2019 ANNUAL REPORT
2 0 1 9 A N N U A L R E P O R T
F or more than 40 years, Cerner has played
a leadership role in digitizing health, an
important step toward improving the
standard of living of the world’s population.
As we enter the cognitive era of health care,
Cerner is leading, alongside our clients,
health care’s ever-quickening transformation.
The opportunities in front of Cerner are
massive, as we expect the foundational
work from digitization to begin harvesting
its true potential – to encourage health and
wellness, to shift to preventative care and to
reduce costs that have yet to be contained.
It’s why we believe that, in a seamless
and connected world, everyone thrives.
Table of Contents: Annual Report 2019
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 ..............................................................................13
Corporate responsibility .................................................................................................................................................................. 14
Form 10-K ............................................................................................................................................................................................... 19
Business and Industry Overview ......................................................................................................................................... 22
Risk Factors .................................................................................................................................................................................... 29
Properties........................................................................................................................................................................................44
Market for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities ......................................................................................................................45
Selected Financial Data ...........................................................................................................................................................46
Management’s Discussion and Analysis of Financial Condition and Results of Operations ............... 47
Quantitative and Qualitative Disclosures about Market Risk .................................................................................57
Controls and Procedures ....................................................................................................................................................... 58
Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters ................................................................................................................................................ 59
Exhibits and Financial Statement Schedules ...............................................................................................................60
Reports of Independent Registered Public Accounting Firm ..............................................................................66
Consolidated Balance Sheets ..............................................................................................................................................69
Consolidated Statements of Operations . ......................................................................................................................70
Consolidated Statements of Comprehensive Income ............................................................................................. 71
Consolidated Statements of Cash Flows ........................................................................................................................72
Consolidated Statements of Changes in Shareholders’ Equity. .......................................................................... 73
Notes to Consolidated Financial Statements ................................................................................................................74
Basis of Presentation, Nature of Operations and Summary of Significant Accounting Policies ..74
Revenue Recognition ..........................................................................................................................................................77
Receivables............................................................................................................................................................................... 81
Investments ............................................................................................................................................................................. 82
Property and Equipment ..................................................................................................................................................84
Leases .........................................................................................................................................................................................84
Software Development .....................................................................................................................................................86
Business Acquisition. .......................................................................................................................................................... 87
Goodwill and Other Intangible Assets .......................................................................................................................88
Long-term Debt ....................................................................................................................................................................89
Fair Value Measurements .................................................................................................................................................. 91
Contingencies. ....................................................................................................................................................................... 92
Other Income ......................................................................................................................................................................... 93
Income Taxes ..........................................................................................................................................................................94
Earnings Per Share ..............................................................................................................................................................96
Share-Based Compensation and Equity ..................................................................................................................96
Foundations Retirement Plan.......................................................................................................................................100
Purchase Obligations .......................................................................................................................................................100
Segment Reporting .............................................................................................................................................................101
Quarterly Results ................................................................................................................................................................ 102
Stock price performance graph ............................................................................................................................................... 103
Corporate information ..................................................................................................................................................................104
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
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 and Chief Executive
Lime Barrell Advisors, LLC
William D. Zollars
Former Chairman, Chief Executive Officer and President
YRC Worldwide, Inc.
2
Leadership
Brent Shafer
Chairman of the Board and
Chief Executive Officer
Donald D. Trigg
President
Marc G. Naughton
Executive Vice President and
Chief Financial Officer
John T. Peterzalek
Executive Vice President and
Chief Client and Services
Officer
Tracy L. Platt
Executive Vice President and
Chief Human Resources Officer
Randy D. Sims
Executive Vice President,
Chief Legal Officer and
Secretary
Travis S. Dalton
Senior Vice President and
President,
Cerner Government Services
Daniel P. Devers
Senior Vice President,
Cloud Strategy
Kimberly H. Gerard
Senior Vice President and
Chief Transformation Officer
Darrell E. Johnson
Senior Vice President and
Chief Marketing Officer
Eva L. Karp, D.H.A.
Senior Vice President,
Chief Clinical and Patient Safety
Officer
Rama V. Nadimpalli
Senior Vice President and GM,
Cerner India
Emil E. Peters
Senior Vice President and
President,
Cerner Global
Brenna M. Quinn
Senior Vice President,
Revenue Cycle
Michael R. Battaglioli
Vice President and
Chief Accounting Officer
3
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.
1986
2009
2019
2009 - 2019
1986 - 2019
Compound Annual Growth Rates
Previous Decade Since Going Public
Top Line
Bookings
Revenue
$18
$1,832
$5,990
$17
$1,672
$5,693
Domestic Revenue
$17
$1,399
$5,038
Global Revenue
$0.2
$273
$654
Revenue Backlog
$11
$4,212 $13,708
Bottom Line Operating Earnings (GAAP)
$3
$292
$601
Operating Margin (GAAP)
14.8%
17.5%
10.6%
Net Earnings (GAAP)
$2
$193
$529
Diluted Earnings Per Share (GAAP)
$0.01
$0.58
$1.65
13%
13%
14%
9%
13%
7%
11%
11%
Adjusted Operating Earnings¹
$3
$309
$1,052
13%
Adjusted Operating Margin¹
14.8%
18.5%
18.5%
Adjusted Net Earnings¹
$2
$204
$862
Adjusted Diluted Earnings Per Share¹ $0.01
$0.61
$2.68
Balance Sheet Total Assets
$26
$2,149
$6,895
Cash and Investments
$8
$559
$961
Days Sales Outstanding
161
90
72
Total Debt
Equity
$1
$121
$1,038
$16
$1,581
$4,317
Cash Flow
Operating Cash Flow
$1
$347
$1,313
Free Cash Flow¹
($1)
$138
$568
Investment
Growth
Capital Expenditures
Research and Development
$1
$2
$131
$472
$285
$784
Market
Performance
Associate Headcount
149
7,576
27,424
Cerner Stock Price
$0.24
$20.61
$73.39
Market Capitalization
$45 $6,742 $22,784
NASDAQ Composite Index
$349 $2,269
$8,973
S&P 500 Index
$242
$1,115
$3,231
16%
16%
12%
6%
-2%
24%
11%
14%
15%
14%
11%
14%
14%
13%
15%
11%
19%
19%
19%
28%
24%
17%
18%
17%
19%
20%
18%
18%
16%
-2%
23%
18%
24%
NM
21%
20%
17%
19%
21%
10%
8%
Notes
Amounts are in millions except operating margin, adjusted operating margin, diluted earnings per share, adjusted diluted earnings per
share, associate headcount, stock prices and index information.
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 performance. These 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
A letter to our shareholders, clients and associates
At the intersection of health care and technology
Thank you for your ongoing partnership and engagement with Cerner. Your belief in our mission,
and support of our company, is foundational to our success.
We are making important strides to position Cerner to play a leadership role in the next wave of
health care’s evolution. Our associates are advancing the success of our clients, and we’ve launched
a new operating model that is yielding important efficiencies. We’re forming critical collaborations
to accelerate innovation and investing in research and development to improve health care.
For more than 40 years, Cerner has played a leadership role in digitizing health care – an important
step toward improving the standard of living of the world’s population. Since the beginning, we’ve
had a vision for what comes after.
With nearly three million health care professionals accessing Cerner’s systems every day, we manage
the data of nearly 250 million lives around the world. As we enter the cognitive era of health care,
Cerner is leading, alongside our clients, health care’s ever-quickening evolution. The opportunities
in front of Cerner are massive, as we expect the foundational work from digitization to enable health
care’s true potential – to focus on preventative care, to improve safety, to reduce costs that have yet
to be contained and to help us all be more connected and thrive.
Worldwide acute EHR market share leader
Global acute care
hospital market share
(n= 11,761 acute care hospitals)
Epic
MEDITECH
Allscripts
cpsi
MEDHOST
athenahealth
Other
Market share data validated as of Dec. 31, 2018, by KLAS Research. Data sourced from the following reports: “Global (Non-US) EMR Market Share 2019: Large Public Tenders Shape 2018 EMR Landscape,” May 2019.
©2019 KLAS Enterprises, LLC. All rights reserved. (pg. 18) and “US Hospital EMR Market Share 2019: Significant Movement in Every Market Sector,” April 2019. © 2019 KLAS Enterprises, LLC. All rights reserved. (pgs. 22-28)
5
Going into a U.S. election year, driving value through preventative medicine, reducing waste and
improving the patient and clinician experience will remain priorities in the U.S. and beyond. These
considerations are more crucial than ever, as data privacy and interoperability are elevated in the
public eye as a result of widespread media coverage and advocacy efforts, alongside prevention,
affordability and access. Consumers are demanding the ability to control their health data. We
believe regulators can make incremental changes to data privacy frameworks while prioritizing
people’s access to their own information and ensuring providers have the data needed to make
better health care decisions. Cerner remains committed to partnering with leaders around the
world to advance interoperability and drive efficiencies in health care through technology. In fact,
Cerner was vocal in recent rulemaking, advocating for the finalization of the Office of the National
Coordinator for Health Information Technology (ONC) proposed rule on provisions of the 21st
Century Cures Act, supporting interoperability of electronic health information.
We believe health care could change more in the next 10 years than it has the previous 30 as the
influences of digital disruption, changing regulatory environments and increasing consumerization
continue to propel the industry forward. We’ve laid the groundwork and are now at the edge of the
possible. I’m honored to share the highlights of our year with you.
Focused on delivering value
In 2019, we grew revenue by six percent to $5.69 billion. This growth reflects ongoing client demand
for our solutions and services, driven by the need to adapt to new regulatory requirements and
changing reimbursement models, while delivering safer and more efficient care. Over the past 10
years, our Compound Annual Growth Rate is 13 percent.
2019
$5.69B
I discussed our focus on improving our results
in 2019. In April, we committed publicly to
increase our adjusted operating margin1 to
20 percent for the fourth quarter of 2019.
I’m pleased to share that we met this goal,
increasing our adjusted operating margin1
from 18.7 percent in the fourth quarter of
2018 to 20.3 percent in the fourth quarter of
2019. This improvement was the result of solid
execution and transformative actions aimed
at driving operating efficiencies and business
simplification.
In 2019, we returned $1.4 billion of capital to
shareholders through the introduction of a
quarterly dividend and our share buyback
program. We also expanded our share
repurchase program and exited 2019 with an
authorized amount available for repurchase of
$1.7 billion. We expect to continue using our
balance sheet and cash flow to return value to
shareholders and invest in growth.
Revenue growth
In billions
$6
$5
$4
$3
$2
$1
0
$1.85B
2010
2012
2014
2016
2018
6
Prepared for what’s next
Last year, we shared phase one of Cerner’s new operating model — essentially an organizational
restructure to align the business closer to clients — and the transformative actions we are taking
to manage our portfolio, improve processes and simplify how we do business. From our executive
leadership team to our Board of Directors to our engagement with shareholders, we’ve had strong
alignment on Cerner’s transformation.
During 2019, Cerner strengthened its governance by refreshing its Board, designating a Lead
Independent Director and establishing a Finance & Strategy Committee. We welcomed four new
independent directors - John Greisch, Melinda Mount, George Riedel, and R. Halsey Wise, who
joined our other five independent directors, Gerald E. Bisbee, Jr., Mitchell E. Daniels, Jr., Linda M.
Dillman, Dr. Julie Gerberding, and William D. Zollars, forming a Board of seasoned leaders.
Our Board’s advice and counsel, alongside their expertise, leadership and experience, help us
continue to evolve in the changing landscapes of health care and technology. In fact, three of our
Board members were recently named to WomenInc.’s Most Influential Corporate Board Directors in
2019 for their achievements in business and contributions to advancing technology and innovation.
We are honored to have such strong leaders on our Board as we all work together to advance
Cerner’s mission.
We have also structurally realigned around improving our client experience, innovating at scale and
driving profitable growth. We’re taking steps to improve our client experience as a result of deep
conversations and candid client feedback. We’re investing in industry standard tools, including
new contracting, quoting and customer relationship management solutions to improve business
practices. We’re improving our internal and client-facing planning processes, advancing our
platforms to speed innovation to clients and working to improve the clinician experience, bringing
the joy back to practicing medicine – more on this later.
Operationally, we’re improving processes across Cerner, simplifying business and leveraging
automation. We’re refining our strategic focus, introducing more disciplined portfolio management
and efficient research and development processes to enable future opportunities and adjacent
business growth. As a result, we are positioned to take advantage of our rapidly changing
opportunities while delivering additional value to our shareholders.
Executing on our commitments
Meeting the needs of our clients remains our most important priority. We are focused on advancing
our clients’ success alongside our transformation.
Our work is always personal – it’s what draws us to health care. Our partnership with the U.S.
Department of Veterans Affairs (VA) and the U.S. Department of Defense is personal, as my own father
was a World War II Army Veteran who received care from the VA. I’m honored to work with heroes
like Greg Gadson, retired colonel, who served in every major U.S. conflict since 1989 and is a member
of the Cerner Government Advisory Board, giving his time to help improve care for Veterans like my
dad. We are actively engaged with Veteran and Military Service Organization communities, hosting
quarterly Service Organization Roundtables with national-level Service Organization leadership.
We’re connecting care for people around the world. In London, we went live in November 2019 with
Cerner Millennium® in Chelsea and Westminster Hospital NHS Foundation Trust, bringing them on
the same system as Imperial College Healthcare NHS Trust, sharing pathways and integrating care
7
practices for the benefit of the large London
population they mutually serve.
including meaningful changes
We are making enhancements to our core
products,
in
Revenue Cycle, where our clients have shared
positive feedback on our increased collaboration
and the direction of IP development. We released
a new three-year roadmap, informed by their
priorities, and we increased engineering capacity
in order to meet client demand, upgrading
more clients and delivering new Application
Programming
to help
organizations further leverage a comprehensive
Revenue Cycle portfolio. Across all of Cerner’s
products in 2019, we had more than 1,200
releases, enabling
improved workflows and
efficiencies for our clients.
Interfaces
(APIs)
Advancing our
federal business
• Migrated 23.5 million historical records for
Veterans in 2019; go-lives begin in 2020
• Deployed 8 DoD sites in Washington state,
California and Idaho
• Acquisition of AbleVets in 2019, a strategic
consulting and engineering firm that is
expected to accelerate our success in providing
integrated care for Veterans, service members
and their families
In addition to advancing our products, we are committed to advancing their underlying infrastructure.
We reported uptime of 99.992 percent in 2019, an increase over last year’s already impressive high.
We’re providing unparalleled service in support of our clients as well. Cerner was named No. 1 for
client service and technical support by Black Book for the fourth year in a row.
Shaping the health care of tomorrow
To truly capitalize on our market opportunities, we must stay one step ahead of our ever-changing
industry. Innovation is built into our mission, and it’s a key component of Cerner’s investment
strategy. We celebrated our 500th patent in 2019 and continue to invest more dollars annually
in research and development than any of our core competitors. We are actively determining and
deploying the required workforce capabilities to bring our transformation to life, including the areas
of cybersecurity and cloud engineering.
We are shaping the health care of tomorrow around the world, including creating international
opportunities for collaboration and innovation. Intermountain Healthcare in Salt Lake City, Utah
is a pioneer in care process models, using data to identify practices and outcomes subject to
greatest variance, cost or risk. Through their longstanding work with Cerner, Intermountain formed
a partnership with Royal Free London Hospitals. This resulted in impressive process innovations in
a number of areas of patient care – an example being in teledermatology, where the new processes
have resulted in a 51 percent reduction in unnecessary clinic referrals, reducing wait times for
patients and cost for the hospital.
With Cerner’s evolution to the Software as a Service (SaaS) health care IT partner, clinicians will be
able to take advantage of our most current product offerings sooner. Through our collaboration
with Amazon Web Services (AWS), we are positioned well in pursuit of Cerner’s goal to be the SaaS
platform for health care, creating a cognitive and more intuitive experience while removing barriers
to client adoption.
These advancements are critical as we enter the cognitive era of health care. At the Cerner Health
Conference, Dr. William Feaster, chief health information officer at CHOC Children’s, shared early
results of a data science project conducted in collaboration with Cerner and AWS to identify patients
8
at a higher risk for re-admission, which has resulted in re-admission declines, sharing “It’s not just a
headline anymore – it’s an actual part of what we’re doing.” From Cerner’s Opioid Toolkit to our St.
John Sepsis Surveillance Agent to new research leveraging our EHR and AWS’ cloud platform, we
have a strong track record of improving lives. And we’re just getting started.
We believe the best care happens when data is connected across disparate systems and health
care entities. It’s why we will always remain a champion of interoperability – making free data flow
easier, while ensuring appropriate measures are taken to protect patient data and privacy. People
benefit from access to the right information, in the right context, at the right time. It’s also why
we deliver innovation through collaboration, with more than 100 unique, secure and reliable client
and third-party applications live in more than 700 environments and used by 100,000 providers
and consumers. Beyond adding new apps, we’re increasing consumer and provider engagement
via APIs – including scheduling-based apps like Kyruus for consumers and non-emergency
transportation solutions like Uber Health, which helps providers eliminate an important access
barrier by scheduling rides for patients.
Horizons of growth
We’ve accomplished much on the journey toward the digitization of health care in the past 40
years. And our journey has just begun. Looking to the future, we see Cerner’s path to continued
growth extending beyond the hospital, fee-for-service and our core Millennium base.
Going back to our founders, we’ve had a vision beyond the electronic health record. We envisioned
a Health Network Architecture for providers of care in every community – automating care
processes, connecting the person, studying data and pushing insights into the care process. We’ve
laid the foundation and believe this can be accomplished in the decade to come.
Health systems are building network strategies within specific metropolitan statistical areas to
enhance contracting power, increase patient “stickiness” and move closer to the premium dollar.
Cerner’s opportunity is enabling performance improvements under value-based contracting
through network design, cybersecurity and analytic services. HealtheIntent® – Cerner’s native
cloud, big data analytics and insights platform – was purpose built to be the unifier of multiple data
sources so providers can deliver care across disparate EHRs, providers and across the continuum.
Today, HealtheIntent already has more than 1,000 data connections, more than 60 connected EHR
systems, and more than 140 connected claims and payer vendors.
Through our unified data foundation, we aim to create a world where the walls of care venues
become transparent. Information will travel between care centers regardless of location. We
believe in delivering insights that extend beyond the hospital, including data from providers, payers,
employers and technology vendors to enable high quality, low cost care.
This year, Geisinger announced an expansion of its use of HealtheIntent as the preferred data platform
across its diverse care delivery network, extending actionable insights and intelligence from the
Cerner platform across its clinical enterprise, accountable care organization and Geisinger Health
Plan. Geisinger is recognized for delivering the highest quality, lowest cost care – and furthered its
relationship with Cerner after realizing the value of the robust intelligence and analytical capabilities
of our platform to bring together health care’s ever-increasing data from many sources, including
disparate EHRs. While Geisinger does not partner with Cerner for their EHR, they are a long-term
client, and represent the market opportunities outside of our core Millennium base.
9
HealtheIntent also positions Cerner as a trusted source of curated health data. In 2019, we saw
early successes in this space, including the development of the Cerner Learning Health NetworkSM
to help clinicians gain health insights and guide care. We launched a pilot with Duke Clinical
Research Institute in August 2019 to evaluate the potential impact of proven therapies for chronic
cardiovascular disease. We expect the Cerner Learning Health Network to have wide-reaching
applications in life sciences, pharmaceuticals and health care at large by accelerating innovation
and life-saving insights. Partnered with Cerner’s HealtheDataLabTM, researchers can transform sets
of de-identified patient data into research-ready formats and build complex models and algorithms
to give providers more information to make informed care decisions. By using predictive modeling
and intelligence, the ecosystem supports early identification of individuals who may be at risk
for costly episodes of care and can help pinpoint the most effective and cost-efficient treatment
options.
We’re making good progress in markets that extend beyond health systems, including with Cerner’s
HealtheHistorySM, which provides HIPAA-compliant patient medical records for life insurance, legal
firms, pharmaceutical companies and other industries. We expect continued growth in creating
information-based solutions that reinvent traditional health care businesses, allowing clients to
better serve their markets and ultimately change lives.
We are also helping our clients increasingly move beyond fee-for-service. In 2019, Cerner focused
on launching solutions to deliver a value-based care offering for health care providers participating
in Medicare’s BPCI Advanced program, to support affordable health care delivery focused on
improving health outcomes. We’re delivering innovative solutions for patient empowerment,
including at BayCare Health System, which leverages advanced technologies and services from
Cerner, Lumeris and Salesforce to better manage its populations, increasing access to care and
improving the health status of patients.
In 2019, Cerner’s Strategic Growth business areas – Health Networks, Long Term and Post-Acute
Care, Data-as-a-Service, Consumer and Workforce Health Services and Real Time Health System
– grew 22 percent over the prior year, and we expect to move further and faster in the quarters
to come. EHR-agnostic offerings and our collaborations with partners like Lumeris, ResMed and
Salesforce are emblematic of the opportunities ahead – we believe a combination of thoughtful
build, buy and partner assessments will accelerate our vision to build a system of health and care
with the individual at the center.
Cerner associates – making a difference around the world
More than 40 years later, the one constant in Cerner’s success has been our associates and
their passion for the work they do. From improving health care to making a difference in their
communities, their impact is felt around the world.
We’ve discussed our innovative culture, which exists only when a diversity of voices, experiences
and expertise are engaged. We’re proud of our diverse associate base, and our continued efforts to
build and improve upon Cerner’s culture of inclusion.
In 2019, I had the honor of signing the CEO Action for Diversity & Inclusion, reflecting Cerner’s – and
my – pledge to advance equity across our company and the broader business community. Globally,
we’ve invested in additional programming to advance diversity and inclusion in the workforce,
workplace, marketplace and community. From encouraging more females to choose STEM careers
to connecting our associates around the globe through Associate Business Resource Groups, we
are committed to advancing these important conversations and initiatives. In 2019, we launched
10
involved
increasingly
training for associate diversity champions
across Cerner, speed mentoring sessions and
speaker sessions – and much more. Cerner
in diversity
became
discussions with our clients and communities,
including welcoming 400 client executives
to our first diversity session at Cerner Health
Conference. We’ve continued to be recognized
by the Human Rights Campaign for being a
best place to work for LGBTQ Equality and
were honored to be named a Best Employer
for Diversity for the second year in a row and a
World’s Best Employer by Forbes.
First Hand programs are improving the learning
environments and lives of children in 14 Bangalore-area
government schools
they work and
Associate impact
around the world
• Associates volunteered with nearly 1,300
organizations
• Nearly 74,000 lives touched through First
Hand Foundation
Our associates give back to the communities
live, contributing
where
millions of dollars last year to Cerner’s partner
foundation, First Hand. First Hand encompasses
two 501(c)(3) charitable organizations, First
Hand Foundation and Healthe Kids Institute.
Funding for these organizations helps children,
families and communities reach their full health
potential and impacted nearly 74,000 lives
in 2019 through wellness screenings, healthy
lifestyle programming, case grants and more.
Conducted around the world, wellness screenings help close the gap for health issues children face
every day by identifying potential medical issues, referring for additional care and, when needed,
providing case grant funding to cover associated costs. In India alone, the foundation conducted
more than 16,000 wellness screenings in 2019 and impacted the lives of 3,700 children by helping
improve sanitation and health conditions in schools. More than 1,100 case grants were provided
around the world in 2019. Associates also participated in seven global medical mission trips in six
countries last year, serving more than 4,500 people.
• 300 tons diverted from landfill through
sustainability efforts
In India, we launched the Cerner Smart Health Initiative, partnering with non-profit organizations
to begin the digitization of primary health care centers. As part of this initiative, we are now live
with our Millennium ambulatory solution across 50 clinics, providing streamlined workflows and
improved patient care, while innovating ways for providers to reach populations in remote, rural
locations without a physician physically present.
Associates give their time as well, volunteering with nearly 1,300 organizations focused on
diversity, civic issues, children’s health, Veterans’ health and wellness, environmental change,
education and more. Cerner associates from around the world reached out to see how they could
help Australia following extensive wildfires in the country. The Cerner Australia team kicked-off a
number of initiatives in support of fire recovery, including fundraising events across our Australian
offices, blood donation drives, and crafting sessions for injured and orphaned wildlife. Our Cerner
Government Services organization financially supports and partners with the Elizabeth Dole
Foundation and HillVets to help advance their missions supporting Veterans, servicemembers and
military caregivers.
We believe in making the world a better place through our business practices, too. We recycle
consumables, reduce waste and practice energy reduction when possible. In 2019, we diverted more
than 300 tons from landfills through our recycling and composting programs in our owned facilities.
11
We use a formal energy management system and continue to invest in additional sustainability
measures whenever financially feasible, including using sustainable practices for building new
construction. Our associates are passionate about this topic, with more than 700 participating
in a grass-roots group focused on advancing sustainable practices through carpooling, campus
recycling and other self-led efforts to decrease their environmental footprint.
We are a mission-driven company, and I’m honored to lead an associate base so passionate about
contributing to the systemic improvement of health care delivery and the health of communities.
Effective, efficient health care is foundational to all of life’s opportunities – I’m proud of the way our
associates contribute to a world where everyone thrives.
Conclusion
On behalf of Cerner associates around the world, thank you for your investment in our company
and support of our vision. I’m proud of what we have achieved together in 2019 – of the confidence
we’ve built in our operations, the efficiencies we’ve created and the innovation we’ve advanced.
Most importantly, I’m excited for the future ahead of us. Thanks to the efforts of our transformation,
the innovation of our associates, and the partnership of our clients, we are closer than ever to
bringing our Health Network Architecture vision to life. Health care is too important to stay the
same – and Cerner expects to play a leading role in changing health care for the better.
Brent Shafer
Chairman of the Board and
Chief Executive Officer
1Adjusted operating margin reflects adjustments compared to results reported on a Generally Accepted Accounting Principles (GAAP) basis. Non-GAAP
results should not be substituted as a measure of our performance but instead should be used along with GAAP results as a supplemental measure of
financial performance. This non-GAAP financial measure is 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 this item to GAAP results.
12
Appendix:
Reconciliation of GAAP results to Non-GAAP results*
Adjusted Operating Earnings and
Adjusted Operating Margin
($ in millions)
1986
1986
2009
2009
2019
2019
Operating
Earnings
Operating
Margin %
Operating
Earnings
Operating
Margin %
Operating
Earnings
Operating
Margin %
Operating earnings (GAAP)
$3
14.8%
$292
17.5%
$601
10.6%
Share-based compensation expense
Acquisition-related amortization
Organizational restructuring and other expense
Charge related to client dispute
Vendor settlement
Adjusted Operating Earnings (non-GAAP) /
Adjusted Operating Margin (non-GAAP)
17
109
85
221
29
7
$3
14.8%
$309
18.5%
$1,052
18.5%
Adjusted Net Earnings and
Adjusted Diluted Earnings Per Share
1986
2009
2019
($ in millions, except per share data)
Net
Earnings
Diluted
Earnings
Per Share
Net
Earnings
Diluted
Earnings
Per Share
Net
Earnings
Diluted
Earnings
Per Share
Net earnings (GAAP)
$2
$0.01
$193
$0.58
$529
$1.65
Pre-tax adjustments for Adjusted Net Earnings:
Share-based compensation expense
Acquisition-related amortization
Organizational restructuring and other expense
Charge related to client dispute
Vendor settlement
Investment gains
17
After-tax adjustments for Adjusted Net Earnings:
Income tax effect of pre-tax adjustments
(6)
109
85
221
29
7
(29)
(81)
(8)
Share-based compensation permanent tax items
Adjusted Net Earnings (non-GAAP) / Adjusted
Diluted Earnings Per Share (non-GAAP)
Free Cash Flow
($ in millions)
Cash flows from operating activities (GAAP)
Capital purchases
Capitalized software development costs
Free Cash Flow (non-GAAP)
Cash flows from investing activities (GAAP)
Cash flows from financing activities (GAAP)
$2
$0.01
$204
$0.61
$862
$2.68
1986
2009
2019
$1
(1)
(1)
$347
$1,313
(131)
(78)
(472)
(273)
($1)
$138
$568
($2)
($1)
($394)
($640)
$17
($601)
*More detail on these adjustments and management’s use of Non-GAAP results is in our 2019 annual report on Form 10-K and our current reports on Form 8-K.
13
Corporate responsibility: 2019 in review
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, modify and improve our approach to business 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 our policies, driving ongoing improvements in sustainability
and value to all we have the privilege to serve.
Board of directors
Gender diversity
Board tenure
Male
70%
Female
30%
6-15
years
1-5
years
16+
years
Board skills and attributes
Leadership
Health care
Technology
Global business
Financial statement experience
Gov’t. and public policy
Data privacy and cybersecurity
Academia
0
2
4
6
8
10
Number of Board members
Linda Dillman
Julie Gerberding
Melinda Mount
Chief executive officer
compensation
Named executive officers (NEO)
compensation
Other
2%
Base salary
6%
Other
2%
Base salary
12%
Long-term
incentive plan
equity award
82%
Performance-based
cash incentives
10%
Long-term
incentive plan
equity award
72%
Performance-based
cash incentives
14%
In 2019 we refreshed and
increased the size of the
Board with the addition of
four highly experienced
and successful independent
directors. Cerner’s Board
members possess the
desirable skills and attributes
to lead the company into the
next phase of our growth.
Executive
compensation
Our compensation strategy
is linked to our performance
management philosophy,
which is designed to
identify and reward
associate performance
through compensation.
We believe in pay for
performance and linking
executive compensation
with shareholder value, as
represented by our CEO and
NEO pay mix.
14
Human capital
“Delivering on Cerner’s vision of a ‘seamless and connected world where everyone thrives’ requires us
to intentionally foster a more inclusive work environment where associates from all backgrounds help
shape the future of health care. Our ongoing commitment to diversity and inclusion is an important
aspect of our culture and one of the things that makes Cerner a great place to work.”
Brent Shafer, Chairman and CEO
Diversity
United States associates
by gender
United States associate
ethnic diversity
Cerner believes in representing
and including all voices. We
serve the health care needs
of all, and our commitment to
diversity and inclusion enables
our ongoing innovation.
In 2019, we revamped our
Associate Business Resource
Group initiatives to promote
our associates’ ability to
connect around shared identity
or experiences so that group
members can help each other
navigate the workplace. These
groups serve as important
resources for our associates’
career development and
enhance Cerner’s workforce
attraction, market position
and community outreach.
We are providing a space for
associates to come together
and address key success
factors through a specific
cultural lens.
Male
59.8%
Female
40%
Diverse
25%
Not declared
0.2%
800+
U.S. military Veteran
and reservist associates
Forbes® Best Employers for Diversity
2019
Human Rights Campaign Foundation™
Best Places to Work for LGBTQ Equality
Forbes® Best Employers for New Grads
Cerner’s approach to diversity and inclusion
Community
Community
Cerner supports regional economies
Cerner supports regional economies
through partnerships that develop healthy
through partnerships that develop healthy
and educated individuals.
and educated individuals.
Marketplace
Marketplace
Cerner’s corporate mission is to relentlessly
Cerner’s corporate mission is to relentlessly
seek breakthrough innovation that will
seek breakthrough innovation that will
shape health care of tomorrow.
shape health care of tomorrow.
Workplace
Workplace
Cerner leverages an environment that
Cerner leverages an environment that
is conducive to having associates feel
is conducive to having associates feel
fully engaged so that they feel safe,
fully engaged so that they feel safe,
they belong, and they matter.
they belong, and they matter.
Workforce
Workforce
Cerner strives for the attraction,
Cerner strives for the attraction,
retention and development of skilled,
retention and development of skilled,
engaged teams of diverse associates.
engaged teams of diverse associates.
15
Associates by region
North America
72%
Global workforce
Cerner associates speak more than 60
different native languages; come from a
variety of cultures, races and countries; and are
provided with a comprehensive set of tools to
help them learn and grow in their careers at
Cerner.
The unique experiences of our associates
from various backgrounds offer an invaluable
platform from which we can explore enhanced
solutions for our clients and the patients they
serve, and provide an internal support system
and social network for our associates.
Europe,
UK and
Middle East
8%
Asia and
Australia
20%
Community impact
True to our corporate mission, we seek to
provide our associates around the world
opportunities to positively impact the
communities where they live and work, so that
individuals have access to the tools they need
to be educated, healthy and productive.
70,000+
2019 logged
associate
volunteer hours
Nearly
1,300
2019 volunteer
organizations
First Hand
First Hand Foundation (First Hand) is powered by the generosity of Cerner, Cerner associates,
business partners and community members. Dedicated to helping children and families achieve
their full health potential, First Hand is closing the gaps in health care for children around the world
through individual grants, as well as health and wellness programs. First Hand funds children’s
medical needs; school health programs that provide preventive screenings and empower students
to take charge of their social-emotional well-being and physical health; and basic necessities for
children in need. Cerner is an avid supporter of the foundation and makes an annual contribution,
which enables associate and business partner donations to go directly toward benefitting children.
Because of the generous support of Cerner associates and business partners, First Hand deployed
over $8.4 million to benefit nearly 74,000 children in 2019. To date, First Hand has changed the lives
of more than 475,000 individuals in 93 countries.
First Hand Foundation 2019 snapshot
2,775
volunteers
16,347
school-aged children in
India received wellness
screenings conducted
through replication of
First Hand model
20,745
elementary students
in the U.S. received
wellness screenings
4,523
individuals served
during medical
mission trips
1,174
individual case
grants funded
16
Commitment to the environment
We believe that we have a responsibility
to promote good environmental practices
for the benefit of the communities in which
we operate and the clients, associates,
shareholders and other individuals with
whom we interact. We seek to minimize
adverse impacts on the environment through
good management, aiming for continuous
improvement in our environmental programs.
Shareholder engagement
tons of waste recycled in 2019
gallons of water
saved in 2019
300+
860,000
13%
reduction in electricity use in past 2 years*
*Excluding Data Centers
Data Center earned EPA’s Energy Star
rating 6 of the last 7 years
Cerner is dedicated to frequent and transparent communication with our investment
community. We make a concerted effort to engage with our shareholder base to
keep them informed about the operations of the company and our outlook, and also
to hear their views. Our leadership and investor relations team engages with the
majority of our shareholders each year through hundreds of interactions, including
in-person meetings, industry conference presentations, webcasts and conference
calls and on-site investor group visits.
COVID-19
The health of Cerner’s associates, clients and communities around the world is our priority. In response to
global concerns around the COVID-19 outbreak, we have been able to successfully implement our business
continuity plans to help reduce the potential exposure and transmission of COVID-19 while maintaining
normal business operations with minimal interruptions. All Cerner associates in roles that can work from
home have been asked to do so, non-essential business travel has been discontinued and Cerner is covering
the cost of testing for COVID-19, when indicated, for any associates who may need it. We are confident in
our ability to continue providing support and service for our clients during this time.
We have embraced the important responsibility of helping clients prepare to protect the health and safety
of their organizations and the patients they treat. We regularly and proactively work with the World Health
Organization (WHO), U.S. Centers for Disease Control and Prevention (CDC) and other global and regional
health organizations to continually monitor guidance and align our response. As a result of recommendations
from these agencies, we are updating our solutions and including guidance and recommendations for
operational readiness, screening, testing, treatment and surveillance of COVID-19.
Many Cerner clients have been at the forefront of this global pandemic and pushed to unprecedented limits.
Our solutions are designed to help health systems effectively screen and monitor patient populations for
potential cases of viruses. In response to the current pandemic, Cerner teams have developed and provided
COVID-19-specific updates to clients that alert providers when a patient is at risk so clinicians can take
appropriate isolation precautions and actively manage the ongoing threat of the virus. Cerner is also
collaborating with Amwell Medical Group to provide a COVID-19 Response Module that empowers clients
to utilize telehealth to help improve access to the right care from the patient’s home to mitigate the impact
and spread of the virus. As the COVID-19 situation continues to evolve, we will work closely with our clients
to understand their needs and will provide further solution enhancements to address them. From business
continuity to product innovation, we are ready and prepared to meet our clients’ needs.
17
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18
Cerner Corporation
2019 Annual Report
Form 10-K
19
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended: December 28, 2019
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
Trading Symbol(s)
CERN
Name of each exchange on which registered
The Nasdaq Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
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
20
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
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
No
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
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
As of June 28, 2019, the aggregate market value of the registrant's common stock held by non-affiliates of the registrant
was $20.8 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, 2020
311,937,692 shares
DOCUMENTS INCORPORATED BY REFERENCE
Document
Portions of the registrant's Proxy Statement for the
2020 Annual Shareholders' Meeting
Parts into Which Incorporated
Part III
21
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.
Cerner® solutions and services help clinicians make care decisions and assist organizations in managing the health of their
populations. The Company also offers integrated clinical and financial systems to help manage day-to-day revenue functions,
as well as a wide range of services to support clinical, financial and operational needs.
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.
22
1
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
International
For the Years Ended
2019
2018
2017
12%
4%
6%
35%
21%
20%
2%
100%
89%
11%
100%
11%
5%
6%
34%
21%
21%
2%
100%
12%
5%
9%
31%
21%
20%
2%
100%
88%
12%
89%
11%
100%
100%
A description of our business models is as follows:
•
Licensed software - We develop and license intellectual property ("IP") (our architectures, application software,
executable and referential knowledge, data and algorithms) to our clients. Our licensed software business model
includes revenues from IP delivered via perpetual license and software as a service, where functionality is delivered
via "the cloud".
• Technology resale - We bundle licensed software with other companies' IP in the form of sublicenses to create
complete technology solutions for our clients. We also resell bundled computer equipment (hardware) from technology
companies to create a completely functional system. Additionally, we resell medical devices for a growing list of
medical device companies.
• Subscriptions - Another method by which we provide IP is on a time-based subscription model that has a periodic
usage charge. This is the primary way we package and provide medical knowledge, which changes frequently based
on research and can be updated independently from the software in which it is embedded. Also included in this
category of revenue is our Electronic Data Interchange ("EDI") transaction revenue. EDI is the electronic transfer of
data between health care providers and payers.
• Professional services - We provide a wide range of professional services to assist our clients in the implementation
of our information systems in their organizations. These services are in the form of project management, technical
and application expertise, clinical process optimization, regulatory consulting and education and training of our clients'
workforce to assist in the design and implementation of our systems. This business model also includes certain
outsourcing services utilized by health care organizations.
• Managed services - Our managed services business model includes revenues from remote hosting, application
management services, operational management services, and disaster recovery. Remote hosting is the largest of
these offerings, and it involves Cerner buying the necessary equipment, installing it in one of our data centers, and
operating the entire system on the client's behalf.
• Support and maintenance - This business model is comprised of the ongoing support and maintenance services we
provide our clients. Almost all of our clients contract for these services. Clients with support contracts get 24x7 access
to our immediate response center, which serves as our "emergency room," as well as access to our SolutionWorks
organization for less urgent issues. In addition, our clients' support payments give them ongoing access to the latest
releases of our IP. We also provide support for sublicensed software and maintenance for third party hardware.
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• Reimbursed travel - Includes reimbursable out-of-pocket expenses (primarily travel) incurred in connection with our
client service activities.
Health Care and Health Care IT Industry
There are several major forces shaping health care worldwide.
• Rising Health Care Costs - Health care costs continue to rise above the rate of inflation, with total health care
expenditures increasing 4.6% to $3.6 trillion in 2018, representing 18% of the U.S. Gross Domestic Product ("GDP").
Health expenditures are expected to grow at approximately 5% over the next decade, which would bring them to
nearly 20% of GDP. Similar growth trends exist in most major non-U.S. markets as well. 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.
•
Industry Consolidation - The number of health care providers turning to mergers, acquisitions and partnerships
has surged. On a 15-year basis the percentage of hospitals functioning under a health system rather than operating
independently increased from approximately 50% to approximately 65%. Today, over 70% of hospitals are operating
as part of a health system rather than independently. This consolidation trend has also included the outpatient setting
as health systems are seeking to build out health networks within defined Metropolitan Statistical Areas ("MSAs").
• Evolving Reimbursement - With the full enactment of The Patient Protection and Affordable Care Act ("ACA"),
Medicaid expansion in more than three-quarters of all states, and the aging population driving Medicare growth, the
government is playing an increasingly material role in U.S. health care economics. The implications for providers
include increased regulatory requirements for payment at less favorable terms than commercial payers. This reality
has exacerbated an already tough margin profile and is expected to be the new normal for the years to come. Provider
organizations are also dealing with an ongoing shift to value-based reimbursement models through programs like
the Medicare Access and CHIP Reauthorization Act ("MACRA") and Bundled Payment Care Initiative, which change
the way that Medicare rewards clinicians for value over volume. These reforms, over time, could materially change
provider economics.
• Consumer Expectations - Increased out-of-pocket expense and technology utilization outside health care have
contributed to rising consumer expectations on cost, convenience and service. This growing consumerism has
increased the political focus on rising drug prices, surprise medical bills, and escalating premiums, highlighting the
importance of having comprehensive strategies for engaging consumers.
• Cognitive Computing - Today, health care is principally digitized across the core clinical, operational and financial
settings. However, while workflows have been digitized, business processes remain largely unautomated and the
industry has yet to realize the benefits of digitization achieved in other industries. Cognitive computing represents a
meaningful opportunity to leverage the digitization that now exists in health care to improve efficiency and quality,
and we believe Cerner is well positioned to play a key role in helping the health care industry achieve this potential.
For the core provider market, many of these forces are contributing to an overall challenging macro environment. Providers
are simultaneously seeking to grow key service lines, drive operational efficiencies to make money at Medicare rates, and
build out the competencies required to take and effectively manage risk and participate in value-based reimbursement models.
Information technology is seen as an enabler of these efforts, which represents an opportunity for Cerner. At the same time,
the low-margin nature of provider businesses can make it difficult to fund required investment, making it important for solutions
and services to have a clear return on investment.
Cerner Vision and Growth Strategy
Throughout our history, Cerner has focused on creating innovation at the intersection of health care and information technology.
Our vision has long been to create a Health Network Architecture ("HNA") for providers of care in every community. HNA
has four core pillars: automate the care process; connect the person; structure, store and study the data; and then 'close the
loop' by pushing analytic insights back into the care process. The base digitization that now exists in health care is foundational
to achieving this vision, and we believe it can be achieved in the decade to come.
Our framework for growth as we work towards achieving our long-term vision includes three core areas.
First, we are focused on delivering in our core market, including executing effectively on our large U.S. federal contracts,
continuing to enhance key solution areas, such as revenue cycle, that are important to existing clients and represent revenue
3
24
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growth opportunities, and aligning with our provider clients to help them increase revenue in key service lines, tackle margin
compression and optimize their reimbursement dollars. In addition, we are investing in platform modernization, with a focus
on delivering a software as a service platform that we expect to lower total cost of ownership, improve clinician experience
and patient outcomes, enable clients to accelerate adoption of new functionality, and better leverage third-party innovations.
These efforts, in collaboration with Amazon Web Services, can differentiate Cerner and position our installed client base to
better manage the forces of change playing out in health care.
Second, we are continuing work towards advancing the HNA vision that has driven Cerner almost since its inception. We
believe that through the creation of a cohesive architecture for health care, the walls between care centers will become
transparent as information travels seamlessly between care settings. Data collected at one setting will be available to others
across the country, ensuring every individual in every part of the care process is connected to the right knowledge, resources
and persons at the appropriate time and place. We believe the coming decade is the window when the confluence of
technology, data liquidity and business model shifts can make this vision a reality. Health systems are increasingly building
network strategies within specific MSAs to enhance contracting power, increase patient stickiness and move closer to the
premium dollar. Cerner has an opportunity to become a strategic partner and assist with network design, provide services
in areas such as cybersecurity and operational reporting, and improve performance under value-based contracting. Cerner's
HealtheIntent platform was purpose-built as a cloud-based, EHR-agnostic platform that enables these efforts. HealtheIntent
is also foundational to our offerings in other areas that represent growth opportunities for Cerner. These include provider
market offerings, such long-term care, home care and hospice, rehabilitation, behavioral health, community care, care team
communications, and health systems operations, as well as consumer and employer offerings.
Third, Cerner has an opportunity to grow by becoming a trusted source of curated health data. This opportunity is also
supported by our HealtheIntent platform. While this opportunity is nascent, Cerner has natural points of differentiation, including
our proximity to the data given that our technology assets are in place in more than a quarter of U.S. health care facilities,
and our proven ability to aggregate and normalize multiple sources of data through our HealtheIntent platform, which contains
data from more than 249 million longitudinal records.
The early returns have been positive. We have made progress in the pharma and life sciences space with our
HealtheDataLabsSM offering and our collaboration with the Duke Clinical Research Institute, which is focused on creating
opportunities for clinical trial participation within Cerner's client base. There also is good traction in our HealtheHistorySM
business, which provides record retrieval for life insurance, legal and other administrative use cases.
Cerner expects to build on this early success and continue creating information-based solutions that reinvent traditional
health care businesses, allow our customers to better serve their markets and ultimately change lives. We believe the data
space not only represents a material addressable market beyond Cerner's traditional provider base, but that it is also consistent
with, and a compelling advancement of, the vision of personalized medicine that animated the original thinking around HNA.
Importantly, Cerner's health data strategy is based on curating data from a willing and engaged network of providers with an
emphasis on clear boundaries around the usage of patient data and based on clearly defined use cases with clarity and
transparency around data rights.
In summary, we believe Cerner's core value proposition remains strong and there is ample opportunity to grow through the
areas discussed above. As Cerner drives these areas of growth, we expect a strong and dynamic competitive landscape,
ranging from startups to mega-cap companies that are attracted to the substantial addressable markets across health care.
Success will require entrepreneurial scale. We will have to move faster and be nimbler than the mega-caps, while also
leveraging our advantages of size and experience that venture-backed startups lack.
Contracting with the Government
As we grow our federal business, revenue attributable to prime contracts or to subcontracts with other contractors engaged
in work for the U.S. government is becoming a bigger contributor to our overall revenue. Within the U.S. government, our
revenues are diversified across various agencies, including the Department of Defense and the U.S. Department of Veterans
Affairs. During 2019, more than 10% of our total revenues were attributable to our relationships (as the prime contractor or
a subcontractor) with U.S. government agencies. Contracting with the U.S. government subjects us to substantial regulation
and unique risks, including the U.S. government's ability to cancel any contract at any time through a termination for the
convenience of the U.S. government. Government cancellation terms typically permit the recovery of all or a portion of our
incurred costs and fees for work performed prior to termination when the U.S. government issues a termination for
convenience. These regulations and risks are described in more detail below under "Risk Factors" in this annual report on
Form 10-K.
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Software Development
We commit significant resources to developing new health information system solutions and services. As of the end of 2019,
approximately 7,300 associates were engaged in research and development activities. Total expenditures for the development
and enhancement of our software solutions were $784 million, $747 million and $706 million during the 2019, 2018 and 2017
fiscal years, respectively. These figures include both capitalized and non-capitalized portions and exclude amounts amortized
for financial reporting purposes.
As discussed above, continued investment in R&D remains a core element of our strategy. This will include ongoing
enhancement of our core solutions and development of new solutions and services.
Intellectual Property
We have a broad portfolio of intellectual property rights to protect the proprietary interests in our solutions, services, devices
and brands. Our solutions constitute works of authorship protected by copyrights in the U.S. and globally. We own valuable
trade secrets embodied in, or related to, our solutions, services and devices and protect these rights through a number of
technical and legal measures. We have registered or applied to register certain trademarks and service marks in a number
of countries with particular emphasis on the Cerner branding elements. We continue to develop our patent portfolio and own
more than 500 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
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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.
Backlog
Backlog, which reflects contracted revenue that has not yet been recognized as revenue, was $13.71 billion as of
December 28, 2019, of which we expect to recognize approximately 30% as revenue over the next 12 months.
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 $760 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.
Capsule Technologies, Inc.
Computer Programs and Systems, Inc.
eClinicalWorks, LLC
Epic Systems Corporation
Evolent Health, LLC
Health Catalyst, Inc.
InterSystems Corporation
MEDHOST, Inc.
Medical Information Technology, Inc. (MEDITECH)
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 2019, we employed approximately 27,400 associates worldwide.
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Information about our Executive Officers
The following table sets forth the names, ages, positions and certain other information regarding the Company's executive
officers as of January 28, 2020. Officers are elected annually and serve at the discretion of the Board of Directors.
Name
Brent Shafer
Age
62
Positions
Chairman of the Board of Directors and Chief Executive Officer
Marc G. Naughton
John Peterzalek
Tracy L. Platt
Randy D. Sims
Donald Trigg
64
59
46
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48
Executive Vice President and Chief Financial Officer
Executive Vice President and Chief Client Officer
Executive Vice President and Chief Human Resources Officer
Executive Vice President, Chief Legal Officer and Secretary
Executive Vice President, Strategic Growth
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.
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.
Tracy L. Platt joined the Company in July 2019 as Executive Vice President and Chief Human Resources Officer. Prior to
joining the Company, Ms. Platt spent nearly 10 years in executive HR roles at Medtronic Plc, a global health care company
that develops and distributes medical devices. More specifically, Ms. Platt was Vice President, Human Resources, Medtronic
from September 2009 to July 2019. Ms. Platt brings health care experience from Medtronic and other key organizations,
including Cardinal Health and GE Healthcare. Her most recent role at Medtronic included HR leadership for its global
operations organization and driving an operating model transformation throughout the enterprise.
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.
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
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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.
Item 1A. Risk Factors.
Risks Related to our Business
We may incur substantial costs related to product and service-related liabilities. Many of our software, 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 otherwise protect us from
liability, and 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 claim, prove to be adequate or continue to remain
available on acceptable terms, if at all. A successful material claim or series of claims against us, if uninsured or under-
insured, could materially harm our business, results of operations and financial condition. Product and service-related claims,
even if not successful, could damage our reputation, result in the loss of existing or potential clients, divert management's
attention, 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. Similarly, errors in the implementation and configuration
of our Solutions and Services can occur and have occurred in the past. Errors in our Solutions and Services could affect
their ability to properly function, integrate or operate with other offerings, create vulnerabilities and adversely affect market
acceptance of our Solutions and Services. This includes third-party software products or services incorporated into our own
solutions and services. Our client agreements typically provide warranties concerning material errors and other matters. If
Solutions and Services provided to a client fail to meet these warranties, it could allow the client to terminate the agreement
and possibly obtain a refund or damages or both, require us to incur additional expense to correct such failure, subject us
to claims or litigation or damage our reputation and 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 claim, prove to be
adequate or continue to remain available on acceptable terms, if at all. A successful material claim or series of claims 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 hosting services for
certain clients, including the collection and storage of critical patient and administrative data and the provision of support
services. Our business relies on the secure electronic transmission, data center storage and hosting of sensitive information,
including protected health information; personally identifiable information; financial information; and other sensitive information
relating to our clients and their patients, providers and certain billing information, our company, our workforce and our third
party suppliers. We also use public cloud providers and other third parties in connection with hosting our own data. A power
failure; an impairment of telecommunications lines; a successful concerted denial of service attack; a significant system,
network or data breach; damage, injury or impairment (environmental, accidental or malicious) to the buildings, the equipment
inside the buildings housing 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 hosting and system support services. System redundancy and other continuity measures may be
ineffective or inadequate, and our business continuity and disaster recovery planning may not be sufficient for all eventualities.
If any of our systems or those of third parties on which we rely are interrupted, damaged or breached, 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.
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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. Our Solutions and Services require us to store, retrieve, process and
manage our clients' information and data (and that of their patients), as well as our own data. Third parties may 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 protected health information,
personally identifiable information, financial information or other sensitive information, or the confidential information or data
of Cerner, our clients or their patients, or our suppliers. 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 may increase as we continue
to grow our cloud offerings, collect, store and process increasingly large amounts of our clients' confidential data, including
protected health information, and host or manage parts of our clients' businesses in cloud-based/multi-tenant IT environments.
We also use third party public cloud providers in connection with certain client facing cloud-based offerings and to host our
own data. We believe we have a reputation for secure and reliable Solution and Service offerings, and we have invested
significant 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. However, there can be no assurance that our policies, procedures and
controls or those of third parties on which we rely will detect or prevent all 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. 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 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. Although we maintain cyber risk insurance, there can be no assurance that such coverage will cover all
of our losses from any future breaches of our IT systems or those of third parties on which we rely, prove to be adequate or
continue to remain available on acceptable terms, if at all.
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 or our software
may be subject to claims related to open source software licenses. 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 and trade secrecy of our proprietary information. We
also rely on trademark, copyright and patent laws to protect our intellectual property rights in the U.S. and abroad. Despite
these efforts, 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 occasionally involved in intellectual property infringement or misappropriation claims.
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. We rely upon open source software in our Solutions and
Services. We may encounter claims from third parties alleging unauthorized use of the software purported to be licensed
under 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. We could also be
required to make our software source code available under the applicable open source license, utilize or develop alternative
technology, or cease using, selling or supporting the applicable Solutions and Services if we are unsuccessful in defending
such claims.
We may be subject to claims or become involved in legal proceedings that could have a material adverse impact
on our business, results of operations and financial condition, and our inability or failure to effectively manage
publicity related to such claims or legal proceedings could adversely impact our business. From time to time and in
the ordinary course of our business, we may become involved in various legal proceedings and claims, including for example,
employment disputes such as harassment or discrimination claims, and litigation; disputes and litigation alleging solution
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and implementation defects, personal injury, intellectual property infringement, violations of law and breaches of contract
and warranties; and other disputes and litigation. All such disputes and legal proceedings are inherently unpredictable and,
regardless of the merits of the claims, litigation may lead to negative publicity, and 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 judgments, injunctive relief or other equitable relief that may affect how we operate our business. Any settlements
of such proceedings may also affect how we operate our business. Although we maintain liability insurance coverage, there
can be no assurance that such coverage will cover any judgment or settlement, prove to be adequate or 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. Additionally, 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.
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
Pacific region. As part of our ongoing portfolio management, we periodically evaluate entering into new markets and adjusting
our focus in certain existing markets. Significant management attention and financial resources could be required to address
the risks noted below associated with new market entry into non-U.S. markets and potential disruptions if we chose to adjust
our focus in a given market. 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 (e.g. CE marking for medical device software), 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;
•
• Political unrest which may impact sales or threaten the safety of associates or our continued presence in these
Labor disruptions that may occur in a country;
countries and the related potential impact on global stability; and
• Our reliance on certain partners, which help us to offer our Solutions and Services at scale, whose reputation may
not be regarded as highly outside the U.S.
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
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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 comparable taxing authorities in other country jurisdictions. Changes in tax laws could cause us to
experience fluctuations in our tax obligations and effective tax rates in future periods and otherwise adversely affect our tax
positions and our tax liabilities. Our effective tax rates, tax payments, tax credits or incentives could be adversely affected
by changes in tax laws.
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 require 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
international trade are evolving as a result of the Base Erosion and Profit Shifting reporting requirements ("BEPS")
recommended by the G-20 and Organization for Economic Cooperation and Development ("OECD"). During 2018, the
European Commission issued proposals and the OECD issued an interim report related to the taxation of the digital economy.
During 2019, the OECD released a public consultation paper and a Programme of Work to achieve a consensus-based
solution to address tax challenges of the digital economy. The Programme of Work was endorsed by the G-20. 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 departure of the United Kingdom (UK) from the European Union (EU) could adversely affect our financial results.
Negotiations surrounding the UK's withdrawal of its membership from the EU, which is commonly referred to as "Brexit," are
continuing, and the specifics of any such departure remain uncertain. 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 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, could adversely affect our business, results of operations and financial condition.
Our success depends upon the recruitment and retention of key personnel. Members of our senior management team
have departed the Company during the past few years for a variety of reasons, and we cannot guarantee that there will not
be additional departures. To remain competitive, 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 industries and technical environments in which our Solutions and Services are offered. As we modernize our core
platforms to the cloud, it is important that we retain and attract experienced technical talent with cloud expertise to lead this
transformation. Competition for such personnel in our industries is intense in both the U.S. and abroad. As other technology
companies aggressively recruit for the same talent, and offer more alternative work arrangements, it is increasingly difficult
to retain and attract this specialized talent. 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,
our success is dependent to a significant degree on the continued contributions of key management, sales, marketing,
consulting and technical personnel. We may also experience increased compensation costs that are not offset by either
improved productivity or higher sales. 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
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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 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.
As we decide to partner rather than directly provide certain Solutions and Services, we will become more dependent on these
strategic relationships to meet our clients' needs. We believe that these relationships contribute to our ability to further build
our brand, extend the reach of our Solutions and Services, develop and deploy new products and services, and generate
additional revenues and cash flows. The loss of a critical strategic relationship or failure to establish additional relationships,
or the failure to realize anticipated synergies and benefits of these strategic relationships, 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 intellectual property and technology in the operation and
delivery of our Solutions and Services. Additionally, we sell or license third party intellectual property and technology 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
the technology covered by these licenses to compete directly with us. If 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. 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 to make strategic investments, 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 investments that we believe are complementary to our business.
Acquisitions and strategic investments 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) diversion of our management's attention from
other business concerns; 2) investment in or entry into markets in which we have little or no direct prior experience; 3) failure
to achieve projected synergies; and 4) failure to commercialize "go forward" Solutions and Services; all of which could require
us to incur significant expenses and cause management distraction. In addition to the above, the following additional risks
are inherent in acquisitions and could have a material adverse effect on our business, results of operations, financial condition
or prospects: 1) failure to successfully integrate the business; 2) loss of clients, key personnel, suppliers and other important
relationships; 3) incurrence of debt or assumption of known and unknown liabilities; 4) write-off of software development
costs, goodwill, client lists and amortization of expenses related to intangible assets; 5) dilutive issuances of equity securities;
6) accounting deficiencies relating to 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 7) litigation related to acquisition
activity, such as claims from former employees, former stockholders, clients or other third parties, all of which could require
us to incur significant expenses and cause management distraction. Further, when we make a strategic investment, we have
to rely on third party management teams to drive the portfolio company's success. If we fail to successfully integrate acquired
businesses or fail to implement our business strategies with respect to our acquisitions or investments, we may not be able
to achieve projected results or support the amount of consideration paid for such acquired businesses or invested into a
portfolio company.
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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. 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 disruption or reduction in the availability of capital or 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 anticipate or 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 our Solutions and Services 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 continue to grow or that we will be able to successfully introduce new Solutions
or Services. We provide solutions to clients via various deployment models, including client-server-based solutions and cloud-
based offerings. As we move more of our offerings to the cloud, we may incur disruption as we transition existing clients and
be less competitive during the transition, which could impact revenue and profitability. We believe 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, machine learning ("ML"), artificial intelligence ("AI"), value-based care,
consumer solutions, population health management and other health network solutions, we expect to face new competitors,
and these competitors may have more experience in these markets, better brand recognition 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. 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.
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
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 retain and generate additional business from our current clients could materially and
adversely impact our business, financial condition and operating results. In addition, there are a limited number of hospitals
and other health care providers in the U.S. market, and the health care industry has been subject to increasing consolidation,
which can cause fewer new footprint opportunities or lead to the replacement of our Solutions and Services in existing clients
if the acquiror (or the group being acquired) has a relationship with a different HCIT provider. If we are unable to adapt to
the impact of industry consolidation, falling costs and technological advancements in a timely manner, our prospects and
financial results could be negatively affected.
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. We expect to pursue growth and expansion opportunities in the
areas of analytics, ML, AI, value-based care, consumer solutions, population health and other health network solutions. 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
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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. Implementing, replacing, or expanding an
information system, or modifying, adding or outsourcing 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 reviews,
inquiries and investigations of our business practices and performance with respect to government contracts. Negative
findings from audits, reviews, inquiries or investigations 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 civil money penalties, 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 or civil laws
involving fraud, conflict of interest, bribery or improper gratuity, a violation of the civil U.S. False Claims Act or receipt
of an overpayment from the government. Failure to make required disclosures could be a basis for suspension or
debarment, or both, 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. Government contracts often involve more extensive scrutiny and publicity. For example, the
United States House Veterans' Affairs Subcommittee on Technology Modernization has oversight and investigative
jurisdiction of the VA's Electronic Health Record Modernization ("EHRM") program. The Subcommittee has requested
Cerner to participate in several oversight hearings. Negative publicity, including allegations of improper or illegal
activity, poor contract performance, 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.
We must comply with specific procurement regulations and a variety of other socio-economic requirements, as well
as various statutes, regulations and requirements related to employment practices, recordkeeping and accounting.
These regulations and requirements affect how we transact business with our clients and suppliers, and in some
instances, involve additional costs.
• Government entities typically fund projects through appropriated monies. Government entities, however, reserve the
right to change the scope of or terminate these projects at their convenience for lack of approved funding or other
reasons. 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. If insufficient funding is appropriated to the government
entity to cover termination costs, we also may not be able to fully recover our investments.
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• Our failure to comply with a variety of complex procurement rules and regulations could result in our liability 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 (e.g., the Federal Acquisition
Regulation and supplements, the Truth in Negotiations Act, the Procurement Integrity Act, and the Civil False Claims
Act), which affect how we do business with our customers and may impose added costs on our business.
• Government contracts may be protested. These protests could result in administrative procedures and litigation,
result in delays in performance and payment, be expensive to defend and be incapable of prompt resolution. Loss
of a bid protest may result in loss of the award, contract modification, expense or delay.
•
It is common in contracting with governments for there to be a prime contractor with privity of contract to the government
client and one or more subcontractors. We serve in both capacities for different government clients. For example,
we are a subcontractor to Leidos, Inc. under the MHS Genesis contract with the U.S. Department of Defense, and
we are the prime contractor under the EHRM contract with the U.S. Department of Veterans Affairs. There are inherent
risks in being a subcontractor, including without limitation, reliance on the performance of the prime contractor for
the execution of the contract to the satisfaction of the client and other risks in government contracting as described
in the bullets above. If the prime contractor fails to perform under the agreement, fails or delays in issuing an order
to us or in paying us for the Solutions and Services rendered, or is debarred or otherwise restricted from contracting
with the government client, it could have a material adverse impact on our business, results of operations and financial
condition. Additionally, when we serve as the prime contractor, we rely on our subcontractors to fulfill certain contractual
obligations under our agreements with government clients. Any failure on the part of the subcontractors to perform
under our subcontracts with them could subject us to negative reputational or contractual risk.
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. As of December 28, 2019, we had $1.03
billion of long-term debt outstanding, and we may incur additional indebtedness in the future. 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 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.
The interest rates under our financing agreements and the interest rate swap related to the outstanding indebtedness
under our Credit Agreement may be adversely impacted by the phase-out of London Interbank Offered Rate ("LIBOR")
as a benchmark reference for short-term interest rates. LIBOR is scheduled to be phased out by the end of 2021. When
LIBOR ceases to exist, we will need to agree upon a replacement index with the lenders under our outstanding indebtedness
at the time, and such new rates may not be as favorable to us as those in effect prior to any LIBOR phase-out. With respect
to our Third Amended and Restated Credit Agreement (as amended, the "Credit Agreement") and the related interest rate
swap, if the swap and the Credit Agreement replacement rates are not identical, our hedge could be less effective. Our failure
to manage these risks effectively could adversely affect our financial condition and results of operations.
Goodwill and other intangible assets represent approximately 18% 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.
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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 Solutions and Services
that enable our clients to meet their compliance requirements. 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 maintaining and
acquiring new client relationships becomes greater.
The last five 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 imaging services,
the Medicare and CHIP Reauthorization Act 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 a nationwide trusted health information exchange, established interoperability requirements for providers,
payers and consumers, and 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 state Medicaid programs.
Reform of payment policies for Medicare and Medicaid continues to evolve. The Patient Protection and Affordable Care Act
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" (APMs) as bundled payment models based on episodes of care or per capita payment for
defined populations as alternatives to traditional fee for service payments to providers. New APMs continue to be developed
under the authorities of the Centers for Medicare and Medicaid Innovations, and value-based efforts such as the Medicare
Shared Savings Program Accountable Care Organization (MSSP ACO) program or Bundled Payment for Care Improvement
(BPCI) Advanced episode-based payment model program have seen their second iteration. APMs have evolved to usually
require two-sided risk (shared saving and shared losses), and use of Certified EHR Technology (CEHRT) as a precondition
for program participation. However, even after failed attempts to repeal the ACA, subsequent judicial developments continue
to create uncertainty for the continued implementation of the ACA. Given a fractious and polarized legislative environment
at the federal level, the near term prospects for health care related legislation face uncertainty. 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. We also anticipate significant impacts from information blocking
provisions of the Cures Act which includes mandated adoption of new certified capabilities and updates to support new
interoperability requirements as a part of required use of certified HCIT. We expect expanded surveillance by federal agencies
of certified HCIT and its use by our clients. We also anticipate newly expanded regulations under the federal Self-Referral
and Anti-Kickback Laws that will contain expanded safe harbors for value based care, and that may promote expanded
donation of certified HCIT and of cybersecurity technologies in support of trusted health information exchange to support
coordinated patient care within value based APMs. In response to this uncertainty, purchasers of HCIT may elect to update
HCIT already in use and postpone investment decisions in new or replacement HCIT, 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 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. Even though we may not be directly regulated by specific health care laws and regulations, our Solutions and
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Services must be capable of being used by our clients in a way that complies with those laws and regulations. There are 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:
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 prosecutorial, regulatory or judicial authorities 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,
because 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 each resulted in the issuance of an FDA Form
483 observation to which we responded promptly. The FDA has taken no further action with respect to either of the Form
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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 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.
Data protection regulations impact how businesses, including both us and our clients, can collect and process the personal
data of individuals. 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. Furthermore, we incur development,
resource, and capital costs in delivering, updating, and supporting Solutions and Services to enable our clients to comply
with these varying and evolving standards. Governmental enforcement personnel 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 and 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.
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.
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. U.S. state data breach notification
laws continue to expand the type of personal information they encompass, such as health and insurance information, and
in many cases are more burdensome than the HIPAA/HITECH breach reporting requirements.
In non-U.S. jurisdictions, we are subject to transnational, national and local data protection legislation, including the EU
General Data Protection Regulation ("GDPR"), Canadian Personal Information Protection and Electronic Documents Act
(PIPEDA) and Canadian Provincial legislation. These regulations may impose 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 European 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").
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.
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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.
Development and adoption of ML and AI technologies offer the potential to significantly improve the delivery of healthcare.
The application of ML and AI technologies to personal and patient information may be regulated under some privacy laws
(e.g. GDPR). Furthermore, the lack of standards for measuring the accuracy and effectiveness of ML and AI can raise new
or exacerbate existing technological, legal or other challenges that could impact our reputation and have a material adverse
impact on our results of operations.
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. These expectations for interoperability are supported
by the information blocking prohibitions of the Cures Act. If our Solutions and Services are not consistent with those
requirements, we could be forced to incur substantial additional development costs to conform. The Office of the National
Coordinator for Health Information Technology (ONC) is also 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 certified health 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 soon to finalize additional regulations under the Cures Act to enforce the act's policy directives relating to data
blocking and interoperability. These regulations will also mandate adoption of updated and expanded certified capabilities
of CEHRT that our clients must adopt to remain able to participate in the federal programs mentioned earlier. 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 became mandatory during 2019. We will continue to address additional
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regulatory requirements as they evolve to support the mandatory updates that are expected as a result of the Cures Act.
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 or our 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
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
applicable laws, 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 laws 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,
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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 other factors, many of which are beyond our control. 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. As a matter of policy, we do not generally comment on our stock price or rumors.
We might not be successful in achieving expected operating efficiencies and sustaining or improving operating
expense reductions, and might experience business disruptions and adverse tax consequences associated with
restructuring, realignment and costs reduction activities. Our Board of Directors has implemented and plans to continue
to implement several restructuring and realignment initiatives to reduce costs and increase operating efficiencies. There can
be no assurance that we will realize, in full or in part, the anticipated benefits of these initiatives. For example, as part of our
ongoing portfolio management, we may decide to divest assets or businesses. When we decide to sell assets or a business,
we may encounter difficulty in finding buyers or alternative exit strategies on acceptable terms in a timely manner, which
could delay the achievement of our strategic objectives. We may also experience greater dis-synergies than expected, and
the impact of the divestiture on our revenue growth could be larger than projected.
Our financial goals assume a level of productivity improvement and cost reduction. If we are unable to deliver on these goals,
while continuing to invest in business growth, or if the volume and nature of change overwhelms available resources, our
business operations and financial results could be materially and adversely impacted. Our ability to successfully manage
and execute these initiatives and realize expected savings and benefits in the amounts and at the times anticipated is important
to our business success. Any failure to do so, which could result from our inability to successfully execute organizational
change, cost-cutting initiatives and productivity improvement plans, changes in global or regional economic conditions,
competition, changes in the industries in which we compete, unanticipated costs or charges, inability to attract or retain key
personnel, attrition beyond any planned reduction in workforce, and other factors described herein, could have a material
adverse effect on our businesses, financial condition and results of operations. Moreover, our ability to achieve our other
strategic goals and business plans might be adversely affected and we could experience business disruptions with clients
and elsewhere if our restructuring and realignment efforts and our cost reduction activities prove ineffective.
Lower than expected revenue growth or shifts in our revenue mix could adversely affect our results of operations.
Our revenue growth and mix could vary over time due to a number of factors, including timing of contracts signing, changes
in the health of our end markets, unexpected client attrition, and the mix of software, hardware, devices, maintenance, support
and services revenues, which carry different margin rates which can vary from period to period. Our operating results could
be harmed by changes in revenue mix and costs, together with numerous other factors, including rapid growth in lower margin
services business, declines in software, and growth in non-cash expenses, such as amortization and depreciation. Any one
of these factors or the cumulative effects of certain of these factors may result in significant fluctuations in our results of
operations. This variability and unpredictability could result in our failure to meet internal expectations or those of securities
analysts or investors for a particular period. If we fail to meet or exceed such expectations for these or any other reasons,
the market price of our shares could decline.
We cannot guarantee that our capital allocation strategy, which may include share repurchases and dividend
payments, will be fully implemented or that it will enhance long-term shareholder value. In fiscal year 2019, our Board
of Directors approved an amendment to our stock repurchase program, increasing the total authorized purchase program
to $3.70 billion, in the aggregate. As of December 28, 2019, the total available for repurchase under the amended program
was $1.68 billion. 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, during fiscal year 2019, we commenced a quarterly cash dividend
program. 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. 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 shareholder value.
Our business could be negatively affected as a result of any future proxy fight or the actions of activist shareholders.
Proxy contests or related activist activities could adversely affect our business for a number of reasons, including, but not
limited to, the fact that responding to proxy contests and other actions by activist shareholders can be costly and time-
consuming and can create perceived uncertainties as to our future direction and governance that may result in the loss of
potential business opportunities and may make it more difficult to attract and retain qualified personnel, business partners,
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customers and others important to our success. Any future proxy contest or activist activities could also cause our stock price
to experience periods of volatility. Further, if a proxy contest or a related settlement results in a change in the composition
of our Board of Directors it could, in certain circumstances, give third parties certain rights under our existing contractual
obligations, which could adversely affect our business.
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," "can," "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
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Item 2. Properties.
As of the end of 2019, we owned approximately 6.0 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 2019, we also leased approximately 334 thousand gross square feet of office space in the U.S. used by our
Domestic segment, and approximately 1.5 million gross square feet of office and data center space outside the U.S., primarily
in Australia, Canada, Europe, India, and the Middle East, which is used by our International segment.
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. See Note (12) of the notes to consolidated
financial statements included under Part II, in Item 8 of this annual report on Form 10-K for information regarding our dispute
with Fujitsu Services Limited. 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.
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Part II.
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities.
Our common stock trades on the Nasdaq Global Select MarketSM under the symbol CERN. The following table sets forth the
high, low and last sales prices for the fiscal quarters of 2019 and 2018 as reported by the Nasdaq Global Select Market.
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
2019
Low
Last
High
2018
Low
$
$
59.19
73.36
76.47
74.10
$
50.51
56.52
65.86
65.02
57.21
73.30
68.37
73.28
$
$
73.43
63.22
67.57
65.44
$
56.49
52.05
59.49
48.78
Last
58.00
59.79
64.41
52.01
At January 28, 2020, there were approximately 930 owners of record.
In 2019, our Board of Directors declared three separate cash dividends of $0.18 per share on our issued and outstanding
common stock. Subject to declaration by our Board of Directors, we expect to continue paying quarterly cash dividends as
a part of our current capital allocation strategy. Future dividends will be subject to the determination, declaration and discretion
of our Board of Directors and compliance with covenants under our outstanding debt agreements. Refer to Note (16) of the
notes to consolidated financial statements for further information regarding our dividend program.
The table below provides information with respect to Common Stock purchases by the Company during the fourth fiscal
quarter of 2019:
Period
September 29, 2019 - October 26, 2019
October 27, 2019 - November 23, 2019
November 24, 2019 - December 28, 2019
Total
Total Number of
Shares
Purchased (a)
Average Price
Paid per Share
— $
4,440,632
—
4,440,632
$
—
67.54
—
67.54
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)
— $
4,440,549
483,460,421
183,549,247
—
1,683,549,247
4,440,549
(a) Of the 4,440,632 shares of common stock, par value $0.01 per share, presented in the table above, 83 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 tax obligations due upon the vesting of restricted stock. Pursuant to the Omnibus Plan, the 83 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) Under our current share repurchase program, which was initially approved by our Board of Directors on May 23, 2017 (and announced May 25,
2017) and most recently amended on December 12, 2019 (as announced on December 13, 2019), the Company is authorized to repurchase up
to $3.70 billion of shares of our common stock, 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 2019, we repurchased 18.8 million shares for total consideration of $1.30 billion under the program pursuant to Rule 10b5-1
plans. As of December 28, 2019, $1.68 billion remains available for repurchase under the program. Refer to Note (16) 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.
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Item 6. Selected Financial Data.
(In thousands, except per share data)
Statement of Operations Data:
Revenues
Operating earnings
Earnings before income taxes
Net earnings
Earnings per share:
Basic
Diluted
Weighted average shares outstanding:
Basic
Diluted
Balance Sheet Data:
Working capital
Total assets
2019(1)
2018(2)
2017(3)
2016
2015(4)
$ 5,692,598
$ 5,366,325
$ 5,142,272
$ 4,796,473
$ 4,425,267
600,669
654,512
529,454
774,785
800,851
630,059
960,471
967,129
866,978
911,013
918,434
636,484
781,136
781,380
539,362
1.66
1.65
1.91
1.89
2.62
2.57
1.88
1.85
1.57
1.54
318,229
321,235
330,084
333,572
331,373
337,999
337,740
343,653
343,178
350,908
$ 1,069,176
$ 1,356,114
$ 1,590,632
$
773,960
$ 1,049,967
6,894,622
6,708,636
6,469,311
5,629,963
5,561,984
Long-term debt, excluding current installments
1,038,382
438,802
515,130
537,552
563,353
Shareholders' equity
4,317,328
4,928,389
4,785,348
3,927,947
3,870,384
(1)
In 2019, we adopted new lease accounting guidance as further discussed in Note (6) of the notes to consolidated financial statements.
(2)
In 2018, we adopted new revenue recognition guidance as further discussed in Note (2) of the notes to consolidated financial statements.
(3)
Includes the impact of certain U.S. income tax reform, as further described in Note (14) of the notes to consolidated financial statements.
(4)
In 2015, we acquired our Health Services business from Siemens AG.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following Management Discussion and Analysis ("MD&A") is intended to help the reader understand our results of
operations and financial condition. This MD&A is provided as a supplement to, and should be read in conjunction with, our
financial statements and the accompanying notes to the financial statements.
All references to years in this MD&A represent fiscal years unless otherwise noted. Refer to Note (1) of the notes to consolidated
financial statements for information regarding our fiscal year end.
Information regarding our 2017 results of operations, including a year-to-year comparison against 2018, may be found in
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our annual report on
Form 10-K for the period ended December 29, 2018, which was filed with the Securities and Exchange Commission on
February 8, 2019.
Management Overview
Our revenues are primarily derived by selling, implementing, operating 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. We may also supplement organic growth with acquisitions or strategic
investments.
Cerner's long history of growth has created an important strategic footprint in health care, with Cerner holding more than 25
percent market share in the U.S. acute care EHR market and a leading market share in several non-U.S. regions. Foundational
to our growth going forward is delivering value to this core client base, including executing effectively on our large U.S. federal
contracts and cross-selling key solutions and services in areas such as revenue cycle. We are also investing in platform
modernization, with a focus on delivering a software as a service platform that we expect to lower total cost of ownership,
improve clinician experience and patient outcomes, and enable clients to accelerate adoption of new functionality and better
leverage third-party innovations.
We also expect to continue driving growth by leveraging our HealtheIntent platform, which is the foundation for established
and new offerings for both provider and non-provider markets. The EHR-agnostic HealtheIntent platform enables Cerner to
become a strategic partner with health care stakeholders and help them improve performance under value-based contracting.
The platform, along with our CareAware platform, also supports offerings in areas such long-term care, home care and
hospice, rehabilitation, behavioral health, community care, care team communications, health systems operations, consumer
and employer, and data-as-a-service.
Beyond our strategy for driving revenue growth, we are also focused on earnings growth. After several years of margin
compression related to slowing revenue growth, increased mix of low-margin services, and lower software demand due to
the end of direct government incentives for EHR adoptions, Cerner implemented a new operating structure and introduced
other initiatives focused on cost optimization and process improvement in 2019. To assist in these efforts, we engaged an
outside consulting firm to conduct a review of our operations and cost structure. We made good progress in 2019 and expect
this progress to be reflected in improved profitability in 2020 and beyond. We are focused on ongoing identification of
opportunities to operate more efficiently and on achieving the efficiencies without impacting the quality of our solutions and
services and commitments to our clients.
We are also focused on delivering strong levels of cash flow which we expect to accomplish by continuing to grow earnings
and prudently managing capital expenditures. We expect to use future cash flow and debt, as appropriate, to meet our capital
allocation objectives, which include investing in our business, potential acquisitions or other strategic investments to drive
profitable growth, and returning capital to shareholders through share repurchases and dividends.
Results Overview
Bookings, which reflects the value of executed contracts for software, hardware, professional services and managed services,
was $5.99 billion in 2019, which is a decrease of 11% compared to $6.72 billion in 2018, with the decrease primarily reflecting
a more selective approach to low-margin, long-term contracts that typically represent large booking values.
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Revenues for 2019 increased 6% to $5.69 billion, compared to $5.37 billion in 2018. The increase in revenue reflects ongoing
demand from new and existing clients for Cerner's solutions and tech-enabled 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 2019 decreased 16% to $529 million, compared to $630 million in 2018. Diluted earnings per share decreased
13% to $1.65 in 2019, compared to $1.89 in 2018. The overall decrease in net earnings and diluted earnings per share was
primarily a result of increased operating expenses, including expenses incurred in connection with our operational
improvement initiatives discussed below, partially offset by increased revenues.
We had cash collections of receivables of $5.79 billion in 2019, compared to $5.49 billion in 2018. Days sales outstanding
was 72 days for the 2019 fourth quarter, compared to 74 days for the 2019 third quarter and 79 days for the 2018 fourth
quarter. Operating cash flows for 2019 were $1.31 billion, compared to $1.45 billion in 2018.
Operational Improvement Initiatives
We transitioned to a new operating structure in the first quarter of 2019. The Company has been focused on leveraging the
impact of this reorganization and identifying additional efficiencies. Currently, we are focused on reducing operating expenses
and generating other efficiencies that are expected to provide longer-term operating margin expansion. We are also
considering exiting certain low-margin businesses and being more selective as we consider new business opportunities. To
assist in these efforts, we have engaged an outside consulting firm to conduct a review of our operations and cost structure.
We are focused on ongoing identification of opportunities to operate more efficiently and on achieving the efficiencies without
impacting the quality of our solutions and services and commitments to our clients.
In the near term, we expect to incur expenses in connection with these efforts. Such expenses may include, but are not
limited to, consultant and other professional services fees, employee separation costs, contract termination costs, and other
such related expenses. We recognized $221 million of expenses related to these efforts in 2019, which are included in
operating expenses in our consolidated statements of operations and discussed further below. We expect to incur additional
expenses in connection with these initiatives in future periods, which may be material.
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.
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Results of Operations
Fiscal Year 2019 Compared to Fiscal Year 2018
(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
% of
Revenue
2018
% of
Revenue
% Change
2019
$ 5,692,598
1,071,041
100% $ 5,366,325
19%
937,348
4,621,557
81%
4,428,977
2,675,337
737,136
520,598
87,817
4,020,888
5,091,929
47%
13%
9%
2%
2,493,696
683,663
389,469
87,364
71%
3,654,192
89%
4,591,540
600,669
11%
774,785
53,843
(125,058)
26,066
(170,792)
100%
17%
83%
46%
13%
7%
2%
68%
86%
14%
6 %
14 %
4 %
7 %
8 %
34 %
1 %
10 %
11 %
(22)%
$
529,454
$
630,059
(16)%
Revenues increased 6% to $5.69 billion in 2019, as compared to $5.37 billion in 2018. This increase was primarily driven
by a $181 million increase in professional services revenue due to growth in implementation activity; growth in licensed
software revenue of $67 million as a result of continued demand for our solutions; and growth in managed services revenue
of $59 million as a result of increased hosting services. Refer to Note (2) of the notes to consolidated financial statements
for further information regarding revenues disaggregated by our business models.
Backlog, which reflects contracted revenue that has not yet been recognized as revenue, was $13.71 billion at the end
of 2019, compared to $15.25 billion at the end of 2018. This decrease was primarily driven by the termination of certain
client contracts, discussed further below. We expect to recognize 30% of our backlog as revenue over the next 12 months.
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 $760 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 19% in 2019, compared to 17% in 2018. The higher costs of revenue
as a percent of revenues was primarily driven by higher third-party costs associated with professional services revenue.
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 $4.02 billion in 2019, compared to $3.65 billion in 2018.
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• Sales and client service expenses as a percent of revenues were 47% in 2019, compared to 46% in 2018. These
expenses increased 7% to $2.68 billion in 2019, from $2.49 billion in 2018. 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 increase in sales and
client service expenses was primarily driven by a $72 million increase in personnel expenses, inclusive of higher
associate benefits costs; a $16 million increase in bad debt expense related to client receivables; $66 million of
charges recognized in 2019 in connection with the termination of certain client contracts prior to the end of their
stated terms; and a $30 million charge in connection with a client dispute recognized in 2019. We expect the
termination of such client contracts to reduce future revenues by approximately $170 million on an annualized
basis. We do not expect a significant impact to future operating earnings, as the terminated contacts related to
lower margin business. Refer to Note (12) of the notes to consolidated financial statements for further information
regarding the client dispute. 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 (12) of the
notes to consolidated financial statements.
• Software development expenses as a percent of revenues were 13% in both 2019 and 2018. 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, population health management, and health network solutions. In addition, 2019 includes costs incurred in
connection with our efforts to modernize our platforms, with a focus on development of a software as a service
platform. A summary of our total software development expense in 2019 and 2018 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
2019
2018
$
783,593
$
747,128
(270,948)
(271,787)
(2,923)
(1,906)
227,414
210,228
$
737,136
$
683,663
• General and administrative expenses as a percent of revenues were 9% in 2019, compared to 7% in 2018. These
expenses increased 34% to $521 million in 2019, from $389 million in 2018. General and administrative expenses
include 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, certain organizational restructuring and other expense. The increase in general and
administrative expenses is primarily driven by expenses incurred in 2019 in connection with our operational
improvement initiatives discussed above; inclusive of $86 million of charges associated with employee separation
benefits, as further discussed in Note (1) of the notes to consolidated financial statements. We expect to incur
additional expenses in connection with these efforts in future periods, which may be material.
• Amortization of acquisition-related intangibles as a percent of revenues was 2% in both 2019 and 2018. These
expenses increased 1% to $88 million in 2019, from $87 million in 2018. 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 increase in amortization of
acquisition-related intangibles includes the impact of intangibles recognized in connection with our acquisition of
AbleVets, LLC ("AbleVets") in 2019. Refer to Note (8) of the notes to consolidated financial statements for further
information regarding our acquisition of AbleVets.
Non-Operating Items
• Other income, net was $54 million in 2019, compared to $26 million in 2018. The 2019 period includes a $16
million gain recognized on the disposition of one of our equity investments and a $14 million unrealized gain
recognized on another one of our equity investments. Refer to Note (13) of the notes to consolidated financial
statements for further information regarding the components of other income, net.
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• Our effective tax rate was 19% in 2019, compared to 21% in 2018. The decrease in the effective tax rate in 2019
is primarily due to increased excess tax benefits recognized as a component of income tax expense due to
elevated stock option exercise activity. Refer to Note (14) 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 2020, from what is reported for 2019.
Operations by Segment
We have two operating segments: Domestic and International (formerly referred to as Global). The Domestic segment
includes revenue contributions and expenditures associated with business activity in the United States. The International
segment includes revenue contributions and expenditures linked to business activity outside the United States, primarily
from Australia, Canada, Europe, and the Middle East. Refer to Note (19) 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 2019 and 2018:
(In thousands)
Domestic Segment
Revenues
Costs of revenue
Operating expenses
Total costs and expenses
Domestic operating earnings
International Segment
Revenues
Costs of revenue
Operating expenses
Total costs and expenses
International operating earnings
Other, net
Consolidated operating earnings
Domestic Segment
% of
Segment
Revenue
% of
Segment
Revenue
2018
2019
% Change
$ 5,038,127
100%
$ 4,730,266
100%
967,035
2,398,422
3,365,457
1,672,670
654,471
104,006
276,914
380,920
273,551
19%
48%
67%
33%
100%
16%
42%
58%
42%
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%
(1,345,552)
$
600,669
(1,168,611)
$
774,785
7%
17%
11%
12%
(4)%
3%
(5)%
(14)%
(12)%
33%
15%
(22)%
• Revenues increased 7% to $5.04 billion in 2019, from $4.73 billion in 2018. This increase was primarily driven
by a $186 million increase in professional services revenue due to growth in implementation activity; growth in
licensed software revenue of $56 million as a result of continued demand for our solutions; and growth in managed
services revenue of $39 million as a result of increased hosting 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 19% in 2019, compared to 18% in 2018. The higher costs of
revenue as a percent of revenues was primarily driven by higher third-party costs associated with professional
services revenue.
• Operating expenses as a percent of revenues were 48% in 2019, compared to 46% in 2018. The higher operating
expenses as a percent of revenues was primarily driven by $66 million of charges in connection with client contract
terminations and the $30 million charge in connection with a client dispute, both recognized in 2019 and discussed
above.
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International Segment
• Revenues increased 3% to $654 million in 2019, from $636 million in 2018. This increase was primarily driven
by a $20 million increase in managed services revenue due to increased hosting services and growth in licensed
software revenue of $11 million as a result of continued demand for our solutions; partially offset by a $15 million
decrease in technology resale revenues. 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 16% in 2019, compared to 17% in 2018. The lower costs of
revenue as a percent of revenues was primarily driven by a lower mix of technology resale revenue, which carries
a higher cost of revenue.
• Operating expenses as a percent of revenues were 42% in 2019, compared to 50% in 2018. The decrease 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 (12) 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, share-based compensation expense, certain amortization and depreciation, certain
organizational restructuring and other expense. These expenses increased 15% to $1.35 billion in 2019, from $1.17 billion
in 2018. The increase is primarily due to expenses incurred in 2019 in connection with our operational improvement
initiatives discussed above; inclusive of $86 million of charges associated with employee separation benefits, as further
discussed in Note (1) of the notes to consolidated financial statements.
The effects of inflation on our business during 2019 and 2018 were not significant.
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Liquidity and Capital Resources
Our liquidity is influenced by many factors, including the amount and timing of our revenues, our cash collections from our
clients and the amount we invest in software development, acquisitions, capital expenditures, and our share repurchase and
dividend programs.
Our principal sources of liquidity are our cash, cash equivalents, which primarily consist of money market funds and time
deposits with original maturities of less than 90 days, short-term investments, and borrowings under our Credit Agreement.
At the end of 2019, we had cash and cash equivalents of $442 million and short-term investments of $100 million, as compared
to cash and cash equivalents of $374 million and short-term investments of $401 million at the end of 2018.
We have entered into a Credit Agreement with a syndicate of lenders that provides for an unsecured $1.00 billion revolving
credit loan facility, along with a letter of credit facility up to $100 million (which is a sub-facility of the $1.00 billion revolving
credit loan facility). We have the ability to increase the maximum capacity to $1.20 billion at any time during the Credit
Agreement's term, subject to lender participation and the satisfaction of specified conditions. The Credit Agreement expires
in May 2024. As of the end of 2019, we had outstanding revolving credit loans and letters of credit of $600 million and $30
million, respectively; which reduced our available borrowing capacity to $370 million under the Credit Agreement. Refer to
Note (10) of the notes to consolidated financial statements for additional information regarding our Credit Agreement and
other sources of debt financing.
We believe that our present cash position, together with cash generated from operations, short-term investments and, as
appropriate, remaining availability under our Credit Agreement and other sources of debt financing, will be sufficient to meet
anticipated cash requirements during 2020.
The following table summarizes our cash flows in 2019 and 2018:
(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
2019
2018
$ 1,313,099
$ 1,454,009
(640,408)
(601,380)
(3,594)
67,717
(828,937)
(609,787)
(12,082)
3,203
374,126
370,923
$
$
441,843
567,710
$
$
374,126
733,388
For the Years Ended
2018
2019
$ 5,787,180
(4,348,438)
(25,639)
(100,004)
$ 5,486,654
(4,032,498)
(15,707)
15,560
$ 1,313,099
$ 1,454,009
Cash flows from operations decreased $141 million in 2019 compared to 2018, due primarily to net refunds of taxes in 2018
along with cash payments in 2019 associated with our operational improvement initiatives discussed above. Days sales
outstanding was 72 days in the fourth quarter of 2019, compared to 74 days for the third quarter of 2019 and 79 days for
the fourth quarter of 2018.
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Cash from Investing Activities
(In thousands)
Capital purchases
Capitalized software development costs
Sales and maturities of investments, net of purchases
Purchase of other intangibles
Acquisition of business, net of cash acquired
Total cash flows from investing activities
For the Years Ended
2019
2018
$ (471,518) $ (446,928)
(273,871)
(273,693)
215,107
(35,587)
(74,539)
(71,497)
(36,819)
—
$ (640,408) $ (828,937)
Cash flows from investing activities consist primarily of capital spending, investment, and acquisition activities.
Our capital spending in 2019 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. Total capital spending in 2019 exceeded 2018 levels, primarily driven by spending to support our facilities
requirements, including the continued construction of our Innovations Campus (office space development located in Kansas
City, Missouri). Capital purchases are expected to decrease in 2020, primarily driven by the expected completion of
construction on the current phases of our Innovations Campus in the first half of 2020.
Short-term investment activity historically consists of the investment of cash generated by our business in excess of what is
necessary to fund operations. The 2019 and 2018 activity is impacted by excess cash being used to execute on our capital
allocation strategy, including the share repurchases and cash dividends discussed below. Additionally, our investment mix
has changed such that our funds are more heavily held in cash and cash equivalents versus short-term and long-term
investments, primarily due to interest rates currently available on cash deposits.
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.
In October 2019, we acquired all of the issued and outstanding membership interests of AbleVets, LLC, a Virginia limited
liability company ("AbleVets"). AbleVets is a health IT engineering and consulting company specializing in cybersecurity,
cloud and system development solutions for federal organizations. Consideration for the acquisition was cash of $75 million.
Refer to Note (8) of the notes to consolidated financial statements for further information regarding this business acquisition.
We expect to continue seeking and completing strategic business acquisitions, investments, and relationships that are
complementary to our business.
Cash from Financing Activities
(In thousands)
Long-term debt issuance
Repayment of long-term debt
Cash from option exercises (net of taxes paid in connection with shares surrendered by associates)
Treasury stock purchases
Dividends paid
Other
Total cash flows from financing activities
For the Years Ended
2019
2018
$
$
600,000
—
241,435
(1,320,542)
(113,823)
(8,450)
—
(75,000)
81,476
(623,127)
—
6,864
$ (601,380) $ (609,787)
In May 2019, we borrowed $600 million of revolving credit loans under the Credit Agreement. In March 2018, we repaid our
$75 million floating rate Series 2015-C Notes due February 15, 2022. Refer to Note (10) of the notes to consolidated financial
statements for further information regarding our outstanding indebtedness.
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We expect to incur additional indebtedness in the next 12 months, for which the amount and timing is yet to be determined.
The proceeds from such indebtedness are expected to be deployed in accordance with our current capital allocation strategy,
which may include share repurchases and dividend payments (as discussed further below), as well as for general corporate
purposes, including acquisitions and investments. The terms and availability of such debt financing may be impacted by
economic and financial market conditions, as well as our financial condition and results of operations at the time we seek
such financing, and there can be no assurances that we will be able to obtain such financing on terms that will be acceptable
or advantageous to us.
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 2020 based on the number of exercisable options at the end of 2019 and our current stock
price. Refer to Note (16) of the notes to consolidated financial statements for additional information regarding our stock option
and equity plans.
During 2019 and 2018, we repurchased 18.8 million and 11.2 million shares, respectively, of our common stock for total
consideration of $1.30 billion and $644 million, respectively. As of December 28, 2019, $1.68 billion remains available for
repurchase under our current repurchase program. We expect to continue to repurchase shares under this program in the
next 12 months, but such repurchases will be dependent on a number of factors, including the price of our common stock
and other cash flow needs. Although we expect to continue to repurchase shares, there is no assurance that we will repurchase
up to the full amount remaining under the program.
In 2019, our Board of Directors declared three separate cash dividends of $0.18 per share on our issued and outstanding
common stock. Subject to declaration by our Board of Directors, we expect to continue paying quarterly cash dividends as
a part of our current capital allocation strategy. Future dividends will be subject to the determination, declaration and discretion
of our Board of Directors and compliance with covenants under our outstanding debt agreements.
The source of funds for such repurchases and dividends may include cash generated from operations, liquidation of investment
holdings, and the incurrence of indebtedness. Refer to Note (16) of the notes to consolidated financial statements for further
information regarding our share repurchase and dividend programs.
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
2019
2018
$ 1,313,099
$ 1,454,009
(471,518)
(273,871)
(446,928)
(273,693)
$
567,710
$
733,388
Free cash flow decreased $166 million in 2019, compared to 2018, primarily due to a decrease in cash from operations along
with increased capital expenditures. 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, and for management compensation
purposes. 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.
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Contractual Obligations, Commitments and Off Balance Sheet Arrangements
The following table represents a summary of our contractual obligations and commercial commitments at the end of 2019,
except short-term purchase order commitments arising in the ordinary course of business.
(In thousands)
Balance sheet obligations(a):
Long-term debt obligations
2020
2021
2022
2023
2024
2025 and
thereafter
Total
Payments Due by Period
$
— $
— $ 225,000
$
— $
600,000
$
214,162
$ 1,039,162
Interest on long-term debt obligations
28,843
27,927
24,488
21,382
13,262
3,580
119,482
Other obligations:
Operating lease obligations
Purchase obligations
33,845
151,950
29,604
95,933
23,903
34,501
16,850
37,237
8,250
30,462
43,238
560,925
155,690
911,008
Total
$ 214,638
$ 153,464
$ 307,892
$
75,469
$
651,974
$
821,905
$ 2,225,342
(a) At the end of 2019, liabilities for unrecognized tax benefits were $19 million.
Off-Balance Sheet Arrangements
Refer to Note (10) of the notes to consolidated financial statements for information regarding our interest rate swap agreement,
which is accounted for as a cash flow hedge in accordance with ASC Topic 815, Derivatives and Hedging. LIBOR is scheduled
to be phased out by the end of 2021. When LIBOR ceases to exist, we will need to agree upon a replacement index with the
lenders under our Credit Agreement at the time, and such new rates may not be as favorable to us as those in effect prior
to any LIBOR phase-out. If the swap and the Credit Agreement replacement rates are not identical, our hedge could be less
effective.
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 (14) 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 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.
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Net realizable value is computed as the estimated gross future revenues from each software solution less the amount of
estimated future costs of completing and disposing of that product. Because the development of projected net future revenues
related to our software solutions used in our net realizable value computation is based on estimates, a significant reduction
in our future revenues could impact the recovery of our capitalized software development costs. If we missed our estimates
of net future revenues by 10%, the amount of our capitalized software development costs would not be impaired.
Capitalized costs are amortized based on current and expected net future revenue for each software solution with minimum
annual amortization equal to the straight-line amortization over the estimated economic life of the software solution. We are
amortizing capitalized costs over five years. The five-year period over which capitalized software development costs are
amortized is an estimate based upon our forecast of a reasonable useful life for the capitalized costs. Historically, use of our
software programs by our clients has exceeded five years and is capable of being used a decade or more.
We expect that major software information systems companies, large information technology consulting service providers
and systems integrators and others specializing in the health care industry may offer competitive products or services. The
pace of change in the HCIT market is rapid and there are frequent new product introductions, product enhancements and
evolving industry standards and requirements. As a result, the capitalized software solutions may become less valuable or
obsolete and could be subject to impairment.
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 are exposed to interest rate risk, primarily changes in LIBOR, related to outstanding revolving credit loans under our
Credit Agreement. As of December 28, 2019, the interest rate on revolving credit loans outstanding was 2.54% based on
LIBOR plus the applicable spread. In order to manage this exposure, we have entered into an interest rate swap agreement,
to hedge the variability of cash flows associated with such interest obligations through May 2024. The interest rate swap
effectively fixes the interest rate on the hedged indebtedness under our Credit Agreement at 3.06%. Refer to Note (10) of
the notes to consolidated financial statements for further information regarding outstanding indebtedness and our interest
rate swap agreement.
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 28, 2019 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 (20) to the consolidated financial statements for supplementary financial information.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
N/A
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Item 9A. Controls and Procedures.
a) Evaluation of Disclosure Controls and Procedures.
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 defined in the Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered
by this annual report (the "Evaluation Date"). 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 reports 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 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.
We are responsible for establishing and maintaining adequate internal control over financial reporting (as defined in
Rule 13a-15(f) under the Exchange Act). We assessed the effectiveness of our internal control over financial reporting
as of December 28, 2019. In making this assessment, we 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, we have concluded that, as of December 28, 2019, 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.
There were no changes in our internal controls over financial reporting during the fiscal quarter ended December 28,
2019, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial
reporting.
d) Limitations on Controls.
We can provide no assurance that our disclosure controls and procedures or our internal control over financial
reporting can prevent all errors and all fraud under all circumstances. A control system, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are
met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits
of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the
Company have been or will be detected. The design of any system of controls also is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions; over time, controls may become inadequate because
of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the
inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be
detected.
Item 9B. Other Information.
N/A
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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," "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 2020 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 2019 proxy statement.
The information required by this Item 10 regarding our Executive Officers is set forth under the caption "Information about
our Executive Officers" in Part I above.
Item 11. Executive Compensation.
The information under "Committees of the Board: Compensation Committee," "Director Compensation," "2019 Director
Compensation Table," "Compensation Committee Report," "Compensation Discussion and Analysis," "Summary
Compensation Table," "2019 Grants of Plan-Based Awards," "Outstanding Equity Awards at 2019 Fiscal Year-End," "2019
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 28, 2019:
(In thousands, except per share data)
Plan category
Equity compensation plans approved by security holders (4)
Equity compensation plans not approved by security holders
Total
(1) Includes grants of stock options, 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.
Securities to
be issued
upon
exercise of
outstanding
options and
rights (1)
18,050
$
—
18,050
Weighted
average
exercise
price per
share (2)
56.36
—
Securities
available for
future
issuance(3)
24,400
—
24,400
(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.
38
59
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 28, 2019 and December 29, 2018
Consolidated Statements of Operations -Years Ended December 28, 2019, December 29, 2018
and December 30, 2017
Consolidated Statements of Comprehensive Income - Years Ended December 28, 2019,
December 29, 2018 and December 30, 2017
Consolidated Statements of Cash Flows - Years Ended December 28, 2019, December 29, 2018
and December 30, 2017
Consolidated Statements of Changes in Shareholders' Equity - Years Ended December 28, 2019,
December 29, 2018 and December 30, 2017
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
60
39
Table of Contents
Exhibit
Number
Exhibit Description
3.1
3.2
4.1
4.2
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
Description of Company Securities
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 Employment Agreement between Cerner
Corporation and Michael R. Nill
Separation 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
Executive Senior Advisor Letter 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 Employment Agreement between Cerner
Corporation and Donald D. Trigg
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)
2/28/2007
000-15386/07658265
X
X
X
X
10-K
10(a)
8-K
99.1
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
10.2
9/11/2017
8-K
10.3
9/11/2017
10-Q
10.10
10/27/2017
8-K
10.4
9/11/2017
10-K
10.13
2/8/2019
10-K
10(f)
10-K
10(g)
3/30/2001
000-15386/1586224
3/30/2001
000-15386/1586224
10-K
10.16
2/8/2019
40
61
Table of Contents
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
(As amended and Restated May 30, 2019)
Cerner Corporation 2011 Omnibus Equity Incentive Plan
- Director Restricted Stock Agreement
2011 Omnibus Equity Incentive Plan - Form of Director
Restricted Stock Agreement
10-K
10(g)
10-K
10(q)
8-K
8-K
10.2
10.1
2/27/2008
000-15386/08646565
2/27/2008
000-15386/08646565
5/27/2015
6/3/2019
10-Q
10.2
5/6/2016
10-Q
10.5
4/26/2019
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
2011 Omnibus Equity Incentive Plan - Form of
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
2011 Omnibus Equity Incentive Plan - Form of Time
Based Restricted Stock Agreement
10-Q
10.3
5/6/2016
10-Q
10.4
10/27/2017
10-Q
10.4
4/26/2019
10-Q
10.4
5/6/2016
10-Q
10.3
10/27/2017
10-Q
10.3
4/26/2019
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
41
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
10-K
10.37
2/8/2019
8-K
8-K
10.1
10.2
3/6/2018
3/6/2018
10.17*
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*
62
10-Q
10.2
4/26/2019
8-K
99.1
1/25/2010
000-15386/10543089
8-K
10.1
12/5/2014
000-15386/141269611
8-K
10.1
11/3/2015
8-K
10.1
5/7/2019
8-K
10.1
11/5/2019
8-K
10.4
11/5/2019
Table of Contents
10.41*
10.42
10.43
10.44
10.45
10.46
10.47
21
23
31.1
31.2
32.1
32.2
Form 2019 Executive Performance Agreement - Section
16 Officer
Interparty Agreement, dated January 19, 2010, among
Kansas Unified Development, LLC, OnGoal, LLC and
Cerner Corporation
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.
First Amendment to Third Amended and Restated Credit
Agreement dated May 6, 2019 among Cerner
Corporation, U.S. Bank National Association,
Commerce Bank N.A., and Bank of America, N.A.
Second Amendment to Third Amended and Restated
Credit Agreement dated November 5, 2019 among
Cerner Corporation, U.S. Bank National Association,
Commerce Bank N.A., Bank of America, N.A. and PNC
Bank, National Association.
Master Note Agreement dated November 11, 2019,
between Cerner Corporation and the Purchasers listed
therein
Subsidiaries of Registrant
Consent of Independent Registered Public Accounting
Firm
Certification of 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 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 - the instance document does
not appear in the interactive data file because its XBRL
tags are embedded within the inline XBRL document.
101.SCH
Inline XBRL Taxonomy Extension Schema Document
101.CAL
101.LAB
101.PRE
101.DEF
104
Inline XBRL Taxonomy Extension Calculation Linkbase
Document
Inline XBRL Taxonomy Extension Labels Linkbase
Document
Inline XBRL Taxonomy Extension Presentation
Linkbase Document
Inline XBRL Taxonomy Extension Definition Linkbase
Document
Cover Page Interactive Data File - formatted in Inline
XBRL and contained in Exhibit 101.
42
X
X
X
X
X
X
X
X
X
X
X
X
X
63
Table of Contents
* Indicates a management contract or compensatory plan or arrangement required to be identified by Part IV, Item 15(a)(3).
PLEASE NOTE: Pursuant to the rules and regulations of the Securities and Exchange Commission, we have filed or incorporated by reference the
agreements referenced above as exhibits to this annual report on Form 10-K. The agreements have been filed to provide investors with information
regarding their respective terms. The agreements are not intended to provide any other factual information about the Company or its business or
operations. In particular, the assertions embodied in any representations, warranties and covenants contained in the agreements may be subject
to qualifications with respect to knowledge and materiality different from those applicable to investors and may be qualified by information in
confidential disclosure schedules not included with the exhibits. These disclosure schedules may contain information that modifies, qualifies and
creates exceptions to the representations, warranties and covenants set forth in the agreements. Moreover, certain representations, warranties and
covenants in the agreements may have been used for the purpose of allocating risk between the parties, rather than establishing matters as facts.
In addition, information concerning the subject matter of the representations, warranties and covenants may have changed after the date of the
respective agreement, which subsequent information may or may not be fully reflected in the Company's public disclosures. Accordingly, investors
should not rely on the representations, warranties and covenants in the agreements as characterizations of the actual state of facts about the
Company or its business or operations on the date hereof.
Item 16. Form 10-K Summary.
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: February 10, 2020
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 10, 2020
Brent Shafer, Chairman of the Board and Chief
Executive Officer (Principal Executive Officer)
/s/ Marc G. Naughton
February 10, 2020
Marc G. Naughton, Executive Vice President and
Chief Financial Officer (Principal Financial Officer)
/s/ Michael R. Battaglioli
February 10, 2020
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/ 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/ John J. Greisch
John J. Greisch, Director
/s/ Melinda J. Mount
Melinda J. Mount, Director
/s/ George A. Riedel
George A. Riedel, Director
/s/ R. Halsey Wise
R. Halsey Wise, Director
/s/ William D. Zollars
William D. Zollars, Director
February 10, 2020
February 10, 2020
February 10, 2020
February 10, 2020
February 10, 2020
February 10, 2020
February 10, 2020
February 10, 2020
February 10, 2020
44
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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 28, 2019, 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 28, 2019, 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 28, 2019 and December 29, 2018, 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 28, 2019, and the related notes (collectively, the consolidated financial
statements), and our report dated February 10, 2020 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 10, 2020
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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 28, 2019 and December 29, 2018, 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 28, 2019,
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 28, 2019 and
December 29, 2018, and the results of its operations and its cash flows for each of the years in the three year period ended
December 28, 2019, 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 28, 2019, 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 10, 2020 expressed an unqualified opinion on the effectiveness of the Company’s
internal control over financial reporting.
Changes in Accounting Principle
As discussed in Note 6 to the consolidated financial statements, the Company has changed its method of accounting for
leases in fiscal year 2019 due to the adoption of Accounting Standard Update 2016-02 "Leases (Topic 842)". As discussed
in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for revenue
transactions with customers in fiscal year 2018 due to the adoption of Accounting Standards Update 2014-09, "Revenue
from Contracts with Customers (Topic 606)".
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.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial
statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts
or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective,
or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated
financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate
opinions on the critical audit matter or on the accounts or disclosures to which it relates.
46
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Assessment of the determination of distinct performance obligations and pattern of revenue recognition
As discussed in Note 2 to the consolidated financial statements, the Company enters into contracts with customers that may
include various combinations of performance obligations related to software licensing, computer hardware, and services
comprised of consulting, hosting, implementation, and software support. When allocating revenue to performance obligations,
the Company estimates the stand-alone selling price for the performance obligations that exist in each contract. Revenue is
recognized when the performance obligations have been satisfied, which may be at a point in time or over time. During 2019,
the Company recognized $526.5 million related to revenue recognized as of a point in time, a portion of which relates to
software licenses.
We identified the assessment of the determination of distinct performance obligations and pattern of revenue recognition as
a critical audit matter. Evaluating whether individual software solutions and services are considered distinct performance
obligations that should be accounted for separately may require significant judgment. The determination of performance
obligations and the pattern of revenue recognition significantly influences the amount and timing of revenue recognized.
Especially challenging auditor judgment was required to evaluate whether such software solutions and services are considered
distinct performance obligations as contract terms are specific to each contract, and can result in different determinations.
Additionally, the Company allocates consideration to the perpetual software license performance obligation based on the
residual approach, therefore the incomplete determination of performance obligations or incorrect pattern of revenue
recognition in a contract could have a significant impact on the timing of revenue recognition. This assessment requires an
understanding of the contract components and involves subjective auditor judgment in determining that all performance
obligations are identified.
The primary procedures performed to address this critical audit matter included the following. We tested certain internal
controls related to the identification of distinct performance obligations and the determination of timing of revenue recognition.
We obtained and read contracts and other relevant documents for a selection of license software revenue and tested the
identification of significant terms, including the identification of distinct performance obligations. We evaluated the timing of
revenue recognition for the identified performance obligations for a selection of contracts.
/s/KPMG LLP
We have served as the Company's auditor since 1983.
Kansas City, Missouri
February 10, 2020
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CERNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 28, 2019 and December 29, 2018
(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
Right-of-use assets
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 current liabilities
Total current liabilities
Long-term debt
Deferred income taxes
Other liabilities
Total liabilities
Shareholders’ Equity:
Common stock, $.01 par value, 500,000,000 shares authorized, 367,634,796 shares issued at December
28, 2019 and 362,212,843 shares issued at December 29, 2018
Additional paid-in capital
Retained earnings
Treasury stock, 56,723,546 shares at December 28, 2019 and 37,905,013 shares at December 29, 2018
Accumulated other comprehensive loss, net
Total shareholders’ equity
Total liabilities and shareholders’ equity
See notes to consolidated financial statements.
2019
2018
$
441,843
$
374,126
99,931
401,285
1,139,595
1,183,494
23,182
392,073
25,029
334,870
2,096,624
2,318,804
1,858,772
1,743,575
123,155
939,859
883,158
364,439
419,419
209,196
—
894,512
847,544
405,305
300,046
198,850
$ 6,894,622
$ 6,708,636
$
273,440
$
293,534
—
360,025
245,843
148,140
1,027,448
1,038,382
377,657
133,807
4,914
399,189
195,931
69,122
962,690
438,802
336,379
42,376
2,577,294
1,780,247
3,676
1,905,171
5,934,909
(3,407,768)
(118,660)
4,317,328
3,622
1,559,562
5,576,525
(2,107,768)
(103,552)
4,928,389
$ 6,894,622
$ 6,708,636
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CERNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 28, 2019, December 29, 2018 and December 30, 2017
(In thousands, except per share data)
Revenues
Costs and expenses:
Costs of revenue
Sales and client service
Software development (Includes amortization of $227,414, $210,228 and $173,250, 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
2019
2018
2017
$ 5,692,598
$ 5,366,325
$ 5,142,272
1,071,041
937,348
854,091
2,675,337
2,493,696
2,276,821
737,136
520,598
87,817
683,663
389,469
87,364
605,046
355,267
90,576
5,091,929
4,591,540
4,181,801
600,669
774,785
960,471
53,843
26,066
6,658
654,512
800,851
967,129
(125,058)
(170,792)
(100,151)
$
$
$
$
$
$
529,454
1.66
1.65
318,229
321,235
$
$
$
630,059
1.91
1.89
330,084
333,572
866,978
2.62
2.57
331,373
337,999
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CERNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the years ended December 28, 2019, December 29, 2018 and December 30, 2017
(In thousands)
Net earnings
Foreign currency translation adjustment and other (net of taxes (benefit) of $(1,288), $(645) and
$4,909, respectively)
Unrealized loss on cash flow hedge (net of tax benefit of $4,137 in 2019)
Unrealized holding gain (loss) on available-for-sale investments (net of taxes (benefit) of $290, $132
and $(416), respectively)
Comprehensive income
See notes to consolidated financial statements.
For the Years Ended
2018
2017
2019
$
529,454
$
630,059
$
866,978
(3,408)
(12,578)
878
(30,575)
37,463
—
405
—
(680)
$
514,346
$
599,889
$
903,761
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CERNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 28, 2019, December 29, 2018 and December 30, 2017
(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
Investment gains
Changes in assets and liabilities (net of business acquired):
Receivables, net
Inventory
Prepaid expenses and other
Accounts payable
Accrued income taxes
Deferred revenue
Other accrued liabilities
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital purchases
Capitalized software development costs
Purchases of investments
Sales and maturities of investments
Purchase of other intangibles
Acquisition of business, net of cash acquired
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt issuance
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
Dividends paid
Other
Net cash used in financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase 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.
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51
For the Years Ended
2019
2018
2017
$
529,454
$
630,059
$
866,978
687,966
103,641
51,125
(29,621)
58,113
1,855
(76,748)
(8,734)
(4,599)
(39,245)
39,892
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)
1,313,099
1,454,009
1,307,675
(471,518)
(273,871)
(364,648)
579,755
(35,587)
(74,539)
(446,928)
(273,693)
(623,293)
551,796
(36,819)
—
(362,083)
(274,148)
(632,048)
292,074
(29,646)
—
(640,408)
(828,937)
(1,005,851)
600,000
—
258,036
(16,601)
(1,320,542)
(113,823)
(8,450)
—
(75,000)
91,349
(9,873)
(623,127)
—
6,864
—
—
76,705
(11,584)
(173,434)
—
(2,671)
(601,380)
(609,787)
(110,984)
(3,594)
(12,082)
9,222
67,717
374,126
3,203
370,923
200,062
170,861
$
441,843
$
374,126
$
370,923
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CERNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the years ended December 28, 2019, December 29, 2018 and December 30, 2017
(In thousands)
Common Stock
Shares
Amount
Additional
Paid-in Capital
Retained
Earnings
Treasury Stock
Accumulated
Other
Comprehensive
Loss, Net
Balance at December 31, 2016
353,731
$
3,537
$
1,230,913
$
4,094,327
$
(1,290,665) $
(110,165)
Exercise of stock options and vests of restricted shares and share units
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 and vests of restricted shares and share units
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)
Exercise of stock options and vests of restricted shares and share units
5,422
Employee share-based compensation expense
Other comprehensive income (loss)
Treasury stock purchases
Cash dividends declared
Net earnings
—
—
—
—
—
54
—
—
—
—
—
241,968
103,641
—
—
—
—
—
—
—
—
(171,070)
529,454
—
—
—
(1,300,000)
—
—
—
—
(15,108)
—
—
—
Balance at December 28, 2019
367,635
$
3,676
$
1,905,171
$
5,934,909
$
(3,407,768) $
(118,660)
See notes to consolidated financial statements.
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CERNER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation, Nature of Operations and Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include all the accounts of Cerner Corporation ("Cerner," the "Company," "we," "us"
or "our") and its subsidiaries. All significant intercompany transactions have been eliminated in consolidation.
The consolidated financial statements were prepared using accounting principles generally accepted in the United States of
America ("GAAP"). These principles require us to make estimates and assumptions that affect the reported amounts of assets
and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. Actual
results could differ from those estimates.
Fiscal Period End
Prior to fiscal year 2020, our fiscal year ended on the Saturday closest to December 31. Fiscal years 2019, 2018 and 2017
each consisted of 52 weeks and ended on December 28, 2019, December 29, 2018 and December 30, 2017, respectively.
All references to years in these notes to consolidated financial statements represent fiscal years unless otherwise noted.
In December 2019, our Board of Directors approved a resolution to change our fiscal year to a calendar year, commencing
with fiscal year 2020. Accordingly, our 2020 fiscal year will be extended and run from December 29, 2019 to December 31,
2020, with subsequent fiscal years beginning on January 1 and ending on December 31 of each year. Beginning December
29, 2019, the first day of our 2020 first quarter, our quarterly results will be for the periods ending March 31, June 30,
September 30 and December 31.
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.
Voluntary Separation Plans
In January 2019, we adopted a voluntary separation plan ("2019 VSP") for eligible associates. Generally, the 2019 VSP was
available to U.S. associates who met a minimum level of combined age and tenure, excluding, among others, our executive
officers. Associates who elected to participate in the 2019 VSP received financial benefits commensurate with their tenure
and position, along with vacation payout, medical benefits, and accelerated vesting of certain share-based payment awards.
The irrevocable acceptance period for associates electing to participate in the 2019 VSP ended in April 2019. In the second
quarter of 2019, we recorded pre-tax charges for the 2019 VSP of $41 million. Such charges are included in general and
administrative expense in our consolidated statements of operations.
In the third quarter of 2019, we offered voluntary separation benefits to certain associates primarily located outside the U.S.
The irrevocable acceptance period for associates to accept such offers ended in September 2019. In the third quarter of
2019, we recorded corresponding pre-tax charges of $11 million. Such charges are included in general and administrative
expense in our consolidated statements of operations.
Involuntary Separation Benefits
During 2019, we recorded pre-tax charges of $34 million in connection with the involuntary termination of approximately 380
U.S. associates. Such charges are included in general and administrative expense in our consolidated statements of
operations. Separation benefits for these associates include cash severance, contribution to a health reimbursement account,
career transition assistance, and accelerated vesting of certain share-based payment awards. At December 28, 2019, a
liability of $9 million for such obligations is included in accrued payroll and tax withholdings in our consolidated balance
sheets, which we expect to settle/pay in the first quarter of 2020.
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Contract Termination Costs
During 2019, we recorded pre-tax charges of $66 million in connection with the termination of certain client contracts prior
to end of their stated terms, the majority of which was paid in cash. Such charges are included in our Domestic operating
segment, and presented in sales and client service expense in our consolidated statements of operations. At December 28,
2019, our consolidated balance sheets do not include a liability for any obligations related to such contract terminations.
Supplemental Disclosures of Cash Flow Information
(In thousands)
Cash paid during the year for:
For the Years Ended
2019
2018
2017
Interest (including amounts capitalized of $17,190, $12,710, and $10,387, respectively)
$
25,639
$
15,707
$
17,914
Income taxes, net of refunds
100,004
(15,560)
186,544
Summary of Significant Accounting Policies
(a) Cash Equivalents - Cash equivalents consist of short-term debt securities with original maturities of less than 90 days.
(b) Investments in Debt Securities – We account for our investments in debt securities as available-for-sale investments
in accordance with Accounting Standards Codification Topic ("ASC") 320, Investments-Debt Securities. 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. Long-term available-for-sale investments are primarily invested in government and corporate
bonds with maturities of less than two years.
Available-for-sale investments 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 investments, 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.
Generally, premiums are amortized and discounts are accreted over the life of the security as adjustments to interest income
for our investments. For investments in callable debt securities, any premiums are amortized to the earliest call date. Interest
income is recognized when earned.
Refer to Note (4) and Note (11) for further description of these assets and their fair value.
(c) Investments in Equity Securities - We account for our investments in equity securities that give us the ability to exercise
significant influence over the operating and financial policies of an investee under the equity method in accordance with ASC
323, Investments-Equity Method and Joint Ventures. Under the equity method, we recognize our share of the earnings or
losses of an investee, generally on a three-month lag. Such share of the investee's earnings or losses are presented in other
income, net in our consolidated statements of operations.
We account for our investments in equity securities that do not qualify for equity method accounting in accordance with ASC
321, Investments-Equity Securities ("ASC 321"). We measure these investments at fair value with changes in fair value
recognized in other income, net in our consolidated statements of operations for such investments with readily determinable
fair values. For these investments that do not have readily determinable fair values, we measure such investments at cost
minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the
identical or similar investment of the same issuer.
(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.
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(e) Inventory - Inventory consists primarily of computer hardware and sublicensed software, held for resale. Inventory is
recorded at the lower of cost (first-in, first-out) or net realizable value.
(f) Property and Equipment - We account for property and equipment in accordance with ASC 360, Property, Plant, and
Equipment. Property, equipment and leasehold improvements are stated at cost. Depreciation of property and equipment is
computed using the straight-line method over periods of one to 50 years. Amortization of leasehold improvements is computed
using a straight-line method over the shorter of the lease terms or the useful lives, which range from periods of one to 15
years.
(g) Software Development Costs - Our software solutions are offered to our clients both through traditional licenses as well
as software as a service delivery models. Development costs associated with the certain solutions offered exclusively through
a software as a service model are accounted for in accordance with ASC 350-40, Internal-Use Software. All other client
solution development costs, which represent a significant majority of development costs, are accounted for in accordance
with ASC 985-20, Costs of Software to be Sold, Leased or Marketed.
Under ASC 985-20, software development costs incurred in creating computer software solutions 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 recorded 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 costs over five years.
Under ASC 350-40, software development costs related to preliminary project activities and post-implementation and
maintenance activities are expensed as incurred. We capitalize direct costs related to application development activities that
are probable to result in additional functionality. Capitalized costs are amortized on a straight-line basis over five years. We
test for impairment whenever events or changes in circumstances that could impact recoverability occur.
See Note (7) for further information relating to our software development costs.
(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 2019, 2018 or 2017. Refer to Note (9) for more information on goodwill and other intangible assets.
(i) Intangible Assets - We account for intangible assets in accordance with ASC 350, Intangibles – Goodwill and Other.
Amortization of finite-lived intangible assets is computed using the straight-line method over periods of three to 30 years.
(j) Income Taxes - Income taxes are accounted for in accordance with ASC 740, Income Taxes. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected
to be recovered or settled. Refer to Note (14) 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 (15) 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 (16) for a detailed discussion of share-based payments.
(m) Voluntary Separation Benefits - We account for voluntary separation benefits in accordance with the provisions of ASC
712, Compensation-Nonretirement Postemployment Benefits. Voluntary separation benefits are recorded to expense when
the associates irrevocably accept the offer and the amount of the termination liability is reasonably estimable.
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(n) Exit or Disposal Cost Obligations - We account for involuntary employee separation benefits pursuant to one-time
benefit arrangements and contract termination costs in accordance with ASC 420, Exit or Disposal Cost Obligations.
(o) 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.
(p) 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.
(q) Accounting Pronouncements Adopted in 2019
Leases. In the first quarter of 2019, we adopted new lease accounting guidance. Refer to Note (6) for further details.
Callable Debt Securities. In March 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards
Update ("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 impacts how premiums
are amortized on our available-for-sale investments. We adopted ASU 2017-08 in the first quarter of 2019. Such guidance
did not have an 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. We adopted ASU 2018-02 in the first quarter of 2019, and did not elect to
reclassify "stranded tax effects" from AOCI to retained earnings.
(r) Recently Issued Accounting Pronouncements
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 did not early adopt.
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 did not 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 standard contains a five-
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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.
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 was primarily driven
by certain new contracts in 2018, which included 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").
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• 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
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:
2019
For the Years Ended
2018
2017(1)
(In thousands)
Domestic
Segment
International
Segment
Total
Domestic
Segment
International
Segment
Total
Domestic
Segment
International
Segment
Total
Licensed software
$
628,958 $
51,627 $
680,585
$
573,034 $
40,544 $
613,578
$
563,524 $
48,666 $
612,190
Technology resale
Subscriptions
Professional services
Managed services
Support and maintenance
Reimbursed travel
225,076
333,298
1,760,532
1,098,695
904,204
87,364
21,809
25,417
246,885
358,715
208,722
300,555
36,354
25,154
245,076
325,709
248,524
446,426
25,069
22,963
273,593
469,389
231,946
1,992,478
1,574,407
237,056
1,811,463
1,393,056
198,793
1,591,849
115,205
1,213,900
1,060,081
94,860
1,154,941
200,434
1,104,638
8,033
95,397
921,336
92,131
196,780
1,118,116
5,311
97,442
970,609
856,304
96,728
76,523
1,047,132
190,352
1,046,656
4,735
101,463
Total revenues
$ 5,038,127 $
654,471 $ 5,692,598
$ 4,730,266 $
636,059 $ 5,366,325
$ 4,575,171 $
567,101 $ 5,142,272
(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
For the Years Ended
2019
2018
Domestic
Segment
International
Segment
Total
Domestic
Segment
International
Segment
Total
$ 4,565,172 $
472,955
600,953 $ 5,166,125
526,473
53,518
$ 4,271,934 $
458,332
569,780 $ 4,841,714
524,611
66,279
Total revenues
$ 5,038,127 $
654,471 $ 5,692,598
$ 4,730,266 $
636,059 $ 5,366,325
Significant Customers
In 2019, a certain customer within our Domestic segment comprised 13% of our consolidated revenues.
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Transaction Price Allocated to Remaining Performance Obligations
As of December 28, 2019, the aggregate amount of transaction price allocated to performance obligations that are unsatisfied
(or partially unsatisfied) for executed contracts approximates $13.71 billion, of which we expect to recognize approximately
30% of the revenue over the next 12 months and the remainder thereafter. As of December 29, 2018, the aggregate amount
of transaction price allocated to performance obligations that were unsatisfied (or partially unsatisfied) for executed contracts
approximated $15.25 billion.
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 2019 and 2018, substantially all of
our contract liability balance at the beginning of each respective year was recognized in revenues during that year.
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. As of
December 28, 2019 and December 29, 2018, our consolidated balance sheets included assets of $89 million and $86 million,
respectively, related to sales commissions to be expensed in future periods, which are included in other assets.
We recognized $41 million of amortization related to these sales commissions assets in each of 2019 and 2018, 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 - Topic 606 Adoption
We 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.
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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;
• 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
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.
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.
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A summary of net receivables is as follows:
(In thousands)
Client receivables
Less: Allowance for doubtful accounts
Client receivables, net of allowance
Other receivables
Total receivables, net
2019
2018
$ 1,245,670
$ 1,237,127
106,075
64,561
1,139,595
1,172,566
—
10,928
$ 1,139,595
$ 1,183,494
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.
2019
2018
2017
$
64,561
$
52,786
$
57,167
(15,653)
25,529
(13,754)
43,028
29,248
(19,490)
$
106,075
$
64,561
$
52,786
During 2019 and 2018, we received total client cash collections of $5.79 billion and $5.49 billion, respectively.
(4) Investments
Available-for-sale investments at the end of 2019 were as follows:
(In thousands)
Cash equivalents:
Money market funds
Time deposits
Total cash equivalents
Short-term investments:
Time deposits
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
$
185,666
$
— $
— $
185,666
64,286
249,952
2,506
83,272
85,778
96,186
—
—
—
52
52
91
—
—
—
(11)
(11)
64,286
249,952
2,506
83,313
85,819
(67)
96,210
$
431,916
$
143
$
(78) $
431,981
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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
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
—
$
578,512
$
1
$
(1,104) $
577,409
(55)
18,192
We sold available-for-sale investments for proceeds of $233 million, $45 million and $29 million in 2019, 2018 and 2017,
respectively, resulting in insignificant gains/losses in each period.
Other Investments
At December 28, 2019 and December 29, 2018, we had investments in equity securities that do not have readily determinable
fair values of $314 million and $277 million, respectively, accounted for in accordance with ASC 321. 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 in 2019 or 2018, respectively.
At December 28, 2019, we had investments in equity securities with readily determinable fair values of $14 million, accounted
for in accordance with ASC 321. Such investments are included in short-term investments in our consolidated balance sheets.
Changes in the measurement of such investments in 2019 of $14 million favorably impacted other income, net.
At December 28, 2019 and December 29, 2018, we had investments in equity securities reported under the equity method
of accounting of $9 million and $5 million, respectively.
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 in accordance with ASC 321.
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, in July 2018,
we sold certain solutions to Lumeris for an aggregate contract value of $28 million, of which we recognized $12 million and
$5 million as revenues in 2019 and 2018, respectively.
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(5) 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
Other equipment
Less accumulated depreciation and leasehold amortization
Total property and equipment, net
Depreciable
Lives (Yrs)
2019
2018
1 — 5
$ 1,855,550
$ 1,686,747
12 — 50
1 — 15
5 — 12
3 — 20
1,374,541
1,239,122
214,608
132,540
1,078
214,697
132,180
1,255
3,578,317
3,274,001
1,719,545
1,530,426
$ 1,858,772
$ 1,743,575
Depreciation and leasehold amortization expense for 2019, 2018 and 2017 was $347 million, $323 million and $290 million,
respectively.
(6) Leases
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which introduced a new accounting model that requires
most leases to be reported on the balance sheet. It also established disclosure requirements, which are more extensive than
those required under prior U.S. GAAP. The standard requires use of the modified retrospective (cumulative effect) transition
approach and was effective for the Company in the first quarter of 2019. We selected the effective date of ASU 2016-02 as
the date of initial application on transition, as permitted by ASU 2016-02, as amended ("Topic 842"). Under this transition
method, the cumulative effect from prior periods upon applying the new guidance to arrangements containing leases was
recognized in our consolidated balance sheets as of December 30, 2018. We did not recast comparative periods.
A summary of such cumulative effect adjustment is as follows:
(In thousands)
Right-of-use asset
Prepaid expenses and other
Other current liabilities
Other liabilities
Arrangements Containing Leases
Increase /
(Decrease)
$
129,652
3,968
22,767
110,853
The cumulative effect adjustment above, is primarily comprised of arrangements where we are the lessee under operating
leases for real estate (office, data center, and warehouse space) and certain dedicated fiber optic lines within our infrastructure.
The duration of these agreements ranges from several months to in excess of 20 years. Generally, variable lease payments
under these operating lease agreements relate to amounts based on changes to an index or rate (i.e. percentage change
in the consumer price index). We do not have any arrangements where we are the lessee, classified as finance leases in
our consolidated financial statements.
In addition to the items described above, we also procure hotel stays and rental cars in connection with associate business
travel, and the use of certain equipment for trade shows, client presentations, conferences, and internal meetings. We have
made the policy election to classify such arrangements as short-term leases, as defined in Topic 842. As such, we have not
recognized lease liabilities and right-of-use assets for such arrangements in our consolidated financial statements. The
duration of these arrangements is less than one month. Therefore, we do not disclose any short-term lease expense, as
permitted by Topic 842. Expense for such items is recognized on a straight-line basis over the term of such arrangements.
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Arrangements in which we are the lessor are not significant to our consolidated financial statements.
Amounts Included in the Consolidated Financial Statements
The following table presents a summary of lease liability and right-of-use asset amounts included in our consolidated balance
sheets as of December 28, 2019, under operating lease arrangements where we are the lessee:
(In thousands)
Description
Right-of-use asset
Lease liability - current
Lease liability - non-current
Balance Sheet Classification
Right-of-use assets
Other current liabilities
Other liabilities
December 28,
2019
$
123,155
29,541
104,614
Lease liabilities recorded upon the commencement of operating leases during 2019 were $30 million.
Operating lease cost was $37 million and variable lease cost was less than $1 million in 2019.
Maturity Analysis
Aggregate future payments under operating lease arrangements where we are the lessee (by fiscal year) are as follows:
(In thousands)
2020
2021
2022
2023
2024
2025 and thereafter
Aggregate future payments
Impact of discounting
Aggregate lease liability at December 28, 2019
Operating
Lease
Obligations
$
33,845
29,604
23,903
16,850
8,250
43,238
155,690
(21,535)
$
134,155
At December 28, 2019, the weighted-average remaining lease term and weighted-average discount rate for our operating
lease arrangements where we are the lessee were 7.11 years and 3.7%, respectively.
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Prior Periods
Prior to the adoption of Topic 842, we accounted for arrangements where we were the lessee under operating leases in
accordance with ASC 840, Leases. Rent expense for office and warehouse space for our regional and global offices was
$31 million in both 2018 and 2017. Aggregate minimum future payments under these non-cancelable operating leases as
of December 29, 2018, were 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
(7) Software Development
A summary of software development costs, net is as follows:
(In thousands)
Software to be sold, leased or marketed
Software delivered exclusively as a service
Total
Software development costs, net
2019
2018
Gross
Carrying
Amount
Accumulated
Amortization
Gross
Carrying
Amount
Accumulated
Amortization
$
2,379,028
$
1,586,134
$
2,173,931
$
1,398,090
305,233
158,268
243,424
124,753
$
2,684,261
$
$
1,744,402
$
2,417,355
939,859
$
$
1,522,843
894,512
Estimated aggregate amortization expense for each of the next five years is as follows:
(In thousands)
2020
2021
2022
2023
2024
$
252,370
238,404
190,241
137,172
89,972
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
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For the Years Ended
2019
2018
2017
$
$
783,593
(273,871)
227,414
747,128
(273,693)
210,228
$
705,944
(274,148)
173,250
$
737,136
$
683,663
$
605,046
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(8) Business Acquisition
On October 25, 2019, we acquired all of the issued and outstanding membership interests of AbleVets, LLC, a Virginia limited
liability company ("AbleVets"). AbleVets is a health IT engineering and consulting company specializing in cybersecurity,
cloud and system development solutions for federal organizations. We believe this acquisition enhances our resource
capabilities and growth opportunities within our federal business. These factors, combined with the synergies and economies
of scale expected from combining the operations of AbleVets, are the basis for acquisition and comprise the resulting goodwill
recorded.
Consideration for the acquisition was $75 million in cash. The purchase price is subject to post-closing adjustments for
working capital and certain other adjustments, as specified in the Purchase Agreement dated October 17, 2019, as amended.
The acquisition of AbleVets is being treated as a purchase in accordance with ASC 805, Business Combinations, which
requires allocation of the purchase price to the estimated fair values of assets and liabilities acquired in the transaction. The
allocation of purchase price is based on management's judgment after evaluating several factors, including a valuation
assessment. The allocation of purchase price is subject to changes as working capital and certain other adjustments are
agreed upon and finalized, and additional information becomes available; however, we do not expect material changes. The
following is a summary of the preliminary allocation of purchase price:
(In thousands)
Cash and cash equivalents
Receivables, net
Prepaid expenses and other
Property and equipment, net
Right-of-use assets
Goodwill
Intangible assets, net
Accounts payable
Deferred revenue
Accrued payroll and tax withholdings
Other current liabilities
Other liabilities
Total purchase price
Allocation
Amount
$
471
11,690
911
1,240
8,448
37,071
37,402
(5,244)
(157)
(5,812)
(2,994)
(8,016)
$
75,010
The fair values of the acquired intangible assets were estimated by applying the income approach. Such estimations required
the use of inputs that were unobservable in the marketplace (Level 3), including a discount rate that we estimated would be
used by a market participant in valuing these assets, projections of revenues and cash flows, and client attrition rates, among
others. Refer to Note (11) for further information about the fair value level hierarchy.
The goodwill was allocated to our Domestic operating segment and is expected to be deductible for tax purposes. Identifiable
intangible assets primarily consist of customer relationship intangible assets and are being amortized over a weighted-
average period of 8 years. The operating results of AbleVets were combined with our operating results subsequent to the
purchase date of October 25, 2019. Pro-forma results of operations, assuming this acquisition was made at the beginning
of the earliest period presented, have not been presented because the effect of this acquisition was not material to our results.
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(9) Goodwill and Other Intangible Assets
The changes in the carrying amounts of goodwill by segment were as follows:
(In thousands)
Balance at the end of 2017
Foreign currency translation adjustment and other
Balance at the end of 2018
Goodwill recorded in connection with the AbleVets acquisition
Foreign currency translation adjustment and other
Balance at the end of 2019
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
Domestic
International
Total
$
782,664
$
70,341
$
853,005
—
(5,461)
(5,461)
782,664
37,071
—
64,880
847,544
—
(1,457)
37,071
(1,457)
$
819,735
$
63,423
$
883,158
2019
2018
Gross
Carrying
Amount
Accumulated
Amortization
Gross
Carrying
Amount
Accumulated
Amortization
$
500,914
$
271,211
$
465,909
$
364,144
174,572
41,731
49,389
353,722
99,272
26,574
15,532
361,964
143,520
40,025
47,905
$
1,130,750
$
$
766,311
$
1,059,323
364,439
$
$
229,545
311,738
78,633
21,275
12,827
654,018
405,305
Amortization expense for 2019, 2018 and 2017 was $114 million, $109 million and $118 million, respectively.
Estimated aggregate amortization expense for each of the next five years is as follows:
(In thousands)
2020
2021
2022
2023
2024
$
79,434
69,235
63,892
53,125
46,180
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(10) Long-term Debt
The following is a summary of indebtedness outstanding:
(In thousands)
Credit agreement loans
Senior notes
Capital lease obligations (under ASC Topic 840)
Other
Debt and capital lease obligations
Less: debt issuance costs
Debt and capital lease obligations, net
Less: current portion
Long-term debt
Credit Agreement
2019
2018
$
600,000
$
—
425,000
425,000
—
14,162
4,914
14,162
1,039,162
444,076
(780)
(360)
1,038,382
443,716
—
(4,914)
$ 1,038,382
$
438,802
In May 2019 and November 2019, we entered into amendments to our Third Amended and Restated Credit Agreement (as
amended, the "Credit Agreement") with a syndicate of lenders. The Credit Agreement provides for an unsecured revolving
credit facility expiring in May 2024, and includes: (a) a revolving credit loan facility of up to $1.00 billion at any time outstanding,
and (b) a letter of credit facility of up to $100 million at any time outstanding (which is a sub-facility of the $1.00 billion revolving
credit loan facility). The Credit Agreement also includes an accordion feature allowing an increase of the credit facility of up
to an additional $200 million ($1.20 billion in the aggregate) at any time outstanding, subject to lender participation and the
satisfaction of specified conditions. Borrowings outstanding under the Credit Agreement are due in May 2024, with prepayment
permitted at any time. Proceeds may be used for working capital and general corporate purposes, including but not limited
to certain business acquisitions and purchases under our share repurchase programs. The Credit Agreement provides certain
restrictions on our ability to borrow, incur liens, sell assets and pay dividends, and contains certain leverage and interest
coverage covenants.
Generally, interest on revolving credit loans is payable at a variable rate based on LIBOR, prime, or the U.S. federal funds
rate, plus a spread that varies depending on leverage ratios maintained. Unused commitment, letter of credit, and other fees
are also payable under the Credit Agreement. As of December 28, 2019, the interest rate on revolving credit loans outstanding
was 2.54% based on LIBOR plus the applicable spread.
As of December 28, 2019, we had outstanding revolving credit loans and letters of credit of $600 million and $30 million,
respectively; which reduced our available borrowing capacity to $370 million under the Credit Agreement.
Senior Notes
On December 4, 2014, we entered into a Master Note Purchase Agreement (the "Master Note Purchase Agreement") with
the Purchasers listed therein, pursuant to which we may issue and sell up to an aggregate principal amount of $1.50 billion
of unsecured senior promissory notes to those Purchasers electing to purchase. In January 2015, we issued $500 million
aggregate principal amount of unsecured Senior Notes ("Senior Notes"), pursuant to the Master Note Purchase Agreement.
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 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. As of December 28, 2019, the remaining
$1.00 billion available for sale is uncommitted and subject to participation by the Purchasers under the Master Note Purchase
Agreement.
In March 2018, we repaid our $75 million floating rate Series 2015-C Notes due February 15, 2022.
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Capital Lease Obligations
Capital lease obligations primarily related to the procurement of hardware and health care devices, accounted for in
accordance with ASC Topic 840.
Other
Other indebtedness includes estimated amounts payable through September 1, 2025, under an agreement entered into in
September 2015.
2019 Shelf Agreement
In November 2019, we entered into a Master Note Agreement (the "2019 Shelf Agreement"), pursuant to which we may issue
and sell up to an aggregate principal amount of $1.05 billion of unsecured senior promissory notes ("Notes") over a three
year period. The $1.05 billion available for sale is uncommitted and subject to participation by the Purchasers under the 2019
Shelf Agreement. The Notes will be priced based on real-time quotes for treasuries and credit spreads at the time of issuance
and will either be Fixed Rate Notes or Floating Rate Notes, depending on the terms agreed to between us and the Purchasers.
Proceeds from the Notes may be used for general corporate purposes. No Notes have been issued under the 2019 Shelf
Agreement as of December 28, 2019.
Covenant Compliance
As of December 28, 2019, we were in compliance with all debt covenants.
Interest Rate Swap
We are exposed to market risk from fluctuations in the variable interest rates on outstanding indebtedness under our Credit
Agreement. In order to manage this exposure, we have entered into an interest rate swap agreement, with an initial notional
amount of $600 million, to hedge the variability of cash flows associated with such interest obligations through May 2024.
The interest rate swap has an effective start date of May 13, 2019, and is designated as a cash flow hedge, which effectively
fixes the interest rate on the hedged indebtedness under our Credit Agreement at 3.06%. As of December 28, 2019, this
swap was in a net liability position with an aggregate fair value of $17 million, which is presented in our consolidated balance
sheets in other current liabilities. We classify fair value measurements of our interest rate swap as Level 2, as further described
in Note (11).
Our interest rate swap agreement is accounted for in accordance with ASC Topic 815, Derivatives and Hedging. Such
agreement is designated as a cash flow hedge and considered to be highly effective under hedge accounting principles.
Therefore, the swap agreement is recognized in our consolidated balance sheets as either an asset or liability, measured at
fair value. Changes in the fair value of the swap agreement are initially recorded in accumulated other comprehensive loss,
net and then subsequently recognized in our consolidated statements of operations in the periods in which earnings are
affected by the hedged item. All cash flows associated with the swap agreement are classified as operating activities in our
consolidated statements of cash flows.
Maturities of indebtedness outstanding at the end of 2019 are as follows:
(In thousands)
2020
2021
2022
2023
2024
2025 and thereafter
Total
90
Credit
Agreement
Loans
Senior
Notes
$
— $
—
—
—
600,000
— $
—
225,000
—
—
Other
Total
— $
—
—
—
—
—
—
225,000
—
600,000
214,162
—
200,000
14,162
$
600,000
$
425,000
$
14,162
$ 1,039,162
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(11) 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 2019:
(In thousands)
Description
Balance Sheet Classification
Money market funds
Time deposits
Time deposits
Cash equivalents
Cash equivalents
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
$
185,666
$
— $
—
—
—
—
64,286
2,506
83,313
96,210
—
—
—
—
—
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
Cash equivalents
Cash equivalents
Cash equivalents
Time deposits
Commercial paper
Government and corporate bonds
Government and corporate bonds
Short-term investments
Short-term investments
Short-term investments
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
—
—
—
—
—
—
—
Our interest rate swap agreement is measured and recorded at fair value on a recurring basis using a Level 2 valuation.
The fair value of such agreement is based on the market standard methodology of netting the discounted expected future
variable cash receipts and the discounted future fixed cash payments. The variable cash receipts are based on an expectation
of future interest rates derived from observed market interest rate forward curves. Since these inputs are observable in active
markets over the terms that the instrument is held, the derivative is classified as Level 2 in the hierarchy.
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
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maturities, at the end of 2019 and 2018 was approximately $1.07 billion and $431 million, respectively. The carrying amount
of such debt at the end of 2019 and 2018 was $1.03 billion and $425 million, respectively.
(12) Contingencies
We accrue estimates for resolution of any legal and other contingencies when losses are probable and reasonably estimable
in accordance with ASC 450, Contingencies (“ASC 450”). No less than quarterly, we review the status of each significant
matter underlying a legal proceeding or claim 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, which may prove to be incomplete or inaccurate or unanticipated events and circumstances
may occur that might cause us to change those estimates and assumptions. 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.
In 2019, we incurred a $30 million pre-tax charge in connection with a client dispute that arose during the same period, for
which we paid cash of $20 million and $10 million in July 2019 and January 2020, respectively. Such pre-tax charge is
included in sales and client service expense in our consolidated statements of operations. We have entered into a settlement
with the client, releasing us from certain claims related to this dispute. We have not accrued a reserve for any additional
damages or claims at this time because we cannot reasonably determine the probability of a loss and we cannot reasonably
estimate the amount of loss, if any. While we can provide no assurances as to the ultimate outcome of any damages resulting
from the excluded claims arising from this dispute, we believe the amount, if any, we will be required to pay to fully settle this
dispute will not have a material adverse impact on our business, results of operations, cash flows or financial condition.
As previously disclosed, we continue to be in dispute with Fujitsu Services Limited ("Fujitsu") regarding Fujitsu's obligation
to pay amounts to us due upon the termination of a subcontract, including client receivables, in connection with Fujitsu's
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. The NHS terminated its contract with Fujitsu, which gave rise to the
termination of our subcontract with Fujitsu. We filed a request for arbitration with the London Court of International Arbitration
on April 22, 2019 seeking damages. On December 30, 2019, Fujitsu filed its Defense and Counterclaim (the "Counterclaim")
in response. In its Counterclaim, Fujitsu defends against our claim in full and argues that we are liable to Fujitsu for: (i) £306
million in damages based on our alleged fraudulent misrepresentations inducing Fujitsu to enter into the subcontract; or (ii)
alternatively, £173.8 million in damages based on our alleged breaches of the subcontract.
We believe that Fujitsu's claims are without merit and will vigorously defend against them, and we continue to believe that
we have valid and equitable grounds for recovery of the disputed client receivables; however, there can be no assurances
as to the outcome of the dispute. As previously disclosed, we recorded a pre-tax charge of $45 million in the fourth quarter
of 2018 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,
which occurred before we filed our request for arbitration. Such pre-tax charge is included in sales and client service expense
in our consolidated statements of operations. We have not concluded that a loss related to the new claims raised by Fujitsu
in the Counterclaim is probable, nor have we accrued a liability related to these claims beyond the previously reported pre-
tax charge recorded in the fourth quarter of 2018. Although we believe a loss may be reasonably possible (as defined in ASC
450), we do not have sufficient information to determine the amount or range of reasonably possible loss with respect to the
Counterclaim given that the dispute is in the early stages of the arbitration process.
Cerner Health Services, Inc. ("Cerner HS"), a wholly owned subsidiary of Cerner Corporation, filed a lawsuit in the Chester
County, Pennsylvania, Court of Common Pleas against NextGen Healthcare Information Systems, LLC ("NextGen") relating
to a dispute arising out of a supplier relationship initially established between Siemens Health Services, Inc. and NextGen
prior to the acquisition of the assets of Siemens Health Services, Inc. by Cerner HS in 2015. In September 2017, the court
issued a preliminary injunction to prevent NextGen from refusing to honor certain contractual obligations to support Cerner
HS's clients who use NextGen ambulatory EHR solutions. In September 2018, NextGen filed a counterclaim alleging breach
of contract and tortious interference but did not specify its damages. In August 2019, NextGen provided an expert report
alleging profit disgorgement damages of $135 million or, alternatively, $30.5 million in lost profit damages, but the report did
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not discuss how our actions allegedly caused NextGen's damages. In December 2019, we deposed NextGen's expert, gaining
additional clarity on categories of alleged damages but not on the alleged theories of liability. A jury trial is set to begin on
April 20, 2020. We believe NextGen's claims are without merit and will vigorously defend against them; however, there can
be no assurances as to the outcome of the dispute. We have not concluded that a loss related to the claims raised by NextGen
in its counterclaim is probable, nor have we accrued a liability related to these claims. Although a loss may be reasonably
possible (as defined in ASC 450), we do not have sufficient information to determine the amount or range of reasonably
possible loss in light of the inherent difficulty of predicting the outcome of litigation generally, the wide range of damages
presented by NextGen's expert, and the continued lack of clarity on the causal connection between Cerner Corporation's
and Cerner HS's actions and any alleged damages.
The terms of our agreements with our clients generally provide for limited indemnification of such clients against losses,
expenses and liabilities arising from third party or other claims based on, among other things, alleged infringement by our
solutions of an intellectual property right of third parties or damages caused by data privacy breaches or system interruptions.
The terms of such indemnification often limit the scope of and remedies for such indemnification obligations and generally
include, as applicable, a right to replace or modify an infringing solution. For several reasons, including the lack of a sufficient
number of prior indemnification claims relating to IP infringement, data privacy breaches or system interruptions, the inherent
uncertainty stemming from such claims, and the lack of a monetary liability limit for such claims under the terms of the
corresponding agreements with our clients, we cannot determine the maximum amount of potential future payments, if any,
related to such indemnification provisions.
In addition to commitments and obligations in the ordinary course of business, we are 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.
(13) Other Income
A summary of non-operating income and expense is as follows:
(In thousands)
Interest income
Interest expense
Gain on sale of equity investment
Unrealized gain on equity investment
Other
Other income, net
For the Years Ended
2018
2017
2019
$
38,227
$
34,211
$
18,933
(14,469)
(7,987)
(8,012)
15,509
14,112
464
—
—
—
—
(158)
(4,263)
$
53,843
$
26,066
$
6,658
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(14) Income Taxes
Income tax expense (benefit) for 2019, 2018 and 2017 consists of the following:
(In thousands)
Current:
Federal
State
Foreign
Total current expense
Deferred:
Federal
State
Foreign
Total deferred expense
Total income tax expense
For the Years Ended
2019
2018
2017
$
45,575
$
89,551
$
37,708
13,429
14,929
73,933
30,353
11,747
9,025
51,125
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
$
125,058
$
170,792
$
100,151
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 2019 and 2018 relate to the following:
(In thousands)
Deferred tax assets:
Accrued expenses
Tax credits and separate return net operating losses
Share-based compensation
Lease liability
Other
Gross deferred tax assets
Less: Valuation Allowance
Total deferred tax assets
Deferred tax liabilities:
Software development costs
Property and equipment
Prepaid expenses
Contract and service revenues and costs
Lease right-of-use assets
Other
Total deferred tax liabilities
Net deferred tax liability
2019
2018
$
31,995
$
19,186
52,643
29,939
12,701
146,464
—
31,273
22,826
60,901
—
14,951
129,951
(1,404)
146,464
128,547
(247,217)
(171,267)
(39,311)
(12,112)
(28,100)
(10,549)
(508,556)
(229,624)
(131,516)
(39,154)
(35,933)
—
(6,199)
(442,426)
$ (362,092) $ (313,879)
At the end of 2019, we had net operating loss carry-forwards from foreign jurisdictions of $25 million that are available to
offset future taxable income with no expiration. In addition, we had a state income tax credit carry-forward of $11 million
available to offset income tax liabilities through December 31, 2030. We expect to fully utilize the net operating loss and tax
credit carry-forwards in future periods.
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At the end of 2019, we had not provided tax on the cumulative undistributed earnings of certain foreign subsidiaries of
approximately $80 million, because it is our intention to reinvest these earnings indefinitely. The unrecognized deferred tax
liability relating to these earnings is approximately $17 million.
The effective income tax rates for 2019, 2018, and 2017 were 19%, 21%, and 10%, respectively. These effective rates differ
from the U.S. federal statutory rate of 21% for 2019 and 2018 and 35% for 2017 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
2019
2018
2017
$
137,447
$
168,179
$
338,495
18,561
(22,750)
(6,328)
(8,090)
—
—
3,278
2,940
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
$
125,058
$
170,792
$
100,151
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
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 and 2019 tax rates through the reduced federal statutory
tax rate, partially offset by the repeal of the permanent domestic production deduction, increases to permanently nondeductible
expenses, as well as a new global intangible low-taxed income ("GILTI") inclusion. We have elected to account for GILTI Tax
as incurred, and therefore have not provided any deferred tax impacts of GILTI in our consolidated financial statements.
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
2019
2018
2017
$
18,688
$
15,287
$
(2,383)
1,220
1,607
—
(7)
—
1,591
2,370
(541)
(19)
9,769
(1,734)
7,252
—
—
—
Unrecognized tax benefit - ending balance
$
19,125
$
18,688
$
15,287
If recognized, $12 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 $15 million within the next twelve months. Our federal returns have
been examined by the Internal Revenue Service through 2016. Our federal returns are open for examination for 2017 and
thereafter. We have various state and foreign returns under examination.
The ending amounts of accrued interest and penalties related to unrecognized tax benefits were $4 million in 2019 and $3
million in 2018. We classify interest and penalties as income tax expense in our consolidated statement of operations, and
our income tax expense for 2019 and 2018 each included $1 million of interest and penalties.
The foreign portion of our earnings before income taxes was $109 million, $89 million, and $126 million in 2019, 2018, and
2017 respectively, and the remaining portion was domestic.
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(15) Earnings Per Share
A reconciliation of the numerators and the denominators of the basic and diluted per share computations are as follows:
Earnings
2019
Shares
Per-Share
Earnings
2018
Shares
Per-Share
Earnings
2017
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, non-vested shares
and share units
Diluted earnings per share:
Income available to common
shareholders including assumed
conversions
$
529,454
318,229
$
1.66
$
630,059
330,084
$
1.91
$
866,978
331,373
$
2.62
—
3,006
—
3,488
—
6,626
$
529,454
321,235
$
1.65
$
630,059
333,572
$
1.89
$
866,978
337,999
$
2.57
Options to purchase 9.6 million, 12.9 million and 10.6 million shares of common stock at per share prices ranging from $52.32
to $75.83, $50.04 to $73.40 and $50.04 to $73.40, were outstanding at the end of 2019, 2018 and 2017, respectively, but
were not included in the computation of diluted earnings per share because they were anti-dilutive.
(16) Share-Based Compensation and Equity
Stock Option and Equity Plans
As of the end of 2019, 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 2019, 24.4 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 4 or 5 years and are
exercisable for periods of up to 10 years.
Stock Options
The fair market value of each stock option award granted in 2019 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.
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The weighted-average assumptions used to estimate the fair market value of stock options were as follows:
Expected volatility (%)
Expected dividend rate (%)
Expected term (yrs)
Risk-free rate (%)
Stock option activity for 2019 was as follows:
(In thousands, except per share and term data)
Outstanding at beginning of year
Granted
Exercised
Forfeited and expired
Outstanding at end of year
Exercisable at end of year
(In thousands, except for grant date fair values)
Weighted-average grant date fair values
Total intrinsic value of options exercised
Cash received from exercise of stock options
Tax benefit realized upon exercise of stock options
For the Years Ended
2019
2018
2017
25.0%
1%
7
2.4%
27.0%
—
7
2.8%
26.7%
—
7
2.1%
Weighted-
Average
Exercise
Price
(Per Share)
Aggregate
Intrinsic
Value
Weighted-
Average
Remaining
Contractual
Term (Yrs)
Number of
Shares
21,792
$
1,108
(6,221)
(1,263)
15,416
52.31
65.62
42.89
60.86
56.36
7,939
$
52.16
$
$
260,809
167,710
6.06
4.47
For the Years Ended
2019
2018
2017
$
$
$
$
17.51
155,202
258,036
36,629
20.13
74,530
91,349
17,233
$
$
20.50
252,277
76,705
85,657
As of the end of 2019, there was $98 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 2.67 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.
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Non-vested share and share unit activity for 2019 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
Per Share
Number of
Shares
882
$
2,349
(448)
(149)
2,634
$
62.82
66.49
67.00
64.31
65.30
For the Years Ended
2019
2018
2017
$
$
66.49
30,558
$
$
59.34
26,264
$
$
66.97
11,050
As of the end of 2019, there was $128 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 2.11 years.
Associate Stock Purchase Plan
We established an Associate Stock Purchase Plan ("ASPP") in 2001, which qualifies under Section 423 of the Internal
Revenue Code. Each individual employed by us and associates of our U.S. based subsidiaries, except as provided below,
are eligible to participate in the ASPP ("Participants"). The following individuals are excluded from participation: (a) persons
who, as of the beginning of a purchase period under the Plan, have been continuously employed by us or our domestic
subsidiaries for less than two weeks; (b) persons who, as of the beginning of a purchase period, own directly or indirectly,
or hold options or rights to acquire under any agreement or Company plan, an aggregate of 5% or more of the total combined
voting power or value of all outstanding shares of all classes of Company common stock; and, (c) persons who are customarily
employed by us for less than 20 hours per week or for less than five months in any calendar year. Participants may elect to
make contributions from 1% to 20% of compensation to the ASPP, subject to annual limitations determined by the Internal
Revenue Service. Participants may purchase Company common stock at a 15% discount on the last business day of the
option period. The purchase of Company common stock is made through the ASPP on the open market and subsequently
reissued to Participants. The difference between the open market purchase and the Participant's purchase price is recognized
as compensation expense, as such difference is paid by Cerner, in cash.
Share-Based Compensation Cost
Our stock option and non-vested share 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)
Stock option and non-vested share and share unit compensation expense
Associate stock purchase plan expense
Amounts capitalized in software development costs, net of amortization
Amounts charged against earnings, before income tax benefit
Amount of related income tax benefit recognized in earnings
77
98
For the Years Ended
2019
2018
2017
$
$
$
103,641
6,053
(410)
109,284
20,967
$
$
$
95,423
6,082
914
102,419
21,371
$
$
$
83,019
6,277
(327)
88,969
25,265
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Preferred Stock
As of the end of 2019 and 2018, we had 1.0 million shares of authorized but unissued preferred stock, $0.01 par value.
Treasury Stock
Under our current share repurchase program, which was initially approved by our Board of Directors in May 2017 and most
recently amended in December 2019, the Company is authorized to repurchase up to $3.70 billion of shares of our common
stock, 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 2019, 2018, and 2017, we repurchased 18.8 million, 11.2 million, and 2.7 million shares for total
consideration of $1.30 billion, $644 million, and $173 million, respectively, under the program. The shares were recorded as
treasury stock and accounted for under the cost method. No repurchased shares have been retired. As of December 28,
2019, $1.68 billion remains available for repurchase under the program.
Dividends
On December 12, 2019, our Board of Directors declared a cash dividend of $0.18 per share on our issued and outstanding
common stock, which was paid on January 9, 2020 to shareholders of record as of December 27, 2019. On September 10,
2019, our Board of Directors declared a cash dividend of $0.18 per share on our issued and outstanding common stock,
which was paid on October 9, 2019 to shareholders of record as of September 25, 2019. On May 29, 2019, our Board of
Directors declared a cash dividend of $0.18 per share on our issued and outstanding common stock, which was paid on
July 26, 2019 to shareholders of record as of June 18, 2019. In connection with the declaration of such dividends, our non-
vested shares and share units are entitled to dividend equivalents, which will be payable to the holder subject to, and upon
vesting of, the underlying awards. Our outstanding stock options are not entitled to dividend or dividend equivalents. At
December 28, 2019, our consolidated balance sheet included a liability for dividends payable of $56 million, which is included
in other current liabilities.
Accumulated Other Comprehensive Loss, Net (AOCI)
The components of AOCI, net of tax, were as follows:
(In thousands)
Balance at December 31, 2016
Other comprehensive income (loss) before reclassifications
Amounts reclassified from AOCI
Balance at December 30, 2017
Other comprehensive income (loss) before reclassifications
Amounts reclassified from AOCI
Balance at December 29, 2018
Other comprehensive income (loss) before reclassifications
Amounts reclassified from AOCI
Foreign
currency
translation
adjustment
and other
Unrealized
loss on
cash flow
hedge
Unrealized
holding gain
(loss) on
available-
for-sale
investments
Total
$
(109,827) $
— $
(338) $
(110,165)
37,463
—
(72,364)
(30,575)
—
(102,939)
(3,408)
—
—
—
—
—
—
—
(13,078)
500
(672)
(8)
(1,018)
402
3
36,791
(8)
(73,382)
(30,173)
3
(613)
(103,552)
901
(23)
(15,585)
477
Balance at December 28, 2019
$
(106,347) $
(12,578) $
265
$
(118,660)
78
99
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The effects on net earnings of amounts reclassified from AOCI were as follows:
(In thousands)
AOCI Component
Location
2019
2018
2017
Years Ended
Unrealized loss on cash flow hedge
Other income, net
$
(624) $
— $
Unrealized holding gain (loss) on available-for-sale investments
Income taxes
Net of tax
Other income, net
Income taxes
Net of tax
124
(500)
29
(6)
23
—
—
(4)
1
(3)
Total amount reclassified, net of tax
$
(477) $
(3) $
—
—
—
12
(4)
8
8
(17) 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, $31 million and $29 million for 2019, 2018
and 2017, 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 have worked at least
92 consecutive calendar days with Cerner during such 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
2019 and 2018, we expensed $28 million and $10 million, respectively, for the second tier discretionary distributions.
(18) Purchase Obligations
We have purchase commitments with various vendors, and minimum funding commitments under collaboration agreements
through 2029. Aggregate future payments under these commitments are as follows:
(In thousands)
2020
2021
2022
2023
2024
2025 and thereafter
Purchase
Obligations
$
151,950
95,933
34,501
37,237
30,462
560,925
$
911,008
100
79
Table of Contents
(19) Segment Reporting
We have two operating segments, Domestic and International (formerly referred to as 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, certain
organizational restructuring and other expense, 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 2019, 2018 and 2017:
(In thousands)
2019
Revenues
Costs of revenue
Operating expenses
Total costs and expenses
Operating earnings (loss)
(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)
Domestic
International
Other
Total
$ 5,038,127
$
654,471
$
— $ 5,692,598
967,035
2,398,422
3,365,457
104,006
276,914
380,920
—
1,345,552
1,345,552
1,071,041
4,020,888
5,091,929
$ 1,672,670
$
273,551
$(1,345,552) $
600,669
Domestic
International
Other
Total
$ 4,730,266
$
636,059
$
— $ 5,366,325
827,904
2,164,465
2,992,369
109,444
321,116
430,560
—
937,348
1,168,611
3,654,192
1,168,611
4,591,540
$ 1,737,897
$
205,499
$(1,168,611) $
774,785
Domestic
International
Other
Total
$ 4,575,171
$
567,101
$
— $ 5,142,272
755,729
1,998,544
2,754,273
98,362
264,196
362,558
—
1,064,970
1,064,970
854,091
3,327,710
4,181,801
$ 1,820,898
$
204,543
$(1,064,970) $
960,471
80
101
Table of Contents
(20) Quarterly Results (unaudited)
Selected quarterly financial data for 2019 and 2018 is set forth below:
(In thousands, except per share data)
2019
First Quarter
Second Quarter(a)
Third Quarter(a)(b)
Fourth Quarter(a)(b)
Total
Earnings
Before
Income
Taxes
Revenues
Net
Earnings
Basic
Earnings
Per Share
Diluted
Earnings
Per Share
$ 1,389,877
$
206,376
$
166,219
$
0.51
$
1,431,061
154,123
126,969
1,429,428
102,312
81,935
1,442,232
191,701
154,331
$ 5,692,598
$
654,512
$
529,454
0.40
0.26
0.49
0.51
0.39
0.26
0.49
(a)Second through Fourth quarter results include pre-tax charges for employee separation costs of $41 million, $32 million and $13 million, respectively, as further described in Note (1).
(b)Third and Fourth quarter results include pre-tax charges for contract termination costs of $60 million and $6 million, respectively, as further described in Note (1).
(In thousands, except per share data)
2018
First Quarter
Second Quarter
Third Quarter
Fourth Quarter (c)
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
(c) 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 (12).
102
81
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, 2014 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, 2019.
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.
103
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 investors.cerner.com 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
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106
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
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