Cerner Reports Third Quarter 2016 Results

KANSAS CITY, Mo., Nov. 01, 2016 (GLOBE NEWSWIRE) -- Cerner Corporation (Nasdaq:CERN) today announced results for the 2016 third quarter that ended October 1, 2016.

Bookings in the third quarter of 2016 were $1.434 billion, slightly below the company's guidance range and down 10 percent from a difficult comparable in the third quarter of 2015 when bookings grew 44% year-over-year to an all-time high of $1.590 billion.

Third quarter revenue was $1.185 billion, an increase of 5 percent compared to $1.128 billion in the third quarter of 2015.  Third quarter 2016 revenue was $15 million below the guidance range provided by the Company, but the lower revenue did not have a material impact on profitability, and Cerner's Adjusted Diluted Earnings Per Share were in-line with guidance.

On a U.S. Generally Accepted Accounting Principles (GAAP) basis, third quarter 2016 net earnings were $170.0 million and diluted earnings per share were $0.49. Third quarter 2015 GAAP net earnings were $147.3 million and diluted earnings per share were $0.42.

Adjusted Net Earnings for third quarter 2016 were $202.6 million, compared to $188.7 million of Adjusted Net Earnings in the third quarter of 2015. Adjusted Diluted Earnings Per Share were $0.59 in the third quarter of 2016, an increase of 9 percent compared to $0.54 of Adjusted Diluted Earnings Per Share in the year-ago quarter and within the Company's guidance range.  Analysts' consensus estimate for third quarter 2016 Adjusted Diluted Earnings Per Share was $0.60.

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

Other 2016 Third Quarter Highlights:

  • Third quarter operating cash flow of $240.3 million.
  • Third quarter Free Cash Flow of $56.5 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."
  • Third quarter days sales outstanding of 76 days, down from 85 days in the year-ago period.
  • Total backlog of $15.471 billion, up 11 percent over the year-ago quarter.

"While Cerner's third quarter results were slightly below our expectations, they were still solid and included the second highest level of bookings in our history," said Zane Burke, Cerner President. "Our competitiveness remains strong and has been bolstered by over $2 billion of investments in research and development over the past four years.  We believe these investments have strengthened our clinical, revenue cycle and population health solutions and position us for strong growth going forward."

Future Period GuidanceCerner currently expects:
  • Fourth quarter 2016 revenue between $1.225 billion and $1.300 billion.
  • Fourth quarter 2016 Adjusted Diluted Earnings Per Share between $0.60 and $0.62. 
  • Fourth quarter 2016 new business bookings between $1.425 billion and $1.575 billion.

Preliminary Comments on 2017Cerner is also providing preliminary comments on expected 2017 results.  Note that these comments should be viewed as preliminary until the Company finalizes its financial plan and provides formal guidance when it reports fourth quarter results.  Cerner currently expects 2017 revenue between $5.200 and $5.450 billion, with the midpoint of this range reflecting growth of 11 percent over 2016 expected results.  Cerner currently expects 2017 Adjusted Diluted Earnings Per Share between $2.50 and $2.70 cents per share, with the midpoint reflecting 13 percent growth over 2016 expected results.  Both the revenue and Adjusted Diluted Earnings Per Share guidance ranges include the current consensus estimates of $5.438 billion in revenue and $2.69 in Adjusted Diluted Earnings Per Share. 

Earnings Conference CallCerner will host an earnings conference call to provide additional detail on the Company's results and outlook at 3:30 p.m. CT on November 1. On the call, Cerner will discuss its third quarter 2016 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, November 1 through 10:59 p.m. CT, November 4. The dial-in number for the re-broadcast is (855)-859-2056; the passcode is 96801101.

An audio webcast will be available live and archived on Cerner's website at www.cerner.com under the About Cerner 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, 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 other non-Cerner marks are the property of their respective owners.

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", "estimate", "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 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 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; 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; risks associated with our recruitment and retention of key personnel; risks related to our dependence on 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; continuing to incur significant expenses relating to the integration of the Cerner Health Services business into Cerner; 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 respond to market changes and changing technologies; variations in our quarterly operating results; potential inconsistencies in our sales forecasts compared to actual sales; volatility in the trading price of our common stock and the timing and volume of market activity; and our directors' authority to issue preferred stock and the anti-takeover provisions in our corporate governance documents. Additional discussion of these and other risks, uncertainties and factors affecting Cerner's business is contained in Cerner's filings with the Securities and Exchange Commission. The reader should not place undue reliance on forward-looking statements, since the statements speak only as of the date that they are made. Except as required by law, Cerner undertakes no obligation to update 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.

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CERNER CORPORATION AND SUBSIDIARIES            
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS            
For the three and nine months ended October 1, 2016 and October 3, 2015            
(unaudited)            
             
(In thousands, except per share data)   Three Months Ended   Nine Months Ended
      2016     2015       2016     2015  
Revenues            
System sales   $ 301,252   $ 325,084     $ 913,710   $ 899,762  
Support, maintenance and services     861,085     783,878       2,561,474     2,295,075  
Reimbursed travel     22,220     18,925       63,470     55,136  
Total revenues     1,184,557     1,127,887       3,538,654     3,249,973  
             
Margin            
System sales     207,977     219,324       617,374     590,001  
Support, maintenance and services     793,610     717,980       2,357,161     2,108,407  
Total margin     1,001,587     937,304       2,974,535     2,698,408  
             
Operating expenses            
Sales and client service     512,671     465,881       1,534,763     1,349,498  
Software development     136,755     132,814       405,451     398,536  
General and administrative     87,071     98,705       267,232     329,061  
Amortization of acquisition-related intangibles     22,865     24,550       68,104     67,311  
Total operating expenses     759,362     721,950       2,275,550     2,144,406  
             
Operating earnings     242,225     215,354       698,985     554,002  
             
Other income (expense), net     (417 )   317       3,734     (554 )
             
Earnings before income taxes     241,808     215,671       702,719     553,448  
Income taxes     (71,829 )   (68,389 )     (215,926 )   (180,194 )
Net earnings   $ 169,979   $ 147,282     $ 486,793   $ 373,254  
             
Basic earnings per share   $ 0.50   $ 0.43     $ 1.44   $ 1.09  
             
Basic weighted average shares outstanding     338,684     344,040       338,675     343,933  
             
Diluted earnings per share   $ 0.49   $ 0.42     $ 1.41   $ 1.06  
             
Diluted weighted average shares outstanding     344,817     351,364       344,917     351,891  
             

 
CERNER CORPORATION AND SUBSIDIARIES              
RECONCILIATION OF GAAP RESULTS TO NON-GAAP RESULTS              
For the three and nine months ended October 1, 2016 and October 3, 2015              
(unaudited)              
               
ADJUSTED OPERATING EARNINGS  
               
(In thousands)   Three Months Ended   Nine Months Ended  
      2016     2015       2016     2015    
               
Operating earnings (GAAP)   $ 242,225   $ 215,354     $ 698,985   $ 554,002    
               
Share-based compensation expense     20,350     20,177       61,132     57,081    
Health Services acquisition-related amortization     20,668     21,425       60,050     57,915    
Acquisition-related deferred revenue adjustment     4,902     9,100       15,808     30,300    
Other acquisition-related adjustments     543     6,370       3,673     40,334    
Voluntary separation plan expense         3,616           45,313    
               
Adjusted Operating Earnings (non-GAAP)   $ 288,688   $ 276,042     $ 839,648   $ 784,945    
               
ADJUSTED NET EARNINGS AND ADJUSTED DILUTED EARNINGS PER SHARE  
               
(In thousands, except per share data)   Three Months Ended   Nine Months Ended  
      2016     2015       2016     2015    
               
Net earnings (GAAP)   $ 169,979   $ 147,282     $ 486,793   $ 373,254    
               
Pre-tax adjustments for Adjusted Net Earnings:              
Share-based compensation expense     20,350     20,177       61,132     57,081    
Health Services acquisition-related amortization     20,668     21,425       60,050     57,915    
Acquisition-related deferred revenue adjustment     4,902     9,100       15,808     30,300    
Other acquisition-related adjustments     543     6,370       3,673     40,334    
Voluntary separation plan expense         3,616           45,313    
               
After-tax adjustments for Adjusted Net Earnings:              
Income tax effect of pre-tax adjustments     (13,801 )   (19,244 )     (43,233 )   (75,447 )  
               
Adjusted Net Earnings (non-GAAP)   $ 202,641   $ 188,726     $ 584,223   $ 528,750    
               
Diluted weighted average shares outstanding     344,817     351,364       344,917     351,891    
               
Adjusted Diluted Earnings Per Share (non-GAAP)   $ 0.59   $ 0.54     $ 1.69   $ 1.50    
               
FREE CASH FLOW  
               
(In thousands)   Three Months Ended   Nine Months Ended  
      2016     2015       2016     2015    
               
Cash flows from operating activities (GAAP)   $ 240,349   $ 271,520     $ 822,374   $ 594,431    
Capital purchases     (110,266 )   (88,241 )     (327,861 )   (255,375 )  
Capitalized software development costs     (73,628 )   (71,844 )     (228,803 )   (204,708 )  
Free Cash Flow (non-GAAP)   $ 56,455   $ 111,435     $ 265,710   $ 134,348    
               
Cash flows from investing activities (GAAP)   $ (257,614 ) $ (116,777 )   $ (695,595 ) $ (1,347,557 )  
               
Cash flows from financing activities (GAAP)   $ 71,306   $ (184,802 )   $ (94,461 ) $ 388,302    
               
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, (iv) other acquisition-related adjustments, and (v) voluntary separation plan expense.  
               
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) voluntary separation plan expense, and (vi) the income tax effect of the aforementioned 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   Nine Months Ended  
      2016     2015       2016     2015    
               
Sales and client service   $ 10,752   $ 9,638     $ 30,935   $ 27,834    
Software development     4,319     4,568       12,627     12,502    
General and administrative     5,279     5,971       17,570     16,745    
Total share-based compensation expense   $ 20,350   $ 20,177     $ 61,132   $ 57,081    
               
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.  
               
Voluntary separation plan expense - Consists of expense associated with a voluntary separation plan available to associates for a specific time period in 2015. We exclude voluntary separation plan expense as 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.  
               
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  October 1, 2016 (unaudited) and January 2, 2016      
       
(In thousands)   2016     2015    
       
Assets      
Current assets:      
Cash and cash equivalents $ 431,497   $ 402,122    
Short-term investments   261,185     111,059    
Receivables, net   985,164     1,034,084    
Inventory   19,705     15,788    
Prepaid expenses and other   300,764     264,780    
Total current assets   1,998,315     1,827,833    
       
Property and equipment, net   1,476,126     1,309,214    
Software development costs, net   690,972     562,559    
Goodwill   848,452     799,182    
Intangible assets, net   591,447     688,058    
Long-term investments   143,859     173,073    
Other assets   199,356     202,065    
Total assets $ 5,948,527   $ 5,561,984    
       
Liabilities and Shareholders' Equity      
Current liabilities:      
Accounts payable $ 219,531   $ 215,510    
Current installments of long-term debt and capital lease obligations   36,619     41,797    
Deferred revenue   308,713     278,443    
Accrued payroll and tax withholdings   204,774     184,225    
Other accrued expenses   58,423     57,891    
Total current liabilities   828,060     777,866    
       
Long-term debt and capital lease obligations   535,920     563,353    
Deferred income taxes and other liabilities   292,769     324,516    
Deferred revenue   13,743     25,865    
Total liabilities   1,670,492     1,691,600    
       
Shareholders' Equity:      
Common stock   3,536     3,503    
Additional paid-in capital   1,205,075     1,075,782    
Retained earnings   3,944,636     3,457,843    
Treasury stock   (790,465 )   (590,390 )  
Accumulated other comprehensive loss, net   (84,747 )   (76,354 )  
Total shareholders' equity   4,278,035     3,870,384    
Total liabilities and shareholders' equity $ 5,948,527   $ 5,561,984    
       
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 

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