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CERNER CORP /MO/ - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) 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 financial statements and the accompanying notes to the financial statements (Notes) found above. Our third fiscal quarter ends on the Saturday closest to September 30. The 2014 and 2013 third quarters ended on September 27, 2014 and September 28, 2013, respectively. All references to years in this MD&A represent the respective three or nine months ended on such dates, unless otherwise noted. Except for the historical information and discussions contained herein, statements contained in this quarterly report on Form 10-Q may 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 can often be identified by the use of forward-looking terminology, such as "could," "should," "will," "intends," "continue," "believe," "may," "expect," "anticipate," "goal," "forecast," "plan," or "estimate" or the negative of these words, variations thereof or similar expressions. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, including without limitation: 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; 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; risks associated with our non-U.S. operations; risks associated with our ability to effectively hedge exposure to 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 United States and non-U.S. countries; risks associated with our recruitment and retention of key personnel; risks related to our reliance on third party suppliers; risks inherent with business acquisitions and other combinations; and the integration thereof, such as difficulties and operational and financial risks associated with integrating Cerner and Siemens Health Services; the potential for losses resulting from asset impairment charges; risks associated with volatility and disruption resulting from global economic conditions; managing growth in the new markets in which we offer solutions, health care devices and services; changing political, economic, regulatory and judicial influences; government regulation; significant competition and market changes; 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; the authority of our Board of Directors to issue preferred stock and anti-takeover provisions contained in our corporate governance documents; material adverse resolution of legal proceedings; the risk of uncertainty as to timing of the consummation of an acquisition; risks that any of the closing conditions to the proposed acquisition of Siemens Health Services may not be satisfied or may not be satisfied in a timely manner; risks related to disruption of management time from ongoing business operations due to the proposed acquisition of Siemens Health Services; failure to realize the synergies and other benefits expected from the proposed acquisition of Siemens Health Services; risk that the assets and business acquired may not continue to be commercially successful; the effect of the proposed acquisition of Siemens Health Services on the ability of Cerner to retain customers and retain and hire key personnel and maintain relationships with key suppliers; unexpected costs, charges or expenses resulting from the acquisition of Siemens Health Services; litigation or claims relating to the transaction or the acquired assets and business; and, other risks, uncertainties and factors discussed elsewhere in this Form 10-Q, in our other filings with the Securities and Exchange Commission 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 to the date they are made. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in future operating results, financial condition or business over time. Management Overview Our revenues are primarily derived by selling, implementing and supporting software solutions, clinical content, hardware, devices and services that give health care providers secure access to clinical, administrative and financial data in real time, allowing them to improve quality, safety and efficiency in the delivery of health care. Our fundamental strategic focus is the creation of organic growth by investing in research and development (R&D) to create solutions and services for the health care industry. This strategy has driven strong growth over the long-term, as reflected in five- and ten-year compound annual revenue growth rates of 12% or more. This growth has also created an important strategic footprint in health care, with Cerner® solutions licensed by approximately 14,000 facilities around the world, including more than 3,000 hospitals; 4,900 physician practices; 60,000 physicians; 590 ambulatory facilities, such as laboratories, ambulatory centers, behavioral health centers, cardiac facilities, radiology clinics and surgery centers; 3,500 extended care 15-------------------------------------------------------------------------------- Table of Contents facilities; 150 employer sites and 1,790 retail pharmacies. Selling additional solutions back into this client base is an important element of our future revenue growth. We are also focused on driving growth through market share expansion by strategically aligning with health care providers that have not yet selected a supplier and by displacing competitors in health care settings that are open to replacing their current supplier. We expect to drive growth through solutions and services that reflect our ongoing ability to innovate and expand our reach into health care. Examples of these include our CareAware® health care device architecture and devices, Cerner ITWorksSM services, revenue cycle solutions and services, and population health solutions and services. Finally, we believe there is significant opportunity for growth outside of the United States, with many non-U.S. markets focused on health care information technology as part of their strategy to improve the quality and lower the cost of health care. Beyond our strategy for driving revenue growth, we are also focused on earnings growth. Similar to our history of growing revenue, our net earnings have increased at compound annual rates of more than 16% over the most recent five- and ten-year periods. We expect to drive continued earnings growth through ongoing revenue growth coupled with margin expansion, which we expect to achieve through efficiencies in our implementation and operational processes and by leveraging R&D investments and controlling general and administrative expenses. We are also focused on continuing to deliver strong levels of cash flow, which we expect to accomplish by continuing to grow earnings and prudently managing capital expenditures. Results Overview The Company delivered strong levels of bookings, revenues, earnings and operating cash flows in the third quarter of 2014. New business bookings revenue, which reflects the value of executed contracts for software, hardware, professional services and managed services, was $1.1 billion in the third quarter of 2014, which was an increase of 19% compared to $928.0 million in the third quarter of 2013. Revenues for the third quarter of 2014 increased 15% to $840.1 million compared to $727.8 million in the third quarter of 2013. The year-over-year increase in revenue reflects ongoing demand for Cerner's core solutions and services driven by the HITECH Act and other regulatory requirements, and increased contributions from Cerner ITWorks and Cerner revenue cycle solutions and services. Third quarter 2014 net earnings increased 12% to $129.0 million compared to $115.3 million in the third quarter of 2013. Diluted earnings per share increased 12% to $0.37 compared to $0.33 in the third quarter of 2013. The growth in net earnings and diluted earnings per share was driven by strong growth in services and higher margin components of system sales. Third quarter 2014 and 2013 net earnings and diluted earnings per share reflect the impact of stock-based compensation expense. The effect of these expenses reduced the third quarter 2014 net earnings and diluted earnings per share by $10.4 million and $0.03, respectively, and the third quarter 2013 net earnings and diluted earnings per share by $8.2 million and $0.02, respectively. The third quarter 2014 net earnings and diluted earnings per share also reflect the impact of acquisition costs related to our pending acquisition of Siemens Health Services, as further described in Note (2) of our notes to condensed consolidated financial statements. These costs reduced net earnings and diluted earnings per share by $5.9 million and $0.02, respectively. We had cash collections of receivables of $858.3 million in the third quarter of 2014 compared to $766.1 million in the third quarter of 2013. Days sales outstanding was 67 days for the third quarter of 2014 compared to 66 days for the second quarter of 2014 and the third quarter of 2013. Operating cash flows for the third quarter of 2014 were $219.5 million compared to $164.2 million in the third quarter of 2013. 16-------------------------------------------------------------------------------- Table of Contents Results of Operations Three Months Ended September 27, 2014 Compared to Three Months Ended September 28, 2013 The following table presents a summary of the operating information for the third quarters of 2014 and 2013: % of % of (In thousands) 2014 Revenue 2013 Revenue % Change Revenues System sales $ 224,345 27 % $ 202,632 28 % 11 % Support and maintenance 177,450 21 % 166,308 23 % 7 % Services 415,618 49 % 342,212 47 % 21 % Reimbursed travel 22,736 3 % 16,678 2 % 36 % Total revenues 840,149 100 % 727,830 100 % 15 % Costs of revenue Costs of revenue 140,065 17 % 119,577 16 % 17 % Total margin 700,084 83 % 608,253 84 % 15 % Operating expenses Sales and client service 346,417 41 % 304,665 42 % 14 % Software development 97,026 12 % 82,998 11 % 17 % General and administrative 68,487 8 % 51,352 7 % 33 % Total operating expenses 511,930 61 % 439,015 60 % 17 % Total costs and expenses 651,995 78 % 558,592 77 % 17 % Operating earnings 188,154 22 % 169,238 23 % 11 % Other income, net 2,181 3,509 Income taxes (61,333 ) (57,403 ) Net earnings $ 129,002 $ 115,344 12 % Revenues & Backlog Revenues increased 15% to $840.1 million in the third quarter of 2014, as compared to $727.8 million in the third quarter of 2013. • System sales, which include revenues from the sale of licensed software (including perpetual license sales and software as a service), technology resale (hardware, devices, and sublicensed software), deployment period licensed software upgrade rights, installation fees, transaction processing and subscriptions, increased 11% to $224.3 million in the third quarter of 2014 from $202.6 million for the same period in 2013. The increase in system sales was primarily driven by strong growth in software of $18.1 million. • Support and maintenance revenues increased 7% to $177.5 million in the third quarter of 2014 compared to $166.3 million during the same period in 2013. This increase was attributable to continued success at selling Cerner Millennium® applications and implementing them at client sites. We expect that support and maintenance revenues will continue to grow as the base of installed Cerner Millennium systems grows. • Services revenue, which includes professional services, excluding installation, and managed services, increased 21% to $415.6 million in the third quarter of 2014 from $342.2 million for the same period in 2013. This increase was driven by growth in CernerWorksSM managed services of $14.1 million as a result of continued demand for our hosting services and a $59.3 million increase in professional services due to growth in implementation and consulting activities. 17-------------------------------------------------------------------------------- Table of Contents Contract backlog, which reflects new business bookings that have not yet been recognized as revenue, increased 22% in the third quarter of 2014 when compared to the same period in 2013. This increase was driven by growth in new business bookings during the past four quarters, including continued strong levels of managed services, Cerner ITWorks, and Cerner revenue cycle services bookings that typically have longer contract terms. A summary of our total backlog follows: (In thousands) September 27, 2014 September 28, 2013 Contract backlog $ 9,342,069 $ 7,627,181 Support and maintenance backlog 814,008 769,847 Total backlog $ 10,156,077 $ 8,397,028 Costs of Revenue Cost of revenues as a percentage of total revenues was 17% in the third quarter of 2014, compared to 16% in the same period of 2013. The higher cost of revenues as a percent of revenue was driven by a higher amount of third party resources being utilized for support and services. Cost of revenues includes 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, services and reimbursed travel) carrying different margin rates changes from period to period. Cost of revenues 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 17% to $511.9 million in the third quarter of 2014, compared with $439.0 million in the third quarter of 2013. • Sales and client service expenses as a percent of total revenues were 41% in the third quarter of 2014, compared to 42% in the same period of 2013. These expenses increased 14% to $346.4 million in the third quarter of 2014, from $304.7 million in the same period of 2013. Sales and client service expenses include salaries of sales and client service personnel, depreciation and other expenses associated with our CernerWorks managed service business, communications expenses, unreimbursed travel expenses, expense for share-based payments, sales and marketing salaries and trade show and advertising costs. The increase was driven by strong services growth. • Software development expenses as a percent of revenue were 12% in the third quarter of 2014, compared to 11% in the same period of 2013. Expenditures for software development reflect ongoing development and enhancement of the Cerner Millennium and Healthe Intent platforms, with a focus on supporting key initiatives to enhance physician experience, revenue cycle and population health solutions. A summary of our total software development expense in the third quarters of 2014 and 2013 is as follows: Three Months Ended (In thousands) 2014 2013 Software development costs $ 115,749 $ 106,986 Capitalized software costs (43,523 ) (47,492 )Capitalized costs related to share-based payments (572 ) (552 ) Amortization of capitalized software costs 25,372 24,056 Total software development expense $ 97,026 $ 82,998 • General and administrative expenses as a percent of total revenues were 8% in the third quarter of 2014, compared to 7% in the same period of 2013. These expenses increased 33% to $68.5 million in 2014, from $51.4 million for the same period in 2013. General and administrative expenses include salaries 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 and acquisition costs. The increase in general and administrative expenses was primarily driven by $9.4 million of acquisition costs related to 18-------------------------------------------------------------------------------- Table of Contents our pending acquisition of Siemens Health Services and a $3.1 million increase in corporate personnel costs, as we have continued to increase such personnel to support our overall revenue growth. Non-Operating Items • Other income was $2.2 million in the third quarter of 2014 and $3.5 million in the same period of 2013. This decrease is primarily due to the 2013 period included a gain recognized on the sale of one of our cost method investments. • Our effective tax rate was 32.2% for the third quarter of 2014 and 33.2% for the third quarter of 2013. This decrease is primarily due to an increase in net favorable discrete items recorded in 2014 relative to 2013, partially offset by the expiration of the research and development tax credit in 2014. Refer to Note (6) of the notes to condensed consolidated financial statements. Operations by Segment We have two operating segments: Domestic and Global. The Domestic segment includes revenue contributions and expenditures associated with business activity in the United States. The Global segment includes revenue contributions and expenditures linked to business activity in Aruba, Australia, Austria, Brazil, Canada, Cayman Islands, Chile, Egypt, England, France, Germany, Guam, India, Ireland, Israel, Malaysia, Mexico, Qatar, Saudi Arabia, Singapore, Spain, Switzerland and the United Arab Emirates. The following table presents a summary of the operating information for the third quarters of 2014 and 2013: (In thousands) 2014 % of Revenue 2013 % of Revenue % Change Domestic Segment Revenues $ 741,830 100% $ 641,541 100% 16% Costs of revenue 126,223 17% 107,560 17% 17% Operating expenses 170,709 23% 148,478 23% 15% Total costs and expenses 296,932 40% 256,038 40% 16% Domestic operating earnings 444,898 60% 385,503 60% 15% Global Segment Revenues 98,319 100% 86,289 100% 14% Costs of revenue 13,842 14% 12,017 14% 15% Operating expenses 30,531 31% 34,078 39% (10)% Total costs and expenses 44,373 45% 46,095 53% (4)% Global operating earnings 53,946 55% 40,194 47% 34% Other, net (310,690 ) (256,459 ) 21% Consolidated operating earnings $ 188,154 $ 169,238 11% Domestic Segment • Revenues increased 16% to $741.8 million in the third quarter of 2014 from $641.5 million in the same period of 2013. This increase was driven by strong growth across most of our business. • Cost of revenues was 17% of revenues in the third quarters of 2014 and 2013. • Operating expenses increased 15% to $170.7 million in the third quarter of 2014 from $148.5 million in the same period of 2013, due primarily to growth in professional services expenses. 19-------------------------------------------------------------------------------- Table of Contents Global Segment • Revenues increased 14% to $98.3 million in the third quarter of 2014 from $86.3 million in the same period of 2013. This increase was driven by growth in managed services of $4.1 million as a result of continued demand for our hosting services and a $7.0 million increase in professional services due to growth in implementation and consulting activities. • Cost of revenues was 14% of revenues in the third quarters of 2014 and 2013. • Operating expenses were at $30.5 million in the third quarter of 2014, compared to $34.1 million in the same period of 2013, primarily due to a decrease in bad debt expense. Other, net Operating results not attributed to an operating segment include expenses, such as centralized professional services costs, software development, marketing, general and administrative, stock-based compensation, acquisition costs, depreciation, and amortization. These expenses increased 21% to $310.7 million in the third quarter of 2014 from $256.5 million in the same period of 2013. This increase was primarily due to an increase in corporate and development personnel costs, as we have increased such personnel to support our overall revenue growth and development initiatives. The 2014 period also includes $9.4 million in acquisition costs related to our pending acquisition of Siemens Health Services. Nine Months Ended September 27, 2014 Compared to Nine Months Ended September 28, 2013 The following table presents a summary of the operating information for the first nine months of 2014 and 2013: % of % of (In thousands) 2014 Revenue 2013 Revenue % Change Revenues System sales $ 665,595 27 % $ 602,037 28 % 11 % Support and maintenance 527,654 21 % 491,824 23 % 7 % Services 1,211,010 49 % 969,899 46 % 25 % Reimbursed travel 72,413 3 % 51,660 2 % 40 % Total revenues 2,476,672 100 % 2,115,420 100 % 17 % Costs of revenue Costs of revenue 431,533 17 % 372,606 18 % 16 % Total margin 2,045,139 83 % 1,742,814 82 % 17 % Operating expenses Sales and client service 1,020,552 41 % 853,213 40 % 20 % Software development 285,897 12 % 246,343 12 % 16 % General and administrative 180,900 7 % 150,995 7 % 20 % Total operating expenses 1,487,349 60 % 1,250,551 59 % 19 % Total costs and expenses 1,918,882 77 % 1,623,157 77 % 18 % Operating earnings 557,790 23 % 492,263 23 % 13 % Other income, net 7,908 9,286 Income taxes (188,137 ) (163,258 ) Net earnings $ 377,561 $ 338,291 12 % Revenues & Backlog Revenues increased 17% to $2.5 billion in the first nine months of 2014, as compared to $2.1 billion in the first nine months of 2013. • System sales increased 11% to $665.6 million in the first nine months of 2014 from $602.0 million for the same period in 2013. The increase in system sales was primarily driven by strong growth in software and subscriptions of $55.4 million and $17.5 million, respectively, partially offset by an $8.7 million decline in technology resale. 20-------------------------------------------------------------------------------- Table of Contents • Support and maintenance revenues increased 7% to $527.7 million in the first nine months of 2014 compared to $491.8 million during the same period in 2013. This increase was attributable to continued success at selling Cerner Millennium applications and implementing them at client sites. We expect that support and maintenance revenues will continue to grow as the base of installed Cerner Millennium systems grows. • Services revenue increased 25% to $1.2 billion in the first nine months of 2014 from $969.9 million for the same period in 2013. This increase was driven by growth in CernerWorks managed services of $43.8 million as a result of continued demand for our hosting services and a $197.4 million increase in professional services due to growth in implementation and consulting activities. Costs of Revenue Cost of revenues as a percentage of total revenues was 17% in the first nine months of 2014, compared to 18% in the same period of 2013. The lower cost of revenues as a percent of revenue was driven by a lower mix of technology resale, which carries a higher cost of revenue. Operating Expenses Total operating expenses increased 19% to $1.5 billion in the first nine months of 2014, compared with $1.3 billion in the same period of 2013. • Sales and client service expenses as a percent of total revenues were 41% in the first nine months of 2014, compared to 40% in the same period of 2013. These expenses increased 20% to $1.0 billion in the first nine months of 2014, from $853.2 million in the same period of 2013. The increase as a percent of revenue reflects a higher mix of services during the period that was driven by strong services growth and the decline in technology resale revenue. • Software development expenses as a percent of revenue were 12% in the first nine months of 2014 and 2013. Expenditures for software development reflect ongoing development and enhancement of the Cerner Millennium and Healthe Intent platforms, with a focus on supporting key initiatives to enhance physician experience, revenue cycle and population health solutions. A summary of our total software development expense in the first nine months of 2014 and 2013 is as follows: Nine Months Ended (In thousands) 2014 2013 Software development costs $ 341,248 $ 302,928 Capitalized software costs (128,732 ) (124,105 ) Capitalized costs related to share-based payments (2,029 ) (1,846 ) Amortization of capitalized software costs 75,410 69,366 Total software development expense $ 285,897 $ 246,343 • General and administrative expenses as a percent of total revenues were 7% in the first nine months of 2014 and 2013. These expenses increased 20% to $180.9 million in 2014, from $151.0 million for the same period in 2013. The increase in general and administrative expenses was primarily driven by $9.4 million of acquisition costs related to our pending acquisition of Siemens Health Services and a $12.2 million increase in corporate personnel costs, as we have continued to increase such personnel to support our overall revenue growth. Non-Operating Items • Other income decreased to $7.9 million in the first nine months of 2014 from $9.3 million in the same period of 2013. This decrease is primarily due to the reductions to interest expense for interest capitalized during the construction of our Continuous Campus in the 2013 period. • Our effective tax rate was 33.3% for the first nine months of 2014 and 32.6% for the first nine months of 2013. This increase is primarily a result of the favorable discrete item recorded in the first quarter of 2013 for the retroactive extension of the 2012 research and development credit and the expiration of the same credit at the end of 2013. Refer to Note (6) of the notes to condensed consolidated financial statements. 21 -------------------------------------------------------------------------------- Table of Contents Operations by Segment The following table presents a summary of the operating information for the first nine months of 2014 and 2013: (In thousands) 2014 % of Revenue 2013 % of Revenue % Change Domestic Segment Revenues $ 2,206,297 100% $ 1,837,171 100% 20% Costs of revenue 389,344 18% 327,356 18% 19% Operating expenses 497,428 23% 439,345 24% 13% Total costs and expenses 886,772 40% 766,701 42% 16% Domestic operating earnings 1,319,525 60% 1,070,470 58% 23% Global Segment Revenues 270,375 100% 278,249 100% (3)% Costs of revenue 42,189 16% 45,250 16% (7)% Operating expenses 98,835 37% 84,685 30% 17% Total costs and expenses 141,024 52% 129,935 47% 9% Global operating earnings 129,351 48% 148,314 53% (13)% Other, net (891,086 ) (726,521 ) 23% Consolidated operating earnings $ 557,790 $ 492,263 13% Domestic Segment • Revenues increased 20% to $2.2 billion in the first nine months of 2014 from $1.8 billion in the first nine months of 2013. This increase was driven by strong growth across most of our business, with the exception of technology resale, which declined slightly. • Cost of revenues was 18% of revenues in the first nine months of 2014 and 2013. • Operating expenses increased 13% to $497.4 million in the first nine months of 2014 from $439.3 million in the same period of 2013, due primarily to growth in professional services expenses. Global Segment • Revenues decreased 3% to $270.4 million in the first nine months of 2014 from $278.2 million in the same period of 2013. This decrease was primarily driven by declines in software and technology resale revenues of $13.4 million and $5.1 million, respectively, partially offset by increases in managed services and professional services of $4.2 million and $8.2 million, respectively. • Cost of revenues was 16% of revenues in the first nine months of 2014 and 2013. • Operating expenses were at $98.8 million in the first nine months of 2014, compared to $84.7 million in the same period of 2013, primarily due to an increase in bad debt expense. Other, net These expenses increased 23% to $891.1 million in the first nine months of 2014 from $726.5 million in the same period of 2013. This increase was primarily due to an increase in corporate and development personnel costs, as we have increased such personnel to support our overall revenue growth and development initiatives. The 2014 period also includes $9.4 million in acquisition costs related to our pending acquisition of Siemens Health Services. 22-------------------------------------------------------------------------------- Table of Contents 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 and capital expenditures. Our principal sources of liquidity are our cash, cash equivalents, which primarily consist of commercial paper, money market funds and time deposits with original maturities of less than 90 days, and short-term investments. At September 27, 2014, we had cash and cash equivalents of $496.5 million and short-term investments of $835.3 million, as compared to cash and cash equivalents of $202.4 million and short-term investments of $677.0 million at December 28, 2013. The non-U.S. subsidiaries for which we have elected to indefinitely reinvest earnings outside of the U.S. held approximately 13% of our aggregate cash, cash equivalents and short-term investments at September 27, 2014. As part of our current business strategy, we plan to indefinitely reinvest the earnings of these foreign operations; however, should the earnings of these foreign operations be repatriated, we would accrue and pay tax on such earnings, which may be material. Additionally, we maintain a $100.0 million multi-year revolving credit facility, which expires in February 2017. The facility provides an unsecured revolving line of credit for working capital purposes, along with a letter of credit facility. Interest is payable at a rate based on prime, LIBOR, or the U.S. federal funds rate, plus a spread that varies depending on the leverage ratios maintained. The agreement provides certain restrictions on our ability to borrow, incur liens, sell assets and pay dividends and contains certain cash flow and liquidity covenants. As of September 27, 2014, we were in compliance with all debt covenants. As of September 27, 2014, we had no outstanding borrowings under this agreement; however, we had $17.1 million of outstanding letters of credit, which reduced our available borrowing capacity to $82.9 million. We believe that our present cash position, together with cash generated from operations, short-term investments and, if necessary, our available line of credit, will be sufficient to meet anticipated cash requirements for the next twelve months. The following table summarizes our cash flows in the first nine months of 2014 and 2013: |