptime, or negative financial impact to clients, we might be subject to claims or litigation by users of our Products and Services or their patients. Errors or failures might damage our reputation and negatively affect future sales. Any such problems might have a materially adverse impact on our business operations and our financial position or results of operations.
Our client agreements typically provide warranties concerning material errors and other matters. Our failure to meet these warranties could allow the client to terminate the agreement and possibly obtain a refund or damages or both, require us to incur additional expense to correct such failure, subject us to claims, damage our reputation and negatively affect future sales. We attempt to contractually limit our liability; however, these contractual limitations may not be enforceable or otherwise protect us from liability. We may also be subject to claims that are not covered by contract. There is no assurance that our liability insurance will adequately cover any claim or remain available on acceptable terms, if at all. If we are uninsured or under-insured for any such claim, our business, results of operations and financial condition could be
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materially harmed. Product and service-related claims, even if not successful, could damage our reputation, result in the loss of existing or potential clients, divert management's attention, result in significant revenue loss, create potential liabilities for our clients and us and increase our operational costs.
Our proprietary technology may be subject to claims for infringement or misappropriation of intellectual property rights of others, or our intellectual property rights may be infringed or misappropriated by others or our software may be subject to claims related to open source software licenses. We rely upon a combination of confidentiality practices and policies, contractual arrangements and technical security measures to maintain the confidentiality and trade secrecy of our proprietary information. We also rely on trademark, copyright and patent laws to protect our intellectual property rights. Despite these efforts, we may not be able to adequately protect against theft, copying, reverse engineering, misappropriation, infringement or unauthorized use or disclosure of our intellectual property, which could have an adverse effect on our competitive position. In addition, we are occasionally involved in intellectual property infringement or misappropriation claims. These claims, even if unmeritorious, are expensive to defend and are often incapable of prompt resolution. If we are unsuccessful in defending these claims, we could be required to pay a substantial damage award, develop alternative technology, obtain a license or cease using, selling, offering for sale, licensing, implementing or supporting the applicable Products and Services. We rely upon open source software in our Products and Services. We may encounter claims alleging unauthorized use of the software purported to be licensed under open source terms, demanding release of derivative works of open source software that could include our proprietary source code, or otherwise seeking to enforce the terms of the applicable open source licenses. These claims could result in litigation and, even if unmeritorious, could be expensive to defend and incapable of prompt resolution. We could also be required to make our software source code available under the applicable open source license, utilize or develop alternative technology, or cease using, selling or supporting the applicable Products and Services if we are unsuccessful in defending such claims.
We may become involved in legal proceedings that could have a material adverse impact on our business, results of operations and financial condition, and our inability or failure to effectively manage publicity related to such claims or legal proceedings could adversely impact our business. From time to time and in the ordinary course of our business, we may become involved in various legal proceedings and claims, including for example, those relating to employment practices, solution and implementation defects, personal injury, torts, intellectual property infringement, violations of law and breaches of contract and warranties. All disputes and legal proceedings are inherently unpredictable. And, regardless of the merits of the claims, litigation may lead to negative publicity and may be expensive, time-consuming and disruptive to our operations and distracting to management. If resolved against us, legal proceedings could result in excessive judgments, injunctive relief or other equitable relief that may affect how we operate our business. Any settlements of disputes or legal proceedings may also affect how we operate our business. There can be no assurance that our liability insurance will adequately cover any judgment or settlement or remain available on acceptable terms, if at all. If we incur liability that exceeds our insurance coverage or that is not within the scope of the coverage, it could have a material adverse effect on our business, results of operations and financial condition. Additionally, the dissemination of information via social media, including information about alleged harassment, discrimination or other claims, could harm our business, brand, reputation, financial condition, and results of operations, regardless of the information's accuracy.
We are subject to risks associated with our global operations. We market, sell and support our Products and Services globally. We periodically evaluate entering into new markets, whether organically or by acquisition, and adjusting our focus in certain existing markets. For example, in connection with the acquisition of the Kantar Health business, we acquired business in, among other countries, new markets such as China and Taiwan. Significant management attention and financial resources are required to address the risks noted below associated with new market entry into non-U.S. markets, including the noted markets above, and potential disruptions if we chose to adjust our focus in a given market. Non-U.S. operations are subject to inherent risks, and our business, results of operations and financial condition, including our revenue growth and profitability, could be adversely affected by a variety of uncontrollable and changing factors. These include, but are not limited to:
•Greater difficulty in collecting accounts receivable and longer collection periods;
•Difficulties and costs of staffing and managing non-U.S. operations and labor disruptions;
•Effects of sovereign debt conditions, including budgetary constraints, or health service provider or government spending patterns or government-imposed austerity measures;
•Legal compliance costs or business risks associated with our global operations, such as: i) local laws and customs differing from, or more stringent than those in the United States, such as those relating to data protection and data security, trade protection measures and intellectual property rights, ii) heightened risk with respect to
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laws prohibiting improper payments and bribery, including without limitation the U.S. Foreign Corrupt Practices Act, the U.K. Anti-Bribery Act and similar laws and regulations in foreign jurisdictions, iii) export control regulations, iv) different or additional functionality requirements or preferences, or v) certification (e.g. CE marking for medical device software), licensing or regulatory requirements and unexpected changes to those requirements;
•The United Kingdom's withdrawal of its membership from the European Union ("EU") (Brexit) and associated uncertainty and disruptions relating thereto;
•Natural disasters, war, terrorist acts or political unrest which may impact sales or threaten the safety of associates or our continued presence in these countries and the related potential impact on global stability;
•Our ability to form relationships with local partners, which help us to offer our Products and Services at scale, and our reliance on these partners whose reputation may not be regarded as highly outside the United States; and
•The increased risks, especially with respect to perceived corruption, cybersecurity threats and IP protection rights, in certain new markets such as China and Taiwan.
We operate in intensely competitive and dynamic industries, and our ability to successfully compete depends on our ability to anticipate or respond quickly to market changes and to bring competitive new Products and Services and features to market in a timely fashion. The IT industry and the market for our Products and Services are intensely competitive, dynamically evolving and subject to rapid technological advances and innovative enhancements, changing delivery and pricing models, evolving standards in computer hardware and software development and communications infrastructure, and changing and increasingly sophisticated client needs. We compete on the basis of a number of factors, including breadth and depth of services, including our open architecture and the level of product integration across care settings; integrated platform; regulatory compliance; reputation; reliability, accuracy and security; client service; total cost of ownership; innovation; and industry acceptance, expertise and experience. Development of new proprietary Products or Services is complex, entails significant time and expense, may not be successful and often involves a long return on investment cycle. We cannot guarantee that the market for our Products and Services will continue to grow or that we will be able to successfully introduce new Products or Services. We provide solutions to clients via various deployment models, including client-server-based solutions and cloud-based offerings.
In addition, we expect that major software information systems companies, highly capitalized consumer technology companies, large information technology consulting service providers and system integrators, start-up companies and others operating in the healthcare industry may offer competitive Products and Services. As we continue to develop new Products and Services to address areas such as analytics, machine learning ("ML"), artificial intelligence ("AI"), value-based care, consumer solutions, population health management and other health network solutions, we expect to face new competitors, and these competitors may have more experience in these markets, better brand recognition or more established relationships with prospective clients. Moreover, we expect that competition will continue to increase as a result of consolidation in both the IT and healthcare industries. We face strong competition and often face downward price pressure, which could adversely affect our results of operations or liquidity. If we do not adapt our pricing models to reflect changes in use of our Products and Services or changes in client demand, our revenues could decrease.
Our success also depends on our ability to maintain and expand our business with our existing clients and effectively transition existing clients to current Products and Services, as well as attracting additional clients. Certain clients originally purchased one or a limited number of our Products and Services. These clients may choose not to expand their use of or purchase new Products and Services. Failure to retain and generate additional business from our current clients could materially and adversely impact our business, financial condition and operating results. In addition, there are a limited number of hospitals and other healthcare providers in the U.S. market, and the healthcare industry has been subject to increasing consolidation, which can cause fewer new footprint opportunities or lead to the replacement of our Products and Services in existing clients if the acquiror (or the group being acquired) has a relationship with a different Health Information Technology (HIT) provider. If we are unable to adapt to the impact of industry consolidation, falling costs and technological advancements in a timely manner, our prospects and financial results could be negatively affected.
We may continue complementary strategic business acquisitions and strategic investments to expand our Products and Services offerings and grow our market and client base. Acquisitions and strategic investments have inherent risks which may have a material adverse effect on our business, results of operations, financial condition or prospects, including, but not limited to: 1) diversion of our management's attention; 2) investment in or entry into markets in which we have little or no direct prior experience; 3) failure to achieve projected synergies; 4) failure to commercialize "go forward" Products and Services; 5) failure to successfully integrate the business; 6) loss of clients, key personnel, suppliers and other important relationships; 7) incurrence of debt or assumption of known and unknown liabilities; 8) write-off of software development costs, goodwill, client lists and amortization of expenses related to intangible assets; 9)
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dilutive issuances of equity securities; 10) accounting deficiencies relating to the acquisition of an acquired company, including issues related to internal control over financial reporting and the time and cost associated with remedying such deficiencies; and 11) litigation related to acquisition activity. Further, when we make a strategic investment, we have to rely on third party management teams to drive the portfolio company's success and at times infuse additional capital or provide bridge loans to protect our investment. If we fail to successfully integrate acquired businesses or fail to implement our business strategies with respect to our acquisitions or investments, we may not be able to achieve projected results or support the amount of consideration paid for such acquired businesses or invested into a portfolio company.
If we are unable to manage our growth in the new markets in which we offer Products and Services, our business, results of operations and financial condition could suffer. Our future financial results will depend on our ability to profitably manage our business in the new markets that we enter. We expect to pursue growth and expansion opportunities in the areas of analytics, ML, AI, value-based care, consumer solutions, population health and other health network solutions. To achieve success in those areas, we will need to, among other things, recruit, train, retain and effectively manage associates, manage changing business conditions and implement and improve our technical, administrative, financial control and reporting systems for offerings in those areas. Difficulties in managing future growth in new markets could have a material adverse impact on our business, results of operations and financial condition.
Long sales cycles for our Products and Services could have a material adverse impact on our future results of operations. Some of our Products and Services have long sales cycles, ranging from several months to eighteen months or more beginning at initial contact with the client through execution of a contract. Implementing, replacing, or expanding an information system, or modifying, adding or outsourcing business processes, are major decisions for healthcare organizations. Many of the Products and Services we provide require a substantial capital investment and time commitments by the client or prospective client. Any decision by our clients or prospective clients to delay a purchasing decision could have a material adverse impact on our results of operations.
We depend on strategic relationships and third-party suppliers and our revenue and operating earnings could suffer if we fail to manage these relationships properly. To be successful, we must continue to maintain our existing strategic relationships and establish additional strategic relationships as necessary with leaders in the markets in which we operate. As we decide to partner rather than directly provide certain Products and Services, we will become more dependent on these strategic relationships to meet our clients' needs. We believe that these relationships contribute to our ability to further build our brand, extend the reach of our Products and Services, develop and deploy new products and services, and generate additional revenues and cash flows. The loss of a critical strategic relationship or failure to establish additional relationships, or the failure to realize anticipated synergies and benefits of these strategic relationships, including as a result of delays, shortages or increasing costs in our supply chain, could have a material adverse impact on our business, results of operations and financial condition.
We license or purchase certain intellectual property and technology (such as software, services, hardware and content) from third parties, including some competitors, and depend on such intellectual property and technology in the operation and delivery of our Products and Services. Additionally, we sell or license third party intellectual property and technology in conjunction with our Products and Services. Our remote hosting and cloud services businesses also rely on a limited number of software and services suppliers for certain functions of these businesses. Most of our third-party software license support contracts expire within one to five years, can be renewed only by mutual consent and may be terminated if we breach the terms of the license and fail to cure the breach within a specified period of time. Most of these third-party software licenses are non-exclusive; therefore, our competitors may obtain the right to use the technology covered by these licenses to compete directly with us. If our third party suppliers were to change product offerings, cease actively supporting the technologies, fail to update and enhance the technologies, encounter technical difficulties in developing these technologies, significantly increase prices, change delivery models, terminate our licenses or supply contracts or suffer significant capacity or supply chain constraints or disruptions, we may need to seek alternative suppliers and incur additional internal or external development costs to ensure continued performance of our Products and Services. Such alternatives may not be available on attractive terms or may not be as widely accepted or as effective as the intellectual property or technology provided by our existing suppliers. In addition, interruption in functionality of our Products and Services as a result of changes in third party suppliers could adversely affect our commitments to clients, future sales of Products and Services, and negatively affect our revenue and operating earnings.
Our success depends upon the recruitment and retention of key personnel. Members of our senior management team and other key personnel have departed the Company during the past few years for a variety of reasons, and we cannot guarantee that there will not be additional departures. To remain competitive, we must attract, motivate and retain highly skilled managerial, sales, marketing, consulting and technical personnel, including key personnel skilled in the
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industries and technical environments in which our Products and Services are offered. As we modernize our core platforms, it is important that we retain and attract experienced technical talent with cloud expertise to lead this transformation. Competition for such personnel in our industries is intense in both the United States and abroad. Our failure to attract additional qualified personnel and to retain and motivate existing personnel to meet our needs could have a material adverse effect on our prospects for long-term growth. We may also experience increased compensation costs that are not offset by either improved productivity or higher sales. The unexpected loss of key personnel, or the failure to successfully develop and execute effective succession planning to assure smooth transitions of those key associates and their knowledge, relationships and expertise, could disrupt our business and have a material adverse impact on our results of operations and financial condition, and could potentially inhibit development and delivery of our Products and Services and market share advances.
We might not be successful in achieving expected operating efficiencies and sustaining or improving operating expense reductions and might experience business disruptions and adverse tax consequences associated with restructuring, realignment and cost reduction activities. Cerner has implemented and plans to continue to implement several restructuring and realignment initiatives to reduce costs and increase operating efficiencies. There can be no assurance that we will realize, in full or in part, the anticipated benefits of these initiatives. If we are unable to deliver on these initiatives, while continuing to invest in business growth, or if the volume and nature of change overwhelms available resources, our business operations and financial results could be materially and adversely impacted. Our ability to successfully manage and execute these initiatives and realize expected savings and benefits in the amounts and at the times anticipated is important to our business success. Any failure to do so could have a material adverse effect on our businesses, financial condition and results of operations. Moreover, our ability to achieve our other strategic goals and business plans might be adversely affected and we could experience business disruptions with clients and elsewhere if our restructuring and realignment efforts and our cost reduction activities prove ineffective.
Regulatory Risks
The healthcare industry is subject to changing political, economic and regulatory influences, which could impact the purchasing practices and operations of our clients and increase our costs to deliver Products and Services that enable our clients to meet their compliance requirements. Many healthcare providers are consolidating to create integrated healthcare delivery systems with greater market power. These providers may try to use their market power to negotiate price reductions for our Products and Services. As the healthcare industry consolidates, our client base could be consolidated with fewer buyers, competition for clients could become more intense and the importance of maintaining and acquiring new client relationships becomes greater.
The last decade has been quite active legislatively with major statutes such as the Protecting Access to Medicare Act (PAMA) of 2014 establishing requirements for "Appropriate Use Criteria" in ordering high dollar diagnostic imaging services, the Medicare and CHIP Reauthorization Act of 2015 which reformed how physicians are paid under Medicare and which established the Merit-based Incentive Payment System (MIPS); the 21st Century Cures Act of 2016 (Cures Act), which laid the groundwork for a nationwide trusted health information exchange, established interoperability requirements for providers, payers and consumers, and set the framework for information blocking regulations; and most recently the Substance Use Disorder Prevention that Promotes Opioid Recovery and Treatment for Patients and Communities (SUPPORT) Act of 2018 that includes significant policies for addressing the opioid crisis. These statutes are heavily laden with provisions that directly call for or describe roles for the use of health information technology to help providers comply with new federal requirements under Medicare and state Medicaid programs.
Reform of payment policies for Medicare and Medicaid continues to evolve. The Patient Protection and Affordable Care Act became law in 2010; this comprehensive healthcare reform legislation introduced value-based principles into federal health insurance payments systems, sought to improve healthcare quality, and expanded access to affordable health insurance. MACRA built upon the value based policies introduced by the ACA. These legislative initiatives accelerated the adoption of "Alternative Payment Models" (APMs) as bundled payment models based on episodes of care or per capita payment for defined populations as alternatives to traditional fee for service payments to providers. New APMs continue to be developed under the authorities of the Centers for Medicare and Medicaid Innovations, and value-based efforts such as the Medicare Shared Savings Program Accountable Care Organization (MSSP ACO) program have seen various iterations. APMs have evolved to usually require two-sided risk (shared saving and shared losses) and use of Certified EHR Technology (CEHRT) as a precondition for program participation. However, even after failed attempts to repeal the ACA, continuing challenges in the courts create uncertainty for the continued implementation of the ACA. Given a fractious and polarized legislative environment at the federal level, the near-term prospects for healthcare related legislation face uncertainty. Because of ongoing federal fiscal budgetary pressures yet to be resolved for federal health
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programs, we cannot predict the full effect of healthcare legislation on our business at this time. The direction and pace of healthcare reform initiatives may adversely impact either our operational results or the way we operate our business. We expect expanded surveillance by federal agencies of certified HIT and its use by our clients. We also anticipate newly expanded regulations under the federal Self-Referral and Anti-Kickback Laws that will contain expanded safe harbors for value based care, and that may promote expanded donation of certified HIT and of cybersecurity technologies in support of trusted health information exchange to support coordinated patient care within value based APMs. In response to this uncertainty, purchasers of HIT may elect to update HIT already in use and postpone investment decisions in new or replacement HIT, including investments in our Products and Services. Future legislation and regulation together with future judicial decisions may ultimately impact the fiscal stability and sustainability of HIT purchasers. Differences in demand related to new regulatory requirements and near-term compliance deadlines that contribute to demand for our Products and Services could impact our financial results. There can be no certainty that any legislation that may be adopted or judicial decisions will be favorable to our business. We cannot predict whether or when future healthcare reform initiatives at the federal or state level or other initiatives affecting our business will be proposed, enacted or implemented or what impact those initiatives may have on our business, results of operations and financial condition.
The healthcare industry is highly regulated, and thus, we are subject to several laws, regulations and industry initiatives, non-compliance with certain of which could materially adversely affect our operations or otherwise adversely affect our business, results of operations and financial condition. As a participant in the healthcare industry, our operations and relationships, and those of our clients, are regulated by several U.S. federal, state, local and foreign governmental entities. The impact of these regulations on us is both direct, to the extent that we are ourselves subject to these laws and regulations, and also indirect, in terms of government program requirements applicable to our clients for the use of HIT. Even though we may not be directly regulated by specific healthcare laws and regulations, our Products and Services must be capable of being used by our clients in a way that complies with those laws and regulations. There are a significant and wide-ranging number of regulations both within the United States and abroad, such as regulations in the areas of healthcare fraud, information sharing, e-prescribing, claims processing and transmission, healthcare devices, the security and privacy of patient data and interoperability standards, that may be directly or indirectly applicable to our operations and relationships or the business practices of our clients. Specific risks include, but are not limited to, the following:
Healthcare Fraud. U.S. federal and state governments continue to enhance regulation of and increase their scrutiny over practices involving healthcare fraud, waste and abuse perpetuated by healthcare providers and professionals whose services are reimbursed by Medicare, Medicaid and other government healthcare programs. Our healthcare provider clients, as well as our provision of Products and Services to government entities, subject our business to laws and regulations on fraud and abuse which, among other things, prohibit the direct or indirect payment or receipt of any remuneration for patient referrals, or arranging for or recommending referrals or other business paid for in whole or in part by these federal or state healthcare programs. U.S. federal enforcement personnel have substantial funding, powers and remedies to pursue suspected or perceived fraud and abuse. The effect of this government regulation on our clients is difficult to predict. Many of the regulations applicable to our clients and that may be applicable to us, including those relating to marketing incentives offered in connection with healthcare device sales and information blocking, are vague or indefinite and have not been interpreted by the courts. They may be interpreted or applied by prosecutorial, regulatory or judicial authorities in a manner that could broaden their applicability to us or require our clients to make changes in their operations or the way in which they deal with us. If we fail to comply with any applicable laws and regulations, we could be subject to civil and criminal penalties, sanctions or other liability, including exclusion from government health programs or from providing certain Products and Services to our clients who participate in such programs, which could have a material adverse effect on our business, results of operations and financial condition. Even an unsuccessful challenge by a regulatory or prosecutorial authority of our activities could result in adverse publicity, require a costly response from us and adversely affect our business, results of operations and financial condition.
Preparation, Transmission, Submission and Collection of Medical Claims for Reimbursement. Our Products and Services are capable of electronically transmitting claims for services and items rendered by a physician to many patients' payers for approval and reimbursement. Such claims are governed by U.S. federal and state laws. U.S. federal law provides civil liability to any persons that knowingly submit, or cause to be submitted, a claim to a payer, including Medicare, Medicaid and private health plans, seeking payment for any services or items that overbills or bills for services or items that have not been provided to the patient. U.S. federal law may also impose criminal penalties for intentionally submitting such false claims. In addition, federal and state law regulates the collection of debt and may impose monetary penalties for violating those regulations. We have policies and procedures in place that we believe result in the accurate and complete preparation, transmission, submission and collection of claims, provided that the information given to us by our clients is also accurate and complete. The Health Insurance Portability and Accountability Act of 1996 ("HIPAA") security, privacy
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and transaction standards, as discussed below, also have a potentially significant effect on our claims preparation, transmission and submission services, because those services must be structured and provided in a way that supports our clients' HIPAA compliance obligations. In connection with these laws, we may be subjected to U.S. federal or state government investigations and possible penalties may be imposed upon us; false claims actions may have to be defended; private payers may file claims against us; and we may be excluded from Medicare, Medicaid or other government-funded healthcare programs. Any investigation or proceeding related to these laws, even if unwarranted or without merit, may have a material adverse effect on our business, results of operations and financial condition.
Regulation of Healthcare Devices. The U.S. Food and Drug Administration ("FDA") has determined that certain of our Products and Services are covered medical devices that are actively regulated under the Federal Food, Drug and Cosmetic Act ("Act") and amendments to the Act. Other countries have similar regulations in place related to medical devices, that now or may in the future apply to certain of our Products and Services. The FDA has also expressed an intention to update its regulatory framework to address AI/ML-based Software as a Medical Device. If other of our Products and Services are deemed to be actively regulated medical devices by the FDA or similar regulatory agencies in countries where we do business, we could be subject to extensive requirements governing pre- and post-marketing activities including pre-market notification clearance. Complying with these medical device regulations globally is time consuming and expensive and could be subject to unanticipated and significant delays. Further, it is possible that these regulatory agencies may become more active in regulating software and devices that are used in healthcare. If we are unable to obtain the required regulatory approvals for any such Products and Services, our short- and long-term business plans for these Products and Services could be delayed or canceled. Our sites have been previously subject to FDA inspections, and we remain subject to periodic FDA inspections. We could be required to undertake additional actions to comply with the Act and any other applicable regulatory requirements. Our failure to comply with the Act and any other applicable regulatory requirements could have a material adverse effect on our ability to continue to manufacture, distribute and deliver our Products and Services.
Security and Privacy. U.S. federal, state and local laws and foreign legislation govern the confidentiality of personal information, how that information may be used, and the circumstances under which such information may be released. These regulations govern both the disclosure and use of confidential personal and patient medical record information and require the users of such information to implement specified security and privacy measures. U.S. regulations currently in place governing electronic health data transmissions continue to evolve and are often unclear and difficult to apply in light of the complexity of our client environments. Laws in non-U.S. jurisdictions are also evolving and often have stricter requirements related to the treatment of personal or patient information.
Data protection regulations impact how businesses, including both us and our clients, can collect and process the personal data of individuals. The costs of compliance with, and other burdens imposed by, such laws, regulations and policies, or modifications thereto, that are applicable to us may limit the use and adoption of our Products and Services and could have a material adverse impact on our business, results of operations and financial condition. Furthermore, we incur development, resource, and capital costs in delivering, updating, and supporting Products and Services to enable our U.S. and non-U.S. clients to comply with these varying and evolving standards. U.S. federal, state, and non-U.S. governmental enforcement personnel have substantial powers and remedies, particularly in the EU, to pursue suspected or perceived violations. If we fail to comply with any applicable laws or regulations or fail to deliver compliant Products and Services, we could be subject to civil penalties, sanctions and contract liability and could otherwise damage our reputation. Enforcement investigations, even if meritless, could have a negative impact on our reputation, cause us to lose existing clients or limit our ability to attract new clients.
In the U.S., HIPAA regulations apply national standards for some types of electronic health information transactions and the data elements used in those transactions to ensure the integrity, security and confidentiality of health information and standards to protect the privacy of individually identifiable health information. Covered entities under HIPAA, which include healthcare organizations such as our clients, and their business associates, many of our employer clinic business and our claims processing, transmission and submission services, are required to comply with HIPAA privacy standards, transaction regulations and security regulations. We and our U.S. clients are also subject to evolving state laws regarding the privacy and security of healthcare information and personal information generally.
In non-U.S. jurisdictions, we are subject to transnational, national and local data protection legislation, including, but not limited to, the EU General Data Protection Regulation ("GDPR"), UK GDPR, Canadian Personal Information Protection and Electronic Documents Act and Canadian Provincial legislation. In addition to EU and Canadian federal legislation, certain European member states and Canadian provinces have adopted more stringent data protection standards, particularly for health data. These regulations may impose restrictions on the processing of personal data (including health
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data) that, in some respects, are more stringent, and impose more significant burdens on subject businesses, than current privacy standards in the United States.
In non-U.S. jurisdictions, we also are subject to potential restrictions on cross-border transfers of personal data to the United States as well as other countries where Cerner has business operations. A recent EU court decision regarding the adequacy of U.S. law to protect EU personal data created additional uncertainty regarding the lawfulness of transfers of EU personal data to the United States and India. Cerner has addressed these requirements through the execution of Standard Contractual Clause Agreements and by designing our support services to minimize, to the extent feasible, transfers of our EU client's patient data to the United States. However, the adoption of data privacy laws and court decisions that restrict cross border transfers or otherwise require data localization could have a material impact on our business. Furthermore, the perception by non-U.S. clients that we cannot provide adequate assurance for transfers of personal information may limit the use and adoption of our Products and Services and could have a material adverse impact on our business, results of operations and financial condition.
Development and adoption of ML and AI technologies offer the potential to significantly improve the delivery of healthcare. The application of ML and AI technologies to personal and patient information may be regulated under some privacy laws (e.g. GDPR). Furthermore, the lack of standards for measuring the accuracy and effectiveness of ML and AI can raise new or exacerbate existing technological, legal or other challenges that could impact our reputation and have a material adverse impact on our results of operations.
Federal Requirements for Use of Interoperable and Certified Health Information Technology. Various U.S. federal, state and non-government agencies continue to generate requirements for the use of certified health information technology and interoperability standards. These requirements are expansions of the statutory ARRA HITECH program that began providing incentive payments in 2011 to hospitals and eligible providers for the "meaningful use of certified electronic health record technology ("CEHRT")." Although those incentive programs have expired, CEHRT continues to be a requirement of participation in federal healthcare programs in order to receive reimbursement for health items and services provided by our clients to Medicare and Medicaid beneficiaries. In the last several years, participation in Medicare's "alternative payment models" to replace traditional "fee for service" payments with quality and risk-sharing payment models has been conditioned on the adoption of CEHRT. The Cures Act has tied CEHRT to its policy goals of reducing barriers to the exchange of health information, encouraging nationwide interoperability, consumer access to health information and improving health information availability between consumers and their care teams. The regulations establishing the certification and interoperability standards for CEHRT will continue to be updated to support these policy goals with greater emphasis on interoperability, consumer engagement, patient safety and health information privacy and security.
Along with recent CMS actions taken for Medicare and Medicaid, these regulations will also mandate adoption of updated and expanded certified capabilities of CEHRT that our clients must adopt to remain able to participate in the federal programs mentioned earlier. In addition, the ONC has increased its surveillance activities concerning vendor compliance relative to CEHRT.
Cerner will be completing software development updates to its certified products and taking them through ONC's certification process in 2022 to meet the new certification requirements that will become mandatory for certain Federal programs under the Cures Act and various CMS regulations. Given recent CMS regulations, these updates must become certified and adopted by our clients by January 1, 2023. However, these standards and specifications are subject to interpretation by the entities designated to certify our electronic healthcare technology as CEHRT compliant. Additionally, the Cures Act requires us to comply with conditions of certification such that if our business practices or our Products and Services are not compliant with these evolving regulatory requirements, our market position and sales could be impaired, we may have to invest significantly in changes to our Products and Services, and our reputation could be damaged. Further, we bear potential financial risks where we are alleged to have not appropriately complied with these regulations. We also bear financial risk where we have entered into agreements with clients to warrant our ability to provide certified Products and Services. While a client's ability to meet future federal health program related attestation requirements may be dependent on the client's ability to adopt, rollout and attain sufficient use of our certified Products and Services on a timely basis, we may face risks that come from issues in full adoption of our certified Products and Services, which in turn could lead to a client missing its attestation targets. These risks are enhanced when we are under agreements to provide application management services to our clients that place responsibilities on us for application configuration and implementation as a prerequisite to attainment of quality measures ordinarily borne by the client.
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The ONC has finalized additional regulations under the Cures Act to enforce the Act's policy directives relating to data sharing and interoperability. The ONC is charged under the Cures Act with developing a Trusted Exchange Framework that establishes governance requirements for trusted health information exchange in the United States. In addition, the ONC certification criteria updated under the Cures Act require that Cerner enable its clients to capture, store and exchange the types of health information defined within the ONC developed U.S. Common Data Set for Interoperability (USCDI) which represents the essential health information data for the U.S. healthcare system. The USCDI is designed to be maintained on an iterative basis to account for new requirements and priorities for health information that may emerge such through the COVID-19 pandemic. ONC continues to modify and refine these standards. We may incur increased software development and administrative expense and delays in delivering Products and Services if we need to update our Products and Services to conform to these varying and evolving requirements and standards. In addition, delays in interpreting these standards may result in postponement or cancellation of our clients' decisions to purchase our Products and Services. If our Products and Services are not compliant with these evolving standards, our market position and sales could be impaired, we may have to invest significantly in changes to our Products and Services, we may be subject to contractual liability and our reputation could be damaged. If our Products and Services are not consistent with those requirements, we could be forced to incur substantial additional development costs to conform.
Our work with government clients exposes us to additional risks inherent in the government contracting environment. Our clients include national, provincial, state, local and foreign governmental entities and their agencies. Our government work carries various risks inherent in contracting with government entities. These risks include, but are not limited to, the following:
•Government entities, particularly in the United States, often reserve the right to audit our contracts and conduct reviews, inquiries and investigations of our business practices and performance with respect to government contracts. If a government client discovers improper conduct during its audits or investigations, we may become subject to various civil and criminal penalties, including those under the civil U.S. False Claims Act, and administrative sanctions, which may include termination of contracts, suspension of payments, fines and civil money penalties, and suspensions or debarment from doing business with other government agencies.
•U.S. government contracting regulations impose strict compliance and disclosure obligations and our failure to comply with these obligations could be a basis for suspension or debarment, or both, from federal government contracting in addition to breach of the specific contract.
•Government contracts are subject to heightened reputational and contractual risks compared to contracts with commercial clients and often involve more extensive scrutiny and publicity. Negative publicity, including allegations of improper or illegal activity, poor contract performance, or information security breaches, regardless of accuracy, may adversely affect our reputation.
•Terms and conditions of government contracts also tend to be more onerous, are often more difficult to negotiate and involve additional costs. We must comply with specific procurement regulations and a variety of other socio-economic requirements, as well as various statutes, regulations and requirements related to employment practices, recordkeeping and accounting. Our failure to comply with a variety of complex procurement rules and regulations could result in our liability for penalties, including termination of our government contracts, disqualification from bidding on future government contracts and suspension or debarment from government contracting.
•Government entities typically fund projects through appropriated monies. Our VA Electronic Health Record Modernization and DOD MHS Genesis agreements are indefinite delivery, indefinite quantity contracts. The change in presidential administration may affect VA and DOD budget priorities for this ongoing work.
•Government entities reserve the right to change the scope of or terminate these projects at their convenience for lack of approved funding or other reasons, which could limit our recovery of reimbursable expenses or investments. In addition, government contracts may be protested, which could result in administrative procedures and litigation, result in delays in performance and payment, be expensive to defend and be incapable of prompt resolution.
•It is common in contracting with governments for there to be a prime contractor with privity of contract to the government client and one or more subcontractors. We serve in both capacities for different government clients. There are inherent risks in being a subcontractor, including without limitation, reliance on the performance of the prime contractor for the execution of the contract to the satisfaction of the client. Additionally, when we serve as the prime contractor, we rely on our subcontractors to fulfill certain contractual obligations under our agreements with government clients. A failure by the prime contractor to perform under an agreement under which we serve as a subcontractor, or a failure by a subcontractor to perform under an agreement under which we serve as a prime contractor, could have a material adverse impact on our business, results of operations and financial condition.
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The occurrences or conditions described above could affect not only our business with the particular government entities involved, but also our business with other entities of the same or other governmental bodies or with certain commercial clients and could have a material adverse effect on our business, results of operations and financial condition.
Capital and Credit Risks
Volatility and disruption resulting from global economic or market conditions could negatively affect our business, results of operations and financial condition. Our business, results of operations, financial condition and outlook may be impacted by the health of the global economy. Our business and financial performance, including new business bookings and collection of our accounts receivable, may be adversely affected by current and future economic conditions that cause a slowdown or decline in client spending. Reduced purchases by our clients or changes in payment terms could adversely affect our revenue growth and cause a decrease in our cash flow from operations. Bankruptcies or similar events affecting clients may cause us to incur bad debt expense at levels higher than historically experienced. Further, volatility and disruption in global financial markets may also limit our ability to access the capital markets at a time when we would like, or need, to raise capital, which could have an impact on our ability to react to changing economic and business conditions. Accordingly, if global financial and economic volatility continues or worsens, particularly in light of the ongoing COVID-19 pandemic or the resurgence thereof, our business, results of operations and financial condition could be materially and adversely affected.
There are risks associated with our outstanding and future indebtedness. As of December 31, 2021, we had $1.84 billion of total outstanding indebtedness, and we may incur additional indebtedness in the future. We have customary restrictive covenants in our current debt agreements, which may limit our flexibility to operate our business. These covenants include limitations on priority debt, liens, mergers, asset dispositions, and transactions with affiliates, and require us to maintain certain leverage and interest coverage ratios. Failure to comply with these covenants could result in an event of default that, if not cured or waived, could have a material adverse effect on our business, results of operations and financial condition. Additionally, our ability to pay interest and repay the principal for our indebtedness is dependent upon our ability to manage our business operations, generate sufficient cash flows to service such debt and the other factors discussed in this section. There can be no assurance that we will be able to manage any of these risks successfully.
Our Fourth Amended and Restated Credit Agreement (as amended, the "Credit Agreement") bears interest at variable interest rates, primarily based on the London Interbank Offered Rate ("LIBOR"). LIBOR is currently in the process of being phased out. The Credit Agreement includes provisions intended to provide for the replacement of LIBOR with the Secured Overnight Financing Rate ("SOFR") or another widely-accepted alternative benchmark rate upon the cessation of LIBOR or the occurrence of other triggering events, with corresponding adjustments to the applicable interest rate margins. However, uncertainty as to the timing and nature of such modifications could cause the interest rate calculated for the Credit Agreement to be materially different than expected, and there is no guarantee that a transition from LIBOR to an alternative will not result in financial market disruptions, significant increases in benchmark rates, or borrowing costs to borrowers, any of which could have an adverse effect on our business, results of operations and financial condition. With respect to our Credit Agreement and the related interest rate swap, if the swap and the Credit Agreement replacement rates are not identical, our hedge could be less effective. Our failure to manage these risks effectively could adversely affect our financial condition and results of operations.
We cannot guarantee that our capital allocation strategy, which may include share repurchases and dividend payments, will be fully implemented or that it will enhance long-term shareholder value. As of December 31, 2021, $3.18 billion remains available for repurchase under our stock repurchase program, which expires on December 31, 2023. We are not obligated to repurchase a specified number or dollar value of shares and do not plan to repurchase shares in the near term. Additionally, while we expect to pay a cash dividend on a quarterly basis, future declarations of such dividends are subject to approval by the Board of Directors. Either or both of our repurchase or dividend programs may be suspended or terminated at any time and, even if fully implemented, may not enhance long-term shareholder value.
Tax, Finance and Accounting Related Risks
We are subject to tax legislation in numerous countries; changes in tax laws or challenges to our tax positions could adversely affect our business, results of operations and financial condition. We are a global corporation with a presence primarily in North America, Europe, the Middle East, Australia, and India. As such, we are subject to tax laws, regulations and policies of the U.S. federal, state and local governments and comparable taxing authorities in other
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country jurisdictions. Changes in tax laws could cause us to experience fluctuations in our tax obligations and effective tax rates in future periods and otherwise adversely affect our tax positions and our tax liabilities. Our effective tax rates, tax payments, tax credits or incentives could be adversely affected by changes in tax laws. In addition, U.S. federal, state and local, as well as other countries' tax laws and regulations, are extremely complex and subject to varying interpretations and require significant judgment in determining our worldwide provision for income taxes and other tax liabilities. As these and other tax laws and related regulations change, our financial results could be materially impacted. In the ordinary course of a global business, there are many intercompany transactions and calculations which could be subject to challenge by tax authorities. We are regularly under audit by tax authorities and those authorities often do not agree with positions taken by us on our tax returns. Our intercompany transfer pricing has been reviewed by the U.S. Internal Revenue Service ("IRS") and by foreign tax jurisdictions and will likely be subject to additional audits in the future. There can be no assurance that our tax positions will not be challenged by relevant tax authorities or that we would be successful in any such challenge, which could result in additional taxation, penalties and interest payments.
Our strategy to transition to a subscription based recurring revenue model and continued modernization of our technology may adversely affect our near-term revenue growth and results of operations. As we transition more of our offerings to leverage cloud technologies, we may incur disruption as we transition existing clients and be less competitive during the transition, which could impact revenue and profitability. We believe we must continue to dedicate a significant amount of resources to our research and development efforts to maintain our competitive position; and oftentimes, successful investments require several years before generating significant revenue. We expect our ongoing shift from a software license model to a subscription-based services revenue model to create a recurring revenue stream that is more predictable. The transition, however, creates changes related to the timing of revenue recognition compared to historical patterns. We also incur certain expenses associated with the infrastructures of our cloud-based offerings in advance of our ability to recognize the revenues associated with these offerings, which may adversely affect our near-term reported revenues, results of operations and cash flows. A decline in renewals of recurring revenue offerings in any period may not be immediately reflected in our results for that period but may result in a decline in our revenue and results of operations in future quarters.
Goodwill and other intangible assets represent approximately 21% of our total assets and we could suffer losses due to asset impairment charges. We assess our goodwill and other intangible assets for impairment periodically in accordance with applicable authoritative accounting guidance. Declines in business performance or other factors could result in a non-cash impairment charge. This could materially and negatively affect our results of operations and financial condition.
Our sales forecasts may vary from actual sales in a particular quarter. We use a "pipeline" system, a common industry practice, to forecast sales and trends in our business. Our sales associates monitor the status of all sales opportunities, such as the date when they estimate that a client will make a purchase decision and the potential dollar amount of the sale. These estimates are aggregated periodically to generate a sales pipeline. We compare this pipeline at various points in time to evaluate trends in our business. This analysis provides guidance in business planning and forecasting, but these pipeline estimates are by their nature speculative. Our pipeline estimates are not necessarily reliable predictors of revenues in a particular quarter or over a longer period of time, partially because of changes in the pipeline and in conversion rates of the pipeline into contracts that can be very difficult to estimate. A negative variation in the expected conversion rate or timing of the pipeline into contracts, or in the pipeline itself, could cause our plan or forecast to be inaccurate and thereby adversely affect business results.
Lower than expected revenue growth or shifts in our revenue mix could adversely affect our results of operations. Our revenue growth and mix could vary over time due to a number of factors, including timing of contracts signing, changes in the health of our end markets, unexpected client attrition, and the mix of software, hardware, devices, maintenance, support and services revenues, which carry different margin rates which can vary from period to period. Our operating results could be harmed by changes in revenue mix and costs, together with numerous other factors, including rapid growth in lower margin services business, declines in software, and growth in non-cash expenses, such as amortization and depreciation.
General Risk Factors
Our quarterly operating results may vary, which could adversely affect our stock price. Our quarterly operating results have varied in the past and may continue to vary in future periods, including variations from guidance, expectations or historical results or trends. Quarterly operating results may vary for a number of reasons including demand for our Products and Services, the financial condition of our current and potential clients, our long sales cycle, potentially long
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installation and implementation cycles for larger, more complex systems, accounting policy changes, our clients' abilities to meet project milestones, seasonality of revenue collection and other factors described in this section and elsewhere in this report. As a result of healthcare industry trends and the market for our Products and Services, a large percentage of our revenues are generated by the sale and installation of larger, more complex and higher-priced systems. The sales process for these systems is lengthy and involves a significant technical evaluation and commitment of capital and other resources by the client. Sales may be subject to delays due to changes in clients' internal budgets, procedures for approving large capital expenditures, competing needs for other capital expenditures, additions or amendments to applicable laws, availability of personnel resources or by actions taken by competitors. Revenue recognized in any quarter may also depend upon our clients' abilities to meet project milestones. Delays in the expected sale, installation or implementation of these large systems or in meeting project milestones may have a significant negative impact on our anticipated quarterly revenues and consequently our earnings, since a significant percentage of our expenses are relatively fixed. Because of the complexity and value of our contracts, the loss of even a small number of clients could have a significant negative effect on our financial results. We may also experience seasonality in revenues.
The trading price of our common stock may be volatile. The market for our common stock may experience significant price and volume fluctuations in response to a number of factors including actual or anticipated variations in operating results, articles or rumors about our performance or Products and Services, announcements of technological innovations or new services or products by our competitors or us, changes in expectations of future financial performance or estimates of securities analysts, governmental regulatory action, healthcare reform measures, client relationship developments, economic conditions, our pending acquisition by Oracle and its affiliates, and other factors, many of which are beyond our control. Furthermore, broad market and industry fluctuations may also adversely affect the trading price of our common stock, regardless of actual operating performance. As a matter of policy, we do not generally comment on our stock price or rumors.
Fluctuations in foreign currency exchange rates could materially affect our financial results. Our consolidated financial statements are presented in U.S. dollars. In general, the functional currency of our subsidiaries is the local currency where the subsidiary operates. For each subsidiary, assets and liabilities denominated in foreign currencies are translated into U.S. dollars at the exchange rates in effect at the balance sheet dates and revenues and expenses are translated at the average exchange rates prevailing during the month of the transaction. Therefore, future fluctuations in foreign currency exchange rates, particularly the strengthening of the U.S. dollar against major currencies, could materially affect our financial results.
Item 1B. Unresolved Staff Comments.
None
Item 2. Properties.
As of the end of 2021, we owned an aggregate of 6.5 million gross square feet of real estate located in the greater Kansas City metro area and Malvern, Pennsylvania. Such property primarily consists of office space, datacenter, and warehouse facilities used primarily by our Domestic segment. An aggregate of 1.2 million gross square feet of this space is currently designated as held for sale. Refer to Note (5) of the Notes for further information regarding our real estate held for sale.
As of the end of 2021, we leased an aggregate of 355 thousand gross square feet of office space in the United States used by our Domestic segment, and an aggregate of 1.4 million gross square feet of office and datacenter space outside the United States, primarily in Australia, Europe, India, and the Middle East, which is used by our International segment.
In general, we believe our facilities are suitable to meet our current and reasonably anticipated future needs.
Item 3. Legal Proceedings.
From time to time, we are involved in litigation which is incidental to our business. In our opinion, no litigation to which we are currently a party is likely to have a material adverse effect on our consolidated financial condition, results of operations, or cash flows.
The disclosure relating to our dispute with Steward Health Care System LLC contained in Note (19) is incorporated herein by reference.
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Item 4. Mine Safety Disclosures.
Not applicable.
Part II.
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stock trades on the Nasdaq Global Select MarketSM under the symbol CERN.
At February 10, 2022, there were approximately 920 owners of record.
Our Board of Directors declared cash dividends on our issued and outstanding common stock in 2021, 2020, and 2019. Subject to declaration by our Board of Directors, we expect to continue paying quarterly cash dividends as a part of our current capital allocation strategy. Future dividends will be subject to the determination, declaration and discretion of our Board of Directors and compliance with covenants under our outstanding debt agreements and the Merger Agreement. Refer to Note (16) of the Notes for further information regarding our dividend program.
The table below provides information with respect to common stock purchases by the Company during the fourth fiscal quarter of 2021:
| Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (a) | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs (a) | |||||||||||||||||||||||
| Period | ||||||||||||||||||||||||||
| October 1, 2021 - October 31, 2021 | 2,866,152 | $ | 70.98 | 2,866,152 | $ | 3,348,677,338 | ||||||||||||||||||||
| November 1, 2021 - November 30, 2021 | 2,300,941 | 74.53 | 2,300,941 | $ | 3,177,186,928 | |||||||||||||||||||||
| December 1, 2021 - December 31, 2021 | — | — | — | $ | 3,177,186,928 | |||||||||||||||||||||
| Total | 5,167,093 | $ | 72.56 | 5,167,093 | ||||||||||||||||||||||
(a) Under our share repurchase program, which was initially approved by our Board of Directors on May 23, 2017 (and announced May 25, 2017) and most recently amended on December 12, 2019 (as announced on December 13, 2019) (the "2017 Share Repurchase Program"), the Company was authorized to repurchase up to $3.70 billion of shares of our common stock, excluding transaction costs. The repurchases were to be effectuated in the open market, by block purchase, in privately negotiated transactions, or through other transactions managed by broker-dealers, or any combination thereof. This program was completed in the third quarter of 2021.
On April 23, 2021, our Board of Directors approved (and announced on May 5, 2021) a new share repurchase program (the "2021 Share Repurchase Program"), which authorizes the Company to repurchase up to $3.75 billion in the aggregate of shares of our common stock, excluding transaction costs. The 2021 Share Repurchase Program was incremental to our 2017 Share Repurchase Program. The repurchases are to be effectuated in the open market, by block purchase, in privately negotiated transactions, or through other transactions managed by broker-dealers, or any combination thereof. The 2021 Share Repurchase Program will expire on December 31, 2023.
During 2021, we repurchased 20.0 million shares for total consideration of $1.50 billion under our share repurchase programs pursuant to Rule 10b5-1 plans. As of December 31, 2021, $3.18 billion remained available for repurchase under the 2021 Share Repurchase Program. The Merger Agreement prohibits us from repurchasing our shares without Parent's consent.
See Part III, Item 12 for information relating to securities authorized for issuance under our equity compensation plans.
Item 6. [Reserved]
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following Management Discussion and Analysis ("MD&A") is intended to help the reader understand our results of operations and financial condition. This MD&A is provided as a supplement to, and should be read in conjunction with, our financial statements and the accompanying Notes.
All references to years in this MD&A represent fiscal years unless otherwise noted. Refer to Note (1) of the Notes for information regarding our fiscal year end.
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Information regarding our 2019 results of operations, including a year-to-year comparison against 2020, may be found in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our annual report on Form 10-K for the period ended December 31, 2020, which was filed with the Securities and Exchange Commission on February 19, 2021.
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 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,
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including receipt of certain regulatory approvals and other customary closing conditions. The Merger is currently expected to close in calendar year 2022.
For additional information related to the Merger Agreement, please refer to the Schedule 14D-9 previously filed with the SEC and other relevant materials in connection with the transaction that we will file with the SEC and that will contain important information about the Merger.
COVID-19
Our business and results of operations in both 2021 and 2020 were impacted by the ongoing COVID-19 pandemic. It has caused us to modify certain of our business practices, including prolonging the requirement that most of our associates 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 ongoing 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 the mid-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 into 2022, we do not expect it to be as significant as either 2020 or 2021. 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.
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Operational Improvement Initiatives
The Company has continued to focus on leveraging the impact of our operating structure, that was implemented in the first quarter of 2019, and identifying additional efficiencies in our business. 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 in Germany and Spain, in July 2020, and the sale of certain of our revenue cycle outsourcing business operations in August 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 improvement initiatives. We continue to be focused on reducing operating expenses and identifying opportunities that are expected to provide longer-term operating margin expansion 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 2021, 2020, and 2019 primarily related to professional services fees, employee separation costs, and asset impairment charges which are included in operating expenses in our 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 reflect the value of executed contracts for software, hardware, professional services and managed services, was $5.83 billion in 2021, which is an increase of 4% compared to $5.58 billion in 2020.
Revenues for 2021 increased 5% to $5.76 billion, compared to $5.51 billion in 2020.
Net earnings for 2021 decreased 29% to $556 million, compared to $780 million in 2020. Diluted earnings per share decreased 27% to $1.84 in 2021, compared to $2.52 in 2020.
We had cash collections of receivables of $6.13 billion in 2021, compared to $5.70 billion in 2020. Days sales outstanding was 73 days in the fourth quarter of 2021, compared to 76 days for both the third quarter of 2021 and fourth quarter of 2020. Operating cash flows for 2021 were $1.77 billion, compared to $1.44 billion in 2020.
Healthcare Information Technology Market Outlook
We have provided an assessment of the healthcare information technology market under "Healthcare and Healthcare IT Industry" in Part I, Item 1 "Business," which is incorporated herein by reference.
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Results of Operations
Fiscal Year 2021 Compared to Fiscal Year 2020
| (In thousands) | 2021 | % of Revenue | 2020 | % of Revenue | % Change | |||||||||||||||||||||
| Revenues | $ | 5,764,824 | 100 | % | $ | 5,505,788 | 100 | % | 5 | % | ||||||||||||||||
| Costs of revenue | 1,001,017 | 17 | % | 932,941 | 17 | % | 7 | % | ||||||||||||||||||
| Margin | 4,763,807 | 83 | % | 4,572,847 | 83 | % | 4 | % | ||||||||||||||||||
| Operating expenses | ||||||||||||||||||||||||||
| Sales and client service | 2,636,205 | 46 | % | 2,582,615 | 47 | % | 2 | % | ||||||||||||||||||
| Software development | 835,995 | 15 | % | 749,007 | 14 | % | 12 | % | ||||||||||||||||||
| General and administrative | 520,667 | 9 | % | 491,586 | 9 | % | 6 | % | ||||||||||||||||||
| Amortization of acquisition-related intangibles | 62,664 | 1 | % | 55,595 | 1 | % | 13 | % | ||||||||||||||||||
| Total operating expenses | 4,055,531 | 70 | % | 3,878,803 | 70 | % | 5 | % | ||||||||||||||||||
| Total costs and expenses | 5,056,548 | 88 | % | 4,811,744 | 87 | % | 5 | % | ||||||||||||||||||
| Gain on sale of businesses | — | — | % | 220,523 | 4 | % | ||||||||||||||||||||
| Operating earnings | 708,276 | 12 | % | 914,567 | 17 | % | (23) | % | ||||||||||||||||||
| Other income (loss), net | (8,816) | 76,906 | ||||||||||||||||||||||||
| Income taxes | (143,864) | (211,385) | ||||||||||||||||||||||||
| Net earnings | $ | 555,596 | $ | 780,088 | (29) | % | ||||||||||||||||||||
Revenues & Backlog
Revenues increased 5% to $5.76 billion in 2021, as compared to $5.51 billion in 2020. The following factors impacted the year-over-year change in revenues:
•Increased implementation activity during 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 2021, 20% of our total revenues were attributable to our relationships (as the prime contractor or a subcontractor) with U.S. government agencies, compared to 18% in 2020.
•The 2021 period includes a $148 million increase in revenues due to contributions from our April 1, 2021 acquisition of the Kantar Health business. Refer to Note (8) of the Notes for further information regarding the Kantar Health acquisition.
•The 2021 period includes a $47 million reduction in revenues due to the sale of certain of our revenue cycle outsourcing business operations, as further discussed in Note (9) of the Notes.
•The 2021 period includes a $40 million reduction in revenues due to the sale of certain of our business operations primarily conducted in Germany and Spain, as further discussed in Note (9) of the Notes.
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 $13.26 billion at the end of 2021, compared to $13.04 billion at the end of 2020. 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 such cancellation provisions are rarely exercised. We expect to recognize approximately $1.22 billion of revenue over the
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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 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 $4.06 billion in 2021, compared to $3.88 billion in 2020.
•Sales and client service expenses as a percent of revenues were 46% in 2021, compared to 47% in 2020. These expenses increased 2% to $2.64 billion in 2021, from $2.58 billion in 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 following factors impacted the year-over-year change in sales and client service expenses:
◦The 2021 period includes $78 million of pre-tax charges recorded in connection with the designation of certain real estate assets as held for sale, as further discussed in Note (5) of the Notes.
◦The 2021 period includes expense contributions from the Kantar Health business, which was acquired on April 1, 2021, as further discussed in Note (8) of the Notes.
◦The 2020 period includes $29 million of pre-tax charges incurred in connection with the termination of certain revenue cycle outsourcing contracts, as further discussed in Note (1) of the Notes.
◦The 2020 period includes a $21 million pre-tax charge to provide an allowance against certain non-current receivables from a former client. Refer to Note (3) of the Notes for further information regarding our provision for expected credit losses.
◦The 2020 period includes expense contributions from divested businesses, until their respective sale dates, as further discussed in Note (9) of the Notes.
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•Software development expenses as a percent of revenues were 15% in 2021, compared to 14% in 2020. 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 2021 and 2020 is as follows:
| For the Years Ended | |||||||||||
| (In thousands) | 2021 | 2020 | |||||||||
| Software development costs | $ | 828,502 | $ | 796,971 | |||||||
| Capitalized software costs | (300,446) | (287,869) | |||||||||
| Capitalized costs related to share-based payments | (7,580) | (7,408) | |||||||||
| Amortization of capitalized software costs | 261,798 | 247,313 | |||||||||
| Net realizable value charges (see Note (7) of the Notes) | 53,721 | — | |||||||||
| Total software development expense | $ | 835,995 | $ | 749,007 | |||||||
•General and administrative expenses as a percent of revenues were 9% in both 2021 and 2020. These expenses increased 6% to $521 million in 2021, from $492 million in 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 is primarily due to increased expense associated with share-based payment awards in connection with the departure, or planned departure, of certain executives. In 2021, general and administrative expenses include $139 million of expenses incurred in connection with our operational improvement initiatives, discussed above, compared to $137 million in 2020. 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 both 2021 and 2020. These expenses increased 13% to $63 million in 2021, from $56 million 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 our April 1, 2021 acquisition of the Kantar Health business. Refer to Note (8) of the Notes for further information regarding the Kantar Health acquisition.
Gain on Sale of Businesses
In 2020, we recognized a $221 million gain on sale of businesses. Refer to Note (9) of the Notes for further information regarding divestiture transactions that closed during the third quarter of 2020. We expect to continue to evaluate and complete divestiture transactions that are strategic to our operational improvement initiatives discussed above.
Non-Operating Items
•Other income (loss), net was a net loss of $9 million in 2021, compared to $77 million of income in 2020. The 2020 period includes 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 2021 from the $300 million of Series 2020-A Notes we issued in March 2020 and the $500 million of Series 2021 Senior Notes we issued in March 2021. Refer to Note (13) of the Notes for further information regarding the components of Other income (loss), net.
•Our effective tax rate was 21% in both 2021 and 2020. Refer to Note (14) of the Notes for further discussion regarding our effective tax rate. We do not expect significant changes to our overall effective tax rate in 2022, from what is reported for 2021.
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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 (20) of the Notes for further information regarding our reportable segments.
The following table presents a summary of our operating segment information for 2021 and 2020:
| (In thousands) | 2021 | % of Segment Revenue | 2020 | % of Segment Revenue | % Change | ||||||||||||||||||||||||
| Domestic Segment | |||||||||||||||||||||||||||||
| Revenues | $ | 5,044,629 | 100% | $ | 4,879,769 | 100% | 3% | ||||||||||||||||||||||
| Costs of revenue | 887,343 | 18% | 854,574 | 18% | 4% | ||||||||||||||||||||||||
| Operating expenses | 2,358,897 | 47% | 2,339,624 | 48% | 1% | ||||||||||||||||||||||||
| Total costs and expenses | 3,246,240 | 64% | 3,194,198 | 65% | 2% | ||||||||||||||||||||||||
| Domestic operating earnings | 1,798,389 | 36% | 1,685,571 | 35% | 7% | ||||||||||||||||||||||||
| International Segment | |||||||||||||||||||||||||||||
| Revenues | 720,195 | 100% | 626,019 | 100% | 15% | ||||||||||||||||||||||||
| Costs of revenue | 113,674 | 16% | 78,367 | 13% | 45% | ||||||||||||||||||||||||
| Operating expenses | 277,308 | 39% | 242,991 | 39% | 14% | ||||||||||||||||||||||||
| Total costs and expenses | 390,982 | 54% | 321,358 | 51% | 22% | ||||||||||||||||||||||||
| International operating earnings | 329,213 | 46% | 304,661 | 49% | 8% | ||||||||||||||||||||||||
| Other costs and expenses, net | (1,419,326) | (1,296,188) | 10% | ||||||||||||||||||||||||||
| Gain on sale of businesses | — | 220,523 | |||||||||||||||||||||||||||
| Consolidated operating earnings | $ | 708,276 | $ | 914,567 | (23)% | ||||||||||||||||||||||||
Domestic Segment
•Revenues increased 3% to $5.04 billion in 2021, from $4.88 billion in 2020. The following factors impacted the year-over-year change in Domestic revenues:
◦Increased implementation activity during 2021 within our federal business, inclusive of ongoing projects with the U.S. Department of Defense and the U.S. Department of Veterans Affairs.
◦The 2021 period includes a $68 million increase in revenues due to contributions from our April 1, 2021 acquisition of the Kantar Health business.
◦The 2021 period includes a $47 million reduction in revenues due to the sale of certain of our revenue cycle outsourcing business operations.
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 18% in both 2021 and 2020.
•Operating expenses as a percent of revenues were 47% in 2021, compared to 48% in 2020. These expenses increased 1% to $2.36 billion in 2021, from $2.34 billion in 2020. The following factors impacted the year-over-year change in Domestic operating expenses:
◦The 2021 period includes $78 million of pre-tax charges recorded in connection with the designation of certain real estate assets as held for sale.
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◦The 2021 period includes expense contributions from the Kantar Health business, which was acquired on April 1, 2021.
◦The 2020 period includes $29 million of pre-tax charges incurred in connection with the termination of certain revenue cycle outsourcing contracts.
◦The 2020 period includes a $21 million pre-tax charge to provide an allowance against certain non-current receivables from a former client.
International Segment
•Revenues increased 15% to $720 million in 2021, from $626 million in 2020. The following factors impacted the year-over-year change in International revenues:
◦The 2021 period includes an $80 million increase in revenues due to contributions from our April 1, 2021 acquisition of the Kantar Health business.
◦The 2021 period includes a $40 million reduction in revenues due to the sale of certain of our business operations primarily conducted in Germany and Spain.
◦The remaining difference is attributable to 2021 revenue growth across the majority of our remaining International Segment operations.
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 16% in 2021, compared to 13% in 2020. 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 39% in both 2021 and 2020. These expenses increased 14% to $277 million in 2021, from $243 million in 2020. 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 10% to $1.42 billion in 2021, from $1.30 billion in 2020. This increase includes the impacts of $54 million of pre-tax charges recorded in 2021 to reduce the carrying amount of certain capitalized software development costs to estimated net realizable value; and increased expense associated with share-based payment awards in connection with the departure, or planned departure, of certain executives.
The effects of inflation on our business during 2021 and 2020 were not significant.
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Liquidity and Capital Resources
Our liquidity is influenced by many factors, including the amount and timing of our revenues, our cash collections from our clients and the amount we invest in software development, acquisitions, 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 the end of 2021, we had cash and cash equivalents of $590 million and short-term investments of $253 million, as compared to cash and cash equivalents of $616 million and short-term investments of $442 million at the end of 2020.
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. At the end of 2021, we had outstanding revolving credit loans and letters of credit of $600 million and $18 million, respectively; which reduced our available borrowing capacity to $607 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 (11) 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 2021 and 2020:
| For the Years Ended | |||||||||||
| (In thousands) | 2021 | 2020 | |||||||||
| Cash flows from operating activities | $ | 1,771,684 | $ | 1,436,705 | |||||||
| Cash flows from investing activities | (729,834) | (801,237) | |||||||||
| Cash flows from financing activities | (1,054,845) | (461,497) | |||||||||
| Effect of exchange rate changes on cash | (12,773) | (199) | |||||||||
| Total change in cash and cash equivalents | (25,768) | 173,772 | |||||||||
| Cash and cash equivalents at beginning of period | 615,615 | 441,843 | |||||||||
| Cash and cash equivalents at end of period | $ | 589,847 | $ | 615,615 | |||||||
| Free cash flow (non-GAAP) | $ | 1,173,964 | $ | 857,447 | |||||||
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Cash from Operating Activities
| For the Years Ended | |||||||||||
| (In thousands) | 2021 | 2020 | |||||||||
| Cash collections from clients | $ | 6,128,808 | $ | 5,704,730 | |||||||
| Cash paid to employees and suppliers and other | (4,185,012) | (4,082,664) | |||||||||
| Cash paid for interest | (46,559) | (36,302) | |||||||||
| Cash paid for taxes, net of refunds | (125,553) | (149,059) | |||||||||
| Total cash from operations | $ | 1,771,684 | $ | 1,436,705 | |||||||
Cash flows from operations increased $335 million in 2021 compared to 2020, due primarily to increased collections of client receivables. Days sales outstanding was 73 days in the fourth quarter of 2021, compared to 76 days for both the third quarter of 2021 and fourth quarter of 2020. Cash flows from operations in 2021 and 2020 include the impact of certain federal payroll taxes related to pay cycles in the second through fourth quarters of 2020, for which we deferred remittance to the taxing authority as permitted under the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"). We remitted $38 million of such amounts to the taxing authority in December 2021 and expect to remit $38 million of remaining deferrals in December 2022, as permitted by the CARES Act.
Cash from Investing Activities
| For the Years Ended | |||||||||||
| (In thousands) | 2021 | 2020 | |||||||||
| Capital purchases | $ | (289,694) | $ | (283,981) | |||||||
| Capitalized software development costs | (308,026) | (295,277) | |||||||||
| Sales and maturities of investments, net of purchases | 243,602 | (363,387) | |||||||||
| Purchases of other intangibles | (29,561) | (38,243) | |||||||||
| Acquisition of businesses, net of cash acquired | (355,504) | (49,820) | |||||||||
| Sale of businesses | — | 229,471 | |||||||||
| Disposition of assets held for sale | 9,349 | — | |||||||||
| Total cash flows from investing activities | $ | (729,834) | $ | (801,237) | |||||||
Cash flows from investing activities consist primarily of capital spending, investment, acquisition, and divestiture activities.
Our capital spending in 2021 was driven by capitalized equipment purchases primarily to support growth in our managed services business and capitalized spending to support our ongoing software development initiatives. In 2022, we expect the aggregate of capital purchases and capitalized software development costs to approximate $686 million.
Short-term investment activity historically consists of the investment of cash generated by our business in excess of what is necessary to fund operations. Both the 2021 and 2020 activity is impacted by excess cash primarily being used to execute on our capital allocation strategy, including the acquisition of businesses, share repurchases and cash dividends, as discussed below. The 2020 activity includes the investment of proceeds from the sale of certain business operations in the third quarter of 2020, as discussed below.
Investment activity also includes the sale of one of our equity investments in August 2020 for cash proceeds of $90 million. Refer to Note (4) of the Notes for further information regarding this investment.
In 2021, we paid $371 million of purchase price consideration in connection with our acquisition of Kantar Health. In 2020, we completed certain business acquisitions of entities providing solutions to clients in the healthcare industry. Refer to Note (8) of the Notes for further information regarding our business acquisitions. We expect to continue seeking and completing strategic business acquisitions, investments, and relationships that are complementary to our business.
On July 1, 2020, we sold certain of our business operations, primarily conducted in Germany and Spain, for cash proceeds of $224 million. We also sold certain of our revenue cycle outsourcing business operations on August 3, 2020.
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Refer to Note (9) of the Notes for further information regarding these sales. We expect to continue to evaluate and complete divestiture transactions that are strategic to our operational improvement initiatives discussed above.
We received proceeds of $9 million in connection with the sale of our Oaks Campus in 2021. We expect future proceeds from the disposition of real estate held for sale; however, the amount and timing of such proceeds are dependent upon economic and market conditions which are not within our control. Refer to Note (5) of the Notes for further information regarding real estate held for sale.
Cash from Financing Activities
| For the Years Ended | |||||||||||
| (In thousands) | 2021 | 2020 | |||||||||
| Long-term debt issuance | $ | 500,000 | $ | 300,000 | |||||||
| Repayment of long-term debt | — | (2,500) | |||||||||
| Cash from option exercises (net of taxes paid in connection with shares surrendered by associates) | 232,241 | 229,933 | |||||||||
| Treasury stock purchases | (1,500,000) | (756,950) | |||||||||
| Dividends paid | (267,478) | (221,461) | |||||||||
| Other | (19,608) | (10,519) | |||||||||
| Total cash flows from financing activities | $ | (1,054,845) | $ | (461,497) | |||||||
In March 2021, we issued $100 million aggregate principal amount of Series 2021-A Notes and $400 million aggregate principal amount of Series 2021-B Notes. In March 2020, we issued $300 million aggregate principal amount of Series 2020-A notes. Refer to Note (11) of the Notes for further information regarding these, as well as our other debt obligations. We do not expect to incur additional indebtedness in the near-term.
On February 15, 2022, we repaid our $225 million of Series 2015-A Notes due February 15, 2022, using cash on hand.
Cash inflows from stock option exercises are dependent on a number of factors, including the price of our common stock, grant activity under our stock option and equity plans, and overall market volatility. We expect net cash inflows from stock option exercises to continue in 2022 based on the number of exercisable options at the end of 2021 and our current stock price. Refer to Note (16) of the Notes for additional information regarding our stock option and equity plans.
During 2021 and 2020, we repurchased 20.0 million and 10.6 million shares of our common stock for total consideration of $1.50 billion and $757 million, respectively. As of December 31, 2021, $3.18 billion remains available for repurchase under our share repurchase program. We do not expect to repurchase additional shares in the near-term as the Merger Agreement prohibits us from repurchasing additional shares without Parent's consent. Refer to Note (16) of the Notes for further information regarding our share repurchase programs.
Refer to Note (16) of the Notes for a summary of cash dividend activity in 2021 and 2020. Subject to declaration by our Board of Directors, we expect to continue paying quarterly cash dividends as a part of our current capital allocation strategy. Future dividends will be subject to the determination, declaration and discretion of our Board of Directors and compliance with covenants under our outstanding debt agreements. The source of funds for such dividends may include cash generated from operations, liquidation of investment holdings and other dispositions of assets.
Free Cash Flow (Non-GAAP)
| For the Years Ended | |||||||||||
| (In thousands) | 2021 | 2020 | |||||||||
| Cash flows from operating activities (GAAP) | $ | 1,771,684 | $ | 1,436,705 | |||||||
| Capital purchases | (289,694) | (283,981) | |||||||||
| Capitalized software development costs | (308,026) | (295,277) | |||||||||
| Free cash flow (non-GAAP) | $ | 1,173,964 | $ | 857,447 | |||||||
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Free cash flow increased $317 million in 2021, compared to 2020, primarily due to increased cash from operations. Free cash flow is a non-GAAP financial measure used by management, along with GAAP results, to analyze our earnings quality and overall cash generation of the business, and for management compensation purposes. We define free cash flow as cash flows from operating activities reduced by capital purchases and capitalized software development costs. The table above sets forth a reconciliation of free cash flow to cash flows from operating activities, which we believe is the GAAP financial measure most directly comparable to free cash flow. The presentation of free cash flow is not meant to be considered in isolation, nor as a substitute for, or superior to, GAAP results, and investors should be aware that non-GAAP measures have inherent limitations and should be read only in conjunction with our consolidated financial statements prepared in accordance with GAAP. Free cash flow may also be different from similar non-GAAP financial measures used by other companies and may not be comparable to similarly titled captions of other companies due to potential inconsistencies in the method of calculation. We believe free cash flow is important to enable investors to better understand and evaluate our ongoing operating results and allows for greater transparency in the review and understanding of our overall financial, operational and economic performance, because free cash flow takes into account certain capital expenditures necessary to operate our business.
Contractual Obligations, Commitments and Off Balance Sheet Arrangements
The following table represents a summary of our contractual obligations and commercial commitments at the end of 2021, except short-term purchase order commitments arising in the ordinary course of business.
| Payments Due by Period | |||||||||||||||||||||||||||||||||||||||||
| (In thousands) | 2022 | 2023 | 2024 | 2025 | 2026 | 2027 and thereafter | Total | ||||||||||||||||||||||||||||||||||
Balance sheet obligations(a): | |||||||||||||||||||||||||||||||||||||||||
| Long-term debt obligations | $ | 225,000 | $ | — | $ | — | $ | 211,662 | $ | 700,000 | $ | 700,000 | $ | 1,836,662 | |||||||||||||||||||||||||||
| Interest on long-term debt obligations | 39,193 | 41,265 | 42,412 | 38,718 | 34,388 | 72,870 | 268,846 | ||||||||||||||||||||||||||||||||||
| Other obligations: | |||||||||||||||||||||||||||||||||||||||||
| Operating lease obligations | 27,694 | 20,826 | 13,824 | 8,884 | 5,978 | 32,031 | 109,237 | ||||||||||||||||||||||||||||||||||
| Purchase obligations | 54,308 | 54,308 | 40,933 | 45,819 | 52,054 | 368,882 | 616,304 | ||||||||||||||||||||||||||||||||||
| Total | $ | 346,195 | $ | 116,399 | $ | 97,169 | $ | 305,083 | $ | 792,420 | $ | 1,173,783 | $ | 2,831,049 | |||||||||||||||||||||||||||
(a) At the end of 2021, liabilities for unrecognized tax benefits were $34 million.
If the Merger Agreement is terminated under certain specified circumstances, we will be required to pay to Parent a termination fee of $950 million.
Off-Balance Sheet Arrangements
Refer to Note (11) of the Notes for information regarding our interest rate swap agreement, which is accounted for as a cash flow hedge in accordance with ASC Topic 815, Derivatives and Hedging. LIBOR is scheduled to be phased out beginning in 2022. When LIBOR ceases to exist, references to LIBOR in our Credit Agreement and interest rate swap agreement will be replaced with a different benchmark rate and a spread adjustment in accordance with the terms of those agreements. The new benchmark rate together with the spread adjustment may not be as favorable to us as those in effect prior to any LIBOR phase-out. If the replacement benchmark rates and spread adjustment in the interest rate swap and the Credit Agreement are not identical, our hedge could be less effective.
Recent Accounting Pronouncements
Refer to Note (1) of the Notes for information regarding recently issued accounting pronouncements.
Critical Accounting Estimates
We believe that there are several accounting policies that are critical to understanding our historical and future performance, as these policies affect the reported amount of revenue and other significant areas involving our judgments and estimates. These significant accounting policies relate to revenue recognition, software development, and income taxes. These accounting policies and our procedures related to these accounting policies are described in detail below
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and under specific areas within this MD&A. In addition, Note (2), Note (7), and Note (14) of the Notes expands upon discussion of our accounting policies for these areas.
Revenue Recognition
We recognize revenue in accordance with the guidance in ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The standard contains a five-step process to be followed in determining the amount and timing of revenue recognition. Refer to Note (2) of the Notes for further discussion regarding significant judgments involved in our application of ASU 2014-09.
Software Development Costs
Costs incurred internally in creating computer software solutions and enhancements to those solutions are expensed until completion of a detailed program design, which is when we determine that technological feasibility has been established. Thereafter, all software development costs are capitalized until such time as the software solutions and enhancements are available for general release, and the capitalized costs subsequently are reported at the lower of amortized cost or net realizable value.
Net realizable value is computed as the estimated gross future revenues from each software solution less the amount of estimated future costs of completing and disposing of that product. Because the development of projected net future revenues related to our software solutions used in our net realizable value computation is based on estimates, a significant reduction in our future revenues could impact the recovery of our capitalized software development costs. If we missed our estimates of net future revenues by 10%, the amount of our capitalized software development costs would not be impaired.
Capitalized costs are amortized based on current and expected net future revenue for each software solution with minimum annual amortization equal to the straight-line amortization over the estimated economic life of the software solution. We are amortizing capitalized costs over five years. The five-year period over which capitalized software development costs are amortized is an estimate based upon our forecast of a reasonable useful life for the capitalized costs. Historically, use of our software programs by our clients has exceeded five years and is capable of being used a decade or more.
We expect that major software information systems companies, large information technology consulting service providers and systems integrators and others specializing in the healthcare industry may offer competitive products or services. The pace of change in the HCIT market is rapid and there are frequent new product introductions, product enhancements and evolving industry standards and requirements. As a result, the capitalized software solutions may become less valuable or obsolete and could be subject to impairment.
Income Taxes
We make a number of assumptions and estimates in determining the appropriate amount of expense to record for income taxes. These assumptions and estimates consider the taxing jurisdictions in which we operate as well as current tax regulations. Accruals are established for estimates of tax effects for certain transactions, business structures and future projected profitability of our businesses based on our interpretation of existing facts and circumstances. If these assumptions and estimates were to change as a result of new evidence or changes in circumstances, the change in estimate could result in a material adjustment to the consolidated financial statements.
We have discussed the development and selection of these critical accounting estimates with the Audit Committee of our Board of Directors and the Audit Committee has reviewed our disclosure contained herein.
Forward-Looking Statements
Statements made in this report, the annual report to shareholders of which this report is made a part, other reports and proxy statements filed with the SEC, communications to shareholders, press releases and oral statements made by representatives of the Company that are not historical in nature, or that state the Company's or management's intentions, hopes, beliefs, expectations, plans, goals or predictions of future events or performance, may constitute "forward-looking statements" within the meaning of Private Securities Litigation Reform Act of 1995. Forward-looking statements can often be identified by the use of forward-looking terminology, such as "could," "can," "should," "will," "intended," "continue," "believe," "may," "expect," "hope," "anticipate," "goal," "positioned", "forecast," "plan," "guidance," "opportunity,"
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"prospects" or "estimate" or the negative of these words, variations thereof or similar expressions. Forward-looking statements are not guarantees of future performance or results. They involve risks, uncertainties and assumptions. It is important to note that any such performance and actual results, financial condition or business, could differ materially from those expressed in such forward-looking statements. Significant factors that could cause or contribute to such differences include, but are not limited to, those discussed in this Item 1A. Risk Factors and elsewhere herein or in other reports filed with the SEC. Other unforeseen factors not identified herein could also have such an effect. Any forward-looking statements made in this report speak only as of the date of this report. Except as required by law, we undertake 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, financial condition or business over time.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
We are exposed to interest rate risk, primarily changes in LIBOR, related to outstanding revolving credit loans under our Credit Agreement. As of December 31, 2021, the interest rate on revolving credit loans outstanding was 0.90% based on LIBOR plus the applicable spread. In order to manage this exposure, we have entered into an interest rate swap agreement, to hedge the variability of cash flows associated with such interest obligations through May 2024. The interest rate swap effectively fixes the interest rate on the hedged indebtedness under our Credit Agreement at 3.06%. Refer to Note (11) of the Notes for further information regarding outstanding indebtedness and our interest rate swap agreement.
We have global operations, and as a result, we are exposed to market risk related to foreign currency exchange rate fluctuations. Foreign currency fluctuations through December 31, 2021 have not had a material impact on our financial position or operating results. We currently do not use currency hedging instruments, though we actively monitor our exposure to foreign currency fluctuations and may use hedging transactions in the future if management deems it appropriate. We believe most of our global operations are naturally hedged for foreign currency risk as our foreign subsidiaries invoice their clients and satisfy their obligations primarily in their local currencies. There can be no guarantee that the impact of foreign currency fluctuations in the future will not have a material impact on our financial position or operating results.
Item 8. Financial Statements and Supplementary Data.
The Financial Statements and notes to consolidated financial statements required by this Item are submitted as a separate part of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
N/A
Item 9A. Controls and Procedures.
a)Evaluation of Disclosure Controls and Procedures.
We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of our disclosure controls and procedures (as defined in the Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this annual report (the "Evaluation Date"). Based upon that evaluation, our CEO and CFO have concluded that, as of the Evaluation Date, our disclosure controls and procedures were designed, and were effective, to provide reasonable assurance that the information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time period specified in SEC rules and forms and is accumulated and communicated to our management, including our CEO and CFO, to allow timely decisions regarding required disclosure.
b)Management's Report on Internal Control over Financial Reporting.
We are responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). We assessed the effectiveness of our internal control over financial reporting as of December 31, 2021. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in its Internal Control-Integrated Framework (2013).
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In accordance with guidance issued by the SEC, companies are permitted to exclude acquisitions from their final assessment of internal control over financial reporting for the first fiscal year in which the acquisition occurred. Our assessment of internal control over financial reporting excluded the internal control activities of Kantar Health, which we acquired on April 1, 2021 (as discussed in Note (8) of the Notes), which accounted for $148 million of consolidated revenues and $104 million of consolidated total assets as of and for the year ended December 31, 2021.
Based on the results of our assessment, we have concluded that, as of December 31, 2021, our internal control over financial reporting was effective based on these criteria. KPMG, LLP, our independent registered public accounting firm, has issued an audit report on the effectiveness of our internal control over financial reporting, which is included herein under "Report of Independent Registered Public Accounting Firm".
c)Changes in Internal Control over Financial Reporting.
There were no changes in our internal controls over financial reporting during the fiscal quarter ended December 31, 2021, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
d)Limitations on Controls.
We can provide no assurance that our disclosure controls and procedures or our internal control over financial reporting can prevent all errors and all fraud under all circumstances. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been or will be detected. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Item 9B. Other Information.
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Not applicable.
PART III.
Item 10. Directors, Executive Officers and Corporate Governance.
The information under "Information Concerning Directors and Nominees," "Meetings of the Board and Committees," "Corporate Governance and Board Matters," "Consideration of Director Nominees," and "Committees of the Board: Audit Committee" as set forth in the Company's definitive proxy statement related to its 2022 annual meeting of stockholders (the "Proxy Statement"), which will be filed with the SEC not later than 120 days after the end of the Company's fiscal year pursuant to Regulation 14A, is incorporated herein by reference.
There have been no material changes to the procedures by which security holders may recommend nominees to our Board of Directors since our last disclosure thereof in our 2021 proxy statement.
The information required by this Item 10 regarding our Executive Officers is set forth under the caption "Information about our Executive Officers" in Part I above.
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Delinquent Section 16(a) Reports
To the Company's knowledge, no director, executive officer or other greater than 10% beneficial owner of our Common Stock failed to file on a timely basis reports required by Section 16(a) of the Exchange Act, with the exception of an inadvertent failure to file a Form 4 for Gerald Bisbee, Jr. concerning his acquisition of 137 shares on July 24, 2019 from the reinvestment of dividends paid on the Company's common stock at that time.
Item 11. Executive Compensation.
The information under "Director Compensation," "2021 Director Compensation Table," "Compensation Committee Report," "Compensation Discussion and Analysis," "Summary Compensation Table," "2021 Grants of Plan-Based Awards," "Outstanding Equity Awards at 2021 Fiscal Year-End," "2021 Option Exercises and Stock Vested," "Potential Payments Under Termination or Change in Control," "Pay Ratio," "Board Leadership Structure and Role in Risk Oversight: Relationship between Compensation and Risk Management" and "Compensation Committee Interlocks and Insider Participation" set forth in the Proxy Statement, which will be filed with the SEC not later than 120 days after the end of the Company's fiscal year pursuant to Regulation 14A, is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table provides information about our common stock that may be issued under our equity compensation plans as of December 31, 2021:
| (In thousands, except per share data) | Securities to be issued upon exercise of outstanding options and rights (1) | Weighted average exercise price per share (2) | Securities available for future issuance(3) | ||||||||||||||
| Plan category | |||||||||||||||||
Equity compensation plans approved by security holders (4) | 8,314 | $ | 59.61 | 12,497 | |||||||||||||
| Equity compensation plans not approved by security holders | — | — | — | ||||||||||||||
| Total | 8,314 | 12,497 | |||||||||||||||
(1) Includes grants of stock options, restricted stock and restricted stock units.
(2) Includes weighted-average exercise price of outstanding stock options only.
(3) Excludes securities to be issued upon exercise of outstanding options and rights.
(4) Includes the Stock Option Plan E and 2011 Omnibus Equity Incentive Plan. All new grants are made under the 2011 Omnibus Equity Incentive Plan, as the previous plans are no longer active.
The information under "Security Ownership of Certain Beneficial Owners and Management" set forth in the Proxy Statement, which will be filed with the SEC not later than 120 days after the end of the Company's fiscal year pursuant to Regulation 14A, is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information under "Certain Transactions," "Director Independence" and "Committees of the Board" set forth in the Proxy Statement, which will be filed with the SEC not later than 120 days after the end of the Company's fiscal year pursuant to Regulation 14A, is incorporated herein by reference.
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Item 14. Principal Accountant Fees and Services.
Our independent registered public accounting firm is KPMG LLP, Kansas City, Missouri, Auditor Firm ID: 185 .
The information under "Audit Related Matters" set forth in the Proxy Statement, which will be filed with the SEC not later than 120 days after the end of the Company's fiscal year pursuant to Regulation 14A, is incorporated herein by reference.
PART IV.
Item 15. Exhibits, Financial Statement Schedules.
a)Financial Statements and Exhibits
(i)Consolidated Financial Statements:
Consolidated Balance Sheets - As of December 31, 2021 and December 31, 2020
Consolidated Statements of Operations -Years Ended December 31, 2021, December 31, 2020 and December 28, 2019
Consolidated Statements of Comprehensive Income - Years Ended December 31, 2021, December 31, 2020 and December 28, 2019
Consolidated Statements of Cash Flows - Years Ended December 31, 2021, December 31, 2020 and December 28, 2019
Consolidated Statements of Changes in Shareholders' Equity - Years Ended December 31, 2021, December 31, 2020 and December 28, 2019
(ii)Financial Statement Schedules
All schedules are omitted because they are not required or the required information is shown in the financial statements or notes thereto.
b)Exhibits
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| Incorporated by Reference | ||||||||||||||||||||||||||||||||
| Exhibit Number | Exhibit Description | Form | Exhibit(s) | Filing Date | Filed Herewith | |||||||||||||||||||||||||||
| 2.1 | 8-K | 2.1 | 12/22/2021 | |||||||||||||||||||||||||||||
| 3.1 | 10-K | 3(a) | 2/11/2015 | |||||||||||||||||||||||||||||
| 3.2 | 8-K | 3.1 | 5/28/2020 | |||||||||||||||||||||||||||||
| 3.3 | 8-K | 3.2 | 5/28/2020 | |||||||||||||||||||||||||||||
| 4.1 | 10-K | 4(a) | 2/28/2007 | |||||||||||||||||||||||||||||
| 4.2 | 10-K | 4.2 | 2/19/2021 | |||||||||||||||||||||||||||||
| 10.1* | 8-K | 99.1 | 6/3/2010 | |||||||||||||||||||||||||||||
| 10.2* | 10-K | 10.3 | 2/12/2018 | |||||||||||||||||||||||||||||
| 10.3* | 10-Q | 10.2 | 5/3/2018 | |||||||||||||||||||||||||||||
| 10.4* | 10-Q | 10.1 | 7/30/2021 | |||||||||||||||||||||||||||||
| 10.5* | 10-Q | 10.1 | 10/26/2018 | |||||||||||||||||||||||||||||
| 10.6* | 10-K | 10.6 | 2/19/2021 | |||||||||||||||||||||||||||||
| 10.7* | 10-K | 10.7 | 2/19/2021 | |||||||||||||||||||||||||||||
| 10.8* | 8-K | 10.2 | 1/19/2022 | |||||||||||||||||||||||||||||
| 10.9* | 10-K | 10.8 | 2/19/2021 | |||||||||||||||||||||||||||||
| 10.10* | 8-K | 10.4 | 9/11/2017 | |||||||||||||||||||||||||||||
| 10.11* | 10-K | 10.13 | 2/8/2019 | |||||||||||||||||||||||||||||
| 10.12* | 10-K | 10.11 | 2/19/2021 | |||||||||||||||||||||||||||||
| 10.13* | 10-K | 10.13 | 2/10/2020 | |||||||||||||||||||||||||||||
| 10.14* | 10-Q | 10.3 | 10/29/2021 | |||||||||||||||||||||||||||||
| 10.15* | 10-Q | 10.3 | 5/05/2021 | |||||||||||||||||||||||||||||
| 10.16* | 10-Q | 10.2 | 5/05/2021 | |||||||||||||||||||||||||||||
43
| 10.17* | 10-Q | 10.1 | 10/29/2021 | |||||||||||||||||||||||||||||
| 10.18* | 10-Q | 10.2 | 10/29/2021 | |||||||||||||||||||||||||||||
| 10.19* | 8-K | 10.1 | 1/19/2022 | |||||||||||||||||||||||||||||
| 10.20* | SC 14D-9 | (e)(16) | 1/19/2022 | |||||||||||||||||||||||||||||
| 10.21* | X | |||||||||||||||||||||||||||||||
| 10.22* | SC 14D-9 | (e)(18) | 1/19/2022 | |||||||||||||||||||||||||||||
| 10.23* | X | |||||||||||||||||||||||||||||||
| 10.24* | SC 14D-9 | (e)(17) | 1/19/2022 | |||||||||||||||||||||||||||||
| 10.25* | SC 14D-9 | (e)(19) | 1/19/2022 | |||||||||||||||||||||||||||||
| 10.26* | 8-K | 10.2 | 5/27/2015 | |||||||||||||||||||||||||||||
| 10.27* | 8-K | 10.1 | 6/3/2019 | |||||||||||||||||||||||||||||
| 10.28* | 10-Q | 10.2 | 5/6/2016 | |||||||||||||||||||||||||||||
| 10.29* | 10-Q | 10.5 | 4/26/2019 | |||||||||||||||||||||||||||||
| 10.30* | 10-K | 10(u) | 2/8/2013 | |||||||||||||||||||||||||||||
| 10.31* | 10-Q | 10.3 | 5/6/2016 | |||||||||||||||||||||||||||||
| 10.32* | 10-Q | 10.4 | 10/27/2017 | |||||||||||||||||||||||||||||
| 10.33* | 10-Q | 10.4 | 4/26/2019 | |||||||||||||||||||||||||||||
| 10.34* | 10-Q | 10.4 | 5/6/2016 | |||||||||||||||||||||||||||||
| 10.35* | 10-Q | 10.3 | 10/27/2017 | |||||||||||||||||||||||||||||
| 10.36* | 10-Q | 10.3 | 4/26/2019 | |||||||||||||||||||||||||||||
| 10.37* | 10-K | 10(v) | 2/8/2013 | |||||||||||||||||||||||||||||
| 10.38* | 10-Q | 10.5 | 5/6/2016 | |||||||||||||||||||||||||||||
| 10.39* | 10-Q | 10.2 | 8/3/2016 | |||||||||||||||||||||||||||||
| 10.40* | 10-Q | 10.2 | 10/27/2017 | |||||||||||||||||||||||||||||
| 10.41* | 10-Q | 10.2 | 4/28/2017 | |||||||||||||||||||||||||||||
44
| 10.42* | 10-Q | 10.5 | 10/27/2017 | |||||||||||||||||||||||||||||
| 10.43* | 10-Q | 10.3 | 4/28/2017 | |||||||||||||||||||||||||||||
| 10.44* | 10-Q | 10.6 | 10/27/2017 | |||||||||||||||||||||||||||||
| 10.45* | 10-K | 10.32 | 2/19/2021 | |||||||||||||||||||||||||||||
| 10.46* | 10-K | 10.33 | 2/19/2021 | |||||||||||||||||||||||||||||
| 10.47* | X | |||||||||||||||||||||||||||||||
| 10.48* | 8-K | 10.1 | 3/6/2018 | |||||||||||||||||||||||||||||
| 10.49* | 10-Q | 10.1 | 4/29/2020 | |||||||||||||||||||||||||||||
| 10.50* | 10-Q | 10.1 | 5/5/2021 | |||||||||||||||||||||||||||||
| 10.51* | 10-K | 10.38 | 2/19/2021 | |||||||||||||||||||||||||||||
| 10.52* | X | |||||||||||||||||||||||||||||||
| 10.53 | 8-K | 10.1 | 12/5/2014 | |||||||||||||||||||||||||||||
| 10.54 | 8-K | 10.1 | 1/4/2022 | |||||||||||||||||||||||||||||
| 10.55 | 8-K | 10.4 | 11/12/2019 | |||||||||||||||||||||||||||||
| 10.56 | 8-K | 10.1 | 10/9/2020 | |||||||||||||||||||||||||||||
| 21 | X | |||||||||||||||||||||||||||||||
| 23 | X | |||||||||||||||||||||||||||||||
| 31.1 | X | |||||||||||||||||||||||||||||||
| 31.2 | X | |||||||||||||||||||||||||||||||
| 32.1 | X | |||||||||||||||||||||||||||||||
| 32.2 | X | |||||||||||||||||||||||||||||||
45
| 101.INS | XBRL Instance Document - the instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document. | X | ||||||||||||||||||||||||||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | X | ||||||||||||||||||||||||||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | X | ||||||||||||||||||||||||||||||
| 101.LAB | Inline XBRL Taxonomy Extension Labels Linkbase Document | X | ||||||||||||||||||||||||||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | X | ||||||||||||||||||||||||||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | X | ||||||||||||||||||||||||||||||
| 104 | Cover Page Interactive Data File - formatted in Inline XBRL and contained in Exhibit 101. | X | ||||||||||||||||||||||||||||||
* Indicates a management contract or compensatory plan or arrangement required to be identified by Part IV, Item 15(a)(3).
PLEASE NOTE: Pursuant to the rules and regulations of the Securities and Exchange Commission, we have filed or incorporated by reference the agreements referenced above as exhibits to this annual report on Form 10-K. The agreements have been filed to provide investors with information regarding their respective terms. The agreements are not intended to provide any other factual information about the Company or its business or operations. In particular, the assertions embodied in any representations, warranties and covenants contained in the agreements may be subject to qualifications with respect to knowledge and materiality different from those applicable to investors and may be qualified by information in confidential disclosure schedules not included with the exhibits. These disclosure schedules may contain information that modifies, qualifies and creates exceptions to the representations, warranties and covenants set forth in the agreements. Moreover, certain representations, warranties and covenants in the agreements may have been used for the purpose of allocating risk between the parties, rather than establishing matters as facts. In addition, information concerning the subject matter of the representations, warranties and covenants may have changed after the date of the respective agreement, which subsequent information may or may not be fully reflected in the Company's public disclosures. Accordingly, investors should not rely on the representations, warranties and covenants in the agreements as characterizations of the actual state of facts about the Company or its business or operations on the date hereof.
Item 16. Form 10-K Summary.
None.
46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| CERNER CORPORATION | |||||||||||
| Date: February 22, 2022 | By: | /s/ David T. Feinberg | |||||||||
| David T. Feinberg | |||||||||||
| President and Chief Executive Officer | |||||||||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
| Signature and Title | Date | |||||||
| /s/ David T. Feinberg | February 22, 2022 | |||||||
| David T. Feinberg, President and Chief Executive Officer (Principal Executive Officer) and Director | ||||||||
| /s/ Mark J. Erceg | February 22, 2022 | |||||||
| Mark J. Erceg, Executive Vice President and Chief Financial Officer (Principal Financial Officer) | ||||||||
| /s/ Michael R. Battaglioli | February 22, 2022 | |||||||
| Michael R. Battaglioli, Senior Vice President and Chief Accounting Officer (Principal Accounting Officer) | ||||||||
| /s/ Gerald E. Bisbee, Jr. | February 22, 2022 | |||||||
| Gerald E. Bisbee, Jr., Ph.D., Director | ||||||||
| /s/ Mitchell E. Daniels | February 22, 2022 | |||||||
| Mitchell E. Daniels, Director | ||||||||
| /s/ Julie L. Gerberding | February 22, 2022 | |||||||
| Julie L. Gerberding, M.D., Director | ||||||||
| /s/ Elder Granger | February 22, 2022 | |||||||
| Elder Granger, M.D., Director | ||||||||
| /s/ John J. Greisch | February 22, 2022 | |||||||
| John J. Greisch, Director | ||||||||
| /s/ Melinda J. Mount | February 22, 2022 | |||||||
| Melinda J. Mount, Director | ||||||||
| /s/ George A. Riedel | February 22, 2022 | |||||||
| George A. Riedel, Director | ||||||||
| /s/ R. Halsey Wise | February 22, 2022 | |||||||
| R. Halsey Wise, Director | ||||||||
| /s/ William D. Zollars | February 22, 2022 | |||||||
| William D. Zollars, Chairman of the Board | ||||||||
47
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Cerner Corporation:
Opinion on Internal Control Over Financial Reporting
We have audited Cerner Corporation and subsidiaries' (the Company) internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive income, cash flows, and changes in shareholders' equity for each of the years in the three-year period ended December 31, 2021, and the related notes (collectively, the consolidated financial statements), and our report dated February 22, 2022 expressed an unqualified opinion on those consolidated financial statements.
The Company acquired Kantar Health during 2021, and management excluded from its assessment of the effectiveness of the Company's internal control over financial reporting as of December 31, 2021, Kantar Health's internal control over financial reporting associated with total assets of $104 million and total revenues of $148 million included in the consolidated financial statements of the Company as of and for the year ended December 31, 2021. Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of Kantar Health.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
48
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/KPMG LLP
Kansas City, Missouri
February 22, 2022
49
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Cerner Corporation:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Cerner Corporation and subsidiaries (the Company) as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive income, cash flows, and changes in shareholders' equity for each of the years in the three-year period ended December 31, 2021, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles.