ANNUAL REPORT 2010
1
Table of Contents: Annual Report 2010
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
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Board of Directors
Neal L. Patterson
■ Chairman of the Board, Chief Executive Officer and President, Cerner Corporation
Clifford W. Illig
■ Vice Chairman, Cerner Corporation
Gerald E. Bisbee Jr., Ph.D.
■ Chairman, Chief Executive Officer and President, ReGen Biologics, Inc., Franklin Lakes, NJ
The Honorable John C. Danforth
■ Ambassador to the United Nations, July 2004–January 2005
■ U.S. Senator - Missouri, 1976-1995
■ Partner, Bryan Cave LLP, St. Louis, MO
Linda M. Dillman
■ Senior Vice President of Enterprise Services/Global Functions IT, Hewlett-Packard Company, Palo Alto, CA
■ Executive Vice President of Benefits and Risk Management, Wal-Mart Stores, Inc., 2006-2009
■ Executive Vice President and Chief Information Officer, Wal-Mart Stores, Inc., 2002-2006
William B. Neaves, Ph.D.
■ President Emeritus and Director, The Stowers Institute for Medical Research, Kansas City, MO
William D. Zollars
■ Chairman, Chief Executive Officer and President, YRC Worldwide, Overland Park, KS
4
Leadership
Cerner Executive Cabinet
Neal L. Patterson ▪ Chairman of the Board, Chief Executive Officer
and President
Clifford W. Illig ▪ Vice Chairman
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 and Chief of Staff
Michael G. Valentine ▪ Executive Vice President and Chief Operating Officer
Paul N. Gorup ▪ Senior Vice President and Chief of Innovation
Thomas P. Herzog ▪ Senior Vice President, IT and Medical Device Technologies
Julia M. Wilson ▪ Senior Vice President and Chief People Officer
Bill D. Wing ▪ Senior Vice President, RevWorks
Cerner Executive Management
Ed L. Enyeart ▪ Senior Vice President, Finance
Richard J. Flanigan ▪ Senior Vice President, Employer Services and Research
William E. Graff ▪ Senior Vice President, CernerWorks Infrastructure
John B. Landis ▪ Senior Vice President, Client Operations
Farrell L. Sanders ▪ Senior Vice President, Cerner ITWorks
Kent C. Scheuler ▪ Senior Vice President, Managed Services
David W. Sides ▪ Senior Vice President, Worldwide Consulting
Randy D. Sims ▪ Senior Vice President, Chief Legal Officer and Secretary
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
Gay M. Johannes ▪ Vice President and Chief Quality Officer
Eva L. Karp ▪ Vice President and General Manager, EMR Business Unit
Allan O. Kells ▪ Vice President, Investor Relations
Catherine E. Mueller ▪ Vice President, Client Experience
J. Randall Nelson ▪ Vice President, Life Sciences
Matthew J. Swindells ▪ Managing Director and Vice President,
Global Consulting
Client Organization
Zane M. Burke ▪ Senior Vice President, Client Development
Michael C. Neal ▪ Senior Vice President, Cerner Corporation
and President, Pacific
John T. Peterzalek ▪ Senior Vice President, Cerner Corporation
and President, Atlantic
Alan C. Fowles ▪ Vice President and General Manager, UK and Ireland
Marcos Garcia ▪ Vice President and General Manager, Spain
Scott A. Schmidt ▪ Vice President and General Manager, Australia
and Asia Pacific
Robert J. Shave ▪ Vice President, Cerner Corporation and President,
Cerner Canada
Bruno N. Slosse ▪ Vice President and General Manager, EMEA
Greg G. White ▪ Vice President and General Manager, Middle East
Talbott G. Young ▪ Vice President and General Manager, Latin America
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
J. Bryan Ince ▪ Vice President, Australia IP Strategy
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
2010 represents the start of Cerner’s fourth decade. The table below offers a view of our growth over the past 10 years
and since our initial public offering in 1986. While every quarter and year is important—and we are the first to scrutinize
their passing—there are a number of insights that come only from reviewing longer intervals. Before we review 2010, we
invite you to study Cerner’s long-term performance.
e
n
i
L
p
o
T
Bookings Revenue
Revenue
Domestic Revenue
Global Revenue
Revenue Backlog
e Operating Earnings1
n
i
L
m
o
t
t
o
B
Operating Margin1
Net Earnings1
Earnings Per Share1
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)1
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
1986
$18
$17
$17
$0.2
$11
$3
14.8%
$2
$0.05
$26
$8
161
$1
$16
$1
-$1
$1
$2
2000
$399
$415
$389
$26
2010
$1,995
$1,850
$1,562
$288
$624
$4,940
$34
8.1%
$20
$0.29
$384
20.8%
$253
$2.96
$616
$2,423
$91
142
$102
$344
$53
$6
$16
$91
$836
87
$93
$1,905
$456
$273
$102
$285
149
3,042
8,242
$0.97
$23.13
$94.74
$45
349
242
$1,647
$8,133
2,471
1,320
2,653
1,258
Compound Annual Growth Rates
Previous Decade
2000-2010
Since Going Public
1986-2010
17%
16%
15%
27%
23%
28%
29%
26%
15%
25%
-5%
-1%
19%
24%
46%
20%
12%
10%
15%
17%
1%
0%
22%
21%
21%
35%
29%
23%
22%
19%
21%
22%
-3%
20%
22%
31%
NM
20%
24%
18%
21%
24%
9%
7%
Notes
Dollars are in millions except Earnings Per Share and stock prices.
Free Cash Flow represents Operating Cash Flow less Capital Expenditures and Capitalized Software.
NM=Not Meaningful, because free cash flow was negative in 1986.
As I did last year, I will offer 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 better 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 and raises your
IQ in the minds of others.
1 Operating margin, net earnings, earnings per share, and free cash flow reflect adjustments compared to results reported on a Generally Accepted Accounting Principles
(GAAP) basis in our 2010 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.
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A Letter to our Shareholders, Clients and Associates:
2010 was a very solid year for Cerner and an auspicious start to a new decade. In this letter, I aim to show you the ways
your company is competing in the present while also getting ready for the future. I will share highlights from our year and
observations about the complex state of the broader healthcare environment. I will talk about our current markets and
the ones we see coming. By the end of the letter, I hope you will be well equipped to understand how present initiatives
and investments fit our long-term strategic vision. And before I close, I want to share some very personal goals that I have
for Cerner.
2010 Highlights
Economic experts say the recession ended in 2009, and yet almost every government in the world, be it state or federal,
is left with the daunting imperative of balancing its budget, the largest portion of which is typically healthcare of some
sort. Despite a cautious and slow recovery, the specific intersection of healthcare and information technology benefitted
from a climate of increasing confidence in the economic and societal value of electronic medical records (EMRs). In an
overall improved economic environment, we delivered strong financial results, with good revenue growth, strong margin
expansion and earnings growth, and very strong cash flow. Below are highlights from 2010.
g
g
g
g
g
g
g
New business bookings increased 9% to $2.0 billion.
Revenue backlog increased 17% to $4.9 billion.
Revenue grew 11% to $1.9B, with domestic revenue increasing 12% and non-U.S. revenue increasing 5%.
Operating margin1 increased 230 basis points to 20.8%, exceeding our long-term goal of 20%, which was
established in 2003 when our operating margin was 9%.
Net earnings1 increased 24% to $253 million.
Cash flow from operations grew 31% to $456 million. Free cash flow1, defined as operating cash flow less capital
expenditures and capitalized software, increased 97% to $273 million.
Cerner’s stock price increased 15% in 2010, from $82.44 to $94.74. The NASDAQ Composite Index increased
17% and S&P 500 increased 13%. As reflected in the table on the prior page, the 15% compound annual growth
rate of Cerner’s stock price over the past decade is very strong compared to the NASDAQ and S&P 500, which
grew at 1% and 0% compound annual growth rates during the same period.
For many years, we have shared an up-to-date analysis of our overall business model in this letter, documenting various
performance measurements at a much more detailed and meaningful level. We have been told this is an uncommon
display of transparency for a public company. From our point of view, we have always felt like we build a better relationship
with investors who understand our business model. For that analysis, refer to the appendix immediately following this
letter.
When a Plan Comes Together
As highlighted above, 2010 was a good year, bettering Cerner’s position for the future. As you might expect, there is a
narrative behind the numbers.
Each year in this letter, I tell the Cerner story, or at least part of it. If you have been reading these letters for a long time,
you should notice some consistency among key elements of our story. The long-term trend driving Cerner’s business is
a steady progress in automating complex healthcare delivery processes. For multiple decades, we have been digitizing
the content of one of the largest sectors of our economy2 and the institutions that deliver our healthcare. It is a very
large, complex undertaking. Thirty-one years ago, had we known exactly how hard, how long and how costly it would be,
we might have chosen a different industry. I am thankful today for how youth and ignorance can sometimes prevail over
conventional wisdom.
2 The latest figures show that healthcare was 17.6% of the United States GDP in 2009.
7
Cerner’s core clients during this time have been organizations that provide some aspect of clinical medicine. Long ago,
when most information systems were financial and administrative in nature, we embraced clinical systems. Our entry
path was in the departments of the care processes—laboratory, radiology and pharmacy—and working to make these
departments higher quality and more efficient. But it became clear that the value of clinical data from any one of these
single-encounter organizational silos would be magnified considerably if it could be put in relationship with data from the
others. We soon developed a person-centric data model, paving the way for a lifetime medical record.
Throughout the 1980s, 1990s and 2000s, our clients embraced the new flow of information. Some went paperless,
eliminating a major source of medical errors. Some used our Discern® decision support technology to develop
sophisticated electronic alerts capable of catching mistakes before they could be made. We have never stopped learning
from our clients, the largest of whom are vast health systems that provide many facets of care, from primary care to the
most advanced multiple organ transplants. For the better part of three decades, Cerner and our clients have been at the
forefront of making healthcare smarter, safer, more efficient and more reliable. But at the macro level, we saw a so-called
healthcare system that did not operate as a system, and we spoke out about the systemic issues that give rise to error,
variance, waste, delay and friction. With a bias for action, we have consistently worked to develop solutions that improve
how healthcare works.
About 10 years ago, we began to see federal governments worldwide taking an interest in stimulating the adoption of
information technology in care delivery. In the United States, lawmakers in both political parties began to agree about
the importance of digitizing health information. Recently, the U.S. government took significant legislative steps to incent
widespread adoption of electronic health records. This came in the form of the HITECH3 funding provision of the American
Recovery and Reinvestment Act of 2009 (ARRA).
While many of Cerner’s clients were already highly advanced in their use of technology, the legislation provides incentives
and penalties that are expected to quickly move almost every hospital and doctor’s office down the same path as those
who have embraced technology all along.
Thus, in 2010, Cerner benefited from increased purchasing in the U.S. related to the legislation, which requires healthcare
providers to demonstrate “meaningful use” of a certified electronic health record. The detailed definition of meaningful
use is being rolled out in three stages over a period of time until 2015, laying out progressively rigorous adoption and
utilization targets. We anticipate that, by the latter half of this decade, nearly all healthcare providers in the U.S. will have
adopted a fairly sophisticated electronic health record.
There Are Always Bends and Bumps in the Road
The market reality described in the previous section is certainly good for the healthcare information technology (HCIT)
industry, at least in the short term. But it is also a complex reality. We believe that, in fewer than five years, the era of
buying first-generation EMRs will be over, or nearly so. In our industry, there are several reasons why some EMR buying
can and will continue for decades, but it is always a mistake to forecast with a ruler. Throughout our history, there have
3 HITECH is an acronym for Health Information Technology for Economic and Clinical Health.
1979
1982
1984
1986
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
8
been a number of bends in the road. Navigating those bends requires vision. Our internal definition of vision is the ability
to look ahead and describe a compelling future state. In my professional experience, vision is the thing you as a leader
use to give your organization the courage and motivation to invest in new ideas years before they produce economic
returns. Because of vision, our company has a culture of routinely making long-term investments that many others fail to
make. With vision, you help define what lies beyond the next bend.
All throughout the journey, your competition is always trying to bump you off the road you are on. At every stage in Cerner’s
31-year history, the view from the competitive field has appeared to be roughly the same. There has always been one
strong competitor showing up consistently in the face-off situations, and our current state is no exception. When we
back away and look at the same race over three decades, however, the view looks very different. A new truth emerges. It
hasn’t been the same competitor. In each era, it has been a different company. Not only have most of our one-time rivals
fallen behind, many don’t even exist as companies today. The outcome is never certain, but we believe the road ahead,
ultimately, has some sharp bends; if you miss just one, you are history.
The key to staying in the race is having a vision for the future … even while you’re competing in the present. In the rest of
this letter, we aim to highlight some ways Cerner has been doing both.
When Things Become Digital, Things Change
One need look no further than what has happened to communications, music, books or photography in the past 10 to
15 years to understand that when the content of an industry goes digital, things change. Since 2005, we have publicly
shared our belief that the EMR is only the beginning, a digital infrastructure that will enable a number of second-order
effects. For years we have done the hard work of creating, improving and hardening that infrastructure. Inside Cerner,
we are actually excited to see the era beyond the core EMR. We view our work over the past 30 years as analogous to
building the foundations and laying the electrical grid for a great city that hasn’t been built. Reaching the place where we
can actually start to build on top of that foundation is inspiring for us and our clients. Things are starting to get fun. I want
to share some ways Cerner has seized opportunities to create those effects.
CareAware: A New Era of Device and Workflow Awareness
Back in 2005, I said that one of the second-order effects of a digitized health system is that every thing would need to be
redesigned; a new generation of aware medical devices would need to be built, capable of tapping directly into the EMR
as the source of truth. By 2006, we had introduced a new global device architecture to focus on creating safer healthcare
environments by connecting all things digital in the clients’ workplace—devices, room lighting, entertainment systems
and all EMRs—not just Cerner’s but our competitors’ as well. And in some instances, this would mean replacing medical
devices and workflows. We called this new architecture CareAware®. Our goal was to use our detailed knowledge of the
information available in the EMR to create the best possible contextual awareness for doctors, nurses and pharmacists as
they make decisions. We worked collaboratively with many of the manufacturers of medical devices and other information
systems to create a standards-based CareAware iBus™, a deceptively simple-looking piece of equipment that acts much
like a USB port for healthcare, enabling plug-and-play connectivity between devices and the EMR. We also developed the
CareAware iAware™ dashboard to provide rapid situational awareness of the patient’s condition using information from
the EMR.
1987
1990
1992
1993
Cerner listed as one of Inc. magazine’s
100 fastest-growing companies
Revenues surpass $50 million
2 for 1 stock split (May 12)
2 for 1 stock split (March 1)
Cerner Vision Center opens
Revenues surpass $100 million
9
To illustrate the depth of functionality we have attained in just a few short years, consider our award-winning CareAware
Infusion Management™ technology, which gathers data from multiple devices and the EMR into a single location. This
technology makes it possible for the first time in healthcare to automate one of the most clinically arduous and error-
prone processes in the nursing workflow—infusion documentation and pump management. The CIO of WellSpan Health in
Gettysburg and York, Pennsylvania, our alpha development partner for this solution, actually left a voicemail for me one
July day shortly after go-live to report the word-for-word feedback of elated WellSpan nurses:
“I feel like a kid on Christmas morning!”
“We have been waiting for something like this.”
“This is a little piece of heaven!”
“It does everything but start the IV.”
“Now all I have to do is take care of my patient.”
Nurses using the solution have consistently reported that their patients are safer, and the nurses have more time to focus
on their care.
Today we are taking the need for situational and contextual awareness to a new level by creating entire work environments
for healthcare called Smart Rooms. In 2007, a dedicated group of Cerner associates began to rethink the patient
and caregiver experience, envisioning how device connectivity, innovative technologies and workflow solutions might
dramatically change the experience. Smart Rooms are the result of that direction. A Smart Room is a care space optimized
for the patient and caregiver experience through connected technologies that utilize real-time health data and event logic.
In April 2010, Fisher-Titus Medical Center and Magruder Hospital went live with the first all-digital hospital Smart Room
installations. Outside a Smart Room, you might find a RoomLink message board that senses the identity of the caregiver
entering the room, while inside an interactive display introduces the new caregiver to the patient. Nearby, a flat-panel
CareAware iAware monitor also senses the caregiver’s identity and pulls up a concise view of the most relevant data from
the patient’s EMR.
Cerner Smart Room technology is used in more than 500 facilities —enabling real-time clinical data from devices, such as
telemetry and vital sign monitors, IV smart pumps and hospital beds, to flow directly into a patient’s EMR without delay or
error. Smart Rooms create such a streamlined experience for caregiver and patients that the technology disappears into
the surroundings and what remains is world-class care.
The Works: A New Era of Services
Another second-order effect of the digitized health system is that our traditional clients now see information technology
(IT) as a core business strategy. They get that IT is an ongoing, significant, value-returning fixture of the 21st century health
system. Having more trust and acceptance of IT, and looking to Cerner as a strategic partner, they are more willing to
invest in services that extend the value of their infrastructure investment.
Over the past couple of years, we have invested in defining additional services that leverage the value of our clinical
systems architecture. Increasingly, we are providing more embedded services to our clients, improving functions they
1994
1995
1999
2000
1,000 associates
2 for 1 stock split (August 7)
HNA Millennium® Phase 1 is completed
3,000 associates
Cerner makes Fortune list of “Best 100
Companies to Work For”
10
already need for their daily operations. We call this family of services “Works”. We started in the first part of last decade
with our CernerWorks™ services, hosting the client’s systems in our datacenters. In the last two years, we have moved
into providing embedded services with our Cerner ITWorks™ services, where we assume responsibility for the client’s
internal IT functions, leveraging our own IT skills and scale; we have also started Cerner RevWorks™, where we assume
responsibility for the client’s internal revenue processes, leveraging our scale and technologies; and QualityWorks,
where we assume responsibility for quality reporting and monitoring while also helping improve their clinical processes
through our Millennium Lighthouse® solutions and services. We believe these new services give us significant growth
opportunities through this decade in our existing client base and in new footprints.
In Sickness and in Health
When the core is digitized, a new level of consumer health awareness is possible. We believe that, as much as people
appreciate having a system they can rely on when they’re sick, they would much rather be healthy. Cerner wants to be at
the center of the healthy revolution.
Virtually every clinician knows and believes the old adage, “An ounce of prevention is worth a pound of cure.” And yet,
to students of the healthcare system, it seems as though very few actors in the system have been able to step off the
conveyor belt that financially rewards providers for treating sick people rather than focusing on keeping the same people
well. At Cerner, we have watched the whole situation play out over multiple decades, and we believe there is a more
complete thought in focusing on both health and care. In doing so over time, the business of health may eventually
become a bigger business than the business of care. Certainly the lines will blur a great deal.
We said it in last year’s letter: Cerner aims to be a significant health company.
Cerner started the last decade trying to crack the code on making good health pay. To do this, we had to identify the
constituents in society who really pay for sickness. Clearly, one major group was us and other self-insured companies
just like us. We all own much of the financial risk, and we foot much of the healthcare bill for our associates and their
families. Historically, there was very little we and other companies were doing to manage this risk. We were our own
perfect laboratory, the alpha client, and so the work began. In the past several years, we have made changes to our health
plan, fired our third party administrator (we prefer to think of it as eliminating our first insurance company), launched an
on-site new age clinic and pharmacy, incorporated biometric measurements for our population, realigned the economic
incentives for associates in our health plan price tags and rolled out a data-based wellness management program that
provides personalized health profiles for our associates. We have also revamped our on-campus cafeterias to include
healthier meals and encouraged fresh thinking about work environments, incorporating options such as standing
workstations. In March 2011, we were pleased when the Kansas City Business Journal awarded Cerner first place among
companies with 3,500 employees or more in its recognition of “Kansas City’s Healthiest Employers.”
This past fall, members of Cerner’s Executive Cabinet engaged our fellow associates in a competition around weight loss,
offering a deluxe vacation to the winning team and their family members. The competition isn’t over yet, but this March
16 associate tweet pretty much sums up the results we have seen:
Holy moly...KC @cerner associates have lost 7 tons (~2.5%) of weight since October
We now give a great deal of thought to the health of our associates and how to engage everyone in healthy lifestyles.
2001
2002
2003
2004
Revenues surpass $500 million
4,000 associates
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
11
Our health-focused initiatives serve at least four important purposes: They’re good for our associates; they save us money;
they supply us with knowledge about a promising new market for us, Employer Services; and they give us insights we can
parlay into solutions for our traditional clients, who under health reform legislation in the U.S. may soon receive increased
Medicare and Medicaid payments for healthier outcomes by way of the Accountable Care Organization payment model.
The Cerner of today is known for care; we expect the Cerner of five or 10 years from now will be recognized for health as much
as care. As I mentioned, we can see a plausible scenario where health actually becomes the bigger portion of our growth.
We are also pursuing an additional strategy, one of innovating a New Middle™ in healthcare. We discuss this strategy
more in the next section of this letter. It is difficult to say how much more opportunity this could create, but if successful,
it could be orders of magnitude greater. We believe a New Middle would also magnify the value of our core business,
creating a much larger Cerner in coming decades.
I have a bit of uneasiness about suggesting such positive views of Cerner. No one knows the future. There will certainly
be challenges in the years and decades ahead. But I do believe these are all very possible results, and describing them
fits my definition of the CEO’s job.
Looking Toward the Cloud
One of the biggest buzzwords in business today is the “cloud.” The cloud is a metaphor for the Internet, a convenient
abstraction of the complexity of the world’s largest network. Of all the second-order effects made possible by the all-digital
health system, none has more potential power than a worldwide network of digital health data. Advances in Internet
computing have made it possible to create a new-breed scalable and reliable architecture layer above any one single
enterprise—in the cloud.
Each of our clients is an enterprise. Cerner’s story in our first three decades is one of improvement within the enterprise.
Some of these enterprises are very large—think large multi-hospital health systems with affiliated physician groups—and
yet they are closed off from other enterprises. Improvement within the enterprise is extremely important and worthwhile.
It has, for three decades, driven everything inside Cerner while improving care for a large number of people. However,
there are some significant issues in healthcare that can only be addressed above the enterprise.
Even the largest health system will not have the scale and scope to provide any one population all of its healthcare
needs. Just pay attention the next time you encounter a health enterprise. Chances are, the first thing you will be handed
is a clipboard. Do you really think your caregivers would hand you that clipboard if they already had access to all of your
medical information inside their own enterprise?
Instead, they have to assume that sometime in the past six months, you have visited a physician down the street, a
drugstore nearby or a laboratory across the way, none of which are part of their enterprise. They have to assume that
2005
2006
2007
Revenues surpass $1 billion
2 for 1 stock split (Jan. 10)
Revenues surpass $1.5 billion
Cerner signs contract with Fujitsu for southern
region of NHS Connecting for Health program
in England
Nearly 7,000 associates
Introduced CareAware® device architecture and
line of devices
Cerner signs contract with BT for London region of
NHS program
Shipped first production units of RxStation® medication
dispensing devices; 25 clients purchase CareAware iBus™
device connectivity
Delivered new Cerner ProVision® PACS Workstation
First Cerner Millennium® site in France
Opened new Data Center at World Headquarters
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
Signed first clients in Spain and Egypt; opened office in
Dublin, Ireland
Acquired Etreby Computer Company (retail pharmacy
solutions)
12
you may have moved once, twice or more in your lifetime, that you visited a different doctor for a year when your spouse
changed health insurance, and that, on your last ski trip, you were seen at an out-of-town emergency room. Moreover,
they have to believe that your parents’ health conditions, treated decades ago at another enterprise, might also be
relevant to what is happening to you today. In short, they have to quickly place your specific complaint today within a
broader context of your past and present health, the health of your parents and siblings, and in some cases, health issues
within your community.
Almost every time you visit a healthcare enterprise, you will get the attention of a small team of very talented, highly
trained and hardworking doctors, nurses and staff, who will use their training and experience for your benefit. Their
challenge is to quickly put content into context. This is a prerequisite before they start making decisions about your health.
It goes far beyond situational awareness required in the ICU. Many times, thankfully, the memory-based inventory works,
whether it is within the warm confines of a physician office or the hectic environment of an emergency department. But
what about the times when it doesn’t? Sadly, the lack of a reliable source of knowledge above the enterprise level is a
major cause of unnecessary error, variance, waste, delay and friction in healthcare … and suffering.
There are errors we as a society know how to count, for example, the ones listed in the Institute of Medicine’s 1999
landmark report, To Err is Human. There are also errors we haven’t yet learned to count because our society accepts
information failure as inevitable. The personal story I’m about to tell involves mostly the latter kind.
In the case of my sister-in-law, Linda, a 52-year-old first grade teacher in rural America, the current system didn’t work.
One Friday afternoon, she presented to her rural doctor with flu-like symptoms. By Sunday night, she was dead of septic
shock, an infection that enters the bloodstream and attacks your vital organs. In sepsis, your body gives off clear signals
of the disease, but once it starts, there are just six golden hours to treat it before organ failure begins. As Linda moved
from primary care on to the critical access rural hospital to the big-city emergency department and finally to the ICU,
pieces of information were produced by the care team that could have saved her life. But Linda’s treatment between
Friday and Sunday night was full of imperfect handoffs between different enterprises, and the information that could have
saved Linda’s life never came together.
Unfortunately, Linda’s story is hardly uncommon, and hardly limited to sepsis. Information failure can occur over the
course of six hours, as it did with Linda, or it can occur just as easily over the course of six years. Connecting and making
sense of all of our lifetime health and medical information regardless of enterprise, and making it actionable, has become
one of Cerner’s biggest long-term ambitions. It is the key function of the initiative we call the New Middle for healthcare.
In October of last year, I made our clients an offer. We committed that, as soon as possible, we would activate for each
client our cloud-based platform and make both it and its first “agent,” the St. John Sepsis Rescue agent, available at no
subscription cost. In addition, Cerner would begin indexing their EMRs in the cloud (a private, secure version), and we
would give them the ability to conduct a Chart Search of their own EMR, again at no cost.
2008
2009
2010
Free Cash Flow surpasses $100 million
Cerner Celebrates 30th Anniversary
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
First two Cerner ITWorksSM contracts signed
University of Missouri and Cerner create Tiger
Institute for Health Innovation
Announced acquisition of IMC Health Care
Cerner clients connect with HHS and CDC to fight
spread of influenza
Announced new mission statement, “To contribute to the systemic
improvement of healthcare delivery and the health of communities”
Introduced Healthe Intent™ cloud-based platform
Patient Protection and Affordable Care Act becomes law in an effort
to reform how healthcare is delivered in the U.S.
Announced agreement with CareFusion to better integrate medical devices
and electronic health records
Fisher-Titus Medical Center and Magruder Hospital partner with Cerner
to become first all-digital, smart hospitals in the U.S.
First two Cerner RevWorksSM contracts signed
Introduced uCern™ and uDevelop™ platforms and
opened uCern Store
Cerner honored as one of the best employers for healthy lifestyles by
The National Business Group on Health
Cerner added to NASDAQ 100 Index
Neal Patterson recognized by Forbes as one of “America’s Best-Performing
Bosses” for providing shareholders with the “biggest bang for the buck”
13
Cerner added to S&P 500 index
8,000 associates
Sepsis Rescue Agent—Screening Algorithm
Temp:
>38C,
<36C
HR: >95
RR: >21
Plasma
Glucose
>120
Existing Patient
in Acute Care
Setting
Diagnosis of
Diabetes?
Yes
Exclude
from SIRS
Criteria
Yes
WBC:
>12k, <4k,
or >10%
Bands
Colony
stimulating
factors within
last 60 days?
DTA’s Used for SIRS Criteria:
Temperature
Heart Rate
Respiratory Rate
Glucose Lvl
Blood Glucose, Capillary
WBC
Band Man
Lactate
>2.0
mmol/L
Creatinine
>2.0 gm/dl
Continue
Monitoring
No
2/5 SIRS
Criteria
Met?
Yes
Look back 48
hours for organ
dysfunction
Platelet
count
>100,000
Bilirubin
>2.0mg/dl
aPTT >60
seconds
SBP <90
or MAP
<65mmHg
SBP decrease
>40mmHg
from previous
reading
Mental
Status
Change
PaO2/FIO2
ratio <300
DTA’s Used for Organ Dysfunction:
Lactic Acid Lvl
Systolic Blood Pressure
Mean Arterial Pressure
Creatinine Level
Bili Total
Platelet Count
Neurological Symptoms
Level of Consciousness
Hallucinations Present
Affect/Behavior
Glasgow Coma Score
Pediatric Coma Score
PTT
PaO2/FiO2 ratio
Labs to be suggested to
clinician if not found on
database within timeframe:
Lactic Acid Lvl
Creatinine Level
Bili Total
Platelet Count
PTT
Blood Cultures
UA
Continue
Monitoring
Yes
Patient taking
recombinant
human
erythropoietins
Diagnosis of
ESRD?
No
Yes
No
Creatinine the
only elevated
lab?
No
Fire Sepsis
Alert / Send
Notifications
Heparin order
within last 24
hrs?
No
Yes
Exclude PTT
from organ
dysfunction
criteria
Yes
At least 1 sign of
organ dysfunction
+ 2/5 SIRS
No
SIRS Alert-
Suggests labs/
cultures not
found on
database to
clinician
Alert / Send
Notifications
Discern Notify-
RN
Discern Notify-
RN
Physician
RRT-Pager
Surviving Sepsis Campaign: International guidelines for management of severe
sepsis and septic shock: 2008 Intensive Care Med (2008) 34:17–60
DOI 10.1007/s00134-007-0934-2
International Sepsis Definitions Conference. Crit Care Med 2003; 31:1250 –1256.
ACCP/SCCM Consensus Conference Committee: American College of Chest
Physicians/Society of Critical Care Medicine Consensus Conference: Definitions
for sepsis and organ failure and guidelines for the use of innovative therapies in
sepsis. Crit Care Med 1992; 20:864–874
© Cerner Corporation. All rights reserved.
Sepsis Rescue, a method of detecting potential cases of sepsis and alerting caregivers, originated inside the enterprise.
Methodist Le Bonheur Healthcare in Memphis, Tenn., was the first organization that worked with Cerner to pioneer this
innovation through the development of algorithms. Since then, a handful of other client enterprises have implemented
variations of technology-based sepsis rescue, to great success. The clients who have adopted this solution are truly
rescuing people from sepsis. The stories they tell are chilling and heartwarming at the same time—stories of patients
being called back after discharge because the system alerted to the possibility of sepsis, of crash teams arriving on the
scene before the ER physicians were aware they were needed and, most significantly, of lives being saved. One early
adopter, WellSpan Health, shares that their implementation of Sepsis Rescue has reduced mortality from severe sepsis
and septic shock inside their organization from 33 percent to a single-digit percentage.
Our plan is to take the same lifesaving technology that works inside the most sophisticated healthcare enterprises in the
U.S. and make it work outside the confines of a single enterprise, in the New Middle. We are naming the cloud-based
technology the St. John Sepsis Rescue agent in honor of our very first client, St. John Health System in Tulsa, Okla., whose
leaders took a chance by selecting our little startup in 1981 over two much larger and more established competitors. St.
John was the first, but not the last, of many clients that made it possible to truly pursue a vision together. Our intent is
that the St. John Sepsis Rescue agent will likewise be the first, but not the last, of many new life-saving agents that will
run out of the New Middle.
In the long term, our plan is that these agents themselves will not be the last examples of what we can accomplish with
the New Middle. Value-based payment models, health maintenance beyond the EMR and large-scale coordination of
providers and consumers are also part of our vision.
Thank you for your attention through what has been a long letter. I don’t want to wrap up without giving you a couple of
additional updates. One is about the Cerner leadership team, the other is a more personal update.
14
The Cerner Team
Inside Cerner, there is also a good story. This is in large part due to a strong, experienced team with more than 8,000
associates executing well across a spectrum of client-oriented, technological, operational and administrative aspects
of our organization. Our scale is becoming a major strength.
Cerner’s senior leaders are working as a highly interrelated team on the vision for Cerner 2020. Each of us has a
clearly defined job and set of responsibilities, but we are working together on realizing a shared vision for big Cerner.
2010 was a good year. Does that mean we are hitting on all cylinders? Probably not, but this may be as close as
we have ever been. Our leaders are not only improving the productivity, performance and quality of the things they
manage, but they are also innovating new solutions to complex problems and working in partnership with clients to
lower their total cost of care. We believe in setting goals that make us stretch for continuous improvement, driving
our core business while innovating new businesses and opportunity at our boundaries.
I sometimes kid the executive team that their respective IQs seem to rise along with the stock price. However, we
know both sides of the stock price/IQ effect, and know that many times it is helped by independent factors outside
of our direct control. Its fluctuations have little effect on our decisions. I suggest to the team to let our parents enjoy
the illusion that we are somehow smarter for a good stock price, as long as we know the truth. The truth is that we
are standing on the shoulders of three decades of prior efforts, with the very good fortune of being at the right place
at the right time, and with an impatience for how little we have actually accomplished.
Over the decades, I have been a part of a number of leadership teams at Cerner. I am confident that this is one of
the very best leadership teams that we could have at this phase of our journey. At the end, even though we are all
major contributors, we know we are part of something that took decades to create and is larger than any one of us.
Neal’s List
Throughout my career, I have made lists. Knock one thing off, and another comes along to take its place. In closing,
I want to share with you a very personal list, Neal’s list. It’s not ”the” list at Cerner—we carefully set top-down goals
and objectives, and each Cerner executive develops his or her version of bottom-up goals and objectives. This is
something different, and I will tell you why.
This is the start of my fourth decade at Cerner. This is the first decade that I will not finish—at least not in the role of
CEO. Unfortunately, there is a direct correlation between years of experience and chronological age. Often when I
share Cerner’s age (31 years), I make the offsetting remark that Paul, Cliff and I were all in our 20s when we started
Cerner. In my case, I was 29. If you add thirty-something to any age, the numbers start getting large. I don’t intend
to end this decade as Cerner’s 70-year-old CEO … which is frustrating because this is going to be the most exciting
decade yet.
At some point during this decade, the core content of healthcare delivery will all be digitized. The second- and third-
order effects of this reality should be mind-boggling. This has been the case in nearly every other industry, and
healthcare will be no different. Cerner will be one of the major innovators throughout. We have a chance to change
the concept of medicine and the paradigm of practice toward engaging first with health.
It’s exciting stuff. At this point in my journey, however, I must content myself with making a final inventory of unfinished
business I want to see accomplished. Most of it is printed below, with a couple of exceptions. We are all entitled to
a few secrets.
First, a little disclaimer. If you think that this list is personal, it is. Some of it relates to people I know and love. In the
list below, I use only one real name, that of my sister-in-law Linda. Elsewhere, when I say the person, I mean a specific
person. When I say anyone, I mean someone in particular. In my experience, all Cerner associates end up thinking
this way. At the end, healthcare becomes personal for all of us. Here’s the list:
1. Fix the person’s personal health record. The fragmentation of information is everywhere, even after decades
of investments in EMRs. Today there are some positive actions by governments around the world to deal
with the issue they call “interoperability.” There is progress, but it is too little and too slow. The New Middle
must be equipped to support a real personal health record. Every part of the fragmented provider system
15
must be required to publish to our personal records. There must be a trusted agent to receive and manage all of
the information in a secure, safe, reliable location, under the control of the person. Just ask anyone managing a
serious illness where their personal health record is and you will get an emotional description of the vapor trail
of records they have left through the healthcare “system.” A personal health record will not cure disease, but
it will make navigating the system of care more efficient, safe and comforting for the person with the condition.
2. Save Linda’s life. Make it systematic that preventable events that harm people are exposed to the appropriate
caregivers and eliminated. This will not bring back Linda, but it may prevent the next 50-year-old schoolteacher
from rural America from dying unnecessarily from the uninformed, sometimes inadequate, sloppy, delay-ridden
thing we call a healthcare system. Make the Sepsis Rescue agent real from the New Middle, changing the
mortality rate across the continuum of care. All I ask is that we implement the St. John Sepsis Rescue agent as
our first preventable condition running in ALL our clients worldwide. After that, I will trust the sanity of the crowd
to add the next 400 conditions, then the next.
3. Engage us in our health. Make the big contextual shift—from reactive (symptomatic-base) care to proactive
(predictive-based) management of health. The transparency created by a digitized health system this decade
will support the creation and maintenance of a dynamic, personalized health plan that puts individual health
goals, including diet and exercise, into context along with current and likely future health problems (from already
present and now accessible information such as longitudinal biomarkers, family history, genetic information,
community epidemiology, etc.). We must crack the code on how to create interactive, meaningful engagement
with the person (consumer) around the personalized health plan. If Apple, Google and Amazon can use algorithms
to motivate us to buy books, music and “stuff,” Cerner can use available information about each member of a
health plan to promote self-engagement in healthy lifestyles and decisions.
I have another one that probably does not fit on this list because it is not all within Cerner’s control.
4. With all of the focus on health reform, the public narrative makes it clear that the future healthcare system
will require tough choices about what is deemed affordable. I have seen the power of personalized medicine.
For our children’s sake, we must enable genetic science to be integrated into clinical practice. This will require
both bottom-up and top-down solutions. Bottom up, we must enable genetic information and insights to be
incorporated into everyday workflows. Top down, we need a healthcare system that can afford to embrace new,
expensive, life-preserving analyses and technologies. At current course and speed, this will be the first powerful
new knowledge that society will not be able to benefit from—not because it isn’t possible but, because, for the
first time, it will be too expensive. As a generation, we cannot let this happen.
Now you know my list. Just don’t call it a bucket list, please—that one actually contains much bigger thoughts. As I
mentioned, mine isn’t the only list at Cerner. On an almost daily basis, I am impressed and inspired by our associates’ and
clients’ goals. Success isn’t guaranteed for any of us, but I know it will be an exciting decade.
Close
As you can tell, it is not hard to find things in the Cerner story to share and discuss. What is difficult is knowing when to
stop. We look forward to the future. To our shareholders, clients and associates, we thank you for investing in what is
hopefully a shared and personal vision for all of us. Healthcare is too important to stay the same.
16
NEAL L. PATTERSON
FOUNDER
Chairman, Chief Executive Officer
& President
CLIFFORD W. ILLIG
FOUNDER
Vice Chairman
PAUL N. GORUP
FOUNDER
Senior Vice President
& Chief of Innovation
JEFFREY A. TOWNSEND
Executive Vice President
& Chief of Staff
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
17
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, run it and support it for healthcare provider
organizations around the world (“it” in this context refers to the solutions Cerner creates for healthcare organizations).
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.
At the top of our model is our Sales Pipeline of potential future business opportunities we have identified in the marketplace.
Our sales pipeline has increased substantially over the past several years, reflecting a strong market for our solutions
as U.S.-based providers focus on achieving the “meaningful use” criteria required in order to receive the incentives
associated with the Health Information
Technology for Economic and Clinical
Health (HITECH) provisions within the
American Recovery and Reinvestment
Act of 2009 (ARRA).
Sales Pipeline
New Contract Bookings: $2.0 billion
Support
Contracts
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. For longer term
contracts, such as for our Remote
ITWorksSM, and RevWorksSM
Hosting,
offerings, contract lengths are typically
more than 5 years.
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.
Contract Backlog: $4.3 billion
Support Backlog:
$655 million
Licensed
Software
$268M
System Sales
Technology
$177M
Total 2010 Revenue = $1,850M
Services, Support & Maintenance
Subscriptions/
Transactions
$106M
Professional
Services
$455M
Managed
Services
$294M
Support &
Maintenance
$518M
Note: Total Revenue
includes $32M
of reimbursed
travel revenue
x87%
x11%
$234M
$19M
x52%
$55M
x30%
$135M
x29%
x76%
$86M
$392M
Contribution Margin %
Total 2010 Contribution Margin =
$921M (50% of Revenue)
Contribution Margin $
Less:
Indirect Costs
R & D
14% of revenue
($266M)
SG & A
15% of revenue
($271M)
($537M)
Operating Margin
+
D&A
=
$384M, 21%
$194M
EBITDA
$578M
31%
Less: Taxes &
Net Int. Exp./Other Income
Taxes
($134M)
Net Interest
Exp./Other Income
$3M
($131M)
Net Earnings
$253M
÷
85M
Shares
Earnings Per Share
$2.96
18
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 2010 at $4.9 billion and has grown at healthy compounded annual
rates of 15%, 18% and 23% over the past 3, 5 and 10 years, respectively.
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 many of our competitors who
charge an additional license fee for new releases of their software. We believe our approach is part of the reason we
have so many long-term client relationships—some lasting over 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 2010, this type of revenue represented 14% of our total revenues with a profit contribution of 87%. Revenues from
licensed software grew 6% in 2010 compared to 2009, with double-digit growth in the first three quarters of the year
and a fourth quarter result that was the 2nd highest in company history—only lower than the all-time high level in the
fourth quarter of 2009.
Technology Resale. 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, and this part of our business has
shown strong growth since it was launched in 2007.
We recognize revenues from technology resale as the
equipment is delivered to our clients. In 2010, 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 increased 16%
in 2010, as growth in device resale and sublicensed
software offset a decline in traditional hardware
resale.
2010 Revenue Mix
Managed
Services
16%
Professional
Services
25%
Technology
Resale
9%
Licensed
Software
14%
Support &
Maintenance
28%
Travel 2%
Subscription/
Transactions 6%
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 2010 they grew 7% and represented 6% of our total revenues with a profit
contribution of 52%.
19
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, clinical process optimization 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 2010, these revenues increased 15% due to increased implementation activity.
Professional services represented 25% of our total 2010 revenue, and the profit contribution for this business model
increased from 28% in 2009 to 30% in 2010. We have also expanded our services offerings with the launch of
Cerner RevWorks, which includes solutions and services to help healthcare organizations improve their revenue cycle
functions. We signed contracts with two clients for our RevWorks offering in 2010.
Managed Services. Under our CernerWorksTM 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, which impacts the technology resale portion of revenue. Managed Services revenue
grew 19% in 2010 and represented 16% of our total revenue with the profit contribution increasing from 28% to 29%.
Additionally, in 2009, we launched Cerner ITWorks 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 six contracted clients as of the end
of 2010. Contracts for our ITWorks offering also impact other business models in addition to Managed Services, such
as Professional Services and Support.
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 2010, support and
maintenance revenues grew 5%. This revenue stream represented 28% of total revenue with a profit contribution of
76% (note that this profit contribution does not include 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 contributes no 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 14% of revenue in 2010, and the indirect portion of Selling, General and Administrative (SG&A) activities, which
represented 15% of revenue in 2010. We have a long history of investing heavily in R&D and using that investment to
systematically expand our target 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 2010, our operating margin of $384 million was 20.8% of revenue, an increase of 230 basis points compared to 2009.
The remaining items in our business model are taxes and net interest expense and other income, which totaled $131
million in 2010, leaving $253 million of net earnings, or $2.96 of earnings per share.
Assessment of 2010 Financial Results
We continued to focus on three key financial objectives in 2010: growing the top line, expanding operating margins and
generating free cash flow.
20
Growing the Top Line
Cerner has delivered strong revenue growth over the long term. Both our new business bookings and revenue have grown
at more than 15% compound annual rates over the past 10 years. In 2010, we grew our new business bookings 9%, to a
record $1.99 billion. Revenue grew 11% in 2010, to a record $1.85 billion. Looking at revenue by geographic segment,
domestic revenue increased 12% and global revenue increased 5% in 2010.
In 2011, we again expect double-digit top-line growth. In the U.S., we expect demand driven by the healthcare IT provisions
in the American Recovery and Reinvestment Act to continue to drive increased demand both inside and outside our client
base. 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 growth in our global business to
accelerate as the global economy strengthens. For more information on our growth strategy, refer to the Cerner Growth
Strategy section in Part 1, Item 1 of our 2010 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 nearly 1150 basis points to 20.8% in 2010.
Our 2010 progress was slightly better than the 20% target we communicated last year, and we are targeting 100 to 200
basis points of operating margin expansion in 2011.
The below graph and table detail our margin expansion since 2003.
Operating Margin
23%
21%
19%
17%
15%
13%
11%
9%
'03
'04
'05
'06
'07
'08
'09
'10
'11E
2003
2004
2005
2006
2007
2008
2009
2010
2011E
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
89%
17%
10%
15%
18%
53%
41%
19%
13%
31%
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%
87%
11%
52%
30%
29%
76%
50%
14%
15%
29%
87%
11%
53%
31%
30%
77%
50%
14%
14%
28%
Operating Margin
9.3%
12.4%
12.6%
Cumulative Improvement (basis points)
313bp
335bp
13.4%
413bp
15.1%
579bp
16.6%
729bp
18.5%
20.8%
22.3%
922bp
1148bp
1301bp
21
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.
Expand Professional Services Margins. We will continue to leverage our Solutions Center implementation approach,
which has higher margins than traditional on-site projects. Ongoing efficiencies are also 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. Leveraging our significant R&D investment and common platform should allow us to
continue our record of innovation while growing R&D investment 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, bringing SG&A as a percentage of revenue down from
15% to 14% in 2011. 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.
Expand Managed Services Margins. As we grow our remote hosting business, we expect that we will continue to
achieve efficiencies as we transition to newer, less expensive technologies.
Increase 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 2010, 75% of our revenue came from these sources.
During the same time period, Contribution Margin from recurring or
visible sources increased from 41% to 73%.
Earnings Growth
Strong revenue growth and margin expansion allowed us to grow our
earnings 24% in 2010. Our 3-, 5-, and 10-year compound annual
earnings growth rates of 20%, 24%, and 29%, 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 our cash flow performance.
2010 was a record year for cash performance with $456 million of
operating cash flow and $273 million of free cash flow (operating cash
flow less capital expenditures and capitalized software). Operating
cash flow increased 31% in 2010 and free cash flow increased 98%
due to growth in operating cash flow as well as capital expenditures
that were lower than anticipated. For the first time in our history, free
cash flow exceeded net earnings for the full year. We expect capital
100%
80%
60%
40%
20%
0%
$500
$450
$400
$350
$300
$250
$200
$150
$100
$50
$0
($50)
22
25%
27%
45%
55%
75%
59%
41%
73%
2000
2010
Revenue
2010
2000
Contribution Margin
Non-recurring
Recurring and Visible
Operating Cash Flow
Free Cash Flow
'00
'01
'02
'03
'04
'05
'06
'07
'08
'09
'10
*FCF = Operating CF less Capital Expenditures and Capitalized Software
expenditures to increase in 2011 compared to 2010, which will have some impact on free cash flow growth, but we still
expect to generate strong free cash flow.
Stock Price
At Cerner, we manage the company, not the stock price. In the short-term, the stock price can be influenced by many
factors beyond our control, but we believe in the long-term it will closely reflect the quality of our decisions. We believe
it is important for our shareholders that we focus on delivering strong long-term results, but we also understand the
importance of delivering consistently against short-term targets.
Following the economic turmoil of 2008 and early 2009, the stock market continued its rebound in 2010, with the
NASDAQ Composite Index and S&P 500 ending 2010 up 17% and 13%, respectively. Cerner’s stock price increased
15% in 2010, reflecting our delivery of strong results and good broader market performance. When measuring our stock
performance over the 5-, 10- and 20-year periods using compound annual growth rates, the returns are 16%, 15% and
29%, respectively. These returns are significantly greater than the returns over the same time frames for the NASDAQ
Composite Index (4%, 1%, and 10%) and S&P 500 (0%, 0%, 7%).
Reconciliation of 2010 GAAP Results to Non-GAAP Results*
($ 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
$
$
359
25
384
Net
Earnings
$
237
25
(9)
$
253
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 2010 Forms 10-K and 8-K.
Operating
Margin %
19.4%
20.8%
Diluted
Earnings
Per Share
$ 2.78
0.29
(0.11)
$ 2.96
Cash Flow
$ 456
(102)
(81)
$ 273
23
ANNUAL REPORT 2010
FORM 10-K
24
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 1, 2011
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 [X]
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 3, 2010, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $5,631,943,354 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 10, 2011
83,380,384 shares
DOCUMENTS INCORPORATED BY REFERENCE
Document
Proxy Statement for the Annual Shareholders’ Meeting to be held May 27, 2011 (Proxy Statement)
Parts Into Which Incorporated
Part III
25
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 (SEC).
Cerner’s mission is to contribute to the systemic improvements of healthcare delivery and the health of communities.
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, for consumers of healthcare
and for the healthcare commerce system. These solutions are licensed by approximately 9,000 facilities around the
world, including more than 2,600 hospitals; 3,500 physician practices covering more than 30,000 physicians; 500
ambulatory facilities, such as laboratories, ambulatory centers, cardiac facilities, radiology clinics and surgery centers;
800 home health facilities; and 1,600 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,
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
2010
2009
2008
Revenues by Solutions & Services
System sales
Support and maintenance
Services
Reimbursed travel
Revenues by Segment
Domestic
Global
30%
28%
40%
2%
100%
84%
16%
100%
31%
28%
39%
2%
100%
78%
22%
100%
30%
29%
39%
2%
100%
84%
16%
100%
26
The Healthcare and Healthcare IT Industry
We believe there are several factors that are favorable for the HIT industry over the next decade, despite some lingering
weakness in the global economy. 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 capital purchases. Most United States
healthcare providers also recognize that they must invest in HIT to meet regulatory, compliance and government
reimbursement requirements and incentive opportunities. In addition, with the Centers for Medicare and Medicaid
Services estimating United States healthcare spending at $2.6 trillion or 17.5 percent of 2010 Gross Domestic
Product, politicians and policymakers agree that the growing cost of our healthcare system is unsustainable. Leaders
of both political parties recognize that the intelligent use of information systems will improve health outcomes and,
correspondingly, drive down costs. This belief is supported by 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.
The broad recognition that HIT is essential to helping control healthcare costs and improve quality 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 incentives for
healthcare organizations to modernize operations through “meaningful use” of HIT. These incentives are contributing
to increased demand for HIT solutions and services in the United States.
Another element in the United States marketplace is the recently passed healthcare reform legislation. We believe the
legislation, which promises to drive insurance coverage to an estimated 32 million additional consumers, could have
many second order effects on our clients. For example, healthcare providers may face increased volumes that could
create capacity constraints, and they may find it challenging to profitably provide care at the planned reimbursement
rates under the expanded coverage models. We also expect additional compliance and reporting challenges for our
clients in the areas of pay-for-quality, ICD-10 coding requirements, and waste, fraud and abuse measures.
We believe the above factors create strong incentives for providers to maximize efficiency and create the need for
additional investments in HIT solutions and services. Cerner is well positioned to benefit from this expected increase
in demand due to our large footprint in United States hospitals and physician practices and our proven ability to deliver
value to our clients.
Outside the United States, the economic downturn of the last few years has impacted and could continue to impact our
results. However, we believe long-term revenue growth opportunities outside the United States remain significant because
other countries are also focused on controlling healthcare spending while improving the efficiency and quality of care that
is delivered, and many of these countries recognize HIT as an important piece of the solution to these issues.
In summary, while the current economic environment has impacted our business, we believe 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.
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.
27
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 and the nation’s focus on improving the efficiency and quality of
healthcare. 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 our core solutions, such as EHRs and computerized physician
order entry, we have a broad range of complementary 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 introduced new 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
amounts 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 improve their revenue cycle functions.
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. For example, our CommunityWorks offering
leverages a shared instance of the Cerner Millennium platform across multiple clients, which decreases the total cost
of ownership for these clients. Our ability to address these markets has also 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 are
reducing up-front hardware costs and ongoing technology obsolescence risks through our remote-hosted, managed
services offering, CernerWorks.
28
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 we expanded our presence in the
employer-sponsored health center market with the acquisition of IMC Health Care, Inc. in January 2010. Additionally,
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 our clients quick access to innovations developed by Cerner, as well
as outside organizations and individuals.
To highlight one area where coordinating information across the fragmented delivery system is gaining traction, our
Cerner Network and Health Information Exchange (HIE) offerings create better clinical integration and coordination
of care by facilitating secure electronic flow of data between hospitals, physician practices, and other stakeholders,
regardless of the EHR system being used. We have had early success with our clients in building out HIEs and Cerner
Network services that are providing value, and nearly 50 million clinical and financial transactions go across the
network each month.
Another key element of our strategy for improving the coordination and quality of care is our Healthe Intent™ platform,
a cloud-based platform that we expect to be the basis for many future offerings. In 2010, we launched Healthe Intent
Chart Search, our first solution on this platform. Healthe Intent Chart Search leverages knowledge of the clinical
meanings of words located within the EMR as well as the context in which those words occur to create algorithms that
identify and rank the most important information contextually. This capability allows the physician to efficiently search
through a patient’s health record and identify relevant information in a matter of seconds. In the coming years, we
believe the Healthe Intent platform will continue to evolve in sophistication to the point where it can anticipate and
determine the clinical intent based on the behavior of the specific user, the history of the patient and the context of
prior actions.
The Healthe Intent platform also provides the ability to apply sophisticated, statistical algorithms against contextual
clinical activity to recommend clinical action. For example, our first national Health Agent is an intelligent mechanism
developed in collaboration with clients, which can assist in detecting the conditions that indicate a patient may be
developing Sepsis, a potentially fatal condition in which the bloodstream is overwhelmed by bacteria. Nearly 750,000
Americans are affected by Sepsis each year. Early results based on initial client use of this algorithm have reflected
remarkable reductions in Sepsis mortality rates, and we believe that moving this capability to a Health Agent in the
cloud will allow us to demonstrate the speed at which new capabilities and evidence can be deployed to our clients.
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 enhance care and reduce friction by facilitating the sharing of relevant clinical and financial information
between payers, consumers and providers.
Furthermore, in the New Middle, 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 unique genetic code. Armed with this
information, consumers would have financial incentives to focus on controlling chronic conditions and reducing the
impact of future maladies.
29
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.
Lastly, we believe the New Middle would provide the segments of our society that pay for healthcare—employers or
governments—a health system with less variance, cost and waste while maximizing the quality of care for all of us.
Software Development
We commit significant resources to developing new health information system solutions. As of the end of 2010,
approximately 2,400 associates were engaged in research and development activities. Total expenditures for the
development and enhancement of our software solutions were approximately $284.8 million, $285.2 million and
$291.4 million during the 2010, 2009 and 2008 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 reducing 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, while the sales cycle is often shorter when selling to smaller
hospitals and physician practices. We have seen some indications that the HITECH provisions of ARRA may shorten the
sales process due to the timeline required for hospitals to earn stimulus incentives.
Our executive marketing management is located at our Innovation Campus in Kansas City, Missouri, 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, 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 to access 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 organizations in England and Ireland.
30
Most clients who buy hardware through Cerner 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 utilize
subcontractors to meet our hardware maintenance obligations. We also offer a set of managed services that include
remote hosting, operational management services and disaster recovery.
Backlog
At the end of 2010, we had a contract backlog of approximately $4.3 billion as compared to approximately $3.6 billion
at the end of 2009. Such backlog represents system sales and services from signed contracts that have not yet been
recognized as revenue. At the end of 2010, we had approximately $140.0 million of contracts receivable compared to
$135.3 million at the end of 2009, which represents revenues recognized but not yet billable under the terms of the
contract. At the end of 2010, we had a software support and maintenance backlog of approximately $654.9 million as
compared to approximately $620.6 million at the end of 2009. Such backlog represents contracted software support
and hardware maintenance services for a period of 12 months. We estimate that approximately 31 percent of the
aggregate backlog at the end of 2010 of $4.9 billion will be recognized as revenue during 2011.
Competition
The market for HIT solutions, devices and services is intensely competitive, rapidly evolving and subject to rapid
technological change. Our principal competitors in the healthcare solutions and services market include: Allscripts
Healthcare Solutions, Inc., Computer Programs and Systems, Inc., Epic Systems Corporation, GE Healthcare Technologies,
iSoft Group Limited, McKesson Corporation, Medical Information Technology, Inc. (Meditech) 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. Athenahealth, Inc.,
eClinicalWorks LLC, e-MDs, Inc., 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.
Cerner partners with third parties as a reseller of devices and markets its own competing proprietary healthcare
devices; we view our principal competitors in the healthcare device market to include: CapsuleTech, Inc., CareFusion
Corporation, GE Healthcare Technologies, McKesson Corporation, Omnicell, Inc. and Royal Philips Electronics; and we
view our principal competitors in the healthcare transactions market to include: Capario, Inc., Emdeon Corporation,
Ingenix, Inc. (a subsidiary of UnitedHealth Group, Inc.) and McKesson Corporation, 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 2010, we employed approximately 8,200 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.
31
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 10, 2011. Officers are elected annually and serve at the discretion of the Board of Directors.
Name
Age
Positions
Neal L. Patterson
Clifford W. Illig
Marc G. Naughton
Michael R. Nill
Randy D. Sims
Jeffrey A. Townsend
Mike Valentine
Julia M. Wilson
61
60
55
46
50
47
42
48
Chairman of the Board of Directors, Chief Executive Officer
and President
Vice Chairman of the Board of Directors
Executive 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 has served as President of the Company since July 2010, which position he also held
from March of 1999 until August of 1999.
Clifford W. Illig has been a Director of the Company for more than five years. He previously served as Chief Operating
Officer of the Company until October 1998 and as President of the Company until March of 1999. Mr. Illig was appointed
Vice Chairman of the Board of Directors in March of 1999.
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 and promoted to Executive Vice President in March 2010.
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.
32
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.
33
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) 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. We attempt to limit by contract our liability; however, the limitations of liability
set forth in the contracts may not be enforceable or may not otherwise protect us from liability for damages. We may
also be subject to claims that are not covered by contract, such as a claim directly by a patient. 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 significant 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 are
very complex and may contain design, coding or other errors, especially when first introduced. It is not uncommon for
HCIT providers to discover errors in software solutions and/or 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. Should a client’s Cerner software solution and/or healthcare device
fail to meet these warranties or lead to faulty clinical decisions or injury to patients, it could i) 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 or ii) subject us to claims or litigation by our clients or clinicians or directly by the patient.
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. We offer our clients disaster recovery services for additional fees to protect clients from isolated
datacenter failures, leveraging our multiple data center facilities, however only a small percentage of our hosted clients
choose to contract for these 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 significant
revenue loss, create potential liabilities for our clients and us and increase insurance and other operating costs.
34
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 policies and procedures, employee nondisclosure agreements, confidentiality agreements with third
parties and technical security measures to maintain the confidentiality, exclusivity 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 these patents do not
provide comprehensive protection for the wide range of solutions and services offered by us. Despite our protective
measures and intellectual property rights, we may not be able to adequately protect against theft, 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, the use of open-source
software increases and we enter new geographies and new markets such as healthcare device innovation, healthcare
transactions and life sciences. These claims, even if not meritorious, are expensive to defend and are oftentimes
incapable of prompt resolution. 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, offering for sale, licensing, importing, 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:
g
g
g
g
g
g
g
g
g
g
g
g
g
g
g
g
g
g
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: i) local laws
and customs differ from those in the United States or ii) risk is heightened with respect to laws prohibiting
improper payments and bribery, including without limitation the U.S. Foreign Corrupt Practices Act and similar
regulations in foreign jurisdictions
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 or preferences
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
35
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
certain 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, which could result in double taxation,
penalties and interest payments.
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 depend on third party suppliers and our revenue and gross margin could suffer if we fail to manage suppliers
properly. 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 or license it in conjunction with our solutions, devices and services. We depend 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, and negatively affect our revenue and gross margins.
36
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.
We could suffer losses due to asset impairment charges. We test our goodwill for impairment during the second
quarter every year, and on an interim date should events or changes in circumstances indicate the carrying value of
goodwill may not be recoverable in accordance with provisions of ASC 350, Intangibles – Goodwill and Other. Declines
in business performance or other factors could cause the fair value of a reporting unit to be revised downward and
could result in a non-cash impairment charge. This could materially affect our reported net earnings.
The ongoing uncertainty in global economic conditions could negatively affect our business, results of operations
and financial condition. Although in recent months, certain indices and economic data have begun to show signs of
stabilization in the United States and certain global markets, there can be no assurance that these improvements will
be broad-based or sustainable, nor is it clear how, if at all, they will affect the markets relevant to us. As a result, our
operating results may be impacted by the health of the global economy. Continued adverse economic conditions may
lead to slowdowns or declines 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 lower than expected economic growth)
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, an 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 continues or worsens,
our business, results of operations and financial condition could be materially and adversely affected.
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 national provider 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.
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.
37
In 2010, the Patient Protection and Affordable Care Act became law. This comprehensive healthcare reform legislation
included provisions to control healthcare costs, improve healthcare quality, and expand access to affordable health
insurance. This healthcare reform legislation could include changes in Medicare and Medicaid payment policies
and other healthcare delivery administrative reforms that could potentially negatively impact our business and the
business of our clients. Because the administrative rules implementing healthcare reform under the legislation have
not yet been finalized, the impact of the healthcare reform legislation on our business is unknown, but there can be no
assurances that healthcare reform legislation will not adversely impact either our operational results or the manner
in which we operate our business. Healthcare industry participants may respond by reducing their investments or
postponing investment decisions, including investments in our solutions and services.
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.
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 federal and state laws. 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. Our solutions are capable of electronically transmitting claims for services and items rendered
by a physician to many patients’ payers for approval and reimbursement, which claims are governed by federal and state
laws. 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. In
connection with these laws, we may be subjected to federal or state government investigations and possible penalties
may be imposed upon us, false claims actions may have to be defended, private payers may file claims against us and
we may be excluded from Medicare, Medicaid or other government-funded healthcare programs. Any investigation or
proceeding related to these laws may have a material adverse impact on our results of operations.
38
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.
There have been ten FDA inspections at various Cerner sites since 1998. Inspections conducted at our world
headquarters in 1999 and 2010, and our prior Houston, Texas facility in 2002, each resulted in the issuance of an
FDA Form 483 observation to which we responded promptly. The FDA has taken no further action with respect to the
Form 483 observations that were issued in 1999, 2002 and 2010. 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, product corrections, seizures, injunctions, refusal to grant pre-market
clearance of products, 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. Federal, state 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, and associated
regulatory requirements, 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 they pertain to handling of covered
client data. However, the extension of these HIPAA obligations to business associates by law has created 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 (although we contractually limit liability, when
possible and where permitted), fines and penalties.
39
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
incentive payments. 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 are subject to interpretation by the entities designated to certify such technology.
While a combination of our solutions have been certified as meeting the initial standards for certified health record
technology, the regulatory standards to achieve certification will continue to evolve over time. 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 and services to the healthcare industry is 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. If we are unable to recognize these changes in a timely manner, or we are
too inflexible to rapidly adjust our business models, growth ambitions and financial results could be affected materially.
Risks Related to Our Stock
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 demand for
40
our solutions, devices and services, the financial condition of our current and potential clients, our long sales cycle,
potentially long installation and implementation cycles for larger, more complex and higher-priced systems, accounting
policy changes 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, additions or amendments to governing federal, state
or local regulations, 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, new federal, state or local regulations directly related
to our industry 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.
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.
41
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 (SEC), 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. The Headquarters Campus and two other nearby locations,
collectively contain approximately 1.43 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.
Other company owned office space, known as the Innovation Campus, houses associates from our intellectual property
organizations and consists of 790,000 gross square feet of useable space located in Kansas City, Missouri.
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.
As of the end of 2010, we leased additional office space in Beverly Hills and Garden Grove, California; Denver, Colorado;
Jacksonville, Florida; Lenexa, Kansas; Waltham, Massachusetts; Minneapolis and Rochester, Minnesota; Columbia,
Missouri; N. Kansas City, Missouri; 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;
London, England; Paris, France; Herzogenrath and Idstein, Germany; Bangalore, India; Dublin, Ireland; Kuala Lumpur,
Malaysia; Riyadh, Saudi Arabia; Singapore; Madrid, Spain; and, Abu Dhabi and Dubai, United Arab Emirates.
42
Item 3. Legal Proceedings
We have no material pending litigation.
Item 4. Removed and Reserved
43
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 2010 and 2009 as reported by The Nasdaq Stock Market®.
2010
Low
High
Last
High
2009
Low
Last
First Quarter
$ 90.72
$ 75.66
$ 85.73
$ 46.40
$ 33.72
$ 43.29
Second Quarter
Third Quarter
Fourth Quarter
91.58
85.03
96.16
75.00
72.85
84.72
76.10
85.03
94.74
63.82
75.17
85.51
41.88
56.80
73.53
60.05
72.50
82.44
At February 10, 2011, there were approximately 1,043 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 1, 2011.
44
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
2010
(1)
2009
(1)
2008
(1)(2)
2007
(1)(3)(4)(5)
2006
(1)(6)
$ 1,850,222
$ 1,671,864
$ 1,676,028
$ 1,519,877
$ 1,378,038
359,333
362,212
237,272
292,006
292,681
193,465
278,885
281,431
188,658
204,083
203,967
127,125
166,167
167,544
109,891
2.88
2.78
2.39
2.31
2.34
2.26
1.60
1.53
1.41
1.34
82,458
85,424
80,981
83,882
80,549
83,435
79,395
83,218
77,691
81,723
$ 840,129
$ 788,232
$ 517,650
$ 530,441
$ 444,656
2,422,790
2,148,567
1,880,988
1,689,956
1,496,433
Long-term debt, excl. current installments
67,923
95,506
111,370
177,606
Cerner Corporation stockholders’ equity
1,905,297
1,580,678
1,311,009
1,132,428
187,391
922,294
(1)
Includes share-based compensation expense recognized. The impact of including this expense is as follows:
(In thousands except share data)
2010
2009
2008
2007
2006
Total stock-based compensation expense
$
24,903
$
16,842
$
15,144
$
16,189
$
19,021
Amount of related income tax benefit
(9,329)
(6,274)
(5,641)
(6,030)
(7,275)
Net impact on earnings
$
15,574
$
10,568
$
9,503
$
10,159
$
11,746
Decrease to diluted earnings per share
$
0.18
$
0.12
$
0.11
$
0.12
$
0.14
(2)
(3)
(4)
(5)
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.
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.
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.
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.
45
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 2010 consisted of 52 weeks and ended
on January 1, 2011; fiscal year 2009 consisted of 52 weeks and ended on January 2, 2010; and fiscal year 2008
consisted of 53 weeks and ended on January 3, 2009. 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 give healthcare providers secure access to 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 centers 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 10% or more. This growth has also created an
important strategic footprint in healthcare, with Cerner® solutions licensed by approximately 9,000 facilities around
the world, including more than 2,600 hospitals; 3,500 physician practices covering more than 30,000 physicians; 500
ambulatory facilities, such as laboratories, ambulatory centers, cardiac facilities, radiology clinics and surgery centers;
800 home health facilities; and 1,600 retail pharmacies. Selling additional solutions back into this client base is an
important element of our future revenue growth. We are also focused on driving growth through market share expansion
by strategically aligning with healthcare providers who have not yet selected a supplier and by displacing competitors in
healthcare settings that are looking to replace their current healthcare information technology (HIT) partners.
We 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, Cerner
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 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 the most recent
five- and ten-year periods. We believe we can continue driving strong levels of earnings growth and leverage 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 entering 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.
46
Results Overview
The Company delivered strong levels of bookings, revenues, earnings and cash flows in 2010.
New business bookings revenue in 2010, which reflects the value of executed contracts for software, hardware,
professional services and managed services, was $2.0 billion, which is an increase of 9% compared to $1.8 billion in
2009. Our 2010 revenues increased 11% to $1.9 billion compared to $1.7 billion in 2009. The year-over-year increase
in revenue reflects improved economic conditions and demand driven by the stimulus incentives. As discussed in the
“Healthcare and Healthcare IT Industry” under Part 1, Item 1, we believe the HITECH incentives and the nation’s focus
on improving the efficiency and quality of healthcare will create a period of increased HIT demand in the United States.
Our 2010 net earnings increased 23% to $237.3 million compared to $193.5 million in 2009. Diluted earnings per
share increased 20% to $2.78 compared to $2.31 in 2009. The 2010 and 2009 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 2010 net earnings and diluted earnings per share by $15.6 million and $0.18,
and the 2009 earnings and diluted earnings per share by $10.5 million and $0.12, respectively. The growth in net
earnings and diluted earnings per share was driven primarily by strong revenue growth and continued progress with
our margin expansion initiatives, particularly leveraging R&D investments and controlling general and administrative
expenses. Though our full-year 2010 operating margin was 19.4%, compared to 17.5% in 2009, we achieved our long
term goal of 20% operating margins in the third and fourth quarters of 2010. Over the next few years, we believe we
can further expand our operating margins by 100-200 basis points per year on average.
We had cash collections of receivables of $1.9 billion in 2010 compared to $1.8 billion in 2009. Days sales outstanding
decreased to 87 days for the 2010 fourth quarter compared to 91 days for 2010 third quarter and 90 days for the 2009
fourth quarter, reflecting our improved cash collections. Operating cash flows for 2010 were strong at $456.4 million
compared to $347.3 million in 2009, with the growth driven by cash collections from clients.
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.
47
Results of Operations
Fiscal Year 2010 Compared to Fiscal Year 2009
(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
2010
% of
Revenue
2009
% of
Revenue
% Change
$
550,792
517,494
749,483
32,453
1,850,222
30%
28%
40%
2%
100%
$
504,561
493,193
643,678
30,432
1,671,864
320,356
1,529,866
767,152
272,851
130,530
1,170,533
1,490,889
359,333
3,439
(560)
(124,940)
17%
83%
42%
15%
7%
64%
81%
19%
281,198
1,390,666
700,639
271,051
126,970
1,098,660
1,379,858
292,006
308
367
(99,216)
30%
29%
39%
2%
100%
17%
83%
42%
16%
8%
66%
83%
17%
9%
5%
16%
7%
11%
14%
10%
9%
1%
3%
7%
8%
23%
Net earnings
$
237,272
$
193,465
23%
Revenues & Backlog
Revenues increased 11% to $1.9 billion in 2010, compared to $1.7 billion 2009.
g
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, increased 9% to $550.8 million in 2010 from $504.6 million in 2009. The increase in system
sales was driven by a strong increase in licensed software and technology resale.
Support and maintenance revenues increased 5% to $517.5 million in 2010 compared to $493.2 million
in 2009. 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. We expect support
and maintenance revenues will continue to grow as the base of installed Cerner Millennium systems grow.
Services revenue, which includes professional services excluding installation and managed services increased
16% to $749.5 million in 2010 compared to $643.7 million in 2009. This increase is driven by growth in
CernerWorksSM managed services as a result of continued demand for our hosting services and an increase
in professional services due to increased implementation activities.
Contract backlog, which reflects new business bookings that have not yet been recognized as revenue, increased 19%
in 2010 compared to 2009. 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.
48
A summary of our total backlog for 2010 and 2009 follows:
(In thousands)
Contract backlog
2010
2009
$
4,285,267
$
3,591,026
Support and maintenance backlog
654,913
620,616
Total backlog
$
4,940,180
$
4,211,642
Costs of Revenue
Cost of revenues remained flat at 17% of total revenues in 2010 and 2009. 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 increased 7% in 2010 to $1.2 billion as compared to $1.1 billion in 2009.
g
g
Sales and client service expenses as a percent of total revenues were 42% in 2010 and 2009. These expenses
increased 9% to $767.2 million in 2010, from $700.6 million in 2009. Sales and client service expenses
include salaries of sales and client service personnel, depreciation and other expenses associated with our
CernerWorks managed service business, communications expenses, unreimbursed travel expenses, expense
for share-based payments, sales and marketing salaries and trade show and advertising costs. The increase
was primarily attributable to growth in the managed services business, a higher level of professional services
expenses and an increase in bad debt expense.
Software development expenses as a percent of revenue were 15% in 2010, as compared to 16% in 2009.
These expenses increased 1% in 2010 to $272.9 million, from $271.1 million in 2009. Expenditures for software
development in 2010 reflect continued development and enhancement of the Cerner Millennium platform and
software solutions and investments in new growth initiatives. Although these expenses increased in 2010, the
reduction as a percent of revenue reflects our ongoing efforts to control spending relative to revenue growth.
Because of the strong platform we have built, we are able to continue advancing our solutions and investing
in new solutions without large increases in spending. A summary of our total software development expense
in 2010 and 2009 is as follows:
(In thousands)
Software development costs
Capitalized software costs
Capitalized costs related to share-based payments
Amortization of capitalized software costs
For the Years Ended
2010
2009
$
284,836
$
285,187
(79,631)
(1,348)
68,994
(76,876)
(871)
63,611
Total software development expense
$
272,851
$
271,051
49
g
General and administrative expenses as a percent of total revenues were 7% in 2010, as compared to 8%
in 2009. These expenses increased 3% to $130.5 million in 2010 from $127.0 million in 2009. 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. The overall increase in general and administrative expenses was driven by a net
transaction loss on foreign currency of $0.9 million in 2010 compared to a gain of $4.0 million in 2009.
Additionally, increased corporate personnel costs were offset by a decrease in amortization expense driven by
certain intangible assets being fully amortized at the end of 2009.
Non-Operating Items
g
g
g
Net interest income was $3.4 million in 2010, compared with net interest income of $0.3 million in 2009.
Interest income increased to $10.3 million in 2010 from $8.8 million in 2009, due primarily to growth in
investments and an increase in investment returns. Interest expense decreased to $6.9 million in 2010 from
$8.5 million in 2009, due to payments on our long-term debt.
Other expense was $0.6 million in 2010, compared to other income of $0.4 million in 2009. Other income
and expense in 2010 and 2009 includes offsetting unrealized gains and losses included in earnings related
to our auction rate securities and put-like settlement feature in the amounts of $9.3 million and $10.5 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% in 2010 and 2009. There were no material changes impacting the effective tax
rate between 2010 and 2009.
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.
The following table presents a summary of our operating segment information for the years ended 2010 and 2009:
2010
% of
Revenue
2009
% of
Revenue
% Change
(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
$ 1,562,563
100% $ 1,398,715
100%
272,385
417,181
689,566
872,997
17%
27%
44%
56%
240,847
372,370
613,217
785,498
17%
27%
44%
56%
287,659
100%
273,149
100%
47,971
124,546
172,517
115,142
(628,806)
17%
43%
60%
40%
40,351
130,256
170,607
102,542
(596,034)
15%
48%
62%
38%
12%
13%
12%
12%
11%
5%
19%
-4%
1%
12%
5%
23%
Consolidated operating earnings
$
359,333
$
292,006
50
Domestic Segment
g
g
g
Revenues increased 12% to $1.6 billion in 2010 from $1.4 billion in 2009. This increase was driven by growth
across all lines of business with the strongest growth in licensed software, managed services and professional
services.
Cost of revenues remained flat at 17% of revenues in both 2010 and 2009.
Operating expenses increased 12% to $417.2 million in 2010, from $372.4 million in 2009, due primarily to
growth in managed services expense, professional services expense and bad debt expense.
Global Segment
g
g
g
Revenues increased 5% to $287.7 million in 2010 from $273.1 million in 2009. This increase was driven by
improved licensed software, technology resale and support revenue, mostly from United Kingdom and the
Middle East region, slightly offset by a decline from France. A change in estimates for certain contracts that
rely on estimates as part of contract accounting also contributed to the increase.
Cost of revenues was 17% and 15% of revenues in 2010 and 2009, respectively. The higher cost of revenues
in 2010 was driven by the increase in technology resale, which carries a higher cost of revenue.
Operating expenses decreased 4% to $124.5 million in 2010, from $130.3 million in 2009, primarily due to
a decrease in personnel-related professional services expense, partially offset by an increase in bad debt
expense.
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 5% to $628.8
million in 2010 from $596.0 million in 2009. This increase was primarily due to growth in corporate and development
personnel costs, stock compensation cost and the previously discussed impact of foreign currency transaction gains
and losses.
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%
29%
39%
2%
100%
$
522,373
472,579
643,317
37,759
1,676,028
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%
39%
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%
51
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.
Revenues and Backlog
Revenues were $1.7 billion in 2009, which was flat compared to 2008.
g
g
g
System sales 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 was 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.
Services revenue remained flat, with growth in CernerWorksSM managed services being offset by declines in
professional services. The decline in professional services reflected the impact of the economy and lower
billable headcount in 2009 compared to 2008.
Contract backlog 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.
Operating Expenses
Total operating expenses remained flat in 2009 at $1.1 billion as compared to 2008.
g
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. The decrease
was primarily attributable to lower professional services expense, partially offset by growth in the managed
services business.
Software development expense decreased 1% in 2009 to $271.1 million, from $272.5 million in 2008.
Expenditures for software development in 2009 reflected 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:
52
(In thousands)
Software development costs
Capitalized software costs
Capitalized costs related to share-based payments
Amortization of capitalized software costs
For the Years Ended
2009
2008
$
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. 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 included 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 was 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 included expense of approximately $2.3 million and 2008 included benefits of
approximately $2.9 million for corrections relating to prior periods.
53
Operations by Segment
The following table presents a summary of our operating segment information for the years ended 2009 and 2008:
2009
% of
Revenue
2008
% of
Revenue
% Change
(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
$ 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.
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.
54
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 2010, we had cash of
$170.3 million, cash equivalents of $44.2 million and short-term investments of $356.5 million, as compared to cash
of $144.8 million, cash equivalents of $97.0 million and short-term investments of $317.1 million at the end of 2009.
Additionally, 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 provides certain restrictions on our ability to borrow,
incur liens, sell assets and pay dividends and contains certain net worth, current ratio and fixed charge coverage
covenants, which as of the end of 2010, we were in compliance with. The current agreement expires on May 31, 2013.
As of the end of 2010, we had no outstanding borrowings under this agreement; however, we have $13.6 million of
outstanding letters of credit, which reduced our available borrowing capacity to $76.4 million.
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 2011.
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. The circumstances surrounding these receivables
remained unchanged at the end of 2010 and represent the significant majority of other long-term assets at the end of
2010 and 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 was 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. At the end of 2010, we held auction rate securities with a par value of $18.5 million, which approximated fair
value, as all outstanding auction rate securities were subsequently called at par value by the issuer in January 2011.
For a more detailed discussion of the auction rate securities, please refer to Note (3), Cash and Investments, in the
Consolidated Financial Statements.
55
The following table provides details about our cash flows in 2010, 2009 and 2008:
For the Years Ended
(In thousands)
2010
2009
2008
Cash flows from operating activities
Cash flows from investing activities
Cash flows from financing activities
Effect of exchange rate changes on cash
Total change in cash and cash equivalents
Cash and cash equivalents at beginning of period
$
456,444
$
347,291
$
281,802
(520,896)
34,841
2,399
(27,212)
241,723
(394,321)
16,770
1,489
(28,771)
270,494
(170,607)
(11,654)
(11,961)
87,580
182,914
Cash and cash equivalents at end of period
$
214,511
$
241,723
$
270,494
Free cash flow (non-GAAP)
$
273,154
$
138,279
$
103,605
Cash Flows from Operating Activities
(In thousands)
2010
2009
2008
Cash collections from clients
$
1,900,145
$
1,780,127
$ 1,729,526
Cash paid to employees and suppliers and other
Cash paid for interest
Cash paid for taxes, net of refund
Total cash from operations
(1,315,077)
(6,887)
(121,737)
(1,377,139)
(1,381,146)
(8,583)
(47,114)
(10,512)
(56,066)
$
456,444
$
347,291
$
281,802
For the Years Ended
Cash flows from operations increased $109.2 million in 2010 compared to 2009 and $65.5 million in 2009 compared
to 2008 primarily due to increased cash collections from clients. During 2010, 2009 and 2008, we received total client
cash collections of $1.90 billion, $1.78 billion and $1.73 billion, respectively, of which approximately 4%, 3% and 5%
were received from third party client financing arrangements and non-recourse payment assignments, respectively.
Days sales outstanding decreased to 87 days for the 2010 fourth quarter compared to 91 days for 2010 third quarter
and 90 days for the 2009 fourth quarter, reflecting our improved cash collections. Revenues provided under support
and maintenance agreements represent recurring cash flows. Support and maintenance revenues increased 5% in
2010 and 4% in 2009, 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
2010
2009
2008
$
(102,311)
$
(131,265)
$
(108,099)
(80,979)
(312,340)
(25,266)
(77,747)
(169,295)
(16,014)
(70,098)
17,510
(9,920)
Total cash flows from investing activities
$
(520,896)
$
(394,321)
$
(170,607)
56
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 2011 is expected to
increase from our 2010 levels, however we also expect strong levels of free cash flow.
In addition, during the first quarter 2010, we completed our acquisition of IMC Health Care, Inc. for approximately
$14.5 million, net of the cash acquired.
Cash Flows from Financing Activities
(In thousands)
2010
2009
2008
For the Years Ended
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
Total cash flows from financing activities
$
$
(27,625)
$
(32,352)
$
(15,317)
60,950
-
1,516
34,841
47,234
-
1,888
16,770
$
24,530
(28,002)
7,135
$
(11,654)
Our primary financing obligations are long-term debt repayments. In the fourth quarter of 2009, we commenced payment
on the first of seven equal annual installments on our 5.54% Great Britain Pound denominated Note Agreement as
well as on the first of four equal annual installments on our 6.42% Series B Senior Notes. Based on debts currently
outstanding and current exchange rates, we expect our debt repayments to approximate $25 million per year through
2012 and approximately $15 million per year from 2013 through 2015.
Free Cash Flow
(In thousands)
2010
2009
2008
Cash flows from operating activities
$
456,444
$
347,291
$
281,802
Capital purchases
Capitalized software development costs
Free cash flow (non-GAAP)
(102,311)
(80,979)
(131,265)
(77,747)
(108,099)
(70,098)
$
273,154
$
138,279
$
103,605
For the Years Ended
Free Cash Flow increased $134.9 million in 2010 as compared to 2009, which we believe reflects continued
strengthening of our earnings quality. Free Cash Flow is a non-GAAP financial measure used by management along
with GAAP results to analyze our earnings quality and overall cash generation of the business. The presentation of Free
Cash Flow is not meant to be considered in isolation, as a substitute for, or superior to, GAAP results and investors
should be aware that non-GAAP measures have inherent limitations and should be read only in conjunction with our
consolidated financial statements prepared in accordance with GAAP. Free Cash Flow may also be different from similar
non-GAAP financial measures used by other companies and may not be comparable to similarly titled captions of other
companies due to potential inconsistencies in the method of calculation. We believe Free Cash Flow is important to
enable investors to better understand and evaluate our ongoing operating results and allows for greater transparency
in the review of our overall financial, operational and economic performance.
57
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 2010, except short-term purchase order commitments arising in the ordinary course of business.
(In thousands)
2011
2012
2013
2014
2015
2016 and
thereafter
Total
Payments due by period
Long-term debt obligations
$ 24,695 $
24,351 $ 14,488 $ 14,488 $ 14,488 $
- $ 92,510
Capital lease obligations
Operating lease obligations
Purchase obligations
Uncertain tax positions
142
23,646
18,810
243
108
21,891
13,707
3,816
-
-
19,847
17,564
7,850
3,427
6,515
6,614
-
11,392
3,263
-
-
250
48,799
13,291
-
143,139
63,436
14,100
Total
$ 67,536 $ 63,873 $ 45,612 $ 45,181 $ 29,143 $ 62,090 $ 313,435
We have no off-balance sheet arrangements. The effects of inflation on our business during 2010, 2009 and 2008
were not significant.
Recent Accounting Pronouncements
During 2009, the Financial Accounting Standards Board (FASB) issued guidance on revenue recognition for non-
software elements that became effective for us beginning on January 2, 2011. Under the new guidance an entity is
required 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. In addition, expanded disclosures are required to provide both qualitative and quantitative information
about the significant judgments made in applying the guidance and subsequent changes in those judgments that
may significantly affect the timing or amount of revenue recognition. Further, for arrangements that include software
elements, tangible products that have software components that are essential to the functionality of the tangible
product will no longer be within the scope of the software revenue recognition guidance, and software-enabled products
will now be subject to other relevant revenue recognition guidance. The guidance is effective for revenue arrangements
entered into or materially modified in fiscal years beginning on or after June 15, 2010. We are assessing the adoption
of the new guidance and do not believe it will have a material impact 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.
Revenue Recognition
We recognize revenue within our multiple element arrangements, including software and software-related services,
using the residual method. 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
58
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. 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.
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:
59
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 2010, we held investments in money market funds, time deposits, commercial paper and government
and corporate bonds. 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 historically utilized valuation models that were
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 was subject to uncertainties that were
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 have been significantly higher or lower than the fair value
we determined. At the end of 2010, we transferred our auction rate securities classified as Level 3 to Level 2 as all
outstanding auction rate securities were subsequently called at par value by the issuer in January 2011.
A considerable amount of judgment and estimation was 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
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 2010 and 2009 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 $161.4
million and $151.5 million at the end of 2010 and 2009, 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 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.
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to 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.
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.
60
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 2010, we designated all of our Great Britain Pound (GBP) denominated long-term debt (46.4 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 $5.5 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 1, 2011, 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 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.
61
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
1, 2011. 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 1, 2011, 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 2011 Annual Shareholders’ Meeting scheduled to be held
May 27, 2011, 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 2011 Annual Shareholders’
Meeting scheduled to be held May 27, 2011, 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 2011 Annual
Shareholders’ Meeting scheduled to be held May 27, 2011, 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 2011 Annual Shareholders’
Meeting scheduled to be held May 27, 2011, 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 2011 Annual Shareholders’
Meeting scheduled to be held May 27, 2011, 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 2011 Annual Shareholders’ Meeting scheduled to be held May 27, 2011, and is incorporated in this Item 11
by reference. 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 2011 Annual
Shareholders’ Meeting scheduled to be held May 27, 2011 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 2011 Annual Shareholders’ Meeting scheduled to be held May
27, 2011, and is incorporated in this Item 12 by reference.
62
The following table provides information about our common stock that may be issued under our equity compensation
plans as of January 1, 2011.
Securities to
be issued upon
exercise of
outstanding
options and
rights (1)
Weighted
average exercise
price per share
(2)
Securities
available
for future
issuance
Plan Category
Equity compensation plans approved by security holders(3)
7,487,305
$
37.73
1,419,585
Equity compensation plans not approved by security holders
Total
-
7,487,305
-
-
1,419,585
(1) Includes grants of stock options, time-based and performance-based restricted stock.
(2) Includes weighted-average exercise price of outstanding stock options only.
(3) Includes the Stock Option Plan D, Stock Option Plan E, 2001 Long-Term Incentive Plan F and 2004 Long-Term Incentive Plan G. No
new grants were permitted to be issued after January 1, 2005 for Stock Option Plans D and E, but some awards remain outstanding.
All other information required by this Item is incorporated by reference from the Proxy Statement under the section
entitled “Principal Security Ownership and Certain Beneficial Owners.”
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 2011 Annual Shareholders’ Meeting
scheduled to be held May 27, 2011, 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 2011 Annual Shareholders’ Meeting scheduled to be held May 27, 2011, 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 2011 Annual Shareholders’ Meeting scheduled
to be held May 27, 2011, and is incorporated in this Item 14 by reference.
63
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) Financial Statements and Exhibits.
(1)
Consolidated Financial Statements:
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets -
As of January 1, 2011 and January 2, 2010
Consolidated Statements of Operations -
Years Ended January 1, 2011, January 2, 2010, and January 3, 2009
Consolidated Statements of Changes in Equity -
Years Ended January 1, 2011, January 2, 2010, and January 3, 2009
Consolidated Statements of Cash Flows -
Years Ended January 1, 2011, January 2, 2010, and January 3, 2009
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 1, 2011 are included herein:
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)
See the Index of Exhibits immediately following the signature page of this Annual Report on Form 10-K.
64
SIGNATURES
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.
Date: February 16, 2011
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, Executive 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/Linda M. Dillman
Linda M. Dillman, Director
/s/William B. Neaves
William B. Neaves, Ph.D., Director
/s/William D. Zollars
William D. Zollars, Director
65
February 16, 2011
February 16, 2011
February 16, 2011
February 16, 2011
February 16, 2011
February 16, 2011
February 16, 2011
February 16, 2011
February 16, 2011
Index to Exhibits
Exhibit
Number
Exhibit Description
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)*
Second Restated Certificate of Incorporation of the
Registrant, dated December 5, 2003
Amended & Restated Bylaws, as amended March 31,
2010
Specimen stock certificate
Amended and Restated Credit Agreement, dated
November 30, 2006, among 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.
First Amendment to Amended and Restated Credit
Agreement, dated November 12, 2009, among Cerner
Corporation, U.S. Bank National Association, Bank of
America, N.A., Commerce Bank, N.A. and UMB Bank, N.A.
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
Note Purchase Agreement, dated December 15, 2002,
among Cerner Corporation and the purchasers therein
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
2006 Form of Indemnification Agreement for use
between the Registrant and its Directors
2010 Form of Indemnification Agreement for use
between the Registrant and its Directors and Section 16
Officers
Amended & Restated Executive Employment Agreement
of Neal L. Patterson dated January 1, 2008
Amended Stock Option Plan D of Registrant dated
December 8, 2000
Amended Stock Option Plan E of Registrant dated
December 8, 2000
Incorporated by Reference
Exhibit
Filing Date
Filed
Herewith
3(a)
3.2
4(a)
99.1
1/3/2004
4/6/2010
2/28/2007
12/6/2006
Form
10-K
8-K
10-K
8-K
8-K
99.1
11/18/2009
8-K
4(e)
4/23/1999
10-K
8-K
10-K
8-K
10-K
10-K
10-K
10(x)
99.1
3/12/2003
11/7/2005
10(a)
2/28/2007
99.1
6/3/2010
10(c)
10(f)
10(g)
Annex I
10(g)
2/27/2008
3/30/2001
3/30/2001
4/16/2001
2/27/2008
10(a)
4/30/2010
Cerner Corporation 2001 Long-Term Incentive Plan F
DEF 14A
Cerner Corporation 2004 Long-Term Incentive Plan G
Amended & Restated dated October 1, 2007
Cerner Corporation 2001 Associate Stock Purchase Plan
as Amended and Restated dated March 1, 2010
10-K
10-Q
Qualified Performance-Based Compensation Plan as
Amended and Restated dated May 28, 2010
Form of 2010 Executive Performance Agreement
Cerner Corporation Executive Deferred Compensation
Plan as Amended & Restated dated January 1, 2008
DEF 14A
Annex I
4/16/2010
8-K
10-K
99.1
10(k)
4/6/2010
2/27/2008
66
Exhibit Description
Exhibit
Filing Date
Filed
Herewith
Incorporated by Reference
3(a)
3.2
4(a)
99.1
1/3/2004
4/6/2010
2/28/2007
12/6/2006
Exhibit
Number
3(a)
3(b)
4(a)
4(b)
4(e)
4(f)
10(f)*
10(g)*
10(j)*
10(k)*
Second Restated Certificate of Incorporation of the
Registrant, dated December 5, 2003
Amended & Restated Bylaws, as amended March 31,
2010
Specimen stock certificate
Amended and Restated Credit Agreement, dated
November 30, 2006, among 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.
Agreement, dated November 12, 2009, among Cerner
Corporation, U.S. Bank National Association, Bank of
America, N.A., Commerce Bank, N.A. and UMB Bank, N.A.
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
Note Purchase Agreement, dated December 15, 2002,
among Cerner Corporation and the purchasers therein
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
4(c)
First Amendment to Amended and Restated Credit
8-K
99.1
11/18/2009
4(d)
Cerner Corporation Note Agreement, dated April 1, 1999,
8-K
4(e)
4/23/1999
10(a) *
2006 Form of Indemnification Agreement for use
10(a)
2/28/2007
between the Registrant and its Directors
10(b)*
2010 Form of Indemnification Agreement for use
99.1
6/3/2010
between the Registrant and its Directors and Section 16
Officers
10(c)*
Amended & Restated Executive Employment Agreement
of Neal L. Patterson dated January 1, 2008
10(d)*
Amended Stock Option Plan D of Registrant dated
10(e)*
Amended Stock Option Plan E of Registrant dated
December 8, 2000
December 8, 2000
Cerner Corporation 2001 Long-Term Incentive Plan F
DEF 14A
Cerner Corporation 2004 Long-Term Incentive Plan G
Amended & Restated dated October 1, 2007
10(h)*
Cerner Corporation 2001 Associate Stock Purchase Plan
10(a)
4/30/2010
as Amended and Restated dated March 1, 2010
10(i)*
Qualified Performance-Based Compensation Plan as
DEF 14A
Annex I
4/16/2010
Amended and Restated dated May 28, 2010
Form of 2010 Executive Performance Agreement
Cerner Corporation Executive Deferred Compensation
Plan as Amended & Restated dated January 1, 2008
10(x)
99.1
3/12/2003
11/7/2005
10(c)
10(f)
10(g)
Annex I
10(g)
2/27/2008
3/30/2001
3/30/2001
4/16/2001
2/27/2008
99.1
10(k)
4/6/2010
2/27/2008
Form
10-K
8-K
10-K
8-K
10-K
8-K
10-K
8-K
10-K
10-K
10-K
10-K
10-Q
8-K
10-K
10-Q
10-K
10-Q
10-K
10-K
8-K
10-K
8-K
10a
10/29/2010
10(v)
3/17/2005
10(a)
11/10/2005
10(x)
3/17/2005
10(w)
3/17/2005
99.1
6/4/2010
10(q)
2/27/2008
10.2 &
10.3
2/9/2007
10-K
10(t)
2/22/2010
8-K
99.1
1/22/2010
X
X
X
X
X
X
10(l)*
10(m)*
10(n)*
10(o)*
10(p)*
10(q)*
10(r)*
10(s)*
10(t)*
10(u)
11
21
23
31.1
31.2
32.1
32.2
Cerner Corporation 2005 Enhanced Severance Pay Plan
as Amended & Restated dated August 15, 2010
Cerner Corporation 2001 Long-Term Incentive Plan F
Nonqualified Stock Option Agreement
Cerner Corporation 2001 Long-Term Incentive Plan F
Nonqualified Stock Option Grant Certificate
Cerner Corporation 2001 Long-Term Incentive Plan F
Nonqualified Stock Option Director Agreement
Cerner Corporation 2001 Long-Term Incentive Plan F
Director Restricted Stock Agreement
Cerner Corporation 2001 Long-Term Incentive Plan F
Restricted Performance-Based Stock Agreement for
Section 16 Officers
Cerner Corporation 2004 Long-Term Incentive Plan G
Nonqualified Stock Option Grant Certificate
Time Sharing Agreements between the Registrant and
Neal L. Patterson and Clifford W. Illig both dated February
7, 2007
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
Interparty Agreement, dated January 19, 2010, among
Kansas Unified Development, LLC, OnGoal, LLC and
Cerner Corporation,
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 Sarbanes-Oxley Act of 2002
Certification of Marc G. Naughton pursuant to Section
302 of Sarbanes-Oxley Act of 2002
Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of Sarbanes-Oxley Act
of 2002
Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of Sarbanes-Oxley Act
of 2002
101.INS†
XBRL Instance Document
101.SCH†
XBRL Taxonomy Extension Schema Document
101.CAL†
XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB†
XBRL Taxonomy Extension Labels Linkbase Document
101.PRE†
XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF†
XBRL Taxonomy Extension Definition Linkbase Document
* Indicates a management contract or compensatory plan or arrangement required to be identified by item 15(a)(3).
† XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for
purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of
1934, and otherwise is not subject to liability under these sections.
67
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 1, 2011,
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 9A. 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 1, 2011, 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 1, 2011 and January
2, 2010, 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 1, 2011, and our report dated February 16, 2011 expressed
an unqualified opinion on those consolidated financial statements.
/s/KPMG LLP
Kansas City, Missouri
February 16, 2011
68
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 1, 2011 and January 2, 2010, 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 1, 2011.
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 Cerner Corporation and subsidiaries as of January 1, 2011 and January 2, 2010, and the results
of their operations and their cash flows for each of the years in the three-year period ended January 1, 2011, 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 1, 2011, 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 16, 2011 expressed an unqualified opinion on the
effectiveness of Cerner Corporation’s internal control over financial reporting.
/s/KPMG LLP
Kansas City, Missouri
February 16, 2011
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.
69
CERNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of January 1, 2011 and January 2, 2010
(In thousands, except share data)
2010
2009
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,
84,029,285 shares issued at January 1, 2011 and
82,564,708 shares issued at January 2, 2010
Additional paid-in capital
Retained earnings
Treasury stock, 790,000 shares
Accumulated other comprehensive loss, net
Total Cerner Corporation stockholders’ equity
Noncontrolling interest
Total stockholders’ equity
$
214,511
$
241,723
356,501
476,905
11,036
83,272
3,836
317,113
461,411
11,242
106,791
8,055
1,146,061
1,146,335
498,829
244,848
161,374
38,468
264,467
68,743
509,178
233,265
151,479
33,719
-
74,591
$ 2,422,790
$ 2,148,567
$
$
65,035
24,837
109,351
86,921
19,788
305,932
67,923
126,215
17,303
517,373
840
645,815
1,290,835
(28,002)
(4,191)
1,905,297
120
36,893
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)
1,580,678
120
1,905,417
1,580,798
Total liabilities and stockholders’ equity
$ 2,422,790
$ 2,148,567
See notes to consolidated financial statements.
70
CERNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended January 1, 2011, January 2, 2010 and January 3, 2009
(In thousands, except per share data)
2010
2009
2008
For the Years Ended
Revenues:
System sales
$ 550,792
$ 504,561
$ 522,373
Support, maintenance and services
1,266,977
1,136,871
1,115,896
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
$68,994, $63,611 and $51,132, 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.
32,453
30,432
37,759
1,850,222
1,671,864
1,676,028
221,055
66,848
32,453
767,152
272,851
186,626
64,140
30,432
700,639
271,051
197,150
61,154
37,759
715,512
272,519
130,530
126,970
113,049
1,490,889
1,379,858
1,397,143
359,333
292,006
278,885
3,439
(560)
2,879
362,212
(124,940)
308
367
675
292,681
(99,216)
3,056
(510)
2,546
281,431
(92,773)
$ 237,272
$ 193,465
$ 188,658
$
$
2.88
$
2.39
$
2.34
2.78
$
2.31
$
2.26
82,458
85,424
80,981
83,882
80,549
83,435
71
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 30, 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)
Exercise of options
1,464
14
34,710
Employee stock option
compensation expense
Employee stock option
compensation net excess tax
benefit
Foreign currency translation
adjustments and other
Net earnings
Comprehensive Income
-
-
-
-
23,723
29,837
-
-
-
-
-
-
237,272
-
-
-
-
(937)
$
(937)
237,272
$
236,335
Balance at January 1, 2011
84,029 $
840
$ 645,815 $ 1,290,835
$
(28,002)
$
(4,191)
See notes to consolidated financial statements.
72
CERNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended January 1, 2011, January 2, 2010 and January 3, 2009
(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
Net cash provided by operating activities
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
For the Years Ended
2009
2008
2010
$ 237,272 $ 193,465 $ 188,658
193,337
23,723
30,362
189,603
15,786
(4,141)
170,466
14,683
(2,521)
(17,370)
188
35,378
30,812
(42,651)
(24,618)
(9,989)
456,444
(102,311)
(80,979)
(803,832)
491,492
(10,780)
(14,486)
(520,896)
1,516
-
(27,625)
26,226
34,724
-
34,841
2,399
(27,212)
241,723
(46,599)
290
(26,350)
(53,417)
29,263
28,127
21,264
347,291
(131,265)
(77,747)
(266,776)
97,481
(12,485)
(3,529)
(394,321)
1,888
-
(32,352)
17,445
29,789
-
16,770
1,489
(28,771)
270,494
(108,072)
(2,542)
(11,735)
2,320
22,827
8,345
(627)
281,802
(108,099)
(70,098)
(488,761)
506,271
(4,201)
(5,719)
(170,607)
7,135
44,500
(59,817)
9,166
15,364
(28,002)
(11,654)
(11,961)
87,580
182,914
Cash and cash equivalents at end of period
$ 214,511 $ 241,723 $ 270,494
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest
Income taxes, net of refund
Summary of acquisition transactions:
Fair value of tangible assets acquired
Fair value of intangible assets acquired
Fair value of goodwill acquired
Fair value of current liabilities assumed
Fair value of contingent liability payable
Cash paid for acquisition
Cash acquired
Net cash used
See notes to consolidated financial statements.
73
$
6,887 $
121,737
8,583 $
47,114
10,512
56,066
$
$
2,126 $
5,076
11,290
(1,057)
(1,725)
15,710
(1,224)
14,486 $
- $
-
3,529
-
-
3,529
-
3,529 $
-
4,053
1,253
(1,306)
-
4,000
-
4,000
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 2010 consisted of 52 weeks and ended
on January 1, 2011; fiscal year 2009 consisted of 52 weeks and ended on January 2, 2010; and fiscal year 2008
consisted of 53 weeks and ended on January 3, 2009. 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 with ASC 605, Revenue Recognition.
In general, revenue is recognized when all of the following criteria have been met:
g
g
g
g
Pervasive evidence of an arrangement exists;
Delivery has occurred and been accepted by the client;
Our fee is fixed, determinable and,
Collection of the revenue is probable
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, which requires that we allocate revenue to each of these elements.
74
Allocation of Revenue to Multiple Element Arrangements
Revenue earned on software arrangements involving multiple-elements is generally required 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.
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, subscriptions and application service provider (ASP) 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, revenue for software, implementation services and, in certain cases, support services for
which VSOE fair value cannot be established are accounted for as a single unit of accounting. The revenue recognized
from these single units of accounting are typically allocated and classified as system sales and support, maintenance
and services. If available, the VSOE fair value of the services provides the basis for support, maintenance and services
allocation and the remaining residual consideration provides the basis for system sales revenue allocations. In cases
where VSOE fair value of the services cannot be established, revenue is classified based on the nature of related
costs incurred. The following table details these revenue classification allocations for these single units of accounting
arrangements:
(In millions)
System sales
Support, maintenance and services
2010
2009
2008
$
$
17.5
88.1
$
$
18.1
60.4
$
$
26.7
86.6
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. 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.
Except for limited arrangements where our software requires significant modifications or customization, 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. However, if software license fees are tied to implementation
75
milestones, then 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
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. Additionally, 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 allocate a portion of the services
fee to the software and recognize it once the client has the ability to take possession of the software. The remaining
services fee in these arrangements, as well as the services fees for arrangements where the client does not have the
contractual right or the ability to take possession of the software at any time, are generally recognized ratably over the
hosting service period.
We also offer our solutions on an ASP service 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.
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 support 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. As 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 sales. 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.
76
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 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 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 percentage completion accounting will be recognized over the remaining
service period until the services are complete and amounts allocated to the other support services not subject to
percentage completion accounting will be recognized over the relevant support periods. The contract expires in 2014.
(b) Cash Equivalents – Cash equivalents consist of short-term marketable securities with original maturities less than
90 days.
(c) Investments – Investment securities which we have the ability and intent to hold until maturity are classified
as held-to-maturity investments and are stated at amortized cost. Investment securities which are bought and held
principally for the purpose of selling them in the near term are classified as trading securities and are stated at fair
market value with changes recorded through earnings.
Our short-term investments are primarily invested in time deposits, commercial paper, government and corporate
bonds. Our long-term investments are primarily invested in government and corporate bonds. All of our short-term
and long-term investments are classified as held-to-maturity securities and stated at their amortized cost which
approximates fair value.
Premiums are amortized and discounts are accreted over the life of the security as adjustments to interest income
using the effective interest method. Interest income is recognized when earned.
Refer to Note (3) and Note (4) for a comprehensive description of these assets and their value.
(d) Concentrations – Substantially all of our cash and cash equivalents and short-term investments are held at four
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 2010, 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.
77
(e) Inventory – Inventory consists primarily of computer hardware, sublicensed software held for resale and RxStation
medication dispensing units. Inventory is recorded at the lower of cost (first-in, first-out) or market.
(f) Property and Equipment – Property, equipment and leasehold improvements are stated at cost. Depreciation of
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.
(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. Software development 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 incurred through the software’s general release
date 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. 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 2010, 2009 or 2008. Refer to Note (7) for more information of Goodwill and other
intangible assets.
(i) Contingencies – We accrue estimates for resolution of any legal and other contingencies when losses are probable
and estimable, in accordance with ASC 450, Contingencies. We 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.
(j) Derivative Instruments and Hedging Activities – Historically, our use of hedging instruments has primarily been
to hedge foreign currency denominated assets and liabilities. We record all hedging instruments on our Consolidated
Balance Sheet at fair value. For hedging instruments that are designated and qualify as a net investment hedge,
the effective portion of the gain or loss on the hedging instrument is reported in the foreign currency translation
component of other comprehensive income (loss). Any ineffective portion of the gain or loss on the hedging instrument
for a cash flow hedge or net investment hedge is recorded in the results of operations immediately. Refer to Note (10)
for more information on our hedging activities.
(k) Income Taxes - Deferred tax assets and liabilities are recognized for the future tax consequences attributable to
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. Refer to Note (12) for
additional information regarding income taxes.
78
(l) Earnings per Common Share – Basic earnings per share (EPS) excludes dilution and is computed, in accordance
with ASC 260, Earnings Per Share, 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. Refer to Note (13) for additional details of our earnings per share
computations.
(m) Accounting for Share-based payments – We recognize all share-based payments to associates, directors and
consultants, including grants of stock options, restricted stock and performance shares, in the financial statements as
compensation cost based on their fair value on the date of grant, in accordance with ASC 718, Stock Compensation.
This compensation cost is recognized over the vesting period on a straight-line basis for the fair value of awards that
actually vest. Refer to Note (14) for a detailed discussion of share-based payments.
(n) Foreign Currency – Assets and liabilities of non-U.S. subsidiaries whose functional currency is the local currency
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. Refer to Note (10) for additional details of our foreign
currency transactions.
(o) Collaborative Arrangements – In accordance with ASC 808, Collaborative Arrangements, third party costs incurred
and revenues generated by arrangements involving joint operating activities of two or more parties that are each
actively involved and exposed to risks and rewards of the activities are classified in the consolidated statements of
operations on a gross basis only if we are determined to be the principal participant in the arrangement. Otherwise,
third party revenues and costs generated by collaborative arrangements are presented on a net basis. Payments
between participants are recorded and classified based on the nature of the payments.
(p) Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In January 2010 we adopted guidance issued by the FASB on transfers of financial assets, which among other things,
created more stringent conditions for reporting a transfer of a portion of a financial asset as a sale. The adoption did
not have a material impact on our consolidated financial statements.
In January 2010, we adopted guidance issued by the FASB improving disclosures about fair value measurements,
which requires disclosures of transfers into and out of Levels 1 and 2, more detailed roll forward reconciliations of
Level 3 recurring fair value measurements on a gross basis, fair value information by class of assets and liabilities, and
descriptions of valuation techniques and inputs for Level 2 and 3 measurements. We adopted the guidance during the
first quarter 2010, which did not have a material impact on our consolidated financial statements.
On February 24, 2010, FASB issued guidance to eliminate contradictions between the requirements of U.S. GAAP and
the Securities and Exchange Commission’s (SEC) filing rules. The amendments also discharge the requirement that
public companies disclose the date of their financial statements in both issued and revised financial statements. The
guidance was effective upon issuance and did not have a material impact on our consolidated financial statements.
In July 2010, the FASB issued guidance to require increased disclosures about the credit quality of financing
receivables and allowances for credit losses, including disclosure about credit quality indicators, past due information
and modifications of financing receivables. Trade accounts receivable with maturities of one year or less are excluded
from the disclosure requirements. We adopted the guidance for the period ended 2010, which did not have a material
impact on our consolidated financial statements.
79
Recently Issued Accounting Pronouncements Not Yet Adopted
During 2009, the FASB issued guidance on revenue recognition for non-software elements that became effective for us
beginning on January 2, 2011. Under the new guidance an entity is required 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. In addition, expanded disclosures
are required to provide both qualitative and quantitative information about the significant judgments made in applying
the guidance and subsequent changes in those judgments that may significantly affect the timing or amount of
revenue recognition. Further, for arrangements that include software elements, tangible products that have software
components that are essential to the functionality of the tangible product will no longer be within the scope of the
software revenue recognition guidance, and software-enabled products will now be subject to other relevant revenue
recognition guidance. The guidance 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. We do not believe the adoption
of the new guidance will have a material impact on our financial position and results of operations.
(2)
Business Acquisitions
IMC Health Care, Inc.
On January 4, 2010, we completed the purchase of 100% of the outstanding common shares of IMC Health Care,
Inc. (IMC), a provider of employer sponsored on-site health centers. The acquisition of IMC expanded our employer
health initiatives, such as on-site employer health centers, occupational health services and wellness programs.
Consideration for this transaction was $15.7 million in cash plus additional contingent consideration. We initially
valued the contingent consideration at $1.7 million based on a probability-weighted assessment of potential contingent
consideration payment scenarios ranging up to $2.5 million. Based on a final assessment of the contingent liability
at the end of 2010, we reduced the contingent consideration liability to $0.9 million and recognized a gain of $0.8
million within the Consolidated Statements of Operations as a component of general and administrative expenses. The
allocation of the purchase price to the estimated fair values of the identified tangible and intangible assets acquired,
net of liabilities assumed, is summarized below:
(In thousands)
Allocation Amount
$
Tangible assets and liabilities
Current assets
Property and equipment
Current liabilities
Total net tangible assets acquired
Intangible assets
Customer relationships
Non-compete agreements
Total intangible assets acquired
Goodwill
Total purchase price
$
1,862
264
(1,057)
1,069
4,073
1,003
5,076
11,290
17,435
The fair values of the acquired intangible assets and the contingent consideration were estimated by applying the
income approach. Such estimations required the use of inputs that were unobservable in the market place (Level 3),
including a discount rate that we estimated would be used by a market participant in valuing these assets, projections
of revenues and cash flows, probability weighting factors and client attrition rates. See Note (4) for further information
about the fair value level hierarchy.
The goodwill was allocated to our Domestic operating segment and is expected to be deductible for tax purposes. The
other identifiable intangible assets are being amortized over five years. The operating results of IMC were combined
with our operating results subsequent to the purchase date of January 4, 2010. Pro-forma results of operations have
not been presented because the effect of this acquisition was not material to our results.
80
LingoLogix, Inc.
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, which consisted of
$3.6 million in developed technology. Total assets and liabilities at the date of acquisition were $5.3 million and $1.3
million, respectively.
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.
(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
2010
2009
$
170,274
$ 144,764
44,237
-
-
80,242
8,523
8,194
Total cash and cash equivalents
$
214,511
$ 241,723
Short-term investments
Time deposits
Commercial paper
Government and corporate bonds
Auction rate securities
Put-like feature
$
41,764
$
37,784
44,500
251,787
18,450
-
19,987
164,792
85,203
9,347
Total short-term investments
$
356,501
$
317,113
Long-term investments
Government and corporate bonds
Total long-term investments
$
264,467
$
264,467
$
$
-
-
All of our short-term and long-term investments are classified as held-to-maturity securities and stated at their amortized
cost which approximates fair value, except for our auction rate securities, which are classified as trading and stated at
fair value. Subsequent to the year-ended 2010, in January 2011, all outstanding auction rate securities were called by
the issuer at par value. 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 periods prior to 2008, 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. However, we
continued to collect all interest receivable on our auction rate securities when due.
81
In August 2008, our broker agreed to a settlement in principle with the SEC, 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.
In conjunction with the execution of the Settlement Agreement, we transferred the auction rate securities from
available-for-sale to trading securities. At the end of 2010, we held auction rate securities with a par value of $18.5
million, which approximated fair value, as all outstanding auction rate securities were subsequently called at par value
by the issuer in January 2011.
The Settlement Agreement had been accounted for as a put-like feature and was carried at fair value with changes
recorded through earnings. We 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.
Based on the fair value assessment of the auction rate securities at the end of 2010, we valued the put-like feature
at zero.
The changes in fair value of the auction rate securities and put-like feature resulted in offsetting gains and losses of
$9.3 million, $10.5 million and $19.9 million in 2010, 2009 and 2008, respectively, within other income within the
Consolidated Statements of Operations.
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 any 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.
82
The following table details our financial assets measured at fair value within the fair value hierarchy at the end of 2010:
(In thousands)
Description
Balance Sheet
Classification
Fair Value Measurements Using
Fair Value Measurements Using
Level 1
Level 2
Level 3
Level 1
Level 2
Level 3
2010
2009
Money market funds
Cash equivalents
$ 44,237
$
-
$
-
$ 80,242
$
-
$
Time deposits
Cash equivalents
Corporate bonds
Cash equivalents
Time deposits
Short-term investments
Commercial paper
Short-term investments
Government and
corporate bonds
Short-term investments
Auction rate securities Short-term investments
Put-like feature
Short-term investments
Government and
corporate bonds
Long-term investments
-
-
-
-
-
-
-
-
-
-
41,764
44,500
251,787
18,450
-
264,467
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
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 historically been
classified as Level 3 assets within the fair value hierarchy, as their valuation required substantial judgment and
estimation of factors that were not currently observable in the market due to the lack of trading in the securities. At the
end of 2010, we transferred our auction rate securities classified as Level 3 to Level 2 based on observable inputs, as
all outstanding auction rate securities were subsequently called at par value by the issuer in January 2011.
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 2010 and 2009:
(In thousands)
Beginning balance
Redemptions at par
Unrealized gain (loss) on auction rate securities included in earnings
Unrealized gain (loss) on put-like feature included in earnings
Transfers out of Level 3 to Level 2
Ending balance
(5)
Receivables
2010
2009
$
94,550
$ 105,300
(76,100)
9,346
(9,346)
(18,450)
(10,750)
10,513
(10,513)
-
$
-
$
94,550
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 2010, 2009 and 2008 totaled $9.9 million, $3.1
million and $10.0 million, respectively.
83
A summary of receivables, net is as follows:
(In thousands)
2010
2009
Gross accounts receivable
$ 352,554
$
342,992
Less: Allowance for doubtful accounts
Accounts receivable, net of allowance
Contracts receivable
Total receivables, net
15,550
337,004
139,901
16,895
326,097
135,314
$
476,905
$
461,411
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. The circumstances surrounding these receivables
remained unchanged at the end of 2010 and represent the significant majority of other long-term assets at the end of
2010 and 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 2010 and 2009, we received total client cash collections of $1.9 billion and $1.8 billion, respectively, of which
$66.6 million and $54.0 million were received from third party arrangements with non-recourse payment assignments.
(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
Depreciable Lives (Yrs)
2010
2009
5
2
2
3
12
5
-
-
-
-
-
-
12
5
15
5
50
20
$
57,763
$
56,631
660,741
164,498
5,914
195,193
564
585,685
139,331
17,147
204,080
964
1,084,673
1,003,838
Less accumulated depreciation and amortization
585,844
494,660
Total property and equipment, net
$
498,829
$
509,178
Depreciation expense for 2010, 2009 and 2008 was $111.4 million, $104.6 million and $96.7 million, respectively.
84
(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. The inputs used to calculate the fair value included the projected
cash flows and discount rates 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
2010
2009
$ 151,479
$ 146,666
11,290
(1,395)
3,425
1,388
$ 161,374
$ 151,479
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)
2010
2009
Gross Carrying
Amount
Accumulated
Amortization
Gross Carrying
Amount
Accumulated
Amortization
5.0
5.0
16.0
5.0
6.1
$ 70,864
$ 48,085
$ 84,968
$ 62,802
59,556
9,128
4,491
54,241
2,365
880
55,606
8,184
1,057
50,960
1,729
605
$ 144,039
$ 105,571
$ 149,815
$ 116,096
Amortization expense for 2010, 2009 and 2008 was $12.0 million, $20.4 million and $20.0 million, respectively.
Estimated aggregate amortization expense for each of the next five years is as follows:
(In thousands)
For year ended:
2011
2012
2013
2014
2015
$
10,535
7,230
5,309
3,795
1,640
85
(8)
Software Development Costs
Information regarding our software development costs is included in the following table:
(In thousands)
For the Years Ended
2010
2009
2008
Software development costs
Capitalized software development costs
Amortization of capitalized software development costs
$ 284,836 $ 285,187 $ 291,368
(80,979)
(77,747)
(69,981)
68,994
63,611
51,132
Total software development expense
$ 272,851 $ 271,051 $ 272,519
We are amortizing capitalized costs over five years. Accumulated amortization as of the end of 2010 and 2009 was
$543.2 million and $474.3 million, respectively.
(9)
Indebtedness
The following is a summary of indebtedness outstanding:
(In thousands)
2010
2009
Note agreement, 5.54%
Senior Notes, Series B, 6.42%
Other obligations
Less: current portion
$
72,438
$
90,090
19,500
822
92,760
(24,837)
29,250
1,180
120,520
(25,014)
$
67,923
$
95,506
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 2010.
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 2010.
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 provides certain restrictions on our ability to borrow, incur liens,
sell assets and pay dividends and contains certain net worth, current ratio and fixed charge coverage covenants, which
as of the end of 2010, we were in compliance with. The current agreement expires on May 31, 2013. As of the end of
2010, we had no outstanding borrowings under this agreement; however, we have $13.6 million of outstanding letters
of credit, which reduced our available borrowing capacity to $76.4 million.
We also have capital lease obligations amounting to $0.2 million, payable over the next two years.
86
The aggregate maturities for our long-term debt, including capital lease obligations, are as follows (In thousands):
2011
2012
2013
2014
2015
$
24,837
24,459
14,488
14,488
14,488
Total maturities
$
92,760
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 $99.6
million and $124.8 million at the end of 2010 and 2009, 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 other comprehensive income (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 gain (loss), net of related income tax effects, on the net investment hedge recognized in other
comprehensive income (loss):
(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
$
14,488
Long-term liabilities
57,950
$
72,438
2010
2009
Net Unrealized
Gain (Loss)
$
$
445
1,416
1,861
Balance Sheet
Classification
Fair Value
Short-term liabilities
$
15,015
Long-term liabilities
75,075
$
90,090
Net Unrealized
Gain (Loss)
$
$
(1,192)
(5,543)
(6,735)
We recognize foreign currency transaction gains and losses within the Consolidated Statements of Operations as a
component of general and administrative expenses. We realized a foreign currency loss of $0.9 million in 2010 and
foreign currency gains of $4.0 million and $9.9 million in 2009 and 2008, respectively.
(11)
Interest Income
A summary of interest income and expense is as follows:
(In thousands)
Interest income
Interest expense
Interest income, net
For the Years Ended
2010
2009
2008
10,347
$
8,801
$
(6,908)
(8,493)
13,604
(10,548)
3,439
$
308 $
3,056
$
$
87
(12)
Income Taxes
Income tax expense (benefit) for 2010, 2009 and 2008 consists of the following:
(In thousands)
2010
2009
2008
For the Years Ended
Current:
Federal
State
Foreign
Total Current Expense
Deferred:
Federal
State
Foreign
Total deferred expense (benefit)
$
85,106
$
90,992
$
68,466
10,355
(883)
8,350
4,015
94,578
103,357
22,297
4,038
4,027
30,362
(1,545)
845
(3,441)
(4,141)
9,338
9,789
87,593
10,873
(1,105)
(4,588)
5,180
Total income tax expense
$
124,940 $
99,216
$
92,773
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 2010 and 2009 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
Net deferred tax liability
2010
2009
$
11,707
$
17,920
15,882
23,514
482
51,585
(85,692)
(3,884)
(67,438)
(3,048)
23,403
18,548
814
60,685
(84,947)
(9,205)
(45,762)
(4,489)
(160,062)
(144,403)
$
(108,477)
$
(83,718)
At the end of 2010, we had net operating loss carry-forwards subject to Section 382 of the Internal Revenue Code for
Federal income tax purposes of $9.4 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 $1.6 million which are available to offset
future taxable income, if any, through 2015 and $39.0 million which are available to offset future taxable income, if
any, with no expiration. We expect to fully realize all these losses in future periods.
88
The effective income tax rates for 2010, 2009, and 2008 were 34%, 34%, and 33%, respectively. These effective rates
differ from the Federal statutory rate of 35% as follows:
(In thousands)
2010
2009
2008
Tax expense at statutory rates
$
126,744
$
102,438
$
98,500
For the Years Ended
State income tax, net of federal benefit
Prior period adjustments
Valuation allowance for deferred tax assets
Audit settlements
Tax credits
Unrecognized tax benefit
Permanent differences
Other, net
10,151
(541)
-
-
(10,568)
7,501
(4,629)
(3,718)
6,658
2,310
-
-
(5,150)
(5,581)
(1,200)
(259)
6,403
(2,879)
(7,982)
4,412
(5,150)
5,691
(1,924)
(4,298)
Total income tax expense
$
124,940
$
99,216
$
92,773
The 2010 beginning and ending amounts of accrued interest related to the underpayment of taxes was $0.1 million
and $0.4 million, respectively. We classify interest and penalties as income tax expense in our consolidated statement
of operations. No accrual for tax penalties was recorded at the end of the year.
The 2010 tax expense amount includes $0.5 million of tax benefits related to prior period foreign operating losses.
The 2009 tax expense amount includes $2.3 million expense related to adjustments from prior period tax returns.
The 2008 tax expense amount includes the recognition of approximately $2.9 million of tax benefits related to an
adjustment of a foreign tax credit claimed. These differences accumulated over several years and the impact to any
one of the prior periods is not material.
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.
During 2010, the Internal Revenue Service commenced its examination of the 2009 and 2008 income tax returns. We
do not believe this examination will have a material effect on our financial position, results of operations or liquidity.
As of the end of 2010, the total amount of unrecognized tax benefits, including interest, was $14.1 million. We do not
expect to resolve any of these matters within the next 12 months.
A reconciliation of the beginning and ending amount of unrecognized tax is presented below:
(In thousands)
2010
2009
2008
Unrecognized tax benefit - beginning balance
$
6,599
$
12,440
$
8,069
Gross decreases- tax positions in prior periods
Gross increases- in current-period tax positions
Settlements
-
7,501
-
(7,961)
2,379
(259)
-
5,690
(1,319)
Unrecognized tax benefit - ending balance
$
14,100
$
6,599
$
12,440
89
(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:
2010
2009
2008
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
Effect of dilutive securities:
$ 237,272
82,458 $ 2.88
$ 193,465
80,981 $ 2.39 $ 188,658
80,549 $ 2.34
Stock options
2,966
2,901
-
2,886
Diluted earnings per share:
Income available to
common stockholders
including assumed
conversions
$ 237,272
85,424 $ 2.78
$ 193,465
83,882
$ 2.31 $ 188,658
83,435 $ 2.26
Options to purchase 0.6 million, 1.8 million and 2.3 million shares of common stock at per share prices ranging from
$58.21 to $91.91, $38.64 to $136.86 and $33.63 to $136.86, were outstanding at the end of 2010, 2009 and 2008,
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 2010, 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. 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.
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. 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.
90
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
g
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.
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.
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)
2010
2009
2008
Expected volatility (%)
39.0 - 41.7
45.2 - 51.5
45.9 - 52.4
Expected term (yrs)
Risk-free rate (%)
9.3 - 9.7
9.3 - 9.6
8.4 - 9.7
2.9
3.8
4.4
A combined summary of the stock option activity of our four fixed stock option and equity plans is presented below:
Options
2010
Number of
Shares
Weighted-
Average
Exercise Price
Aggregate Intrinsic
Value
Weighted-Average
Remaining
Contractual Term
Outstanding at beginning of year
8,281,924
$
31.30
Granted
Exercised
Forfeited and Expired
705,495
(1,451,077)
(160,037)
86.48
23.93
44.63
Outstanding at end of year
7,376,305
$
37.73
$ 420,520,520
Options exercisable at the end of the year
4,785,823
$
26.18
$ 328,092,174
6.19
5.21
(In thousands, except for grant date fair value)
2010
2009
2008
Weighted-average grant date fair values
$
44.83
$
27.96
Total intrinsic value of options exercised
$ 88,876
$ 63,465
Cash received from exercise of stock options
$ 34,724
$ 29,789
Tax benefit realized upon exercise of stock options
$ 33,802
$ 23,654
$
$
$
$
22.99
26,841
15,364
10,001
For the Years Ended
As of the end of 2010, there was $54.2 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 3.02 years.
91
Non-vested Shares
Non-vested 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.
On June 1, 2010 we granted approximately 118,000 shares of performance-based non-vested stock to certain
executive officers, pursuant to our Long-Term Incentive Plan F. The fair value of each of these awards was $81.90
based on the closing price of our common stock on the date of grant. These awards will vest according to the following
schedule, contingent upon a relative adjusted GAAP earnings growth percentage over 2009 for each respective year
and subjective performance criteria for certain shares, as defined in the award agreements:
Vesting Dates
June 1, 2011
June 1, 2012
June 1, 2013
Total Shares
Number of
Shares
14,000
15,500
88,500
118,000
Subsequent to July 3, 2010, approximately 21% of the total shares related to this award were forfeited due to the
resignation of an executive officer. The amount of compensation expense recognized is based on management’s
estimate of the most likely outcome and will be reassessed at each reporting date through the final vesting date, which
may result in adjustments to compensation cost. Based on a current period vesting probability assessment, total
compensation cost related to these awards is $7.6 million, net of forfeitures, and is expected to be recognized over a
period of 3 years.
A summary of our non-vested 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
2010
Weighted-Average
Grant Date
Fair Value
$ 56.52
82.17
56.52
81.90
$ 82.24
Number of Shares
13,500
136,000
(13,500)
(25,000)
111,000
(In thousands, except for grant date fair value)
2010
2009
2008
Weighted average grant date fair values
Total fair value of shares vested during the year
$
$
82.24
1,147
$
$
56.52
923
$
$
45.91
797
For the Years Ended
As of the end of 2010, there was $6.6 million of total unrecognized compensation cost related to non-vested share
awards granted under all plans. That cost is expected to be recognized over a weighted-average period of 1.92 years.
92
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
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. 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 non-vested share awards qualify for equity classification. 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, non-vested shares and ASPP
are as follows:
(In thousands)
For the Years Ended
2010
2009
2008
Stock option and non-vested share compensation expense
$ 23,723
$ 15,786
$ 14,674
Associate stock purchase plan expense
Amounts capitalized in software development costs, net of amortization
1,692
(512)
1,318
(262)
1,310
(840)
Amounts charged against earnings, before income tax benefit
$ 24,903
$ 16,842
$ 15,144
Amount of related income tax benefit recognized in earnings
$ 9,329
$
6,274
$
5,641
Treasury Stock
As of the end of 2010 and 2009, we held 0.8 million treasury shares carried at cost of $28.0 million.
Preferred Stock
As of the end of 2010 and 2009, we had 1.0 million shares of authorized but unissued preferred stock, $0.01 par value.
(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 $8.9 million, $8.7 million and
$8.7 million for 2010, 2009 and 2008, 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 1st of
the Plan year are eligible to receive the discretionary match contribution. For the years ended 2010, 2009 and 2008
we expensed $8.9 million, $2.0 million and $2.2 million for the second tier discretionary distributions, respectively.
93
(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 and 2008 we paid an aggregate of $1.4 million and $0.4 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, during 2009 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 2010, 2009 and 2008 was $20.5
million, $16.6 million and $16.1 million, respectively. Aggregate minimum future payments under these non-cancelable
operating leases are as follows:
(In thousands)
2011
2012
2013
2014
2015
2016 and thereafter
Total:
Operating Lease
Obligations
$
23,646
21,891
19,847
17,564
11,392
48,799
$
143,139
Purchase Obligations
We have purchase commitments with various vendors through 2019. 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)
2011
2012
2013
2014
2015
2016 and thereafter
Total:
Purchase Obligations
$
$
18,810
13,707
7,850
6,515
3,263
13,291
63,436
94
(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 that have not been allocated to the operating segments, such as software development, marketing, general
and administrative, share-based compensation expense and depreciation. We manage our operating segments to the
operating earnings level. Items such as interest, income taxes, capital expenditures and total assets and are managed
at the consolidated level and thus are not included in our operating segment disclosures.
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 2010, 2009 and 2008.
Operating Segments
Domestic
Global
Other
Total
(In thousands)
2010
Revenues
(In thousands)
2009
Revenues
(In thousands)
2008
Revenues
$ 1,562,563
$
287,659
$
Cost of revenues
Operating expenses
Total costs and expenses
272,385
417,181
689,566
47,971
124,546
172,517
-
-
628,806
628,806
$ 1,850,222
320,356
1,170,533
1,490,889
Operating earnings (loss)
$
872,997
$
115,142
$
(628,806)
$
359,333
Operating Segments
Domestic
Global
Other
Total
$ 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
Domestic
Global
Other
Total
$ 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
95
(19)
Quarterly Results (unaudited)
Selected quarterly financial data for 2010 and 2009 is set forth below:
(In thousands,
except per share data)
2010 quarterly results:
Revenues
Earnings Before
Income Taxes
Net Earnings
Basic Earnings
Per Share
Diluted Earnings
Per Share
First Quarter
$
431,337
$
77,363
$ 50,286
$
0.61
$
Second Quarter
Third Quarter
Fourth Quarter
456,001
462,683
500,201
86,278
94,084
104,487
55,477
60,872
70,637
0.67
0.74
0.85
Total
$ 1,850,222
$ 362,212
$ 237,272
2009 quarterly results:
First Quarter
$ 392,322
$
61,863
$ 40,830
$
0.51
$
Second Quarter
403,806
66,223
43,745
Third Quarter
Fourth Quarter
Total
409,415
466,321
70,887
48,394
93,708
60,496
$ 1,671,864
$
292,681
$ 193,465
0.54
0.60
0.74
0.59
0.65
0.71
0.82
0.49
0.52
0.57
0.71
96
Stock Price Performance Graph
The following graph presents a comparison for the five-year period ended December 31, 2010 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
$300
$200
$100
$0
12/05
12/06
12/07
12/08
12/09
12/10
Cerner Corporation
Nasdaq Computer and Data Processing Index
Nasdaq Stock Market (US Companies)
The above comparison assumes $100 was invested on December 31, 2005 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.
97
Annual Shareholders’ Meeting
The Annual Shareholders’ Meeting will be held at 10:00 a.m. on May 27, 2011, 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 2011.
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
98