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Cerner Reports Second Quarter 2017 Results

KANSAS CITY, Mo., July 27, 2017 (GLOBE NEWSWIRE) -- Cerner Corporation (Nasdaq:CERN) today announced results for the 2017 second quarter that ended July 1, 2017.

Bookings in the second quarter of 2017 were $1.636 billion, which is an all-time high and an increase of 16 percent compared to $1.405 billion in the second quarter of 2016.

Second quarter revenue was $1.292 billion, an increase of 6 percent compared to $1.216 billion in the second quarter of 2016 and in the Company’s guidance range.

On a U.S. Generally Accepted Accounting Principles (GAAP) basis, second quarter 2017 net earnings were $179.7 million and diluted earnings per share were $0.53. Second quarter 2016 GAAP net earnings were $166.5 million and diluted earnings per share were $0.48.

Adjusted Net Earnings for second quarter 2017 were $205.5 million, compared to $199.2 million of Adjusted Net Earnings in the second quarter of 2016. Adjusted Diluted Earnings Per Share were $0.61 in the second quarter of 2017, an increase of 5 percent compared to $0.58 of Adjusted Diluted Earnings Per Share in the year-ago quarter and in-line with the Company’s guidance range. Analysts’ consensus estimate for second quarter 2017 Adjusted Diluted Earnings Per Share was $0.61.

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

Other 2017 Second Quarter Highlights:

  • Second quarter operating cash flow of $292.2 million.
  • Second quarter Free Cash Flow of $119.1 million. Free Cash Flow is a non-GAAP financial measure defined as GAAP cash flows from operating activities less capital purchases and capitalized software development costs. Please see the accompanying schedule, titled “Reconciliation of GAAP Results to Non-GAAP Results.”
  • Second quarter days sales outstanding of 73 days, down from 74 days in the year-ago period.
  • Total backlog of $16.648 billion, up 11 percent over the year-ago quarter.

“We are pleased with our execution in the second quarter, which included all key metrics being within or above our targeted ranges,” said Zane Burke, President. “Our record bookings reflect Cerner’s strong competitiveness and good marketplace activity.”

Future Period Guidance
Cerner currently expects:

  • Third quarter 2017 revenue between $1.265 billion and $1.325 billion.
  • Full year 2017 revenue between $5.150 billion and $5.250 billion, which represents a narrowing of the previous $5.100 billion to $5.300 billion guidance range.
  • Third quarter 2017 Adjusted Diluted Earnings Per Share between $0.61 and $0.63.
  • Full year 2017 Adjusted Diluted Earnings Per Share between $2.46 and $2.54, which represents a narrowing of the previous $2.44 to $2.56 guidance range.
  • Third quarter 2017 bookings between $1.450 billion and $1.600 billion.

Earnings Conference Call

Cerner will host an earnings conference call to provide additional detail on the Company’s results and outlook at 3:30 p.m. CT on July 27, 2017. On the call, Cerner will discuss its second quarter 2017 results and answer questions from the investment community. The call may also include discussion of Cerner developments, and forward-looking and other material information about business and financial matters. The dial-in number for the conference call is (678)-509-7542; the passcode is Cerner. Cerner recommends joining the call 15 minutes early for registration. The re-broadcast of the call will be available from 6:30 p.m. CT, July 27, 2017 through 11:59 p.m. CT, July 30, 2017. The dial-in number for the re-broadcast is (855)-859-2056; the passcode is 51427043.

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

About Cerner

Cerner’s health information technologies connect people, information and systems at more than 25,000 facilities worldwide. Recognized for innovation, Cerner® solutions assist clinicians in making care decisions and enable organizations to manage the health of populations. The company also offers an integrated clinical and financial system to help health care organizations manage revenue, as well as a wide range of services to support clients’ clinical, financial and operational needs. Cerner’s mission is to contribute to the systemic improvement of health care delivery and the health of communities. Nasdaq: CERN. For more information about Cerner, visit cerner.com, read our blog at blogs.cerner.com, or connect with us on Twitter at twitter.com/cerner and on Facebook at facebook.com/cerner. Our website, blog, Twitter account and Facebook page contain a significant amount of information about Cerner, including financial and other information for investors.

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

All statements in this press release that do not directly and exclusively relate to historical facts constitute forward-looking statements. These forward-looking statements are based on the current beliefs, expectations and assumptions of Cerner's management with respect to future events and are subject to a number of significant risks and uncertainties. It is important to note that Cerner's performance, and actual results, financial condition or business could differ materially from those expressed in such forward-looking statements. The words “expects”, “guidance”, “position”, “believe”, “plan”, “opportunity” or the negative of these words, variations thereof or similar expressions are intended to identify such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to: the possibility of significant costs and reputational harm related to product-related liabilities; potential claims for system errors and warranties; the possibility of interruption at our data centers or client support facilities; the possibility of increased expenses, exposure to legal claims and regulatory actions and reputational harm associated with a cyberattack or other breach in our IT security; our proprietary technology may be subject to claims for infringement or misappropriation of intellectual property rights of others, or may be infringed or misappropriated by others; potential claims or other risks associated with relying on open source software in our proprietary software, solutions or services; material adverse resolution of legal proceedings; risks associated with our global operations; risks associated with fluctuations in foreign currency exchange rates; the potential for tax legislation initiatives that could adversely affect our tax position and/or challenges to our tax positions in the U.S. and non-U.S. countries; the uncertainty surrounding the impact of the United Kingdom’s vote to leave the European Union (commonly referred to as Brexit) on our global business; risks associated with the unexpected loss or recruitment and retention of key personnel, 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; risks related to our dependence on strategic partners and third party suppliers; difficulties and operational and financial risks associated with successfully completing the integration of the Cerner Health Services (formerly Siemens Health Services) business into our business or the failure to realize the synergies and other benefits expected from the acquisition; risks inherent with business acquisitions and combinations and the integration thereof; the potential for losses resulting from asset impairment charges; risks associated with volatility and disruption resulting from global economic or market conditions; managing growth in the new markets in which we offer solutions, health care devices or services; risks inherent in contracting with government clients; risks associated with our outstanding and future indebtedness, such as compliance with restrictive covenants, which may limit our flexibility to operate our business; changing political, economic, regulatory and judicial influences, which could impact the purchasing practices and operations of our clients and increase costs to deliver compliant solutions and services; government regulation; significant competition and our ability to quickly respond to market changes and changing technologies and to bring competitive new solutions, devices, features and services to market in a timely fashion; long sales cycles for our solutions and services; variations in our quarterly operating results; potential variations in our sales forecasts compared to actual sales; volatility in the trading price of our common stock and the timing and volume of market activity; our directors’ authority to issue preferred stock and the anti-takeover provisions in our corporate governance documents; and changes in accounting standards issued by the Financial Accounting Standards Board or other standard-setting bodies may adversely affect our financial statements. Additional discussion of these and other risks, uncertainties and factors affecting Cerner's business is contained in Cerner's filings with the Securities and Exchange Commission. The reader should not place undue reliance on forward-looking statements, since the statements speak only as of the date that they are made. Except as required by law, Cerner undertakes no obligation to update 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.

CERNER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and six months ended July 1, 2017 and July 2, 2016
(unaudited)
(In thousands, except per share data) Three Months Ended Six Months Ended
2017 2016 2017 2016
Revenues
System sales $347,808 $333,104 $667,664 $612,458
Support, maintenance and services 917,416 860,751 1,835,654 1,700,389
Reimbursed travel 26,770 22,107 49,162 41,250
Total revenues 1,291,994 1,215,962 2,552,480 2,354,097
Margin
System sales 230,533 219,268 449,980 409,397
Support, maintenance and services 838,398 791,138 1,680,444 1,563,551
Total margin 1,068,931 1,010,406 2,130,424 1,972,948
Operating expenses
Sales and client service 563,387 520,265 1,123,587 1,022,092
Software development 142,835 135,164 288,736 268,696
General and administrative 90,633 90,027 179,025 180,161
Amortization of acquisition-related intangibles 22,688 23,638 45,562 45,239
Total operating expenses 819,543 769,094 1,636,910 1,516,188
Operating earnings 249,388 241,312 493,514 456,760
Other income, net 2,661 2,470 1,545 4,151
Earnings before income taxes 252,049 243,782 495,059 460,911
Income taxes (72,366) (77,328) (142,163) (144,097)
Net earnings $179,683 $166,454 $352,896 $316,814
Basic earnings per share $0.54 $0.49 $1.07 $0.94
Basic weighted average shares outstanding 331,056 337,759 330,607 338,657
Diluted earnings per share $0.53 $0.48 $1.05 $0.92
Diluted weighted average shares outstanding 337,898 344,026 337,116 344,984

CERNER CORPORATION AND SUBSIDIARIES
RECONCILIATION OF GAAP RESULTS TO NON-GAAP RESULTS
For the three and six months ended July 1, 2017 and July 2, 2016
(unaudited)
ADJUSTED OPERATING EARNINGS
(In thousands) Three Months Ended Six Months Ended
2017 2016 2017 2016
Operating earnings (GAAP) $249,388 $241,312 $493,514 $456,760
Share-based compensation expense 23,154 21,416 42,009 40,782
Health Services acquisition-related amortization 20,845 20,878 41,873 39,382
Acquisition-related deferred revenue adjustment 4,288 5,393 8,772 10,906
Other acquisition-related adjustments 10 245 40 3,130
Adjusted Operating Earnings (non-GAAP) $297,685 $289,244 $586,208 $550,960
ADJUSTED NET EARNINGS AND ADJUSTED DILUTED EARNINGS PER SHARE
(In thousands, except per share data) Three Months Ended Six Months Ended
2017 2016 2017 2016
Net earnings (GAAP) $179,683 $166,454 $352,896 $316,814
Pre-tax adjustments for Adjusted Net Earnings:
Share-based compensation expense 23,154 21,416 42,009 40,782
Health Services acquisition-related amortization 20,845 20,878 41,873 39,382
Acquisition-related deferred revenue adjustment 4,288 5,393 8,772 10,906
Other acquisition-related adjustments 10 245 40 3,130
After-tax adjustments for Adjusted Net Earnings:
Income tax effect of pre-tax adjustments (13,867) (15,204) (26,618) (29,432)
Share-based compensation permanent tax items (8,598) (15,660)
Adjusted Net Earnings (non-GAAP) $205,515 $199,182 $403,312 $381,582
Diluted weighted average shares outstanding 337,898 344,026 337,116 344,984
Adjusted Diluted Earnings Per Share (non-GAAP) $0.61 $0.58 $1.20 $1.11
FREE CASH FLOW
(In thousands) Three Months Ended Six Months Ended
2017 2016 2017 2016
Cash flows from operating activities (GAAP) $292,243 $260,429 $595,828 $596,634
Capital purchases (101,307) (118,244) (189,372) (217,595)
Capitalized software development costs (71,874) (79,835) (142,966) (155,175)
Free Cash Flow (non-GAAP) $119,062 $62,350 $263,490 $223,864
Cash flows from investing activities (GAAP) $(237,651)$(134,427) $(341,503)$(437,981)
Cash flows from financing activities (GAAP) $23,281 $(40,322) $27,650 $(180,376)
Explanation of Non-GAAP Financial Measures
We report our financial results in accordance with accounting principles generally accepted in the United States of America ("GAAP"). However, we supplement our GAAP results with certain non-GAAP financial measures, which we believe enable investors to better understand and evaluate our ongoing operating results and allows for greater transparency in the review and understanding of our overall financial, operational and economic performance. These non-GAAP financial measures are not meant to be considered in isolation, as a substitute for, or superior to GAAP results and investors should be aware that non-GAAP measures have inherent limitations and should be read only in conjunction with Cerner's consolidated financial statements prepared in accordance with GAAP. These non-GAAP measures may also be different from similar non-GAAP financial measures used by other companies and may not be comparable to similarly titled captions of other companies due to potential inconsistencies in the method of calculations. We provide the measures of Adjusted Operating Earnings, Adjusted Net Earnings and Adjusted Diluted Earnings Per Share as such measures are used by management, along with GAAP results, to analyze Cerner's business, make strategic decisions, assess long-term trends on a comparable basis, and for management compensation purposes. We provide the measure of Free Cash Flow as such measure takes into account certain capital expenditures necessary to operate our business. Free Cash Flow is used by management, along with GAAP results, to analyze our earnings quality and overall cash generation of the business.
We calculate each of our non-GAAP financial measures as follows:
Adjusted Operating Earnings - Consists of GAAP operating earnings adjusted for: (i) share-based compensation expense, (ii) Health Services acquisition-related amortization, (iii) acquisition-related deferred revenue adjustment, and (iv) other acquisition-related adjustments.
Adjusted Net Earnings - Consists of GAAP net earnings adjusted for: (i) share-based compensation expense, (ii) Health Services acquisition-related amortization, (iii) acquisition-related deferred revenue adjustment, (iv) other acquisition-related adjustments, (v) the income tax effect of the aforementioned items, and (vi) share-based compensation permanent tax items.
Adjusted Diluted Earnings Per Share - Consists of Adjusted Net Earnings, as defined above, divided by diluted weighted average shares outstanding, in the applicable period.
Free Cash Flow - Consists of cash flows from operating activities, less capital purchases and capitalized software development costs.
Adjustments included in the calculations of Adjusted Operating Earnings and Adjusted Net Earnings are described below:
Share-based compensation expense - Non-cash expense arising from our equity compensation and stock purchase plans available to our associates and directors. We exclude share-based compensation expense as we believe the amount of such non-cash expenses in any specific period may not directly correlate to the underlying performance of our business operations. Share-based compensation expense is included in our Condensed Consolidated Statements of Operations as follows:
(In thousands) Three Months Ended Six Months Ended
2017 2016 2017 2016
Sales and client service $12,666 $10,964 $22,337 $20,183
Software development 4,636 4,621 8,863 8,308
General and administrative 5,852 5,831 10,809 12,291
Total share-based compensation expense $23,154 $21,416 $42,009 $40,782
Health Services acquisition-related amortization - Non-cash expense consisting of the amortization of customer relationships, acquired technology, and trade name intangible assets recorded in connection with our acquisition of the Health Services business in February 2015. We exclude Health Services acquisition-related amortization as we believe the amount of such non-cash expenses in any specific period may not directly correlate to the underlying performance of our business operations. Such amount is included in our Condensed Consolidated Statements of Operations in the caption "Amortization of acquisition-related intangibles."
Acquisition-related deferred revenue adjustment - Consists of acquisition-related deferred revenue adjustments in connection with our acquisition of the Health Services business in February 2015. Accounting guidance requires that deferred revenue acquired in a business combination be written-down to an estimate of fulfillment cost, plus a normal profit margin, as a part of the allocation of purchase price to assets acquired and liabilities assumed. We add back the amount of the write-down applicable to the period as we believe such amount directly correlates to the underlying performance of our business operations.
Other acquisition-related adjustments - Consists of acquisition, employee separation, and other costs associated with our acquisition of the Health Services business in February 2015. We exclude other acquisition-related adjustments as they are non-recurring charges, and we believe the amount of such expenses in any specific period may not directly correlate to the underlying performance of our business operations. Such amount is included in our Condensed Consolidated Statements of Operations in the caption "General and administrative" expense.
Income tax effect of pre-tax adjustments - The GAAP effective income tax rate for the applicable quarterly period is applied to pre-tax adjustments for Adjusted Net Earnings.
Share-based compensation permanent tax items - Consists of permanent items impacting the Company's income tax provision related to our share-based compensation arrangements, including net excess tax benefits recognized upon the exercise of stock options. We exclude such items as we believe the amount of such items in any specific period may not directly correlate to the underlying performance of our business operations. Such amount is included in our Condensed Consolidated Statements of Operations in the caption "Income Taxes."
Cerner's future period guidance in this release includes adjustments for items not indicative of our core operations, which may include without limitation share-based compensation expense and acquisition-related expenses, such as integration expenses, and may be affected by changes in ongoing assumptions and judgments relating to the Company's acquired businesses, and may also be affected by nonrecurring, unusual or unanticipated charges, expenses or gains, all of which are excluded in the calculation of non-GAAP Adjusted Operating Earnings, Adjusted Net Earnings and Adjusted Diluted Earnings Per Share as described above. The exact amount of these adjustments are not currently determinable, but may be significant. It is therefore not practicable to reconcile this non-GAAP guidance to the most comparable GAAP measures.

CERNER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
As of July 1, 2017 (unaudited) and December 31, 2016
(In thousands) 2017 2016
Assets
Current assets:
Cash and cash equivalents$460,430 $170,861
Short-term investments 176,563 185,588
Receivables, net 1,036,980 944,943
Inventory 14,550 14,740
Prepaid expenses and other 323,703 303,229
Total current assets 2,012,226 1,619,361
Property and equipment, net 1,593,999 1,552,524
Software development costs, net 784,347 719,209
Goodwill 849,876 844,200
Intangible assets, net 522,584 566,047
Long-term investments 110,875 109,374
Other assets 184,734 219,248
Total assets$6,058,641 $5,629,963
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable$259,092 $238,134
Current installments of long-term debt and capital lease obligations 18,494 26,197
Deferred revenue 325,790 311,839
Accrued payroll and tax withholdings 184,893 211,554
Other accrued expenses 53,440 57,677
Total current liabilities 841,709 845,401
Long-term debt and capital lease obligations 524,921 537,552
Deferred income taxes and other liabilities 323,062 306,263
Deferred revenue 13,446 12,800
Total liabilities 1,703,138 1,702,016
Shareholders’ Equity:
Common stock 3,556 3,537
Additional paid-in capital 1,301,373 1,230,913
Retained earnings 4,424,784 4,094,327
Treasury stock (1,290,665) (1,290,665)
Accumulated other comprehensive loss, net (83,545) (110,165)
Total shareholders’ equity 4,355,503 3,927,947
Total liabilities and shareholders’ equity$6,058,641 $5,629,963

CERNER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
For the six months ended July 1, 2017 and July 2, 2016
(unaudited)
Six Months Ended
(In thousands) 2017 2016
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings$352,896 $316,814
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization 278,889 244,096
Share-based compensation expense 39,359 37,954
Provision for deferred income taxes 25,849 19,577
Changes in assets and liabilities (net of businesses acquired):
Receivables, net (79,723) 40,682
Inventory 211 (2,546)
Prepaid expenses and other 106 (39,172)
Accounts payable 33,647 (5,228)
Accrued income taxes (3,846) 13,156
Deferred revenue 12,336 (12,334)
Other accrued liabilities (63,896) (16,365)
Net cash provided by operating activities 595,828 596,634
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital purchases (189,372) (217,595)
Capitalized software development costs (142,966) (155,175)
Purchases of investments (182,484) (241,161)
Sales and maturities of investments 187,355 183,311
Purchase of other intangibles (14,036) (7,361)
Net cash used in investing activities (341,503) (437,981)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercises of stock options 38,293 24,942
Payments to taxing authorities in connection with shares directly withheld from associates (7,972) (3,169)
Treasury stock purchases (200,075)
Contingent consideration payments for acquisition of businesses (2,671) (2,074)
Net cash provided by (used in) financing activities 27,650 (180,376)
Effect of exchange rate changes on cash and cash equivalents 7,594 (2,817)
Net increase (decrease) in cash and cash equivalents 289,569 (24,540)
Cash and cash equivalents at beginning of period 170,861 402,122
Cash and cash equivalents at end of period$460,430 $377,582
Summary of acquisition transactions:
Fair value of tangible assets acquired$ $(10,200)
Fair value of intangible assets acquired (25,000)
Fair value of goodwill 46,940
Less: Fair value of liabilities assumed (11,740)
Net cash used$ $

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

Source:Cerner Corporation