ANNUAL REPORT 2009
1
Table of Contents: Annual Report 2009
Board of Directors
Leadership
Letter to Our Shareholders
Appendix: Cerner’s Business Model and Financial Assessment
Form 10-K
Business and Industry Overview
Risk Factors
Properties
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Report of Independent Registered Public Accountant
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Changes in Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Summary of Significant Accounting Policies
Business Acquisitions
Cash and Investments
Fair Value Measurements
Receivables
Property and Equipment
Goodwill and Other Intangible Assets
Software Development Costs
Indebtedness
Hedging Activities
Interest Income
Income Taxes
Earnings Per Share
Share Based Compensation and Equity
Foundations Retirement Plan
Related Party Transactions
Commitments
Segment Reporting
Quarterly Results
Stock Price Performance Graph
Corporate Information
3
4
5
6
16
22
24
30
38
41
42
64
66
67
68
69
70
70
75
77
78
80
81
81
82
83
84
84
85
87
87
91
91
91
92
94
95
96
Board of Directors
Neal L. Patterson
■ Chairman of the Board and Chief Executive Officer, Cerner Corporation
Clifford W. Illig
■ Vice Chairman, Cerner Corporation
Gerald E. Bisbee Jr., Ph.D.
■ Chairman, President and Chief Executive Officer, ReGen Biologics, Inc., Franklin Lakes, NJ
The Honorable John C. Danforth
■ Partner, Bryan Cave LLP, St. Louis, MO
■ Ambassador to the United Nations, July 2004–January 2005
■ U.S. Senator - Missouri, 1976-1995
Michael E. Herman
■ General Partner, Herman Family Trading Company, Kansas City, MO
■ President, Kansas City Royals Baseball Club, 1992-2000
William B. Neaves, Ph.D.
■ Chief Executive Officer and Director, The Stowers Institute for Medical Research, Kansas City, MO
William D. Zollars
■ Chairman, President and Chief Executive Officer, YRC Worldwide, Overland Park, KS
4
Leadership
Cerner Executive Cabinet
Neal L. Patterson ▪ Chairman of the Board and Chief Executive Officer
Clifford W. Illig ▪ Vice Chairman
Earl H. “Trace” Devanny, III ▪ President
Marc G. Naughton ▪ Executive Vice President and Chief Financial Officer
Michael R. Nill ▪ Executive Vice President and Chief Engineering Officer
Jeffrey A. Townsend ▪ Executive Vice President
Michael G. Valentine ▪ Executive Vice President and Chief Operating Officer
Paul N. Gorup ▪ Senior Vice President and Chief of Innovation
Julia M. Wilson ▪ Senior Vice President and Chief People Officer
Thomas P. Herzog ▪ Vice President, IT and Medical Device Technologies
Bill D. Wing ▪ Vice President, Cerner RevWorks
Cerner Executive Management
Zane M. Burke ▪ Senior Vice President, Employer Services
Richard J. Flanigan ▪ Senior Vice President, Research Services
John B. Landis ▪ Senior Vice President, Client Operations
Farrell L. Sanders ▪ Senior Vice President, Cerner ITWorks
Kent C. Scheuler ▪ Senior Vice President, Managed Services
Shellee K. Spring ▪ Senior Vice President, PowerWorks
Joanne M. Burns ▪ Vice President, Cerner Corporation and CIO, Tiger Institute
Robert J. Campbell ▪ Vice President and Chief Learning Officer
Kimberly K. Hlobik ▪ Vice President, Lighthouse
J. Bryan Ince ▪ Vice President, Health Economy
Gay M. Johannes ▪ Vice President and Chief Quality Officer
Eva L. Karp ▪ Vice President, Direct Care and Nursing Strategies
Catherine E. Mueller ▪ Vice President, Client Experience
J. Randall Nelson ▪ Vice President, Life Sciences
David W. Sides ▪ Vice President, Worldwide Consulting
Randy D. Sims ▪ Vice President, Chief Legal Officer and Secretary
Jacob P. Sorg ▪ Vice President, National Practices
Client Organization
Jude G. Dieterman ▪ Senior Vice President, Cerner Corporation and President,
Richard W. Heise ▪ Vice President and General Manager,
Client Development
Michael C. Neal ▪ Senior Vice President, Cerner Corporation and President,
Pacific
John T. Peterzalek ▪ Senior Vice President, Cerner Corporation and President,
Atlantic
Richard M. Berner ▪ Vice President and General Manager, Middle East
Marcos Garcia ▪ Vice President and General Manager, Spain
Australia and Asia Pacific
Robert J. Shave ▪ Vice President, Cerner Corporation and President,
Cerner Canada
Bruno N. Slosse ▪ Vice President and General Manager, EMEA
Holger Cordes ▪ General Manager, Germany
Amanda J. Green ▪ Managing Director, Ireland
Intellectual Property Organization
Douglas S. McNair, M.D. & Ph.D. ▪ Senior Vice President,
Knowledge and Discovery
Ryan R. Hamilton ▪ Vice President, Intellectual Property Development
David P. McCallie, Jr., M.D. ▪ Vice President, Medical Informatics
Rama Nadimpalli ▪ Vice President and General Manager, Cerner India
Owen L. Straub ▪ Vice President, Millennium Development
5
Cerner’s Long-Term Performance
2009 represents the end of Cerner’s third decade. In business, as well as life, we measure progress against certain
predefined periods on the calendar. As a public company, the time intervals that get the most attention are the quarter
and the year. The decade offers some insights the shorter intervals do not. The table below highlights Cerner’s growth
over the past decade and since we became a publically traded company in 1986.
1986
1999
2009
Compound Annual Growth Rates
Previous Decade
1999-2009
Since Going Public
1986-2009
e
n
i
L
p
o
T
Bookings Revenue
Revenue
Domestic Revenue
Global Revenue
Revenue Backlog
Operating Margin
e Operating Earnings
n
i
L
m
o
t
t
o
B
Net Earnings
Earnings Per Share
t Total Assets
e
e
h
S
e
c
n
a
a
B
l
Cash and Investments
Days Sales Outstanding
Total Debt
Equity
h
s
a
C
t
n
e
m
t
s
e
v
n
I
t
e
k
r
a
M
w Operating Cash Flow
o
F
Free Cash Flow (FCF)
l
t
h Capital Expenditures
w
o
r
G
n
R&D Spending
Associate Headcount
i
Market Capitalization
e Cerner Stock Price
c
n
a
m
r
o
f
r
e
P
Nasdaq Composite Index
S&P 500 Index
$18
$17
$17
$0.2
$11
$3
14.8%
$2
$285
$358
$334
$24
$1,832
$1,672
$1,399
$273
$501
$4,212
$13
3.5%
$7
$309
18.5%
$204
$2.43
$0.05
$0.10
$26
$8
161
$1
$16
$1
-$1
$1
$2
$661
$2,149
$76
164
$100
$379
$27
-$17
$14
$89
$559
90
$121
$1,581
$347
$138
$131
$285
149
2,625
7,576
$0.97
$9.84
$82.44
$45
349
242
$668
$6,992
4,069
1,469
2,269
1,115
20%
17%
15%
28%
24%
38%
40%
37%
13%
22%
-6%
2%
15%
29%
25%
12%
11%
24%
26%
-6%
-3%
22%
22%
21%
38%
30%
23%
22%
18%
21%
21%
-2%
22%
22%
31%
23%
25%
19%
21%
25%
8%
7%
Notes
Dollars are in millions except Earnings Per Share and stock prices.
Cerner’s historical stock prices are split adjusted.
Free Cash Flow represents Operating Cash Flow less Capital Expenditures and Capitalized Software.
Operating Earnings, Operating Margin, Net Earnings, and Earnings Per Share exclude impact of share-based compensation expense.
Some observations from our numerical history: First, if you grow a company consistently over a long period of time, people
eventually start viewing it as big. (Cerner was added to the S&P 500 index in April 2010.) Second, if you use vision to guide
the company’s development, you have a chance of growing over a long period of time. Third, it never hurts to be in the right
place at the right time, which increases your odds for success.
6
A Letter to our Shareholders, Clients and Associates:
A very strong finish turned 2009 into a fair year for Cerner, despite challenging economic conditions worldwide over the
past 24 months. 2009 capped off another decade of strong Cerner growth—we are three for three since our founding in
1979. Each decade has seen Cerner deliver much of the vision that was in place at the beginning of that decade. We exit
both 2009 and the first decade of the new millennium poised for future success, with a fresh vision and clear intent for
what lies ahead. In this letter, we attempt to provide some context to Cerner’s performance in 2009, putting it into the
perspective of the past decade. We also attempt to share some insights into how we are approaching the decade that
has just begun. Finally, we end with comments on our vision for some of the fundamental changes necessary to sustain
high-quality, affordable healthcare in the not-so-distant future.
At the outset, Cerner fully anticipated 2009 would be a challenging year, and it did not disappoint. Our larger clients,
health systems and hospitals in the U.S., were still dealing with an array of financial issues that impacted them in
2008, while they committed to strengthening their balance sheets, cash balances and operating margins. The growth
in unemployment and corresponding cuts in Medicaid reimbursements by state governments added to their challenges.
Moreover, there was no safe haven for healthcare around the world, with few countries enjoying prosperity. Through it all,
our clients remained committed to their most strategic information technology (IT) projects, but more cautiously so.
In February 2009, actions by the U. S. Congress gave providers who have not yet gone paperless a reason to believe that
investment in electronic health records (EHRs) would not only be warranted but also compulsory. By promising to provide
approximately $35B1 in reimbursements to hospitals, providers and other eligible professionals who implement and
demonstrate “meaningful use” of a core EHR, the HITECH2 provisions of the American Recovery and Reinvestment Act of
2009 (ARRA) started the wheels in motion to create a state of near-ubiquitous EHR use in the U. S. by the middle of the
new decade. At the same time, a lack of clarity around the definition of meaningful use created a new source of strategic
uncertainty. By our fourth quarter, the combination of conditions and influences shifted more to the positive, and we saw
our clients become bolder with their plans and commitments. A very strong finish gave us a fair year, one with somewhat
disappointing top-line growth but strong shareholder returns; a year in which we met our earnings targets, expanded our
operating margins and delivered strong cash flows.
Below are a few highlights from 2009. For more details, refer to the financial appendix that follows this letter.
g
g
g
g
g
New business bookings increased 19% to $1.8 billion.
Revenue backlog increased 21% to $4.2 billion.
Operating margins3 increased 190 basis points to 18.5%, which drove a net earnings3 increase of 12% to $204
million, despite flat revenue levels of $1.7 billion. We were pleased to achieve a 21% operating margin in the
fourth quarter, the first time we surpassed the 20% target that we publicly set as our goal in 2003, when our
operating margin was 9%.
Cash flow from operations grew 23% to $347 million. Free cash flow3, defined as operating cash flow less capital
expenditures and capitalized software, increased 33% to $138 million.
Cerner’s stock price increased 114%, compared to a 44% increase in the NASDAQ Composite Index and a 23%
increase in the S&P 500, reflecting our delivery of solid results in a challenging environment, our strong position
to benefit from the healthcare IT provisions in ARRA and improved broader stock market performance.
1 The $35 billion designated for incentives is before estimated penalties for those that do not comply and before expected savings from a more efficient healthcare system and
higher corporate tax receipts from businesses that will spend less on healthcare in a more efficient system. The net amount of the incentives is approximately $17 billion.
2 HITECH is an acronym for Health Information Technology for Economic and Clinical Health.
3 Operating margin, net earnings, and free cash flow reflect adjustments compared to results reported on a Generally Accepted Accounting Principles (GAAP) basis in our 2009
Form 10-K. Non-GAAP results should not be substituted as a measure of our performance but instead should be used along with GAAP results as a supplemental measure of
financial performance. Non-GAAP results are used by management along with GAAP results to analyze our business, make strategic decisions, assess long-term trends on a
comparable basis and for management compensation purposes. Please see the appendix to this letter for a reconciliation of these items to GAAP results.
7
A Look Back: Strong Growth in an Important Decade
The year 2009 marked the conclusion of a huge decade for Cerner. Before discussing the enormous potential in the
decade ahead of us, we would like to reflect on the past 10 years and our track record during this time.
The decade itself was frequented by macro events, most with global impact, that challenged the overall foundations upon
which economies, institutions, behaviors, cultures and liberties are built. It started with a dramatic economic plunge
precipitated by the dot-com bubble burst. Then, one morning in 2001, history separated itself into “before” and “after”
9/11. Two wars followed and have continued longer than many expected. Other events were fused to this temporal
framework—hanging chads, anthrax, Enron, WorldCom, Katrina, a tsunami, Virginia Tech, Madoff, tainted sports heroes,
real estate foreclosures, Wall Street’s collapse, GM and Chrysler bankruptcies, bank bailouts, “too big to fail,” H1N1 and
Fort Hood. Late 2008 revealed a painful bookend to the era—a severe, global economic recession. Under it, the world
economy staggered to the point of frightening governments into behaviors that will take a generation or more to evaluate.
It is against this depressed backdrop that healthcare became a much more pressing subject of debate in all countries.
A consensus began to form that digitization of healthcare information, especially the medical record, was a change that
would produce more efficient and safer care. In the U.S., the broad topic of healthcare reform was introduced at the
decade’s close. While Cerner was not totally insulated from the negative impacts of the events of the past decade, we
had a great 10 years, finding ourselves at the right place at the right time with the right stuff.
The table on the following page compares Cerner’s stock price performance over time with that of some other major
companies, many of which are more familiar, household names. Study this table for a bit, and you will begin to appreciate
what your Company has accomplished over the past decade.
Cerner is in an enviable class of enterprises. Based on stock price performance, almost all of the old-world companies—
newspapers, airlines, auto, film and telephone—did not fare well in the last decade. Many of these companies faced
seemingly unexpected changes in their markets, often arising from the impact of disruptive technologies. To the extent
that they may have found it possible to anticipate changes in the business environment, you wonder how much a lack
of major innovation or timely adaptation cost these companies. Even the front-line, historically substantial technology
companies such as IBM, HP, Microsoft and Oracle experienced declines or limited growth in market value over the past
decade. Similarly, the new-age companies such as Amazon and eBay saw little growth in market value during the same
timeframe. The companies that stand out were game-changing innovators, such as Google and Apple, which used their
success to establish platforms capable of supporting the growth of entirely new market segments based on substantially
different business models.
From its inception, Cerner was positioned at the intersection of information technology and healthcare delivery. In our
opinion, that is the right place to be. Both industries have a dynamic past and both continue to have a strong future
relevance to our individual lives and to global economies.
Despite the dot-com bust and the ensuing cascade of negative events, overall, technology had a strong decade. With
disruptive impact, the innovators continued to innovate, transforming how we work, play and connect, possibly altering
even how we elect our leaders. In the past 10 years, we rediscovered our personal music collections, located our grad
school friends online, mastered new user interfaces with our thumbs, learned to play “guitar” by the light of the TV, used
satellites to find where we were going, worked practically anywhere and discovered how to watch our favorite TV shows
on our schedule rather than the networks’. Rapidly evolving Internet technologies helped activate innovative business
models designed to preserve consumers’ perceptions of a free experience, while opening new worlds and options for how
we spend our time and money.
In healthcare, it was the decade when progressive healthcare provider organizations finally committed to the difficult
journey of digitizing their organizations. This era was launched in part by an Institute of Medicine report, released in
November 1999, which compiled strong evidence that systematic medical errors harm and kill a staggering number of
people each year. The name of the publication, To Err is Human4, implied both the root cause and a systems solution,
4 Institute of Medicine, Committee on Quality of Health Care in America. To Err is Human: Building a Safer Health System. Kohn LT, Corrigan JM, Donaldson, MS, eds.
Washington, D.C: National Academy Press, 1999.
8
and it set the stage for healthcare leaders to adopt EHRs. Because of two prior decades (1979-1999) of Cerner growth
through boundary expansion, foresight and leadership in developing highly clinical, technologically superior EHRs, Cerner
was poised at the decade’s outset to meet the demand for systemic solutions to complex healthcare problems.
Notably, most Cerner associates still implicitly understand that healthcare has yet to realize the full potential of IT, and
consumers have yet to discover the best ways to utilize their own health information. Right time and right place, indeed.
Imagine with us where Cerner can be in 2020.
Stock Price
Market Capitalization
Stock Price Change to 2009
CAGRs to 2009
Cerner
$9.84 $82.44
$1,998
$6,843
738%
210%
1999
2009
2004
2009
1999
2004
2006
81%
3-Year
5-Year
10-Year
22%
25%
24%
105%
369%
-9%
147%
-33%
39%
-50%
21%
23%
-65%
-86%
23%
-27%
-29%
N/A
-99%
-60%
69%
-92%
-63%
22%
39%
79%
156%
-5%
204%
-47%
-71%
222%
554%
-8%
-3%
4%
26%
86%
-10%
58%
-39%
-9%
-54%
0%
-2%
-44%
-83%
-11%
33%
-74%
-69%
-98%
-68%
-14%
-93%
-74%
6%
38%
43%
27%
7%
241%
-22%
-65%
35%
148%
-21%
-16%
-6%
8%
23%
-3%
16%
-15%
-3%
-23%
0%
-1%
-18%
-44%
-4%
10%
-37%
-32%
-75%
-32%
-5%
-60%
-36%
2%
11%
13%
8%
2%
51%
-8%
-29%
10%
35%
-8%
-6%
-2%
15%
36%
-2%
20%
-8%
7%
-13%
4%
4%
-19%
-32%
4%
-6%
-7%
N/A
-58%
-17%
11%
-39%
-18%
4%
7%
12%
21%
-1%
25%
-12%
-22%
26%
46%
-2%
-1%
1%
12%
1%
-3%
N/A
-15%
-1%
-9%
1%
2%
-11%
-22%
-2%
-8%
-12%
N/A
-37%
-1%
9%
-20%
-7%
-5%
3%
-1%
3%
-6%
3%
4%
-2%
N/A
23%
-3%
-1%
-6%
McKesson
$20.83
$62.50
$9,114
$16,749
200%
Allscripts-Misys
$17.76
$20.23
Eclipsys
CPSI
$25.63
$18.52
N/A
$46.05
Quadramed
$43.59
$8.39
$176
$970
$195
$100
$2,936
$1,055
$505
$70
AT&T
GE
Siemens
Disney
$31.64
$28.03
$66,350
$165,377
$38.55
$15.13
$320,227
$161,135
$85.04
$91.70
$67,769
$79,452
$26.34
$32.25
$52,724
$60,308
New York Times Co
$40.02
$12.36
Eastman Kodak
$49.78
$4.22
$5,171
$8,369
$1,787
$1,132
Daimler Chrysler
$62.37
$53.30
$43,984
$53,407
Ford
$22.72
$10.00
$25,968
$33,100
American Airlines
$28.37
$7.73
$1,763
United Airlines
N/A
$12.91
N/A
$2,570
$2,156
14%
-28%
N/A
-81%
-11%
-61%
8%
22%
-69%
-92%
-15%
-56%
-73%
N/A
General Motors
$50.66
$0.47
$19,522
$272
-99%
Bank of America
$16.64
$15.06
$153,462
$130,269
-9%
Goldman Sachs
$73.76 $168.84
$48,172
$86,797
129%
Citigroup
UBS
Microsoft
IBM
Oracle
$29.42
$3.31
$209,151
$75,667
$31.72
$15.51
$96,458
$54,595
$48.50
$30.48
$268,178
$270,662
$97.03 $127.25
$156,493
$166,698
$28.01
$24.53
$70,589
$122,895
Hewlett-Packard
$39.72
$51.51
$57,194
$121,564
Intel
Amazon
Ebay
$36.96
$20.40
$133,627
$112,608
$99.88 $134.52
$18,159
$58,244
$15.65
$23.53
$59,304
$30,354
-89%
-51%
-37%
31%
-12%
30%
-45%
35%
50%
Electronic Arts
$21.00
$17.75
$19,121
$5,777
-15%
N/A
$619.98
$51,475
$196,701
N/A
$25.70 $210.73
$26,887
$189,800
720%
Google
Apple
S&P 500
Dow
1,469
1,115
11,497
10,428
NASDAQ Composite
4,069
2,269
CAGR=Compound Annual Growth Rate
Market Capitalization Dollars in Millions
Historical stock prices are adjusted for splits and dividends.
N/A=Not available for date reflected in table.
-24%
-9%
-44%
9
Health Reform Circa 2010
Health reform has been a topic in every American generation over the past century. But in the last 12 months, we have
witnessed an unprecedented national political discussion about the characteristics of the healthcare system we are
leaving for our children. Hopefully, a real dialog happened behind closed doors between wise members of the government
and industry. The public view, however, was of a more negative, polarized, loud, partisan and bitter political battle.
Nevertheless, the most significant U.S. healthcare legislation in 30 years passed along party lines in March 2010. The
language describing the legislation changed over time from health reform to health insurance reform to reflect a more
limited scope focused on decreasing the rolls of the uninsured.
The legislation mandates employers and individuals to offer and purchase medical insurance, and it moves a broader
group of Americans into the existing Medicaid system. The legislation also creates state-based insurance exchanges
that give small employers and individuals the purchasing powers of larger groups, and it eliminates the exclusionary
underwriting practice around preexisting conditions. A set of new taxes on wealthy individuals, excise taxes on healthcare
companies and unfunded mandates and penalties on employers and individuals are being used to partially underwrite
the costs of the new benefits. The other major source of new funds is a significant projected savings from the federal
Medicare program, which, if materialized, will come from eliminating fraud and abuse, decreasing payments to providers
and/or decreasing services to beneficiaries.
What is the impact of this legislation on Cerner? To some degree, the larger impact on Cerner’s core business was
introduced with little public debate a year earlier by ARRA, which provides incentives to hospitals, providers and other
eligible professionals to implement EHRs and use them in a meaningful way. There are still some very important details
to be resolved on how the HITECH Act will be implemented, but this legislation is expected to move the hospital and
physician IT markets forward. Healthcare information technology (HIT) reached the status of “desired infrastructure” for
efficient and safe healthcare delivery in the past decade. In this next decade, it will be one of the major levers for creating
new models and methods of care delivery.
The 2010 health insurance legislation promises to eliminate one of the biggest business risks our hospital clients face—
unreimbursed medical services. In the short term, this new source of funding is expected to grow the size of healthcare in
the U.S., which will be a positive for our clients and Cerner. At this time, it is uncertain if the excise tax on medical device
manufacturers will apply to Cerner.
Ultimately, a significant historical advantage to Cerner will persist because of what the legislation does not do. It does not
try to reform healthcare delivery. To us at Cerner, it seems self-evident that the most powerful forms of innovation cannot
be prescribed by legislation. One of Cerner’s most enduring competitive advantages comes from using the power of
information technology to create innovative solutions that play an important role in transforming the delivery of care. While
the term health reform probably is not definable in a broad public debate, Cerner has for decades had our own definition
of reform: a healthcare system in which all avoidable error, inappropriate variance, unnecessary waste, needless delay
and costly friction are eliminated. The recent legislation does create a framework for the Secretary of Health and Human
Services to experiment with new methods to achieve a reformed healthcare system. This is work to be done in the next
10 years. Cerner will have a significant opportunity during this time frame to continue to innovate solutions that will help
our clients achieve this transformation. At the start of a new decade, we believe there is once again a strong chance that
we are at the right place at the right time.
1979
1982
1984
1986
1987
1990
Neal Patterson, Paul Gorup,
and Cliff Illig leave Arthur
Andersen & Co. to form their
own company
PathNet® is installed in
the lab at St. John Medical
Center in Tulsa, Oklahoma
Cerner secures $1.5 million
venture capital funding
from First Chicago Capital
Corporation
Cerner goes public on
NASDAQ (CERN)
$17 million of revenue
149 associates
Cerner listed as one of Inc.
magazine’s 100 fastest-
growing companies
Revenues surpass
$50 million
10
New Decade, New Opportunity: Cerner’s Agenda for the Next 10 Years
We love our core business; it has led us to become the leading HIT company in the world. We clearly believe this business
will grow substantially over the next decade. However, we are also seeing that, in this new decade, we will probably have
the opportunity to move the boundaries of Cerner once again to create a significant health company. Nothing will be easy.
Success in all dimensions could make Cerner a household name in many languages by 2020. In the following sections,
we describe some of the thinking that drives the Cerner of today and the company we aim to become.
Our Core Business—Worldwide HIT
We see significant opportunities to grow our core business with four fairly straightforward strategies:
g
g
g
g
First, we must seize the opportunities created in the U.S. by the government’s charge for healthcare providers to
achieve meaningful use of EHRs.
Second, we must advance our leadership position in Europe, the Middle East, Asia-Pacific and the rest of the world.
Third, we must expand the concepts and successes we have had with our CernerWorksSM managed services
business in the past decade by growing new value-added managed services that will help our clients become the
highest-performing and highest-quality organizations in all of healthcare.
And fourth, we must continue to innovate new technological solutions to current and emerging healthcare problems.
Success in achieving these four objectives should position Cerner for profitable growth through the next decade.
The first two strategies are very familiar territory for Cerner—implementing advanced IT solutions for healthcare provider
organizations in the U.S. and other countries around the world. Still, achieving the continued success of both of these
strategies will be no small feat considering the dynamic nature of what we do and the fact that we conduct business in
more than 25 countries. While it is very important that we make full use of the opportunity created by ARRA in the U.S.,
we must do so while also advancing our position as an HIT leader in the rest of the world.
The third strategy is to expand and further align our relationships with our current clients through new services that help
them become more successful in their local and regional markets. In 2009, we announced the signing of our first two
Cerner ITWorksSM clients. In this enhanced relationship, Cerner assumes responsibility for running the client’s internal IT
department and functions. We literally become a part of our clients’ organizations—the highest form of strategic alignment
possible. A second new service is Cerner RevWorksSM, which includes solutions as well as services to help healthcare
organizations with their revenue cycle functions. In addition to representing substantial new revenue opportunities for
Cerner, both initiatives make us much more strategically aligned with and vital to our clients, allowing us to innovate at
the edges of healthcare and helping our clients improve healthcare quality, safety and efficiency.
Our fourth strategy is to continue to be the technological innovator in the marketplace, creating highly valued architectural
platforms and solutions beyond the core EHR. Our Innovation Campus in Kansas City is a high-energy hive of activity for
this creative expansion. One example of this organic growth opportunity is in the medical device space, where the next
generation of medical devices must be designed around the context of the EHR. Today, a growing number of clients
use our CareAware® MDBus® architecture as their enterprise device connectivity strategy, including clients outside our
Cerner Millennium® EHR installed base. Also in 2009, our CareAware RxStation® medication dispensing cabinets reached
a new stage of maturity, having successfully administered and controlled more than one million medication orders.
1992
1993
1994
1995
1997
1999
2 for 1 stock split (May 12)
2 for 1 stock split (March 1)
1,000 associates
2 for 1 stock split (August 7)
2,000 associates
Cerner Vision Center opens
Revenue surpasses $100
million
HNA Millennium® Phase 1
is completed
Cerner makes Fortune list
of “Best 100 Companies to
Work For”
11
In early 2009, we successfully launched more than 10 new agile business units across certain vertical healthcare
markets that we believe represent meaningful whitespace opportunities for engaging existing and future clients. These
business units each have talented next-generation Cerner leaders with aligned sales, services and development teams
to help make Cerner a dynamic competitor in these traditionally niche markets. A good example of where this focus has
paid off is in our Women’s Health business unit, which signed 22 major clients in 2009, displacing the top best-of-breed
competitors in many of these client decisions.
Becoming a Health Company—CERN
In the near future, as medical records become digitized and care delivery organizations get connected, there will be
a number of second-order effects, which may develop into major new opportunities for Cerner. We collectively refer to
these opportunities by the acronym CERN, which stands for Consumer, Employer, Research and Network. At Cerner, we
are privileged to have among our associates and clients some of the brightest and most proactive minds in healthcare
today. Together, we often discuss the health system limitations and failings of the current healthcare-related transactions.
Healthcare reform has been the dominant topic in the halls of Congress for the past year, but the truth is that the most
common and heartbreaking problems with our modern healthcare system can never be fixed by legislation. Instead,
solving these problems will require significant and ambitious innovation and improvements in the delivery of healthcare.
Part of Cerner’s vision for healthcare in this decade is placing the Consumer at the center of the health system, with
each person in control of his or her own smart, secure, contextually relevant, interactive personal health record. This
record should be the private property of the person and should hold their complete medical history. Also, we believe that
this record should give people ready access to information on both the price and quality of the care they receive, and
that it will be capable of “personalizing” medicine using a predictive model of future needs based on a person’s family
history, medical history, current problems and unique genetic code. Equipped with this information, consumers and
their providers would have financial, emotional and pragmatic incentives to work together to achieve health objectives,
strategically manage chronic conditions and intervene early in emerging future health issues. With more complete patient
information, providers also will be able to communicate instantly with the rest of the patient’s care team. And providers
will receive immediate point-of-service payments for the delivery of appropriate care rather than waiting weeks or months
while claims work through the current arcane, inefficient reimbursement system.
We expect that a major consumer-based health company will emerge during the next 10 years. We anticipate that many
companies will try to become players in this new segment. The vision and strategies that have positioned Cerner to
succeed in our first three decades also give us a very good shot at becoming the consumer health company of this
decade. It will not be easy, but that has never deterred us.
We continue to believe that the Employer will be a much more active participant in healthcare solutions in this new decade,
due to the large percentage of healthcare costs funded by employers. The new U.S. legislation further expands employers’
responsibilities, mandating their participation. In 2009, we expanded our footprint and capabilities in the employer space.
Our acquisition of IMC HealthCare expands our employer clinic offering to include occupational health while increasing
our list of employer clients, including some that are very large organizations. We have a great opportunity to grow these
employer relationships to include other Healthe employer services, such as cost-effective on-site pharmacies, highly
personalized condition and wellness management programs and new-age benefit plan design services. Cerner has
designed these services to help large, self-insured employers better control the costs associated with managing and
improving the health of their employees. We have tested and proven our ability to do this inside Cerner, where we have
2000
3,000 associates
2001
Revenue surpasses
$500 million
2002
4,000 associates
2003
2004
2005
Cerner and Atos Origin
awarded U.K. National
Health Services Choose
and Book contract
Cerner celebrates
25th anniversary
Cerner ranks third among
software companies in
The Wall Street Journal’s
Top 50 Returns over a
five-year period
5,000 associates
Revenues surpass $1 billion
Cerner signs contract with
Fujitsu for southern region
of NHS Connecting for
Health program in England
Nearly 7,000 associates
12
held health costs flat over the past several years while improving the health of our associate base, as measured by
meaningful clinical indicators, such as cholesterol levels, body mass index, blood pressure and glucose levels.
Further, we believe the managed transparency created by the EHR will transform how medical Research is conducted in
the U.S. and abroad by academic institutions, pharmaceutical companies and others. Our EHR capabilities should enable
new and completely different methods, processes and platforms for clinical trials and regulatory compliance, shortening
the time frame needed for research to enter practice and giving researchers broad new data sources for prospective and
retrospective study. Additionally, our research platform involves identifying new and effective ways to incorporate the most
recent clinical research contextually into care delivery.
Finally, healthcare around the globe has an array of challenges and requirements that will give rise to new Networks
facilitating the interchange of secure medical information. In each country, either the government will define standards
for interoperability of systems, making the sharing of data possible, or private companies will provide services that do
so. In the U.S., the ARRA-defined requirements and funding enable and encourage the creation of regional networks that
will facilitate broader interoperability, allowing for things like personal health records, population health management
and chronic disease management programs to exist. Cerner’s clients will enjoy the benefits of connectivity as we create
national capabilities that drive interoperability with all venues in healthcare.
A New Middle for Healthcare
We have a strong belief in the value of our work over the past three decades and the momentum that is building as
practically all venues of healthcare automate the core processes of how medicine is practiced. We see this automation
leading to a series of disruptive structural changes to healthcare, ultimately creating new models for delivering care and
radically altering the current middle layer that separates care organizations from the source of funds. To put it differently,
one of our goals is to eliminate insurance companies, as they exist today.
All the CERN initiatives in the previous section are tied to this bigger vision of creating what we call a New Middle for
healthcare. Like many other complex systems that develop from independent parts over time, the pieces of today’s
healthcare “system” are tied together almost exclusively by financial transactions. Viewing healthcare purely through
finance is like trying to understand society by looking only at bank statements. Today, the insurance-based middle layer
works for employers or governments to aggregate both the supply of healthcare goods and services and the potential
demand for goods and services. The current middle layer is defined by loosely coupled, highly proprietary networks of
carriers and providers that are focused on contracts and prices, not on clinical activities, standards of care and actual
results. Further, this layer currently consists of a labyrinth of insurance-serving financial transactions. These transactions
create misaligned economic incentives that reinforce negative trends rather than promoting quality and value.
The New Middle is something we have thought about extensively and conceived as a radically different transactional
layer for healthcare—one that will work synergistically with the broader EHR adoption and interoperability capabilities that
will unfold in this decade. Over the next year, we will invest in further defining the characteristics of the New Middle and
staking out Cerner’s IP positioning for it. Inside Cerner, our early discussions of the New Middle have already begun to
influence and inform our internal development activities. It is becoming the vision to guide a new era of long-term growth
for Cerner.
2006
2007
2008
2009
2 for 1 stock split (Jan. 10)
Revenues surpass $1.5 billion
Free Cash Flow surpasses $100 million
Cerner Celebrates 30th Anniversary
Introduced CareAware® device
architecture and line of devices
Cerner signs contract with BT for London
region of NHS program
First Cerner Millennium® site in France
Delivered Cerner Millennium 2007
software release, containing more new
features than any prior release and setting
a new quality standard
Opened Cerner Healthe Clinic at World
Headquarters
Shipped first production units of
RxStation® medication dispensing
devices; 25 clients purchase MDBus®
device connectivity
Delivered new Cerner ProVision® PACS
Workstation
Opened new Data Center at World
Headquarters
Signed first clients in Spain and Egypt;
opened office in Dublin, Ireland
Acquired Etreby Computer Company
(retail pharmacy solutions)
Smart Semi, a mobile hospital room of
the future, introduced and made 93 stops,
hosting nearly 9,000 client attendees
American Recovery & Reinvestment Act
becomes law and includes $35 billion in
incentives for the adoption of healthcare IT
Signed first agreement for the
Smart Room
Expanded footprint in Middle East with
signing of Ministry of Health in
United Arab Emirates
Signed first hosted client in France
Signed first client in Latin America
13
First two Cerner ITWorksSM contracts signed
University of Missouri and Cerner create
Tiger Institute for Health Innovation
Announced acquisition of IMC HealthCare
Cerner clients connect with HHS and CDC to
fight spread of influenza
Introduced uCern™ and uDevelop™
platforms, to connect associates, clients,
and consumers and allow collaboration
between Cerner and external developers;
opened uCern Store to provide access to
items developed by Cerner and others
Cerner added to NASDAQ 100 Index
In conclusion, Cerner’s healthcare intellectual property, intellectual capital and market position represent strong assets
that we must continue to grow. As we expand our core markets, the widening network of hospitals, physicians, laboratories,
pharmacies and home health agencies that are the Cerner client family represent an impressive platform for further
development and expansion of our business, and the potential for significant impact on healthcare worldwide. Over
the next several years, Cerner will be building the value-based pieces of a new-age platform for consumers, providers,
employers and researchers. While each element of the platform will have value by itself, in time, it is possible that the
platform may become the competition for the insurance-based infrastructure that is the current middle.
At Cerner, we are excited to be starting a new decade. It seems like with each passing year, Cerner’s vision and mission
become more relevant. With your support, we will drive forward with the same energy and purpose that have defined our
company for the past three decades.
NEAL L. PATTERSON
FOUNDER
Chairman & Chief Executive Officer
CLIFFORD W. ILLIG
FOUNDER
Vice Chairman
PAUL N. GORUP
FOUNDER
Senior Vice President & Chief of Innovation
EARL H. DEVANNY, III
President
JEFFREY A. TOWNSEND
Executive Vice President
MICHAEL R. NILL
Executive Vice President
& Chief Engineering Officer
MICHAEL G. VALENTINE
Executive Vice President
& Chief Operating Officer
MARC G. NAUGHTON
Executive Vice President
& Chief Financial Officer
JULIA M. WILSON
Senior Vice President
& Chief People Officer
14
15
Appendix: Cerner’s Business Model and Financial Assessment
Introduction
This appendix is our annual discussion of our business model and financial performance. Note that some of the results
in this discussion reflect adjustments compared to results reported on a Generally Accepted Accounting Principles (GAAP)
basis in our Form 10-K. Non-GAAP results should not be substituted as a measure of our performance but instead may
be used along with GAAP results as a supplemental measure of financial performance. Non-GAAP results are used by
management along with GAAP results to analyze our business, make strategic decisions, assess long-term trends on a
comparable basis, and for management compensation purposes. Please see the end of this appendix for a reconciliation
of non-GAAP items to GAAP results.
The Cerner Business Model
The core of our business model is the creation of intellectual property (IP) in the form of software and other types of digital
content. Our software is bundled with other technologies and services to create complete clinical and business solutions
for healthcare providers. In short, we build it, sell it, deliver it, and support it for healthcare provider organizations around
the world (“it” in this context refers to the solutions Cerner creates for healthcare organizations). In our opinion, we
have a healthy business model that has improved over time. Below is a graphical representation of our business model
showing a top-to-bottom flow of how we
convert new business opportunities and
our backlog into revenue and earnings.
Sales Pipeline
At the top of our model is our Sales Pipeline
of potential future business opportunities
we have identified in the marketplace.
Despite the challenging economy, our
pipeline has increased substantially over
the past several years, reflecting a strong
market for our solutions.
During each quarter, we sign new
contracts to deliver our solutions to
clients. These contract signings are
reported as New Contract Bookings and
become part of our contract backlog. A
typical new contract will impact our
revenues in the current quarter and
for the next several quarters, or even
years, depending on how the licenses,
technology, subscriptions/transactions,
managed services, and professional
services are delivered.
Almost all of our client contracts will
also contain provisions for Support
Contracts in which Cerner agrees to
provide a broad set of services that
support our clients’ use of our solutions
in demanding clinical settings. This
support includes addressing technical
issues related to our software and
providing access to future releases
of licensed software. We also provide
support and maintenance agreements
for third party software and hardware
that we resell to our clients.
New Contract Bookings: $1.8 billion
Contract Backlog: $3.6 billion
Support
Contracts
Support Backlog:
$620 million
Licensed
Software
$254M
System Sales
Technology
$152M
Total 2009 Revenue = $1,672M
Services, Support & Maintenance
Subscriptions/
Transactions
$99M
Professional
Services
$397M
Managed
Services
$247M
Support &
Maintenance
$493M
Note: Total Revenue
includes $30M
of reimbursed
travel revenue
x88%
x11%
$224M
$17M
x52%
$51M
x28%
x28%
$111M
$69M
x74%
$365M
Contribution Margin %
Total 2009 Contribution Margin =
$837M (50% of Revenue)
Contribution Margin $
Less:
Indirect Costs
R & D
16% of revenue
($267M)
SG & A
16% of revenue
($261M)
($528M)
Operating Margin
+
D&A
=
$309M, 19%
$189M
EBITDA
$498M
30%
Less: Taxes &
Net Int. Exp./Other Income
Taxes
($106M)
Net Interest
Exp./Other Income
$1M
($105M)
Net Earnings
$204M
÷
84M
Shares
Earnings Per Share
$2.43
16
Continuing with our top-down business model flow, the value of the new contract bookings and support contracts rolls into
our Contract Backlog and Support Backlog, respectively. Even though almost all of our systems are in service for decades,
our reported Support Backlog only includes the expected value for one year of support revenue for all of our client support
contracts. We report the value of these backlogs because we believe they are important to our shareholders’ ability to
interpret the overall health of our business. Our total backlog (signed contracts with unrecognized revenues and one year of
support for all support contracts) ended 2009 at $4.2 billion and has grown at healthy compounded annual rates of 16%,
22% and 24% over the past 3, 5 and 10 years.
At the core of our business model are our various revenue streams and the contribution each stream makes toward the
profitability of Cerner. The contribution is stated as the recognized revenue less the direct cost to produce that revenue.
On our business model graphic, we have depicted six revenue categories that roll into the two revenue line items on our
income statement. Licensed Software, Technology, and Subscriptions/Transactions make up the System Sales line
of our income statement, and Professional Services, Managed Services, and Support & Maintenance make up the
Services, Support & Maintenance line. Here is a description of each revenue stream:
Licensed Software. We develop and license IP (our architectures, application software, executable and referential
knowledge, data and algorithms) to our clients. Our standard license is perpetual—providing our clients permanent
rights to use the software they purchase. This approach contrasts with the approach of most of our competitors who
are always trying to sell “upgrades” to their clients. We believe our approach is part of the reason we have so many
long-term client relationships—some lasting three decades. We recognize revenues from licensed software as we
achieve pre-defined client engagement milestones, such as delivery and installation of our software. In 2009, this
type of revenue represented 15% of our total revenues with a profit contribution of 88%. Revenues from licensed
software were flat in 2009 compared to 2008, with a very strong fourth quarter offsetting declines in two of the first
three quarters.
Managed
Services
15%
Professional
Services
24%
Cerner 2009 Revenue Mix
Technology. We bundle licensed software with other
companies’ IP (e.g., that of HP, IBM, Microsoft, Oracle) in
the form of sublicenses to create complete technology
solutions for our clients. We also resell bundled computer
equipment (hardware) from technology companies to create
a completely functional system. More recently, we have
begun to resell medical devices for a growing list of medical
device companies. We recognize revenues from technology
resale as the equipment is delivered to our clients. In 2009,
these revenues represented 9% of our total revenue with
a profit contribution of 11%. Even at lower margins than
the rest of our businesses, technology resale is valuable to
Cerner as it is a driver of other high margin, high visibility
revenue, such as technical services, sublicensed software
support, and equipment maintenance. Technology revenue
decreased 12% in 2009, reflecting a tepid environment for
capital purchases most of the year. Additionally, as discussed in past years, the resale of hardware has been impacted by
a trend of our clients electing to have us host their Cerner Millennium® systems instead of buying the hardware upfront
from us and hosting it themselves. This is a fundamentally positive trend as a lower margin one-time revenue stream
is replaced by a higher-margin and longer-term managed services revenue stream. We believe traditional technology
sales will continue to be pressured by this trend, but we have been building new channels, such as relationships with
device manufactures to resell their devices to our clients as part of our CareAware® solutions initiative.
Support &
Maintenance
29%
Subscription/
Transaction, 6%
Licensed
Software
15%
Reimbursed
Travel, 2%
Technology
9%
Subscriptions/Transactions. Another method by which we provide IP is based on a subscription model that has a
periodic usage charge. This is the primary way we package and provide medical knowledge, which changes frequently
based on research and can be updated independently from the software in which it is embedded. Also included in
this category of revenue is our Electronic Data Interchange (EDI) transaction revenue. EDI is the electronic transfer
of data between healthcare providers and payers. Both the subscription and transaction model revenue streams
are generally recognized monthly, and in 2009 they grew 5% and represented 6% of our total revenues with a profit
contribution of 52%.
17
Professional Services. We provide a wide range of professional services to assist our clients in the implementation of
our information systems in their organizations. These services are in the form of project management, technical and
application expertise, and education and training of our clients’ workforce to assist in the design and implementation
of our systems. We recognize revenues associated with these consulting activities as they are provided to our clients.
In 2009, these revenues decreased 11% due to slightly lower billable headcount in the U.S. and a slowdown in project
work associated with our contracts in England. The services revenue decline is 6% after adjusting for a one-time UK
catch-up and an extra week in our 2008 fiscal year. Professional services represented 24% of our total 2009 revenue
with a profit contribution of 28%.
Managed Services. Under our CernerWorksSM suite of solutions, we offer a set of technical services that include
Remote Hosting, Application Management Services, Operational Management Services, and Disaster Recovery. Remote
Hosting is the largest of these offerings, and it involves Cerner buying the necessary equipment, installing it in one of
our data centers, and operating the entire system on the client’s behalf. The revenues for this service and our charge
for the equipment are recognized monthly as we provide the services. Most of our clients still choose to own their own
software license, so that portion of the revenue is unchanged. We own the equipment rather than selling it upfront to
the client, so this impacts the technology resale portion of revenue. In 2009, Managed Services revenue grew 24% and
represented 15% of our total revenue with the profit contribution increasing from 26% to 28%. Additionally in 2009, we
launched an extension of our CernerWorks solutions, our Cerner ITWorksSM solutions, which involves further strategic
alignment with clients, including Cerner taking on more of their IT functions. This initiative is off to a good start with our
first two clients operational and has the potential to become a large contributor to our revenue.
Support & Maintenance. The final business model is comprised of the ongoing support and maintenance services
we provide after our systems are in use by our client organizations. Almost all of our clients contract for these services.
Clients with support contracts get 24x7 access to our Immediate Response Center, which serves as our “emergency
room”, as well as access to a very knowledgeable base of associates in our SolutionWorks organization for less urgent
issues. In addition, our clients’ support payments give them ongoing access to the latest releases of our IP. We also
provide support for sublicensed software and maintenance for third party hardware. In 2009, support and maintenance
revenues grew 4%. Support revenue grew 8% after adjusting for the one-time UK catch-up and the extra week in our
2008 fiscal year. This revenue stream represented 29% of total revenue with a profit contribution of 74% (note that this
profit contribution is before a charge for research and development, which is treated as an indirect expense).
The revenue categories discussed above add up to 98% of total revenue. The remaining 2% is revenue from reimbursed
travel expenses related to our associates traveling to client locations. This revenue has a zero margin as it is simply a
pass-through of our client-related travel expenses that are billed to our clients and required to be reported as revenue.
The two large indirect expenses in our business model are the costs of our Research and Development (R&D), which was
equal to 16% of revenue in 2009, and the indirect portion of Selling, General and Administrative (SG&A) activities, which
also represented 16% of revenue in 2009. We have a long history of investing heavily in R&D and using that investment to
systematically expand markets to create organic growth. We expect to invest at least $1 billion in R&D over the next four
to five years, an investment we believe is unmatched in our industry. Over the next several years, we expect the industrial
strength of our Cerner Millennium architecture and the enactment of several initiatives designed to leverage our R&D
investments to slow the rate of increase in R&D spending, while continuing our strong record of innovation and organic
growth. Similarly, we expect to take advantage of our scalable business infrastructure to reduce the rate of increase in
SG&A spending to below our revenue growth rate. We expect this leverage to help improve operating margins without
impacting our ability to develop and deliver new solutions to our clients.
In 2009, our operating margin of $309 million was 18.5% of revenue, an increase of 190 basis points compared to 2008.
The remaining items in our business model are taxes, net interest income and other income, which totaled $105 million
in 2009, leaving $204 million of net earnings, or $2.43 of earnings per share.
Assessment of 2009 Financial Results
We continued to focus on three key financial objectives in 2009: growing the top line, expanding operating margins and
generating free cash flow.
Growing the Top Line
Cerner has delivered strong revenue growth over the long term. Both our new business bookings and revenue have
grown at double-digit compound annual rates over the past 5 and 10-year horizons. In 2009, we grew our new business
bookings 19%, driven by a record fourth quarter. A challenging global economy impacted revenue growth in 2009, and
18
total revenue was flat compared to 2008, with domestic revenue growth being offset by a decline in global revenue. Total
revenue grew 3% after adjusting 2008 revenue for the one-time UK catch-up and the extra week in fiscal year 2008.
Looking at revenue by geographic segment, domestic revenue increased 7% in 2009, while global revenue decreased
26% (20% after adjusting 2008 for the one-time UK catch-up).
In 2010, we expect our top-line growth to improve as the economy begins its recovery. In the U.S., we expect demand
driven by the healthcare IT provisions in the American Recovery and Reinvestment Act to begin driving increased demand
both inside and outside our installed based. Innovative new solutions and services that have been introduced in the last
few years are also expected to make a meaningful contribution to top-line growth in the coming years. Additionally, we
expect our global business will rebound and resume being a contributor to our growth. For more information on our growth
strategy, refer to the Cerner Growth Strategy section in Part 1, Item 1 of our Form 10-K.
Expanding Operating Margins
In February of 2004, we mapped out our path from the 2003 level of 9% operating margins to our target of 20%. We have
made very good progress since then, with our operating margin expanding over 900 basis points to 18.5% in 2009. Our
2009 progress was mostly in line with what we communicated last year, and our fourth quarter operating margin of 21.0%
exceeded our goal of exiting the year with operating margins greater than 20%. We are targeting 20% operating margins
for the full year in 2010.
The below graph and table detail our margin expansion since 2003.
Operating Margin
21%
19%
17%
15%
13%
11%
9%
'03
'04
'05
'06
'07
'08
'09
'10E
2003
2004
2005
2006
2007
2008
2009
2010E
Contribution Margin
Licensed Software
Technology
Subscription/Transaction
Professional Services
Managed Services
Support & Maintenance
Total Contribution Margin
Indirect Costs % of Revenue
R&D
SG&A
Total
Operating Margin
89%
17%
10%
15%
18%
53%
41%
19%
13%
31%
9.3%
Cumulative Improvement (basis points)
88%
20%
12%
23%
20%
57%
45%
19%
14%
33%
85%
13%
37%
27%
25%
62%
46%
18%
15%
33%
84%
11%
43%
27%
25%
65%
46%
18%
15%
32%
89%
12%
49%
29%
25%
69%
47%
17%
15%
32%
88%
12%
50%
29%
26%
72%
48%
16%
15%
31%
88%
11%
52%
28%
28%
74%
50%
16%
16%
32%
88%
12%
53%
29%
29%
75%
51%
15%
15%
30%
12.4%
313bp
12.6%
335bp
13.4%
413bp
15.1%
579bp
16.6%
729bp
18.5%
20.3%
922bp
1101bp
19
Highlights of the margin expansion drivers include:
Increase profitability of Support & Maintenance. As we have continued to harden the Cerner Millennium platform,
our incremental cost to support each additional client has declined. We expect this to continue, which will allow us to
expand the profitability of this highly visible revenue stream.
Improving Professional Services Margins. We will continue to leverage our Solutions Center implementation
approach, which has higher margins than traditional on-site projects. And ongoing efficiencies are expected from
initiatives such as our Bedrock® technology, which automates much of the implementation and management of our
Cerner Millennium information platform, and our MethodM® implementation methodology approach, which provides
standardized processes during implementation. These initiatives reduce the implementation costs for Cerner and our
clients while delivering more predictable outcomes, allowing for margin expansion and a competitive advantage in the
marketplace.
Leverage R&D investments, bringing R&D as a percentage of revenue down from 16% to 15% in 2010. Leveraging
our significant R&D investment and common platform should allow us to continue our record of innovation while
growing R&D spending at a rate that is slower than our top-line growth rate. The key to doing this will be our ability to
extend our solutions to new revenue opportunities, such as the global marketplace, without significant incremental
costs. Efficiencies from our operations in India will also contribute to our ability to control the rate of R&D growth.
Leverage Sales, General and Administrative expenses. We have built a scalable business infrastructure that should
allow us to keep our SG&A spending growth rate lower than our top-line growth rate.
Increase profitability of Technology Resale. The primary driver of this will be focusing on achieving better margins
on hardware sales and increasing the mix of higher margin sublicensed software as a percent of total technology
resale.
Expand Margins and grow revenue in Subscriptions/Transactions business model. This business model is
relatively immature, but has good growth potential, and we expect it to become more profitable as it grows and the
fixed costs associated with supporting it are spread over a higher revenue base.
A key point regarding our margin expansion strategy is that we
are executing it while our business model is transitioning to more
visible and recurring revenue components. For example, in 2000,
approximately 55% of our revenue (before reimbursed travel) came
from what we consider visible or recurring sources such as Professional
Services, Managed Services, Subscriptions/Transactions, and
Support & Maintenance. In 2009, 75% of our revenue came from
these sources. Similarly, Contribution Margin from recurring or visible
sources increased from 41% to 71%.
Strong margin expansion allowed us to grow our earnings 12% in
2009 even though revenue growth was flat. Our 3-, 5-, and 10-year
compound annual earnings growth rates of 22%, 26%, and 40%,
respectively, reflect our ability to drive long-term earnings growth.
Going forward, our top-line growth strategies coupled with continued
focus on productivity enhancements and margin expansion position
us well for continued strong earnings growth.
Generating Cash Flow
A healthy business generates cash flow. Perhaps our most significant
improvement in recent years has been in our cash flow performance.
Despite the challenging economy, 2009 was a record year for cash
performance with $347 million of operating cash flow and $138
million of free cash flow (operating cash flow less capital expenditures
and capitalized software). Operating cash flow increased 23% in 2009
and more than offset slightly higher capital expenditures. Free cash
flow as a percent of net earnings has increased from 22% in 2007,
to 55% in 2008, and then to 72% in 2009. We expect to continue
100%
80%
60%
40%
20%
0%
$350
$300
$250
$200
$150
$100
$50
$0
($50)
20
25%
29%
45%
55%
75%
59%
41%
71%
2000
2009
Revenue
2009
2000
Contribution Margin
Non-recurring
Recurring and Visible
Operating Cash Flow
Free Cash Flow
'00
'01
'02
'03
'04
'05
'06
'07
'08
'09
*FCF = Operating CF less Capital Expenditures and Capitalized Software
growing free cash flow in the next few years through growth in operating cash flow combined with keeping capital spending
in the $150 million per year range.
Stock Price
At Cerner, we manage the company, not the stock price. In the short-term, the stock price can be influenced by many
factors beyond our control, but we believe in the long-term it will closely reflect the quality of our decisions. We believe
it is important for our shareholders that we focus on delivering strong long-term results, but we also understand the
importance of delivering consistently against short-term targets.
Following the economic turmoil of 2008 and early 2009, the stock market rebounded, with the NASDAQ Composite Index
and S&P 500 ending 2009 up 44% and 23%, respectively. Cerner’s stock price increased 114% in 2009, reflecting our
delivery of solid results in a challenging environment, our strong position to benefit from the healthcare IT provisions in
the U.S. stimulus bill, and improved broader market performance. When measuring our stock performance over the 5-,
10- and 20-year periods using compound annual growth rates, the returns are 25%, 24%, and 26%, respectively. These
returns are significantly greater than the returns over the same time frames for the NASDAQ Composite Index (1%, -6%,
and 8%) and S&P 500 (-2%, -3%, 6%).
Reconciliation of 2009 GAAP Results to Non-GAAP Results*
($ in millions except Earnings Per Share)
GAAP Operating Earnings
Share-based compensation expense
Adjusted Operating Earnings
GAAP Net Earnings
Share-based compensation expense
Income tax benefit of share-based compensation
Adjusted Net Earnings (non-GAAP)
Operating
Earnings
$
$
$
292
17
309
Net
Earnings
$
$
$
$
193
17
(6)
204
Reconciliation of GAAP Operating Cash Flow to Non-GAAP Free Cash Flow
Cash flows from operating activities
Capital purchases
Capitalized software development costs
Free cash flow (FCF)
*More detail on these adjustments and management’s use of Non-GAAP results is in our 2009 Form 10-K and 8-Ks.
Operating
Margin %
17.5%
18.5%
Diluted
Earnings
Per Share
$ 2.31
0.20
(0.08)
$ 2.43
Cash Flow
$ 347
$ (131)
$
(78)
$ 138
21
ANNUAL REPORT 2009
FORM 10-K
22
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: January 2, 2010
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number: 0-15386
CERNER CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
Incorporation or organization)
2800 Rockcreek Parkway
North Kansas City, MO
(Address of principal executive offices)
43-1196944
(I.R.S. Employer
Identification No.)
64117
(Zip Code)
(816) 221-1024
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $.01 par value per share
(Title of Class)
NASDAQ Stock Market
(Name of exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [X]
No [ ]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes [ ]
No [X]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X]
No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
Yes [ ]
No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [X]
Smaller reporting company [ ]
Non-accelerated filer [ ]
Accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ]
No [X]
As of July 4, 2009, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $4,265,742,365 based on the
closing sale price as reported on the NASDAQ Global Select Market.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
[Common Stock, $.01 par value per share]
Outstanding at February 16, 2010
81,889,914 shares
DOCUMENTS INCORPORATED BY REFERENCE
Document
Proxy Statement for the Annual Shareholders’ Meeting to be held May 28, 2010 (Proxy Statement)
Parts Into Which Incorporated
Part III
23
PART I
Item 1. Business
Overview
Cerner Corporation is a Delaware business corporation formed in 1980. Unless the context otherwise requires, references
in this report to “Cerner,” “the Company,” “we,” “us” or “our” mean Cerner Corporation and its subsidiaries.
Our corporate headquarters are located at 2800 Rockcreek Parkway, North Kansas City, Missouri 64117. Our telephone
number is 816.221.1024. Our Web site address, which we use to communicate important business information, can
be accessed at: www.cerner.com. We make our annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and all amendments to those reports available free of charge on or through this Web site as soon
as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange
Commission.
We are a leading supplier of healthcare information technology (HIT) solutions, healthcare devices and related services,
and are transforming healthcare by eliminating error, variance and waste for healthcare providers and consumers. Cerner®
solutions optimize processes for healthcare organizations ranging in size from single-doctor practices, to health systems,
to entire countries, for the pharmaceutical and medical device industries, and for the healthcare commerce system. These
solutions are licensed by more than 8,500 facilities around the world, including approximately 2,300 hospitals; 3,400
physician practices covering more than 30,000 physicians; 600 ambulatory facilities, such as laboratories, ambulatory
centers, cardiac facilities, radiology clinics and surgery centers; 700 home health facilities; and 1,500 retail pharmacies.
We design and develop most of our software solutions on the unified Cerner Millennium® architecture, a person-centric
computing framework, which combines clinical, financial and management information systems. This architecture allows
providers to securely access an individual’s electronic health record (EHR) at the point of care, and it organizes and
proactively delivers information to meet the specific needs of physicians, nurses, laboratory technicians, pharmacists or
other care providers, front- and back-office professionals and consumers.
We also offer a broad range of services, including implementation and training, remote hosting, operational management
services, revenue cycle services, support and maintenance, healthcare data analysis, clinical process optimization,
transaction processing, employer health centers, employee wellness programs and third party administrator (TPA)
services for employer-based health plans.
The following table presents our consolidated revenues by major solutions and services and by segment, as a
percentage of total revenues:
For the Years Ended
2009
2008
2007
Revenues by Solutions & Services
System sales
Support and maintenance
Services
Reimbursed travel
Revenues by Segment
Domestic
Global
31%
28%
38%
2%
100%
78%
22%
100%
33%
26%
39%
2%
100%
81%
19%
100%
30%
29%
39%
2%
100%
84%
16%
100%
24
The Healthcare and Healthcare IT Industry
The lingering downturn in the worldwide economy has impacted almost all industries. While healthcare is not immune to
economic cycles, we believe it is more resilient than most segments of the economy. The impact of the current economic
conditions on our existing and prospective clients has been mixed. Some organizations are doing well operationally,
but others face challenges such as higher levels of uninsured patients and Medicaid payments being impacted by the
weakened financial condition of state governments.
We believe the result of these challenges is that healthcare organizations are focusing on strategic spending that
generates a return on their investment. Because HIT solutions play an important role in healthcare by improving safety,
efficiency and reducing cost, they are often viewed as more strategic than other potential purchases. Most healthcare
providers also recognize that they must invest in HIT to meet regulatory, compliance and government reimbursement
requirements.
Overall, while the economy has certainly impacted and could continue to impact our business, we believe there are
several macro trends that are favorable for the HIT industry. One example is the need to curb the growth of United States
healthcare spending, which analysts from the Centers for Medicare and Medicaid Services estimate at $2.5 trillion or
17.3 percent of Gross Domestic Product in 2009. In the United States, politicians and policymakers agree that the growing
cost of our healthcare system is unsustainable. Leaders of both parties say the intelligent use of information systems will
improve health outcomes and, correspondingly, drive down costs. They cite a 2005 study by RAND Corp., which estimated
that the widespread adoption of HIT in the United States could cut healthcare costs by $162 billion annually.
In 2009, the broad recognition that HIT is essential to helping control healthcare costs contributed to the inclusion of HIT
incentives in the American Recovery and Reinvestment Act (ARRA). The Health Information Technology for Economic and
Clinical Health (HITECH) provisions within ARRA include more than $35 billion (in the form of incentives and penalties)
to help healthcare organizations modernize operations through the acquisition and wide-spread use of HIT. We believe
ARRA could represent the single biggest United States HIT opportunity in our 30 years as a company. With our large
footprint in United States hospitals and physician practices, together with our proven ability to deliver value, we believe
the Company is well-positioned to benefit from these incentives over the next several years.
Another dynamic in the United States marketplace is broader federal healthcare reform and uncertainty about how the
legislation will impact the industry. While this creates some near-term uncertainty for healthcare providers, we believe HIT
continues to be viewed as a transformational agent that is essential in all scenarios of reform.
Outside of the United States, the economy has impacted and could continue to impact our results in almost all regions.
However, we believe revenue growth opportunities outside the United States remain significant because other countries
are also grappling with increased healthcare spending, safety concerns and inefficient care, and many of these countries
recognize HIT as an important part of the solution to these issues.
In summary, while the current economic environment has impacted our business, the fundamental value proposition of
HIT remains strong. The HIT industry will likely benefit as healthcare providers and governments continue to recognize
that these solutions and services contribute to safer, more efficient healthcare.
Cerner Vision
Cerner’s vision has evolved from a fundamental thought: Healthcare should revolve around the individual, not the
encounter. This concept led to Cerner’s vision of the unified Cerner Millennium architecture and a Community Health
Model, which encompasses four steps:
Automate the Care Process
We offer a longitudinal, person-centric EHR, which gives clinicians electronic access to the right information at the right
time and place to achieve optimal health outcomes.
25
Connect the Person
We are dedicated to building a personal health system. Medical information and care regimens accessible from home
empower consumers to effectively manage their conditions and adhere to treatment plans, creating a new medium
between physicians and individuals.
Structure the Knowledge
We are dedicated to building systems that help bring the best science to every medical decision by structuring, storing
and studying the content surrounding each care episode to achieve optimal clinical and financial outcomes.
Close the Loop
Incorporating a medical discovery into daily practice can take as long as 10 years. We are dedicated to building systems
that implement evidence-based medicine, reducing the average time between discovery of an improved method to a
change in the standard of care.
As our vision evolves, we expect medicine will become increasingly personalized and technology more accessible. We are
creating new solutions and collaborative, information-sharing networks for large user communities, including strategies
to:
g
g
g
Connect all stakeholders in the healthcare system, including payers (employers and governments), providers and
consumers
Remove clinical, financial and administrative friction
Create a secure, transparent and open network for data sharing to improve disease management and facilitate
personalized medicine
To achieve this vision, we are leveraging the Cerner Millennium architecture and expanding our solutions and services,
as discussed below.
Cerner Growth Strategy
Our business strategies are anchored by our industry-leading solution and device architectures, the breadth and depth
of our solutions and services, our proven ability to deliver value, and, most importantly, the success of our clients. A
core strength that has led to this strong market position is our proven ability to innovate, which has driven consistent
expansion of solutions and services, entry into new markets and strong long-term growth.
We believe our strengths position us well to gain market share in the United States during a period of expected strong
demand driven by the HITECH provisions of ARRA. We also have a strong global brand and a presence in more than 25
countries and believe we have a good opportunity to gain market share outside of the United States.
We also have a significant opportunity to grow revenues by expanding our solution footprint in existing clients. In addition
to the opportunity to expand penetration of core solutions, such as EHR’s and computerized physician order entry, we
have a broad range of solutions that can be offered into our existing client base. Examples include solutions and services
for women’s health, anesthesiology, imaging, clinical process optimization, critical care, medical device connectivity,
emergency department, revenue cycle and surgery.
Additionally, we have recently introduced additional services targeted at capturing a larger percent of our clients’ existing
IT spending. These services leverage our proven operational capabilities and the success of our CernerWorksSM managed
services business, where we have demonstrated the ability to improve our clients’ service levels at a cost that is at
or below levels they were previously spending. One of these new services is Cerner ITWorksSM, a suite of services that
improve the ability of hospital IT departments to meet their organization’s needs while also creating a closer alignment
between Cerner and our clients. A second example is Cerner RevWorksSM, which includes solutions and services to help
healthcare organizations with their revenue cycle functions.
26
We have made good progress over the past several years at reducing the total cost of ownership of our solutions,
which expands our end market opportunities by allowing us to offer lower-cost, higher-value solutions and services to
smaller community hospitals, critical access hospitals and physician practices. Our ability to address these markets
has been aided by our Bedrock® technology, which automates much of the implementation and management of the
Cerner Millennium platform. We have also streamlined implementations and made them more predictable through our
MethodM® implementation methodology, which draws upon practices proven to be effective during thousands of past
implementations. Additionally, we reduced up-front hardware costs and ongoing technology obsolescence risks through
our remote-hosted, managed services offering, CernerWorks.
We also expect to drive growth over the course of the next decade through initiatives outside the core HIT market. For
example, we offer clinic, pharmacy and wellness services directly to employers. And as described below, we believe being
able to connect employers, governments and consumers directly with their healthcare providers through a “New Middle”
presents a substantial growth opportunity as we aim to help eliminate the friction that consumes more than 30 percent
of healthcare spending.
Creating the Cerner Network and The New Middle
Several years ago, we introduced a surveillance system called the LightsOn Network®, which identifies performance
problems in real time and has the ability to predict issues that could create system vulnerability. With more than 300
participating clients, the LightsOn™ solution has become an evidence-based network that enhances performance and
allows our clients to maximize the value they gain from our systems. Our LightsOn solution also shows our ability to create
a network—a common platform of learning and improvements from which all our clients can benefit.
Along these lines, we have created the uCern™ platform, a collaboration and social networking platform which gives
clients a place where they can collaborate with peers or Cerner associates about topics ranging from healthcare reform
to solution enhancements to project status updates. Approximately 95 percent of our core Cerner Millennium clients
actively engage on this platform. Additionally, we have created the uDevelop™ solution, a collaborative ecosystem that
supports a unique audience of engineers, including both our associates and external developers, who work to improve
our solutions; and the uCern Store, which offers quick access to innovations developed by us, as well as other individuals
and organizations.
Another example of how we are creating value out of the connectedness of our client base is the Flu Pandemic Initiative.
In partnership with the United States Department of Health and Human Services and the Centers for Disease Control and
Prevention (CDC), we created a secure, rapid-detection network for the influenza virus in 2009. This network supplies
public health departments, clients and the CDC with real-time situational awareness information to help communities
triage resources during an influenza outbreak.
In addition, we are leading efforts to create interoperability in order to make the process of electronically sharing clinical
information faster and easier for healthcare providers. For example, we have solutions like the Cerner Hub, which enables
the secure electronic flow of clinical data between hospitals and physician practices, regardless of the EHR system being
used.
Through these connections and networks, we are creating the building blocks for an entirely new healthcare system
that will introduce much-needed competition for our current, insurance-based infrastructure. In this new system, a
“New Middle” would facilitate the sharing of relevant clinical and financial information between payers, consumers and
providers, enhancing care and reducing friction.
Consumers would have a personal health record, giving them ready access to information on both the price and quality of
the care they receive. This record would have the consumer’s complete medical history and a predictive model of future
needs based on his or her genetic code. Armed with this information, consumers would have financial incentives to focus
on controlling chronic conditions and reducing future maladies.
With more complete patient information, providers could focus on preventive rather than reactive medicine. Through
this New Middle, providers could communicate instantly with the rest of the patient’s care team, and they would receive
immediate point-of-service payments for the delivery of appropriate care rather than waiting weeks or months while
claims work through the reimbursement process.
27
Finally, the segments of our society that pay for care—employers or governments—would receive a rational health system,
one that eliminates variance, cost and waste while maximizing the quality of healthcare for all of us.
Software Development
We commit significant resources to developing new health information system solutions. As of the end of 2009,
approximately 2,000 associates were engaged in research and development activities. Total expenditures for the
development and enhancement of our software solutions were approximately $285.2 million, $291.4 million and $283.1
million during the 2009, 2008 and 2007 fiscal years, respectively. These figures include both capitalized and non-
capitalized portions and exclude amounts amortized for financial reporting purposes.
As discussed above, continued investment in research and development remains a core element of our strategy. This will
include ongoing enhancement of our core solutions and development of new solutions and services.
Sales and Marketing
The markets for Cerner® HIT solutions, healthcare devices and services include integrated delivery networks, physician
groups and networks, managed care organizations, hospitals, medical centers, free-standing reference laboratories, home
health agencies, blood banks, imaging centers, pharmacies, pharmaceutical manufacturers, employers, governments
and public health organizations. The majority of our sales are sales of clinical solutions and services to hospital and
health systems, but the Cerner Millennium architecture is highly scalable and organizations ranging from several-doctor
physician practices, to community hospitals, to complex integrated delivery networks, to local, regional and national
government agencies use our Cerner Millennium solutions.
As previously discussed, we have focused on bringing down the total cost of ownership of our systems, which allows us to
be price competitive across the full size and organizational structure range of healthcare providers. Sales to large health
systems typically take approximately nine to 18 months, with the sale cycle often shorter when selling to smaller hospitals
and physician practices. We have seen some indications that the HITECH provisions of ARRA may shorten this process.
Our executive marketing management is located in our North Kansas City, Missouri headquarters, while our client
representatives are deployed across the United States and globally. In addition to the United States, through our
subsidiaries, we have sales associates and/or offices in Australia, Canada, Chile, England, France, Germany, China (Hong
Kong), India, Ireland, Malaysia, Saudi Arabia, Singapore, Spain and the United Arab Emirates.
We support our sales force with technical personnel who perform demonstrations of Cerner solutions and services and
assist clients in determining the proper hardware and software configurations. Our primary direct marketing strategy is
to generate sales contacts from our existing client base and through presentations at industry seminars and tradeshows.
We market the PowerWorks® solutions, offered on a subscription basis, directly to the physician practice market using
telemarketing, channel partners and through existing acute care clients that are looking to extend Cerner solutions to
affiliated physicians. We attend a number of major tradeshows each year and sponsor executive user conferences, which
feature industry experts who address the HIT needs of large healthcare organizations.
Client Services
Substantially all of Cerner’s HIT software solutions clients enter into software maintenance agreements with us for
support of their Cerner systems. In addition to immediate software support in the event of problems, these agreements
allow clients the use of new releases of the Cerner solutions covered by maintenance agreements. Each client has
24-hour access to the client support team located at our world headquarters in North Kansas City, Missouri, and our
global support organization in England and Ireland.
Most Cerner clients who buy hardware through us also enter into hardware maintenance agreements with us. These
arrangements normally provide for a fixed monthly fee for specified services. In the majority of cases, we subcontract
hardware maintenance to the hardware manufacturer. We also offer a set of managed services that include remote
hosting, operational management services and disaster recovery.
28
Backlog
At the end of 2009, we had a contract backlog of approximately $3.6 billion as compared to approximately $2.9 billion
at the end of 2008. Such backlog represents system sales and services from signed contracts that have not yet been
recognized as revenue. At the end of 2009, we had approximately $135.3 million of contracts receivable compared to
$141.0 million at the end of 2008, which represents revenues recognized but not yet billable under the terms of the
contract. At the end of 2009, we had a software support and maintenance backlog of approximately $620.6 million as
compared to approximately $580.9 million at January 3, 2009. Such backlog represents contracted software support and
hardware maintenance services for a period of 12 months. We estimate that approximately 33 percent of the aggregate
backlog at the end of 2009 of $4.2 billion will be recognized as revenue during 2010.
Competition
The market for HIT solutions, devices and services is intensely competitive, rapidly evolving and subject to rapid
technological change. Our principal existing competitors in the healthcare solutions and services market include:
Computer Programs and Systems, Inc., Eclipsys Corporation, Epic Systems Corporation, GE Healthcare Technologies,
iSoft Group Limited, McKesson Corporation, Medical Information Technology, Inc. (Meditech), Misys Healthcare Systems
and Siemens Medical Solutions Health Services Corporation, each of which offers a suite of software solutions that
compete with many of our software solutions and services.
Other competitors focus on only a portion of the market that we address. For example, competitors such as Accenture,
Capgemini, Computer Sciences Corporation, Computer Task Group, Inc. (CTG), Dell, Inc., Deloitte LLP, Hewlett-Packard
Company and IBM Corporation offer HIT services that compete directly with our consulting services. Allscripts-Misys
Healthcare Solutions, Inc., athenahealth, Inc., eClinicalWorks LLC, Emdeon Corporation, Greenway Medical Technologies,
Quality Systems, Inc. and Sage Software Healthcare LLC offer solutions to the physician practice market but do not
currently have a significant presence in the health systems and independent hospital market.
We view our principal competitors in the healthcare device market to include: CareFusion Corporation, McKesson
Corporation, Omnicell, Inc. and Royal Philips Electronics; and we view our principal competitors in the healthcare
transactions market to include: Emdeon Corporation, McKesson Corporation and ProxyMed, Inc. (d/b/a MedAvant
Healthcare Solutions), with almost all of these competitors being substantially larger or having more experience and
market share than us in their respective market.
In addition, we expect that major software information systems companies, large information technology consulting
service providers and system integrators, start-up companies, managed care companies and others specializing in the
healthcare industry may offer competitive software solutions, devices or services. The pace of change in the HIT market
is rapid and there are frequent new software solutions, devices or service introductions, enhancements and evolving
industry standards and requirements. We believe that the principal competitive factors in this market include the breadth
and quality of solution and service offerings, the stability of the solution provider, the features and capabilities of the
information systems and devices, the ongoing support for the systems and devices and the potential for enhancements
and future compatible software solutions and devices.
Number of Employees (Associates)
At the end of 2009, we employed approximately 7,600 associates worldwide.
Operating Segments
Information about our operating segments, which are geographically based, may be found in Item 7 “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” below and in Note 18 to the financial statements.
29
Item 1A. Risk Factors
Risks Related to Cerner Corporation
We may incur substantial costs related to product-related liabilities. Many of our software solutions, healthcare
devices or services (including life sciences/research services) provide data for use by healthcare providers in providing
care to patients. We attempt to limit by contract our liability to clients; however, the limitations of liability set forth in
the contracts may not be enforceable or may not otherwise protect us from liability for damages. Although we maintain
liability insurance coverage in an amount that we believe is sufficient for our business, there can be no assurance that
such coverage will cover any particular claim that has been brought or that may be brought in the future, prove to be
adequate or that such coverage will continue to remain available on acceptable terms, if at all. A successful material
claim or series of claims brought against us, if uninsured or under-insured, could materially harm our business, results
of operations and financial condition. Product-related claims, even if not successful, could damage our reputation, cause
us to lose existing clients, limit our ability to obtain new clients, divert management’s attention from operations, result in
revenues loss, create potential liabilities for our clients and us and increase insurance and other operational costs.
We may be subject to claims for system errors and warranties. Our software solutions and healthcare devices,
particularly the Cerner Millennium versions, are very complex. Our software solutions and healthcare devices may contain
design, coding or other errors, especially when first introduced. We have discovered errors in our software solutions
and healthcare devices after their introduction. Our software solutions and healthcare devices are intended for use in
collecting, storing, and displaying clinical and healthcare-related information used in the diagnosis and treatment of
patients and in related healthcare settings such as admissions, billing, etc. Therefore, users of our software solutions
and healthcare devices have a greater sensitivity to errors than the market for software products and devices generally.
Our client agreements typically provide warranties concerning material errors and other matters. Failure of a client’s
Cerner software solutions and/or healthcare devices to meet these warranties could constitute a material breach under
the client agreement, allowing the client to terminate the agreement and possibly obtain a refund and/or damages, or
might require us to incur additional expense in order to make the software solution or healthcare device meet these
criteria. Our client agreements generally limit our liability arising from such claims but such limits may not be enforceable
in certain jurisdictions or circumstances. Although we maintain liability insurance coverage in an amount that we believe
is sufficient for our business, there can be no assurance that such coverage will cover any particular claim that has been
brought or that may be brought in the future, prove to be adequate or that such coverage will continue to remain available
on acceptable terms, if at all. A successful material claim or series of claims brought against us, if uninsured or under-
insured, could materially harm our business, results of operations and financial condition.
We may experience interruption at our data centers or client support facilities. We perform data center and/or hosting
services for certain clients, including the storage of critical patient and administrative data. In addition, we provide support
services to our clients through various client support facilities. We have invested in reliability features such as multiple
power feeds, multiple backup generators and redundant telecommunications lines, as well as technical (such as multiple
overlapping security applications and countermeasures) and physical security safeguards, and structured our operations
to reduce the likelihood of disruptions. Periodic risk assessments are conducted to ensure additional risks are identified
and appropriately mitigated. However, complete failure of all local public power and backup generators, impairment of all
telecommunications lines, a “concerted denial of service cyber attack”, damage (environmental, accidental, intentional
or pandemic) to the buildings, the equipment inside the buildings housing our data centers, the client data contained
therein and/or the personnel trained to operate such facilities could cause a disruption in operations and negatively
impact clients who depend on us for data center and system support services. Any interruption in operations at our data
centers and/or client support facilities could damage our reputation, cause us to lose existing clients, hurt our ability to
obtain new clients, result in revenue loss, create potential liabilities for our clients and us and increase insurance and
other operating costs.
30
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. We rely upon a combination of license agreements,
confidentiality procedures, employee nondisclosure agreements, confidentiality agreements with third parties and
technical measures to maintain the confidentiality and trade secrecy of our proprietary information. We also rely on
trademark and copyright laws to protect our intellectual property rights in the United States and abroad. We continue to
develop our patent portfolio of United States and global patents, but currently have a limited number of issued patents.
Despite our protective measures and intellectual property rights, we may not be able to adequately protect against copying,
reverse-engineering, misappropriation, infringement or unauthorized use or disclosure of our intellectual property.
In addition, we are routinely involved in intellectual property infringement or misappropriation claims and we expect this
activity to continue or even increase as the number of competitors, patents and patent enforcement organizations in the
HIT market increases, the functionality of our software solutions and services expands, and we enter new markets such
as healthcare device innovation, healthcare transactions and life sciences. These claims, even if not meritorious, are
expensive to defend. If we become liable to third parties for infringing or misappropriating their intellectual property rights,
we could be required to pay a substantial damage award, develop alternative technology, obtain a license and/or cease
using, selling, licensing, implementing and supporting the solutions, devices and services that violate the intellectual
property rights.
We are subject to risks associated with our non-U.S. operations. We market, sell and service our solutions, devices and
services globally. We have established offices around the world, including in: the Americas, Europe, the Middle East and
the Asia Pacific region. We will continue to expand our non-U.S. operations and enter new global markets. This expansion
will require significant management attention and financial resources to develop successful direct and indirect non-U.S.
sales and support channels. Our business is generally transacted in the local functional currency. In some countries, our
success will depend in part on our ability to form relationships with local partners. There is a risk that we may sometimes
choose the wrong partner. For these reasons, we may not be able to maintain or increase non-U.S. market demand for
our solutions, devices and services.
Non-U.S. operations are subject to inherent risks, and our future results could be adversely affected by a variety of
uncontrollable and changing factors. These include, but are not limited to:
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Greater difficulty in collecting accounts receivable and longer collection periods
Difficulties and costs of staffing and managing non-U.S. operations
The impact of global economic conditions
Unfavorable or changing foreign currency exchange rates
Legal compliance costs and/or business risks associated with our global operations where local laws and
customs differ from those in the United States
Certification, licensing or regulatory requirements
Unexpected changes in regulatory requirements
Changes to or reduced protection of intellectual property rights in some countries
Inability to obtain necessary financing on reasonable terms to adequately support non-U.S. operations and
expansion
Potentially adverse tax consequences and difficulties associated with repatriating cash generated or held abroad
in a tax-efficient manner.
Different or additional functionality requirements
Trade protection measures
Export control regulations
Service provider and government spending patterns
Natural disasters, war or terrorist acts
Labor disruptions that may occur in a country
Poor selection of a partner in a country
Political conditions which may impact sales or threaten the safety of associates or our continued presence in
these countries
31
Our failure to effectively hedge exposure to fluctuations in foreign currency exchange rates could unfavorably affect
our performance. We currently utilize a non-derivative instrument to hedge our exposure to fluctuations in foreign
currency exchange rates. This instrument may involve elements of market risk in excess of the amounts recognized
in the Consolidated Financial Statements. For additional information about risk on financial instruments, see Item 7A
“Quantitative and Qualitative Disclosures about Market Risk”. Further, our financial results from non-U.S. operations may
be negatively affected if we fail to execute or improperly hedge our exposure to currency fluctuations.
We are subject to tax legislation in several countries; tax legislation initiatives or challenges to our tax positions
could adversely affect our results of operations and financial condition. We are a large corporation with operations in
more than twenty countries. As such, we are, or in the future could be, subject to tax laws and regulations of the United
States federal, state and local governments and of other country jurisdictions. From time to time, various legislative
initiatives may be proposed that could adversely affect our tax positions and/or our tax liabilities. There can be no
assurance that our effective tax rate or tax payments will not be adversely affected by these initiatives. In addition, United
States federal, state and local, as well as other countries’ tax laws and regulations, are extremely complex and subject to
varying interpretations. There can be no assurance that our tax positions will not be challenged by relevant tax authorities
or that we would be successful in any such challenge.
Our success depends upon the recruitment and retention of key personnel. To remain competitive in our industries,
we must attract, motivate and retain highly skilled managerial, sales, marketing, consulting and technical personnel,
including executives, consultants, programmers and systems architects skilled in the HIT, healthcare devices, healthcare
transactions and life sciences industries and the technical environments in which our solutions, devices and services are
needed. Competition for such personnel in our industries is intense in both the United States and abroad. Our failure to
attract additional qualified personnel to meet our non-U.S. personnel needs could have a material adverse effect on our
prospects for long-term growth. Our success is dependent to a significant degree on the continued contributions of key
management, sales, marketing, consulting and technical personnel. The unexpected loss of key personnel could have a
material adverse impact on our business and results of operations, and could potentially inhibit development and delivery
of our solutions, devices and services and market share advances.
We rely significantly on third party suppliers. We license or purchase intellectual property and technology (such as
software, hardware and content) from third parties, including some competitors, and incorporate such third party software,
hardware and/or content into or sell it in conjunction with our solutions, devices and services. We rely significantly on
some of the third party software, hardware and/or content in the operation and delivery of our solutions, devices and
services. For instance, we currently depend on Microsoft and IBM Websphere technologies for portions of the operational
abilities of our Millennium solutions. Our remote hosting business also relies on a single or a limited number of suppliers
for certain functions of this business, such as Oracle database technologies, CITRIX technologies and CISCO network
technologies, and we rely on Hewlett Packard and IBM for our hardware technology platforms.
Most of the third party software licenses we have expire within one to five years, can be renewed only by mutual consent
and may be terminated if we breach the terms of the license and fail to cure the breach within a specified period of time.
Most of these third party software licenses are non-exclusive; therefore, our competitors may obtain the right to use any
of the technology covered by these licenses and use the technology to compete directly with us.
If any of the third party suppliers were to change product offerings, cease actively supporting the technologies, fail to
update and enhance the technologies to keep pace with changing industry standards, encounter technical difficulties
in the continuing development of these technologies, significantly increase prices or terminate our licenses or supply
contracts, we would need to seek alternative suppliers and incur additional internal or external development costs
to ensure continued performance of our solutions, devices and services. Such alternatives may not be available on
attractive terms, or may not be as widely accepted or as effective as the intellectual property or technology provided by
our existing suppliers. If the cost of licensing, purchasing or maintaining the third party intellectual property or technology
significantly increases, our gross margin levels could significantly decrease. In addition, interruption in functionality of
our solutions, devices and services as a result of changes in third party suppliers could adversely affect future sales of
solutions, devices and services.
32
We intend to continue strategic business acquisitions, which are subject to inherent risks. In order to expand our
solutions, device offerings and services and grow our market and client base, we may continue to seek and complete
strategic business acquisitions that we believe are complementary to our business. Acquisitions have inherent risks
which may have a material adverse effect on our business, financial condition, operating results or prospects, including,
but not limited to: 1) failure to successfully integrate the business and financial operations, services, intellectual property,
solutions or personnel of an acquired business and to maintain uniform standard controls, policies and procedures; 2)
diversion of management’s attention from other business concerns; 3) entry into markets in which we have little or no direct
prior experience; 4) failure to achieve projected synergies and performance targets; 5) loss of clients or key personnel;
6) incurrence of debt and/or assumption of known and unknown liabilities; 7) write-off of software development costs,
goodwill, client lists and amortization of expenses related to intangible assets; 8) dilutive issuances of equity securities;
and, 9) accounting deficiencies that could arise in connection with, or as a result of, the acquisition of an acquired
company, including issues related to internal control over financial reporting and the time and cost associated with
remedying such deficiencies. If we fail to successfully integrate acquired businesses or fail to implement our business
strategies with respect to these acquisitions, we may not be able to achieve projected results or support the amount of
consideration paid for such acquired businesses.
Risks Related to the Healthcare Information Technology, Healthcare Device and Healthcare Transaction Industry
The healthcare industry is subject to changing political, economic and regulatory influences. For example, the Health
Insurance Portability and Accountability Act of 1996 (as modified by The Health Information Technology for Economic
and Clinical Health Act (HITECH) provisions of the American Recovery and Reinvestment Act of 2009) (HIPAA) continues
to have a direct impact on the healthcare industry by requiring identifiers and standardized transactions/code sets
and necessary security and privacy measures in order to ensure the appropriate level of privacy of protected health
information. These regulatory factors affect the purchasing practices and operation of healthcare organizations. Federal
and state legislatures have periodically considered programs to reform or amend the United States healthcare system at
both the federal and state level and to change healthcare financing and reimbursement systems. These programs may
contain proposals to increase governmental involvement in healthcare, lower reimbursement rates or otherwise change
the environment in which healthcare industry participants operate. Healthcare industry participants may respond by
reducing their investments or postponing investment decisions, including investments in our solutions and services.
Many healthcare providers are consolidating to create integrated healthcare delivery systems with greater market power.
These providers may try to use their market power to negotiate price reductions for our solutions and services. As the
healthcare industry consolidates, our client base could be eroded, competition for clients could become more intense
and the importance of landing new client relationships becomes greater.
Recently, Congressional leaders also have expressed their intention to enact a comprehensive healthcare reform plan,
including provisions to control healthcare costs, improve healthcare quality, and expand access to affordable health
insurance, potentially including the establishment of a government health insurance plan that would compete with private
health plans. Healthcare reform legislation could include changes in Medicare and Medicaid payment policies and other
healthcare delivery reforms that would potentially impact our business. The United States House of Representatives
and United States Senate have each passed different versions of healthcare reform legislation, but Congress has not
yet issued a Conference Committee Report reconciling the House and Senate versions of the legislation. As a result, the
exact provisions to be included in a final bill are unknown at this time, and we cannot be certain of when or if any such
legislation will be enacted. Given the potentially sweeping nature of the changes under consideration, there can be no
assurances that healthcare reform legislation, if adopted, will not adversely impact either our results of operations or the
manner in which we operate our business.
The healthcare industry is highly regulated at the local, state and federal level. We are subject to a significant and
wide-ranging number of regulations both within the United States and elsewhere, such as regulations in the areas of
healthcare fraud, e-prescribing, claims processing and transmission, medical devices, the security and privacy of patient
data and interoperability standards.
33
Healthcare Fraud. Federal and state governments continue to enhance regulation of and increase their scrutiny over
practices involving healthcare fraud affecting healthcare providers whose services are reimbursed by Medicare, Medicaid
and other government healthcare programs. Our healthcare provider clients are subject to laws and regulations on fraud
and abuse which, among other things, prohibit the direct or indirect payment or receipt of any remuneration for patient
referrals, or arranging for or recommending referrals or other business paid for in whole or in part by these federal or
state healthcare programs. Federal enforcement personnel have substantial funding, powers and remedies to pursue
suspected or perceived fraud and abuse. The effect of this government regulation on our clients is difficult to predict.
Many of the regulations applicable to our clients and that may be applicable to us, including those relating to marketing
incentives offered in connection with medical device sales, are vague or indefinite and have not been interpreted by
the courts. They may be interpreted or applied by a prosecutorial, regulatory or judicial authority in a manner that could
broaden their applicability to us or require our clients to make changes in their operations or the way in which they deal
with us. If such laws and regulations are determined to be applicable to us and if we fail to comply with any applicable
laws and regulations, we could be subject to civil and criminal penalties, sanctions or other liability, including exclusion
from government health programs, which could have a material adverse effect on our business, results of operations and
financial condition.
E-Prescribing. The use of our solutions by physicians for electronic prescribing, electronic routing of prescriptions to
pharmacies and dispensing is governed by state and Federal law. States have differing prescription format requirements,
which we have programmed into our solutions. In addition, in November 2005, the Department of Health and Human
Services announced regulations by Centers for Medicare and Medicaid Services (CMS) related to “E-Prescribing and the
Prescription Drug Program” (E-Prescribing Regulations). These E-Prescribing Regulations were mandated by the Medicare
Prescription Drug, Improvement, and Modernization Act of 2003. The E-Prescribing Regulations set forth standards for
the transmission of electronic prescriptions. These standards are detailed and significant, and cover not only transactions
between prescribers and dispensers for prescriptions but also electronic eligibility, benefits inquiries, drug formulary and
benefit coverage information. Our efforts to provide solutions that enable our clients to comply with these regulations
could be time-consuming and expensive.
Claims Transmissions. Certain of our solutions assist our clients in submitting claims to payers, which claims are governed
by federal and state laws. Our solutions are capable of electronically transmitting claims for services and items rendered
by a physician to many patients’ payers for approval and reimbursement. Federal law provides civil liability to any person
that knowingly submits a claim to a payer, including Medicare, Medicaid and private health plans, seeking payment for
any services or items that have not been provided to the patient. Federal law may also impose criminal penalties for
intentionally submitting such false claims. We have policies and procedures in place that we believe result in the accurate
and complete transmission of claims, provided that the information given to us by our clients is also accurate and
complete. The HIPAA security, privacy and transaction standards, as discussed below, also have a potentially significant
effect on our claims transmission services, since those services must be structured and provided in a way that supports
our clients’ HIPAA compliance obligations. Any investigation or proceeding related to these laws may have an adverse
impact on our results of operations.
Regulation of Medical Devices. The United States Food and Drug Administration (the FDA) has determined that certain
of our solutions are medical devices that are actively regulated under the Federal Food, Drug and Cosmetic Act (Act)
and amendments to the Act. Other countries have similar regulations in place related to medical devices, that now or
may in the future apply to certain of our solutions. If other of our solutions are deemed to be actively regulated medical
devices by the FDA or similar regulatory agencies in countries where we do business, we could be subject to extensive
requirements governing pre- and post-marketing requirements including pre-market notification clearance. Complying
with these medical device regulations on a global perspective is time consuming and expensive, and could be subject
to unanticipated and significant delays. Further, it is possible that these regulatory agencies may become more active in
regulating software that is used in healthcare. If we are unable to obtain the required regulatory approvals for any such
solutions or medical devices, our short to long term business plans for these solutions and/or medical devices could be
delayed or canceled.
34
There have been nine FDA inspections at various Cerner sites since 1998. Inspections conducted at our world headquarters
in 1999 and our prior Houston, Texas facility in 2002 each resulted in the issuance of an FDA Form 483 that we responded
to promptly. The FDA has taken no further action with respect to either of the Form 483s that were issued in 1999 and
2002. The remaining seven FDA inspections, including inspections at our world headquarters in 2006 and 2007, resulted
in no issuance of a Form 483. We remain subject to periodic FDA inspections and we could be required to undertake
additional actions to comply with the Act and any other applicable regulatory requirements. Our failure to comply with the
Act and any other applicable regulatory requirements could have a material adverse effect on our ability to continue to
manufacture and distribute our solutions. The FDA has many enforcement tools including recalls, seizures, injunctions,
civil fines and/or criminal prosecutions. Any of the foregoing could have a material adverse effect on our business, results
of operations and financial condition.
Security and Privacy of Patient Information. State, federal and local laws regulate the confidentiality of patient records
and the circumstances under which those records may be released. These regulations govern both the disclosure and
use of confidential patient medical record information and require the users of such information to implement specified
security measures. United States regulations currently in place governing electronic health data transmissions continue
to evolve and are often unclear and difficult to apply. Similarly, laws in non-U.S. jurisdictions may have similar or even
stricter requirements related to the treatment of patient information.
In the United States, HIPAA regulations require national standards for some types of electronic health information
transactions and the data elements used in those transactions, security standards to ensure the integrity and confidentiality
of health information and standards to protect the privacy of individually identifiable health information. Covered entities
under HIPAA, which include healthcare organizations such as our clients, our employer clinic business model and our
claims transmission services, are required to comply with the privacy standards, the transaction regulations and the
security regulations. Moreover, the recently enacted HITECH provisions of ARRA extend many of the HIPAA obligations,
formerly imposed only upon covered entities, to business associates as well. As a business associate of our clients who
are covered entities, we were in most instances already contractually required to ensure compliance with the HIPAA
regulations as it pertains to handling of covered client data, and when the HITECH provisions go into effect, we will have
additional liability risks related to the privacy and security of individually identifiable health information.
Evolving HIPAA and HITECH-related laws or regulations and regulations in non-U.S. jurisdictions could restrict the ability
of our clients to obtain, use or disseminate patient information. This could adversely affect demand for our solutions if
they are not re-designed in a timely manner in order to meet the requirements of any new interpretations or regulations
that seek to protect the privacy and security of patient data or enable our clients to execute new or modified healthcare
transactions. We may need to expend additional capital, software development and other resources to modify our
solutions and devices to address these evolving data security and privacy issues. Furthermore, our failure to maintain
confidentiality of sensitive personal information in accordance with the applicable regulatory requirements could damage
our reputation and expose us to breach of contract claims, fines and penalties.
Interoperability Standards. Our clients are concerned with and often require that our software solutions and healthcare
devices be interoperable with other third party HIT suppliers. Market forces or governmental/regulatory authorities could
create software interoperability standards that would apply to our solutions, and if our software solutions and/or healthcare
devices are not consistent with those standards, we could be forced to incur substantial additional development costs to
conform. The Certification Commission for Healthcare Information Technology (CCHIT) has developed a comprehensive
set of criteria for the functionality, interoperability and security of various software modules in the HIT industry. CCHIT,
however, continues to modify and refine those standards. Achieving CCHIT certification is becoming a competitive
requirement, resulting in increased software development and administrative expense to conform to these requirements.
Additionally, various Federal, state and non-U.S. government agencies are also developing standards that could become
mandatory for systems purchased by these agencies. For example, ARRA requires “meaningful use of certified electronic
health record technology” by healthcare providers in order to receive stimulus funds from the United States Federal
government. Interim final regulations have been issued that identify initial standards and implementation specifications
and establish the certification standards for qualifying electronic health record technology. Nevertheless, these standards
and specifications, once finalized, will be subject to interpretation by the entities designated to certify such technology.
35
We may incur increased development costs and delays in delivering solutions if we need to upgrade our software and
healthcare devices to be in compliance with these varying and evolving standards. In addition, delays in interpreting these
standards may result in postponement or cancellation of our clients’ decisions to purchase our solutions. If our software
solutions and healthcare devices are not consistent with these evolving standards, our market position and sales could
be impaired and we may have to invest significantly in changes to our software solutions and healthcare devices, although
we do not expect such costs to be significant in relation to the overall development costs for our solutions.
We operate in intensely competitive and dynamic industries, and our ability to successfully compete and continue
to grow our business depends on our ability to respond quickly to market changes and changing technologies and
to bring competitive new solutions, devices, features and services to market in a timely fashion. The market for
healthcare information systems, healthcare devices, healthcare transactions and life sciences consulting services are
intensely competitive, dynamically evolving and subject to rapid technological and innovative changes. Development of
new proprietary technology or services is complex, entails significant time and expense and may not be successful. We
cannot guarantee that we will be able to introduce new solutions, devices or services on schedule, or at all, nor can
we guarantee that errors will not be found in our new solution releases, devices or services before or after commercial
release, which could result in solution, device or service delivery redevelopment costs and loss of, or delay in, market
acceptance.
Certain of our competitors have greater financial, technical, product development, marketing and other resources than us
and some of our competitors offer software solutions that we do not offer. Our principal existing competitors are set forth
above under Part I, Item 1 Competition.
In addition, we expect that major software information systems companies, large information technology consulting
service providers and system integrators, start-up companies and others specializing in the healthcare industry may offer
competitive software solutions, devices or services. We face strong competitors and often face downward price pressure,
which could adversely affect our results of operations or liquidity. Additionally, the pace of change in the healthcare
information systems market is rapid and there are frequent new software solution introductions, software solution
enhancements, device introductions, device enhancements and evolving industry standards and requirements. There
are a limited number of hospitals and other healthcare providers in the United States HIT market and in recent years,
the healthcare industry has been subject to increasing consolidation. As the industry consolidates, costs fall, technology
improves, and market factors continue to compel investment by healthcare organizations in solutions and services like
ours, market saturation in the United States may change the competitive landscape in favor of larger, more diversified
competitors with greater scale.
Risks Related to Our Stock
The ongoing adverse financial market environment and uncertainty in global economic conditions could negatively
affect our business, results of operations and financial condition. Our operating results may be impacted by the health
of the global economy. Adverse economic conditions may cause a slowdown or decline in client spending which could
adversely affect our business and financial performance. Our business and financial performance, including new business
bookings and collection of our accounts receivable, may be adversely affected by current and future economic conditions
(including a reduction in the availability of credit, higher energy costs, rising interest rates, financial market volatility and
recession) that cause a slowdown or decline in client spending. Reduced purchases by our clients or changes in payment
terms could adversely affect our revenue growth and cause a decrease in our cash flow from operations. Bankruptcies
or similar events affecting clients may cause us to incur bad debt expense at levels higher than historically experienced.
Further, the ongoing global financial crisis may also limit our ability to access the capital markets at a time when we would
like, or need, to raise capital, which could have an impact on our ability to react to changing economic and business
conditions. Accordingly, if the global financial crisis and current economic downturn continue or worsen, our business,
results of operations and financial condition could be materially and adversely affected.
36
Our quarterly operating results may vary, which could adversely affect our stock price. Our quarterly operating results
have varied in the past and may continue to vary in future periods, including, variations from guidance, expectations or
historical results or trends. Quarterly operating results may vary for a number of reasons including accounting policy
changes, demand for our solutions, devices and services, the financial condition of our clients and potential clients,
our long sales cycle, potentially long installation and implementation cycles for larger, more complex and higher-priced
systems and other factors described in this section and elsewhere in this report. As a result of healthcare industry
trends and the market for our Cerner Millennium solutions, a large percentage of our revenues are generated by the
sale and installation of larger, more complex and higher-priced systems. The sales process for these systems is lengthy
and involves a significant technical evaluation and commitment of capital and other resources by the client. Sales may
be subject to delays due to changes in clients’ internal budgets, procedures for approving large capital expenditures,
competing needs for other capital expenditures, availability of personnel resources and by actions taken by competitors.
Delays in the expected sale, installation or implementation of these large systems may have a significant impact on
our anticipated quarterly revenues and consequently our earnings, since a significant percentage of our expenses are
relatively fixed.
Revenue recognized in any quarter may depend upon our and our clients’ abilities to meet project milestones. Delays in
meeting these milestone conditions or modification of the project plan could result in a shift of revenue recognition from
one quarter to another and could have a material adverse effect on results of operations for a particular quarter.
Our revenues from system sales historically have been lower in the first quarter of the year and greater in the fourth
quarter of the year, primarily as a result of clients’ year-end efforts to make all final capital expenditures for the then-
current year.
Our sales forecasts may vary from actual sales in a particular quarter. We use a “pipeline” system, a common industry
practice, to forecast sales and trends in our business. Our sales associates monitor the status of all sales opportunities,
such as the date when they estimate that a client will make a purchase decision and the potential dollar amount of the
sale. These estimates are aggregated periodically to generate a sales pipeline. We compare this pipeline at various points
in time to evaluate trends in our business. This analysis provides guidance in business planning and forecasting, but
these pipeline estimates are by their nature speculative. Our pipeline estimates are not necessarily reliable predictors
of revenues in a particular quarter or over a longer period of time, partially because of changes in the pipeline and in
conversion rates of the pipeline into contracts that can be very difficult to estimate. A negative variation in the expected
conversion rate or timing of the pipeline into contracts, or in the pipeline itself, could cause our plan or forecast to be
inaccurate and thereby adversely affect business results. For example, a slowdown in information technology spending,
adverse economic conditions or a variety of other factors can cause purchasing decisions to be delayed, reduced in
amount or cancelled, which would reduce the overall pipeline conversion rate in a particular period of time. Because a
substantial portion of our contracts are completed in the latter part of a quarter, we may not be able to adjust our cost
structure quickly enough in response to a revenue shortfall resulting from a decrease in our pipeline conversion rate in
any given fiscal quarter.
The trading price of our common stock may be volatile. The market for our common stock may experience significant
price and volume fluctuations in response to a number of factors including actual or anticipated variations in operating
results, rumors about our performance or solutions, devices and services, changes in expectations of future financial
performance or estimates of securities analysts, governmental regulatory action, healthcare reform measures, client
relationship developments, changes occurring in the securities markets in general and other factors, many of which are
beyond our control. As a matter of policy, we do not generally comment on our stock price or rumors.
Furthermore, the stock market in general, and the markets for software, healthcare devices, other healthcare solutions
and services and information technology companies in particular, have experienced extreme volatility that often has
been unrelated to the operating performance of particular companies. These broad market and industry fluctuations may
adversely affect the trading price of our common stock, regardless of actual operating performance.
37
Our Directors have authority to issue preferred stock and our corporate governance documents contain anti-takeover
provisions. Our Board of Directors has the authority to issue up to 1,000,000 shares of preferred stock and to determine
the preferences, rights and privileges of those shares without any further vote or action by the shareholders. The rights of
the holders of common stock may be harmed by rights granted to the holders of any preferred stock that may be issued
in the future.
In addition, some provisions of our Certificate of Incorporation and Bylaws could make it more difficult for a potential
acquirer to acquire a majority of our outstanding voting stock. These include provisions that provide for a classified
board of directors, prohibit shareholders from taking action by written consent and restrict the ability of shareholders to
call special meetings. We are also subject to provisions of Delaware law that prohibit us from engaging in any business
combination with any interested shareholder for a period of three years from the date the person became an interested
shareholder, unless certain conditions are met, which could have the effect of delaying or preventing a change of control.
Factors that May Affect Future Results of Operations, Financial Condition or Business
Statements made in this report, the Annual Report to Shareholders of which this report is made a part, other reports
and proxy statements filed with the Securities and Exchange Commission, communications to shareholders, press
releases and oral statements made by representatives of the Company that are not historical in nature, or that state
the Company’s or management’s intentions, hopes, beliefs, expectations or predictions of the future, may constitute
“forward-looking statements” within the meaning of Section 21E of the Securities 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,” “intended,” “continue,” “believe,” “may,” “expect,” “hope,” “anticipate,” “goal,” “forecast,”
“plan,” “guidance” or “estimate” or the negative of these words, variations thereof or similar expressions. Forward-looking
statements are not guarantees of future performance or results. They involve risks, uncertainties and assumptions. It is
important to note that any such performance and actual results, financial condition or business, could differ materially
from those expressed in such forward-looking statements. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in this Item 1A. Risk Factors and elsewhere herein or in other reports filed
with the SEC. Other unforeseen factors not identified herein could also have such an effect. 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.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our properties consist mainly of owned and leased office and data center facilities.
Our United States corporate world headquarters operations are located in a Company-owned office park (the Headquarters
Campus) in North Kansas City, Missouri, containing approximately 1.1 million gross square feet of useable space and
land capable of housing approximately 300,000 square feet of future building development. The Headquarters Campus
primarily houses office space, but also includes space for other business needs, such as our Healthe Clinic and our
Headquarters Campus data center.
In December 2009, we purchased approximately 790,000 gross square feet of property located in Kansas City, Missouri,
which we had previously occupied under a long-term lease since 2007. This office space, known as the Innovation Campus,
houses associates from our intellectual property organizations.
Our Cerner-operated data center facilities, which are used to provide remote hosting, disaster recovery and other services
to our clients, are located at the Headquarters Campus and a leased facility in Lee’s Summit, Missouri.
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As of the end of 2009, we leased additional office space in Beverly Hills and Garden Grove, California; Denver, Colorado;
Overland Park, Kansas; Waltham, Massachusetts; Minneapolis and Rochester, Minnesota; N. Kansas City, Missouri;
Blue Bell, Pennsylvania; and Vienna, Virginia. Globally, we also leased office space in: Brisbane, Sydney and Melbourne,
Australia; London-Ontario, Canada; Santiago, Chile; Hong Kong, China; London, England; Paris, France; Herzogenrath and
Idstein, Germany; Bangalore, India; Dublin, Ireland; Kuala Lumpur, Malaysia; Riyadh, Saudi Arabia; Singapore; Barcelona
and Madrid, Spain; and, Abu Dhabi and Dubai, United Arab Emirates.
Item 3.
Legal Proceedings
We have no material pending litigation.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the shareholders of the Company during the fourth quarter of the fiscal year ended
January 2, 2010.
Executive Officers of the Registrant
The following table sets forth the names, ages, positions and certain other information regarding the Company’s executive
officers as of February 16, 2010. Officers are elected annually and serve at the discretion of the Board of Directors.
Name
Age
Positions
Neal L. Patterson
Clifford W. Illig
Earl H. Devanny, III
Marc G. Naughton
Michael R. Nill
Randy D. Sims
Jeffrey A. Townsend
Mike Valentine
Julia M. Wilson
60
59
58
54
45
49
46
41
47
Chairman of the Board of Directors and Chief Executive Officer
Vice Chairman of the Board of Directors
President
Senior Vice President and Chief Financial Officer
Executive Vice President and Chief Engineering Officer
Vice President, Chief Legal Officer and Secretary
Executive Vice President
Executive Vice President and Chief Operating Officer
Senior Vice President and Chief People Officer
Neal L. Patterson has been Chairman of the Board of Directors and Chief Executive Officer of the Company for more than
five years. Mr. Patterson also served as President of the Company from March of 1999 until August of 1999.
Clifford W. Illig has been a Director of the Company for more than five years. He also served as Chief Operating Officer of
the Company for more than five years until October 1998 and as President of the Company for more than five years until
March of 1999. Mr. Illig was appointed Vice Chairman of the Board of Directors in March of 1999.
Earl H. Devanny, III joined the Company in August of 1999 as President. Mr. Devanny also served as interim President of
Cerner Southeast from January 2003 through July 2003. Prior to joining the Company, Mr. Devanny served as president of
ADAC Healthcare Information Systems, Inc. Prior to joining ADAC, Mr. Devanny served as a Vice President of the Company
from 1994 to 1997. Prior to that he spent 17 years with IBM Corporation.
39
Marc G. Naughton joined the Company in November 1992 as Manager of Taxes. In November 1995 he was named Chief
Financial Officer and in February 1996 he was promoted to Vice President. He was promoted to Senior Vice President in
March 2002.
Michael R. Nill joined the Company in November, 1996. Since that time he has held several positions in the Technology,
Intellectual Property and CernerWorks client hosting organizations. He was promoted to Vice President in January 2000,
promoted to Senior Vice President in April 2006 and promoted to Executive Vice President and named Chief Engineering
Officer in February 2009.
Randy D. Sims joined the Company in March 1997 as Vice President and Chief Legal Officer. Prior to joining the Company,
Mr. Sims worked at Farmland Industries, Inc. for three years where he served most recently as Associate General Counsel.
Prior to Farmland, Mr. Sims was in-house legal counsel at The Marley Company for seven years, holding the position of
Assistant General Counsel when he left to join Farmland.
Jeffrey A. Townsend joined the Company in June 1985. Since that time he has held several positions in the Intellectual
Property Organization and was promoted to Vice President in February 1997. He was appointed Chief Engineering Officer
in March 1998, promoted to Senior Vice President in March 2001 and promoted to Executive Vice President in March
2005.
Mike Valentine joined the Company in December 1998 as Director of Technology. He was promoted to Vice President in
2000 and to President of Cerner Mid America in January of 2003. In February 2005, he was named General Manager
of the United States Client Organization and was promoted to Senior Vice President in March 2005. He was promoted to
Executive Vice President in March 2007 and named Chief Operation Officer in January 2010. Prior to joining the Company,
Mr. Valentine was with Accenture Consulting.
Julia M. Wilson joined the Company in November 1995. Since that time, she has held several positions in the Functional
Group Organization. She was promoted to Vice President and Chief People Officer in August 2003 and to Senior Vice
President in March 2007.
PART II
Item 5.
Market for the Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of
Equity Securities
Our common stock trades on The NASDAQ Global Select MarketSM under the symbol CERN. The following table sets forth
the high, low and last sales prices for the fiscal quarters of 2009 and 2008 as reported by The Nasdaq Stock Market®.
2009
Low
High
Last
High
2008
Low
Last
First Quarter
$ 46.40
$ 33.72
$ 43.29
$ 59.59
$ 38.40
$ 38.40
Second Quarter
Third Quarter
Fourth Quarter
63.82
75.17
85.51
41.88
56.80
73.53
60.05
72.50
82.44
48.17
49.34
45.08
37.28
43.21
31.58
45.70
47.32
39.18
At February 16, 2010, there were approximately 1,106 owners of record. To date, we have paid no cash dividends and we
do not intend to pay cash dividends in the foreseeable future. We believe it is in the shareholders’ best interest for us to
reinvest funds in the operation of the business.
In March 2008, our Board of Directors authorized a stock repurchase program for $45 million of our Common Stock.
There were no shares repurchased by us during the quarter or the year ended January 2, 2010.
40
Item 6. Selected Financial Data
(In thousands, except per share data)
Statement of Earnings Data:
Revenues
Operating earnings
Earnings before income taxes
Net earnings
Earnings per share:
Basic
Diluted
Weighted average shares outstanding:
Basic
Diluted
Balance Sheet Data:
Working capital
Total assets
2009
(1)
2008
(1)(2)
2007
(1)(3)(4)(5)
2006
(1)(6)
2005
(7)(8)
$ 1,671,864
$ 1,676,028
$ 1,519,877
$ 1,378,038
$ 1,160,785
292,006
292,681
193,465
278,885
281,431
188,658
204,083
203,967
127,125
166,167
167,544
109,891
140,436
135,244
86,251
2.39
2.31
2.34
2.26
1.60
1.53
1.41
1.34
1.16
1.10
80,981
83,882
80,549
83,435
79,395
83,218
77,691
81,723
74,144
78,090
$ 788,232
$ 517,650
$ 530,441
$ 444,656
$ 391,541
2,148,567
1,880,988
1,689,956
1,496,433
1,303,629
Long-term debt, excl. current installments
95,506
111,370
177,606
Cerner Corporation stockholders’ equity
1,580,678
1,311,009
1,132,428
187,391
922,294
194,265
760,533
(1) Includes share-based compensation expense recognized in accordance with ASC 718, Stock Compensation. The impact of including this expense is a $10.6 million
decrease, net of $6.3 million tax benefit, in net earnings and a decrease to diluted earnings per share of $0.12 in 2009, $9.5 million decrease, net of $5.6 million tax
benefit, in net earnings and a decrease to diluted earnings per share of $0.11 in 2008, a $10.2 million decrease, net of $6.0 million tax benefit, in net earnings and a
decrease to diluted earnings per share of $0.12 in 2007 and a $11.7 million decrease, net of $7.3 million tax benefit, in net earnings and a decrease to diluted earnings
per share of $0.14 in 2006.
(2) Includes expense related to a settlement with a third party provider of software related to the use of the third party’s software in our remote hosting business. The
settlement included compensation for the use of the software for periods prior to 2008 as well as compensation for licenses of the software for future use for existing
and additional clients through January 2009. Of the total settlement amount, we determined that $5.0 million should have been recorded in prior periods, primarily 2005
through 2007. Based on this valuation, 2008 results include an increase of $8.0 million to sales and client service expense, a decrease of $5.0 million to net earnings,
and a decrease of $0.06 to diluted earnings per share that are attributable to prior periods.
(3) Includes a research and development write-off related to the RxStation® medication dispensing devices. In connection with production and delivery of the RxStation
medication dispensing devices, we reviewed the accounting treatment for the RxStation line of devices and determined that $8.6 million of research and development
activities for the RxStation medication dispensing devices that should have been expensed was incorrectly capitalized. The impact of this charge is a $5.4 million
decrease, net of $3.2 million tax benefit, in net earnings and a decrease to diluted earnings per share of $0.06 in the year ended December 29, 2007. $2.1 million of
this $5.4 million after tax amount recorded in 2007 related to periods prior to 2007.
(4) Includes a $3.1 million tax benefit recorded in 2007 related to periods prior to 2007. The tax benefit relates to the over-expensing of state income taxes, which resulted
in an increase to diluted earnings per share of $0.04 in the year ended December 29, 2007.
(5) Includes an adjustment to correct the amounts previously reported for the second quarter of 2007 for a previously disclosed out-of-period tax item relating to foreign net
operating losses. The effect of this adjustment increases tax expense for the year ended December 29, 2007, by $4.2 million and increases January 1, 2005 retained
earnings (Shareholders’ Equity) by the same amount.
(6) Includes a tax benefit of $2.0 million for adjustments relating to prior periods. This results in an increase to diluted earnings per share of $0.02.
(7) Includes a tax benefit of $4.8 million relating to the carry-back of a capital loss generated by the sale of Zynx Health Incorporated (Zynx) in the first quarter of 2004. The
impact of this refund claim is a $4.8 million increase in net earnings and an increase in diluted earnings per share of $0.06 for 2005.
(8) Includes a charge for the write-off of acquired in process research and development related to the acquisition of the medical business division of VitalWorks, Inc. The
impact of this charge is a $3.9 million decrease, net of $2.4 million tax benefit, in net earnings and a decrease to diluted earnings per share of $0.05 for 2005.
41
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management Discussion and Analysis (MD&A) is intended to help the reader understand our results of
operations and financial condition. 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).
Our fiscal year ends on the Saturday closest to December 31. Fiscal year 2009 consisted of 52 weeks and ended on
January 2, 2010; fiscal year 2008 consisted of 53 weeks and ended on January 3, 2009; and fiscal year 2007 consisted
of 52 weeks and ended on December 29, 2007. All references to years in this MD&A represent fiscal years unless
otherwise noted.
Management Overview
Our revenues are primarily derived by selling, implementing and supporting software solutions, clinical content, hardware,
healthcare devices and services that allow healthcare providers to securely access clinical, administrative and financial
data in real time, allowing them to improve the quality, safety and efficiency in the delivery of healthcare. We implement
the healthcare solutions as stand-alone, combined or enterprise-wide systems. Cerner Millennium® software solutions
can be managed by our clients or in our data center via a managed services model.
Our fundamental strategy centers on creating organic growth by investing in research and development (R&D) to create
solutions and services for the healthcare industry. This strategy has driven strong growth over the long-term, as reflected
in five- and ten-year compound annual revenue growth rates of 13% or more. This growth has also created a very strategic
footprint in healthcare, with Cerner® solutions licensed by over 8,500 facilities, including approximately 2,300 hospitals;
3,400 physician practices with over 30,000 physicians; 600 ambulatory facilities, such as laboratories, ambulatory
centers, cardiac facilities, radiology clinics and surgery centers; 700 home health facilities; and 1,500 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 replacing competitors in healthcare settings that are
looking to replace their current HIT partners or those who have not yet strategically aligned with a supplier. We expect
the HITECH provisions in ARRA will create a period of increased demand within the United States during which we believe
we can gain additional market share. We also expect to drive growth through new initiatives and services that reflect our
ongoing ability to innovate and expand our reach into healthcare. Examples of these include our CareAware® healthcare
device architecture and devices, Healthe™ employer services, Cerner ITWorksSM services, Cerner RevWorksSM services,
physician practice solutions and solutions and services for the pharmaceutical market. Finally, we are focused on selling
our solutions and services outside of the United States. Many non-U.S. markets have a low penetration of HIT solutions
and their governing bodies are in many cases focused on HIT as part of their strategy to improve the quality and lower the
cost of healthcare.
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 more than 20% compound annual rates over five- and ten-year periods. We
believe we can continue driving strong levels of earnings growth by continuing to grow revenue while also leveraging key
areas to create operating margin expansion. The primary areas of opportunity for margin expansion include:
g
g
g
becoming more efficient at implementing our software by leveraging implementation tools and methodologies
we have developed that can reduce the amount of effort required to implement our software;
leveraging our investments in R&D by addressing new markets that do not require significant incremental R&D
but can contribute significantly to revenue growth; and,
leveraging our scalable business infrastructure to reduce the rate of increase in general and administrative
spending to below our revenue growth rate.
We are also focused on increasing cash flow by growing earnings, reducing the use of working capital and controlling
capital expenditures.
42
Results Overview
In a challenging economic environment, we continued to execute on our core strategies to drive top-line growth, expand
operating margins, grow earnings and generate good cash flow in 2009. The 2009 results included strong levels of new
business bookings, earnings and cash flow.
New business bookings revenue in 2009, which reflects the value of executed contracts for software, hardware,
professional services and managed services, was $1.83 billion, which is an increase of 19% compared to $1.54 billion
in 2008. This growth was concentrated in the second half of 2009, which included strong bookings growth that offset
slight declines in the first half of the year. The improvement in the second half of the year reflects slightly better economic
conditions and some early demand driven by the HITECH stimulus incentives.
Our 2009 revenues remained flat at $1.7 billion as compared to 2008, with the lack of growth largely the result of the
challenging economic conditions that persisted through much of the year. Additionally, our revenue comparisons in 2009
were impacted by a $28.6 million cumulative catch-up adjustment recognized in the fourth quarter of 2008, resulting
from a significant change in an accounting estimate related to our contract in London as part of the NHS initiative to
automate clinical processes and digitize medical records in England.
Our 2009 net earnings increased 3% to $193.5 million compared to $188.7 million in 2008. Diluted earnings per share
increased 2% to $2.31 compared to $2.26 in 2008. The 2009 and 2008 net earnings and diluted earnings per share
reflect the impact of accounting for stock-based compensation using the fair value method to measure and record
expense for stock options, pursuant to Accounting Standards Codification (ASC), 718, Stock Compensation. The effect of
these expenses reduced the 2009 net earnings and diluted earnings per share by $10.5 million and $0.12, and the 2008
earnings and diluted earnings per share by $9.5 million and $0.11, respectively. Our 2008 net earnings also include the
previously discussed cumulative catch-up adjustment. The after-tax effect of this catch-up increased 2008 net earnings
and diluted earnings per share by $20.6 million and $0.24, respectively. The growth in net earnings and diluted earnings
per share was driven primarily by continued progress with our margin expansion initiatives, particularly expanding the
profitability of support and maintenance revenue, leveraging R&D investments, and controlling sales and client services
expenses, partially offset by the 2008 catch-up adjustment. Our 2009 operating margin was 17.5%, compared to 16.6%
in 2008, and we remain on target to achieve our long term goal of 20% operating margins.
We had cash collections of receivables of $1.8 billion in 2009 compared to $1.7 billion in 2008. Days sales outstanding
decreased to 90 days for the 2009 fourth quarter compared to 105 days for 2009 third quarter and 92 days for the 2008
fourth quarter. Approximately 12 days of this quarterly decline is driven by the reclassification of our Fujitsu receivables
to other long term assets, which are not included in our days sales outstanding calculation. The remaining decline is
reflective of improved cash collections. Operating cash flows for 2009 were $347.3 million compared to $281.8 million in
2008, with the growth driven by increased earnings and decreased use of working capital.
Healthcare Information Technology Market Outlook
We have provided a detailed assessment of the healthcare information technology market under Part I, Item 1, The
Healthcare and Healthcare IT Industry.
43
Results of Operations
Fiscal Year 2009 Compared to Fiscal Year 2008
(in thousands)
Revenues
System sales
Support and maintenance
Services
Reimbursed travel
Total revenues
Costs of revenue
Costs of revenue
Total margin
Operating expenses
Sales and client
Software development
General and administrative
Total operating expenses
Total costs and expenses
Operating earnings
Interest income (expense), net
Other income (expense), net
Income taxes
2009
% of
Revenue
2008
% of
Revenue
% Change
$ 504,561
493,193
643,678
30,432
1,671,864
30% $ 522,373
472,579
29%
643,317
39%
37,759
2%
1,676,028
100%
281,198
1,390,666
700,639
271,051
126,970
1,098,660
1,379,858
292,006
308
367
(99,216)
17%
83%
42%
16%
8%
66%
83%
17%
296,063
1,379,965
715,512
272,519
113,049
1,101,080
1,397,143
278,885
3,056
(510)
(92,773)
31%
28%
38%
2%
100%
18%
82%
43%
16%
7%
66%
83%
17%
-3%
4%
0%
-19%
0%
-5%
1%
-2%
-1%
12%
0%
-1%
5%
Net earnings
$ 193,465
$ 188,658
3%
As discussed in the results overview, our 2008 consolidated and global segment revenues and margin included
a cumulative catch-up adjustment recognized in the fourth quarter, in the amount of $28.6 million, resulting from a
significant change in accounting estimate related to our contract in London. The majority of the catch-up adjustment
revenue was included in support, maintenance and services. Refer to Note (1a) of the notes to consolidated financial
statements for more information on this adjustment.
Revenues & Backlog
Revenues were $1.7 billion in 2009, which is flat compared to 2008.
g
g
System sales, which include revenues from the sale of software, technology resale (hardware and sublicensed
software), deployment period licensed software upgrade rights, installation fees, transaction processing and
subscriptions, decreased 3% to $504.6 million in 2009 from $522.4 million in 2008. The decrease in system
sales was driven by a decline in technology resale, with licensed software basically flat and subscriptions
increasing slightly.
Support and maintenance revenues increased 4% to $493.2 million in 2009 compared to $472.6 million in
2008. This increase is attributable to continued success at selling Cerner Millennium applications, implementing
them at client sites and initiating billing for support and maintenance fees. The growth rate of support and
maintenance revenue was negatively impacted by the extra week in 2008 (53) compared to 2009 (52) and the
catch-up adjustment in 2008.
44
g
Services revenue, which includes professional services excluding installation, and managed services, remained
flat, with growth in CernerWorksSM managed services being offset by declines in professional services. The decline
in professional services reflects the impact of the economy and lower billable headcount in 2009 compared to
2008.
Contract backlog, which reflects new business bookings that have not yet been recognized as revenue, increased 23%
in 2009 compared to 2008. This increase was driven by growth in new business bookings during the past four quarters,
including continued strong levels of managed services bookings that typically have longer contract terms. In the second
quarter of 2008, contract backlog was reduced by approximately $178.0 million as a result of the contract withdrawal by
Fujitsu Limited as the prime contractor in the southern region of England. A summary of our total backlog for 2009 and
2008 follows:
(In thousands)
Contract backlog
2009
2008
$ 3,591,026
$
2,907,762
Support and maintenance backlog
620,616
580,915
Total backlog
$ 4,211,642
$ 3,488,677
Costs of Revenue
Cost of revenues was 17% of total revenues in 2009, as compared to 18% in 2008, with the slightly lower level reflective
of the decline in technology resale, which includes higher third party costs. The cost of revenues includes the cost
of reimbursed travel expense, sales commissions, third party consulting services and subscription content, computer
hardware and sublicensed software purchased from hardware and software 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, maintenance, support,
services and reimbursed travel) carrying different margin rates changes from period to period. Costs 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 remained flat in 2009 at $1.1 billion as compared to 2008. Accounting pursuant to ASC 718,
which results in the expensing of share-based compensation, impacted expenses in 2009 and 2008 as indicated below:
(In thousands)
Sales and client service expenses
Software development expense
General and administrative expenses
2009
$
7,552
4,374
4,916
2008
$
7,750
3,232
4,162
Total stock-based compensation expense
$
16,842
$
15,144
g
Sales and client service expenses as a percent of total revenues were 42% in 2009, as compared to 43%
in 2008. These expenses decreased 2% to $700.6 million in 2009, from $715.5 million in 2008. 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 decrease was primarily attributable to lower professional services expense, partially offset by growth
in the managed services business.
45
g
Software development expense decreased 1% in 2009 to $271.1 million, from $272.5 million in 2008.
Expenditures for software development in 2009 reflect continued development and enhancement of the
Cerner Millennium platform and software solutions and investments in new growth initiatives. A summary of our
total software development expense in 2009 and 2008 is as follows:
(In thousands)
2009
2008
Software development costs
Capitalized software costs
Capitalized costs related to share-based payments
Amortization of capitalized software costs
$
285,187
$
291,368
(76,876)
(871)
63,611
(69,039)
(942)
51,132
Total software development expense
$
271,051
$
272,519
g
General and administrative expenses as a percent of total revenues were 8% in 2009, as compared to 7% in 2008.
These expenses increased 12% to $127.0 million in 2009 from $113.0 million in 2008. General and administrative
expenses include salaries for corporate, financial and administrative staff, utilities, communications expenses,
professional fees, the transaction gains or losses on foreign currency and expense for share-based payments.
We recorded a net transaction gain on foreign currency of $4.0 million and $9.9 million in 2009 and 2008,
respectively. The lower gain in 2009 compared to 2008 was the primary reason for the increase in general and
administrative expenses, with the balance driven by legal fees and other corporate expenses.
Non-Operating Items
g
g
g
Net interest income was $0.3 million in 2009, compared with net interest income of $3.1 million in 2008. Interest
income decreased to $8.8 million in 2009 from $13.6 million in 2008, due primarily to a decline in investment
returns. Interest expense decreased to $8.5 million in 2009 from $10.5 million in 2008, due primarily to a
reduction in long-term debt.
Other income was $0.4 million in 2009, compared to other expense of $0.5 million in 2008. Other income
and expense in 2009 and 2008 includes offsetting unrealized gains and losses included in earnings related to
our auction rate securities and put-like settlement feature in the amounts of $10.5 million and $19.9 million,
respectively. Refer to Liquidity and Capital Resources within this MD&A and Notes 3 and 4 of the notes to
consolidated financial statements for additional information on our auction rate securities.
Our effective tax rate was 34% and 33% in 2009 and 2008, respectively. This net increase is primarily due to
higher tax expense recorded at the statutory rates of approximately $5.0 million and prior period tax expense
of $2.3 million, offset by a decrease in our unrecognized tax benefits of $5.6 million. The tax rate for 2008 was
slightly lower than normal due to strong income levels from global regions that have lower tax rates. Tax expense
for 2009 includes expense of approximately $2.3 million and 2008 includes benefits of approximately $2.9
million for corrections relating to prior periods.
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, Belgium, Canada, Cayman Islands, Chile, China
(Hong Kong), Egypt, England, France, Germany, India, Ireland, Malaysia, Puerto Rico, Saudi Arabia, Singapore, Spain,
Sweden, Switzerland and the United Arab Emirates.
46
The following table presents a summary of our operating segment information for the years ended 2009 and 2008:
(in thousands)
Domestic Segment
Revenues
Costs of revenue
Operating expenses
Total costs and expenses
Domestic operating earnings
Global Segment
Revenues
Costs of revenue
Operating expenses
Total costs and expenses
Global operating earnings
Other, net
2009
% of
Revenue
2008
% of
Revenue
% Change
$ 1,398,715
100% $ 1,307,510
100%
240,847
372,370
613,217
785,498
17%
27%
44%
56%
225,955
361,213
587,168
720,342
17%
28%
45%
55%
273,149
100%
368,518
100%
40,351
130,256
170,607
102,542
(596,034)
15%
48%
62%
38%
70,108
150,729
220,837
147,681
(589,138)
19%
41%
60%
40%
7%
7%
3%
4%
9%
-26%
-42%
-14%
-23%
-31%
1%
5%
Consolidated operating earnings
$ 292,006
$ 278,885
Domestic Segment
g
g
g
g
Revenues increased 7% to $1.4 billion in 2009 from $1.3 billion in 2008. This increase was driven by growth
in managed services, licensed software, technology resale, and support and maintenance, partially offset by a
decline in professional services.
Cost of revenues was 17% of revenues in both 2009 and 2008.
Operating expenses increased 3% to $372.4 million in 2009, from $361.2 million in 2008, due primarily to
growth in managed services.
Operating earnings of the Domestic segment increased 9% to $785.5 million in 2009 from $720.3 million in
2008.
Global Segment
g
g
g
g
Revenues decreased 26% to $273.1 million in 2009 from $368.5 million in 2008. This decrease was driven by
the previously discussed cumulative catch-up adjustment in 2008 and a decline in revenue from Middle Eastern
and European countries resulting from the challenging global economic conditions.
Cost of revenues was 15% and 19% of revenues in 2009 and 2008, respectively. The lower cost of revenues was
driven by a lower mix of hardware revenues in 2009.
Operating expenses decreased 14% to $130.3 million in 2009, from $150.7 million in 2008, primarily due to a
decrease in professional services expense.
Operating earnings of the Global segment decreased 31% to $102.5 million in 2009 from $147.7 million in 2008.
This decline was driven by the catch-up adjustment in 2008 and the lower level of revenues in 2009.
47
Other, net
Operating results not attributed to an operating segment include expenses, such as software development, marketing,
general and administrative, stock-based compensation and depreciation. These expenses increased 1% to $596.0
million in 2009 from $589.1 million in 2008.
Fiscal Year 2008 Compared to Fiscal Year 2007
(in thousands)
Revenues
System sales
Support and maintenance
Services
Reimbursed travel
Total revenues
Costs of revenue
Costs of revenue
Total margin
Operating expenses
Sales and client
Software development
General and administrative
Total operating expenses
Total costs and expenses
Operating earnings
Interest income (expense), net
Other income (expense), net
Income taxes
Net earnings
2008
% of
Revenue
2007
% of
Revenue
% Change
$ 522,373
31% $ 500,319
472,579
643,317
37,759
28%
38%
2%
397,713
585,067
36,778
33%
26%
38%
2%
1,676,028
100%
1,519,877
100%
296,063
1,379,965
715,512
272,519
113,049
1,101,080
1,397,143
278,885
3,056
(510)
(92,773)
18%
82%
43%
16%
7%
66%
83%
17%
280,110
1,239,767
657,956
270,576
107,152
1,035,684
1,315,794
204,083
1,269
(1,385)
(76,842)
18%
82%
43%
18%
7%
68%
87%
13%
4%
19%
10%
3%
10%
6%
11%
9%
1%
6%
6%
6%
37%
$ 188,658
$ 127,125
48%
As discussed in the results overview, our 2008 consolidated and global segment revenues and margin included
a cumulative catch-up adjustment recognized in the fourth quarter, in the amount of $28.6 million, resulting from a
significant change in accounting estimate related to our contract in London. The majority of the catch-up adjustment
revenue was included in support, maintenance and services. Refer to Note (1a) of the notes to consolidated financial
statements for more information on this adjustment.
48
Revenues and Backlog
Revenues increased 10% to $1.7 billion in 2008, compared with $1.5 billion in 2007.
g
g
g
System sales revenues increased 4% to $522.4 million in 2008 from $500.3 million in 2007. The increase in
system sales was driven by growth in licensed software, sublicensed software and subscriptions.
Support and maintenance revenues increased 19% to $472.6 million in 2008 from $397.7 million in 2007,
mainly due to continued success at selling Cerner Millennium applications, implementing them at client sites
and initiating billing for support and maintenance fees.
Services revenue increased 10% to $643.3 million in 2008 from $585.1 million in 2007 primarily attributable to
growth in CernerWorks managed services.
Contract backlog, which reflects new business bookings that have not yet been recognized as revenue, increased 7%
in 2008 compared to 2007. This increase was driven by growth in new business bookings during the past four quarters,
including continued strong levels of managed services bookings that typically have longer contract terms. In the second
quarter of 2008, contract backlog was reduced by approximately $178.0 million as a result of the contract withdrawal
by the prime contractor in the southern region of England. A summary of our total backlog for 2008 and 2007 follows:
(In thousands)
Contract backlog
2008
2007
$
2,907,762
$
2,712,195
Support and maintenance backlog
580,915
541,095
Total backlog
$ 3,488,677
$ 3,253,290
Costs of Revenue
Cost of revenues was 18% of total revenues in both 2008 and 2007. Such costs, as a percent of revenues, typically
have varied as the mix of revenue (software, hardware, maintenance, support, services and reimbursed travel) carrying
different margin rates changes from period to period.
Operating Expenses
Total operating expenses increased 6% to $1.1 billion in 2008 from $1.0 billion in 2007. Accounting pursuant to ASC 718,
which results in the expensing of share-based compensation, impacted expenses in 2008 and 2007 as indicated below:
Sales and client service expenses
Software development expense
General and administrative expenses
2008
$
7,750
3,232
4,162
2007
$
9,518
3,032
3,639
Total stock-based compensation expense
$
15,144
$
16,189
g
Sales and client service expenses as a percent of total revenues were 43% in both 2008 and 2007. These
expenses increased 9% to $715.5 million in 2008, from $658.0 million in 2007. The increase was primarily
attributable to growth in the managed services business, including $8.0 million of expense recorded in the
second quarter of 2008 for a settlement with a third party provider of software related to the use of the third
party’s software in this business.
49
g
Total expense for software development in 2008 increased 1% to $272.5 million, from $270.6 million in 2007.
Included in 2007 software development expense is $8.6 million of research and development activities for the
RxStation medical dispensing device. $3.4 million of this amount recorded in 2007 is related to periods prior to
2007. A summary of our total software development expense in 2008 and 2007 is as follows:
(In thousands)
2008
2007
Software development costs
Capitalized software costs
Capitalized costs related to share-based payments
Amortization of capitalized software costs
$
291,368
$
283,086
(69,039)
(942)
51,132
(64,789)
(1,196)
53,475
Total software development expense
$
272,519
$
270,576
g
General and administrative expenses as a percent of total revenues were 7% in 2008 and 2007. These expenses
increased 6% to $113.0 million in 2008 from $107.2 million in 2007. This increase was due primarily to the
growth of our core business and increased presence in the global market. We recorded a net transaction gain on
foreign currency of $9.9 million and $3.7 million in 2008 and 2007, respectively.
Non-Operating Items
g
g
g
Net interest income was $3.1 million in 2008, compared with net interest income of $1.3 million in 2007. Interest
income increased to $13.6 million in 2008 from $13.2 million in 2007, due primarily to higher returns received
from our investments in auction rate securities. Interest expense decreased to $10.5 million in 2008 from $11.9
million in 2007, due primarily to a reduction in long-term debt.
Other expense was $0.5 million in 2008, compared to $1.4 million in 2007. As a result of entering into a
settlement agreement with an investment firm relating to auction rate securities, other expense in 2008 includes
the recognition of a gain of $19.9 million for a put-like feature. This gain was offset by the recognition of an
unrealized loss recorded on our auction rate securities due to a transfer of these securities from available-for-
sale to trading.
Our effective tax rate was 33% and 38% in 2008 and 2007, respectively. This decrease is primarily due to a
higher than normal rate in 2007. The effective rate in 2007 was impacted primarily by a recognition of a valuation
allowance in the third quarter of 2007 on certain of our foreign tax loss carry-forwards. Such additional tax
expense in 2007 was partially offset by a tax benefit for adjustments relating to prior periods. The tax rate for
2008 was slightly lower than normal due to strong income levels from global regions that have lower tax rates.
During the second quarter of 2007, we determined that due to a change in circumstances in the quarter, it was more
likely than not that certain tax operating loss carry-forwards in a non-U.S. jurisdiction would not be realized resulting in
the recognition of a valuation allowance totaling approximately $8.0 million. The 2007 valuation allowance was used in
2008 to offset a reduction in the operating loss carry-forward for the non-U.S. jurisdiction.
Tax expense for 2008 and 2007 include benefits of approximately $2.9 million and $3.1 million, respectively, for
corrections relating to prior periods.
50
Operations by Segment
The following table presents a summary of our operating segment information for the years ended 2008 and 2007:
(in thousands)
Domestic Segment
Revenues
Costs of revenue
Operating expenses
Total costs and expenses
Domestic operating earnings
Global Segment
Revenues
Costs of revenue
Operating expenses
Total costs and expenses
Global operating earnings
Other, net
2008
% of
Revenue
2007
% of
Revenue
% Change
$ 1,307,510
100% $ 1,227,434
100%
225,955
361,213
587,168
720,342
17%
28%
45%
55%
221,154
331,124
552,278
675,156
18%
27%
45%
55%
368,518
100%
290,677
100%
70,108
150,729
220,837
147,681
(589,138)
19%
41%
60%
40%
53,367
151,355
204,722
85,955
(557,028)
18%
52%
70%
30%
7%
2%
9%
6%
7%
27%
31%
0%
8%
72%
6%
37%
Consolidated operating earnings
$ 278,885
$ 204,083
Domestic Segment
g
g
g
g
Revenues increased 7% to $1.3 billion in 2008 from $1.2 billion in 2007. This increase was primarily driven by
growth in managed services and support and maintenance.
Cost of revenues was 17% and 18% of revenues in 2008 and 2007, respectively. The decline was driven primarily
by a lower level of hardware sales.
Operating expenses increased 9% to $361.2 million 2008, from $331.1 million in 2007, due primarily to growth
in managed services.
Operating earnings of the Domestic segment increased 7% to $720.3 million in 2008 from $675.2 million in
2007.
Global Segment
g
g
g
g
Revenues increased 27% to $368.5 million in 2008 from $290.7 million in 2007. This increase was primarily
driven by an increase in sales in Europe and the Middle East and the previously discussed cumulative catch-up
adjustment.
Cost of revenues was 19% and 18% of revenues in 2008 and 2007, respectively. The higher cost of revenues
was driven by a higher mix of hardware revenues in 2008.
Operating expenses remained flat in 2008 as compared to 2007.
Operating earnings of the Global segment increased 72% to $147.7 million in 2008 from $86.0 million in 2007.
51
Other, net
Net operating expenses not attributed to an operating segment increased 6% to $589.1 million in 2008 from $557.0
million in 2007. This increase was primarily due to increased research and development and general and administrative
spending and a settlement with a third party supplier in the second quarter of 2008 related to the prior period usage of
their software in our remote hosting business. The third party supplier settlement increased expense by $8.0 million in
the second quarter of 2008.
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 consist of money market funds, time deposits
and bonds with original maturities of less than 90 days and short-term investments. At the end of 2009, we had cash of
$144.8 million, cash equivalents of $97.0 million and short-term investments of $317.1 million, as compared to cash of
$199.5 million, cash equivalents of $71.0 million and short-term investments of $38.4 million at the end of 2008.
We believe that our present cash position, together with cash generated from operations, short-term investments and, if
necessary, our available lines of credit, will be sufficient to meet anticipated cash requirements during 2010.
During the second quarter of 2008, Fujitsu Services Limited’s (Fujitsu) contract as the prime contractor in the National
Health Service (NHS) initiative to automate clinical processes and digitize medical records in the Southern region of
England was terminated by the NHS. This had the effect of automatically terminating our subcontract for the project.
We are in dispute with Fujitsu regarding Fujitsu’s obligation to pay the amounts comprised of accounts receivable
and contracts receivable related to that subcontract, and we are working with Fujitsu to resolve these issues based
on processes provided for in the contract. Part of that process requires resolution of disputes between Fujitsu and
the NHS regarding the contract termination. During the 2009 fourth quarter certain events occurred in the resolution
process between Fujitsu and the NHS which reduced the likelihood the matter will be resolved in the next 12 months.
Therefore we reclassified the receivables, which represented more than 10% of our net receivables, from current assets
to other long term assets during the 2009 fourth quarter. These receivables represent the significant majority of other
long-term assets at the end of 2009. While the ultimate collectability of the receivables pursuant to this process is
uncertain, management believes that it has valid and equitable grounds for recovery of such amounts and that collection
of recorded amounts is probable.
In February and March 2008, liquidity issues in the global credit markets resulted in the progressive failure of auctions
representing all the auction rate securities held by us. These conditions persisted through the remainder of 2008 and into
2009. During the fourth quarter of 2008, we entered into a settlement agreement with the investment firm that sold us
the auction rate securities. Under the terms of the settlement agreement, we received the right to redeem the securities
at par value during a period from mid-2010 through mid-2012. The settlement is in effect a put-like instrument with a
fair value generally equal to the difference between the auction rate securities’ fair value and par value. In the fourth
quarter of 2009, these securities were reclassified to short term investments based on our intention to exercise the put-
like settlement feature and redeem the securities within the next year. At the end of 2009, we held auction rate securities
with a par value of $94.6 million and an estimated fair value of $85.2 million.
We anticipate that any future changes in the fair value of the put-like feature will be offset by the changes in the fair
value of the related auction rate securities with no material net impact to the Consolidated Statements of Operations.
For a more detailed discussion of the auction rate securities, please refer to Note (3), Cash and Investments, in the
Consolidated Financial Statements. We do not expect the auction failures to impact our ability to fund our working capital
needs, capital expenditures or other business requirements.
52
The following table provides details about our cash flows in 2009, 2008 and 2007:
For the Years Ended
(In thousands)
2009
2008
2007
Cash flows from operating activities
$
347,291
$
281,802
$
274,565
Cash flows from investing activities
Cash flows from financing activities
Effect of exchange rate changes on cash
(394,321)
16,770
1,489
(170,607)
(11,654)
(11,961)
(287,666)
37,083
(3,613)
Total change in cash and cash equivalents
$
(28,771)
$
87,580
$
20,369
Cash Flows from Operating Activities
Cash flows from operations increased in 2009 due primarily to the increase in cash impacting earnings and decreased
use of working capital. During 2009, 2008 and 2007, we received total client cash collections of $1.8 billion, $1.7 billion
and $1.6 billion, respectively, of which approximately 3%, 5% and 5% were received from third party client financing
arrangements and non-recourse payment assignments, respectively. Days sales outstanding decreased to 90 days for the
2009 fourth quarter compared to 105 days for 2009 third quarter and 92 days for the 2008 fourth quarter. Approximately
12 days of this quarterly decline is driven by the reclassification of our Fujitsu receivables to other long term assets, which
are not included in our days sales outstanding calculation. The remaining decline is reflective of our improved cash
collections. Revenues provided under support and maintenance agreements represent recurring cash flows. Support and
maintenance revenues increased 4% in 2009 and 19% in 2008, and we expect these revenues to continue to grow as
the base of installed Cerner Millennium systems grows.
Cash Flows from Investing Activities
(In thousands)
Capital purchases
Capitalized software development costs
Purchases of investments, net of maturities
Other, net
For the Years Ended
2009
2008
2007
$
(131,265)
$
(108,099)
$
(180,723)
(77,747)
(169,295)
(16,014)
(70,098)
17,510
(9,920)
(66,063)
(13,277)
(27,603)
Total cash flows from investing activities
$
(394,321)
$
(170,607)
$
(287,666)
Cash flows from investing activities consists primarily of capital spending and our short-term investment activities. Capital
spending consists of capitalized equipment purchases primarily to support growth in our CernerWorks managed services
business, capitalized land, building and improvement purchases to support our facilities requirements and capitalized
spending to support our ongoing software development initiatives. Capital spending in 2010 is expected to approximate
our 2009 levels.
53
Cash Flows from Financing Activities
For the Years Ended
(In thousands)
2009
2008
2007
Line of credit and long-term debt borrowings and
repayments, net
Cash from option exercises (incl. excess tax benefits)
Purchase of treasury stock
Other, net
$
(32,352)
$
(15,317)
$
(22,359)
47,234
-
1,888
24,530
(28,002)
7,135
59,442
-
-
Total cash flows from financing activities
$
16,770
$
(11,654)
$
37,083
In November 2005, we completed a £65.0 million private placement of debt at 5.54% pursuant to a Note Agreement. The
Note Agreement is payable in seven equal annual installments, which commenced in November 2009. The proceeds were
used to repay the outstanding amount under our credit facility and for general corporate purposes. The Note Agreement
contains certain net worth and fixed charge coverage covenants and provides certain restrictions on our ability to borrow,
incur liens, sell assets and pay dividends. We were in compliance with all covenants at the end of 2009.
In December 2002, we completed a $60.0 million private placement of debt pursuant to a Note Agreement. The Series
A Senior Notes, with a $21.0 million principal amount at 5.57% were paid in full by the end of 2008. The Series B Senior
notes, with a $39.0 million principal amount at 6.42%, are payable in four equal annual installments, which commenced
in December 2009. The proceeds were used to repay the outstanding amount under our credit facility and for general
corporate purposes. The Note Agreement contains certain net worth and fixed charge coverage covenants and provides
certain restrictions on our ability to borrow, incur liens, sell assets and pay dividends. We were in compliance with all
covenants at the end of 2009.
In April 1999, we completed a $100.0 million private placement of debt pursuant to a Note Agreement. The Series A
Senior Notes, with a $60.0 million principal amount at 7.14%, were paid in full by the end of 2006. The Series B Senior
Notes, with a $40.0 million principal amount at 7.66%, were paid in full by the end of 2009.
We maintain a $90 million, multi-year revolving credit facility, which provides an unsecured revolving line of credit for
working capital purposes. Interest is payable at a rate based on prime or LIBOR plus a spread that varies depending
on the net worth ratios maintained. The agreement contains certain net worth, current ratio and fixed charge coverage
covenants and provides certain restrictions on our ability to borrow, incur liens, sell assets and pay dividends. The current
agreement expires on May 31, 2013. As of the end of 2009, we had no outstanding borrowings under this agreement and
were in compliance with all covenants.
54
Contractual Obligations, Commitments and Off Balance Sheet Arrangements
The following table represents a summary of our contractual obligations and commercial commitments, excluding interest,
at the end of 2009, except short-term purchase order commitments arising in the ordinary course of business.
Payments due by period
(In thousands)
2010
2011
2012
2013
2014
2015 and
thereafter
Total
Long-term debt obligations
$
24,765 $ 25,338 $
24,765 $ 15,015 $ 15,015 $ 15,015 $ 119,913
Capital lease obligations
249
250
108
-
-
-
607
Operating lease obligations
25,504
23,041
20,573
17,677
15,143
60,195
162,133
Purchase obligations
15,592
6,067
5,644
5,597
2,797
10,665
46,362
Uncertain tax positions
-
314
3,226
3,059
-
-
6,599
Total
$ 66,110 $ 55,010 $ 54,316 $ 41,348 $ 32,955 $ 85,875 $ 335,614
The effects of inflation on our business during 2009, 2008 and 2007 were not significant.
Recent Accounting Pronouncements
In September 2009, Accounting Standards Update (ASU) 09-13, Revenue Recognition (Topic 605) – Multiple Deliverable
Revenue Arrangements, was issued, which will require an entity to apply the relative selling price allocation method in order
to estimate selling price for all units of accounting, including delivered items, when vendor-specific objective evidence
(VSOE) or acceptable third party evidence (TPE) does not exist and expands the disclosure requirements to require an
entity to provide both qualitative and quantitative information about the significant judgments made in applying the
guidance in ASU 09-13 and subsequent changes in those judgments that may significantly affect the timing or amount of
revenue recognition. ASU 09-13 is effective for revenue arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010 and shall be applied on a prospective basis. Earlier application is permitted. We are
assessing the potential impact of ASU 09-13 on our financial position and results of operations.
In September 2009, ASU 09-14, Software (Topic 985) – Certain Revenue Arrangements that Include Software Elements,
was issued, which requires the exclusion from the scope of ASC 985 of all tangible products containing both software and
non-software components that function together to deliver the product’s essential functionality. ASU 09-14 is effective for
revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 and shall
be applied on a prospective basis. Earlier application is permitted. We are assessing the impact of ASU 09-14 on our
financial position and results of operations.
In December 2009, ASU 09-16, Accounting for Transfers of Financial Assets, was issued, which among other things
creates more stringent conditions for reporting a transfer of a portion of a financial asset as a sale. ASU 09-16 is effective
for financial asset transfers as of the beginning of fiscal years that begin after November 15, 2009. Earlier adoption is
prohibited. We are assessing the impact of ASU 09-16 on our financial position and results of operations.
Critical Accounting Policies
We believe that there are several accounting policies that are critical to understanding our historical and future
performance, as these policies affect the reported amount of revenue and other significant areas involving our judgments
and estimates. These significant accounting policies relate to revenue recognition, software development, potential
impairments of goodwill and income taxes. These policies and our procedures related to these policies are described in
detail below and under specific areas within this MD&A. In addition, Note (1) to the consolidated financial statements
expands upon discussion of our accounting policies.
55
Revenue Recognition
We recognize revenue within our multiple element arrangements, including software and software-related services, using
the residual method under ASC 985-605, Software - Revenue Recognition. Key factors in our revenue recognition model
are our assessments that installation services are essential to the functionality of our software whereas implementation
services are not; and the length of time it takes for us to achieve the delivery and installation milestones for our licensed
software. If our business model were to change such that implementation services are deemed to be essential to the
functionality of our software, the period of time over which our licensed software revenue would be recognized would
lengthen. We generally recognize revenue from the sale of our licensed software over two key milestones, delivery
and installation, based on percentages that reflect the underlying effort from planning to installation. Generally, both
milestones are achieved in the quarter the contracts are executed. If the period of time to achieve our delivery and
installation milestones for our licensed software were to lengthen, our milestones would be adjusted and the timing of
revenue recognition for our licensed software could materially change.
We also recognize revenue for certain projects using the percentage of completion method pursuant to ASC 605-35,
Revenue Recognition – Construction-Type and Production-Type Contracts, as prescribed by ASC 985-605. Our revenue
recognition is dependent upon our ability to reliably estimate the direct labor hours to complete a project which generally
can span several years. We utilize our historical project experience and detailed planning process as a basis for our future
estimates to complete current projects. Significant delays in completion of the projects, unforeseen cost increases or
penalties could result in significant reductions to revenue and margins on these contracts. The actual project results can
be significantly different from the estimated results. When adjustments are indentified near or at the end of a project, the
full impact of the change in estimate is recognized in that period. This can result in a material impact on our results for
a single reporting period.
Software Development Costs
Costs incurred internally in creating computer software solutions and enhancements to those solutions are expensed until
completion of a detailed program design, which is when we determine that technological feasibility has been established.
Thereafter, all software development costs are capitalized until such time as the software solutions and enhancements
are available for general release, and the capitalized costs subsequently are reported at the lower of amortized cost or
net realizable value.
Net realizable value is computed as the estimated gross future revenues from each software solution less the amount
of estimated future costs of completing and disposing of that product. Because the development of projected net
future revenues related to our software solutions used in our net realizable value computation is based on estimates, a
significant reduction in our future revenues could impact the recovery of our capitalized software development costs. We
historically have not experienced significant inaccuracies in computing the net realizable value of our software solutions
and the difference between the net realizable value and the unamortized cost has grown over the past three years. We
expect that trend to continue in the future. If we missed our estimates of net future revenues by up to 10%, the amount
of our capitalized software development costs would not be impaired.
Capitalized costs are amortized based on current and expected net future revenue for each software solution with minimum
annual amortization equal to the straight-line amortization over the estimated economic life of the software solution. We
are amortizing capitalized costs over five years. The five-year period over which capitalized software development costs
are amortized is an estimate based upon our forecast of a reasonable useful life for the capitalized costs. Historically, use
of our software programs by our clients has exceeded five years and is capable of being used a decade or more.
We expect that major software information systems companies, large information technology consulting service providers
and systems integrators and others specializing in the healthcare industry may offer competitive products or services.
The pace of change in the HIT market is rapid and there are frequent new product introductions, product enhancements
and evolving industry standards and requirements. As a result, the capitalized software solutions may become less
valuable or obsolete and could be subject to impairment.
56
Fair Value Measurements
We determine fair value measurements used in our consolidated financial statements based upon the price that would
be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. The fair value hierarchy distinguishes between (1) market participant assumptions developed based
on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about
market participant assumptions developed based on the best information available in the circumstances (unobservable
inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted
prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).
The three levels of the fair value hierarchy are described below:
g
g
g
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.
As of the end of 2009, we held investments in money market funds, time deposits, commercial paper, government
and corporate bonds and auction rate securities. Auction rate securities are debt instruments with long-term nominal
maturities, for which the interest rates regularly reset every 7-35 days under an auction system. Due to the lack of
availability of observable market quotes on our investment portfolio of auction rate securities, we utilize valuation models
that are based on discounted cash flow streams, including assessments of counterparty credit quality, default risk
underlying the security, discount rates and overall capital market liquidity. The valuation is subject to uncertainties that
are difficult to predict. If different assumptions were used for the various inputs to the valuation, including, but not limited
to, assumptions involving the estimated holding periods for the auction rate securities, the estimated cash flows over
those estimated lives, and the estimated discount rates, including the liquidity discount rate, applied to those cash flows,
the estimated fair value of these investments could be significantly higher or lower than the fair value we determined.
A considerable amount of judgment and estimation is applied in the valuation of auction rate securities. In addition, we
also apply judgment in determining whether the marketable securities are other-than-temporarily impaired. We typically
consider the severity and duration of the decline, future prospects of the issuer and our ability and intent to hold the
security to recovery.
Goodwill
We account for goodwill under the provisions of ASC 350, Intangibles - Goodwill and Other. As a result, goodwill and
intangible assets with indefinite lives are not amortized but are evaluated for impairment annually or whenever there
is an impairment indicator. All goodwill is assigned to a reporting unit, where it is subject to an annual impairment test
based on fair value. We assess goodwill for impairment in the second quarter of each fiscal year and evaluate impairment
indicators at each quarter end. We assessed our goodwill for impairment in the second quarters of 2009 and 2008 and
concluded that goodwill was not impaired. In each respective year, the fair values of each of our reporting units exceeded
their carrying amounts by a significant margin. We used a discounted cash flow analysis utilizing Level 3 inputs, to
determine the fair value of the reporting units for all periods. Goodwill amounted to $151.5 million and $146.7 million at
the end of 2009 and 2008, respectively. If future, anticipated cash flows from our reporting units that recognized goodwill
do not materialize as expected, our goodwill could be impaired, which could result in significant charges to earnings.
Income Taxes
We account for income taxes under the provisions of ASC 740, Income Taxes. We make a number of assumptions and
estimates in determining the appropriate amount of expense to record for income taxes. These assumptions and estimates
consider the taxing jurisdictions in which we operate as well as current tax regulations. Accruals are established for
estimates of tax effects for certain transactions, business structures and future projected profitability of our businesses
based on our interpretation of existing facts and circumstances. If these assumptions and estimates were to change as
a result of new evidence or changes in circumstances, the change in estimate could result in a material adjustment to
the consolidated financial statements.
57
We have discussed the development and selection of these critical accounting estimates with the Audit Committee of our
Board of Directors and the Audit Committee has reviewed our disclosure contained herein.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We use a foreign-currency denominated debt instrument to reduce our foreign currency exposure in the U.K. As of the
end of 2009, we designated all of our Great Britain Pound (GBP) denominated long-term debt (55.7 million GBP) as a net
investment hedge of our U.K. operations. Because the borrowing is denominated in pounds, we are exposed to movements
in the foreign currency exchange rate between the U.S. dollar (USD) and the GPB. We estimate that a hypothetical 10%
change in the foreign currency exchange rate between the USD and GBP would have impacted the unrealized loss, net
of related income tax effects, of the net investment hedge recognized in other comprehensive income by approximately
$6.6 million. Please refer to Notes (9) and (10) to the Consolidated Financial Statements for a more detailed discussion
of the foreign-currency denominated debt instrument.
Item 8.
Financial Statements and Supplementary Data
The Financial Statements and Notes required by this Item are submitted as a separate part of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
N/A
Item 9.A. Controls and Procedures
a)
b)
c)
Evaluation of disclosure controls and procedures. The Company’s Chief Executive Officer (CEO) and Chief
Financial Officer (CFO) have evaluated the effectiveness of the Company’s disclosure controls and procedures
(as defined in the Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by the
Annual Report (the Evaluation Date). They have concluded that, as of the Evaluation Date and based on the
evaluation of these controls and procedures required by paragraph (b) of Exchange Act Rule 13a-15 or 15d-
15, these disclosure controls and procedures were effective to ensure that material information relating to the
Company and its consolidated subsidiaries would be made known to them by others within those entities and
would be disclosed on a timely basis. The CEO and CFO have concluded that the Company’s disclosure controls
and procedures are designed, and are effective, to give reasonable assurance that the information required to be
disclosed by the Company in reports that it files under the Exchange Act is recorded, processed, summarized and
reported within the time period specified in the rules and forms of the SEC. They have also concluded that the
Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed
in the reports that are filed or submitted under the Exchange Act are accumulated and communicated to the
Company’s management, including the CEO and CFO, to allow timely decisions regarding required disclosure.
There were no changes in the Company’s internal controls over financial reporting during the three months
ended January 2, 2010, that have materially affected, or are reasonably likely to materially affect, its internal
controls over financial reporting.
The Company’s management, including its Chief Executive Officer and Chief Financial Officer, have concluded
that our disclosure controls and procedures and internal control over financial reporting are designed to provide
reasonable assurance of achieving their objectives and are effective at that reasonable assurance level.
However, the Company’s management can provide no assurance that our disclosure controls and procedures or
our internal control over financial reporting can prevent all errors and all fraud under all circumstances. A control
system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that
the objectives of the control system are met. Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered relative to their costs. Because
of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the Company have been or will be detected. The design
58
of any system of controls also is based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its stated goals under all potential
future conditions; over time, controls may become inadequate because of changes in conditions, or the degree
of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective
control system, misstatements due to error or fraud may occur and not be detected.
Management’s Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial
reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended). The Company’s
management assessed the effectiveness of the Company’s internal control over financial reporting as of January 2, 2010.
In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in its Internal Control-Integrated Framework. The Company’s
management has concluded that, as of January 2, 2010, the Company’s internal control over financial reporting is
effective based on these criteria. The Company’s independent registered public accounting firm that audited the
consolidated financial statements included in the annual report has issued an audit report on the effectiveness of the
Company’s internal control over financial reporting, which is included herein under “Report of Independent Registered
Public Accounting Firm.”
Item 9.B. Other Information
N/A
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this Item 10 regarding our Directors will be set forth under the caption “Election of Directors” in
our Proxy Statement in connection with the 2010 Annual Shareholders’ Meeting scheduled to be held May 28, 2010, and
is incorporated in this Item 10 by reference. The information required by this Item 10 concerning compliance with Section
16(a) of the Securities Exchange Act of 1934 will be set forth under the caption “Section 16(a) Beneficial Ownership
Reporting Compliance” in our Proxy Statement in connection with the 2010 Annual Shareholders’ Meeting scheduled to
be held May 28, 2010, and is incorporated in this Item 10 by reference.
The information required by this Item 10 concerning our Code of Business Conduct and Ethics will be set forth under the
caption “Code of Business Conduct and Ethics” in our Proxy Statement in connection with the 2010 Annual Shareholders’
Meeting scheduled to be held May 28, 2010, and is incorporated in this Item 10 by reference. The information required by
this Item 10 concerning our Audit Committee and our Audit Committee financial expert will be set forth under the caption
“Audit Committee” in our Proxy Statement in connection with the 2010 Annual Shareholders’ Meeting scheduled to be
held May 28, 2010, and is incorporated in this Item 10 by reference.
There have been no material changes to the procedures by which security holders may recommend nominees to our Board
of Directors since our last disclosure thereof. The names of our executive officers and their ages, titles and biographies
are incorporated by reference under the caption “Executive Officers of the Registrant” under Part I, above.
Item 11. Executive Compensation
The information required by this Item 11 concerning our executive compensation will be set forth under the caption
“Compensation Discussion and Analysis” in our Proxy Statement in connection with the 2010 Annual Shareholders’
Meeting scheduled to be held May 28, 2010, and is incorporated in this Item 11 by reference. The information required
by this Item 11 concerning Compensation Committee interlocks and insider participation will be set forth under the
caption “Compensation Committee Interlocks and Insider Participation” in our Proxy Statement in connection with the
2010 Annual Shareholders’ Meeting scheduled to be held May 28, 2010, and is incorporated in this Item 11 by reference.
59
The information required by this Item 11 concerning Compensation Committee report will be set forth under the caption
“Compensation Committee Report” in our Proxy Statement in connection with the 2010 Annual Shareholders’ Meeting
scheduled to be held May 28, 2010 and is incorporated in this Item 11 by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item 12 will be set forth under the caption “Voting Securities and Principal Holders
Thereof” in our Proxy Statement in connection with the 2010 Annual Shareholders’ Meeting scheduled to be held May 28,
2010, and is incorporated in this Item 12 by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item 13 concerning our transactions with related parties will be set forth under the caption
“Certain Transactions” in our Proxy Statement in connection with the 2010 Annual Shareholders’ Meeting scheduled to be
held May 28, 2010, and is incorporated in this Item 13 by reference. The information required by this Item 13 concerning
director independence will be set forth under the caption “Director Independence” in our Proxy Statement in connection
with the 2010 Annual Shareholders’ Meeting scheduled to be held May 28, 2010, and is incorporated in this Item 13 by
reference.
Item 14. Principal Accountant Fees and Services
The information required by this Item 14 will be set forth under the caption “Relationship with Independent Registered
Public Accounting Firm” in our Proxy Statement in connection with the 2010 Annual Shareholders’ Meeting scheduled to
be held May 28, 2010, and is incorporated in this Item 14 by reference.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a)
(1)
Financial Statements and Exhibits.
Consolidated Financial Statements:
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets -
As of January 2, 2010 and January 3, 2009
Consolidated Statements of Operations -
Years Ended January 2, 2010, January 3, 2009, and December 29, 2007
Consolidated Statements of Changes in Equity
Years Ended January 2, 2010, January 3, 2009, and December 29, 2007
Consolidated Statements of Cash Flows
Years Ended January 2, 2010, January 3, 2009, and December 29, 2007
Notes to Consolidated Financial Statements
(2)
The following financial statement schedule and Report of Independent Registered Public Accounting Firm of the Registrant for the
three-year period ended January 2, 2010 are included herein:
Schedule II - Valuation and Qualifying Accounts
Report of Independent Registered Public Accounting Firm
All other schedules are omitted, as the required information is inapplicable or the information is presented in the consolidated
financial statements or related notes.
(3)
The exhibits required to be filed by this item are set forth below:
60
Number
3(a)
3(b)
4(a)
4(b)
4(c)
4(d)
4(e)
4(f)
10(a)
10(b)
10(c)
10(d)
10(e)
10(f)
10(g)
10(h)
10(i)
10(j)
10(k)
10(l)
10(m)
Description
Second Restated Certificate of Incorporation of the Registrant, dated December 5, 2003 (filed as exhibit 3(a) to Registrant’s Annual Report on
Form 10-K for the year ended January 3, 2004 and incorporated herein by reference).
Amended and Restated Bylaws, dated September 16, 2008 (filed as Exhibit 3.1 to Registrant’s Form 8-K filed on September 22, 2008 and
incorporated herein by reference).
Specimen stock certificate (filed as Exhibit 4(a) to Registrant’s Annual Report on Form 10-K for the year ended December 30, 2006 and
incorporated herein by reference).
Amended and Restated Credit Agreement between Cerner Corporation and U.S. Bank N.A., Bank of America, N.A. (successor in interest to LaSalle
Bank National Association), Commerce Bank, N.A. and UMB Bank, N.A., dated November 30, 2006 (filed as Exhibit 99.1 to Registrant’s Form 8-K
filed on December 6, 2006, and incorporated herein by reference).
First Amendment to Amended and Restated Credit Agreement between Cerner Corporation, U.S. Bank National Association, Bank of America, N.A.,
Commerce Bank, N.A. and UMB Bank, N.A., dated November 12, 2009 (filed as Exhibit 99.1 to Registrant’s Form 8-K filed on November 18, 2009,
and incorporated herein by reference).
Cerner Corporation Note Agreement dated April 1, 1999 among Cerner Corporation, Principal Life Insurance Company, Principal Life Insurance
Company, on behalf of one or more separate accounts, Commercial Union Life Insurance Company of America, Nippon Life Insurance Company
of America, John Hancock Mutual Life Insurance Company, John Hancock Variable Life Insurance Company, and Investors Partner Life Insurance
Company (filed as Exhibit 4(e) to Registrant’s Form 8-K dated April 23, 1999 and incorporated herein by reference).
Note Purchase Agreement between Cerner Corporation and the purchasers therein, dated December 15, 2002 (filed as Exhibit 10(x) to
Registrant’s Annual Report on Form 10-K for the year ended December 28, 2002 and incorporated herein by reference).
Cerner Corporation Note Purchase Agreement dated November 1, 2005 among Cerner Corporation, as issuer, and AIG Annuity Insurance Company,
American General Life Insurance Company and Principal Life Insurance Company, as purchasers, (filed as Exhibit 99.1 to Registrant’s Form 8-K
filed on November 7, 2005 and incorporated herein by reference).
Indemnification Agreement Form for use between the Registrant and its Directors (filed as Exhibit 10(a) to Registrant’s Annual Report on Form
10-K for the year ended December 30, 2006 and incorporated herein by reference).*
Employment Agreement of Earl H. Devanny, III dated August 13, 1999 (filed as Exhibit 10(q) to Registrant’s Annual Report on Form 10-K for the
year ended January 1, 2000 and incorporated herein by reference).*
Amendment Number One to Cerner Associate Employment Agreement between Cerner Corporation and E. H. Devanny, III, dated November
1, 2008 (filed as Exhibit 10(c) to Registrant’s Annual Report on Form 10-K for the year ended January 3, 2009 and incorporated herein by
reference).*
Amended & Restated Executive Employment Agreement of Neal L. Patterson dated January 1, 2008 (filed as Exhibit 10(c) to Registrant’s Annual
Report on Form 10-K for the year ended December 29, 2007 and incorporated herein by reference).*
Amended Stock Option Plan D of Registrant dated December 8, 2000 (filed as Exhibit 10(f) to Registrant’s Annual Report on Form 10-K for the
year ended December 30, 2000 and incorporated herein by reference).*
Amended Stock Option Plan E of Registrant dated December 8, 2000 (filed as Exhibit 10(g) to Registrant’s Annual Report on Form 10-K for the
year ended December 30, 2000 and incorporated herein by reference).*
Cerner Corporation 2001 Long-Term Incentive Plan F (filed as Annex I to Registrant’s 2001 Proxy Statement and incorporated herein by
reference).*
Cerner Corporation 2004 Long-Term Incentive Plan G Amended & Restated dated October 1, 2007 (filed as Exhibit 10(g) to Registrant’s Annual
Report on Form 10-K for the year ended December 29, 2007 and incorporated herein by reference).*
Cerner Corporation 2001 Associate Stock Purchase Plan (filed as Annex II to Registrant’s 2001 Proxy Statement and incorporated herein by
reference).*
Qualified Performance-Based Compensation Plan dated December 3, 2007 (filed as Exhibit 10(i) to the Registrant’s Annual Report on Form 10-K
for the year ended December 29, 2007 and incorporated herein by reference).*
Form of 2009 Executive Performance Agreement (filed as Exhibit 99.1 to Registrant’s Form 8-K on April 6, 2009 and incorporated herein by
reference).*
Cerner Corporation Executive Deferred Compensation Plan as Amended & Restated dated January 1, 2008 (filed as Exhibit 10(k) to Registrant’s
Annual Report on Form 10-K for the year ended December 29, 2007 and incorporated herein by reference.)*
Cerner Corporation 2005 Enhanced Severance Pay Plan as Amended and Restated dated January 1, 2008 (filed as Exhibit 10(l) to Registrant’s
Annual Report on Form 10-K for the year ended December 29, 2007 and incorporated herein by reference.)*
61
10(n)
10(o)
10(p)
10(q)
10(r)
10(s)
10(t)
11
21
23
31.1
31.2
32.1
32.2
Cerner Corporation 2001 Long-Term Incentive Plan F Nonqualified Stock Option Agreement (filed as Exhibit 10(v) to Registrant’s Annual Report on
Form 10-K for the year ended January 1, 2005 and incorporated herein by reference).*
Cerner Corporation 2001 Long-Term Incentive Plan F Nonqualified Stock Option Grant Certificate (filed as Exhibit 10(a) to Registrant’s Quarterly
Report on Form 10-Q for the quarter ended October 1, 2005 and incorporated herein by reference).*
Cerner Corporation 2001 Long-Term Incentive Plan F Nonqualified Stock Option Director Agreement (filed as Exhibit 10(x) to Registrant’s Annual
Report on Form 10-K for the year ended January 1, 2005 and incorporated herein by reference).*
Cerner Corporation 2001 Long-Term Incentive Plan F Director Restricted Stock Agreement (filed as Exhibit 10(w) to Registrant’s Annual Report on
Form 10-K for the year ended January 1, 2005 and incorporated herein by reference).*
Cerner Corporation 2004 Long-Term Incentive Plan G Nonqualified Stock Option Grant Certificate (filed as Exhibit 10(q) to Registrant’s Annual
Report on Form 10-K for the year ended December 29, 2007 and incorporated herein by reference).*
Time Sharing Agreements between the Registrant and Neal L. Patterson and Clifford W. Illig, both dated February 7, 2007 (filed as Exhibits 10.2
and 10.3, respectively, to Registrant’s Form 8-K filed on February 9, 2007 and incorporated herein by reference).*
Notice of Change of Aircraft Provided Under Time Sharing Agreements from Registrant to Neal L. Patterson and Clifford W. Illig, both notices dated
December 28, 2009.*
*Management contracts or compensatory plans or arrangements required to be identified by Item 15(a)(3)
Computation of Registrant’s Earnings Per Share. (Exhibit omitted. Information contained in notes to consolidated financial statements.)
Subsidiaries of Registrant.
Consent of Independent Registered Public Accounting Firm.
Certification of Neal L. Patterson pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Marc G. Naughton pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification pursuant to 18 U.S.C. Section. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Certification pursuant to 18 U.S.C. Section. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b)
Exhibits.
The response to this portion of Item 15 is submitted as a separate section of this report.
(c)
Financial Statement Schedules.
The response to this portion of Item 15 is submitted as a separate section of this report.
62
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: February 22, 2010
CERNER CORPORATION
By:/s/Neal L. Patterson
Neal L. Patterson
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated:
Signature and Title
Date
/s/Neal L. Patterson
Neal L. Patterson, Chairman of the Board and
Chief Executive Officer (Principal Executive Officer)
/s/Clifford W. Illig
Clifford W. Illig, Vice Chairman and Director
/s/Marc G. Naughton
Marc G. Naughton, Senior Vice President and
Chief Financial Officer (Principal Financial Officer)
/s/Michael R. Battaglioli
Michael R. Battaglioli, Vice President and
Chief Accounting Officer
/s/Gerald E. Bisbee, Jr.
Gerald E. Bisbee, Jr., Ph.D., Director
/s/John C. Danforth
John C. Danforth, Director
/s/Michael E. Herman
Michael E. Herman, Director
/s/William B. Neaves
William B. Neaves, Ph.D., Director
/s/William D. Zollars
William D. Zollars, Director
February 22, 2010
February 22, 2010
February 22, 2010
February 22, 2010
February 22, 2010
February 22, 2010
February 22, 2010
February 22, 2010
February 22, 2010
63
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Cerner Corporation:
We have audited Cerner Corporation’s (the Corporation) internal control over financial reporting as of January 2, 2010,
based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Corporation’s management is responsible for maintaining
effective internal control over financial reporting and for its assessment of the effectiveness of internal control over
financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting,
appearing in Item 9.A. Our responsibility is to express an opinion on the Corporation’s internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also
included performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over financial reporting includes those policies
and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on
the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
In our opinion, Cerner Corporation maintained, in all material respects, effective internal control over financial reporting
as of January 2, 2010, based on criteria established in Internal Control – Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated balance sheets of Cerner Corporation and subsidiaries as of January 2, 2010 and January 3,
2009, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for each
of the years in the three-year period ended January 2, 2010, and our report dated February 22, 2010 expressed an
unqualified opinion on those consolidated financial statements.
/s/KPMG LLP
Kansas City, Missouri
February 22, 2010
64
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Cerner Corporation:
We have audited the accompanying consolidated balance sheets of Cerner Corporation and subsidiaries (collectively,
the Corporation) as of January 2, 2010 and January 3, 2009, and the related consolidated statements of operations,
changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended January 2, 2010.
These consolidated financial statements are the responsibility of the Corporation’s management. Our responsibility is to
express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of the Cerner Corporation and subsidiaries as of January 2, 2010 and January 3, 2009, and the results of their
operations and their cash flows for each of the years in the three-year period ended January 2, 2010, in conformity with
U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), Cerner Corporation’s internal control over financial reporting as of January 2, 2010, based on criteria established
in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), and our report dated February 22, 2010 expressed an unqualified opinion on the effectiveness of
Cerner Corporation’s internal control over financial reporting.
/s/KPMG LLP
Kansas City, Missouri
February 22,2010
Management’s Report
The management of Cerner Corporation is responsible for the consolidated financial statements and all other information
presented in this report. The financial statements have been prepared in conformity with U.S. generally accepted
accounting principles appropriate to the circumstances, and, therefore, included in the financial statements are certain
amounts based on management’s informed estimates and judgments. Other financial information in this report is
consistent with that in the consolidated financial statements. The consolidated financial statements have been audited
by Cerner Corporation’s independent registered public accountants and have been reviewed by the Audit Committee of
the Board of Directors.
65
CERNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of January 2, 2010 and January 3, 2009
(In thousands, except share data)
2009
2008
Assets
Current assets:
Cash and cash equivalents
Short-term investments
Receivables, net
Inventory
Prepaid expenses and other
Deferred income taxes
Total current assets
Property and equipment, net
Software development costs, net
Goodwill
Intangible assets, net
Long-term investments
Other assets
Total assets
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
Current installments of long-term debt
Deferred revenue
Accrued payroll and tax withholdings
Other accrued expenses
Total current liabilities
Long-term debt
Deferred income taxes and other liabilities
Deferred revenue
Total Liabilities
Stockholders’ Equity:
Cerner Corporation stockholders’ equity:
Com mon stock, $.01 par value, 150,000,000 shares authorized,
82,564,708 shares issued at January 2, 2010 and
81,043,345 issued at January 3, 2009
Additional paid-in capital
Retained earnings
Treasury stock
Accumulated other comprehensive loss, net
$
241,723
$
270,494
317,113
461,411
11,242
106,791
8,055
1,146,335
509,178
233,265
151,479
33,719
-
74,591
38,400
468,928
10,096
69,553
1,402
858,873
483,399
218,811
146,666
51,925
105,300
16,014
$ 2,148,567
$ 1,880,988
$
36,893
$
93,667
25,014
137,095
80,093
79,008
358,103
95,506
98,372
15,788
567,769
826
557,545
1,053,563
(28,002)
(3,254)
30,116
107,554
67,266
42,620
341,223
111,370
100,546
15,554
568,693
810
491,080
860,098
(28,002)
(12,977)
Total Cerner Corporation stockholders’ equity
1,580,678
1,311,009
Noncontrolling interest
Total stockholders’ equity
120
1,286
1,580,798
1,312,295
Total liabilities and stockholders’ equity
$ 2,148,567
$ 1,880,988
See notes to consolidated financial statements.
66
CERNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended January 2, 2010, January 3, 2009 and December 29, 2007
(In thousands, except per share data)
2009
2008
2007
For the Years Ended
Revenues:
System sales
Support, maintenance and services
Reimbursed travel
Total revenues
Costs and expenses:
Cost of system sales
Cost of support, maintenance and services
Cost of reimbursed travel
Sales and client service
Software development
(Includes amortization of
$63,611, $51,132 and $53,475, respectively)
General and administrative
Total costs and expenses
Operating earnings
Other income (expense):
Interest income (expense), net
Other income (expense), net
Total other income (expense), net
Earnings before income taxes
Income taxes
Net earnings
Basic earnings per share
Diluted earnings per share
Basic weighted average shares outstanding
Diluted weighted average shares outstanding
See notes to consolidated financial statements.
$
504,561
$
522,373
$
500,319
1,136,871
1,115,896
30,432
37,759
982,780
36,778
1,671,864
1,676,028
1,519,877
186,626
64,140
30,432
700,639
271,051
197,150
61,154
37,759
715,512
272,519
181,744
61,588
36,778
657,956
270,576
126,970
113,049
107,152
1,379,858
1,397,143
1,315,794
292,006
278,885
204,083
308
367
675
292,681
(99,216)
193,465
2.39
2.31
80,981
83,882
$
$
$
3,056
(510)
2,546
281,431
(92,773)
188,658
2.34
2.26
80,549
83,435
$
$
$
1,269
(1,385)
(116)
203,967
(76,842)
127,125
1.60
1.53
79,395
83,218
$
$
$
67
CERNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In thousands)
Common Stock
Shares
Amount
Additional
Paid-in
Capital
Retained
Earnings
Treasury
Stock
Accumulated
Other
Comprehensive
Income (Loss)
Comprehensive
Income (Loss)
Balance at December 31, 2006
78,392 $
784
$ 376,595
$ 544,315
$
- $
600
Exercise of options
1,756
17
29,068
Employee stock option compensation
expense
Employee stock option compensation
net excess tax benefit
Foreign currency translation
adjustments and other
Net earnings
Comprehensive Income
-
-
-
-
-
-
-
-
16,348
29,865
-
-
-
-
-
-
127,125
-
-
-
-
-
-
-
-
7,711
$7,711
-
127,125
$134,836
Balance at December 29, 2007
80,148 $
801
$ 451,876
$ 671,440
$
-
$
8,311
Exercise of options
895
9
15,250
Employee stock option compensation
expense
Employee stock option compensation
net excess tax benefit
Purchase of treasury shares
Foreign currency translation
adjustments and other
Net earnings
Comprehensive Income
-
-
-
-
-
-
-
-
-
-
14,788
9,166
-
-
-
-
-
-
-
-
188,658
-
-
-
(28,002)
-
-
-
-
-
-
(21,288)
$(21,288)
-
188,658
$167,370
Balance at January 3, 2009
81,043 $
810
$ 491,080
$ 860,098
$
(28,002)
$
(12,977)
Exercise of options
1,522
16
29,773
Employee stock option compensation
expense
Employee stock option compensation
net excess tax benefit
Foreign currency translation
adjustments and other
Net earnings
Comprehensive Income
-
-
-
-
15,786
20,906
-
-
-
-
-
-
193,465
-
-
-
-
9,723
$9,723
193,465
$203,188
Balance at January 2, 2010
82,565 $
826
$ 557,545
$ 1,053,563
$
(28,002)
$
(3,254)
See notes to consolidated financial statements.
68
CERNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended January 2, 2010, January 3, 2009 and December 29, 2007
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization
Share-based compensation expense
Provision for deferred income taxes
Changes in assets and liabilities (net of businesses acquired):
Receivables, net
Inventory
Prepaid expenses and other
Accounts payable
Accrued income taxes
Deferred revenue
Other accrued liabilities
For the Years Ended
2009
2008
2007
$ 193,465
$ 188,658
$ 127,125
189,603
170,466
152,817
15,786
(4,141)
14,683
(2,521)
16,189
(4,496)
(46,599)
(108,072)
(22,802)
290
(26,350)
(53,417)
29,263
28,127
21,264
(2,542)
(11,735)
2,320
22,827
8,345
(627)
5,435
5,752
1,768
(5,236)
10,993
(12,980)
274,565
Net cash provided by operating activities
347,291
281,802
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital purchases
Capitalized software development costs
Purchases of investments
Maturities of investments
Purchase of other intangibles
Acquisition of businesses, net of cash acquired
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of future receivables
Proceeds from revolving line of credit and long-term debt
Repayment of revolving line of credit and long-term debt
Proceeds from excess tax benefits from stock compensation
Proceeds from exercise of options
Purchase of treasury stock
Net cash provided by (used in) financing activities
Effect of exchange rate changes on cash
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
(131,265)
(108,099)
(180,723)
(77,747)
(266,776)
97,481
(12,485)
(3,529)
(70,098)
(488,761)
506,271
(4,201)
(5,719)
(66,063)
(495,508)
482,231
(3,542)
(24,061)
(394,321)
(170,607)
(287,666)
1,888
-
(32,352)
17,445
29,789
-
16,770
1,489
(28,771)
270,494
7,135
44,500
(59,817)
9,166
15,364
(28,002)
(11,654)
(11,961)
87,580
182,914
-
40,000
(62,359)
30,357
29,085
-
37,083
(3,613)
20,369
162,545
Cash and cash equivalents at end of period
$ 241,723
$ 270,494
$ 182,914
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest
Income taxes, net of refund
Non-cash changes resulting from acquisitions:
Increase in accounts receivable
Increase in property and equipment, net
Increase in goodwill and intangibles
Increase in deferred revenue
Increase in long term debt
Decrease in other working capital components
Total
See notes to consolidated financial statements.
69
$
8,583
$
10,512
$
12,024
47,114
56,066
54,301
$
-
$
-
-
-
-
-
$
-
-
4,025
(25)
-
-
930
391
23,368
(476)
-
(152)
$
-
$
4,000
$
24,061
Notes to Consolidated Financial Statements
(1) Basis of Presentation, Nature of Operations and Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include all the accounts of Cerner Corporation and its subsidiaries. All significant
intercompany transactions have been eliminated in consolidation.
The consolidated financial statements were prepared using accounting principles generally accepted in the United States.
These principles require us to make estimates and assumptions that affect the reported amounts of assets and liabilities,
the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. Actual results
could differ from those estimates.
Certain prior year amounts in the consolidated financial statements have been reclassified to conform to the current
year presentation. These reclassifications had no effect on the results of operations or stockholders’ equity as previously
reported.
Our fiscal year ends on the Saturday closest to December 31. Fiscal year 2009 consisted of 52 weeks and ended on
January 2, 2010; fiscal year 2008 consisted of 53 weeks and ended on January 3, 2009; and fiscal year 2007 consisted of
52 weeks and ended on December 29, 2007. All references to years in these notes to consolidated financial statements
represent fiscal years unless otherwise noted.
Nature of Operations
We design, develop, market, install, host and support healthcare information technology, healthcare devices and content
solutions for healthcare organizations and consumers. We also provide a wide range of value-added services, including
implementing solutions as individual, combined or enterprise-wide systems; hosting solutions in our data center; and
clinical process optimization services. Furthermore, we provide fully–automated on-site employer health clinics and third
party administrator health plan services for employers.
Summary of Significant Accounting Policies
(a) Revenue Recognition – We recognize software-related revenue in accordance with the provisions of ASC 985-605,
Software – Revenue Recognition and non software-related revenue in accordance ASC 605, Revenue Recognition. The
following are our major components of revenue:
g
g
g
System sales – includes the licensing of computer software, deployment period upgrades, installation, content
subscriptions, transaction processing and the sale of computer hardware and sublicensed software;
Support, Maintenance and Service – includes software support and hardware maintenance, remote hosting and
managed services, training, consulting and implementation services;
Reimbursed Travel – includes reimbursable out-of-pocket expenses (primarily travel) incurred in connection with
our client service activities.
We provide for several models of procurement of our information systems and related services. The predominant model
involves multiple deliverables and includes a perpetual software license agreement, project-related installation services,
implementation and consulting services, software support and either hosting services or computer hardware and
sublicensed software.
Allocation of Revenue to Multiple Element Arrangements
ASC 985-605 generally requires revenue earned on software arrangements involving multiple-elements to be allocated to
each element based on the relative fair values of those elements if fair values exist for all elements of the arrangement.
Since we do not have vendor specific objective evidence (VSOE) of fair values on all the elements within our multiple
element arrangements, we recognize revenue using the residual method.
70
Under the residual method, revenue is recognized in a multiple-element arrangement when vendor-specific objective
evidence of fair value exists for all of the undelivered elements in the arrangement (i.e. professional services, software
support, hardware maintenance, remote hosting services, hardware and sublicensed software), but does not exist for
one or more of the delivered elements in the arrangement (i.e. licenses for software solutions including project-related
installation services). We allocate revenue to each undelivered element in a multiple-element arrangement based on the
element’s respective fair value, with the fair value determined by the price charged when that element is sold separately.
Specifically, we determine the fair value of the software support, hardware maintenance, sublicensed software support,
remote hosting and subscriptions portions of the arrangement based on the substantive renewal price for these services
charged to clients; professional services (including training and consulting) portion of the arrangement, other than
installation services, based on hourly rates which we charge for these services when sold apart from a software license;
and, the hardware and sublicensed software, based on the prices for these elements when they are sold separately
from the software. The residual amount of the fee after allocating revenue to the fair value of the undelivered elements
is attributed to the licenses for software solutions, including project-related installation services. If evidence of the fair
value cannot be established for the undelivered elements of a license agreement, the entire amount of revenue under
the arrangement is deferred until these elements have been delivered or objective evidence can be established.
For certain arrangements, the implementation services are deemed to be essential to the functionality of the licenses for
software solutions due to significant modifications and customization of the software. For such software arrangements,
revenue for both product and services are accounted for using the percentage-of-completion method under ASC 605-
35, Revenue Recognition – Construction-Type and Production-Type Contracts. Such arrangements typically include post-
contract support (PCS). In certain arrangements for which fair value of PCS cannot be established, we classify revenue as
systems sales or support, maintenance and services based on the nature of costs incurred. For similar arrangements for
which VSOE of PCS exists, PCS is separated from the arrangement based on VSOE and the residual amount is allocated
to the software and services accounted for on a combined basis under ASC 605-35. For these arrangements, the service
component of the ASC 605-35 deliverable is classified as service revenue based on the VSOE of the services as if
provided on a stand-alone basis and the residual is classified as systems sales revenue. Approximately $18.1 million,
$26.7 million and $20.0 million of such revenues in 2009, 2008 and 2007, respectively, were included in system sales.
Approximately $60.4 million, $86.6 million and $95.0 million of such revenues were included in 2009, 2008 and 2007,
respectively, were included in support, maintenance and services for such arrangements.
Revenue Recognition Models for Each Element
We provide project-related installation services when licensing our software solutions, which include project-scoping
services, conducting pre-installation audits and creating initial environments. We have deemed installation services to be
essential to the functionality of the software, and therefore recognize the software license over the software installation
period using the percentage of completion method pursuant ASC 605-35, Revenue Recognition – Construction-Type and
Production-Type Contracts, as prescribed by ASC 985-605. We measure the percentage of completion based on output
measures which reflect direct labor hours incurred, beginning at software delivery and culminating at completion of
installation. The installation services process length is dependent upon client specific factors and generally occurs in the
same period the contracts are executed but can extend up to one year.
We provide implementation and consulting services. These services vary depending on the scope and complexity requested
by the client. Examples of such services may include database consulting, system configuration, project management,
testing assistance, network consulting, post conversion review and application management services. Implementation
and consulting services generally are not deemed to be essential to the functionality of the software, and thus do not
impact the timing of the software license recognition, unless software license fees are tied to implementation milestones.
In those instances, the portion of the software license fee tied to implementation milestones is deferred until the related
milestone is accomplished and related fees become billable and non-forfeitable. Implementation fees are recognized
over the service period, which may extend from nine months to three years for multi-phased projects.
Remote hosting and managed services are marketed under long-term arrangements generally over periods of five to 10
years. These services are typically provided to clients that have acquired a perpetual license for licensed software and
have contracted with us to host the software in our data center. Under these arrangements, the client generally has the
71
contractual right to take possession of the licensed software at any time during the hosting period without significant
penalty and it is feasible for the client to either run the software on its own equipment or contract with another party
unrelated to us to host the software. These services are not deemed to be essential to the functionality of the licensed
software or other elements of the arrangement and as such, we account for these arrangements under ASC 985-605
(EITF Issue No. 00-3, Application of AICPA Statement of Position 97-2 to Arrangements That Include the Right to Use
Software Stored on Another Entity’s Hardware). For those arrangements where the client does not have the contractual
right or the ability to take possession of the software at any time, we account for the arrangement as a service contract
and thereby recognize revenues for the arrangement over the hosting service period. The hosting and managed services
are recognized as the services are performed.
We also offer our solutions on an application service provider (ASP) model, making available time based licenses for our
software functionality and providing the software solutions on a remote processing basis from our data centers. The data
centers provide system and administrative support as well as processing services. Revenue on software and services
provided on an ASP or term license basis is combined and recognized on a monthly basis over the term of the contract.
We capitalize related direct costs consisting of third party costs and direct software installation and implementation
costs associated with the initial set up of the client on the ASP service. These costs are amortized over the term of the
arrangement.
Software support fees are marketed under annual and multi-year arrangements and are recognized as revenue ratably
over the contracted support term. Hardware and sublicensed software maintenance revenues are recognized ratably over
the contracted maintenance term.
Subscription and content fees are generally marketed under annual and multi-year agreements and are recognized
ratably over the contracted terms.
Hardware and sublicensed software sales are generally recognized when delivered to the client, assuming title and risk
of loss have transferred to the client.
Where we have contractually agreed to develop new or customized software code for a client as a single element
arrangement, we utilize percentage of completion accounting, labor-hours method, in accordance with ASC 605-35.
Payment Arrangements
Our payment arrangements with clients typically include an initial payment due upon contract signing and date-based
licensed software payment terms and payments based upon delivery for services, hardware and sublicensed software.
Revenue recognition on payments received in advance of the services being performed are deferred and classified as
either current or long term deferred revenue depending on whether the revenue will be earned within one year.
We have periodically provided long-term financing options to creditworthy clients through third party financing institutions
and have directly provided extended payment terms to clients from contract date. These extended payment term
arrangements typically provide for date based payments over periods ranging from 12 months up to seven years. Pursuant
to ASC 985-605, because a significant portion of the fee is due beyond one year, we have analyzed our history with these
types of arrangements and have concluded that we have a standard business practice of using extended payment term
arrangements and a long history of successfully collecting under the original payment terms for arrangements with
similar clients, product offerings, and economics without granting concessions. Accordingly, we consider the fee to be
fixed and determinable in these extended payment term arrangements and, thus, the timing of revenue is not impacted
by the existence of extended payments.
Some of these payment streams have been assigned on a non-recourse basis to third party financing institutions. We
account for the assignment of these receivables as “true sales” as defined in ASC 860, Transfers and Servicing. Provided
all revenue recognition criteria have been met, we recognize revenue for these arrangements under our normal revenue
recognition criteria, and if appropriate, net of any payment discounts from financing transactions.
72
NHS Initiative
In England, we have contracted with third parties to customize software and provide implementation and support
services under long term arrangements (nine years). Prior to 2008 we accounted for the arrangements as single units
of accounting under ASC 605-35 because the arrangements require customization and development of software, and
fair value for the support services had not been established. Also prior to 2008 we believed it was reasonably assured
that no loss would be incurred under these arrangements and therefore we utilized the zero margin approach of applying
percentage-of-completion accounting.
During 2008 we established fair value of the undelivered elements of the arrangement that are not subject to percentage
of completion accounting. Also, during the fourth quarter of 2008 we realized a significant milestone in London which
significantly enhances our ability to reliably estimate work effort for the remainder of the contract and estimate a minimum
level of profit on the arrangement. These events, combined with our experience since the contract signed in 2006 and
the experience gained in the South, allowed us to conclude that reasonably dependable work effort estimates could be
produced and allow for margin recognition.
As a result, our fourth quarter 2008 revenues included a cumulative catch-up adjustment, resulting from the significant
change in accounting estimate, in the amount of $28.6 million which represents the margin on the contract which had
been previously deferred as a result of the zero margin approach of applying percentage of completion accounting.
Greater than a majority of the catch-up adjustment revenue was included in support, maintenance and services. The
remaining margin attributed to the services subject to ASC 605-35 will be recognized over the remaining service period
until the services are complete and amounts allocated to the other support services subject to ASC 985-605 will be
recognized over the relevant support periods. The contract expires in 2014.
Cash Equivalents – Cash equivalents consist of short-term marketable securities with original maturities less than
(b)
90 days.
(c)
Investments – Our short-term investments are primarily invested in time deposits, commercial paper, government
and corporate bonds and auction rate securities. Refer to Note (3) and Note (4) for a comprehensive description of these
assets and their value.
Concentrations – Substantially all of our cash and cash equivalents and short-term investments are held at two
(d)
major financial institutions. The majority of our cash equivalents consist of money market funds. Deposits held with
banks may exceed the amount of insurance provided on such deposits. Generally these deposits may be redeemed upon
demand and, therefore, bear minimal risk.
Substantially all of our clients are integrated delivery networks, physicians, hospitals and other healthcare related
organizations. If significant adverse macro-economic factors were to impact these organizations it could materially
adversely affect us. Our access to certain software and hardware components is dependent upon single and sole source
suppliers. The inability of any supplier to fulfill our supply requirements could affect future results.
As of the end of 2009, we had significant concentration of receivables owed to us by Fujitsu Services Limited, which are
currently in dispute. Refer to Note 5 for additional information.
Inventory - Inventory consists primarily of computer hardware, sublicensed software held for resale and RxStation
(e)
medication dispensing units. Inventory is recorded at the lower of cost (first-in, first-out) or market.
Property and Equipment - Property, equipment and leasehold improvements are stated at cost. Depreciation of
(f)
property and equipment is computed using the straight-line method over periods of two to 50 years. Amortization of
leasehold improvements is computed using a straight-line method over the shorter of the lease terms or the useful lives,
which range from periods of two to 15 years.
73
(g)
Software Development Costs – Software development costs are accounted for in accordance with ASC 985-20,
Costs of Software to be Sold, Leased or Marketed. Costs incurred internally in creating computer software products are
expensed until technological feasibility has been established upon completion of a detailed program design. Thereafter,
all software development costs are capitalized and subsequently reported at the lower of amortized cost or net realizable
value. Capitalized costs are amortized based on current and expected future revenue for each software solution with
minimum annual amortization equal to the straight-line amortization over the estimated economic life of the solution.
(h) Goodwill and Other Intangible Assets – We account for goodwill under the provisions of ASC 350, Intangibles –
Goodwill and Other. As a result, goodwill and intangible assets with indefinite lives are not amortized but are evaluated for
impairment annually or whenever there is an impairment indicator. Based on these evaluations, there was no impairment
of goodwill in 2009, 2008 or 2007. Refer to Note (7) for more information of Goodwill and other intangible assets.
Contingencies – We accrue for legal and other contingencies in accordance with ASC 450, Contingencies. We
(i)
currently have no material pending litigation.
The terms of our software license agreements with our clients generally provide for a limited indemnification of such
intellectual property against losses, expenses and liabilities arising from third party claims based on alleged infringement
by our solutions of an intellectual property right of such third party. The terms of such indemnification often limit the
scope of and remedies for such indemnification obligations and generally include a right to replace or modify an infringing
solution. To date, we have not had to reimburse any of our clients for any losses related to these indemnification
provisions pertaining to third party intellectual property infringement claims. For several reasons, including the lack of
prior indemnification claims and the lack of a monetary liability limit for certain infringement cases under the terms of
the corresponding agreements with our clients, we cannot determine the maximum amount of potential future payments,
if any, related to such indemnification provisions.
From time to time we are involved in routine litigation incidental to the conduct of our business, including for example,
employment disputes and litigation alleging solution defects, intellectual property infringement, violations of law and
breaches of contract and warranties. We believe that no such routine litigation currently pending against us, if adversely
determined, would have a material adverse effect on our consolidated financial position, results of operations or cash
flows.
Derivative Instruments and Hedging Activities - We follow ASC 815, Derivatives and Hedging to account for our
(j)
hedging activities. Refer to Note (10) for more information on our hedging activities.
Income Taxes - Deferred tax assets and liabilities are recognized for the future tax consequences attributable to
(k)
differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be recovered or settled.
Earnings per Common Share – Earnings per common share is computed in accordance with ASC 260, Earnings
(l)
Per Share. Refer to Note (13) for additional details of our earnings per share computations.
(m) Accounting for Share-based payments - We follow ASC 718, Stock Compensation, which addresses the accounting
for share-based payment transactions with employees and other third parties and requires that the compensation costs
relating to such transactions be recognized in the consolidated statement of earnings. Refer to Note (14) for a detailed
discussion of share-based payments.
Foreign Currency - Assets and liabilities of non-U.S. subsidiaries whose functional currency is the local currency
(n)
are translated into U.S. dollars at exchange rates prevailing at the balance sheet date. Revenues and expenses are
translated at average exchange rates during the year. The net exchange differences resulting from these translations are
reported in accumulated other comprehensive income. Gains and losses resulting from foreign currency transactions
are included in the consolidated statements of operations. The net gain resulting from foreign currency transactions is
included in general and administrative expenses in the consolidated statements of operations and amounted to $4.0
million, $9.9 million, and $3.7 million in 2009, 2008 and 2007, respectively.
74
(o)
Collaborative Arrangements - We account for arrangements involving joint operating activities of two or more
parties that are each actively involved and exposed to risks and rewards of the activities in accordance with ASC 808,
Collaborative Arrangements. Third party costs incurred and revenues generated by such activities are classified in the
consolidated statements of operations based on the gross or net reporting requirements included in ASC 605. Payments
between participants are recorded based on the nature of the payments in accordance with the applicable authoritative
guidance.
(p) Recent Accounting Pronouncements - In September 2009, Accounting Standards Update (ASU) 09-13, Revenue
Recognition (Topic 605) – Multiple Deliverable Revenue Arrangements, was issued, which will require an entity to apply
the relative selling price allocation method in order to estimate selling price for all units of accounting, including delivered
items, when vendor-specific objective evidence (VSOE) or acceptable third party evidence (TPE) does not exist and
expands the disclosure requirements to require an entity to provide both qualitative and quantitative information about
the significant judgments made in applying the guidance in ASU 09-13 and subsequent changes in those judgments that
may significantly affect the timing or amount of revenue recognition. ASU 09-13 is effective for revenue arrangements
entered into or materially modified in fiscal years beginning on or after June 15, 2010 and shall be applied on a prospective
basis. Earlier application is permitted. We are assessing the potential impact of ASU 09-13 on our financial position and
results of operations.
In September 2009, ASU 09-14, Software (Topic 985) – Certain Revenue Arrangements that Include Software Elements,
was issued, which requires the exclusion from the scope of ASC 985 of all tangible products containing both software and
non-software components that function together to deliver the product’s essential functionality. ASU 09-14 is effective for
revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 and shall
be applied on a prospective basis. Earlier application is permitted. We are assessing the impact of ASU 09-14 on our
financial position and results of operations.
In December 2009, ASU 09-16, Accounting for Transfers of Financial Assets, was issued, which among other things
creates more stringent conditions for reporting a transfer of a portion of a financial asset as a sale. ASU 09-16 is effective
for financial asset transfers as of the beginning of fiscal years that begin after November 15, 2009. Earlier adoption is
prohibited. We are assessing the impact of ASU 09-16 on our financial position and results of operations.
(2) Business Acquisitions
There were no business acquisitions by the Company during 2009. During the 2008 and 2007, we completed two
acquisitions, which were accounted for under the purchase method of accounting. The results of each acquisition were
included in our consolidated statements of operations from the date of each acquisition. Below is a description of the
acquisitions.
On August 1, 2008, we completed the purchase of LingoLogix, Inc. (LingoLogix), for $4.0 million in cash. LingoLogix
was a provider of software used for computer automated coding technology. The acquisition of LingoLogix enhanced
our revenue cycling offerings as the solutions can be used in both inpatient and outpatient environments to improve
physician workflow and drive more accurate and efficient reimbursement through automated coding. The operating
results of LingoLogix were combined with our operating results subsequent to the purchase date of August 1, 2008. The
allocation of the purchase price to the estimated fair values of the identified tangible and intangible assets acquired and
liabilities assumed resulted in goodwill of $1.3 million and $4.1 million in intangible assets. The goodwill was allocated to
our Domestic operating segment. The intangible assets are being amortized over 5 years. Pro-forma results of operations
have not been presented because the effect of this acquisition was not material to our results.
On February 22, 2007, we completed the purchase of assets of Etreby Computer Company, Inc. (Etreby), for $25.1 million
in cash, which was reduced by $1.6 million for a working capital adjustment in the second quarter of 2007. Etreby was a
software provider of retail pharmacy management systems. The acquisition of Etreby’s assets expanded our pharmacy
systems portfolio. The operating results of Etreby were combined with our operating results subsequent to the purchase
date of February 22, 2007. The allocation of the purchase price to the estimated fair values of the identified tangible and
75
intangible assets acquired and liabilities assumed resulted in goodwill of $12.7 million and $10.2 million in intangible
assets. The goodwill was allocated to our Domestic operating segment and is expected to be deductible for tax purposes.
The intangible assets are being amortized over five years. Pro-forma results of operations have not been presented
because the effect of this acquisition was not material to our results.
A summary of our purchase acquisitions for the three years ended 2009, is as follows:
(In millions)
Date
Goodwill
(Tax Basis)
Intangibles
Developed
Technology
Form of
Consideration
Fiscal Year 2008 Acquisition
Name:
LingoLogix, Inc.
Description of Business:
Computer Automated Coding Technology
Reason for Acquisition:
Integrate technology into Cerner Millennium
Fiscal Year 2007 Acquisition
Name:
Etreby Computer Company, Inc.
Description of Business:
Software provider of retail pharmacy
management systems
Reason for Acquisition:
Integrate technology into Cerner Millennium
8/08
$1.3
$ -
$0.5
$3.6
$4.0 cash
2/07
$12.7
($12.7)
$8.3
$1.9
$23.5 cash
The assets and liabilities of the acquired companies at the date of acquisition are as follows:
(In thousands)
Current assets
Total assets
Current liabilities
Total liabilities
LingoLogix, Inc.
Etreby Computer
Company, Inc.
$
-
$
5,306
25
1,306
1,002
24,280
748
748
76
(3) Cash and Investments
Our cash, cash equivalents and investment securities consisted of the following:
(In thousands)
Cash and cash equivalents:
Cash
Money market funds
Time deposits
Corporate bonds
2009
2008
$
144,764
$ 199,543
80,242
8,523
8,194
70,951
-
Total cash and cash equivalents
$
241,723
$ 270,494
Short-term investments
Time deposits
Commercial paper
Government and corporate bonds
Auction rate securities
Put-like feature
$
37,784
$
4,084
19,987
164,792
85,203
9,347
34,316
-
-
-
Total short-term investments
$
317,113
$
38,400
Long-term investments
Auction rate securities
Put-like feature
Total long-term investments
$
$
-
-
-
$
85,440
19,860
$ 105,300
Refer to Note (4) for details of the fair value measurements within the fair value hierarchy of these financial assets.
Auction rate securities are debt instruments with long-term nominal maturities, for which the interest rates regularly reset
every 7-35 days under an auction system. Because auction rate securities historically re-priced frequently, they traded
in the market on a par-in, par-out basis. In prior periods, we regularly liquidated our investments in these securities for
reasons including, among others, changes in the market interest rates and changes in the availability of, and the yield
on, alternative investments. Beginning in February 2008, liquidity issues in the global credit markets resulted in the
progressive failure of auctions representing all of the auction rate securities we hold, because the amount of securities
submitted for sale in those auctions exceeded the amount of bids. To date we have collected all interest receivable on
our auction rate securities when due and expect to continue to do so in the future; however, the principal associated with
failed auctions will not be accessible until successful auctions occur, a buyer is found outside of the auction process,
the issuers establish a different form of financing to replace these securities or final payments come due according to
contractual maturities ranging from 13 to 30 years.
In August 2008, our broker agreed to a settlement in principle with the Securities and Exchange Commission, the New
York Attorney General and other regulatory agencies to restore liquidity to clients who hold auction rate securities. During
the fourth quarter of 2008, we entered into a settlement agreement (the Settlement Agreement) with the investment firm
that sold us the auction rate securities. Under the terms of the Settlement Agreement, we received the right to redeem
the securities at par during a period from mid-2010 through mid-2012. Additionally, we have the option to obtain a loan,
secured by such securities, at no net cost prior to the redemption period.
77
In conjunction with the execution of the Settlement Agreement, we transferred the auction rate securities from available-
for-sale to trading securities. As trading securities, these investments are carried at fair value with changes recorded
through earnings. At the end of 2009, we held auction rate securities with a par value of $94.6 million and recognized
an unrealized trading gain of $10.5 million for the year then ended in other income within the Consolidated Statements
of Operations.
The Settlement Agreement is being accounted for as a put-like feature and is carried at fair value with changes recorded
through earnings. We have valued the put-like feature as the difference between the par value of the auction rate
securities and the fair value of the securities, discounted by the credit risk of the broker. The loan option was also valued
taking into account the settlement discount and credit risk during the time necessary to administer the loan. At the end of
2009, we valued the put-like feature at $9.3 million and recognized an unrealized loss of $10.5 million for the year then
ended in other income within the Consolidated Statement of Operations. We anticipate that any future changes in the fair
value of the put-like feature will be substantially offset by changes in the fair value of the related auction rate securities
with no material net impact to the Consolidated Statements of Operations.
All of the auction rate securities that we currently hold are A rated or higher and are collateralized by student loan
portfolios, the majority of which are backed by the U.S. government through its Federal Family Education Loan Program.
In the fourth quarter of 2009, we reclassified our auction rate securities from long-term to short-term investments based
on our intention of exercising the put-like settlement feature and redeeming the securities within the next year.
We regularly review investment securities for impairment based on both quantitative and qualitative criteria that include
the extent to which cost exceeds fair value, the duration of the market decline, our intent and ability to hold to maturity
or until forecasted recovery, and the financial health of and specific prospects for the issuer. Unrealized losses that are
other than temporary are recognized in earnings.
(4)
Fair Value Measurements
We determine fair value measurements used in our consolidated financial statements based upon the price that would
be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. The fair value hierarchy distinguishes between (1) market participant assumptions developed based
on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about
market participant assumptions developed based on the best information available in the circumstances (unobservable
inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted
prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).
The three levels of the fair value hierarchy are described below:
g
g
g
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.
78
The following table details our financial assets measured at fair value within the fair value hierarchy at the end of 2009:
(In thousands)
Description
Balance Sheet
Classification
Fair Value Measurements at Reporting Date Using
Quoted Prices in
Significant Other
Active Markets for
Observable
Significant
Identical Assets
Inputs
Unobservable Inputs
2009
(Level 1)
(Level 2)
(Level 3)
Money market funds
Cash equivalents
$
80,242
$
80,242
$
-
$
Time deposits
Corporate bonds
Time deposits
Commercial paper
Cash equivalents
Cash equivalents
Short-term investments
Short-term investments
8,523
8,194
37,784
19,987
Government and corporate bonds
Short-term investments
164,792
Auction rate securities
Short-term investments
Put-like feature
Short-term investments
85,203
9,347
-
-
-
-
-
-
-
8,523
8,194
37,784
19,987
164,792
-
-
-
-
-
-
-
-
85,203
9,347
Refer to Note (3) for a comprehensive description of these assets. Our auction rate securities have been classified as
Level 3 assets within the fair value hierarchy, as their valuation requires substantial judgment and estimation of factors
that are not currently observable in the market due to the lack of trading in the securities. If different assumptions were
used for the various inputs to the valuation, including, but not limited to, assumptions involving the estimated holding
periods for the auction rate securities, the estimated cash flows over those estimated lives, and the estimated discount
rates, including the liquidity discount rate, applied to those cash flows, the estimated fair value of these investments
could be significantly higher or lower than the fair value we determined.
The table below presents the activity of our assets measured at fair value on a recurring basis using significant
unobservable inputs (Level 3) for the years ended 2009 and 2008:
(In thousands)
Beginning balance
Purchases and settlements, net
Transfer to Level 3
Redemptions at par
Unrealized gain (loss) on auction rate securities included in earnings
Unrealized gain (loss) on put-like feature included in earnings
2009
2008
$
105,300
$
160,900
-
-
(10,750)
10,513
(10,513)
(54,950)
105,950
(650)
(19,860)
19,860
Ending balance
$
94,550
$
105,300
On January 4, 2009, we fully adopted ASC 820, Fair Value Measurements and Disclosures, to include all non-financial
assets and liabilities that are not recognized or disclosed at fair value in the financial statements on a recurring basis,
which includes goodwill and non-financial long-lived assets, and are measured at fair value in certain circumstances (for
example, when there is evidence of impairment). As of the end of 2009, there was no indication of impairment related to
our non-financial assets and liabilities. Refer to Note (7) – Goodwill and Other Intangible Assets for further description of
the inputs used to measure fair value of goodwill as part of our annual impairment test.
79
(5) Receivables
Receivables consist of accounts receivable and contracts receivable. Accounts receivable represent recorded revenues
that have been billed. Contracts receivable represent recorded revenues that are billable by us at future dates under the
terms of a contract with a client. Billings and other consideration received on contracts in excess of related revenues
recognized are recorded as deferred revenue. Substantially all receivables are derived from sales and related support and
maintenance and professional services of our clinical, administrative and financial information systems and solutions to
healthcare providers located throughout the United States and in certain non-U.S. countries.
We perform ongoing credit evaluations of our clients and generally do not require collateral from our clients. We provide an
allowance for estimated uncollectible accounts based on specific identification, historical experience and our judgment.
Provisions for losses on uncollectible accounts for 2009, 2008 and 2007 totaled $3.1 million, $10.0 million and $7.4
million, respectively.
A summary of receivables, net is as follows:
(In thousands)
2009
2008
Gross accounts receivable
$ 342,992
$
346,063
Less: Allowance for doubtful accounts
Accounts receivable, net of allowance
Contracts receivable
Total receivables, net
16,895
326,097
135,314
18,149
327,914
141,014
$
461,411
$
468,928
During the second quarter of 2008, Fujitsu Services Limited’s (Fujitsu) contract as the prime contractor in the National
Health Service (NHS) initiative to automate clinical processes and digitize medical records in the Southern region of
England was terminated by the NHS. This had the effect of automatically terminating our subcontract for the project.
We are in dispute with Fujitsu regarding Fujitsu’s obligation to pay the amounts comprised of accounts receivable
and contracts receivable related to that subcontract, and we are working with Fujitsu to resolve these issues based
on processes provided for in the contract. Part of that process requires resolution of disputes between Fujitsu and
the NHS regarding the contract termination. During the 2009 fourth quarter certain events occurred in the resolution
process between Fujitsu and the NHS which reduced the likelihood the matter will be resolved in the next 12 months.
Therefore we reclassified the receivables, which represented more than 10% of our net receivables, from current assets
to other long term assets during the 2009 fourth quarter. These receivables represent the significant majority of other
long-term assets at the end of 2009. While the ultimate collectability of the receivables pursuant to this process is
uncertain, management believes that it has valid and equitable grounds for recovery of such amounts and that collection
of recorded amounts is probable.
During 2009 and 2008, we received total client cash collections of $1.8 billion and $1.7 billion, respectively, of which
$54.0 million and $89.9 million were received from third party arrangements with non-recourse payment assignments.
80
(6)
Property and Equipment
A summary of property, equipment and leasehold improvements stated at cost, less accumulated depreciation and
amortization, is as follows:
(In thousands)
Furniture and fixtures
Computer and communications equipment
Leasehold improvements
Capital lease equipment
Land, buildings and improvements
Other equipment
Less accumulated depreciation and amortization
Depreciable Lives (Yrs)
2009
2008
5
2
2
3
12
5
-
-
-
-
-
-
12
5
15
5
50
20
$
56,631
$
58,334
585,685
139,331
17,147
204,080
964
1,003,838
494,660
513,652
135,792
16,797
177,596
2,983
905,154
421,755
Total property and equipment, net
$
509,178
$
483,399
Depreciation expense for 2009, 2008 and 2007 was $104.6 million, $96.7 million and $80.0 million, respectively.
(7) Goodwill and Other Intangible Assets
Goodwill and intangible assets with indefinite lives are tested for impairment annually or whenever there is an impairment
indicator. All goodwill is assigned to a reporting unit, where it is subject to an impairment test based on fair value using
Level 3 inputs as defined in the fair value hierarchy. Refer to Note (4) - Fair Value Measurements for the definition of the
levels in the fair value hierarchy as defined by ASC 820. The inputs used to calculate the fair value included the projected
cash flows and a discount rate that we estimated would be used by a market participant in valuing these assets. Our
most recent annual test of goodwill impairment indicated that goodwill was not impaired. The fair values of each of our
reporting units exceeded their carrying amounts by a significant margin.
The changes in the carrying amounts of goodwill were as follows:
(In thousands)
Beginning Balance
Goodwill acquired and earnout payments for prior acquisitions
Foreign currency translation adjustment and other
Ending Balance
2009
2008
$
146,666
$
143,924
3,425
1,388
2,392
350
$
151,479
$
146,666
81
Our intangible assets, other than goodwill or intangible assets with indefinite lives, are all subject to amortization, are
amortized on a straight-line basis, and are summarized as follows:
(In thousands)
Purchased software
Customer lists
Patents
Non-compete agreements
Total
Weighted-Average
Amortization
Period (Yrs)
2009
2008
Gross Carrying
Amount
Accumulated
Amortization
Gross Carrying
Amount
Accumulated
Amortization
5.0
5.0
14.5
3.0
5.5
$ 84,968
$ 62,802
$ 83,302
$ 53,233
55,606
8,184
1,057
50,960
1,729
605
55,553
7,491
2,011
40,604
1,275
1,320
$ 149,815
$ 116,096
$ 148,357
$ 96,432
Amortization expense for 2009, 2008 and 2007 was $20.4 million, $20.0 million and $19.7 million, respectively.
Estimated aggregate amortization expense for each of the next five years is as follows:
(In thousands)
For year ended:
2010
2011
2012
2013
2014
$
10,161
8,163
4,977
3,218
1,877
(8)
Software Development Costs
Information regarding our software development costs is included in the following table:
(in thousands)
Software development costs
Capitalized software development costs
Amortization of capitalized software development costs
Total software development expense
For the Years Ended
2009
2008
2007
$ 285,187
$ 291,368
$ 283,086
(77,747)
63,611
(69,981)
51,132
(65,985)
53,475
$ 271,051
$ 272,519
$ 270,576
Included in 2007 total software development costs is $8.6 million of research and development activities for the RxStation
medical dispensing devices. Of this amount, $3.4 million was related to periods prior to 2007 and was immaterial to both
2007 and the prior periods to which it related.
We are amortizing capitalized costs over five years. Accumulated amortization as of the end of 2009 and 2008 was
$474.3 million and $410.4 million, respectively.
82
(9)
Indebtedness
The following is a summary of indebtedness outstanding:
(In thousands)
2009
2008
Note agreement, 5.54%
Senior Notes, Series B, 6.42%
Senior Notes, Series B, 7.66%
Other obligations
Less: current portion
$
90,090
$ 94,556
29,250
-
1,180
120,520
(25,014)
39,000
6,667
1,263
141,486
(30,116)
$
95,506
$ 111,370
In November 2005, we completed a £65.0 million private placement of debt at 5.54% pursuant to a Note Agreement. The
Note Agreement is payable in seven equal annual installments, which commenced November 2009. The proceeds were
used to repay the outstanding amount under our credit facility and for general corporate purposes. The Note Agreement
contains certain net worth and fixed charge coverage covenants and provides certain restrictions on our ability to borrow,
incur liens, sell assets and pay dividends. We were in compliance with all covenants at the end of 2009.
In December 2002, we completed a $60.0 million private placement of debt pursuant to a Note Agreement. The Series
A Senior Notes, with a $21.0 million principal amount at 5.57% were paid in full in 2008. The Series B Senior notes, with
a $39.0 million principal amount at 6.42%, are payable in four equal annual installments, which commenced December
2009. The proceeds were used to repay the outstanding amount under our credit facility and for general corporate
purposes. The Note Agreement contains certain net worth and fixed charge coverage covenants and provides certain
restrictions on our ability to borrow, incur liens, sell assets and pay dividends. We were in compliance with all covenants
at the end of 2009.
In April 1999, we completed a $100.0 million private placement of debt pursuant to a Note Agreement. The Series A
Senior Notes, with a $60.0 million principal amount at 7.14% were paid in full in 2006. The Series B Senior Notes, with a
$40.0 million principal amount at 7.66%, were paid in full in 2009.
We maintain a $90 million, multi-year revolving credit facility, which provides an unsecured revolving line of credit for
working capital purposes. Interest is payable at a rate based on prime or LIBOR plus a spread that varies depending
on the net worth ratios maintained. The agreement contains certain net worth, current ratio and fixed charge coverage
covenants and provides certain restrictions on our ability to borrow, incur liens, sell assets and pay dividends. The current
agreement expires on May 31, 2013. As of the end of 2009, under this agreement we had $6.6 million of outstanding
letters of credit, no direct borrowings and were in compliance with all covenants.
We also have capital lease obligations amounting to $0.6 million, payable over the next three years.
The aggregate maturities for our long-term debt, including capital lease obligations, are as follows (in thousands):
2010
2011
2012
2013
2014
2015 and thereafter
Total maturities
$
25,014
25,588
24,873
15,015
15,015
15,015
$ 120,520
83
We estimate the fair value of our long-term, fixed-rate debt using a level 3 discounted cash flow analysis based on our
current borrowing rates for debt with similar maturities. The fair value of our long-term debt was approximately $124.8
million and $159.3 million at the end of 2009 and 2008, respectively.
(10) Hedging Activities
We designated all of our Great Britain Pound (GBP) denominated long-term debt as a net investment hedge of our U.K.
operations. The objective of the hedge is to reduce our foreign currency exposure in our U.K. subsidiary investment.
Changes in the exchange rate between the United States Dollar (USD) and GBP, related to the notional amount of the
hedge, are recognized as a component of accumulated other comprehensive loss, to the extent the hedge is effective.
The following table represents the fair value of the net investment hedge included within the Consolidated Balance Sheet
and the unrealized loss, net of related income tax effects, on the net investment hedge recognized in accumulated other
comprehensive income:
(In thousands)
Derivatives designated
Net investment hedge
Net investment hedge
Total net investment hedge
(In thousands)
Derivatives designated
Net investment hedge
Net investment hedge
Total net investment hedge
Balance Sheet
Classification
Fair Value
Short-term liabilities
$
15,015
Long-term liabilities
75,075
$
90,090
2009
2008
Net Unrealized
Gain (Loss)
$
$
(1,192)
(5,543)
(6,735)
Balance Sheet
Classification
Fair Value
Net Unrealized
Gain (Loss)
Short-term liabilities
$
13,508
$
3,158
Long-term liabilities
81,048
18,945
$
94,556
$
22,103
We recognize foreign currency transaction gains and losses within the Consolidated Statements of Operations as a
component of general and administrative expenses. We realized foreign currency gains in 2009, 2008 and 2007 of
$4.0 million, $9.9 million and $3.7 million, respectively.
(11)
Interest Income
A summary of interest income and expense is as follows:
(In thousands)
Interest income
Interest expense
For the Years Ended
2009
2008
2007
$
8,801
$ 13,604
$ 13,206
(8,493)
(10,548)
(11,937)
Interest income, net
$
308
$
3,056
$
1,269
84
(12)
Income Taxes
Income tax expense (benefit) for 2009, 2008 and 2007 consists of the following:
(In thousands)
2009
2008
2007
For the Years Ended
Current:
Federal
State
Foreign
Total Current Expense
Deferred:
Federal
State
Foreign
Total deferred expense (benefit)
$ 90,992
$ 68,466
$ 66,701
8,350
4,015
103,357
(1,545)
845
(3,441)
(4,141)
9,338
9,789
87,593
10,873
(1,105)
(4,588)
5,180
3,600
24,629
94,930
(1,726)
(1,360)
(15,002)
(18,088)
Total income tax expense
$ 99,216
$ 92,773
$ 76,842
Temporary differences between the financial statement carrying amounts and tax basis of assets and liabilities that give
rise to significant portions of deferred income taxes at the end of 2009 and 2008 relate to the following:
(In thousands)
Deferred tax assets
Accrued expenses
Separate return net operating losses
Share based compensation
Other
Total deferred tax assets
Deferred tax liabilities
Software development costs
Contract and service revenues and costs
Depreciation and amortization
Other
Total deferred tax liabilities
2009
2008
$
17,920
$
24,077
23,403
18,548
814
60,685
(84,947)
(9,205)
(45,762)
(4,489)
22,156
15,678
7,914
69,825
(80,623)
(17,070)
(39,814)
(17,621)
(144,403)
(155,128)
Net deferred tax liability before valuation allowance
(83,718)
(85,303)
Valuation allowance
Net deferred tax liability
-
-
$
(83,718)
$
(85,303)
85
During 2007, we determined that due to a change in circumstances, it is more likely than not that certain tax operating
loss carry-forwards in a non-U.S. jurisdiction would not be realized resulting in the recognition of a valuation allowance
totaling approximately $8.0 million. During 2008, this non-U.S. jurisdiction audited us. As a result of the audit, certain tax
positions previously taken were disallowed by the foreign jurisdiction, which reduced the deferred tax asset relating to the
net operating loss carryforward in that jurisdiction. The valuation allowance related to the net operating loss carryforward
was released because we believe it is more likely than not we will realize the remaining operating loss carry-forward
amount. Based upon the level of historical taxable income and projections for future taxable income over the periods
which the remaining deferred tax assets are expected to be deductible, as well as the scheduled reversal of deferred tax
liabilities, we believe it is more likely than not we will realize the remaining deferred tax assets and no valuation allowance
is required.
At the end of 2009, we had net operating loss carry-forwards subject to Section 382 of the Internal Revenue Code for
Federal income tax purposes of $11.6 million which are available to offset future Federal taxable income, if any, through
2020. We had net operating loss carry-forwards from non-U.S. jurisdictions of $1.5 million which are available to offset
future taxable income, if any, through 2015 and $49.7 million which are available to offset future taxable income, if any,
with no expiration.
The effective income tax rates for 2009, 2008, and 2007 were 34%, 33%, and 38%, respectively. These effective rates
differ from the Federal statutory rate of 35% as follows:
(In thousands)
2009
2008
2007
Tax expense at statutory rates
$ 102,438
$ 98,500
$ 71,389
For the Years Ended
State income tax, net of federal benefit
Prior period adjustments
Valuation allowance
Audit settlements
Tax Credits
Unrecognized Tax Benefit
Other, net
Total income tax expense
6,658
2,310
-
-
(5,150)
(5,581)
(1,459)
6,403
(2,879)
(7,982)
4,412
(5,150)
5,691
(6,223)
4,640
(3,125)
7,982
-
(4,150)
2,882
(2,776)
$ 99,216
$ 92,772
$ 76,842
The 2009 tax expense amount includes $2.3 million expense related to adjustments from prior period tax returns. The
impact to any one of these tax years was not material. The 2008 and 2007 tax expense amounts include the recognition of
approximately $2.9 million and $3.1 million, respectively, of tax benefits. The 2008 amount was related to an adjustment
of a foreign tax credit claimed. The adjustments in 2007 were recorded primarily to correct an error in our 2006 state
income tax rate. These differences have accumulated over several years and the impact to any one of these prior periods
is not material.
The 2009 beginning and ending amounts of accrued interest related to the underpayment of taxes was $0.9 million and
$0.1 million, respectively. We classify interest and penalties as income tax expense in our consolidated statement of
operations, which is consistent with how we previously classified interest and penalties related to the underpayment of
income taxes. No accrual for tax penalties was recorded at the end of the year.
During 2008, we settled IRS examinations for the 2005 to 2006 periods and as a result reversed previously recorded
reserves for tax uncertainties by $1.3 million. During 2009, the Internal Revenue Service (IRS) completed its examination
of the 2007 income tax return and refund claim related to the foreign tax credit for the 2004, 2005 and 2006 income tax
returns. We decreased the unrecognized tax benefits by $8.0 million primarily due to the settlement of the 2007 IRS audit.
As of the end of 2009, the total amount of unrecognized tax benefits, including interest, was $6.6 million. We do not
expect to resolve any of these matters within the next 12 months.
86
A reconciliation of the beginning and ending amount of unrecognized tax is presented below:
(In thousands)
2009
2008
2007
Unrecognized tax benefit - beginning balance
$
12,440
$
8,069
$
13,300
Gross decreases- tax positions in prior periods
Gross increases- in current-period tax positions
Settlements
Unrecognized tax benefit - ending balance
$
(7,961)
2,379
(259)
6,599
-
5,690
(1,319)
(1,732)
4,614
(8,113)
$
12,440
$
8,069
(13) Earnings Per Share
Basic earnings per share (EPS) excludes dilution and is computed by dividing income available to common shareholders
by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue stock were exercised or converted into common stock or resulted in
the issuance of common stock that then shared in our earnings. A reconciliation of the numerators and the denominators
of the basic and diluted per-share computations are as follows:
2009
2008
2007
Earnings
(Numerator)
Shares
(Denominator)
Per-Share
Amount
Earnings
(Numerator)
Shares
(Denominator)
Per-Share
Amount
Earnings
(Numerator)
Shares
(Denominator)
Per-Share
Amount
(In thousands, except per share data)
Basic earnings per share:
Income available to common
stockholders
$ 193,465
80,981
$ 2.39
$ 188,658
80,549
$ 2.34
$ 127,125
79,395
$ 1.60
Effect of dilutive securities:
Stock options
Diluted earnings per share:
Income available to common
stockholders including
assumed conversions
2,901
-
2,886
-
3,823
$ 193,465
83,882
$ 2.31
$ 188,658
83,435
$ 2.26
$ 127,125
83,218
$ 1.53
Options to purchase 1.8 million, 2.3 million and 1.1 million shares of common stock at per share prices ranging from
$38.64 to $136.86, $33.63 to $136.86 and $40.84 to $136.86, were outstanding at the end of 2009, 2008 and 2007,
respectively, but were not included in the computation of diluted earnings per share because they were anti-dilutive.
(14) Share Based Compensation and Equity
Stock Option and Equity Plans
As of the end of 2009, we had four fixed stock option and equity plans in effect for associates. This includes two plans
from which we could issue grants, (Plans F & G); and two plans from which no new grants were permitted to be issued
after January 1, 2005, but some awards remain outstanding, (Plans D & E).
Under the 2001 Long-Term Incentive Plan F, we are authorized to grant to associates, directors and consultants 4.0
million shares of common stock awards taking into account the stock-split effective January 10, 2006. Awards under
this plan may consist of stock options, restricted stock and performance shares, as well as other awards such as stock
appreciation rights, phantom stock and performance unit awards which may be payable in the form of common stock or
cash at our discretion. However, not more than 1.0 million of such shares will be available for granting any types of grants
other than options or stock appreciation rights. Options under Plan F are exercisable at a price not less than fair market
value on the date of grant as determined by the Section 16 Insider Equity and Incentive Compensation Subcommittee
(the Committee). Options under this plan typically vest over a period of five years as determined by the Committee and
are exercisable for periods of up to 25 years.
87
Under the 2004 Long-Term Incentive Plan G, we are authorized to grant to associates and directors 4.0 million shares of
common stock awards taking into account the stock-split effective January 10, 2006. Awards under this plan may consist
of stock options, restricted stock and performance shares, as well as other awards such as stock appreciation rights,
phantom stock and performance unit awards which may be payable in the form of common stock or cash at our discretion.
Options under Plan G are exercisable at a price not less than fair market value on the date of grant as determined by the
Committee. Options under this plan typically vest over a period of five years as determined by the Committee and are
exercisable for periods of up to 12 years. In 2007, Long-Term Incentive Plan G was amended to provide us the ability to
recover fringe benefit tax payments made by us on behalf of our associates in India.
Stock Options
The fair market value of each stock option award is estimated on the date of grant using a lattice option-pricing model.
The pricing model requires the use of the following estimates and assumptions:
g Expected volatilities under the lattice model are based on an equal weighting of implied volatilities from traded options
on our shares and historical volatility. We use historical data to estimate the stock option exercise and associate
departure behavior used in the lattice model; groups of associates (executives and non-executives) that have similar
historical behavior are considered separately for valuation purposes.
g The expected term of stock options granted is derived from the output of the lattice model and represents the period
of time that stock options granted are expected to be outstanding; the range given below results from certain groups
of associates exhibiting different post-vesting behaviors.
g The risk-free rate is based on the zero-coupon U.S. Treasury bond with a term equal to the contractual term of the
awards.
The weighted-average assumptions used to estimate the fair market value of stock options are as follows:
(In thousands)
2009
2008
2007
Expected volatility (%)
45.2 - 51.5
45.9 - 52.4
43.1 - 46.1
Expected term (yrs)
Risk-free rate (%)
9.3 - 9.6
8.4 - 9.7
9.6 - 9.9
3.8
4.4
4.6
A combined summary of the stock option activity of our four fixed stock option and equity plans is presented below:
Options
2009
Number of
Shares
Weighted-
Average
Exercise Price
Aggregate Intrinsic
Value
Weighted-Average
Remaining
Contractual Term
Outstanding at beginning of year
8,924,321 $ 27.25
Granted
Exercised
Forfeited and Expired
950,680
(1,504,863)
(88,214)
52.04
19.80
42.13
Outstanding at end of year
8,281,924 $ 31.29 $
423,581,294
Options exercisable at the end of the year
5,436,321 $ 22.81 $
318,812,325
6.31
5.36
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(In thousands, except for grant date fair value)
2009
2008
2007
Weighted-average grant date fair values
$
27.96
$
22.99
$
29.17
Total intrinsic value of options exercised
$ 63,465
$ 26,841
$ 67,336
Cash received from exercise of stock options
$ 29,789
$ 15,364
$ 29,085
Tax benefit realized upon exercise of stock options
$ 23,654
$ 10,001
$ 29,865
For the Years Ended
As of the end of 2009, there was $49.3 million of total unrecognized compensation cost related to stock options granted
under all plans. That cost is expected to be recognized over a weighted-average period of 3.09 years.
Nonvested Shares
Nonvested shares were valued at the fair market value on the date of grant and will vest provided the recipient has
continuously served on the Board of Directors through such vesting date or in the case of an associate provided that
performance measures are attained. The expense associated with these grants is being recognized over the period from
the date of grant to the vesting date.
A summary of our nonvested restricted stock compensation arrangements granted under all plans is presented below:
Nonvested shares
Outstanding at beginning of year
Granted
Vested
Forfeited
Outstanding at end of year
2009
Weighted-Average
Grant Date
Fair Value
$ 45.91
56.52
45.91
45.91
56.52
Number of Shares
19,800
13,500
(16,500)
(3,300)
13,500
(In thousands, except for grant date fair value)
2009
2008
2007
Weighted average grant date fair values
Total fair value of shares vested during the year
$
$
56.52
923
$
$
45.91
797
$
$
54.20
1,380
For the Years Ended
As of the end of 2009, there was $0.3 million of total unrecognized compensation cost related to nonvested share awards
granted under all plans. That cost is expected to be recognized over a weighted-average period of 0.4 years.
Associate Stock Purchase Plan
We established an Associate Stock Purchase Plan (ASPP) in 2001, which qualifies under Section 423 of the Internal
Revenue Code. Each individual employed by us and associates of our United States based subsidiaries, except as provided
below, are eligible to participate in the Plan (Participants). The following individuals are excluded from participation: (a)
persons who, as of the beginning of a purchase period under the Plan, have been continuously employed by us or our
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domestic subsidiaries for less than two weeks; (b) persons who, as of the beginning of a purchase period, own directly or
indirectly, or hold options or rights to acquire under any agreement or Company plan, an aggregate of 5% or more of the
total combined voting power or value of all outstanding shares of all classes of Company Common Stock; and, (c) persons
who are customarily employed by us for less than 20 hours per week or for less than five months in any calendar year.
Participants may elect to make contributions from 1% to 20% of compensation to the ASPP, subject to annual limitations
determined by the Internal Revenue Service. Participants may purchase Company Common Stock at a 15% discount on
the last business day of the option period. The purchase of our Common Stock is made through the ASPP on the open
market and subsequently reissued to the associates. Under ASC 718, the difference of the open market purchase and
the participant’s purchase price is being recognized as compensation expense.
Share Based Compensation Cost
Our stock option and nonvested share awards qualify for equity classification pursuant to ASC 718, Stock Compensation.
The costs of our ASPP, along with participant contributions, are recorded as a liability until open market purchases
are completed. The amounts recognized in the consolidated statements of operations with respect to stock options,
nonvested shares and ASPP are as follows:
(In thousands)
For the Years Ended
2009
2008
2007
Stock option and non-vested share compensation expense
$ 15,786
$ 14,674
$ 16,348
Associate stock purchase plan expense
Amounts capitalized in software development costs, net of amortization
1,318
(262)
1,310
(840)
986
(1,145)
Amounts charged against earnings, before income tax benefit
$ 16,842
$ 15,144
$ 16,189
Amount of related income tax benefit recognized in earnings
$
6,274
$
5,641
$ 6,030
Treasury Stock
In March 2008, our Board of Directors authorized a stock repurchase program of up to $45 million of our Common Stock
on the open market and/or in privately-negotiated purchase. There were no shares repurchased by us during 2009. The
stock repurchase activity in 2008 was as follows:
Shares repurchased
Average price per share
790,000
$
35.45
Cost of shares repurchased, net of commissions
$ 28,002,000
These repurchased shares are recorded as treasury stock and are accounted for under the cost method. No repurchased
shares have been retired.
Preferred Stock
As of the end of 2009 and 2008, we had 1.0 million shares of authorized but unissued preferred stock, $0.01 par value.
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(15) Foundations Retirement Plan
The Cerner Corporation Foundations Retirement Plan (the Plan) was established under Section 401(k) of the Internal
Revenue Code. All associates age 18 and older and who are not a member of an excluded class are eligible to participate.
Participants may elect to make pretax contributions from 1% to 80% of eligible compensation to the Plan, subject to
annual limitations determined by the Internal Revenue Service. Participants may direct contributions into mutual funds,
a stable value fund, a Company stock fund, or a self-directed brokerage account. We have a first tier discretionary match
that is made on behalf of participants in an amount equal to 33% of the first 6% of the participant’s salary contribution.
Our first tier discretionary match expenses for the Plan amounted to $8.7 million, $8.7 million and $8.3 million for 2009,
2008 and 2007, respectively.
We added a second tier discretionary match to the Plan in 2000. Contributions are based on attainment of established
earnings per share goals for the year or the established financial metric for the Plan. Only participants who defer 2% of
their paid base salary, are actively employed as of the last day of the Plan year and are employed before October 1 of
the Plan year are eligible to receive the discretionary match contribution. For the years ended 2009, 2008 and 2007 we
expensed $2.0 million, $2.2 million and $6.0 million for the second tier discretionary distributions, respectively.
(16) Related Party Transactions
From July 1994 until August 2008 we leased an airplane from PANDI, Inc. (PANDI), a company owned by Neal L. Patterson
and Clifford W. Illig, our Chairman of the Board and CEO and Vice Chairman of the Board, respectively. During 2009, 2008
and 2007 we paid an aggregate of $1.4 million, $0.4 million and $0.6 million for the rental of the airplane, respectively.
The airplane was used principally by us for client development and support and business development activities; and in
particular, to reduce business related travel time of our executives and associates, increase travel flexibility and increase
the number of client visits than would have been possible using solely commercial travel. On August 14, 2008, PANDI sold
the airplane to a third party and the lease agreement with us was terminated.
Following the sale of the airplane, PANDI undertook a complete accounting of the actual financing, operation, depreciation
and maintenance costs of the airplane during the 14 year time period that we leased the airplane from PANDI. Following
the due diligence efforts by a committee comprised of the independent members of the Board of Directors, we were
authorized to pay PANDI the sum of $1.4 million.
(17) Commitments
Leases
We are committed under operating leases for office space and computer equipment through October 2027. Rent
expense for office and warehouse space for our regional and global offices for 2009, 2008 and 2007 was $16.6 million,
$16.1 million and $12.4 million, respectively. Aggregate minimum future payments under these non-cancelable operating
leases are as follows:
Operating Lease
Obligations
$
25,504
23,041
20,573
17,677
15,143
60,195
$
162,133
(In thousands)
2010
2011
2012
2013
2014
2015 and thereafter
Total:
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Purchase Obligations
We have purchase commitments with various vendors through 2020. These commitments represent non-cancellable
commitments primarily to provide ongoing support, maintenance and service to our clients. Aggregate future payments
under these commitments are as follows:
(In thousands)
2010
2011
2012
2013
2014
2015 and thereafter
Total:
Purchase Obligations
$
15,592
6,067
5,644
5,597
2,797
10,665
46,362
$
(18) Segment Reporting
We have two operating segments, Domestic and Global. Revenues are derived primarily from the sale of clinical, financial
and administrative information systems and solutions. The cost of revenues includes the cost of third party consulting
services, computer hardware and sublicensed software purchased from computer and software manufacturers for
delivery to clients. It also includes the cost of hardware maintenance and sublicensed software support subcontracted
to the manufacturers. Operating expenses incurred by the geographic business segments consist of sales and client
service expenses including salaries of sales and client service personnel, communications expenses and unreimbursed
travel expenses. Performance of the segments is assessed at the operating earnings level and, therefore, the segment
operations have been presented as such. “Other” includes revenues not generated by the operating segments and
expenses such as software development, marketing, general and administrative, share-based compensation expense and
depreciation that has not been allocated to the operating segments. It is impractical for us to track assets by geographical
business segment.
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Accounting policies for each of the reportable segments are the same as those used on a consolidated basis. The
following table presents a summary of the operating information for 2009, 2008 and 2007.
Operating Segments
(In thousands)
Domestic
Global
Other
Total
2009
Revenues
$ 1,398,715
$
273,149
$
Cost of revenues
Operating expenses
Total costs and expenses
240,847
372,370
613,217
40,351
130,256
170,607
-
-
596,034
596,034
$ 1,671,864
281,198
1,098,660
1,379,858
Operating earnings (loss)
$
785,498
$
102,542
$
(596,034)
$
292,006
Operating Segments
(In thousands)
Domestic
Global
Other
Total
2008
Revenues
$ 1,307,510
$
368,518
$
Cost of revenues
Operating expenses
Total costs and expenses
225,955
361,213
587,168
70,108
150,729
220,837
-
-
589,138
589,138
$ 1,676,028
296,063
1,101,080
1,397,143
Operating earnings (loss)
$
720,342
$
147,681
$
(589,138)
$
278,885
Operating Segments
(In thousands)
Domestic
Global
Other
Total
2007
Revenues
$ 1,227,434
$
290,677
$
1,766
$ 1,519,877
Cost of revenues
Operating expenses
Total costs and expenses
221,154
331,124
552,278
53,367
151,355
204,722
5,589
553,205
558,794
280,110
1,035,684
1,315,794
Operating earnings (loss)
$
675,156
$
85,955
$
(557,028)
$
204,083
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(19) Quarterly Results (unaudited)
Selected quarterly financial data for 2009 and 2008 is set forth below:
(In thousands,
except per share data)
2009 quarterly results:
Revenues
Earnings Before
Income Taxes
Net Earnings
Basic Earnings
Per Share
Diluted Earnings
Per Share
First Quarter
$ 392,322
$
61,863
$
40,830
$
0.51
$
Second Quarter
Third Quarter
Fourth Quarter
403,806
409,415
466,321
66,223
70,887
93,708
43,745
48,394
60,496
0.54
0.60
0.74
Total
$ 1,671,864
$
292,681
$ 193,465
2008 quarterly results:
First Quarter
$
384,765
$
57,284
$
36,817
$
0.46
$
Second Quarter
Third Quarter
402,800
422,728
53,723
67,958
Fourth Quarter (1)
465,735
102,466
35,287
45,014
71,540
0.44
0.56
0.89
Total
$ 1,676,028
$
281,431
$ 188,658
0.49
0.52
0.57
0.71
0.44
0.42
0.54
0.86
(1) Includes margin of $28.6 million related to our contract in London as part of the National Health Service (NHS) initiative to automate clinical processes and digitize
medical records in England. This represents a one-time catch-up resulting from a change in accounting estimate and the ability to separate the support services
element of the contract. The after tax effect of this item increased fourth quarter 2008 net earnings and diluted earnings per share by $20.6 million and $0.24,
respectively.
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Stock Price Performance Graph
The following graph presents a comparison for the five-year period ended December 31, 2009 of the performance of the Common
Stock of the Company with the NASDAQ Composite Index (US Companies) (as calculated by The Center for Research in Security Prices)
and the NASDAQ Computer/Data Processing Group (as calculated by The Center for Research in Security Prices):
Comparison of 5 Year Cumulative Total Return
$500
$400
$300
$200
$100
$0
12/04
12/05
12/06
12/07
12/08
12/09
Cerner Corporation
Nasdaq Computer and Data Processing Index
Nasdaq Stock Market (US Companies)
The above comparison assumes $100 was invested on December 31, 2004 in Common Stock of the Company and in each of the
foregoing indices and assumes reinvestment of dividends. The results of each component issuer of each group are weighted according
to such issuer’s stock market capitalization at the beginning of each year.
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Annual Shareholders’ Meeting
The Annual Shareholders’ Meeting will be held at 10:00 a.m. on May 28, 2010, at The Cerner Round auditorium in the Cerner Vision
Center, located on the Cerner campus at 2850 Rockcreek Parkway, North Kansas City, Missouri. A formal notice of the Meeting, with
a Proxy Statement and Proxy Card, will be available, to each shareholder of record, in April 2010.
Annual Report/10-K Report
Publications of interest to current and potential Cerner investors are available upon written request or via Cerner’s Web site at
www.cerner.com. These include annual and quarterly reports and the Form 10-K filed with the Securities and Exchange Commission.
Written requests should be made to:
Cerner Corporation
Investor Relations
2800 Rockcreek Parkway
North Kansas City, MO 64117-2551
Inquiries of an administrative nature relating to shareholder accounting records, stock transfer, change of address and
miscellaneous shareholder requests should be directed to the transfer agent and registrar, Computershare Trust Company,
at 1-800-884-4225.
Transfer Agent and Registrar
Computershare Trust Company, N.A.
P.O. Box 43078
Providence, RI 02940-3078
1-800-884-4225
Stock Listings
Cerner Corporation’s common stock trades on The NASDAQ Stock Market LLC under the symbol CERN.
Independent Accountants
KPMG LLP
Kansas City, MO
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