Cerner Corporation 2016 Annual Report
At Cerner, we do more than just anticipate the future of health care – we work
together with our clients to create it. With 38 years of experience building
successful health care platforms, we know how to build innovative solutions to
answer tomorrow’s challenges today. In a world where technology changes by the
millisecond and health care needs grow by the hour, we are moving from the
now to the next. Join us. Because health care is too important to stay the same.
Our front, back and inside cover features Christine, a Cerner on-site health clinic physician, and her daughter Cara.
Cerner Corporation
2016 Annual Report
Table of Contents: Annual Report 2016
Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Leadership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
Cerner’s Long-Term Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
A Letter to Our Shareholders, Clients and Associates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
Appendix: Reconciliation of GAAP Results to Non-GAAP Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Form 10-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Business and Industry Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Market for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . 45
Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Reports of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
Consolidated Statements of Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
Consolidated Statements of Changes in Shareholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
Basis of Presentation, Nature of Operations and Summary of Significant Accounting Policies . . . 74
Business Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
Fair Value Measurements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
Property and Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
Goodwill and Other Intangible Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
Software Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
Long-term Debt and Capital Lease Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
Contingencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
Other Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
Earnings Per Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
Share-Based Compensation and Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
Foundations Retirement Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
Related Party Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
Segment Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
Quarterly Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
Stock Price Performance Graph . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103
Corporate Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104
1
01110100 01101111 01101101 01101111 01110010 01110010 01101111 01110111 00100000 01110100 01101111 01100100 01100001 011110018801110100 01101111 01101101 01101111 01110010 01110010 01101111 01110111 00100000 01110100 01101111 01100100 01100001 01111001
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.
Denis A. Cortese, M.D.
Chairman, Chief Executive Officer and Co-founder,
The Health Management Academy
Former Chairman, Chief Executive Officer and President,
ReGen Biologics, Inc ., 1998–2011
Emeritus President and Chief Executive Officer, Mayo Clinic
Foundation Professor, Arizona State University College of
Health Solutions
Director of Arizona State University’s Health Care Delivery
& Policy Program
President of the Healthcare Transformation Institute
The Honorable John C. Danforth
Partner, Dowd Bennett LLP
Partner, Bryan Cave LLP, 1995–2014
Ambassador to the United Nations, 2004–2005
U .S . Senator, Missouri, 1976–1995
Mitchell E. Daniels Jr.
President, Purdue University
Governor of the State of Indiana, 2005–2013
Linda M. Dillman
Julie L. Gerberding
Former Chief Information Officer, QVC, Inc ., 2012-2016
Senior Vice President of Enterprise Services/Global Functions IT,
Hewlett-Packard Company, 2009–2012
Executive Vice President of Benefits and Risk Management,
Wal-Mart Stores, Inc ., 2006–2009
Executive Vice President and Chief Information Officer,
Wal-Mart Stores, Inc ., 2002-2006
Executive Vice President and Chief Patient Officer,
Strategic Communications, Global Public Policy and Population
Health, Merck & Co ., Inc .
Executive Vice President for Strategic Communications, Global
Public Policy and Population Health, Merck & Co ., Inc ., 2015-2016
President, Merck Vaccines, 2010-2015
Director of U .S . Centers for Disease Control and Prevention,
2002-2009
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 (now YRC Freight), 1999–2011
2
01110100 01101111 01101101 01101111 01110010 01110010 01101111 01110111 00100000 01110100 01101111 01100100 01100001 011110018801110100 01101111 01101101 01101111 01110010 01110010 01101111 01110111 00100000 01110100 01101111 01100100 01100001 01111001
Leadership
Neal L. Patterson
Chairman of the Board, Chief Executive Officer and Co-founder
Clifford W. Illig
Vice Chairman of the Board 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
John T. Peterzalek
Executive Vice President, Client Relationships
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, Population Health
Randy D. Sims
Senior Vice President, Chief Legal Officer and Secretary
Donald D. Trigg
Senior Vice President and President, Cerner Health Ventures
Michael R. Battaglioli
Vice President and Chief Accounting Officer
Emil E. Peters
President, Cerner Global
3
01110100 01101111 01101101 01101111 01110010 01110010 01101111 01110111 00100000 01110100 01101111 01100100 01100001 011110018801110100 01101111 01101101 01101111 01110010 01110010 01101111 01110111 00100000 01110100 01101111 01100100 01100001 01111001 Cerner’s Long-Term Performance
This table provides a view of our growth over the last 10 years and over our 30 years as a publicly
traded company .
1986
2006
2016
2006–2016
1986–2016
Compound Annual Growth Rates
Previous Decade
Since Going Public
i
e
n
L
p
o
T
i
e
n
L
m
o
t
t
o
B
t
e
e
h
S
e
c
n
a
l
a
B
Bookings
Revenue
Domestic Revenue
Global Revenue
Revenue Backlog
Adjusted Operating Earnings1
$18
$17
$17
$1,469
$5,446
$1,378
$4,796
$1,171
$4,245
$0 .2
$207
$551
$11
$3
$2,664
$15,927
$185
$1,133
Adjusted Operating Margin1
14 .8%
13 .4%
23 .6%
Adjusted Net Earnings1
$2
$114
$790
Adjusted Diluted Earnings Per Share1
$0 .01
$0 .35
$2 .30
Total Assets
Cash and Investments
Days Sales Outstanding
Total Debt
Equity
h
s
a
C
t
n
e
m
t
s
e
v
n
I
t
e
k
r
a
M
w Operating Cash Flow
o
F
Free Cash 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
$26
$1,491
$5,630
$8
161
$1
$16
$1
-$1
$1
$2
$309
$466
87
69
$208
$564
$918
$3,928
$233
$1,156
$40
$402
$131
$459
$262
$705
149
7,419
24,400
$0 .24
$11 .38
$47 .37
$45
349
242
$3,567
$15,615
2,415
5,383
1,418
2,239
14%
13%
14%
10%
20%
20%
21%
21%
14%
4%
-2%
10%
16%
17%
26%
13%
10%
13%
15%
16%
8%
5%
21%
21%
20%
30%
27%
22%
22%
20%
20%
15%
-3%
24%
20%
27%
NM
23%
22%
19%
19%
22%
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 "A Letter
to Our Shareholders, Clients and Associates" for a reconciliation of these items to GAAP results .
4
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A Letter to Our Shareholders, Clients and Associates
I like to say that the intersection of health care
and information technology (IT) is a great place
to wake up every morning . Our environment has
always been influenced by the trends, changes
and pressures of both environments . Considered
separately, they are two of the largest, fastest
moving, most complex currents in the economy .
interplay between them creates unique
The
challenges and opportunities . 2016 saw health
care trying to assert itself—temporarily at least—as
the stronger stream .
2016 was a mixed year for Cerner, with positives
and negatives coexisting in a transitional health
care environment . We competed extremely well in
our core and emerging markets, but we also faced
an uncertain health care policy and regulatory
environment that decreased our clients’ urgency
to buy technology within a specific timeframe .
This contributed to health IT stocks in aggregate
declining 32% for the year .2 While our overall
pipeline remained strong, and we saw bookings
growth in the majority of our businesses, we
had disappointing performance against our
own Cerner ITWorksSM and technology resale
projections that impacted our ability to deliver all
aspects of our financial plan and contributed to
us missing guidance for some metrics . As a result
of these industry-wide and company-specific
factors, 2016 was a disappointing year for Cerner
shareholders, with Cerner stock price decreasing
21% over the year . As you can see from the table on
the preceding page, however, the value of Cerner
stock has had an impressive run over the past 10
years and over our 30 years as a publicly traded
company . It was tough to see that momentum
broken during 2016, but I remain optimistic about
our growth prospects . We have always focused
on investing in long-term growth, doing what is
right for clients, and managing the company, not
the stock price, and this approach has resulted in
very good returns for shareholders over time . If
there is one thing I know after four decades at “the
intersection,” it is that these currents move . I will
use the later parts of this letter to communicate
what I think is coming, and the role I believe Cerner
will play .
First, here are some facts and highlights from the
year . Other than the core financials, what you get
out of this might depend on how well you know
Cerner’s lines of business and how long you have
followed our progress:
• Revenue was $4 .8 billion, up 8% against 2015,
a year when we grew 30% .
• Our GAAP diluted earnings per share increased
20% and our adjusted diluted earnings per
share1 grew 9% over 2015 .
• New business bookings were a record $5 .45
billion, just past the $5 .43 billion in bookings we
achieved in 2015 . Apart from the disappointments
in hardware and Cerner ITWorks, 2016 bookings
were otherwise solid, especially considering 2015
bookings had grown 28% over 2014, creating a
difficult comparable .
• We competed extremely well in our core
electronic health record (EHR) marketplace,
with a win rate over 50% against competitors
up and down market . This led to strong
contributions from new client footprints, with
35% of bookings coming from outside of our
installed base, nearly matching record levels
of new business established in 2015 . All told,
Cerner added nearly 400 facilities with more
than 50,000 beds to our market share over the
past two years .
• We continued to grow our acute care EHR
market share and continue to have share
comparable to that of our primary competitor .
That competitor positioned itself for much of
the past decade as the clear market leader;
now it is in a more defensive stance and has to
fight hard for every win against Cerner .
• In the replacement acute care EHR marketplace,
we displaced others but did not see a single
competitive displacement within the Cerner
Millennium® acute care client base in 2016 .
• Continuing a multi-year trend, 2016 was an
excellent year for Cerner® software release
quality and system availability . 98% of all
in
Cerner service packages
2016 were defect-free, up from 97 .1% in 2015,
and our full-year system availability (Service
Level Agreement uptime percentage) for
remote hosting,
CernerWorksSM—including
cloud
datacenter
and
operations—was 99 .9891% .
infrastructure
implemented
• Twenty new patents were issued to Cerner
in 2016, bringing our total to more than 350 .
We filed more than 80 new patent applications
during the year .
5
01110100 01101111 01101101 01101111 01110010 01110010 01101111 01110111 00100000 01110100 01101111 01100100 01100001 011110018801110100 01101111 01101101 01101111 01110010 01110010 01101111 01110111 00100000 01110100 01101111 01100100 01100001 01111001 • Despite not signing the expected number of
new Cerner ITWorks clients, we did sign our
first Cerner ITWorks client outside the U .S .,
and we had strong sales back into our existing
Cerner ITWorks client base . The resulting 28%
year-over-year increase in Cerner ITWorks
revenue in an “off” year confirms the latent
potential of this highly aligned form of service
offering, which grows out of relationships with
existing EHR clients .
• Ambulatory had 28 displacements of our
primary ambulatory competitors .
• Cerner’s revenue cycle solutions and services
had a strong growth year, driven both by new
EHR client footprints and increased penetration
of revenue cycle within our EHR installed base .
• On the global health IT front, we gained new
footprints in the United Kingdom, France and
the Middle East, and displaced our primary
competitor in the Middle East .
• In September, England’s National Health
Service (NHS) announced its Global Digital
Exemplar sites, 12 acute care trusts recognized
for being the most advanced digital hospitals
in the NHS . A full half of the 12 were Cerner
clients, with no other competitor representing
more than one . The 12 are meant to be reference
sites for other trusts seeking to go digital, and
each of the Exemplar sites is eligible to receive
up to £10 million in funds for additional digital
infrastructure projects .
None of this changes the fact that it was a
somewhat challenging year for health IT, which
was already coming down off the compressed-
buying-activity high of the mandated Meaningful
Use era when it ran smack into late-year concerns
about the potential health care impacts of an
unexpected presidential election result . While we
believe Cerner weathered the year better than
most in our peer group, we are very critical of our
own shortcomings relative to our financial plan .
We can and must do better in 2017 .
Before I go further, I’ll say a few things about other
significant happenings that colored our year . They
are a little too complex to make the highlight reel
in the requisite sentence or two:
First, I want to provide an update on the Health
Services acquisition .
In October 2016 we
completed the integration of the Health Services
business with Cerner, including data centers,
software development operations, field consulting,
and client-facing organizations . We like our new
Cerner Health Services associates a lot, and several
of the associates have been integrated into the
highest levels of Cerner’s leadership structures .
Early on, we combined our revenue cycle teams,
and a number of the more advanced Soarian®
solution capabilities are now being leveraged
by Cerner Millennium . We like our new clients,
too . In 2016, more than 75% of clients migrating
from one of the legacy Health Services platforms
chose Cerner Millennium as their future platform .
Those remaining on one of the legacy platforms
have benefited from on-time software releases,
including Meaningful Use 3 requirements for
Soarian® clinical systems . Cerner Health Services
hosting uptimes have hit new high water marks
in line with industry-best CernerWorks hosting,
and we have successfully launched new service
offerings based on existing Cerner Millennium
service models . There is plenty of work yet to do to
responsibly serve and migrate these clients, but I
consider the acquisition and integration a success .
Second, I want to comment on our project work
for the U .S . Department of Defense (DoD) . In 2015,
together with Leidos and our other partners, we
were awarded the contract to modernize the DoD’s
1979
1982
1984
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, OK
Cerner secures $1 .5 million
venture capital funding from
First Chicago Capital Corporation
1986
Cerner goes public and is
listed on NASDAQ (CERN)
$17 million of revenue
149 associates
6
01110100 01101111 01101101 01101111 01110010 01110010 01101111 01110111 00100000 01110100 01101111 01100100 01100001 011110018801110100 01101111 01101101 01101111 01110010 01110010 01101111 01110111 00100000 01110100 01101111 01100100 01100001 01111001 health IT capabilities . Throughout 2016, our team
worked with our partners to design, configure
and test the initial phases of the MHS Genesis
system, the unified electronic health record built
on the Cerner Millennium platform . The system
had its successful first go-live at Fairchild Air
Force Base in February 2017 . Additional fixed-
facility deployments will occur in 2017, and work
is underway on complex environments like theater
hospitals, forward resuscitative sites, naval surface
ships and submarines . There is a real feeling of
pride in being able to bring modern health IT to
our nation’s military personnel and their families . It
is a huge responsibility and an honor .
And third, many of you are aware that I was
diagnosed with cancer at the beginning of 2016 . I
gave an update on it in this letter last year . Although
treatable, the treatments were physically difficult .
Fortunately, I have had a career-long practice of
surrounding myself with a great team that is not
dependent upon me to move Cerner forward .
Together with Cerner’s Board of Directors and
co-founder Cliff Illig, they kept me up to date on
the essentials and let me focus on treatment and
healing as needed . I made a surprise return to the
public eye in front of 14,000 people at our annual
Cerner Health Conference in October, where I
spoke about my experience .
At Cerner, we teach that health care ultimately
becomes personal for each of us, fueling our work .
We encourage each other to bring our stories
to work and make them part of our mission . My
sister-in-law Linda’s tragic death from sepsis in
2006 became the catalyst for a life-saving cloud-
based surveillance solution we developed in
2010 . A peer-reviewed study just published in the
American Journal of Medical Quality in February
found that the St . John Sepsis Surveillance Agent
performs better than the best national protocol
for sepsis detection .3 It identifies roughly three
times the number of individuals who are on a path
for sepsis to occur, and identifies them quicker,
sometimes prior to the infection taking hold, and
two to three hours before the national protocol
algorithm triggers, on average . And because it has
been deployed in the cloud to over 550 hospitals,
750,000 to 1 million patients had their care altered
last year because of the agent . Each client is
different, but a published report from one 284-bed
hospital that implemented the agent indicated
they had a 30% reduction in the risk of adverse
outcomes after one year .4 Our clients tell us the
agent helps save a lot of lives . This is incredibly
meaningful to me on a personal level, because my
sister-in-law’s death from sepsis is what prompted
our work in this area . We can’t go back in time
and save Linda, but my family is powerfully moved
knowing that “her” agent has helped doctors
and nurses prevent the same devastation from
happening to other families .
In another personal example, my wife Jeanne’s
10-year journey with metastatic breast cancer and
her experience carrying bags of her own health
records around helped propel our intense focus on
interoperability . This led to Cerner’s co-founding
of CommonWell Health Alliance, a not-for-profit
trade association of companies working together
to provide patient-centered interoperability of
health records, regardless of location, provider or
software . Four years after launching, more than 20
care settings now are represented by its 60-plus
members, which include the majority of acute care
EHR companies . Up to this year, enrollment and
access to patients’ health records via CommonWell
has been done through the 5,000-plus doctors’
offices and other health care sites live nationwide
on CommonWell services . In August, CommonWell
announced that people would now be able to self-
enroll in CommonWell, link to their health records
1987
1990
1992
1993
1994
Cerner listed as one
of Inc . magazine’s
100 fastest-growing
companies
Revenues surpass $50 million
2 for 1 stock split (May 12)
2 for 1 stock split (March 1)
1,000 associates
Cerner Vision Center opens
Revenues surpass
$100 million
7
01110100 01101111 01101101 01101111 01110010 01110010 01101111 01110111 00100000 01110100 01101111 01100100 01100001 011110018801110100 01101111 01101101 01101111 01110010 01110010 01101111 01110111 00100000 01110100 01101111 01100100 01100001 01111001 in the places they receive care, and view their
records on the network . We are making progress .
And now, I am using my own encounters as a
cancer patient inside the gears of the health
system to bring new focus to the role of the person
in care delivery . The provision of health care is
incredibly complex, and conditions like cancer
require large teams of caregivers to work in a
coordinated fashion . Sometimes the coordination
breaks down, and the patient suffers the
effects and is left patching up the pieces . These
breakdowns can have real impacts on outcomes .
It is time for the patient to be part of the team,
and for their experience to be a more seamless
one . All of our clients are focused on improving
the patient experience and patient engagement .
I believe there is much Cerner can do to improve
people’s experiences with health care, as well as
their outcomes .
Throughout Cerner’s history, we have grown by
adding new rings around what we already do . We
started in the laboratory—the nexus of a single
complex, interconnected health care enterprise—
and expanded . Today we still do lab, but we also do
integrated delivery networks, national systems of
health care, and employer- and consumer-focused
work . Our pattern is to grow outward—deeper into
the complexity of the multi-trillion dollar health
care industry—without ever leaving our clients and
their missions behind .
In the rest of this letter, I want to explore where else
this journey might lead us . But to understand the
direction, it’s important to discuss some realities
in our health care environment . Let’s take a look .
THE MADNESS OF MARCH AND THE DRIVERS
OF HEALTH CARE SPENDING
Here is a little disclosure that will mean more to
U .S . basketball fans: I make an annual practice
of working on this letter during March Madness .
This particular March seems unusually mad, and it
has nothing to do with basketball . That’s because
here in the U .S, we are 60-something days into
the first 100 days of the Trump presidency, and
the political rhetoric on both sides around the
potential repeal, replace or reform of the Patient
Protection and Affordable Care Act (widely known
as “Obamacare”) has reached a fevered pitch . As
I write this, the Republican-sponsored American
Health Care Act of 2017 vote has recently been
pulled for lack of support, and the nation seems
to be in a suspended state of uncertainty about
the future legislative direction of health care . The
simplified political rhetoric sometimes obfuscates
the real forces that drive health care spending in
the U .S ., which also are the essential drivers for
health IT .
For those interested in reading the tea leaves
about health IT, I suggest it’s good to look past the
rhetoric and “FUD” (fear, uncertainty and doubt)
for a moment and lay out the base case for a
growing future business:
1 . We have an unsustainable cost curve . In the
U .S ., growth in health care spending has
outpaced the overall growth in the economy
for a half century . Stated differently, health
care is taking a bigger piece of the American
pie every year . The Centers for Medicare and
Medicaid Services (CMS) indicates that almost
18% of the U .S . gross domestic product (GDP)
is already spent on health care, and that
percentage is only going up . As a point of
reference, the $3 trillion we spend as a nation
on health care far exceeds, say, the $600 billion
we spend on defense . Out-of-pocket spending
is high and rising . The Medicare population
spends well above the average of $10,000 per
person, nearly all of which is paid for by the
federal government . And no economics expert
alive today has been able to reverse the trend,
regardless of which political party has been in
1995
2 for 1 stock split
(Aug . 7)
1999
2000
2001
2002
HNA Millennium® Phase 1 is completed
3,000 associates
Revenues surpass $500 million
4,000 associates
Cerner makes Fortune magazine's list of
Best 100 Companies to Work For
8
01110100 01101111 01101101 01101111 01110010 01110010 01101111 01110111 00100000 01110100 01101111 01100100 01100001 011110018801110100 01101111 01101101 01101111 01110010 01110010 01101111 01110111 00100000 01110100 01101111 01100100 01100001 01111001 power . It is not sustainable, and yet so far it has
been unstoppable . It will create the demand for
fundamental change . The heart of the cost issue
is neither access nor insurance reform, although
those get a lot of attention . The heart of the
cost problem is how to actually stop spending
as much money to achieve the desired results .
Although the U .S . has the highest level of
spending, other developed nations face a similar
predicament, so it really is a global challenge .
2 . The populous baby boom generation (born
1946-1964) is reaching retirement age . The
first boomer turned 65 in 2011 . As has been
well-chronicled, the impact of Boomers on
health care delivery and cost will continue to
grow at the same time their contributions to
Medicare (through the tax rolls) will decline .
Further stressing the system, people are living
longer lives than they were when the system
was designed .
3 . Chronic conditions—ranging from diabetes
to heart disease—account for 85% of health
care spending, and obesity-related chronic
conditions have increased at alarming rates .
The top six cancers are said to be preventable .
Prediction, prevention and intervention can
play a real role in reducing costs .
4 . The broken health care payment system is
driving costs . In the U .S ., doctors still mostly
get paid based on the volume of visits and
procedures they generate, not based on
keeping people well . As Cerner Board member
Denis Cortese, M .D ., has written, we have “a
system inherently and unavoidably designed
to drive and incentivize high cost, not great
value or customer care .”5 Our payment system
drives workflow pain points such as excessive
documentation to achieve E&M codes6 and
patient care pain points such as professionals
“practicing at the top of license” and limiting any
form of patient contact that can be performed
by a lesser professional .
5 . Any stakeholder with a brain will raise the,
“What are we getting for our money?”, a/k/a
“Prove the Quality”, argument . The U .S . has
the most expensive health care system in the
world but is ranked behind many other nations
on measures of infant mortality, mortality
amenable to medical care, and mortality at
age 60 .
6 . Over the last several decades (and particularly
the last seven years of Meaningful Use), health
IT has been recognized by members of both
political parties as a means of increasing
quality while reducing cost . The core content
of U .S . health care has been digitized through
EHRs . While there is grueling work still to be
done—particularly for interoperability, usability
and patient safety—digitization can now be
assumed . Throughout the rest of the world,
varying states of digitization exist .
7 . The second and third order impacts of achieving
a fully digitized state will be profound and create
far bigger opportunities than any we have seen
in the current EHR era . Think of similar impacts
that occurred after music, books and banking
were digitized . The largest impacts were on
the middlemen . In the music industry, there
is more music being created and consumed
today, but with almost no brick-and-mortar
music stores . This is what I expect to happen
in health care .
8 . Even though health care processes are now
automated in a basic sense, the current systems
still contain many
inefficiencies—such as
fragmentation of care and high administrative
costs—as well as opportunities to make better
use of the explosion of scientific and medical
knowledge .
9 . While health care is ripe for major transformation,
system-level innovation—changing both health
and care—requires scale . Doing it around the
world requires global scale .
2003
Cerner and Atos Origin
awarded UK National
Health Services Choose
and Book contract
2004
2005
2006
Cerner ranks third among software
companies in The Wall Street
Journal’s Top 50 Returns over a
five-year period
5,000 associates
Revenues surpass $1 billion
2 for 1 stock split (Jan . 10)
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 our World Headquarters
9
01110100 01101111 01101101 01101111 01110010 01110010 01101111 01110111 00100000 01110100 01101111 01100100 01100001 011110018801110100 01101111 01101101 01101111 01110010 01110010 01101111 01110111 00100000 01110100 01101111 01100100 01100001 01111001 10 . Following the trend of other industries, health
information systems of the future will become
more natural to use, intelligently anticipating
and simplifying workflows, and cognizant of
all factors—clinical, social, environmental and
geographic—that affect health and personal
engagement in managing health .
the system is in the system itself . Information
technology is the single biggest lever to drive
cost down and quality up . An innovative health
information technology company—with deep
clinical knowledge, proven platforms, global reach,
and an enormous technological moat7—could
make a real impact .
Regardless of where you stand, consider that the
dialogue around Obamacare and its Republican
alternatives is actually quite alike in that its main
focus seems to be access and insurance reform,
not care delivery reform . The most discussed
cost elements are related to the lack of a shared
pool to spread the healthy in with the sick . Other
than pricing on medications, there isn’t much of
a discussion around cost of care delivery . My
point is, whether Washington decides to replace
or revise core elements of Obamacare, the cost
implications of the ten forces above will continue
to pile up, even accelerate . To think otherwise
would be the real March Madness . Absent
rationing care or patently denying care to the sick
and vulnerable—two things most politicians claim
to be against—the State and Federal deficits will
continue to mount . The hunger for new solutions—
and new enterprise entrants—will grow with it .
To an entrepreneur, the opportunity to elevate
quality and decrease cost is massive . In my view,
the race is on . It is a race between technology-
driven transformation — and budgeting to limit
care through a single-payer system . For the sake
of future generations, I know which of the two
alternatives I want to win . The money to transform
MACRA: IS A TRANSFORMED PAYMENT SYSTEM
PART OF THE ANSWER?
Even though Obamacare and its alternatives
have become heavily politicized, there is one bit
of bipartisan reform passed and signed in 2015
that has a chance of reshaping care delivery in a
powerful way .
To explain the Medicare Access and CHIP
Reauthorization Act of 2015 (MACRA), a little
background is needed . Some 55 million U .S .
citizens are on Medicare, the Federal safety net
insurance program for people over retirement
age and younger people with disabilities . In the
1990s, after years of unsustainable growth in
Medicare spending, the Balanced Budget Act of
1997 attempted to fix the problem by introducing
the Medicare Sustainable Growth Rate (SGR), a
formula that tied Medicare spending growth to
U .S . GDP growth . Unfortunately, because health
care spending routinely outpaced growth in
the GDP, the SGR formula eventually resulted in
unreasonable annual payment cuts for the doctors
who cared for Medicare patients . Seventeen
times between 2003 and 2014, Congress passed
temporary “Doc Fix” legislation to prevent the
2007
2008
2009
Revenues surpass $1 .5 billion
Free cash flow surpasses $100 million
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)
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
healthcare IT
First two Cerner ITWorksSM contracts signed
University of Missouri and Cerner create Tiger Institute
for Health Innovation
Announced acquisition of IMC Health Care
Cerner clients connect with HHS and CDC to fight
spread of influenza
Introduced uCern® suite of social collaboration tools for
clients and associates
Cerner added to NASDAQ 100 Index
10
01110100 01101111 01101101 01101111 01110010 01110010 01101111 01110111 00100000 01110100 01101111 01100100 01100001 011110018801110100 01101111 01101101 01101111 01110010 01110010 01101111 01110111 00100000 01110100 01101111 01100100 01100001 01111001 cuts from being applied . In 2015, Congress passed
MACRA, also known as the “Permanent Doc Fix”,
with broad bipartisan support .
MACRA repealed the flawed SGR, but it also
introduced significant changes in the future
for Medicare physicians .
payment model
fee-for-
Instead of authorizing
service payments, MACRA mandates that future
payments to physicians who serve Medicare
patients be based on one of two value-based
payment schemes .
traditional
Inside Cerner, we believe that MACRA could
be the government’s next Meaningful Use—
in other words, a program that will impact
buying behavior . Unlike Meaningful Use, which
mandated EHR adoption without requiring
proof of better outcomes, MACRA
is a
competitive mandate that will reward providers
who achieve better outcomes and penalize
providers who do not . Most providers are thin-
margin organizations, and a 2% penalty on half
of their revenues is a major event . As the payer
for roughly 50% of care, Washington knows how
to change health care using the carrot and the
stick . Now that the core system is digital, they
can demand the measurements to continuously
move the meters toward higher quality, lower
cost care .
Broadly, CMS has been using its status as the largest
health care buyer in the world to move the market
toward outcomes-focused, risk-based payment,
with former Secretary Burwell calling for 50% of
all Medicare payments to be value-based by 2018 .
With the change in presidential administration,
we will see a predictable review and perhaps
even a little drama . However, policymakers seem
confident that MACRA will continue as planned . It
is difficult to predict the direction of policymakers,
but based on the forces and pressures that drive
health care spending ever upward, it is hard to
imagine ignoring the power of shifting from fee-
for-service to a value-based system inside the
competitive marketplace .
TOMORROW, TODAY: WHAT CERNER DOES
There is a reproducible formula for how value and
results are created at Cerner, one that starts with
vision and then flows downstream to mission,
strategy, structure, process, tools, effort and finally
results . The “water” can be muddied at any point
along the stream, but can ultimately only be as
pure as what preceded it . Whenever we don’t like
our results, or perhaps their trend or variance,
we stop and examine every level in the formula,
starting at the top .
I consider the most important executive functions
to be the ability to develop vision, mission and
strategy . Together, they’re the art of working on
tomorrow, today . Vision is based on contemplating
a desirable future state, of connecting dots to
mentally solve a problem that exists in the future .
Once we have clear vision of the compelling
future state and have identified an actionable
mission to get there, it is time to choose the
strategies that will accomplish the mission . One
of our dependable growth strategies is to build
world-class information technology platforms that
address the future need . There is art in the timing .
2010
Announced new mission statement, “To contribute to
the systemic improvement of health care delivery and
the health of communities”
Introduced HealtheIntentSM 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 .
Announced agreement with CareFusion to better
integrate medical devices and electronic health records
Fisher-Titus Medical Center and Magruder Hospital
partner with Cerner to become first all-digital, smart
hospitals in the U .S .
First two Cerner RevWorksSM contracts signed
Cerner honored as one of the best employers for healthy
lifestyles by The National Business Group on Health
Neal Patterson recognized by Forbes as one of
America’s Best-Performing Bosses for providing
shareholders with the “biggest bang for the buck”
Cerner added to S&P 500 index
8,000 associates
2011
2 for 1 stock split (June 27)
Acquired Resource Systems
(long-term care solutions)
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 SkyboxSM suite of
cloud services
Signed first Cerner QualityWorksSM 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
2012
Surpassed $3 billion in annual bookings, including over
$1 billion in Q4
Announced $170 million Share Repurchase Program
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 ModelSM
Stage 6 or 7 in 2012 than our closest competitor;
most stage 6 or 7 clients outside the U .S . as well
PowerChart+Touch™ went live at 13 early adopter clients
Advocate Health Care partnership led to more than
20% improvement in ability to predict readmissions
Partnered with NBA to provide HealtheAthlete® an
organization-wide automated health care management system
Kicked off Healthy Nevada project to cultivate a culture
of health, digitize health care and establish integrated
communication among all providers in the community
11
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Health Management
Last year, I spent considerable space in this letter
on the evolution of population health management
and why value-based-payment was necessary to
drive it . Without rehashing all of that, at a very
simplified level, population health management
is a model of care provision where a group of
providers take on financial risk and responsibility
for the health of a defined population, and they
actively work to improve the health of every person
in that population so that costs are controlled and
outcomes are improved . In our view, population
health management is going to have to be the
answer to the question of how to curb the drivers
of health care spending . Payment reform adds a
missing ingredient, the immediate “Why now?”
that gives providers the incentive to transition
to risk-based, population-based, outcome-based
models of care .
As the market emerges for population health
management systems, we like where we’re at and
what we’ve got . We started with a compelling vision
for population health management . We defined
the mission in 2012, and we began building it . Our
HealtheIntentSM platform is entirely cloud-based
and is designed to manage the health of defined
populations whose boundaries are not limited to
a single health care enterprise . Its sources of data
are boundless, including numerous EHR platforms,
insurance claims, prescription data, consumer-
contributed social data, GPS and environmental
data . The data aggregation platform went live in
2013 and now has a growing family of solutions
sitting on top of it . By the end of 2016, we had
more than 100 clients, including some of our
primary competitor’s EHR clients, and the
database contained more than 6PB of aggregated
data from more than 88 million persons . Another
core growth strategy after building world-class
information technology platforms is to add high-
value services to leverage the technology and
extend its benefits . The era of population health
management will provide many opportunities for
value-added services that make use of the power
of the HealtheIntent platform . Like with Cerner
Millennium, it could very much end up being about
being at the right place at the right time with the
right stuff .
WHAT DOES HEALTH IT BECOME WHEN CARS
DRIVE THEMSELVES?
Health care is incredibly complex . Consider for a
moment the fact that, in 1950, the total body of
published medical knowledge likely progressed
at a rate sufficient to double every 50 years .8 By
2020, however, the doubling rate for new medical
knowledge is projected to be every 73 days .9
That’s crazy, but it might not be too much of a
problem as long as all of the new knowledge
gets diffused into practice quickly . Unfortunately,
it doesn’t . A famous study by Balas and Boren
showed that it takes 17 years for a mere 14% of
new evidence published in medical journal articles
to work its way into practice 50% of the time .10
With the help of information technology, though,
these and other hard realities can become
opportunities . IT is the only lever strong enough to
change health care .
2013
2014
2015
2 for 1 stock split (July 1)
Annual revenue grew 17% to $3 .4 billion
Revenue grew 30% to $4 .4 billion
Annual bookings grew 20% to $3 .8 billion
Total assets surpass $4 billion
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
Repurchased $217 million of stock
under our Share Repurchase Program
First place on Kansas City Business
Journal’s list of Healthiest Employers
for companies employing over
3,500 people
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
Purchased 237 acres of land for a new campus in Kansas City, MO,
for long-term plan to add 16,000 associates
15,800 associates
Surpassed $5 billion in annual bookings
Completed $1 .4 billion acquisition of Siemens Health
Services
Repurchased $345 million of stock under Share
Repurchase Programs
Awarded Department of Defense Healthcare Management
System Modernization contract as part of Leidos
Partnership
22,200 associates
Board member Mitch Daniels named as one of Fortune
magazine’s Top 50 World’s Greatest Leaders
Chilmark Research gave Cerner’s population health
management solutions the best product overall grade
and market overall grade
Released HealtheRegistriesSM 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
12
01110100 01101111 01101101 01101111 01110010 01110010 01101111 01110111 00100000 01110100 01101111 01100100 01100001 011110018801110100 01101111 01101101 01101111 01110010 01110010 01101111 01110111 00100000 01110100 01101111 01100100 01100001 01111001 The Journey from Raw Data to Understanding
The British science fiction writer Arthur C . Clarke
once wrote,
“The Information Age offers much to
mankind, and I would like to think that we
will rise to the challenges it presents . But it
is vital to remember that information — in
the sense of raw data — is not knowledge,
that knowledge is not wisdom, and that
wisdom is not foresight . But information is
the first essential step to all of these .”11
He’s right . What he’s describing is a sequence, a
series of transformations . Solving big problems
in health care requires this exact sequence,
and that is what is at the heart of the most
sophisticated branches of IT—artificial intelligence
(AI) and cognitive computing . I want to share
some examples of what we are already doing
using cognitive techniques, and reflect on the
tremendous promise they hold for the future .
The very name “Cerner” is related to the concepts
of discernment and understanding . We created
our first AI-based solution, Discern Expert®, in
1988 . Discern Expert was (and remains) an event-
driven, rule-based decision support software
application that allows its users to define clinical
and management rules that get applied to
ongoing clinical event data captured in other parts
of the system . Its uses are really only limited by
a clinician’s imagination; for example, it can be
used to send out alerts if a relevant lab result has
returned a certain predetermined value so that a
physician can determine whether to stop a surgery
from occuring . The HTML-based Discern Advisor®
solution was added in the mid-2000s to focus on
medication usage criteria, automation of complex
decision trees, patient scoring systems and clinical
calculators in support of complex clinical decision-
making .
Today we have numerous Discern®, CareDecisionsTM,
Cerner MathTM and HealtheIntentSM solutions that
use a variety of machine learning techniques .
Some are auto-adaptive, while others require
more human curation to tune their effectiveness .
Some are aimed at accomplishing difficult data
mapping tasks at tremendous scale, while others
are laser-sighted on assisting in the prediction
and prevention of a specific cost, consequence or
condition . In aggregate, they are aimed at helping
to solve big problems in health care .
Prior to her sudden and tragic death from
strep pneumonia sepsis, my sister-in-law Linda
was a kindergarten teacher in rural Kansas . A
challenging feature in her case, not unusual in
rural environments, was her movement between
different care venues as her condition deteriorated .
It was only days later in the final location, an ICU
an hour away from home, that her true condition
was recognized at last and antibiotic treatment was
initiated—too late, unfortunately, to save her . Each
venue—whether rural primary care, rural emergency
room, ambulance, larger hospital, or ICU—had
generated its own data about her, but there was no
common connection among the venues sufficient
to create wisdom about her condition, much less
foresight about what to do about it . When Cerner
engineers sought to create a solution capable of
helping to save the next “Linda,” they had to solve
the big problem of how to collect various types
2016
Revenue grew 8% to $4 .8 billion
Cerner Awards
Solutions now in more than 25,000 facilities
in over 35 countries and 15 languages
• #1 on Black Book Rankings’ list of EHR vendors for
community hospitals for fifth straight year
Over 100 HealtheIntent clients
Over 150 CommunityWorksSM clients
Repurchased $700 million of stock under
Share Repurchase Programs
24,400 associates
• #1 on Black Book Rankings’ list of HIE suppliers for
inpatient and ambulatory EHRs for fourth straight year
• #1 on Black Book Rankings’ list of ambulatory EMRs for
interoperability, communications and connectivity
• Named to Fortune magazine’s list of World’s Most Admired
Companies in Health Care: Pharmacy and Other Services
category for second year in a row
• Named to Healthiest Employers, LLC’s list of Healthiest
Workplaces in America for third year in a row
• Named to Forbes list of World’s Most Innovative Companies
for fifth year in a row
• Named to Glassdoor’s list of Best Places to Interview in 2016
• Awarded Children’s Innovation Award for the advancement
and innovation of pediatric care by Children’s National Health
System
• Recognized on Forbes list of America’s Best Employers for
second straight year
• CEO Neal Patterson named one of Harvard Business Review’s
best-performing CEOs in the world for second year in a row
13
01110100 01101111 01101101 01101111 01110010 01110010 01101111 01110111 00100000 01110100 01101111 01100100 01100001 011110018801110100 01101111 01101101 01101111 01110010 01110010 01101111 01110111 00100000 01110100 01101111 01100100 01100001 01111001 of data from different venues, gather it into the
cloud, and transform it into a single understandable
record that could become the basis for taking
further actions such as monitoring and generating
alerts . They did this with help from cognitive
techniques such as ontology mapping and adaptive
knowledge processing . Inspired by the cross-venue
complexity of Linda’s story and others like it, the
standards-based longitudinal person record is now
an important foundational building block within
HealtheIntent, our platform that accepts data from
an unlimited number of sources, including multiple
venues using disparate EHRs .
As of today, we don’t make any cognitive
systems meant to replace humans, but we use
cognitive techniques to automate tasks that are
too big or repetitive for humans to handle, and
we use AI-based machine learning to provide
adaptive, embedded forms of assistance we
call “cognitive moments”—discrete information-
based predictions and interactions that help
advise and assist a physician or other clinician
at the moment of decision . They are adaptive
in the sense of reading contextual clues present
in the myriad combinations of roles, actions,
events, venues and conditions; and
then
consulting models to identify which patterns
exist that might inform what should happen
next . When appropriate, our Cerner Math data
scientists leverage machine learning to build
predictive mathematical models for use within
CareDecisions and elsewhere . To date, they have
built more than 50 predictive models .
The Importance of Good Sources of Data
Given the Arthur C . Clarke quote, it shouldn’t be a
surprise that the raw data you feed your AI models
matters a great deal .
Last year, Microsoft launched Tay, an AI-based
Twitter chatbot that had been built using “relevant
public data” that was said to be “modeled, cleaned
and filtered .” That certainly sounds like a good diet .
But once it was turned on and fed a supplemental
diet of sarcastic and abusive tweets, it went from
saying “Humans are super cool” to voicing racist
and misogynistic opinions in less than 24 hours .
Needless to say, it was turned off .
At Cerner, we believe we have a near-perfect diet
for our clinical AI-based models . The discovery,
development and validation of our Cerner Math
predictive models have primarily been performed
using Cerner’s own Health Facts® data warehouse .
EHR-derived,
This will get a little technical, but bear with me .
Health Facts is a HIPAA-compliant, de-identified,
ontology-
privacy-protected,
mapped, longitudinally Enterprise Master Patient
Index (eMPI)-linked repository of the serial care-
episode health records of the patients cared for
at nearly 700 U .S . health institutions that have
established data-rights agreements with Cerner .
Begun on January 1, 2000, and expanded daily since
then, Health Facts currently contains more than 150
million distinct persons’ longitudinal records, more
than 400 million episodes of care, and more than 5
billion clinical events . Health Facts is not a context-
poor “claims” database . Instead, it includes the
majority of the content in patients’ EHR records,
including medications, lab results, procedures,
problem list entries, diagnoses, and claims—with
each data element or transaction time-stamped
with minute-level precision and each successive
episode for a given person longitudinally linked via
a key that is encrypted from the eMPI .
When we want to “teach” one of our machine
learning based AI models, we might begin with a
cohort of 20,000 or more cases and a comparable
number of controls, and give it several hundred
input variables . From there it gets even more
technical . Compare this to a traditional clinical trial
where you have a cohort of perhaps 100 or 200
patients and you hold all variables constant except
one . This is a very different way of finding patterns
and evidence . We are studying what is actually
occurring versus a staged activity, and looking
at large numbers of cases . This type of access
to big data can bring to light patterns that have
never previously been known, leading to further
investigation and modeling . If we can use that new
pattern to accurately predict the next cases, then
we know we have found something of real value .
Looking to the Future
We have known for a long time that cognitive
techniques hold a lot of promise for health care .
They are beginning to deliver on the promise . As
we look to the future, we see a number of logical
next steps . Many of these are aimed at helping
caregivers deal with the increasing complexity
of health care and the rising expectations to be
aware of “everything,” even when “everything” is
beyond the ability of one person to comprehend .
A natural follow-up to the standards-based
longitudinal person record will be the so-called
“contextualization” of the record so that each
14
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conditions—require
member of the care team gets a perspective of
the person’s record that meets the needs of their
role and venue . We can manually curate content
for single-condition needs, but the comorbid
cases—those involving two or more coexisting
medical
significant
knowledge discovery and curation effort . We
plan to use machine learning techniques to take
a more systematized approach to discover such
content, yet verified by our informatics and clinical
personnel . This type of data-driven approach to
derive knowledge will help create more cognitive
moments for providers and researchers that are
both contextual and adaptive in nature . We can
also use techniques similar to those used to create
the longitudinal person record to help assimilate
the rapidly expanding body of new medical
knowledge into what we call model practice and
model outcomes .
The cognitive techniques that are transforming
other industries are also transforming the provision
of health care . Given the relative complexity of
health care, it will take time to figure out which
techniques will be most impactful and build them
out . It is an exciting time to be involved in health IT .
CONCLUSION
Cerner believes in innovation . A large part of our
value proposition to our clients is that we establish
and maintain our technology leadership, remaining
contemporary so that our clients receive benefits
from meaningful advances in computing . Never in
the history of IT has the rate of change moved this
fast nor had such a ubiquitous impact on almost
everyone in our society . The old concept of rising
expectations is at work, down in the complexities
of health care . The cognitive era of health care will
happen, and we will lead .
To our shareholders new and old, thanks for your
continued confidence . I continue to be amazed by
the amount of growth potential there is in health IT .
The future is not guaranteed, but I like our chances
of being the ones who can positively impact the
delivery of care .
Sincerely,
NEAL L . PATTERSON
Chairman of the Board, Chief Executive Officer
& Co-founder
232% represents the average decline for the following publicly traded health IT stocks: Allscripts Healthcare Solutions, Inc . (MDRX), which
was down 34%; Athenahealth, Inc . (ATHN), which was down 35%; Cerner Corporation (CERN), which was down 21%; Computer Programs and
Systems, Inc . (CPSI), which was down 53%; and Quality Systems, Inc . (QSII), which was down 18% .
3Robert C . Amland and Bharat B . Sutariya, MD . "Quick Sequential [Sepsis-Related] Organ Failure Assessment (qSOFA) and St . John Sepsis
Surveillance Agent to Detect Patients at Risk of Sepsis: An Observational Cohort Study ." American Journal of Medical Quality, February 2017 .
4Robert C . Amland, James M . Haley, MD, and Jason J . Lyons, MD . "A Multidisciplinary Sepsis Program Enabled by a Two-Stage Clinical Decision
Support System ." American Journal of Medical Quality, November 2016 .
5Anthony Bell and Denis A . Cortese, MD . Rescuing Healthcare: A Leadership Prescription to Make Healthcare What We All Want It to Be, 2017 .
6Evaluation and management (E&M) coding is required in the United States to be reimbursed by Medicare, Medicaid and private insurance .
7I use moat here in the Warren Buffett sense of a defensive barrier in the form of a durable competitive advantage that cannot be easily
replicated by competitors .
8Peter Densen, MD . “Challenges and Opportunities Facing Medical Education .” Transactions of the American Clinical and Climatological
Association, 2011 .
9Id .
10E . Andrew Balas and Suzanne A . Boren . “Managing clinical knowledge for health care improvement .” Yearbook of Medical Informatics 2000:
Patient-Centered Systems, 2000 .
11Sir Arthur C . Clarke . “Humanity Will Survive Information Deluge .” OneWorld South Asia, 2003 .
15
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Reconciliation of GAAP Results to Non-GAAP Results*
Appendix:
Reconciliation of GAAP Results to Non-GAAP Results*
Adjusted Operating Earnings
1986
2006
2016
Operating
Earnings
Operating
Margin %
Operating
Earnings
Operating
Margin %
Operating
Earnings
Operating
Margin %
($ in millions)
Operating earnings (GAAP)
Share-based compensation expense
Health Services acquisition-related amortization
Acquisition-related deferred revenue adjustment
Other acquisition-related adjustments
Voluntary separation plan expense
$3
14 .8%
$166
19
12 .1%
$911
19 .0%
81
81
20
4
36
Adjusted Operating Earnings (non-GAAP)
$3
14 .8%
$185
13 .4%
$1,133
23 .6%
Adjusted Net Earnings and Adjusted Diluted
Earnings Per Share
1986
2006
2016
Net
Earnings
Diluted
Earnings
Per Share
Net
Earnings
Diluted
Earnings
Per Share
Net
Earnings
Diluted
Earnings
Per Share
($ in millions, except per share data)
Net earnings (GAAP)
$2
$0 .01
$110
$0 .34
$636
$1 .85
Pre-tax adjustments for Adjusted Net Earnings:
Share-based compensation expense
Health Services acquisition-related amortization
Acquisition-related deferred revenue adjustment
Other acquisition-related adjustments
Voluntary separation plan expense
After-tax adjustments for Adjusted Net Earnings:
Income tax effect of pre-tax adjustments
Tax benefits unrelated to the current period
19
(7)
(8)
81
81
20
4
36
(68)
Adjusted Net Earnings (non-GAAP)
$2
$0 .01
$114
$0 .35
$790
$2 .30
Free Cash Flow
($ in millions)
Cash flows from operating activities (GAAP)
Capital purchases
Capitalized software development costs
Free Cash Flow (non-GAAP)
Cash flows from investing activities (GAAP)
Cash flows from financing activities (GAAP)
1986
2006
2016
$1
(1)
(1)
($1)
($2)
($1)
$233
(131)
(61)
$40
$1,156
(459)
(294)
$402
($178)
($790)
($1)
($587)
*More detail on these adjustments and management's use of non-GAAP results is in our 2016 annual report on Form 10-K and our current reports on
Form 8-K .
16
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2016 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: December 31, 2016
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
(NASDAQ Global Select Market)
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]
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of
this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and
post such files).
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter)
is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or
a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting
company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [X] 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 July 2, 2016, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant
was $17.6 billion based on the closing sale price as reported on the NASDAQ Global Select Market. Shares of common
stock held by each executive officer, director and holder of 10% or more of the outstanding common stock have been
excluded in that such persons may be deemed to be affiliates. This determination of affiliate status for purposes of this
calculation is not intended as a conclusive determination of affiliate status for other purposes.
Indicate the number of shares outstanding of the issuer’s classes of common stock, as of the latest practicable date.
Class
Common Stock, $0.01 par value per share
Outstanding at February 1, 2017
329,719,501 shares
DOCUMENTS INCORPORATED BY REFERENCE
Document
Portions of the registrant's Proxy Statement for the
Annual Shareholders' Meeting to be held May 24,
2017
Parts into Which Incorporated
Part III
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PART I.
Item 1. Business
Overview
Cerner Corporation started doing business as a Missouri corporation in 1980 and was merged into 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"). We do not
intend for information contained in our website to be part of this annual report on Form 10-K.
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 25,000 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 designed to scale at a population level while facilitating health and care at a person and provider level.
On the HealtheIntent platform, we offer EHR-agnostic solutions that help health care systems aggregate, transform and
reconcile data across the continuum of care, manage the health of populations they serve, improve outcomes and lower
costs.
On February 2, 2015, Cerner acquired Siemens Health Services (now referred to as "Cerner Health Services"). Cerner 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.
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.
20
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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
2016
2015
2014
26%
21%
51%
2%
100%
89%
11%
100%
29%
22%
47%
2%
100%
28%
21%
48%
3%
100%
88%
12%
89%
11%
100%
100%
Health Care and Health Care IT Industry
Health care expenditures continue to consume an increasing portion of most economies. In the U.S., health care spending
increased 5.5 percent to $3.20 trillion in 2015, growing to 17.8 percent of the U.S.'s Gross Domestic Product ("GDP"). The
Centers for Medicare and Medicaid Services ("CMS") estimates U.S. health care spending in 2016 at $3.35 trillion, or 18.1
percent of GDP, and projects it to be 20.1 percent of GDP by 2025. We believe this trajectory is unsustainable and that health
care IT can play an important role in facilitating a shift from a high-cost health care system that incents volume to a proactive
system that incents health, quality and efficiency.
For this change to occur, traditional fee-for-service ("FFS") reimbursement models must shift to value-based approaches
that are more aligned with quality, outcomes, and efficiency. The largest signal of this shift occurred in January of 2015 when
the U.S. Department of Health & Human Services laid out a plan to shift 50 percent of Medicare payments to value-based
payment models by the end of 2018, and to tie 90 percent of the remaining traditional FFS payments to quality measures.
A further step towards a value-based model occurred in 2016 with the passage of The Medicare Access and CHIP
Reauthorization Act ("MACRA"), which enacts significant reforms to the payment programs under the Medicare Physician
Fee Schedule and consolidated three current value-based programs into one. We believe that MACRA and other government
and private models aligning payment with value, quality and outcomes will drive major changes in the way health care is
provided in the next decade, and we expect a much greater focus on patient engagement, wellness and prevention. As
health care providers become accountable for proactively managing the health of the populations they serve, we expect
them to need 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.
The increasingly complex and more clinical outcomes-based reimbursement environment is also contributing to a heightened
demand for revenue cycle solutions and services and a desire for these solutions and services to be closely aligned with
clinical solutions. We believe this trend is positive for Cerner because our Cerner Millennium revenue cycle solutions and
services are integrated with our clinical solutions, creating a clinically driven revenue cycle solution that has had significant
adoption in recent years.
Over the past several years, we have also seen a shift in the U.S. marketplace towards a preference for a single platform
across inpatient and ambulatory settings. The number of physicians employed by hospitals has increased as hospitals have
acquired physician groups, 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, which spans multiple
venues, and significant enhancements we have made to our physician solutions in recent years.
While health care providers are showing a preference for a single platform across multiple venues, there is also an increased
push for interoperability across disparate systems to address the reality that no patient’s record will only have information
from a single health care IT system. We believe health information should be shareable and accessible among primary care
physicians, specialists, and hospital physicians.
2
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As a result, Cerner has led or been a key participant in nearly every major industry effort to advance interoperability and
system openness. One example is Cerner’s role as a founding member of the CommonWell Health Alliance, an open, not-
for-profit industry consortium that brought health care IT firms together for the purpose of enabling safe nationwide
interoperability. 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 available from all the prior places he or she has visited.
CommonWell members represent about 70 percent of the acute care market and about 30 percent of the ambulatory market.
CommonWell membership also spans a diverse range of clinical care settings beyond acute and ambulatory, including health
IT market leaders in imaging, perinatal, emergency department, laboratory, retail pharmacy, oncology, care management,
patient portal, post-acute care, and state and federal government agencies. In 2016, CommonWell and CareQuality, another
national interoperability framework, announced an agreement to work together and leverage the respective strengths of each
organization to create a level interoperability playing field for all provider organizations that wish to share clinical information
using standards-based queries. This agreement is expected to create near-universal connectivity that establishes a baseline
query capability for all providers, regardless of their EHR supplier.
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 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 we believe will require having more sophisticated
information technology than many of our competitors provide.
In addition to growth by gaining market share, we believe we have a significant opportunity to grow revenues by expanding
our solution footprint with existing clients. For example, less than 35 percent of our Cerner Millennium EHR clients have
implemented Cerner revenue cycle solutions. This penetration has been growing in recent years and we expect it to continue
because of the preference for having EHR and revenue cycle systems provided on the same platform. There is also opportunity
to expand penetration of other solutions, such as women’s health, anesthesiology, imaging, clinical process optimization,
critical care, health care devices, device connectivity, emergency department 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 improves 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 associate 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 keeping our health care costs below industry averages.
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As discussed below, another significant opportunity for future growth, and a large 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 and
employers manage the health of populations.
Population Health
Population Health Management involves a 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 at a lower cost. This shift will shape the future of health care and
enable a system driven by accountability, transparency and value.
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 have created a series of initial solutions on the HealtheIntent platform, including the following solutions that are generally
available or being released soon:
•
•
•
•
•
•
•
•
Longitudinal Record - provides clinicians and the patient a view of their consolidated clinical record, gathered and
normalized from multiple sources.
Registries - identifies and automatically segments patients by disease, guides interventions according to clinical
best practice, provides visibility to quality measures for provider’s population, produces client-defined performance
scorecards, and tracks their health and their interventions according to clinical best practice.
Analytics - allows the integrated data to be analyzed for the purpose of population health management and research.
Provider Performance Management - creates visibility for providers on their performance against key clinical and
operation metrics and can be aligned with payment models that incentivize high quality and efficient care.
Patient/Member Engagement - an enhanced patient portal complemented by engagement services to help health
care organizations create more meaningful interactions and engagement with the members they serve, and provides
the ability to target individuals at risk of becoming chronically ill.
Care Management - provides a person-centric approach of proactive surveillance, coordination and facilitation of
health services across the care continuum to achieve optimal health status, quality and costs.
Population Health Programs - leverages evidence-based guidelines and the contextual information within
HealtheIntent to provide identification, prediction and management of a condition at the population, provider and
person level and facilitates a personalized plan of care for each member.
Contract Network Management - for managing provider networks, modeling to inform payer negotiations,
determining appropriate business models, and managing contract performance in near real-time.
In less than three years since the first HealtheIntent solution went live at our alpha client, more than 100 additional clients
have purchased HealtheIntent solutions. The broad addressable market for population health solutions is reflected in the
diversity of these clients, which include health systems, physician groups, employers, health plans, state governments, and
accountable care organizations. The initial adoption by a large number of clients is encouraging and positions us for larger
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contributions to revenue from HealtheIntent solutions as these initial clients and others transition away from FFS models to
value-based and at-risk models that require population health solutions and services.
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.
Software Development
We commit significant resources to developing new health information system solutions and services. As of the end of 2016,
approximately 6,100 associates were engaged in research and development activities. Total expenditures for the development
and enhancement of our software solutions were $705 million, $685 million and $467 million during the 2016, 2015 and 2014
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.
Intellectual Property
We have a broad portfolio of intellectual property rights to protect the proprietary interests in our solutions, services, devices
and brands. Our solutions constitute works of authorship protected by copyrights in the U.S. and globally. We own valuable
trade secrets embodied in, or related to, our solutions, services and devices and protect these rights through a number of
technical and legal measures. We have registered or applied to register certain trademarks and service marks in a number
of countries with particular emphasis on the Cerner branding elements. We continue to develop our patent portfolio and own
more than 350 issued patents with hundreds of patent applications pending. We do not consider any of our businesses to
be dependent upon any one patent, copyright, trademark, or trade secret, or any family or families of the same.
Our solutions, devices and services incorporate or rely on intellectual property rights licensed from third parties, including
software subject to open source software licenses. Certain technologies licensed to Cerner are also important for internal
use in running our business and supporting our clients. Although replacing any existing licenses could be inconvenient, based
on our experiences, existing contractual relationships, and the incentives of our technology suppliers, we believe that Cerner
will continue to obtain these technologies or suitable alternatives for commercially reasonable prices on commercially
reasonable terms or under open source software licenses acceptable to Cerner.
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 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.
Our executive marketing management is located at our Realization Campus in Kansas City, Missouri (formerly known as our
Innovations Campus), 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 35
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.
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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 applicable client support teams, including those located at our world headquarters in North Kansas
City, Missouri, our Continuous Campus in Kansas City, Kansas, our campus in Malvern, Pennsylvania, and our global support
organizations in Germany, 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 2016, we had a revenue backlog of $15.9 billion, which compares to $14.2 billion at the end of 2015. Such
backlog represents contracted revenue that has not yet been recognized. We currently estimate that approximately 26%
percent of the backlog at the end of 2016 will be recognized as revenue during 2017.
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 each offer a suite of software solutions
that compete with many of our software solutions and services. These competitors include, but are not limited to:
Allscripts Healthcare Solutions, Inc.
athenahealth, Inc.
Epic Systems Corporation
Evident Health Services, LLC
GE Healthcare
Healthland, Inc.
McKesson Corporation
MEDHOST, Inc.
Medical Information Technology, Inc.
Other competitors focus on only a portion of the market that we address. For example, we deem the following competitors,
which offer HCIT services that compete directly with some of our service offerings, as principal competitors in the HCIT
services space:
Deloitte Consulting, LLP (Deloitte)
Encore Health Resources, LLC
HCI Group
IBM Corporation (IBM)
Impact Advisors
S&P Consultants
The Advisory Board Company (Advisory Board)
Xerox Corporation, Ltd.
We view the following competitors that offer solutions to the ambulatory market (but do not currently have a significant
presence in the broader health systems and independent hospital market) as principal competitors in this market:
AmazingCharts.com, Inc.
eClinicalWorks, LLC
e-MDs, Inc.
Greenway Health, LLC
Netsmart Technologies
Practice Fusion, Inc.
Quality Systems, Inc.
SRSsoft
Vitera Healthcare Solutions
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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:
Becton, Dickinson and Company
Connexall Company, Ltd.
Nanthealth, LLC
Omnicell, Inc.
PerfectServe, Inc.
Philips N.V.
Qualcomm, Inc.
Siemens AG
Vocera Communication, Inc.
We view our principal competitors in the health care revenue cycle and transaction services market to include, without
limitation:
Accretive Health, Inc.
Conifer Health Solutions
Dell, Inc.
Deloitte
Emdeon Corporation
Experian plc
MedAssets, Inc.
Optum, Inc. (Optum)
Quadramed Corporation
We view our competitors in the population health market to range from small niche competitors, to large health insurance
companies including, without limitation:
Advisory Board
Enli Health Intelligence
Evolent Health, LLC
i2i, Inc.
IBM
Influence Health, Inc.
Lightbeam Health Solutions
Lumeris, Inc.
Optum
WellCentive, Inc.
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 2016, we employed approximately 24,400 associates worldwide.
Operating Segments
Information about our operating segments, which are geographically based, may be found in Item 7 “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” below and in Note (18) of the notes to consolidated financial
statements.
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Executive Officers of the Registrant
The following table sets forth the names, ages, positions and certain other information regarding the Company’s executive
officers as of February 1, 2017. Officers are elected annually and serve at the discretion of the Board of Directors.
Name
Neal L. Patterson
Age
67
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
66
51
61
52
56
53
54
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.
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. If a client’s Cerner software solution or health care
devices fail to meet these warranties or leads 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, which could interrupt clients’ access
to their data, exposing us to significant costs and reputational harm. Our business relies on the secure electronic
transmission, data center storage and hosting of sensitive information, including protected health information, personally
identifiable 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 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 attack; a significant system,
network or data breach; damage, injury or impairment (environmental, accidental or intentional) 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.
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If our IT security is breached, we could be subject to increased expenses, exposure to legal claims and regulatory
actions, and clients could be deterred from using our solutions and services. We are in the information technology
business, and in providing our products and services, we store, retrieve, process and manage our clients’ information and
data (and that of their patients), as well as our own data. We believe we have a reputation for secure and reliable solution
offerings and related services, and we have invested a great deal of time and resources in protecting the security, confidentiality,
integrity and availability of our solutions, services and the internal and external data that we manage. At times, we encounter
attempts by third parties to identify and exploit solution and service vulnerabilities, penetrate or bypass our security measures,
and gain unauthorized access to our or our clients’, partners’ and suppliers’ software, hardware and cloud offerings, networks
and systems, any of which could lead to the compromise of personal information or the confidential information or data of
Cerner, our clients or their patients.
High-profile security breaches at other companies have increased in recent years, and security industry experts and
government officials have warned about the risks of hackers and cyber-attacks targeting information technology products
and businesses. Although this is an industry-wide problem that affects other software and hardware companies, we may be
targeted by computer hackers because we are a prominent health care IT company. These risks will increase as we continue
to grow our cloud offerings and store and process increasingly large amounts of data, including personal health information,
and our clients’ confidential information and data, and host or manage parts of our clients’ businesses in cloud-based IT
environments.
The costs we would incur to address and fix these security incidents would increase our expenses, and our efforts to address
these problems may not be successful and could result in interruptions, delays, cessation of service and loss of existing or
potential clients that may impede our sales, development of solutions, provision of services or other critical functions. If a
cyber-attack or other security incident described above were to allow unauthorized access to or modification of our clients’
or suppliers’ data, our own data or our IT systems, or if our solutions or services are perceived as having security vulnerabilities,
we could suffer significant damage to our brand and reputation. This in turn could lead to fewer clients using our solutions
and services and result in reduced revenue and earnings. These types of security incidents could also lead to lawsuits,
regulatory investigations and claims and increased legal liability, including in some cases contractual costs related to
notification and fraud monitoring of impacted persons.
Our proprietary technology may be subject to claims for infringement or misappropriation of intellectual property
rights of others, or our intellectual property rights may be infringed or misappropriated by others. We rely upon a
combination of confidentiality practices and policies, license agreements, 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 U.S. and abroad. We continue to develop our patent portfolio of U.S. 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 and broader IT market increases, the functionality of our software solutions, devices and services expands, the use of
open-source software increases and we enter new geographies and new market segments. These claims, even if
unmeritorious, 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, implementing or supporting
the applicable solutions, devices and services.
Many of our solutions and services contain open source software that may pose particular risks to our proprietary
software, solutions, and services in a manner that could have a negative effect on our business. We rely upon open
source software in our solutions and services. The licensing terms applicable for certain open source software have not
been interpreted by U.S. or foreign courts and could be construed in a manner that imposes unanticipated conditions or
restrictions on our ability to provide and support our solutions or services.
Additionally, we may encounter claims from third parties claiming ownership of the software purported to be licensed under
the open source terms, demanding release of derivative works of open source software, which could include our proprietary
source code, or otherwise seeking to enforce the terms of the applicable open source licenses. These claims could result in
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litigation and, even if unmeritorious, could be expensive to defend and incapable of prompt resolution. If we become liable
to third parties for such claims, we could be required to make our software source code available under the applicable open
source license, utilize or develop alternative technology, or cease using, selling, offering for sale, licensing, implementing or
supporting the applicable solutions or services. In addition, use of certain open source software may pose greater risks than
use of third-party commercial software, as most open source licensors and distributors do not provide commercial warranties
or indemnities or controls on the origin of software.
We may become subject to legal proceedings that could have a material adverse impact on our business, results
of operations and financial condition. 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 a material adverse effect on our business, results of operations and financial condition.
We are subject to risks associated with our global operations. We market, sell and support 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. Our acquisition of the Cerner Health Services business increased our assets and operations within
Europe and, accordingly, our exposure to economic conditions in Europe. 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 business, results of operations and financial condition, including
our revenue growth and profitability, 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;
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Difficulties and costs of staffing and managing non-U.S. operations;
The impact of global economic and political market 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, or are more stringent than those in the U.S., such as those relating to data protection and data security
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 and unexpected changes to those requirements;
Changes to or reduced protection of intellectual property rights in some countries;
Potentially adverse tax consequences as a result of changes in tax laws or otherwise, 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 or government-imposed austerity measures;
Natural disasters, war or terrorist acts;
Labor disruptions that may occur in a country; or
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Political unrest which may impact sales or threaten the safety of associates or our continued presence in these
countries and the related potential impact on global stability.
Fluctuations in foreign currency exchange rates could materially affect our financial results. Our consolidated financial
statements are presented in U.S. dollars. In general, the functional currency of our subsidiaries is the local currency. For
each subsidiary, assets and liabilities denominated in foreign currencies are translated into U.S. dollars at the exchange
rates in effect at the balance sheet dates and revenues and expenses are translated at the average exchange rates prevailing
during the month of the transaction. Therefore, increases or decreases in the value of the U.S. dollar against other major
currencies affect our revenues, net earnings and the value of balance sheet items denominated in foreign currencies. Future
fluctuations in foreign currency exchange rates, particularly the strengthening of the U.S. dollar against major currencies,
could materially affect our financial results.
We are subject to tax legislation in numerous countries; tax legislation initiatives or challenges to our tax positions
could adversely affect our business, results of operations and financial condition. We are a global corporation with a
presence in more than 35 countries. As such, we are subject to tax laws, regulations and policies of the U.S. federal, state
and local governments and of comparable taxing authorities in 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, tax payments, tax credits or incentives will not be adversely affected by these initiatives. In addition,
U.S. 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 additional taxation, penalties and interest payments.
The vote by the United Kingdom (UK) to leave the European Union (EU) could adversely affect our financial results.
In June 2016, UK voters approved a referendum to withdraw the UK's membership from the EU, which is commonly referred
to as "Brexit". The referendum was advisory, and the terms of any withdrawal are subject to a negotiation period after the
government of the UK formally initiates a withdrawal process. We have operations in the UK and the EU, and as a result,
we face risks associated with the potential uncertainty and disruptions that may lead up to and follow Brexit, including with
respect to volatility in exchange rates and interest rates and potential material changes to the regulatory regime applicable
to our operations in the UK. Brexit could adversely affect European or worldwide political, regulatory, economic or market
conditions and could contribute to instability in global political institutions, regulatory agencies and financial markets. For
example, depending on the terms of Brexit, the UK could also lose access to the single EU market and to the global trade
deals negotiated by the EU on behalf of its members. Disruptions and uncertainty caused by Brexit may also cause our
clients to closely monitor their costs and reduce their spending budget on our solutions and services. Any of these effects of
Brexit, and others we cannot anticipate or that may evolve over time, could adversely affect our business, results of operations
and financial condition.
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 offered. Competition for such personnel in our industries is intense in both the
U.S. 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, results
of operations and financial condition, and could potentially inhibit development and delivery of our solutions, devices and
services and market share advances.
We depend on strategic partners and third party suppliers and our revenue and operating earnings could suffer if
we fail to manage these relationships properly. To be successful, we must continue to maintain our existing strategic
relationships and establish additional strategic relationships as necessary with leaders in the markets in which we operate.
We believe that these relationships contribute to our ability to further build our brand, extend the reach of our solutions and
services, and generate additional revenues and cash flows. If we were to lose critical strategic relationships, this could have
a material adverse impact on our business, results of operations and financial condition.
We license or purchase certain intellectual property and technology (such as software, hardware and content) from third
parties, including some competitors, and depend on such third party intellectual property and software, hardware or content
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in the operation and delivery of our solutions, devices and services. Additionally, we sell or license third party intellectual
property and software, hardware or content in conjunction with our solutions, devices and services. For instance, we currently
depend on Microsoft, Oracle 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 Dell EMC, Hewlett-Packard Enterprise, HP Inc., NetApp, IBM and others for our hardware technology platforms.
Most of our third party software license support contracts expire within one to five years, can be renewed only by mutual
consent and may be terminated if we breach the terms of the license and fail to cure the breach within a specified period of
time. Most of these third party software licenses are non-exclusive; therefore, our competitors may obtain the right to use
any of the technology covered by these licenses and use the technology to compete directly with us.
If any of our 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 our 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 encounter difficulties as we continue to integrate our Cerner Health Services business into our business
or fail to realize the long-term anticipated benefits of the acquisition of the Cerner Health Services 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 expansion into markets in which we have little or no direct prior experience, and
the potential inability to maintain the goodwill of existing clients. Potential difficulties that we may encounter as part of the
integration process, which may preclude us from fully realizing the anticipated benefits of the acquisition, including the
anticipated synergies, growth opportunities and cost savings, include, among other factors:
• managing a larger company;
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integrating two business cultures;
creating uniform standards, controls, procedures, policies and information systems and minimizing the costs
associated with such matters;
preserving client, supplier, research and development, distribution, marketing, promotion and other important
relationships;
commercializing "go forward" solutions under development and increasing revenues from existing marketed solutions;
and
integrating complex technologies and solutions from different businesses in a manner that is seamless to clients.
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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 Cerner Health Services acquisition, or could reduce our
earnings or otherwise adversely affect our business, results of operations and financial condition.
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
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, results of operations, financial
condition 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 our 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
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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 or market conditions could negatively affect our business,
results of operations and financial condition. Our business, results of operations, financial condition and outlook 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, results of operations and financial condition 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 material adverse impact on our business, results of operations and financial condition.
Our work with government clients exposes us to additional risks inherent in the government contracting
environment. Our clients include national, provincial, state and local governmental entities. Our government work carries
various risks inherent in the government contracting process. These risks include, but are not limited to, the following:
• Government entities, particularly in the U.S., often reserve the right to audit our contracts and conduct inquiries and
investigations of our business practices with respect to government contracts. U.S. government agencies conduct
reviews and investigations and make inquiries regarding our systems in connection with our performance and
business practices with respect to our government contracts. Negative findings from audits, investigations or inquiries
could affect our future sales and profitability by preventing us, by operation of law or in practice, from receiving new
government contracts for some period of time.
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If a government client discovers improper or illegal activities in the course of audits or investigations, we may become
subject to various civil and criminal penalties, including those under the civil U.S. False Claims Act, and administrative
sanctions, which may include termination of contracts, suspension of payments, fines and suspensions or debarment
from doing business with other agencies of that government. The inherent limitations of internal controls may not
prevent or detect all improper or illegal activities.
U.S. government contracting regulations impose strict compliance and disclosure obligations. Disclosure is required
if certain company personnel have knowledge of “credible evidence” of a violation of federal criminal laws involving
fraud, conflict of interest, bribery or improper gratuity, a violation of the civil U.S. False Claims Act or receipt of a
significant overpayment from the government. Failure to make required disclosures could be a basis for suspension
and/or debarment from federal government contracting in addition to breach of the specific contract and could also
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impact contracting beyond the U.S. federal level. Reported matters also could lead to audits or investigations and
other civil, criminal or administrative sanctions.
• Government contracts are subject to heightened reputational and contractual risks compared to contracts with
commercial clients. For example, government contracts and the proceedings surrounding them are often subject to
more extensive scrutiny and publicity. Negative publicity, including allegations of improper or illegal activity, poor
contract performance, deficiencies in services or other deliverables, or information security breaches, regardless of
accuracy, may adversely affect our reputation.
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Terms and conditions of government contracts also tend to be more onerous and are often more difficult to negotiate.
• Government entities typically fund projects through appropriated monies. While these projects are often planned
and executed as multi-year projects, government entities usually reserve the right to change the scope of or terminate
these projects for lack of approved funding and/or at their convenience. Changes in government or political
developments, including budget deficits, shortfalls or uncertainties, government spending reductions (e.g.,
Congressional sequestration of funds under the Budget Control Act of 2011) or other debt constraints could result
in our projects being reduced in price or scope or terminated altogether, which also could limit our recovery of
reimbursable expenses. Furthermore, if insufficient funding is appropriated to the government entity to cover
termination costs, we may not be able to fully recover our investments.
The occurrences or conditions described above could affect not only our business with the particular government entities
involved, but also our business with other entities of the same or other governmental bodies or with certain commercial
clients, and could have a material adverse effect on our business, results of operations and financial condition.
There are risks associated with our outstanding and future indebtedness. We have customary restrictive covenants
in our current debt agreements, which may limit our flexibility to operate our business. These covenants include limitations
on priority debt, liens, mergers, asset dispositions, and transactions with affiliates, and require us to maintain certain leverage
and interest coverage ratios. Failure to comply with these covenants 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 business, results
of operations and financial condition. Additionally, our ability to pay interest and repay the principal for our indebtedness is
dependent upon our ability to manage our business operations, generate sufficient cash flows to service such debt and the
other factors discussed in this section. There can be no assurance that we will be able to manage any of these risks successfully.
Risks Related to the Health Care Information Technology, Health Care Device, Health Care Transaction, Revenue
Cycle Management and Population Health Management Industries
The health care industry is subject to changing political, economic and regulatory influences, which could impact
the purchasing practices and operations of our clients and increase our costs to deliver compliant solutions and
services. 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. The results of the November 8, 2016, elections create uncertainty for the future of
the Affordable Care Act and other health care-related legislation. Because of that uncertainty, because not all the administrative
rules implementing health care reform under current legislation have been finalized, and because of ongoing federal fiscal
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budgetary pressures yet to be resolved for federal health programs, we cannot predict the full effect of health care legislation
on our business at this time. There can be no assurances that health care reform initiatives will not adversely impact either
our operational results or the manner in which we operate our business, including changes to existing regulatory oversight
that may impact operating expenses and increase compliance risk. Purchasers of HCIT may respond to the uncertainty by
reducing their investments or postponing investment decisions, including investments in our devices, solutions and services.
Future legislation and regulation may ultimately impact the fiscal stability and sustainability of HCIT purchasers. A lower
amount of regulatory incentives and/or near-term compliance deadlines that contribute to demand for our solutions and
services could impact our financial results. There can be no certainty that incentives will be offered in regard to our solutions
and services, nor can there be any assurance that any legislation that may be adopted would be favorable to our business.
We cannot predict whether or when future health care reform initiatives at the federal or state level or other initiatives affecting
our business will be proposed, enacted or implemented or what impact those initiatives may have on our business, results
of operations and financial condition.
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, results of operations and financial condition. As a participant in the health care industry,
our operations and relationships, and those of our clients, are regulated by a number of U.S. federal, state, local 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, both in terms of the level of government reimbursement available to our clients
and 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 U.S. 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. U.S. federal and state governments continue to enhance regulation of and increase their scrutiny over
practices involving health care fraud, waste and abuse perpetuated by health care providers and professionals 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. U.S. 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 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, require a costly response from us
and adversely affect our business, results of operations and financial condition.
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 revenue cycle management 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 U.S. federal and state laws. U.S.
federal law provides civil liability to any persons that knowingly submit, or cause to be submitted, a claim to a payer, including
Medicare, Medicaid and private health plans, seeking payment for any services or items that overbills or bills for services or
items that have not been provided to the patient. U.S. 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 U.S. 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
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or other government-funded health care programs. Any investigation or proceeding related to these laws, even if unwarranted
or without merit, may have a material adverse effect on our business, results of operations and financial condition.
Regulation of Health Care Devices. The U.S. Food and Drug Administration ("FDA") has determined that certain of our
solutions are medical devices that are actively regulated under the Federal Food, Drug and Cosmetic Act ("Act") and
amendments to the Act. Other countries have similar regulations in place related to medical devices, that now or may in the
future apply to certain of our solutions. If other of our solutions are deemed to be actively regulated medical devices by the
FDA or similar regulatory agencies in countries where we do business, we could be subject to extensive requirements
governing pre- and post-marketing activities including pre-market notification clearance. Complying with these medical device
regulations on a global perspective is time consuming and expensive and could be subject to unanticipated and significant
delays. Further, it is possible that these regulatory agencies may become more active in regulating software and 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 Headquarters
Campus and Realization Campus (formerly known as our 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 Headquarters Campus 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. U.S. federal, state and local and foreign laws regulate the confidentiality of
personal information, how that information may be used, and the circumstances under which such information may be
released. These regulations govern both the disclosure and use of confidential personal and patient medical record information
and require the users of such information to implement specified security and privacy measures. U.S. 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 are also evolving and may have similar or even stricter requirements related to the treatment of
personal or patient information.
In the U.S., HIPAA regulations apply 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 and our claims processing, transmission and submission
services, are required to comply with HIPAA privacy standards, transaction regulations and 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 EU data protection legislation, including the 1995 Data Protection Directive, 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 U.S. The EU
directives establish several obligations that organizations must follow with respect to use of personal data, including a
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prohibition on the transfer of personal information from the EU to other countries whose laws do not adequately protect the
privacy and security of personal data to European standards. In addition to this EU-wide legislation, certain member states
have adopted more stringent data protection standards. We have addressed these requirements, relative to data transfers,
by self-certifying our compliance with the EU-U.S. Privacy Shield Framework to the U.S. Department of Commerce
International Trade Administration ("ITA"). The ITA has approved our self-certification. However, continued criticism of the
Privacy Shield by officials in Europe casts uncertainty as to the long-term effectiveness of the Privacy Shield to support EU-
U.S. transfers of personal data. For that reason, we are pursuing alternative methods of compliance, but those methods
also may be subject to scrutiny by data protection authorities in European member states.
On April 14, 2016, the European Parliament approved the General Data Protection Regulation ("GDPR"). The GDPR will
replace the 1995 Data Protection Directive and will become enforceable on May 24, 2018. The GDPR will have significant
impacts on how businesses, including both us and our clients, can collect and process the personal data of EU individuals.
We may incur increased development costs and delays in delivering solutions as we need to update our software, devices
or health care devices to enable our European clients to comply with these varying and evolving standards to the extent that
they differ from the standards of the previous 1995 Data Protection Directive. In addition, delays in interpreting the GDPR's
standards may result in postponement or cancellation of our clients' decisions to purchase our solutions or health care
devices. 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 business, results of operations and financial condition.
Both the 1995 Data Protection Directive and the GDPR grant broad enforcement powers to regulatory agencies to investigate
and enforce our compliance with their data privacy and security requirements. Governmental enforcement personnel,
particularly in the EU, 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. We may incur increased software development and administrative expense and delays
in delivering solutions if we need to update our software, devices or health care devices to conform to these varying and
evolving requirements. 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.
Federal Requirements for Certified Health Information Technology. Various U.S. federal and state and non-U.S. government
agencies are also developing standards for the use of information technology that in some cases have become prerequisite
to or mandatory as requirements for providing health care services to beneficiaries of federal health insurance programs that
are paid for by these agencies. Hospitals and physicians participating in the statutory ARRA HITECH program for “meaningful
use of certified electronic health record technology ("CEHRT")” first started receiving stimulus funds in 2011 as incentive
payments for adoption of EHRs from the U.S. federal government. In most cases, these incentives have now evolved into
negative payment adjustments for providers who do not adopt CEHRT. In the last year, the requirements for adoption of
CEHRT have expanded to be linked to other federal statutory and regulatory requirements for providers to participate in
“alternative payment models” for Medicare as the federal government moves to adopt more “value” (or quality) based payment
methods in lieu of traditional “fee for service” payment methodologies. The use of CEHRT has also been folded into the
physician payment reforms adopted under MACRA, for which the federal government has adopted final regulations that will
go into effect starting in 2017. Regulations have been issued that identify standards and implementation specifications and
establish the certification standards for qualifying electronic health record technology to become CEHRT. Nevertheless, these
standards and specifications are subject to interpretation by the entities designated to certify such technology. While a
combination of our solutions have been certified as meeting the 2011 and 2014 editions of the CEHRT standards, the regulatory
requirements to achieve certification continue to evolve, and we will need to meet the requirements set forth in the 2015
edition of these standards applicable to Stage 3 and other federal programs by January 1, 2018.
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We may incur increased development costs and delays in delivering solutions as we need to update 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. Further, we bear potential financial risks where we have entered into agreements with clients to
warrant their ability to meet future stage meaningful use certification requirements. While a client’s ability to meet future stage
meaningful use attestation requirements may be dependent on such client’s ability to adopt, rollout and attain sufficient use
of our certified solutions on a timely basis, we may face risks that come from issues in full adoption of our certified solutions,
which in turn could lead to a client missing its attestation targets. These risks are enhanced when we are under agreements
to provide application management services to our clients that place responsibilities on us for application configuration and
implementation as a prerequisite to or impactful to meaningful use attainment ordinarily borne by the client in other
circumstances.
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 the market for our
solutions, devices and services will develop as quickly as expected. 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, better brand recognition
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 U.S. 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
prospects and financial results could be negatively affected materially.
Long sales cycles for our solutions and services could have a material adverse impact on our future results of
operations. Some of our solutions have long sales cycles, ranging from several months to eighteen months or more beginning
at initial contact with the client through execution of a contract. How and when to implement, replace, or expand an information
system, or modify or add business processes, are major decisions for health care organizations. Many of the solutions we
provide require a substantial capital investment and time commitments by the client or prospective client. Any decision by
our clients or prospective clients to delay a purchasing decision could have a material adverse impact on our results of
operations.
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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 U.S.
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. Because of
the complexity and value of our contracts, the loss of even a small number of clients could have a significant negative effect
on our financial results.
Revenue recognized in any quarter may depend upon our or our clients’ abilities to meet project milestones. Delays in meeting
these milestone conditions or modification of the project plan could result in a shift of revenue recognition from one quarter
to another and could have a material adverse effect on results of operations for a particular quarter.
Our revenues from system sales historically have been lower in the first quarter of the year and greater in the fourth quarter
of the year, primarily as a result of clients’ year-end efforts to make final capital expenditures for the then-current year.
Our sales forecasts may vary from actual sales in a particular quarter. We use a “pipeline” system, a common industry
practice, to forecast sales and trends in our business. Our sales associates monitor the status of all sales opportunities, such
as the date when they estimate that a client will make a purchase decision and the potential dollar amount of the sale. These
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 or
changed U.S. 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, key management changes, 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.
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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 and issuances of preferred stock could be used to delay or hinder a change of control of the Company.
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 or otherwise effect a change of control of the Company. These include
provisions that provide for a classified board of directors, require advance notice of stockholder proposals at stockholder
meetings, 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.
Changes in accounting standards issued by the Financial Accounting Standards Board ("FASB") or other standard-
setting bodies may adversely affect our financial statements. Our financial statements are subject to the application of
U.S. GAAP, which is periodically revised and/or expanded. From time to time, we are required to adopt new or revised
accounting standards issued by recognized authoritative bodies, including the FASB and the SEC. It is possible that future
accounting standards we are required to adopt, such as amended guidance for revenue recognition, leases, and share based
payments, may require changes to the current accounting treatment that we apply to our consolidated financial statements
and may require us to make significant changes to our systems. Such changes could result in a material adverse impact on
our business, results of operations and financial condition.
Cautions about Forward-looking Statements
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 SEC, communications to shareholders, press releases and oral statements made by
representatives of the Company that are not historical in nature, or that state the Company’s or management’s intentions,
hopes, beliefs, expectations, plans, goals or predictions of future events or performance, may constitute “forward-looking
statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements can often be identified by the use of
forward-looking terminology, such as "could," "should," "will," "intended," "continue," "believe," "may," "expect," "hope,"
"anticipate," "goal," "forecast," "plan," "guidance," "opportunity," "prospects" 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. Any forward-looking statements made in this report speak only as of the date of this report. Except as required
by law, we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the
occurrence of unanticipated events or changes in our business, results of operations, financial condition or business over
time.
Market and Industry Data
This Annual Report on Form 10-K contains market, industry and government data and forecasts that have been obtained
from publicly available information, various industry publications and other published industry sources. We have not
independently verified the information and cannot make any representation as to the accuracy or completeness of such
information. None of the reports and other materials of third party sources referred to in this Annual Report on Form 10-K
were prepared for use in, or in connection with, this Annual Report.
Item 1B. Unresolved Staff Comments
None
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Item 2. Properties
Our properties consist mainly of owned and leased office and data center facilities.
Our corporate world headquarters is located in a Company-owned office park (the Headquarters Campus) in North Kansas
City, Missouri. The Headquarters Campus and two other nearby locations, collectively contain approximately 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 Realization Campus (formerly known as our Innovations Campus), primarily
houses associates from our intellectual property organization and consists of 830,000 gross square feet of useable space
located in Kansas City, Missouri.
Company-owned office space known as the Continuous Campus, primarily houses associates who manage and support our
clients' IT systems and consists of 650,000 gross square feet of useable space located in Kansas City, Kansas.
Company-owned office space known as the Malvern Campus, houses associates who joined Cerner in connection with our
acquisition of Siemens Health Services on February 2, 2015, and consists of approximately 110 acres of property in Malvern,
Pennsylvania. This property includes approximately 675,000 gross square feet of office space, and a 100,000 square foot
data center.
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, Malvern Campus and office space in Lee’s Summit, Missouri, known
as the Lee's Summit Tech Center. The Lee's Summit Tech Center consists of 550,000 gross square feet and houses data
center space and certain third-party tenants in a multi-tenant office building.
We have purchased approximately 286 acres of land located in Kansas City, Missouri, known as the Innovations Campus
(formerly known as our Trails Campus). Construction on the Innovations Campus began in November 2014. The first two
phases of the project include approximately 859,000 gross square feet of office space, and were completed in January of
2017.
In November 2016, we purchased approximately 700,000 gross square feet of useable office and warehouse space located
in Kansas City, Missouri. Such space was acquired to accommodate our anticipated growth, and is located adjacent to our
Realization Campus.
As of the end of 2016, we leased additional domestic office space in the following locations:
Brooklyn, New York
Burlington, Vermont
Carlsbad, California
Columbia, Missouri
Costa Mesa, California
Culver City, California
Denver, Colorado
Downingtown, Pennsylvania
Durham, North Carolina
Franklin, Tennessee
Kansas City, Missouri
Mason, Ohio
Minneapolis, Minnesota
Nevada, Missouri
New Concord, Ohio
New York, New York
North Kansas City, Missouri
Rochester, Minnesota
Salt Lake City, Utah
Tempe, Arizona
Waltham, Massachusetts
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Globally, we also leased office space in the following locations:
Abu Dhabi, United Arab Emirates
Gmund, Austria
Augsburg, Germany
Bangalore, India
Berlin, Germany
Brasov, Romania
Brisbane, Australia
Cairo, Egypt
Doha, Qatar
Gothenburg, Sweden
Hamburg, Germany
Idstein, Germany
Kolkata, India
Kosice, Slovakia
Kuala Lumpur, Malaysia
Lisbon, Portugal
Dubai, United Arab Emirates
London, England
Dublin, Ireland
Erlangen, Germany
Essen, Germany
Madrid, Spain
Melbourne, Australia
Oslo, Norway
Item 3. Legal Proceedings
Paris, France
Perth, Australia
Peterborough, Ontario, Canada
Riyadh, Saudi Arabia
Sao Paulo, Brazil
Singapore
St. Wolfgang, Germany
Stockholm, Sweden
Sydney, Australia
The Hague, Netherlands
Toronto, Ontario, Canada
Vienna, Austria
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 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 2016 and 2015 as reported by the NASDAQ Global Select Market.
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
2016
Low
Last
High
2015
Low
$
$
59.92
59.14
67.50
62.53
$
49.59
52.84
57.59
47.01
54.08
58.91
61.75
47.37
$
$
74.83
75.72
75.00
68.31
$
63.19
65.67
57.42
55.82
Last
72.77
68.48
61.34
60.17
At February 1, 2017, there were approximately 960 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 2016:
Period
October 2, 2016 - October 29, 2016
October 30, 2016 - November 26, 2016
November 27, 2016 - December 31, 2016
Total
Total Number of
Shares
Purchased
Average Price
Paid per Share
— $
7,742,399
2,238,243
9,980,642
$
—
50.15
49.92
50.10
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs (a)
Approximate Dollar
Value of Shares
That May Yet Be
Purchased Under
the Plans or
Programs (a)
— $
7,742,399
2,238,243
9,980,642
100,000,000
211,730,000
100,000,000
(a) As announced on March 8, 2016, our Board of Directors authorized a share repurchase program for an aggregate purchase of up to $300 million
of our common stock, excluding transaction costs. That program was completed in November 2016. As announced on November 14, 2016, our
Board of Directors authorized a new share repurchase program for an aggregate purchase of up to $500 million of our common stock, excluding
transaction costs. As of December 31, 2016, $100 million remained available for repurchase. No time limit has been set for the completion of the
program. During 2016, the Company repurchased 13.7 million shares for total consideration of $700 million pursuant to Rule 10b5-1 plans. Refer
to Note (14) of the notes to consolidated financial statements for further information regarding our share repurchase programs.
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:
Working capital
Total assets
2016
2015(1)
2014
2013(2)
2012
$ 4,796,473
911,013
918,434
636,484
$ 4,425,267
781,136
781,380
539,362
$ 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
1.88
1.85
1.57
1.54
1.54
1.50
1.16
1.13
1.16
1.13
337,740
343,653
343,178
350,908
342,150
350,386
343,636
352,281
341,861
351,394
$
773,960
5,629,963
$ 1,049,967
5,561,984
$ 1,714,471
4,530,565
$ 1,121,276
4,098,364
$ 1,210,394
3,704,468
Long-term debt and capital lease obligations, excl. current installments
Shareholders' equity
537,552
3,927,947
563,353
3,870,384
62,868
3,565,968
111,717
3,167,664
136,557
2,833,650
(1)
In 2015 we acquired Siemens Health Services, as further described in Note 2 of the notes to consolidated financial statements.
(2)
Includes a pre-tax settlement charge of $106 million.
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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 years 2016 and 2015 each consisted of 52 weeks and
ended on December 31, 2016 and January 2, 2016, respectively. Fiscal year 2014 consisted of 53 weeks and ended on
January 3, 2015. The additional week in fiscal year 2014 impacts the results of operations discussion below. 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 and other stakeholders secure access to clinical, administrative and
financial data in real or near-real time, helping 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 13% or more. This growth has also created an important
strategic footprint in health care, with Cerner® solutions in more than 25,000 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 and services 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 may also supplement organic growth
with acquisitions.
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 HealtheIntent 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 15% 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.
Siemens Health Services
On February 2, 2015, we acquired the Cerner Health Services business, as further described in Note (2) of the notes to
consolidated financial statements. The addition of this business impacts the comparability of our 2015 consolidated financial
statements in relation to the comparative periods presented herein.
Results Overview
The Company delivered good levels of bookings, revenues, earnings and operating cash flows in 2016.
New business bookings revenue, which reflects the value of executed contracts for software, hardware, professional services
and managed services, was flat year-over-year at $5.4 billion in both 2016 and 2015, but we still view 2016 bookings as solid
given 2015 had grown 28% over 2014, creating a difficult comparable.
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Revenues for 2016 increased 8% to $4.8 billion compared to $4.4 billion in 2015. The increase in revenue reflects ongoing
demand for Cerner's core solutions and services driven by our clients' needs to keep up with regulatory requirements;
contributions from Cerner ITWorks and revenue cycle solutions and services; and attaining new clients.
Our 2016 net earnings were $636 million compared to $539 million in 2015. Diluted earnings per share were $1.85 in 2016
compared to $1.54 in 2015. The overall increase in net earnings and diluted earnings per share was primarily a result of
increased revenues, combined with a decline in costs associated with our acquisition of the Cerner Health Services business
in 2015.
We had cash collections of receivables of $5.2 billion in 2016 compared to $4.4 billion in 2015. Days sales outstanding was
69 days for the 2016 fourth quarter compared to 76 days for the 2016 third quarter and 80 days for the 2015 fourth quarter.
Operating cash flows for 2016 were $1.2 billion compared to $948 million in 2015.
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," which is incorporated herein by reference.
Results of Operations
Fiscal Year 2016 Compared to Fiscal Year 2015
(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
Amortization of acquisition-related intangibles
Total operating expenses
Total costs and expenses
Operating earnings
Other income, net
Income taxes
Net earnings
Revenues & Backlog
2016
% of
Revenue
2015
% of
Revenue
%
Change
$ 1,265,962
1,015,811
2,426,155
88,545
26% $ 1,281,890
975,701
21%
2,094,874
51%
72,802
2%
29%
22%
47%
2%
4,796,473
100%
4,425,267
100%
779,116
4,017,357
2,071,926
551,418
392,454
90,546
3,106,344
3,885,460
911,013
7,421
(281,950)
16%
84%
43%
11%
8%
2%
65%
81%
19%
750,781
3,674,486
1,838,600
539,799
423,424
91,527
2,893,350
3,644,131
781,136
244
(242,018)
17%
83%
42%
12%
10%
2%
65%
82%
18%
(1)%
4 %
16 %
22 %
8 %
4 %
9 %
13 %
2 %
(7)%
(1)%
7 %
7 %
17 %
$
636,484
$
539,362
18 %
Revenues increased 8% to $4.8 billion in 2016, as compared to $4.4 billion in 2015.
•
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
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licensed software upgrade rights, installation fees, transaction processing and subscriptions, decreased 1% from
2016 to 2015. The decrease in system sales was primarily driven by a decline in technology resale.
•
•
Support and maintenance revenues increased 4% to $1.0 billion in 2016 compared to $976 million in 2015. This
increase was primarily attributable to continued success selling Cerner Millennium applications and implementing
them at client sites.
Services revenue, which includes professional services (excluding installation) and managed services, increased
16% to $2.4 billion in 2016 from $2.1 billion in 2015. This increase was driven by a $207 million increase in
professional services due to growth in implementation and consulting activities and growth in managed services
of $124 million as a result of continued demand for our hosting services.
Revenue backlog, which reflects contracted revenue that has not yet been recognized as revenue, increased 12% to
$15.9 billion in 2016 compared to $14.2 billion in 2015. This increase was driven by solid levels of new business bookings
revenue during the past four quarters, including strong levels of managed services bookings that typically have longer
contract terms.
Costs of Revenue
Costs of revenue as a percent of total revenues were 16% in 2016 compared to 17% in 2015. The lower costs of revenue
as a percent of total revenues was primarily driven by a lower mix of technology resale, which carries a higher cost of
revenue.
Costs of revenue 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 total 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. Costs of revenue does not include the costs of our client service personnel who are responsible for delivering our
service offerings. Such costs are included in sales and client service expense.
Operating Expenses
Total operating expenses increased 7% to $3.1 billion in 2016, compared with $2.9 billion in 2015.
•
•
Sales and client service expenses as a percent of total revenues were 43% in 2016, compared to 42% in 2015.
These expenses increased 13% to $2.1 billion in 2016, from $1.8 billion in 2015. Sales and client service expenses
include salaries and benefits of sales, marketing, support, and services personnel, depreciation and other
expenses associated with our managed services business, communications expenses, unreimbursed travel
expenses, expense for share-based payments, and trade show and advertising costs. The growth in services
expense and increase as a percent of total revenues reflects hiring of services personnel to support the strong
growth in services revenue.
Software development expenses as a percent of total revenues were 11% in 2016, compared to 12% in 2015.
Expenditures for software development include ongoing development and enhancement of the Cerner Millennium
and HealtheIntent platforms, with a focus on supporting key initiatives to enhance physician experience, revenue
cycle and population health solutions. A summary of our total software development expense in 2016 and 2015
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
2015
2016
$
$
704,882
(290,911)
(2,785)
140,232
685,260
(262,177)
(2,479)
119,195
$
551,418
$
539,799
• General and administrative expenses as a percent of total revenues were 8% in 2016, compared to 10% in 2015.
These expenses decreased 7% to $392 million in 2016, from $423 million in 2015. General and administrative
expenses include salaries and benefits for corporate, financial and administrative staffs, utilities, communications
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expenses, professional fees, depreciation and amortization, transaction gains or losses on foreign currency,
expense for share-based payments, acquisition costs and related adjustments. The decrease as a percent of
total revenues was primarily the result of decreased expenses in 2016 related to acquisition costs and related
adjustments associated with our acquisition of the Cerner Health Services business and our voluntary separation
plans. General and administrative expenses in 2016 and 2015 include acquisition costs and related adjustments
associated with our Cerner Health Services business of $4 million and $46 million, respectively. General and
administrative expenses in 2016 and 2015 include costs associated with our voluntary separation plans of $36
million and $46 million, respectively. We expect expenses in 2017 for acquisition costs and related adjustments
associated with our acquisition of the Cerner Health Services business to be de minimis. We do not expect to
record expenses in 2017 associated with our voluntary separation plans. At the end of 2016, our voluntary
separation plans were complete. Refer to Note (1) of the notes to consolidated financial statements for further
detail regarding the voluntary separation plans.
•
Amortization of acquisition-related intangibles as a percent of total revenues was 2% in both 2016 and 2015.
These expenses decreased 1% to $91 million in 2016, from $92 million in 2015. Amortization of acquisition-
related intangibles includes the amortization of customer relationships, acquired technology, trade names, and
non-compete agreements recorded in connection with our business acquisitions. The decrease in amortization
of acquisition-related intangibles includes the impact of certain intangible assets becoming fully amortized.
Non-Operating Items
• Other income, net was $7 million in 2016 compared to less than $1 million in 2015. This increase is primarily due
to increased capitalization of interest on construction in process, primarily related to our Innovations Campus
(office space development located in Kansas City, Missouri, formerly referred to as our Trails Campus).
• Our effective tax rate was 31% in both 2016 and 2015. Refer to Note (12) of the notes to consolidated financial
statements for further information regarding our effective tax rate.
Operations by Segment
We have two operating segments: Domestic and Global. The Domestic segment includes revenue contributions and
expenditures associated with business activity in the United States. The Global segment includes revenue contributions
and expenditures linked to business activity in Aruba, Australia, Austria, the Bahamas, Belgium, Bermuda, Brazil, Canada,
Cayman Islands, Chile, Denmark, Egypt, England, Finland, France, Germany, Guam, India, Ireland, Kuwait, Luxembourg,
Malaysia, Mexico, Netherlands, Norway, Portugal, Qatar, Romania, Saudi Arabia, Singapore, Slovakia, Spain, Sweden,
Switzerland and the United Arab Emirates. Refer to Note (18) of the notes to consolidated financial statements for further
information regarding our reportable segments.
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The following table presents a summary of our operating segment information for the years ended 2016 and 2015:
(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
2016
% of
Revenue
2015
% of
Revenue
%
Change
$ 4,245,097
676,437
1,774,146
2,450,583
100%
16%
42%
58%
$ 3,904,454
651,826
1,577,594
2,229,420
100%
17%
40%
57%
1,794,514
42%
1,675,034
43%
551,376
102,679
246,243
348,922
100%
19%
45%
63%
520,813
98,955
233,047
332,002
100%
19%
45%
64%
202,454
37%
188,811
36%
(1,085,955)
(1,082,709)
$
911,013
$
781,136
9%
4%
12%
10%
7%
6%
4%
6%
5%
7%
—%
17%
•
•
Revenues increased 9% to $4.2 billion in 2016 from $3.9 billion in 2015. This increase was primarily driven by
growth in services revenue.
Costs of revenue as a percent of revenues were 16% in 2016 compared to 17% in 2015. The lower costs of
revenue as a percent of revenues was primarily driven by a lower mix of technology resale, which carries a higher
cost of revenue.
• Operating expenses as a percent of revenues were 42% in 2016 compared to 40% in 2015. The increase as a
percent of revenues reflects a higher mix of services during 2016 that was driven by services revenue growth.
Global Segment
•
•
Revenues increased 6% to $551 million in 2016 from $521 million in 2015. This increase was driven by growth
across most of our business.
Costs of revenue as a percent of revenues were 19% in both 2016 and 2015.
• Operating expenses as a percent of revenues were 45% in both 2016 and 2015.
Other, net
Operating results not attributed to an operating segment include expenses, such as software development, general and
administrative expenses, acquisition costs and related adjustments, share-based compensation expense, and certain
amortization and depreciation. These expenses were flat at $1.1 billion in both 2016 and 2015.
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Fiscal Year 2015 Compared to Fiscal Year 2014
(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
Amortization of acquisition-related intangibles
Total operating expenses
Total costs and expenses
Operating earnings
Other income, net
Income taxes
Net earnings
Revenues & Backlog
2015
% of
Revenue
2014
% of
Revenue
%
Change
$ 1,281,890
975,701
2,094,874
72,802
29% $
22%
47%
2%
945,858
724,840
1,642,119
89,886
28%
21%
48%
3%
4,425,267
100%
3,402,703
100%
750,781
3,674,486
1,838,600
539,799
423,424
91,527
2,893,350
3,644,131
781,136
244
(242,018)
17%
83%
42%
12%
10%
2%
65%
82%
18%
604,377
2,798,326
1,395,568
392,805
233,393
13,476
2,035,242
2,639,619
763,084
11,090
(248,741)
18%
82%
41%
12%
7%
—%
60%
78%
22%
36 %
35 %
28 %
(19)%
30 %
24 %
31 %
32 %
37 %
81 %
579 %
42 %
38 %
2 %
$
539,362
$
525,433
3 %
Revenues increased 30% to $4.4 billion in 2015, as compared to $3.4 billion in 2014.
•
•
•
System sales increased 36% to $1.3 billion in 2015 from $946 million in 2014. The increase in system sales was
primarily driven by contributions from the Cerner Health Services business.
Support and maintenance revenues increased 35% to $976 million in 2015 compared to $725 million in 2014.
This increase was primarily attributable to contributions from the Cerner Health Services business.
Services revenue increased 28% to $2.1 billion in 2015 from $1.6 billion in 2014. This increase was driven by
contributions from the Cerner Health Services business.
Revenue backlog increased 34% to $14.2 billion in 2015 compared to $10.6 billion in 2014. 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, coupled with
contributions from the Cerner Health Services business.
Costs of Revenue
Costs of revenue as a percent of total revenues were 17% in 2015 compared to 18% in 2014. The lower costs of revenue
as a percent of total revenues was primarily driven by a lower mix of technology resale, which carries a higher cost of
revenue.
Operating Expenses
Total operating expenses increased 42% to $2.9 billion in 2015, compared with $2.0 billion in 2014.
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•
•
Sales and client service expenses as a percent of total revenues were 42% in 2015, compared to 41% in 2014.
These expenses increased 32% to $1.8 billion in 2015, from $1.4 billion in 2014. The increase was primarily
driven by the addition of the Cerner Health Services business.
Software development expenses as a percent of total revenues were 12% in both 2015 and 2014. 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. Software development expenses in 2015 also include expenditures related
to the Cerner Health Services solutions. A summary of our total software development expense in 2015 and 2014
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
2015
$
$
685,260
(262,177)
(2,479)
119,195
467,158
(175,262)
(2,538)
103,447
$
539,799
$
392,805
• General and administrative expenses as a percent of total revenues were 10% in 2015, compared to 7% in 2014.
These expenses increased 81% to $423 million in 2015 from $233 million in 2014. The increase in general and
administrative expenses was primarily driven by the addition of the Cerner Health Services business. General
and administrative expenses in 2015 and 2014 include acquisition costs and related adjustments associated with
our Cerner Health Services business of $46 million and $16 million, respectively. General and administrative
expenses in 2015 also include $46 million of costs associated with our 2015 voluntary separation plan.
•
Amortization of acquisition-related intangibles increased 579% to $92 million in 2015 from $13 million in 2014.
The increase in amortization of acquisition-related intangibles was driven by the acquisition of the Cerner Health
Services business in the first quarter of 2015. Refer to Note (2) of the notes to consolidated financial statements
for further detail regarding intangible assets recorded in connection with our acquisition of the Cerner Health
Services business.
Non-Operating Items
• Other income, net was less than $1 million in 2015 and $11 million in 2014. This decline was primarily due to
increased interest expense as a result of the issuance of Senior Notes in January 2015, as further discussed in
Note (9) of the notes to consolidated financial statements. Interest income also declined in 2015 due to lower
average investment balances throughout the year. Refer to Note (11) of the notes to consolidated financial
statements for further detail on the composition of other income.
• Our effective tax rate was 31% in 2015 compared to 32% in 2014. The rates include net favorable permanent
differences recognized in both periods. Refer to Note (12) of the notes to consolidated financial statements for
further information regarding our effective tax rate.
The research and development credit expired on December 31, 2013, but in the fourth quarter of 2014, was
retroactively reinstated 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. In the fourth quarter of 2015, the research and development
credit was made permanent for amounts paid or incurred after December 31, 2014. We recognized the research
and development tax credit related to 2015 in the fourth quarter of 2015.
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Operations by Segment
The following table presents a summary of our operating segment information for the years ended 2015 and 2014:
(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
2015
% of
Revenue
2014
% of
Revenue
%
Change
$ 3,904,454
651,826
1,577,594
2,229,420
100%
17%
40%
57%
$ 3,021,790
542,210
1,163,413
1,705,623
100%
18%
39%
56%
1,675,034
43%
1,316,167
44%
520,813
98,955
233,047
332,002
100%
19%
45%
64%
380,913
62,167
182,965
245,132
100%
16%
48%
64%
188,811
36%
135,781
36%
(1,082,709)
(688,864)
$
781,136
$
763,084
29%
20%
36%
31%
27%
37%
59%
27%
35%
39%
57%
2%
•
•
Revenues increased 29% to $3.9 billion in 2015 from $3.0 billion in 2014. This increase was primarily driven by
contributions from the Cerner Health Services business.
Costs of revenue as a percent of revenues were 17% in 2015 compared to 18% in 2014. The lower costs of
revenue as a percent of revenues was primarily driven by a lower mix of technology resale, which carries a higher
cost of revenue.
• Operating expenses as a percent of revenues were 40% in 2015 compared to 39% in 2014. The slight increase
as a percent of revenues was primarily driven by the addition of the Cerner Health Services business.
Global Segment
•
•
Revenues increased 37% to $521 million in 2015 from $381 million in 2014. This increase was primarily driven
by contributions from the Cerner Health Services business.
Costs of revenue as a percent of revenues were 19% in 2015 compared to 16% in 2014. The higher costs of
revenue as a percent of revenue in 2015 were primarily driven by a higher amount of third party resources utilized
for support and services.
• Operating expenses increased 27% to $233 million in 2015 from $183 million in 2014, due primarily to the addition
of the Cerner Health Services business.
Other, net
These expenses increased 57% to $1.1 billion in 2015 from $689 million in 2014. This increase is primarily due to the
addition of corporate and development personnel from our acquisition of the Cerner Health Services business. Additionally,
2015 included amortization of acquisition-related intangibles associated with our Cerner Health Services business,
acquisition costs and related adjustments, and costs related to our voluntary separation plan of $79 million, $46 million,
and $46 million, respectively. Our 2014 fiscal year includes acquisition costs and related adjustments of $16 million.
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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, capital expenditures, and in recent years, our share
repurchase programs.
Our principal sources of liquidity are our cash, cash equivalents, which primarily consist of money market funds and time
deposits with original maturities of less than 90 days, and short-term investments. At the end of 2016, we had cash and cash
equivalents of $171 million and short-term investments of $186 million, as compared to cash and cash equivalents of $402
million and short-term investments of $111 million at the end of 2015.
The non-U.S. subsidiaries for which we have elected to indefinitely reinvest earnings outside the U.S. held approximately
45% of our aggregate cash, cash equivalents and short-term investments at December 31, 2016. 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.
We maintain a $100 million multi-year revolving credit facility, which expires in October 2020. The facility provides an unsecured
revolving line of credit for working capital purposes, which includes a letter of credit facility. We have the ability to increase
the maximum capacity to $200 million at any time during the facility's term, subject to lender participation. As of the end of
2016, we had no outstanding borrowings under this facility; however, we had $32 million of outstanding letters of credit, which
reduced our available borrowing capacity to $68 million. Refer to Note (9) of the notes to consolidated financial statements
for additional information regarding our credit facility.
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 2017.
The following table summarizes our cash flows in 2016, 2015 and 2014:
(In thousands)
Cash flows from operating activities
Cash flows from investing activities
Cash flows from financing activities
Effect of exchange rate changes on cash
Total change in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Free cash flow (non-GAAP)
Cash from Operating Activities
(In thousands)
Cash collections from clients
Cash paid to employees and suppliers and other
Cash paid for interest
Cash paid for taxes, net of refunds
Total cash from operations
For the Years Ended
2015
2014
2016
$ 1,155,612
(789,774)
(586,652)
(10,447)
(231,261)
$
947,526
(1,405,943)
236,249
(10,913)
(233,081)
402,122
170,861
402,489
$
$
635,203
402,122
320,738
$
$
$
$
$
847,027
(284,567)
(120,324)
(9,310)
432,826
202,377
635,203
392,643
For the Years Ended
2015
2014
2016
$ 5,184,252
(3,755,617)
(18,484)
(254,539)
$ 4,419,650
(3,340,551)
(13,164)
(118,409)
$ 3,480,591
(2,483,559)
(5,682)
(144,323)
$ 1,155,612
$
947,526
$
847,027
Cash flow from operations increased $208 million in 2016 compared to 2015, due primarily to a reduction in cash used to
fund working capital requirements, along with an increase in cash impacting earnings. Cash flow from operations increased
$100 million in 2015 compared to 2014, due primarily to an increase in cash impacting earnings. During 2016, 2015 and
2014, we received total client cash collections of $5.2 billion, $4.4 billion and $3.5 billion, respectively. Days sales outstanding
was 69 days in the fourth quarter of 2016, compared to 76 days for the 2016 third quarter and 80 days for the 2015 fourth
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quarter. Revenues provided under support and maintenance agreements represent recurring cash flows. We expect these
revenues to continue to grow as the base of installed systems grows.
Cash from Investing Activities
(In thousands)
Capital purchases
Capitalized software development costs
Sales and maturities of investments, net of purchases
Acquisition of businesses
Purchases of other intangibles
Total cash flows from investing activities
For the Years Ended
2015
2014
2016
(293,696)
(18,179)
$ (459,427) $ (362,132) $ (276,584)
(177,800)
190,810
(7,476)
(13,517)
(264,656)
720,406
— (1,478,129)
(21,432)
(18,472)
$ (789,774) $(1,405,943) $ (284,567)
Cash flows from investing activities consist primarily of capital spending, short-term investment, and acquisition activities.
Our capital spending in 2016 was driven by capitalized equipment purchases primarily to support growth in our 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 purchases are expected to decrease in 2017, as we completed the first two phases of construction on our
Innovations Campus in January of 2017.
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 invested more
heavily in cash equivalents versus short-term and long-term investments, as we prepared to fund our acquisition of the Cerner
Health Services business in February 2015. The increase in net cash from investments in 2015 is due to the use of proceeds
from additional investment sales and maturities to partially fund our acquisition of the Cerner Health Services business. In
2016, we returned to net purchases of investments, which we expect to continue in 2017, as we expect strong levels of cash
flow.
During 2015, we paid cash to acquire the Cerner Health Services business and the Lee's Summit Tech Center of $1.39 billion
and $85 million, respectively. In 2014, we acquired 100% of the outstanding membership interests of InterMedHx, LLC for
$7 million. We expect to continue seeking and completing strategic business acquisitions that are complementary to our
business. Refer to Note (2) of the notes to consolidated financial statements for additional information regarding our business
acquisitions.
Cash from Financing Activities
(In thousands)
Long-term debt issuance
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
2015
2014
2016
$
$
— $
—
115,697
(700,275)
(2,074)
—
—
500,000
(14,325)
107,434
(345,057)
(11,012)
—
(791)
—
(14,930)
71,411
(217,082)
(10,617)
48,000
2,894
$ (586,652) $
236,249
$ (120,324)
In January 2015, we issued $500 million in aggregate principal amount of Senior Notes. Proceeds from the Senior Notes
were available for general corporate purposes. Refer to Note (9) of the notes to consolidated financial statements for additional
information regarding the Senior Notes.
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 2017 based on the number of exercisable options at the end of 2016 and our current stock price.
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During 2016, 2015 and 2014, we repurchased 13.7 million shares of our common stock for total consideration of $700 million,
5.7 million shares of our common stock for total consideration of $345 million, and 4.1 million shares of our common stock
for total consideration of $217 million, respectively. At the end of 2016, $100 million remains available for repurchase under
our current repurchase program. Although we may continue to repurchase shares, there is no assurance that we will
repurchase up to the full amount of shares remaining available under the program. Refer to Note (14) of the notes to
consolidated financial statements for further information regarding our share repurchase programs.
During 2016, we paid $2 million of contingent consideration related to our acquisition of InterMedHx, LLC. In 2015 we paid
an aggregate of $11 million of contingent consideration related to our acquisitions of InterMedHx, LLC and Kaufman & Keen,
LLC (doing business as PureWellness). In 2014, we paid $11 million of contingent consideration related to our acquisition
of PureWellness. We expect additional contingent consideration payments in 2017 related to our acquisitions of the Lee's
Summit Tech Center 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 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 (16) of the notes to consolidated financial
statements for additional information.
Free Cash Flow (Non-GAAP)
(In thousands)
Cash flows from operating activities (GAAP)
Capital purchases
Capitalized software development costs
Free cash flow (non-GAAP)
For the Years Ended
2015
2014
2016
$
$ 1,155,612
(459,427)
(293,696)
947,526
(362,132)
(264,656)
$
847,027
(276,584)
(177,800)
$
402,489
$
320,738
$
392,643
Free cash flow increased $82 million in 2016, compared to 2015. This increase is due to an increase in cash flows from
operations, partially offset by higher levels of both capital spending to support our growth initiatives and facilities requirements,
and capitalized spending to support our ongoing software development initiatives. Free cash flow decreased $72 million in
2015, compared to 2014. The decrease was due to higher levels of both capital spending to support our growth initiatives
and facilities requirements, and capitalized spending to support our ongoing software development initiatives, partially offset
by an increase in cash flows from operations.
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. We define free cash flow as cash flows from operating activities reduced
by capital purchases and capitalized software development costs. The table above sets forth a reconciliation of free cash
flow to cash flows from operating activities, which we believe to be the GAAP financial measure most directly comparable
to free cash flow. 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
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 and understanding of our overall financial, operational and economic performance, because free
cash flow takes into account certain capital expenditures necessary to operate our business.
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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 2016,
except short-term purchase order commitments arising in the ordinary course of business.
(In thousands)
Balance sheet obligations(a):
Long-term debt obligations
Interest on long-term debt obligations
Capital lease obligations
Interest on capital lease obligations
Other obligations:
Operating lease obligations
Purchase obligations
2017
2018
2019
2020
2021
2022 and
thereafter
Total
Payments Due by Period
$
— $
2,500
$
— $
1,100
$
1,700
$
508,621
$
513,921
15,945
26,197
1,229
30,089
83,002
16,377
11,719
690
26,898
41,887
16,701
8,718
292
22,041
19,205
16,915
3,380
55
16,085
7,677
17,057
29,351
112,346
430
6
—
—
50,444
2,272
11,147
3,711
8,722
26,890
114,982
182,372
Total
$
156,462
$
100,071
$
66,957
$
45,212
$
34,051
$
573,584
$
976,337
(a) At the end of 2016, liabilities for unrecognized tax benefits were $10 million.
We have no off balance sheet arrangements as defined in Regulation S-K. The effects of inflation on our business during
2016, 2015 and 2014 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 accounting policies and our procedures related to these accounting 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 implementation services are
not essential to the functionality of our software, we can establish vendor specific objective evidence (VSOE) of fair value
for any undelivered elements, and the length of time it takes for us to achieve the delivery and implementation 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. If VSOE of fair value cannot be established for both the implementation services and the support services, the
entire arrangement fee is recognized ratably over the period during which the implementation services are expected to be
performed or the support period, whichever is longer, beginning with delivery of the software, provided that all other revenue
recognition criteria are met.
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
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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 as of the second quarters of 2016 and 2015 and concluded that goodwill was not impaired. The assessments
consisted of a qualitative analysis in accordance with Accounting Standards Update 2011-08, Testing for Goodwill Impairment.
A key consideration in conducting those analyses was the significant 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
$844 million and $799 million at the end of 2016 and 2015, 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.
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.
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Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to interest rate risk, primarily changes in LIBOR, related to our Series 2015-C Notes issued in January 2015.
As of December 31, 2016, the interest rate for the current interest period on our Series 2015-C Notes was 1.90%, based on
the three-month floating LIBOR rate. Based on our balance of $75 million of Series 2015-C Notes as of December 31, 2016,
an increase in interest rates of 1.0% would cause a corresponding increase in our annual interest expense of less than $1
million.
We have global operations, and as a result, we are exposed to market risk related to foreign currency exchange rate
fluctuations. Foreign currency fluctuations through December 31, 2016 have not had a material impact on our financial position
or operating results. We currently do not use currency hedging instruments, though we actively monitor our exposure to
foreign currency fluctuations and may use hedging transactions in the future if management deems it appropriate. We believe
most of our global operations are naturally hedged for foreign currency risk as our foreign subsidiaries invoice their clients
and satisfy their obligations primarily in their local currencies. There can be no guarantee that the impact of foreign currency
fluctuations in the future will not have a material impact on our financial position or operating results.
Item 8. Financial Statements and Supplementary Data
The Financial Statements and Notes required by this Item are submitted as a separate part of this report. See Note (19) to
the Consolidated Financial Statements for supplementary financial information.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
N/A
Item 9A. Controls and Procedures
a) Evaluation of Disclosure Controls and Procedures.
The Company’s Chief Executive Officer (CEO) and Chief Financial Officer (CFO) have evaluated the effectiveness
of the Company’s disclosure controls and procedures (as defined in the Exchange Act Rules 13a-15(e) and 15d-15
(e)) as of the end of the period covered by 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) Management's Report on Internal Control over Financial Reporting.
The Company’s management is responsible for establishing and maintaining adequate internal control over financial
reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended). The Company’s
management assessed the effectiveness of the Company’s internal control over financial reporting as of
December 31, 2016. 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 (2013). The Company’s management has concluded that, as of December 31, 2016, 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”.
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c) Changes in Internal Control over Financial Reporting.
On February 2, 2015, we acquired Siemens Health Services, as further described in Note (2) of the notes to
consolidated financial statements. During 2016, we continued to integrate policies, processes, people, technology
and operations for our combined operations. Except for any changes in internal controls related to the integration of
the Siemens Health Services business into Cerner, there were no other changes in the Company’s internal controls
over financial reporting during the year ended December 31, 2016, that have materially affected, or are reasonably
likely to materially affect, the Company’s internal controls over financial reporting.
d) Limitations on Controls.
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
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.
Item 9B. Other Information
N/A
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PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information under “Information Concerning Directors,” “Certain Transactions,” “Section 16(a) Beneficial Ownership
Reporting Compliance,” “Corporate Governance: Code of Business Conduct and Ethics” and “Committees of the Board:
Audit Committee” set forth in the Company's definitive proxy statement related to its 2017 annual meeting of stockholders
(the "Proxy Statement"), which will be filed with the SEC not later than 120 days after the end of the Company's fiscal year
pursuant to Regulation 14A, is incorporated herein 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 in our 2016 proxy statement.
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 under “Committees of the Board: Compensation Committee,” "Director Compensation," "2016 Director
Compensation Table," "Compensation Committee Report," "Compensation Discussion and Analysis," "Summary
Compensation Table," "2016 Grants of Plan-Based Awards," "Outstanding Equity Awards at 2016 Fiscal Year-End," "2016
Option Exercises and Stock Vested," "Employment Agreements & Potential Payments Under Termination or Change in
Control" and "Compensation Committee Interlocks and Insider Participation" set forth in the Proxy Statement, which will be
filed with the SEC not later than 120 days after the end of the Company's fiscal year pursuant to Regulation 14A, is incorporated
herein by reference.
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Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table provides information about our common stock that may be issued under our equity compensation plans
as of December 31, 2016:
(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
(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.
Securities to
be issued
upon
exercise of
outstanding
options and
rights (1)
23,955
$
—
23,955
Weighted
average
exercise
price per
share (2)
40.33
—
Securities
available for
future
issuance(3)
17,448
—
17,448
(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.
The information under “Security Ownership of Certain Beneficial Owners and Management” set forth in the Proxy Statement,
which will be filed with the SEC not later than 120 days after the end of the Company's fiscal year pursuant to Regulation
14A, is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information under “Certain Transactions” and "Meetings of the Board and Committees" set forth in the Proxy Statement,
which will be filed with the SEC not later than 120 days after the end of the Company's fiscal year pursuant to Regulation
14A, is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
The information under “Relationship with Independent Registered Public Accounting Firm” set forth in the Proxy Statement,
which will be filed with the SEC not later than 120 days after the end of the Company's fiscal year pursuant to Regulation
14A, is incorporated herein 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 December 31, 2016 and January 2, 2016
Consolidated Statements of Operations -Years Ended December 31, 2016, January 2, 2016 and
January 3, 2015
Consolidated Statements of Comprehensive Income - Years Ended December 31, 2016,
January 2, 2016 and January 3, 2015
Consolidated Statements of Cash Flows - Years Ended December 31, 2016, January 2, 2016
and January 3, 2015
Consolidated Statements of Changes in Shareholders' Equity - Years Ended December 31, 2016,
January 2, 2016 and January 3, 2015
Notes to Consolidated Financial Statements
(2) See the Index to Exhibits immediately following the signature page of this Annual Report on Form 10-K.
Item 16. Form 10-K Summary.
None.
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Table of Contents
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 10, 2017
CERNER CORPORATION
By:
/s/ Neal L. Patterson
Neal L. Patterson
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated:
Signature and Title
Date
/s/ Neal L. Patterson
Neal L. Patterson, Chairman of the Board and Chief
Executive Officer (Principal Executive Officer)
February 10, 2017
/s/ Clifford W. Illig
Clifford W. Illig, Vice Chairman and Director
/s/ Marc G. Naughton
Marc G. Naughton, Executive Vice President and
Chief Financial Officer (Principal Financial Officer)
February 10, 2017
February 10, 2017
/s/ Michael R. Battaglioli
Michael R. Battaglioli, Vice President and
Chief Accounting Officer (Principal Accounting Officer)
February 10, 2017
/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 10, 2017
February 10, 2017
February 10, 2017
February 10, 2017
February 10, 2017
February 10, 2017
February 10, 2017
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Exhibit
Number
Exhibit Description
INDEX TO EXHIBITS
Incorporated by Reference
Exhibit(s)
Filing Date
SEC File No./Film No.
Filed
Herewith
Cerner Corporation 2001 Long-Term Incentive Plan F
DEF 14A
Annex I
3.1
3.2
4
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 Incorporation of Cerner
Corporation
Amended & Restated Bylaws as of February 25, 2016
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
(As Amended and Restated May 22, 2015)
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
- Performance Based Restricted Stock Agreement
Form
10-K
8-K
10-K
3(a)
3.2
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
2/11/2015
2/29/2016
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)
2/27/2008
000-15386/08646565
2/27/2008
000-15386/08646565
8-K
10.2
5/27/2015
10-Q
10.1
7/27/2012
10-K
10(u)
2/8/2013
10-Q
10.3
5/6/2016
64
45
01110100 01101111 01101101 01101111 01110010 01110010 01101111 01110111 00100000 01110100 01101111 01100100 01100001 011110018801110100 01101111 01101101 01101111 01110010 01110010 01101111 01110111 00100000 01110100 01101111 01100100 01100001 01111001 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
10.35
10.36
Cerner Corporation 2011 Omnibus Equity Incentive Plan
- Time Based Restricted Stock Agreement
Cerner Corporation 2011 Omnibus Equity Incentive Plan
- Director Restricted Stock Agreement
Cerner Corporation 2011 Omnibus Equity Incentive
Plan-Non-Qualified Stock Option Grant Certificate
Cerner Corporation 2011 Omnibus Equity Incentive Plan
- Non-Qualified Stock Option Grant Certificate
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 May 27, 2016)
Form of 2016 Executive Performance Agreement-
Covered Executives pursuant to the Cerner Corporation
Performance-Based Compensation Plan
10-Q
10.4
5/6/2016
10-Q
10.2
5/6/2016
10-K
10(v)
2/8/2013
10-Q
10.2
8/3/2016
S-8
4.6
5/27/2011
333-174568/11877216
8-K/A
10.1
6/1/2016
10-Q
10.1
5/6/2016
Cerner Corporation Executive Deferred Compensation
Plan as Amended & Restated dated January 1, 2008
10-K
10(k)
2/27/2008
000-15386/08646565
Cerner Corporation 2005 Enhanced Severance Pay
Plan as Amended & Restated Effective January 4, 2015
Exhibit A to the Enhanced Severance Pay Plan -
Severance Matrix Effective August 25, 2016
Second Amended and Restated Aircraft Time Sharing
Agreement between Cerner Corporation and Neal L.
Patterson dated July 24, 2013
Amendment No. 1 to Second Amended and Restated
Aircraft Time Sharing Agreement between Cerner
Corporation and Neal Patterson dated October 28, 2015
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
Master Note Purchase Agreement between Cerner
Corporation and the Purchasers listed in Schedule A
thereto dated December 4, 2014
10-K
10.3
2/11/2015
10-Q
10.1
11/2/2016
10-Q
10.1
7/26/2013
10-K
10.25
2/17/2016
8-K
99.1
1/22/2010
000-153866/10543089
8-K
10.1
8/1/2013
10-K
10.28
2/11/2015
10-K
10.29
2/11/2015
10-Q
2.1
10/24/2014
8-K
10.1
2/2/2015
8-K
10.1
12/5/2014
46
65
01110100 01101111 01101101 01101111 01110010 01110010 01101111 01110111 00100000 01110100 01101111 01100100 01100001 011110018801110100 01101111 01101101 01101111 01110010 01110010 01101111 01110111 00100000 01110100 01101111 01100100 01100001 01111001 Table of Contents
10.37
21
23
31.1
31.2
32.1
32.2
Third Amended and Restated Credit Agreement, dated
October 30, 2015, among Cerner Corporation and U.S.
Bank National Association, Bank of America, N.A. and
Commerce Bank, 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
8-K
10.1
11/3/2015
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).
PLEASE NOTE: Pursuant to the rules and regulations of the Securities and Exchange Commission, we have filed or incorporated by reference the
agreements referenced above as exhibits to this annual report on Form 10-K. The agreements have been filed to provide investors with information
regarding their respective terms. The agreements are not intended to provide any other factual information about the Company or its business or
operations. In particular, the assertions embodied in any representations, warranties and covenants contained in the agreements may be subject
to qualifications with respect to knowledge and materiality different from those applicable to investors and may be qualified by information in
confidential disclosure schedules not included with the exhibits. These disclosure schedules may contain information that modifies, qualifies and
creates exceptions to the representations, warranties and covenants set forth in the agreements. Moreover, certain representations, warranties and
covenants in the agreements may have been used for the purpose of allocating risk between the parties, rather than establishing matters as facts.
In addition, information concerning the subject matter of the representations, warranties and covenants may have changed after the date of the
respective agreement, which subsequent information may or may not be fully reflected in the Company's public disclosures. Accordingly, investors
should not rely on the representations, warranties and covenants in the agreements as characterizations of the actual state of facts about the
Company or its business or operations on the date hereof.
66
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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 December 31, 2016,
based on criteria established in Internal Control - Integrated Framework (2013) 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 December 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) 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 December 31, 2016 and January 2, 2016, 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 December 31, 2016, and our report dated February 10, 2017 expressed
an unqualified opinion on those consolidated financial statements.
/s/KPMG LLP
Kansas City, Missouri
February 10, 2017
48
67
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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 December 31,
2016 and January 2, 2016, 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 December 31, 2016. These consolidated
financial statements are the responsibility of Cerner Corporation and subsidiaries' management. Our responsibility is to
express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of Cerner Corporation and subsidiaries as of December 31, 2016 and January 2, 2016, and the results of their
operations and their cash flows for each of the years in the three-year period ended December 31, 2016, 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 December 31, 2016, based on criteria
established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), and our report dated February 10, 2017 expressed an unqualified opinion on the effectiveness
of Cerner Corporation and subsidiaries’ internal control over financial reporting.
/s/KPMG LLP
Kansas City, Missouri
February 10, 2017
68
49
01110100 01101111 01101101 01101111 01110010 01110010 01101111 01110111 00100000 01110100 01101111 01100100 01100001 011110018801110100 01101111 01101101 01101111 01110010 01110010 01101111 01110111 00100000 01110100 01101111 01100100 01100001 01111001 Table of Contents
CERNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31, 2016 and January 2, 2016
(In thousands, except share data)
Assets
Current assets:
Cash and cash equivalents
Short-term investments
Receivables, net
Inventory
Prepaid expenses and other
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, 353,731,237 shares issued at December
31, 2016 and 350,323,367 shares issued at January 2, 2016
Additional paid-in capital
Retained earnings
Treasury stock, 24,089,737 shares at December 31, 2016 and 10,364,691 shares at January 2, 2016
Accumulated other comprehensive loss, net
Total shareholders’ equity
Total liabilities and shareholders’ equity
See notes to consolidated financial statements.
2016
2015
$
170,861
185,588
944,943
14,740
303,229
1,619,361
1,552,524
719,209
844,200
566,047
109,374
219,248
$
402,122
111,059
1,034,084
15,788
264,780
1,827,833
1,309,214
562,559
799,182
688,058
173,073
202,065
$ 5,629,963
$ 5,561,984
$
238,134
26,197
311,839
211,554
57,677
845,401
537,552
306,263
12,800
1,702,016
$
215,510
41,797
278,443
184,225
57,891
777,866
563,353
324,516
25,865
1,691,600
3,537
1,230,913
4,094,327
(1,290,665)
(110,165)
3,927,947
3,503
1,075,782
3,457,843
(590,390)
(76,354)
3,870,384
$ 5,629,963
$ 5,561,984
50
69
01110100 01101111 01101101 01101111 01110010 01110010 01101111 01110111 00100000 01110100 01101111 01100100 01100001 011110018801110100 01101111 01101101 01101111 01110010 01110010 01101111 01110111 00100000 01110100 01101111 01100100 01100001 01111001 Table of Contents
CERNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 2016, January 2, 2016 and January 3, 2015
(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 $140,232, $119,195 and $103,447, respectively)
General and administrative
Amortization of acquisition-related intangibles
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
2015
2014
2016
$ 1,265,962
$ 1,281,890
$
945,858
3,441,966
3,070,575
2,366,959
88,545
72,802
89,886
4,796,473
4,425,267
3,402,703
412,066
278,505
88,545
430,335
247,644
72,802
314,089
200,402
89,886
2,071,926
1,838,600
1,395,568
551,418
392,454
90,546
539,799
423,424
91,527
392,805
233,393
13,476
3,885,460
3,644,131
2,639,619
911,013
781,136
763,084
7,421
244
11,090
918,434
781,380
774,174
(281,950)
(242,018)
(248,741)
$
$
$
636,484
1.88
1.85
$
$
$
539,362
1.57
1.54
$
$
$
525,433
1.54
1.50
337,740
343,178
342,150
343,653
350,908
350,386
70
51
01110100 01101111 01101101 01101111 01110010 01110010 01101111 01110111 00100000 01110100 01101111 01100100 01100001 011110018801110100 01101111 01101101 01101111 01110010 01110010 01101111 01110111 00100000 01110100 01101111 01100100 01100001 01111001 Table of Contents
CERNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the years ended December 31, 2016, January 2, 2016 and January 3, 2015
(In thousands)
Net earnings
Foreign currency translation adjustment and other (net of taxes (benefit) of $2,092, $(3,201) and
$(1,111), respectively)
Change in net unrealized holding gain (loss) on available-for-sale investments (net of taxes (benefits) of
$37, $(46) and $(331), respectively)
Comprehensive income
See notes to consolidated financial statements.
For the Years Ended
2015
2014
2016
$
636,484
$
539,362
$
525,433
(33,871)
(32,171)
(30,145)
60
(87)
(522)
$
602,673
$
507,104
$
494,766
52
71
01110100 01101111 01101101 01101111 01110010 01110010 01101111 01110111 00100000 01110100 01101111 01100100 01100001 011110018801110100 01101111 01101101 01101111 01110010 01110010 01101111 01110111 00100000 01110100 01101111 01100100 01100001 01111001 Table of Contents
CERNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2016, January 2, 2016 and January 3, 2015
(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 cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt issuance
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
For the Years Ended
2015
2014
2016
$
636,484
$
539,362
$
525,433
504,236
74,536
(11,517)
78,258
(666)
(66,658)
(13,197)
12,170
1,555
(59,589)
452,225
70,121
65,245
(160,124)
12,951
(55,363)
7
(690)
9,450
14,342
302,353
59,292
106,905
(74,786)
8,117
(14,625)
2,974
(21,764)
4,346
(51,218)
1,155,612
947,526
847,027
(459,427)
(293,696)
(482,078)
463,899
(18,472)
(362,132)
(264,656)
(487,981)
1,208,387
(21,432)
— (1,478,129)
(276,584)
(177,800)
(1,214,036)
1,404,846
(13,517)
(7,476)
(789,774)
(1,405,943)
(284,567)
—
—
51,903
63,794
(700,275)
(2,074)
—
—
(586,652)
500,000
(14,325)
55,959
51,475
(345,057)
(11,012)
—
(791)
236,249
—
(14,930)
39,532
31,879
(217,082)
(10,617)
48,000
2,894
(120,324)
Effect of exchange rate changes on cash and cash equivalents
(10,447)
(10,913)
(9,310)
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Summary of acquisition transactions:
Fair value of tangible assets acquired
Fair value of intangible assets acquired
Fair value of goodwill
Less: Fair value of liabilities assumed
Less: Fair value of contingent liability payable
Net cash used
See notes to consolidated financial statements.
(231,261)
402,122
(233,081)
635,203
170,861
$
402,122
(10,200) $
(25,000)
46,940
(11,740)
—
532,625
637,980
485,387
(176,863)
(1,000)
$
$
432,826
202,377
635,203
184
3,800
16,785
(1,693)
(11,600)
— $ 1,478,129
$
7,476
$
$
$
72
53
01110100 01101111 01101101 01101111 01110010 01110010 01101111 01110111 00100000 01110100 01101111 01100100 01100001 011110018801110100 01101111 01101101 01101111 01110010 01110010 01101111 01110111 00100000 01110100 01101111 01100100 01100001 01111001 Table of Contents
CERNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the years ended December 31, 2016, January 2, 2016 and January 3, 2015
(In thousands)
Common Stock
Additional
Retained
Treasury
Shares
Amount
Paid-in Capital
Earnings
Stock
Accumulated
Other
Comprehensive
Income (Loss)
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)
Exercise of stock options (including net-settled option exercises)
3,337
Employee share-based compensation expense
Employee share-based compensation net excess tax benefit
Other comprehensive income (loss)
Treasury stock purchases
Net earnings
—
—
—
—
—
33
—
—
—
—
—
15,647
70,121
56,568
—
—
—
—
—
—
—
—
—
—
—
—
(345,057)
539,362
—
—
—
—
(32,258)
—
—
Balance at January 2, 2016
350,323
3,503
1,075,782
3,457,843
(590,390)
(76,354)
Exercise of stock options (including net-settled option exercises)
3,408
Employee share-based compensation expense
Employee share-based compensation net excess tax benefit
Other comprehensive income (loss)
Treasury stock purchases
Net earnings
—
—
—
—
—
34
—
—
—
—
—
27,747
74,536
52,848
—
—
—
—
—
—
—
—
—
—
—
—
(700,275)
636,484
—
—
—
—
(33,811)
—
—
Balance at December 31, 2016
353,731
$
3,537
$
1,230,913
$
4,094,327
$
(1,290,665) $
(110,165)
See notes to consolidated financial statements.
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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 of
America ("GAAP"). These principles require us to make estimates and assumptions that affect the reported amounts of assets
and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. Actual
results could differ from those estimates.
Our fiscal year ends on the Saturday closest to December 31. Fiscal years 2016 and 2015 each consisted of 52 weeks and
ended on December 31, 2016 and January 2, 2016, respectively. Fiscal year 2014 consisted of 53 weeks and ended on
January 3, 2015. 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.
Factors Impacting Comparability of Financial Statements
Siemens Health Services
On February 2, 2015, we acquired Siemens Health Services, as further described in Note (2). The addition of the Siemens
Health Services business impacts the comparability of our consolidated financial statements as of and for the year ended
January 2, 2016, in relation to the comparative periods presented herein.
52/53 Week Periods
Our 2014 fiscal year included 53 weeks, as discussed above. This additional week impacts the comparability of our
consolidated financial statements as of and for the year ended January 3, 2015, in relation to the comparative periods
presented herein.
Voluntary Separation Plans
In the first quarter of 2015, the Company adopted a voluntary separation plan ("2015 VSP") for eligible associates. Generally,
the 2015 VSP was available to U.S. associates who met a minimum level of combined age and tenure, excluding, among
others, our executive officers. Associates who elected to participate in the 2015 VSP received financial benefits commensurate
with their tenure and position, along with vacation payout and medical benefits. The irrevocable acceptance period for most
associates electing to participate in the 2015 VSP ended in May 2015. During 2015, we recorded pre-tax charges for the
2015 VSP of $46 million, which are included in general and administrative expense in our consolidated statements of
operations. At the end of 2015, this program was complete.
In the fourth quarter of 2016, the Company adopted a new voluntary separation plan ("2016 VSP") for eligible associates.
This 2016 VSP was available to U.S. associates who met a minimum level of combined age and tenure. Associates who
elected to participate in the 2016 VSP received financial benefits commensurate with their tenure and position, along with
vacation payout and medical benefits. The irrevocable acceptance period for associates electing to participate in the 2016
VSP ended in December 2016. During 2016, we recorded pre-tax charges for the 2016 VSP of $36 million, which are included
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in general and administrative expense in our consolidated statements of operations. At the end of 2016, this program was
complete.
Supplemental Disclosures of Cash Flow Information
(In thousands)
Cash paid during the year for:
For the Years Ended
2015
2014
2016
Interest (including amounts capitalized of $14,852, $7,106, and $1,583, respectively)
Income taxes, net of refunds
$
18,484
254,539
$
13,164
118,409
$
5,682
144,323
Summary of Significant Accounting Policies
(a) Revenue Recognition - We recognize software related revenue in accordance with the provisions of ASC 985-605,
Software – Revenue Recognition and non-software related revenue in accordance with ASC 605, Revenue Recognition. In
general, revenue is recognized when all of the following criteria have been met:
•
•
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 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.
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, 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
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after allocating revenue to the fair value of the undelivered elements is attributed to the licenses for software solutions. 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. If VSOE of fair value cannot be
established for both the implementation services and the support services, the entire arrangement fee is recognized ratably
over the period during which the implementation services are expected to be performed or the support period, whichever is
longer, beginning with delivery of the software, provided that all other revenue recognition criteria are met. The revenue
recognized from single units of accounting are typically allocated and classified as system sales and support, maintenance
and services. In cases where VSOE cannot be established, revenue is classified based on contract value. In instances where
VSOE for undelivered elements is established subsequent to the outset of an arrangement, a cumulative adjustment to
revenue is recognized in the period VSOE for the undelivered elements is established.
Revenue Recognition Policies for Each Element
We provide implementation and consulting services. These services vary depending on the scope and complexity of the
engagement. Examples of such services may include database consulting, system configuration, project management, testing
assistance, network consulting, post conversion review and application management services. Except for limited
arrangements where our software requires significant modifications or customization, implementation and consulting services
generally are not deemed to be essential to the functionality of the software and, thus, do not impact the timing of the software
license recognition. However, if software license fees are tied to implementation milestones, then the portion of the software
license fee tied to implementation milestones is deferred until the related milestone is accomplished and related fees become
due and payable and non-forfeitable. Implementation fees, for which VSOE of fair value can be determined, 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. As such, in situations for which we have VSOE of fair value for the undelivered items, we
allocate the residual portion of the arrangement fee to the software and recognize it once the client has the ability to take
possession of the software. The remaining fees in these arrangements, as well as the fees for arrangements where the client
does not have the contractual right or the ability to take possession of the software at any time or for situations in which
VSOE of fair value does not exist for undelivered elements, are 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.
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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, in these situations, we consider the fee to be fixed and determinable in these extended
payment term arrangements and, thus, the timing of revenue is not impacted by the existence of extended payments.
Some of these payment streams have been assigned on a non-recourse basis to third party financing institutions. We account
for the assignment of these receivables as sales of financial assets. Provided all revenue recognition criteria have been met,
we recognize revenue for these arrangements under our normal revenue recognition criteria, and if appropriate, net of any
payment discounts from financing transactions.
(b) Cash Equivalents - Cash equivalents consist of short-term marketable securities with original maturities less than 90
days.
(c) Investments – Our short-term investments are primarily invested in time deposits, commercial paper, government and
corporate bonds, 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 loss 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.
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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. 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 2016, 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 net realizable value.
(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 2016, 2015 or 2014. Refer to Note (7) for more information on goodwill and other intangible assets.
(i) Intangible Assets - We account for intangible assets in accordance with ASC 350, Intangibles – Goodwill and Other.
Amortization of finite-lived intangible assets is computed using the straight-line method over periods of three to 30 years.
(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 (12) 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 (13) 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 (14) for a detailed discussion of share-based payments.
(m) Voluntary Separation Benefits - We account for voluntary separation benefits in accordance with the provisions of ASC
Topic 712, Compensation-Nonretirement Postemployment Benefits. Voluntary separation benefits are recorded to expense
when the associates irrevocably accept the offer and the amount of the termination liability is reasonably estimable.
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(n) Foreign Currency - In accordance with ASC 830, Foreign Currency Matters, assets and liabilities of non-U.S. subsidiaries
whose functional currency is the local currency are translated into U.S. dollars at exchange rates prevailing at the balance
sheet date. Revenues and expenses are translated at average exchange rates during the year. The net exchange differences
resulting from these translations are reported in accumulated other comprehensive loss. Gains and losses resulting from
foreign currency transactions are included in the consolidated statements of operations.
(o) Collaborative Arrangements - In accordance with ASC 808, Collaborative Arrangements, third party costs incurred and
revenues generated by arrangements involving joint operating activities of two or more parties that are each actively involved
and exposed to risks and rewards of the activities are classified in the consolidated statements of operations on a gross
basis only if we are determined to be the principal participant in the arrangement. Otherwise, third party revenues and costs
generated by collaborative arrangements are presented on a net basis. Payments between participants are recorded and
classified based on the nature of the payments.
(p) Recently Issued Accounting Pronouncements
Revenue Recognition. In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update
(ASU) 2014-09, Revenue from Contracts with Customers (Topic 606), 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. The new standard introduces a five-step process to be
followed in determining the amount and timing of revenue recognition. It also provides guidance on accounting for costs
incurred to obtain or fulfill contracts with customers, and establishes disclosure requirements which are more extensive than
those required under existing U.S. GAAP.
The FASB has issued the following amendments to ASU 2014-09 from August 2015 through December 2016:
•
•
•
•
•
ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date
ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Consideration (Reporting
Revenue Gross versus Net)
ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and
Licensing
ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical
Expedients
ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers
Such amendments provide supplemental and clarifying guidance, as well as amend the effective date of the new standard.
ASU 2014-09, as amended, is effective for the Company in the first quarter of 2018, with early adoption permitted in the first
quarter of 2017. The standard permits the use of either the retrospective or modified retrospective (cumulative effect) transition
method.
In 2015, we formed a cross-functional implementation team and began our analysis of this new guidance. Such analysis
includes assessment of the impact of the new guidance on our consolidated financial statements and related disclosures,
as well as related impacts on processes, accounting systems, and internal controls. Based on our analysis to-date, we have
reached the following tentative conclusions regarding this new guidance and how we expect it to impact our consolidated
financial statements and related disclosures:
• We expect to adopt this new guidance effective with our first quarter of 2018; we will not early adopt.
• We expect to use the cumulative effect transition method. Such method provides that the cumulative effect from prior
periods upon applying the new guidance is recognized in our consolidated balance sheets as of the date of adoption,
including an adjustment to retained earnings. Prior periods will not be retrospectively adjusted.
• We believe substantially all of our revenue falls within the scope of ASU 2014-09, as amended; substantially all of
our revenue is contractual.
•
As discussed above, generally, our subscription and content fees revenue is recognized ratably over the respective
contract terms (“over time”). Upon adoption of the new guidance, we expect to recognize a license component of
certain subscription and content fees revenue upon delivery to the customer (“point in time”) and a non-license
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component (i.e. support) of such revenues over the respective contract terms (“over time”). At the date of adoption
of this new guidance, we expect to record a cumulative adjustment to our consolidated balance sheet, including an
adjustment to retained earnings, to adjust for the impact of certain prior period subscription and content fees revenue,
as calculated under the new guidance.
• We have determined the only significant incremental costs incurred to obtain contracts with customers within the
scope of ASU 2014-09, as amended, are sales commissions paid to associates. Under current U.S. GAAP we
recognize sales commissions as earned, and record such amounts as a component of total costs and expenses in
our consolidated statements of operations. We recognized sales commission expense of $44 million, $45 million
and $35 million in 2016, 2015, and 2014, respectively. Under the new guidance, we expect to record sales
commissions as an asset, and amortize to expense over the related contract performance period. At the date of
adoption of this new guidance, we expect to record an asset in our consolidated balance sheets for the amount of
unamortized sales commissions for prior periods, as calculated under the new guidance. Such amount will
subsequently be amortized to expense over the remaining performance periods of the related contracts with remaining
performance obligations.
Our analysis and evaluation of the new standard will continue through the effective date in the first quarter of 2018. A significant
amount of work remains, due to the complexity of revenue recognition within our industry, the increased number of judgments
and estimates required by this new guidance, and the volume of our contract portfolio which must be examined. We must
quantify all impacts of this new guidance, including the topics discussed above, which may be material to our consolidated
financial statements and related disclosures. We must also implement any necessary changes/modifications to processes,
accounting systems, and internal controls.
Consolidation. In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810): Amendments to the
Consolidation Analysis, which provides guidance when evaluating whether to consolidate certain legal entities. The updated
guidance modifies evaluation criteria of limited partnerships and similar legal entities, eliminates the presumption that a
general partner should consolidate a limited partnership, and affects the consolidation analysis of reporting entities that are
involved with variable interest entities, particularly those that have fee arrangements and related party relationships. ASU
2015-02 was effective for the Company in the first quarter of 2016. The adoption of ASU 2015-02 did not have a material
impact on our consolidated financial statements and related disclosures.
Financial Instruments. In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10):
Recognition and Measurement of Financial Assets and Financial Liabilities, which addresses certain aspects of recognition,
measurement, presentation, and disclosure of financial instruments. ASU 2016-01 is effective for the Company in the first
quarter of 2018, with early adoption permitted. We are currently evaluating the effect that ASU 2016-01 will have on our
consolidated financial statements and related disclosures, and we have not determined if we will early adopt.
Leases. In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which introduces a new model that requires
most leases to be reported on the balance sheet and aligns many of the underlying principles of the new lessor model with
those in the new revenue recognition standard. The standard requires the use of the modified retrospective (cumulative
effect) transition approach. ASU 2016-02 is effective for the Company in the first quarter of 2019, with early adoption permitted.
We are currently evaluating the effect that ASU 2016-02 will have on our consolidated financial statements and related
disclosures, and we have not determined if we will early adopt.
Share-Based Compensation. In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic
718): Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 changes several aspects of the
accounting for share-based payment award transactions, including: (1) accounting and cash flow classification for excess
tax benefits and deficiencies, (2) forfeitures, and (3) tax withholding requirements and cash flow classification. ASU 2016-09
is effective for the Company in the first quarter of 2017. We expect this new guidance to have the following impact on our
consolidated financial statements:
•
Under current GAAP, when associates exercise stock options, or upon the vesting of restricted stock awards, we
recognize any related excess tax benefits or deficiencies (the difference between the deduction for tax purposes and
the cumulative compensation cost recognized in the consolidated financial statements) in additional paid-in capital.
We recognized excess tax benefits of $53 million, $57 million and $40 million in 2016, 2015, and 2014, respectively.
Under the new guidance, all excess tax benefits and tax deficiencies are recognized as a component of income tax
expense. They are not estimated when determining the annual estimated effective tax rate; instead, they are recorded
as discrete items in the reporting period they occur. This provision of the new guidance may have a significant impact
on our future income tax expense, including increased variability in our quarterly effective tax rates, which is dependent
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on a number of factors, including the price of our common stock, grant activity under our stock and equity plans, and
the timing of option exercises by our associates. This provision of the new guidance is required to be applied
prospectively. Upon adoption, prior periods will not be retrospectively adjusted.
•
Under current GAAP, we utilize the treasury stock method for calculating diluted earnings per share. This method
assumes that any excess tax benefits generated from the hypothetical exercise of dilutive options are used to
repurchase outstanding shares. Assumed share repurchases for excess tax benefits included in our 2016, 2015 and
2014 calculations of diluted earnings per share were 2.0 million, 3.2 million and 3.9 million, respectively. Under the
new guidance, excess tax benefits generated from the hypothetical exercise of dilutive options are excluded from
the calculation of diluted earnings per share. Therefore, the denominator in our diluted earnings per share calculation
will increase. We estimate that this provision of the new guidance will reduce our calculation of diluted earnings per
share by approximately $0.01 to $0.02 for fiscal 2017. This provision of the new guidance is required to be applied
prospectively. Upon adoption, prior periods will not be retrospectively adjusted.
• We currently present excess tax benefits in our consolidated statements of cash flows as a cash inflow from financing
activities. Under the new guidance, excess tax benefits are to be presented within operating activities. We expect
to apply this provision of the new guidance retrospectively. Upon adoption, prior periods will be retrospectively
adjusted.
• We currently present cash payments to taxing authorities in connection with shares directly withheld from associates
upon the exercise of stock options, or upon the vesting of restricted stock awards, to meet statutory tax withholding
requirements (employee withholdings) as a cash outflow from operating activities. Such amounts were $38 million,
$36 million and $11 million in 2016, 2015, and 2014, respectively. Under the new guidance, such payments are to
be presented within financing activities. This provision of the new guidance is required to be applied retrospectively.
Upon adoption, prior periods will be retrospectively adjusted.
Credit Losses on Financial Instruments. In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit
Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which provides new guidance regarding the
measurement and recognition of credit impairment for certain financial assets. Such guidance will impact how we determine
our allowance for estimated uncollectible receivables and evaluate our available-for-sale investments for impairment. ASU
2016-13 is effective for the Company in the first quarter of 2020, with early adoption permitted in the first quarter of 2019.
We are currently evaluating the effect that ASU 2016-13 will have on our consolidated financial statements and related
disclosures, and we have not determined if we will early adopt.
Cash Flow Presentation. In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification
of Certain Cash Receipts and Cash Payments, which includes clarifying guidance regarding the cash flow statement
presentation of contingent consideration payments made after business combinations. ASU 2016-15 is effective for the
Company in the first quarter of 2018, with early adoption permitted. The standard requires use of the retrospective transition
method. The Company adopted the standard early, in the fourth quarter of 2016. The adoption of ASU 2016-15 did not have
an impact on our consolidated financial statements.
Income Taxes. In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets
Other than Inventory, which provides new guidance regarding when an entity should recognize the income tax consequences
of certain intra-entity asset transfers. Current U.S. GAAP prohibits entities from recognizing the income tax consequences
of intercompany asset transfers, including transfers of intellectual property. The seller defers any net tax effect, and the buyer
is prohibited from recognizing a deferred tax asset on the difference between the newly created tax basis of the asset in its
tax jurisdiction and its financial statement carrying amount as reported in the consolidated financial statements. ASU 2016-16
requires entities to recognize these tax consequences in the period in which the transfer takes place, with the exception of
inventory transfers.
ASU 2016-16 is effective for the Company in the first quarter of 2018, with early adoption permitted in the first quarter of
2017. The standard requires the use of the modified retrospective (cumulative effect) transition approach. We expect to early
adopt ASU 2016-16 in the first quarter of 2017. In connection with such adoption, we expect to record a cumulative effect
adjustment reducing retained earnings by approximately $22 million. The cumulative effect adjustment includes recognition
of the income tax consequences of intra-entity transfers of assets other than inventory that occurred prior to the adoption
date. Prior periods will not be retrospectively adjusted.
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Business Acquisitions. In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying
the Definition of a Business, which provides guidance regarding the definition of a business, with the objective of adding
guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of
assets or businesses. ASU 2017-01 is effective for the Company in the first quarter of 2018, with early adoption permitted,
and prospective application required. The Company adopted the standard early, in the fourth quarter of 2016. The adoption
of ASU 2017-01 did not have a material impact on our consolidated financial statements.
(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, a stock corporation established under the laws of Germany,
and its affiliates. Siemens Health Services offered 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 were offered on the Soarian, Invision, and i.s.h.med platforms, among others. Siemens Health Services also offered
a range of complementary services, including support, hosting, 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 added over 5,000 highly-skilled associates that 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 and comprise the resulting goodwill recorded.
Consideration for the acquisition was $1.39 billion of cash, consisting of the $1.3 billion agreed upon purchase price plus
working capital and certain other adjustments under the Master Sale and Purchase Agreement ("MSPA") dated August 5,
2014, as amended.
We incurred pre-tax costs of $22 million and $16 million in 2015 and 2014, respectively, in connection with our acquisition
of Siemens Health Services, which are included in general and administrative expense in our consolidated statements of
operations.
The acquisition of Siemens Health Services was treated as a purchase in accordance with ASC Topic 805, Business
Combinations, which requires allocation of the purchase price to the estimated fair values of the assets acquired and liabilities
assumed in the transaction.
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The final allocation of purchase price is as follows:
(in thousands)
Receivables, net of allowances of $34,191
Other current assets
Property and equipment
Goodwill
Intangible assets:
Customer relationships
Existing technologies
Trade names
Total intangible assets
Other non-current assets
Accounts payable
Deferred revenue (current)
Other current liabilities
Deferred revenue (non-current)
Total purchase price
Estimated
Weighted
Average
Useful Life
Allocation
Amount
$
226,207
20 years
10 years
5 years
8 years
46,682
158,324
532,327
371,000
201,990
39,990
612,980
5,212
(42,306)
(85,314)
(12,853)
(48,130)
$ 1,393,129
The intangible assets in the table above are being amortized on a straight-line basis over their estimated useful lives, with
such amortization included in amortization of acquisition-related intangibles in our consolidated statements of operations.
The fair value measurements of tangible and intangible assets and liabilities were based on significant inputs not observable
in the market and thus represent Level 3 measurements within the fair value measurement hierarchy. Level 3 inputs included,
among others, discount rates that we estimated would be used by a market participant in valuing these assets and liabilities,
projections of revenues and cash flows, client attrition rates, royalty rates, and market comparables.
Property and equipment was valued primarily using the sales comparison method, a form of the market approach, in which
the value is derived by evaluating the market prices of assets with comparable features such as size, location, condition and
age. Our analysis included multiple property categories, including land, buildings, and personal property and included
assumptions for market prices of comparable assets, and physical and economic obsolescence, among others.
Customer relationship intangible assets were valued using the excess earnings method, a form of the income approach, in
which the value is derived by estimation of the after-tax cash flows specifically attributable to the customer relationships. Our
analysis consisted of two customer categories, order backlog and existing customer relationships and included assumptions
for projections of revenues and expenses, contributory asset charges, discount rates, and a tax amortization benefit, among
others.
Existing technology and trade name intangible assets were valued using the relief from royalty method, a form of the income
approach, in which the value is derived by estimation of the after-tax royalty savings attributable to owning the assets.
Assumptions in these analyses included projections of revenues, royalty rates representing costs avoided due to ownership
of the assets, discount rates, and a tax amortization benefit.
Deferred revenue was valued using an income approach, in which the value was derived by estimation of the fulfillment cost,
plus a normal profit margin (which excludes any selling margin), for performance obligations assumed in the acquisition.
Assumptions included estimations of costs incurred to fulfill the obligations, profit margins a market participant would expect
to receive, and a discount rate.
The goodwill of $532 million was allocated among our Domestic and Global operating segments, and is expected to be
deductible for tax purposes. Refer to Note (7) for additional information on goodwill.
Our consolidated statements of operations include revenues of approximately $930 million attributable to the acquired
business (now referred to as "Cerner Health Services") in 2015. Disclosure of the earnings contribution from the Cerner
Health Services business in 2015 is not practicable, as we had already integrated operations in many areas.
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The following table provides unaudited pro forma results of operations for the years ended January 2, 2016 and January 3,
2015, as if the acquisition had been completed on the first day of our 2014 fiscal year.
(In thousands, except per share data)
Pro forma revenues
Pro forma net earnings
Pro forma diluted earnings per share
For the Years Ended
2015
2014
$ 4,518,947
$ 4,549,387
546,027
463,344
1.56
1.32
These pro forma results are based on estimates and assumptions, which we believe are reasonable. They are not the results
that would have been realized had we been a combined company during the periods presented, nor are they indicative of
our consolidated results of operations in future periods. The pro forma results for the 2015 year include pre-tax adjustments
for amortization of intangible assets, fair value adjustments for deferred revenue, and the elimination of acquisition costs of
$7 million, $6 million and $22 million, respectively. Pro forma results for the 2014 year include pre-tax adjustments for
amortization of intangible assets, fair value adjustments for deferred revenue, and elimination of acquisition costs of $86
million, $52 million, and $16 million respectively.
Lee's Summit Tech Center
On December 17, 2015, we purchased real estate interests, in-place tenant leases, and certain other assets associated with
the property commonly referred to as the Summit Technology Campus, located in Lee's Summit, Missouri. The acquired
property (now referred to as the "Lee's Summit Tech Center") consists of a 550,000 square foot multi-tenant office building.
We expect to utilize this space to support our data center and office space needs. Consideration for the Lee's Summit Tech
Center is expected to total $86 million, consisting of $85 million of up-front cash plus contingent consideration not to exceed
$1 million.
The acquisition of the Lee's Summit Tech Center was treated as a purchase in accordance with ASC Topic 805, Business
Combinations. The final allocation of purchase price resulted in the allocation of $86 million to property and equipment, net
in our consolidated balance sheets. The in-place tenant leases had a de minimis impact on the allocation of purchase price.
No goodwill resulted from the transaction.
InterMedHx
On April 1, 2014, we purchased 100% of the outstanding membership interests of InterMedHx, LLC (InterMedHx). InterMedHx
was 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 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 $12 million based on projections of revenue over the assessment period. We paid $2
million in both 2016 and 2015 to satisfy a portion of this contingent consideration obligation.
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 $17 million and $4 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.
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(3) Investments
Available-for-sale investments at the end of 2016 were as follows:
(In thousands)
Cash equivalents:
Money market funds
Time deposits
Total cash equivalents
Short-term investments:
Time deposits
Commercial paper
Government and corporate bonds
Total short-term investments
Long-term investments:
Government and corporate bonds
Total available-for-sale investments
Available-for-sale investments at the end of 2015 were as follows:
(In thousands)
Cash equivalents:
Money market funds
Time deposits
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
$
$
23,110
11,477
34,587
— $
—
—
— $
—
—
23,110
11,477
34,587
40,639
22,325
122,729
185,693
95,806
—
—
3
3
—
—
(24)
(84)
(108)
40,639
22,301
122,648
185,588
(438)
95,368
$
316,086
$
3
$
(546) $
315,543
Adjusted
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
$
126,752
$
— $
— $
126,752
5,677
73
132,502
30,989
1,500
78,655
111,144
156,527
$
400,173
$
—
—
—
—
—
20
20
14
34
—
—
—
—
(2)
(103)
(105)
5,677
73
132,502
30,989
1,498
78,572
111,059
(569)
155,972
$
(674) $
399,533
Investments reported under the cost method of accounting as of December 31, 2016 and January 2, 2016 were $12 million
and $16 million, respectively. Investments reported under the equity method of accounting as of December 31, 2016 and
January 2, 2016 were $2 million and $1 million, respectively.
We sold available-for-sale investments for proceeds of $245 million and $293 million in 2016 and 2015, respectively, resulting
in insignificant losses in each period.
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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 2016:
(In thousands)
Description
Balance Sheet Classification
Money market funds
Time deposits
Time deposits
Commercial paper
Government and corporate bonds
Government and corporate bonds
Cash equivalents
Cash equivalents
Short-term investments
Short-term investments
Short-term investments
Long-term investments
Fair Value Measurements Using
Level 2
Level 3
Level 1
$
23,110
—
—
—
—
—
$
— $
11,477
40,639
22,301
122,648
95,368
—
—
—
—
—
—
The following table details our financial assets measured and recorded at fair value on a recurring basis at the end of 2015:
(In thousands)
Description
Balance Sheet Classification
Money market funds
Time deposits
Government and corporate bonds
Time deposits
Commercial paper
Government and corporate bonds
Government and corporate bonds
Cash equivalents
Cash equivalents
Cash equivalents
Short-term investments
Short-term investments
Short-term investments
Long-term investments
Fair Value Measurements Using
Level 2
Level 3
Level 1
$
126,752
—
—
—
—
—
—
$
— $
5,677
73
30,989
1,498
78,572
155,972
—
—
—
—
—
—
—
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. We estimate the fair value of our long-term, variable rate debt using a Level
3 discounted cash flow analysis based on LIBOR rate forward curves. The fair value of our long-term debt, including current
maturities, at the end of 2016 and 2015 was approximately $515 million and $505 million, respectively. The carrying amount
of such debt at the end of both 2016 and 2015 was $500 million.
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(5) Receivables
Receivables consist of accounts receivable and the current portion of amounts due under sales-type leases. Accounts
receivable primarily 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.
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.
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
2016
2015
$
958,843
$ 1,043,069
43,028
48,119
915,815
994,950
29,128
39,134
$
944,943
$ 1,034,084
A reconciliation of the beginning and ending amount of our allowance for doubtful accounts is as follows:
(in thousands)
Allowance for doubtful accounts - beginning balance
Additions charged to costs and expenses
Additions through acquisitions
Deductions(a)
Allowance for doubtful accounts - ending balance
(a) Deductions in 2014 include a $14 million reclassification to other non-current assets.
2016
2015
2014
$
$
48,119
5,060
—
(10,151)
$
25,531
2,317
34,159
(13,888)
36,286
5,274
—
(16,029)
$
43,028
$
48,119
$
25,531
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
2016
2015
$
59,171
2,253
56,918
27,790
$
101,968
5,593
96,375
57,241
$
29,128
$
39,134
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Future minimum lease payments to be received under existing sales-type leases for the next five years are as follows:
(In thousands)
2017
2018
2019
2020
2021
$
30,180
14,155
10,343
3,983
510
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 December 31, 2016, 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 2016 and 2015. While the ultimate collectability of the receivables pursuant to this process is
uncertain, we believe that we have valid and equitable grounds for recovery of such amounts and that collection of recorded
amounts is probable. 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 2016 and 2015, we received total client cash collections of $5.2 billion and $4.4 billion, respectively.
(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
2016
2015
$ 1,363,799
961,550
226,471
102,151
3,197
1,398
$ 1,261,338
742,760
201,155
102,681
3,200
1,155
2,658,566
2,312,289
1,106,042
1,003,075
$ 1,552,524
$ 1,309,214
Depreciation and leasehold amortization expense for 2016, 2015 and 2014 was $246 million, $217 million and $163 million,
respectively.
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(7) Goodwill and Other Intangible Assets
The changes in the carrying amounts of goodwill were as follows:
(In thousands)
Balance at the end of 2014
Goodwill recorded in connection with the Cerner Health Services acquisition
Foreign currency translation adjustment and other
Balance at the end of 2015
Purchase price allocation adjustments for Cerner Health Services
Foreign currency translation adjustment and other
Balance at the end of 2016
A summary of net intangible assets is as follows:
(In thousands)
Purchased software
Customer lists
Internal use software
Trade names
Other
Total
Intangible assets, net
Domestic
Global
Total
$
311,170
$
9,368
$
320,538
419,667
—
730,837
51,827
—
65,720
(6,743)
68,345
(4,887)
(1,922)
485,387
(6,743)
799,182
46,940
(1,922)
$
782,664
$
61,536
$
844,200
2016
2015
Gross
Carrying
Amount
Accumulated
Amortization
Gross
Carrying
Amount
Accumulated
Amortization
$
368,174
$
225,754
$
370,073
$
469,353
153,750
495,328
87,966
40,583
44,844
$ 1,010,920
$
$
47,325
11,156
6,888
68,966
40,739
43,133
444,873
$ 1,018,239
566,047
$
$
168,024
115,325
36,062
5,690
5,080
330,181
688,058
Amortization expense for 2016, 2015 and 2014 was $118 million, $116 million and $36 million, respectively.
Estimated aggregate amortization expense for each of the next five years is as follows:
(In thousands)
2017
2018
2019
2020
2021
$
117,049
102,727
98,734
55,990
49,733
(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
2016
2015
2014
$
704,882
$
685,260
$
467,158
(293,696)
(264,656)
(177,800)
140,232
119,195
103,447
$
551,418
$
539,799
$
392,805
70
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01110100 01101111 01101101 01101111 01110010 01110010 01101111 01110111 00100000 01110100 01101111 01100100 01100001 011110018801110100 01101111 01101101 01101111 01110010 01110010 01101111 01110111 00100000 01110100 01101111 01100100 01100001 01111001 Table of Contents
Accumulated amortization as of the end of 2016 and 2015 was $1.1 billion and $1.0 billion, respectively.
(9) Long-term Debt and Capital Lease Obligations
The following is a summary of indebtedness outstanding:
(In thousands)
Senior Notes
Capital lease obligations
Other
Debt and capital lease obligations
Less: debt issuance costs
Debt and capital lease obligations, net
Less: current portion
Long-term debt and capital lease obligations
Senior Notes
$
2016
2015
$
500,000
50,444
13,921
564,365
(616)
563,749
(26,197)
500,000
92,416
13,450
605,866
(716)
605,150
(41,797)
$
537,552
$
563,353
In January 2015, we issued $500 million aggregate principal amount of unsecured Senior Notes ("Senior Notes"), pursuant
to a Master Note Purchase Agreement dated December 4, 2014. The issuance consisted of $225 million of 3.18% Series
2015-A Notes due February 15, 2022, $200 million of 3.58% Series 2015-B Notes due February 14, 2025, and $75 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. As of December 31, 2016, the interest rate for the current interest period was 1.90% based on the three-
month floating LIBOR rate. The debt issuance costs in the table above relate to the issuance of these Senior Notes. The
Master Note Purchase Agreement contains certain leverage and interest coverage ratio covenants and provides certain
restrictions on our ability to borrow, incur liens, sell assets, and other customary terms. Proceeds from the Senior Notes are
available for general corporate purposes.
Capital Leases
Our capital lease obligations are primarily related to the procurement of hardware and health care devices, and generally
have a term of five years.
Other
Other indebtedness includes estimated amounts payable through September 2025, under an agreement entered into in
September 2015.
Credit Facility
In October 2015, we amended and restated our revolving credit facility. The amended facility provides a $100 million unsecured
revolving line of credit for working capital purposes, which includes a letter of credit facility, expiring in October 2020. We
have the ability to increase the maximum capacity to $200 million at any time during the facility’s term, subject to lender
participation. 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 2016, we had no
outstanding borrowings under this facility; however, we had $32 million of outstanding letters of credit, which reduced our
available borrowing capacity to $68 million.
Covenant Compliance
As of December 31, 2016, we were in compliance with all debt covenants.
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Minimum annual payments under existing capital lease obligations and maturities of indebtedness outstanding at the end of
2016 are as follows:
(In thousands)
2017
2018
2019
2020
2021
2022 and thereafter
Total
(10) Contingencies
Capital Lease Obligations
Minimum
Lease
Payments
Less:
Interest
Principal
Senior
Notes
Other
Total
$
27,426
$
1,229
$
26,197
$
— $
— $
12,409
9,010
3,435
436
—
690
292
55
6
—
11,719
8,718
3,380
430
—
—
—
—
—
500,000
2,500
—
1,100
1,700
8,621
26,197
14,219
8,718
4,480
2,130
508,621
$
52,716
$
2,272
$
50,444
$
500,000
$
13,921
$
564,365
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 judgments or settlements to third parties related to these indemnification provisions
pertaining to intellectual property infringement claims. For several reasons, including the lack of a sufficient number 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 that arise in the ordinary course of business, including for example, employment and client disputes and litigation
alleging solution and implementation defects, personal injury, intellectual property infringement, violations of law and breaches
of contract and warranties. In addition, we are a defendant in lawsuits filed in federal and state courts brought as putative
class or collective actions on behalf of various groups of current and former associates in the U.S alleging that we misclassified
associates as exempt from overtime pay under the Fair Labor Standards Act and state wage and hour laws. These proceedings
are at various procedural stages and seek unspecified monetary damages, injunctive relief and attorneys’ fees. We do not
believe any material losses under these claims to be probable or estimable at this time.
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 one 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 business, results of
operations, cash flows or financial condition.
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(11) Other Income
A summary of other income is as follows:
(In thousands)
Interest income
Interest expense
Other
Other income, net
(12) Income Taxes
Income tax expense (benefit) for 2016, 2015 and 2014 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
2015
2014
2016
$
15,252
$
11,990
$
16,342
(4,479)
(3,352)
(11,820)
74
(3,993)
(1,259)
$
7,421
$
244
$
11,090
For the Years Ended
2016
2015
2014
$
252,795
$
140,921
$
114,508
31,642
9,030
18,647
17,205
13,504
13,824
293,467
176,773
141,836
(18,014)
(2,103)
8,600
60,015
5,680
(450)
95,057
8,873
2,975
(11,517)
65,245
106,905
$
281,950
$
242,018
$
248,741
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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 2016 and 2015 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
Total deferred tax assets
Deferred tax liabilities:
Software development costs
Depreciation and amortization
Prepaid expenses
Contract and service revenues and costs
Other
Total deferred tax liabilities
Net deferred tax liability
2016
2015
$
25,454
$
27,762
81,133
59,217
9,723
27,555
29,265
69,555
—
16,334
203,289
142,709
(275,888)
(133,424)
(30,255)
—
(3,050)
(216,435)
(133,242)
(25,655)
(10,684)
(3,589)
(442,617)
(389,605)
$ (239,328) $ (246,896)
At the end of 2016, we had net operating loss carry-forwards subject to Section 382 of the Internal Revenue Code for U.S.
federal income tax purposes of $4 million that are available to offset future U.S. federal taxable income, if any, through 2020.
We had net operating loss carry-forwards from foreign jurisdictions of $37 million that are available to offset future taxable
income with no expiration. We had a deferred tax asset for state net operating loss carry-forwards of $1 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 $13 million available to offset income tax liabilities through 2030, and a foreign jurisdiction tax credit carry-forward available
to offset future tax liabilities of $1 million through 2027. We expect to fully utilize the net operating loss and tax credit carry-
forwards in future periods.
At the end of 2016, we had not provided tax on the cumulative undistributed earnings of our foreign subsidiaries of
approximately $111 million, because it is our intention to reinvest these earnings indefinitely. If these earnings were distributed,
we would be subject to U.S. federal and state income 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 2016, 2015, and 2014 were 31%, 31%, and 32%, respectively. These effective rates differ
from the U.S. federal statutory rate of 35% as follows:
(In thousands)
Tax expense at statutory rates
State income tax, net of federal benefit
Tax credits
Foreign rate differential
Permanent differences
Other, net
Total income tax expense
For the Years Ended
2015
2014
2016
$
321,452
$
273,483
$
270,961
22,644
(23,881)
(16,468)
(20,330)
(1,467)
16,129
(20,681)
(14,821)
(14,314)
2,222
19,301
(19,469)
(13,057)
(12,253)
3,258
$
281,950
$
242,018
$
248,741
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
Gross increases - tax positions in current year
Settlements
Currency translation
2016
2015
2014
$
4,878
$
7,202
$
—
—
6,945
(1,859)
(195)
(4,323)
690
2,824
(1,299)
(216)
2,100
(804)
5,906
—
—
—
Unrecognized tax benefit - ending balance
$
9,769
$
4,878
$
7,202
If recognized, $6 million of the unrecognized tax benefit will favorably impact our effective tax rate. We do not anticipate that
our unrecognized tax benefits will decrease significantly within the next twelve months. During 2016, we filed amended
federal returns for 2011, 2012 and 2013. Our 2011 through 2014 federal returns are currently under examination by the
Internal Revenue Service. We have various state and foreign returns under examination.
The ending amounts of accrued interest and penalties related to unrecognized tax benefits were less than $1 million in 2016
and $1 million in 2015. We classify interest and penalties as income tax expense in our consolidated statement of operations.
The foreign portion of our earnings before income taxes was $86 million, $83 million, and $68 million in 2016, 2015, and
2014 respectively, and the remaining portion was domestic.
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(13) Earnings Per Share
A reconciliation of the numerators and the denominators of the basic and diluted per share computations are as follows:
Earnings
2016
Shares
Per-Share
Earnings
2015
Shares
Per-Share
Earnings
2014
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
Effect of dilutive securities:
Stock options and non-vested
shares
Diluted earnings per share:
Income available to common
shareholders including assumed
conversions
$
636,484
337,740
$
1.88
$
539,362
343,178
$
1.57
$
525,433
342,150
$
1.54
—
5,913
—
7,730
—
8,236
$
636,484
343,653
$
1.85
$
539,362
350,908
$
1.54
$
525,433
350,386
$
1.50
Options to purchase 9.4 million, 2.9 million and 5.7 million shares of common stock at per share prices ranging from $47.38
to $73.40, $50.04 to $73.40 and $44.05 to $66.10, were outstanding at the end of 2016, 2015 and 2014, respectively, but
were not included in the computation of diluted earnings per share because they were anti-dilutive.
(14) Share-Based Compensation and Equity
Stock Option and Equity Plans
As of the end of 2016, 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 2016, 17.4 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 granted in 2016 is estimated on the date of grant using the Black-Scholes-
Merton (BSM) pricing model. The pricing model requires the use of the following estimates and assumptions:
•
•
•
Expected volatilities under the BSM model are based on an equal weighting of implied volatilities from traded options
on our common shares and historical volatility.
The expected term of stock options granted is the period of time for which an option is expected to be outstanding
beginning on the grant date. Our calculation of expected term takes into account the contractual term of the option,
as well as the effects of employees' historical exercise patterns; groups of associates (executives and non-executives)
that have similar historical behavior are considered separately for valuation purposes.
The risk-free rate is based on the zero-coupon U.S. Treasury bond with a term consistent with the expected term of
the awards.
The weighted-average assumptions used to estimate the fair market value of stock options were as follows:
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(13) Earnings Per Share
Basic earnings per share:
Income available to common
shareholders
Effect of dilutive securities:
Stock options and non-vested
shares
Diluted earnings per share:
Income available to common
shareholders including assumed
A reconciliation of the numerators and the denominators of the basic and diluted per share computations are as follows:
Earnings
Per-Share
Earnings
Per-Share
Earnings
Per-Share
2015
Shares
2014
Shares
2016
Shares
(In thousands, except per share data)
(Numerator)
(Denominator)
Amount
(Numerator)
(Denominator)
Amount
(Numerator)
(Denominator)
Amount
$
636,484
337,740
$
1.88
$
539,362
343,178
$
1.57
$
525,433
342,150
$
1.54
—
5,913
—
7,730
—
8,236
conversions
$
636,484
343,653
$
1.85
$
539,362
350,908
$
1.54
$
525,433
350,386
$
1.50
Options to purchase 9.4 million, 2.9 million and 5.7 million shares of common stock at per share prices ranging from $47.38
to $73.40, $50.04 to $73.40 and $44.05 to $66.10, were outstanding at the end of 2016, 2015 and 2014, respectively, but
were not included in the computation of diluted earnings per share because they were anti-dilutive.
(14) Share-Based Compensation and Equity
Stock Option and Equity Plans
As of the end of 2016, 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 2016, 17.4 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 granted in 2016 is estimated on the date of grant using the Black-Scholes-
Merton (BSM) pricing model. The pricing model requires the use of the following estimates and assumptions:
• Expected volatilities under the BSM model are based on an equal weighting of implied volatilities from traded options
on our common shares and historical volatility.
• The expected term of stock options granted is the period of time for which an option is expected to be outstanding
beginning on the grant date. Our calculation of expected term takes into account the contractual term of the option,
as well as the effects of employees' historical exercise patterns; groups of associates (executives and non-executives)
that have similar historical behavior are considered separately for valuation purposes.
• The risk-free rate is based on the zero-coupon U.S. Treasury bond with a term consistent with the expected term of
the awards.
Table of Contents
The weighted-average assumptions used to estimate the fair market value of stock options were as follows:
Expected volatility (%)
Expected term (yrs)
Risk-free rate (%)
76
Stock option activity for 2016 was as follows:
(In thousands, except per share data)
Outstanding at beginning of year
Granted
Exercised
Forfeited and expired
Outstanding at end of year
Exercisable at end of year
(In thousands, except for grant date fair values)
Weighted-average grant date fair values
Total intrinsic value of options exercised
Cash received from exercise of stock options
Tax benefit realized upon exercise of stock options
For the Years Ended
2016
2015
2014
29.4%
7
1.5%
27.6%
7
1.8%
29.7%
9
2.9%
Weighted-
Average
Exercise
Price
Aggregate
Intrinsic
Value
Number of
Shares
Weighted-
Average
Remaining
Contractual
Term (Yrs)
$
24,267
4,133
(4,053)
(746)
23,601
34.46
55.14
17.46
55.71
40.33
$ 280,586
12,662
$
26.19
$ 275,484
6.00
4.14
For the Years Ended
2015
2014
2016
$
$
18.31
177,375
$
$
21.51
196,127
$
$
22.59
124,828
63,794
64,347
51,475
66,868
31,879
44,029
As of the end of 2016, there was $150 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 3.18 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.
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Non-vested share activity for 2016 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
$
557
58
(216)
(45)
354
$
59.42
57.22
53.74
70.37
61.12
For the Years Ended
2015
2014
2016
$
$
57.22
12,221
$
$
68.57
13,730
$
$
55.27
11,294
As of the end of 2016, there was $8 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 1.82 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 U.S. 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.
Share-Based Compensation Cost
Our stock option and non-vested share awards qualify for equity classification. The costs of our ASPP, along with participant
contributions, are recorded as a liability until open market purchases are completed. The amounts recognized in the
consolidated statements of operations with respect to stock options, non-vested shares and ASPP are as follows:
(In thousands)
Stock option and non-vested share compensation expense
Associate stock purchase plan expense
Amounts capitalized in software development costs, net of amortization
Amounts charged against earnings, before income tax benefit
Amount of related income tax benefit recognized in earnings
For the Years Ended
2015
2014
2016
$
74,536
$
70,121
$
59,292
6,537
(482)
5,393
(588)
4,603
(930)
$
$
80,591
24,749
$
$
74,926
23,435
$
$
62,965
22,101
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Preferred Stock
As of the end of 2016 and 2015, we had 1.0 million shares of authorized but unissued preferred stock, $0.01 par value.
Treasury Stock
In March 2016, our Board of Directors authorized a share repurchase program that allowed the Company to repurchase
shares of our common stock up to $300 million, excluding transaction costs. That program was completed in November
2016. In November 2016, our Board of Directors authorized a new share repurchase program that allows the Company to
repurchase shares of our common stock up to $500 million, excluding transaction costs. No time limit was set for the completion
of the current program. During 2016, we repurchased 13.7 million shares for total consideration of $700 million under these
programs. The shares were recorded as treasury stock and accounted for under the cost method. No repurchased shares
have been retired. At December 31, 2016, $100 million remains available for repurchase under the outstanding program.
In September 2015, our Board of Directors authorized a share repurchase program that allowed the Company to repurchase
shares of our common stock up to $245 million, excluding transaction costs. During 2015, we repurchased 4.1 million shares
for total consideration of $245 million under the program. These shares were recorded as treasury stock and accounted for
under the cost method. No repurchased shares have been retired. This program is now complete.
In December of 2013, our Board of Directors authorized a share repurchase program that allowed the Company to repurchase
shares of our common stock up to $217 million, excluding transaction costs. In May 2014, our Board of Directors approved
an amendment to the repurchase program that was authorized in December 2013. Under the amendment, the Company
was authorized to repurchase shares of our common stock up to an additional $100 million, for an aggregate of $317 million,
excluding transaction costs. Under this program, we repurchased 1.6 million shares for total consideration of $100 million,
and 4.1 million shares for total consideration of $217 million, in 2015 and 2014, respectively. These shares were recorded
as treasury stock and accounted for under the cost method. No repurchased shares have been retired. This program is now
complete.
(15) Foundations Retirement Plan
The Cerner Corporation Foundations Retirement Plan (the Plan) was established under Section 401(k) of the Internal Revenue
Code. All associates age 18 and older and who are not a member of an excluded class are eligible to participate. Participants
may elect to make pre-tax and Roth (post-tax) 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 $28 million, $30 million and $18 million for 2016, 2015 and 2014,
respectively.
The Plan also provides for a second tier matching contribution that is purely discretionary, the payment of which will depend
on overall Company performance and other conditions. If approved by the Compensation Committee, contributions by the
Company will be tied to attainment of established financial metric goals, such as earnings per share for the year. 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, if any such second tier
matching contribution is approved by the Compensation Committee. For the years ended 2016, 2015 and 2014 we expensed
$8 million, $7 million and $5 million for the second tier discretionary distributions, respectively.
(16) 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.
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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 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 million of incentives are described below:
Cash Grants - In January 2014 we received $48 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 $49 million (the $48 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 $49 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 million.
We recorded the cash grants as an obligation/liability at $48 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 2016, the obligation/liability
balance was $28 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 were not required to remit an aggregate of $11 million of sales tax on these capital
purchases.
State Income Tax Credits - We expect state income tax credits to aggregate $19 million. Such credits are available to offset
our Kansas state income tax, and are being 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, was 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 million appraisal
value.
GRAND Construction, LLC
GRAND Construction, LLC ("Grand") is a limited liability company owned in part by an entity controlled by Messrs. Patterson
and Illig. Grand has historically provided construction management and related services to the Company in connection with
our office campuses, for which we paid $2 million in both 2016 and 2015.
(17) Commitments
Leases
We are committed under operating leases primarily for office and data center space and computer equipment through October
2027. Rent expense for office and warehouse space for our regional and global offices for 2016, 2015 and 2014 was $29
million, $32 million and $25 million, respectively. Aggregate minimum future payments under these non-cancelable operating
leases are as follows:
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Illig.
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
The Company currently estimates it will receive incentives in the aggregate of $82 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 million of incentives are described below:
Cash Grants - In January 2014 we received $48 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 $49 million (the $48 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 $49 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 million.
We recorded the cash grants as an obligation/liability at $48 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 2016, the obligation/liability
balance was $28 million, the majority of which is included in deferred income taxes and other liabilities in our consolidated
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 were not required to remit an aggregate of $11 million of sales tax on these capital
State Income Tax Credits - We expect state income tax credits to aggregate $19 million. Such credits are available to offset
our Kansas state income tax, and are being recognized as a reduction of income tax expense as we are eligible to claim
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, was 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 million appraisal
balance sheets.
purchases.
them.
value.
GRAND Construction, LLC
GRAND Construction, LLC ("Grand") is a limited liability company owned in part by an entity controlled by Messrs. Patterson
and Illig. Grand has historically provided construction management and related services to the Company in connection with
our office campuses, for which we paid $2 million in both 2016 and 2015.
(17) Commitments
Leases
Table of Contents
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 2016, 2015 and 2014 was $29
million, $32 million and $25 million, respectively. Aggregate minimum future payments under these non-cancelable operating
leases are as follows:
80
(In thousands)
2017
2018
2019
2020
2021
2022 and thereafter
Operating
Lease
Obligations
$
30,089
26,898
22,041
16,085
11,147
8,722
$
114,982
Table of Contents
Other Obligations
We have purchase commitments with various vendors, and minimum funding commitments under collaboration agreements
through 2037. Aggregate future payments under these commitments are as follows:
(In thousands)
2017
2018
2019
2020
2021
2022 and thereafter
Purchase
Obligations
$
83,002
41,887
19,205
7,677
3,711
26,890
$
182,372
Siemens Innovation Alliance
Concurrently with the execution of the MSPA, we entered into an agreement with Siemens AG 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 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.
In 2016 and 2015, we contributed $3 million and less than $1 million, respectively, to fund approved projects.
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Table of Contents
(18) Segment Reporting
We have two operating segments, Domestic and Global. Revenues are derived primarily from the sale of clinical, financial
and administrative information systems and solutions. The cost of revenues includes the cost of third party consulting services,
computer hardware, devices and sublicensed software purchased from manufacturers for delivery to clients. It also includes
the cost of hardware maintenance and sublicensed software support subcontracted to the manufacturers. Operating expenses
incurred by the geographic business segments consist of sales and client service expenses including salaries of sales and
client service personnel, expenses associated with our managed services business, marketing expenses, communications
expenses and unreimbursed travel expenses. “Other” includes expenses that have not been allocated to the operating
segments, such as software development, general and administrative expenses, acquisition costs and related adjustments,
share-based compensation expense, and certain amortization and depreciation. Performance of the segments is assessed
at the operating earnings level by our chief operating decision maker, who is our Chief Executive Officer. 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 2016, 2015 and 2014:
(In thousands)
2016
Revenues
Cost of revenues
Operating expenses
Total costs and expenses
Operating earnings (loss)
(In thousands)
2015
Revenues
Cost of revenues
Operating expenses
Total costs and expenses
Operating earnings (loss)
(In thousands)
2014
Revenues
Cost of revenues
Operating expenses
Total costs and expenses
Operating earnings (loss)
Domestic
Global
Other
Total
$ 4,245,097
$
551,376
$
— $ 4,796,473
676,437
1,774,146
2,450,583
102,679
246,243
348,922
—
1,085,955
1,085,955
779,116
3,106,344
3,885,460
$ 1,794,514
$
202,454
$(1,085,955) $
911,013
Domestic
Global
Other
Total
$ 3,904,454
$
520,813
$
— $ 4,425,267
651,826
1,577,594
2,229,420
98,955
233,047
332,002
—
750,781
1,082,709
2,893,350
1,082,709
3,644,131
$ 1,675,034
$
188,811
$(1,082,709) $
781,136
Domestic
Global
Other
Total
$ 3,021,790
$
380,913
$
— $ 3,402,703
542,210
1,163,413
1,705,623
62,167
182,965
245,132
—
688,864
688,864
604,377
2,035,242
2,639,619
$ 1,316,167
$
135,781
$ (688,864) $
763,084
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(19) Quarterly Results (unaudited)
Selected quarterly financial data for 2016 and 2015 is set forth below:
(In thousands, except per share data)
2016
First Quarter
Second Quarter
Third Quarter
Fourth Quarter (a)
Total
Earnings
Before
Income
Taxes
Revenues
Net
Earnings
Basic
Earnings
Per Share
Diluted
Earnings
Per Share
$ 1,138,135
$
217,129
$
150,360
$
0.44
$
1,215,962
243,782
166,454
1,184,557
241,808
169,979
1,257,819
215,715
149,691
$ 4,796,473
$
918,434
$
636,484
0.49
0.50
0.45
0.43
0.48
0.49
0.44
(a) Fourth quarter results include pre-tax costs related to the 2016 VSP of $36 million as further described in Note (1).
(In thousands, except per share data)
2015
First Quarter (b)
Second Quarter (b)(c)
Third Quarter (b)(c)
Fourth Quarter (b)(c)
Total
Earnings
Before
Income
Taxes
Revenues
Net
Earnings
Basic
Earnings
Per Share
Diluted
Earnings
Per Share
$
996,089
$
167,120
$
110,934
$
0.32
$
1,125,997
170,657
115,038
1,127,887
215,671
147,282
1,175,294
227,932
166,108
$ 4,425,267
$
781,380
$
539,362
0.33
0.43
0.49
0.32
0.33
0.42
0.48
(b) First through Fourth quarter results include pre-tax acquisition costs of $17 million, $3 million, $1 million and $1 million, respectively, as further described in Note (2).
(c) Second through Fourth quarter results include pre-tax costs related to the 2015 VSP of $42 million, $3 million and $1 million, respectively, as further described in Note (1).
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$200
$150
$100
$50
$0
12/11
Comparison of 5 Year Cumulative Total Return
12/12
12/13
12/14
12/15
12/16
Cerner Corporation
ICB: 9533 Computer Services (Subsector) Index
Standard & Poor's 500 Index
NASDAQ US Benchmark TR Index
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ANNUAL SHAREHOLDERS’ MEETING
The Annual Shareholders’ Meeting will be held at 10:00 a .m . local time on Wednesday, May 24, 2017,
at 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, together with our
Proxy Statement and Proxy Card, will be available to each shareholder of record as of March 29, 2017 .
ANNUAL REPORT/FORM 10-K
Publications of interest to current and potential Cerner investors (including our quarterly reports
on Form 10-Q and annual reports on Form 10-K, which are filed with the Securities and Exchange
Commission) are available at no charge to shareholders. To obtain copies of these materials, you can
access them at www.cerner.com/about/Investor_Relations/ or send a written request 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 our transfer agent and
registrar, Computershare Trust Company, N .A . at 1-800-884-4225 .
TRANSFER AGENT AND REGISTRAR
Computershare Trust Company, N .A .
P .O . Box 30170
College Station, TX 77842-3170
1-800-884-4225
STOCK LISTINGS
Cerner Corporation’s common stock trades on the NASDAQ Global Select Market SM under the
symbol CERN .
INDEPENDENT ACCOUNTANTS
KPMG LLP
Kansas City, MO
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