2 0 1 2 A N N U A L R E P O R T
creating a future where the health system works to improve the health of
individual people—and entire populations.
A HEALTHY
a c c o m p l i s h
SYSTEM. Our solutions allow our clients to
streamline an
their day-to-day revenue management,
m e a s u r e s .
individual’s data and improve key business
and think for
Helpful, essential tools that work for today
tomorrow. HOME. CLINIC. HOSPITAL. REHAB.
People are on
their health records should be, too. We’re
the move and
solutions to connect data across venues
designing our
continuum, helping systems be their most
a n d t h e c a r e
health and care are wherever people are.
e f f i c i e n t , s o
Digitizing data records was just the
A STEP AHEAD.
beginning. Today
we’re focused on building intelligence
into systems, giving care teams the right information at the right time.
PARTNERING FOR BETTER HEALTH. With our clients,
we’re giving members the opportunity to interact with the
health system in a new way. It’s about raising the bar for
organizations and people alike, to realize benefits that
match their individual needs. BECAUSE
IT’S PERSONAL. At Cerner, we know the
work we do makes a difference in the lives of physicians,
nurses, parents, children and friends. And health will get
even more personal as we unlock the human genome.
working with our
T h a t ’s w h y we ’ re
ex p e r i e n ce s t h a t
c l i e n t s t o c r e a t e p e r s o n a l i z e d
reflect real life. WORKING THE WAY
PH YSICIANS DO.
solutions designed
A t C e r n e r, w e a r e d e v e l o p i n g
with physicians in mind so they can
focus on people, not
e a s y a n d s m a r t .
technology. Solutions that are fast,
Just what the doctor ordered. KNOW ME. ENGAGE ME. IMPROVE THE
QUALITY OF MY LIFE. That’s our philosophy. Together with our clients, we are
World Headquarters
Cerner Corporation
2800 Rockcreek Parkway
Kansas City, MO USA 64117
816.221.1024
www.cerner.com
Worldwide
Australia
Canada
Chile
Egypt
France
Germany
India
Ireland
Malaysia
Mexico
Qatar
Saudi Arabia
Singapore
Spain
United Arab Emirates
United Kingdom
Ready for now. Prepared for what’s next.
WORKING THE WAY PHYSICIANS DO.
At Cerner, we are developing solutions designed with physicians
in mind so they can focus on people, not technology. Solutions that
are fast, easy and smart. Just what the doctor ordered.
KNOW ME. ENGAGE ME. IMPROVE THE QUALITY OF MY LIFE.
That’s our philosophy. Together with our clients, we are creating a
future where the health system works to improve the health of
individual people—and entire populations.
A HEALTHY SYSTEM.
Our solutions allow our clients to accomplish their day-to-day
revenue management, streamline an individual’s data and improve
key business measures. Helpful, essential tools that work for today
and think for tomorrow.
HOME. CLINIC. HOSPITAL. REHAB.
People are on the move and their health records should be, too.
We’re designing our solutions to connect data across venues and
the care continuum, helping systems be their most efficient,
so health and care are wherever people are.
A STEP AHEAD.
Digitizing data records was just the beginning. Today we’re focused
on building intelligence into systems, giving care teams the right
information at the right time.
PARTNERING FOR BETTER HEALTH.
With our clients, we’re giving members the opportunity to interact
with the health system in a new way. It’s about raising the bar
for organizations and people alike, to realize benefits that match
their individual needs.
BECAUSE IT’S PERSONAL.
At Cerner, we know the work we do makes a difference in the lives
of physicians, nurses, parents, children and friends. And health will
get even more personal as we unlock the human genome. That’s why
we’re working with our clients to create personalized experiences
that reflect real life.
Annual Report
2012
Ready for now. Prepared for what’s next.
WORKING THE WAY PHYSICIANS DO.
At Cerner, we are developing solutions designed with physicians
in mind so they can focus on people, not technology. Solutions that
are fast, easy and smart. Just what the doctor ordered.
KNOW ME. ENGAGE ME. IMPROVE THE QUALITY OF MY LIFE.
That’s our philosophy. Together with our clients, we are creating a
future where the health system works to improve the health of
individual people—and entire populations.
A HEALTHY SYSTEM.
Our solutions allow our clients to accomplish their day-to-day
revenue management, streamline an individual’s data and improve
key business measures. Helpful, essential tools that work for today
and think for tomorrow.
HOME. CLINIC. HOSPITAL. REHAB.
People are on the move and their health records should be, too.
We’re designing our solutions to connect data across venues and
the care continuum, helping systems be their most efficient,
so health and care are wherever people are.
A STEP AHEAD.
Digitizing data records was just the beginning. Today we’re focused
on building intelligence into systems, giving care teams the right
information at the right time.
PARTNERING FOR BETTER HEALTH.
With our clients, we’re giving members the opportunity to interact
with the health system in a new way. It’s about raising the bar
for organizations and people alike, to realize benefits that match
their individual needs.
BECAUSE IT’S PERSONAL.
At Cerner, we know the work we do makes a difference in the lives
of physicians, nurses, parents, children and friends. And health will
get even more personal as we unlock the human genome. That’s why
we’re working with our clients to create personalized experiences
that reflect real life.
2
Table of Contents: Annual Report 2012
Board of Directors
Leadership
Cerner’s Long-Term Performance
Letter to Our Shareholders
Appendix: Cerner’s Business Model and Financial Assessment
Form 10-K
Business and Industry Overview
Risk Factors
Properties
Market for the Registrant’s Common Equity and Related Stockholder Matters and
4
5
6
7
15
23
25
32
41
Issuer Purchases of Equity Securities
Selected Financial Data
42
43
Management’s Discussion and Analysis of Financial Condition and Results of Operations 44
56
56
Quantitative and Qualitative Disclosures About Market Risk
Controls and Procedures
Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
Exhibits
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income
Consolidated Statements of Cash Flows
Consolidated Statements of Changes in Shareholders’ Equity
Notes to Consolidated Financial Statements
58
59
64
66
67
68
69
70
71
Basis of Presentation, Nature of Operations and Summary of Significant Accounting Policies 71
76
Business Acquistions
79
Investments
79
Fair Value Measurements
80
Receivables
82
Property and Equipment
82
Goodwill and Other Intangible Assets
83
Software Development
83
Long-term Debt and Capital Lease Obligations
84
Hedging Activities
85
Other Income
85
Income Taxes
87
Earnings Per Share
87
Share-Based Compensation and Equity
90
Foundations Retirement Plan
90
Related Party Transactions
92
Commitments
92
Segment Reporting
93
Quarterly Results
95
96
Stock Price Performance Graph
Corporate Information
TABLE OF CONTENTS: ANNUAL REPORT 2012 •
3
Board of Directors
Neal L. Patterson
Chairman of the Board, Chief Executive Officer,
President and Co-founder, Cerner Corporation
Clifford W. Illig
Vice Chairman and Co-founder, Cerner Corporation
Gerald E. Bisbee Jr., Ph.D.
Co-founder, Chairman and Chief Executive Officer,
The Health Management Academy
Former Chairman, Chief Executive Officer and President,
ReGen Biologics, Inc., 1998-September 2011
Denis A. Cortese, M.D.
Emeritus President and Chief Executive Officer, Mayo Clinic
Foundation Professor, Arizona State University School
of Health Management and Policy
Director of Arizona State University’s Health Care
Delivery & Policy Program
President of the Healthcare Transformation Institute
The Honorable John C. Danforth
Partner, Bryan Cave LLP
Ambassador to the United Nations,
July 2004–January 2005
U.S. Senator - Missouri, 1976-1995
Linda M. Dillman
Chief Information Officer, QVC, Inc.
Senior Vice President of Enterprise Services/Global
Functions IT, Hewlett-Packard Company,
August 2009-January 2012
Executive Vice President of Benefits and Risk Management,
Wal-Mart Stores, Inc., April 2006-July 2009
Executive Vice President and Chief Information Officer,
Wal-Mart Stores, Inc., August 2002-April 2006
William B. Neaves, Ph.D.
President Emeritus and Director, The Stowers Institute for
Medical Research
William D. Zollars
Former Chairman, Chief Executive Officer and President,
YRC Worldwide, November 1999-July 2011
4
• BOARD OF DIRECTORS
Leadership
Cerner Executive Cabinet
Neal L. Patterson ▪ Chairman of the Board, Chief Executive Officer, President
and Co-founder
Clifford W. Illig ▪ Vice Chairman and Co-founder
Zane M. Burke ▪ Executive Vice President, Client Organization
Marc G. Naughton ▪ Executive Vice President and Chief Financial Officer
Michael R. Nill ▪ Executive Vice President and Chief Operating Officer
Jeffrey A. Townsend ▪ Executive Vice President and Chief of Staff
Julia M. Wilson ▪ Executive Vice President and Chief People Officer
Joanne M. Burns ▪ Senior Vice President, Strategic Relationships
Kathleen M. Chaffee ▪ Senior Vice President, Worldwide Consulting
Paul N. Gorup ▪ Senior Vice President, Chief of Innovation and Co-founder
Michael C. Neal ▪ Senior Vice President, Cerner Corporation and President, Pacific
John T. Peterzalek ▪ Senior Vice President, Cerner Corporation and President, Atlantic
Matthew J. Swindells ▪ Senior Vice President, Population Health and Global Strategy
Donald D. Trigg ▪ Senior Vice President, Cerner Corporation and
President, Cerner Health Ventures
Cerner Executive Management Don D. Bisbee ▪ Senior Vice President, DeviceWorks
Stephen W. Eckman ▪ Senior Vice President, Physician Experience
Ed L. Enyeart ▪ Senior Vice President, Finance
Richard J. Flanigan ▪ Senior Vice President, Client Alignment
William E. Graff ▪ Senior Vice President, Cerner Technology Services
Richard W. Heise ▪ Senior Vice President, Revenue Cycle
Eva L. Karp ▪ Senior Vice President and General Manager, EMR Business Unit
Max A. Reinig ▪ Senior Vice President, Physician Solutions Development
Farrell L. Sanders ▪ Senior Vice President, Cerner ITWorks
Kent C. Scheuler ▪ Senior Vice President, Managed Services
Randy D. Sims ▪ Senior Vice President, Chief Legal Officer and Secretary
Shellee K. Spring ▪ Senior Vice President, PowerWorks
Michael R. Battaglioli ▪ Vice President and Chief Accounting Officer
Robert J. Campbell ▪ Vice President and Chief Learning Officer
Bradley J. Carey ▪ Vice President, Population Health Sales
Michael J. Heckman ▪ Vice President, Employer Services
Cheryl A. Hertel ▪ Vice President, Population Health Markets
Kimberly K. Hlobik ▪ Vice President, Population Health Programs
Gay M. Johannes ▪ Vice President and Chief Quality Officer
Allan O. Kells ▪ Vice President, Investor Relations
Lisa A. McDermott ▪ Vice President, Population Health Advisory Services
J. Randall Nelson ▪ Vice President, Life Sciences
David T. Nill ▪ Vice President and CMO, Cerner Healthe
Clay A. Patterson ▪ Vice President and Managing Director, Cerner Capital
Bharat B. Sutariya ▪ Vice President and CMO, Population Health
Jay E. Linney ▪ Senior Vice President, Pacific Client Operations
Sam P. Pettijohn ▪ Senior Vice President, Investor Owned
Robert J. Shave ▪ Senior Vice President, Cerner Corporation and President, Cerner Canada
Lisa A. Campbell ▪ Vice President, Client Development
Marcos Garcia ▪ Vice President and General Manager, Spain and Latin America
Kristen S. Guillaume ▪ Vice President, Client Development
G. Ben Hilmes ▪ Vice President, Atlantic Client Operations
E. Tim Kostner ▪ Vice President, Client Development
Emil E. Peters ▪ Vice President and General Manager, United Kingdom
Mike A. Pomerance ▪ Vice President and General Manager, Middle East
Holger Cordes ▪ General Manager, Germany
Cameron D. Burt ▪ Managing Director, Australia
Amanda J. Green ▪ Managing Director, Ireland
Charles G. Haynes ▪ Managing Director, Southeast Asia
Client Organization
Intellectual Property Organization Douglas S. McNair, M.D., Ph.D. ▪ Senior Vice President, Cerner Corporation
and President, Cerner Math
Ryan R. Hamilton ▪ Senior Vice President, Intellectual Property Development
David P. McCallie, Jr., M.D. ▪ Senior Vice President, Medical Informatics
Eric W. Geis ▪ Vice President, Cerner Millennium Intellectual Property
Rama Nadimpalli ▪ Vice President and General Manager, Cerner India
CERNER LEADERSHIP •
5
Cerner’s Long-Term Performance
Before we review 2012, we invite you to study Cerner’s remarkable long-term performance. We have a saying:
create real value and good things will happen.
e
n
i
L
p
o
T
Bookings
Revenue
Domestic Revenue
Global Revenue
Revenue Backlog
Operating Margin1
e Operating Earnings1
n
i
L
m
o
t
t
o
B
Net Earnings1
Diluted Earnings Per Share1
t Total Assets
e
e
h
S
Cash and Investments
e
c
n
a
a
B
l
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 Flow1
l
h Capital Expenditures
t
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
2002
2012
Compound Annual Growth Rates
Previous Decade
2002-2012
Since Going Public
1986-2012
$18
$17
$17
$0.2
$11
$3
14.8%
$2
$0.03
$26
$8
161
$1
$16
$1
-$1
$1
$2
$736
$3,139
$780
$2,665
$751
$2,341
$29
$324
$1,002
$7,273
$91
11.6%
$610
22.9%
$52
$421
$0.35
$2.39
$789
$3,704
$144
$1,546
120
74
$149
$196
$441
$2,834
$37
-$73
$60
$150
$708
$425
$183
$320
149
4,791
11,866
$0.49
$7.82
$77.51
$45
349
242
$1,111
$13,339
1,336
3,020
880
1,426
16%
13%
12%
27%
22%
21%
23%
21%
17%
27%
-5%
3%
20%
34%
NM
12%
8%
9%
26%
28%
8%
5%
22%
21%
21%
33%
28%
23%
23%
18%
21%
22%
-3%
23%
22%
29%
NM
22%
22%
18%
22%
24%
9%
7%
Notes
Dollars are in millions except Diluted Earnings Per Share and stock prices.
Free Cash Flow represents cash flows from operating activities less capital purchases and capitalized software development costs.
NM=Not Meaningful, because free cash flow was negative in 1986 and 2002.
1Operating earnings, operating margin, net earnings, diluted earnings per share, and free cash flow reflect adjustments compared to results reported on a
Generally Accepted Accounting Principles (GAAP) basis. 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.
6
• CERNER’S LONG-TERM PERFORMANCE
A Letter to our Shareholders, Clients and Associates:
2012 was another very successful year for Cerner. We delivered outstanding bookings, revenue, earnings and
cash flow growth, with this growth coming from expanding relationships with existing clients and record levels
of bookings from new clients. We will share some highlights in the next section. On the U.S. side, our client
base made great progress in their march toward Meaningful Use, but even more exciting were the clients who
are looking to a future beyond Meaningful Use as the largest industry in the economy digitizes its content at a
fairly rapid pace.
In the broadest of economic contexts, health care spending is on an unsustainable path. In the U.S., we
currently spend more than one out of every six dollars on health care. By 2020, it will be one out of every five
dollars. It’s not inherently wrong for wealthy nations to want to spend an increasing amount of their wealth on
things that give vitality and life span, but that is not what is going on here. Instead we are seeing fundamental
issues in demand driven by shifts in demographics and evolution of sciences, incentives that promote volume
without addressing epidemics of chronic diseases. If we took every single federal tax dollar collected in the
United States in 2012—all 2.45 trillion of them—and spent them all on health care, without a penny for defense,
education, roads or other expenses, it would still not pay our 2012 health care bills, which topped $2.8 trillion!
The problem is the same in every country we visit. Nations that spend more and more on health care are faced
with the same dilemma—how to finance the increases and stop the trend.
Health care is in for a staggering amount of change and challenge over the rest of this decade as stakeholders
look for ways to take costs out of the system. In the U.S., based on the reform passed in 2009, there are highly
visible changes programmed into how the so-called “system” works for the remaining part of the decade. In
reality, management teams all around the world have the same view. It will be a hard period for health care
delivery systems, but health care is too important—and too big—to fail. Our clients worldwide sense the change
coming from seemingly all directions.
While this may be a disheartening reality for many, it spells opportunity at the intersection of health care and
information technology. Looking at Cerner’s identity and mission statement, we are a global health company
contributing to the systemic improvement of health care delivery and the health of communities. In early 2013,
Citi released a list of World Champions, 50 sector-leading stocks selected because of their similarity to stocks
that have “served investors well during previous lost decades around the world.” Cerner was selected as “the
only company executing the healthcare technology business on a global scale.” We exist to create solutions that
help health system stakeholders—of all sizes—bend the cost curve for providing care and improve outcomes.
And as you will see in this note, promoting and safeguarding health is a big and increasing part of what we do.
We would like to use the rest of this note to highlight our performance in 2012, our progress on important
initiatives, some marketplace observations and our plans for the future. We would also like to share a little
about our leadership team and the culture that continue to make Cerner special after 33 years in health IT.
Before we start, a little anecdote and a greeting. Historically, I (Neal) have put some time and thought into
writing this letter. Perhaps it is because I am a big fan of the GE/Welch letters from the 1990s and the Buffett
letters from any year. But aside from a smattering of emails I get from friendly retirees and investors, I am never
really sure who reads our letters. Not long ago, a Cerner business development executive told me of a meeting
he had with a Chinese EMR company. During the meeting, he noted aloud that one of their slides looked
similar to something from our annual report. The CEO of the Chinese company said, “It should. The Cerner
annual report is the bible for health care IT in China. Everyone in Chinese HCIT reads it eagerly each year when
it comes out.” Now, apart from giving me slight pause to consider the issue of intellectual property rights, this
story confirmed the global relevance of our business and also helped me to momentarily feel, if not like the
Sage of Omaha, then at least like the Sage of Rockcreek Parkway (our address in Kansas City). Hello, China.
SHAREHOLDER LETTER •
7
OUR PERFORMANCE: 2012 HIGHLIGHTS
Here are some highlights of Cerner’s 2012 performance:
• Bookings were up 15 percent to $3.14 billion.
• Revenue was up 21 percent to $2.67 billion.
•Our
total revenue backlog
is $7.27 billion,
consisting of $6.53 billion of contract backlog and
$738 million of support and maintenance backlog.
• Diluted earnings per share were up 28 percent
to $2.26.
• We achieved cash collections of $2.71 billion,
driving operating cash flow of $708 million.
• Free cash flow was up 18 percent for the year to a
record $425 million.
• We closed the year with $1.5 billion in cash and
investments on the balance sheet, and low debt.
• We continued to have great success at gaining
market share, with 30 percent of bookings coming
from outside of our Cerner Millennium installed
base in 2012. This follows a strong year of share
gains in 2011, and when you look at 2011 and
2012 combined, our bookings from new clients
are approximately equal to new client bookings
for the prior four years.
• We added 30 new fully paperless HIMSS Analytics
Stage 7 hospitals during the year, outdoing our
closest competitor by a factor of three. Only 1.8
percent of U.S. hospitals have reached this level
of EMR adoption. To date more than 200 Cerner
clients have reached Stage 6 or 7, which are
the highest levels in the industry-standard EMR
Adoption Model.
• Likewise, we proved our global reputation by
distancing our lead in global clients that have
attained HIMSS Stage 6 or 7 levels of adoption.
We are the only HIT supplier with Stage 6 or 7
hospitals in Europe, North and South America,
the Middle East and Asia.
• We added almost 2,000 net new associates to
our workforce in 2012, and currently have more
than 12,000 associates around the world.
• We neared completion on the first of two nine-story
towers being built on our newest campus in Kansas
City, Kansas. When open, the Continuous Campus
will fulfill the purpose its name implies, supporting
the 24-hour-a-day, 365 day-per-year continuous
environment in which health care operates. The
CernerWorks and ITWorks organizations will be the
core associate groups in residence.
For three consecutive years, Cerner has outshined
other health IT suppliers to earn top standing
in Black Book Rankings’ lists of top inpatient
electronic health records.
• #1 Ranked EHR: Inpatient Hospital Systems,
Chains and IDNs
Cerner received “overwhelming satisfaction” in every category.
• #1 Ranked EHR: Community Hospitals,
100-250 Beds
Cerner scored top in 11 out of 18 categories.
Black Book collected data on 18 performance
areas from more than 16,000 validated EMR
users nationwide. Each response was audited by
one Black Book and two independent auditors.
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
A LETTER TO OUR SHAREHOLDERS, CLIENTS AND ASSOCIATES:
8
• SHAREHOLDER LETTER
Externally, Cerner had a year of high visibility, with
Neal featured on the April 2012 cover of Forbes and
called out as fourth on their list of “America’s Best
CEOs.” In September, Forbes ranked Cerner 14th in
the world and 8th in the U.S. on its lists of the “Most
Innovative Companies.” This type of attention, while
creating bragging opportunities for our mothers,
means little in the continuous reality of business. As
a team, we realize that any validation we receive today
is actually for our past accomplishments. And even in
a great year, we can make plenty of mistakes. In truth,
there is no way to adequately measure a company’s
success in the present of doing the things required to
be successful in the future. Time alone will be the final
judge. That doesn’t mean we don’t try to measure.
In an effort to keep ourselves on track to deliver the
future, each year we come up with a list of essential
goals we call our imperatives. The next section is a
review of our progress in achieving our self-imposed
imperatives for future growth.
OUR PROGRESS: HEADWAY ON KEY INITIATIVES
In last year’s letter, we discussed three focused, near-
term corporate imperatives for Cerner: supporting our
clients in Meaningful Use, creating a new standard
for physician productivity and advancing our work in
population health. We made outstanding progress on
all three in 2012.
MEANINGFUL USE: A CADENCE MOVING
HEALTH CARE FORWARD IN THE U.S.
Prior to 2009, adoption of health IT was moving
ahead nicely, albeit without a tremendous amount of
pressure. Organizations deliberated about when to
adopt IT the same way some couples deliberate about
when to have a first child. It wasn’t a matter of if,
but when. Then, triggered by the $35 billion HITECH
legislation in 2009, the entire health care industry
sprang into motion with a new urgency, new narrative
and a newly synchronized cadence. With both carrot
and stick incentives in play, terms like Meaningful
Use 1, 2 and 3 became major drivers. Health care
organizations of any scale or ambition set out to grab
the rewards and avoid the penalties. Many of them
had to “true up” wishful views of their IT plans with
reality so they could move forward. The less urgent
were suddenly looking for ways to catch up with
earlier adopters. From the federal side, there were
phased plans outlining the path forward, with clear
measurables for everyone to achieve, including the
health IT companies. From a solution perspective, we
were very well positioned, but there were still small
changes needed to support Stage 1, and our clients
would need to get on the current code release. 2012
was a critical year.
In our letter last year, we said that, by the end of 2012,
we expected more than 85 percent of eligible Cerner
hospitals to have attested to Meaningful Use of a
certified EHR and to have received Meaningful Use
Stage 1 incentive payments. We ended the year with
86 percent of our clients attested or in process.
Stages 2 and 3 are defined but are still to come. The
rest of the decade will be an exciting time.
A MESSAGE ABOUT INTEROPERABILITY
Imagine a world where iPhones, Blackberrys, Androids
and your AT&T landlines can’t place calls to one
another, and you will get a pretty good idea of what
has been going on in health IT over the past few
decades. Without systems interoperability, fragments
of people’s health information get stranded as they
move from one care provider to another. After years
of industry discussion and a mouthful of initiatives
like HL7, CCHIT, CHIN, RHIO and HIE, unfortunately
we still have medical staff standing over fax machines
and cancer patients and their family members hauling
printed copies of their medical records around in
shopping bags from one organization to another. It’s
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
SHAREHOLDER LETTER •
9
true; I’ve carried the bags. Ethically, it’s indefensible.
We are now at a serious crossroads in the United States
on creating the level of seamless interoperability that
will be essential for every American to access their
health information—and for the information to be
available to health care providers across the health
system. In short, true data liquidity.
There is no denying the inherent complexity of making
health data fully and safely interoperable. The
positive part of the story is the degree of movement
that has occurred in the past few years and the
fairly rapid development of standards that define
the key structures for transmitting and receiving
health information. Stage 1 of Meaningful Use was
largely about establishing a baseline of electronic
medical records; Stages 2 and 3 will focus on broader
adoption of EMRs and increasingly on interoperability
and outcomes. In 2012, we made great progress in
advancing interoperability.
One of the biggest steps forward was creating the
ability to “push” health information from point to
point with the Direct protocol. The contributions
of two of our associates really stand out and help
tell this story. Dr. David McCallie, Jr., our SVP of
Medical Informatics, has done a remarkable job as
Cerner’s representative on the ONC’s HIT Standards
Committee. His thoughtful leadership has contributed
not only to much-needed standards work, but also to
the development of a simplified, scalable, internet-
based interoperability strategy that was embraced by
the Office of the National Coordinator as the basis for
the Direct Project. Launched in 2010, Direct relies on
open-source code contributions to create a system
that supports preliminary exchanging of health
information. Cerner Principal Architect Greg Meyer
has been instrumental in getting Direct off the ground,
contributing more than 50,000 lines of open source
code to the collaboration. Use of Direct as a channel
for data sharing will be required in Meaningful Use
Stage 2. Thanks, David and Greg.
A giant historical barrier to full and fluid interoperability
has been the lack of a systematic method of identifying
individuals in the United States. In our phone example,
it would be like trying to make phone calls without
having phone numbers. Without correct identity
management, large-scale interchange of records can
actually lead to mismatched data and new sources
of error. (This was something we confirmed when we
and other HIT suppliers paid RAND to study the issue
in 2005.) The concept of a national patient ID was
embedded in the original HIPAA legislation of 1996,
but it became a political hot potato that passed from
administration to administration. In fact, it is now so
unpopular that the Department of Health and Human
Services is expressly forbidden by legislation from
solving the problem publicly, preferring that private
industry solve it instead. Despite the fact that we
have three stages of Meaningful Use marshaling the
providers toward interoperability, this central issue of
interoperability has remained unaddressed.
To address it, in March 2013, Cerner and four other
IT companies—McKesson, athenahealth,
health
Greenway Medical and Allscripts—joined together to
launch CommonWell Health Alliance, an open, nonprofit
industry consortium founded on the idea that patients
and their care providers should be able to access their
health information regardless of where care occurs. A
central piece of CommonWell is an agreement to use
a standards-based, cloud-based identity management
service to help ensure correct identity and to manage
consent and keep track of the locations of your record.
The EMR suppliers who
launched CommonWell
represent an estimated 40 percent of all U.S. hospitals
and 25 percent of U.S. physician offices. We are
actively recruiting other health IT companies to join,
and we look forward to validating the concept through
pilots conducted this year.
This needs to happen for our health care “system”
to become a real system. It is a special time when
companies that compete with each other come
together to create the missing link.
1994
1995
1999
2000
2001
1,000 associates
2 for 1 stock split (August 7)
HNA Millennium® Phase 1 is completed
3,000 associates
Revenues surpass $500 million
Cerner makes Fortune list of “Best 100
Companies to Work For”
10
• SHAREHOLDER LETTER
PHYSICIAN EXPERIENCE
In past decades, I (Neal) used to hold up a pen
and call it the most dangerous medical device ever
invented. Its danger came not only from the threat of
illegibility, but also from what the pen was tethered
to—a single human mind and memory. I learned
quickly that doctors love their pens and don’t want to
give them up. And, although it has been my calling
in life to get them to do just that, a part of me has
never completely blamed them for holding on. After
all, physicians are busy people. They face a lot of
constraints and demands. In health IT, we ask them to
give up their pens and face realities like CPOE, online
medication reconciliation, online documentation, ICD-
10 diagnosis and procedure coding and Meaningful
Use. We ask them to spend less time looking at their
patients and more time staring at screens. In a fee-
for-service world, time is money, and any impact to
productivity is keenly felt.
In 30 years of making health IT software, I have always
been confident that what we offer in exchange is safer
and smarter than the pen. But up until a few years
ago, I never thought that we could make something
faster and easier to use than a pen.
But times and technologies are changing. In late
2011, we made a commitment in front of our clients
to create a new standard of physician experience
and productivity in the health IT industry. We formed
a Physician Experience team to examine everything
from the way we design and implement applications
to the way practicing physicians use them, both on the
traditional desktop and in lighter, more mobile devices.
That’s where PowerChart Touch™ and Millennium+™
come in. With a few swipes across a smooth iPad or
phone screen, physicians can follow a workflow built
for them and access the precise information they need.
Best of all, they once again engage their patients face
to face. Pen, eat your heart out. In one short year, we
created the platform and had 13 ambulatory clients live
on PowerChart Touch. This year, we will move to inpatient
and begin to turn out specialty-specific apps. We plan to
deploy it across much of the client base in 2013.
Two decades ago, we made health care smarter.
This decade, we’re still making it smarter, but we’re
also making it faster and easier. If we succeed, the
marketplace will thank us.
POPULATION HEALTH
As nations experiment with new outcomes-focused
payment incentives, providers will be forced to take
on additional risk. According to the 2012 National
Physicians Survey, 20 percent of physicians are
already in discussions to join or form Accountable
Care Organizations
These providers
(ACOs).
need powerful strategies and systems for staying
profitable while delivering better health outcomes for
the populations they serve. Population health is the
objective at the heart of all ACOs. In our 2011 annual
report, we stated that we would “develop the system
capabilities to manage the health of a population.”
Cerner’s definition of population health is broad and
robust. Over the past couple of years, our grasp of
population health management requirements has
driven the extension of our core EMR architecture
to the cloud in our Healthe Intent™ platform. While
the EMR will remain essential to the practice of
medicine, it is not the ideal tool for managing the
health of populations. Rather, the EMR will feed
a new layer that collects and analyzes data from
multiple sources—multiple EMRs, claims sent to
and from insurance companies, pharmacy benefit
management and enrollment data,
information
collected from the community, from personal devices
and the home. In 2012, we made great progress in
building that new layer.
Cerner’s development approach is to work in tight
partnerships with progressive clients who are already
walking the path of accountable care. The true
challenge for these organizations comes when their
2002
4,000 associates
2003
2004
2005
Cerner and Atos Origin awarded U.K.
National Health Services Choose
and Book contract
Cerner celebrates 25th anniversary
Revenues surpass $1 billion
Cerner ranks third among software
companies in The Wall Street Journal’s
Top 50 Returns over a five-year period
Cerner signs contract with Fujitsu for southern
region of NHS Connecting for Health program
in England
5,000 associates
Nearly 7,000 associates
SHAREHOLDER LETTER •
11
initial programs are successful. How do they grow
and manage multiple programs at scale, matching
resources to demands, staying ahead of zip code
competitors, getting reimbursed and demonstrating
value? It is a systems problem that requires a
systems solution. That is where we come in.
We have announced two major agreements with
Advocate Health Care, a large integrated delivery
system in the Chicago area, within the past 12
months. I must brag on them a bit. They were the
pioneers in Clinical Integration in the last decade;
in today’s narrative, they are an Accountable Care
Organization. Of the 250 ACOs created in the U.S.
in the past 15 months, Advocate is the largest one.
With Advocate, our first agreement was to work
together to build effective models and algorithms that
change the cost and quality of care in populations. The
second was to automate the workflow of population
health management. At the heart of the system
is the conversion of complex processes covering a
network of doctors, other providers, hospitals, home
health, nursing homes, pharmacies, etc., into simple,
rules-based health management programs, and the
hand off of this work to the most appropriate venue.
This description is a bit abstract, but abstraction is
necessary inside this form of communication. We
are extremely pleased with our partnership and think
it is the beginning of something very important.
I
reaches, we
travel and Cerner
Everywhere
encounter health systems with the same triad of
challenges: improving population health, improving
the experience of providing and receiving care,
and reducing per capita costs. Our HIMSS Level 7
hospital in Denia, Spain, which I visited in September,
is by any definition an ACO: they are paid a per capita
fee to care for a population, and they succeed or fail
based on their ability to keep people healthy and treat
them efficiently. In the Middle East, the governments
who are our clients want to know how to care for
a population where 75 percent of the adults are
migrant workers. In Canada, the Vancouver Island
Health Authority has moved beyond digitizing health
care institutions to seeking to use technology to
create integrated care for all its residents. Because
we are thinking the bigger thought, I am confident
that our population health solutions will provide the
platform on which health systems around the world
can realize their goal of continuously improving
health and care in a manner that is sustainable for
the future.
MARKETPLACE OBSERVATIONS
Competition is great. It makes everything better fast,
and clients reap the benefits.
In each era of our existence as a company, we seem
to have one major head-to-head competitor. When we
first started out doing lab systems, it was Sunquest.
Then, as we grew and expanded, it became Shared
Medical Systems, then HBOC and Eclipsys. While very
tough and even dominant rivals in their time, those
companies all failed to prepare for the future and have
now been sold and are part of the distant landscape
of health IT. Competitive battles tend to be bitterly
fought over who is best in the present, but over time,
it is whoever can navigate the present and build the
future that wins.
We clearly have our faceoff in this era, and of course
it is a strong competitor. Our combined client bases
make up nearly 50 percent of large hospitals in the
U.S., and we are both gaining market share at the
expense of the rest of the field. There are fundamental
differences in platforms, in technologies and in short
and long-term value propositions for clients. As the
decade plays out, we believe there will be big turns
ahead for them in technology investment, business
model and leadership succession.
Leadership and governance structure are definitely
a differentiator for us. Our competitor is a private
company, essentially a family business. They sell
2006
2007
2008
2009
2 for 1 stock split (Jan. 10)
Introduced CareAware® device
architecture and line of devices
Cerner signs contract with BT for London
region of NHS program
Revenues surpass $1.5 billion
Free Cash Flow surpasses $100 million
Cerner Celebrates 30th Anniversary
Shipped first production units of RxStation®
medication dispensing devices; 25 clients purchase
CareAware iBus™ device connectivity
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
Delivered new Cerner ProVision® PACS Workstation
First Cerner Millennium® site in France
Opened new Data Center at World Headquarters
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
• SHAREHOLDER LETTER
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
Introduced uCern™ and uDevelop™ platforms and
opened uCern Store
Cerner added to NASDAQ 100 Index
hard the value of being private, as though having
shareholders is a bad thing. In truth, they do have
a really big shareholder, a single individual. Anyone
who has followed Cerner’s track record will know that
we always take a long-range view, and we do what is
right for our clients and the future of health care—this
has, in turn, led to strong returns for our shareholders.
Our structure as a public company with transparent
governance and succession is something that our
clients appreciate; many say they rest easier knowing
Cerner will be around for the long haul. All three
cofounders—myself, Cliff and Paul—are all still active
in our company, surrounded by a world class team and
a Board of Directors who actively think about Cerner’s
longevity and the succession of leadership at the top
of the company. When it’s time to change leadership,
the only hard choice will be how to pick among so much
talent. Decades ago, Cliff articulated that we needed
to be a company with a vision rather than a company
with a visionary. Listening to discussions in Cabinet
meetings, our name for the executive committee that
runs Cerner, we are there.
Cerner is a strong company with an amazing record
of double-digit organic growth over more than three
decades. We have a modern architecture, transparent
governance, a strong balance sheet, a formidable
performance record, predictability around cost and
exceptionally strong leaders. We love competition, and
we will never let competitive gaps stand unaddressed
for long. We make the biggest R&D investment in the
industry and are adding almost 1,000 associates to
what is already the largest R&D organization in the
industry. Most importantly, we will always focus on
the future of health care. This is not a sprint; it’s a
marathon. And we are here to win the race. We like
our chances.
OUR PLANS FOR 2013 AND BEYOND
automation,
We wake up every morning at the intersection of
health care and information technology. Information
technology is a fast-changing, highly complex force
that has become nearly ubiquitous in society, providing
communication,
and
entertainment experiences to young and old. Health
care is a fast-changing, highly complex essential
service rooted in intricate human biology and provided
by a massive network of organizations; in execution, it
touches every member of society. When health care
fails, the results are devastating. We all need health
care, and we need it to improve. It is too important to
stay the same.
information
It is hard to imagine a more dynamic, more information-
driven intersection in which to exist as a company.
Over many decades, even when we were the smallest
of small-caps, we watched the biggest names in tech
get attracted to our industry because of its undeniable
essentiality, only to be repelled after a time by its
complexity. For those of us who remain in health IT,
what we do is hard, complex and ambiguous at best.
Most days it does truly feel like a cockpit of a fighter jet,
and we are both firing and taking fire. It is never boring.
We have some very strong beliefs on how we approach
the enormous responsibilities and opportunities of
being Cerner. It starts with actively managing two
timeframes: the present and future. The present has
tremendous pressures: serving our current clients
in their round-the-clock environments; competing
every day for new opportunities; designing, building,
delivering and running solutions; maintaining a
workplace that fosters careers for 12,000-plus
associates; competing for talent; and doing all of this
across an increasingly global business platform. But
the future will get here, and much faster than anyone
expects. Our clients think our job is to run the present,
and it is. But our other job is to create the future. Any
company that fails to plan for and invest in the future
is at risk when the future becomes the present.
2010
2011
2012
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
Cerner honored as one of the best employers for healthy lifestyles by
The National Business Group on Health
Neal Patterson recognized by Forbes as one of “America’s Best-Performing
Bosses” for providing shareholders with the “biggest bang for the buck”
Cerner added to S&P 500 index
8,000 associates
2 for 1 stock split (June 27)
Surpassed $3B in annual bookings, including over $1B in Q4
Acquired Resource Systems (long-term care solutions)
Announced $170 million Share Repurchase Program
Acquired Clairvia (workforce management solutions)
Acquisition of behavioral health company Anasazi Software
Revenue and Bookings surpass $2 billion
86% of clients attested or in process of attesting for Stage 1 Meaningful Use
Introduced new logo and tagline: Health care is too
important to stay the same.TM
Launched Cerner SkyboxSM suite of cloud services
Signed 1st QualityWorks client
Cerner associates shed more than 20,000 pounds
during Slimdown Throwdown weight-loss competition
Cerner clients begin receiving stimulus funds related
to achieving Meaningful Use
Nearly double the number of client sites achieved HIMSS Analytics Electronic
Medical Records Adoption ModelSM Stage 6 or 7 in 2012 than our closest
competitor; most stage 6 or 7 clients outside the U.S. as well
PowerChart Touch went live at 13 early adopter clients
Advocate Health Care partnership led to more than 20% improvement in ability
to predict readmissions
“Healthe Athlete” partnered with NBA to provide an organization-wide automated
health care management system
Healthy Nevada project is creating a culture of health, digitizing health care and
establishing integrated communication among all providers in the community.
SHAREHOLDER LETTER •
13
There are a number of plans we are focused on in
2013 to improve the present and create the future.
The workflows of doctors have been changed as their
environment has become digitized. Change always
creates some disruption. As we mentioned, we are
committed to creating an environment that creates
a new standard of productivity for all involved in the
provision of health care, with a high focus on the front
line of physicians and nurses. This productivity must
extend to the revenue cycle, which is increasingly
linked to clinical outcomes and is progressing toward
a model where health care providers will receive a
set fee to be responsible for the health of a defined
instead of receiving a fee for each
population
procedure and visit. We are building the clinical and
financial systems to support this future model.
Our plans, though, go well beyond productivity
improvements. The biological and social sciences are
exploding with information that can and should inform
care decisions. The intelligence of Cerner systems,
always a strength, is evolving yet again as we introduce
new forms of awareness and even discovery in our
systems. These innovations will allow our clients to see
across the entire continuum of traditional medicine,
creating opportunities for interactive engagement and
partnership with individuals and changing the practice
of medicine to individualize care and prevention. We
are shifting health care from its current “present
and react” model that waits for us to turn up with
our problems to a systematic “predict and prevent”
method of surveillance and intervention. In short, we
are creating systems that know us and show us how
to protect and improve our health. From big data to
tiny genomes, we are converting raw information into
powerful intuition and action. This will drive a closer
and more trusting relationship between us and our
providers as they manage the health of populations,
one person at a time.
At Cerner, we are committed to reaching our potential as
an organization and delivering tremendous value in the
process. Create real value and good things will happen.
Thanks for being on this journey with us.
Sincerely,
OUR TEAM AND CULTURE
We have covered our performance, our progress and
our plans. Before we close, I (Neal) would like to
offer a few comments on our team and culture. The
quality of our team is very high. As I look around the
room during Cabinet meetings, most of the seats are
occupied by all-stars in our industry at their positions,
some which are the best that I have ever seen or
worked with at their respective strengths. With regard
to our pipeline of future leaders, we have a lot of future
all-stars in the next couple of layers down. It requires
discipline to free them up from the now to give them
their next big job. Fortunately, growth is a good
incentive. Externally, our team is regularly targeted
by private equity firms wanting to staff their portfolio
companies, by other health care industry companies
wanting to hire our secret sauce, and by other health
IT companies. While we don’t like losing anyone, we
are not unhappy with our plight. Any company given
the choice of being an exporter of CEOs or an importer
of the same would choose the former reality any day.
Our Cerner culture continues to be dynamic, even after
growing from a three-person startup to a 12,000-person
global company with revenue approaching $3 billion.
There is a paradox to being a large, well-managed
company that is also an entrepreneurial one. We
understand the balance—usually giving a slight edge
to the entrepreneurs—and it has been the key to
30-plus years of growth and innovation.
CLOSE
Cerner is at our best when we are bold. Over the past
two years, we have had a surge of boldness that excites
us. Our clients are beginning to look beyond the initial
phase of wiring of the infrastructure to see the change
that is possible in a digitized health system. As a
company, we are addressing the needs of the present
and we are building the company they need for the
future. This is the beginning of a golden era.
NEAL L. PATTERSON
Chairman, Chief Executive Officer,
President & Co-founder
CLIFFORD W. ILLIG
Vice Chairman & Co-founder
PAUL N. GORUP
Senior Vice President, Chief
of Innovation & Co-founder
JEFFREY A. TOWNSEND
Executive Vice President
& Chief of Staff
MICHAEL R. NILL
Executive Vice President
& Chief Operating Officer
ZANE M. BURKE
Executive Vice President
Client Organization
14
• SHAREHOLDER LETTER
MARC G. NAUGHTON
Executive Vice President
& Chief Financial Officer
JULIA M. WILSON
Senior Vice President
& Chief People Officer
Appendix: Cerner’s Business Model and Financial Assessment
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 pipeline has increased substantially
over the past several years, reflecting a strong market
for our solutions as providers invest in health care
information technology (HCIT) to meet regulatory
requirements, comply with government reimbursement
requirements, and qualify for incentives.
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 Hosting, ITWorks, and RevWorks
offerings, contract lengths are typically more than five
years. Our bookings have grown at strong compounded
annual rates of 20%, 14%, and 16% over the past 3,
5, and 10 years.
INTRODUCTION
This appendix contains our annual discussion of our
business model and financial performance. Some of the
results in this discussion reflect adjustments compared
to results reported on a Generally Accepted Accounting
Principles (GAAP) basis in our annual report on 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 financial
measures to GAAP results.
CERNER’S 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
health care providers. In short, we build it, sell it,
deliver it, run it and support it for health care provider
organizations around the world (“it” in this context
refers to the solutions Cerner creates for health care
organizations). Below is a graphical representation of
Sales Pipeline
New Contract Bookings: $3.1 billion
Contract Backlog: $6.5 billion
Support
Contracts
Support Backlog:
$738 million
Licensed
Software
$345M
System Sales
Technology
Resale
$392M
Total 2012 Revenue = $2,665M
Services, Support & Maintenance
Subscriptions/
Transactions
$166M
Professional
Services
$686M
Managed
Services
$417M
Support &
Maintenance
$604M
Note: Total Revenue
includes $55M
of reimbursed
travel revenue
x88%
x13%
$305M
$52M
x58%
$96M
x30%
$207M
x33%
$139M
x75%
$454M
Contribution Margin %
Total 2012 Contribution Margin =
$1,253M (47% of Revenue)
Contribution Margin $
Less
Indirect Expense
R & D
11% of revenue
($292M)
SG & A
13% of revenue
($351M)
($643M)
Operating Margin
$610M,* 23%*
Less Net Other Income
Taxes
($205M)
Net Other Income
$16M
($189M)
Net Earnings
$421M*
÷
176M
Shares
Diluted EPS
$2.39*
* Operating margin, net earnings and diluted earnings per share reflect
adjustments compared to results reported on a Generally Accepted
Accounting Principles (GAAP) basis in our 2012 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 page 20 for a
reconciliation of these items to GAAP results.
APPENDIX •
15
• 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 are always trying to
sell “upgrades” to their clients. We believe our
approach is part of the reason we have so many
long-term client relationships—some lasting over
three decades. We generally recognize revenues
from licensed software as we achieve pre-defined
client engagement milestones, such as delivery
and installation of our software. In 2012, this type
of revenue represented 13% of our total revenues
with a profit contribution of 88%. Revenues from
licensed software grew 6% in 2012. This followed
very strong growth in 2011, leading to the
strongest two years of software growth in a decade.
•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. In total,
technology revenue increased 59% in 2012,
with strong growth in device resale. We generally
recognize revenues from technology resale as the
equipment is delivered to our clients. In 2012,
these revenues represented 15% of our total
revenue with a profit contribution of 13%. 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.
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.
Continuing with our top-down business model flow,
the value of the new contract bookings and support
into our Contract Backlog and
contracts rolls
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 and maintenance 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 2012 at $7.3
billion and has grown at healthy compounded annual
rates of 20%, 17%, and 22% over the past 3, 5, and
10 years.
toward
At the core of our business model are our various
revenue streams and the contribution each stream
the profitability of Cerner. The
makes
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:
Subscriptions/
Transactions 6%
2012 Revenue Mix
Professional
Services
26%
Managed
Services
16%
Technology
Resale
15%
Licensed
Software
13%
Support &
Maintenance
23%
Travel 1%
16
• APPENDIX
•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
health care providers and payers. Subscription
and transaction revenue streams are generally
recognized monthly. In 2012, they grew 22% and
represented 6% of our total revenues with a profit
contribution of 58%.
•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 generally recognize revenues
associated with these consulting activities as
they are provided to our clients. In 2012, these
increased
revenues
increased 25% due to
implementation activity and growth
in new
services, such as Cerner ITWorksSM and Cerner
RevWorks.SM Professional services represented
26% of our total 2012 revenue, and the profit
contribution for this business model was 30%.
•Managed Services. Under our CernerWorksSM
suite of solutions, we offer a set of technical
services that include Remote Hosting, Application
Management Services, Operational Management
Services, and Disaster Recovery. Remote Hosting
is the largest of these offerings, and it involves
Cerner buying the necessary equipment, installing
it in one of our data centers, and operating the
entire system on the client’s behalf. The revenues
for this service and our charge for the equipment
are recognized monthly as we provide the
services. Most of our clients still choose to own
their own software license, so that portion of the
revenue is unchanged. We own the equipment
rather than selling it upfront to the client, which
impacts the technology resale portion of revenue.
Managed Services revenue grew 19% in 2012
and represented 16% of our total revenue with the
profit contribution increasing from 31% to 33%.
•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
2012, support and maintenance revenues grew
10%. This revenue stream represented 23% of
total revenue with a profit contribution of 75%
(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
99% of total revenue. The remaining 1% 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 11% of revenue in 2012,
and the indirect portion of Selling, General and
Administrative (SG&A) activities, which represented
13% of revenue in 2012. We have a long history of
investing heavily in R&D and using that investment to
create organic growth. Even with what we believe is
an industry-leading level of R&D investment over the
past several years, our R&D has grown slower than
revenue and created operating leverage. In 2013, we
expect R&D to grow more than in recent years as we
increase investments in key areas, such as physician
experience, revenue cycle, population health, and our
cloud capabilities, but we still expect to be able to grow
revenue faster than R&D spend over time. Similarly,
we expect to take advantage of our scalable business
infrastructure to allow us to grow SG&A spending slower
than 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 2012, our operating margin of $610 million was
22.9% of revenue, an increase of 70 basis points
compared to 2011. The remaining items in our
APPENDIX •
17
business model are taxes and net other income, which
totaled $189 million in 2012, leaving $421 million of
adjusted net earnings, or $2.39 of adjusted diluted
earnings per share.
ASSESSMENT OF 2012 FINANCIAL RESULTS
Our financial objectives each year include growing the
top line, expanding operating margins, and generating
free cash flow.
Growing the Top Line
Cerner has delivered strong revenue growth over
the long term. Both our new business bookings and
revenue have grown at more than 13% compound
annual rates over the past 10 years. In 2012, we grew
our new business bookings 15%, to a record $3.14
billion. Revenue grew 21% in 2012 to a record $2.67
billion. Looking at revenue by geographic segment,
domestic revenue increased 24% and global revenue
increased 5% in 2012.
In 2013, we again expect double-digit top-line growth.
In the U.S., we expect continued strong demand for
our solutions both inside and outside our current
client base as health care providers invest in solutions
and services to meet regulatory and reimbursement
requirements and to qualify for incentives. We also
expect solutions and services we have introduced in
the last few years to make increasing contributions
to our growth. Additionally, we expect our global
business to continue to grow as the global economy
strengthens and governments invest in HCIT in an
effort to improve quality and control the cost of care.
For more information on our growth strategy, refer to
the Cerner Vision and Growth Strategy section in Part I,
Item 1 of our annual report on Form 10-K.
Expanding Operating Margins
In February of 2004, we mapped out a path from
the 2003 level of 9% operating margins to a target
of 20%. We surpassed this target in 2010 and have
continued to drive solid margin expansion since, with
an operating margin of 22.9% in 2012, reflecting more
than 200 basis points of improvement since 2010.
The following table details our margin expansion
since 2003, showing how a combination of growth
in margins across the previously discussed business
models and leverage of indirect expenses have
contributed to margin expansion.
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Contribution Margin
Licensed Software
Technology Resale
Subscriptions/Transactions
Professional Services
Managed Services
Support & Maintenance
Total Contribution Margin
Indirect Expense % 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%
13%
56%
30%
31%
76%
49%
13%
14%
27%
88%
13%
58%
30%
33%
75%
47%
11%
13%
24%
Operating Margin
9.3%
12.4%
12.6%
13.4%
15.1%
16.6%
18.5%
20.8%
22.2%
22.9%
18
• APPENDIX
Highlights of the margin expansion drivers include:
•Expanding margins in Subscriptions/Transactions.
This business model has had good recent growth in
revenue and profitability has also increased as the
fixed costs associated with supporting it are spread
over a higher revenue base.
•Improving Professional Services margins.
We have leveraged tools and methodologies
to make our implementation processes more
efficient, predictable, and profitable. This has
led to continued strong margins even though
this business model has absorbed some of the
lower margin components of Cerner ITWorks and
Cerner RevWorks. These newer business models
have lower initial margins, but we expect them to
increase as the businesses gain scale.
•Improving Managed
Services margins.
As we have grown our remote hosting business, we
have increased profitability through scale and by
transitioning to newer, less expensive technologies.
•Increased profitability of Support & Maintenance.
As we have continued to harden the Cerner
Millennium platform, our incremental cost to
support each additional client has declined,
leading to increased margins on Support and
Maintenance. Higher third-party costs led to
slightly lower margins in 2012, but this business
model is still very accretive to overall margins.
.•Leverage R&D investments. We have leveraged
our significant R&D
investments by growing
R&D slower than our top-line growth rate, while
still maintaining industry-leading levels of R&D
investment and
innovation. Efficiencies from
our operations in India have also contributed to
our ability to control the rate of R&D growth. As
previously noted, we expect to grow R&D more in
2013, but still expect to gain leverage from our
R&D investments over time.
•Leverage Sales, General, and Administrative
expenses. We have built a scalable business
infrastructure that has allowed us to keep our
SG&A spending growth rate lower than our top-
line growth rate in recent years.
We expect to continue to drive margin expansion
going forward through ongoing efficiencies across
our business models and additional leverage of R&D
investments and SG&A expenses.
A key point regarding our margin expansion is that we
have accomplished it while our business model has
transitioned 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 2012, 72% of our revenue came
from these sources. Similarly, Contribution Margin
from recurring or visible sources increased from
41% to 72%, marking the first time the percent of
contribution margin coming from visible and recurring
sources equaled the percent of revenue coming from
these sources. This is a result of the strong growth
and margin expansion in our services and support
business models.
i
n
g
r
a
M
n
o
i
t
u
b
i
r
t
n
o
C
d
n
a
e
u
n
e
v
e
R
%
g
n
i
r
r
u
c
e
R
r
o
e
b
s
V
l
i
i
75%
75%
70%
70%
65%
60%
60%
60%
55%
50%
50%
50%
45%
40%
40%
40%
35%
40%
30%
30%
23%
13%
8%
2000
2006
2012
Revenue
Contribution Margin
Operating Margin
25%
20%
15%
10%
5%
0%
O
p
e
r
a
t
i
n
g
M
a
r
g
n
i
Earnings Growth
Strong revenue growth and margin expansion drove
adjusted net earnings growth of 30% in 2012. Our 3-,
5-, and 10-year compound annual earnings growth
rates of 27%, 24%, and 23%, respectively, reflect
our ability to drive long-term earnings growth. Going
forward, we believe our top-line growth strategies
coupled with continued
focus on productivity
enhancements and margin expansion position us well
for continued strong earnings growth.
APPENDIX •
19
Generating Cash Flow
A healthy business generates positive cash flow.
Perhaps our most significant improvement over the
past decade has been in our cash flow performance.
2012 was a record year for cash performance, with
$708 million of operating cash flow and $425 million
of free cash flow (operating cash flow less capital
purchases and capitalized software development
costs). Operating cash flow increased 30% in 2012,
and free cash flow increased 18%. We expect
capital expenditures to increase in 2013 compared
to 2012 due to construction of additional facilities
to accommodate our growth and an
increased
investment in R&D, but we still expect to generate
good free cash flow.
Operating Cash Flow
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
that 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.
2012 was a strong year for the stock market as
economies worldwide grew steadily, overall. The
NASDAQ Composite Index ended the year up 16%
and the S&P 500 ended the year up 13%. Cerner’s
stock price increased 27% in 2012, reflecting our
delivery of strong results. When measuring our stock
performance over the 5-, 10-, and 20-year periods
using compound annual growth rates, the returns are
22%, 26%, and 17%, respectively. These returns are
significantly greater than the returns over the same
time frames for the NASDAQ Composite Index (3%,
8%, and 8%) and S&P 500 (-1%, 5%, 6%).
$800
$700
$600
$500
$400
$300
$200
$100
s
n
o
i
l
l
i
M
n
I
s
’
$
$0
($100)
'03
'04
'05
'06
'07
'08
'09
'10
'11
'12
*FCF = Operating CF less Capital Expenditures and Capitalized Software
Reconciliation of 2012 Non-GAAP Results to GAAP Results*
($ in millions except Earnings Per Share)
GAAP Operating Earnings
Share-based compensation expense
Adjusted Operating Earnings (Non-GAAP)
GAAP Net Earnings
Share-based compensation expense
Income tax benefit of share-based compensation
Adjusted Net Earnings (Non-GAAP)
GAAP Operating Cash Flow
Capital purchases
Capitalized software development costs
Free Cash Flow (Non-GAAP)
Operating
Earnings
Operating
Margin %
$
572
21.4%
38
$
610
22.9%
Net
Earnings
$
397
38
(14)
$
421
Diluted
Earnings
Per Share
$ 2.26
0.21
(0.08)
$ 2.39
$ 708
(183)
(100)
$ 425
* More detail on these adjustments and management’s use of Non-GAAP results is in our 2012 annual
report on Form 10-K and our current reports on Form 8-K.
20
• APPENDIX
Annual Report
2012
Form 10-K
22
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(X)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended: December 29, 2012
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
Number)
64117
(Zip Code)
(816) 221-1024
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.01 par value per share
Name of each exchange on which registered
The NASDAQ Stock Market LLC
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 [ ]
23
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] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [ ]
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 June 30, 2012, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant
was $12,351,700,511 based on the closing sale price as reported on the NASDAQ Global Select Market.
Indicate the number of shares outstanding of the issuer’s classes of common stock, as of the latest practicable date.
Class
Common Stock, $0.01 par value per share
Outstanding at February 1, 2013
172,207,737 shares
DOCUMENTS INCORPORATED BY REFERENCE
Document
Proxy Statement for the Annual Shareholders'
Meeting to be held May 24, 2013
Parts into Which Incorporated
Part III
24
PART I.
Item 1. Business
Overview
Cerner Corporation started doing business in 1980, and it was organized as a Delaware corporation in 1986. 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 world headquarters is located in a Company-owned office park in North Kansas City, Missouri, with our principal
place of business 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 improvement of health care delivery and the health of communities. We are
a leading supplier of health care information technology (HCIT) solutions, services, devices and hardware. Our solutions
optimize processes and help eliminate errors, variance and waste for health care organizations ranging from single-doctor
practices to entire countries, for the pharmaceutical and medical device industries, and for the field of health care as a whole.
These solutions are licensed by approximately 10,000 facilities around the world, including more than 2,700 hospitals; 4,150
physician practices; 45,000 physicians; 550 ambulatory facilities, such as laboratories, ambulatory centers, behavioral health
centers, cardiac facilities, radiology clinics and surgery centers; 800 home health facilities; 45 employer sites and 1,750 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. In recent years, we have extended this platform to include the next evolution of Cerner
Millennium, Millennium+™, which leverages the cloud and enables greater mobility. We have also created the Healthe IntentTM
platform, a cloud-based platform that enables a new generation of solutions to leverage the increasing amount of data being
captured as the health care industry is digitized. On the Healthe Intent platform, we are building solutions based on
sophisticated, statistical algorithms that are intended to help providers predict and improve outcomes, control costs, and
improve quality.
We offer a broad range of services, including implementation and training, remote hosting, operational management services,
revenue cycle services, support and maintenance, health care data analysis, clinical process optimization, transaction
processing, employer health centers, employee wellness programs and third party administrator (TPA) services for employer-
based health plans.
In addition to software and services, we offer a wide range of complementary hardware and devices, both directly from Cerner
and as a reseller for third parties.
25
The following table presents our consolidated revenues by major solutions and services and by segment, as a percentage
of total revenues:
Revenues by Solutions & Services
System sales
Support and maintenance
Services
Reimbursed travel
Revenues by Segment
Domestic
Global
For the Years Ended
2012
2011
2010
34%
23%
41%
2%
100%
88%
12%
100%
32%
25%
41%
2%
100%
30%
28%
40%
2%
100%
86%
14%
84%
16%
100%
100%
Health Care and Health Care IT Industry
We believe there are several factors that are favorable for the HCIT industry over the next decade. The Centers for Medicare
and Medicaid Services (CMS) estimates United States health care spending in 2012 at $2.8 trillion, or 17.9 percent of Gross
Domestic Product (GDP), and projects it to be 19.2 percent of GDP by 2020. We believe this growing cost of our health care
system is unsustainable. We also believe the intelligent use of information systems can help reduce costs while also improving
health outcomes. Further, most United States health care providers recognize that they must invest in HCIT to meet regulatory
requirements, comply with government reimbursement requirements, and qualify for incentives. The importance of HCIT in
facilitating this compliance along with the benefits of improving safety, efficiency and reducing costs, leads to investments
in HCIT being viewed as more strategic than many other capital purchases, and supports our belief that we are positioned
for continued growth.
An ongoing contributor to our growth is the inclusion of HCIT 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 health care organizations to modernize operations through “Meaningful Use” of HCIT.
Hospitals and physicians that met the first of three stages of Meaningful Use criteria of the ARRA began receiving incentive
funds in 2011, and the ongoing incentive program is contributing to continued demand for HCIT solutions and services in the
United States. In addition to the demand created by existing clients seeking solutions and services to ensure they are
positioned to qualify for incentives, we are seeing significant demand outside of our installed base from hospitals that previously
chose a system from another supplier. We believe these hospitals are looking to change to a platform that better positions
them for success as later stages of Meaningful Use and other regulatory requirements require more sophisticated IT systems.
Another trend in the United States marketplace that we believe will contribute to demand is the shift away from fee-for-service
or volume-based reimbursement towards value-based or outcomes-based reimbursement. Payers, including health insurance
companies and federal and state governments, are implementing programs to link reimbursement to quality measurements
and outcomes, and we believe this alignment creates significant financial motivation for HCIT adoption. Within our current
client base, we estimate that there could be more than $5 billion of annual reimbursement at risk tied to Value Based
Purchasing, Medicare 30-day readmission rules, and quality reporting requirements by 2017. In order to comply with these
programs, we believe our clients will need to expand their data analytics and reporting capabilities through the use of HCIT
solutions and services. Ultimately, we believe all of these shifts are leading to an environment in which health care providers
will become accountable for proactively managing the health of the populations they serve, and this will require ongoing
investment in sophisticated information technology solutions that will enable them to predict when intervention is needed so
they can improve outcomes and lower the cost of providing care.
In recent years, we have also seen a shift in the United States marketplace towards a preference for a single platform across
inpatient and ambulatory settings. The number of physicians employed by hospitals has increased significantly as hospitals
have acquired physician groups in order to ensure a consistent stream of referrals, and health systems are recognizing the
benefit of having a single patient record at the hospital and the physician office. We are benefiting from this trend due to our
26 unified Cerner Millennium platform that spans multiple venues and due to the significant enhancements we have made to
our physician solutions in recent years.
Outside the United States, the economic downturn of the last several years has impacted and could continue to impact our
results of operations. However, we believe long-term revenue growth opportunities outside the United States remain significant
because other countries are also focused on controlling health care spending while improving the efficiency and quality of
care that is delivered, and many of these countries recognize HCIT as an important piece of the solution to these issues.
Cerner Vision and Growth Strategy
For more than 30 years, Cerner has been executing its vision to make health care safer and more efficient. We started with
the foundation of digitizing paper processes and now offer what we believe to be the most comprehensive array of solutions,
services, hardware, and devices to the health care industry. Since our company began, we have been committed to
transformational change in the vital task of keeping people healthy. Now more than ever, our focus is on developing the
innovations that will help improve the entire health care system. Ultimately, we believe health care is personal and nothing
matters more than our health and our families. As a result, we believe health care is too important to stay the same, and we
are focused on changing the way people:
Use and share information
• We empower providers to base decisions on the best clinical evidence.
• We coordinate care across traditionally fragmented health care systems.
• We provide clinical organizations with reliability, flexibility and continuous innovation available through cloud-based
intelligence.
• We provide contextually relevant information to the right people at the right time.
Pay for health and care
• We believe IT investment must be matched with innovative payment models that are easier to navigate.
• We are replacing the current, claims-based system with streamlined electronic payments.
• We develop ways to reward people and their providers for proactively achieving positive health goals.
Think about health
• We empower people to actively engage in their health by providing them with a standards-based, lifetime personal
health record.
• We are replacing the reactive “sick care” model with a proactive, personalized plan for health.
Our vision has always guided our large investments in research and development, which have created strong levels of organic
growth throughout our history. Our proven ability to innovate has led to what we believe to be industry-leading solution and
device architectures and an unmatched breadth and depth of solutions and services. We believe these 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 health care. 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.
In addition to growth by gaining market share, we have a significant opportunity to grow revenues by expanding our solution
footprint with existing clients. There is opportunity to expand penetration of our core solutions, such as EHRs and computerized
physician order entry, and increase penetration of our broad range of complementary solutions that can be offered into our
existing client base. Examples include women’s health, anesthesiology, imaging, clinical process optimization, critical care,
medical devices, device connectivity, emergency department, revenue cycle and surgery.
We have also introduced services in recent years that are 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 services is Cerner ITWorksSM, a suite of solutions and 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
health care organizations improve their revenue cycle functions.
27 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 CommunityWorksTM offering
leverages a shared instance of the Cerner Millennium platform across multiple clients, which decreases the total cost of
ownership for these clients.
We also expect to drive growth over the course of the next decade through initiatives outside the core HCIT market. For
example, we offer clinic, pharmacy, wellness and third-party administrator services directly to employers. These offerings
have been shaped by what we have learned from changes we have implemented at Cerner over the past six years. We have
removed our third-party administrator and become self-administered, launched an on-site clinic and pharmacy, incorporated
biometric measurements for our population, realigned the economic incentives for associates in our health plan, and
implemented a data-driven wellness management program. These changes have had a significant impact on the health of
our associates and have allowed us to do what all employers want to do - reduce health care costs. We believe incorporating
this success into our employer services offerings positions us well in a substantial addressable market of over 8,000 U.S.
employers with over 1,000 employees.
As discussed below, another opportunity for future growth, and a significant area of investment for Cerner, is leveraging the
vast amounts of data being created as the health care industry is digitized and using this data to help providers manage the
health of populations.
Population Health
Today's system of episodic, fee-for-service care is characterized by waiting until a condition advances to the point of definite
illness and complications to initiate costly and less effective treatment. We believe information technology will play a key role
in a revolution to promote and manage health by helping predict what will happen in the future and allowing for lower cost
interventions that can prevent harmful, costly outcomes.
For health care providers, population health management means serving patients with more precision. It means preventing
potentially avoidable complications by developing prescriptive personalized health plans and applying preventative care to
keep more people in a state of health, delaying and possibly preventing or reversing the effects of chronic disease, and using
acute care as the last resort.
While this approach is logical and desirable, our system of care is structured in a way that physicians and hospitals get paid
when people experience illness, not when they remain healthy. This is beginning to change through the formation of
organizations, often called Accountable Care Organizations, which reward health systems for keeping healthy people healthy
and for delivering higher quality and lower cost care to a defined population. As the industry continues down this path of
creating incentives for managing the health of populations, we believe there will be significant new opportunities for Cerner.
We are already providing solutions and services to many of our clients that are foundational elements for population health.
Examples of these include data liquidity through our Cerner Network interoperability and health information exchange
offerings, Lighthouse Enterprise Data Warehousing and Quality solutions, our patient portal platform and personal health
record solutions that offer a range of device and provider connectivity options and wellness offerings.
Supporting these solutions is Healthe Intent, which is our cloud-based architectural platform for population health that is
agnostic to the source EHR and is also able to capture research, evidence, and financial and operational data. Healthe
Intent also supports Chart Search, which leverages knowledge of the clinical meanings of words located within the EHR 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. Chart Search adoption has now hit a tipping point across our client base, with more than
50 percent of our U.S. client base utilizing the solution.
The Healthe Intent platform also provides the ability to apply sophisticated, statistical algorithms against contextual clinical
activity to recommend clinical action. We have illustrated this with our sepsis agent, 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. Clients that have implemented this agent as part of a comprehensive sepsis prevention process have experienced
significant reductions in sepsis mortality rates, and the adoption in our client base increased significantly in the past year.
In 2012 we outlined our vision for how we will continue to advance our capabilities in population health, building on the
Healthe Intent platform and other foundational solutions that are already in place. Fundamental to the design of this platform
28 is an evolving operating system specifically designed to identify the person, predict where interventions will be effective,
attribute the individual to accountable providers and guide them to take appropriate action. We believe these elements will
be critical to our clients in an accountable care environment, as providers will need the ability to predict and prevent incidents
such as readmissions and proactively monitor patients with chronic conditions so complications can be prevented.
Our name for the clinical programming language that will drive our operating system for population health is Synapse. Synapse
is a purpose built, clinical programming language that creates agents within the Healthe Intent platform to trigger and coordinate
health care programs across a population. Very much like the clinical definition of Synapse, the language supports the
signaling of an event, then coordinates that action across the platform based on localized requirements. We think this is a
fundamental differentiator as the level of sophistication to manage the health of a population ultimately requires both
personalization to the individual and adapting to the local provider network. This must be much more than a set of workflow
applications with independent configuration options. We believe the ability to create these sophisticated commands in a
natural language familiar to clinicians will create an ecosystem of discovery and innovation beyond the four walls of Cerner.
We are also working closely with clients to advance our population health capabilities. We announced a partnership in 2012
with Advocate Health Care, a leader in population health management, which will help us advance our population health
initiatives and position us for significant opportunities as we deploy these capabilities across our client base. Early progress
from these efforts has included joint development of sophisticated predictive models, including a predictive agent for
readmissions that demonstrated a more than 20 percent improvement in predictive power as compared to the majority of
the existing evidence based models in use today.
Another initiative that we believe will demonstrate the power of coordinated population health management is our partnership
with Nevada, Missouri, which was announced in July 2012. We are collaborating with the city to build a new model of health
and care with a goal of significantly improving health status and outcomes in Nevada. In addition to deploying Cerner solutions
at Nevada Regional Medical Center, the project is focused on creating a culture of health in the community through education,
incentives, infrastructure and partnerships with stakeholders such as the Nevada school district, local employers and
community organizations. In addition, all residents will have access to their health information regardless of where they are
or which provider they see. We believe a project of this scope has never been done before. Our goal is to see how quickly
we can impact the cost, accessibility and quality of health and care and to create a replicable and sustainable model for other
communities.
In summary, we believe we are uniquely positioned to build on our existing investments and create the most comprehensive
platform for facilitating population health. We expect this platform to create significant opportunities for Cerner as health
care continues to evolve towards a model that incents keeping people healthy.
Software Development
We commit significant resources to developing new health information system solutions and services. As of the end of 2012,
approximately 3,200 associates were engaged in research and development activities. Total expenditures for the development
and enhancement of our software solutions were approximately $319.8 million, $290.6 million and $284.8 million during the
2012, 2011 and 2010 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 HCIT solutions, health care 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 physician practices,
to community hospitals, to complex integrated delivery networks, to local, regional and national government agencies use
our Cerner Millennium solutions and services.
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 health care 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
29 physician practices. In some instances, the HITECH provisions of ARRA have shortened the sales process due to the timeline
required for hospitals to qualify for 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 giving us a presence in more than 25 countries.
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 HCIT needs of large health care organizations.
Client Services
Substantially all of Cerner’s HCIT software solutions clients enter into software support agreements with us for maintenance
and 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 support 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.
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 2012, we had a contract backlog of $6.5 billion as compared to $5.4 billion at the end of 2011. Such backlog
represents system sales and services from signed contracts that have not yet been recognized as revenue. At the end of
2012, we had $18.2 million of contracts receivable compared to $81.8 million at the end of 2011, which represents revenues
recognized but not yet billable under the terms of the contract. At the end of 2012, we had a software support and maintenance
backlog of $738.2 million as compared to $705.7 million at the end of 2011. Such backlog represents contracted software
support and hardware maintenance services for a period of 12 months. We estimate that approximately 29 percent of the
aggregate backlog at the end of 2012 of $7.3 billion will be recognized as revenue during 2013.
Competition
The market for HCIT solutions, devices and services is intensely competitive, rapidly evolving and subject to rapid technological
change. Our principal competitors in the health care solutions and services market include, but are not limited to: Allscripts
Healthcare Solutions, Inc., Computer Programs and Systems, Inc. (CPSI), Epic Systems Corporation (Epic), GE Healthcare
Technologies (GE), Healthcare Management Systems, Inc. (HMS), Healthland, Inc., Computer Sciences Corporation (iSoft),
Keane, Inc., McKesson Corporation (McKesson), Medical Information Technology, Inc. (Meditech), Siemens Medical Solutions
Health Services Corporation (Siemens), and Quadramed Corporation (Quadramed), 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, without limitation, such
as Accenture plc, Affiliated Computer Services (ACS), Cap Gemini S. A., Computer Task Group, Inc. (CTGHS), Dell, Inc.
(Dell), Deloitte Consulting LLP, Hewlett-Packard Company, IBM Corporation and Science Applicaitons International
Corporation (formerly maxIT Healthcare LLC) offer HCIT services that compete directly with some of our service offerings.
AmazingCharts.com, Inc., Athenahealth, Inc., eClinicalWorks LLC, e-MDs, Inc., Greenway Medical Technologies, MED3000,
Inc., NexGen Healthcare, Inc., Quality Systems, Inc., Sevocity (a division of Conceptual MindWorks, Inc.) and Vitera
Healthcare Solutions (formerly 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 health care devices.
We view our principal competitors in the health care device market to include, without limitation: API Healthcare, CapsuleTech,
Inc., CareFusion Corporation, GE, iSirona, LLC, McKesson and Omnicell, Inc. We view our principal competitors in the health
care revenue cycle transactions market to include, without limitation: Accretive Health, Inc., Allscripts, Dell, Emdeon
30 Corporation, Epic, GE, McKesson, MedAssets, Inc., Meditech, Optum, Inc., Quadramed, Siemens, SSI Group, Inc. and 3M
Company with almost all of these competitors being substantially larger or having more experience and market share than
us in their respective markets.
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 health care
industry may offer competitive software solutions, devices or services. The pace of change in the HCIT market is rapid and
there are frequent new software solutions, devices or services 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 2012, we employed approximately 11,900 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 consolidated financial statements.
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 1, 2013. Officers are elected annually and serve at the discretion of the Board of Directors.
Name
Neal L. Patterson
Age
63
Positions
Chairman of the Board of Directors, Chief Executive Officer and President
Clifford W. Illig
Marc G. Naughton
Michael R. Nill
Randy D. Sims
Jeffrey A. Townsend
Julia M. Wilson
Zane M. Burke
62
57
48
52
49
50
47
Vice Chairman of the Board of Directors
Executive Vice President and Chief Financial Officer
Executive Vice President and Chief Operating Officer
Senior Vice President, Chief Legal Officer and Secretary
Executive Vice President and Chief of Staff
Senior Vice President and Chief People Officer
Executive Vice President - Client Organization
Neal L. Patterson, co-founder of the Company, 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, co-founder of the Company, 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. Mr. Nill was appointed Chief Operating Officer in May 2011.
Randy D. Sims joined the Company in March 1997 as Vice President and Chief Legal Officer and was promoted to Senior
Vice President in March 2011. Prior to joining the Company, Mr. Sims worked at Farmland Industries, Inc. for three years
31
where he last served 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, named Chief of Staff in July 2003 and promoted to Executive
Vice President in March 2005.
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.
Zane M. Burke joined the Company in September 1996. Since that time, he has held a variety of client-facing sales,
implementation and support roles, including Corporate Controller and Vice President of Finance. He was promoted to
President of the Company’s West region in 2002 and Senior Vice President of National Alignment in 2006. He was further
promoted to Executive Vice President - Client Organization in July 2011.
Item 1A. Risk Factors
Risks Related to our Business
We may incur substantial costs related to product-related liabilities. Many of our software solutions, health care devices
or services (including life sciences/research services) are intended for use in collecting, storing and displaying clinical and
health care-related information used in the diagnosis and treatment of patients and in related health care 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, that such coverage will 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 revenue 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 health care 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 health care devices after their introduction to the market. Our software
solutions and health care devices are intended for use in collecting, storing, and displaying clinical and health care-related
information used in the diagnosis and treatment of patients and in related health care settings such as admissions, billing,
etc. Therefore, users of our software solutions and health care 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 or health care device fail to meet these warranties or lead to
faulty clinical decisions or injury to patients, it could 1) constitute a material breach under the client agreement, allowing the
client to terminate the agreement and possibly obtain a refund or damages or both, or require us to incur additional expense
in order to make the software solution or health care device meet these criteria or 2) subject us to claims or litigation by our
clients or clinicians or directly by the patient. Additionally, such failures could damage our reputation and could negatively
affect future sales. 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, that such coverage will 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
32 security applications, access control and other 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, a significant data breach, damage, injury or
impairment (environmental, accidental, intentional or pandemic) to the buildings, the equipment inside the buildings housing
our data centers, the personnel operating such facilities or the client data contained therein, or errors by 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 data center 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.
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, devices and services we offer. 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, which could have an adverse effect on our
competitive position.
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
HCIT 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 health care device innovation, health care transactions,
population health management and life sciences. These claims, even if not meritorious, are expensive to defend and are
often 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
or cease using, selling, offering for sale, licensing, importing, implementing or supporting the solutions, devices and services
that violate the intellectual property rights.
We may become subject to legal proceedings that could have a material adverse impact on our financial position
and results of operations. From time to time and in the ordinary course of our business, we and certain of our subsidiaries
may become involved in various legal proceedings. All such legal proceedings are inherently unpredictable and, regardless
of the merits of the claims, litigation may be expensive, time-consuming, disruptive to our operations and distracting to
management. If resolved against us, such legal proceedings could result in excessive verdicts, injunctive or other equitable
relief that may affect how we operate our business, or settlements of claims for monetary damages. Future court decisions,
business expansion or legislative activity may increase our exposure to litigation and regulatory investigations. In some
cases, substantial non-economic remedies or punitive damages may be sought.
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 and other 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:
• 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
33 • Effects of sovereign debt conditions, including budgetary constraints
• Unfavorable or volatile foreign currency exchange rates
•
Legal compliance costs 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, the U.K. Anti-Bribery Act and similar
laws and 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
• 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
• Health service provider or 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
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 market 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 if we improperly hedge our exposure to currency fluctuations.
We are subject to tax legislation in numerous countries; tax legislation initiatives or challenges to our tax positions
could adversely affect our results of operations and financial condition. We are a global corporation with a presence
in more than 25 countries. As such, we are, or in the future could be, subject to tax laws, regulations and policies 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 HCIT, health care devices, health care
transactions, population health management 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 needs could have a material adverse
effect on our prospects for long-term growth. In addition, we invest significant time and expense in training our employees,
which increases their value to clients and competitors who may seek to recruit them and increases the cost of replacing
them. 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 operating earnings 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 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 or content
34
in the operation and delivery of our solutions, devices and services. For instance, we currently depend on Microsoft and IBM
technologies for portions of the operational capabilities 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 networking technologies. Additionally, 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, terminate our licenses or supply contracts, suffer significant
capacity constraints or suffer significant disruptions, 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 operating earnings could significantly decrease. In addition, interruption
in functionality of our solutions, devices or services as a result of changes in third party suppliers could adversely affect our
commitments to customers, future sales of solutions, devices and services, and negatively affect our revenue and operating
earnings.
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 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 assess 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 Accounting Standards Codification Topic 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 certain indices and economic data have shown 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
35 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.
If we are unable to manage our growth in the new markets in which we offer solutions, health care devices or services,
our business and financial results could suffer. Our future financial results will depend in part on our ability to profitability
manage our business in the new markets that we enter. Over the past several years, we have engaged in the identification
of, and competition for, growth and expansion opportunities in the areas of analytics, revenue cycle and population health.
In order to achieve those initiatives, we will need to, among other things, recruit, train, retain and effectively manage associates,
manage changing business conditions and implement and improve our technical, administrative, financial control and reporting
systems for offerings in those areas. Difficulties in managing future growth in new markets could have a significant negative
impact on our business, financial condition and results of operations.
Risks Related to the Health Care Information Technology, Health Care Device, Health Care Transaction and Population
Health Management Industry
The health care 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) (collectively, HIPAA)
continues to have a direct impact on the health care 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 health care
organizations.
Many health care providers are consolidating to create integrated health care delivery systems with greater market power.
These providers may try to use their market power to negotiate price reductions for our solutions, health care devices and
services. As the health care 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.
The Patient Protection and Affordable Care Act, which was amended by the Health Care and Education Reconciliation Act
of 2010, became law in 2010. This comprehensive health care reform legislation included provisions to control health care
costs, improve health care quality, and expand access to affordable health insurance. This health care reform legislation
could include changes in Medicare and Medicaid payment policies and other health care delivery administrative reforms that
could potentially negatively impact our business and the business of our clients. Because the administrative rules implementing
health care reform under the legislation have not yet been finalized, the impact of the health care reform legislation on our
business is unknown, but there can be no assurances that health care reform legislation will not adversely impact either our
operational results or the manner in which we operate our business. Health care industry participants may respond by reducing
their investments or postponing investment decisions, including investments in our solutions and services.
The health care industry is highly regulated at the local, state and federal level. The impact of these regulations on us
is direct, to the extent that we are ourselves subject to these laws and regulations, and is also indirect because, in a number
of situations, even though we may not be directly regulated by specific health care laws and regulations, our solutions, devices
and services must be capable of being used by our clients in a way that complies with those laws and regulations. There is
a significant and wide-ranging number of regulations both within the United States and abroad, such as regulations in the
areas of health care fraud, e-prescribing, claims processing and transmission, medical devices, the security and privacy of
patient data and interoperability standards, that may be directly or indirectly applicable to our operations and relationships
or the business practices of our clients. Specific risks include, but are not limited to, the following:
Health Care Fraud. Federal and state governments continue to enhance regulation of and increase their scrutiny over practices
involving health care fraud affecting health care providers whose services are reimbursed by Medicare, Medicaid and other
government health care programs. Our health care 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 health care
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
36 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. Even an unsuccessful challenge by a regulatory
or prosecutorial authority of our activities could result in adverse publicity, could require a costly response from us and could
adversely affect our business, financial condition and results of operations.
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 regulations that govern the electronic
transmission of certain prescription orders and prescription format requirements. The Centers for Medicare and Medicaid
Services' (CMS) regulations related to “E-Prescribing and the Prescription Drug Program” 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. In general, regulations in this area impose certain requirements which can be burdensome and evolve
regularly, meaning that any potential benefits may be reversed by a newly-promulgated regulation that adversely affects our
business model. Our efforts to provide solutions that enable our clients to comply with these regulations could be time-
consuming and expensive.
Preparation, Transmission and Submission of Medical Claims for Reimbursement. Our solutions are capable of electronically
transmitting claims for services and items rendered by a physician to many patients' payers for approval and reimbursement.
We also provide services to our clients that include the coding, preparation and submission of claims for medical service to
payers for reimbursement. Such 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 preparation, transmission and submission 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 preparation, transmission and submission 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 health care programs. Any investigation or proceeding related to these laws, even if
unwarranted or without merit, may have a material adverse effect on our business, results of operations and financial condition.
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 activities 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 and medical
devices that are used in health care. 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 or medical devices could be delayed or canceled.
There have been six FDA inspections at various Cerner sites since 2003. Inspections conducted at our world headquarters
and Innovations Campus in 2010 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 observation that was issued in 2010. The remaining 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, distribute and deliver our solutions,
services and devices. The FDA has many enforcement tools including recalls, product corrections, seizures, injunctions,
refusal to grant pre-market clearance of products, civil fines and 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, local and foreign 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
37
and privacy measures. United States regulations currently in place governing electronic health data transmissions continue
to evolve and are often unclear and difficult to apply. 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 health care organizations such as our clients, our employer clinic business model and our claims processing,
transmission and submission services, are required to comply with the privacy standards, the transaction regulations and
the security regulations. Moreover, the 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 in the U.S. and data privacy and security laws or 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 health care 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.
Federal and state statutes and regulations have granted broad enforcement powers to regulatory agencies to investigate
and enforce our compliance with these privacy and security laws and regulations. Federal and state enforcement personnel
have substantial funding, powers and remedies to purse suspected or perceived violations. If we fail to comply with any
applicable laws or regulations, we could be subject to civil penalties, sanctions or other liability. Enforcement investigations,
even if meritless, could have a negative impact on our reputation, cause us to lose existing clients or limit our ability to attract
new clients.
Interoperability Standards. Our clients are concerned with and often require that our software solutions and health care
devices be interoperable with other third party HCIT suppliers. Market forces or governmental/regulatory authorities could
create software interoperability standards that would apply to our solutions, health care devices or solutions, and if our
software solutions, health care devices or services 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 HCIT 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.
ARRA Meaningful Use Program. 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 health care providers in order to receive incentive payments. Regulations
have been issued that identify 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, devices or health care 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
or health care devices. If our software solutions, devices or health care devices are not compliant 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,
devices or health care devices, although we do not expect such costs to be significant in relation to the overall development
costs for our solutions, devices and health care devices.
38 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 health
care information systems, health care devices and services to the health care 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 such solutions, devices or
services will achieve market acceptance. Moreover, we cannot 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, harm to our reputation, lost sales, license terminations or renegotiations, product liability claims,
diversion of resources to remedy errors and loss of, or delay in, market acceptance.
Certain of our competitors have greater financial, technical, product development, marketing or other resources than us and
some of our competitors offer software solutions, devices or services 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 health care industry may offer competitive
software solutions, devices or services. As we continue to develop new health care devices and services to address areas
such as analytics, transaction services, HCIT and device integration, and population health management, we expect to face
new competitors, and these competitors may have more experience in these markets and/or more established relationships
with prospective clients. We face strong competition and often face downward price pressure, which could adversely affect
our results of operations or liquidity. Additionally, the pace of change in the health care 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 health
care providers in the United States market and in recent years, the health care industry has been subject to increasing
consolidation. As the industry consolidates, costs fall, technology improves, and market factors continue to compel investment
by health care 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, our growth ambitions and financial
results could be negatively affected materially.
Risks Related to Our Common 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 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 systems, accounting policy changes and other factors described in this
section and elsewhere in this report. As a result of health care industry trends and the market for our 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 federal,
state or local regulations, availability of personnel resources or by actions taken by competitors. Delays in the expected sale,
installation or implementation of these large systems may have a significant negative 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 or 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 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
39
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 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,
articles or rumors about our performance or solutions, devices or services, announcements of technological innovations or
new services or products by our competitors or us, changes in expectations of future financial performance or estimates of
securities analysts, governmental regulatory action, health care reform measures, client relationship developments, economic
conditions and changes occurring in the securities markets in general and other factors, many of which are beyond our
control. For instance, our quarterly operating results have varied in the past and may continue to vary in future periods, due
to a number of reasons including, but not limited to, demand for 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 herein. 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, health care devices, other health care 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.
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, plans, goals or predictions of future events or performance, may
constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities 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
40 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 is located in a Company-owned office park (the Headquarters Campus) in
North Kansas City, Missouri. The Headquarters Campus and three other nearby locations, collectively contain approximately
2.22 million gross square feet of useable space situated on 278 acres of land. The Headquarters Campus and the nearby
properties primarily house office space, but also include space for other business needs, such as our Healthe Clinic and our
Headquarters Campus data centers.
Company owned office space, known as the Innovation Campus, houses associates from our intellectual property organization
and consists of 790,000 gross square feet of useable space located in Kansas City, Missouri.
Owned office space currently under construction, known as the Continuous Campus, will house associates who manage
and support our clients' IT systems and consists of 611,000 gross square feet of useable space located in Kansas City,
Kansas.
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 2012, we leased additional office space in Tempe, Arizona; Culver City and Garden Grove, California; Denver,
Colorado; Lenexa, Kansas; Waltham, Massachusetts; Minneapolis and Rochester, Minnesota; Columbia, Lee’s Summit and
Kansas City, Missouri; Durham, North Carolina; New Concord, Ohio; and Vienna, Virginia. Globally, we also leased office
space in: Brisbane, Sydney and Melbourne, Australia; Sao Paulo, Brazil; Toronto, Canada; Santiago, Chile; Cairo, Egypt;
London, England; Paris, France; Idstein, Germany; Bangalore, India; Dublin, Ireland; Kuala Lumpur, Malaysia; Riyadh, Saudi
Arabia; Singapore; Madrid, Spain; Doha, Qatar; and Abu Dhabi and Dubai, United Arab Emirates.
Item 3. Legal Proceedings
We are not a party to and none of our property is subject to any material pending legal proceedings, other than ordinary
routine litigation incidental to our business.
Item 4. Mine Safety Disclosures
Not applicable
41 Part II
Item 5. Market for the Registrant’s Common Equity, 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 2012 and 2011 as reported by The Nasdaq Stock Market®.
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
2012
Low
Last
High
2011
Low
$
$
78.13
86.91
83.56
81.12
$
59.78
72.26
71.00
68.00
76.16
82.66
77.39
76.08
$
$
56.45
62.54
72.88
69.97
$
47.18
54.46
54.93
55.75
Last
56.45
62.54
68.52
61.25
At February 1, 2013, there were approximately 980 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.
The following table provides information with respect to Common Stock purchases by the Company during the fourth fiscal
quarter of 2012:
Period
September 30, 2012 - October 27, 2012
October 28, 2012 - November 24, 2012
November 25, 2012 - December 29, 2012
Total
Total Number of
Shares
Purchased (a)
Average Price
Paid per Share
2,356
—
—
2,356
$
$
72.56
—
—
72.56
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs (b)
Approximate Dollar
Value of Shares
That May Yet Be
Purchased Under
the Plans or
Programs (b)
—
—
—
—
—
—
—
(a) All of the shares of common stock, par value $0.01 per share, presented on the table above were originally granted to employees as restricted
stock pursuant to our Long-Term Incentive Plan F. The Long-Term Incentive Plan F allows for the withholding of shares to satisfy minimum tax
obligations due upon the vesting of restricted stock, and pursuant to the Long-Term Incentive Plan F, the shares reflected above were relinquished
by employees in exchange for our agreement to pay federal and state withholding obligations resulting from the vesting of the Company’s restricted
stock.
(b) As announced on December 12, 2012, our Board of Directors authorized a stock repurchase program for an aggregate purchase of up to $170.0
million of our Common Stock. As of December 29, 2012, $170.0 million remains available under the authorized program. There were no shares
repurchased by us under the program during the quarter or year ended December 29, 2012. The previous stock repurchase program approved
by the Company's Board of Directors in 2008 was terminated.
See Part III, Item 12 for information relating to securities authorized for issuance under our equity compensation plans.
42 Item 6. Selected Financial Data
(In thousands, except per share data)
Statement of Operations Data:
Revenues
Operating earnings
Earnings before income taxes
Net earnings
Earnings per share:
Basic
Diluted
Weighted average shares outstanding:
Basic
Diluted
Balance Sheet Data:
2012
(1)
2011
(1)
2010
(1)
2009
(1)
2008
(1)(2)
$ 2,665,436
571,662
587,708
397,232
$ 2,203,153
459,798
469,694
306,627
$ 1,850,222
359,333
362,212
237,272
$ 1,671,864
292,006
292,681
193,465
$ 1,676,028
278,885
281,431
188,658
2.32
2.26
1.82
1.76
1.44
1.39
1.19
1.15
1.17
1.13
170,931
175,697
168,634
173,867
164,916
170,847
161,963
167,764
161,097
166,869
Working capital
Total assets
Long-term debt and capital lease obligations, excl. current
installments
Cerner Corporation shareholders' equity
$ 1,210,394
3,704,468
$ 1,063,593
3,000,358
$
840,129
2,422,790
$
788,232
2,148,567
$
517,650
1,880,988
136,557
2,833,650
86,821
2,310,681
67,923
1,905,297
95,506
1,580,678
111,370
1,311,009
(1)
Includes share-based compensation expense. The impact of this expense is as follows:
(In thousands, except share data)
2012
2011
2010
2009
2008
Total share-based compensation expense
Amount of related income tax benefit
Net impact on earnings
Decrease to diluted earnings per share
$
$
$
38,112
(14,578)
23,534
0.13
$
$
$
29,479
(11,256)
18,223
0.11
$
$
$
24,903
(9,329)
15,574
0.09
$
$
$
16,842
(6,274)
10,568
0.06
$
$
$
15,144
(5,641)
9,503
0.06
(2)
Includes expense related to a settlement with a third party provider of software related to the use of the third party’s software in our remote hosting
business. The settlement included compensation for the use of the software for periods prior to 2008 as well as compensation for licenses of the
software for future use for existing and additional clients through January 2009. Of the total settlement amount, we determined that $5.0 million
should have been recorded in prior periods, primarily 2005 through 2007. Based on this valuation, 2008 results include an increase of $8.0 million
to sales and client service expense, a decrease of $5.0 million to net earnings, and a decrease of $0.03 to diluted earnings per share that are
attributable to prior periods.
43 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 years 2012, 2011 and 2010 each consisted of 52 weeks
and ended on December 29, 2012, December 31, 2011 and January 1, 2011, respectively. 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,
devices and services that give health care providers secure access to clinical, administrative and financial data in real time,
allowing them to improve quality, safety and efficiency in the delivery of health care.
Our fundamental strategy centers on creating organic growth by investing in research and development (R&D) to create
solutions and services for the health care industry. This strategy has driven strong growth over the long-term, as reflected
in five- and ten-year compound annual revenue growth rates of 12% or more. This growth has also created an important
strategic footprint in health care, with Cerner® solutions licensed by approximately 10,000 facilities around the world, including
more than 2,700 hospitals; 4,150 physician practices; 45,000 physicians; 550 ambulatory facilities, such as laboratories,
ambulatory centers, behavioral health centers, cardiac facilities, radiology clinics and surgery centers; 800 home health
facilities; 45 employer sites and 1,750 retail pharmacies. Selling additional solutions back into this client base is an important
element of our future revenue growth. We are also focused on driving growth through market share expansion by strategically
aligning with health care providers that have not yet selected a supplier and by displacing competitors in health care settings
that are looking to replace their current supplier.
We expect to drive growth through new initiatives and services that reflect our ongoing ability to innovate and expand our
reach into health care. Examples of these include our CareAware® health care device architecture and devices, employer
services, Cerner ITWorks services, Cerner RevWorks services, and solutions on our Healthe Intent platform. Finally, we
believe there is significant opportunity for growth outside of the United States, with many non-U.S. markets focused on HCIT
as part of their strategy to improve the quality and lower the cost of health care.
Beyond our strategy for driving revenue growth, we are also focused on earnings growth. Similar to our history of growing
revenue, our net earnings have increased at compound annual rates of more than 20% over the most recent five- and ten-
year periods. We expect to drive continued earnings growth through ongoing revenue growth coupled with margin expansion,
which we expect to achieve through efficiencies in our implementation and operational processes and by leveraging R&D
investments and controlling general and administrative expenses.
We are also focused on continuing to deliver strong levels of cash flow, which we expect to do by continuing to grow earnings
and prudently managing capital expenditures.
Results Overview
The Company delivered strong levels of bookings, revenues, earnings and cash flows in 2012.
New business bookings revenue in 2012, which reflects the value of executed contracts for software, hardware, professional
services and managed services, was $3.1 billion, which is an increase of 15% compared to $2.7 billion in 2011. Our 2012
revenues increased 21% to $2.7 billion compared to $2.2 billion in 2011. The year-over-year increase in revenue reflects
improved economic conditions, ongoing demand related to the HITECH Act, and increased contributions form new initiatives,
such as device resale, Cerner ITWorks and Cerner RevWorks.
Our 2012 net earnings increased 30% to $397.2 million compared to $306.6 million in 2011. Diluted earnings per share
increased 28% to $2.26 compared to $1.76 in 2011. The 2012 and 2011 net earnings and diluted earnings per share reflect
the impact of stock-based compensation expense. The effect of these expenses reduced the 2012 net earnings and diluted
earnings per share by $23.5 million and $0.13, and the 2011 earnings and diluted earnings per share by $18.2 million and
$0.11, 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, including efficiencies in our implementation and operational
44 processes, leveraging R&D investments and controlling general and administrative expenses. Our full-year 2012 operating
margin of 21.4% reflects an increase of 50 basis points compared to 2011, which was driven by strong margin expansion in
our core business that was somewhat offset by record levels of lower-margin technology resale.
We had cash collections of receivables of $2.7 billion in 2012 compared to $2.2 billion in 2011. Days sales outstanding was
74 days for the 2012 fourth quarter compared to 73 days for the 2012 third quarter and 83 days for the 2011 fourth quarter.
Operating cash flows for 2012 were strong at $708.3 million compared to $546.3 million in 2011.
Health Care Information Technology Market Outlook
We have provided a detailed assessment of the health care information technology market under “Health Care and Health
Care IT Industry” in Part I, Item 1 "Business."
Results of Operations
Fiscal Year 2012 Compared to Fiscal Year 2011
(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 service
Software development
General and administrative
Total operating expenses
Total costs and expenses
Operating earnings
Other income, net
Income taxes
Net earnings
Revenues & Backlog
2012
% of
Revenue
2011
% of
Revenue
%
Change
$ 902,799
604,247
1,103,082
55,308
34% $ 706,714
550,554
23%
901,193
41%
44,692
2%
32%
25%
41%
2%
2,665,436
100%
2,203,153
100%
608,197
2,057,239
1,020,640
301,370
163,567
1,485,577
2,093,774
571,662
16,046
(190,476)
23%
77%
38%
11%
6%
56%
79%
21%
441,672
1,761,481
869,962
286,801
144,920
1,301,683
1,743,355
459,798
9,896
(163,067)
20%
80%
39%
13%
7%
59%
79%
21%
28%
10%
22%
24%
21%
38%
17%
17%
5%
13%
14%
20%
24%
$ 397,232
$ 306,627
30%
Revenues increased 21% to $2.7 billion in 2012, as compared to $2.2 billion in 2011.
• System sales, which include revenues from the sale of licensed software, software as a service, technology resale
(hardware, devices, and sublicensed software), deployment period licensed software upgrade rights, installation
fees, transaction processing and subscriptions, increased 28% to $902.8 million in 2012 from $706.7 million for the
same period in 2011. The increase in system sales was driven by record levels of technology resale and solid growth
in subscriptions and software.
• Support and maintenance revenues increased 10% to $604.2 million in 2012 compared to $550.6 million during the
same period in 2011. This increase was attributable to continued success at selling Cerner Millennium applications
and implementing them at client sites. We expect that support and maintenance revenues will continue to grow as
the base of installed Cerner Millennium systems grows.
45
• Services revenue, which includes professional services, excluding installation, and managed services, increased
22% to $1.1 billion in 2012 from $0.9 billion for the same period in 2011. This increase was driven by growth in
CernerWorks managed services as a result of continued demand for our hosting services and an increase in
professional services due to increased implementation activities and growth in Cerner ITWorks services.
Contract backlog, which reflects new business bookings that have not yet been recognized as revenue, increased 21% in
2012 when compared to 2011. This increase was driven by growth in new business bookings during the past four quarters,
including continued strong levels of managed services and Cerner ITWorks services bookings that typically have longer
contract terms.
A summary of total backlog at the end of 2012 and 2011 follows:
(In thousands)
Contract backlog
Support and maintenance backlog
Total backlog
Costs of Revenue
2012
2011
$ 6,534,564
$ 5,401,427
738,154
705,744
$ 7,272,718
$ 6,107,171
Cost of revenues as a percentage of total revenues was 23% in 2012, compared to 20% in the same period of 2011. The
higher cost of revenues as a percent of revenue was driven by a higher mix of technology resale, which carries a higher cost
of revenue.
Cost of revenues includes the cost of reimbursed travel expense, sales commissions, third party consulting services and
subscription content and computer hardware, devices and sublicensed software purchased from manufacturers for delivery
to clients. It also includes the cost of hardware maintenance and sublicensed software support subcontracted to the
manufacturers. Such costs, as a percent of revenues, typically have varied as the mix of revenue (software, hardware,
devices, maintenance, support, services and reimbursed travel) carrying different margin rates changes from period to period.
Cost of revenues does not include the costs of our client service personnel who are responsible for delivering our service
offerings. Such costs are included in sales and client service expense.
Operating Expenses
Total operating expenses increased 14% to $1.5 billion in 2012, compared with $1.3 billion in 2011.
• Sales and client service expenses as a percent of total revenues were 38% in 2012, compared to 39% in the same
period of 2011. These expenses increased 17% to $1.0 billion in 2012, from $0.9 billion in the same period of 2011.
Sales and client service expenses include salaries of sales and client service personnel, depreciation and other
expenses associated with our CernerWorks managed service business, communications expenses, unreimbursed
travel expenses, expense for share-based payments, sales and marketing salaries and trade show and advertising
costs. The decrease as a percent of revenue reflects ongoing efficiencies in our implementation and operational
processes.
46
• Software development expenses as a percent of revenue were 11% in 2012, compared to 13% in 2011. Expenditures
for software development reflect ongoing development and enhancement of the Cerner Millennium platform, including
investments in the next evolution of Cerner Millennium, Millennium+, which leverages the cloud and enables greater
mobility. The reduction as a percentage of revenue reflects our 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. Expense was also limited by a higher percentage of our software
development investments being capitalized, which we expect to continue, as a higher percent of our development
initiatives are focused on new functionality versus maintenance. A summary of our total software development
expense in 2012 and 2011 is as follows:
(In thousands)
Software development costs
Capitalized software costs
Capitalized costs related to share-based payments
Amortization of capitalized software costs
Total software development expense
For the Years Ended
2012
2011
$ 319,828
(98,067)
(2,122)
81,731
$ 290,645
(81,417)
(1,525)
79,098
$ 301,370
$ 286,801
• General and administrative expenses as a percent of total revenues were 6% in 2012, compared to 7% in 2011.
These expenses increased 13% to $163.6 million in 2012, from $144.9 million for the same period in 2011. General
and administrative expenses include salaries for corporate, financial and administrative staffs, utilities,
communications expenses, professional fees, transaction gains or losses on foreign currency and expense for share-
based payments. The increase in general and administrative expenses was primarily driven by an increase in
corporate personnel costs, as we have continued to increase such personnel to support our overall revenue growth.
Non-Operating Items
•
Interest income increased to $16.5 million in 2012 from $15.2 million in 2011 due primarily to growth in investments.
Interest expense decreased to $5.1 million in 2012 compared to $5.3 million in 2011 due primarily to payments on
our long-term debt, offset by increased capital lease obligations. Other income in 2012 also includes a $4.5 million
gain recognized on the disposition of one of our cost-method investments.
• Our effective tax rate decreased to 32% in 2012 from 35% in 2011. This decrease was primarily due to an increase
in net favorable permanent differences, along with a favorable adjustment to our unrecognized tax benefits, partially
offset by the expiration of the research and development tax credit on December 31, 2011. We do not expect the
favorable impact of permanent differences to be as significant in 2013. We also do not expect any significant favorable
adjustments to our unrecognized tax benefits in 2013. Refer to Note (12) of the notes to consolidated financial
statements for further information regarding our effective tax rate.
In January 2013, the American Taxpayer Relief Act of 2012 (Act) became law. The Act reinstates the research and
development tax credit retroactively from January 1, 2012 to December 31, 2013. In the first quarter of 2013, we
will recognize the research and development tax credit related to 2012 as a favorable discrete item. Research and
development tax credits generated in 2013 will be recognized pro-rata over that year as a component of the overall
2013 effective tax rate.
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 Argentina, Aruba, Australia, Austria, Canada, Cayman Islands, Chile, China (Hong
Kong), Egypt, England, France, Germany, Guam, India, Ireland, Italy, Japan, Malaysia, Mexico, Morocco, Puerto Rico, Qatar,
Saudi Arabia, Singapore, Spain, Sweden, Switzerland and the United Arab Emirates.
47
The following table presents a summary of the operating information for the years ended 2012 and 2011:
(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
Consolidated operating earnings
Domestic Segment
2012
% of
Revenue
2011
% of
Revenue
%
Change
$ 2,341,304
548,813
506,249
1,055,062
100%
23%
22%
45%
$ 1,894,454
387,466
439,465
826,931
100%
20%
23%
44%
1,286,242
55%
1,067,523
56%
324,132
59,384
131,580
190,964
100%
18%
41%
59%
308,699
54,206
126,997
181,203
100%
18%
41%
59%
133,168
41%
127,496
41%
(847,748)
(735,221)
$
571,662
$
459,798
24%
42%
15%
28%
20%
5%
10%
4%
5%
4%
15%
24%
• Revenues increased 24% to $2.3 billion in 2012 from $1.9 billion in 2011. This increase was primarily driven by strong
growth in technology resale and professional services.
• Cost of revenues was 23% of revenues in 2012, compared to 20% of revenues in 2011. The higher cost of revenues
as a percent of revenue was primarily driven by a higher mix of technology resale, which carries a higher cost of
revenue.
• Operating expenses increased 15% to $506.2 million in 2012 from $439.5 million in 2011, due primarily to growth in
managed services and professional services expenses.
Global Segment
• Revenues increased 5% to $324.1 million in 2012 from $308.7 million in 2011. This increase was primarily driven
by growth in technology resale and managed services, along with a higher level of support services. Growth in our
Global Segment revenues has lagged our faster rate of revenue growth in our Domestic Segment due to the more
significant impact of the economic downturn of the last several years on the non-U.S. countries in which we conduct
operations.
• Cost of revenues was 18% in 2012 and 2011, due to a similar mix of sales.
• Operating expenses were at $131.6 million in 2012, compared to $127.0 million in 2011, primarily due to overall
growth in our Global segment.
Other, net
Operating results not attributed to an operating segment include expenses, such as centralized professional services costs,
software development, marketing, general and administrative, stock-based compensation, depreciation, and amortization.
These expenses increased 15% to $847.7 million in 2012 from $735.2 million in 2011. This increase was primarily due to
growth in corporate and development personnel costs.
48
Fiscal Year 2011 Compared to Fiscal Year 2010
(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 service
Software development
General and administrative
Total operating expenses
Total costs and expenses
Operating earnings
Other income, net
Income taxes
Net earnings
Revenues & Backlog
2011
% of
Revenue
2010
% of
Revenue
%
Change
$ 706,714
550,554
901,193
44,692
32% $ 550,792
517,494
25%
749,483
41%
32,453
2%
30%
28%
40%
2%
2,203,153
100%
1,850,222
100%
441,672
1,761,481
869,962
286,801
144,920
1,301,683
1,743,355
459,798
9,896
(163,067)
20%
80%
39%
13%
7%
59%
79%
21%
320,356
1,529,866
767,152
272,851
130,530
1,170,533
1,490,889
359,333
2,879
(124,940)
$ 306,627
$ 237,272
17%
83%
42%
15%
7%
64%
81%
19%
28%
6%
20%
38%
19%
38%
15%
13%
5%
11%
11%
17%
28%
29%
Revenues increased 19% to $2.2 billion in 2011, as compared to $1.9 billion in 2010.
• System sales increased 28% to $706.7 million in 2011 from $550.8 million in 2010. The increase in system sales
was driven by strong increases in licensed software, technology resale, and subscriptions.
• Support and maintenance revenues increased 6% to $550.6 million in 2011 compared to $517.5 million in 2010. This
increase was attributable to continued success at selling Cerner Millennium applications and implementing them at
client sites.
• Services revenue increased 20% to $901.2 million in 2011 compared to $749.5 million in 2010. This increase was
driven by growth in CernerWorks managed services as a result of continued demand for our hosting services and
an increase in professional services due to increased implementation activities and growth in Cerner ITWorks
services.
Contract backlog, which reflects new business bookings that have not yet been recognized as revenue, increased 26% in
2011 compared to 2010. This increase was driven by growth in new business bookings during 2011, including continued
strong levels of managed services and Cerner ITWorks bookings that typically have longer contract terms.
A summary of total backlog at the end of 2011 and 2010 follows:
(In thousands)
Contract backlog
Support and maintenance backlog
Total backlog
2011
2010
$ 5,401,427
$ 4,285,267
705,744
654,913
$ 6,107,171
$ 4,940,180
49
Costs of Revenue
Cost of revenues as a percentage of total revenues was 20% of total revenues in 2011, as compared to 17% of total revenues
in 2010. The higher cost of revenues as a percent of revenue was primarily driven by a higher mix of technology resale,
which carries a higher cost of revenue, and a slightly higher level of third party consulting costs.
Operating Expenses
Total operating expenses increased 11% in 2011 to $1.3 billion as compared to $1.2 billion in 2010.
• Sales and client service expenses as a percent of total revenues were 39% in 2011, as compared to 42% in 2010.
These expenses increased 13% to $870.0 million in 2011, from $767.2 million in 2010. The increase in these expenses
was primarily attributable to growth in the managed services business and a higher level of professional services
expenses. The decrease as a percent of revenue reflected efficiencies in our implementation and operational
processes.
• Software development expenses as a percent of revenue were 13% in 2011, as compared to 15% in 2010. These
expenses increased 5% in 2011 to $286.8 million, from $272.9 million in 2010. Expenditures for software development
in 2011 reflected continued development and enhancement of the Cerner Millennium platform and software solutions
and investments in new growth initiatives. Although these expenses increased in 2011, the reduction as a percent
of revenue reflected our ongoing efforts to control spending relative to revenue growth. A summary of our total
software development expense in 2011 and 2010 is as follows:
(In thousands)
Software development costs
Capitalized software costs
Capitalized costs related to share-based payments
Amortization of capitalized software costs
Total software development expense
For the Years Ended
2011
2010
$ 290,645
(81,417)
(1,525)
79,098
$ 284,836
(79,631)
(1,348)
68,994
$ 286,801
$ 272,851
• General and administrative expenses as a percent of total revenues were 7% in 2011 and 2010. These expenses
increased 11% to $144.9 million in 2011 from $130.5 million in 2010. An increase in corporate personnel costs
accounted for the majority of the overall increase in general and administrative expenses, as we increased personnel
to support our overall revenue growth.
Non-Operating Items
•
Interest income increased to $15.2 million in 2011 from $10.3 million in 2010 due primarily to growth in investments
and related increase in investment returns. Interest expense decreased to $5.3 million in 2011 from $6.9 million in
2010 due to payment on our long-term debt.
• Our effective tax rate was 35% in 2011, as compared to 34% in 2010. The increase was attributable to the mix of
domestic and foreign earnings.
50
Operations by Segment
The following table presents a summary of our operating segment information for the years ended 2011 and 2010:
(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
Consolidated operating earnings
Domestic Segment
2011
% of
Revenue
2010
% of
Revenue
%
Change
$ 1,894,454
387,466
439,465
826,931
100%
20%
23%
44%
$ 1,562,563
272,385
417,181
689,566
100%
17%
27%
44%
1,067,523
56%
872,997
56%
308,699
54,206
126,997
181,203
100%
18%
41%
59%
287,659
47,971
124,546
172,517
100%
17%
43%
60%
127,496
41%
115,142
40%
(735,221)
(628,806)
$
459,798
$
359,333
21%
42%
5%
20%
22%
7%
13%
2%
5%
11%
17%
28%
• Revenues increased 21% to $1.9 billion in 2011 from $1.6 billion in the same period in 2010. This increase was
driven by growth across all business models, with particular strength in licensed software, technology resale,
professional services and managed services.
• Cost of revenues increased to 20% of revenues in 2011, compared to 17% in 2010. The higher cost of revenues as
a percent of revenue was primarily driven by a higher mix of technology resale, which carries a high cost of revenue,
and an increase in third party consulting costs.
• Operating expenses increased 5% to $439.5 million in 2011, from $417.2 million in 2010, due primarily to growth in
managed services and professional services expense.
Global Segment
• Revenues increased 7% to $308.7 million in 2011 from $287.7 million in 2010. Global revenues increased due to an
increase in licensed software and managed services revenue, which was partially offset by a decrease in professional
services and technology resale revenue. The global comparisons were also impacted by a change in certain contract
accounting estimates during the first quarter of 2010.
• Cost of revenues was 18% and 17% in 2011 and 2010, respectively. The higher cost of revenues in 2011 was primarily
driven by an increase in third party professional services costs.
• Operating expenses increased 2% to $127.0 million in 2011 from $124.5 million in 2010, which was primarily to
support our revenue growth.
Other, net
These expenses increased 17% to $735.2 million in 2011 from $628.8 million in 2010. This increase was primarily due to
increased costs in software development, increased corporate and development personnel costs, increased stock
compensation costs, and growth in other professional services.
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.
51 Our principal sources of liquidity are our cash, cash equivalents, which consist of money market funds and time deposits
with original maturities of less than 90 days, and short-term investments. At the end of 2012, we had cash and cash equivalents
of $317.1 million and short-term investments of $719.7 million, as compared to cash and cash equivalents of $243.1 million
and short-term investments of $531.6 million at the end of 2011.
Approximately 15% of our aggregate cash, cash equivalents and short-term investments at December 29, 2012, were held
outside of the United States. As part of our business strategy, we plan to indefinitely reinvest the earnings of our foreign
operations; however, should the earnings of our foreign operations be repatriated, we would accrue and pay tax on such
earnings, which may be material.
Additionally, we maintain a $100.0 million multi-year revolving credit facility, which expires in February 2017. The facility
provides an unsecured revolving line of credit for working capital purposes, along with a letter of credit facility. Interest is
payable at a rate based on prime, LIBOR, or the U.S. federal funds rate, plus a spread that varies depending on the leverage
ratios maintained. The agreement provides certain restrictions on our ability to borrow, incur liens, sell assets and pay
dividends and contains certain cash flow and liquidity covenants. As of the end of 2012, we were in compliance with all debt
covenants. As of the end of 2012, we had no outstanding borrowings under this agreement; however, we had $14.3 million
of outstanding letters of credit, which reduced our available borrowing capacity to $85.7 million.
We believe that our present cash position, together with cash generated from operations, short-term investments and, if
necessary, our available line of credit, will be sufficient to meet anticipated cash requirements during 2013.
The following table summarizes our cash flows in 2012, 2011 and 2010:
(In thousands)
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
Cash and cash equivalents at end of period
Free cash flow (non-GAAP)
Cash from Operating Activities
(In thousands)
Cash collections from clients
Cash paid to employees and suppliers and other
Cash paid for interest
Cash paid for taxes, net of refund
Total cash from operations
For the Years Ended
2011
2010
2012
$ 708,314
(701,631)
66,034
1,257
73,974
$ 546,294
(565,091)
48,853
(1,421)
28,635
$ 456,444
(520,896)
34,841
2,399
(27,212)
243,146
214,511
241,723
$ 317,120
$ 243,146
$ 214,511
$ 424,696
$ 358,557
$ 273,154
For the Years Ended
2011
2010
2012
$ 2,714,315
(1,840,682)
(6,448)
(158,871)
$ 2,211,361
(1,543,414)
(5,786)
(115,867)
$ 1,900,145
(1,315,077)
(6,887)
(121,737)
$ 708,314
$ 546,294
$ 456,444
Cash flow from operations increased $162.0 million in 2012 compared to 2011 and $89.9 million in 2011 compared to 2010
due primarily to the increase in cash impacting earnings, along with cash provided by working capital changes. During 2012,
2011 and 2010, we received total client cash collections of $2.7 billion, $2.2 billion and $1.9 billion, respectively, of which
3%, 3% and 4%, respectively, were received from third party client financing arrangements and non-recourse payment
assignments. Days sales outstanding was 74 days in the fourth quarter of 2012, 73 days in the third quarter of 2012 and 83
days in the fourth quarter of 2011. Revenues provided under support and maintenance agreements represent recurring cash
flows. Support and maintenance revenues increased 10% in 2012 and 6% in 2011. We expect these revenues to continue
to grow as the base of installed Cerner Millennium systems grows.
52
Cash from Investing Activities
(In thousands)
Capital purchases
Capitalized software development costs
Purchases of investments, net of sales and maturities
Other, net
Total cash flows from investing activities
For the Years Ended
2011
2010
2012
$ (183,429) $ (104,795) $ (102,311)
(80,979)
(312,340)
(25,266)
(100,189)
(354,603)
(63,410)
(82,942)
(291,393)
(85,961)
$ (701,631) $ (565,091) $ (520,896)
Cash flows from investing activities consist 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, building and improvement purchases to support our facilities requirements and capitalized spending to support
our ongoing software development initiatives. Capital spending is expected to increase in 2013, primarily due to capital
purchases associated with new office space and spending related to software development initiatives; however, we still
expect strong levels of free cash flow.
Short-term investment activity consists of the investment of cash generated by our business in excess of what is necessary
to fund operations. We expect to continue such short-term investment activity in 2013, as we expect strong levels of cash
flow.
During 2012, we completed our acquisition of Anasazi Software, Inc. for $40.5 million, net of cash acquired. During 2011,
we completed our acquisitions of Resource Systems, Inc. and Clairvia, Inc. for approximately $28.1 million and $37.2 million,
net of cash acquired, respectively. During 2010, we completed our acquisition of IMC Health Care, Inc. for approximately
$14.5 million, net of cash acquired. We expect to continue seeking and completing strategic business acquisitions that are
complementary to our business.
Cash from Financing Activities
(In thousands)
Repayment of long-term debt and capital lease obligations
Cash from option exercises (including excess tax benefits)
Other, net
Total cash flows from financing activities
For the Years Ended
2011
2010
2012
$
(17,083) $
86,517
(3,400)
(25,701) $
75,333
(779)
(27,625)
60,950
1,516
$
66,034
$
48,853
$
34,841
Cash inflows from stock option exercises are dependent on a number of factors, including the price of our common stock,
grant activity under our stock option and equity plans, and overall market volatility. We expect cash inflows from stock option
exercises to continue in 2013 based on the number of exercisable options at the end of 2012 and our current stock price.
Free Cash Flow
(In thousands)
Cash flows from operating activities (GAAP)
Capital purchases
Capitalized software development costs
Free cash flow (non-GAAP)
For the Years Ended
2011
2010
2012
$ 708,314
(183,429)
(100,189)
$ 546,294
(104,795)
(82,942)
$ 456,444
(102,311)
(80,979)
$ 424,696
$ 358,557
$ 273,154
Free cash flow increased $66.1 million from 2011 to 2012 and $85.4 million from 2010 to 2011, which we believe reflects
continued strength in our earnings. 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, nor 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
53
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, because free cash flow takes into account the capital expenditures necessary to operate our
business.
Contractual Obligations, Commitments and Off Balance Sheet Arrangements
The following table represents a summary of our contractual obligations and commercial commitments at the end of 2012,
except short-term purchase order commitments arising in the ordinary course of business.
(In thousands)
Balance sheet obligations(a):
Long-term debt obligations
Interest on long-term debt obligations
Capital lease obligations
Interest on capital lease obligations
Other obligations(b):
Operating lease obligations
Purchase obligations
2013
2014
2015
2016
2017
2018 and
thereafter
Total
Payments Due by Period
$
24,765
$
15,015
$
15,015
$
2,808
34,817
3,900
24,943
39,654
1,664
32,860
2,855
22,843
33,052
832
32,025
1,767
16,803
12,721
— $
—
— $
—
30,214
589
12,210
2,594
11,428
94
11,911
2,184
— $
54,795
—
—
—
5,304
141,344
9,205
40,133
4,000
128,843
94,205
Total
$ 130,887
$ 108,289
$
79,163
$
45,607
$
25,617
$
44,133
$ 433,696
(a) At the end of 2012, liabilities for unrecognized tax benefits were $2.2 million.
(b) At the end of 2012, we had certain obligations related to the construction of office space in Kansas City, Kansas. Refer to Note (16) of the
notes to consolidated financial statements for information regarding the construction.
We have no off balance sheet arrangements as defined in Regulation S-K. The effects of inflation on our business during
2012, 2011 and 2010 were insignificant.
Recent Accounting Pronouncements
Refer to Note (1) of the notes to consolidated financial statements for information regarding recently adopted accounting
pronouncements.
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
54 in the quarter the contracts are executed. If the period of time to achieve our delivery and installation milestones for our
licensed software were to lengthen, our milestones would be adjusted and the timing of revenue recognition for our licensed
software could materially change.
We also recognize revenue for certain projects using the percentage of completion method. 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 identified 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 this trend to continue in
the future. If we missed our estimates of net future revenues by 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 health care industry may offer competitive products or services. The
pace of change in the HCIT 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.
Goodwill
Goodwill is not amortized but is 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 assessment. 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 2012 and 2011 and concluded that goodwill was not impaired. The 2012 assessment
consisted of a qualitative analysis in accordance with new guidance effective in 2012. The 2011 assessment consisted of a
quantitative analysis, in which 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 in
2011. Goodwill amounted to $247.6 million and $211.8 million at the end of 2012 and 2011, 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.
55
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.
We have discussed the development and selection of these critical accounting estimates with the Audit Committee of our
Board of Directors and the Audit Committee has reviewed our disclosure contained herein.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We use a foreign-currency denominated debt instrument to reduce our foreign currency exchange rate exposure in the U.K.
As of the end of 2012, we designated all of our Great Britain Pound (GBP) denominated long-term debt (27.9 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% adverse 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 in 2012 by
approximately $2.8 million, as compared to $3.6 million in 2011. The 2012 model assumes an exchange rate of 1.617 at
December 29, 2012 and a tax rate of 38.25%. The hypothetical decrease in other comprehensive income in 2012 from 2011
is a result of a lower amount of GBP denominated debt outstanding. Actual results may differ. 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. See Note (19) to
the Consolidated Financial Statements for supplementary financial information.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
N/A
Item 9A. Controls and Procedures
a) 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 this 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 to allow timely decisions regarding required disclosure.
b) There were no changes in the Company’s internal controls over financial reporting during the three months ended
December 29, 2012, that have materially affected, or are reasonably likely to materially affect, its internal controls
over financial reporting.
c) The Company’s management, including its CEO and CFO, 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,
56 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.
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 December 29, 2012. 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 December 29, 2012, 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 this 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 9B. Other Information
N/A
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this Item 10 regarding our Directors and any nominees to become Directors will be set forth
under the caption “Information Concerning Directors” in our Proxy Statement in connection with the 2013 Annual Shareholders’
Meeting scheduled to be held May 24, 2013 (the Proxy Statement), and is incorporated in this Item 10 by reference. The
information required by this Item 10 regarding family relationships between any Director, Executive Officer or other person
nominated to become a Director or Executive Officer will be set forth under the caption “Certain Transactions” in our Proxy
Statement 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 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 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 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 information required by this Item 10 regarding our Executive Officers is set
forth under the caption “Executive Officers of the Registrant” in 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 and is incorporated in this Item 11 by reference. The
information required by this Item 11 concerning director compensation will be set forth under the caption "Director
Compensation" in our Proxy Statement 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 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 and is incorporated in this Item 11 by reference.
57
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 “Security Ownership of Certain Beneficial
Owners and Management” in our Proxy Statement and is incorporated in this Item 12 by reference.
The following table provides information about our common stock that may be issued under our equity compensation
plans as of December 29, 2012:
(In thousands, except per share data)
Plan category
Equity compensation plans approved by
security holders (4)
Equity compensation plans not approved by
security holders
Total
Securities to
be issued
upon
exercise of
outstanding
options and
rights (1)
Weighted
average
exercise
price per
share (2)
Securities
available for
future
issuance(3)
12,337
$
33.97
—
12,337
—
7,718
—
7,718
(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) Excludes securities to be issued upon exercise of outstanding options and rights.
(4) Includes the Stock Option Plan D, Stock Option Plan E, 2001 Long-Term Incentive Plan F, 2004 Long-Term Incentive Plan G and 2011 Omnibus Equity Incentive Plan. All new
grants are made under the 2011 Omnibus Equity Incentive Plan, as the previous plans are no longer active.
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 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 “Meetings of the Board and Committees”
in our Proxy Statement 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 and is incorporated in this Item 14 by reference.
58
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 December 29, 2012 and December 31, 2011
Consolidated Statements of Operations -Years Ended December 29, 2012, December 31, 2011
and January 1, 2011
Consolidated Statements of Comprehensive Income - Years Ended December 29, 2012,
December 31, 2011 and January 1, 2011
Consolidated Statements of Cash Flows - Years Ended December 29, 2012, December 31, 2011
and January 1, 2011
Consolidated Statements of Changes in Shareholders' Equity - Years Ended December 29, 2012,
December 31, 2011 and January 1, 2011
Notes to Consolidated Financial Statements
(2) See the Index to Exhibits immediately following the signature page of this Annual Report on Form 10-K.
59
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 8, 2013
CERNER CORPORATION
By:
/s/ Neal L. Patterson
Neal L. Patterson
Chairman of the Board, Chief Executive Officer
and President
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
February 8, 2013
Neal L. Patterson, Chairman of the Board,
Chief Executive Officer and President
(Principal Executive Officer)
/s/ Clifford W. Illig
February 8, 2013
Clifford W. Illig, Vice Chairman and Director
/s/ Marc G. Naughton
February 8, 2013
Marc G. Naughton, Executive Vice President,
Treasurer and Chief Financial Officer
(Principal Financial Officer)
/s/ Michael R. Battaglioli
February 8, 2013
Michael R. Battaglioli, Vice President and
Chief Accounting Officer (Principal Accounting Officer)
/s/ Gerald E. Bisbee, Jr.
Gerald E. Bisbee, Jr., Ph.D., Director
/s/ Denis A. Cortese, M.D.
Denis A. Cortese, M.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
February 8, 2013
February 8, 2013
February 8, 2013
February 8, 2013
February 8, 2013
February 8, 2013
60
INDEX TO EXHIBITS
Exhibit
Number
Exhibit Description
Second Restated Certificate of Incorporation of the
Registrant, dated December 5, 2003
Certificates of Amendment to the Second Restated
Certificate of Incorporation
Amended & Restated Bylaws dated September 16, 2008
(as amended March 31, 2010 and March 9, 2011)
Specimen stock certificate
Amended and Restated Credit Agreement, dated
February 10, 2012, among Cerner Corporation and U.S.
Bank National Association, Bank of America, N.A.,
Commerce Bank, N.A., UMB Bank, N.A. and RBS
Citizens, N.A.
First Amendment to Amended and Restated Credit
Agreement, dated December 28, 2012, among Cerner
Corporation and U.S. Bank National Association, Bank
of America, N.A., Commerce Bank, N.A., UMB Bank,
N.A. and RBS Citizens, N.A.
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
Incorporated by Reference
Form
10-K
Exhibit(s)
3(a)
Filing Date
SEC File No./Film No.
Filed
Herewith
3/18/2004
0-15386/04677199
8-K
3.1 & 3.2
6/1/2011
8-K
3.2
3/15/2011
10-K
4(a)
8-K
99.1
2/28/2007
0-15386/08646565
2/13/2012
0-15386/12599122
X
8-K
99.1
11/7/2005
0-15386/051183275
10(d)*
Cerner Corporation 2001 Long-Term Incentive Plan F
DEF 14A
Annex I
2006 Form of Indemnification Agreement for use
between the Registrant and its Directors
10-K
10(a)
2/28/2007
0-15386/07658265
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
8-K
99.1
6/3/2010
10-K
10(c)
2/27/2008
4/16/2001
0-15386/1603080
2/27/2008
0-15386/08646565
Cerner Corporation 2004 Long-Term Incentive Plan G
(as amended on December 3, 2007)
10-K
10(g)
Cerner Corporation 2011 Omnibus Equity Incentive Plan
Cerner Corporation 2001 Associate Stock Purchase Plan
as Amended and Restated March 1, 2010 and May 27,
2011
Cerner Corporation Qualified Performance-Based
Compensation Plan (as Amended and Restated) dated
May 28, 2010
Form of 2012 Executive Performance Agreement
Cerner Corporation Executive Deferred Compensation
Plan as Amended & Restated dated January 1, 2008
Cerner Corporation 2005 Enhanced Severance Pay Plan
as Amended & Restated dated August 15, 2010
S-8
S-8
4.5
4.6
5/27/2011
5/27/2011
DEF 14A
Annex I
4/16/2010
10-Q
10-K
10.1
10(k)
4/27/2012
2/27/2008
0-15386/08646565
10-Q
10(a)
10/29/2010
3(a)
3(b)
3(c)
4(a)
4(b)
4(c)
4(d)
10(a)*
10(b)*
10(c)*
10(e)*
10(f)*
10(g)*
10(h)*
10(i)*
10(j)*
10(k)*
61 10(l)*
10(m)*
10(n)*
10(o)*
10(p)*
10(q)*
10(r)*
10(s)*
10(t)*
10(u)
10(v)*
10(w)*
10(x)*
10(y)
10(z)
10(aa)
21
23
31.1
31.2
32.1
Cerner Corporation 2005 Enhanced Severance Pay Plan
as Amended & Restated (for I.R.C. § 409A) Effective
December 31, 2012
Exhibit A Severance Matrix, effective April 1, 2011 to the
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
Director Restricted Stock Agreement
Cerner Corporation 2001 Long-Term Incentive Plan F
Nonqualified Stock Option Director Agreement
Cerner Corporation 2001 Long-Term Incentive Plan F
Performance-Based Restricted Stock Agreement for
Section 16 Officers
10-Q
10(a)
4/29/2011
10-K
10(v)
10-Q
10(a)
10-K
10(x)
10-K
10(w)
3/17/2005
0-15386/05688830
11/10/2005
0-15386/051193974
3/17/2005
0-15386/05688830
3/17/2005
0-15386/05688830
8-K
99.1
6/4/2010
Cerner Corporation 2004 Long-Term Incentive Plan G
Nonqualified Stock Option Grant Certificate
10-K
10(q)
2/27/2008
0-15386/08646565
Cerner Corporation 2011 Omnibus Equity Incentive Plan
- Director Restricted Stock Agreement
Cerner Corporation 2011 Omnibus Equity Incentive Plan
- Performance Based Restricted Stock Agreement
Cerner Corporation 2011 Omnibus Equity Incentive Plan-
Non-Qualified Stock Option Grant Certificate
10-Q
10.1
7/27/2012
Aircraft Time Sharing Agreement between Cerner
Corporation and Clifford W. Illig dated February 7, 2007
8-K
10.3
2/9/2007
0-15386/07598012
10-K
10(t)
2/22/2010
8-K
99.1
1/22/2010
Notice of Change of Aircraft Provided Under Time
Sharing Agreement from Cerner Corporation to Clifford
W. Illig dated December 28, 2009
Notice of Change of Aircraft Provided Under Time
Sharing Agreement from Cerner Corporation to Clifford
W. Illig dated effective December 20, 2011
Amended and Restated Aircraft Time Sharing
Agreement between Cerner Corporation and Neal L.
Patterson dated February 1, 2012
Interparty Agreement, dated January 19, 2010, among
Kansas Unified Development, LLC, OnGoal, LLC and
Cerner Corporation
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 of Neal L. Patterson pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of
Sarbanes-Oxley Act of 2002
X
X
X
X
X
X
X
X
X
X
62 32.2
Certification of Marc G. Naughton 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
101.LAB
101.PRE
101.DEF
XBRL Taxonomy Extension Calculation Linkbase
Document
XBRL Taxonomy Extension Labels Linkbase
Document
XBRL Taxonomy Extension Presentation Linkbase
Document
XBRL Taxonomy Extension Definition Linkbase
Document
* Indicates a management contract or compensatory plan or arrangement required to be identified by Part IV, Item 15(a)(3).
X
X
X
X
X
X
X
63 Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Cerner Corporation:
We have audited Cerner Corporation’s (the Corporation) internal control over financial reporting as of December 29, 2012,
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 December 29, 2012, 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 December 29, 2012 and December 31, 2011,
and the related consolidated statements of operations, comprehensive income, changes in shareholders’ equity, and cash
flows for each of the years in the three-year period ended December 29, 2012, and our report dated February 8, 2013
expressed an unqualified opinion on those consolidated financial statements.
/s/KPMG LLP
Kansas City, Missouri
February 8, 2013
64 Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Cerner Corporation:
We have audited the accompanying consolidated balance sheets of Cerner Corporation and subsidiaries (collectively, the
Corporation) as of December 29, 2012 and December 31, 2011, and the related consolidated statements of operations,
comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended
December 29, 2012. 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 December 29, 2012 and December 31, 2011, and the results of their
operations and their cash flows for each of the years in the three-year period ended December 29, 2012, 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 December 29, 2012, 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 8, 2013 expressed an unqualified opinion on the effectiveness of Cerner Corporation’s
internal control over financial reporting.
/s/KPMG LLP
Kansas City, Missouri
February 8, 2013
65 CERNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 29, 2012 and December 31, 2011
(In thousands, except share data)
Assets
Current assets:
Cash and cash equivalents
Short-term investments
Receivables, net
Inventory
Prepaid expenses and other
Deferred income taxes, net
Total current assets
Property and equipment, net
Software development costs, net
Goodwill
Intangible assets, net
Long-term investments
Other assets
Total assets
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable
Current installments of long-term debt and capital lease obligations
Deferred revenue
Accrued payroll and tax withholdings
Other accrued expenses
Total current liabilities
Long-term debt and capital lease obligations
Deferred income taxes and other liabilities
Deferred revenue
Total liabilities
Shareholders’ Equity:
Cerner Corporation shareholders’ equity:
Common stock, $.01 par value, 250,000,000 shares authorized, 172,089,351 shares issued at December
29, 2012 and 169,565,856 shares issued at December 31, 2011
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss, net
Total Cerner Corporation shareholders’ equity
Noncontrolling interest
Total shareholders’ equity
Total liabilities and shareholders’ equity
See notes to consolidated financial statements.
2012
2011
$
317,120
719,665
577,848
23,681
113,572
38,620
1,790,506
569,708
267,307
247,616
132,045
509,467
187,819
$
243,146
531,635
563,209
23,296
94,232
46,795
1,502,313
488,996
248,750
211,826
75,366
359,324
113,783
$ 3,704,468
$ 3,000,358
$
$
141,212
59,582
189,652
125,253
64,413
580,112
136,557
143,212
10,937
870,818
85,545
39,722
153,139
109,227
51,087
438,720
86,821
150,229
13,787
689,557
1,721
842,490
1,994,694
(5,255)
2,833,650
—
2,833,650
1,696
723,490
1,597,462
(11,967)
2,310,681
120
2,310,801
$ 3,704,468
$ 3,000,358
66 CERNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 29, 2012, December 31, 2011 and January 1, 2011
(In thousands, except per share data)
Revenues:
System sales
Support, maintenance and services
Reimbursed travel
Total revenues
Costs and expenses:
Cost of system sales
Cost of support, maintenance and services
Cost of reimbursed travel
Sales and client service
Software development (Includes amortization of $81,731, $79,098 and $68,994, respectively)
General and administrative
Total costs and expenses
Operating earnings
Other income, 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.
For the Years Ended
2011
2010
2012
$ 902,799
$ 706,714
$ 550,792
1,707,329
1,451,747
1,266,977
55,308
44,692
32,453
2,665,436
2,203,153
1,850,222
427,456
125,433
55,308
1,020,640
301,370
163,567
296,561
100,419
44,692
869,962
286,801
144,920
221,055
66,848
32,453
767,152
272,851
130,530
2,093,774
1,743,355
1,490,889
571,662
459,798
359,333
16,046
9,896
2,879
587,708
469,694
362,212
(190,476)
(163,067)
(124,940)
$ 397,232
$ 306,627
$ 237,272
$
$
2.32
2.26
$
$
1.82
1.76
$
$
1.44
1.39
170,931
168,634
164,916
175,697
173,867
170,847
67
CERNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the years ended December 29, 2012, December 31, 2011 and January 1, 2011
(In thousands)
Net earnings
Foreign currency translation adjustment and other (net of taxes (benefit) of $(1,396), $(2,162) and
$1,146, respectively)
Change in net unrealized holding gain (loss) on available-for-sale investments (net of taxes of $125, $0
and $0, respectively)
Comprehensive income
See notes to consolidated financial statements.
For the Years Ended
2011
2010
2012
$ 397,232
$ 306,627
$ 237,272
6,511
(7,776)
(937)
201
—
—
$ 403,944
$ 298,851
$ 236,335
68
CERNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 29, 2012, December 31, 2011 and January 1, 2011
(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
Sales and 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:
Repayment of long-term debt and capital lease obligations
Proceeds from excess tax benefits from share-based compensation
Proceeds from exercise of options
Contingent consideration payments for acquisition of businesses
Proceeds from sale of future receivables
Net cash provided by financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
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 net tangible assets (liabilities) acquired (assumed)
Fair value of intangible assets acquired
Fair value of goodwill
Less: Fair value of contingent liability payable
Less: Fair value of working capital settlement payable
Cash paid for acquisitions
Cash acquired
Net cash used
See notes to consolidated financial statements.
For the Years Ended
2011
2010
2012
$ 397,232
$ 306,627
$ 237,272
222,580
36,113
8,342
(83,705)
(279)
(2,224)
35,265
(22,784)
33,277
84,497
212,556
27,919
(22,113)
(128,979)
(12,329)
9,974
17,504
26,053
33,792
75,290
193,337
23,723
30,362
(17,370)
188
35,378
30,812
(42,651)
(24,618)
(9,989)
708,314
546,294
456,444
(183,429)
(100,189)
(1,286,997)
932,394
(22,870)
(40,540)
(104,795)
(82,942)
(1,083,274)
791,881
(20,620)
(65,341)
(102,311)
(80,979)
(803,832)
491,492
(10,780)
(14,486)
(701,631)
(565,091)
(520,896)
(17,083)
48,370
38,147
(3,400)
—
66,034
1,257
73,974
243,146
(25,701)
36,433
38,900
(779)
—
48,853
(1,421)
28,635
214,511
(27,625)
26,226
34,724
—
1,516
34,841
2,399
(27,212)
241,723
$ 317,120
$ 243,146
$ 214,511
$
$
6,448
158,871
$
5,786
115,867
$
6,887
121,737
(6,375) $
18,559
35,281
(1,916)
—
45,549
(5,009)
(8,464) $
32,264
50,751
(5,235)
(939)
68,377
(3,036)
1,069
5,076
11,290
(1,725)
—
15,710
(1,224)
$
40,540
$
65,341
$
14,486
69 CERNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the years ended December 29, 2012, December 31, 2011 and January 1, 2011
(In thousands)
Balance at January 2, 2010
Exercise of stock options
Employee share-based compensation expense
Employee share-based compensation net excess tax benefit
Other comprehensive income (loss)
Net earnings
Balance at January 1, 2011
Exercise of stock options
Employee share-based compensation expense
Employee share-based compensation net excess tax benefit
Other comprehensive income (loss)
Net earnings
Employee share-based compensation expense
Employee share-based compensation net excess tax benefit
Other comprehensive income (loss)
Net earnings
Dissolution of underlying entity
Balance at December 29, 2012
See notes to consolidated financial statements.
Common Stock
Additional
Accumulated
Other
Non-
Shares
Amount
Paid-in
Capital
Retained
Earnings
Comprehensive
Income (Loss)
controlling
Interest
163,550
$
1,636
$
528,733
$ 1,053,563
$
(3,254) $
120
2,929
—
—
—
—
29
—
—
—
—
34,695
23,723
29,837
—
—
—
—
—
—
237,272
—
—
—
(937)
—
—
—
—
—
—
166,479
1,665
616,988
1,290,835
(4,191)
120
3,087
—
—
—
—
31
—
—
—
—
38,869
27,919
39,714
—
—
—
—
—
—
306,627
25
—
—
—
—
—
32,561
36,113
50,326
—
—
—
—
—
—
—
397,232
—
—
—
—
—
—
—
—
—
(7,776)
—
(11,967)
—
—
—
6,712
—
—
172,089
$
1,721
$
842,490
$ 1,994,694
$
(5,255) $
—
—
—
—
—
120
—
—
—
—
(120)
—
Balance at December 31, 2011
169,566
1,696
723,490
1,597,462
Exercise of stock options (including net-settled option exercises)
2,523
70 CERNER CORPORATION AND SUBSIDIARIES
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.
Our fiscal year ends on the Saturday closest to December 31. Fiscal years 2012, 2011 and 2010 consisted of 52 weeks and
ended on December 29, 2012, December 31, 2011 and January 1, 2011, respectively. 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 health care information technology, health care devices, hardware and
content solutions for health care organizations and consumers. We also provide a wide range of value-added services,
including implementation and training, remote hosting, operational management services, revenue cycle services, support
and maintenance, health care data analysis, clinical process optimization, transaction processing, employer health centers,
employee wellness programs and third party administrator services for employer-based health plans.
Summary of Significant Accounting Policies
(a) Revenue Recognition - We recognize software related revenue in accordance with the provisions of Accounting Standards
Codification (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:
• Persuasive evidence of an arrangement exists;
• Delivery has occurred or services have been rendered;
• Our fee is fixed or determinable; and
• Collection of the revenue is reasonably assured.
The following are our major components of revenue:
• System sales – includes the licensing of computer software, software as a service, 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; and
• 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.
71
Allocation of Revenue to Multiple Element Arrangements
For multiple element arrangements that contain software and non-software elements, we allocate revenue to software and
software-related elements as a group and any non-software element separately. After the arrangement consideration has
been allocated to the non-software elements, revenue is recognized when the basic revenue recognition criteria are met for
each element. For the group of software and software-related elements, revenue is recognized under the guidance applicable
to software transactions.
Since we do not have vendor specific objective evidence (VSOE) of fair value on software licenses within our multiple element
arrangements, we recognize revenue on our software and software-related elements using the residual method. Under the
residual method, license 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, when software is installed and all other conditions
to revenue recognition are met. 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 software as a service 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 sublicensed software based on its price when 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 using VSOE, the entire amount of revenue under the arrangement is deferred until these elements
have been delivered or VSOE of fair value can be established.
We also enter into arrangements that include multiple non-software deliverables. For each element in a multiple element
arrangement that does not contain software-related elements to be accounted for as a separate unit of accounting, the
following must be met: the delivered products or services have value to the client on a stand-alone basis; and for an
arrangement that includes a general right of return relative to the delivered products or services, delivery or performance of
the undelivered product or service is considered probable and is substantially controlled by the Company. We allocate the
arrangement consideration to each element based on the selling price hierarchy of VSOE of fair value, if it exists, or third-
party evidence (TPE) of selling price. If neither VSOE nor TPE are available, we use estimated selling price. After the
arrangement consideration has been allocated to the elements, we account for each respective element in the arrangement
as described below.
For certain arrangements, revenue for software, implementation services and, in certain cases, support services for which
VSOE of fair value cannot be established are accounted for as a single unit of accounting. The revenue recognized from
single units of accounting are typically allocated and classified as system sales and support, maintenance and services. If
available, the VSOE of 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 cannot
be established, revenue is classified based on the nature of related costs incurred. The following table details the classification
allocations for arrangements accounted for as a single unit of accounting:
(In millions)
System sales
Support, maintenance and services
Revenue Recognition Policies for Each Element
For the Years Ended
2012
2011
2010
$
17.7
$
140.7
$
23.3
97.5
17.5
88.1
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 that reflect direct
labor hours incurred, beginning at software delivery and culminating at completion of installation. Installation generally occurs
in the same period the contracts are executed but in the past has been extended over a longer period of time depending on
client specific factors.
72
We provide implementation and consulting services. These services vary depending on the scope and complexity of the
engagement. 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 milestones, then the portion of the software
license fee tied to implementation milestones is deferred until the related milestone is accomplished and related fees become
due and payable 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 fee for arrangements where the client does not have the contractual right or the ability to take possession of the
software at any time, is generally recognized ratably over the hosting service period.
We also offer our solutions on a software as a service model, providing time-based licenses for our software solutions available
within an environment that we manage from our data centers. The data centers provide system and administrative support
as well as processing services. Revenue on these services is combined and recognized on a monthly basis over the term
of the contract. We capitalize related pre-contract direct set-up costs consisting of third party costs and direct software
installation and implementation costs associated with the initial set up of a software as a service client. 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 contractual support term. Hardware and sublicensed software maintenance revenues are recognized ratably over the
contractual maintenance term.
Subscription and content fees are generally marketed under annual and multi-year agreements and are recognized ratably
over the contractual terms.
Hardware and sublicensed software sales are generally recognized when title and risk of loss have transferred to the client.
The sale of equipment under sales-type leases is recorded as system sales revenue at the inception of the lease. Sales-
type leases also produce financing income, which is included in system sales revenue and is recognized at consistent rates
of return over the lease term.
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.
Revenue generally is recognized net of any taxes collected from clients and subsequently remitted to governmental authorities.
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
73 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 of financial assets. 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.
(b) Cash Equivalents - Cash equivalents consist of short-term marketable securities with original maturities less than 90
days.
(c) Investments – 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 with maturities of
less than two years.
Effective April 1, 2012, we began reporting all securities in our investment portfolio as available-for-sale. The change resulted
in the transfer of investments with an aggregate carrying amount of $1.0 billion from held-to-maturity to available-for-sale,
with gross unrealized gains of $0.7 million and gross unrealized losses of $0.7 million. The unrealized gains and losses, net
of the related tax effects, were recorded to accumulated other comprehensive income. The decision to transfer the securities
to available-for-sale is intended to provide us with financial flexibility in determining whether to hold our investment securities
to maturity. Such change contemplates the possibility that securities may be liquidated prior to maturity as we manage through
changing market conditions.
Available-for-sale securities are recorded at fair value with the unrealized gains and losses reflected in accumulated other
comprehensive income until realized. Realized gains and losses from the sale of available-for-sale securities, if any, are
determined on a specific identification basis.
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, and the financial health of and specific prospects
for the issuer. Unrealized losses that are other than temporary are recognized in earnings.
Premiums are amortized and discounts are accreted over the life of the security as adjustments to interest income for our
investments. Interest income is recognized when earned.
Refer to Note (3) and Note (4) for further description of these assets and their fair value.
(d) Concentrations - Substantially all of our cash and cash equivalents 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.
As of the end of 2012, 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.
(e) Inventory - Inventory consists primarily of computer hardware and sublicensed software, held for resale. Inventory is
recorded at the lower of cost (first-in, first-out) or market.
(f) Property and Equipment - We account for property and equipment in accordance with ASC 360, Property, Plant, 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 one 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 one 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
74
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. We amortize capitalized software development costs over five
years.
(h) Goodwill - We account for goodwill under the provisions of ASC 350, Intangibles – Goodwill and Other. Goodwill is not
amortized but is 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 assessment. Based on these evaluations, there was no impairment
of goodwill in 2012, 2011 or 2010. 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 clients
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, personal injury, 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 - We account for our hedging activities in accordance with ASC 815,
Derivatives and Hedging. 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 sheets 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 is recorded in the results of operations immediately. Refer
to Note (10) for more information on our hedging activities.
(k) Income Taxes - Income taxes are accounted for in accordance with ASC 740, 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.
(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, Compensation-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 - In accordance with ASC 830, Foreign Currency Matters, 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
75
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.
(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) Recently Adopted Accounting Pronouncements
Comprehensive Income. On January 1, 2012, we adopted Financial Accounting Standards Board (FASB) Accounting
Standards Update (ASU) 2011-05, Presentation of Comprehensive Income. ASU 2011-05 requires an entity to present the
total of comprehensive income, the components of net income, and the components of other comprehensive income either
in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05
eliminates the option to present the components of other comprehensive income as part of the statement of changes in
equity. These consolidated financial statements include separate consolidated statements of comprehensive income.
Goodwill Impairment. On January 1, 2012, we adopted FASB ASU 2011-08, Testing for Goodwill Impairment. ASU 2011-08
amends existing guidance by giving an entity the option to first assess qualitative factors to determine whether it is more
likely than not that the fair value of a reporting unit is less than the carrying amount. The more-likely-than-not threshold is
defined as having a likelihood of more than 50 percent. If an entity determines that it is more likely than not that the fair value
of a reporting unit is less than its carrying amount, then it is necessary to perform the two-step goodwill impairment test, as
currently prescribed by FASB Accounting Standards Codification Topic 350. Otherwise, the two-step goodwill impairment
test is not required. The adoption of this standard did not have a material effect on our consolidated financial statements.
(2) Business Acquisitions
Anasazi Software, Inc.
On November 26, 2012, we completed the purchase of 100% of the outstanding stock of Anasazi Software, Inc. (Anasazi).
Anasazi is a provider of behavioral health technology solutions. We believe the combination of Cerner Millennium, including
in-patient behavioral health, and Anasazi's community behavioral health solutions will create a more comprehensive offering
in the market.
Consideration for the acquisition of Anasazi is expected to total $47.5 million consisting of up-front cash plus contingent
consideration, which is payable if we achieve certain revenue milestones during 2013 from Anasazi solutions and services.
We valued the contingent consideration at $1.9 million based on a probability-weighted assessment of potential contingent
consideration payment scenarios.
76 The acquisition of Anasazi is being treated as a purchase in accordance with ASC 805, Business Combinations, which
requires allocation of the purchase price to the estimated fair values of assets and liabilities acquired in the transaction. The
allocation of purchase price is based on management's judgment after evaluating several factors, including a preliminary
valuation assessment. The allocation of purchase price is subject to changes as an appraisal of intangible assets and
liabilities is finalized and additional information becomes available; however, we do not expect material changes. The following
is a summary of the preliminary allocation of purchase price:
(In thousands)
Tangible assets and liabilities
Current assets
Property and equipment
Current liabilities
Deferred income taxes, net
Total net tangible liabilities
Intangible assets
Customer relationships
Existing technologies
Trade names
Total intangible assets
Goodwill
Total purchase price
Allocation
Amount
$
6,026
798
(6,605)
(6,594)
(6,375)
12,829
5,218
512
18,559
35,281
$
47,465
The fair values of the acquired intangible assets 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, and client attrition rates, among
others. See Note (4) for further information about the fair value level hierarchy.
The goodwill of $35.3 million arising from the acquisition consists largely of the synergies and economies of scale, including
the value of the assembled workforce, expected from combining the operations of Cerner and Anasazi. All of the goodwill
was allocated to our Domestic operating segment and is not expected to be deductible for tax purposes. Identifiable intangible
assets are being amortized over a weighted-average period of 12 years. The operating results of Anasazi were combined
with our operating results subsequent to the purchase date of November 26, 2012. Pro-forma results of operations, assuming
this acquisition was made at the beginning of the earliest period presented, have not been presented because the effect of
this acquisition was not material to our results.
Clairvia, Inc.
On October 17, 2011, we purchased the net assets of Clairvia, Inc. Clairvia is a developer of health care workforce management
solutions, including Care Value Management™ and Physician Scheduler™. The Care Value Management suite was integrated
into our broader cloud-based and interoperability platforms, Cerner Healthe Intent and CareAware, which allows us to offer
a comprehensive suite of resource management solutions.
Consideration for the acquisition of Clairvia was $38.3 million, which was paid in cash. The allocation of the purchase price
to the estimated fair value of the identified tangible and intangible assets acquired and liabilities assumed resulted in goodwill
of $24.6 million and $14.1 million in intangible assets, of which $6.8 million and $6.1 million was related to the value of
established customer relationships and existing technologies, respectively. The goodwill was allocated to our Domestic
operating segment and is expected to be deductible for tax purposes. Identifiable intangible assets are being amortized over
a weighted-average period of seven years.
The operating results of Clairvia were combined with our operating results subsequent to the purchase date of October 17,
2011. Pro-forma results of operations have not been presented because the effect of this acquisition was not material to our
results.
77
Resource Systems, Inc.
On May 23, 2011, we completed the purchase of 100% of the outstanding common shares of Resource Systems, Inc.,
developer of the CareTracker® point-of-care electronic documentation system primarily used within skilled nursing and
assisted living facilities. Cerner believes that there is significant market opportunity for information technology solutions in
the long-term care market as the U.S. population ages and life expectancy continues to increase.
Consideration for the acquisition of Resource Systems was $36.3 million consisting of up-front cash plus additional contingent
consideration, which was payable upon the achievement of certain revenue and bookings milestones. During 2012, we paid
$3.4 million to satisfy all contingent consideration obligations.
The allocation of the purchase price to the estimated fair value of the identified tangible and intangible assets acquired and
liabilities assumed resulted in goodwill of $26.1 million and $18.2 million in intangible assets, of which $11.2 million and $6.4
million was related to the value of established customer relationships and existing technologies, respectively. The goodwill
was allocated to our Domestic operating segment and is not expected to be deductible for tax purposes. Identifiable intangible
assets are being amortized over five years.
The operating results of Resource Systems were combined with our operating results subsequent to the purchase date of
May 23, 2011. Pro-forma results of operations have not been presented because the effect of this acquisition was not material
to our results.
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 $16.6 million, which was paid in cash.
The allocation of the purchase price to the estimated fair value of the identified tangible and intangible assets acquired and
liabilities assumed resulted in goodwill of $11.3 million and $5.1 million in intangible assets, of which $4.1 million was related
to the value of established customer relationships.
The goodwill was allocated to our Domestic operating segment and is expected to be deductible for tax purposes. 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.
78 (3) Investments
Available-for-sale investments at the end of 2012 were as follows:
(In thousands)
Cash equivalents:
Money market funds
Time deposits
Total cash equivalents
Short-term investments:
Time deposits
Commercial paper
Government and corporate bonds
Total short-term investments
Long-term investments:
Time deposits
Government and corporate bonds
Total long-term investments
Total available-for-sale investments
Adjusted
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
$
68,267
$
— $
— $
24,068
92,335
90,535
86,500
542,236
719,271
6,190
496,845
503,035
—
—
17
15
497
529
10
324
334
—
—
(2)
(57)
(76)
(135)
(3)
(399)
(402)
68,267
24,068
92,335
90,550
86,458
542,657
719,665
6,197
496,770
502,967
$ 1,314,641
$
863
$
(537) $ 1,314,967
At December 29, 2012, we also held $6.5 million of investments reported under the cost-method of accounting.
At December 31, 2011, we held cash equivalents, short-term investments and long-term investments of $131.3 million, $531.6
million and $359.3 million, respectively. Investments at December 31, 2011 were classified as held-to-maturity and stated at
amortized cost, which approximated fair value.
We sold available-for-sale investments for proceeds of $28.6 million in 2012, resulting in an insignificant gain.
(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:
•
•
•
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.
79
The following table details our financial assets measured and recorded at fair value on a recurring basis at the end of 2012:
(In thousands)
Description
Money market funds
Time deposits
Time deposits
Commercial paper
Balance Sheet Classification
Cash equivalents
Cash equivalents
Short-term investments
Short-term investments
Government and corporate bonds
Short-term investments
Time deposits
Long-term investments
Government and corporate bonds
Long-term investments
Fair Value Measurements Using
Level 1
Level 2
Level 3
$
68,267
$
— $
—
—
—
—
—
—
24,068
90,550
86,458
542,657
6,197
496,770
—
—
—
—
—
—
—
The following table details our financial assets measured, but not recorded, at fair value on a recurring basis at the end of
2011:
(In thousands)
Description
Money market funds
Time deposits
Time deposits
Commercial paper
Balance Sheet Classification
Cash equivalents
Cash equivalents
Short-term investments
Short-term investments
Government and corporate bonds
Short-term investments
Time deposits
Long-term investments
Government and corporate bonds
Long-term investments
Fair Value Measurements Using
Level 1
Level 2
Level 3
$
123,919
$
— $
—
—
—
—
—
—
7,358
67,632
23,250
440,753
19,579
337,245
—
—
—
—
—
—
—
We estimate the fair value of our long-term, fixed rate debt using a Level 3 discounted cash flow analysis based on current
borrowing rates for debt with similar maturities. The fair value of our long-term debt, including current maturities, at the end
of 2012 and 2011 was approximately $59.0 million and $72.6 million, respectively. The carrying amount of such fixed-rate
debt at the end of 2012 and 2011 was $54.8 million and $67.5 million, respectively.
(5) Receivables
Receivables consist of accounts receivable, contracts receivable, and the current portion of amounts due under sales-type
leases. 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 health care 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 2012, 2011, and 2010 totaled $13.5 million, $11.4 million and $9.9 million,
respectively.
80
A summary of net receivables is as follows:
(In thousands)
Gross accounts receivable
Less: Allowance for doubtful accounts
Accounts receivable, net of allowance
Contracts receivable
Current portion of lease receivables
Total receivables, net
2012
2011
$ 563,141
$ 496,706
33,230
24,270
529,911
472,436
18,245
29,692
81,776
8,997
$ 577,848
$ 563,209
Lease receivables represent our net investment in sales-type leases resulting from the sale of certain medical devices to our
clients. The components of our net investment in sales-type leases are as follows:
(In thousands)
Minimum lease payments receivable
Less: Unearned income
Total lease receivables
Less: Long-term receivables included in other assets
Current portion of lease receivables
2012
2011
$ 152,112
$
60,695
8,206
143,906
114,214
5,347
55,348
46,351
$
29,692
$
8,997
Future minimum lease payments to be received under existing sales-type leases for the next five years are as follows:
(In thousands)
2013
2014
2015
2016
2017
$
33,145
36,840
36,782
32,477
12,868
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.
As of December 29, 2012, it remains unlikely that the matter will be resolved in the next 12 months. Therefore, these receivables
have been classified as long-term and represent less than the majority of other long-term assets at the end of 2012 and
2011. While the ultimate collectability of the receivables pursuant to this process is uncertain, we believe that we have valid
and equitable grounds for recovery of such amounts and that collection of recorded amounts is probable.
During 2012 and 2011, we received total client cash collections of $2.7 billion and $2.2 billion, respectively, of which $69.1
million and $68.2 million were received from third party arrangements with non-recourse payment assignments.
81
(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)
Computer and communications equipment
Land, buildings and improvements
Leasehold improvements
Furniture and fixtures
Capital lease equipment
Other equipment
Less accumulated depreciation and leasehold amortization
Total property and equipment, net
Depreciable
Lives (Yrs)
1 — 5
12 — 50
1 — 15
5 — 12
3 — 5
3 — 20
2012
2011
$ 817,186
281,798
146,004
$ 741,547
207,069
163,794
63,848
3,194
575
61,499
5,914
383
1,312,605
1,180,206
742,897
691,210
$ 569,708
$ 488,996
Depreciation and leasehold amortization expense for 2012, 2011 and 2010 was $120.1 million, $117.9 million and $111.4
million, respectively.
(7) Goodwill and Other Intangible Assets
The changes in the carrying amounts of goodwill were as follows:
(In thousands)
Beginning Balance
Goodwill recorded in connection with business acquisitions
Foreign currency translation adjustment and other
Ending Balance
2012
2011
$ 211,826
$ 161,374
35,281
509
51,100
(648)
$ 247,616
$ 211,826
Our intangible assets subject to amortization are amortized on a straight-line basis, and are summarized as follows:
(In thousands)
Purchased software
Customer lists
Patents
Other
Total
Intangible assets, net
2012
2011
Gross
Carrying
Amount
Accumulated
Amortization
Gross
Carrying
Amount
Accumulated
Amortization
$
153,330
$
67,178
$
94,963
$
90,376
10,877
16,419
$
271,002
$
$
62,403
4,562
4,814
77,513
10,298
11,460
138,957
$
194,234
132,045
$
$
55,305
58,259
2,997
2,307
118,868
75,366
Amortization expense for 2012, 2011 and 2010 was $20.3 million, $14.7 million and $12.0 million, respectively.
82 Estimated aggregate amortization expense for each of the next five years is as follows:
(In thousands)
2013
2014
2015
2016
2017
$
29,015
27,315
24,850
20,286
13,555
(8) Software Development
Information regarding our software development costs is included in the following table:
(In thousands)
Software development costs
Capitalized software development costs
Amortization of capitalized software development costs
Total software development expense
For the Years Ended
2012
2011
2010
$ 319,828 $ 290,645 $ 284,836
(100,189)
(82,942)
(80,979)
81,731
79,098
68,994
$ 301,370 $ 286,801 $ 272,851
Accumulated amortization as of the end of 2012 and 2011 was $703.1 million and $621.9 million, respectively.
(9) Long-term Debt and Capital Lease Obligations
The following is a summary of indebtedness outstanding:
(In thousands)
Note agreement, 5.54%
Senior Notes, Series B, 6.42%
Capital lease obligations
Other obligations
Total debt and capital lease obligations
Less: current portion
Long-term debt and capital lease obligations
$
2012
2011
$
45,045
9,750
141,344
—
196,139
(59,582)
57,683
9,750
58,995
115
126,543
(39,722)
$ 136,557
$
86,821
In November 2005, we completed a £65.0 million unsecured 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 2012.
In December 2002, we completed a $60.0 million unsecured 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 2012.
On December 31, 2012, we made the final installment payment, repaying the Series B Senior Notes in full.
83 Minimum annual payments under existing capital lease obligations and maturities of indebtedness at the end of 2012 are as
follows:
(In thousands)
2013
2014
2015
2016
2017
Total
Capital Lease Obligations
Minimum
Lease
Payments
Less:
Interest
Principal
Principal
Amount of
Indebtedness
$
38,717
$
3,900
$
34,817
$
24,765
$
35,715
33,792
30,803
11,522
2,855
1,767
589
94
32,860
32,025
30,214
11,428
15,015
15,015
—
—
Total
59,582
47,875
47,040
30,214
11,428
$ 150,549
$
9,205
$ 141,344
$
54,795
$ 196,139
We maintain a $100.0 million multi-year revolving credit facility, which expires in February 2017. The facility provides an
unsecured revolving line of credit for working capital purposes, along with a letter of credit facility. Interest is payable at a
rate based on prime, LIBOR, or the U.S. federal funds rate, plus a spread that varies depending on the leverage ratios
maintained. The agreement provides certain restrictions on our ability to borrow, incur liens, sell assets and pay dividends
and contains certain cash flow and liquidity covenants. As of the end of 2012, we were in compliance with all debt covenants.
As of the end of 2012, we had no outstanding borrowings under this agreement; however, we had $14.3 million of outstanding
letters of credit, which reduced our available borrowing capacity to $85.7 million.
(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 tables
represent the fair value of our net investment hedge included within the consolidated balance sheets and the related unrealized
gain or loss, net of related income tax effects, on the net investment hedge recognized in comprehensive income:
(In thousands)
Derivatives Designated
Balance Sheet Classification
Net investment hedge
Short-term liabilities
Net investment hedge
Long-term liabilities
Total net investment hedge
(In thousands)
Derivatives Designated
Balance Sheet Classification
Net investment hedge
Short-term liabilities
Net investment hedge
Long-term liabilities
Total net investment hedge
2012
Fair Value
Net
Unrealized
Loss
$
$
15,015
$
30,030
451
981
45,045
$
1,432
2011
Fair Value
Net
Unrealized
Loss
$
$
14,421
$
43,262
133
1,381
57,683
$
1,514
84 (11) Other Income
A summary of other income is as follows:
(In thousands)
Interest income
Interest expense
Other
Other income, net
For the Years Ended
2011
2010
2012
$
16,543
$
15,191
$
10,347
(5,068)
4,571
(5,341)
46
(6,908)
(560)
$
16,046
$
9,896
$
2,879
Other income in 2012 includes a $4.5 million gain recognized on the disposition of one of our cost-method investments.
(12) Income Taxes
Income tax expense (benefit) for 2012, 2011 and 2010 consists of the following:
(In thousands)
Current:
Federal
State
Foreign
Total current expense
Deferred:
Federal
State
Foreign
Total deferred expense (benefit)
Total income tax expense
For the Years Ended
2012
2011
2010
$ 164,690
$ 162,288
$ 85,106
13,302
4,142
19,061
3,831
10,355
(883)
182,134
185,180
94,578
9,035
4,453
(5,146)
(15,927)
22,297
(5,410)
(776)
4,038
4,027
8,342
(22,113)
30,362
$ 190,476
$ 163,067
$ 124,940
85 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 2012 and 2011 relate to the following:
(In thousands)
Deferred tax assets:
Accrued expenses
Separate return net operating losses
Share based compensation
Contract and service revenues and costs
Other
Total deferred tax assets
Deferred tax liabilities:
Software development costs
Depreciation and amortization
Other
Total deferred tax liabilities
Net deferred tax liability
2012
2011
$
20,346
$
21,412
35,323
17,339
6,890
101,310
18,597
16,757
26,462
25,022
5,410
92,248
(101,393)
(96,695)
(5,537)
(91,267)
(85,746)
(4,029)
(203,625)
(181,042)
$ (102,315) $
(88,794)
At the end of 2012, we had net operating loss carry-forwards subject to Section 382 of the Internal Revenue Code for Federal
income tax purposes of $7.4 million that 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 $0.9 million that are available to offset future taxable income,
if any, through 2024 and $59.8 million that are available to offset future taxable income, if any, with no expiration. In addition,
we had a deferred tax asset for state net operating loss carryforwards of $0.9 million which are available to offset future
taxable income, if any, through 2032. We expect to fully realize all these net operating loss carry-forwards in future periods.
At the end of 2012, we had not provided tax on the cumulative undistributed earnings of our foreign subsidiaries of
approximately $82 million, because it is our intention to reinvest these earnings indefinitely. If these earnings were distributed,
we would be subject to U.S. taxes and foreign withholding taxes, net of U.S. foreign tax credits which may be available. The
calculation of this unrecognized deferred tax liability is complex and not practicable.
The effective income tax rates for 2012, 2011, and 2010 were 32%, 35%, and 34%, respectively. These effective rates differ
from the Federal statutory rate of 35% as follows:
(In thousands)
Tax expense at statutory rates
State income tax, net of federal benefit
Tax credits
Unrecognized tax benefit (including interest)
Permanent differences
Other, net
Total income tax expense
For the Years Ended
2012
2011
2010
$ 205,698
$ 164,393
$ 126,744
13,856
(1,510)
(12,832)
(19,900)
5,164
11,439
(5,520)
102
(2,472)
(4,875)
10,151
(10,568)
7,501
(4,629)
(4,259)
$ 190,476
$ 163,067
$ 124,940
86
A reconciliation of the beginning and ending amount of unrecognized tax benefit is presented below:
(In thousands)
Unrecognized tax benefit - beginning balance
Gross increases (decreases) - tax positions in prior periods
Gross increases - current-period tax positions
Unrecognized tax benefit - ending balance
2012
2011
2010
$
14,640
$
14,100
$
6,599
(12,464)
—
540
—
—
7,501
$
2,176
$
14,640
$
14,100
All of the unrecognized tax benefit will favorably impact our effective tax rate if recognized. We do not expect to recognize
any material portion of our unrecognized tax benefits in the next 12 months. Our federal returns have been examined by
the Internal Revenue Service through 2009. We have various state and foreign returns under examination.
The 2012 beginning and ending amounts of accrued interest related to unrecognized tax benefits were $0.9 million and $0.1
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.
(13) Earnings Per Share
A reconciliation of the numerators and the denominators of the basic and diluted per share computations are as follows:
2012
2011
2010
Earnings
Shares
Per-
Share
Earnings
Shares
Per-
Share
Earnings
Shares
Per-
Share
(In thousands, except per share data)
(Numerator)
(Denominator)
Amount
(Numerator)
(Denominator)
Amount
(Numerator)
(Denominator)
Amount
Basic earnings per share:
Income available to common shareholders $
397,232
170,931
$
2.32
$
306,627
168,634
$
1.82
$
237,272
164,916
$
1.44
Effect of dilutive securities:
Stock options and non-vested shares
—
4,766
—
5,233
—
5,931
Diluted earnings per share:
Income available to common shareholders
including assumed conversions
$
397,232
175,697
$
2.26
$
306,627
173,867
$
1.76
$
237,272
170,847
$
1.39
Options to purchase 2.3 million, 2.1 million and 1.2 million shares of common stock at per share prices ranging from $55.24
to $85.96, $39.36 to $68.45 and $29.11 to $45.96, were outstanding at the end of 2012, 2011 and 2010, 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 2012, we had five fixed stock option and equity plans in effect for associates and directors. This includes
one plan from which we could issue grants, the Cerner Corporation 2011 Omnibus Equity Incentive Plan (the Omnibus Plan);
and four plans from which no new grants are permitted, but some awards remain outstanding (Plans D, E, F, and G).
Awards under the Omnibus Plan may consist of stock options, stock appreciation rights, restricted stock, restricted stock
units, performance shares, performance units, performance grants and bonus shares. At the end of 2012, 7.7 million shares
remain available for awards. Stock options granted under the Omnibus Plan are exercisable at a price not less than fair
market value on the date of grant. Stock options under the Omnibus Plan typically vest over a period of five years and are
exercisable for periods of up to 10 years.
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:
87
• 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 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:
Expected volatility (%)
Expected term (yrs)
Risk-free rate (%)
Stock option activity for 2012 was as follows:
(In thousands, except per share data)
Outstanding at beginning of year
Granted
Exercised
Forfeited and expired
Outstanding at end of year
Exercisable at end of year
(In thousands, except for grant date fair values)
Weighted-average grant date fair values
Total intrinsic value of options exercised
Cash received from exercise of stock options
Tax benefit realized upon exercise of stock options
2012
2011
2010
34.8%
9.1
2.1%
36.5%
8.6
2.2%
40.9%
9.5
2.9%
Weighted-
Average
Exercise
Price
Aggregate
Intrinsic
Value
Number of
Shares
Weighted-
Average
Remaining
Contractual
Term (Yrs)
$
12,909
1,931
(2,521)
(283)
12,036
23.78
81.00
15.87
51.27
33.97
$ 516,168
7,265
$
17.72
$ 423,982
6.35
5.13
For the Years Ended
2012
2011
2010
$
37.04
$
28.89
$ 152,117
$ 117,601
$
$
38,147
55,952
38,900
44,908
22.42
88,876
34,724
33,802
As of the end of 2012, there was $99.3 million of total unrecognized compensation cost related to stock options granted
under all plans. That cost is expected to be recognized over a weighted-average period of 3.20 years.
Non-vested Shares
Non-vested shares are valued at 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 recognized over the period from the date of grant to
the vesting date, when achievement of the performance condition is deemed probable.
88 Non-vested share activity for 2012 was as follows:
(In thousands, except per share data)
Outstanding at beginning of year
Granted
Vested
Forfeited
Outstanding at end of year
(In thousands, except for grant date fair values)
Weighted average grant date fair values for shares granted during the year
Total fair value of shares vested during the year
Weighted-
Average
Grant Date
Fair Value
Number of
Shares
$
254
99
(52)
—
301
$
47.75
76.55
50.24
—
56.82
For the Years Ended
2012
2011
2010
$
$
76.55
2,612
$
$
54.07
2,527
$
$
41.09
1,147
As of the end of 2012, there was $8.5 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 1.31 years.
Associate Stock Purchase Plan
We established an Associate Stock Purchase Plan (ASPP) in 2001, which qualifies under Section 423 of the Internal Revenue
Code. Each individual employed by us and associates of our United States based subsidiaries, except as provided below,
are eligible to participate in the Plan (Participants). The following individuals are excluded from participation: (a) persons
who, as of the beginning of a purchase period under the Plan, have been continuously employed by us or our 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)
Stock option and non-vested share compensation expense
Associate stock purchase plan expense
Amounts capitalized in software development costs, net of amortization
Amounts charged against earnings, before income tax benefit
Amount of related income tax benefit recognized in earnings
For the Years Ended
2012
2011
2010
$
36,113
$
27,919
$
23,723
2,859
(860)
2,180
(620)
1,692
(512)
$
$
38,112
14,578
$
$
29,479
11,256
$
$
24,903
9,329
89
Preferred Stock
As of the end of 2012 and 2011, 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 $12.3 million, $10.5 million and $8.9 million for 2012, 2011 and 2010, 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 2012, 2011 and 2010 we expensed
$11.9 million, $10.5 million and $8.9 million for the second tier discretionary distributions, respectively.
(16) Related Party Transactions
During 2009, as part of our long-term space planning analysis, we determined that we would require additional office space
for associates to accommodate our anticipated growth. We evaluated various sites in the Kansas City metropolitan area and
negotiated with several different governmental entities regarding available incentives. Upon completion of this review, we
decided to proceed with an office development in Wyandotte County, Kansas, which is part of the “Village West” development.
In order to maximize available incentives, we agreed to pursue the Village West office development in conjunction with the
development of an 18,000 seat, multi-sport stadium and related recreational athletic complex.
The Village West stadium complex was developed by Kansas Unified Development, LLC (the “Developer”), an entity controlled
by Neal Patterson, Chairman of the Board of Directors, Chief Executive Officer and President of Cerner Corporation, and
Clifford Illig, Vice Chairman of the Board of Directors of Cerner Corporation. Sporting Kansas City (“Sporting KC”) is the
principal tenant of the stadium complex. OnGoal LLC (“OnGoal”), the owner of the Sporting KC professional soccer club, is
also controlled by Messrs. Patterson and Illig.
The total construction and development cost of the office complex has been estimated to be approximately $170.0 million.
The Company currently believes it will receive incentives totaling approximately $82.0 million from the Developer, the Unified
Government of Wyandotte County/Kansas City, Kansas (the “Unified Government”) and the Kansas Department of
Commerce. Incentives from the Kansas Department of Commerce will include cash grants, tax exemptions and tax credits.
The value of some of these incentives may ultimately increase or decrease depending upon the final capital invested and
the number of new jobs created. We currently expect our net investment in the Village West office complex, after applying
expected government incentives and payments from the Developer, to be approximately $88.0 million.
In connection with the Village West office complex development and the related incentives, we have entered into three
agreements:
•
Land Transfer and Specific Venture Agreement (the “Land Transfer Agreement”) dated January 19, 2010 with the
Unified Government and the Developer,
• Workforce Services Training Agreement (the “Workforce Agreement”) dated January 20, 2010 with the Kansas
Department of Commerce, as amended by the First Amendment to Workforce Services Training Agreement dated
June 7, 2011, and
•
Interparty Agreement dated January 19, 2010 with OnGoal and the Developer.
Pursuant to the Land Transfer Agreement, we acquired the land from the Unified Government with certain contingencies
upon which the office complex is being constructed. The purchase price, equal to the site’s fair market value, is being paid
by the Developer. In the second quarter of 2012, vertical construction began on the Village West office development. In
connection with the commencement of vertical construction, contingencies were resolved and we recorded land contributed
to the Company from the Unified Government at its appraisal value.
90 Pursuant to the Workforce Agreement, as amended, we agreed to establish positions for 4,500 employees with an average
annual wage of at least $31.00 per hour. In consideration of this commitment, we have elected to receive up to $48.5 million
from the Kansas Department of Commerce for project investment costs and employee training (the “IMPACT Award”). We
can specify the date when the IMPACT Award will be distributed by the Kansas Department of Commerce, which must be
by December 31, 2014. The State of Kansas has issued bonds in order to fund these incentives to us and has incurred costs
of issuance and debt service obligations. We may be obligated to repay the Kansas Department of Commerce under the
following circumstances:
•
•
•
If we do not request distribution of all or part of the IMPACT Award, we must pay $64.9 million (which represents the
Impact Award amount plus the state’s estimated issuance costs)(the “Gross Funded Amount”) less an amount equal
to any IMPACT Award amount not received,
If we fail to establish new jobs for at least 4,275 full time employees at the Village West office complex prior to
December 31, 2017, we will repay an amount equal to $48.0 million multiplied by the shortfall of total new jobs created
by us, which is 4,500 less the number of jobs created as of December 31, 2017, divided by 4,500 (the “MPI Repayment
Amount”), and
If we have not generated aggregate Kansas state tax withholdings from wages earned by new jobs at the Village
West office complex of at least the Gross Funded Amount within 10 years after receiving the IMPACT Award, then
we will repay the difference (the “Withholding Tax Repayment Amount”).
The MPI Repayment Amount is not due until 10 years after we first receive the IMPACT Award. Our total repayment obligations
under the Workforce Agreement will not exceed the Withholding Tax Repayment Amount.
The Interparty Agreement provides that the Developer and OnGoal will be responsible for the repayment of any issuance
costs plus the MPI Repayment Amount owed by us under the Workforce Agreement. The Developer and OnGoal will also
indemnify and hold us harmless from and against any and all losses, costs, expenses, penalties and damages arising as a
result of: a) the Developer’s failure to pay any sum that it has agreed to pay, or b) the Developer’s breach of any agreement
with us which creates an obligation on our part for which the Developer has agreed to be responsible.
The Interparty Agreement further provides that the Developer or OnGoal will pay us a success fee of $4.0 million if the terms
and conditions of the Workforce Agreement are satisfied so that no MPI Repayment Amounts or issuance costs are due by
the Developer under the Workforce Agreement.
Pursuant to the Multi-Sport Stadium Specific Venture Agreement, the Developer, recognizing that the Unified Government
relied on our jobs creation goals in its decision to provide incentives for the stadium complex, agreed to make ten annual
“Office Payment Installments” to the Unified Government, each in the amount of approximately $3.0 million, commencing in
2017. The Office Payment Installments are intended to supplement the purchase prices paid to the Unified Government by
the Developer for the stadium site and the office site. The Office Payment Installments may be reduced if the Developer
meets certain conditions and if we commence construction of the office complex and meet the job creation goals.
We believe that the amount of government incentives that the Developer and OnGoal received, as well as the government
incentives received by us, were materially increased due to the fact that we agreed to build our office complex in close
proximity to the stadium complex. The independent members of our Board of Directors, acting as a committee, reviewed
and unanimously approved the decision to proceed with the development of the Village West office complex in 2009. The
independent Directors received advice from outside legal counsel, retained a consultant with real estate expertise regarding
the transaction and were briefed on the structure of the various expansion options by members of management (other than
Messrs. Patterson and Illig) at six separate meetings.
We entered into a Construction Coordinator Agreement dated January 20, 2012, as amended by Amendment No. 1 to the
Construction Coordinator Agreement dated May 31, 2012, with GRAND Construction, LLC (“Coordinator”), a limited liability
company owned in part by an entity controlled by Messrs. Patterson and Illig, to coordinate, supervise, schedule and assist
with managing the development, design and construction of the Cerner Phase 1 and 2 Buildings and site at the Village West
development. Under the agreement, we will pay Coordinator 2% of the total cost of the project (as specified in the agreement).
We paid Coordinator $1.4 million in 2012. Based on management’s projected scope of services, it is anticipated that the total
fees will be approximately $3.2 million, and paid over two years through April 2014. The independent members of the
Company’s Board of Directors, acting as a committee, reviewed and unanimously approved the Construction Coordinator
Agreement dated January 20, 2012.
91 Additionally, in June 2012, the Company entered into an agreement with Coordinator for a separate project to make
improvements to a parking facility for future use by one of our office campuses. That project is complete, and we paid
Coordinator $0.3 million.
(17) Commitments
Leases
We are committed under operating leases primarily for office and data center space and computer equipment through October
2027. Rent expense for office and warehouse space for our regional and global offices for 2012, 2011 and 2010 was $18.1
million, $17.6 million and $20.5 million, respectively. Aggregate minimum future payments under these non-cancelable
operating leases are as follows:
(In thousands)
2013
2014
2015
2016
2017
2018 and thereafter
Operating
Lease
Obligations
$
24,943
22,843
16,803
12,210
11,911
40,133
$
128,843
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)
2013
2014
2015
2016
2017
2018 and thereafter
Purchase
Obligations
$
39,654
33,052
12,721
2,594
2,184
4,000
$
94,205
(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, devices and sublicensed software purchased from manufacturers for delivery to clients. It also includes
the cost of hardware maintenance and sublicensed software support subcontracted to the manufacturers. 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. “Other” includes expenses that have
not been allocated to the operating segments, such as software development, marketing, general and administrative, share-
based compensation expense and depreciation. Performance of the segments is assessed at the operating earnings level
and, therefore, the segment operations have been presented as such. Items such as interest, income taxes, capital
92 expenditures and total assets 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 our operating segments and other expense for 2012, 2011 and 2010:
(In thousands)
2012
Revenues
Cost of revenues
Operating expenses
Total costs and expenses
Operating earnings (loss)
(In thousands)
2011
Revenues
Cost of revenues
Operating expenses
Total costs and expenses
Operating earnings (loss)
(In thousands)
2010
Revenues
Cost of revenues
Operating expenses
Total costs and expenses
Operating earnings (loss)
Domestic
Global
Other
Total
$ 2,341,304
$ 324,132
$
— $ 2,665,436
548,813
506,249
1,055,062
59,384
131,580
190,964
—
847,748
847,748
608,197
1,485,577
2,093,774
$ 1,286,242
$ 133,168
$ (847,748) $ 571,662
Domestic
Global
Other
Total
$ 1,894,454
$ 308,699
$
— $ 2,203,153
387,466
439,465
826,931
54,206
126,997
181,203
—
441,672
735,221
735,221
1,301,683
1,743,355
$ 1,067,523
$ 127,496
$ (735,221) $ 459,798
Domestic
Global
Other
Total
$ 1,562,563
$ 287,659
$
— $ 1,850,222
272,385
417,181
689,566
47,971
124,546
172,517
—
320,356
628,806
628,806
1,170,533
1,490,889
$ 872,997
$ 115,142
$ (628,806) $ 359,333
(19) Quarterly Results (unaudited)
Selected quarterly financial data for 2012 and 2011 is set forth below:
(In thousands, except per share data)
2012 quarterly results:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Total
Earnings
Before
Income
Taxes
Revenues
Net
Earnings
Basic
Earnings
Per Share
Diluted
Earnings
Per Share
$ 641,212
$ 130,063
$
88,708
$
0.52
$
637,358
138,897
676,482
151,047
97,829
98,887
710,384
167,701
111,808
0.57
0.58
0.65
$ 2,665,436
$ 587,708
$ 397,232
0.51
0.56
0.56
0.63
93
(In thousands, except per share data)
2011 quarterly results:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Total
Earnings
Before
Income
Taxes
Revenues
Net
Earnings
Basic
Earnings
Per Share
Diluted
Earnings
Per Share
$ 491,664
$
95,710
$
64,556
$
0.38
$
524,223
110,853
571,640
123,167
615,626
139,964
72,044
78,835
91,192
0.43
0.47
0.54
$ 2,203,153
$ 469,694
$ 306,627
0.37
0.42
0.45
0.52
94 Stock Price Performance Graph
The following graph presents a comparison for the five-year period ended December 31, 2012 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
12/07
12/08
12/09
12/10
12/11
12/12
Cerner Corporation
Nasdaq Computer and Data Processing Index
Nasdaq Stock Market (US Companies)
The above comparison assumes $100 was invested on December 31, 2007 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.
95
Corporate Information
ANNUAL SHAREHOLDERS’ MEETING
The Annual Shareholders’ Meeting will be held at 10:00 a.m. local time on May 24, 2013, in The Cerner Round
Auditorium in the Cerner Vision Center, located on the Cerner campus at 2850 Rockcreek Parkway, North Kansas
City, Missouri, 64117. A formal notice of the Meeting, with a Proxy Statement and Proxy Card, will be available to
each shareholder of record in April 2013.
ANNUAL REPORT/FORM 10-K
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
96
2 0 1 2 A N N U A L R E P O R T
creating a future where the health system works to improve the health of
individual people—and entire populations.
SYSTEM. Our solutions allow our clients to
their day-to-day revenue management,
individual’s data and improve key business
Helpful, essential tools that work for today
tomorrow. HOME. CLINIC. HOSPITAL. REHAB.
A HEALTHY
a c c o m p l i s h
streamline an
m e a s u r e s .
and think for
People are on
the move and
designing our
a n d t h e c a r e
e f f i c i e n t , s o
A STEP AHEAD.
beginning. Today
their health records should be, too. We’re
solutions to connect data across venues
continuum, helping systems be their most
health and care are wherever people are.
Digitizing data records was just the
we’re focused on building intelligence
into systems, giving care teams the right information at the right time.
PARTNERING FOR BETTER HEALTH. With our clients,
we’re giving members the opportunity to interact with the
health system in a new way. It’s about raising the bar for
organizations and people alike, to realize benefits that
match their individual needs. BECAUSE
IT’S PERSONAL. At Cerner, we know the
work we do makes a difference in the lives of physicians,
nurses, parents, children and friends. And health will get
even more personal as we unlock the human genome.
T h a t ’s w h y we ’ re
c l i e n t s t o c r e a t e p e r s o n a l i z e d
reflect real life. WORKING THE WAY
A t C e r n e r, w e a r e d e v e l o p i n g
with physicians in mind so they can
technology. Solutions that are fast,
working with our
ex p e r i e n ce s t h a t
P HYSIC IAN S DO.
solutions designed
focus on people, not
e a s y a n d s m a r t .
Just what the doctor ordered. KNOW ME. ENGAGE ME. IMPROVE THE
QUALITY OF MY LIFE. That’s our philosophy. Together with our clients, we are
World Headquarters
Cerner Corporation
2800 Rockcreek Parkway
Kansas City, MO USA 64117
816.221.1024
www.cerner.com
Worldwide
Australia
Canada
Chile
Egypt
France
Germany
India
Ireland
Malaysia
Mexico
Qatar
Saudi Arabia
Singapore
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United Arab Emirates
United Kingdom