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Health care is too important to stay the same.TM
cerner.com
-REV Cover.indd 1
Cerner Corporation 2014 Annual Report
4/6/15 8:45 AM
Cerner connects people and systems through our open, powerful and versatile platforms
and solutions, providing information where it’s needed most. Together with
our clients and industry collaborators, we’re creating a future where the health system
works to improve the well-being of individual people and entire populations.
© Cerner Corporation. All Rights Reserved. All Cerner trademarks and logos are owned or licensed by Cerner Corporation
and/or its affiliates. All other brand or product names are trademarks or registered marks of their respective owners.
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4/6/15 8:45 AM
Cerner Corporation
2014 Annual Report
Table of Contents: Annual Report 2014
Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Leadership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Cerner’s Long-Term Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Letter to Our Shareholders, Clients and Associates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Appendix: Reconciliation of 2014 Non-GAAP Results to GAAP Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Form 10-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Business and Industry Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37
Market for the Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . 40
Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .53
Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .53
Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .57
Reports of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Consolidated Statements of Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .67
Consolidated Statements of Changes in Shareholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Basis of Presentation, Nature of Operations and Summary of Significant Accounting Policies . . . 69
Business Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .73
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
Fair Value Measurements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Property and Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Goodwill and Other Intangible Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Software Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
Long-term Debt and Capital Lease Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
Hedging Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
Contingencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
Other Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
Earnings Per Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
Share-Based Compensation and Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
Foundations Retirement Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
Related Party Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
Segment Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
Quarterly Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
Stock Price Performance Graph . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
Corporate Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
1
Board of Directors
Neal L. Patterson
Chairman of the Board, Chief Executive Officer,
and Co-founder, Cerner Corporation
Clifford W. Illig
Vice Chairman and Co-founder, Cerner Corporation
Gerald E. Bisbee Jr., Ph.D.
Chairman, Chief Executive Officer, and Co-founder,
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 Retired Partner, Bryan Cave LLP, January 1995–September 2014
Ambassador to the United Nations, July 2004–January 2005
U.S. Senator, Missouri, 1976–1995
Mitchell E. Daniels, Jr.
President, Purdue University
Governor of the State of Indiana, January 2005–January 2013
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
2
Leadership
Cerner Executive Cabinet
Neal L. Patterson • Chairman of the Board, Chief Executive Officer and Co-founder
Clifford W. Illig • Vice Chairman and Co-founder
Zane M. Burke • President
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 and Chief Strategy Officer
John P. Glaser • Senior Vice President, Health Policy
Michael C. Neal • Senior Vice President, Professional Services
John T. Peterzalek • Senior Vice President, Client Relationships
Matthew J. Swindells • Senior Vice President, Population Health
Donald D. Trigg • Senior Vice President and President, Cerner Health Ventures
Cerner Executive Management Don D. Bisbee • Senior Vice President, Strategic Business Units
Client Organization
Kathleen M. Chaffee • Senior Vice President, Population Health Advisory Services
L. Mitchell Clark • Senior Vice President and General Manager, CommunityWorks
Stephen W. Eckman • Senior Vice President, Application Services
Ed L. Enyeart • Senior Vice President, Finance
Richard J. Flanigan • Senior Vice President and President, Cerner Health Services
William E. Graff • Senior Vice President, Cerner Technology Services
Ryan R. Hamilton • Senior Vice President, Population Health Intellectual Property Development
Richard W. Heise • Senior Vice President, Revenue Cycle
Eva L. Karp • Senior Vice President, Chief Clinical Operations Officer and
General Manager, Clinical ABUs
David P. McCallie, Jr., M.D. • Senior Vice President, Medical Informatics
Douglas S. McNair, M.D. & Ph.D. • Senior Vice President, Cerner Corporation and
President, Cerner Math
Rama Nadimpalli • Senior Vice President and General Manager, Cerner India
Max A. Reinig • Senior Vice President, Intellectual Property Development
Farrell L. Sanders • Senior Vice President and Chief Operating Officer, Cerner Health Services
Kent C. Scheuler • Senior Vice President, CernerWorks
Randy D. Sims • Senior Vice President, Chief Legal Officer and Secretary
Shellee K. Spring • Senior Vice President, Ambulatory and Client Experience
Michael R. Battaglioli • Vice President and Chief Accounting Officer
Gay M. Johannes • Vice President and Chief Quality Officer
Allan O. Kells • Vice President, Investor Relations
G. Ben Hilmes • Senior Vice President, US East
E. Tim Kostner • Senior Vice President, Client Development
Jay E. Linney • Senior Vice President, US West
Sam P. Pettijohn • Senior Vice President and General Manager, Investor Owned
Robert J. Shave • Senior Vice President, Cerner Corporation and President, Cerner Canada
Cameron D. Burt • Vice President and General Manager, Australia
Michael J. McHugh • Vice President, Cerner Health Services
Emil E. Peters • Vice President and Managing Director, Europe
Michael A. Pomerance • Vice President and General Manager, Middle East
Geoff Segal • Vice President and General Manager, United Kingdom and Ireland
Arne Westphal • Vice President and General Manager, Germany
Israel D. Armstrong • General Manager, Brazil
Holger Cordes • Chief Operating Officer, Europe
David E. Corcos • Regional General Manager, Belgium, France, Netherlands,
Sweden and Switzerland
Amanda J. Green • Regional General Manager, Denmark, Ireland and Norway
Rebecca A. LaNasa • Regional General Manager, Southeast Asia
Jose Maniega • Regional General Manager, Portugal and Spain
Stefan Radatz • General Manager, Austria
3
Cerner’s Long-Term Performance
The following table provides a view of our growth over the last decade and since we first became a
publicly traded company in 1986.
i
e
n
L
p
o
T
Bookings
Revenue
Domestic Revenue
Global Revenue
Revenue Backlog
i
Adjusted Operating Margin1
e Adjusted Operating Earnings1
n
L
m
o
t
t
o
B
Adjusted Net Earnings1
Adjusted Diluted Earnings Per Share1
t Total Assets
e
e
h
S
e
c
n
a
l
a
B
Total Debt
Cash and Investments
Days Sales Outstanding
Equity
w Operating Cash Flow
o
F
Free Cash Flow1
l
t
h Capital Expenditures
w
o
r
G
n
R&D Spending
Associate Headcount
i
Market Capitalization
e Cerner Stock Price
c
n
a
m
r
o
f
r
e
P
S&P 500 Index
NASDAQ Composite Index
h
s
a
C
t
n
e
m
t
s
e
v
n
I
t
e
k
r
a
M
1986
2004
2014
2004–2014
1986–2014
Compound Annual Growth Rates
Previous Decade
Since Going Public
$18
$17
$17
$917
$4,250
$926
$3,403
$862
$3,022
$0.2
$64
$381
$11
$3
$1,539
$10,617
$115
$842
14.8%
12.4%
24.7%
$2
$65
$576
$0.01
$0.22
$1.65
$26
$8
161
$1
$16
$1
-$1
$1
$2
$982
$4,531
$190
$1,652
104
$131
66
$130
$597
$3,566
$168
$847
$53
$393
$56
$277
$188
$467
149
5,345
15,800
$0.24
$6.65
$64.66
$45
349
242
$1,948
$22,135
2,175
1,212
4,736
2,059
17%
14%
13%
20%
21%
22%
24%
23%
17%
24%
-4%
0%
20%
18%
22%
17%
10%
11%
26%
28%
8%
5%
22%
21%
20%
31%
28%
22%
22%
20%
20%
21%
-3%
19%
21%
27%
NM
22%
22%
18%
22%
25%
10%
8%
NOTES
Dollars are in millions except Adjusted 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
1 Adjusted operating earnings, adjusted operating margin, adjusted net earnings, adjusted 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, to make strategic decisions, to
assess long-term trends on a comparable basis, and for management compensation purposes. Please see the appendix following the Letter
to Our Shareholders, Clients and Associates for a reconciliation of these items to GAAP results.
4
A Letter to Our Shareholders, Clients and Associates
In 2014, Cerner had another strong year financially,
operationally and
strategically, which also
translated into a good year for our shareholders.
We continued to position our company for long-
term success through significant investments in
research and development focused on population
health, physician experience, open platforms,
revenue cycle and mobility. We also announced the
acquisition of Siemens Health Services. I will share
more details later in the letter, but first, I’d like to
provide some highlights of our financial results.
• We had record bookings of $4.25 billion,
reflecting 13% growth over 2013.
• Our revenue backlog grew 19% and eclipsed
$10.6 billion, providing a high level of visibility
into future revenue.
• Total revenue grew 17% to a record $3.4
billion. Below is a breakdown of revenue by
business model for the year:
o Licensed Software grew 17% to
$453 million;
o Technology Resale grew 4% to
$273 million;
o Subscriptions and Transactions increased
12% to $220 million;
o Professional Services revenue grew
28% to $1.09 billion;
o Managed Services increased 15% to
$549 million;
o Support & Maintenance was up 9% to
$725 million; and
o Reimbursed Travel was $90 million,
which is up 28%.
• Our adjusted operating earnings1 grew 15%
and our adjusted EPS1 of $1.65 reflects
growth of 17%.
• Our adjusted operating margin1 of 24.7%
reflects a slight drop from 25.1% in 2013,
mainly due to a mix of revenue that had
higher third-party costs in 2014 compared
to 2013.
• We ended 2014 with a strong cash and
investment balance of $1.65 billion, which is
up over $200 million from 2013 even after
investing over $465 million in R&D and $275
million in capital expenditures to support
our growth. This strong cash and investment
position funded our $1.37 billion acquisition
of Siemens Health Services, which closed on
February 2nd of this year.
Apart from the financial growth, we grew
throughout 2014 in other meaningful ways—
clients, countries, patents and associates. We
ended the year with nearly 16,000 associates, and
that was before we added our Siemens Health
Services associates in February 2015.
Cerner’s success puts us on the radar to get
recognized by business analysts and publications
on annual lists that use superlatives like “best,”
“most competitive,” “elite” and “top.” It’s fun,
and it’s the kind of stuff that makes parents
beam. My personal philosophy (and advice to
any Cerner associates reading) is to focus less on
reading the press and more on being worthy of
what has been said about us. As we begin 2015,
we are simultaneously recognized by Forbes as
one of the “World’s Most Innovative Companies”
and by Fortune as one of the “World’s Most
Admired Companies.” We’re honored, but we also
recognize that those are tall orders to fill. Every
day we see things that can and must be better.
Frankly, one of the best things about a pattern
of success is that it reinforces our resolve to
pursue long term objectives, knowing today’s
long-term is tomorrow’s present. When you lead
through vision, confidence that the future will be
greatly different from the present is essential.
Communication is also essential. In order to read a
map, you need to know two pieces of information:
where you are and where you’re going. At least a
few times a year, I use internal notes to all Cerner
associates to communicate important things
about both our current coordinates and our
destination. And, although there is a very public
audience for this note, I try to do the same thing
here. There are always more potential topics than
5
time to write about them. For this letter, I’ve tried
to choose some topics that will give you a sense
of our year, our environment at the intersection of
health care and IT, and where our journey might
take us next.
THE RIGHT TIME AND PLACE FOR A BOLD MOVE:
THE SIEMENS HEALTH SERVICES ACQUISITION
To understand the respect I have for the core of
Siemens Health Services, you would have to travel
back in time to 1979 when Cerner was founded.
Shared Medical Systems (or SMS) was the
dominant company then, a pioneer and innovator
in health IT. In some ways, it was the strength
of SMS in patient billing and revenue cycle
management in the 1970s and 1980s that shaped
Cerner’s choice to become a “clinical systems”
company. German multinational conglomerate
Siemens AG bought the company in 2000, seeing
the strategic nature of IT in shaping health care
delivery. Siemens was right about the strategy,
but I believe the pace of change of health IT,
which has been accelerated by Meaningful Use in
the U.S., made Siemens Health Services more of a
distraction to the parent company than an asset.
Health IT is our sole focus. We saw an opportunity,
and we liked it.
I have said and still maintain that I don’t believe
you can build a company through acquisitions.
The core must be based on your commitment to
your vision, and it grows organically. For 35 years,
we have built Cerner organically by investing in
the development of our own intellectual property,
much of it software but also valuable content,
algorithms, models and data built for a common
architecture and its platforms. The belief that
Architecture Matters has served Cerner well,
and integration is a strategy that has been
validated resoundingly in the marketplace. As we
have grown, we’ve strategically acquired a few
wonderful smaller companies along the way with
good technology and talent, but the acquisition
of a billion-dollar business unit with multiple
distinct platforms and architectures was not a
natural thing for us.
We didn’t need to make the acquisition, but the
reasons for wanting to were clear to us. It would
expand the base into which we can sell our broad
range of solutions and services. It would augment
our non-U.S. growth opportunities through a large
global presence. It would increase our ability to
continue investing heavily in R&D. And it would
add thousands of highly skilled associates that
could enhance Cerner’s capabilities.
We have been clear with the Health Services
clients that we will support the Soarian platform
for a very long time. All of the platforms we
investment
acquired will need support and
sufficient to validate the investment and the
choice the clients have made in selecting them.
We understand their needs well, because they’re
the same as the rest of our clients. Having said
that, Millennium and HealtheIntent are our EMR
and population health platforms. They’re proven,
powerful, flexible and scalable, and they will be
our clients’ paths to the future. Siemens is a major
health care company outside of health IT, and it
cared deeply that its clients were in the hands of
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 and is
listed on NASDAQ (CERN)
$17 million of revenue
149 associates
1987
Cerner listed as one
of Inc. magazine’s
100 fastest-growing
companies
6
an organization that could address their health
IT needs in the future. Cerner’s platforms are the
path to the future, but it will not be a journey of
one year or even five in many cases. We will all
arrive at the same destination.
The battle for talent is one of our toughest fronts.
From January 2012 to January 2015, before the
acquisition, Cerner hired more than 5,500 net
new associates, with plans to add even more. The
acquisition brought more than 5,000 associates
with a great deal of specific health IT knowledge
that is complementary to our own. I visited the
Malvern, PA, headquarters of Health Services
shortly after the acquisition closed, and I held
back-to-back town halls with as many associates
as we could fit in the auditorium there. I was
very impressed with the associates I met. Their
strength in billing and revenue cycle goes back
decades, and there is also some wonderful
expertise in workflows and a large global base
of associates. We were in the same industry
following paths that led to different outcomes,
with different strengths. We have a great deal to
learn from each other. I am convinced we will be
stronger together. Together we will be focused on
using IT as the lever to help our clients produce
the best possible health outcomes at the lowest
attainable cost.
Remarkably, combining our organizations allows
us to not only combine talent, but also to invest
an expected $650 million a year in research and
development for the rest of the decade. We
believe there is no company that will match this
level of investment in health IT. It’s a good thing....
we are going to need a lot of strength in the next era.
In short, the combination of Health Services with
Cerner makes us a stronger company, with new
opportunities to make it even better. Only time
will tell how successful we are, but it is already
clear that it is a wonderful set of new clients
and associates.
OUR SIZE AND SKILLS
Health care is huge, and it’s worldwide. We
believe that size, scale and skills are important to
partner with health care providers to solve their
challenges today and prepare for an uncertain
future. An anecdote about size: In October, we
made a difficult decision to cancel our planned
companywide Town Hall, in part because it
would have caused a traffic jam in downtown
Kansas City. Associates still wanted to meet, so
I chose to make a whistle-stop tour of a number
of our campuses. Those meetings with groups
of 200 to 500 associates turned out to be one
of the highlights of my year. Growth can have its
challenges, but it’s also exciting to expand the
boundaries and see what we can create together.
As I write this memo in March 2015, we are at
a size that we probably didn’t imagine even
10 years ago. Cerner is on a very short list of
companies that have consistently performed well
throughout a decades-long winnowing of the
health IT industry. Today, we are a roughly $25
billion market cap, highly profitable company
with a strong balance sheet, growing at double
digit rates in all categories. We have more than
20,000 associates and a presence in more than
30 countries. We have a singular focus on health
1990
1992
1993
1994
Revenues surpass $50 million
2 for 1 stock split (May 12)
2 for 1 stock split (March 1)
1,000 associates
Cerner Vision Center opens
Revenues surpass
$100 million
1995
2 for 1 stock split
(August 7)
7
IT. We’re halfway through the biggest decade of
change in health care to date—and we have seen a
lot of big, change-filled decades. Every U.S. client
we have is concerned about cost and quality, ICD-
10, Meaningful Use Stage 3, and the transition
away from fee-for-service reimbursement. Every
client outside the U.S. has a similar list of critical
environmental
issues creating the need for
fundamental change. The list of challenging work
ahead is huge, but nearly all of it is resourced, with
good talent driving us forward. We have a very
good opportunity to finish the decade strong and
make a real impact on health and care.
Size matters because health care is the largest
sector in almost all worldwide economies. It has
tremendous complexities, breadth and reach. Our
size alone is of no value without vision, agility and
real skills.
In the next section, I want to talk about a client
engagement that is making use of vision, agility
and skills to advance clinical computing beyond
its current state, creating the v2.0 EHR and
Revenue Cycle instance for the industry.
THE INTERMOUNTAIN MODEL
In last year’s letter, we had already signed
our multi-year strategic partnership with
Intermountain Healthcare, but I chose not to
write about it because it was not “live” yet. Now
that we’re beginning to bring sites live there, I
want to share more about this very special client
relationship and engagement.
Intermountain
iconic health system
with 22 hospitals and more than 180 clinics
is an
in Utah. They are widely viewed as a model
health system because of their track record
of providing high quality care at low cost—the
holy grail of health care. Somewhat amusingly,
in 2012, Intermountain’s excellence was one of
the few points mutually agreed upon by both
Democratic and Republican candidates Barack
Obama and Mitt Romney in the first presidential
debate. Intermountain also has a special claim
to fame as the home of Dr. Homer Warner, one
of the undisputed fathers of clinical computing.
Dr. Warner was a cardiologist who saw the
enormous potential impact that computing would
have on the practice of medicine and acted on it,
helping to pioneer the field of medical informatics.
Because of Homer Warner’s legacy, Intermountain
has been using computers in medicine since the
1950s. That is not a typo. In the 1980s, I used to
go to Salt Lake City to listen to Dr. Warner speak,
soaking up some of the insights that would pour
out of his prodigiously creative mind and soul.
Needless to say, when we learned in 2012 that
Intermountain was looking for a commercial EHR
to continue its work, our interest was beyond
piqued. Throughout 2013, we participated in
a highly competitive, head-to-head selection
process. In the end, we were chosen. The
Intermountain executive team voiced several
reasons—a mix of system capabilities in the present
with adaptability for the future, a commitment
to support new payment models and the open
interchange of information, and the ability to
support the continuation of their very important
innovations around quality, safety and cost. And
significantly, they also spoke of something else
1999
2000
2001
2002
2003
HNA Millennium® Phase 1 is completed
3,000 associates
Revenues surpass $500 million
4,000 associates
Cerner makes Fortune list of
“Best 100 Companies to Work For”
Cerner and Atos Origin
awarded UK National
Health Services Choose
and Book contract
8
we felt from the earliest meetings—an alignment
of cultures and a shared vision for the future.
The full project commenced with contract signing
in late November 2013. It was slated to replace
their current ambulatory, inpatient and revenue
cycle systems across all facilities. They call the
project iCentra, a combination of some letters in
the names Intermountain and Cerner. Embedded
in the iCentra project and platform are several
triggers for helping support
Intermountain’s
stated goal of “helping people live the healthiest
lives possible.” We converted the first phase of
the project in early 2015 with two hospitals and
20 clinics coming live in February, 15 months
after contract signing. In an industry where large
health system conversions can take years, this is
a significant accomplishment. We will continue
bringing hospitals and clinics online throughout
the remainder of 2015 and into 2016. The real
focus, however, is less on dates on a calendar
and more on creating a flexible and long-lasting
platform to innovate, learn and improve.
When a health system adopts a completely
integrated system, the act of conversion changes
the workflow of every doctor, every nurse and
almost every dollar of revenue. It also completely
alters the existing ecosystem of information
technologies that have been in place for decades.
I have always called health IT conversions the
organizational equivalent of organ transplant
surgery. We are just a month or so out of the
operating room at this point, but I can report
that the patient is doing well. Within a couple of
months post conversion, the shock to the system
usually wears off and the users gain a new level
of familiarity and trust in the new systems. With
20 hospitals left to come online, we expect some
bumps in the road ahead, but we are also very
excited. Overall, it has been an extraordinary
project that has now had an auspicious launch.
This is the first Cerner project to make use of our
new Agile Deployment Methodology, a model
that represents a departure from the industry-
standard waterfall
implementation process.
In the Agile model, physicians and other end
users participate in the system build and design,
and never go more than six weeks without the
opportunity to see, use and give feedback on the
system prior to go-live. We don’t want to give
away all of our secrets, but it’s a great process
with benefits that will extend beyond go-live as
well. We believe it might even be the keystone that
supports the other elements of a learning health
system, another of medicine’s elusive grails.
Intermountain made it clear from the start that
they were enthusiastic about being an “all-in”
proof point for Cerner’s capabilities. They were
also excited about the potential for the iCentra
work to positively impact other health systems.
Using capabilities that already exist in Millennium
and some that have been developed together, our
combined teams have built out hundreds of health
care roles and hundreds of clinical workflows
across 50+ medical specialties and subspecialties.
There are also 350+ financial workflows, with
detailed workflows defined that are multi-role,
multi-venue. In some cases, we’re getting down to
the condition level. Together we’re fully leveraging
2004
2005
2006
2007
Cerner celebrates 25th anniversary
Revenues surpass $1 billion
2 for 1 stock split (Jan. 10)
Revenues surpass $1.5 billion
Cerner ranks third among software
companies in The Wall Street Journal’s
Top 50 Returns over a five-year period
5,000 associates
Nearly 7,000 associates
Introduced CareAware® device
architecture and line of devices
Cerner signs contract with BT for
London region of NHS program
First Cerner Millennium® site
in France
Opened Cerner Healthe Clinic
at World Headquarters
Shipped first production units of
RxStation® medication dispensing
devices; 25 clients purchase
CareAware iBus® device connectivity
Delivered new Cerner ProVision®
PACS Workstation
Opened new Data Center at
World Headquarters
Signed first clients in Spain and Egypt;
opened office in Dublin, Ireland
Acquired Etreby Computer Company
(retail pharmacy solutions)
9
iCentra capabilities like MPages, Discern Rules
and order sets to embed the evidence-based
models of care that Intermountain is known for.
For years Intermountain’s Care Process Models
and Clinical Process Guidelines have helped
its clinicians achieve high quality care and low
overall cost. Now they’re moving from paper
documents into digital workflows that are used
every day. In Intermountain quality guru Brent
James’ terms, the goal is to provide “the best
patient care currently available, at an executable
level where we consistently perform on behalf of
our patients.” In Cerner’s terms, it’s to eliminate
all avoidable error, variance, waste, delay and
friction from health care.
This project has great visibility. As it continues
to roll out, we believe it will become our version
2.0 Millennium to meet the complex needs of
providers across the spectrum of health care,
coordinating care any time, any place, using
intelligence to inform decisions by the highest
standards, connecting all of the individuals they
serve seamlessly into the process. It’s exciting
stuff. There is far too much to explain here, but
hopefully I have given you a sense of why we are
so enthusiastic about it.
INTEROP: AN INSIDE STORY
There is a story within a story playing out in
the health IT industry around how our health
information should be shareable and accessible
among our primary care physicians, specialists,
hospital physicians and selves. In the past couple
of years, the public discourse around the lack
of interoperability among health IT systems
has at times reached an almost fevered pitch,
partly because of competitive marketplaces, but
principally because the decisions around the
availability and safe handling of health information
are very sensitive and have real consequences in
terms of how care is provided when we or our
loved ones are sick. In recent years, a great deal
of money has been spent on health IT—over $27
billion directly from the U.S. federal government
to eligible providers and hospitals for the
purpose of creating a digital health care system.
And while that has largely occurred, the day-to-
day lack of interoperability across health care
organizations and platforms limits the benefits to
us as individuals and creates huge costs to the
entire system. Interoperability in health IT is not
entirely comparable to the interoperability found
among personal computing platforms, telephony
components, music services or even banking
systems, although it has some similarities. The
key differences are a result of the degree of
complexity, privacy, importance and data diffusion
found in health care. Health information is very
complex—as complex as systems of the body,
the wide world of diseases, and the burgeoning
sciences. It’s also highly private—dealing with the
most intimate details of our bodies and lives. It
is critically important—in the moment you need
it, it can have life or death importance. And it is
highly diffused—in the United States, the average
person has seen 18 different doctors, a number
that increases to 28 doctors if you’re over 652.
Each of your physicians has pieces of your health
data, but not all of it. The lack of a unified view can
2008
2009
2010
Free Cash Flow surpasses $100 million
Cerner Celebrates 30th Anniversary
Smart Semi, a mobile hospital room of
the future, introduced and made 93 stops,
hosting nearly 9,000 client attendees
Signed first agreement for the
Cerner 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
American Recovery & Reinvestment Act
becomes law and includes $35 billion in
incentives for the adoption of health care IT
First two Cerner ITWorks℠ contracts signed
Announced new mission statement, “To contribute to the systemic
improvement of health care delivery and the health of communities”
Introduced HealtheIntent™ cloud-based platform
Patient Protection and Affordable Care Act becomes law
in an effort to reform how health care is delivered in the U.S.
University of Missouri and Cerner create
Tiger Institute for Health Innovation
Announced agreement with CareFusion to better integrate medical
devices and electronic health records
Announced acquisition of IMC Health Care
Cerner clients connect with HHS and CDC
to fight spread of influenza
Fisher-Titus Medical Center and Magruder Hospital partner with
Cerner to become first all-digital, smart hospitals in the U.S.
First two Cerner RevWorks℠ contracts signed
Introduced uCern® platform and opened
uCern Store
Cerner honored as one of the best employers for healthy lifestyles
by The National Business Group on Health
Cerner added to NASDAQ 100 Index
Neal Patterson recognized by Forbes as one of “America’s Best-
Performing Bosses” for providing shareholders with the “biggest
bang for the buck”
Cerner added to S&P 500 index
8,000 associates
2 Per a 2010 Practice Fusion survey conducted by GfK Roper.
10
lead to missed opportunities for diagnosis, delays
in treatment, waste of resources and excess costs
due to repeated tests.
The absence of interoperability in health care
causes a significant direct and added burden
on sick people and their families, who are left
“holding the bag”—not the figurative bag of
blame (it is certainly not their fault), but a very
real bag of hundreds of printed pages, faxed
records, radiography films and data disks they
must carry between doctor’s visits. My wife
Jeanne, a surviving cancer patient, has a bag like
this....she actually has several of them. To further
shed light on the problem, it’s typically only the
better-resourced and proactive patients
like
Jeanne who are able to assemble their records in
the first place. That’s because each set of pages
and each disk in the bag represents a visit to a
records department, a wait at an information
desk, or a phone call that was put on hold.
In the last few years, the term “data hoarding” has
entered the health care lexicon. A data hoarder
is any person or organization that withholds a
person’s health data for competitive reasons,
stands up business practices that disincentivize
interoperability, or puts up other unfair barriers
to data exchange. Data hoarding occurs when
an organization is able to share data but makes
business-related choices about who to share
with and how. A data hoarder can be a provider
organization; it can also be a health IT vendor. I
have seen provider organizations that are willing
to exchange a person’s health data with anyone
but the competing hospital across the street. I
have also seen health IT vendors that will send a
person’s data for free anywhere in the country as
long as it stays on their proprietary platform, but
will charge provider organizations a fee if the data’s
destination is a competing health IT platform.
In some industries, you might chalk this kind of
behavior up to shrewd business tactics. Health
care is different and should be different. In health
care there is a self-evident ethical understanding
that a person’s health data belongs to the
person as much as it does to any physician or
organization that holds it. For several years, this
has been powerfully articulated using phrases like
“Nothing About Me Without Me” and “Give Me
My Damn Data,” by everyone from patient rights
activists like Dave DeBronkart and Regina Holliday
to health reform officials like Don Berwick and
Suzanne DelBanco. At the national policy level,
there is a movement to expose and penalize data
hoarding practices wherever they occur.
Health care data is different. It belongs to the
person, and it also has different requirements and
protections under the law. The Health Insurance
Portability and Accountability Act of 1996 (HIPAA)
made it illegal to share personally identifiable
health care information without the consent of
the patient. HIPAA also mandated the creation
of unique national patient identifiers (NPIs) for
U.S. citizens, a move that could have greatly
facilitated the kind of accurate patient matching
needed for safe nationwide
interoperability.
Two years later, however, Congress prohibited
funding the creation of NPIs because of privacy
concerns. When it comes to exchanging health
2011
2012
2013
2 for 1 stock split (June 27)
Acquired Resource Systems
(long-term care solutions)
Surpassed $3B in annual bookings, including over
$1 billion in Q4
Announced $170 million Share Repurchase Program
2 for 1 stock split (July 1)
Annual bookings grew 20% to $3.8 billion
Total assets surpass $4 billion
Acquired Clairvia
(workforce management solutions)
Revenue and bookings surpass $2 billion
Introduced new logo and tagline: Health
care is too important to stay the same.™
Launched Cerner Skybox℠ suite of
cloud services
Signed 1st Cerner 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
Acquisition of behavioral health company Anasazi Software
86% of clients attested or in process of attesting for
Stage 1 Meaningful Use
Nearly double the number of client sites achieved HIMSS
Analytics Electronic Medical Records Adoption Model℠
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
Partnered with NBA to provide HealtheAthlete,® 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
Completed $170 million Share Repurchase Program and
announced another $217 million Share Repurchase Program
Announced partnership with Intermountain Healthcare for
clinical systems, revenue cycle and population health
Signed first client in Brazil, Hospital Israelita Albert Einstein
Acquisitions of wellness company PureWellness and
laboratory automation company Labotix
Associates who manage and support our clients’ IT systems
moved into new Continuous Campus facility
Purchased 237 acres adjacent to Innovations Campus in
Kansas City, MO, for long-term plan to add 15,000 associates
Released HealtheIntent Smart Registries℠ on Cerner’s
cloud-based population health platform
#4 on Top 100 Healthiest Companies in America
#13 on Forbes list of World’s Most Innovative Companies,
ahead of Google and Apple
14,000 associates
11
data, the needs for privacy, security, accuracy and
consumer control are real. It’s not easy to meet all
of these obligations, but it is possible.
A few years ago, the head of the Office of the
Information
National Coordinator for Health
Technology implored the health IT industry to
come together to provide a private solution
to certain problems and limitations that were
hamstringing progress toward interoperability.
In response, Cerner and several competitors
co-founded CommonWell Health Alliance, an
open, not-for-profit industry consortium that
brings health IT firms together for the purpose
of enabling safe nationwide interoperability. The
idea behind CommonWell is not to compete with
federal policy, but to complement and accelerate it
by providing solutions to three areas of weakness
in the national standards: identity management,
location and consent management.
record
Through CommonWell, the vendors that have
profited from Meaningful Use come together
and pay a fee based on their revenues that
provides for an interoperability infrastructure
that facilitates
identity management, record
location and consent management for provider
organizations at commodity prices. In a world
where patients desperately need interoperability,
CommonWell is a practical, market-led way to
achieve it relatively quickly, especially without
any additional costs to taxpayers.
When I started this letter, CommonWell members
represented about 50% of the acute care market
share. As we go to print, the number has increased
to 70%. It needs to be 100%. CommonWell
has completed the pilot projects phase where
members tested transactions between all the
different vendors, and it is starting to sign up
health care provider organizations to use the
service. It is a network, and we expect to see the
“network effect” phenomenon where benefits are
modest and perhaps poorly understood at first,
but greatly increase in value as more providers
and consumers connect.
The one vocal opponent of CommonWell is a
sizable health IT vendor that has used innuendo
and outright misstatements to
imply that
CommonWell is a “business” with a hidden
purpose to make money for a group of select
interests. The detractor’s CEO has stated publicly
that she believes CommonWell will profit from
selling personal health data. The truth is that
CommonWell is not a business; it’s a not-for-
profit. And CommonWell’s terms and conditions
provide CommonWell with no data rights and
prohibit its service provider from selling data.
The negative statements are as clear-cut an
example of FUD as I have ever seen. Interestingly,
in testimony before Senate in March 2015, the
same company expressed no misgivings about
the actual architecture of CommonWell and what
it does, saying “in terms of what they’re doing,
architecturally there’s not a problem with that.”3
Other industries have worked together to solve
this type of problem. The banking industry did
so around the creation of ATM networks. And, as
nearly everyone knows, today you can open an
account in any bank, obtain a temporary debit
card, travel to another city or even country, and
2014
Annual revenue grew 17% to $3.4 billion
Repurchased $217 million of stock
under our Share Repurchase Program
Signed definitive agreement to purchase
the Siemens Health Services business for
$1.3 billion
Cerner client Marina Salud became first
non-U.S. hospital to earn HIMSS Davies
Enterprise Award for demonstrating
significant, sustainable improvement of
patient outcomes through the utilization of
an EHR and information technology while
achieving return on investment
Cerner client Croydon Health Services NHS
Trust in South London was recognized by
HIMSS Europe as the first hospital in the UK
to achieve Stage 6 certification
First place on Kansas City Business Journal’s
list of Healthiest Employers for companies
employing over 3,500 people
Cerner client Truman Medical Center honored
with HIMSS Davies Enterprise Award and The
College of Healthcare Information Management
Executives (CHIME) – American Hospital
Association (AHA) Transformational
Leadership Award
CEO Neal Patterson recognized with Industry
Leader Award by CHIME
Named to top 25 of Forbes list of World’s Most
Innovative Companies
Named to Fortune magazine’s list of World’s
Most Admired Companies and #1 Most Admired
in Health Care industry
15,800 associates
3 Full Committee Hearing - America’s Health IT Transformation: Translating the Promise of Electronic Health Records Into Better Care, March 17, 2015.
12
use your card to safely withdraw money from
your account at any ATM in the world, even
if it is operated by a competing bank with no
relationship with you or your bank. This is what
we are trying to accomplish with CommonWell.
The vision of CommonWell is for a patient to be
able to visit a new doctor, give their consent, and,
within moments, have his or her lifetime record
assemble from all the prior places he or she has
visited. No one will be left holding the bag.
The federal government is giving heavy scrutiny
to interoperability. There is a 10-year roadmap
to interoperability, and interop is a major focus
of Meaningful Use Stage 3 rulemaking (with
much of the workload appropriately falling on
the vendors). Interoperability will happen. It is
just now a matter of time. We hope and believe
that CommonWell will play a big role in making it
happen sooner versus later.
At the risk of providing too much information
on this subject, one final note. We need to
go beyond simply sending data between
systems for review by the providers to much
involving so-
more sophisticated scenarios
called “semantic interoperability,” where data
continually flows
in machine-understandable
format from one platform to another, where it can
be consumed into intelligent workflows, just like
information that is native to that system. Today
Cerner supports its clients who want to do point-
to-point interfacing and connect to local health
information exchanges, but we are working to
advance that universal “built in” connectivity.
THE BIGGEST CHANGE FACING OUR CLIENTS
IS LOOMING
We just passed the five-year anniversary of the
Affordable Care Act (a.k.a. “Obamacare”), which
has created the biggest decade of change that
health care has ever seen in the U.S. All of our
clients are reacting to the major changes in
their environments. They are in the mode to
protect their current revenues, find new sources
of revenues, improve their measurable quality,
and prepare themselves for risk by significantly
reducing their cost of providing care. Many of the
clients feel that they need to take 20% or more out
of their cost and provide higher quality care. The
biggest lever to do so is information technology.
13
In the last year, we have engaged with a number
of our longstanding clients to drive value creation
and process improvement initiatives within their
organizations. Each long-term engagement has
a slightly different flavor, depending on what is
most important to that client. We are steadfastly
committed to creating the innovations that will
help them deliver the best care, every time, to
every person, and at the lowest attainable cost.
We are also committed to moving the boundaries
of health care so that health systems can engage
their communities in managing their health, right
in the environments where they live. All of this,
including our platform for helping providers
to manage population health, should be an
important part of the next phase of Cerner.
Despite the fact that the last several years
have brought profound changes, the biggest
change of all is yet to come. Barring unforeseen
circumstances, I believe it will get here in the next
three years. I am talking about a change in how
doctors, hospitals and other providers get paid.
For the past 100 years, fee-for-service (FFS) has
been the core method for commerce in health
care. The more services, the more fees. The ills
of fee-for-service have been well publicized; I’m
not going to rehash them all here. The biggest
issue with FFS is a misalignment of incentives.
The only way for physicians and hospitals to
get paid is for you to become sick and for them
to do things for you. No one is getting paid to
keep you well, and the act of paying providers
and hospitals for every procedure and treatment,
rather than outcomes, produces exactly what you
think it would produce—volumes of procedures
and
to
outcomes. I don’t think that FFS was “designed”
to produce the outcomes it produces. Physicians
and hospitals do very specialized work, and it
is important for them to be fairly compensated
for their years of education and their work. It is a
blessing that they are there when the need is the
greatest (when you are sick), but there is also no
doubt that the system itself creates no incentive
to keep people healthy and out of doctor’s offices
and hospitals. On the contrary, most of the time,
the system will not pay physicians for e-visits,
telemedicine visits, and other technology-based
delivery that would save time and resources,
help prevent avoidable complications, and add
treatments, with
little correlation
convenience. If you want to read more about FFS,
there have been plenty of eye-opening articles
on the subject, from Atul Gawande’s 2009 New
Yorker piece on the high cost of health care in
McAllen, Texas, to Haley Sweetland Edwards’ 2013
article in Washington Monthly about the “RUC.”
On a thirty-year cycle, there have been attempts
to introduce new methods of payment, including
a significant effort in 1986 with the introduction
of DRGs. It has been 30 years since the last major
effort to change.
This is the decade that many believe will see
the end of FFS, or at least its diminution to a
lesser-used model of payment. The lever for
this change will be the Centers for Medicare
and Medicaid Services (CMS), which pays more
than 50% of medical bills in the U.S. In January
of 2015, HHS Secretary Sylvia Burwell laid out
a plan to shift 50% of Medicare payments to
value-based payment models by the end of 2018,
and to tie 90% of the remaining traditional FFS
payments to quality measures. Tying payment to
health outcomes is going to produce some really
massive shifts in the way health care is provided
in the next decade. You will see a greater focus
on patient engagement, wellness and prevention,
and the locus of health and care will shift away
from high-cost venues like hospitals and into
lower-cost venues like the home.
Health care providers and health systems
are already actively experimenting with risk-
based, value-based, bundled payment models
in an attempt to prepare for the shift toward
Accountable Care Organizations that many
see as inevitable. What few people outside of
health care seem to know is that most health
care provider organizations do not actually know
how much it costs to provide the care they give
to you. How much they are paid for a particular
procedure is largely determined by forces outside
of their control, and there is also a great deal of
cost-shifting that occurs between Medicare and
Medicaid patients, insured patients and uninsured
patients. As provider organizations go more “at-
risk” for the outcomes within their populations,
they will have an increased need to understand
their own costs and control them relative to
outcomes. I’m very excited that one of the focuses
of our relationship with Intermountain Healthcare is
to produce a true Activity-Based Costing system
for health care. In addition to implementing
existing Intermountain Care Process Models and
Clinical Process Guidelines inside their workflows,
we have done preliminary work on this system
with
Intermountain’s Chief Quality Officer
Dr. Brent James, who is widely regarded as
an expert in the subject. As health care heads
toward a new era of performance-based payment
models, it couldn’t come at a better time.
A CO-FOUNDER RETIRES
We started Cerner 35 years ago as three
twentysomethings—Cliff Illig, Paul Gorup and
myself—sitting around a park bench during the
summer of 1979, dreaming out loud....if we were
to start a company, what industry would we set
out to change? Back then when someone said
the words information technology, they were
talking about hardware. We started our careers
“writing code” (software) working as information
systems consultants. We had seen just enough
to intuit that software was the real value in the
stack of information technology. We wanted to
start our company at the operational side of an
organization, not just automating back office
administrative functions. Although at first we
didn’t know exactly what we wanted to do, we
made a list of characteristics the right industry
should have. It should be in a vertical market with
specialized needs. It should be highly complex.
Ideally it would be an industry with a strong
need for standardization. And it needed to be an
industry where information played a very big role.
In short, we wanted to be an application software
company that automated the mission-critical
industry.
processes of an
When we found our first health care client, it
was a little bit like finding your dream date. The
bonus was that health care also turned out to be
important, exciting, and intensely personal. The
entrepreneurial idea turned into a true calling.
Since that discovery, our work has been about
connecting what matters.
information-driven
Although it’s a fairly common story today, in
the late ‘70s, there were not a lot of people our
age starting companies. This year we are hitting
another milestone, with Paul Gorup retiring. On the
road to building Cerner, each of the founders has
14
played a critical role. One way for me to describe
Paul’s enormous contribution is the way I have
introduced him from day one: he is the smartest
of the three of us. Those who know us well have
no doubt. He is simply brilliant, adapting his
intelligence to create architectures, technologies
and solutions for health care. The other way is to
state the title he has had in the company for the
last decade, Chief of Innovation. Paul is one of the
most creative, passionate people you could hope
to meet, certainly at Cerner and possibly in all of
health information technology. Paul will continue
to work with us for the remainder of this decade
in a couple of areas, but his grandkids are now
going to see much more of him. I am grateful for
the opportunity to create and grow this company
with Paul.
The founders’ strengths have helped determine
the core Cerner attributes of vision, innovation
and culture. A more wondrous thing is how, at
some point, the attributes have become imprinted
on the organization. Today I see Cliff in associates
who have never met Cliff, Paul in associates who
have never met Paul. Even though Paul is retiring,
he will still be here.
CONCLUSION—IN THE LONG TERM
The interesting thing about the future is that it
quickly becomes the present, and then, in a flash,
it is our past. At Cerner we have always believed
in keeping our vision of the future as our daily
guidepost. A regular question for our executives
is, are you getting dominated by the “windshield”
of present demands, or are you also working
on what’s next? A quick glance back gives us
reinforcement that these principles are rewarding.
As CEO for all of these years, I am somewhat
plagued by thoughts about mistakes we made
and how much better we could have been.
Despite our very human journey, we continue to
be at a great place—the intersection of health
care and information technology—with discipline
around vision, a great culture, and an instinct to
innovate. If we keep our focus on creating value
for our clients, and if we keep redefining the
boundaries, it is highly probable that our vision,
innovation and culture will be rewarded well into
the future. Thank you for the role you play in the
Cerner journey.
Sincerely,
NEAL L. PATTERSON
Chairman, Chief Executive Officer
& Co-founder
15
Appendix:
Reconciliation of 2014 Non-GAAP Results to GAAP Results*
($ in millions except Earnings Per Share)
GAAP Operating Earnings
Share-based compensation expense
Adjustments related to acquisition of Siemens Health Services
Operating
Earnings
Operating
Margin %
$763
22.4%
63
16
Adjusted Operating Earnings (non-GAAP)
$842
24.7%
GAAP Net Earnings
Share-based compensation expense, net of tax
Adjustments related to acquisition of Siemens Health Services,
net of tax
Net
Earnings
Diluted
Earnings
Per Share
$525
41
10
$1.50
0 .12
0 .03
Adjusted Net Earnings (non-GAAP)
$576
$1.65
GAAP Operating Cash Flow
Capital purchases
Capitalized software development costs
Free Cash Flow (non-GAAP)
$847
(276)
(178)
$393
* More detail on these adjustments and management’s use of Non-GAAP results is in our 2014 annual
report on Form 10-K and our current reports on Form 8-K .
16
Cerner Corporation
2014 Annual Report
Form 10-K
Table of Contents
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: January 3, 2015
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) 201-1024
(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 [ ]
18
Table of Contents
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 28, 2014, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant
was $15.5 billion 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 6, 2015
342,588,295 shares
DOCUMENTS INCORPORATED BY REFERENCE
Document
Proxy Statement for the Annual Shareholders'
Meeting to be held May 22, 2015
Parts into Which Incorporated
Part III
19
Table of Contents
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
816.201.1024. Our Web site, 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 is a leading supplier of health care information technology (HCIT). Our mission is to contribute to the improvement
of health care delivery and the health of communities. We offer a wide range of intelligent solutions and services that support
the clinical, financial and operational needs of organizations of all sizes. We have systems in more than 18,000 facilities
worldwide, including hospitals, physician practices, laboratories, ambulatory centers, behavioral health centers, cardiac
facilities, radiology clinics, surgery centers, extended care facilities, retail pharmacies, and employer sites.
Cerner solutions are offered on the unified Cerner Millennium® architecture and on the HealtheIntent™ cloud-based platform.
Cerner Millennium is a person-centric computing framework, which includes integrated 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. Our HealtheIntent platform is 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 HealtheIntent platform, we offer EHR-agnostic solutions based on sophisticated,
statistical algorithms that are intended to help providers predict and improve outcomes, control costs, improve quality, and
manage the health of the populations they serve.
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.
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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
2014
2013
2012
28%
21%
48%
3%
100%
89%
11%
100%
29%
23%
46%
2%
100%
34%
23%
41%
2%
100%
88%
12%
88%
12%
100%
100%
Health Care and Health Care IT Industry
There are several trends in health care that we believe create a favorable environment for Cerner. One is the unsustainable
rate of growth in health care spending. The Centers for Medicare and Medicaid Services (CMS) estimates United States
health care spending in 2014 at $3.1 trillion, or 17.6 percent of Gross Domestic Product (GDP), and projects it to be 19.3
percent of GDP by 2023. We believe health care IT is one of few remaining levers that can change this trajectory. Further,
health care providers continue to operate in an environment that includes what we call ‘raining measures and mandates’.
Examples of these include:
• Health Information Technology for Economic and Clinical Health (HITECH) provisions within the American Recovery
and Reinvestment Act (ARRA) that offer incentives for health care organizations to modernize operations through
“Meaningful Use” of HCIT and will begin to penalize for non-compliance in coming years;
• Value-Based Purchasing programs that link reimbursement to quality and outcomes;
•
• Readmission reduction programs that penalize hospitals for unnecessary readmissions.
Increasing requirements to report quality metrics; and
Collectively, these measures and mandates are driving providers to focus on delivering higher quality care at a lower cost,
and we believe HCIT is a key lever that can help providers accomplish this. We also 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.
As providers position themselves for these shifts, there has been an increase in industry consolidation, with health systems
acquiring hospitals, physician practices, and other venues to control more of the care continuum and achieve economies of
scale. We believe this is a positive trend for Cerner as we have relationships with the majority of the largest health systems
responsible for most of the acquisition activity, creating an opportunity to offer our solutions and services to the acquired
facilities.
The increasingly complex and more clinical outcomes-based reimbursement environment is also contributing to a heightened
demand for revenue cycle solutions and a desire for these solutions to be closely aligned with clinical solutions. We believe
this trend is positive for Cerner because our revenue cycle solutions are integrated with our clinical solutions, creating a
clinically driven revenue cycle solution that has had significant adoption 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 unified Cerner
Millennium platform that spans multiple venues and due to significant enhancements we have made to our physician solutions
in recent years.
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Outside the United States, we believe Cerner’s growth opportunities are good as most countries are also dealing with health
care expenditures growing faster than their economies, which is leading to a focus on controlling costs while also improving
quality of care.
Cerner Vision and Growth Strategy
For over three decades, Cerner has been continuously building intelligent solutions for the health care industry. Together
with our clients, we are creating a future where the health care system works to improve the well-being of individuals and
communities. Our vision has always guided our large investments in research and development (R&D), 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. The strength of
our solutions and services has led to our ability to gain market share in recent years, which has contributed to our growth.
We believe we are positioned to continue gaining share in coming years as regulatory requirements and industry shifts
continue to pressure health care providers to improve quality while lowering costs, which will require having more sophisticated
information technology than many of our competitors provide.
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,
health care devices, device connectivity, emergency department, revenue cycle and surgery.
We also have an opportunity to grow by expanding penetration of services we offer that are targeted at capturing a larger
percentage 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.
We have made progress over the past several years at reducing the total cost 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 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. 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 positive impact on the health of our associates while
also reducing our health care costs.
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
We believe Population Health Management is more than an industry buzzword or the next big fad. It is the shift from solely
automating health systems to managing a person’s health. Getting there requires complete, accurate patient data and
meaningfully using that data to engage individuals, exchange information between providers and ultimately drive better
outcomes. This shift will shape the future of health care and enable a system driven by accountability, transparency and
value.
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Cerner's approach to population health is to enable organizations to:
• KNOW what is happening and predict what will happen within their population through solutions for data exchange,
longitudinal record, enterprise data warehouse, analytics and quality and regulatory reporting;
• ENGAGE providers and patients in health and care delivery through personal health portals and solutions for care
management, home care, long-term care, and retail pharmacy; and
• MANAGE health and improve care with capacity and workforce management, clinical research, predictive modeling,
health registries, and contract and network management.
These solutions are enabled by Cerner’s HealtheIntent platform, which is a multi-purpose, programmable platform designed
to scale at a population level while facilitating health and care at a person and provider level. This cloud-based platform
enables organizations to aggregate, transform and reconcile data across the continuum of care, and helps improve outcomes
and lower costs.
HealtheIntent is scalable, secure and can be accessed anywhere, anytime. It is able to receive data from any EHR, existing
HCIT system and other data sources, such as pharmacy benefits managers or insurance claims. HealtheIntent collects data
from multiple, disparate sources in near real-time, providing clarity to millions of data points in an actionable and programmable
workflow. It enables organizations to identify, score and predict the risks of individual patients, allowing them to match the
right care programs to the right individuals. The EHR-agnostic nature of our HealtheIntent platform allows us to offer our
solutions to the entire marketplace, not just existing Cerner clients.
We are investing heavily in expanding the HealtheIntent platform and our overall capabilities to support population health.
One of the ways we are expanding our capabilities is working closely with clients that are early movers at taking accountability
for keeping the populations they serve healthy. A key partner with whom we are working is Advocate Health Care ("Advocate").
One of the first outcomes of this collaboration was the joint development in 2012 of a predictive agent for readmissions that
has demonstrated significant improvement in predictive power as compared to the majority of existing models. Our relationship
expanded in early 2013 to further advance clinical integration and population health management capabilities across the
continuum of care for the more than 500,000 lives for which they have gone at risk.
In September 2013, we released HealtheRegistries™, which provides the ability to stratify patient populations based on risk,
conditions, and attributed physicians. Advocate went live with HealtheRegistries in January 2014 and we have since sold
the solution to multiple clients. In 2014, we continued to advance our population health capabilities through our work with
Advocate, including development of care management solutions that we expect to release in 2015 and a transition of care
model that suggests 30 percent of the population could be sent to a more optimal venue and achieve better outcomes at a
lower cost.
In summary, we believe our comprehensive architectural approach to population health is differentiated in the marketplace.
We expect population health to be a large contributor to our long-term growth as health care continues to evolve towards a
model that incents keeping people healthy.
Siemens Health Services Acquisition
On February 2, 2015, we acquired substantially all of the assets, and assumed certain liabilities of Siemens AG's health
information technology business unit, Siemens Health Services. We believe our acquisition of Siemens Health Services
enhances our organic growth opportunities discussed above. The acquisition provides a larger base into which we can sell
our broad range of solutions and services, with opportunities ranging from selling Cerner’s EHR into the Siemens Health
Services client base, to selling EHR-agnostic solutions such as population health, to selling services such as RevWorks and
ITWorks. The acquisition also augments our non-U.S. growth opportunities, increases our ability to continue investing in
R&D, and adds thousands of highly-skilled associates that will enhance Cerner’s capabilities.
Software Development
We commit significant resources to developing new health information system solutions and services. As of the end of 2014,
approximately 4,300 associates were engaged in research and development activities. Total expenditures for the development
and enhancement of our software solutions were approximately $467.2 million, $418.7 million and $319.8 million during the
2014, 2013 and 2012 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 R&D remains a core element of our strategy. This will include ongoing
enhancement of our core solutions and development of new solutions and services.
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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 and revenue cycle solutions and services to hospitals
and health systems, but our solutions and services are highly scalable and sold to organizations ranging from physician
practices, to community hospitals, to complex integrated delivery networks, to local, regional and national government
agencies.
Sales to large health systems typically take approximately nine to 18 months, while the sales cycle is often shorter when
selling to smaller hospitals and physician practices. 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 lead generation
activities 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 clients that buy software solutions also 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, our Continuous
Campus in Kansas City, Kansas 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 2014, we had a revenue backlog of $10.6 billion, which compares to $8.9 billion at the end of 2013. Such
backlog represents contracted revenue that has not yet been recognized. We estimate that approximately 27 percent of the
backlog at the end of 2014 will be recognized as revenue during 2015.
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, GE Healthcare
Technologies, Healthland, Inc., McKesson Corporation, MEDHOST, Inc. and Medical Information Technology, Inc., 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, such competitors include, without
limitation, Clinovations, Inc., Dell, Inc. (Dell), Deloitte Consulting LLP (Deloitte), Encore Health Resources, LLC, IBM
Corporation (IBM), Impact Advisors, LLC and Xerox Corporation Ltd., which offer HCIT services that compete directly with
some of our service offerings. AmazingCharts.com, Inc., Athenahealth, Inc., eClinicalWorks LLC, e-MDs, Inc., Netsmart
Technologies, Practice Fusion, Inc., Quality Systems, Inc., SRSsoft and Vitera Healthcare Solutions offer solutions to the
physician practice market or niche market, but do not currently have a significant presence in the broader health systems
and independent hospital market.
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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: Aesynt Inc., CapsuleTech,
Inc., CareFusion Corporation, Connexall Company, Ltd., Nanthealth, LLC, Omnicell, Inc., PerfectServe, Inc., Siemens AG
and Vocera Communication, Inc. We view our principal competitors in the health care revenue cycle market to include, without
limitation: Accretive Health, Inc., Conifer Health Solutions, Dell, Deloitte, Emdeon Corporation, MedAssets, Inc., Optum, Inc.
(Optum), Quadramed Corporation, SSI Group, Inc. and 3M Company. We view our competitors in the population health
market to range from small niche competitors, to large health insurance companies including, without limitation: Aetna Inc.,
Evolent Health, LLC, Explorys, Inc., IBM, MedeAnalytics, Inc., NetOrange, Inc., Optum, Phytel, Inc., The Advisory Board
Company, and WellCentive, Inc. Some of these competitors are larger or have more experience 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, healthcare insurance companies,
accountable care organizations 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 2014, we employed approximately 15,800 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 (19) 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 6, 2015. Officers are elected annually and serve at the discretion of the Board of Directors.
Name
Neal L. Patterson
Age
65
Positions
Chairman of the Board of Directors and Chief Executive Officer
Clifford W. Illig
Zane M. Burke
Marc G. Naughton
Michael R. Nill
Randy D. Sims
Jeffrey A. Townsend
Julia M. Wilson
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54
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Vice Chairman of the Board of Directors
President
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
Executive Vice President and Chief People Officer
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 served as President of the Company from July 2010 to September
2013, 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.
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 and to President of the Company in September
2013.
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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
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 first joined the Company in July 1990. 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, to Senior Vice President in
March 2007 and to Executive Vice President in March 2013.
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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. Although we maintain liability insurance coverage, 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. Similarly,
the installation of our software solutions and health care devices is very complex and errors in the implementation and
configuration of our systems can occur. 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, 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 interruptions at our data centers or client support facilities. Our business relies on the secure
electronic transmission, data center storage and hosting of sensitive information, including protected health information,
financial information and other sensitive information relating to our clients, company and workforce. We perform data center
and/or hosting services for certain clients, including the storage of critical patient and administrative data and support services
through various client support facilities. If any of these systems are interrupted, damaged or breached by an unforeseen
event or actions of a Cerner associate or contractor or a third party, including a cyber-attack, or fail for any extended period
of time, it could have a material adverse impact on our results of operations. 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. Additionally, Cerner’s core systems are disaster
tolerant as we have implemented redundancy across physically diverse data centers. 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,
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confidentiality policies and procedures, confidentiality provisions in employment 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,
revenue cycle, 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 and disruptive to our operations and distracting to
management. If resolved against us, such legal proceedings could result in excessive verdicts, injunctive relief or other
equitable relief that may affect how we operate our business. Similarly, if we settle such legal proceedings, it may affect how
we operate our business. Future court decisions, alternative dispute resolution awards, 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. Although we maintain liability insurance coverage, there can be no assurance
that such coverage will cover any particular verdict, judgment or settlement that may be entered against us, that such coverage
will prove to be adequate or that such coverage will continue to remain available on acceptable terms, if at all. If we incur
liability that exceeds our insurance coverage or that is not within the scope of the coverage in legal proceedings brought
against us, it could have an adverse effect on our business, financial condition and results of operations.
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 plan to 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
• 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
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• 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 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, revenue cycle 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
associates, 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
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 and cloud services
businesses also rely on a limited number of suppliers for certain functions of these businesses, such as Oracle database
technologies, CITRIX technologies and Cisco networking technologies. Additionally, we rely on EMC, Hewlett Packard,
NetApp and IBM for our hardware technology platforms.
Most of the third party software license contracts 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
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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 or supply chain 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 clients, future sales of solutions, devices and services, and negatively affect our revenue and
operating earnings.
We may be unable to successfully integrate the Siemens Health Services business with our business or to realize
the anticipated benefits of the acquisition of Siemens Health Services. On February 2, 2015, we completed the
acquisition of the assets of Siemens AG's health information technology business unit, Siemens Health Services. The success
of the acquisition of Siemens Health Services will depend, in part, on the ability to realize the anticipated synergies, growth
opportunities and cost savings from integrating Siemens Health Services’ business with our business. The integration of two
independent businesses is a complex, costly and time-consuming process and involves numerous risks, including difficulties
in the assimilation of operations, services, solutions and personnel, the diversion of management’s attention from other
business concerns, the entry into markets in which we have little or no direct prior experience, the potential loss of Siemens
Health Services’ key personnel, and the potential inability to maintain the goodwill of existing clients. The difficulties of
combining the operations of the companies include, among other factors:
• managing a larger company;
•
the possibility of faulty assumptions underlying expectations regarding the integration process, including the
assumption of known and unknown liabilities;
integrating two business cultures;
creating uniform standards, controls, procedures, policies and information systems and minimizing the costs
associated with such matters;
integrating information systems, purchasing, accounting, finance, legal, sales, billing, payroll and regulatory
compliance functions;
preserving client, supplier, research and development, distribution, marketing, promotion and other important
relationships;
commercializing solutions under development and increasing revenues from existing marketed solutions;
combining the sales force territories and competencies associated with the sale of solutions and services presently
sold or provided by us or Siemens Health Services;
integrating personnel from different businesses while maintaining focus on providing consistent, high-quality solutions
and client support and attracting prospective clients;
integrating complex technologies and solutions from different businesses in a manner that is seamless to clients;
and
performance shortfalls as a result of the diversion of management’s attention to the Siemens Health Services
acquisition.
•
•
•
•
•
•
•
•
•
If management is unable to successfully integrate the business of Siemens Health Services into our business in a manner
that permits us to achieve the cost savings and operating synergies anticipated to result from the Siemens Health Services
acquisition, such anticipated benefits of the Siemens Health Services acquisition may not be realized fully or at all or may
take longer to realize than expected. Any significant diversion of management’s attention away from the ongoing businesses,
and any difficulties encountered in the transition and integration process, could adversely affect our financial results. Moreover,
the failure to achieve the anticipated benefits of the Siemens Health Services acquisition could result in increased costs or
decreases in the amount of expected revenues. Any of the above difficulties could adversely affect our ability to maintain
relationships with clients, partners, suppliers and associates or our ability to achieve the anticipated benefits of the Siemens
Health Services acquisition, or could reduce our earnings or otherwise adversely affect our business and financial results.
We intend to continue strategic business acquisitions and other combinations, 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
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seek and complete strategic business acquisitions and other combinations 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 negatively affect our reported net earnings.
Volatility and disruption resulting from 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. Volatility and disruption in global capital and credit markets 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, volatility and disruption in global financial
markets may also limit our ability to access the capital markets at a time when we would like, or need, to raise capital, which
could have an impact on our ability to react to changing economic and business conditions. Accordingly, if global financial
and economic volatility 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 profitably
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.
We will incur significant additional expenses in connection with the integration of the Siemens Health Services
business into Cerner. As we work to integrate the business, we expect to incur significant additional expenses relating to
the integration of personnel, geographically diverse operations, information technology systems, accounting systems, clients,
and strategic partners of each business and the implementation of consistent standards, policies, and procedures, and we
may be subject to material write downs in assets and charges to earnings, which are expected to include severance pay and
other costs. The integration process will be long-term and will continue to create significant expenses.
We have restrictive covenants in our debt agreements, which may restrict our flexibility to operate our business. If
we do not comply with these restrictive covenants, our failure could result in material and adverse effects on our
operating results and our financial condition. Our debt agreements contain customary restrictive covenants, including
limitations on consolidated indebtedness, liens, investments, subsidiary investments, asset dispositions, and restricted
payments, and require us to maintain certain leverage and interest coverage ratios. Failure to comply with these covenants
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could result in an event of default that, if not cured or waived, could result in reduced liquidity for the Company and could
have a material adverse effect on our operating results and financial condition.
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, operating rules 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. Together with ongoing statutory and
budgetary policy developments at a federal level, 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 not all the administrative rules implementing health care reform under the
legislation have been finalized, and because of ongoing federal fiscal budgetary pressures yet to be resolved for federal
health programs, the full impact of the health care reform legislation and of further statutory actions to reform healthcare
payment 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 devices, solutions
and services.
The health care industry is highly regulated, and thus, we are subject to a number of laws, regulations and industry
initiatives, non-compliance with certain of which could materially adversely affect our operations or otherwise
adversely affect our business, financial condition and operating results. As a participant in the health care industry,
our operations and relationships, and those of our clients, are regulated by a number of local, state, federal and foreign
governmental entities. 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, health care 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, waste and abuse affecting health care providers whose services are reimbursed by Medicare,
Medicaid and other government health care programs. Our health care provider clients, as well as our provision of products
and services to government entities subject our business 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 health care
device sales, are vague or indefinite and have not been interpreted by the courts. They may be interpreted or applied by a
prosecutorial, regulatory or judicial authority in a manner that could broaden their applicability to us or require our clients to
make changes in their operations or the way in which they deal with us. If such laws and regulations are determined to be
applicable to us and if we fail to comply with any applicable laws and regulations, we could be subject to civil and criminal
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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.
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, submission and collection 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.
Implementation of ICD-10 Coding for Medical Coding. The Centers for Medicare & Medicaid Services (CMS) has mandated
that all providers, payers, clearinghouses and billing services implement the use of new patient codes for medical coding,
referred to as ICD-10 codes on or before October 1, 2015. This mandate substantially increases the number of medical
billing codes by which providers will seek reimbursement, increasing the complexity of submitting claims for reimbursement.
Claims submitted after October 1, 2015 must use ICD-10 codes or they will not be paid. Our efforts to provide services and
solutions that enable our clients to comply with the ICD-10 mandate could be time consuming and expensive. In addition,
due to the effort and expense of complying with the ICD-10 mandate, our clients may postpone or cancel decisions to purchase
our solutions and services. Either of the foregoing could have a material adverse effect on our business, financial condition
and results of operations.
Regulation of Health Care Devices. The United States Food and Drug Administration (the FDA) has determined that certain
of our solutions are health care 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 health care 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 health care 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 health care
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
health care devices that are used in health care. If we are unable to obtain the required regulatory approvals for any such
solutions or health care devices, our short and long term business plans for these solutions or health care devices could be
delayed or canceled.
There have been eight 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, 2007 and 2014, 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 used and 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
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security 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 to ensure the integrity, security 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 claims, fines and penalties.
In Europe, we are subject to the European Union (“EU”) data protection regulations, including the EU Directive on Data
Protection, which requires member states to impose minimum restrictions on the collection and use of personal data that, in
some respects, are more stringent, and impose more significant burdens on subject businesses, than current privacy standards
in the United States. The EU regulations establish several obligations that organizations must follow with respect to use of
personal data, including a prohibition on the transfer of personal information from the EU to other countries whose laws do
not protect personal data to an adequate level of privacy or security. In addition to this EU-wide legislation, certain member
states have adopted more stringent data protection standards. Cerner has addressed these requirements by certification to
the US - EU and US - Switzerland Safe Harbor Frameworks. The costs of compliance with, and other burdens imposed by,
such laws, regulations and policies, or modifications thereto, that are applicable to us may limit the use and adoption of our
solutions and could have a material adverse impact on our results of operations.
Applicable 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. Governmental enforcement personnel have substantial
funding, powers and remedies to pursue 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 Office of the National Coordinator for Health Information Technology
(ONC) has developed a comprehensive set of criteria for the functionality, interoperability and security of various software
modules in the HCIT industry. ONC, however, continues to modify and refine those standards. Achieving 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 stimulus funds from the U.S. federal
government. 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
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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.
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 solutions 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, revenue cycle 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. If we are unable to recognize the impact of industry consolidation, falling costs and
technological advancements 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.
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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
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,”
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“may,” “expect,” “hope,” “anticipate,” “goal,” “forecast,” “plan,” “guidance” or “estimate” or the negative of these words,
variations thereof or similar expressions. Forward-looking statements are not guarantees of future performance or results.
They involve risks, uncertainties and assumptions. It is important to note that any such performance and actual results,
financial condition or business, could differ materially from those expressed in such forward-looking statements. Factors that
could cause or contribute to such differences include, but are not limited to, those discussed in this Item 1A. Risk Factors
and elsewhere herein or in other reports filed with the SEC. Other unforeseen factors not identified herein could also have
such an effect. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions,
the occurrence of unanticipated events or changes in future operating results, financial condition or business over time.
Item 1B. Unresolved Staff Comments
None
Item 2. Properties
Our properties consist mainly of owned and leased office and data center facilities.
Our United States corporate world headquarters 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 known as the Continuous Campus, houses 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. Construction of the Continuous
Campus was completed in February 2014.
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.
We have purchased approximately 260 acres of land located in Kansas City, Missouri. This property, known as the Trails
Campus, was acquired as a site for future office space development to further accommodate our anticipated growth.
Construction on the Trails Campus began in November 2014.
As of the end of 2014, we leased additional office space in Tempe, Arizona; Carlsbad, Culver City and Garden Grove,
California; Denver, Colorado; Lenexa, Kansas; Waltham, Massachusetts; Minneapolis and Rochester, Minnesota; Columbia,
Nevada, Lee’s Summit and Kansas City, Missouri; Durham, North Carolina; New Concord, Ohio; Franklin, Tennessee; Salt
Lake City, Utah; Burlington, Vermont; and Vienna, Virginia. Globally, we also leased office space in: Brisbane, Sydney and
Melbourne, Australia; Sao Paulo, Brazil; Peterborough and Toronto, Ontario, Canada; 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.
In connection with our acquisition of Siemens Health Services on February 2, 2015, we acquired approximately 110 acres
of property in Malvern, Pennsylvania. This property includes approximately 675,000 square feet of office space, and a
102,000 square foot data center. We also now lease additional office space in various locations, globally.
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
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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 2014 and 2013 as reported by The Nasdaq Stock Market®.
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
2014
Low
Last
High
2013(a)
Low
$
$
63.07
56.94
60.07
66.45
$
51.65
48.39
50.30
55.75
56.15
51.27
58.66
65.03
$
$
47.37
49.68
52.61
58.24
$
38.76
45.60
46.06
52.55
Last
47.37
48.05
52.61
55.58
(a) Sales prices have been retroactively adjusted to give effect to the 2-for-1 stock split effective June 28, 2013.
At February 6, 2015, there were approximately 940 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 2014:
(In millions, except share data)
Period
September 28, 2014 - October 25, 2014
October 26, 2014 - November 22, 2014
November 23, 2014 - January 3, 2015
Total
Total Number of
Shares
Purchased (a)
Average Price
Paid per Share
—
658
—
658
$
$
—
63.34
—
63.34
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)
— $
—
—
—
100.0
100.0
100.0
(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 2011 Omnibus Equity Incentive Plan (the Omnibus Plan). The Omnibus Plan allows for the withholding of shares to satisfy
minimum tax obligations due upon the vesting of restricted stock. Pursuant to the Omnibus Plan, 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)
In May 2014, our Board of Directors approved an amendment to the stock repurchase program that was authorized in December 2013. Under
the amendment, the Company may repurchase shares of our common stock up to an aggregate of $317.0 million, excluding transaction costs.
During 2014, the Company repurchased 4.1 million shares for consideration of $217.0 million, excluding transaction costs, pursuant to a Rule
10b5-1 plan. As of January 3, 2015, $100.0 million remains available under the authorized program.
See Part III, Item 12 for information relating to securities authorized for issuance under our equity compensation plans.
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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:
2014
(1)(2)
2013
(1)(3)
2012
(1)
2011
(1)
2010
(1)
$ 3,402,703
763,084
774,174
525,433
$ 2,910,748
576,012
588,054
398,354
$ 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
1.54
1.50
1.16
1.13
1.16
1.13
0.91
0.88
0.72
0.69
342,150
350,386
343,636
352,281
341,861
351,394
337,267
347,734
329,833
341,695
Working capital
Total assets
Long-term debt and capital lease obligations, excl. current
installments
Shareholders' equity
$ 1,714,471
4,530,565
$ 1,121,276
4,098,364
$ 1,210,394
3,704,468
$ 1,063,593
3,000,358
$
840,129
2,422,790
62,868
3,565,968
111,717
3,167,664
136,557
2,833,650
86,821
2,310,681
67,923
1,905,297
(1)
Includes share-based compensation expense. The impact of this expense is as follows:
(In thousands, except share data)
2014
2013
2012
2011
2010
Total share-based compensation expense
Amount of related income tax benefit
Net impact on earnings
Decrease to diluted earnings per share
$
$
$
62,965
(22,101)
40,864
0.12
$
$
$
48,954
(18,607)
30,347
0.09
$
$
$
38,112
(14,578)
23,534
0.07
$
$
$
29,479
(11,256)
18,223
0.05
$
$
$
24,903
(9,329)
15,574
0.05
(2)
Includes $15.8 million of pre-tax costs in connection with our acquisition of Siemens Health Services, as further described in Note 2 of the notes
to consolidated financial statements.
(3)
Includes a pre-tax settlement charge of $106.2 million, as further described in Note 11 of the notes to consolidated financial statements.
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management Discussion and Analysis (MD&A) is intended to help the reader understand our results of
operations and financial condition. This MD&A is provided as a supplement to, and should be read in conjunction with, our
financial statements and the accompanying notes to the financial statements (Notes).
Our fiscal year ends on the Saturday closest to December 31. Fiscal year 2014 consisted of 53 weeks and ended on January 3,
2015, and fiscal years 2013 and 2012 each consisted of 52 weeks and ended on December 28, 2013 and December 29,
2012, respectively. The additional week in fiscal 2014 impacts the results of operations discussion below, for the comparison
of fiscal years 2014 and 2013. 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 strategic focus is the creation of organic growth by investing in research and development (R&D) to create
solutions and services for the health care industry. This strategy has driven strong growth over the long-term, as reflected
in five- and ten-year compound annual revenue growth rates of 14% or more. This growth has also created an important
strategic footprint in health care, with Cerner® solutions in more than 18,000 facilities worldwide, including hospitals, physician
practices, laboratories, ambulatory centers, behavioral health centers, cardiac facilities, radiology clinics, surgery centers,
extended care facilities, retail pharmacies, and employer sites. 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 solutions and services that reflect our ongoing ability to innovate and expand our reach
into health care. Examples of these include our CareAware® health care device architecture and devices, Cerner ITWorks
services, revenue cycle solutions and services, and population health solutions and services. Finally, we believe there is
significant opportunity for growth outside of the United States, with many non-U.S. markets focused on health care information
technology as part of their strategy to improve the quality and lower the cost of health care.
Beyond our strategy for driving revenue growth, we are also focused on earnings growth. Similar to our history of growing
revenue, our net earnings have increased at compound annual rates of 20% or more 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 operating cash flows in 2014.
New business bookings revenue in 2014, which reflects the value of executed contracts for software, hardware, professional
services and managed services, was $4.3 billion, which is an increase of 13% compared to $3.8 billion in 2013. Our 2014
revenues increased 17% to $3.4 billion compared to $2.9 billion in 2013. The year-over-year increase in revenue reflects
ongoing demand for Cerner's core solutions and services driven by our clients’ needs to keep up with regulatory requirements,
increased contributions from Cerner ITWorks and Cerner revenue cycle solutions and services, and attaining new clients.
Our 2014 net earnings were $525.4 million compared to $398.4 million in 2013. Diluted earnings per share were $1.50 in
2014 compared to $1.13 in 2013. The 2014 and 2013 net earnings and diluted earnings per share reflect the impact of stock-
based compensation expense. The effect of these expenses reduced the 2014 net earnings and diluted earnings per share
by $40.9 million and $0.12, respectively, and the 2013 net earnings and diluted earnings per share by $30.3 million and
$0.09, respectively. The 2014 net earnings and diluted earnings per share also reflect the impact of acquisition costs related
to our acquisition of Siemens Health Services, as further described below. These costs reduced net earnings and diluted
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earnings per share by $10.1 million and $0.03, respectively. The 2013 net earnings and diluted earnings per share also
reflect the impact of a settlement charge, as further described in Note (11) of our notes to consolidated financial statements.
The effect of this charge reduced 2013 net earnings and diluted earnings per share by $68.1 million and $0.19, respectively.
We had cash collections of receivables of $3.5 billion in 2014 compared to $3.1 billion in 2013. Days sales outstanding was
66 days for the 2014 fourth quarter compared to 67 days for both the 2014 third quarter and the 2013 fourth quarter. Operating
cash flows for 2014 were strong at $847.0 million compared to $695.9 million in 2013.
Siemens Health Services
On February 2, 2015, we acquired substantially all of the assets, and assumed certain liabilities of Siemens Health Services,
the health information technology business unit of Siemens AG, a stock corporation established under the laws of Germany.
Siemens Health Services offers a portfolio of enterprise-level clinical and financial health care information technology solutions,
as well as departmental, connectivity, population health, and care coordination solutions globally. Solutions are offered on
the Soarian, Invision, and i.s.h.med platforms, among others. Siemens Health Services also offers a range of complementary
and support services including hosting and managed services, implementation services, and strategic consulting.
We believe the acquisition enhances our organic growth opportunities as it provides us a larger base into which we can sell
our combined portfolio of solutions and services. The acquisition also augments our non-U.S. footprint and growth
opportunities, increases our ability and scale for R&D investment, and adds approximately 5,500 highly-skilled associates
that will enhance our capabilities. These factors, combined with the synergies and economies of scale expected from
combining the operations of Cerner and Siemens Health Services, are the basis for the acquisition.
Consideration for the acquisition was $1.37 billion of cash, consisting of the $1.3 billion agreed upon price plus working
capital adjustments. The purchase price is subject to certain post-closing adjustments for working capital and pension
obligations, as specified in the Master Sale and Purchase Agreement dated August 5, 2014, as amended.
The operating results of Siemens Health Services will be combined with our operating results subsequent to the purchase
date of February 2, 2015. We expect the acquisition of Siemens Health Services to have a significant impact on our results
of operations in 2015. As a reference for magnitude, we expect the Siemens Health Services business to contribute
approximately $1.0 billion of revenues in 2015. We are currently unable to provide estimates of contributions to GAAP net
earnings and diluted earnings per share, primarily due to the timing of the transaction in proximity to the date of this filing.
The initial accounting for the acquisition, including the preliminary allocation of purchase price, is incomplete as of the filing
date.
Health Care Information Technology Market Outlook
We have provided an assessment of the health care information technology market under “Health Care and Health Care IT
Industry” in Part I, Item 1 "Business."
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Results of Operations
Fiscal Year 2014 Compared to Fiscal Year 2013
(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
2014
% of
Revenue
2013
% of
Revenue
%
Change
$
945,858
724,840
1,642,119
89,886
28% $
21%
48%
3%
847,809
661,979
1,330,851
70,109
29%
23%
46%
2%
3,402,703
100%
2,910,748
100%
604,377
2,798,326
1,395,568
392,805
246,869
2,035,242
2,639,619
763,084
11,090
(248,741)
18%
82%
41%
12%
7%
60%
78%
22%
514,722
2,396,026
1,173,051
338,786
308,177
1,820,014
2,334,736
576,012
12,042
(189,700)
18%
82%
40%
12%
11%
63%
80%
20%
12 %
9 %
23 %
28 %
17 %
17 %
17 %
19 %
16 %
(20)%
12 %
13 %
32 %
$
525,433
$
398,354
32 %
Revenues increased 17% to $3.4 billion in 2014, as compared to $2.9 billion in 2013.
• System sales, which include revenues from the sale of licensed software (including perpetual license sales and
software as a service), technology resale (hardware, devices, and sublicensed software), deployment period
licensed software upgrade rights, installation fees, transaction processing and subscriptions, increased 12% to
$945.9 million in 2014 from $847.8 million in 2013. The increase in system sales was primarily driven by strong
growth in software and subscriptions of $65.4 million and $22.9 million, respectively.
• Support and maintenance revenues increased 9% to $724.8 million in 2014 compared to $662.0 million in 2013.
This increase was attributable to continued success at selling Cerner Millennium applications and implementing
them at client sites. We expect that support and maintenance revenues will continue to grow as the base of
installed Cerner Millennium systems grows.
• Services revenue, which includes professional services, excluding installation, and managed services, increased
23% to $1.6 billion in 2014 from $1.3 billion in 2013. This increase was driven by growth in CernerWorks managed
services of $70.0 million as a result of continued demand for our hosting services and a $241.3 million increase
in professional services due to increased implementation and consulting activities.
Revenue backlog, which reflects contracted revenue that has not yet been recognized as revenue, increased 19% to
$10.6 billion in 2014 compared to $8.9 billion in 2013. This increase was driven by growth in new business bookings
during the past four quarters, including continued strong levels of managed services, Cerner ITWorks and Cerner revenue
cycle services bookings that typically have longer contract terms.
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Costs of Revenue
Cost of revenues as a percentage of total revenues was 18% in both 2014 and 2013.
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 12% to $2.0 billion in 2014, compared with $1.8 billion in 2013.
• Sales and client service expenses as a percent of total revenues were 41% in 2014, compared to 40% in 2013.
These expenses increased 19% to $1.4 billion in 2014, from $1.2 billion in 2013. Sales and client service expenses
include salaries of sales, marketing, support, and services personnel, depreciation and other expenses associated
with our CernerWorks managed service business, communications expenses, unreimbursed travel expenses,
expense for share-based payments, and trade show and advertising costs. The increase as a percent of revenue
reflects a higher mix of services during the period that was driven by strong services revenue growth.
• Software development expenses as a percent of revenue were 12% in 2014 and 2013. Expenditures for software
development reflect ongoing development and enhancement of the Cerner Millennium and HealtheIntent
platforms, with a focus on supporting key initiatives to enhance physician experience, revenue cycle and population
health solutions. A summary of our total software development expense in 2014 and 2013 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
2014
2013
$ 467,158
(175,262)
(2,538)
103,447
$ 418,747
(172,211)
(2,438)
94,688
$ 392,805
$ 338,786
• General and administrative expenses as a percent of total revenues were 7% in 2014, compared to 11% in 2013.
These expenses decreased 20% to $246.9 million in 2014, from $308.2 million in 2013. General and administrative
expenses include salaries for corporate, financial and administrative staffs, utilities, communications expenses,
professional fees, depreciation and amortization, transaction gains or losses on foreign currency, expense for
share-based payments and acquisition costs. The 2013 amount includes a $106.2 million settlement charge, as
further described in Note (11) of our notes to consolidated financial statements. The decrease of $61.3 million
was primarily driven by the 2013 settlement charge, offset by $15.8 million of acquisition costs related to the
acquisition of Siemens Health Services and a $14.8 million increase in corporate personnel costs, as we have
continued to increase such personnel to support our overall revenue growth.
Non-Operating Items
• Other income was $11.1 million in 2014 and $12.0 million in 2013. Refer to Note (12) of the notes to consolidated
financial statements for further detail on the composition of other income.
• Our effective tax rate was 32% in both 2014 and 2013. The rate includes net favorable permanent differences
recognized in both periods. Refer to Note (13) of the notes to consolidated financial statements for further
information regarding our effective tax rate.
In January 2013, the research and development tax credit was extended retroactively from January 1, 2012 to
December 31, 2013. In the first quarter of 2013, we recognized the research and development tax credit related
to 2012 as a favorable discrete item and the credit related to 2013 as a component of the overall 2013 effective
tax rate. The credit expired on December 31, 2013, but in the fourth quarter of 2014, was retroactively reinstated
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from January 1, 2014 to December 31, 2014. We recognized the research and development tax credit related
to 2014 in the fourth quarter of 2014. We estimate the expiration of the research and development tax credit on
December 31, 2014 will negatively impact our effective tax rate for 2015 by approximately one percentage point,
unless such credit is reinstated.
Operations by Segment
We have two operating segments: Domestic and Global. The Domestic segment includes revenue contributions and
expenditures associated with business activity in the United States. The Global segment includes revenue contributions
and expenditures linked to business activity in Aruba, Australia, Austria, Brazil, Canada, Cayman Islands, Chile, Egypt,
England, Finland, France, Germany, Guam, India, Ireland, Israel, Malaysia, Mexico, Netherlands, Qatar, Saudi Arabia,
Singapore, Spain, Switzerland and the United Arab Emirates.
The following table presents a summary of our operating segment information for the years ended 2014 and 2013:
(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
2014
% of
Revenue
2013
% of
Revenue
%
Change
$ 3,021,790
542,210
677,817
1,220,027
100%
18%
22%
40%
$ 2,550,115
458,540
600,341
1,058,881
100%
18%
24%
42%
1,801,763
60%
1,491,234
58%
380,913
62,167
131,096
193,263
100%
16%
34%
51%
360,633
56,182
115,281
171,463
100%
16%
32%
48%
187,650
49%
189,170
52%
(1,226,329)
(1,104,392)
$
763,084
$
576,012
18%
18%
13%
15%
21%
6%
11%
14%
13%
(1)%
11%
32%
• Revenues increased 18% to $3.0 billion in 2014 from $2.6 billion in 2013. This increase was driven by strong
growth across most of our business.
• Cost of revenues was 18% of revenues in both 2014 and 2013.
• Operating expenses increased 13% to $677.8 million in 2014 from $600.3 million in 2013, due primarily to growth
in professional services expenses.
Global Segment
• Revenues increased 6% to $380.9 million in 2014 from $360.6 million in 2013. This increase was primarily driven
by increases in managed services and professional services of $11.3 million and $12.7 million, respectively,
partially offset by a decline in software revenues of $7.3 million.
• Cost of revenues was 16% of revenues in both 2014 and 2013.
• Operating expenses increased 14% to $131.1 million in 2014 from $115.3 million in 2013, due primarily to an
increase in bad debt expense.
Other, net
Operating results not attributed to an operating segment include expenses, such as centralized professional services
costs, software development, marketing, general and administrative, stock-based compensation, acquisition costs,
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depreciation and amortization. These expenses increased 11% to $1.2 billion in 2014 from $1.1 billion in 2013. The
increase was driven by an increase in corporate personnel costs of $182.7 million, as we have continued to increase such
personnel to support our overall revenue growth, combined with $15.8 million of acquisition costs related to our acquisition
of Siemens Health Services. This is partially offset by the 2013 settlement charge of $106.2 million, as further described
in Note (11) of our notes to consolidated financial statements.
Fiscal Year 2013 Compared to Fiscal Year 2012
(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
2013
% of
Revenue
2012
% of
Revenue
%
Change
$
847,809
661,979
1,330,851
70,109
29% $
23%
46%
2%
902,799
604,247
1,103,082
55,308
34%
23%
41%
2%
2,910,748
100%
2,665,436
100%
514,722
2,396,026
1,173,051
338,786
308,177
1,820,014
2,334,736
576,012
12,042
(189,700)
18%
82%
40%
12%
11%
63%
80%
20%
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%
(6)%
10 %
21 %
27 %
9 %
(15)%
16 %
15 %
12 %
88 %
23 %
12 %
1 %
$
398,354
$
397,232
— %
Revenues increased 9% to $2.9 billion in 2013, as compared to $2.7 billion in 2012.
• System sales decreased 6% to $847.8 million in 2013 from $902.8 million in 2012. The decrease in system sales
was driven by lower levels of technology resale, which more than offset growth in licensed software, subscriptions,
and software as a service.
• Support and maintenance revenues increased 10% to $662.0 million in 2013 compared to $604.2 million in 2012.
This increase was attributable to continued success at selling Cerner Millennium systems and implementing them
at client sites.
• Services revenue increased 21% to $1.3 billion in 2013 compared to $1.1 billion in 2012. 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 and consulting activities and growth in Cerner
ITWorks and Cerner RevWorks services.
Revenue backlog increased 23% to $8.9 billion in 2013 compared to $7.3 billion in 2012 This increase was driven by
growth in new business bookings during the past four quarters, including continued strong levels of managed services,
Cerner ITWorks and Cerner revenue cycle services bookings that typically have longer contract terms.
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Costs of Revenue
Cost of revenues as a percentage of total revenues was 18% of total revenues in 2013, as compared to 23% of total
revenues in 2012. The lower cost of revenues as a percent of revenue was driven by a lower mix of technology resale,
which carries a higher cost of revenue.
Operating Expenses
Total operating expenses increased 23% in 2013 to $1.8 billion as compared to $1.5 billion in 2012.
• Sales and client service expenses as a percent of total revenues were 40% in 2013, as compared to 38% in 2012.
These expenses increased 15% to $1.2 billion in 2013, from $1.0 billion in 2012. The increase as a percent of
revenue reflects a higher mix of services during 2013 that was driven by strong services revenue growth and the
decline in technology resale revenue.
• Software development expenses as a percent of revenue were 12% in 2013, as compared to 11% in 2012. These
expenses increased 12% in 2013 to $338.8 million, from $301.4 million in 2012. The increase in both expensed
and capitalized software development expenditures reflects a focus on development and enhancement of solutions
that support key initiatives to enhance physician experience, revenue cycle, and population health. A summary
of our total software development expense in 2013 and 2012 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
2013
2012
$ 418,747
(172,211)
(2,438)
94,688
$ 319,828
(98,067)
(2,122)
81,731
$ 338,786
$ 301,370
• General and administrative expenses as a percent of total revenues were 11% in 2013, compared to 6% in 2012.
These expenses increased 88% to $308.2 million in 2013 from $163.6 million in 2012. The 2013 amount includes
a $106.2 million settlement charge, as further described in Note (11) of our notes to consolidated financial
statements. Absent this charge, 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, and an increase in amortization expense due to acquired intangibles.
Non-Operating Items
•
Interest income decreased to $15.3 million in 2013 from $16.5 million in 2012 due primarily to a slight decrease
in investment returns. Interest expense decreased to $4.2 million in 2013 from $5.1 million in 2012 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 was 32% in both 2013 and 2012. The rate includes net favorable permanent differences
recognized in both periods. Refer to Note (13) of the notes to consolidated financial statements for further
information regarding our effective tax rate.
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Operations by Segment
The following table presents a summary of our operating segment information for the years ended 2013 and 2012:
(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
2013
% of
Revenue
2012
% of
Revenue
%
Change
$ 2,550,115
458,540
600,341
1,058,881
100%
18%
24%
42%
$ 2,341,304
548,813
506,249
1,055,062
100%
23%
22%
45%
1,491,234
58%
1,286,242
55%
360,633
56,182
115,281
171,463
100%
16%
32%
48%
324,132
59,384
131,580
190,964
100%
18%
41%
59%
189,170
52%
133,168
41%
(1,104,392)
(847,748)
$
576,012
$
571,662
9%
(16)%
19%
—%
16%
11%
(5)%
(12)%
(10)%
42%
30%
1%
• Revenues increased 9% to $2.6 billion in 2013 from $2.3 billion in the same period in 2012. This increase was
primarily driven by strong growth across most of our business, partially offset by lower levels of technology resale.
• Cost of revenues was 18% of revenues in 2013, compared to 23% in 2012. The lower cost of revenues as a
percent of revenue was primarily driven by a lower mix of technology resale, which carries a higher cost of revenue.
• Operating expenses increased 19% to $600.3 million in 2013, from $506.2 million in 2012, due primarily to growth
in managed services and professional services expenses.
Global Segment
• Revenues increased 11% to $360.6 million in 2013 from $324.1 million in 2012. This increase was primarily driven
by growth across most of our business, partially offset by lower levels of technology resale.
• Cost of revenues was 16% in 2013, compared to 18% in 2012. The lower cost of revenues as a percent of
revenue was primarily driven by a lower mix of technology resale, which carries a higher cost of revenue.
• Operating expenses decreased 12% to $115.3 million in 2013 from $131.6 million in 2012, due primarily to a
decrease in non-personnel and bad debt expense.
Other, net
These expenses increased 30% to $1.1 billion in 2013 from $847.7 million in 2012. The 2013 amount includes a $106.2
million settlement charge, as further described in Note (11) of our notes to consolidated financial statements. Absent this
charge, the increase was primarily due to growth in corporate and development personnel costs, along with increased
depreciation and amortization related to acquired intangibles. This was partially offset by increased software capitalization.
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Liquidity and Capital Resources
Our liquidity is influenced by many factors, including the amount and timing of our revenues, our cash collections from our
clients and the amount we invest in software development, acquisitions and capital expenditures.
Our principal sources of liquidity are our cash, cash equivalents, which primarily consist of money market funds, commercial
paper, and time deposits with original maturities of less than 90 days, and short-term investments. At the end of 2014, we
had cash and cash equivalents of $635.2 million and short-term investments of $785.7 million, as compared to cash and
cash equivalents of $202.4 million and short-term investments of $677.0 million at the end of 2013.
The non-U.S. subsidiaries for which we have elected to indefinitely reinvest earnings outside the U.S. held approximately
11% of our aggregate cash, cash equivalents and short-term investments at January 3, 2015. As part of our current business
strategy, we plan to indefinitely reinvest the earnings of these foreign operations; however, should the earnings of these
foreign operations be repatriated, we would accrue and pay tax on such earnings, which may be material.
In January 2015, we issued $500.0 million aggregate principal amount of Senior Notes. Proceeds from the Senior Notes
are available for general corporate purposes. Refer to Note (9) of the notes to consolidated financial statements for additional
information regarding the Senior Notes.
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. As of the end of 2014, we
had no outstanding borrowings under this agreement; however, we had $16.6 million of outstanding letters of credit, which
reduced our available borrowing capacity to $83.4 million. Refer to Note (9) of the notes to consolidated financial statements
for additional information regarding our credit facility.
On February 2, 2015 we acquired Siemens Health Services, as discussed above. Consideration for the acquisition was
$1.37 billion of cash, consisting of the $1.3 billion agreed upon price plus working capital adjustments. We used a combination
of cash on hand and proceeds from the sale of investments to fund the acquisition.
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 2015.
The following table summarizes our cash flows in 2014, 2013 and 2012:
(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)
For the Years Ended
2013
2012
2014
$ 847,027
(284,567)
(120,324)
(9,310)
432,826
$ 695,865
(688,429)
(119,389)
(2,790)
(114,743)
$ 708,314
(701,631)
66,034
1,257
73,974
202,377
317,120
243,146
$ 635,203
$ 202,377
$ 317,120
$ 392,643
$ 168,339
$ 424,696
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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
2013
2012
2014
$ 3,480,591
(2,483,559)
(5,682)
(144,323)
$ 3,050,633
(2,172,418)
(6,973)
(175,377)
$ 2,714,315
(1,840,682)
(6,448)
(158,871)
$ 847,027
$ 695,865
$ 708,314
Cash flow from operations increased $151.2 million in 2014 compared to 2013, due primarily to 2013 including a payment
related to the previously mentioned settlement charge, along with an increase in 2014 of cash impacting earnings. Cash
flow from operations decreased $12.4 million in 2013 compared to 2012, due primarily to the aforementioned settlement
charge. During 2014, 2013 and 2012, we received total client cash collections of $3.5 billion, $3.1 billion and $2.7 billion,
respectively, of which 2%, 2% and 3%, respectively, were received from third party client financing arrangements and non-
recourse payment assignments. Days sales outstanding was 66 days in the fourth quarter of 2014, compared to 67 days
for both the 2014 third quarter and the 2013 fourth quarter. Revenues provided under support and maintenance agreements
represent recurring cash flows. Support and maintenance revenues increased 9% in 2014 and 10% in 2013. We expect
these revenues to continue to grow as the base of installed Cerner Millennium systems grows.
Cash from Investing Activities
(In thousands)
Capital purchases
Capitalized software development costs
Purchases of investments, net of sales and maturities
Acquisition of businesses, net of cash acquired
Other, net
Total cash flows from investing activities
For the Years Ended
2013
2012
2014
$ (276,584) $ (352,877) $ (183,429)
(100,189)
(354,603)
(40,540)
(22,870)
(177,800)
190,810
(7,476)
(13,517)
(174,649)
(36,221)
(67,877)
(56,805)
$ (284,567) $ (688,429) $ (701,631)
Cash flows from investing activities consist primarily of capital spending, short-term investment, and acquisition activities.
Our capital spending in 2014 has been driven by capitalized equipment purchases primarily to support growth in our
CernerWorks managed services business, investments in a cloud infrastructure to support cloud-based solutions, 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 2015, as we continue our current capital and software
development initiatives, fund equipment purchases necessary in connection with our acquisition of Siemens Health Services,
and construction on our Trails Campus.
Short-term investment activity historically consists of the investment of cash generated by our business in excess of what is
necessary to fund operations. The 2014 activity is impacted by a change in investment mix, whereas we have invested more
heavily in cash equivalents versus short-term and long-term investments, as we prepared to fund our acquisition of Siemens
Health Services. Refer to Notes (2) and (3) of the notes to consolidated financial statements. We expect short-term investment
activity to moderate in 2015 as excess cash will primarily be used to fund capital spending and acquisition activity.
During 2014, we acquired 100% of the outstanding membership interests of InterMedHx, LLC for $7.5 million. In 2013, we
acquired the net assets of Kaufman & Keen, LLC (doing business as PureWellness) and 100% of the outstanding stock of
Labotix Corporation for $67.5 million, net of cash acquired. During 2012, we completed our acquisition of Anasazi Software,
Inc. for $40.5 million, net of cash acquired. We expect to continue seeking and completing strategic business acquisitions
that are complementary to our business.
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Cash from Financing Activities
(In thousands)
Repayment of long-term debt and capital lease obligations
Cash from option exercises (including excess tax benefits)
Treasury stock purchases
Contingent consideration payments for acquisition of businesses
Cash grants
Other, net
Total cash flows from financing activities
For the Years Ended
2013
2012
2014
$
(14,930) $
71,411
(217,082)
(10,617)
48,000
2,894
(24,700) $
71,330
(170,042)
(800)
—
4,823
(17,083)
86,517
—
(3,400)
—
—
$ (120,324) $ (119,389) $
66,034
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 2015 based on the number of exercisable options at the end of 2014 and our current stock price.
In May 2014, our Board of Directors approved an amendment to the stock repurchase program that was authorized in
December 2013. Under the amendment, the Company may repurchase shares of our common stock up to an aggregate of
$317.0 million, excluding transaction costs. In 2014, we purchased 4.1 million shares for total consideration of $217.1 million.
At the end of 2014, $100.0 million remains available for purchases under the program. We may continue to purchase shares
under this program in 2015, which will be dependent on a number of factors, including the price of our common stock.
In December 2012, our Board of Directors authorized a stock repurchase program of up to $170.0 million, excluding transaction
costs, of our common stock. During 2013, we repurchased 3.6 million shares for total consideration of $170.0 million. This
program is now complete.
In September 2014 we paid $10.6 million of the contingent consideration related to our acquisition of PureWellness. We
expect additional contingent consideration payments in 2015 related to our acquisitions of PureWellness and InterMedHx.
Refer to Note (2) of the notes to consolidated financial statements for additional information regarding our contingent
consideration arrangements.
In January 2014 we received $48.0 million of cash grants from the Kansas Department of Commerce for project costs in
connection with the construction of our Continuous Campus. Refer to Note (17) of the notes to consolidated financial
statements for additional information.
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
2013
2012
2014
$ 847,027
(276,584)
(177,800)
$ 695,865
(352,877)
(174,649)
$ 708,314
(183,429)
(100,189)
$ 392,643
$ 168,339
$ 424,696
Free cash flow increased $224.3 million from 2013 to 2014. This increase is largely due to an increase in cash flows from
operations combined with a decrease in capital purchases, primarily due to the completion of construction on our Continuous
Campus. Free cash flow for 2013 also includes a payment related to the settlement charge, described in Note (11) of our
notes to consolidated financial statements. Free cash flow decreased $256.4 million from 2012 to 2013. This decrease was
primarily due to the previously mentioned settlement charge, combined with increased capital spending in 2013 to support
our growth initiatives and facilities requirements and capitalized spending to support our ongoing software development
initiatives. We believe our free cash flow levels reflect 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 used by other companies and may not be comparable to similarly
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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 2014,
except short-term purchase order commitments arising in the ordinary course of business.
(In thousands)
Balance sheet obligations(a):
Long-term debt obligations (b)
Interest on long-term debt obligations
Capital lease obligations
Interest on capital lease obligations
Other obligations:
Operating lease obligations
Purchase obligations
2015
2016
2017
2018
2019
2020 and
thereafter
Total
Payments Due by Period
$
14,233
$
789
53,227
2,741
23,525
42,300
— $
—
— $
—
34,510
1,458
21,693
23,481
19,522
530
21,467
6,762
— $
— $
— $
14,233
—
6,721
156
—
2,115
22
—
—
—
789
116,095
4,907
19,294
4,345
14,984
4,001
39,607
8,000
140,570
88,889
Total
$ 136,815
$
81,142
$
48,281
$
30,516
$
21,122
$
47,607
$ 365,483
(a) At the end of 2014, liabilities for unrecognized tax benefits were $7.2 million.
(b) Amounts do not include the long-term debt issued in January 2015.
We have no off balance sheet arrangements as defined in Regulation S-K. The effects of inflation on our business during
2014, 2013 and 2012 were not significant.
Recent Accounting Pronouncements
Refer to Note (1) of the notes to consolidated financial statements for information regarding recently issued 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
in the quarter the contracts are executed. If the period of time to achieve our delivery and installation milestones for our
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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 in which services are deemed essential to the functionality of the software
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. 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 2014 and 2013 and concluded that goodwill was not impaired. The assessments
consisted of a qualitative analysis in accordance with new guidance effective in 2012. A key consideration in conducting
those analyses was the growth in both the revenues and operating earnings of our reporting units since our last quantitative
assessment. Our last quantitative assessment was performed in 2011, 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 $320.5 million and $307.4 million at the end
of 2014 and 2013, respectively. If future anticipated cash flows from our reporting units that recognized goodwill do not
materialize as expected, our goodwill could be impaired, which could result in significant charges to earnings.
Income Taxes
We make a number of assumptions and estimates in determining the appropriate amount of expense to record for income
taxes. These assumptions and estimates consider the taxing jurisdictions in which we operate as well as current tax
regulations. Accruals are established for estimates of tax effects for certain transactions, business structures and future
projected profitability of our businesses based on our interpretation of existing facts and circumstances. If these assumptions
and estimates were to change as a result of new evidence or changes in circumstances, the change in estimate could result
in a material adjustment to the consolidated financial statements.
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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 2014, we designated all of our Great Britain Pound (GBP) denominated long-term debt (9.3 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 2014 by
approximately $0.9 million, as compared to $1.9 million in 2013. The 2014 model assumes an exchange rate of 1.533 at
January 3, 2015 and a tax rate of 38.8%. The hypothetical decrease in other comprehensive income in 2014 from 2013 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 (20) 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
January 3, 2015, 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,
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
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in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent
limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Management’s Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting
(as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended). The Company’s management
assessed the effectiveness of the Company’s internal control over financial reporting as of January 3, 2015. 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 (1992). The Company’s management has
concluded that, as of January 3, 2015, 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
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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 2015 Annual Shareholders’
Meeting scheduled to be held May 22, 2015 (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 “Corporate Governance: 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 “Committees of the Board: 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.
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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 January 3, 2015:
(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)
25,135
$
27.00
—
25,135
—
8,080
—
8,080
(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.
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PART IV
Item 15. Exhibits and Financial Statement Schedules
a) Financial Statements and Exhibits
(1) Consolidated Financial Statements:
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets - As of January 3, 2015 and December 28, 2013
Consolidated Statements of Operations -Years Ended January 3, 2015, December 28, 2013 and
December 29, 2012
Consolidated Statements of Comprehensive Income - Years Ended January 3, 2015,
December 28, 2013 and December 29, 2012
Consolidated Statements of Cash Flows - Years Ended January 3, 2015, December 28, 2013
and December 29, 2012
Consolidated Statements of Changes in Shareholders' Equity - Years Ended January 3, 2015,
December 28, 2013 and December 29, 2012
Notes to Consolidated Financial Statements
(2) The following financial statement schedule and Report of Independent Registered Public Accounting Firm
of the Registrant for the three-year period ended January 3, 2015 are included herein:
Schedule II—Valuation and Qualifying Accounts, Report of Independent Registered Public
Accounting Firm
All other schedules are omitted, as the required information is inapplicable or the information is
presented in the consolidated financial statements or related notes.
(3) See the Index to Exhibits immediately following the signature page of this Annual Report on Form 10-K.
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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 11, 2015
CERNER CORPORATION
By:
/s/ Neal L. Patterson
Neal L. Patterson
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated:
Signature and Title
Date
/s/ Neal L. Patterson
February 11, 2015
Neal L. Patterson, Chairman of the Board and Chief
Executive Officer (Principal Executive Officer)
/s/ Clifford W. Illig
February 11, 2015
Clifford W. Illig, Vice Chairman and Director
/s/ Marc G. Naughton
February 11, 2015
Marc G. Naughton, Executive Vice President and
Chief Financial Officer (Principal Financial Officer)
/s/ Michael R. Battaglioli
February 11, 2015
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/ Mitchell E. Daniels
Mitchell E. Daniels, 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 11, 2015
February 11, 2015
February 11, 2015
February 11, 2015
February 11, 2015
February 11, 2015
February 11, 2015
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INDEX TO EXHIBITS
Incorporated by Reference
Exhibit
Number
Exhibit Description
Form
Exhibit(s)
Filing Date
SEC File No./Film No.
Filed
Herewith
8-K
3.2
12/23/2013
X
Cerner Corporation 2001 Long-Term Incentive Plan F
DEF 14A
Annex I
3(a)
3(b)
4(a)
10.1*
10.2*
10.3*
10.4*
10.5*
10.6*
10.7*
10.8*
10.9*
10.10*
10.11*
10.12*
10.13*
10.14*
10.15*
10.16*
10.17*
Third Restated Certificate of
September 12, 2013
Incorporation dated
Amended & Restated Bylaws as of September 16, 2008
(as amended March 31, 2010, March 9, 2011 and
December 23, 2013)
Specimen stock certificate
2006 Form of Indemnification Agreement for use
between the Registrant and its Directors
2010 Form of Indemnification Agreement for use
between the Registrant and its Directors and Section 16
Officers
Amended & Restated Executive Employment
Agreement of Neal L. Patterson dated January 1, 2008
Amended Stock Option Plan D of Registrant dated
December 8, 2000
Amended Stock Option Plan E of Registrant dated
December 8, 2000
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
Cerner Corporation 2004 Long-Term Incentive Plan G
(as amended on December 3, 2007)
Cerner Corporation 2004 Long-Term Incentive Plan G
Nonqualified Stock Option Grant Certificate
Cerner Corporation 2011 Omnibus Equity Incentive Plan
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
59
40
10-K
4(a)
10-K
10(a)
8-K
99.1
10-K
10(c)
10-K
10(f)
10-K
10(g)
10-K
10(v)
10-Q
10(a)
10-K
10(x)
10-K
10(w)
8-K
99.1
2/28/2007
000-15386/07658265
2/28/2007
000-15386/07658265
6/3/2010
000-15386/10875957
2/27/2008
000-15386/08646565
3/30/2001
000-15386/1586224
3/30/2001
000-15386/1586224
4/16/2001
000-15386/1603080
3/17/2005
000-15386/05688830
11/10/2005
000-15386/051193974
3/17/2005
000-15386/05688830
3/17/2005
000-15386/05688830
6/4/2010
000-15386/10879084
10-K
10(g)
10-K
10(q)
S-8
10-Q
4.5
10.1
2/27/2008
000-15386/08646565
2/27/2008
000-15386/08646565
5/27/2011
7/27/2012
10-K
10(u)
2/8/2013
10-K
10(v)
2/8/2013
Table of Contents
10.18*
10.19*
10.20*
10.21*
10.22*
10.23*
10.24*
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32
10.33
10.34
Cerner Corporation 2001 Associate Stock Purchase
Plan as Amended and Restated March 1, 2010 and May
27, 2011
Cerner Corporation Performance-Based Compensation
Plan (as Amended and Restated March 5, 2014)
Form of 2014 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 (for I.R.C. § 409A)
Effective December 31, 2012
Cerner Corporation 2005 Enhanced Severance Pay
Plan as Amended & Restated (for I.R.C. § 409A)
Effective January 4, 2015
Exhibit A Severance Matrix, effective April 1, 2011 to the
Cerner Corporation 2005 Enhanced Severance Pay
Plan as Amended & Restated dated August 15, 2010
Second Amended and Restated Aircraft Time Sharing
Agreement between Cerner Corporation and Neal L.
Patterson dated July 24, 2013
Interparty Agreement, dated January 19, 2010, among
Kansas Unified Development, LLC, OnGoal, LLC and
Cerner Corporation
Real Estate Purchase Agreement between Cerner
Property Development, Inc. and Trails Property II, Inc.
dated July 30, 2013
First Amendment to Real Estate Purchase Agreement
between Cerner Property Development, Inc. and Trails
Property II, Inc. dated December 23, 2013
Second Amendment
to Real Estate Purchase
Agreement between Cerner Property Development, Inc.
and Trails Property II, Inc. dated October 16, 2014
Master Sale and Purchase Agreement between
Siemens AG and Cerner Corporation dated August 5,
2014
Amendment Agreement
the Master Sale and
to
Purchase Agreement between Siemens AG and Cerner
Corporation dated February 2, 2015
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
Master Note Purchase Agreement between Cerner
Corporation and the Purchasers listed in Schedule A
thereto dated December 4, 2014
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.
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41
X
X
X
X
S-8
4.6
5/27/2011
10-Q
10-K
10.1
10(k)
4/25/2014
2/27/2008
000-15386/08646565
10-K
10(l)
2/8/2013
10-Q
10(a)
4/29/2011
10-Q
10.1
7/26/2013
8-K
99.1
1/22/2010
000-153866/10543089
8-K
10.1
8/1/2013
10-Q
2.1
10/24/2014
8-K
10.1
2/2/2015
8-K
99.1
11/7/2005
000-15386/051183275
8-K
10.1
12/5/2014
8-K
99.1
2/13/2012
000-15386/12599122
Table of Contents
10.35
10.36
21
23
31.1
31.2
32.1
32.2
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.
Second Amendment to Amended and Restated Credit
Agreement, dated January 15, 2015, 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.
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
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
10-K
4(c)
2/8/2013
X
X
X
X
X
X
X
X
X
X
X
X
X
* Indicates a management contract or compensatory plan or arrangement required to be identified by Part IV, Item 15(a)(3).
61
42
Table of Contents
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Cerner Corporation:
We have audited Cerner Corporation and subsidiaries’ internal control over financial reporting as of January 3, 2015, based
on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO). Cerner Corporation and subsidiaries’ 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. Our responsibility
is to express an opinion on Cerner Corporation and subsidiaries’ 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 and subsidiaries maintained, in all material respects, effective internal control over financial
reporting as of January 3, 2015, based on criteria established in Internal Control - Integrated Framework (1992) issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the consolidated balance sheets of Cerner Corporation and subsidiaries as of January 3, 2015 and December 28, 2013, and
the related consolidated statements of operations, comprehensive income, cash flows, and changes in shareholders’ equity
for each of the years in the three-year period ended January 3, 2015, and our report dated February 11, 2015 expressed an
unqualified opinion on those consolidated financial statements.
/s/KPMG LLP
Kansas City, Missouri
February 11, 2015
43
62
Table of Contents
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 as of January 3,
2015 and December 28, 2013, and the related consolidated statements of operations, comprehensive income, cash flows,
and changes in shareholders’ equity for each of the years in the three-year period ended January 3, 2015. These consolidated
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of Cerner Corporation and subsidiaries as of January 3, 2015 and December 28, 2013, and the results of their
operations and their cash flows for each of the years in the three-year period ended January 3, 2015, 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 and subsidiaries’ internal control over financial reporting as of January 3, 2015, based on criteria
established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), and our report dated February 11, 2015 expressed an unqualified opinion on the effectiveness
of Cerner Corporation and subsidiaries’ internal control over financial reporting.
/s/KPMG LLP
Kansas City, Missouri
February 11, 2015
44
63
Table of Contents
CERNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of January 3, 2015 and December 28, 2013
(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:
Common stock, $.01 par value, 500,000,000 shares authorized, 346,985,811 shares issued at January 3,
2015 and 344,338,030 shares issued at December 28, 2013
Additional paid-in capital
Retained earnings
Treasury stock, 4,652,515 shares at January 3, 2015 and 570,616 shares at December 28, 2013
Accumulated other comprehensive loss, net
Total shareholders’ equity
Total liabilities and shareholders’ equity
See notes to consolidated financial statements.
64
45
2014
2013
$ 635,203
785,663
672,778
23,789
209,278
22,075
2,348,786
$ 202,377
677,004
582,926
32,299
175,488
91,614
1,761,708
924,260
420,199
320,538
126,636
231,147
158,999
792,781
347,077
307,422
144,132
554,873
190,371
$ 4,530,565
$ 4,098,364
$ 160,285
67,460
209,655
140,230
56,685
634,315
$ 145,019
54,107
209,746
147,986
83,574
640,432
62,868
256,601
10,813
964,597
111,717
170,392
8,159
930,700
3,470
933,446
2,918,481
(245,333)
(44,096)
3,565,968
3,443
812,853
2,393,048
(28,251)
(13,429)
3,167,664
$ 4,530,565
$ 4,098,364
Table of Contents
CERNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended January 3, 2015, December 28, 2013 and December 29, 2012
(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 $103,447, $94,688 and $81,731, 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
2013
2012
2014
$ 945,858
$ 847,809
$ 902,799
2,366,959
1,992,830
1,707,329
89,886
70,109
55,308
3,402,703
2,910,748
2,665,436
314,089
200,402
89,886
302,374
142,239
70,109
427,456
125,433
55,308
1,395,568
1,173,051
1,020,640
392,805
246,869
338,786
308,177
301,370
163,567
2,639,619
2,334,736
2,093,774
763,084
576,012
571,662
11,090
12,042
16,046
774,174
588,054
587,708
(248,741)
(189,700)
(190,476)
$ 525,433
$ 398,354
$ 397,232
$
$
1.54
1.50
$
$
1.16
1.13
$
$
1.16
1.13
342,150
343,636
341,861
350,386
352,281
351,394
46
65
Table of Contents
CERNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the years ended January 3, 2015, December 28, 2013 and December 29, 2012
(In thousands)
Net earnings
Foreign currency translation adjustment and other (net of tax benefits of $1,111, $3,604 and $1,396,
respectively)
Change in net unrealized holding gain (loss) on available-for-sale investments (net of taxes (benefits) of
$(331), $10 and $125, respectively)
Comprehensive income
See notes to consolidated financial statements.
For the Years Ended
2013
2012
2014
$ 525,433
$ 398,354
$ 397,232
(30,145)
(8,185)
6,511
(522)
11
201
$ 494,766
$ 390,180
$ 403,944
47
66
Table of Contents
CERNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended January 3, 2015, December 28, 2013 and December 29, 2012
(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
Treasury stock purchases
Contingent consideration payments for acquisition of businesses
Cash grants
Other
Net cash provided by (used in) 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 refunds
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
Cash paid for acquisitions
Cash acquired
Net cash used
See notes to consolidated financial statements.
48
67
For the Years Ended
2013
2012
2014
$ 525,433
$ 398,354
$ 397,232
302,353
59,292
106,905
(74,786)
8,117
(14,625)
2,974
(21,764)
4,346
(51,218)
263,538
46,295
(22,647)
(9,599)
(8,111)
(36,038)
4,130
14,694
18,053
27,196
222,580
36,113
8,342
(83,705)
(279)
(2,224)
35,265
(22,784)
33,277
84,497
847,027
695,865
708,314
(276,584)
(177,800)
(1,214,036)
1,404,846
(13,517)
(7,476)
(352,877)
(174,649)
(1,106,819)
1,070,598
(56,805)
(67,877)
(183,429)
(100,189)
(1,286,997)
932,394
(22,870)
(40,540)
(284,567)
(688,429)
(701,631)
(14,930)
39,532
31,879
(217,082)
(10,617)
48,000
2,894
(24,700)
39,927
31,403
(170,042)
(800)
—
4,823
(120,324)
(119,389)
(9,310)
(2,790)
432,826
202,377
(114,743)
317,120
(17,083)
48,370
38,147
—
(3,400)
—
—
66,034
1,257
73,974
243,146
$ 635,203
$ 202,377
$ 317,120
$
$
5,682
144,323
$
6,973
175,377
(1,509) $
3,800
16,785
(11,600)
7,476
—
2,550
25,489
59,570
(18,982)
68,627
(750)
$
$
6,448
158,871
(6,375)
18,559
35,281
(1,916)
45,549
(5,009)
$
7,476
$
67,877
$
40,540
Table of Contents
CERNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the years ended January 3, 2015, December 28, 2013 and December 29, 2012
(In thousands)
Common Stock
Additional
Retained
Treasury
Shares
Amount
Paid-in Capital
Earnings
Stock
Accumulated
Other
Noncont
rolling
Comprehensiv
e Income
(Loss)
Interest
Balance at December 31, 2011
339,132
$ 3,392
$
721,794
$
1,597,462
$
— $
(11,967) $
120
Exercise of stock options (including net-settled option exercises)
5,047
Employee share-based compensation expense
Employee share-based compensation net excess tax benefit
Other comprehensive income (loss)
Dissolution of underlying entity
Net earnings
—
—
—
—
—
50
—
—
—
—
—
32,536
36,113
50,326
—
—
—
—
—
—
—
—
397,232
Balance at December 29, 2012
344,179
3,442
840,769
1,994,694
Exercise of stock options (including net-settled option exercises)
3,204
Employee share-based compensation expense
Employee share-based compensation net excess tax benefit
Other comprehensive income (loss)
Treasury stock purchases
Distribution of treasury stock in stock split
Net earnings
—
—
—
—
(3,045)
—
32
—
—
—
—
(31)
—
27,056
46,295
40,493
—
—
(141,760)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(170,042)
141,791
—
398,354
—
—
—
—
6,712
—
—
(5,255)
—
—
—
(8,174)
—
—
—
Balance at December 28, 2013
344,338
3,443
812,853
2,393,048
(28,251)
(13,429)
Exercise of stock options (including net-settled option exercises)
2,648
Employee share-based compensation expense
Employee share-based compensation net excess tax benefit
Other comprehensive income (loss)
Treasury stock purchases
Net earnings
—
—
—
—
—
27
—
—
—
—
—
21,613
59,292
39,688
—
—
—
—
—
—
—
—
—
—
—
—
(217,082)
525,433
—
—
—
—
(30,667)
—
—
Balance at January 3, 2015
346,986
$ 3,470
$
933,446
$
2,918,481
$
(245,333) $
(44,096) $
See notes to consolidated financial statements.
49
68
—
—
—
—
(120)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Table of Contents
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 (Cerner, the Company, we, us or our)
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 year 2014 consisted of 53 weeks and ended on January 3,
2015, and fiscal years 2013 and 2012 consisted of 52 weeks each and ended on December 28, 2013 and December 29,
2012, 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.
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Table of Contents
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 delivered, 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.
Revenue Recognition Policies for Each Element
We provide project-related installation services when licensing our software solutions, which include project-scoping services,
conducting pre-installation audits and creating initial environments. We have deemed installation services to be essential to
the functionality of the software and, therefore, recognize the software license over the software installation period using the
percentage-of-completion method. We measure the percentage-of-completion based on output measures 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.
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
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Table of Contents
due and payable and non-forfeitable. Implementation fees are recognized over the service period, which may extend from
nine months to several 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, 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
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,
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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, with maturities of less than one year. Our long-term investments are primarily invested in government and
corporate bonds with maturities of less than two years. All of our investments, other than a small portion accounted for under
the cost and equity methods, are classified as available-for-sale.
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 - The majority of our cash and cash equivalents are held at three major financial institutions. The majority
of our cash equivalents consist of money market funds and commercial paper. 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 2014, we had a 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
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 2014, 2013 or 2012. Refer to Note (7) for more information on goodwill and other intangible assets.
(i) 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
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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.
(j) 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 (13) for additional information regarding income taxes.
(k) 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 (14) for additional details of our earnings per share computations.
(l) 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 (15) for a detailed discussion of share-based payments.
(m) 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
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.
(n) 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.
(o) Recently Issued Accounting Pronouncements
Revenue Recognition. In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update (ASU)
No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which
it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing
revenue recognition guidance in U.S. GAAP when it becomes effective. This new guidance is effective for the Company in
the first quarter of 2017, with no early adoption permitted. The standard permits the use of either the retrospective or
cumulative effect transition method. At this time we have not selected a transition method. We are currently evaluating the
effect that ASU 2014-09 will have on our consolidated financial statements and related disclosures.
(2) Business Acquisitions
Siemens Health Services
On February 2, 2015, we acquired substantially all of the assets, and assumed certain liabilities of Siemens Health Services,
the health information technology business unit of Siemens AG ("Siemens"), a stock corporation established under the laws
of Germany. Siemens Health Services offers a portfolio of enterprise-level clinical and financial health care information
technology solutions, as well as departmental, connectivity, population health, and care coordination solutions globally.
Solutions are offered on the Soarian, Invision, and i.s.h.med platforms, among others. Siemens Health Services also offers
a range of complementary and support services including hosting and managed services, implementation services, and
strategic consulting.
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We believe the acquisition enhances our organic growth opportunities as it provides us a larger base into which we can sell
our combined portfolio of solutions and services. The acquisition also augments our non-U.S. footprint and growth
opportunities, increases our ability and scale for R&D investment, and adds approximately 5,500 of highly-skilled associates
that will enhance our capabilities. These factors, combined with the synergies and economies of scale expected from
combining the operations of Cerner and Siemens Health Services, are the basis for acquisition.
Consideration for the acquisition was $1.37 billion of cash, consisting of the $1.3 billion agreed upon price plus working
capital adjustments. The purchase price is subject to certain post-closing adjustments for working capital and pension
obligations, as specified in the Master Sale and Purchase Agreement ("MSPA") dated August 5, 2014, as amended.
In 2014 we incurred $15.8 million of pre-tax costs in connection with our acquisition of Siemens Health Services, which are
included in general and administrative expense in our consolidated statements of operations.
Our acquisition of Siemens Health Services will be 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.
Due to the timing of the acquisition subsequent to our 2014 fiscal year-end, certain disclosures, including the preliminary
allocation of purchase price, have been omitted from this Annual Report on Form 10-K because the initial accounting for the
business combination is incomplete as of the filing date. We will include necessary disclosures in our Quarterly Report on
Form 10-Q for our first fiscal quarter of 2015.
The operating results of Siemens Health Services will be combined with our operating results subsequent to the purchase
date of February 2, 2015.
InterMedHx
On April 1, 2014, we purchased 100% of the outstanding membership interests of InterMedHx, LLC (InterMedHx). InterMedHx
is a provider of health technology solutions in the areas of preventive care, patient administration, and medication history.
We believe the addition of InterMedHx solutions provides additional capabilities in the market.
Consideration for the acquisition of InterMedHx is expected to total $19.1 million, consisting of up-front cash plus contingent
consideration, which is payable at a percentage of the revenue contribution from InterMedHx solutions and services. We
valued the contingent consideration at $11.6 million based on projections of revenue over the assessment period.
The allocation of purchase price to the estimated fair value of the identified tangible and intangible assets acquired and
liabilities assumed resulted in goodwill of $16.8 million and $3.8 million in intangible assets related to the value of existing
technologies. 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 period of five years.
The operating results of InterMedHx were combined with our operating results subsequent to the purchase date of April 1,
2014. Pro-forma results of operations have not been presented because the effect of this acquisition was not material to
our results.
PureWellness
On March 4, 2013, we purchased the net assets of Kaufman & Keen, LLC (doing business as PureWellness). PureWellness
is a health and wellness company that develops solutions for the administration and management of wellness programs,
and to enable plan member engagement strategies. Our acquisition of PureWellness will further expand what we believe to
be a robust offering of solutions to manage and improve the health of populations.
Consideration for the acquisition of PureWellness is expected to total $69.2 million consisting of up-front cash plus contingent
consideration, which is payable if we achieve certain revenue milestones from PureWellness solutions and services during
the period commencing on August 1, 2013 and ending April 30, 2015. We valued the contingent consideration at $19.0
million based on a probability-weighted assessment of potential contingent consideration payment scenarios. During 2014,
we paid $10.6 million to satisfy a portion of this contingent consideration obligation.
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 $48.6 million and $20.3 million in intangible assets, of which $10.5 million and $9.8
million was related to the value of established customer relationships and existing technologies, respectively. The goodwill
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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 PureWellness were combined with our operating results subsequent to the purchase date of March 4,
2013. 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.
Labotix
On March 18, 2013, we purchased 100% of the outstanding stock of Labotix Corporation (together with its wholly owned
subsidiary Labotix Automation, Inc., Labotix). Labotix is a developer of laboratory automation solutions for clinical laboratories.
We believe the combination of Cerner Millennium, Cerner Copath, and Labotix will allow us to offer a comprehensive set of
capabilities to support high volume laboratory testing.
Consideration for the acquisition of Labotix was $18.0 million, which was paid in cash. The allocation of purchase price to
the estimated fair value of the identified tangible and intangible assets acquired and liabilities assumed resulted in goodwill
of $11.7 million and $5.2 million in intangible assets related to the value of existing technologies. 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 period of five years.
The operating results of Labotix were combined with our operating results subsequent to the purchase date of March 18,
2013. Pro-forma results of operations have not been presented because the effect of this acquisition was not material to
our results.
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 create a more comprehensive offering in
the market.
Consideration for the acquisition of Anasazi was $47.7 million consisting of up-front cash plus contingent consideration, which
was payable upon the achievement of certain revenue milestones during 2013 from Anasazi solutions and services. During
2013, we paid $0.8 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 $34.6 million and $18.6 million in intangible assets, of which $12.8 million and $5.2
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 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.
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(3) Investments
Available-for-sale investments at the end of 2014 were as follows:
(In thousands)
Cash equivalents:
Money market funds
Time deposits
Commercial Paper
Total cash equivalents
Short-term investments:
Time deposits
Commercial paper
Government and corporate bonds
Total short-term investments
Long-term investments:
Government and corporate bonds
Total available-for-sale investments
Available-for-sale investments at the end of 2013 were as follows:
(In thousands)
Cash equivalents:
Money market funds
Time deposits
Commercial Paper
Government and corporate bonds
Total cash equivalents
Short-term investments:
Time deposits
Commercial paper
Government and corporate bonds
Total short-term investments
Long-term investments:
Government and corporate bonds
Total available-for-sale investments
Adjusted
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
$ 189,137
$
— $
— $ 189,137
9,989
115,638
314,764
52,830
435,555
297,311
785,696
219,439
$ 1,319,899
$
—
—
—
—
1
69
70
26
96
—
—
—
(1)
(12)
(90)
(103)
9,989
115,638
314,764
52,829
435,544
297,290
785,663
(500)
218,965
$
(603) $ 1,319,392
Adjusted
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
$
57,254
$
— $
— $
57,254
7,771
3,000
410
68,435
70,303
33,750
572,670
676,723
542,644
—
—
—
—
12
1
356
369
346
—
—
—
—
—
(9)
(79)
(88)
7,771
3,000
410
68,435
70,315
33,742
572,947
677,004
(279)
542,711
$ 1,287,802
$
715
$
(367) $ 1,288,150
Investments reported under the cost method of accounting as of January 3, 2015 and December 28, 2013 were $8.7 million
and $7.2 million, respectively. Investments reported under the equity method of accounting as of January 3, 2015 and
December 28, 2013 were $3.5 million and $5.0 million, respectively.
We sold available-for-sale investments for proceeds of $697.9 million and $125.3 million in 2014 and 2013, respectively,
resulting in insignificant gains.
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(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.
The following table details our financial assets measured and recorded at fair value on a recurring basis at the end of 2014:
(In thousands)
Description
Money market funds
Time deposits
Commercial paper
Time deposits
Commercial paper
Balance Sheet Classification
Cash equivalents
Cash equivalents
Cash equivalents
Short-term investments
Short-term investments
Government and corporate bonds
Short-term investments
Government and corporate bonds
Long-term investments
Fair Value Measurements Using
Level 1
Level 2
Level 3
$ 189,137
$
— $
—
—
—
—
—
—
9,989
115,638
52,829
435,544
297,290
218,965
—
—
—
—
—
—
—
The following table details our financial assets measured and recorded at fair value on a recurring basis at the end of 2013:
(In thousands)
Description
Money market funds
Time deposits
Commercial paper
Government and corporate bonds
Time deposits
Commercial paper
Balance Sheet Classification
Cash equivalents
Cash equivalents
Cash equivalents
Cash equivalents
Short-term investments
Short-term investments
Government and corporate bonds
Short-term investments
Government and corporate bonds
Long-term investments
Fair Value Measurements Using
Level 1
Level 2
Level 3
$
57,254
$
— $
—
—
—
—
—
—
—
7,771
3,000
410
70,315
33,742
572,947
542,711
—
—
—
—
—
—
—
—
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 2014 and 2013 was approximately $14.9 million and $32.6 million, respectively. The carrying amount of such fixed-rate
debt at the end of 2014 and 2013 was $14.2 million and $30.6 million, respectively.
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(5) Receivables
Receivables consist of accounts receivable and the current portion of amounts due under sales-type leases. Accounts
receivable represent recorded revenues that have been billed. 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 2014, 2013, and 2012 totaled $5.3 million, $7.0 million and $13.5 million,
respectively.
A summary of net receivables is as follows:
(In thousands)
Gross accounts receivable
Less: Allowance for doubtful accounts
Accounts receivable, net of allowance
Current portion of lease receivables
Total receivables, net
2014
2013
$ 641,160
$ 583,312
25,531
36,286
615,629
547,026
57,149
35,900
$ 672,778
$ 582,926
Lease receivables represent our net investment in sales-type leases resulting from the sale of certain health care 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
2014
2013
$ 125,906
$ 146,566
6,089
7,602
119,817
138,964
62,668
103,064
$
57,149
$
35,900
Future minimum lease payments to be received under existing sales-type leases for the next five years are as follows:
(In thousands)
2015
2016
2017
2018
2019
$
60,198
36,259
20,293
6,986
2,170
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 continue to be 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 final resolution of disputes between Fujitsu and the NHS regarding the
contract termination. As of January 3, 2015, it remains unlikely that our matter with Fujitsu 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 2014 and 2013. While the ultimate collectability of the receivables pursuant to this process is
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uncertain, we believe that we have valid and equitable grounds for recovery of such amounts and that collection of recorded
amounts is probable. Nevertheless, it is reasonably possible that our estimates regarding collectability of such amounts
might materially change in the near term, considering that we do not have complete knowledge of the status of the proceedings
between Fujitsu and NHS and their effect on our claim.
During 2014 and 2013, we received total client cash collections of $3.5 billion and $3.1 billion, respectively, of which $79.9
million and $60.8 million were received from third party arrangements with non-recourse payment assignments.
(6) Property and Equipment
A summary of property, equipment and leasehold improvements stated at cost, less accumulated depreciation and
amortization, is as follows:
(In thousands)
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
2014
2013
$ 1,137,497
439,567
187,351
$ 963,301
411,382
160,030
96,244
3,196
915
72,601
3,207
710
1,864,770
1,611,231
940,510
818,450
$ 924,260
$ 792,781
Depreciation and leasehold amortization expense for 2014, 2013 and 2012 was $163.0 million, $135.7 million and $120.1
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
2014
2013
$ 307,422
$ 247,616
16,757
(3,641)
59,570
236
$ 320,538
$ 307,422
Our intangible assets subject to amortization are amortized on a straight-line basis, and are summarized as follows:
(In thousands)
Purchased software
Customer lists
Other
Total
Intangible assets, net
2014
2013
Gross
Carrying
Amount
Accumulat
ed
Amortizati
on
Gross
Carrying
Amount
Accumulat
ed
Amortizati
on
$ 169,703
$ 110,344
$ 168,798
$
100,681
68,859
73,637
28,626
100,909
45,915
89,691
68,094
13,705
$ 339,243
$ 212,607
$ 315,622
$ 171,490
$ 126,636
$ 144,132
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Amortization expense for 2014, 2013 and 2012 was $35.9 million, $32.9 million and $20.3 million, respectively.
Estimated aggregate amortization expense for each of the next five years is as follows:
(In thousands)
2015
2016
2017
2018
2019
$
34,048
29,359
22,651
8,494
5,208
Note that the above estimate of future amortization expense does not include any impact of intangible assets that may be
recorded in connection with our February 2, 2015 acquisition of Siemens Health Services, as further described in Note (2).
(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
2014
2013
2012
$ 467,158 $ 418,747 $ 319,828
(177,800)
(174,649)
(100,189)
103,447
94,688
81,731
$ 392,805 $ 338,786 $ 301,370
Accumulated amortization as of the end of 2014 and 2013 was $890.7 million and $798.0 million, respectively.
(9) Long-term Debt and Capital Lease Obligations
The following is a summary of indebtedness outstanding:
(In thousands)
Note agreement, 5.54%
Capital lease obligations
Total debt and capital lease obligations
Less: current portion
Long-term debt and capital lease obligations
2014
2013
$
14,233
116,095
$
30,608
135,216
130,328
(67,460)
165,824
(54,107)
$
62,868
$ 111,717
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 2014.
In January 2015, we issued $500.0 million aggregate principal amount of unsecured Senior Notes ("Notes"), pursuant to a
Master Note Purchase Agreement dated December 4, 2014. The issuance consisted of $225.0 million of 3.18% Series 2015-
A Notes due February 15, 2022, $200.0 million of 3.58% Series 2015-B Notes due February 14, 2025, and $75.0 million in
floating rate Series 2015-C Notes due February 15, 2022. Interest is payable semiannually on February 15th and August
15th in each year, commencing on August 15, 2015 for the Series 2015-A Notes and Series 2015-B Notes. The Series 2015-
C Notes will accrue interest at a floating rate equal to the Adjusted LIBOR Rate (as defined in the Master Note Purchase
Agreement), payable quarterly on February 15th, May 15th, August 15th and November 15th in each year, commencing on
May 15, 2015. The Master Note Purchase Agreement contains certain leverage and interest coverage ratio covenants and
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provides certain restrictions on our ability to borrow, incur liens, sell assets, and other customary terms. Proceeds from the
Notes are available for general corporate purposes.
Our capital lease obligations are primarily related to the procurement of hardware and health care devices, and generally
have a term of five years.
Minimum annual payments under existing capital lease obligations and maturities of indebtedness outstanding at the end of
2014 are as follows:
(In thousands)
2015
2016
2017
2018
2019
Total
Capital Lease Obligations
Minimum
Lease
Payments
Less:
Interest
Principal
Principal
Amount of
Indebtedn
ess
$
55,968
$
2,741
$
53,227
$
14,233
$
35,968
20,052
6,877
2,137
1,458
530
156
22
34,510
19,522
6,721
2,115
—
—
—
—
Total
67,460
34,510
19,522
6,721
2,115
$ 121,002
$
4,907
$ 116,095
$
14,233
$ 130,328
We also 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 2014, we were in compliance with all debt covenants.
As of the end of 2014, we had no outstanding borrowings under this agreement; however, we had $16.6 million of outstanding
letters of credit, which reduced our available borrowing capacity to $83.4 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
Total net investment hedge
Short-term liabilities
(In thousands)
Derivatives Designated
Balance Sheet Classification
Net investment hedge
Short-term liabilities
Net investment hedge
Long-term liabilities
Total net investment hedge
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81
2014
Fair Value
Net
Unrealized
Gain
$
14,233
$
929
2013
Fair Value
Net
Unrealized
Loss
$
$
15,304
$
15,304
30,608
$
178
178
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(11) Contingencies
We accrue estimates for resolution of any legal and other contingencies when losses are probable and estimable, in
accordance with ASC 450, Contingencies.
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.
In addition to commitments and obligations in the ordinary course of business, we are subject to various legal proceedings
and claims, including for example, employment disputes and litigation alleging solution defects, personal injury, intellectual
property infringement, violations of law and breaches of contract and warranties. Many of these proceedings are at preliminary
stages and many seek an indeterminate amount of damages.
No less than quarterly, we review the status of each significant matter and assess our potential financial exposure. We accrue
a liability for an estimated loss if the potential loss from any legal proceeding or claim is considered probable and the amount
can be reasonably estimated. Significant judgment is required in both the determination of probability and the determination
as to whether the amount of an exposure is reasonably estimable, and accruals are based only on the information available
to our management at the time the judgment is made. Furthermore, the outcome of legal proceedings is inherently uncertain,
and we may incur substantial defense costs and expenses defending any of these matters. Should any one or a combination
of more than one of these proceedings be successful, or should we determine to settle any or a combination of these matters,
we may be required to pay substantial sums, become subject to the entry of an injunction or be forced to change the manner
in which we operate our business, which could have a material adverse impact on our financial position or results of operations.
RLIS, Inc., a non-practicing entity, filed a complaint in the Southern District of Texas against the Company alleging that certain
of the Company’s electronic medical record solutions infringe two patents owned by the plaintiff. At trial, Plaintiff requested
damages between $35.3 million and $38.2 million. Plaintiff also sought attorneys’ fees, costs, and an ongoing royalty. A jury
trial was conducted from January 5, 2015, to January 16, 2015. The jury rendered a verdict that all remaining patent claims
asserted against the Company were invalid and not infringed by the Company. The Company continues to dispute the
Plaintiff’s claims and will vigorously defend itself if the Plaintiff appeals after a final judgment is entered. In the opinion of our
management, if the Plaintiff were to appeal, there is a reasonable possibility that we could incur losses with respect to this
matter but we are unable to estimate a range of any such possible losses at this time, and we do not believe a loss is probable.
Our management will continue to evaluate the potential exposure related to this matter in future periods.
Settlement Charge
On December 10, 2013, the Company received an interim ruling on a pending arbitration matter between Cerner and a
client, awarding the client damages and awarding us part of our counterclaim to collect accounts receivable. The client
dispute arose from allegations that a certain patient accounting software solution sold to the client in 2008 was defective
and did not deliver the promised benefits. This matter was resolved and paid in 2013. We recognized a gross pre-tax
charge of $106.2 million in the fourth quarter of 2013, which is included in general and administrative expense in our
consolidated statements of operations.
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(12) Other Income
A summary of other income is as follows:
(In thousands)
Interest income
Interest expense
Other
Other income, net
For the Years Ended
2013
2012
2014
$
16,342
$
15,314
$
16,543
(3,993)
(1,259)
(4,226)
954
(5,068)
4,571
$
11,090
$
12,042
$
16,046
Other income in 2012 includes a $4.5 million gain recognized on the disposition of one of our cost-method investments.
(13) Income Taxes
Income tax expense (benefit) for 2014, 2013 and 2012 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
2013
2012
2014
$ 114,508
$ 178,424
$ 164,690
13,504
13,824
25,148
8,775
13,302
4,142
141,836
212,347
182,134
95,057
8,873
2,975
(9,792)
(7,116)
(5,739)
9,035
4,453
(5,146)
106,905
(22,647)
8,342
$ 248,741
$ 189,700
$ 190,476
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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 2014 and 2013 relate to the following:
(In thousands)
Deferred tax assets:
Accrued expenses
Tax credits and separate return net operating losses
Share based compensation
Contract and service revenues and costs
Other
Gross deferred tax assets
Less: Valuation allowance
Total deferred tax assets
Deferred tax liabilities:
Software development costs
Depreciation and amortization
Contract and service revenues and costs
Other
Total deferred tax liabilities
Net deferred tax liability
2014
2013
$
25,398
$
28,953
58,271
—
10,347
22,948
25,612
44,856
65,407
12,529
122,969
171,352
(776)
(896)
122,193
170,456
(163,938)
(129,684)
(7,511)
(3,625)
(130,583)
(113,492)
—
(2,859)
(304,758)
(246,934)
$ (182,565) $
(76,478)
At the end of 2014, we had net operating loss carry-forwards subject to Section 382 of the Internal Revenue Code for Federal
income tax purposes of $5.5 million that are available to offset future Federal taxable income, if any, through 2020. We had
net operating loss carry-forwards from foreign jurisdictions of $0.4 million that are available to offset future taxable income,
if any, through 2024, $0.7 million that are available to offset future taxable income, if any, through 2033, and $46.8 million
that are available to offset future taxable income, if any, with no expiration. We had a deferred tax asset for state net operating
loss carry-forwards of $0.8 million which are available to offset future taxable income, if any, through 2034. In addition, we
have a state income tax credit carry-forward of $16.0 million available to offset income tax liabilities through 2030.
During 2013, we recorded a valuation allowance of $0.9 million against our deferred tax asset for certain foreign net operating
losses, generated in prior years, because we concluded that it is not more likely than not that we will generate income of the
appropriate character to utilize these losses. We expect to fully utilize all the remaining net operating loss and tax credit
carry-forwards in future periods.
At the end of 2014, we had not provided tax on the cumulative undistributed earnings of our foreign subsidiaries of
approximately $99 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.
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The effective income tax rates for 2014, 2013, and 2012 were 32%, 32%, and 32%, 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
2014
2013
2012
$ 270,961
$ 205,819
$ 205,698
15,715
(20,986)
5,538
(12,253)
(10,234)
17,502
(18,683)
(20)
(14,760)
(158)
13,856
(1,510)
(12,832)
(19,900)
5,164
$ 248,741
$ 189,700
$ 190,476
A reconciliation of the beginning and ending amount of unrecognized tax benefit is presented below:
(In thousands)
Unrecognized tax benefit - beginning balance
Gross decreases - tax positions in prior periods
Gross increases - tax positions in prior periods
Unrecognized tax benefit - ending balance
2014
2013
2012
$
$
2,100
$
2,176
$
14,640
(804)
5,906
(76)
—
(12,464)
—
7,202
$
2,100
$
2,176
If recognized, $5.9 million of the unrecognized tax benefit will favorably impact our effective tax rate. We anticipate that it is
reasonably possible that our unrecognized tax benefits will decrease by up to $4 million within the next twelve months due
to the potential settlement of examinations and lapse of the statutes of limitations in various taxing jurisdictions. Our federal
returns have been examined by the Internal Revenue Service through 2009. Our federal returns for 2010 through 2012 are
currently under examination by the Internal Revenue Service. We have various state and foreign returns under examination.
The 2014 beginning and ending amounts of accrued interest related to unrecognized tax benefits were $0.2 million and $0.6
million, respectively. We classify interest and penalties as income tax expense in our consolidated statement of operations.
No accrual for tax penalties was recorded at the end of the year.
The foreign portion of our earnings before income taxes was $68.3 million, $4.5 million, and ($15.4) million in 2014, 2013,
and 2012 respectively, and the remaining portion was domestic.
(14) Earnings Per Share
A reconciliation of the numerators and the denominators of the basic and diluted per share computations are as follows:
2014
2013
2012
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
$
525,433
342,150
$
1.54
$
398,354
343,636
$
1.16
$
397,232
341,861
$
1.16
Effect of dilutive securities:
Stock options and non-vested shares
—
8,236
—
8,645
—
9,533
Diluted earnings per share:
Income available to common shareholders
including assumed conversions
$
525,433
350,386
$
1.50
$
398,354
352,281
$
1.13
$
397,232
351,394
$
1.13
Options to purchase 5.7 million, 6.1 million and 4.6 million shares of common stock at per share prices ranging from $44.05
to $66.10, $36.92 to $56.39 and $27.62 to $42.98, were outstanding at the end of 2014, 2013 and 2012, respectively, but
were not included in the computation of diluted earnings per share because they were anti-dilutive.
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(15) Share-Based Compensation and Equity
Stock Option and Equity Plans
As of the end of 2014, 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 2014, 8.1 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:
• 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 2014 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
2014
2013
2012
29.7%
9.1
2.9%
30.5%
9.1
1.9%
34.8%
9.1
2.1%
Weighted-
Average
Exercise
Price
Aggregate
Intrinsic
Value
Number of
Shares
Weighted-
Average
Remaining
Contractual
Term (Yrs)
$
24,407
3,271
(2,719)
(330)
24,629
22.24
52.19
12.70
42.31
27.00
$ 936,584
14,387
$
14.39
$ 728,611
6.00
4.50
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(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
For the Years Ended
2014
2013
2012
$
22.59
$
19.57
$
18.52
$ 124,828
$ 118,051
$ 152,117
31,879
44,029
31,403
43,523
38,147
55,952
As of the end of 2014, there was $136.1 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 3.10 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.
Non-vested share activity for 2014 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
$
552
167
(208)
(5)
506
$
38.54
55.27
33.38
34.48
46.21
For the Years Ended
2014
2013
2012
$
$
55.27
11,294
$
$
46.66
13,649
$
$
38.28
2,612
As of the end of 2014, there was $11.0 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 1.29 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 ASPP (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 Company Common Stock is made through the ASPP on the open market and subsequently
reissued to Participants. The difference between the open market purchase and the Participant’s purchase price is recognized
as compensation expense, as such difference is paid by Cerner, in cash.
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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
Preferred Stock
For the Years Ended
2014
2013
2012
$
59,292
$
46,295
$
36,113
4,603
(930)
3,704
(1,045)
2,859
(860)
$
$
62,965
22,101
$
$
48,954
18,607
$
$
38,112
14,578
As of the end of 2014 and 2013, we had 1.0 million shares of authorized but unissued preferred stock, $0.01 par value.
Treasury Stock
In May 2014, our Board of Directors approved an amendment to the stock repurchase program that was authorized in
December 2013. Under the amendment, the Company may repurchase shares of our common stock up to an additional
$100.0 million. This increase authorizes repurchases of up to $317.0 million, in the aggregate, excluding transaction costs.
The repurchases are to be effectuated in the open market, by block purchase, or possibly through other transactions managed
by broker-dealers. No time limit was set for completion of the program.
During 2014, we repurchased 4.1 million shares for consideration of $217.0 million, excluding transaction costs. These
shares were recorded as treasury stock and accounted for under the cost method. No repurchased shares have been retired.
At January 3, 2015, $100.0 million remains available for purchases under the program.
In December 2012, our Board of Directors authorized a stock repurchase program of up to $170.0 million, excluding transaction
costs, of our common stock. During 2013, we repurchased 3.6 million shares for total consideration of $170.0 million. All of
the repurchased shares at the time of our June 2013 stock split were utilized to settle a portion of the stock split distribution.
This program is now complete.
(16) 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. The Plan has 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. The Plan's first tier
discretionary match expenses amounted to $17.9 million, $14.9 million and $12.3 million for 2014, 2013 and 2012, 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. 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 second tier discretionary match contribution. For the years ended 2014, 2013 and 2012 we expensed
$4.9 million, $13.5 million and $11.9 million for the second tier discretionary distributions, respectively.
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(17) Related Party Transactions
Continuous Campus
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 (known as our “Continuous Campus”) in Wyandotte County, Kansas. In order
to maximize available incentives, we agreed to pursue the office development in conjunction with the development of an
18,000 seat, multi-sport stadium complex and related recreational athletic complex.
The stadium complex was developed by Kansas Unified Development, LLC (the “Developer”), an entity controlled by Neal
Patterson, Chairman of the Board of Directors and Chief Executive Officer of the Company, and Clifford Illig, Vice Chairman
of the Board of Directors of the Company. 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 Company currently estimates it will receive incentives in the aggregate of $82.0 million from the Developer, the Unified
Government of Wyandotte County/Kansas City, Kansas (the “Unified Government”) and the Kansas Department of
Commerce. Components of the $82.0 million of incentives are described below:
Cash Grants - In January 2014 we received $48.0 million of cash grants from the Kansas Department of Commerce for
project costs. The State of Kansas has issued bonds in order to fund these incentives and has incurred costs of issuance
and debt service obligations. As consideration for the grant, we made certain new job and state payroll tax withholding
commitments. Should aggregate state payroll tax withholdings (related to associates at our Continuous Campus) over a 10-
year period commencing in January 2014 be less than $51.9 million (the $48.0 million of cash we received plus amounts
representing debt service costs incurred by the State of Kansas), we would be required to repay the shortfall. The $51.9
million maximum repayment amount will be adjusted up or down during the 10-year period, based on any future change to
Kansas payroll tax withholding rates.
Under a separate agreement, the Developer and OnGoal have agreed to be responsible for certain shortfall payments that
may become due. If no payment from Developer or OnGoal becomes due at the end of the 10-year period, the Developer
or OnGoal will pay us a success fee of $4.0 million.
We recorded the cash grants as an obligation/liability at $48.0 million, upon receipt in January 2014. Over time this liability
will accrete, utilizing the effective interest method, up to the maximum repayment amount, offset by reductions based on
actual state payroll tax withholdings generated by our Continuous Campus associates. This activity is recognized as a
component of operating expense as it occurs over a period not to exceed 10 years. At the end of 2014, the obligation/liability
balance was $43.0 million, the majority of which is included in deferred income taxes and other liabilities in our consolidated
balance sheets.
Sales Tax Exemptions - We have received a sales tax exemption on materials and other fixed assets purchased in connection
with the construction. As such, we will not be required to remit an aggregate of $11.5 million of sales tax on these capital
purchases.
State Income Tax Credits - We expect state income tax credits to aggregate $18.5 million. Such credits are available to
offset our Kansas state income tax in the future, and will be recognized as a reduction of income tax expense as we are
eligible to claim them.
Land - We acquired the land for our Continuous Campus from the Unified Government with certain contingencies upon which
the office complex was being constructed. The purchase price of the land, equal to the site’s fair market value, is being paid
by the Developer. In the second quarter of 2012, we commenced vertical construction on the office development, which
resolved contingencies and the land contributed to the Company from the Unified Government was recorded at its $4.0
million appraisal value.
In 2012, we contracted with GRAND Construction, LLC (“Grand”), 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,
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design and construction of our Continuous Campus. Under the agreement, we paid Grand $0.4 million, $1.4 million, and
$1.4 million in 2014, 2013, and 2012, respectively. This contract was completed in 2014.
We also paid Grand $0.3 million in both 2013 and 2012 for separate projects to make improvements to parking facilities
utilized by one of our other office campuses.
Trails Campus Development
In December 2013, we purchased approximately 237 acres of land located in Kansas City, Missouri, from Trails Properties
II, Inc. (“Trails”), for $42.5 million. Trails is an entity controlled by Messrs. Patterson and Illig. The property (currently known
as our "Trails Campus") was acquired as a site for future office space development to further accommodate our anticipated
growth. Construction on the Trails Campus began in November 2014.
In December 2014, we contracted with Grand to coordinate, supervise, schedule and assist with managing the development,
design and construction of the first two phases of our Trails Campus. Under the agreement, we expect to pay Grand $3.6
million over a period estimated at two years.
(18) 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 2014, 2013 and 2012 was $25.1
million, $20.0 million and $18.1 million, respectively. Aggregate minimum future payments under these non-cancelable
operating leases are as follows:
(In thousands)
2015
2016
2017
2018
2019
2020 and thereafter
Operating
Lease
Obligations
$
23,525
21,693
21,467
19,294
14,984
39,607
$
140,570
Other Obligations
We have purchase commitments with various vendors, and minimum funding commitments under collaboration agreements
through 2023. Aggregate future payments under these commitments are as follows:
(In thousands)
2015
2016
2017
2018
2019
2020 and thereafter
71
90
Purchase
Obligations
$
42,300
23,481
6,762
4,345
4,001
8,000
$
88,889
Table of Contents
Siemens Innovation Alliance
Concurrently with the execution of the MSPA, we entered into an agreement with Siemens to create a strategic alliance to
jointly invest in innovative projects that integrate health information technology with medical technologies for the purpose of
enhancing workflows and improving clinical outcomes. Each company will contribute up to $50.0 million to fund projects of
shared importance to both companies and their clients, over an initial term of three years, commencing on February 2, 2015.
(19) Segment Reporting
We have two operating segments, Domestic and Global. Our Chief Executive Officer is our chief operating decision maker
("CODM"). 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 (including the settlement
charge discussed in Note (11)), acquisition costs, 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,
as our CODM reviews segment performance exclusive of these charges. Items such as interest, income taxes, capital
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 2014, 2013 and 2012:
(In thousands)
2014
Revenues
Cost of revenues
Operating expenses
Total costs and expenses
Operating earnings (loss)
(In thousands)
2013
Revenues
Cost of revenues
Operating expenses
Total costs and expenses
Operating earnings (loss)
(In thousands)
2012
Revenues
Cost of revenues
Operating expenses
Total costs and expenses
Operating earnings (loss)
Domestic
Global
Other
Total
$ 3,021,790
$ 380,913
$
— $ 3,402,703
542,210
677,817
1,220,027
62,167
131,096
193,263
—
1,226,329
1,226,329
604,377
2,035,242
2,639,619
$ 1,801,763
$ 187,650
$(1,226,329) $ 763,084
Domestic
Global
Other
Total
$ 2,550,115
$ 360,633
$
— $ 2,910,748
458,540
600,341
1,058,881
56,182
115,281
171,463
—
514,722
1,104,392
1,820,014
1,104,392
2,334,736
$ 1,491,234
$ 189,170
$(1,104,392) $ 576,012
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
—
608,197
847,748
847,748
1,485,577
2,093,774
$ 1,286,242
$ 133,168
$ (847,748) $ 571,662
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Table of Contents
(20) Quarterly Results (unaudited)
Selected quarterly financial data for 2014 and 2013 is set forth below:
(In thousands, except per share data)
2014 quarterly results:
First Quarter
Second Quarter
Third Quarter (a)
Fourth Quarter (a)
Total
Earnings
Before
Income
Taxes
Revenues
Net
Earnings
Basic
Earnings
Per Share
Diluted
Earnings
Per Share
$ 784,761
$ 180,993
$ 119,526
$
0.35
$
851,762
194,370
129,033
840,149
190,335
129,002
926,031
208,476
147,872
0.38
0.38
0.43
$ 3,402,703
$ 774,174
$ 525,433
0.34
0.37
0.37
0.42
(a) Third and Fourth quarter results include pre-tax acquisition costs of $9.4 million and $6.4 million, respectively, as further described in Note (2).
(In thousands, except per share data)
2013 quarterly results:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter (b)
Total
Earnings
Before
Income
Taxes
Revenues
Net
Earnings
Basic
Earnings
Per Share
Diluted
Earnings
Per Share
$ 680,029
$ 159,613
$ 110,040
$
0.32
$
707,561
169,189
112,907
727,830
172,747
115,344
795,328
86,505
60,063
0.33
0.34
0.17
$ 2,910,748
$ 588,054
$ 398,354
0.31
0.32
0.33
0.17
(b) Fourth quarter results include a pre-tax settlement charge of $106.2 million, as further described in Note (11).
73
92
STOCK PRICE PERFORMANCE GRAPH
The following graph presents a comparison for the five-year period ended December 31, 2014 of the
performance of the Common Stock of the Company with the NASDAQ Composite Index (U.S.Companies)
(as calculated by The Center for Research in Security Prices), the NASDAQ Computer and Data Processing
Index (as calculated by The Center for Research in Security Prices), the ICB: 9533 Computer Services
(Subsector) Index and the NASDAQ US Benchmark TR Index. As a result of a change in the total return
data made available to us through our third-party index provider, in lieu of using indices calculated by
the Center for Research in Security Prices, as we have in prior years, our performance graphs going
forward will be using comparable indices provided by NASDAQ OMX Global Indexes. Please note,
information for the NASDAQ Computer and Data Processing Index and the NASDAQ Composite Index
(U.S. Companies) is provided only from December 31, 2009 through December 31, 2013, the last day
this data was available by our third-party index provider. These indices have been replaced by the ICB:
9533 Computer Services (Subsector) Index and NASDAQ U.S. Benchmark TR Index, respectively.
Comparison of 5-Year Cumulative Total Return
$350
$300
$250
$200
$150
$100
$50
$0
12/09
12/10
12/11
12/12
12/13
12/14
Cerner Corporation
NASDAQ Computer and Data Processing Index
NASDAQ Stock Market (U.S. Companies)
ICB: 9533 Computer Services (Subsector)
NASDAQ U.S. Benchmark TR Index
The above comparison assumes $100 was invested on December 31, 2009 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.
93
Corporate Information
ANNUAL SHAREHOLDERS’ MEETING
The Annual Shareholders’ Meeting will be held at 10:00 a.m. local time on May 22, 2015, 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 2015.
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 under the symbol CERN.
INDEPENDENT ACCOUNTANTS
KPMG LLP
Kansas City, MO
Cerner connects people and systems through our open, powerful and versatile platforms
and solutions, providing information where it’s needed most. Together with
our clients and industry collaborators, we’re creating a future where the health system
works to improve the well-being of individual people and entire populations.
94
© Cerner Corporation. All Rights Reserved. All Cerner trademarks and logos are owned or licensed by Cerner Corporation
and/or its affiliates. All other brand or product names are trademarks or registered marks of their respective owners.
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Cerner connects people and systems through our open, powerful and versatile platforms
and solutions, providing information where it’s needed most. Together with
our clients and industry collaborators, we’re creating a future where the health system
works to improve the well-being of individual people and entire populations.
© Cerner Corporation. All Rights Reserved. All Cerner trademarks and logos are owned or licensed by Cerner Corporation
and/or its affiliates. All other brand or product names are trademarks or registered marks of their respective owners.
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Connecting what mattersTM
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Cerner Corporation
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Kansas City, MO USA 64117
816 201 1024
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Cerner Corporation 2014 Annual Report
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