Cerner
Annual Report 2018

Plain-text annual report

What’s next changes everything. 201 8 ANN UAL RE PORT Sick care / Well care Health system data / Consumer-directed data Volume / Value Patient / Consumerion / Intelligent insights Patient / Consumer Retrospective analytics / Predictive analytics Manual data entry Volume / Value Generic/ Precision Packaged software / Continuously deployed Reactive / Proactive Health system chart / Longitudinal record & plan Care fragmentation / Coordinated care Patient / Consumer Generic care cision medicine Managed software / Continuously deployed Reactive / Proactive Health system chart / Longitudinal record & plan Health system data / Consumer-directed data Seamless record & plan Digitization / Intelligent insights Manual data entry / Virtual assistants Volume Manual / Virtual assistants Retrospective analytics / Predictive analytics Generic care plans / Precision medicine Packaged software / Continuously Collected data Patient / Consumer Digitization / Intelligent insights Reactive Population health / Personalized health Health system chart Longitudinal record & plan system data / Consumer-directed data Health system chart / Seamless record & plan Care fragmentation / Coordinated care Cerner Corporation 2018 Annual Report F or 40 years, Cerner has connected people and systems around the improve health care world to outcomes. As we enter the next era of health care, our commitment to seeking innovation remains stronger than ever. We understand care profoundly affects people’s everyday lives; that’s why we constantly work to help create a seamless and connected world where everyone thrives. We help shape the future of health care by delivering value to our clients through data-driven insights and intelligent solutions. Sick care / Well care Health system data / Consumer-directed data Volume / Value Patient / Consumerion / Intelligent insights Patient / Consumer Retrospective analytics / Predictive analytics Manual data entry Volume / Value Generic/ Precision Packaged software / Continuously deployed Reactive / Proactive Health system chart / Longitudinal record & plan Care fragmentation / Coordinated care Patient / Consumer Generic care cision medicine Managed software / Continuously deployed Reactive / Proactive Health system chart / Longitudinal record & plan Health system data / Consumer-directed data Seamless record & plan Digitization / Intelligent insights Manual data entry / Virtual assistants Volume Manual / Virtual assistants Retrospective analytics / Predictive analytics Generic care plans / Precision medicine Packaged software / Continuously Collected data Patient / Consumer Digitization / Intelligent insights Reactive Population health / Personalized health Health system chart Longitudinal record & plan system data / Consumer-directed data Health system chart / Seamless record & plan Care fragmentation / Coordinated care Cerner Corporation 2018 Annual Report Table of Contents: Annual Report 2018 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Form 10-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Business and Industry Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16 Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24 Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40 Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . .42 Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 Reports of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 Consolidated Statements of Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 Consolidated Statements of Changes in Shareholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 Basis of Presentation, Nature of Operations and Summary of Significant Accounting Policies . . . . 69 Revenue Recognition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 Fair Value Measurements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 Property and Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 Goodwill and Other Intangible Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 Software Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 Long-term Debt and Capital Lease Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 Contingencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 Other Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 Earnings Per Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 Share-Based Compensation and Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 Foundations Retirement Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 Segment Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 Quarterly Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 Stock Price Performance Graph . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .94 Corporate Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 1 Board of Directors Brent Shafer Chairman of the Board and Chief Executive Officer, Cerner Corporation Gerald E. Bisbee Jr., Ph.D., M.B.A. Co-founder and Executive Chairman, The Health Management Academy Denis A. Cortese, M.D. Emeritus President and Chief Executive Officer, Mayo Clinic Mitchell E. Daniels Jr., J.D. President, Purdue University Linda M. Dillman Former Chief Information Officer, QVC, Inc. Julie L. Gerberding, M.D., M.P.H. Executive Vice President and Chief Patient Officer, Strategic Communications, Global Public Policy and Population Health, Merck & Co., Inc. John J. Greisch, M.B.A. Former President and Chief Executive Officer, Hill-Rom Holdings, Inc. Melinda J. Mount, M.B.A. Former President, AliphCom, Inc. (d/b/a Jawbone) George A. Riedel, M.B.A. Former Chairman and Chief Executive Officer, Cloudmark, Inc. R. Halsey Wise, M.B.A. Founder, Chairman and Chief Executive Officer, Lime Barrel Advisors, LLC William D. Zollars Former Chairman, President and Chief Executive Officer, YRC Worldwide, Inc. 2 Leadership Brent Shafer Chairman of the Board and Chief Executive Officer 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 and Chief Client Officer Randy D. Sims Executive Vice President, Chief Legal Officer and Secretary Jeffrey A. Townsend Executive Vice President and Chief of Innovation Donald D. Trigg Executive Vice President, Strategic Growth Julia M. Wilson Executive Vice President and Chief People Officer Joanne M. Burns Senior Vice President and Chief Strategy Officer Travis S. Dalton Senior Vice President and President, Cerner Government Services John P. Glaser Senior Vice President and Executive Advisor Emil E. Peters Senior Vice President and President, Cerner Global Michael R. Battaglioli Vice President and Chief Accounting Officer 3 Cerner’s Long-Term Performance Cerner’s Long-Term Performance This table provides a view of our growth over the last decade and since we first became a publicly traded company in 1986. This table provides a view of our growth over the last decade and since we first became a publicly traded company in 1986. 1986 2008 2018 2008–2018 1986–2018 Compound Annual Growth Rates Previous Decade Since Going Public Bookings Revenue Domestic Revenue Global Revenue Revenue Backlog $18 $17 $17 $1,539 $6,721 $1,676 $5,366 $1,307 $4,730 $0.2 $369 $636 $11 $3,489 $15,254 Operating Earnings (GAAP) $3 $279 $775 Operating Margin (GAAP) 14.8% 16.6% 14.4% Net Earnings (GAAP) $2 $189 Diluted Earnings Per Share (GAAP) $0.01 $0.57 $630 $1.89 Adjusted Operating Earnings1 $3 $273 $1,011 Adjusted Operating Margin1 Adjusted Net Earnings1 14.8% $2 16.6% $183 18.8% $819 Adjusted Diluted Earnings Per Share1 $0.01 $0.55 $2.45 Total Assets $26 $1,881 $6,709 Cash and Investments Days Sales Outstanding Total Debt Equity Operating Cash Flow Free Cash Flow1 Capital Expenditures Research and Development $8 161 $1 $16 $1 -$1 $1 $2 $414 $1,075 92 79 $141 $444 $1,311 $4,928 $282 $1,454 $104 $733 $108 $291 $447 $747 Associate Headcount 149 7,547 29,227 Cerner Stock Price Market Capitalization NASDAQ Composite Index S&P 500 Index $0.24 $9.61 $52.44 $45 349 242 $3,144 $16,867 1,577 6,635 903 2,507 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 h s a C w o F l t n e m t s e v n I t e k r a M h t w o r G e c n a m r o f r e P NOTES 16% 12% 14% 6% 16% 11% 13% 13% 14% 16% 16% 14% 10% -2% 12% 14% 18% 22% 15% 10% 14% 18% 18% 15% 11% 20% 20% 19% 29% 25% 19% 20% 18% 20% 21% 19% 19% 17% -2% 21% 20% 26% NM 21% 20% 18% 18% 20% 10% 8% Amounts are in millions except diluted earnings per share, adjusted diluted earnings per share, associate headcount, stock prices and index information. Free Cash Flow represents cash flows from operating activities less capital purchases and capitalized software development costs. NM = Not Meaningful 1Adjusted 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 1Adjusted operating earnings, adjusted operating margin, adjusted net earnings, adjusted diluted earnings per share, and free cash flow reflect performance. These non-GAAP financial measures are used by management along with GAAP results to analyze our business, to make strategic adjustments compared to results reported on a Generally Accepted Accounting Principles (GAAP) basis. Non-GAAP results should not be substituted decisions, to assess long-term trends on a comparable basis, and for management compensation purposes. Please see the appendix following as a measure of our performance but instead should be used along with GAAP results as a supplemental measure of financial performance. These “A Letter to Our Shareholders, Clients and Associates” for a reconciliation of these items to GAAP results. non-GAAP financial measures 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 4 A Letter to Our Shareholders, Clients and Associates 2018 was an eventful and important year. I joined Cerner at the beginning of February 2018, and proudly took the reins from co- founder, Cliff Illig (more on Cliff later in the letter). After nearly 30 years of health care industry experience and a core philosophy around client focus, my first imperative was to quickly gain an understanding of the business and listen to key constituents— Cerner clients, associates, partners, and, of course, shareholders. As a result of these conversations and recognizing the vast opportunity in front of Cerner, we made some changes to fortify the company to speed innovation, create more value for our clients and drive profitable growth. Health care is extremely complex, with rapidly changing economic, demographic, political and technical dynamics. With a presence in more than 35 countries globally, we’re proud of the role we’ve played in digitizing the world’s Electronic Health Records (EHRs) and honored to maintain relationships with more health care providers around the world than any other supplier. Cerner® platforms are accessed daily by nearly three million clinicians and non-provider users and contain information on more than 200 million lives. We have more than 27,500 contracted provider 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. Our mission is to relentlessly seek breakthrough innovation—in the core EHR and beyond—that will shape the health care of tomorrow. During my conversations with clients over the past year, I was repeatedly told how Cerner solutions were advancing their businesses—and they urged us to go faster because our solutions are important to them and their patients. We were humbled and honored to win the U.S. Department of Veterans Affairs (VA) 10-year, $10 billion opportunity to digitize health records for the VA. There will be more about the VA later in this letter, but this represents the largest integrated health system in the U.S. In 2018, we grew bookings (value of contracts signed during the year) by 6% and total revenue by 4%. The non-U.S. revenue component grew at a healthy rate of 12%. Both our revenue and earnings were below expectations that had been established at the beginning of the year. The main drivers of this were a slowdown in our core EHR market and the VA contract signing later than we expected. Our results, combined with a poor year for the broader stock market, led to a 22% decline in our stock price for 2018. While we did deliver within a revised guidance range that we provided shortly after I joined, I was not pleased with our overall performance and expect us to deliver better results. Driving improved results will be our primary goal as we move forward. After considerable strategic planning work in 2018 and distilling the information gathered on my listening tour, an important first step was to cement Cerner’s brand promise: Health care is too important to stay the same.™ There was considerable portfolio management work done in 2018 where we carefully evaluated Cerner solutions and made determinations about further investment or divestment. Additionally, we are refining our operating model to position Cerner to capitalize on growth opportunities, while also operating more efficiently and delivering value to clients faster. We are past the era of direct incentives for EHR use that was a catalyst for our industry. During this “Meaningful Use” era incentive payments were provided to health care providers that could demonstrate they were “meaningfully using” EHRs. Since the majority of major health systems have already adopted EHRs, we need to organize around growth in new markets while also operating more efficiently in our core market. We believe this an achievable goal for our company. Over the past ten years, Cerner’s revenue has grown 220% to $5.37 billion. Said a different way, Cerner’s compound annual growth rate (CAGR) for revenue over the past 10 years is 12%. The CAGRs for GAAP EPS and Adjusted EPS over the same period are 13% and 16%, respectively. 5 Cerner Revenue 5.37 5.14 4.80 4.43 3.40 2.91 2.67 2.20 1.85 1.67 $6B $5B $4B $3B $2B $1B 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 This track record of growth has garnered Cerner a 25% acute care market share in the U.S. EHR business and the largest share globally. As the domestic EHR market has matured into a replacement market, Cerner has an opportunity to capture efficiencies with its structural advantage to penetrate other, adjacent markets. is estimated that global spending on health care IT is approximately $280 billion. Our vision has always extended well beyond the base level It of digitization that now exists in health care. We are now in an era where we have an opportunity to play a significant role in leveraging data to materially impact quality and costs in health care and doing so brings us to bigger addressable markets. As Neal Patterson, the late co-founder and former Cerner CEO would say, “the intersection of health care and information technology is a great place to wake up every morning.” Areas of Growth Total Health Care IT Spend: $280B $87B $30B $40B $45B $48B $20B $280B $75B $50B $25B Telehealth Analytics & AI EHR Pop Health Management IT Outsourcing Rev Cycle Management Source: Markets & Markets HIT Global Forecast (2017) Cerner will leverage its legacy of innovation and disruption to drive growth in new markets and tackle the world’s health care challenges in support of patients, clinicians and populations. Cerner associates—at all levels of the company—are eager to continue our extraordinary heritage of relentless innovation and deliver a new dawn of discovery and growth to shape the health care of tomorrow. 6 2018 Highlights U.S. Department of Veterans Affairs Signs $10B Contract with Cerner to Digitize Health Records The VA is the largest medical system in the U.S., serving nine million people. As the son of a Veteran, I am immensely proud of the opportunity we have been given to provide transitioning service members veterans, and their care providers access to their medical history through a modern EHR. Using technology that has been deployed successfully at U.S. Department of Defense (DoD) medical facilities and thousands of global provider sites, Cerner plans to modernize the VA’s EHR systems and promote interoperability of medical data across the VA’s high-performing integrated network, including VA facilities, community providers and DoD facilities. As the EHR provider for both the VA and DoD, Cerner will modernize technology and help improve health care for nearly 20 million Americans. Sweden Chooses Cerner as IT Health Solution to Support Nearly Three Million People Region Skäne and Västra Götalands Regionen, two regions of Sweden representing nearly one-third of the country, signed agreements to use Cerner’s solutions to replace existing IT systems in 17 hospitals and over 200 primary care facilities across 49 municipalities. This also represents Cerner’s first Nordic population health footprint, with an opportunity to positively impact the health of nearly three million people through the use of Cerner’s HealtheIntent® platform. launched a new offering, Maestro Advantage™, for value-based arrangements, including Medicare Advantage and provider-sponsored health plans. Maestro Advantage combines Cerner’s EHR-agnostic platform HealtheIntent, Cerner and Lumeris technology-enabled services and Lumeris’ accountable primary care model. Maestro Advantage enables health systems to create sustainable, value- based care programs tied to better health outcomes, improved clinical quality and lower total cost of care. These three examples are just a few of the many successes contributing to Cerner’s long-term growth opportunity. While the EHR market is mature, there are approximately 1,900 acute facilities that remain on legacy EHR platforms. This group represents nearly 1,100 health system potential buying decisions or collectively 20% of U.S. health care. We believe Cerner is well-positioned to participate in this replacement opportunity. Realigned for Growth As an overall leadership team, we spent much of 2018 assessing market opportunities, listening to clients, reviewing internal processes, and evaluating our profitability and capital allocation strategy. As a result of considerable strategic planning, we have four commitments that shape Cerner’s focus going forward. We believe that delivering on these client-facing commitments will drive growth and improved profitability for the company. 1) We must relentlessly advance our clients’ successes 2) We will imagine, design and implement intelligent health networks Cerner Invests $266M in Lumeris to Tackle Inefficiencies in Value-based Care 3) We will focus on better health care experiences and outcomes In July, Cerner announced a 10-year partnership with Lumeris—an organization that has more than 10 years of experience operating one of the highest performing Medicare Advantage plans in the country and a proven model for helping health systems launch their own provider- sponsored health plans. The significance of this investment relates to the megatrends of Population Health (a $45 billion market opportunity) and the aging of America. In the Fall of 2018, the Cerner-Lumeris collaboration 4) We will become the partner of choice for health care innovation While there’s overlap in these commitments, they serve as our North Star as we embrace a new beginning. Organizationally, we needed to more optimally align Cerner’s internal structure to maximize success relative to these commitments. The team spent a great deal of time working to create better resource alignment and began the roll-out in late 2018. This new Operating Model is expected to not 7 only reduce complexity for our clients, but also accelerate Cerner’s ability to innovate. The faster we deliver relevant innovations, the more quickly clients can adopt new solutions. Each year, we invest more than $700 million in research and development. The new structure helps us focus that sizeable investment in ways that ensure we’re feeding new sources of growth as well as innovations that keep our core strong. By aligning resources around client focus and an efficient delivery of innovation, I expect Cerner to operate more cost-effectively, have more predictable results and deliver profitable growth. Strategic The Operating Model consists of four major pillar organizations: Client Relationships, and Greenhouse, Operations. There are also Cerner associates in Marketing, Finance, Communications, Human Resources and other corporate support roles that will play a foundational role in the refocused organization. Growth, Client Relationships to growth As described earlier, four commitments shape Cerner’s focus. The first commitment is relentless focus on our clients’ success. Fundamentally, is the key attracting and retaining clients. The Client Relationship organization has responsibility for worldwide engagement of clients and prospects for mature solution sales, as well as overall account management and satisfaction. Through our Client Relationship team, we are simplifying and streamlining the client journey by providing clients with a single point of contact — “OneCerner.” Dedicated resources facilitate a client’s interaction with all parts of the company to ensure they are receiving the best service and taking full advantage of Cerner’s broad portfolio of products, services and solutions. They are responsible for routinely measuring the client experience, ensuring satisfaction and identifying growth opportunities within the client environment. Greenhouse The new Greenhouse organization is dedicated to discovering and accelerating innovation by working with a small, unique set of 8 clients that will help us identify ‘first-of-a- kind’ solutions. One of the design principles of the Greenhouse pillar is an emphasis on speeding early adoption and validation of new solutions. Upon client adoption and success, innovations will be transitioned to the Operations team to deliver scalability of solutions to Cerner’s client base. Strategic Growth The Strategic Growth organization is dedicated to repositioning Cerner beyond the core hospital-based EHR business. More specifically, this team is focused on opportunities resulting from megatrends affecting the health care industry. The Strategic Growth team focuses on markets to with sufficient growth opportunity justify investing our resources and will also explore potential strategic partnerships and acquisitions. This organization is also responsible for identifying and coordinating the development of new products and services to meet emerging market needs. Once a product achieves pre-defined revenue thresholds and client adoption, it will be transitioned to the Operations team for improved scalability and long-term support. Operations The Operations organization has primary responsibility for the creation, implementation, management and support of all products taken to market or used internally by Cerner. The Operations team will continue to drive innovation within these products, further advancing Cerner’s position in the market. The Operations group is also responsible for managing all aspects of Cerner’s technology infrastructure. I believe the new structure, along with some internal process changes, can reduce complexity for our clients and make it easier for them to do business with Cerner. I also believe we can innovate faster and work more efficiently in ways that enable clients to more quickly adopt new solutions. As a result, we believe the business can operate in a more cost-effective manner and deliver profitable growth for Cerner shareholders, particularly as we tackle new health care opportunities. Health Care Landscape As I mentioned in the Strategic Growth section of this letter, there are extensive opportunities from “megatrends” affecting health care. for Cerner resulting The “graying” of America has been well- documented. Nearly 10,000 Americans turn 65 each day. With aging comes greater susceptibility to chronic medical conditions that require expensive medical treatment. According to the Peterson-Kaiser Health System Tracker, per capita annual spending on health care in the United States has surpassed $10,000—nearly 20% of our total per capita GDP. This staggering figure far outpaces the $4,000 average in other developed countries. Today, half of all Americans have at least one chronic condition and, as the 65-and- older demographic doubles from 46 million today to more than 98 million in 2060, the demand for predictive tools that enable preventative care to avoid costly acute care will only increase. An intelligence-driven alternative to traditional American health care will lead to more engaged, healthier populations. Continued movement toward alternative payment models, including momentum for value- based care, is also accelerating this trend. As described in last year’s shareholder letter, a big step towards a value-based model occurred with the passage of The Medicare Access and CHIP Reauthorization Act (MACRA), which enacts significant reforms to payment programs under the Medicare Physician Fee Schedule. According to some estimates, adoption of value-based care is expected to grow significantly in the coming years. In fact, the Health Care Transformation Task Force, a group of leading health care payers, providers, purchasers and patient organizations, set an ambitious goal to have 75% of their respective businesses operate under value-based arrangements by 2020. As the population ages and reimbursement models evolve to put more emphasis on cost-efficient care and preventive population health strategies, value-based approaches will increasingly become standard health care practice. Another trend industry consolidation. Searching for scale, smaller health care is organizations face pressure to compete with their larger counterparts. Health care economics are clearly changing. The pursuit of greater efficiencies, a shift from inpatient to outpatient volumes and the emergence of capitation-based payments are driving an unprecedented level of mergers and acquisitions. Deloitte estimates that in the next decade only 50% of current health systems will remain. According to Kaufman Hall, there were 90 announced transactions in 2018. The deals involved for-profit and non-profit entities and the average size (in revenue) of 2018 sellers was $409 million. Through consolidation, a growing number of provider systems are now faced with increasingly complex and diverse portfolios of technology platforms. The average hospital has 16 disparate EHR systems in use across their network of affiliates, and only 2% have a single supplier. To realize the full value of an acquisition in a value-based care payment environment, organizations must consider how these systems share information across the continuum of care to improve health outcomes and deliver cost savings. aggregates health platform, Cerner’s population from data HealtheIntent, disparate sources, including Cerner and non-Cerner EHRs, to drive insights at the clinician’s fingertips. By leveraging vast stores of information already available through digitization, HealtheIntent uses predictive modeling to identify individuals at risk for costly episodes of care before they are symptomatic. The platform also catalogues and analyzes episodes of care, using data and intelligence to determine and prompt the most effective and cost-efficient intervention models available. Health care’s post-digitization era requires renewed spirit of collaboration and a openness. EHRs have created immense data stores foundational to unlocking new insights in support of health care’s quadruple aim: improving patient care, improving the health of populations, reducing per capita health care costs, and improving the work life of health care providers. But relying on any one company to discover and action all possible innovations is neither prudent nor realistic. Cerner’s persistent pursuit of a more sustainable health care model is clear from 9 our 400+ patents. Equally indicative of this commitment is the strong momentum we’ve experienced with the Cerner Open Developer Experience (code). In early 2016, Cerner launched the code platform to provide third-party developers with APIs to create applications that can be embedded across Cerner and non-Cerner EHRs. Today, nearly 40,000 active monthly users access the 30 applications that have completed validation through the code platform, and nearly 4,000 registered developers utilize the sandbox of tools we’ve made available. Capital Allocation Strategy As mentioned earlier in this letter, 2018 was a year of assessments and evaluations. One important area to address was Cerner’s capital allocation strategy. Earlier this year, we shared the result of this review, which included the announcement that we plan to add a quarterly dividend to our capital allocation program in 2019. There are several objectives we are looking to accomplish with our capital allocation program. First, we want to provide recurring income to existing shareholders while also increasing the attractiveness of Cerner shares to a wider investor base. Second, we expect to continue using free cash flow for share repurchases to offset dilution from equity compensation and perform additional share repurchases as deemed appropriate. Third, we want to have flexibility to make other investments in growth, including relationships like Lumeris or other potential strategic acquisitions that complement Cerner’s organic growth investments. Given our very strong balance sheet and expected strong cash flow, we believe we are in a comfortable position to deliver against these three objectives with free cash flow, while maintaining flexibility to use debt for strategic opportunities and larger share repurchases. We also believe adding a dividend to our capital allocation approach will create discipline and focus on free cash flow generation. We have also incorporated free cash flow into our variable compensation plans for our executive officers as part of broader changes that we believe will increase alignment with shareholders. Our People Make Cerner a Great Place to Work One of the reasons I chose to come to Cerner was its reputation. As I’ve met associates across the company, I see an organization of people who are passionate about making a difference in health care. • Forbes Magazine named Cerner one of “America’s Best Employers” for the fourth consecutive year. • Forbes Magazine named Cerner on its list of “America’s Best Employers for New Graduates.” • Forbes Magazine named Cerner one of the “Best Employers for Diversity.” We are proud to employ some of the industry’s best and brightest minds while offering award-winning career development. Internal measurements also reflect the engagement and commitment of Cerner’s associates. • 93% understand and believe in Cerner’s mission • 94% understand how the work they do contributes to the goals of the organization I’d like to take this opportunity to thank our 29,000+ associates around the world for all they do to help our clients succeed in delivering high-quality health care to populations around the globe. We are committed to attracting and retaining global talent and to pursuing best practices for inclusion and diversity. 10 Conclusion Cliff Illig, one of Cerner’s co-founders and the longtime vice chairman of Cerner’s Board of Directors, retired from Cerner in January 2019. Cliff played an instrumental role in Cerner’s rise from a start-up to a multibillion-dollar global health care technology company. His laser focus on client experience, commitment to operational excellence and attention to detail are indelibly instilled in Cerner’s culture. Cliff’s impact on the company, the industry and the future of health care will last for decades to come. On behalf of all Cerner associates worldwide, I express my greatest gratitude to Cliff for his extraordinary contributions to health care and Cerner. We wish Cliff the very best in his future endeavors. At Cerner, we are innovators who believe health care is too important to stay the same. We recognize and embrace our duty to identify, develop, implement and support health care technology solutions that will deliver on our vision of a seamless and connected world where everyone thrives. As we work, we remain relentlessly focused on our clients’ success in everything we do— because our clients are the real heroes in health care. Remember, it’s personal—we are all patients, caregivers and consumers. As a result of changes to our operating model and a renewed focus on innovation and growth, I believe we can deliver on the results expected by our shareholders and continue to play a leading role in transforming the future of health care. Thank you for your commitment to Cerner. BRENT SHAFER Chairman of the Board and Chief Executive Officer 11 Appendix: Reconciliation of GAAP Results to Non-GAAP Results* Adjusted Operating Earnings and Adjusted Operating Margin 1986 2008 2018 Operating Earnings Operating Margin % Operating Earnings Operating Margin % Operating Earnings Operating Margin % ($ in millions) Operating earnings (GAAP) $3 14.8% $279 16.6% Share-based compensation expense Health Services acquisition-related amortization Allowance on non-current asset Other adjustments 15 (21) 14.4% $775 102 84 45 5 Adjusted Operating Earnings (non-GAAP) $3 14.8% $273 16.6% $1,011 18.8% Adjusted Net Earnings and Adjusted Diluted Earnings Per Share 1986 2008 2018 Net Earnings Diluted Earnings Per Share Net Earnings Diluted Earnings Per Share Net Earnings Diluted Earnings Per Share ($ in millions, except per share data) Net earnings (GAAP) $2 $0.01 $189 $0.57 $630 $1.89 Pre-tax adjustments for Adjusted Net Earnings: Share-based compensation expense Health Services acquisition-related amortization Allowance on non-current asset Other adjustments After-tax adjustments for Adjusted Net Earnings: Income tax effect of pre-tax adjustments Share-based compensation permanent tax items 15 (21) 102 84 45 5 (46) (1) Adjusted Net Earnings (non-GAAP) $2 $0.01 $183 $0.55 $819 $2.45 Free Cash Flow ($ in millions) Cash flows from operating activities (GAAP) Capital purchases Capitalized software development costs Free Cash Flow (non-GAAP) 1986 2008 2018 $1 (1) (1) ($1) $282 $1,454 (108) (70) $104 (447) (274) $733 Cash flows from investing activities (GAAP) ($2) ($171) ($829) Cash flows from financing activities (GAAP) ($1) ($12) ($610) *More detail on these adjustments and management’s use of Non-GAAP results is in our 2018 annual report on Form 10-K and our current reports on Form 8-K. 12 1986 2008 2018 Operating Operating Operating Operating Operating Operating Earnings Margin % Earnings Margin % Earnings Margin % Operating earnings (GAAP) $3 14.8% $279 16.6% 14.4% ($ in millions) Share-based compensation expense Health Services acquisition-related amortization Allowance on non-current asset Other adjustments Adjusted Operating Earnings (non-GAAP) $3 14.8% $273 16.6% $1,011 18.8% Adjusted Net Earnings and Adjusted Diluted 1986 2008 2018 Earnings Per Share Net Earnings Diluted Earnings Per Share Net Earnings Diluted Earnings Per Share Net Earnings Diluted Earnings Per Share Net earnings (GAAP) $2 $0.01 $189 $0.57 $630 $1.89 15 (21) 15 (21) $775 102 84 45 5 102 84 45 5 (46) (1) 1986 2008 2018 $1 (1) (1) ($1) $282 $1,454 (108) (70) $104 (447) (274) $733 ($ in millions, except per share data) Pre-tax adjustments for Adjusted Net Earnings: Share-based compensation expense Health Services acquisition-related amortization Allowance on non-current asset Other adjustments After-tax adjustments for Adjusted Net Earnings: Income tax effect of pre-tax adjustments Share-based compensation permanent tax items Free Cash Flow ($ in millions) Capital purchases Cash flows from operating activities (GAAP) Capitalized software development costs Free Cash Flow (non-GAAP) Adjusted Net Earnings (non-GAAP) $2 $0.01 $183 $0.55 $819 $2.45 Cash flows from investing activities (GAAP) ($2) ($171) ($829) Cash flows from financing activities (GAAP) ($1) ($12) ($610) *More detail on these adjustments and management’s use of Non-GAAP results is in our 2018 annual report on Form 10-K and our current reports on Form 8-K. Cerner Corporation 2018 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 29, 2018 or ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to ___________ Commission file number: 0-15386 CERNER CORPORATION (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 2800 Rockcreek Parkway North Kansas City, MO (Address of principal executive offices) 43-1196944 (I.R.S. Employer Identification No.) 64117 (Zip Code) (816) 221-1024 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: 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] 1414 Table of Contents 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 every Interactive Data File required to be submitted 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 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, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [ ] Emerging growth company [ ] If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of the Exchange Act. [ ] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] As of June 29, 2018, the aggregate market value of the registrant's common stock held by non-affiliates of the registrant was $18.8 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 each of the registrant's classes of common stock, as of the latest practicable date. Class Common Stock, $0.01 par value per share Outstanding at January 28, 2019 324,360,908 shares DOCUMENTS INCORPORATED BY REFERENCE Document Portions of the registrant's Proxy Statement for the Annual Shareholders' Meeting to be held May 30, 2019 Parts into Which Incorporated Part III 15 Table of Contents 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 816.221.1024. 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") solutions and tech-enabled services. Our mission is to relentlessly seek breakthrough innovation that will shape health care of tomorrow. We offer a wide range of intelligent solutions and tech-enabled services that support the clinical, financial and operational needs of organizations of all sizes. We have systems in more than 27,500 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 solutions that aggregate, transform and reconcile data across the continuum of care, enabling key stakeholders to manage the health of populations, improve outcomes and lower costs. Cerner also has an EHR agnostic platform, CareAware®, that facilitates connectivity of health care devices to EHRs, allowing for more efficient and effective care. On February 2, 2015, Cerner acquired the Health Services business from Siemens AG, which 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. We offer a broad range of tech-enabled 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. 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. 16 Table of Contents The following table presents consolidated revenues by our business models and by segment, as a percentage of total revenues: Revenues by Business Models Licensed software Technology resale Subscriptions Professional services Managed services Support and maintenance Reimbursed travel Revenues by Segment Domestic Global For the Years Ended 2018 2017 2016 11% 5% 6% 34% 21% 21% 2% 100% 88% 12% 100% 12% 5% 9% 31% 21% 20% 2% 100% 11% 6% 9% 30% 21% 21% 2% 100% 89% 11% 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 3.9 percent to $3.5 trillion in 2017, and now represents 17.9 percent of the U.S.' Gross Domestic Product ("GDP"). An aging population and high levels of chronic conditions are contributing to expectations that health care expenditures will continue growing faster than the economy. The Centers for Medicare and Medicaid Services ("CMS") estimates annual U.S. health care spending will grow at an average rate of 5.5 percent through 2026 and reach $5.7 trillion, or 19.7 percent of GDP by 2026. 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, we believe traditional fee-for-service ("FFS") reimbursement models must continue to shift to value- based approaches that are more aligned with quality, outcomes, and efficiency. The shift away from traditional FFS is evident in growth of lives covered under Accountable Care Organizations ("ACOs"). ACOs are groups of hospitals and providers that focus on providing coordinated, high quality care to Medicare, Medicaid, or commercially insured populations and then share in savings created by lowering the cost of care. According to Leavitt Partners, lives covered under ACOs grew from approximately 5 million in 2011 to more than 32 million in 2018. In addition to the increasing number of lives covered under ACOs, the structure of ACOs is evolving to where providers are expected to assume more risk. Currently, most ACO contracts are upside only, which means providers can receive bonuses for good performance, but they assume no downside for underperformance. In 2018, CMS released a rule called "Pathways to Success" that accelerates the timeframe during which providers need to move to ACOs that include both upside bonuses and downside penalties. We believe this shift is important as assumption of risk by providers creates a strong incentive for them to improve care coordination and deliver high quality care at a lower cost. Another step towards a value-based model occurred 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. While each of the different approaches to aligning reimbursement with value will continue to evolve, we believe the trend away from traditional FFS will continue. We believe this growth in 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. 17 Table of Contents 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 ongoing enhancements we have made to our physician solutions. 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. 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. In 2018, CommonWell announced general availability of its connection to CareQuality, another national interoperability framework. This connection allows CommonWell and CareQuality enabled health care providers to connect and bilaterally exchange health data to improve care coordination and delivery. This is a significant milestone on the path to achieving true nationwide interoperability and making health data available to individuals and providers regardless of where care occurs. 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 nearly four decades, Cerner has focused on creating innovation at the intersection of health care and information technology. 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 contributed to our growth. We believe we are positioned to continue growing 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. A key area of growth for Cerner in recent years has been in the U.S. Federal government sector. As part of the Leidos Partnership for Defense Health, Cerner has played a key role in the U.S. Department of Defense's ("DoD") EHR rollout, which achieved completion of its fourth pilot site in 2018. Broader deployment has kicked off with implementations beginning at four additional sites in the second half of 2018. Also, Cerner was selected in 2018 by the U.S. Department of Veterans Affairs ("VA") to replace their existing EHR system with one based on the EHR being deployed across the DoD health system. With the VA managing one of the largest health systems in the world, this opportunity is expected to contribute to Cerner's growth for several years. In addition, we believe there is potential for this project to have broad industry impact. At the core of this project, Cerner aims to enable seamless care through a single system that links both veteran and military populations, totaling more than 18 million people, while also delivering national interoperability to the commercial market. This will allow patient data to be shared between VA, DoD, and community providers through a secure system. In addition to growing our client base, we believe we have an opportunity to grow revenues by expanding our solution footprint with existing clients. For example, less than half 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 18 Table of Contents 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 our services 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. Another area in which we continue to have success is our CommunityWorksSM offering, which leverages a shared instance of the Cerner Millennium platform across multiple clients, allowing us to offer low-cost, high-value solutions and services to smaller community hospitals and critical access hospitals. We believe there continues to be a good opportunity to grow in the small hospital market given many of the existing suppliers in this market have struggled to keep up with ongoing regulatory requirements and marketplace expectations. 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 administration services directly to employers. In 2019, we're expanding our onsite services to include a multi-employer tenant clinic model, serving employers who would not normally be able to support their own onsite clinic. 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. 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 and accurate patient data and meaningfully using that data to engage individuals, exchange information between providers and ultimately drive better outcomes at a lower cost. We believe 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 clinical or revenue cycle system and also incorporate other data, such as pharmacy, claims, patient satisfaction, socioeconomic, genomic and dozens of open data sources. HealtheIntent collects the data from these 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. 19 Table of Contents We have created a series of solutions on the HealtheIntent platform, including the following solutions: • • • • • • • • Longitudinal Record - provides clinicians and the patient a view of their consolidated clinical record, gathered and normalized from multiple sources. Registries and Scorecards - 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. Enterprise and Population Health 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. Community 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 and 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 five years since the first HealtheIntent solution went live at our alpha client, more than 155 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 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. The data variety and scalability of the HealtheIntent platform has also grown quickly, as reflected in its over 1,025 data connections, including over 60 EHR systems and 140 claims and payer systems, and records for more than 218 million people. In 2018, we announced a collaboration with Lumeris Healthcare Outcomes, LLC ("Lumeris") that we believe will strengthen our ability to help health systems succeed in a value-based care market. Lumeris is a company with a consistently highly rated Medicare Advantage plan, a proven methodology to help leading health systems advance value-based care strategies, and the subject matter expertise required to support those efforts. Cerner and Lumeris are launching an EHR-agnostic offering called Maestro AdvantageTM that is designed to help health systems set up and manage Medicare Advantage Plans and provider-sponsored health plans. As part of the collaboration, Lumeris is adopting HealtheIntent as the platform for its clinical methodology and advanced analytics. With this relationship, we gain a partner with a 4.5-Star Medicare Advantage plan to build out the end-to-end capabilities required to run a provider-sponsored health plan within HealtheIntent. We also gain an opportunity to be a larger participant in the economics of the provider-sponsored health plan market by being able to offer additional services as part of the Maestro Advantage offering, such as care management and provider engagement, along with the solutions on the HealtheIntent platform. In summary, we believe our comprehensive 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 2018, approximately 7,300 associates were engaged in research and development activities. Total expenditures for the development and enhancement of our software solutions were $747 million, $706 million and $705 million during the 2018, 2017 and 2016 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. 20 Table of Contents 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 440 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. Managing Cybersecurity Risks Our business operations, including the provision of the solutions and services described above, involve the compilation, hosting and transmission of confidential information, including patient health information. We have included security features in our solutions and services that are intended to protect the privacy and integrity of this information, but our solutions and services may be vulnerable to security breaches, viruses, programming errors and other similar disruptive problems. Cerner maintains documented information privacy, security and risk management programs with clearly defined roles, responsibilities, policies, and procedures which are designed to secure the information maintained on Cerner's platforms. In addition, all of our associates are required to complete annual cybersecurity education and training, which includes identifying suspicious emails, Internet threats, telecommunication threats and ransomware. Cerner regularly reviews and modifies its security program to reflect changing technology, regulatory environment, laws, risk, industry and security practices and other business needs. We believe our policies and procedures are adequate to ensure that relevant information about cybersecurity risks and incidents is appropriately reported and disclosed. 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 world headquarters in Kansas City, Missouri, while our client representatives are deployed across the United States and globally. In addition to the United States, through our subsidiaries, we have sales associates and/or offices giving us a presence in more than 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 our ambulatory solutions, offered on a subscription basis, directly to the physician practice market using lead generation activities and through existing acute care clients that are looking to extend Cerner solutions to affiliated physicians. We attend a number of major tradeshows each year and sponsor executive user conferences, which feature industry experts who address the HCIT needs of large health care organizations. Client Services Substantially all of Cerner's clients that buy software solutions also enter into software support agreements with us for maintenance and support of their Cerner systems. In addition to immediate software support in the event of problems, these agreements allow clients to access new releases of the Cerner solutions covered by support agreements. Each client has 24-hour access to the applicable client support teams, including those located at our world headquarters in North Kansas 21 Table of Contents 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 Backlog, which reflects contracted revenue that has not yet been recognized as revenue, was $15.25 billion as of December 29, 2018, of which we expect to recognize approximately 29% as revenue over the next 12 months. In the first quarter of 2018, we adopted new revenue recognition guidance as further discussed in Note (2) of the notes to consolidated financial statements. In connection with the adoption of such guidance, we modified our calculation of backlog as previously determined under Regulation S-K to represent the aggregate amount of transaction price allocated to performance obligations that are unsatisfied (or partially satisfied) to conform to the new revenue recognition guidance. Backlog amounts disclosed prior to the adoption of the new revenue recognition guidance have not been adjusted, and are not comparable to, the current period presentation. We believe that backlog may not necessarily be a comprehensive indicator of future revenue as certain of our arrangements may be canceled (or conversely renewed) at our clients' option, thus contract consideration related to such cancellable periods has been excluded from our calculation of backlog. However, historically our experience has been that such cancellation provisions are rarely exercised. We expect to recognize approximately $525 million of revenue over the next 12 months under currently executed contracts related to such cancellable periods, which is not included in our calculation of backlog. Competition The market for HCIT solutions, devices and services is intensely competitive, rapidly evolving and subject to rapid technological change. We offer a suite of intelligent solutions and services that support the clinical, financial and operational needs of organizations of all sizes. The principle markets in which we compete include, without limitation, health care software solutions, HCIT services, ambulatory, health care device and technology resale, health care revenue cycle and transaction services, value-based care technologies, analytics systems, care management solutions, population health management, and post- acute care. Our principal existing competitors, including their affiliates, in these markets include, but are not limited to: Allscripts Healthcare Solutions, Inc. athenahealth, Inc. InterSystems Corporation MEDHOST, Inc. Computer Programs and Systems, Inc. Medical Information Technology, Inc. (MEDITECH) eClinicalWorks, LLC Epic Systems Corporation Optum, 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 our markets 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. We believe that we compete favorably with our competitors on the basis of these factors and that we are the leader- or among the leaders- in each of our main offerings. Our brand recognition and reputation for innovative technology and service delivery, combined with our breadth of solution and services offerings, global distribution channels and client relationships position us as a strong competitor going forward. Number of Employees (Associates) At the end of 2018, we employed approximately 29,200 associates worldwide. 22 Table of Contents 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 January 28, 2019. Officers are elected annually and serve at the discretion of the Board of Directors. Name Brent Shafer Age 61 Positions Chairman of the Board of Directors and Chief Executive Officer Marc G. Naughton Michael R. Nill John Peterzalek Randy D. Sims Jeffrey A. Townsend Donald Trigg Julia M. Wilson 63 54 58 58 55 47 56 Executive Vice President and Chief Financial Officer Executive Vice President and Chief Operating Officer Executive Vice President and Chief Client Officer Executive Vice President, Chief Legal Officer and Secretary Executive Vice President and Chief of Innovation Executive Vice President, Strategic Growth Executive Vice President and Chief People Officer Brent Shafer was appointed Chief Executive Officer and Chairman of the Board of Directors effective February 1, 2018. Prior to joining the Company, Mr. Shafer served as Chief Executive Officer of Philips North America, a health technology company and the North American division of Koninklijke Philips N.V. ("Philips") since February 2014. In that position, Mr. Shafer led an organization of 17,000 employees and oversaw a health technology portfolio that included a broad range of solutions and services covering patient monitoring, imaging, clinical informatics, sleep and respiratory care as well as a group of market- leading consumer-oriented brands. For 12 years, Mr. Shafer played a key role in helping Philips develop and strengthen its health care focus, increase its profitability and grow its market share. Prior to his most recent position, Mr. Shafer served as Chief Executive Officer of the global Philips' Home Healthcare Solutions business, a home healthcare services provider with 6,000 employees, from May 2010 until May 2014, as Chief Executive Officer of the North America region for Royal Philips Electronics from January 2009 until May 2010, and as president and Chief Executive Officer of the Healthcare Sales and Service business for Philips North America from May 2005 until May 2010. Prior to joining Philips, Mr. Shafer served in various senior leadership positions with other companies, including Hill-Rom Company Inc., GE Medical Systems, and Hewlett- Packard. 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. John Peterzalek joined the Company in 2003 as President, Cerner South East and has held a variety of business and client leadership roles since that time, including Senior Vice President, East Region, a title which he held from 2007 to 2014 when he was named Senior Vice President, Client Relationships. He was promoted to Executive Vice President, Client Relationships in April 2017 and Executive Vice President, Worldwide Client Relationships in October 2017. He held the title of Executive Vice President, Worldwide Client Relationships until September 2018 when he was named Executive Vice President and Chief Client Officer. As Chief Client Officer, Mr. Peterzalek focuses on driving value, innovation and results to Cerner's clients globally and leads the corporate direction for revenue generation, solution strategy, business development, and marketing. Randy D. Sims joined the Company in March 1997 as Vice President and Chief Legal Officer, was promoted to Senior Vice President in March 2011, and Executive Vice President in April 2018. 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 23 Table of Contents 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. Donald Trigg serves as Executive Vice President, Strategic Growth. He originally joined the Company in 2002 as Vice President, Corporate Positioning. He has held multiple roles during his time at the Company, including Chief Marketing Officer from 2003 to 2007, General Manager for the Kansas City region from 2006-2007, Managing Director for the United Kingdom and Ireland from 2008-2010 and Senior Vice President and President, Cerner Health Ventures from 2012-2018. From 2010-2012, Mr. Trigg served as Chief Revenue Officer at CodeRyte, Inc prior to its acquisition by 3M's healthcare division. Mr. Trigg also spent more than a decade serving in the public policy space as a senior advisor for the 2000 Bush for President campaign in Austin, TX, the Director of Policy at the U.S. Department of Commerce and in a series of senior policy roles in the U.S. House and U.S. Senate. 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. 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, technology-enabled services or other services (collectively referred to as "Solutions and 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 registration, scheduling and billing. 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 Solutions and Services 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 Solutions and Services after their introduction to the market. Similarly, the installation of our Solutions and Services is very complex and errors in the implementation and configuration of our systems can occur. Our Solutions and 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 registration, scheduling and billing. Therefore, users of our Solutions and Services are less tolerant of errors than the market for other types of technologies generally. Our client agreements typically provide warranties concerning material errors and other matters. If a client's Solutions and Services 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 Solution or Service 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. We perform data center and/or hosting services for certain clients, including the collection and storage of critical patient and administrative data and the provision of support services through various client support facilities. Our business relies on the secure electronic transmission, data center storage and hosting of sensitive information, including protected health information; personally identifiable information; 24 Table of Contents financial information; and other sensitive information relating to our clients and their patients, providers and certain billing information, our company, our workforce and our third party suppliers. Complete failure of all local public power and backup generators; impairment of all telecommunications lines; a successful 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. 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 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, increase insurance and other operating costs and have a material adverse impact on our results of operations. We use third party public cloud providers in connection with certain cloud-based offerings and third parties to host our own data, in which case we have to rely on such third parties to prevent service interruption and such reliance is subject to similar risks described above with respect to our own data center and hosting services. If our IT security is breached, or if the IT security of third parties on which we rely is breached, we could be subject to increased expenses, exposure to legal claims and regulatory actions, and clients and prospective clients could be deterred from using our Solutions and Services. We are in the information technology business, and in providing our Solutions 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 and Service offerings, and we have invested a great deal of time and resources in protecting the security, confidentiality, integrity and availability of our Solutions and Services and the internal and external data that we manage. Third parties attempt to identify and exploit Solution and Service vulnerabilities, penetrate or bypass our security measures, and gain unauthorized access to our or our clients' and suppliers' software, hardware and cloud offerings, networks and systems, any of which could lead to disruptions in mission-critical systems or the unauthorized release or corruption 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 and have high profile clients, including government clients. These risks will increase as we continue to grow our cloud offerings, collect, store and process increasingly large amounts of our clients' confidential data, including personal health information, and host or manage parts of our clients' businesses in cloud-based/multi-tenant IT environments. We use third party public cloud providers in connection with certain cloud-based offerings and third party providers to host our own data, in which case we have to rely on the processes, control and security such third parties have in place to protect the infrastructure, which are subject to similar risks described above with respect to our IT security. We continue to invest in and improve our threat protection, detection and mitigation policies, procedures and controls. In addition, we work with other companies in the industry on increased awareness and enhanced protections against cybersecurity threats. Because of the evolving nature and sophistication of these security threats, which can be difficult to detect, there can be no assurance that our policies, procedures and controls or those of third parties on which we rely will detect or prevent any of these threats and we cannot predict the full impact of any such past or future incident. The costs we would incur to address and remediate 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 regulatory actions by state and federal government authorities and non-US authorities and, in some cases, contractual costs related to notification and fraud monitoring of impacted persons. We maintain cyber risk insurance, but this insurance may not be sufficient to cover all of our losses from any future breaches of our IT systems or those of third parties on which we rely. 25 Table of Contents 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 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 Solutions 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 and Services. Many of our software solutions and technology-enabled services contain open source software that may pose particular risks to our proprietary software solutions and technology-enabled services in a manner that could have a negative effect on our business. We rely upon open source software in our software solutions and technology-enabled 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 and unauthorized use of the software purported to be licensed under the open source terms, demanding release of derivative works of open source software that could include our proprietary source code, or otherwise seeking to enforce the terms of the applicable open source licenses. These claims could result in 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 technology-enabled 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 the software. We may become involved in 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 and claims, including for example, employment disputes and litigation; client disputes and litigation alleging solution and implementation defects, personal injury, intellectual property infringement, violations of law and breaches of contract and warranties; and other third party disputes and litigation alleging personal injury, intellectual property infringement, violations of law, and breaches of contracts and warranties. 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 and Services globally. We have established offices around the world, including in the Americas, Europe, the Middle East and the Asia 26 Table of Contents Pacific region. We plan to continue to expand our non-U.S. operations and enter new global markets. This expansion will require significant management attention and financial resources to develop successful direct and indirect non-U.S. sales and support channels. Our business is generally transacted in the local functional currency. In some countries, our success will depend in part on our ability to form relationships with local partners. There is a risk that we may sometimes choose the wrong partner. For these and other reasons, we may not be able to maintain or increase non-U.S. market demand for our Solutions 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; • • • • • 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; and 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 where the subsidiary operates. 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; changes in tax laws 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. Changes in tax laws, including for example the U.S. federal tax legislation commonly referred to as the Tax Cuts and Jobs Act of 2017 ("Tax Act"), as well as other factors, could cause us to experience fluctuations in our tax obligations and effective tax rates in 2018 and thereafter and otherwise adversely affect our tax positions and/or our tax liabilities. Although our accounting for the effects of the enactment of the Tax Act is now complete, there could be additional regulations we may become subject to. The full impact of the Tax Act on us may change significantly as regulations, interpretations and rulings relating to the Tax Act are issued and additional changes in U.S. federal and state tax laws may be made in the future. There can be no assurance that our effective tax rates, tax payments, tax credits or incentives will not be adversely affected by these or other 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 and requires significant judgment in determining our worldwide provision for income taxes and other tax liabilities. Longstanding international tax norms that determine each country's jurisdiction to tax cross-border 27 Table of Contents international trade are evolving as a result of the Base Erosion and Profit Shifting reporting requirements ("BEPS") recommended by the G8, G20 and Organization for Economic Cooperation and Development ("OECD"). Further, during 2018, the European Commission issued proposals and the OECD issued an interim report related to the taxation of the digital economy. As these and other tax laws and related regulations change, our financial results could be materially impacted. Given the unpredictability of these possible changes and their potential interdependency, it is very difficult to assess the overall effect of such potential tax changes, but such changes could adversely impact our financial results. In the ordinary course of a global business, there are many intercompany transactions and calculations which could be subject to challenge by tax authorities. We are regularly under audit by tax authorities and those authorities often do not agree with positions taken by us on our tax returns. Our intercompany transfer pricing has been reviewed by the U.S. Internal Revenue Service ("IRS") and by foreign tax jurisdictions and will likely be subject to additional audits in the future. 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". In March 2017, the UK government initiated the exit process under Article 50 of the Treaty of the European Union, commencing a period of up to two years for the UK and the other EU member states to negotiate the terms of the withdrawal, such period ending on March 29, 2019 unless extended. There has been limited progress so far in the negotiations and continued uncertainty in the UK government and Parliament, which increases the possibility of the UK exiting the EU on March 29, 2019 without a formal withdrawal agreement in place and of significant market and economic disruption. 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 and revenue cycle industries and the technical environments in which our Solutions and Services are offered. Competition for such personnel in our industries is intense in both the U.S. and abroad. We may also experience increased compensation costs that are not offset by either improved productivity or higher sales. Our failure to attract additional qualified personnel and to retain and motivate existing 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. Members of our senior management team have left over the years for a variety of reasons, and we cannot guarantee that there will not be additional departures. The unexpected loss of key personnel, or the failure to successfully develop and execute effective succession planning to assure smooth transitions of those key associates and their knowledge, relationships and expertise, could disrupt our business and have a material adverse impact on our results of operations and financial condition, and could potentially inhibit development and delivery of our Solutions and Services and market share advances. We may be subject to harassment or discrimination claims and legal proceedings, and our inability or failure to respond to and effectively manage publicity related to such claims could adversely impact our business. Although our Global Code of Conduct and other employment policies prohibit harassment and discrimination in the workplace, in sexual or in any other form, we have ongoing programs for workplace training and compliance, and we investigate and take disciplinary action with respect to alleged violations, actions by our associates could violate those policies. And, with the increased use of social media platforms, including blogs, chat platforms, social media websites, and other forms of Internet- based communications that allow individuals access to a broad audience, there has been an increase in the speed and accessibility of information dissemination. The dissemination of information via social media, including information about alleged harassment, discrimination or other claims, could harm our business, brand, reputation, financial condition, and results of operations, regardless of the information's accuracy. 28 Table of Contents We depend on strategic relationships 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, services, hardware and content) from third parties, including some competitors, and depend on such third party intellectual property and software, services, hardware and content in the operation and delivery of our Solutions and Services. Additionally, we sell or license third party intellectual property, services and software, hardware or content in conjunction with our Solutions and Services. For instance, we currently depend on Amazon Web Services, Microsoft, Cloudera, Oracle, VMWare and IBM technologies for portions of the operational capabilities of, among others, our Millennium and HealtheIntent solutions. Our remote hosting and cloud services businesses also rely on a limited number of software and services suppliers for certain functions of these businesses, such as Oracle, NetApp, Microsoft, Veritas, CITRIX, GTT and Equinix. Additionally, we rely on Dell/EMC, Hewlett-Packard Enterprise, Cisco, 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, change delivery models, terminate our licenses or supply contracts, suffer significant capacity or supply chain constraints or suffer significant disruptions, we may need to seek alternative suppliers and incur additional internal or external development costs to ensure continued performance of our Solutions 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 and Services as a result of changes in third party suppliers could adversely affect our commitments to clients, future sales of Solutions and Services, and negatively affect our revenue and operating earnings. We intend to continue strategic business acquisitions and other combinations, which are subject to inherent risks. In order to expand our Solutions and Services offerings 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, culture and financial operations, services, intellectual property, solutions or personnel of an acquired business and to maintain uniform standard controls, policies, procedures and information systems; 2) diversion of our management's attention from other business concerns; 3) management of a larger company and entry into markets in which we have little or no direct prior experience; 4) failure to achieve projected synergies and performance targets; 5) failure to commercialize "go forward" Solutions and Services under development and increase revenues from existing marketed Solutions and Services; 6) loss of clients, key personnel, supplier, research and development, distribution, marketing, promotion and other important relationships; 7) incurrence of debt or assumption of known and unknown liabilities; 8) write-off of software development costs, goodwill, client lists and amortization of expenses related to intangible assets; 9) dilutive issuances of equity securities; 10) accounting deficiencies that could arise in connection with, or as a result of, the acquisition of an acquired company, including issues related to internal control over financial reporting and the time and cost associated with remedying such deficiencies; and 11) litigation arising from claims or liabilities assumed from an acquired company or that are otherwise related to acquisition activity, such as claims from former employees, former stockholders or other third parties, all of which could require us to incur significant expenses and cause management distraction. 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. 29 Table of Contents 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. 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, changing technologies and evolving pricing and deployment methods and to bring competitive new Solutions and Services and features to market in a timely fashion. The market for health care information systems, Solutions and Services to the health care industry is intensely competitive, dynamically evolving and subject to rapid technological advances and innovative enhancements, changing delivery and pricing models, evolving standards in computer hardware and software development and communications infrastructure, and changing and increasingly sophisticated client needs. Development of new proprietary Solutions or Services is complex, entails significant time and expense, may not be successful and often involves a long return on investment cycle. We cannot guarantee that the market for our Solutions and Services will develop as quickly as expected or at all or that we will be able to introduce new Solutions or Services on schedule or at all. Moreover, we cannot guarantee that errors will not be found in our new Solution releases before or after commercial release, which could result in Solution 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. We believe that we must continue to dedicate a significant amount of resources to our research and development efforts to maintain our competitive position; and oftentimes, successful investments require several years before generating significant revenue. In addition, we expect that major software information systems companies, highly capitalized consumer technology companies, large information technology consulting service providers and system integrators, start-up companies and others operating in the health care industry may offer competitive Solutions and Services. As we continue to develop new Solutions and Services to address areas such as analytics, transaction services, 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. For example, some of our competitors may bundle products for promotional purposes or as a long-term pricing strategy, commit to large deployments at prices that are unprofitable, or provide guarantees of prices and product implementations. These practices could, over time, significantly constrain the prices that we can charge for certain of our Solutions and Services. If we do not adapt our pricing models to reflect changes in use of our Solutions and Services or changes in client demand, our revenues could decrease. Additionally, the pace of change in the health care information systems market is rapid and there are frequent new software solution introductions, new deployment models (such as via the cloud), software solution enhancements, device introductions, device enhancements and evolving industry standards and requirements. We provide our cloud and other offerings to clients globally via deployment models that best suit their needs, including via our cloud-based software as a services (SaaS) offering. As our business models continue to evolve, we may not be able to compete effectively, generate significant revenues or maintain the profitability of our cloud offerings. If we do not successfully execute our strategy or anticipate the needs of our clients, our reputation as a SaaS provider could be harmed and our revenues and profitability could decline. 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. Our success also depends on our ability to maintain and expand our business with our existing clients and effectively transition existing clients to current Solutions and Services, as well as attracting additional clients. Certain clients originally purchased 30 Table of Contents one or a limited number of our Solutions and Services. These clients may choose not to expand their use of or purchase new Solutions and Services. Failure to generate additional business from our current clients could materially and adversely impact our business, financial condition and operating results. If we are unable to manage our growth in the new markets in which we offer Solutions and Services, our business, results of operations and financial condition could suffer. Our future financial results will depend on our ability to profitably manage our business in the new markets that we enter. Over the past several years, we have pursued growth and expansion opportunities in the areas of analytics, revenue cycle and population health. To achieve success in those areas, 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. Long sales cycles for our Solutions and Services could have a material adverse impact on our future results of operations. Some of our Solutions and Services 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, add or outsource business processes, are major decisions for health care organizations. Many of the Solutions and Services 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. Our work with government clients exposes us to additional risks inherent in the government contracting environment. Our clients include national, provincial, state, local and foreign governmental entities and their agencies. Our government work carries various risks inherent in contracting with such government entities and agencies. 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. • • If a government client discovers improper or illegal activities during its 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 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. • Terms and conditions of government contracts also tend to be more onerous and are often more difficult to negotiate. Because government contracts are subject to specific procurement regulations and a variety of other socio-economic requirements, we must comply with such requirements. We must also comply with various statutes, regulations and requirements related to employment practices, recordkeeping and accounting. These regulations and requirements 31 Table of Contents affect how we transact business with our clients and suppliers, and in some instances, impose additional costs on our business operations. • 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 projects or terminate these projects at their convenience either for lack of approved funding or any other reason. Changes in government or political developments, including budget deficits, shortfalls or uncertainties, government spending reductions (e.g., U.S. 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. • Our failure to comply with a variety of complex procurement rules and regulations could result in our being liable for penalties, including termination of our government contracts, disqualification from bidding on future government contracts and suspension or debarment from government contracting. We must comply with laws and regulations relating to the formation, administration and performance of government contracts, which affect how we do business with our customers and may impose added costs on our business. Significant statutes and regulations in the U.S. that we must comply with include the Federal Acquisition Regulation and supplements, the Truth in Negotiations Act, the Procurement Integrity Act, and the Civil False Claims Act. • Government contracts may be protested by unsuccessful bidders. These protests could result in administrative procedures and litigation, could be expensive to defend and incapable of prompt resolution. Loss of a bid protest may result in loss of the award, contract modification, expense or delay. 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. 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 lease accounting, 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 processes and systems. Refer to Note (1) of the notes to consolidated financial statements relating to summary of significant accounting policies and recently issued accounting pronouncements for more information. Such changes could result in a material adverse impact on our business, results of operations and financial condition. Goodwill and other intangible assets represent approximately 19% of our total assets and we could suffer losses due to asset impairment charges. We assess our goodwill and other intangible assets for impairment periodically in accordance with applicable authoritative accounting guidance. Declines in business performance or other factors could result in a non-cash impairment charge. This could materially and negatively affect our results of operations and financial condition. Risks Related to our 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. The last four years have been quite active legislatively with major statutes such as the Protecting Access to Medicare Act (PAMA) of 2014 establishing requirements for "Appropriate Use Criteria" in ordering high dollar diagnostic 32 Table of Contents imaging services, the Medicare and CHIP Reauthorization Act (MACRA) of 2015 which reformed how physicians are paid under Medicare and which established the Merit-based Incentive Payment System (MIPS), the 21st Century Cures Act of 2016 (Cures Act) which laid the groundwork for nationwide trusted health information exchange, established interoperability requirements for providers, payers and consumers and which set the framework for information blocking regulations, and most recently the Substance Use Disorder Prevention that Promotes Opioid Recovery and Treatment for Patients and Communities (SUPPORT) Act of 2018 that includes significant policies for addressing the opioid crisis. These statutes are heavily laden with provisions that directly call for or describe roles for the use of health information technology to help providers comply with new federal requirements under Medicare and for state Medicaid programs. 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 and Services. As the health care industry consolidates, our client base could be consolidated with fewer buyers, competition for clients could become more intense and the importance of landing new client relationships becomes greater. Reform of payment policies for Medicare and Medicaid continues to evolve. The Patient Protection and Affordable Care Act (the "ACA") became law in 2010; this comprehensive health care reform legislation introduced value-based principles into federal health insurance payments systems, sought to improve health care quality, and expanded access to affordable health insurance. MACRA built upon the value based policies introduced by the ACA. These legislative initiatives accelerated the adoption of "Alternative Payment Models" as bundled payment models based on episodes of care or per capita payment for defined populations emerged as alternatives to traditional fee for service payments to providers. Subsequent legislative, regulatory and judicial developments have created uncertainty for the continued implementation of the ACA and other health care-related legislation and, to the extent that implementation continues, the way in which they are implemented. Examples include the Medicare Shared Savings Program for Accountable Care Organizations and the Bundled Payment for Care Improvement - Advanced model program under the Innovation Center of the Center for Medicare and Medicaid Services (CMS) which focuses on episode-based payment for hospital and ambulatory services. Together with ongoing statutory and budgetary policy developments at a federal level, the collective impact of this health care reform legislation could include changes in Medicare and Medicaid payment policies and other health care delivery administrative reforms that could potentially negatively impact our business and the business of our clients. Because of that uncertainty and because of ongoing federal fiscal 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. The direction and pace of health care reform initiatives may adversely impact either our operational results or the way we operate our business. Federal health insurance programs still routinely require adoption of certified HCIT as a program requirement or prerequisite, and we anticipate future adoption of new certification requirements. But we also anticipate possible significant impacts from information blocking provisions of the Cures Act and expanded surveillance by federal agencies of both certified HCIT and its use by our clients. CMS has also mandated updates to the electronic prescribing standards and adoption of controlled substance electronic prescribing by hospitals in response to the opioid crisis which may drive upgrades of existing HCIT investments by hospitals and physicians rather than seeking replacement. In response to this uncertainty, purchasers of HCIT may postpone investment decisions, including investments in our Solutions and Services. Future legislation and regulation may ultimately impact the fiscal stability and sustainability of HCIT purchasers. Differences in demand related to new regulatory requirements 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 any legislation that may be adopted will 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 several 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 several U.S. federal, state, local and foreign governmental entities. The impact of these regulations on us is both direct, to the extent that we are ourselves subject to these laws and regulations, and also indirect, in terms of government program requirements applicable to our clients for the use of HCIT and because, in a number of situations, even though we may not be directly regulated by specific health care laws and regulations, our Solutions 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, information blocking, 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: 33 Table of Contents 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 Solutions 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 and information blocking, 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, Submission and Collection of Medical Claims for Reimbursement. Our Solutions and Services 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, submission and collection 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. In addition, federal and state law regulates the collection of debt and may impose monetary penalties for violating those regulations. 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 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 and Services 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 and Services. If other of our Solutions and Services 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 globally 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 and Services, our short- and long-term business plans for these Solutions and Services could be delayed or canceled. There have been nine FDA inspections at various Cerner sites since 2003. Inspections conducted at our Headquarters Campus, Realization Campus and Innovations Campus in 2010 and 2017 resulted in the issuance of an FDA Form 483 observation to which we responded promptly. The FDA has taken no further action with respect to the Form 483 observations that were issued in 2010 and 2017. The remaining FDA inspections, including inspections at our campuses 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 and Services. The FDA has many enforcement tools including recalls, device corrections, seizures, injunctions, refusal to grant pre-market clearance of products, civil fines and criminal 34 Table of Contents prosecutions. Any of the foregoing could have a material adverse effect on our business, results of operations and financial condition. Security and Privacy. 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 the American Recovery and Reinvestment Act of 2009 ("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 comply 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 and regulations in the U.S. and data privacy and security laws and regulations in non-U.S. jurisdictions could restrict the ability of our clients to obtain, use or disseminate patient information. This could adversely affect demand for our Solutions and Services if they are not re-designed in a timely manner 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 Services 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 and national data protection legislation, including the 2016 General Data Protection Regulation ("GDPR") which imposes restrictions on the processing of personal data (including health 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 regulation establishes several obligations that organizations must follow with respect to use of personal data, including a prohibition on the transfer of personal information from the EU to other countries whose laws do not 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, particularly for health data. 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 also pursuing alternative methods of compliance (e.g. Standard Contractual Clauses), but those methods also may be subject to scrutiny by data protection authorities in European member states. The GDPR impacts how businesses, including both us and our clients, can collect and process the personal data of EU individuals. We have incurred development costs in delivering Solutions and Services as we update our Solutions and Services to enable our European clients to comply with these varying and evolving standards. 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 Services and could have a material adverse impact on our business, results of operations and financial condition. The GDPR grants 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 powers and remedies to pursue suspected or perceived violations. If we fail to comply with any applicable laws or regulations or fail to deliver compliant Solutions and Services, we could be subject to civil penalties, sanctions or contract 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. 35 Table of Contents Interoperability Standards. Our clients continue to be concerned and often require that our Solutions and Services be interoperable with other third party HCIT suppliers. Market forces and governmental/regulatory authorities create software interoperability standards that may apply to our Solutions and Services. If our Solutions and 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) is charged under the Cures Act with developing a Trusted Exchange Framework that establishes governance requirements for trusted health information exchange in the U.S. ONC has developed the U.S. Common Data Set for Interoperability which may lay the groundwork for future data exchange requirements for trusted exchange. ONC continues to modify and refine these standards. We may incur increased software development and administrative expense and delays in delivering Solutions and Services if we need to update our Solutions and Services 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 and Services. If our Solutions and Services 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 Solutions and Services. Federal Requirements for Certified Health Information Technology. Various U.S. federal, state and non-government agencies continue to generate requirements for the use of information technology. In many cases, these requirements have become conditions for receiving payment for health care services to beneficiaries of federal health insurance programs. These requirements are expansions of the statutory ARRA HITECH program that began providing incentive payments in 2011 to hospitals and eligible providers for the "meaningful use of certified electronic health record technology ("CEHRT")." Although those incentive programs have expired, CEHRT continues to be a condition of participation in federal health care programs. In 2015, MACRA required the use of CEHRT as part of its Quality Payment Program for eligible providers under Medicare. CEHRT is also one of the areas measured under the Merit based Incentive Payment System (known as MIPS) by which the Medicare Physician Fee Schedule was restructured. In the last several years, participation in Medicare's "alternative payment models" to replace traditional "fee for service" payments with quality and risk-sharing payment models has been conditioned on CEHRT and this continues with the Trump Administration. The Cures Act has tied CEHRT to its policy goals of reducing barriers to the exchange of health information data blocking, encouraging nationwide interoperability, consumer access to health information and improving health information availability between consumers and their care teams. The regulations establishing the certification standards for CEHRT will continue to be updated to support these policy goals with greater emphasis on interoperability, consumer engagement, patient safety and health information privacy and security. The ONC is due to develop additional regulations under the Cures Act to enforce the act’s policy directives relating to data blocking and interoperability. In addition, the ONC has increased its surveillance activities concerning vendor compliance relative to CEHRT. We have completed certification efforts to meet current CEHRT requirements that became mandatory for certain Federal programs on January 1, 2019, and for many others that become mandatory during 2019. We will continue to address additional regulatory requirements as they evolve. However, these standards and specifications are subject to interpretation by the entities designated to certify our electronic health care technology as CEHRT compliant. Additionally, if our business practices, Solutions and Services are not compliant with these evolving regulatory requirements, our market position and sales could be impaired, and we may have to invest significantly in changes to our Solutions and Services. Further, we bear potential financial risks where we are alleged to have not appropriately complied with these regulations. We also bear financial risk where we have entered into agreements with clients to warrant their ability to meet future federal program requirements that require use of CEHRT. While a client's ability to meet future federal health program related attestation requirements may be dependent on the client's ability to adopt, rollout and attain sufficient use of our certified Solutions and Services on a timely basis, we may face risks that come from issues in full adoption of our certified Solutions and Services, 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 meaningful use attainment ordinarily borne by the client. 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 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 and Services, a large percentage of our revenues are generated by the sale and installation of larger, more complex and higher-priced 36 Table of Contents 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. We may also experience seasonality in revenues. For example, our revenues 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. These seasonal variations may lead to fluctuations in our annual and quarterly revenues and operating results. 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 and 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 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. We cannot guarantee that our stock repurchase program or our quarterly dividend program will be fully implemented or that either will enhance long-term stockholder value. Our Board of Directors has approved a stock repurchase program totaling $1.0 billion, of which $283 million remains available for purchase at the end of 2018. The repurchase program does not have an expiration date and we are not obligated to repurchase a specified number or dollar value of shares. Additionally, our Board has approved the initiation of a quarterly cash dividend program and while we expect to pay a cash dividend on a quarterly basis, future declarations of such quarterly cash dividends are subject to approval by the Board of Directors and the Board of Directors' determination that the declaration of dividends are in the best interests of Cerner and its shareholders. 37 Table of Contents Either or both of our repurchase or dividend programs may be suspended or terminated at any time and, even if fully implemented, may not enhance long-term stockholder value. 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. Risks Relating to 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 may contain 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 38 Table of Contents Item 2. Properties. As of the end of 2018, we owned approximately six million gross square feet of real estate located in the greater Kansas City metro area and Malvern, Pennsylvania. Such property primarily consists of office space, data center, and warehouse facilities used primarily by our Domestic Segment. As of the end of 2018, we leased additional space used primarily by our Domestic Segment in the following locations: Arlington, Virginia Brooklyn, New York Carlsbad, California Colchester, Vermont Columbia, Missouri Costa Mesa, California Denver, Colorado Durham, North Carolina Franklin, Tennessee Jefferson City, Missouri Kansas City, Missouri Lakeland, Florida 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 We also leased space primarily used by our Global Segment in the following locations: Abu Dhabi, United Arab Emirates Bangalore, India Berlin, Germany Brasov, Romania Brisbane, Australia Cairo, Egypt Doha, Qatar Dubai, United Arab Emirates Dublin, Ireland Erlangen, Germany Essen, Germany Gmund, Austria Gothenburg, Sweden Hamburg, Germany Idstein, Germany Kolkata, India Kuala Lumpur, Malaysia Las Palmas, Gran Canaria, Spain Lisbon, Portugal London, England Lund, Sweden Madrid, Spain Markham, Ontario, Canada Melbourne, Australia Oslo, Norway Palma de Mallorca, Spain Paris, France Riyadh, Saudi Arabia Sao Paulo, Brazil Singapore St. Wolfgang, Germany Stockholm, Sweden Sydney, Australia The Hague, Netherlands Vienna, Austria In general, we believe our facilities are suitable to meet our current and reasonably anticipated future needs. Item 3. Legal Proceedings. From time to time, we are involved in litigation which is incidental to our business. In our opinion, no litigation to which we are currently a party is likely to have a material adverse effect on our consolidated financial condition, results of operations, or cash flows. Item 4. Mine Safety Disclosures. Not applicable 39 Table of Contents 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 2018 and 2017 as reported by the Nasdaq Global Select Market. First Quarter Second Quarter Third Quarter Fourth Quarter High 2018 Low Last High 2017 Low $ $ 73.43 63.22 67.57 65.44 $ 56.49 52.05 59.49 48.78 58.00 59.79 64.41 52.01 $ $ 59.83 69.28 72.27 73.86 $ 47.09 58.09 61.53 62.86 Last 58.85 66.47 71.32 67.39 At January 28, 2019, there were approximately 940 owners of record. To date, we have paid no cash dividends. Subject to declaration by the Board of Directors, the Company plans to initiate a quarterly cash dividend of $0.15 per share, with the first payment expected in the third quarter of 2019. Future dividends will be subject to the determination, declaration and discretion of the Board of Directors and compliance with our covenants under our credit facility. The table below provides information with respect to Common Stock purchases by the Company during the fourth fiscal quarter of 2018: Period September 30, 2018 - October 27, 2018 October 28, 2018 - November 24, 2018 November 25, 2018 - December 29, 2018 Total Total Number of Shares Purchased (a) Average Price Paid per Share — $ 1,722,734 3,745,917 5,468,651 $ — 58.05 52.96 54.56 Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (b) Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs (b) — $ 1,722,124 3,745,917 5,468,041 581,522,399 481,556,844 283,172,767 (a) Of the 5,468,651 shares of common stock, par value $0.01 per share, presented in the table above, 610 shares were originally granted to employees as restricted stock pursuant to our 2011 Omnibus Equity Incentive Plan (the "Omnibus Plan"). The Omnibus Plan allows for the withholding of shares to satisfy the minimum tax obligations due upon the vesting of restricted stock. Pursuant to the Omnibus Plan, the 610 shares reflected above were relinquished by employees in exchange for our agreement to pay U.S. federal and state withholding obligations resulting from the vesting of the Company's restricted stock. (b) As announced on May 25, 2017, our Board of Directors authorized a share repurchase program that allows the Company to repurchase up to $500 million of shares of our common stock, excluding transaction costs. As announced on May 21, 2018, our Board of Directors approved an amendment to the repurchase program that was authorized in May 2017. Under the amendment, the Company was authorized to repurchase up to an additional $500 million of shares of our common stock, for an aggregate of $1 billion, excluding transaction costs. The repurchases are to be effectuated in the open market, by block purchase, in privately negotiated transactions, or through other transactions managed by broker- dealers. No time limit was set for the completion of the program. During 2018, we repurchased 11.2 million shares for total consideration of $644 million under the program pursuant to Rule 10b5-1 plans. At December 29, 2018, $283 million remains available for repurchase under the outstanding program. Refer to Note (14) of the notes to consolidated financial statements for further information regarding our share repurchase program. See Part III, Item 12 for information relating to securities authorized for issuance under our equity compensation plans. 40 Table of Contents 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 2018(1) 2017(2) 2016 2015(3) 2014 $ 5,366,325 $ 5,142,272 $ 4,796,473 $ 4,425,267 $ 3,402,703 774,785 800,851 630,059 960,471 967,129 866,978 911,013 918,434 636,484 781,136 781,380 539,362 763,084 774,174 525,433 1.91 1.89 2.62 2.57 1.88 1.85 1.57 1.54 1.54 1.50 330,084 333,572 331,373 337,999 337,740 343,653 343,178 350,908 342,150 350,386 $ 1,356,114 $ 1,590,632 $ 773,960 $ 1,049,967 $ 1,714,471 6,708,636 6,469,311 5,629,963 5,561,984 4,530,565 Long-term debt and capital lease obligations, excl. current installments 438,802 515,130 537,552 563,353 62,868 Shareholders' equity 4,928,389 4,785,348 3,927,947 3,870,384 3,565,968 (1) In 2018, we adopted new revenue recognition guidance as further discussed in Note (2) of the notes to consolidated financial statements. (2) Includes the impact of certain U.S. income tax reform, as further described in Note (12) of the notes to consolidated financial statements. (3) In 2015, we acquired our Health Services business from Siemens AG. 41 Table of Contents 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. Our fiscal year ends on the Saturday closest to December 31. Fiscal years 2018, 2017 and 2016 each consisted of 52 weeks and ended on December 29, 2018, December 30, 2017, and December 31, 2016, respectively. All references to years in this MD&A represent fiscal years unless otherwise noted. Management Overview Our revenues are primarily derived by selling, implementing and supporting software solutions, clinical content, hardware, devices and services that give health care providers 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 core strategy is to create organic growth by investing in research and development ("R&D") to create solutions and tech enabled 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% and 12%, respectively. This growth has also created an important strategic footprint in health care, with Cerner® solutions in more than 27,500 contracted provider 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 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 suppliers. We may also supplement organic growth with acquisitions or strategic investments. We expect to drive growth through solutions and tech-enabled 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 ITWorksSM services, revenue cycle solutions and services, and HealtheIntent® population health solutions and services. Finally, we continue to 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 10% and 13% over the most recent five- and ten- year periods, respectively. We expect to drive earnings growth as we continue to grow our revenue. We also have opportunities to expand our operating margins over time. In the near term, we expect growth in non-cash expenses, such as amortization and depreciation, and a mix of lower margin revenue associated with some of our rapidly growing services businesses will limit our margin expansion. Longer-term, we expect to generate margin expansion as the growth rate of non-cash expenses slows, we achieve economies of scale and efficiencies in our services businesses, control general and administrative expenses, and get more contributions to our growth from solutions on our HealtheIntent platform, which we expect to be accretive to our overall margins. We are also focused on continuing to deliver strong levels of cash flow, which we expect to accomplish by continuing to grow earnings and prudently managing capital expenditures. Results Overview Bookings, which reflects the value of executed contracts for software, hardware, professional services and managed services, was $6.72 billion in 2018, which is an increase of 6% compared to $6.32 billion in 2017. Revenues for 2018 increased 4% to $5.37 billion, compared to $5.14 billion in 2017. The increase in revenue reflects ongoing demand from new and existing clients for Cerner's solutions and services driven by their needs to keep up with regulatory requirements, adapt to changing reimbursement models, and deliver safer and more efficient care. Net earnings for 2018 decreased 27% to $630 million, compared to $867 million in 2017. Diluted earnings per share decreased 26% to $1.89 in 2018, compared to $2.57 in 2017. The overall decrease in net earnings and diluted earnings per share was 42 Table of Contents primarily a result of increased operating expenses, which includes the hiring of personnel to support revenue growth and a $45 million pre-tax charge to provide an allowance against certain disputed client receivables. Additionally, we had a lower effective tax rate in 2017, stemming from certain U.S. income tax reform enacted in December 2017. We had cash collections of receivables of $5.49 billion in 2018 compared to $5.44 billion in 2017. Days sales outstanding was 79 days for the 2018 fourth quarter compared to 82 days for the 2018 third quarter and 72 days for the 2017 fourth quarter. Operating cash flows for 2018 were $1.45 billion compared to $1.31 billion in 2017. Revenue Recognition In the first quarter of 2018, we adopted new revenue recognition guidance as further discussed in Note (2) of the notes to consolidated financial statements. The impact of applying this new guidance (versus prior U.S. GAAP) increased 2018 revenues and earnings before income taxes by $207 million and $101 million, respectively. This impact is primarily driven by certain new contracts in 2018 where we made commitments for specified upgrades. Under the new revenue guidance, we are required to estimate stand-alone selling price when allocating transaction consideration to performance obligations, such as specified upgrades. Under prior U.S. GAAP, we could not establish vendor specific objective evidence of fair value for specified upgrades, which would have delayed the revenue recognition on the entire contract until the upgrades were delivered. 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 2018 Compared to Fiscal Year 2017 (In thousands) Revenues Costs of revenue 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 2018 % of Revenue 2017 % of Revenue % Change $ 5,366,325 100% $ 5,142,272 937,348 17% 854,091 4,428,977 83% 4,288,181 2,493,696 683,663 389,469 87,364 3,654,192 4,591,540 46% 13% 7% 2% 2,276,821 605,046 355,267 90,576 68% 3,327,710 86% 4,181,801 774,785 14% 960,471 26,066 (170,792) 6,658 (100,151) 100% 17% 83% 44% 12% 7% 2% 65% 81% 19% 4 % 10 % 3 % 10 % 13 % 10 % (4)% 10 % 10 % (19)% $ 630,059 $ 866,978 (27)% Revenues increased 4% to $5.37 billion in 2018, as compared to $5.14 billion in 2017. The growth in revenues includes a $220 million increase in professional services revenue, driven by increased contributions from Cerner ITWorks and revenue cycle services. Refer to Note (2) of the notes to consolidated financial statements for further information regarding revenues disaggregated by our business models. 43 Table of Contents Backlog, which reflects contracted revenue that has not yet been recognized as revenue, was $15.25 billion as of December 29, 2018, of which we expect to recognize approximately 29% as revenue over the next 12 months. In the first quarter of 2018, we adopted new revenue recognition guidance as further discussed in Note (2) of the notes to consolidated financial statements. In connection with the adoption of such guidance, we modified our calculation of backlog as previously determined under Regulation S-K to represent the aggregate amount of transaction price allocated to performance obligations that are unsatisfied (or partially satisfied) to conform to the new revenue recognition guidance. Backlog amounts disclosed prior to the adoption of the new revenue recognition guidance have not been adjusted, and are not comparable to, the current period presentation. We believe that backlog may not necessarily be a comprehensive indicator of future revenue as certain of our arrangements may be canceled (or conversely renewed) at our clients' option, thus contract consideration related to such cancellable periods has been excluded from our calculation of backlog. However, historically our experience has been that such cancellation provisions are rarely exercised. We expect to recognize approximately $525 million of revenue over the next 12 months under currently executed contracts related to such cancellable periods, which is not included in our calculation of backlog. Costs of Revenue Costs of revenue as a percent of revenues were 17% in both 2018 and 2017. Costs of revenue include the cost of reimbursed travel expense, sales commissions, third party consulting services and subscription content and computer hardware, devices and sublicensed software purchased from manufacturers for delivery to clients. It also includes the cost of hardware maintenance and sublicensed software support subcontracted to the manufacturers. Such costs, as a percent of revenues, typically have varied as the mix of revenue (software, hardware, devices, maintenance, support, and services) 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 10% to $3.65 billion in 2018, as compared to $3.33 billion in 2017. • • Sales and client service expenses as a percent of revenues were 46% in 2018, compared to 44% in 2017. These expenses increased 10% to $2.49 billion in 2018, from $2.28 billion in 2017. 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 2018 amount includes a pre-tax charge of $45 million to provide an allowance against certain client receivables with Fujitsu Services Limited ("Fujitsu"), as further discussed in Note (3) of the notes to consolidated financial statements. The remaining growth in sales and client service expenses is primarily due to the hiring of services personnel to support growth in services revenue. Software development expenses as a percent of revenues were 13% in 2018, compared to 12% in 2017. 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 2018 and 2017 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 2017 2018 $ 747,128 $ 705,944 (271,787) (271,411) (1,906) 210,228 (2,737) 173,250 $ 683,663 $ 605,046 • General and administrative expenses as a percent of revenues were 7% in both 2018 and 2017. These expenses increased 10% to $389 million in 2018, from $355 million in 2017. General and administrative expenses include 44 Table of Contents salaries and benefits for corporate, financial and administrative staffs, utilities, communications expenses, professional fees, depreciation and amortization, transaction gains or losses on foreign currency, expense for share-based payments, acquisition costs and related adjustments. The increase in general and administrative expenses is primarily due to increased expense associated with share-based payment awards. • Amortization of acquisition-related intangibles as a percent of revenues was 2% in both 2018 and 2017. These expenses decreased 4% to $87 million in 2018, from $91 million in 2017. 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 $26 million in 2018, compared to $7 million in 2017. The increase is primarily attributable to increased interest on our cash and investment balances, due to rising interest rates. • Our effective tax rate was 21% in 2018, compared to 10% in 2017. The increase in the effective tax rate in 2018 is primarily a result of impacts from certain U.S. income tax reform enacted in December 2017. Refer to Note (12) of the notes to consolidated financial statements for further information regarding our effective tax rate. We do not expect significant changes to our overall effective tax rate in 2019, from what is reported for 2018. 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 primarily 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, 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 (17) of the notes to consolidated financial statements for further information regarding our reportable segments. The following table presents a summary of our operating segment information for the years ended 2018 and 2017: (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 % of Segment Revenue % of Segment Revenue 2017 2018 % Change $ 4,730,266 100% $ 4,575,171 100% 827,904 2,164,465 2,992,369 1,737,897 636,059 109,444 321,116 430,560 205,499 18% 46% 63% 37% 100% 17% 50% 68% 32% 755,729 1,998,544 2,754,273 1,820,898 567,101 98,362 264,196 362,558 204,543 17% 44% 60% 40% 100% 17% 47% 64% 36% (1,168,611) $ 774,785 (1,064,970) $ 960,471 3% 10% 8% 9% (5)% 12% 11% 22% 19% —% 10% (19)% • Revenues increased 3% to $4.73 billion in 2018, from $4.58 billion in 2017. The growth in revenues includes a $181 million increase in professional services revenue, driven by increased contributions from Cerner ITWorks 45 Table of Contents and revenue cycle services. Refer to Note (2) of the notes to consolidated financial statements for further information regarding revenues disaggregated by our business models. • Costs of revenue as a percent of revenues were 18% in 2018, compared to 17% in 2017. The higher costs of revenue as a percent of revenues was primarily driven by higher third-party costs associated with services revenue. • Operating expenses as a percent of revenues were 46% in 2018, compared to 44% in 2017. The higher operating expenses as a percent of revenues reflects the hiring of personnel to support revenue growth. Global Segment • • Revenues increased 12% to $636 million in 2018, from $567 million in 2017. This increase was driven by growth across most of our business. Refer to Note (2) of the notes to consolidated financial statements for further information regarding revenues disaggregated by our business models. Costs of revenue as a percent of revenues were 17% in both 2018 and 2017. • Operating expenses as a percent of revenues were 50% in 2018, compared to 47% in 2017. The increase as a percent of revenues is primarily due to a pre-tax charge of $45 million in 2018 to provide an allowance against certain client receivables with Fujitsu, as further discussed in Note (3) of the notes to consolidated financial statements. 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 increased 10% from 2017 to 2018. The increase is primarily due to increased software development expenses, including increased amortization of capitalized software costs resulting from releases of new and enhanced solutions over the last four quarters. Fiscal Year 2017 Compared to Fiscal Year 2016 (In thousands) Revenues Costs of revenue 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 2017 % of Revenue 2016 % of Revenue % Change $ 5,142,272 100% $ 4,796,473 854,091 17% 779,116 4,288,181 83% 4,017,357 2,276,821 605,046 355,267 90,576 3,327,710 4,181,801 44% 12% 7% 2% 2,071,926 551,418 392,454 90,546 65% 3,106,344 81% 3,885,460 960,471 19% 911,013 6,658 (100,151) 7,421 (281,950) $ 866,978 $ 636,484 100% 16% 84% 43% 11% 8% 2% 65% 81% 19% 7 % 10 % 7 % 10 % 10 % (9)% — % 7 % 8 % 5 % 36 % 46 Table of Contents Revenues Revenues increased 7% to $5.14 billion in 2017, as compared to $4.80 billion in 2016. The growth in revenues includes a $147 million increase in professional services revenue, driven by growth in implementation and consulting activities. Refer to Note (2) of the notes to consolidated financial statements for further information regarding revenues disaggregated by our business models. Costs of Revenue Costs of revenue as a percent of revenues were 17% in 2017, compared to 16% in 2016. The marginally higher costs of revenue as a percent of revenues was primarily due to higher third-party costs associated with technology resale. Operating Expenses Total operating expenses increased 7% to $3.33 billion in 2017, as compared to $3.11 billion in 2016. • • Sales and client service expenses as a percent of revenues were 44% in 2017, compared to 43% in 2016. These expenses increased 10% to $2.28 billion in 2017, from $2.07 billion in 2016. The growth in sales and client service expenses reflects hiring of services personnel to support the growth in services revenue. Software development expenses as a percent of revenues were 12% in 2017, compared to 11% in 2016. 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 2017 and 2016 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 2017 2016 $ $ 705,944 (271,411) (2,737) 173,250 704,882 (290,911) (2,785) 140,232 $ 605,046 $ 551,418 • General and administrative expenses as a percent of revenues were 7% in 2017, compared to 8% in 2016. These expenses decreased 9% to $355 million in 2017, from $392 million in 2016. The decrease in general and administrative expenses was primarily due to 2016 containing $36 million of expenses associated with a voluntary separation plan. Refer to Note (1) of the notes to consolidated financial statements for further detail regarding our 2016 voluntary separation plan. • Amortization of acquisition-related intangibles as a percent of revenues was 2% in both 2017 and 2016. These expenses remained flat at $91 million in both 2017 and 2016. Non-Operating Items • Other income, net remained flat at $7 million in both 2017 and 2016. • Our effective tax rate was 10% in 2017, compared to 31% in 2016. The decrease in the effective tax rate in 2017 is primarily a result of impacts from certain U.S. income tax reform enacted in December 2017, and the inclusion of net excess tax benefits as discrete items within the tax provision, upon our adoption of ASU 2016-09 in the first quarter of 2017. Refer to Note (12) of the notes to consolidated financial statements for further information regarding our effective tax rate. 47 Table of Contents Operations by Segment The following table presents a summary of our operating segment information for the years ended 2017 and 2016: (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 % of Segment Revenue % of Segment Revenue % Change 2016 2017 $ 4,575,171 100% $ 4,245,097 100% 755,729 1,998,544 2,754,273 1,820,898 17% 44% 60% 40% 567,101 100% 98,362 264,196 362,558 204,543 17% 47% 64% 36% 676,437 1,774,146 2,450,583 1,794,514 551,376 102,679 246,243 348,922 202,454 16% 42% 58% 42% 100% 19% 45% 63% 37% (1,064,970) $ 960,471 (1,085,955) $ 911,013 8% 12% 13% 12% 1% 3% (4)% 7% 4% 1% (2)% 5% • • Revenues increased 8% to $4.58 billion in 2017, from $4.25 billion in 2016. The growth in revenues includes a $141 million increase in professional services revenue, driven by growth in implementation and consulting activities. Refer to Note (2) of the notes to consolidated financial statements for further information regarding revenues disaggregated by our business models. Costs of revenue as a percent of revenues were 17% in 2017, compared to 16% in 2016. The marginally higher costs of revenue as a percent of revenues was primarily due to higher third-party costs associated with technology resale. • Operating expenses as a percent of revenues were 44% in 2017, compared to 42% in 2016. The increase as a percent of revenues reflects hiring of services personnel to support the growth in services revenue. Global Segment • • Revenues increased 3% to $567 million in 2017, from $551 million in 2016. The growth in revenues includes a $13 million increase in support and maintenance revenue. Refer to Note (2) of the notes to consolidated financial statements for further information regarding revenues disaggregated by our business models. Costs of revenue as a percent of revenues were 17% in 2017, compared to 19% in 2016. 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 47% in 2017, compared to 45% in 2016. The increase as a percent of revenues is primarily due to an increase in non-personnel expenses. Other, net These expenses decreased 2% from 2016 to 2017. The decrease was primarily due to 2016 containing $36 million of expenses associated with a voluntary separation plan. Refer to Note (1) of the notes to consolidated financial statements for further detail regarding our 2016 voluntary separation plan. 48 Table of Contents 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, commercial paper and time deposits with original maturities of less than 90 days, and short-term investments. At the end of 2018, we had cash and cash equivalents of $374 million and short-term investments of $401 million, as compared to cash and cash equivalents of $371 million and short-term investments of $435 million at the end of 2017. 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, along with 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 2018, we had no outstanding borrowings under this facility; however, we had $30 million of outstanding letters of credit, which reduced our available borrowing capacity to $70 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 2019. The following table summarizes our cash flows in 2018, 2017 and 2016: (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 2017 2016 2018 $ 1,454,009 $ 1,307,675 $ 1,245,637 (828,937) (1,005,851) (609,787) (110,984) (12,082) 9,222 (789,774) (676,677) (10,447) 3,203 200,062 (231,261) 370,923 170,861 402,122 $ $ 374,126 733,388 $ $ 370,923 671,444 $ $ 170,861 492,514 For the Years Ended 2018 2017 2016 $ 5,486,654 $ 5,444,531 $ 5,184,252 (4,032,498) (3,932,398) (3,665,592) (15,707) 15,560 (17,914) (18,484) (186,544) (254,539) $ 1,454,009 $ 1,307,675 $ 1,245,637 Cash flow from operations increased $146 million in 2018 compared to 2017, due primarily to net refunds of taxes. Cash flow from operations increased $62 million in 2017 compared to 2016, due primarily to an increase in cash impacting earnings, partially offset by an increase in cash used to fund working capital requirements. During 2018, 2017 and 2016, we received total client cash collections of $5.49 billion, $5.44 billion and $5.18 billion, respectively. Days sales outstanding was 79 days in the fourth quarter of 2018, compared to 82 days for the 2018 third quarter and 72 days for the 2017 fourth 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. 49 Table of Contents Cash from Investing Activities (In thousands) Capital purchases Capitalized software development costs Purchases of investments, net of sales and maturities Purchase of other intangibles Total cash flows from investing activities For the Years Ended 2018 2017 2016 $ (446,928) $ (362,083) $ (459,427) (273,693) (71,497) (36,819) (274,148) (339,974) (29,646) (293,696) (18,179) (18,472) $ (828,937) $(1,005,851) $ (789,774) Cash flows from investing activities consist primarily of capital spending and short-term investment activities. Our capital spending in 2018 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 in 2018 were higher than 2017 levels, primarily driven by an increase in spending to support our facilities requirements, including commencement of construction on the next two phases of our Innovations Campus (office space development located in Kansas City, Missouri); along with increased capital purchases to support the growth in our managed services business. Total capital spending is expected to increase more than $75 million in 2019, primarily driven by spending to support our facilities requirements, including the continued construction of our Innovations Campus. Short-term investment activity historically consists of the investment of cash generated by our business in excess of what is necessary to fund operations. Our 2016 and 2018 activity is impacted by higher levels of excess cash being used to repurchase shares of our common stock, as discussed further below. Additionally, on July 27, 2018 we acquired a minority interest in Essence Group Holdings Corporation for cash consideration of $266 million. Refer to Note (4) of the notes to consolidated financial statements for further information regarding this investment. We expect to continue seeking and completing strategic acquisitions or investments that are complementary to our business. Cash from Financing Activities (In thousands) Repayment of long-term debt For the Years Ended 2018 2017 2016 $ (75,000) $ — $ — Cash from option exercises (net of taxes paid in connection with shares surrendered by associates) 81,476 65,121 25,672 Treasury stock purchases Contingent consideration payments for acquisition of businesses Other Total cash flows from financing activities (623,127) (173,434) (700,275) (1,691) 8,555 (2,671) (2,074) — — $ (609,787) $ (110,984) $ (676,677) In March 2018, we repaid our $75 million floating rate Series 2015-C Notes due February 15, 2022. Refer to Note (9) of the notes to consolidated financial statements for further information regarding our outstanding indebtedness. 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 net cash inflows from stock option exercises to continue in 2019 based on the number of exercisable options at the end of 2018 and our current stock price. Refer to Note (14) of the notes to consolidated financial statements for additional information regarding our stock option and equity plans. During 2018, 2017 and 2016, we repurchased 11.2 million shares of our common stock for total consideration of $644 million, 2.7 million shares of our common stock for total consideration of $173 million, and 13.7 million shares of our common stock for total consideration of $700 million, respectively. At the end of 2018, $283 million remains available for repurchase under our current repurchase program. We may continue to repurchase shares under this program in 2019, which will be dependent on a number of factors, including the price of our common stock. Although we may continue to repurchase shares, there is no assurance that we will repurchase up to the full amount remaining under the program. Refer to Note (14) of the notes to consolidated financial statements for further information regarding our share repurchase program. 50 Table of Contents Subject to declaration by the Board of Directors, the Company plans to initiate a quarterly cash dividend of $0.15 per share, with the first payment expected in the third quarter of 2019. Future dividends will be subject to the determination, declaration and discretion of the Board of Directors and compliance with our covenants under our credit facility. The Company anticipates that the cash used for future dividends and share repurchases will come primarily from cash from operations. 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 2018 2017 2016 $ 1,454,009 $ 1,307,675 $ 1,245,637 (446,928) (273,693) (362,083) (274,148) (459,427) (293,696) $ 733,388 $ 671,444 $ 492,514 Free cash flow increased $62 million in 2018, compared to 2017. This increase was primarily due to an increase in cash from operations, partially offset by increased capital purchases. Free cash flow increased $179 million in 2017, compared to 2016. This increase was primarily due to an increase in cash from operations, along with reduced capital purchases. 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 is 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. 51 Table of Contents 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 2018, except short-term purchase order commitments arising in the ordinary course of business. (In thousands) Balance sheet obligations(a): Long-term debt obligations 2019 2020 2021 2022 2023 2024 and thereafter Total Payments Due by Period $ — $ 2,500 $ — $ 226,100 $ 1,700 $ 208,862 $ 439,162 Interest on long-term debt obligations Capital lease obligations Interest on capital lease obligations 14,315 4,914 143 14,315 14,315 10,738 7,160 10,740 — — — — — — — — — — 71,583 4,914 143 Other obligations: Operating lease obligations Purchase obligations 29,739 138,851 27,669 102,773 22,904 24,746 17,240 15,517 10,166 15,486 17,743 26,924 125,461 324,297 Total $ 187,962 $ 147,257 $ 61,965 $ 269,595 $ 34,512 $ 264,269 $ 965,560 (a) At the end of 2018, liabilities for unrecognized tax benefits were $19 million. We have no off balance sheet arrangements as defined in Regulation S-K. The effects of inflation on our business during 2018, 2017 and 2016 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, 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), Note (2), and Note (12) of the notes to consolidated financial statements expands upon discussion of our accounting policies for these areas. Revenue Recognition In the first quarter of 2018, we adopted Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09, as amended, replaced most existing revenue recognition guidance in U.S. GAAP. This new guidance requires a significant amount of judgments and estimates in implementing its five-step process to be followed in determining the amount and timing of revenue recognition and related disclosures. Refer to Note (2) of the notes to consolidated financial statements for further discussion regarding significant judgments involved in our application of ASU 2014-09. 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 52 Table of Contents 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. Income Taxes We make a number of assumptions and estimates in determining the appropriate amount of expense to record for income taxes. These assumptions and estimates consider the taxing jurisdictions in which we operate as well as current tax regulations. Accruals are established for estimates of tax effects for certain transactions, business structures and future projected profitability of our businesses based on our interpretation of existing facts and circumstances. If these assumptions and estimates were to change as a result of new evidence or changes in circumstances, the change in estimate could result in a material adjustment to the consolidated financial statements. We have discussed the development and selection of these critical accounting estimates with the Audit Committee of our Board of Directors and the Audit Committee has reviewed our disclosure contained herein. Item 7A. Quantitative and Qualitative Disclosures about Market Risk. We 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 29, 2018 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 to consolidated financial statements required by this Item are submitted as a separate part of this report. See Note (18) 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. Our management is responsible for maintaining disclosure controls and procedures (as defined in the Exchange Act Rules 13a-15(e) and 15d-15(e)). We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report (the "Evaluation Date"). Based upon that evaluation, our CEO and CFO have concluded that, as of the Evaluation Date, our disclosure controls and procedures were designed and were effective to provide reasonable assurance that the information required to be disclosed by us in our reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time period specified in SEC rules and forms and is 53 Table of Contents accumulated and communicated to our management, including our CEO and CFO, to allow timely decisions regarding required disclosure. b) Management's Report on Internal Control over Financial Reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our management assessed the effectiveness of our internal control over financial reporting as of December 29, 2018. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in its Internal Control-Integrated Framework (2013). Based on this assessment, our management has concluded that, as of December 29, 2018, our internal control over financial reporting was effective based on these criteria. Our 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 our internal control over financial reporting, which is included herein under "Report of Independent Registered Public Accounting Firm". c) Changes in Internal Control over Financial Reporting. During the fourth fiscal quarter ended December 29, 2018, progress continued on a plan that calls for modifications and enhancements to our internal controls over financial reporting in relation to our upcoming adoption of the new lease standard effective in the first quarter of 2019. Such plan resulted in changes to certain processes and procedures during the quarter. Specifically, we implemented/modified internal controls to address: • Monitoring of the adoption process; and • The gathering of information and evaluation of analysis used in the development of disclosures required prior to the new standard's adoption. As we continue the implementation process, we expect that there will be additional changes in internal controls over financial reporting. Except as disclosed above, there were no other changes in our internal controls over financial reporting during the fiscal quarter ended December 29, 2018, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. d) Limitations on Controls. Our management, including our 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, our 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 54 Table of Contents PART III. Item 10. Directors, Executive Officers and Corporate Governance. The information under "Information Concerning Directors," "Meetings of the Board and Committees," "Section 16(a) Beneficial Ownership Reporting Compliance," "Corporate Governance: Code of Business Conduct and Ethics," "Consideration of Director Nominees," "Committees of the Board: Audit Committee" and "Certain Transactions" as it relates to family relationships as set forth in the Company's definitive proxy statement related to its 2019 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 2018 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," "2018 Director Compensation Table," "Compensation Committee Report," "Compensation Discussion and Analysis," "Summary Compensation Table," "2018 Grants of Plan-Based Awards," "Outstanding Equity Awards at 2018 Fiscal Year-End," "2018 Option Exercises and Stock Vested," "Potential Payments Under Termination or Change in Control," "Pay Ratio" 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. 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 29, 2018: (In thousands, except per share data) Plan category Equity compensation plans approved by security holders (4) Equity compensation plans not approved by security holders Total Securities to be issued upon exercise of outstanding options and rights (1) 22,674 $ — 22,674 Weighted average exercise price per share (2) 52.31 — Securities available for future issuance(3) 7,400 — 7,400 (1) Includes grants of stock options, time-based and performance-based restricted stock and restricted stock units. (2) Includes weighted-average exercise price of outstanding stock options only. (3) Excludes securities to be issued upon exercise of outstanding options and rights. (4) Includes the Stock Option Plan D, Stock Option Plan E, 2001 Long-Term Incentive Plan F, 2004 Long-Term Incentive Plan G and 2011 Omnibus Equity Incentive Plan. All new grants are made under the 2011 Omnibus Equity Incentive Plan, as the previous plans are no longer active. 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. 55 Table of Contents 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. PART IV. Item 15. Exhibits, Financial Statement Schedules. a) Financial Statements and Exhibits (1) Consolidated Financial Statements: Reports of Independent Registered Public Accounting Firm Consolidated Balance Sheets - As of December 29, 2018 and December 30, 2017 Consolidated Statements of Operations -Years Ended December 29, 2018, December 30, 2017 and December 31, 2016 Consolidated Statements of Comprehensive Income - Years Ended December 29, 2018, December 30, 2017 and December 31, 2016 Consolidated Statements of Cash Flows - Years Ended December 29, 2018, December 30, 2017 and December 31, 2016 Consolidated Statements of Changes in Shareholders' Equity - Years Ended December 29, 2018, December 30, 2017 and December 31, 2016 Notes to Consolidated Financial Statements (2) Financial Statement Schedules All schedules are omitted because they are not required or the required information is shown in the financial statements or notes thereto. b) Exhibits 56 Table of Contents Exhibit Number Exhibit Description 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* Third Restated Certificate of Incorporation of Cerner Corporation Amended & Restated Bylaws of Cerner Corporation (effective March 2, 2018) 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 Executive Employment Agreement between Cerner Corporation and Brent Shafer Relocation Agreement between Cerner Corporation and Brent Shafer Amended & Restated Aircraft Time Sharing Agreement between Cerner Corporation and Brent Shafer Amended & Restated Executive Employment Agreement between Cerner Corporation and Clifford W. Illig Amended Employment Agreement between Cerner Corporation and Zane M. Burke Separation Agreement between Cerner Corporation and Zane M. Burke Amended Employment Agreement between Cerner Corporation and Michael R. Nill Amended Employment Agreement between Cerner Corporation and Jeffrey A. Townsend Relocation Agreement between Cerner Corporation and Jeffrey A. Townsend Amended Employment Agreement between Cerner Corporation and Marc G. Naughton Amended Employment Agreement between Cerner Corporation and John Peterzalek Amended Stock Option Plan D of Registrant dated December 8, 2000 Amended Stock Option Plan E of Registrant dated December 8, 2000 Cerner Corporation Associate Equity Participation Program Non-Qualified Stock Option Agreement Incorporated by Reference Form 10-K 8-K Exhibit(s) Filing Date SEC File No./Film No. Filed Herewith 3(a) 3.1 2/11/2015 3/6/2018 10-K 4(a) 10-K 10(a) 8-K 99.1 2/28/2007 000-15386/07658265 2/28/2007 000-15386/07658265 6/3/2010 000-15386/10875957 10-K 10.3 2/12/2018 10-Q 10.2 5/3/2018 10-Q 10.1 10/26/2018 8-K/A 10.1 8/17/2017 8-K 10.1 9/11/2017 10-Q 10.2 10/26/2018 8-K 8-K 10.2 10.3 9/11/2017 9/11/2017 10-Q 10.10 10/27/2017 8-K 10.4 9/11/2017 10-K 10(f) 10-K 10(g) 3/30/2001 000-15386/1586224 3/30/2001 000-15386/1586224 X X 57 10.17* Cerner Corporation 2001 Long-Term Incentive Plan F DEF 14A Annex I 4/16/2001 000-15386/1603080 Table of Contents 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 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 10-K 10(v) 10-Q 10(a) 10-K 10(g) 10-K 10(q) 3/17/2005 000-15386/05688830 11/10/2005 000-15386/051193974 2/27/2008 000-15386/08646565 2/27/2008 000-15386/08646565 8-K 10.2 5/27/2015 10-Q 10.2 5/6/2016 Cerner Corporation 2011 Omnibus Equity Incentive Plan - Performance Based Restricted Stock Agreement 10-K 10(u) 2/8/2013 000-15386/13586825 Cerner Corporation 2011 Omnibus Equity Incentive Plan - Performance Based Restricted Stock Agreement Cerner Corporation 2011 Omnibus Equity Incentive Plan - Performance Based Restricted Stock Agreement Cerner Corporation 2011 Omnibus Equity Incentive Plan - Time Based Restricted Stock Agreement Cerner Corporation 2011 Omnibus Equity Incentive Plan - Time Based Restricted Stock Agreement 10-Q 10.3 5/6/2016 10-Q 10.4 10/27/2017 10-Q 10.4 5/6/2016 10-Q 10.3 10/27/2017 Cerner Corporation 2011 Omnibus Equity Incentive Plan-Non-Qualified Stock Option Grant Certificate 10-K 10(v) 2/8/2013 000-15386/13586825 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 2011 Omnibus Equity Incentive Plan - Non-Qualified Stock Option Grant Certificate Cerner Corporation 2011 Omnibus Equity Incentive Plan - Time-Based Restricted Stock Unit Agreement Cerner Corporation 2011 Omnibus Equity Incentive Plan - Time-Based Restricted Stock Unit Agreement Cerner Corporation 2011 Omnibus Equity Incentive Plan - Performance-Based Restricted Stock Unit Agreement Cerner Corporation 2011 Omnibus Equity Incentive Plan - Performance-Based Restricted Stock Unit Agreement Cerner Corporation 2001 Associate Stock Purchase Plan as Amended and Restated January 1, 2019 Cerner Corporation 2018 Performance Compensation Plan (effective January 1, 2018) 2018 Executive Performance Agreement - Section 16 Officer Interparty Agreement, dated January 19, 2010, among Kansas Unified Development, LLC, OnGoal, LLC and Cerner Corporation 10-Q 10.5 5/6/2016 10-Q 10.2 8/3/2016 10-Q 10.2 10/27/2017 10-Q 10.2 4/28/2017 10-Q 10.5 10/27/2017 10-Q 10.3 4/28/2017 10-Q 10.6 10/27/2017 X 8-K 8-K 8-K 10.1 10.2 99.1 3/6/2018 3/6/2018 1/25/2010 000-15386/10543089 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* 10.37* 10.38* 10.39* 10.40 58 Table of Contents 10.41 10.42 10.43 10.44 21 23 31.1 31.2 32.1 32.2 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 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 D. Brent Shafer 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 D. Brent Shafer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002 Certification of Marc G. Naughton pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002 101.INS XBRL Instance Document 101.SCH XBRL Taxonomy Extension Schema Document 101.CAL 101.LAB 101.PRE 101.DEF XBRL Taxonomy Extension Calculation Linkbase Document XBRL Taxonomy Extension Labels Linkbase Document XBRL Taxonomy Extension Presentation Linkbase Document XBRL Taxonomy Extension Definition Linkbase Document 10-Q 2.1 10/24/2014 000-15386/141172425 8-K 10.1 2/2/2015 8-K 10.1 12/5/2014 000-15386/141269611 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 59 Table of Contents 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. Item 16. Form 10-K Summary. None. 60 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 8, 2019 CERNER CORPORATION By: /s/ Brent Shafer D. Brent Shafer 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/ Brent Shafer February 8, 2019 Brent Shafer, Chairman of the Board and Chief Executive Officer (Principal Executive Officer) /s/ Marc G. Naughton February 8, 2019 Marc G. Naughton, Executive Vice President and Chief Financial Officer (Principal Financial Officer) /s/ Michael R. Battaglioli February 8, 2019 Michael R. Battaglioli, Vice President and Chief Accounting Officer (Principal Accounting Officer) /s/ Gerald E. Bisbee, Jr. Gerald E. Bisbee, Jr., Ph.D., Director /s/ Denis A. Cortese Denis A. Cortese, M.D., Director /s/ Mitchell E. Daniels Mitchell E. Daniels, Director /s/ Linda M. Dillman Linda M. Dillman, Director /s/ Julie L. Gerberding Julie L. Gerberding, M.D., Director /s/ William D. Zollars William D. Zollars, Director February 8, 2019 February 8, 2019 February 8, 2019 February 8, 2019 February 8, 2019 February 8, 2019 61 Table of Contents Report of Independent Registered Public Accounting Firm To the Shareholders and Board of Directors Cerner Corporation: Opinion on Internal Control Over Financial Reporting We have audited Cerner Corporation and subsidiaries' (the "Company") internal control over financial reporting as of December 29, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 29, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the consolidated balance sheets of the Company as of December 29, 2018 and December 30, 2017, 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 29, 2018, and the related notes (collectively, the consolidated financial statements), and our report dated February 8, 2019 expressed an unqualified opinion on those consolidated financial statements. Basis for Opinion The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. 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 of internal control over financial reporting 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. Definition and Limitations of Internal Control Over Financial Reporting 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. /s/KPMG LLP Kansas City, Missouri February 8, 2019 62 Table of Contents Report of Independent Registered Public Accounting Firm To the Shareholders and Board of Directors Cerner Corporation: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Cerner Corporation and subsidiaries (the "Company") as of December 29, 2018 and December 30, 2017, 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 29, 2018, and the related notes (collectively, the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 29, 2018 and December 30, 2017, and the results of its operations and its cash flows for each of the years in the three year period ended December 29, 2018, 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) ("PCAOB"), the Company's internal control over financial reporting as of December 29, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 8, 2019 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting. Changes in Accounting Principle As discussed in note 2 to the consolidated financial statements, the Company changed its method of accounting for revenue transactions with customers in 2018 due to the adoption of Accounting Standards Update 2014-09, "Revenue from Contracts with Customers (Topic 606)". The Company also changed its method of accounting for certain share-based payment award transactions in 2017 due to the adoption of Accounting Standards Update 2016-09 "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting". Basis for Opinion These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/KPMG LLP We have served as the Company's auditor since 1983. Kansas City, Missouri February 8, 2019 63 Table of Contents CERNER CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS As of December 29, 2018 and December 30, 2017 (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 Other liabilities Total liabilities Shareholders’ Equity: Common stock, $.01 par value, 500,000,000 shares authorized, 362,212,843 shares issued at December 29, 2018 and 359,204,864 shares issued at December 30, 2017 Additional paid-in capital Retained earnings 2018 2017 $ 374,126 $ 370,923 401,285 434,844 1,183,494 1,042,781 25,029 334,870 15,749 515,930 2,318,804 2,380,227 1,743,575 1,603,319 894,512 847,544 405,305 300,046 198,850 822,159 853,005 479,753 196,837 134,011 $ 6,708,636 $ 6,469,311 $ 293,534 $ 218,996 4,914 399,189 195,931 69,122 962,690 438,802 336,379 42,376 11,585 311,337 183,770 63,907 789,595 515,130 336,446 42,792 1,780,247 1,683,963 3,622 3,592 1,559,562 1,380,371 5,576,525 4,938,866 Treasury stock, 37,905,013 shares at December 29, 2018 and 26,743,517 shares at December 30, 2017 (2,107,768) (1,464,099) Accumulated other comprehensive loss, net Total shareholders’ equity Total liabilities and shareholders’ equity See notes to consolidated financial statements. (103,552) (73,382) 4,928,389 4,785,348 $ 6,708,636 $ 6,469,311 64 Table of Contents CERNER CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS For the years ended December 29, 2018, December 30, 2017 and December 31, 2016 (In thousands, except per share data) Revenues Costs and expenses: Costs of revenue Sales and client service Software development (Includes amortization of $210,228, $173,250 and $140,232, 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 2018 2017 2016 $ 5,366,325 $ 5,142,272 $ 4,796,473 937,348 854,091 779,116 2,493,696 2,276,821 2,071,926 683,663 389,469 87,364 605,046 355,267 90,576 551,418 392,454 90,546 4,591,540 4,181,801 3,885,460 774,785 960,471 911,013 26,066 6,658 7,421 800,851 967,129 918,434 (170,792) (100,151) (281,950) $ $ $ $ $ $ 630,059 1.91 1.89 330,084 333,572 866,978 2.62 2.57 331,373 337,999 $ $ $ 636,484 1.88 1.85 337,740 343,653 65 Table of Contents CERNER CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the years ended December 29, 2018, December 30, 2017 and December 31, 2016 (In thousands) Net earnings Foreign currency translation adjustment and other (net of taxes (benefit) of $(645), $4,909 and $2,092, respectively) Unrealized holding gain (loss) on available-for-sale investments (net of taxes (benefit) of $132, $(416) and $37, respectively) Comprehensive income See notes to consolidated financial statements. For the Years Ended 2018 2017 2016 $ 630,059 $ 866,978 $ 636,484 (30,575) 37,463 (33,871) 405 (680) 60 $ 599,889 $ 903,761 $ 602,673 66 Table of Contents CERNER CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 29, 2018, December 30, 2017 and December 31, 2016 (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: 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 Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of long-term debt Proceeds from exercise of stock options Payments to taxing authorities in connection with shares directly withheld from associates Treasury stock purchases Contingent consideration payments for acquisition of businesses Other Net cash used in financing activities Effect of exchange rate changes on cash and cash equivalents Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period See notes to consolidated financial statements. For the Years Ended 2018 2017 2016 $ 630,059 $ 866,978 $ 636,484 642,591 580,723 95,423 34,428 83,019 47,409 (207,785) (32,836) (9,307) 156,216 65,202 (27,849) 81,538 (6,507) (972) (191,369) 6,960 18,358 (3,114) (67,481) 504,236 74,536 (11,517) 78,258 (666) (66,658) (13,197) 64,073 1,555 (21,467) 1,454,009 1,307,675 1,245,637 (446,928) (273,693) (623,293) 551,796 (36,819) (362,083) (274,148) (632,048) 292,074 (29,646) (459,427) (293,696) (482,078) 463,899 (18,472) (828,937) (1,005,851) (789,774) (75,000) 91,349 (9,873) — 76,705 (11,584) — 63,794 (38,122) (623,127) (173,434) (700,275) (1,691) 8,555 (2,671) (2,074) — — (609,787) (110,984) (676,677) (12,082) 9,222 (10,447) 3,203 370,923 200,062 170,861 (231,261) 402,122 $ 374,126 $ 370,923 $ 170,861 67 Table of Contents CERNER CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY For the years ended December 29, 2018, December 30, 2017 and December 31, 2016 (In thousands) Common Stock Additional Retained Treasury Shares Amount Paid-in Capital Earnings Stock Accumulated Other Comprehensive Loss, Net 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) Exercise of stock options (including net-settled option exercises) 5,474 Employee share-based compensation expense Cumulative effect of accounting change (ASU 2016-16) Other comprehensive income (loss) Treasury stock purchases Net earnings — — — — — 55 — — — — — 66,439 83,019 — — — — — — (22,439) — — — — — — (173,434) 866,978 — — — — 36,783 — — Balance at December 30, 2017 359,205 3,592 1,380,371 4,938,866 (1,464,099) (73,382) Exercise of stock options (including net-settled option exercises) 3,008 Employee share-based compensation expense Cumulative effect of accounting change (ASU 2014-09) Other comprehensive income (loss) Treasury stock purchases Net earnings — — — — — 30 — — — — — 83,768 95,423 — — — — — — 7,600 — — — — — — (643,669) 630,059 — — — — (30,170) — — Balance at December 29, 2018 362,213 $ 3,622 $ 1,559,562 $ 5,576,525 $ (2,107,768) $ (103,552) See notes to consolidated financial statements. 68 Table of Contents CERNER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Basis of Presentation, Nature of Operations and Summary of Significant Accounting Policies Basis of Presentation The consolidated financial statements include all the accounts of Cerner Corporation ("Cerner," the "Company," "we," "us" or "our") and its subsidiaries. All significant intercompany transactions have been eliminated in consolidation. The consolidated financial statements were prepared using accounting principles generally accepted in the United States 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 2018, 2017 and 2016 each consisted of 52 weeks and ended on December 29, 2018, December 30, 2017 and December 31, 2016, respectively. All references to years in these notes to consolidated financial statements represent fiscal years unless otherwise noted. Nature of Operations We design, develop, market, install, host and support health care information technology, health care devices, hardware and content solutions for health care organizations and consumers. We also provide a wide range of value-added services, including implementation and training, remote hosting, operational management services, revenue cycle services, support and maintenance, health care data analysis, clinical process optimization, transaction processing, employer health centers, employee wellness programs and third party administrator services for employer-based health plans. Factors Impacting Comparability of Financial Statements As of December 29, 2018, we have separately presented deferred income taxes in our consolidated balance sheets and reclassified other non-current liabilities to the caption "other liabilities". While this reporting change did not impact our consolidated results, prior period reclassifications have been made to conform to the current period presentation. Voluntary Separation Plans In the fourth quarter of 2016, we adopted a 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 in general and administrative expense in our consolidated statements of operations. At the end of 2016, this program was complete. In January 2019, we adopted a new voluntary separation plan ("2019 VSP") for eligible associates. Generally, this 2019 VSP is available to U.S. associates who meet a minimum level of combined age and tenure, excluding, among others, or executive officers. Associates who elect to participate in the 2019 VSP will receive financial benefits commensurate with their tenure and position, along with vacation payout, medical benefits, and accelerated vesting of certain share-based payment awards. Eligible associates will have until February 13, 2019 to indicate interest in participation. For those associates approved to participate, their voluntary departure date will be in April 2019. We expect to record expense related to the 2019 VSP in 2019, once we know the level of associate participation. Supplemental Disclosures of Cash Flow Information (In thousands) Cash paid during the year for: For the Years Ended 2017 2016 2018 Interest (including amounts capitalized of $12,710, $10,387, and $14,852, respectively) $ 15,707 $ 17,914 $ 18,484 Income taxes, net of refunds (15,560) 186,544 254,539 69 Table of Contents Summary of Significant Accounting Policies (a) Revenue Recognition - Refer to Note (2) for discussion regarding new revenue guidance adopted in the first quarter of 2018. (b) Cash Equivalents - Cash equivalents consist of short-term marketable securities with original maturities less than 90 days. (c) Available-for-sale Investments – Our short-term available-for-sale investments are primarily invested in time deposits, commercial paper, government and corporate bonds, with maturities of less than one year. Our long-term available-for-sale investments are primarily invested in government and corporate bonds with maturities of less than two years. 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. Refer to Note (4) and Note (5) 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. (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 Accounting Standards Codification Topic ("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 2018, 2017 or 2016. 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 70 Table of Contents 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. In 2017 we adopted Accounting Standards Update ("ASU") 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 impacted several aspects of our 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. Prior to the adoption of ASU 2016-09, when associates exercised stock options, or upon the vesting of restricted stock awards, we recognized 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 ("APIC"). During 2016 we recognized net excess tax benefits in APIC of $53 million. 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 was required to be applied prospectively, and prior periods were not retrospectively adjusted. We utilize the treasury stock method for calculating diluted earnings per share. Prior to the adoption of ASU 2016-09, this method assumed that any net excess tax benefits generated from the hypothetical exercise of dilutive options were used to repurchase outstanding shares. Assumed share repurchases for net excess tax benefits included in our calculation of diluted earnings per share for 2016 were 2.0 million shares. Under the new guidance, net 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 has increased (comparatively). This provision of the new guidance was required to be applied prospectively, and prior periods were not retrospectively adjusted. (m) Voluntary Separation Benefits - We account for voluntary separation benefits in accordance with the provisions of ASC 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. (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. 71 Table of Contents (p) Accounting Pronouncements Adopted in 2018 Revenue Recognition. In the first quarter of 2018, we adopted new revenue guidance. Refer to Note (2) for further details. Financial Instruments. In January 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which was subsequently amended in February 2018 by ASU 2018-03, Technical Corrections and Improvements to Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. This new guidance addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Such guidance impacts how we account for our investments reported under the cost method of accounting as follows: • • Equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) are required to be measured at fair value with changes in fair value recognized in net earnings. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The impairment assessment of equity investments without readily determinable fair values will require a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value. We adopted this new guidance effective for our first quarter of 2018. Provisions within the guidance applicable to the Company were required to be applied prospectively. We have elected to measure our cost method investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. At December 29, 2018, we had cost method investments of $277 million, which do not have readily determinable fair values. Such investments are included in long-term investments in our consolidated balance sheets. We did not record any changes in the measurement of such investments during 2018. Internal-Use Software. In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract (a consensus of the FASB Emerging Issues Task Force). Such guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. ASU 2018-15 is effective for the Company in the first quarter of 2020, with early adoption permitted, and either prospective or retrospective application accepted. The Company adopted the standard early, in the third quarter of 2018, and elected prospective application. The adoption of such guidance did not have a material impact on our consolidated financial statements and related disclosures. (q) Recently Issued Accounting Pronouncements 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. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which includes new transition guidance for the adoption of ASU 2016-02. Such guidance creates an additional transition method allowing entities to use the effective date of ASU 2016-02 as the date of initial application on transition. Under this method, entities will not be required to recast comparative periods when transitioning to the new guidance. Entities will also not be required to present comparative period disclosures under the new guidance in the period of adoption. We expect to select this new transition method upon our adoption in the first quarter of 2019. In the fourth quarter of 2018, we continued our analysis of contractual arrangements that may qualify as leases under the new standard. We currently expect the most significant impact of this new guidance will be the recognition of right-of-use assets and lease liabilities for our operating leases of office space. Refer to Note (16) where we disclose aggregate minimum future payments under these arrangements of $125 million at the end of 2018. 72 Table of Contents Our analysis and evaluation of the new standard will continue through the effective date in the first quarter of 2019. We must complete our analysis of contractual arrangements, quantify all impacts of this new guidance, and evaluate related disclosures. We must also implement any necessary changes/modifications to processes, accounting systems, and internal controls. 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 do not expect to early adopt. Callable Debt Securities. In March 2017, the FASB issued ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities, which shortens the amortization period for certain investments in callable debt securities purchased at a premium by requiring the premium be amortized to the earliest call date. Such guidance will impact how premiums are amortized on our available-for-sale investments. ASU 2017-08 is effective for the Company in the first quarter of 2019, with early adoption permitted. The standard requires the use of the modified retrospective (cumulative effect) transition approach. We do not expect ASU 2017-08 to have a material impact on our consolidated financial statements and related disclosures. Accumulated Other Comprehensive Income. In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows a reclassification from accumulated other comprehensive income ("AOCI") to retained earnings for "stranded tax effects" resulting from certain U.S. tax reform enacted in December 2017. Such "stranded tax effects" were created when deferred tax assets and liabilities related to items in AOCI were remeasured at the lower U.S. corporate tax rate in the period of enactment. ASU 2018-02 is effective for the Company in the first quarter of 2019, with early adoption permitted. The guidance in this ASU is to be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. corporate tax rate was recognized. We are currently evaluating the effect that ASU 2018-02 will have on our consolidated financial statements and related disclosures. Collaborative Arrangements. In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606, which clarifies when transactions between participants in a collaborative arrangement are within the scope of the FASB's new revenue standard (Topic 606). Such guidance clarifies revenue recognition and financial statement presentation for transactions between collaboration participants. ASU 2018-18 is effective for the Company in the first quarter of 2020, with early adoption permitted. The standard requires retrospective application to the date we adopted Topic 606, December 31, 2017. We are currently evaluating the effect that ASU 2018-18 will have on our consolidated financial statements and related disclosures, and we have not determined if we will early adopt. (2) Revenue Recognition In May 2014, the FASB issued 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 replaced 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 prior U.S. GAAP. 73 Table of Contents ASU 2014-09, as amended ("Topic 606"), was effective for the Company in the first quarter of 2018. We selected the modified retrospective (cumulative effect) transition method of adoption. Such method provides that the cumulative effect from prior periods upon applying the new guidance to contracts which were not complete as of the adoption date be recognized in our consolidated balance sheets as of December 31, 2017, including an adjustment to retained earnings. A summary of such cumulative effect adjustment is as follows: (In thousands) Receivables, net Prepaid expenses and other Other assets Accounts payable Deferred income taxes Retained earnings Increase / (Decrease) $ (79,492) (2,253) 81,157 (9,361) 1,173 7,600 Prior periods were not retrospectively adjusted. The impact of applying Topic 606 (versus prior U.S. GAAP) increased 2018 revenues and earnings before income taxes by $207 million and $101 million, respectively. This impact is primarily driven by certain new contracts in 2018, which include certain specified upgrades for which we are required to estimate stand-alone selling price when allocating transaction consideration to performance obligations. Under prior U.S. GAAP, we would not have been able to establish vendor specific objective evidence ("VSOE") of fair value for such items, and thus would have delayed the timing of revenue recognition for such contracts. The application of Topic 606 (versus prior U.S. GAAP) did not have a significant impact on other line items in our consolidated statements of operations, statements of comprehensive income, and statements of cash flows in 2018. Additionally, the application of Topic 606 did not have a significant impact on our consolidated balance sheet as of December 29, 2018. Revenue Recognition Policy We enter into contracts with customers that may include various combinations of our software solutions and related services, which are generally capable of being distinct and accounted for as separate performance obligations. The predominant model of customer procurement involves multiple deliverables and includes a software license agreement, project-related implementation and consulting services, software support, hosting services, and computer hardware. We allocate revenues to each performance obligation within an arrangement based on estimated relative stand-alone selling price. Revenue is then recognized for each performance obligation upon transfer of control of the software solution or services to the customer in an amount that reflects the consideration we expect to receive. Generally, we recognize revenue under Topic 606 for each of our performance obligations as follows: • • • • • Perpetual software licenses - We recognize perpetual software license revenues when control of such licenses are transferred to the client ("point in time"). We determine the amount of consideration allocated to this performance obligation using the residual approach. Software as a service - We recognize software as a service ratably over the related hosting period ("over time"). Time-based software and content license fees - We recognize a license component of time-based software and content license fees upon delivery to the client ("point in time") and a non-license component (i.e. support) ratably over the respective contract term ("over time"). Hosting - Remote hosting recurring services are recognized ratably over the hosting service period ("over time"). Certain of our hosting arrangements contain fees deemed to be a "material right" under Topic 606. We recognize such fees over the term that will likely affect the client's decision about whether to renew the related hosting service ("over time"). Services - We recognize revenue for fixed fee services arrangements over time, utilizing a labor hours input method. For fee-for-service arrangements, we recognize revenue over time as hours are worked at the rates clients are 74 Table of Contents invoiced, utilizing the "as invoiced" practical expedient available in Topic 606. For stand-ready services arrangements, we recognize revenue ratably over the related service period. • • • Support and maintenance - We recognize support and maintenance fees ratably over the related contract period ("over time"). Hardware - We recognize hardware revenues when control of such hardware/devices is transferred to the client ("point in time"). Transaction processing - We recognize transaction processing revenues ratably as we provide such services ("over time"). Such revenues are recognized net of any taxes collected from customers and subsequently remitted to governmental authorities. Disaggregation of Revenue The following table presents revenues disaggregated by our business models: Domestic Segment 2018 Global Segment Total For the Years Ended 2017(1) Global Segment Domestic Segment Total Domestic Segment 2016(1) Global Segment Total $ 573,034 $ 40,544 $ 613,578 $ 563,524 $ 48,666 $ 612,190 $ 499,422 $ 49,697 $ 549,119 208,722 300,555 36,354 25,154 245,076 325,709 248,524 446,426 25,069 22,963 273,593 469,389 246,694 416,311 27,781 26,057 274,475 442,368 (In thousands) Licensed software Technology resale Subscriptions Professional services 1,574,407 237,056 1,811,463 1,393,056 198,793 1,591,849 1,251,726 192,852 1,444,578 Managed services 1,060,081 94,860 1,154,941 Support and maintenance 921,336 196,780 1,118,116 Reimbursed travel 92,131 5,311 97,442 970,609 856,304 96,728 76,523 1,047,132 190,352 1,046,656 4,735 101,463 909,584 838,745 82,615 71,993 981,577 177,066 1,015,811 5,930 88,545 Total revenues $4,730,266 $ 636,059 $5,366,325 $4,575,171 $ 567,101 $5,142,272 $4,245,097 $ 551,376 $4,796,473 (1)As noted above, prior period amounts were not adjusted upon our adoption of Topic 606. The following table presents our revenues disaggregated by timing of revenue recognition: (In thousands) Revenue recognized over time Revenue recognized at a point in time Total revenues For the Year Ended Domestic Segment 2018 Global Segment Total $ 4,271,934 $ 569,780 $ 4,841,714 458,332 66,279 524,611 $ 4,730,266 $ 636,059 $ 5,366,325 75 Table of Contents Transaction Price Allocated to Remaining Performance Obligations As of December 29, 2018, the aggregate amount of transaction price allocated to performance obligations that are unsatisfied (or partially unsatisfied) for executed contracts approximates $15.25 billion, of which we expect to recognize approximately 29% of the revenue over the next 12 months and the remainder thereafter. Contract Liabilities 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. Customer payments received in advance of satisfaction of the related performance obligations are deferred as contract liabilities. Such amounts are classified in our consolidated balance sheets as deferred revenue. During 2018, substantially all of our contract liability balance at the beginning of such period was recognized in revenues. Costs to Obtain or Fulfill a Contract We have determined the only significant incremental costs incurred to obtain contracts with clients within the scope of Topic 606 are sales commissions paid to our associates. We record sales commissions as an asset, and amortize to expense ratably over the remaining performance periods of the related contracts with remaining performance obligations. At December 29, 2018, our consolidated balance sheet includes an $86 million asset related to sales commissions to be expensed in future periods, which is included in other assets. In 2018, we recognized $41 million of amortization related to this sales commissions asset, which is included in costs of revenue in our consolidated statements of operations. Significant Judgments when Applying Topic 606 Our contracts with clients typically include various combinations of our software solutions and related services. Determining whether such software solutions and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. Specifically, judgment is required to determine whether software licenses are distinct from services and hosting included in an arrangement. Contract transaction price is allocated to performance obligations using estimated stand-alone selling price. Judgment is required in estimating stand-alone selling price for each distinct performance obligation. We determine stand-alone selling price maximizing observable inputs such as stand-alone sales when they exist or substantive renewal prices charged to clients. In instances where stand-alone selling price is not observable, we utilize an estimate of stand-alone selling price. Such estimates are derived from various methods that include: cost plus margin, historical pricing practices, and the residual approach, which requires a considerable amount of judgment. The labor hours input method used for our fixed fee services performance obligation is dependent on our ability to reliably estimate the direct labor hours to complete a project, which may span several years. We utilize our historical project experience and detailed planning process as a basis for our future estimates to complete current projects. Certain of our arrangements contain variable consideration. We do not believe our estimates of variable consideration to be significant to our determination of revenue recognition. Practical Expedients We have reflected the aggregate effect of all contract modifications occurring prior to the Topic 606 adoption date when (i) identifying the satisfied and unsatisfied performance obligations, (ii) determining the transaction price, and (iii) allocating the transaction price to the satisfied and unsatisfied performance obligations. Revenue Recognition - 2017 and Prior Prior to the adoption of Topic 606, we recognized 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 was recognized when all of the following criteria were met: • Persuasive evidence of an arrangement existed; 76 Table of Contents Delivery had occurred or services had been rendered; • • Our fee was fixed or determinable; and • Collection of the revenue was reasonably assured. For multiple element arrangements that contained software and non-software elements, we allocated revenue to software and software-related elements as a group and any non-software element separately. After the arrangement consideration had been allocated to the non-software elements, revenue was recognized when the basic revenue recognition criteria were met for each element. For the group of software and software-related elements, revenue was recognized under the guidance applicable to software transactions. Since we did not have VSOE of fair value on software licenses within our multiple element arrangements, we recognized revenue on our software and software-related elements using the residual method. Under the residual method, license revenue was recognized in a multiple-element arrangement when VSOE of fair value existed for all of the undelivered elements in the arrangement, when software was delivered, installed and all other conditions to revenue recognition were met. We allocated 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 was sold separately. Specifically, we determined the fair value of (i) 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 those services charged to clients; (ii) the professional services (including training and consulting) portion of the arrangement based on the hourly rates that we charged for these services when sold apart from a software license; and (iii) the sublicensed software based on its price when sold separately from the software. The residual amount of the fee after allocating revenue to the fair value of the undelivered elements was attributed to the licenses for software solutions. If evidence of the fair value could not be established for the undelivered elements of a license agreement using VSOE, the entire amount of revenue under the arrangement was deferred until those elements were delivered or VSOE of fair value was established. We also entered into arrangements that included multiple non-software deliverables. For each element in a multiple element arrangement that did not contain software-related elements to be accounted for as a separate unit of accounting, the following were met: the delivered products or services had 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 was considered probable and is substantially controlled by the Company. We allocated the arrangement consideration to each element based on the selling price hierarchy of VSOE of fair value, if it existed, or third-party evidence ("TPE") of selling price. If neither VSOE nor TPE were available, we used estimated selling price. For certain arrangements, revenue for software, implementation services and, in certain cases, support services for which VSOE of fair value could not be established were accounted for as a single unit of accounting. If VSOE of fair value could not be established for both the implementation services and the support services, the entire arrangement fee was recognized ratably over the period during which the implementation services were expected to be performed or the support period, whichever was longer, beginning with delivery of the software, provided that all other revenue recognition criteria were met. (3) Receivables Receivables consist of client receivables and the current portion of amounts due under sales-type leases. Client receivables represent recorded revenues that have either been billed, or for which we have an unconditional right to invoice and receive payment in the future. We periodically provide long-term financing options to creditworthy clients through extended payment terms. Generally, these extended payment terms provide for date-based payments over a fixed period, not to exceed the term of the overall arrangement. Thus, our portfolio of client contracts contains a financing component, which is recognized over time as a component of other income, net in our consolidated statements of operations. Lease receivables represent our net investment in sales-type leases resulting from the sale of certain health care devices to our clients. 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. 77 Table of Contents A summary of net receivables is as follows: (In thousands) Client receivables Less: Allowance for doubtful accounts Client receivables, net of allowance Current portion of lease receivables Total receivables, net 2018 2017 $ 1,237,127 $ 1,082,886 64,561 52,786 1,172,566 1,030,100 10,928 12,681 $ 1,183,494 $ 1,042,781 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 Deductions(a) Allowance for doubtful accounts - ending balance (a) Deductions in 2017 include a $13 million reclassification to other non-current assets. 2018 2017 2016 $ 52,786 $ 43,028 $ 48,119 25,529 (13,754) 29,248 (19,490) 5,060 (10,151) $ 64,561 $ 52,786 $ 43,028 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 2018 2017 $ 11,854 $ 20,425 926 10,928 — 1,447 18,978 6,297 $ 10,928 $ 12,681 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. This gave rise to the termination of our subcontract for the project. We continue to be in dispute with Fujitsu regarding Fujitsu's obligation to pay amounts due upon termination, including our client receivables and damages for pre- termination losses. Part of the process required final resolution of disputes between Fujitsu and the NHS regarding the prime contract termination, which has now occurred. In 2018 we initiated the formal dispute resolution procedure under the subcontract, with the non-binding alternative dispute resolution procedures concluding in the fourth quarter of 2018. The Company must now resolve the issues based on the formal processes provided for in the subcontract. In the fourth quarter of 2018 we recorded a pre-tax charge of $45 million to provide an allowance against the disputed client receivables, reflecting the uncertainty in collection of such receivables and related litigation risk resulting from the conclusion of the non-binding alternative dispute resolution procedures. Such pre-tax charge is included in sales and client service expense in our consolidated statements of operations. As of December 29, 2018, it remains unlikely that our matter with Fujitsu will be resolved in the next 12 months. Therefore, these client receivables remain classified in other long-term assets at December 29, 2018. While the ultimate collectability of the client receivables pursuant to this process is uncertain, we believe that we have valid and equitable grounds for recovery of such amounts. Nevertheless, it is possible that our estimates regarding collectability of such amounts might materially change as the parties proceed through the formal phases of the subcontract dispute resolution procedure. During 2018 and 2017, we received total client cash collections of $5.49 billion and $5.44 billion, respectively. 78 Table of Contents (4) Investments Available-for-sale investments at the end of 2018 were as follows: (In thousands) Cash equivalents: Money market funds Time deposits Commercial paper Total cash equivalents Short-term investments: Time deposits Commercial paper Government and corporate bonds Total short-term investments Long-term investments: Government and corporate bonds Total available-for-sale investments Available-for-sale investments at the end of 2017 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 $ 76,471 $ — $ — $ — — — — (91) (958) (1,049) 76,471 71,461 10,000 157,932 31,947 75,354 293,984 401,285 71,461 10,000 157,932 31,947 75,445 294,941 402,333 18,247 — — — — — 1 1 — (55) 18,192 $ 578,512 $ 1 $ (1,104) $ 577,409 Adjusted Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value $ 99,472 $ — $ — $ 99,472 60,226 850 160,548 40,186 147,509 247,149 434,844 — — — — (139) (477) (616) 60,226 850 160,548 40,186 147,646 247,626 435,458 185,478 — — — — 2 — 2 — $ 781,484 $ 2 $ (1,642) $ 779,844 (1,026) 184,452 Investments reported under the cost method of accounting as of December 29, 2018 and December 30, 2017 were $277 million and $11 million, respectively. Investments reported under the equity method of accounting were $5 million and $2 million at December 29, 2018 and December 30, 2017, respectively. We sold available-for-sale investments for proceeds of $45 million and $29 million in 2018 and 2017, respectively, resulting in insignificant gains/losses in each period. 79 Table of Contents Essence Group Holdings Corporation On July 27, 2018, we acquired a minority interest in Essence Group Holdings Corporation ("Essence Group") for cash consideration of $266 million under a Stock Purchase Agreement ("SPA") dated July 9, 2018. Such investment is presented in long-term investments in our consolidated balance sheets and is accounted for under the cost method of accounting. Concurrently with the execution of the SPA, we announced a strategic operating relationship with Lumeris Healthcare Outcomes, LLC ("Lumeris"), a subsidiary of Essence Group, pursuant to which we will collaborate to bring to market an EHR- agnostic offering, Maestro AdvantageTM, designed to help providers who participate in value-based arrangements, including Medicare Advantage and provider-sponsored health plans, control costs and improve outcomes. Additionally, we sold certain solutions to Lumeris for an aggregate contract value of $28 million, of which we recognized $5 million as revenue in 2018. (5) 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 2018: (In thousands) Description Balance Sheet Classification Money market funds Time deposits Commercial paper Time deposits Commercial paper Government and corporate bonds Cash equivalents Cash equivalents Cash equivalents Short-term investments Short-term investments Short-term investments Government and corporate bonds Long-term investments Fair Value Measurements Using Level 1 Level 2 Level 3 $ 76,471 $ — $ — — — — — — 71,461 10,000 31,947 75,354 293,984 18,192 — — — — — — — 80 Table of Contents The following table details our financial assets measured and recorded at fair value on a recurring basis at the end of 2017: (In thousands) Description Balance Sheet Classification Money market funds Time deposits Government and corporate bonds Time deposits Commercial paper Cash equivalents Cash equivalents Cash equivalents Short-term investments Short-term investments Government and corporate bonds Short-term investments Government and corporate bonds Long-term investments Fair Value Measurements Using Level 1 Level 2 Level 3 $ 99,472 $ — $ — — — — — — 60,226 850 40,186 147,509 247,149 184,452 — — — — — — — 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 2018 and 2017 was approximately $431 million and $519 million, respectively. The carrying amount of such debt at the end of 2018 and 2017 was $425 million and $500 million, 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) 2018 2017 1 — 5 $ 1,686,747 $ 1,511,445 12 — 50 1,239,122 1,051,658 1 — 15 5 — 12 3 — 5 3 — 20 214,697 132,180 — 1,255 216,586 123,945 3,197 1,161 3,274,001 2,907,992 1,530,426 1,304,673 $ 1,743,575 $ 1,603,319 Depreciation and leasehold amortization expense for 2018, 2017 and 2016 was $323 million, $290 million and $246 million, respectively. (7) Goodwill and Other Intangible Assets The changes in the carrying amounts of goodwill were as follows: (In thousands) Balance at the end of 2016 Foreign currency translation adjustment and other Balance at the end of 2017 Foreign currency translation adjustment and other Balance at the end of 2018 Domestic Global Total $ 782,664 — 782,664 — $ $ 61,536 8,805 844,200 8,805 70,341 (5,461) 853,005 (5,461) $ 782,664 $ 64,880 $ 847,544 81 Table of Contents A summary of net intangible assets is as follows: (In thousands) Customer lists Purchased software Internal use software Trade names Other Total Intangible assets, net 2018 2017 Gross Carrying Amount Accumulated Amortization Gross Carrying Amount Accumulated Amortization $ 465,909 $ 229,545 $ 472,697 $ 361,964 143,520 40,025 47,905 311,738 78,633 21,275 12,827 369,728 114,574 41,224 46,581 $ 1,059,323 $ $ 654,018 $ 1,044,804 405,305 $ $ 195,190 282,141 60,924 16,961 9,835 565,051 479,753 Amortization expense for 2018, 2017 and 2016 was $109 million, $118 million and $118 million, respectively. Estimated aggregate amortization expense for each of the next five years is as follows: (In thousands) 2019 2020 2021 2022 2023 $ 113,566 65,184 58,314 53,071 43,927 (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 2018 2017 2016 $ 747,128 $ 705,944 $ 704,882 (273,693) (274,148) (293,696) 210,228 173,250 140,232 $ 683,663 $ 605,046 $ 551,418 Accumulated amortization as of the end of 2018 and 2017 was $1.5 billion and $1.3 billion, respectively. 82 Table of Contents (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 2018 2017 $ 425,000 $ 500,000 4,914 14,162 13,068 14,162 444,076 527,230 (360) (515) 443,716 (4,914) 526,715 (11,585) $ 438,802 $ 515,130 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 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. In March 2018, we repaid our $75 million floating rate Series 2015-C Notes due February 15, 2022. Capital Leases Our capital lease obligations are primarily related to the procurement of hardware and health care devices. 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 2018, we had no outstanding borrowings under this facility; however, we had $30 million of outstanding letters of credit, which reduced our available borrowing capacity to $70 million. Covenant Compliance As of December 29, 2018, we were in compliance with all debt covenants. 83 Table of Contents Minimum annual payments under existing capital lease obligations and maturities of indebtedness outstanding at the end of 2018 are as follows: (In thousands) 2019 2020 2021 2022 2023 2024 and thereafter Total (10) Contingencies Capital Lease Obligations Minimum Lease Payments Less: Interest Principal Senior Notes Other Total $ 5,057 $ 143 $ 4,914 $ — $ — $ — — — — — — — — — — — — — — — — — 225,000 — 200,000 2,500 — 1,100 1,700 8,862 4,914 2,500 — 226,100 1,700 208,862 $ 5,057 $ 143 $ 4,914 $ 425,000 $ 14,162 $ 444,076 We accrue estimates for resolution of any legal and other contingencies when losses are probable and reasonably 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. Refer to Note (3) with regard to our dispute with Fujitsu. In addition to commitments and obligations in the ordinary course of business, we are involved in various other 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. Many of these proceedings are at preliminary stages and many seek an indeterminate amount of damages. At this time, we do not believe the range of potential losses under such claims to be material to our consolidated financial statements. 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. 84 Table of Contents (11) Other Income A summary of non-operating income and expense is as follows: (In thousands) Interest income Interest expense Other Other income, net (12) Income Taxes Income tax expense (benefit) for 2018, 2017 and 2016 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 2017 2016 2018 $ 34,211 $ 18,933 $ 15,252 (7,987) (158) (8,012) (4,263) (4,479) (3,352) $ 26,066 $ 6,658 $ 7,421 For the Years Ended 2018 2017 2016 $ 89,551 $ 37,708 $ 252,795 24,804 22,009 136,364 31,129 8,144 (4,845) 34,428 4,878 10,156 52,742 13,676 23,278 10,455 47,409 31,642 9,030 293,467 (18,014) (2,103) 8,600 (11,517) $ 170,792 $ 100,151 $ 281,950 85 Table of Contents 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 2018 and 2017 relate to the following: (In thousands) Deferred tax assets: Accrued expenses Tax credits and separate return net operating losses Share-based compensation Other Gross deferred tax assets Less: Valuation Allowance 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 2018 2017 $ 31,273 $ 22,826 60,901 14,951 23,295 26,304 56,263 17,754 129,951 123,616 (1,404) — 128,547 123,616 (229,624) (131,516) (39,154) (35,933) (6,199) (208,494) (96,492) (21,214) (65,043) (10,400) (442,426) (401,643) $ (313,879) $ (278,027) At the end of 2018, we had net operating loss carry-forwards from foreign jurisdictions of $30 million that are available to offset future taxable income with no expiration. In addition, we had a state income tax credit carry-forward of $12 million available to offset income tax liabilities through 2030. We expect to fully utilize the net operating loss and tax credit carry- forwards in future periods. At the end of 2018, we had not provided tax on the cumulative undistributed earnings of certain foreign subsidiaries of approximately $69 million, because it is our intention to reinvest these earnings indefinitely. The unrecognized deferred tax liability relating to these earnings is approximately $15 million. The effective income tax rates for 2018, 2017, and 2016 were 21%, 10%, and 31%, respectively. These effective rates differ from the U.S. federal statutory rate of 21% for 2018 and 35% for 2017 and 2016 as follows: (In thousands) Tax expense at statutory rates State income tax, net of federal benefit Tax credits Foreign rate differential Share-based compensation Change in U.S. tax rate Deemed mandatory repatriation Permanent differences Other, net Total income tax expense For the Years Ended 2017 2016 2018 $ 168,179 $ 338,495 $ 321,452 25,321 (19,737) (4,851) (1,696) — — 6,224 (2,648) 22,214 (17,727) (26,379) (62,501) (170,999) 25,114 (10,700) 2,634 22,644 (23,881) (16,468) — — — (20,330) (1,467) $ 170,792 $ 100,151 $ 281,950 H.R. 1, An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018 ("U.S. Tax Reform"), was enacted on December 22, 2017. U.S. Tax reform provides for, among other things, the reduction of the U.S. corporate tax rate from 35% to 21%, effective January 1, 2018. The impact of U.S. Tax Reform on our 2017 tax 86 Table of Contents rate includes the impact of the revaluation of our net deferred tax liability to the lower enacted tax rate, and the impact of mandatory deemed repatriation. U.S. Tax Reform impacts our 2018 tax rate through the reduced federal statutory tax rate, partially offset by the repeal of the permanent domestic production deduction and increases to permanently nondeductible expenses, as well as a new global intangible low-taxed income ("GILTI") inclusion. We have elected to account for GILTI in the period in which it is incurred, and therefore have not provided any deferred tax impacts of GILTI in our consolidated financial statements for 2017 or 2018. Relevant accounting guidance provides that the impact of the enactment of U.S. Tax Reform may be provisionally recorded in 2017 and adjusted during a measurement period of up to one year. As of December 30, 2017, we provisionally recorded certain impacts of U.S. Tax Reform including the adjustment to our net deferred tax liability arising from the reduction in the federal tax rate as well as the impact of mandatory deemed repatriation. Adjustments to these provisional amounts that we recorded in 2018 did not have a significant impact on our consolidated financial statements. Our accounting for the effects of the enactment of U.S. Tax Reform is now complete. 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 Unrecognized tax benefit - ending balance 2018 2017 2016 $ 15,287 $ 9,769 $ 4,878 — 1,591 2,370 (541) (19) (1,734) 7,252 — — — — — 6,945 (1,859) (195) $ 18,688 $ 15,287 $ 9,769 If recognized, $11 million of the unrecognized tax benefit will favorably impact our effective tax rate. It is reasonably possible that our unrecognized tax benefits may decrease by up to $11 million within the next twelve months. Our federal returns have been examined by the Internal Revenue Service through 2014. Our federal returns are open for examination for 2015 and thereafter, and our 2016 return is currently under examination. We have various state and foreign returns under examination. The ending amounts of accrued interest and penalties related to unrecognized tax benefits were $3 million in 2018 and $2 million in 2017. We classify interest and penalties as income tax expense in our consolidated statement of operations, and our income tax expense for 2018 includes $1 million of interest and penalties. The foreign portion of our earnings before income taxes was $89 million, $126 million, and $86 million in 2018, 2017, and 2016 respectively, and the remaining portion was domestic. (13) Earnings Per Share A reconciliation of the numerators and the denominators of the basic and diluted per share computations are as follows: Earnings 2018 Shares Per-Share Earnings 2017 Shares Per-Share Earnings 2016 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 $ 630,059 330,084 $ 1.91 $ 866,978 331,373 $ 2.62 $ 636,484 337,740 $ 1.88 — 3,488 — 6,626 — 5,913 $ 630,059 333,572 $ 1.89 $ 866,978 337,999 $ 2.57 $ 636,484 343,653 $ 1.85 87 Table of Contents Options to purchase 12.9 million, 10.6 million and 9.4 million shares of common stock at per share prices ranging from $50.04 to $73.40, $50.04 to $73.40 and $47.38 to $73.40, were outstanding at the end of 2018, 2017 and 2016, 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 2018, 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 2018, 7.4 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 2018 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: For the Years Ended 2018 2017 2016 27.0% 7 2.8% 26.7% 7 2.1% 29.4% 7 1.5% Weighted- Average Exercise Price Aggregate Intrinsic Value Number of Shares Weighted- Average Remaining Contractual Term (Yrs) 21,332 $ 3,598 (2,660) (478) 21,792 49.40 58.35 35.37 62.46 52.31 11,045 $ 44.60 $ $ 118,831 118,054 6.28 4.48 Expected volatility (%) Expected term (yrs) Risk-free rate (%) Stock option activity for 2018 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 88 Table of Contents (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 2018 2017 2016 $ $ 20.13 74,530 91,349 17,233 $ $ 20.50 252,277 $ $ 18.31 177,375 76,705 85,657 63,794 64,347 As of the end of 2018, there was $148 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 3.23 years. Non-vested Shares and Share Units Non-vested shares and share units 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 service and/or performance measures are attained. The expense associated with these grants is recognized over the period from the date of grant to the vesting date. Non-vested share and share unit activity for 2018 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 $ 799 537 (432) (22) 882 $ 66.76 59.34 65.77 62.94 62.82 For the Years Ended 2017 2016 2018 $ $ 59.34 26,264 $ $ 66.97 11,050 $ $ 57.22 12,221 As of the end of 2018, there was $32 million of total unrecognized compensation cost related to non-vested share and share unit awards granted under all plans. That cost is expected to be recognized over a weighted-average period of 1.94 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. 89 Table of Contents Share-Based Compensation Cost Our stock option and non-vested share and share unit 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 share units and ASPP are as follows: (In thousands) For the Years Ended 2017 2016 2018 Stock option and non-vested share and share unit compensation expense $ 95,423 $ 83,019 $ 74,536 Associate stock purchase plan expense Amounts capitalized in software development costs, net of amortization Amounts charged against earnings, before income tax benefit Amount of related income tax benefit recognized in earnings Preferred Stock 6,082 914 6,277 (327) 6,537 (482) $ $ 102,419 21,371 $ $ 88,969 25,265 $ $ 80,591 24,749 As of the end of 2018 and 2017, we had 1.0 million shares of authorized but unissued preferred stock, $0.01 par value. Treasury Stock In May 2017, our Board of Directors authorized a share repurchase program that allows the Company to repurchase up to $500 million of shares of our common stock, excluding transaction costs. In May 2018, our Board of Directors approved an amendment to the repurchase program that was authorized in May 2017. Under the amendment, the Company was authorized to repurchase up to an additional $500 million of shares of our common stock, for an aggregate of $1 billion, excluding transaction costs. The repurchases are to be effectuated in the open market, by block purchase, in privately negotiated transactions, or through other transactions managed by broker-dealers. No time limit was set for the completion of the program. During 2018, we repurchased 11.2 million shares for total consideration of $644 million under the program. The shares were recorded as treasury stock and accounted for under the cost method. No repurchased shares have been retired. At December 29, 2018, $283 million remains available for repurchase under the outstanding program. During 2017 and 2016, we repurchased 2.7 million and 13.7 million shares of our common stock for total consideration of $173 million and $700 million, respectively. These shares were recorded as treasury stock and accounted for under the cost method. No repurchased shares have been retired. (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 were $31 million, $29 million and $28 million for 2018, 2017 and 2016, 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 2018 and 2016 we expensed $10 million and $8 million, respectively, for the second tier discretionary distributions. 90 Table of Contents (16) Commitments Leases We are committed under operating leases primarily for office and data center space through December 2029. Rent expense for office and warehouse space for our regional and global offices for 2018, 2017 and 2016 was $31 million, $31 million and $29 million, respectively. Aggregate minimum future payments under these non-cancelable operating leases are as follows: (In thousands) 2019 2020 2021 2022 2023 2024 and thereafter Operating Lease Obligations $ 29,739 27,669 22,904 17,240 10,166 17,743 $ 125,461 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) 2019 2020 2021 2022 2023 2024 and thereafter Purchase Obligations $ 138,851 102,773 24,746 15,517 15,486 26,924 $ 324,297 91 Table of Contents (17) Segment Reporting We have two operating segments, Domestic and Global. Revenues are derived primarily from the sale of clinical, financial and administrative information solutions and services. 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 2018, 2017 and 2016: Domestic Global Other Total $ 4,730,266 $ 636,059 $ — $ 5,366,325 827,904 2,164,465 2,992,369 109,444 321,116 430,560 — 1,168,611 1,168,611 937,348 3,654,192 4,591,540 $ 1,737,897 $ 205,499 $(1,168,611) $ 774,785 Domestic Global Other Total $ 4,575,171 $ 567,101 $ — $ 5,142,272 755,729 1,998,544 2,754,273 98,362 264,196 362,558 — 854,091 1,064,970 3,327,710 1,064,970 4,181,801 $ 1,820,898 $ 204,543 $(1,064,970) $ 960,471 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 (In thousands) 2018 Revenues Costs of revenue Operating expenses Total costs and expenses Operating earnings (loss) (In thousands) 2017 Revenues Costs of revenue Operating expenses Total costs and expenses Operating earnings (loss) (In thousands) 2016 Revenues Costs of revenue Operating expenses Total costs and expenses Operating earnings (loss) 92 Table of Contents (18) Quarterly Results (unaudited) Selected quarterly financial data for 2018 and 2017 is set forth below: (In thousands, except per share data) 2018 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 $ 1,292,861 $ 200,079 $ 160,001 $ 0.48 $ 1,367,727 214,884 169,357 1,340,073 214,099 169,381 1,365,664 171,789 131,320 $ 5,366,325 $ 800,851 $ 630,059 0.51 0.51 0.40 0.48 0.51 0.51 0.40 (a) Fourth quarter results include a pre-tax charge of $45 million to provide an allowance against certain client receivables with Fujitsu, as further discussed in Note (3). (In thousands, except per share data) 2017 First Quarter Second Quarter Third Quarter Fourth Quarter (b) Total Earnings Before Income Taxes Revenues Net Earnings Basic Earnings Per Share Diluted Earnings Per Share $ 1,260,486 $ 243,010 $ 173,213 $ 0.52 $ 1,291,994 252,049 179,683 1,276,007 250,415 177,424 1,313,785 221,655 336,658 $ 5,142,272 $ 967,129 $ 866,978 0.54 0.53 1.02 0.52 0.53 0.52 1.00 (b) Fourth quarter results include the impact of certain U.S. income tax reform enacted in December 2017 as further described in Note (12). 93 Stock Price Performance Graph The following graph presents a comparison of the cumulative total shareholder return on our Common Stock with the cumulative total return of the ICB: 9533 Computer Services (Subsector) Index, the Standard & Poor’s 500 Index and the NASDAQ US Benchmark TR Index. The graph assumes that $100 was invested on December 31, 2013 in our Common Stock and in each of the foregoing indices, and that all dividends were reinvested. The total cumulative dollar returns shown on the graph represent the value that such investments would have had on December 31, 2018. Comparison of 5 Year Cumulative Total Return $200 $150 $100 $50 $0 12/13 12/14 12/15 12/16 12/17 12/18 Cerner Corporation Standard & Poor's 500 Index ICB: 9533 Computer Services (Subsector) Index NASDAQ US Benchmark TR Index The information contained in this Stock Price Performance Graph section shall not be deemed to be “soliciting material” or “filed” or incorporated by reference in future filings with the Securities and Exchange Commission, or subject to the liabilities of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), except to the extent we specifically incorporate it by reference into a document filed under the Securities Exchange Act of 1933, as amended, or the Exchange Act. 94 9598 Corporate Information 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 505000 Louisville, KY 40233-5000 1-800-884-4225 STOCK LISTINGS Cerner Corporation’s common stock trades on the Nasdaq Global Select MarketSM under the symbol CERN. INDEPENDENT ACCOUNTANTS KPMG LLP Kansas City, MO CORPORATE RESPONSIBILITY AND SUSTAINABILITY Cerner believes we have a responsibility to our clients, associates, shareholders and the communities in which we operate to conduct business in a manner that promotes strong corporate, social and environmental governance. We believe this commitment to corporate responsibility inherently drives value for all Cerner stakeholders. We routinely evaluate and mitigate risks through diligent corporate oversight, promoting a clean environment, fostering a fully inclusive and diverse workforce, and supporting our local communities. We are thoughtful about the initiatives we have in place and will continue to implement and enhance future policies, driving ongoing improvements in sustainability and value to all of those we have the privilege to serve. For more information on Cerner’s corporate responsibility, please visit: https://www.cerner.com/about/corporate-responsibility. 95 World Headquarters Cerner Corporation 2800 Rockcreek Parkway North Kansas City, MO USA 64117 816.221.1024 Worldwide with associates in Australia Austria Belgium Brazil Canada Egypt Finland France Germany India Ireland Malaysia Mexico Netherlands Norway Portugal Qatar Romania Saudi Arabia Singapore Spain Sweden United Arab Emirates United Kingdom United States of America © Cerner Corporation. All Rights Reserved. All Cerner trademarks and logos are owned or licensed by Cerner Corporation and/or its affiliates. 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