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CERN Cerner

Filed: 30 Jul 21, 4:02pm
0000804753us-gaap:TreasuryStockMember2021-01-012021-03-31
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2021
or
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________

Commission File Number: 0-15386

CERNER CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
cern-20210630_g1.jpg
43-1196944
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer Identification No.)
2800 Rock Creek Parkway
North Kansas City,MO64117
(Address of principal executive offices)(Zip Code)

(816) 221-1024
(Registrant's telephone number, including area code)
_________________________________________________________________
(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.01 par value per shareCERNThe Nasdaq Stock Market LLC
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. Yes     No
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). Yes     No
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.
Large Accelerated Filer Accelerated Filer 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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes     No
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class  Outstanding at July 26, 2021
Common Stock, $0.01 par value per share  295,585,810 shares



CERNER CORPORATION

TABLE OF CONTENTS
 
Part I.Financial Information:
Item 1.Financial Statements:
Item 2.
Item 3.
Item 4.
Part II.Other Information:
Item 1.
Item 2.
Item 6.
Signatures



Part I. Financial Information

Item 1. Financial Statements

CERNER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
As of June 30, 2021 (unaudited) and December 31, 2020
(In thousands, except share data)20212020
Assets
Current assets:
Cash and cash equivalents$246,404 $615,615 
Short-term investments638,488 442,473 
Receivables, net1,237,230 1,168,712 
Inventory20,168 23,027 
Prepaid expenses and other398,510 401,160 
Total current assets2,540,800 2,650,987 
Property and equipment, net1,768,617 1,804,083 
Right-of-use assets95,666 104,536 
Software development costs, net1,001,440 1,009,349 
Goodwill1,129,699 914,520 
Intangible assets, net492,547 329,249 
Long-term investments497,350 510,220 
Other assets194,983 198,152 
Total assets$7,721,102 $7,521,096 
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable$332,959 $235,755 
Current installments of long-term debt225,000 
Deferred revenue429,219 393,293 
Accrued payroll and tax withholdings332,513 309,814 
Other current liabilities223,203 229,764 
Total current liabilities1,542,894 1,168,626 
Long-term debt1,611,154 1,336,069 
Deferred income taxes389,018 376,035 
Other liabilities151,552 157,799 
Total liabilities3,694,618 3,038,529 
Shareholders' Equity:
Common stock, $0.01 par value, 500,000,000 shares authorized, 376,935,912 shares issued at June 30, 2021 and 373,224,832 shares issued at December 31, 20203,769 3,732 
Additional paid-in capital2,509,545 2,288,806 
Retained earnings6,546,615 6,475,551 
Treasury stock, 77,455,570 shares at June 30, 2021 and 67,371,686 shares at December 31, 2020(4,914,718)(4,164,718)
Accumulated other comprehensive loss, net(118,727)(120,804)
Total shareholders' equity4,026,484 4,482,567 
Total liabilities and shareholders' equity$7,721,102 $7,521,096 

See notes to condensed consolidated financial statements (unaudited).
1

CERNER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and six months ended June 30, 2021 and June 30, 2020
(unaudited)
 
 Three Months EndedSix Months Ended
(In thousands, except per share data)2021202020212020
Revenues$1,456,755 $1,330,349 $2,844,533 $2,742,090 
Costs and expenses:
Costs of revenue261,325 211,963 491,981 466,379 
Sales and client service731,077 645,087 1,353,253 1,281,736 
Software development (Includes amortization of $65,247 and $130,097 for the three and six months ended June 30, 2021, respectively; and $61,197 and $122,208 for the three and six months ended June 30, 2020, respectively)241,600 178,955 433,927 364,275 
General and administrative156,307 134,332 268,672 274,184 
Amortization of acquisition-related intangibles16,886 13,114 29,082 30,242 
Total costs and expenses1,407,195 1,183,451 2,576,915 2,416,816 
Operating earnings49,560 146,898 267,618 325,274 
Other income (loss), net(1,678)24,632 (472)30,227 
Earnings before income taxes47,882 171,530 267,146 355,501 
Income taxes(15,175)(36,782)(62,187)(73,594)
Net earnings$32,707 $134,748 $204,959 $281,907 
Basic earnings per share$0.11 $0.44 $0.68 $0.92 
Diluted earnings per share$0.11 $0.44 $0.67 $0.91 
Basic weighted average shares outstanding300,737 304,776 302,723 307,256 
Diluted weighted average shares outstanding303,591 306,717 305,802 309,520 
See notes to condensed consolidated financial statements (unaudited).

2

CERNER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the three and six months ended June 30, 2021 and June 30, 2020
(unaudited)
 
 Three Months EndedSix Months Ended
(In thousands)2021202020212020
Net earnings$32,707 $134,748 $204,959 $281,907 
Foreign currency translation adjustment and other (net of taxes (benefit) of $250 and $(429) for the three and six months ended June 30, 2021, and $(88) and $337 for the three and six months ended June 30, 2020, respectively)4,486 9,197 (4,505)(11,349)
Unrealized gain (loss) on cash flow hedge (net of taxes (benefit) of $736 and $2,245 for the three and six months ended June 30, 2021, and $(332) and $(6,682) for the three and six months ended June 30, 2020, respectively)2,238 (1,007)6,826 (20,315)
Unrealized holding gain (loss) on available-for-sale investments (net of taxes (benefit) of $(9) and $(80) for the three and six months ended June 30, 2021, and $494 and $215 for the three and six months ended June 30, 2020, respectively)(27)1,502 (244)653 
Comprehensive income$39,404 $144,440 $207,036 $250,896 

See notes to condensed consolidated financial statements (unaudited).

3

CERNER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended June 30, 2021 and June 30, 2020
(unaudited)
 Six Months Ended
(In thousands)20212020
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings$204,959 $281,907 
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization354,567 343,941 
Share-based compensation expense101,891 72,580 
Provision for deferred income taxes3,232 12,884 
Investment gains(26,410)
Asset impairments115,812 
Changes in assets and liabilities (net of businesses acquired):
Receivables, net(41,751)(48,426)
Inventory2,868 5,509 
Prepaid expenses and other9,914 (36,431)
Accounts payable54,088 (31,711)
Accrued income taxes11,585 26,358 
Deferred revenue(676)(66,137)
Other accrued liabilities3,080 8,032 
Net cash provided by operating activities819,569 542,096 
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital purchases(199,281)(166,296)
Capitalized software development costs(167,108)(151,393)
Purchases of investments(558,686)(91,957)
Sales and maturities of investments380,156 81,022 
Purchase of other intangibles(16,031)(20,656)
Acquisition of businesses, net of cash acquired(349,869)(35,766)
Net cash used in investing activities(910,819)(385,046)
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt issuance500,000 300,000 
Proceeds from exercise of stock options154,900 156,908 
Payments to taxing authorities in connection with shares directly withheld from associates(36,346)(14,217)
Treasury stock purchases(750,000)(650,000)
Dividends paid(135,260)(111,101)
Other(8,672)(4,159)
Net cash used in financing activities(275,378)(322,569)
Effect of exchange rate changes on cash and cash equivalents(2,583)(6,429)
Net decrease in cash and cash equivalents(369,211)(171,948)
Cash and cash equivalents at beginning of period615,615 441,843 
Cash and cash equivalents at end of period$246,404 $269,895 

See notes to condensed consolidated financial statements (unaudited).
4

CERNER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the three and six months ended June 30, 2021 and June 30, 2020
(unaudited)
Common StockAdditional Paid-in CapitalRetained EarningsTreasury StockAccumulated Other Comprehensive Loss, Net
(In thousands)SharesAmount
Balance at December 28, 2019367,635 $3,676 $1,905,171 $5,934,909 $(3,407,768)$(118,660)
Exercise of stock options and vests of restricted shares and share units2,543 26 114,050 — — — 
Employee share-based compensation expense— — 35,031 — — — 
Cumulative effect of accounting change (ASU 2016-13)— — — (4,606)— — 
Other comprehensive income (loss)— — — — — (40,703)
Treasury stock purchases— — — — (650,000)— 
Cash dividends declared ($0.18 per share)— — — (55,206)— — 
Net earnings— — — 147,159 — — 
Balance at March 31, 2020370,178 3,702 2,054,252 6,022,256 (4,057,768)(159,363)
Exercise of stock options and vests of restricted shares and share units1,009 10 28,540 — — — 
Employee share-based compensation expense— — 37,549 — — — 
Other comprehensive income (loss)— — — — — 9,692 
Cash dividends declared ($0.18 per share)— — — (55,602)— — 
Net earnings— — — 134,748 — — 
Balance at June 30, 2020371,187 $3,712 $2,120,341 $6,101,402 $(4,057,768)$(149,671)
Balance at December 31, 2020373,225 $3,732 $2,288,806 $6,475,551 $(4,164,718)$(120,804)
Exercise of stock options and vests of restricted shares and share units824 31,471 — — — 
Employee share-based compensation expense— — 47,950 — — — 
Other comprehensive income (loss)— — — — — (4,620)
Treasury stock purchases— — — — (350,000)— 
Cash dividends declared ($0.22 per share)— — — (67,191)— — 
Net earnings— — — 172,252 — — 
Balance at March 31, 2021374,049 3,740 2,368,227 6,580,612 (4,514,718)(125,424)
Exercise of stock options and vests of restricted shares and share units2,887 29 87,377 — — — 
Employee share-based compensation expense— — 53,941 — — — 
Other comprehensive income (loss)— — — — — 6,697 
Treasury stock purchases— — — — (400,000)— 
Cash dividends declared ($0.22 per share)— — — (66,704)— — 
Net earnings— — — 32,707 — — 
Balance at June 30, 2021376,936 $3,769 $2,509,545 $6,546,615 $(4,914,718)$(118,727)

See notes to condensed consolidated financial statements (unaudited).
5

CERNER CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
(1) Interim Statement Presentation

Basis of Presentation

The condensed consolidated financial statements included herein have been prepared by Cerner Corporation ("Cerner," the "Company," "we," "us" or "our") without audit, pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in our latest annual report on Form 10-K.
In management's opinion, the accompanying unaudited condensed consolidated financial statements include all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position and the results of operations and cash flows for the periods presented. Our interim results as presented in this quarterly report on Form 10-Q are not necessarily indicative of the operating results for the entire year.

The condensed consolidated financial statements were prepared using GAAP. These principles require us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. Actual results could differ from those estimates.

All references to quarters or six month periods ended 2021 and 2020 in these notes to condensed consolidated financial statements refer to the respective three and six month periods ended June 30, 2021 and June 30, 2020, unless otherwise noted.

Employee Separation Costs

In connection with involuntary separation benefits, we recognized $40 million and $12 million of expenses in the second quarters of 2021 and 2020, respectively; and $45 million and $15 million of expenses during the first six months of 2021 and 2020, respectively.

In connection with voluntary separation benefits, we recognized $14 million and $2 million of expenses in the second quarters of 2021 and 2020, respectively; and $27 million and $15 million of expenses during the first six months of 2021 and 2020, respectively.

Such employee separation costs are included in "General and administrative" expense in our condensed consolidated statements of operations.

At June 30, 2021, a liability of $48 million for such obligations is included in "Accrued payroll and tax withholdings" in our condensed consolidated balance sheets.

Real Estate Held For Sale

In connection with our operational improvement initiatives, during the second quarter of 2021 we made certain decisions regarding the continued use of certain of our owned real estate. As a result of those decisions, on July 9, 2021, we sold office space located in Kansas City, Missouri (known as our Oaks Campus), in April 2021 began the process of marketing office space located in Kansas City, Missouri (known as our Riverport Campus), and in June 2021 began the process of marketing office space located in Kansas City, Kansas (known as our Continuous Campus). At June 30, 2021, these long-lived assets aggregating $67 million were held for sale and presented within our condensed consolidated balance sheets in "Property and equipment, net." In connection with the designation as held for sale, during the three months ended June 30, 2021, we recorded a pre-tax charge of $68 million to reduce the amount of such long-lived assets to fair value, less estimated costs to sell. Such charge is included in "Sales and client service" expense in our condensed consolidated statements of operations.


6

Software Development Costs

In the second quarter of 2021, we recorded a pre-tax charge of $48 million to reduce the carrying amount of certain capitalized software development costs to estimated net realizable value. Such charge is included in "Software development" expense in our condensed consolidated statements of operations.

Supplemental Disclosures of Cash Flow Information
 Six Months Ended
(In thousands)20212020
Cash paid during the period for:
Interest (including amounts capitalized of $5,514 and $8,831, respectively)$20,190 $16,572 
Income taxes, net of refunds53,358 8,690 
Non-cash items:
Lease liabilities recorded upon the commencement of operating leases7,743 22,270 
Financed capital purchases6,143 

Recently Issued Accounting Pronouncements

Reference Rate Reform. The Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting in March 2020 and ASU 2021-01, Reference Rate Reform (Topic 848): Scope in January 2021. Such guidance provides optional financial reporting alternatives to reduce the cost and complexity associated with the accounting for contracts and hedging relationships affected by reference rate reform, such as the upcoming discontinuance of the London Interbank Offered Rate ("LIBOR"). The accommodations within this guidance may be applied prospectively from the beginning of our 2020 first quarter through December 31, 2022. We are currently evaluating the effect that this guidance may have on our contracts that reference LIBOR, specifically, our Third Amended and Restated Credit Agreement (as amended, the "Credit Agreement") and related interest rate swap. As of the date of this filing, we have not elected to apply any of the provisions of this guidance.

7

(2) Business Acquisition

On April 1, 2021, we acquired Kantar Health, a division of Kantar Group. Kantar Health provides data, analytics, commercial research, and consulting services to the life sciences industry. We believe this acquisition complements our existing Data-as-a-Service efforts as it provides a meaningful entry into the pharmaceutical market through Kantar Health's existing clients and their leadership team with important industry experience and relationships. These factors, combined with the synergies and economies of scale expected, are the basis for the acquisition and comprise the resulting goodwill recorded.

Consideration for the acquisition was a base cash purchase price of $375 million. The base purchase price is subject to post-closing adjustments for working capital and certain other adjustments, as specified in the Securities Purchase Agreement dated December 16, 2020, as amended.

Our acquisition of Kantar Health is being treated as a purchase in accordance with ASC 805, Business Combinations, which requires allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed in the transaction. The allocation of purchase price is based on management's judgment after evaluating several factors, including a preliminary valuation assessment. The allocation of purchase price is preliminary and subject to changes, as appraisals of intangible assets are finalized, working capital and certain other adjustments are agreed upon, and additional information becomes available. The following is a summary of the preliminary allocation of purchase price:
(In thousands)Allocation Amount
Cash and cash equivalents$14,541 
Receivables, net30,895 
Prepaid expenses and other13,860 
Property and equipment, net1,136 
Right-of-use assets1,680 
Goodwill210,247 
Intangible assets, net:
Customer relationships143,100 
Existing technologies39,700 
Trade names10,200 
Other assets26 
Accounts payable(34,215)
Deferred revenue(36,656)
Accrued payroll and tax withholdings(9,910)
Other current liabilities(3,777)
Deferred income taxes(10,169)
Other liabilities(6,248)
Total purchase price$364,410 

The fair values of the acquired intangible assets were estimated by applying the income approach. Such estimations required the use of inputs that were unobservable in the marketplace (Level 3), including a discount rate that we estimated would be used by a market participant in valuing these assets, projections of revenues and cash flows, and client attrition rates, among others. The acquired intangible assets are being amortized over a weighted-average period of 13 years. Refer to Note (7) for further information about the fair value level hierarchy.

The goodwill of $210 million was allocated among our Domestic and International operating segments, as shown below, with approximately $160 million of such goodwill expected to be deductible for tax purposes.


8

The changes in the carrying amounts of goodwill for the six months ended June 30, 2021 were as follows:
(In thousands)DomesticInternationalTotal
Beginning balance at December 31, 2020$854,188 $60,332 $914,520 
Goodwill recorded in connection with the Kantar Health acquisition118,386 91,861 210,247 
Foreign currency translation adjustment and other4,932 4,932 
Ending balance at June 30, 2021$972,574 $157,125 $1,129,699 

Our condensed consolidated statements of operations for the three and six months ended June 30, 2021 include revenues of $45 million attributable to the acquired business since the April 1, 2021 acquisition date. The earnings contribution from the acquired business for the three and six months ended June 30, 2021 was not material to our condensed consolidated financial statements. Pro forma results of operations, assuming the acquisition was made at the beginning of the earliest period presented, have not been presented because the effect of this acquisition was not material to our results.

(3) Revenue Recognition

Disaggregation of Revenue

The following tables present revenues disaggregated by our business models:

Three Months Ended
20212020
(In thousands)Domestic
Segment
International
Segment
TotalDomestic
Segment
International
Segment
Total
Licensed software$157,908 $17,208 $175,116 $138,950 $13,212 $152,162 
Technology resale51,680 5,180 56,860 36,376 5,741 42,117 
Subscriptions94,222 4,215 98,437 85,281 6,771 92,052 
Professional services457,901 79,177 537,078 409,848 51,234 461,082 
Managed services284,758 36,019 320,777 275,679 31,479 307,158 
Support and maintenance211,986 47,689 259,675 220,301 53,735 274,036 
Reimbursed travel8,572 240 8,812 1,778 (36)1,742 
Total revenues$1,267,027 $189,728 $1,456,755 $1,168,213 $162,136 $1,330,349 

Six Months Ended
20212020
(In thousands)Domestic
Segment
International
Segment
TotalDomestic
Segment
International
Segment
Total
Licensed software$306,741 $30,036 $336,777 $285,447 $24,747 $310,194 
Technology resale89,571 12,961 102,532 80,825 12,779 93,604 
Subscriptions189,605 8,644 198,249 172,217 14,220 186,437 
Professional services892,063 139,437 1,031,500 862,632 109,796 972,428 
Managed services566,834 71,319 638,153 555,415 61,097 616,512 
Support and maintenance429,485 93,514 522,999 443,717 104,000 547,717 
Reimbursed travel14,720 (397)14,323 14,375 823 15,198 
Total revenues$2,489,019 $355,514 $2,844,533 $2,414,628 $327,462 $2,742,090 


9

The following tables present our revenues disaggregated by timing of revenue recognition:

Three Months Ended
20212020
(In thousands)Domestic
Segment
International
Segment
TotalDomestic
Segment
International
Segment
Total
Revenue recognized over time$1,189,314 $178,406 $1,367,720 $1,101,797 $151,456 $1,253,253 
Revenue recognized at a point in time77,713 11,322 89,035 66,416 10,680 77,096 
Total revenues$1,267,027 $189,728 $1,456,755 $1,168,213 $162,136 $1,330,349 

Six Months Ended
20212020
(In thousands)Domestic
Segment
International
Segment
TotalDomestic
Segment
International
Segment
Total
Revenue recognized over time$2,342,163 $332,274 $2,674,437 $2,267,312 $304,900 $2,572,212 
Revenue recognized at a point in time146,856 23,240 170,096 147,316 22,562 169,878 
Total revenues$2,489,019 $355,514 $2,844,533 $2,414,628 $327,462 $2,742,090 

Transaction Price Allocated to Remaining Performance Obligations

As of June 30, 2021, the aggregate amount of transaction price allocated to performance obligations that are unsatisfied (or partially unsatisfied) for executed contracts approximates $13.19 billion of which we expect to recognize approximately 30% of the revenue over the next 12 months and the remainder thereafter.

Contract Liabilities

Customer payments received in advance of satisfaction of the related performance obligations are deferred as contract liabilities. Such amounts are classified in our condensed consolidated balance sheets as "Deferred revenue". During the six months ended June 30, 2021, we recognized $259 million of revenues that were included in our contract liability balance at the beginning of such period.

Significant Customers

Revenues attributable to our relationships (as the prime contractor or a subcontractor) with U.S. government agencies, within our Domestic segment, comprised 20% and 17% of our consolidated revenues for the second quarters of 2021 and 2020, respectively; and 20% and 17% for the first six months of 2021 and 2020, respectively. Amounts due in connection with these relationships comprised 16% and 13% of client receivables as of June 30, 2021 and December 31, 2020, respectively.

(4) Receivables

A summary of net receivables is as follows:
(In thousands)June 30, 2021December 31, 2020
Client receivables$1,389,724 $1,322,278 
Less: Provision for expected credit losses152,494 153,566 
Total receivables, net$1,237,230 $1,168,712 

In addition to the client receivables presented above, at June 30, 2021 and December 31, 2020, we had $14 million and $17 million of non-current net client receivables, respectively, which are presented in "Other assets" in our condensed consolidated balance sheets.

10

A reconciliation of the beginning and ending amount of our provision for expected credit losses is as follows:

(In thousands)CurrentNon-currentTotal
Provision for expected credit losses - balance at December 31, 2020$153,566 $38,564 $192,130 
Additions charged to costs and expenses20,251 20,251 
Deductions, foreign currency and other2,278 2,278 
Provision for expected credit losses - balance at March 31, 2021176,095 38,564 214,659 
Additions charged to costs and expenses5,887 5,887 
Reclassifications to non-current(26,480)26,480 
Deductions, foreign currency and other(3,008)(3,008)
Provision for expected credit losses - balance at June 30, 2021$152,494 $65,044 $217,538 

Our estimates of expected credit losses for client receivables at both June 30, 2021 and December 31, 2020, were primarily based on historical credit loss experience and adjustments for certain asset-specific risk characteristics (i.e. known client financial hardship or bankruptcy). Exposure to credit losses may increase if our clients are adversely affected by changes in healthcare laws; changes in reimbursement or payor models; economic pressures or uncertainty associated with local or global economic recessions; disruption associated with the COVID-19 pandemic; or other client-specific factors. Although we have historically not experienced significant credit losses, it is possible that there could be an adverse impact from potential adjustments to the carrying amount of client receivables as clients' cash flows are impacted by the COVID-19 pandemic and related economic uncertainty, which may be material.

During the first six months of 2021 and 2020, we received total client cash collections of $2.90 billion and $2.66 billion, respectively.

(5) Investments

Available-for-sale investments at June 30, 2021 were as follows:
(In thousands)Adjusted CostGross Unrealized GainsGross Unrealized LossesFair Value
Cash equivalents:
Money market funds$52,425 $— $— $52,425 
Time deposits37,685 — — 37,685 
Total cash equivalents90,110 — — 90,110 
Short-term investments:
Time deposits32,163 — — 32,163 
Commercial paper354,800 27 (13)354,814 
Government and corporate bonds251,453 112 (54)251,511 
Total short-term investments638,416 139 (67)638,488 
Long-term investments:
Government and corporate bonds106,306 (108)106,200 
Total available-for-sale investments$834,832 $141 $(175)$834,798 

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Available-for-sale investments at December 31, 2020 were as follows:
(In thousands)Adjusted CostGross Unrealized GainsGross Unrealized LossesFair Value
Cash equivalents:
Money market funds$40,027 $— $— $40,027 
Time deposits36,756 — — 36,756 
Commercial Paper61,000 — — 61,000 
Total cash equivalents137,783 — — 137,783 
Short-term investments:
Time deposits28,302 — — 28,302 
Commercial Paper264,000 12 (19)263,993 
Government and corporate bonds149,975 247 (44)150,178 
Total short-term investments442,277 259 (63)442,473 
Long-term investments:
Government and corporate bonds136,983 152 (57)137,078 
Total available-for-sale investments$717,043 $411 $(120)$717,334 

We sold available-for-sale investments for proceeds of $80 million and $5 million during the six months ended June 30, 2021 and June 30, 2020, respectively, resulting in insignificant losses in each period.

Other Investments

At June 30, 2021 and December 31, 2020, we had investments in equity securities that do not have readily determinable fair values of $371 million and $361 million, respectively, accounted for in accordance with Accounting Standards Codification Topic ("ASC") 321, Investments-Equity Securities. Such investments are included in "Long-term investments" in our condensed consolidated balance sheets. We did not record any changes in the measurement of such investments during the six months ended June 30, 2021 and June 30, 2020, respectively.

At June 30, 2021 and December 31, 2020, we had investments in equity securities reported under the equity method of accounting of $20 million and $12 million, respectively. Such investments are included in "Long-term investments" in our condensed consolidated balance sheets.

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(6) Long-term Debt

The following is a summary of indebtedness outstanding:
(In thousands)June 30, 2021December 31, 2020
Credit agreement loans due May 5, 2024$600,000 $600,000 
Senior notes:
Series 2021-A due March 24, 2026100,000 
Series 2021-B due March 24, 2031400,000 
Series 2020-A due March 11, 2030300,000 300,000 
Series 2015-A due February 15, 2022225,000 225,000 
Series 2015-B due February 14, 2025200,000 200,000 
Other11,662 11,662 
Total indebtedness1,836,662 1,336,662 
Less: debt issuance costs(508)(593)
Indebtedness, net1,836,154 1,336,069 
Less: current installments of long-term debt(225,000)
Long-term debt$1,611,154 $1,336,069 

Credit Agreement

As of June 30, 2021, the interest rate on revolving credit loans outstanding under our Credit Agreement was 0.87% based on LIBOR plus the applicable spread.

We are exposed to market risk from fluctuations in the variable interest rates on outstanding indebtedness under our Credit Agreement. 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. The interest rate swap is designated as a cash flow hedge, which effectively fixes the interest rate on the hedged indebtedness under our Credit Agreement at 3.06%. At June 30, 2021 and December 31, 2020, this swap was in a net liability position with an aggregate fair value of $28 million and $37 million, respectively; which is presented in our condensed consolidated balance sheets in "Other current liabilities".

Series 2021 Senior Notes

We entered into a Master Note Agreement on November 11, 2019, and subsequently amended on October 8, 2020 (collectively and as amended, the "2019 Shelf Agreement"), pursuant to which we may issue and sell up to an aggregate principal amount of $1.80 billion of unsecured senior promissory notes. In March 2021, we issued $500 million aggregate principal amount of unsecured senior notes (the "Series 2021 Senior Notes"), pursuant to the 2019 Shelf Agreement. The issuance consisted of $100 million of 2.00% Series 2021-A Notes due March 24, 2026 and $400 million of 2.59% Series 2021-B Notes due March 24, 2031. Interest on the Series 2021 Senior Notes is payable semiannually on each March 24 and September 24, commencing September 24, 2021, and the principal balance is due at maturity. The Company may prepay at any time all, or any part of, the outstanding principal amount of the Series 2021 Senior Notes, subject to the payment of a make-whole amount. The Series 2021 Senior Notes are subject to the terms of the 2019 Shelf Agreement, which contains customary events of default and covenants related to limitations on indebtedness and transactions with affiliates and the maintenance of certain financial ratios. As of the date of this filing, $1.00 billion remains available for sale under the 2019 Shelf Agreement, which is uncommitted and subject to participation by the purchasers.

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(7) Fair Value Measurements

We determine fair value measurements used in our consolidated financial statements based upon the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity's own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:
 
Level 1 – Valuations based on quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.
Level 2 – Valuations based on quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities.
Level 3 – Valuations based on inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The following table details our investments in available-for-sale debt securities measured and recorded at fair value on a recurring basis at June 30, 2021:

(In thousands)Fair Value Measurements Using
DescriptionBalance Sheet ClassificationLevel 1Level 2Level 3
Money market fundsCash equivalents$52,425 $— $
Time depositsCash equivalents— 37,685 
Time depositsShort-term investments— 32,163 
Commercial paperShort-term investments— 354,814 
Government and corporate bondsShort-term investments— 251,511 
Government and corporate bondsLong-term investments— 106,200 

The following table details our investments in available-for-sale debt securities measured and recorded at fair value on a recurring basis at December 31, 2020:
(In thousands)Fair Value Measurements Using
DescriptionBalance Sheet ClassificationLevel 1Level 2Level 3
Money market fundsCash equivalents$40,027 $— $
Time depositsCash equivalents— 36,756 
Commercial paperCash equivalents— 61,000 — 
Time depositsShort-term investments— 28,302 
Commercial paperShort-term investments— 263,993 — 
Government and corporate bondsShort-term investments— 150,178 
Government and corporate bondsLong-term investments— 137,078 

Our interest rate swap agreement is measured and recorded at fair value on a recurring basis using a Level 2 valuation. The fair value of such agreement is based on the market standard methodology of netting the discounted expected future variable cash receipts and the discounted future fixed cash payments. The variable cash receipts are based on an expectation of future interest rates derived from observed market interest rate forward curves. Since these inputs are observable in active markets over the terms that the instrument is held, the derivative is classified as Level 2 in the hierarchy.

We estimate the fair value of our long-term, fixed rate debt using a Level 3 discounted cash flow analysis based on current borrowing rates for debt with similar maturities. We estimate the fair value of our long-term, variable rate debt using a
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Level 3 discounted cash flow analysis based on LIBOR rate forward curves. The fair value of our long-term debt at June 30, 2021 and December 31, 2020 was approximately $1.88 billion and $1.36 billion, respectively. The carrying amount of such debt at June 30, 2021 and December 31, 2020 was $1.83 billion and $1.33 billion, respectively.

(8) Income Taxes

We determine the tax provision for interim periods using an estimate of our annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter we update our estimate of the annual effective tax rate, and if our estimated tax rate changes, we make a cumulative adjustment. Our effective tax rate was 23.3% and 20.7% for the first six months of 2021 and 2020, respectively. A $6 million valuation allowance was recorded in the second quarter of 2021 against a deferred tax asset where it became more likely than not that such deferred tax asset will not be realized, while a valuation allowance of $3 million was recorded during the first quarter of 2020. The remainder of the increase in the effective tax rate is primarily related to unfavorability of permanent book-tax differences for share-based compensation in 2021 compared to 2020.

(9) Earnings Per Share

A reconciliation of the numerators and the denominators of the basic and diluted per share computations are as follows:
Three Months Ended
 20212020
 EarningsSharesPer-ShareEarningsSharesPer-Share
(In thousands, except per share data)(Numerator)(Denominator)Amount(Numerator)(Denominator)Amount
Basic earnings per share:
Income available to common shareholders$32,707 300,737 $0.11 $134,748 304,776 $0.44 
Effect of dilutive securities:
Stock options, non-vested shares and share units— 2,854 — 1,941 
Diluted earnings per share:
Income available to common shareholders including assumed conversions$32,707 303,591 $0.11 $134,748 306,717 $0.44 

For the three months ended June 30, 2021 and June 30, 2020, options to purchase 0.4 million and 6.0 million shares of common stock at per share prices ranging from $52.32 to $76.49 and $52.32 to $76.49, respectively, were outstanding but were not included in the computation of diluted earnings per share because they were anti-dilutive.

Six Months Ended
 20212020
 EarningsSharesPer-ShareEarningsSharesPer-Share
(In thousands, except per share data)(Numerator)(Denominator)Amount(Numerator)(Denominator)Amount
Basic earnings per share:
Income available to common shareholders$204,959 302,723 $0.68 $281,907 307,256 $0.92 
Effect of dilutive securities:
Stock options, non-vested shares and share units— 3,079 — 2,264 
Diluted earnings per share:
Income available to common shareholders including assumed conversions$204,959 305,802 $0.67 $281,907 309,520 $0.91 

For the six months ended June 30, 2021 and June 30, 2020, options to purchase 0.5 million and 4.5 million shares of common stock at per share prices ranging from $52.32 to $76.49 and $52.32 to $76.49, respectively, were outstanding but were not included in the computation of diluted earnings per share because they were anti-dilutive.
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(10) Share-Based Compensation and Equity

Stock Options

Stock option activity for the six months ended June 30, 2021 was as follows:
(In thousands, except per share and term data)Number of
Shares
Weighted-
Average
Exercise 
Price
(Per Share)
Aggregate
Intrinsic 
Value
Weighted-Average 
Remaining
Contractual
Term (Yrs)
Outstanding at beginning of year10,204 $58.59 
Exercised(2,763)56.18 
Forfeited and expired(108)59.56 
Outstanding as of June 30, 20217,333 $59.49 $136,929 4.57
Exercisable as of June 30, 20215,484 $58.79 $106,205 3.99

As of June 30, 2021, there was $28 million of total unrecognized compensation cost related to stock options granted under all plans. That cost is expected to be recognized over a weighted-average period of 1.59 years.

Non-vested Shares and Share Units

Non-vested share and share unit activity for the six months ended June 30, 2021 was as follows:
(In thousands, except per share data)Number of SharesWeighted-Average
Grant Date Fair Value Per Share
Outstanding at beginning of year4,131 $68.05 
Granted2,054 77.01 
Vested(1,435)65.80 
Forfeited(332)72.08 
Outstanding as of June 30, 20214,418 $72.64 

As of June 30, 2021, there was $249 million of total unrecognized compensation cost related to non-vested share and share unit awards granted under all plans. That cost is expected to be recognized over a weighted-average period of 2.23 years.

Share-Based Compensation Cost

The following table presents total compensation expense recognized with respect to stock options, non-vested shares and share units, and our associate stock purchase plan:
 Three Months EndedSix Months Ended
(In thousands)2021202020212020
Stock option and non-vested share and share unit compensation expense$53,941 $37,549 $101,891 $72,580 
Associate stock purchase plan expense1,613 1,727 3,161 2,828 
Amounts capitalized in software development costs, net of amortization(1,463)(1,076)(3,126)(1,821)
Amounts charged against earnings, before income tax benefit$54,091 $38,200 $101,926 $73,587 
Amount of related income tax benefit recognized in earnings$10,191 $8,191 $20,447 $14,634 


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Treasury Stock

Under our share repurchase program, which was initially approved by our Board of Directors on May 23, 2017, and most recently amended on December 12, 2019 (the "2017 Share Repurchase Program"), the Company is authorized to repurchase up to $3.70 billion of shares of our common stock, excluding transaction costs. 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. No time limit was set for the completion of the 2017 Share Repurchase Program.

On April 23, 2021, our Board of Directors approved 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 is 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 the six months ended June 30, 2021, we repurchased 10.1 million shares for total consideration of $750 million under our share repurchase programs. The shares were recorded as treasury stock and accounted for under the cost method. No repurchased shares have been retired. As of June 30, 2021, an aggregate of $3.93 billion remained available for repurchase under the programs.

Dividends

On March 25, 2021, our Board of Directors declared a cash dividend of $0.22 per share on our issued and outstanding common stock, which was paid on April 20, 2021 to shareholders of record as of April 6, 2021. On May 19, 2021, our Board of Directors declared a cash dividend of $0.22 per share on our issued and outstanding common stock, which was paid on July 13, 2021 to shareholders of record as of June 28, 2021. In connection with the declaration of such dividends, our non-vested shares and share units are entitled to dividend equivalents, which will be payable to the holder subject to, and upon vesting of, the underlying awards. Our outstanding stock options are not entitled to dividend or dividend equivalents. At June 30, 2021 and December 31, 2020, our condensed consolidated balance sheets included liabilities for dividends payable of $68 million and $69 million, respectively, which are included in "Other current liabilities".

Accumulated Other Comprehensive Loss, Net (AOCI)

The components of AOCI, net of tax, were as follows:
 Foreign currency translation adjustment and otherUnrealized loss on cash flow hedgeUnrealized holding gain (loss) on available-for-sale investmentsTotal
(In thousands)
Balance at December 31, 2020$(93,450)$(27,788)$434 $(120,804)
Other comprehensive income (loss) before reclassifications(8,991)2,061 (217)(7,147)
Amounts reclassified from AOCI2,527 2,527 
Balance at March 31, 2021(102,441)(23,200)217 (125,424)
Other comprehensive income (loss) before reclassifications4,486 (429)(26)4,031 
Amounts reclassified from AOCI2,667 (1)2,666 
Balance at June 30, 2021$(97,955)$(20,962)$190 $(118,727)
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Foreign currency translation adjustment and otherUnrealized loss on cash flow hedgeUnrealized holding gain (loss) on available-for-sale investmentsTotal
(In thousands)
Balance at December 28, 2019$(106,347)$(12,578)$265 $(118,660)
Other comprehensive income (loss) before reclassifications(20,546)(20,430)(849)(41,825)
Amounts reclassified from AOCI1,122 1,122 
Balance at March 31, 2020(126,893)(31,886)(584)(159,363)
Other comprehensive income (loss) before reclassifications9,197 (3,205)1,502 7,494 
Amounts reclassified from AOCI2,198 2,198 
Balance at June 30, 2020$(117,696)$(32,893)$918 $(149,671)

The effects on net earnings of amounts reclassified from AOCI were as follows:

(In thousands)Three Months EndedSix Months Ended
AOCI ComponentLocation2021202020212020
Unrealized loss on cash flow hedgeOther income, net$(3,287)$(2,798)$(6,504)$(4,170)
Income taxes620 600 1,310 850 
Net of tax(2,667)(2,198)(5,194)(3,320)
Unrealized holding gain (loss) on available-for-sale investmentsOther income, net
Income taxes(1)(1)
Net of tax
Total amount reclassified, net of tax$(2,666)$(2,198)$(5,193)$(3,320)

(11) Contingencies

We accrue estimates for resolution of any legal and other contingencies when losses are probable and reasonably estimable in accordance with ASC 450, Contingencies ("ASC 450"). No less than quarterly, and as facts and circumstances change, we review the status of each significant matter underlying a legal proceeding or claim and assess our potential financial exposure. We accrue a liability for an estimated loss if the potential loss from any legal proceeding or claim is considered probable and the amount can be reasonably estimated. Significant judgment is required in both the determination of probability and the determination as to whether the amount of an exposure is reasonably estimable, and accruals are based only on the information available to our management at the time the judgment is made, which may prove to be incomplete or inaccurate or unanticipated events and circumstances may occur that might cause us to change those estimates and assumptions. Furthermore, the outcome of legal proceedings is inherently uncertain, and we may incur substantial defense costs and expenses defending any of these matters. Should any one or a combination of more than one of these proceedings be successful, or should we determine to settle any one or a combination of these matters, we may be required to pay substantial sums, become subject to the entry of an injunction or be forced to change the manner in which we operate our business, which could have a material adverse impact on our business, results of operations, cash flows or financial condition.
Cerner Health Services, Inc. ("Cerner HS"), a wholly owned subsidiary of Cerner Corporation, filed a lawsuit in the Chester County, Pennsylvania, Court of Common Pleas against NextGen Healthcare Information Systems, LLC ("NextGen") relating to a dispute arising out of a supplier relationship initially established between Siemens Health Services, Inc. and NextGen prior to the acquisition of the assets of Siemens Health Services, Inc. by Cerner HS in 2015. In September 2017, the court issued a preliminary injunction to prevent NextGen from refusing to honor certain contractual obligations to support Cerner HS's clients who use NextGen ambulatory EHR solutions. In September 2018, NextGen filed a counterclaim alleging breach of contract and tortious interference. NextGen’s expert testified at trial that NextGen should be entitled to collect profit disgorgement damages of $122 million or, at least $18 million of ambulatory-
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related disgorgement damages. Alternatively, he claimed NextGen should recover $26 million in lost profit damages. A remote trial commenced on January 25, 2021 and trial continues. We believe NextGen's claims are without merit and are vigorously defending against them; however, there can be no assurances as to the outcome of the dispute. We have not concluded that a loss related to the claims raised by NextGen in its counterclaim is probable, nor have we accrued a liability related to these claims. Although a loss may be reasonably possible (as defined in ASC 450), we do not have sufficient information to determine the amount or range of reasonably possible loss in light of the inherent difficulty of predicting the outcome of litigation generally, the wide range of damages presented by NextGen's expert, and the continued lack of clarity on the causal connection between Cerner Corporation's and Cerner HS's actions and any alleged damages.

The terms of our agreements with our clients generally provide for limited indemnification of such clients against losses, expenses and liabilities arising from third party or other claims based on, among other things, alleged infringement by our solutions of an intellectual property right of third parties or damages caused by data privacy breaches or system interruptions. The terms of such indemnification often limit the scope of and remedies for such indemnification obligations and generally include, as applicable, a right to replace or modify an infringing solution. For several reasons, including the lack of a sufficient number of prior indemnification claims relating to intellectual property infringement, data privacy breaches or system interruptions, the inherent uncertainty stemming from such claims, and the lack of a monetary liability limit for such claims under the terms of the corresponding agreements with our clients, we cannot determine the maximum amount of potential future payments, if any, related to such indemnification provisions.

In addition to commitments and obligations in the ordinary course of business, we are involved in various other legal proceedings and claims that arise in the ordinary course of business, including for example, employment and client disputes and litigation alleging solution and implementation defects, personal injury, intellectual property infringement, violations of law, breaches of contract and warranties, and compliance audits by various government agencies. Many of these proceedings are at preliminary stages and many seek an indeterminate amount of damages. At this time, we do not believe the range of potential losses under any claims to be material to our consolidated financial statements.

(12) Segment Reporting

We have two operating segments, Domestic and International. Revenues are derived primarily from the sale of clinical, financial and administrative information solutions and services. The cost of revenues includes the cost of third-party consulting services, 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. Operating expenses incurred by the geographic business segments consist of sales and client service expenses including salaries of sales and client service personnel, expenses associated with our managed services business, marketing expenses, communications expenses and unreimbursed travel expenses. "Other" includes expenses that have not been allocated to the operating segments, such as software development, general and administrative expenses, certain organizational restructuring and other expense, share-based compensation expense, and certain amortization and depreciation. Performance of the segments is assessed at the operating earnings level by our chief operating decision maker, who is our Chief Executive Officer. Items such as interest, income taxes, capital expenditures and total assets are managed at the consolidated level and thus are not included in our operating segment disclosures. Accounting policies for each of the reportable segments are the same as those used on a consolidated basis.

The following table presents a summary of our operating segments and other expense for the three and six months ended June 30, 2021 and June 30, 2020:
(In thousands)DomesticInternationalOtherTotal
Three Months Ended 2021
Revenues$1,267,027 $189,728 $— $1,456,755 
Costs of revenue232,225 29,100 — 261,325 
Operating expenses656,369 74,708 414,793 1,145,870 
Total costs and expenses888,594 103,808 414,793 1,407,195 
Operating earnings (loss)$378,433 $85,920 $(414,793)$49,560 

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(In thousands)DomesticInternationalOtherTotal
Three Months Ended 2020
Revenues$1,168,213 $162,136 $— $1,330,349 
Costs of revenue189,779 22,184 — 211,963 
Operating expenses587,674 57,413 326,401 971,488 
Total costs and expenses777,453 79,597 326,401 1,183,451 
Operating earnings (loss)$390,760 $82,539 $(326,401)$146,898 

(In thousands)DomesticInternationalOtherTotal
Six Months Ended 2021
Revenues$2,489,019 $355,514 $— $2,844,533 
Costs of revenue437,919 54,062 — 491,981 
Operating expenses1,216,931 136,322 731,681 2,084,934 
Total costs and expenses1,654,850 190,384 731,681 2,576,915 
Operating earnings (loss)$834,169 $165,130 $(731,681)$267,618 

(In thousands)DomesticInternationalOtherTotal
Six Months Ended 2020
Revenues$2,414,628 $327,462 $— $2,742,090 
Costs of revenue418,346 48,033 — 466,379 
Operating expenses1,157,768 123,968 668,701 1,950,437 
Total costs and expenses1,576,114 172,001 668,701 2,416,816 
Operating earnings (loss)$838,514 $155,461 $(668,701)$325,274 


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Item 2. 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 the results of operations and financial condition of Cerner Corporation ("Cerner," the "Company," "we," "us" or "our"). This MD&A is provided as a supplement to, and should be read in conjunction with, our condensed consolidated financial statements and the accompanying notes to condensed consolidated financial statements ("Notes") found above. Certain statements in this quarterly report on Form 10-Q contain forward-looking statements within the meanings of the Private Securities Litigation Reform Act of 1995, as amended, regarding our future plans, objectives, beliefs, expectations, representations and projections. See the end of this MD&A for more information on our forward-looking statements, including a discussion of the most significant factors that could cause actual results to differ materially from those in the forward-looking statements.

All references to quarters or six month periods ended 2021 and 2020 in this MD&A represent the respective three and six month periods ended June 30, 2021 and June 30, 2020, unless otherwise noted.

Management Overview

Our revenues are primarily derived by selling, implementing, operating and supporting software solutions, clinical content, hardware, devices and services that give healthcare providers and other stakeholders secure access to clinical, administrative and financial data in real or near-real time, helping them to improve quality, safety and efficiency in the delivery of healthcare.

Our core strategy is to create organic growth by investing in research and development to create solutions and tech-enabled services for the healthcare industry. We expect to also supplement organic growth with acquisitions or strategic investments and collaborations.

Cerner's long history of growth has created an important strategic footprint in healthcare, 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 value-based contracting. The platform, along with our CareAware® platform, also supports offerings in areas such as long-term care, home care and hospice, rehabilitation, behavioral health, community care, care team communications, health systems operations, consumer and employer, and data-as-a-service.

Beyond our strategy for driving revenue growth, we are also focused on earnings growth. After several years of margin compression related to slowing revenue growth, increased mix of low-margin services, and lower software demand due to the end of direct government incentives for EHR adoption, Cerner implemented a new operating structure and introduced other initiatives focused on cost optimization and process improvement in 2019. To assist in these efforts, we engaged an outside consulting firm to conduct a review of our operations and cost structure. We have made good progress since we kicked off our transformation in 2019 and expect this progress to be reflected in improved profitability going forward. We are focused on ongoing identification of opportunities to operate more efficiently and on achieving the efficiencies without impacting the quality of our solutions and services and commitments to our clients.

We are also focused on delivering strong levels of cash flow which we expect to accomplish by continuing to grow earnings and prudently managing capital expenditures. We expect to use future cash flow and debt, as appropriate, to meet our capital allocation objectives, which include investing in our business, entering into acquisitions or other strategic investments to drive profitable growth, and returning capital to shareholders through share repurchases and dividends.


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COVID-19

Our business and results of operations for the first six months of both 2021 and 2020 were impacted by the ongoing COVID-19 pandemic. It has caused us to modify certain of our business practices, including requiring most of our associates to work remotely; restricting associate travel; developing social distancing plans for our associates; and canceling or postponing in person participation in certain meetings, events and conferences. It is not possible to quantify the full financial impact that the COVID-19 pandemic has had on our results of operations, cash flows, or financial condition, due to the uncertainty surrounding the pandemic, the difficulty inherent in identifying and measuring the various impacts that have or may stem from such an event and the fact that there are no comparable recent events that provide guidance as to how to measure or predict the effect the COVID-19 pandemic may have on our business. However, we believe COVID-19 has impacted, and could continue in the near-term to impact, our business results, primarily, but not limited to, in the following areas:

Bookings, backlog and revenues – A decline in new business bookings as certain client purchasing decisions and projects are delayed to focus on treating patients, procuring necessary medical supplies, administering vaccines, and managing their own organizations through this crisis. This decline in bookings flows through to reduced backlog and lower subsequent revenues.

Associate productivity – A decline in associate productivity, primarily for our services personnel, as a large amount of work is typically done at client sites, which is being impacted by travel restrictions and our clients' focus on the pandemic. Our clients' focus on the pandemic has also led to pauses on existing projects and postponed start dates for others, which translates into lower professional services revenues and a lower operating margin percentage. We are mitigating this by doing more work remotely than we have in the past, but we cannot fully offset the negative impact.

Travel – Associate travel restrictions reduce client-related travel, which reduces reimbursed travel revenues and lowers our costs of revenue as a percent of revenues. Such restrictions also reduce non-reimbursable travel, which lowers operating expenses.

Cash collections – A delay in client cash collections due to COVID-19's impact on national reimbursement processes, and client focus on managing their own organizations' liquidity during this time. This translates to lower cash flows from operating activities, and a higher days sales outstanding metric. Lower cash flows from operating activities may impact how we execute under our capital allocation strategy.

Capital expenditures – A decline in capital spending as certain capital projects are delayed or strategies evolve.

We believe the impact of COVID-19 on our results of operations for the first quarter of 2020 was limited, due to 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 in 2021, we do not expect it to be as significant as 2020. The impact will continue to be difficult to quantify as there are many factors that continue to be outside of our control, so any forward looking statements that we make regarding our projections of future financial performance; new solutions and services; capital allocation plans; cost optimization and operational improvement initiatives; and the expected benefits of our acquisitions, divestitures or other collaborations are all subject to increased risks.

Operational Improvement Initiatives

The Company has continued to focus on leveraging the impact of our new operating structure and identifying additional efficiencies in our business. We continue to be focused on reducing operating expenses and generating other efficiencies that are expected to provide longer-term operating margin expansion. We are continuing our portfolio management, which includes ongoing evaluation of our offerings, exiting certain low-margin businesses, and being more selective as we consider new business opportunities. To assist in these efforts, we engaged an outside consulting firm to conduct a review of our operations and cost structure. As part of our portfolio management, we closed on the sale of certain of our business operations, primarily conducted 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.
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We expect to continue to evaluate and potentially complete divestiture transactions that are strategic to our operational improvement initiatives. We continue to be focused on ongoing identification of opportunities to operate more efficiently and on achieving the efficiencies without impacting the quality of our solutions and services and commitments to our clients.

In the near term, we expect to incur expenses in connection with these efforts. Such expenses may include, but are not limited to, consultant and other professional services fees, employee separation costs, contract termination costs, asset impairment charges, and other such related expenses. Expenses recognized in the first six months of 2021 and 2020 primarily related to professional services fees, employee separation costs, and asset impairment charges which are included in operating expenses in our condensed consolidated statements of operations. We expect to incur additional expenses in connection with these initiatives in future periods, which may be material.

Results Overview

Bookings, which reflects the value of executed contracts for software, hardware, professional services and managed services, was $1.36 billion in the second quarter of 2021, which is an increase of 2% compared to $1.34 billion in the second quarter of 2020.

Revenues for the second quarter of 2021 increased 10% to $1.46 billion, compared to $1.33 billion in the second quarter of 2020.

Net earnings for the second quarter of 2021 decreased 76% to $33 million, compared to $135 million in the second quarter of 2020. Diluted earnings per share decreased 75% to $0.11, compared to $0.44 in the second quarter of 2020.

We had cash collections of receivables of $1.46 billion in the second quarter of 2021, compared to $1.29 billion in the second quarter of 2020. Days sales outstanding was 77 days in the second quarter of 2021, compared to 77 days for the first quarter of 2021 and 81 days for the second quarter of 2020. Operating cash flows for the second quarter of 2021 were $369 million, compared to $259 million in the second quarter of 2020.


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Results of Operations

Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020

The following table presents a summary of our operating information for the second quarters of 2021 and 2020:

(In thousands)2021% of
Revenue
2020% of
Revenue
% Change  
Revenues$1,456,755 100 %$1,330,349 100 %10 %
Costs of revenue261,325 18 %211,963 16 %23 %
Margin1,195,430 82 %1,118,386 84 %%
Operating expenses
Sales and client service731,077 50 %645,087 48 %13 %
Software development241,600 17 %178,955 13 %35 %
General and administrative156,307 11 %134,332 10 %16 %
Amortization of acquisition-related intangibles16,886 %13,114 %29 %
Total operating expenses1,145,870 79 %971,488 73 %18 %
Total costs and expenses1,407,195 97 %1,183,451 89 %19 %
Operating earnings49,560 %146,898 11 %(66)%
Other income (loss), net(1,678)24,632 
Income taxes(15,175)(36,782)
Net earnings$32,707 $134,748 (76)%

Revenues & Backlog

Revenues increased 10% to $1.46 billion in the second quarter of 2021, as compared to $1.33 billion in the same period of 2020. The following factors impacted the year-over-year change in revenues:

Increased implementation activity during the second quarter of 2021 within our federal business, inclusive of ongoing projects with the U.S. Department of Defense and the U.S. Department of Veterans Affairs. In the second quarter of 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 17% in the same period of 2020.

The second quarter of 2021 includes a $45 million increase in revenues due to contributions from our April 1, 2021 acquisition of the Kantar Health business. We expect the acquired business to contribute over $85 million of additional revenues over the remainder of 2021. Refer to Note (2) of the Notes for further information regarding the Kantar Health acquisition.

Moderate recovery from the impact of the COVID-19 pandemic, which we believe had the most significant unfavorable impact to our business operations in the second quarter of 2020, as further discussed above. The largest impact was in the areas of licensed software, technology resale, professional services, and reimbursed travel revenues.

The second quarter of 2021 includes a $20 million reduction in revenues due to the sale of certain of our revenue cycle outsourcing business operations to affiliates of R1 RCM Inc., on August 3, 2020.

The second quarter of 2021 includes a $19 million reduction in revenues due to the sale of certain of our business operations primarily conducted in Germany and Spain to affiliates of CompuGroup Medical SE & Co. KGaA on July 1, 2020.

Refer to Note (3) of the Notes for further information regarding revenues disaggregated by our business models.

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Backlog, which reflects contracted revenue that has not yet been recognized as revenue, was $13.19 billion at June 30, 2021, compared to $13.04 billion at December 31, 2020. We expect to recognize 30% of our backlog as revenue over the next 12 months.

We believe that backlog may not necessarily be a comprehensive indicator of future revenue as certain of our arrangements may be canceled (or conversely renewed) at our clients' option; thus contract consideration related to such cancellable periods has been excluded from our calculation of backlog. However, historically our experience has been that such cancellation provisions are rarely exercised. We expect to recognize approximately $1.07 billion of revenue over the next 12 months under currently executed contracts related to such cancellable periods, which is not included in our calculation of backlog.

Costs of Revenue

Costs of revenue as a percent of revenues were 18% in the second quarter of 2021, compared to 16% in the same period of 2020. The higher costs of revenue as a percent of revenues was primarily driven by higher reimbursed travel revenue, which carries a 100% cost of revenue; a higher mix of technology resale revenue, which carries a high cost of revenue; and the impact of the Kantar Health business acquired on April 1, 2021.

Costs of revenue include the cost of reimbursed travel expense, sales commissions, third-party consulting services and subscription content and computer hardware, devices and sublicensed software purchased from manufacturers for delivery to clients. It also includes the cost of hardware maintenance and sublicensed software support subcontracted to the manufacturers. Such costs, as a percent of revenues, typically have varied as the mix of revenue (software, hardware, devices, maintenance, support, and services) carrying different margin rates changes from period to period. Costs of revenue does not include the costs of our client service personnel who are responsible for delivering our service offerings. Such costs are included in sales and client service expense.

Operating Expenses

Total operating expenses increased 18% to $1.15 billion in the second quarter of 2021, compared to $971 million in the same period of 2020.
 
Sales and client service expenses as a percent of revenues were 50% in the second quarter of 2021, compared to 48% in the same period of 2020. These expenses increased 13% to $731 million in the second quarter of 2021, from $645 million in the same period of 2020. Sales and client service expenses include salaries and benefits of sales, marketing, support, and services personnel, depreciation and other expenses associated with our managed services business, communications expenses, unreimbursed travel expenses, expense for share-based payments, and trade show and advertising costs. The increase in sales and client service expenses was primarily driven by a $68 million pre-tax charge recorded in the second quarter of 2021 in connection with the designation of certain real estate assets as held for sale. Refer to Note (1) of the Notes for further information.

Software development expenses as a percent of revenues were 17% in the second quarter of 2021, compared to 13% in the same period of 2020. Expenditures for software development include ongoing development and enhancement of the Cerner Millennium® and HealtheIntent platforms, as well as other key initiatives such as platform modernization, with a focus on development of a software as a service platform. A summary of our total software development expense in the second quarters of 2021 and 2020 is as follows:

 Three Months Ended
(In thousands)20212020
Software development costs$212,258 $195,296 
Capitalized software costs(81,306)(75,850)
Capitalized costs related to share-based payments(2,252)(1,688)
Amortization of capitalized software costs65,247 61,197 
Net realizable value charge (see Note (1) of the Notes)47,653 — 
Total software development expense$241,600 $178,955 
 
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General and administrative expenses as a percent of revenues were 11% in the second quarter of 2021, compared to 10% in the same period of 2020. These expenses increased 16% to $156 million in the second quarter of 2021, from $134 million in the same period of 2020. General and administrative expenses include salaries and benefits for corporate, financial and administrative staffs, utilities, communications expenses, professional fees, depreciation and amortization, transaction gains or losses on foreign currency, expense for share-based payments, certain organizational restructuring and other expense. The increase in general and administrative expenses was primarily driven by increased employee separation costs recognized in connection with our operational improvement initiatives, as further discussed in Note (1) of the Notes. We expect to incur additional expenses in connection with these efforts in future periods, which may be material.

Amortization of acquisition-related intangibles as a percent of revenues was 1% in the second quarter of both 2021 and 2020. These expenses increased 29% to $17 million in the second quarter of 2021, from $13 million in the same period in 2020. Amortization of acquisition-related intangibles includes the amortization of customer relationships, acquired technology, trade names, and non-compete agreements recorded in connection with our business acquisitions. The increase in amortization of acquisition-related intangibles is primarily due to amortization of intangibles acquired in our April 1, 2021 acquisition of the Kantar Health business. Refer to Note (2) of the Notes for further information regarding the Kantar Health acquisition.

Non-Operating Items
 
Other income (loss), net was a net loss of $2 million in the second quarter of 2021, compared to $25 million of income in the same period of 2020. The decrease is primarily attributable to the second quarter of 2020 including a $26 million unrealized gain recognized in connection with the measurement of one of our equity investments.

Our effective tax rate was 31.7% for the second quarter of 2021, compared to 21.4% for the same period of 2020. The increase in the effective tax rate is primarily due to a $6 million valuation allowance recorded in the second quarter of 2021 against a deferred tax asset where it has become more likely than not that such deferred tax asset will not be realized. Refer to Note (8) of the Notes for further discussion regarding our effective tax rate.

Operations by Segment

We have two operating segments: Domestic and International. The Domestic segment includes revenue contributions and expenditures associated with business activity 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 (12) of the Notes for further information regarding our reportable segments.

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The following table presents a summary of our operating segment information for the second quarters of 2021 and 2020:

(In thousands)2021% of Revenue2020% of Revenue% Change  
Domestic Segment
Revenues$1,267,027 100%$1,168,213 100%8%
Costs of revenue232,225 18%189,779 16%22%
Operating expenses656,369 52%587,674 50%12%
Total costs and expenses888,594 70%777,453 67%14%
Domestic operating earnings378,433 30%390,760 33%(3)%
International Segment
Revenues189,728 100%162,136 100%17%
Costs of revenue29,100 15%22,184 14%31%
Operating expenses74,708 39%57,413 35%30%
Total costs and expenses103,808 55%79,597 49%30%
International operating earnings85,920 45%82,539 51%4%
Other costs and expenses, net(414,793)(326,401)27%
Consolidated operating earnings$49,560 $146,898 (66)%

Domestic Segment

Revenues increased 8% to $1.27 billion in the second quarter of 2021, from $1.17 billion in the same period of 2020. The following factors impacted the year-over-year change in Domestic revenues:

Increased implementation activity during the second quarter of 2021 within our federal business, inclusive of ongoing projects with the U.S. Department of Defense and the U.S. Department of Veterans Affairs.

The second quarter of 2021 includes a $21 million increase in revenues due to contributions from our April 1, 2021 acquisition of the Kantar Health business.

Moderate recovery from the impact of the COVID-19 pandemic, which we believe had the most significant unfavorable impact to our business operations in the second quarter of 2020, as further discussed above. The largest impact was in the areas of licensed software, technology resale, professional services, and reimbursed travel revenues.

The second quarter of 2021 includes a $20 million reduction in revenues due to the sale of certain of our revenue cycle outsourcing business operations to affiliates of R1 RCM Inc., on August 3, 2020.

Refer to Note (3) of the Notes for further information regarding revenues disaggregated by our business models.

Costs of revenue as a percent of revenues were 18% in the second quarter of 2021, compared to 16% in the same period of 2020. The higher costs of revenue as a percent of revenues was primarily driven by higher reimbursed travel revenue, which carries a 100% cost of revenue; a higher mix of technology resale revenue, which carries a high cost of revenue; and the impact of the Kantar Health business acquired on April 1, 2021.

Operating expenses as a percent of revenues were 52% in the second quarter of 2021, compared to 50% in the same period of 2020. These expenses increased 12% to $656 million in the second quarter of 2021, from $588 million in the same period of 2020. The increase in operating expenses was primarily driven by a $68 million pre-tax charge recorded in the second quarter of 2021 in connection with the designation of certain real estate assets as held for sale. Refer to Note (1) of the Notes for further information.


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International Segment

Revenues increased 17% to $190 million in the second quarter of 2021, compared to $162 million in the same period of 2020. The following factors impacted the year-over-year change in International revenues:

The second quarter of 2021 includes a $24 million increase in revenues due to contributions from our April 1, 2021 acquisition of the Kantar Health business.

The second quarter of 2021 includes a $19 million reduction in revenues due to the sale of certain of our business operations primarily conducted in Germany and Spain to affiliates of CompuGroup Medical SE & Co. KGaA on July 1, 2020.

The remaining difference is attributable to 2021 revenue growth across the majority of our remaining International Segment operations.

Refer to Note (3) of the Notes for further information regarding revenues disaggregated by our business models.

Costs of revenue as a percent of revenues were 15% in the second quarter of 2021, compared to 14% in the same period of 2020. The higher costs of revenue as a percent of revenues was primarily driven by the impact of the Kantar Health business acquired on April 1, 2021.

Operating expenses as a percent of revenues were 39% in the second quarter of 2021, compared to 35% in the same period of 2020. These expenses increased 30% to $75 million in the second quarter of 2021, from $57 million in the same period of 2020. The increase in operating expenses is primarily due to 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 27% to $415 million in the second quarter of 2021, from $326 million in the same period of 2020. The increase is primarily due to increased employee separation costs recognized in connection with our operational improvement initiatives, and a pre-tax charge of $48 million to reduce the carrying amount of certain capitalized software development costs to estimated net realizable value, both of which are further discussed in Note (1) of the Notes.


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Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020

The following table presents a summary of our operating information for the first six months of 2021 and 2020:

(In thousands)2021% of
Revenue
2020% of
Revenue
% Change  
Revenues$2,844,533 100 %$2,742,090 100 %%
Costs of revenue491,981 17 %466,379 17 %%
Margin2,352,552 83 %2,275,711 83 %%
Operating expenses
Sales and client service1,353,253 48 %1,281,736 47 %%
Software development433,927 15 %364,275 13 %19 %
General and administrative268,672 %274,184 10 %(2)%
Amortization of acquisition-related intangibles29,082 %30,242 %(4)%
Total operating expenses2,084,934 73 %1,950,437 71 %%
Total costs and expenses2,576,915 91 %2,416,816 88 %%
Operating earnings267,618 %325,274 12 %(18)%
Other income (loss), net(472)30,227 
Income taxes(62,187)(73,594)
Net earnings$204,959 $281,907 (27)%

Revenues & Backlog

Revenues increased 4% to $2.84 billion in the first six months of 2021, as compared to $2.74 billion in the same period of 2020. The following factors impacted the year-over-year change in revenues:

Increased implementation activity during the first six months of 2021 within our federal business, inclusive of ongoing projects with the U.S. Department of Defense and the U.S. Department of Veterans Affairs. In the first six months of 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 17% in the same period of 2020.

The first six months of 2021 includes a $45 million increase in revenues due to contributions from our April 1, 2021 acquisition of the Kantar Health business. Refer to Note (2) of the Notes for further information regarding the Kantar Health acquisition.

The first six months of 2021 includes a $43 million reduction in revenues due to the sale of certain of our revenue cycle outsourcing business operations to affiliates of R1 RCM Inc., on August 3, 2020.

The first six months of 2021 includes a $40 million reduction in revenues due to the sale of certain of our business operations primarily conducted in Germany and Spain to affiliates of CompuGroup Medical SE & Co. KGaA on July 1, 2020.

Refer to Note (3) of the Notes for further information regarding revenues disaggregated by our business models.

Costs of Revenue

Costs of revenue as a percent of revenues were 17% in the first six months of both 2021 and 2020.


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Operating Expenses

Total operating expenses increased 7% to $2.08 billion in the first six months of 2021, compared to $1.95 billion in the same period of 2020.
 
Sales and client service expenses as a percent of revenues were 48% in the first six months of 2021, compared to 47% in the same period of 2020. These expenses increased 6% to $1.35 billion in the first six months of 2021, from $1.28 billion in the same period of 2020. The increase in sales and client service expenses was primarily driven by a $68 million pre-tax charge recorded in the first six months of 2021 in connection with the designation of certain real estate assets as held for sale. Refer to Note (1) of the Notes for further information.

Software development expenses as a percent of revenues were 15% in the first six months of 2021, compared to 13% in the same period of 2020. Expenditures for software development include ongoing development and enhancement of the Cerner Millennium and HealtheIntent platforms, as well as other key initiatives such as platform modernization, with a focus on development of a software as a service platform. A summary of our total software development expense in the first six months of 2021 and 2020 is as follows:

 Six Months Ended
(In thousands)20212020
Software development costs$423,285 $393,460 
Capitalized software costs(162,461)(148,354)
Capitalized costs related to share-based payments(4,647)(3,039)
Amortization of capitalized software costs130,097 122,208 
Net realizable value charge (see Note (1) of the Notes)47,653 — 
Total software development expense$433,927 $364,275 
 
General and administrative expenses as a percent of revenues were 9% in the first six months of 2021, compared to 10% in the same period of 2020. These expenses decreased 2% to $269 million in the first six months of 2021, from $274 million in the same period of 2020. The slight decrease in general and administrative expenses was primarily driven by lower depreciation expenses associated with property and equipment.

Amortization of acquisition-related intangibles as a percent of revenues was 1% in the first six months of both 2021 and 2020. These expenses were relativity flat at $29 million in the first six months of 2021, compared to $30 million in the same period in 2020.

Non-Operating Items
 
Other income (loss), net was a net loss of less than $1 million in the first six months of 2021, compared to $30 million of income in the same period of 2020. The first six months of 2020 includes a $26 million unrealized gain recognized in connection with the measurement of one of our equity investments. The remaining difference is primarily attributable to increased interest expense in the first six months of 2021 from the $300 million of Series 2020-A Notes we issued in March 2020 and the $500 million of Series 2021 Senior Notes we issued in March 2021.

Our effective tax rate was 23.3% for the first six months of 2021, compared to 20.7% for the same period of 2020. A $6 million valuation allowance was recorded in the first six months of 2021 against a deferred tax asset where it became more likely than not that such deferred tax asset will not be realized, while a valuation allowance of $3 million was recorded during first six months of 2020. The remainder of the increase in the effective tax rate is primarily related to unfavorability of permanent book-tax differences for share based compensation in 2021 compared to 2020. Refer to Note (8) of the Notes for further discussion regarding our effective tax rate.


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Operations by Segment

The following table presents a summary of our operating segment information for the first six months of 2021 and 2020:

(In thousands)2021% of Revenue2020% of Revenue% Change  
Domestic Segment
Revenues$2,489,019 100%$2,414,628 100%3%
Costs of revenue437,919 18%418,346 17%5%
Operating expenses1,216,931 49%1,157,768 48%5%
Total costs and expenses1,654,850 66%1,576,114 65%5%
Domestic operating earnings834,169 34%838,514 35%(1)%
International Segment
Revenues355,514 100%327,462 100%9%
Costs of revenue54,062 15%48,033 15%13%
Operating expenses136,322 38%123,968 38%10%
Total costs and expenses190,384 54%172,001 53%11%
International operating earnings165,130 46%155,461 47%6%
Other costs and expenses, net(731,681)(668,701)9%
Consolidated operating earnings$267,618 $325,274 (18)%

Domestic Segment

Revenues increased 3% to $2.49 billion in the first six months of 2021, from $2.41 billion in the same period of 2020. The following factors impacted the year-over-year change in Domestic revenues:

Increased implementation activity during the first six months of 2021 within our federal business, inclusive of ongoing projects with the U.S. Department of Defense and the U.S. Department of Veterans Affairs.

The first six months of 2021 includes a $21 million increase in revenues due to contributions from our April 1, 2021 acquisition of the Kantar Health business.

The first six months of 2021 includes a $43 million reduction in revenues due to the sale of certain of our revenue cycle outsourcing business operations to affiliates of R1 RCM Inc., on August 3, 2020.

Refer to Note (3) of the Notes for further information regarding revenues disaggregated by our business models.

Costs of revenue as a percent of revenues were 18% in the first six months of 2021, compared to 17% in the same period of 2020. The higher costs of revenue as a percent of revenues was primarily driven by a higher mix of technology resale revenue, which carries a high cost of revenue; along with the impact of the Kantar Health business acquired on April 1, 2021.

Operating expenses as a percent of revenues were 49% in the first six months of 2021, compared to 48% in the same period of 2020. These expenses increased 5% to $1.22 billion in the first six months of 2021, from $1.16 billion in the same period of 2020. The increase in operating expenses was primarily driven by a $68 million pre-tax charge recorded in the first six months of 2021 in connection with the designation of certain real estate assets as held for sale. Refer to Note (1) of the Notes for further information.


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International Segment

Revenues increased 9% to $356 million in the first six months of 2021, from $327 million in the same period of 2020. The following factors impacted the year-over-year change in International revenues:

The first six months of 2021 includes a $24 million increase in revenues due to contributions from our April 1, 2021 acquisition of the Kantar Health business.

The first six months of 2021 includes a $40 million reduction in revenues due to the sale of certain of our business operations primarily conducted in Germany and Spain to affiliates of CompuGroup Medical SE & Co. KGaA on July 1, 2020.

The remaining difference is attributable to 2021 revenue growth across the majority of our remaining International Segment operations.

Refer to Note (3) of the Notes for further information regarding revenues disaggregated by our business models.

Costs of revenue as a percent of revenues were 15% in the first six months of both 2021 and 2020.

Operating expenses as a percent of revenues were 38% in the first six months of both 2021 and 2020. These expenses increased 10% to $136 million in the first six months of 2021, from $124 million in the same period of 2020. The increase in operating expenses is primarily due to the April 1, 2021 acquisition of the Kantar Health business.

Other Costs and Expenses, Net

These expenses increased 9% to $732 million in the first six months of 2021, from $669 million in the same period of 2020. The increase is primarily due to a pre-tax charge of $48 million recorded in the first six months of 2021 to reduce the carrying amount of certain capitalized software development costs to estimated net realizable value, as further discussed in Note (1) of the Notes.

Liquidity and Capital Resources
Our liquidity is influenced by many factors, including the amount and timing of our revenues, our cash collections from our clients and the amount we invest in software development, acquisitions, collaborations, capital expenditures, and our share repurchase and dividend programs.
Our principal sources of liquidity are our cash, cash equivalents (which primarily consist of money market funds, time deposits and commercial paper with original maturities of less than 90 days), short-term investments, borrowings under our Credit Agreement and other sources of debt financing. At June 30, 2021, we had cash and cash equivalents of $246 million and short-term investments of $638 million, as compared to cash and cash equivalents of $616 million and short-term investments of $442 million at December 31, 2020.

We have entered into a Credit Agreement with a syndicate of lenders that provides for an unsecured $1.00 billion revolving credit loan facility, along with a letter of credit facility up to $100 million (which is a sub-facility of the $1.00 billion revolving credit loan facility). We have the ability to increase the maximum capacity to $1.20 billion at any time during the Credit Agreement's term, subject to lender participation and the satisfaction of specified conditions. The Credit Agreement expires in May 2024. As of June 30, 2021, we had outstanding revolving credit loans and letters of credit of $600 million and $31 million, respectively; which reduced our available borrowing capacity to $369 million under the Credit Agreement.

We have also entered into note purchase agreements pursuant to which we may issue and sell unsecured senior promissory notes to those purchasers electing to purchase. See Note (6) of the Notes for further information.

We believe that our present cash position, together with cash generated from operations, short-term investments and, as appropriate, remaining availability under our Credit Agreement and other sources of debt financing, will be sufficient to meet anticipated cash requirements for the next 12 months.
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The following table summarizes our cash flows in the first six months of 2021 and 2020:
 Six Months Ended
(In thousands)20212020
Cash flows from operating activities$819,569 $542,096 
Cash flows from investing activities(910,819)(385,046)
Cash flows from financing activities(275,378)(322,569)
Effect of exchange rate changes on cash(2,583)(6,429)
Total change in cash and cash equivalents(369,211)(171,948)
Cash and cash equivalents at beginning of period615,615 441,843 
Cash and cash equivalents at end of period$246,404 $269,895 
Free cash flow (non-GAAP)$453,180 $224,407 

Cash from Operating Activities
 Six Months Ended
(In thousands)20212020
Cash collections from clients$2,903,150 $2,658,956 
Cash paid to employees and suppliers and other(2,010,033)(2,091,598)
Cash paid for interest(20,190)(16,572)
Cash paid for taxes, net of refunds(53,358)(8,690)
Total cash from operations$819,569 $542,096 

Cash flows from operations increased $277 million in the first six months of 2021 when compared to the same period of 2020, due primarily to increased collections of client receivables. Days sales outstanding was 77 days in the second quarter of 2021, compared to 77 days for the first quarter of 2021 and 81 days for the second quarter of 2020.

Cash from Investing Activities
 Six Months Ended
(In thousands)20212020
Capital purchases$(199,281)$(166,296)
Capitalized software development costs(167,108)(151,393)
Purchases of investments, net of sales and maturities(178,530)(10,935)
Purchases of other intangibles(16,031)(20,656)
Acquisition of businesses, net of cash acquired(349,869)(35,766)
Total cash flows from investing activities$(910,819)$(385,046)

Cash flows from investing activities consist primarily of capital spending, investment, acquisition, and divestiture activities.

Our capital spending in the first six months of 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. Capital purchases for the remainder of 2021 are expected to be below 2020 levels, primarily driven by reduced purchases to support our facilities requirements, reflective of the completion of construction on the most recent phases of our Innovations Campus in the third quarter of 2020.

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 share repurchases and cash dividends discussed below.

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On April 1, 2021, we paid $364 million of purchase price consideration in connection with our acquisition of Kantar Health, as further discussed in Note (2) of the Notes. We expect to continue seeking and completing strategic business acquisitions, investments, and relationships that are complementary to our business.

Cash from Financing Activities
 Six Months Ended
(In thousands)20212020
Long-term debt issuance$500,000 $300,000 
Cash from option exercises (net of taxes paid in connection with shares surrendered by associates)118,554 142,691 
Treasury stock purchases(750,000)(650,000)
Dividends paid(135,260)(111,101)
Other(8,672)(4,159)
Total cash flows from financing activities$(275,378)$(322,569)

In March 2021, we issued $500 million aggregate principal amount of Series 2021 Senior Notes. In March 2020, we issued $300 million aggregate principal amount of Series 2020-A notes. Refer to Note (6) of the Notes for further information regarding these, as well as our other debt obligations.

We may incur additional indebtedness in the next 12 months, which will primarily be dependent on cash flows from operations, market interest rates, and the timing of business acquisition and capital allocation activity. The proceeds from such indebtedness would be deployed in accordance with our capital allocation strategy, which may include share repurchases and dividend payments (as discussed further below), as well as for general corporate purposes, including acquisitions and investments. The terms and availability of any such debt financing may be impacted by economic and financial market conditions, as well as our financial condition and results of operations at the time we seek such financing, and there can be no assurances that we would be able to obtain such financing on terms that will be acceptable or advantageous to us.

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 throughout 2021 based on the number of exercisable options as of June 30, 2021 and our current stock price.

During the first six months of 2021 and 2020, we repurchased 10.1 million shares of our common stock for total consideration of $750 million and 9.2 million shares of our common stock for total consideration of $650 million, respectively. As of June 30, 2021, an aggregate of $3.93 billion remained available for repurchase under our share repurchase programs. We will continue to repurchase shares under our share repurchase programs, but the amount and timing of such repurchases will be dependent on a number of factors, including the price of our common stock and other cash flow needs. There is no assurance that we will repurchase up to the full amount remaining under our programs. Refer to Note (10) of the Notes for further information regarding our share repurchase programs.

During the first six months of both 2021 and 2020, we declared and paid quarterly cash dividends. 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. Refer to Note (10) of the Notes for further information regarding our cash dividend activity.

The source of funds for such repurchases and dividends may include cash generated from operations, liquidation of investment holdings and other dispositions of assets, and the incurrence of indebtedness.

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Free Cash Flow (Non-GAAP)
 Three Months EndedSix Months Ended
(In thousands)2021202020212020
Cash flows from operating activities (GAAP)$369,135 $258,590 $819,569 $542,096 
Capital purchases(123,356)(117,048)(199,281)(166,296)
Capitalized software development costs(83,558)(77,538)(167,108)(151,393)
Free cash flow (non-GAAP)$162,221 $64,004 $453,180 $224,407 

Free cash flow increased $229 million in the first six months of 2021 compared to the same period in 2020, primarily due to increased cash from operations, partially offset by an increase in capital spending. 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.

Forward-Looking Statements

All statements contained in this quarterly report on Form 10-Q that do not directly and exclusively relate to historical facts constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements are based on the current beliefs, expectations and assumptions of Cerner's management with respect to future events and are subject to a number of significant risks and uncertainties. It is important to note that Cerner's performance, and actual results, financial condition or business could differ materially from those expressed in such forward-looking statements. The words "will," "believe," "plans," "may," "expect," "expected," "anticipated," "strategy," "opportunities," "future," "estimated," "objectives", or the negative of these words, variations thereof or similar expressions are intended to identify such forward-looking statements. For example, our forward-looking statements include statements regarding our expectations, opportunities or plans for growth; our operational improvement initiatives and the results expected to be realized from those initiatives; our expectations with respect to realizing revenue from backlog; our anticipated expenses, cash requirements and sources of liquidity; the expected impact of the COVID-19 pandemic on our results of operations, financial condition, business and operations; the expected revenue contributions of acquired businesses; and our capital allocation strategies and plans. These statements involve a number of risks, uncertainties and other factors that could cause or contribute to actual results differing materially, including without limitation: the extent to which the COVID-19 pandemic and measures taken in response thereto could adversely affect our financial condition, future bookings and results of operations; the possibility of interruption at our data centers or client support facilities, or those of third parties with whom we have contracted (such as public cloud providers), that could expose us to significant costs and reputational harm; the possibility of increased expenses, exposure to legal claims and regulatory actions and reputational harm associated with a cyberattack or other breach in our IT security or the IT security of third parties on which we rely; potential claims for system errors and warranties or significant costs and reputational harm related to product and service-related liabilities; our proprietary technology may be subject to claims for infringement or misappropriation of intellectual property rights of others, or may be infringed or misappropriated by others, or subject to claims related to open source licenses; material adverse resolution of legal proceedings or other claims or reputational harm stemming from negative publicity related to such claims or legal proceedings; risks associated with our global operations, including without limitation greater difficulty in collecting accounts receivable; significant competition and our ability to anticipate or respond quickly to market changes, changing technologies and evolving pricing and deployment methods and to bring competitive new solutions, devices, features and services to market in a timely fashion; risks inherent with business acquisitions, strategic investments, collaborations and the failure to achieve projected synergies, or divestitures; managing growth in the new markets in which we offer solutions, healthcare devices or services; long sales cycles for our solutions and
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services; risks related to our dependence on strategic relationships and third party suppliers, including any impact to such supplier’s business resulting from the COVID-19 pandemic; risks associated with the loss or recruitment and retention of key personnel, the failure to successfully develop and execute succession planning to assure transitions of key associates and their knowledge, relationships and expertise and uncertainties as to how quickly we are able to finalize our CEO succession plans; inability to achieve expected operating efficiencies and sustain or improve operating expense reductions or business disruptions or adverse tax consequences associated with restructuring, realignment and costs reduction activities; changing political, economic and regulatory influences, which could impact the purchasing practices and operations of our clients and increase costs to deliver compliant solutions and services; non-compliance with laws, regulations or certain industry initiatives or failure to deliver solutions or services that enable our clients to comply with laws or regulations applicable to their businesses; risks inherent in contracting with government clients, including without limitation, complying with strict compliance and disclosure obligations, navigating complex procurement rules and processes, and defending against bid protests; volatility and disruption resulting from global economic or market conditions, including the impact from the COVID-19 pandemic; risks associated with our outstanding and future indebtedness, such as compliance with restrictive covenants, which may limit our flexibility to operate our business; risk that our capital allocation strategy will not be fully implemented or enhance long-term shareholder value; changes in tax laws, regulations or guidance that could adversely affect our tax position and/or challenges to our tax positions in the U.S. and non-U.S. countries; the potential for losses resulting from asset impairment charges; potential variations in our sales forecasts compared to actual sales; risks that our revenue growth may be lower than anticipated and/or that the mix of revenue shifts to low margin revenue; variations in our quarterly operating results; volatility in the trading price of our common stock and the timing and volume of market activity; risks associated with fluctuations in foreign currency exchange rates; and our directors’ authority to issue preferred stock and the anti-takeover provisions in our corporate governance documents. Additional discussion of these and other risks, uncertainties and factors affecting Cerner's business is contained in our filings with the Securities and Exchange Commission, including those under the caption "Risk Factors" in our latest annual report on Form 10-K, or in materials incorporated herein or therein by reference. Forward-looking statements are not guarantees of future performance or results. The reader should not place undue reliance on forward-looking statements since the statements speak only as of the date that they are made. Except as required by law, 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 or financial condition over time.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

No material changes.

Item 4. 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 quarterly report on Form 10-Q (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)Changes in Internal Control over Financial Reporting.

There were no changes in our internal controls over financial reporting during the fiscal quarter ended June 30, 2021, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. During the fiscal quarter ended June 30, 2021, we completed the acquisition of Kantar Health. As permitted by Securities and Exchange Commission staff interpretative guidance that an assessment of a recently acquired business may be omitted from the scope of an assessment for a period not to exceed one year from the date of acquisition, the scope of our assessment of our internal controls over financial reporting at June 30, 2021 does not include Kantar Health.


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c)Limitations on Controls.

Our management 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.

Part II. Other Information

Item 1. Legal Proceedings

From time to time, we are involved in litigation which is incidental to our business. There have been no material developments to the legal proceedings previously reported in our 2020 annual report on Form 10-K. 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.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(c) Issuer Purchases of Equity Securities

The table below provides information with respect to Common Stock purchases by the Company during the second fiscal quarter of 2021.
Total Number of Shares Purchased (a)Average Price Paid per ShareTotal Number of Shares Purchased as Part of Publicly Announced Plans or Programs (b)Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs (b)
Period
April 1, 2021 - April 30, 20211,365,000 $74.30 1,365,000 $4,225,494,010 
May 1, 2021 - May 31, 20212,123,675 77.32 2,123,675 4,061,290,425 
June 1, 2021 - June 30, 20211,693,842 79.41 1,690,841 3,927,014,404 
Total5,182,517 $77.21 5,179,516 

(a)    Of the 5,182,517 shares of common stock, par value $0.01 per share, presented in the table above, 3,001 shares were originally granted to employees as restricted stock pursuant to our 2011 Omnibus Equity Incentive Plan (the "Omnibus Plan"). The Omnibus Plan allows for the withholding of shares to satisfy tax obligations due upon the vesting of restricted stock. Pursuant to the Omnibus Plan, the 3,001 shares reflected above were relinquished by employees in exchange for our agreement to pay U.S. federal and state withholding obligations resulting from the vesting of the Company's restricted stock.

(b)    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 is authorized to repurchase up to $3.70 billion of shares of our common stock, excluding transaction costs. 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. No time limit was set for the completion of the 2017 Share Repurchase Program.
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 is 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 the six months ended June 30, 2021, we repurchased 10.1 million shares for total consideration of $750 million under our share
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repurchase programs pursuant to Rule 10b5-1 plans. As of June 30, 2021, an aggregate of $3.93 billion remained available for repurchase under the programs.


Item 6. Exhibits

(a)Exhibits
10.1*
31.1
31.2
32.1
32.2
101.INSInline 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.
101.SCHInline XBRL Taxonomy Extension Schema Document
101.CALInline XBRL Taxonomy Extension Calculation Linkbase Document
101.LABInline XBRL Taxonomy Extension Labels Linkbase Document
101.PREInline XBRL Taxonomy Extension Presentation Linkbase Document
101.DEFInline XBRL Taxonomy Extension Definition Linkbase Document
104Cover Page Interactive Data File - formatted in Inline XBRL and contained in Exhibit 101.
*Indicates a management contract or compensatory plan or arrangement.

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SIGNATURES

Pursuant to the requirements 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
Registrant
Date: July 30, 2021By:/s/ Mark J. Erceg
  Mark J. Erceg
  Executive Vice President and Chief
  Financial Officer (duly authorized
officer and principal financial officer)