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SECURITIES AND EXCHANGE COMMISSION

Part I.Financial Information:
Item 1.Financial Statements:
Condensed Consolidated Balance Sheets as of September 30, 2017 (unaudited) and December 31, 20161
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2017 and October 1, 2016 (unaudited)2
Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2017 and October 1, 2016 (unaudited)3
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2017 and October 1, 2016 (unaudited)4
Notes to Condensed Consolidated Financial Statements (unaudited)5
Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations18
Item 3. Quantitative and Qualitative Disclosures about Market Risk29
Item 4.Controls and Procedures29
Part II.Other Information:
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds30
Item 6.Exhibits31
Signatures
(In thousands, except share data)20172016
Assets
Current assets:
Cash and cash equivalents$573,054
$170,861
Short-term investments278,996
185,588
Receivables, net1,020,707
944,943
Inventory15,687
14,740
Prepaid expenses and other343,060
303,229
Total current assets2,231,504
1,619,361
Property and equipment, net1,587,035
1,552,524
Software development costs, net802,874
719,209
Goodwill851,961
844,200
Intangible assets, net501,299
566,047
Long-term investments112,401
109,374
Other assets145,182
219,248
Total assets$6,232,256
$5,629,963
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable$204,323
$238,134
Current installments of long-term debt and capital lease obligations13,988
26,197
Deferred revenue327,622
311,839
Accrued payroll and tax withholdings202,640
211,554
Other accrued expenses58,292
57,677
Total current liabilities806,865
845,401
Long-term debt and capital lease obligations521,016
537,552
Deferred income taxes and other liabilities327,340
306,263
Deferred revenue13,032
12,800
Total liabilities1,668,253
1,702,016
Shareholders’ Equity:
Common stock, $.01 par value, 500,000,000 shares authorized, 356,765,307 shares issued at September 30, 2017 and 353,731,237 shares issued at December 31, 20163,568
3,537
Additional paid-in capital1,345,022
1,230,913
Retained earnings4,602,208
4,094,327
Treasury stock, 24,452,763 shares at September 30, 2017 and 24,089,737 shares at December 31, 2016(1,314,054)(1,290,665)
Accumulated other comprehensive loss, net(72,741)(110,165)
Total shareholders’ equity4,564,003
3,927,947
Total liabilities and shareholders’ equity$6,232,256
$5,629,963
Three Months EndedNine Months Ended
(In thousands, except per share data)2017201620172016
Revenues:
System sales$324,021
$301,252
$991,685
$913,710
Support, maintenance and services927,829
861,085
2,763,483
2,561,474
Reimbursed travel24,157
22,220
73,319
63,470
Total revenues1,276,007
1,184,557
3,828,487
3,538,654
Costs and expenses:
Cost of system sales105,200
93,275
322,884
296,336
Cost of support, maintenance and services73,547
67,475
228,757
204,313
Cost of reimbursed travel24,157
22,220
73,319
63,470
Sales and client service564,621
512,671
1,688,208
1,534,763
Software development (Includes amortization of $44,358 and $126,346 for the three and nine months ended September 30, 2017, respectively; and $35,552 and $102,429 for the three and nine months ended October 1, 2016, respectively)153,834
136,755
442,570
405,451
General and administrative84,178
87,071
263,203
267,232
Amortization of acquisition-related intangibles22,564
22,865
68,126
68,104
Total costs and expenses1,028,101
942,332
3,087,067
2,839,669
Operating earnings247,906
242,225
741,420
698,985
Other income (expense), net2,509
(417)4,054
3,734
Earnings before income taxes250,415
241,808
745,474
702,719
Income taxes(72,991)(71,829)(215,154)(215,926)
Net earnings$177,424
$169,979
$530,320
$486,793
Basic earnings per share$0.53
$0.50
$1.60
$1.44
Diluted earnings per share$0.52
$0.49
$1.57
$1.41
Basic weighted average shares outstanding331,993
338,684
331,319
338,675
Diluted weighted average shares outstanding338,780
344,817
337,946
344,917
Three Months EndedNine Months Ended
(In thousands)2017201620172016
Net earnings$177,424
$169,979
$530,320
$486,793
Foreign currency translation adjustment and other (net of taxes (benefit) of $(100) and $991 for the three and nine months ended September 30, 2017; and $1,282 and $3,437 for the three and nine months ended October 1, 2016)10,806
(2,085)37,369
(8,557)
Unrealized holding gain (loss) on available-for-sale investments (net of taxes (benefit) of $(1) and $34 for the three and nine months ended September 30, 2017; and $(188) and $101 for the three and nine months ended October 1, 2016)(2)(308)55
164
Comprehensive income$188,228
$167,586
$567,744
$478,400
Nine Months Ended
(In thousands)20172016
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings$530,320
$486,793
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization425,241
371,385
Share-based compensation expense59,217
56,896
Provision for deferred income taxes36,667
(25,922)
Changes in assets and liabilities (net of businesses acquired):
Receivables, net(19,080)43,699
Inventory(909)(5,590)
Prepaid expenses and other(11,908)(33,801)
Accounts payable(12,651)(19,566)
Accrued income taxes1,984
53,393
Deferred revenue12,749
(1,780)
Other accrued liabilities(62,865)(17,809)
Net cash provided by operating activities958,765
907,698
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital purchases(262,372)(327,861)
Capitalized software development costs(210,033)(228,803)
Purchases of investments(337,010)(387,809)
Sales and maturities of investments237,912
262,100
Purchase of other intangibles(22,186)(13,222)
Net cash used in investing activities(593,689)(695,595)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options61,688
60,486
Payments to taxing authorities in connection with shares directly withheld from associates(7,989)(38,122)
Treasury stock purchases(23,389)(200,075)
Contingent consideration payments for acquisition of businesses(2,671)(2,074)
Net cash provided by (used in) financing activities27,639

(179,785)
Effect of exchange rate changes on cash and cash equivalents9,478
(2,943)
Net increase in cash and cash equivalents402,193
29,375
Cash and cash equivalents at beginning of period170,861
402,122
Cash and cash equivalents at end of period$573,054
$431,497
Summary of acquisition transactions:
Fair value of tangible assets acquired$
$(10,200)
Fair value of intangible assets acquired
(25,000)
Fair value of goodwill
46,940
Less: Fair value of liabilities assumed
(11,740)
Net cash used$
$
Prior to the adoption of ASU 2016-09, when associates exercised stock options, or upon the vesting of restricted stock awards, we recognized any related excess tax benefits or deficiencies (the difference between the deduction for tax purposes and the cumulative compensation cost recognized in the consolidated financial statements) in additional paid-in capital ("APIC"). During the three and nine months ended October 1, 2016, we recognized net excess tax benefits in APIC of $37 million and $48 million, respectively.
We utilize the treasury stock method for calculating diluted earnings per share. Prior to the adoption of ASU 2016-09, this method assumed that any net excess tax benefits generated from the hypothetical exercise of dilutive options were used to repurchase outstanding shares. Assumed share repurchases for net excess tax benefits included in our calculation of diluted earnings per share for the three and nine months ended October 1, 2016 were 2.1 million shares and 2.0 million shares respectively.
Prior to the adoption of ASU 2016-09, we presented net excess tax benefits in our condensed consolidated statements of cash flows as a cash inflow from financing activities. Under the new guidance, net excess tax benefits are presented within operating activities. We have elected to apply this provision of the new guidance retrospectively. Prior periods have been retrospectively adjusted.
Prior to the adoption of ASU 2016-09, we presented cash payments to taxing authorities in connection with shares directly withheld from associates upon the exercise of stock options, or upon the vesting of restricted stock awards, to meet statutory tax withholding requirements (employee withholdings) as a cash outflow from operating activities. Under the new guidance, such payments are presented within financing activities. This provision of the new guidance was required to be applied retrospectively. Prior periods have been retrospectively adjusted.
Under the new guidance, an entity is permitted to make an entity-wide accounting policy election (at adoption) either to estimate the number of forfeitures expected to occur or to account for forfeitures as a reduction to compensation cost when they occur. Upon adoption of ASU 2016-09, we did not change our policy of estimating participant forfeitures as a part of our calculations of share-based compensation cost.
We will use the cumulative effect transition method. Such method provides that the cumulative effect from prior periods upon applying the new guidance is recognized in our consolidated balance sheets as of the date of adoption, including an adjustment to retained earnings. Prior periods will not be retrospectively adjusted.
We believe substantially all of our revenue falls within the scope of ASU 2014-09, as amended; substantially all of our revenue is contractual.
Generally, our subscription and content fees revenue is recognized ratably over the respective contract terms ("over time"). Upon adoption of the new guidance, we expect to recognize a license component of certain subscription and content fees revenue upon delivery to the customer ("point in time") and a non-license component (i.e. support) of such revenues over the respective contract terms ("over time"). At the date of adoption of this new guidance, we expect to record a cumulative adjustment to our consolidated balance sheet, including an adjustment to retained earnings, to adjust for the impact of certain prior period subscription and content fees revenue, as calculated under the new guidance.
For certain of our arrangements, revenue for software, implementation services and, in certain cases, support services for which vendor specific objective evidence (VSOE) of fair value cannot be established are accounted for as a single unit of accounting. If VSOE of fair value cannot be established for both the implementation services and the support services, the entire arrangement fee is recognized ratably ("over time") over the period during which the implementation services are expected to be performed or the support period, whichever is longer, beginning with delivery of the software, provided that all other revenue recognition criteria are met. Upon adoption of the new guidance, the concept of VSOE of fair value is eliminated. Consideration for an arrangement is allocated to performance obligations based on stand-alone selling price or an estimate of stand-alone selling price. With this change, we expect to be able to allocate consideration to the various elements within arrangements currently accounted for as a single unit of accounting. Such revenue will then be recognized as each performance obligation is delivered (i.e. "point in time" for software) or as provided to the customer (i.e. "over time" for implementation services and support services). At the date of adoption of this new guidance, we expect to record a cumulative adjustment to our consolidated balance sheet, including an adjustment to retained earnings, to adjust for the impact
We have determined the only significant incremental costs incurred to obtain contracts with customers within the scope of ASU 2014-09, as amended, are sales commissions paid to associates. Under current U.S. GAAP, we recognize sales commissions as earned, and record such amounts as a component of total costs and expenses in our consolidated statements of operations. We recognized sales commission expense of $44 million, $45 million and $35 million in the 2016, 2015, and 2014 annual periods, respectively. Under the new guidance, we expect to record sales commissions as an asset, and amortize to expense over the related contract performance period. At the date of adoption of this new guidance, we expect to record an asset in our consolidated balance sheets for the amount of unamortized sales commissions for prior periods, as calculated under the new guidance. Such amount will subsequently be amortized to expense over the remaining performance periods of the related contracts with remaining performance obligations. We currently estimate the amount of this asset to approximate $80 million. Such estimate is preliminary and subject to change as we finalize our implementation process.
In connection with the expected cumulative adjustments described above, we also expect to record a cumulative adjustment to our consolidated balance sheet, including an adjustment to retained earnings, for the related impact on deferred income taxes from such adjustments.
Equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) will be required to be measured at fair value with changes in fair value recognized in net earnings. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.
The impairment assessment of equity investments without readily determinable fair values will require a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value.
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.
(In thousands)

Fair Value Measurements Using
DescriptionBalance Sheet ClassificationLevel 1Level 2Level 3
Money market fundsCash equivalents$319,668
$
$
Time depositsCash equivalents
51,426

Commercial paperCash equivalents
23,550

Government and corporate bondsCash equivalents
500

Time depositsShort-term investments
32,808

Commercial paperShort-term investments
87,874

Government and corporate bondsShort-term investments
158,314

Government and corporate bondsLong-term investments
99,032

(In thousands)
Fair Value Measurements Using
DescriptionBalance Sheet ClassificationLevel 1Level 2Level 3
Money market fundsCash equivalents$23,110
$
$
Time depositsCash equivalents
11,477

Time depositsShort-term investments
40,639

Commercial paperShort-term investments
22,301

Government and corporate bondsShort-term investments
122,648

Government and corporate bondsLong-term investments
95,368

(In thousands)Adjusted CostGross Unrealized GainsGross Unrealized LossesFair Value
Cash equivalents:
Money market funds$319,668
$
$
$319,668
Time deposits51,426


51,426
Commercial paper23,550


23,550
Government and corporate bonds500


500
Total cash equivalents395,144


395,144
Short-term investments:
Time deposits32,808


32,808
Commercial paper87,916
2
(44)87,874
Government and corporate bonds158,532
2
(220)158,314
Total short-term investments279,256
4
(264)278,996
Long-term investments:
Government and corporate bonds99,226

(194)99,032
Total available-for-sale investments$773,626

$4

$(458)
$773,172
(In thousands)Adjusted CostGross Unrealized GainsGross Unrealized LossesFair Value
Cash equivalents:
Money market funds$23,110
$
$
$23,110
Time deposits11,477


11,477
Total cash equivalents34,587


34,587
Short-term investments:
Time deposits40,639


40,639
Commercial paper22,325

(24)22,301
Government and corporate bonds122,729
3
(84)122,648
Total short-term investments185,693
3
(108)185,588
Long-term investments:
Government and corporate bonds95,806

(438)95,368
Total available-for-sale investments$316,086
$3
$(546)$315,543
(In thousands)September 30, 2017December 31, 2016
Gross accounts receivable$1,065,903
$958,843
Less: Allowance for doubtful accounts59,673
43,028
Accounts receivable, net of allowance1,006,230
915,815
Current portion of lease receivables14,477
29,128
Total receivables, net$1,020,707
$944,943
Three Months Ended
20172016
EarningsSharesPer-ShareEarningsSharesPer-Share
(In thousands, except per share data)(Numerator)(Denominator)Amount(Numerator)(Denominator)Amount
Basic earnings per share:
Income available to common shareholders$177,424
331,993
$0.53
$169,979
338,684
$0.50
Effect of dilutive securities:
Stock options and non-vested shares
6,787

6,133
Diluted earnings per share:
Income available to common shareholders including assumed conversions$177,424
338,780
$0.52
$169,979
344,817
$0.49
Nine Months Ended
20172016
EarningsSharesPer-ShareEarningsSharesPer-Share
(In thousands, except per share data)(Numerator)(Denominator)Amount(Numerator)(Denominator)Amount
Basic earnings per share:
Income available to common shareholders$530,320
331,319
$1.60
$486,793
338,675
$1.44
Effect of dilutive securities:
Stock options and non-vested shares
6,627

6,242
Diluted earnings per share:
Income available to common shareholders including assumed conversions$530,320
337,946
$1.57
$486,793
344,917
$1.41
(In thousands, except per share data)Number ofSharesWeighted-AverageExercise PriceAggregateIntrinsic ValueWeighted-Average Remaining Contractual Term (Yrs)
Outstanding at beginning of year23,601
$40.33
Granted4,194
63.25
Exercised(2,685)25.03
Forfeited and expired(850)57.35
Outstanding as of September 30, 201724,260
45.39
$629,257
5.99
Exercisable as of September 30, 201712,802
$32.88
$492,125
3.82
(In thousands, except per share data)Number of SharesWeighted-AverageGrant Date Fair Value
Outstanding at beginning of year354
$61.12
Granted586
66.86
Vested(158)57.79
Forfeited(10)57.02
Outstanding as of September 30, 2017772
$66.21
Three Months EndedNine Months Ended
(In thousands)2017201620172016
Stock option and non-vested share and share unit compensation expense$19,858
$18,942
$59,217
$56,896
Associate stock purchase plan expense1,546
1,503
4,516
4,722
Amounts capitalized in software development costs, net of amortization(45)(95)(365)(486)
Amounts charged against earnings, before income tax benefit$21,359
$20,350
$63,368
$61,132
Amount of related income tax benefit recognized in earnings$6,226
$6,045
$18,289
$18,793
(In thousands)DomesticGlobal Other Total
Three Months Ended 2017
Revenues$1,133,971
$142,036
$
$1,276,007
Cost of revenues176,198
26,706

202,904
Operating expenses502,256
68,229
254,712
825,197
Total costs and expenses678,454
94,935

254,712
1,028,101
Operating earnings (loss)$455,517
$47,101
$(254,712)$247,906
(In thousands)DomesticGlobal Other Total
Three Months Ended 2016
Revenues$1,055,037
$129,520
$
$1,184,557
Cost of revenues161,625
21,345

182,970
Operating expenses446,704
60,430
252,228
759,362
Total costs and expenses608,329
81,775
252,228
942,332
Operating earnings (loss)$446,708
$47,745
$(252,228)$242,225
(In thousands)DomesticGlobal Other Total
Nine Months Ended 2017
Revenues$3,421,429
$407,058
$
$3,828,487
Cost of revenues549,895
75,065

624,960
Operating expenses1,474,591
197,333
790,183
2,462,107
Total costs and expenses2,024,486
272,398
790,183
3,087,067
Operating earnings (loss)$1,396,943
$134,660
$(790,183)$741,420
(In thousands)DomesticGlobal Other Total
Nine Months Ended 2016
Revenues$3,132,566
$406,088
$
$3,538,654
Cost of revenues488,404
75,715

564,119
Operating expenses1,304,731
183,824
786,995
2,275,550
Total costs and expenses1,793,135
259,539
786,995
2,839,669
Operating earnings (loss)$1,339,431
$146,549
$(786,995)$698,985
(In thousands)2017% ofRevenue2016% ofRevenue% Change
Revenues
System sales$324,021
25%$301,252
25%8 %
Support and maintenance263,361
21%253,425
21%4 %
Services664,468
52%607,660
51%9 %
Reimbursed travel24,157
2%22,220
2%9 %
Total revenues1,276,007
100%1,184,557
100%8 %
Costs of revenue
Costs of revenue202,904
16%182,970
15%11 %
Total margin1,073,103
84%1,001,587
85%7 %
Operating expenses
Sales and client service564,621
44%512,671
43%10 %
Software development153,834
12%136,755
12%12 %
General and administrative84,178
7%87,071
7%(3)%
Amortization of acquisition-related intangibles22,564
2%22,865
2%(1)%
Total operating expenses825,197
65%759,362
64%9 %
Total costs and expenses1,028,101
81%942,332
80%9 %
Operating earnings247,906
19%242,225
20%2 %
Other income (expense), net2,509
(417)
Income taxes(72,991)(71,829)
Net earnings$177,424
$169,979
4 %
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 8% to $324 million in the third quarter of 2017, from $301 million in the same period of 2016. The increase in system sales was primarily driven by increases in licensed software and subscriptions of $15 million and $12 million, respectively.
Support and maintenance revenues increased 4% to $263 million in the third quarter of 2017, from $253 million in the same period of 2016. This increase was primarily attributable to continued success selling Cerner Millennium® applications and implementing them at client sites.
Services revenue, which includes professional services (excluding installation) and managed services, increased 9% to $664 million in the third quarter of 2017, from $608 million in the same period of 2016. This increase was driven by a $42 million increase in professional services due to growth in implementation and consulting activities and growth in managed services of $15 million as a result of continued demand for our hosting services.
Sales and client service expenses as a percent of total revenues were 44% in the third quarter of 2017, compared to 43% in the same period of 2016. These expenses increased 10% to $565 million in the third quarter of 2017, from $513 million in the same period of 2016. 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 growth in sales and client service expenses reflects hiring of services personnel to support the growth in services revenue.
Software development expenses as a percent of total revenues were 12% in the third quarter of both 2017 and 2016. Expenditures for software development include ongoing development and enhancement of the Cerner Millennium and HealtheIntent 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 2017 and 2016 is as follows:
Three Months Ended
(In thousands)20172016
Software development costs$176,543
$174,831
Capitalized software costs(66,404)(72,943)
Capitalized costs related to share-based payments(663)(685)
Amortization of capitalized software costs44,358
35,552
Total software development expense$153,834
$136,755
General and administrative expenses as a percent of total revenues were 7% in the third quarter of both 2017 and 2016. These expenses decreased 3% to $84 million in the third quarter of 2017, from $87 million in the same period of 2016. 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, acquisition costs and related adjustments. The decrease in general and administrative expenses is primarily due to lower expense for share-based payments, driven by stock option awards forfeited by our former CEO upon his passing in July 2017.
Amortization of acquisition-related intangibles as a percent of total revenues were 2% in the third quarter of both 2017 and 2016. These expenses remained flat at $23 million in the third quarter of both 2017 and 2016. 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.
Other income (expense), net was $3 million in income in the third quarter of 2017, and less than $1 million in expense in the same period of 2016. The increase is primarily attributable to an impairment loss recognized on one of our investments accounted for under the cost method in the third quarter of 2016.
Our effective tax rate was 29.1% for the third quarter of 2017 and 29.7% in the same period of 2016. The decrease in the effective tax rate in 2017 is primarily a result of the inclusion of net excess tax benefits as discrete items within the tax provision, upon our adoption of ASU 2016-09 in the first quarter of 2017. Refer to Note (1) of the notes to condensed consolidated financial statements for further discussion regarding our adoption of ASU 2016-09 and its impact on our condensed consolidated financial statements.
(In thousands)2017% of Revenue2016% of Revenue% Change
Domestic Segment
Revenues$1,133,971
100%$1,055,037
100%7%
Costs of revenue176,198
16%161,625
15%9%
Operating expenses502,256
44%446,704
42%12%
Total costs and expenses678,454
60%608,329
58%12%
Domestic operating earnings455,517
40%
446,708
42%2%
Global Segment
Revenues142,036
100%129,520
100%10%
Costs of revenue26,706
19%21,345
16%25%
Operating expenses68,229
48%60,430
47%13%
Total costs and expenses94,935
67%81,775
63%16%
Global operating earnings47,101
33%47,745
37%(1)%
Other, net(254,712)(252,228)1%
Consolidated operating earnings$247,906
$242,225
2%
Revenues increased 7% to $1.13 billion in the third quarter of 2017, from $1.06 billion in the same period of 2016. This increase was primarily driven by growth in services revenue.
Costs of revenue as a percent of revenues was 16% in the third quarter of 2017 compared to 15% in the same period of 2016. The marginally higher costs of revenue as a percent of revenues was primarily due to higher third-party costs associated with technology resale.
Operating expenses as a percent of revenues were 44% in the third quarter of 2017, compared to 42% in the same period of 2016. The increase as a percent of revenues reflects a higher mix of services during the third quarter of 2017 that was driven by services revenue growth.
Revenues increased 10% to $142 million in the third quarter of 2017, from $130 million in the same period of 2016. This increase was primarily driven by growth in services revenue.
Costs of revenue as a percent of revenues were 19% in the third quarter of 2017, compared to 16% in the same period of 2016. The higher costs of revenue as a percent of revenues were primarily driven by a higher amount of third party resources utilized for support and services.
Operating expenses as a percent of revenues were 48% in the third quarter of 2017, compared to 47% in the same period of 2016. The increase as a percent of revenues was primarily due to an increase in non-personnel expenses.
(In thousands)2017% ofRevenue2016% ofRevenue% Change
Revenues
System sales$991,685
26%$913,710
26%9 %
Support and maintenance785,039
21%761,165
22%3 %
Services1,978,444
52%1,800,309
51%10 %
Reimbursed travel73,319
2%63,470
2%16 %
Total revenues3,828,487
100%3,538,654
100%8 %
Costs of revenue
Costs of revenue624,960
16%564,119
16%11 %
Total margin3,203,527
84%2,974,535
84%8 %
Operating expenses
Sales and client service1,688,208
44%1,534,763
43%10 %
Software development442,570
12%405,451
11%9 %
General and administrative263,203
7%267,232
8%(2)%
Amortization of acquisition-related intangibles68,126
2%68,104
2% %
Total operating expenses2,462,107
64%2,275,550
64%8 %
Total costs and expenses3,087,067
81%2,839,669
80%9 %
Operating earnings741,420
19%698,985
20%6 %
Other income, net4,054
3,734
Income taxes(215,154)(215,926)
Net earnings$530,320
$486,793
9 %
System sales increased 9% to $992 million in the first nine months of 2017, from $914 million in the same period of 2016. The increase in system sales was primarily driven by increases in licensed software and subscriptions of $51 million and $28 million, respectively.
Support and maintenance revenues increased 3% to $785 million in the first nine months of 2017, from $761 million in the same period of 2016. This increase was primarily attributable to continued success selling Cerner Millennium applications and implementing them at client sites.
Services revenue increased 10% to $2.0 billion in the first nine months of 2017, from $1.8 billion in the same period of 2016. This increase was driven by a $124 million increase in professional services due to growth in implementation and consulting activities, and growth in managed services of $54 million as a result of continued demand for our hosting services.
Sales and client service expenses as a percent of total revenues were 44% in the first nine months of 2017, compared to 43% in the same period of 2016. These expenses increased 10% to $1.7 billion in the first nine months of 2017, from $1.5 billion in the same period of 2016. The growth in sales and client service expenses reflects hiring of services personnel to support the strong growth in services revenue.
Software development expenses as a percent of total revenues were 12% in the first nine months of 2017, compared to 11% in the same period of 2016. Expenditures for software development include ongoing development and enhancement of the Cerner Millennium and HealtheIntent 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 2017 and 2016 is as follows:
Nine Months Ended
(In thousands)20172016
Software development costs$526,257
$531,825
Capitalized software costs(207,910)(226,640)
Capitalized costs related to share-based payments(2,123)(2,163)
Amortization of capitalized software costs126,346
102,429
Total software development expense$442,570
$405,451
General and administrative expenses as a percent of total revenues were 7% in the first nine months of 2017, compared to 8% in the same period of 2016. These expenses decreased 2% to $263 million in the first nine months of 2017, from $267 million in the same period of 2016. The decrease in general and administrative expenses includes lower expense for share-based payments, driven by stock option awards forfeited by our former CEO upon his passing in July 2017.
Amortization of acquisition-related intangibles as a percent of total revenues were 2% in the first nine months of both 2017 and 2016. These expenses remained flat at million in the first nine months of both 2017 and 2016.
Our effective tax rate was 28.9% for the first nine months of 2017 and 30.7% in the same period of 2016. The decrease in the effective tax rate in 2017 is primarily a result of the inclusion of net excess tax benefits as discrete items within the tax provision, upon our adoption of ASU 2016-09 in the first quarter of 2017. Refer to Note (1) of the notes to condensed consolidated financial statements for further discussion regarding our adoption of ASU 2016-09 and its impact on our condensed consolidated financial statements.
(In thousands)2017% of Revenue2016% of Revenue% Change
Domestic Segment
Revenues$3,421,429
100%$3,132,566
100%9%
Costs of revenue549,895
16%488,404
16%13%
Operating expenses1,474,591
43%1,304,731
42%13%
Total costs and expenses2,024,486
59%1,793,135
57%13%
Domestic operating earnings1,396,943
41%
1,339,431
43%4%
Global Segment
Revenues407,058
100%406,088
100%—%
Costs of revenue75,065
18%75,715
19%(1)%
Operating expenses197,333
48%183,824
45%7%
Total costs and expenses272,398
67%259,539
64%5%
Global operating earnings134,660
33%146,549
36%(8)%
Other, net(790,183)(786,995)—%
Consolidated operating earnings$741,420
$698,985
6%
Costs of revenue as a percent of revenues were 16% in the first nine months of both 2017 and 2016.
Operating expenses as a percent of revenues were 43% in the first nine months of 2017, compared to 42% in the same period of 2016. The increase as a percent of revenues reflects a higher mix of services in 2017 that was driven by services revenue growth.
Revenues were flat at $407 million in the first nine months of 2017, and $406 million in the same period of 2016.
Costs of revenue were flat at $75 million in the first nine months of 2017, and $76 million in the same period of 2016.
Operating expenses as a percent of revenues were 48% in the first nine months of 2017, compared to 45% in the same period in 2016. The increase as a percent of revenues is primarily due to an increase in non-personnel expenses.
Nine Months Ended
(In thousands)20172016
Cash flows from operating activities$958,765
$907,698
Cash flows from investing activities(593,689)(695,595)
Cash flows from financing activities27,639
(179,785)
Effect of exchange rate changes on cash9,478
(2,943)
Total change in cash and cash equivalents402,193
29,375
Cash and cash equivalents at beginning of period170,861
402,122
Cash and cash equivalents at end of period$573,054
$431,497
Free cash flow (non-GAAP)$486,360
$351,034
Nine Months Ended
(In thousands)20172016
Cash collections from clients$4,060,904
$3,796,652
Cash paid to employees and suppliers and other(2,917,105)(2,707,928)
Cash paid for interest(17,175)(17,397)
Cash paid for taxes, net of refunds(167,859)(163,629)
Total cash from operations$958,765
$907,698
Nine Months Ended
(In thousands)20172016
Capital purchases$(262,372)$(327,861)
Capitalized software development costs(210,033)(228,803)
Purchases of investments, net of sales and maturities(99,098)(125,709)
Purchases of other intangibles(22,186)(13,222)
Total cash flows from investing activities$(593,689)$(695,595)
Nine Months Ended
(In thousands)20172016
Cash from option exercises (net of taxes paid in connection with shares surrendered by associates)$53,699
$22,364
Treasury stock purchases(23,389)(200,075)
Contingent consideration payments for acquisition of businesses(2,671)(2,074)
Total cash flows from financing activities$27,639
$(179,785)
Three Months EndedNine Months Ended
(In thousands)2017201620172016
Cash flows from operating activities (GAAP)$362,937
$311,064
$958,765
$907,698
Capital purchases(73,000)(110,266)(262,372)(327,861)
Capitalized software development costs(67,067)(73,628)(210,033)(228,803)
Free cash flow (non-GAAP)$222,870
$127,170
$486,360
$351,034
The gathering of information and evaluation of analysis used in the development of disclosures required prior to the new standard’s effective date
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
July 2, 2017 - July 29, 2017
$

$600,000,000
July 30, 2017 - August 26, 2017285,726
64.25
285,726
581,642,586
August 27, 2017 - September 30, 201777,556
65.00
77,300
576,618,633
Total363,282
$64.41
363,026
(a)Of the 363,282 shares of common stock, par value $0.01 per share, presented in the table above, 256 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 the minimum tax obligations due upon the vesting of restricted stock. Pursuant to the Omnibus Plan, the 256 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)During the nine months ended September 30, 2017, the Company repurchased 0.4 million shares of our common stock under our share repurchase programs for consideration of $23 million, excluding transaction costs, pursuant to Rule 10b5-1 plans.

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