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EX-21 - EX-21 - CERNER Corp | c56132exv21.htm |
EX-23 - EX-23 - CERNER Corp | c56132exv23.htm |
EX-31.2 - EX-31.2 - CERNER Corp | c56132exv31w2.htm |
EX-32.1 - EX-32.1 - CERNER Corp | c56132exv32w1.htm |
EX-31.1 - EX-31.1 - CERNER Corp | c56132exv31w1.htm |
EX-10.T - EX-10.T - CERNER Corp | c56132exv10wt.htm |
EX-32.2 - EX-32.2 - CERNER Corp | c56132exv32w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended: January 2, 2010
OR
o | 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 | 43-1196944 | |
(State or other jurisdiction of | (I.R.S. Employer | |
Incorporation or organization) | Identification No.) | |
2800 Rockcreek Parkway | ||
North Kansas City, MO | 64117 | |
(Address of principal executive offices) | (Zip Code) |
(816) 221-1024
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $.01 par value per share
(Title of Class)
Common Stock, $.01 par value per share
(Title of Class)
NASDAQ Stock Market
(Name of exchange on which registered)
(Name of exchange on which registered)
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 þ No o
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 o No þ
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
(§229.405 of this chapter) is not contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
As of July 4, 2009, the aggregate market value of the registrants common stock held by
non-affiliates of the registrant was $4,265,742,365 based on the closing sale price as reported on
the NASDAQ Global Select Market.
Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of the latest practicable date.
Class | Outstanding at February 16, 2010 | |
[Common Stock, $.01 par value per share] | 81,889,914 shares |
DOCUMENTS INCORPORATED BY REFERENCE
Parts Into Which | ||
Document | Incorporated | |
Proxy Statement for the Annual Shareholders Meeting to be held May 28, 2010 (Proxy Statement)
|
Part III |
TABLE OF CONTENTS
Table of Contents
PART I.
Item 1. Business
Overview
Cerner Corporation is a Delaware business corporation formed in 1980. 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 headquarters are located at 2800 Rockcreek Parkway, North Kansas City, Missouri
64117. Our telephone number is 816.221.1024. Our Web site address, which we use to communicate
important business information, can be accessed at: www.cerner.com. We make our annual report on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those
reports available free of charge on or through this Web site as soon as reasonably practicable
after such material is electronically filed with or furnished to the Securities and Exchange
Commission.
We are a leading supplier of healthcare information technology (HIT) solutions, healthcare devices
and related services, and are transforming healthcare by eliminating error, variance and waste for
healthcare providers and consumers. Cerner® solutions optimize processes for healthcare
organizations ranging in size from single-doctor practices, to health systems, to entire countries,
for the pharmaceutical and medical device industries, and for the healthcare commerce system. These
solutions are licensed by more than 8,500 facilities around the world, including approximately
2,300 hospitals; 3,400 physician practices covering more than 30,000 physicians; 600 ambulatory
facilities, such as laboratories, ambulatory centers, cardiac facilities, radiology clinics and
surgery centers; 700 home health facilities; and 1,500 retail pharmacies.
We design and develop most of our software solutions on the unified Cerner Millennium®
architecture, a person-centric computing framework, which combines clinical, financial and
management information systems. This architecture allows providers to securely access an
individuals 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 or other care providers, front- and back-office professionals and consumers.
We also offer a broad range of services, including implementation and training, remote hosting,
operational management services, revenue cycle services, support and maintenance, healthcare data
analysis, clinical process optimization, transaction processing, employer health centers, employee
wellness programs and third party administrator (TPA) services for employer-based health plans.
The following table presents our consolidated revenues by major solutions and services and by
segment, as a percentage of total revenues:
For the Years Ended | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Revenues by Solutions & Services |
||||||||||||
System sales |
30 | % | 31 | % | 33 | % | ||||||
Support and maintenance |
29 | % | 28 | % | 26 | % | ||||||
Services |
39 | % | 38 | % | 39 | % | ||||||
Reimbursed travel |
2 | % | 2 | % | 2 | % | ||||||
100 | % | 100 | % | 100 | % | |||||||
Revenues by Segment |
||||||||||||
Domestic |
84 | % | 78 | % | 81 | % | ||||||
Global |
16 | % | 22 | % | 19 | % | ||||||
100 | % | 100 | % | 100 | % | |||||||
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The Healthcare and Healthcare IT Industry
The lingering downturn in the worldwide economy has impacted almost all industries. While
healthcare is not immune to economic cycles, we believe it is more resilient than most segments of
the economy. The impact of the current economic conditions on our existing and prospective clients
has been mixed. Some organizations are doing well operationally, but others face challenges such as
higher levels of uninsured patients and Medicaid payments being impacted by the weakened financial
condition of state governments.
We believe the result of these challenges is that healthcare organizations are focusing on
strategic spending that generates a return on their investment. Because HIT solutions play an
important role in healthcare by improving safety, efficiency and reducing cost, they are often
viewed as more strategic than other potential purchases. Most healthcare providers also recognize
that they must invest in HIT to meet regulatory, compliance and government reimbursement
requirements.
Overall, while the economy has certainly impacted and could continue to impact our business, we
believe there are several macro trends that are favorable for the HIT industry. One example is the
need to curb the growth of United States healthcare spending, which analysts from the Centers for
Medicare and Medicaid Services estimate at $2.5 trillion or 17.3 percent of Gross Domestic Product
in 2009. In the United States, politicians and policymakers agree that the growing cost of our
healthcare system is unsustainable. Leaders of both parties say the intelligent use of information
systems will improve health outcomes and, correspondingly, drive down costs. They cite a 2005 study
by RAND Corp., which estimated that the widespread adoption of HIT in the United States could cut
healthcare costs by $162 billion annually.
In 2009, the broad recognition that HIT is essential to helping control healthcare costs
contributed to the inclusion of HIT incentives in the American Recovery and Reinvestment Act
(ARRA). The Health Information Technology for Economic and Clinical Health (HITECH) provisions
within ARRA include more than $35 billion (in the form of incentives and penalties) to help
healthcare organizations modernize operations through the acquisition and wide-spread use of HIT.
We believe ARRA could represent the single biggest United States HIT opportunity in our 30 years as
a company. With our large footprint in United States hospitals and physician practices, together
with our proven ability to deliver value, we believe the Company is well-positioned to benefit from
these incentives over the next several years.
Another dynamic in the United States marketplace is broader federal healthcare reform and
uncertainty about how the legislation will impact the industry. While this creates some near-term
uncertainty for healthcare providers, we believe HIT continues to be viewed as a transformational
agent that is essential in all scenarios of reform.
Outside of the United States, the economy has impacted and could continue to impact our results in
almost all regions. However, we believe revenue growth opportunities outside the United States
remain significant because other countries are also grappling with increased healthcare spending,
safety concerns and inefficient care, and many of these countries recognize HIT as an important
part of the solution to these issues.
In summary, while the current economic environment has impacted our business, the fundamental value
proposition of HIT remains strong. The HIT industry will likely benefit as healthcare providers and
governments continue to recognize that these solutions and services contribute to safer, more
efficient healthcare.
Cerner Vision
Cerners vision has evolved from a fundamental thought: Healthcare should revolve around the
individual, not the encounter. This concept led to Cerners vision of the unified Cerner Millennium
architecture and a Community Health Model, which encompasses four steps:
Automate the Care Process
We offer a longitudinal, person-centric EHR, which gives clinicians electronic access to the right
information at the right time and place to achieve optimal health outcomes.
Connect the Person
We are dedicated to building a personal health system. Medical information and care regimens
accessible from home empower consumers to effectively manage their conditions and adhere to
treatment plans, creating a new medium between physicians and individuals.
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Structure the Knowledge
We are dedicated to building systems that help bring the best science to every medical decision by
structuring, storing and studying the content surrounding each care episode to achieve optimal
clinical and financial outcomes.
Close the Loop
Incorporating a medical discovery into daily practice can take as long as 10 years. We are
dedicated to building systems that implement evidence-based medicine, reducing the average time
between discovery of an improved method to a change in the standard of care.
As our vision evolves, we expect medicine will become increasingly personalized and technology more
accessible. We are creating new solutions and collaborative, information-sharing networks for large
user communities, including strategies to:
| Connect all stakeholders in the healthcare system, including payers (employers and
governments), providers and consumers |
||
| Remove clinical,
financial and administrative friction |
||
| Create a secure, transparent and open network for data sharing to improve disease
management and facilitate personalized medicine |
To achieve this vision, we are leveraging the Cerner Millennium architecture and expanding our
solutions and services, as discussed below.
Cerner Growth Strategy
Our business strategies are anchored by our industry-leading solution and device architectures, the
breadth and depth of our solutions and services, our proven ability to deliver value, and, most
importantly, the success of our clients. A core strength that has led to this strong market
position is our proven ability to innovate, which has driven consistent expansion of solutions and
services, entry into new markets and strong long-term growth.
We believe our strengths position us well to gain market share in the United States during a period
of expected strong demand driven by the HITECH provisions of ARRA. We also have a strong global
brand and a presence in more than 25 countries and believe we have a good opportunity to gain
market share outside of the United States.
We also have a significant opportunity to grow revenues by expanding our solution footprint in
existing clients. In addition to the opportunity to expand penetration of core solutions, such as
EHRs and computerized physician order entry, we have a broad range of solutions that can be offered into our
existing client base. Examples include solutions and services for womens health, anesthesiology,
imaging, clinical process optimization, critical care, medical device connectivity, emergency
department, revenue cycle and surgery.
Additionally, we have recently introduced additional services targeted at capturing a larger
percent of our clients existing IT spending. These services leverage our proven operational
capabilities and the success of our CernerWorksSM managed services business, where we have
demonstrated the ability to improve our
clients service levels at a cost that is at or below
levels they were previously spending. One of these new services is
Cerner
ITWorksSM, a suite of
services that improve the ability of hospital IT departments to meet their organizations needs
while also creating a closer alignment between Cerner and our clients. A second example is Cerner
RevWorksSM, which includes solutions and services to help healthcare organizations with their revenue
cycle functions.
We have made good progress over the past several years at reducing the total cost of ownership of
our solutions, which expands our end market opportunities by allowing us to offer lower-cost,
higher-value solutions and services to smaller community hospitals, critical access hospitals and
physician practices. Our ability to address these markets has been aided by our Bedrock®
technology, which automates much of the implementation and management of the Cerner Millennium
platform. We have also streamlined implementations and made them more predictable through our
MethodM® implementation methodology, which draws upon practices proven to be effective during
thousands of past implementations. Additionally, we reduced up-front hardware costs and ongoing
technology obsolescence risks through our remote-hosted, managed services offering, CernerWorks.
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We also expect to drive growth over the course of the next decade through initiatives outside the
core HIT market. For example, we offer clinic, pharmacy and wellness services directly to
employers. And as described below, we believe being able to connect employers, governments and
consumers directly with their healthcare providers through a New Middle presents a substantial
growth opportunity as we aim to help eliminate the friction that consumes more than 30 percent of
healthcare spending.
Creating the Cerner Network and The New Middle
Several years ago, we introduced a surveillance system called the LightsOn Network®, which
identifies performance problems in real time and has the ability to predict issues that could
create system vulnerability. With more than 300 participating clients, the LightsOn solution has
become an evidence-based network that enhances performance and allows our clients to maximize the
value they gain from our systems. Our LightsOn solution also shows our ability to create a
networka common platform of learning and improvements from which all our clients can benefit.
Along these lines, we have created the uCern platform, a collaboration and social networking
platform which gives clients a place where they can collaborate with peers or Cerner associates
about topics ranging from healthcare reform to solution enhancements to project status updates.
Approximately 95 percent of our core Cerner Millennium clients actively engage on this platform.
Additionally, we have created the uDevelop solution, a collaborative ecosystem that supports a
unique audience of engineers, including both our associates and external developers, who work to
improve our solutions; and the uCern Store, which offers quick access to innovations developed by
us, as well as other individuals and organizations.
Another example of how we are creating value out of the connectedness of our client base is the Flu
Pandemic Initiative. In partnership with the United States Department of Health and Human Services
and the Centers for Disease Control and Prevention (CDC), we created a secure, rapid-detection
network for the influenza virus in 2009. This network supplies public health departments, clients
and the CDC with real-time situational awareness information to help communities triage resources
during an influenza outbreak.
In addition, we are leading efforts to create interoperability in order to make the process of
electronically sharing clinical information faster and easier for healthcare providers. For
example, we have solutions like the Cerner Hub, which enables the secure electronic flow of
clinical data between hospitals and physician practices, regardless of the EHR system being used.
Through these connections and networks, we are creating the building blocks for an entirely new
healthcare system that will introduce much-needed competition for our current, insurance-based
infrastructure. In this new system, a New Middle would facilitate the sharing of relevant
clinical and financial information between payers, consumers and providers, enhancing care and
reducing friction.
Consumers would have a personal health record, giving them ready access to information on both the
price and quality of the care they receive. This record would have the consumers complete medical
history and a predictive model of future needs based on his or her genetic code. Armed with this
information, consumers would have financial incentives to focus on controlling chronic conditions
and reducing future maladies.
With more complete patient information, providers could focus on preventive rather than reactive
medicine. Through this New Middle, providers could communicate instantly with the rest of the
patients care team, and they would receive immediate point-of-service payments for the delivery of
appropriate care rather than waiting weeks or months while claims work through the reimbursement
process.
Finally, the segments of our society that pay for careemployers or governmentswould receive a
rational health system, one that eliminates variance, cost and waste while maximizing the quality
of healthcare for all of us.
Software Development
We commit significant resources to developing new health information system solutions. As of the
end of 2009, approximately 2,000 associates were engaged in research and development activities.
Total expenditures for the development and enhancement of our software solutions were approximately
$285.2 million, $291.4 million and $283.1
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million during the 2009, 2008 and 2007 fiscal years, respectively. These figures include both capitalized and non-capitalized portions and exclude
amounts amortized for financial reporting purposes.
As discussed above, continued investment in research and development remains a core element of our
strategy. This will include ongoing enhancement of our core solutions and development of new
solutions and services.
Sales and Marketing
The markets for Cerner HIT solutions, healthcare devices and services include integrated delivery
networks, physician groups and networks, managed care organizations, hospitals, medical centers,
free-standing reference laboratories, home health agencies, blood banks, imaging centers,
pharmacies, pharmaceutical manufacturers, employers, governments and public health organizations.
The majority of our sales are sales of clinical solutions and services to hospital and health
systems, but the Cerner Millennium architecture is highly scalable and organizations ranging from
several-doctor physician practices, to community hospitals, to complex integrated delivery
networks, to local, regional and national government agencies use our Cerner Millennium solutions.
As previously discussed, we have focused on bringing down the total cost of ownership of our
systems, which allows us to be price competitive across the full size and organizational structure
range of healthcare providers. Sales to large health systems typically take approximately nine to
18 months, with the sale cycle often shorter when selling to smaller hospitals and physician practices. We have
seen some indications that the HITECH provisions of ARRA may shorten this process.
Our executive marketing management is located in our North Kansas City, Missouri headquarters,
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 in Australia,
Canada, Chile, England, France, Germany, China (Hong Kong), India, Ireland, Malaysia, Saudi Arabia,
Singapore, Spain and the United Arab Emirates.
We support our sales force with technical personnel who perform demonstrations of Cerner solutions
and services and assist clients in determining the proper hardware and software configurations. Our
primary direct marketing strategy is to generate sales contacts from our existing client base and
through presentations at industry seminars and tradeshows. We market the PowerWorks® solutions,
offered on a subscription basis, directly to the physician practice market using telemarketing,
channel partners and through existing acute care clients that are looking to extend Cerner
solutions to affiliated physicians. We attend a number of major tradeshows each year and sponsor
executive user conferences, which feature industry experts who address the HIT needs of large
healthcare organizations.
Client Services
Substantially all of Cerners HIT software solutions clients enter into software maintenance
agreements with us for support of their Cerner systems. In addition to immediate software support
in the event of problems, these agreements allow clients the use of new releases of the Cerner
solutions covered by maintenance agreements. Each client has 24-hour access to the client support
team located at our world headquarters in North Kansas City, Missouri and our global support
organization in England and Ireland.
Most Cerner clients who buy hardware through us also enter into hardware maintenance agreements
with us. These arrangements normally provide for a fixed monthly fee for specified services. In the
majority of cases, we subcontract hardware maintenance to the hardware manufacturer. We also offer
a set of managed services that include remote hosting, operational management services and disaster
recovery.
Backlog
At the end of 2009, we had a contract backlog of approximately $3.6 billion as compared to
approximately $2.9 billion at the end of 2008. Such backlog represents system sales and services
from signed contracts that have not yet been recognized as revenue. At the end of 2009, we had
approximately $135.3 million of contracts receivable compared to $141.0 million at the end of 2008,
which represents revenues recognized but not yet billable under the terms of the contract. At the
end of 2009, we had a software support and maintenance backlog of approximately $620.6 million as
compared to approximately $580.9 million at January 3, 2009. Such backlog represents contracted
software support and
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hardware maintenance services for a period of 12 months. We estimate that
approximately 33 percent of the aggregate backlog at the end of 2009 of $4.2 billion will be
recognized as revenue during 2010.
Competition
The market for HIT solutions, devices and services is intensely competitive, rapidly evolving and
subject to rapid technological change. Our principal existing competitors in the healthcare
solutions and services market include: Computer Programs and Systems, Inc., Eclipsys Corporation,
Epic Systems Corporation, GE Healthcare Technologies, iSoft Group Limited, McKesson Corporation,
Medical Information Technology, Inc. (Meditech), Misys Healthcare Systems and Siemens Medical
Solutions Health Services Corporation, each of which offers a suite of software solutions that
compete with many of our software solutions and services.
Other competitors focus on only a portion of the market that we address. For example, competitors
such as Accenture, Capgemini, Computer Sciences Corporation, Computer Task Group, Inc. (CTG), Dell,
Inc., Deloitte LLP, Hewlett-Packard Company and IBM Corporation offer HIT services that compete
directly with our consulting services. Allscripts-Misys Healthcare Solutions, Inc., athenahealth,
Inc., eClinicalWorks LLC, Emdeon Corporation, Greenway Medical Technologies, Quality Systems, Inc.
and Sage Software Healthcare LLC offer solutions to the physician practice market but do not
currently have a significant presence in the health systems and independent hospital market.
We view our principal competitors in the healthcare device market to include: CareFusion
Corporation, McKesson Corporation, Omnicell, Inc. and Royal Philips Electronics; and we view our
principal competitors in the healthcare transactions market to include: Emdeon Corporation,
McKesson Corporation and ProxyMed, Inc. (d/b/a MedAvant Healthcare Solutions), with almost all of
these competitors being substantially larger or having more experience and market share than us in
their respective market.
In addition, we expect that major software information systems companies, large information
technology consulting service providers and system integrators, start-up companies, managed care
companies and others specializing in the healthcare industry may offer competitive software
solutions, devices or services. The pace of change in the HIT market is rapid and there are
frequent new software solutions, devices or service introductions, enhancements and evolving
industry standards and requirements. We believe that the principal competitive factors in this
market include the breadth and quality of solution and service offerings, the stability of the
solution provider, the features and capabilities of the information systems and devices, the
ongoing support for the systems and devices and the potential for enhancements and future
compatible software solutions and devices.
Number of Employees (Associates)
At the end of 2009, we employed approximately 7,600 associates worldwide.
Operating Segments
Information about our operating segments, which are geographically based, may be found in Item 7
Managements Discussion and Analysis of Financial Condition and Results of Operations below and
in Note 18 to the financial statements.
Item 1A. Risk Factors
Risks Related to Cerner Corporation
We may incur substantial costs related to product-related liabilities. Many of our software
solutions, healthcare devices or services (including life sciences/research services) provide data
for use by healthcare providers in providing care to patients. We attempt to limit by contract our
liability to clients; however, the limitations of liability set forth in the contracts may not be
enforceable or may not otherwise protect us from liability for damages. Although we maintain
liability insurance coverage in an amount that we believe is sufficient for our business, there can
be no assurance that such coverage will cover any particular claim that has been brought or
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that may be brought in the future, prove to be adequate or that such coverage will continue to remain
available on acceptable terms, if at all. A successful material claim or series of claims brought
against us, if uninsured or under-insured, could materially harm our business, results of
operations and financial condition. Product-related claims, even if not successful, could damage
our reputation, cause us to lose existing clients, limit our ability to obtain new clients,
divert managements attention from operations, result in revenues loss, create potential
liabilities for our clients and us and increase insurance and other operational costs.
We may be subject to claims for system errors and warranties. Our software solutions and healthcare
devices, particularly the Cerner Millennium versions, are very complex. Our software solutions and
healthcare devices may contain design, coding or other errors, especially when first introduced.
We have discovered errors in our software solutions and healthcare devices after their
introduction. Our software solutions and healthcare devices are intended for use in collecting,
storing, and displaying clinical and healthcare-related information used in the diagnosis and
treatment of patients and in related healthcare settings such as admissions, billing, etc.
Therefore, users of our software solutions and healthcare devices have a greater sensitivity to
errors than the market for software products and devices generally. Our client agreements
typically provide warranties concerning material errors and other matters. Failure of a clients
Cerner software solutions and/or healthcare devices to meet these warranties could constitute a
material breach under the client agreement, allowing the client to terminate the agreement and
possibly obtain a refund and/or damages, or might require us to incur additional expense in order
to make the software solution or healthcare device meet these criteria. Our client agreements
generally limit our liability arising from such claims but such limits may not be enforceable in
certain jurisdictions or circumstances. Although we maintain liability insurance coverage in an
amount that we believe is sufficient for our business, there can be no assurance that such coverage
will cover any particular claim that has been brought or that may be brought in the future, prove
to be adequate or that such coverage will continue to remain available on acceptable terms, if at
all. A successful material claim or series of claims brought against us, if uninsured or
under-insured, could materially harm our business, results of operations and financial condition.
We may experience interruption at our data centers or client support facilities. We perform data
center and/or hosting services for certain clients, including the storage of critical patient and
administrative data. In addition, we provide support services to our clients through various
client support facilities. We have invested in reliability features such as multiple power feeds,
multiple backup generators and redundant telecommunications lines, as well as technical (such as
multiple overlapping security applications and countermeasures) and physical security
safeguards, and structured our operations to reduce the likelihood of disruptions. Periodic risk
assessments are conducted to ensure additional risks are identified and appropriately mitigated.
However, complete failure of all local public power and backup generators, impairment of all
telecommunications lines, a concerted denial of service cyber
attack, damage (environmental,
accidental, intentional or pandemic) to the buildings, the equipment inside the buildings housing
our data centers, the client data contained therein and/or the personnel trained to operate such
facilities could cause a disruption in operations and negatively impact clients who depend on us
for data center and system support services. Any interruption in operations at our data centers
and/or client support facilities could damage our reputation, cause us to lose existing clients,
hurt our ability to obtain new clients, result in revenue loss, create potential liabilities for
our clients and us and increase insurance and other operating costs.
Our proprietary technology may be subject to claims for infringement or misappropriation of
intellectual property rights of others, or may be infringed or misappropriated by others. We rely
upon a combination of license agreements, confidentiality procedures, employee nondisclosure
agreements, confidentiality agreements with third parties and technical measures to maintain the
confidentiality and trade secrecy of our proprietary information. We also rely on trademark and
copyright laws to protect our intellectual property rights in the United States and abroad. We
continue to develop our patent portfolio of United States and global patents, but currently have a
limited number of issued patents. Despite our protective measures and intellectual property
rights, we may not be able to adequately protect against copying, reverse-engineering, misappropriation, infringement or unauthorized use or disclosure of our intellectual
property.
In addition, we are routinely involved in intellectual property infringement or misappropriation
claims and we expect this activity to continue or even increase as the number of competitors,
patents and patent enforcement organizations in the HIT market increases, the functionality of our
software solutions and services expands, and we
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enter new markets such as healthcare device
innovation, healthcare transactions and life sciences. These claims, even if not meritorious, are
expensive to defend. 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 and/or cease using, selling, licensing, implementing and
supporting the solutions, devices and services that violate the intellectual property rights.
We are subject to risks associated with our non-U.S. operations. We market, sell and service our
solutions, devices and services globally. We have established offices around the world, including
in: the Americas, Europe, the Middle East and the Asia Pacific region. We will continue to expand
our non-U.S. operations and enter new global markets. This expansion will require significant
management attention and financial resources to develop successful direct and indirect non-U.S.
sales and support channels. Our business is generally transacted in the local functional currency.
In some countries, our success will depend in part on our ability to form relationships with local
partners. There is a risk that we may sometimes choose the wrong partner. For these reasons, we
may not be able to maintain or increase non-U.S. market demand for our solutions, devices and
services.
Non-U.S. operations are subject to inherent risks, and our future results could be adversely
affected by a variety of uncontrollable and changing factors. These include, but are not limited
to:
| Greater difficulty
in collecting accounts receivable and longer collection periods |
||
| Difficulties and
costs of staffing and managing non-U.S. operations |
||
| The impact
of global economic conditions |
||
| Unfavorable or
changing foreign currency exchange rates |
||
| Legal compliance costs and/or business risks associated with our global operations where
local laws and customs differ from those in the United States |
||
| Certification,
licensing or regulatory requirements |
||
| Unexpected changes in
regulatory requirements |
||
| Changes to or
reduced protection of intellectual property rights in some
countries |
||
| Inability to obtain
necessary financing on reasonable terms to adequately support
non-U.S. operations and expansion |
||
| Potentially adverse
tax consequences and difficulties associated with repatriating cash
generated or held abroad in a tax-efficient manner. |
||
| Different or
additional functionality requirements |
||
| Trade protection
measures |
||
| Export
control regulations |
||
| Service provider
and government spending patterns |
||
| Natural
disasters, war or terrorist acts |
||
| Labor disruptions
that may occur in a country |
||
| Poor selection
of a partner in a country |
||
| Political
conditions which may impact sales or threaten the safety of associates or our
continued presence in these countries |
Our failure to effectively hedge exposure to fluctuations in foreign currency exchange rates could
unfavorably affect our performance. We currently utilize a non-derivative instrument to hedge our
exposure to fluctuations in foreign currency exchange rates. This instrument may involve elements
of market risk in excess of the amounts recognized in the Consolidated Financial Statements. For
additional information about risk on financial instruments, see Item 7A Quantitative and
Qualitative Disclosures about Market Risk. Further, our financial results from non-U.S.
operations may be negatively affected if we fail to execute or improperly hedge our exposure to
currency fluctuations.
We are subject to tax legislation in several countries; tax legislation initiatives or challenges
to our tax positions could adversely affect our results of operations and financial condition. We
are a large corporation with operations in more than twenty countries. As such, we are, or in the
future could be, subject to tax laws and regulations of the United States federal, state and local
governments and of other country jurisdictions. From time
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to time, various legislative initiatives may be proposed that could adversely affect our tax positions and/or our tax liabilities. There can
be no assurance that our effective tax rate or tax payments will not be adversely affected by these
initiatives. In addition, United States federal, state and local, as well as other countries tax
laws and regulations, are extremely complex and subject to varying interpretations. There can be no
assurance that our tax positions will not be challenged by relevant tax authorities or that we
would be successful in any such challenge.
Our success depends upon the recruitment and retention of key personnel. To remain competitive in
our industries, we must attract, motivate and retain highly skilled managerial, sales, marketing,
consulting and technical personnel, including executives, consultants, programmers and systems
architects skilled in the HIT, healthcare devices, healthcare transactions and life sciences
industries and the technical environments in which our solutions, devices and services are needed.
Competition for such personnel in our industries is intense in both the United States and abroad.
Our failure to attract additional qualified personnel to meet our non-U.S. personnel needs could
have a material adverse effect on our prospects for long-term growth. Our success is dependent to
a significant degree on the continued contributions of key management, sales, marketing, consulting
and technical personnel. The unexpected loss of key personnel could have a material adverse impact
on our business and results of operations, and could potentially inhibit development and delivery
of our solutions, devices and services and market share advances.
We rely significantly on third party suppliers. We license or purchase intellectual property and
technology (such as software, hardware and content) from third parties, including some competitors,
and incorporate such third party software, hardware and/or content into or sell it in conjunction
with our solutions, devices and services. We rely significantly on some of the third party
software, hardware and/or content in the operation and delivery of our solutions, devices and
services. For instance, we currently depend on Microsoft and IBM Websphere technologies for
portions of the operational abilities of our Millennium solutions. Our remote hosting business
also relies on a single or a limited number of suppliers for certain functions of this business,
such as Oracle database technologies, CITRIX technologies and CISCO network technologies, and we
rely on Hewlett Packard and IBM for our hardware technology platforms.
Most of the third party software licenses we have expire within one to five years, can be renewed
only by mutual consent and may be terminated if we breach the terms of the license and fail to cure
the breach within a specified period of time. Most of these third party software licenses are
non-exclusive; therefore, our competitors may obtain the right to use any of the technology covered
by these licenses and use the technology to compete directly with us.
If any of the third party suppliers were to change product offerings, cease actively supporting the
technologies, fail to update and enhance the technologies to keep pace with changing industry
standards, encounter technical difficulties in the continuing development of these technologies,
significantly increase prices or terminate our licenses or supply contracts, we would need to seek
alternative suppliers and incur additional internal or external development costs to ensure
continued performance of our solutions, devices and services. Such alternatives may not be
available on attractive terms, or may not be as widely accepted or as effective as the intellectual
property or technology provided by our existing suppliers. If the cost of licensing, purchasing or
maintaining the third party intellectual property or technology significantly increases, our gross
margin levels could significantly decrease. In addition, interruption in functionality of our
solutions, devices and services as a result of changes in third party suppliers could adversely
affect future sales of solutions, devices and services.
We intend to continue strategic business acquisitions, which are subject to inherent risks. In
order to expand our solutions, device offerings and services and grow our market and client base,
we may continue to seek and complete strategic business acquisitions that we believe are
complementary to our business. Acquisitions have inherent risks which may have a material adverse
effect on our business, financial condition, operating results or prospects, including, but not
limited to: 1) failure to successfully integrate the business and financial operations, services,
intellectual property, solutions or personnel of an acquired business and to maintain uniform
standard controls, policies and procedures; 2) diversion of managements attention from other
business concerns; 3) entry into markets in which we have little or no direct prior experience; 4)
failure to achieve projected synergies and performance targets; 5) loss of clients or key
personnel; 6) incurrence of debt and/or assumption of known and
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unknown liabilities; 7) write-off of software development costs, goodwill, client lists and amortization of expenses related to
intangible assets; 8) dilutive issuances of equity securities; and, 9) accounting deficiencies that
could arise in connection with, or as a result of, the acquisition of an acquired company,
including issues related to internal control over financial reporting and the time and cost
associated with remedying such deficiencies. If we fail to successfully integrate acquired
businesses or fail to implement our business strategies with respect to these acquisitions, we may
not be able to achieve projected results or support the amount of consideration paid for such
acquired businesses.
Risks Related to the Healthcare Information Technology, Healthcare Device and Healthcare
Transaction Industry
The healthcare industry is subject to changing political, economic and regulatory influences. For
example, the Health Insurance Portability and Accountability Act of 1996 (as modified by The Health
Information Technology for Economic and Clinical Health Act (HITECH) provisions of the American
Recovery and Reinvestment Act of 2009) (HIPAA) continues to have a direct impact on the healthcare
industry by requiring identifiers and standardized transactions/code sets and necessary security
and privacy measures in order to ensure the appropriate level of privacy of protected health
information. These regulatory factors affect the purchasing practices and operation of healthcare
organizations. Federal and state legislatures have periodically considered programs to reform or
amend the United States healthcare system at both the federal and state level and to change
healthcare financing and reimbursement systems. These programs may contain proposals to increase
governmental involvement in healthcare, lower reimbursement rates or otherwise change the
environment in which healthcare industry participants operate. Healthcare industry participants
may respond by reducing their investments or postponing investment decisions, including investments
in our solutions and services.
Many healthcare providers are consolidating to create integrated healthcare 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 healthcare industry consolidates, our client
base could be eroded, competition for clients could become more intense and the importance of
landing new client relationships becomes greater.
Recently, Congressional leaders also have expressed their intention to enact a comprehensive
healthcare reform plan, including provisions to control healthcare costs, improve healthcare
quality, and expand access to affordable health insurance, potentially including the establishment
of a government health insurance plan that would compete with private health plans. Healthcare
reform legislation could include changes in Medicare and Medicaid payment policies and other
healthcare delivery reforms that would potentially impact our business. The United States House of
Representatives and United States Senate have each passed different versions of healthcare reform
legislation, but Congress has not yet issued a Conference Committee Report reconciling the House
and Senate versions of the legislation. As a result, the exact provisions to be included in a
final bill are unknown at this time, and we cannot be certain of when or if any such legislation
will be enacted. Given the potentially sweeping nature of the changes under consideration, there
can be no assurances that healthcare reform legislation, if adopted, will not adversely impact
either our results of operations or the manner in which we operate our business.
The healthcare industry is highly regulated at the local, state and federal level. We are subject
to a significant and wide-ranging number of regulations both within the United States and
elsewhere, such as regulations in the areas of healthcare fraud, e-prescribing, claims processing
and transmission, medical devices, the security and privacy of patient data and interoperability
standards.
Healthcare Fraud. Federal and state governments continue to enhance regulation of and increase
their scrutiny over practices involving healthcare fraud affecting healthcare providers whose
services are reimbursed by Medicare, Medicaid and other government healthcare programs. Our
healthcare provider clients are subject to laws and regulations on fraud and abuse which, among
other things, prohibit the direct or indirect payment or receipt of any remuneration for patient
referrals, or arranging for or recommending referrals or other business paid for in whole or in
part by these federal or state healthcare programs. Federal enforcement personnel have substantial
funding, powers and remedies to pursue suspected or perceived fraud and abuse. The effect of this
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government regulation on our clients is difficult to predict. Many of the regulations applicable
to our clients and that may be applicable to us, including those relating to marketing incentives
offered in connection with medical device sales, are vague or indefinite and have not been
interpreted by the courts. They may be interpreted or applied by a prosecutorial, regulatory or
judicial authority in a manner that could broaden their applicability to us or require our clients
to make changes in their operations or the way in which they deal with us. If such laws and
regulations are determined to 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.
E-Prescribing. The use of our solutions by physicians for electronic prescribing, electronic
routing of prescriptions to pharmacies and dispensing is governed by state and Federal law. States
have differing prescription format requirements, which we have programmed into our solutions. In
addition, in November 2005, the Department of Health and Human Services announced regulations by
Centers for Medicare and Medicaid Services (CMS) related to E-Prescribing and the Prescription
Drug Program (E-Prescribing Regulations). These E-Prescribing Regulations were
mandated by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003. The
E-Prescribing Regulations set forth standards for the transmission of electronic prescriptions.
These standards are detailed and significant, and cover not only transactions between prescribers
and dispensers for prescriptions but also electronic eligibility, benefits inquiries, drug
formulary and benefit coverage information. Our efforts to provide solutions that enable our
clients to comply with these regulations could be time-consuming and expensive.
Claims Transmissions. Certain of our solutions assist our clients in submitting claims to payers,
which claims are governed by federal and state laws. Our solutions are capable of electronically
transmitting claims for services and items rendered by a physician to many patients payers for
approval and reimbursement. Federal law provides civil liability to any person that knowingly
submits a claim to a payer, including Medicare, Medicaid and private health plans, seeking payment
for any services or items that have not been provided to the patient. Federal law may also impose
criminal penalties for intentionally submitting such false claims. We have policies and procedures
in place that we believe result in the accurate and complete transmission 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 transmission services, since those services must be structured and provided in a way
that supports our clients HIPAA compliance obligations. Any investigation or proceeding related to
these laws may have an adverse impact on our results of operations.
Regulation of Medical Devices. The United States Food and Drug Administration (the FDA) has
determined that certain of our solutions are medical devices that are actively regulated under the
Federal Food, Drug and Cosmetic Act (Act) and amendments to the Act. Other countries have similar
regulations in place related to medical devices, that now or may in the future apply to certain of
our solutions. If other of our solutions are deemed to be actively regulated medical devices by
the FDA or similar regulatory agencies in countries where we do business, we could be subject to
extensive requirements governing pre- and post-marketing requirements including pre-market
notification clearance. Complying with these medical device regulations on a global perspective is
time consuming and expensive, and could be subject to unanticipated and significant delays.
Further, it is possible that these regulatory agencies may become more active in regulating
software that is used in healthcare. If we are unable to obtain the required regulatory approvals
for any such solutions or medical devices, our short to long term business plans for these
solutions and/or medical devices could be delayed or canceled.
There have been nine FDA inspections at various Cerner sites since 1998. Inspections conducted at
our world headquarters in 1999 and our prior Houston, Texas facility in 2002 each resulted in the
issuance of an FDA Form 483 that we responded to promptly. The FDA has taken no further action
with respect to either of the Form 483s that were issued in 1999 and 2002. The remaining seven FDA
inspections, including inspections at our world headquarters in 2006 and 2007, resulted in no
issuance of a Form 483. We remain subject to periodic FDA inspections and we could be required to
undertake additional actions to comply with the Act and any other applicable regulatory
requirements. Our failure to comply with the Act and any other applicable regulatory requirements
could have a material adverse effect on our ability to continue to manufacture and distribute our
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solutions. The FDA has many enforcement tools including recalls, seizures, injunctions, civil
fines and/or criminal prosecutions. Any of the foregoing could have a material adverse effect on
our business, results of operations and financial condition.
Security and Privacy of Patient Information. State, federal and local laws regulate the
confidentiality of patient records and the circumstances under which those records may be released.
These regulations govern both the disclosure and use of confidential patient medical
record information and require the users of such information to implement specified security
measures. United States regulations currently in place governing electronic health data
transmissions continue to evolve and are often unclear and difficult to apply. Similarly, laws in
non-U.S. jurisdictions may have similar or even stricter requirements related to the treatment of
patient information.
In the United States, HIPAA regulations require national standards for some types of electronic
health information transactions and the data elements used in those transactions, security
standards to ensure the integrity and confidentiality of health information and standards to
protect the privacy of individually identifiable health information. Covered entities under HIPAA,
which include healthcare organizations such as our clients, our employer clinic business model and
our claims transmission services, are required to comply with the privacy standards, the
transaction regulations and the security regulations. Moreover, the recently enacted HITECH
provisions of ARRA extend many of the HIPAA obligations, formerly imposed only upon covered
entities, to business associates as well. As a business associate of our clients who are covered
entities, we were in most instances already contractually required to ensure compliance with the
HIPAA regulations as it pertains to handling of covered client data, and when the HITECH provisions
go into effect, we will have additional liability risks related to the privacy and security of
individually identifiable health information.
Evolving HIPAA and HITECH -related laws or regulations 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 if they are not re-designed in a timely manner in
order to meet the requirements of any new interpretations or regulations that seek to protect the
privacy and security of patient data or enable our clients to execute new or modified healthcare
transactions. We may need to expend additional capital, software development and other resources to
modify our solutions and devices to address these evolving data security and privacy issues.
Furthermore, our failure to maintain confidentiality of sensitive personal information in
accordance with the applicable regulatory requirements could damage our reputation and expose us to
breach of contract claims, fines and penalties.
Interoperability Standards. Our clients are concerned with and often require that our software
solutions and healthcare devices be interoperable with other third party HIT suppliers. Market
forces or governmental/regulatory authorities could create software interoperability standards that
would apply to our solutions, and if our software solutions and/or healthcare devices are not
consistent with those standards, we could be forced to incur substantial additional development
costs to conform. The Certification Commission for Healthcare Information Technology (CCHIT) has
developed a comprehensive set of criteria for the functionality, interoperability and security of
various software modules in the HIT industry. CCHIT, however, continues to modify and refine those
standards. Achieving CCHIT certification is becoming a competitive requirement, resulting in
increased software development and administrative expense to conform to these requirements.
Additionally, various Federal, state and non-U.S. government agencies are also developing standards
that could become mandatory for systems purchased by these agencies. For example, ARRA requires
meaningful use of certified electronic health record technology by healthcare providers in order
to receive stimulus funds from the United States Federal government. Interim final regulations
have been issued that identify initial standards and implementation specifications and establish
the certification standards for qualifying electronic health record technology. Nevertheless,
these standards and specifications, once finalized, will be subject to interpretation by the
entities designated to certify such technology. We may incur increased development costs and delays
in delivering solutions if we need to upgrade our software and healthcare devices to be in
compliance with these varying and evolving standards. In addition, delays in interpreting these
standards may result in postponement or cancellation of our clients decisions to purchase our
solutions. If our software solutions and healthcare devices are not consistent with these evolving standards, our market position and sales
could be impaired and we may
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have to invest significantly in changes to our software solutions and healthcare devices,
although we do not expect such costs to be significant in relation to the overall development costs
for our solutions.
We operate in intensely competitive and dynamic industries, and our ability to successfully compete
and continue to grow our business depends on our ability to respond quickly to market changes and
changing technologies and to bring competitive new solutions, devices, features and services to
market in a timely fashion. The market for healthcare information systems, healthcare devices,
healthcare transactions and life sciences consulting services are intensely competitive,
dynamically evolving and subject to rapid technological and innovative changes. Development of new
proprietary technology or services is complex, entails significant time and expense and may not be
successful. We cannot guarantee that we will be able to introduce new solutions, devices or
services on schedule, or at all, nor can we guarantee that errors will not be found in our new
solution releases, devices or services before or after commercial release, which could result in
solution, device or service delivery redevelopment costs and loss of, or delay in, market
acceptance.
Certain of our competitors have greater financial, technical, product development, marketing and
other resources than us and some of our competitors offer software solutions that we do not offer.
Our principal existing competitors are set forth above under Part I, Item 1 Competition.
In addition, we expect that major software information systems companies, large information
technology consulting service providers and system integrators, start-up companies and others
specializing in the healthcare industry may offer competitive software solutions, devices or
services. We face strong competitors and often face downward price pressure, which could adversely
affect our results of operations or liquidity. Additionally, the pace of change in the healthcare
information systems market is rapid and there are frequent new software solution introductions,
software solution enhancements, device introductions, device enhancements and evolving industry
standards and requirements. There are a limited number of hospitals and other healthcare providers
in the United States HIT market and in recent years, the healthcare industry has been subject to
increasing consolidation. As the industry consolidates, costs fall, technology improves, and
market factors continue to compel investment by healthcare organizations in solutions and services
like ours, market saturation in the United States may change the competitive landscape in favor of
larger, more diversified competitors with greater scale.
Risks Related to Our Stock
The ongoing adverse financial market environment and uncertainty in global economic conditions
could negatively affect our business, results of operations and financial condition. Our operating
results may be impacted by the health of the global economy. Adverse economic conditions may cause
a slowdown or decline in client spending which could adversely affect our business and financial
performance. Our business and financial performance, including new business bookings and
collection of our accounts receivable, may be adversely affected by current and future economic
conditions (including a reduction in the availability of credit, higher energy costs, rising
interest rates, financial market volatility and recession) 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, the ongoing global financial crisis may also limit our ability
to access the capital markets at a time when we would like, or need, to raise capital, which could
have an impact on our ability to react to changing economic and business conditions. Accordingly,
if the global financial crisis and current economic downturn continue or worsen, our business,
results of operations and financial condition could be materially and adversely affected.
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 accounting policy changes, demand for
our solutions, devices and services, the financial condition of our clients and potential clients,
our long sales cycle, potentially long installation and implementation cycles for larger, more
complex and higher-priced systems and other factors described in this section and elsewhere in this
report. As a
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result of healthcare industry trends and the market for our Cerner Millennium
solutions, a large percentage of our revenues are generated by the sale and installation of larger,
more complex and higher-priced systems. The sales
process for these systems is lengthy and involves a significant technical evaluation and commitment
of capital and other resources by the client. Sales may be subject to delays due to changes in
clients internal budgets, procedures for approving large capital expenditures, competing needs for
other capital expenditures, availability of personnel resources and by actions taken by
competitors. Delays in the expected sale, installation or implementation of these large systems
may have a significant impact on our anticipated quarterly revenues and consequently our earnings,
since a significant percentage of our expenses are relatively fixed.
Revenue recognized in any quarter may depend upon our and our clients abilities to meet project
milestones. Delays in meeting these milestone conditions or modification of the project plan could
result in a shift of revenue recognition from one quarter to another and could have a material
adverse effect on results of operations for a particular quarter.
Our revenues from system sales historically have been lower in the first quarter of the year and
greater in the fourth quarter of the year, primarily as a result of clients year-end efforts to
make all final capital expenditures for the then-current year.
Our sales forecasts may vary from actual sales in a particular quarter. We use a pipeline
system, a common industry practice, to forecast sales and trends in our business. Our sales
associates monitor the status of all sales opportunities, such as the date when they estimate that
a client will make a purchase decision and the potential dollar amount of the sale. These
estimates are aggregated periodically to generate a sales pipeline. We compare this pipeline at
various points in time to evaluate trends in our business. This analysis provides guidance in
business planning and forecasting, but these pipeline estimates are by their nature speculative.
Our pipeline estimates are not necessarily reliable predictors of revenues in a particular quarter
or over a longer period of time, partially because of changes in the pipeline and in conversion
rates of the pipeline into contracts that can be very difficult to estimate. A negative variation
in the expected conversion rate or timing of the pipeline into contracts, or in the pipeline
itself, could cause our plan or forecast to be inaccurate and thereby adversely affect business
results. For example, a slowdown in information technology spending, adverse economic conditions
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, rumors about our performance or solutions,
devices and services, changes in expectations of future financial performance or estimates of
securities analysts, governmental regulatory action, healthcare reform measures, client
relationship developments, changes occurring in the securities markets in general and other
factors, many of which are beyond our control. As a matter of policy, we do not generally comment
on our stock price or rumors.
Furthermore, the stock market in general, and the markets for software, healthcare devices, other
healthcare solutions and services and information technology companies in particular, have
experienced extreme volatility that often has been unrelated to the operating performance of
particular companies. These broad market and industry fluctuations may adversely affect the
trading price of our common stock, regardless of actual operating performance.
Our Directors have authority to issue preferred stock and our corporate governance documents
contain anti-takeover provisions. Our Board of Directors has the authority to issue up to
1,000,000 shares of preferred stock and to determine the preferences, rights and privileges of
those shares without any further vote or action by the shareholders. The rights of the holders of
common stock may be harmed by rights granted to the holders of any preferred stock that may be
issued in the future.
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In addition, some provisions of our Certificate of Incorporation and Bylaws could make it more
difficult for a potential acquirer to acquire a majority of our outstanding voting stock. These
include provisions that provide for a classified board of directors, prohibit shareholders from
taking action by written consent and restrict the ability of
shareholders to call special meetings. We are also subject to provisions of Delaware law that
prohibit us from engaging in any business combination with any interested shareholder for a period
of three years from the date the person became an interested shareholder, unless certain conditions
are met, which could have the effect of delaying or preventing a change of control.
Factors that May Affect Future Results of Operations, Financial Condition or Business
Statements made in this report, the Annual Report to Shareholders of which this report is made a
part, other reports and proxy statements filed with the Securities and Exchange Commission,
communications to shareholders, press releases and oral statements made by representatives of the
Company that are not historical in nature, or that state the Companys or managements intentions,
hopes, beliefs, expectations or predictions of the future, may constitute forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended
(the Exchange Act). Forward-looking statements can often be identified by the use of
forward-looking terminology, such as could, should, will, intended, continue, believe,
may, expect, hope, anticipate, goal, forecast, plan, guidance or estimate or the
negative of these words, variations thereof or similar expressions. Forward-looking statements are
not guarantees of future performance or results. They involve risks, uncertainties and
assumptions. It is important to note that any such performance and actual results, financial
condition or business, could differ materially from those expressed in such forward-looking
statements. Factors that could cause or contribute to such differences include, but are not
limited to, those discussed in this Item 1A. Risk Factors and elsewhere herein or in other reports
filed with the SEC. Other unforeseen factors not identified herein could also have such an effect.
We undertake no obligation to update or revise forward-looking statements to reflect changed
assumptions, the occurrence of unanticipated events or changes in future operating results,
financial condition or business over time.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our properties consist mainly of owned and leased office and data center facilities.
Our United States corporate world headquarters operations are located in a Company-owned office
park (the Headquarters Campus) in North Kansas City, Missouri, containing approximately 1.1 million
gross square feet of useable space and land capable of housing approximately 300,000 square feet of
future building development. The Headquarters Campus primarily houses office space, but also
includes space for other business needs, such as our Healthe Clinic and our Headquarters Campus
data center.
In December 2009, we purchased approximately 790,000 gross square feet of property located in
Kansas City, Missouri, which we had previously occupied under a long-term lease since 2007. This
office space, known as the Innovation Campus, houses associates from our intellectual property
organizations.
Our Cerner-operated data center facilities, which are used to provide remote hosting, disaster
recovery and other services to our clients, are located at the Headquarters Campus and a leased
facility in Lees Summit, Missouri.
As of the end of 2009, we leased additional office space in Beverly Hills and Garden Grove,
California; Denver, Colorado; Overland Park, Kansas; Waltham, Massachusetts; Minneapolis and
Rochester, Minnesota; N. Kansas City, Missouri; Blue Bell, Pennsylvania; and Vienna, Virginia.
Globally, we also leased office space in: Brisbane, Sydney and Melbourne, Australia;
London-Ontario, Canada; Santiago, Chile; Hong Kong, China; London, England; Paris,
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France;
Herzogenrath and Idstein, Germany; Bangalore, India; Dublin, Ireland; Kuala Lumpur, Malaysia;
Riyadh, Saudi Arabia; Singapore; Barcelona and Madrid, Spain; and, Abu Dhabi and Dubai, United Arab
Emirates.
Item 3. Legal Proceedings
We have no material pending litigation.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the shareholders of the Company during the fourth quarter of
the fiscal year ended January 2, 2010.
Executive Officers of the Registrant
The following table sets forth the names, ages, positions and certain other information regarding
the Companys executive officers as of February 16, 2010. Officers are elected annually and serve
at the discretion of the Board of Directors.
Name | Age | Positions | ||||
Neal L. Patterson
|
60 | Chairman of the Board of Directors and Chief Executive Officer | ||||
Clifford W. Illig
|
59 | Vice Chairman of the Board of Directors | ||||
Earl H. Devanny, III
|
58 | President | ||||
Marc G. Naughton
|
54 | Senior Vice President and Chief Financial Officer | ||||
Michael R. Nill
|
45 | Executive Vice President and Chief Engineering Officer | ||||
Randy D. Sims
|
49 | Vice President, Chief Legal Officer and Secretary | ||||
Jeffrey A. Townsend
|
46 | Executive Vice President | ||||
Mike Valentine
|
41 | Executive Vice President and Chief Operating Officer | ||||
Julia M. Wilson
|
47 | Senior Vice President and Chief People Officer |
Neal L. Patterson has been Chairman of the Board of Directors and Chief Executive Officer of the
Company for more than five years. Mr. Patterson also served as President of the Company from March
of 1999 until August of 1999.
Clifford W. Illig has been a Director of the Company for more than five years. He also served as
Chief Operating Officer of the Company for more than five years until October 1998 and as President
of the Company for more than five years until March of 1999. Mr. Illig was appointed Vice Chairman
of the Board of Directors in March of 1999.
Earl H. Devanny, III joined the Company in August of 1999 as President. Mr. Devanny also served as
interim President of Cerner Southeast from January 2003 through July 2003. Prior to joining the
Company, Mr. Devanny served as president of ADAC Healthcare Information Systems, Inc. Prior to
joining ADAC, Mr. Devanny served as a Vice President of the Company from 1994 to 1997. Prior to
that he spent 17 years with IBM Corporation.
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Marc G. Naughton joined the Company in November 1992 as Manager of Taxes. In November 1995 he was
named Chief Financial Officer and in February 1996 he was promoted to Vice President. He was
promoted to Senior Vice President in March 2002.
Michael R. Nill joined the Company in November, 1996. Since that time he has held several
positions in the Technology, Intellectual Property and CernerWorks client hosting organizations.
He was promoted to Vice President in January 2000, promoted to Senior Vice President in April 2006
and promoted to Executive Vice President and named Chief Engineering Officer in February 2009.
Randy D. Sims joined the Company in March 1997 as Vice President and Chief Legal Officer. Prior to
joining the Company, Mr. Sims worked at Farmland Industries, Inc. for three years where he served
most recently as Associate General Counsel. Prior to Farmland, Mr. Sims was in-house legal counsel
at The Marley Company for seven years, holding the position of Assistant General Counsel when he
left to join Farmland.
Jeffrey A. Townsend joined the Company in June 1985. Since that time he has held several positions
in the Intellectual Property Organization and was promoted to Vice President in February 1997. He
was appointed Chief Engineering Officer in March 1998, promoted to Senior Vice President in March
2001 and promoted to Executive Vice President in March 2005.
Mike Valentine joined the Company in December 1998 as Director of Technology. He was promoted to
Vice President in 2000 and to President of Cerner Mid America in January of 2003. In February
2005, he was named General Manager of the United States Client Organization and was promoted to
Senior Vice President in March 2005. He was promoted to Executive Vice President in March 2007 and
named Chief Operation Officer in January 2010. Prior to joining the Company, Mr. Valentine was
with Accenture Consulting.
Julia M. Wilson joined the Company in November 1995. Since that time, she has held several
positions in the Functional Group Organization. She was promoted to Vice President and Chief
People Officer in August 2003 and to Senior Vice President in March 2007.
PART II
Item 5. Market for the Registrants Common Equity and 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 2009 and
2008 as reported by The Nasdaq Stock Market®.
2009 | 2008 | |||||||||||||||||||||||
High | Low | Last | High | Low | Last | |||||||||||||||||||
First Quarter |
$ | 46.40 | $ | 33.72 | $ | 43.29 | $ | 59.59 | $ | 38.40 | $ | 38.40 | ||||||||||||
Second Quarter |
63.82 | 41.88 | 60.05 | 48.17 | 37.28 | 45.70 | ||||||||||||||||||
Third Quarter |
75.17 | 56.80 | 72.50 | 49.34 | 43.21 | 47.32 | ||||||||||||||||||
Fourth Quarter |
85.51 | 73.53 | 82.44 | 45.08 | 31.58 | 39.18 |
At February 16, 2010, there were approximately 1,106 owners of record. To date, we have paid no
cash dividends and we do not intend to pay cash dividends in the foreseeable future. We believe it
is in the shareholders best interest for us to reinvest funds
in the operation of the business. In March 2008, our Board of Directors authorized a stock repurchase program for $45 million of
our Common Stock. There were no shares repurchased by us during the quarter or the year ended
January 2, 2010.
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Item 6. Selected Financial Data
(In thousands, except per share data) | 2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||
(1) | (1)(2) | (1)(3)(4)(5) | (1)(6) | (7)(8) | ||||||||||||||||
Statement of Earnings Data: |
||||||||||||||||||||
Revenues |
$ | 1,671,864 | $ | 1,676,028 | $ | 1,519,877 | $ | 1,378,038 | $ | 1,160,785 | ||||||||||
Operating earnings |
292,006 | 278,885 | 204,083 | 166,167 | 140,436 | |||||||||||||||
Earnings before income taxes |
292,681 | 281,431 | 203,967 | 167,544 | 135,244 | |||||||||||||||
Net earnings |
193,465 | 188,658 | 127,125 | 109,891 | 86,251 | |||||||||||||||
Earnings per share: |
||||||||||||||||||||
Basic |
2.39 | 2.34 | 1.60 | 1.41 | 1.16 | |||||||||||||||
Diluted |
2.31 | 2.26 | 1.53 | 1.34 | 1.10 | |||||||||||||||
Weighted average shares outstanding: |
||||||||||||||||||||
Basic |
80,981 | 80,549 | 79,395 | 77,691 | 74,144 | |||||||||||||||
Diluted |
83,882 | 83,435 | 83,218 | 81,723 | 78,090 | |||||||||||||||
Balance Sheet Data: |
||||||||||||||||||||
Working capital |
$ | 788,232 | $ | 517,650 | $ | 530,441 | $ | 444,656 | $ | 391,541 | ||||||||||
Total assets |
2,148,567 | 1,880,988 | 1,689,956 | 1,496,433 | 1,303,629 | |||||||||||||||
Long-term debt, excl. current installments |
95,506 | 111,370 | 177,606 | 187,391 | 194,265 | |||||||||||||||
Cerner Corporation stockholders equity |
1,580,678 | 1,311,009 | 1,132,428 | 922,294 | 760,533 |
(1) | Includes share-based compensation expense recognized in accordance with ASC 718, Stock Compensation. The impact of including this expense is a $10.6 million decrease, net of $6.3 million tax benefit, in net earnings and a decrease to diluted earnings per share of $0.12 in 2009, $9.5 million decrease, net of $5.6 million tax benefit, in net earnings and a decrease to diluted earnings per share of $0.11 in 2008, a $10.2 million decrease, net of $6.0 million tax benefit, in net earnings and a decrease to diluted earnings per share of $0.12 in 2007 and a $11.7 million decrease, net of $7.3 million tax benefit, in net earnings and a decrease to diluted earnings per share of $0.14 in 2006. | |
(2) | Includes expense related to a settlement with a third party provider of software related to the use of the third partys software in our remote hosting business. The settlement included compensation for the use of the software for periods prior to 2008 as well as compensation for licenses of the software for future use for existing and additional clients through January 2009. Of the total settlement amount, we determined that $5.0 million should have been recorded in prior periods, primarily 2005 through 2007. Based on this valuation, 2008 results include an increase of $8.0 million to sales and client service expense, a decrease of $5.0 million to net earnings, and a decrease of $0.06 to diluted earnings per share that are attributable to prior periods. | |
(3) | Includes a research and development write-off related to the RxStation® medication dispensing devices. In connection with production and delivery of the RxStation medication dispensing devices, we reviewed the accounting treatment for the RxStation line of devices and determined that $8.6 million of research and development activities for the RxStation medication dispensing devices that should have been expensed was incorrectly capitalized. The impact of this charge is a $5.4 million decrease, net of $3.2 million tax benefit, in net earnings and a decrease to diluted earnings per share of $0.06 in the year ended December 29, 2007. $2.1 million of this $5.4 million after tax amount recorded in 2007 related to periods prior to 2007. | |
(4) | Includes a $3.1 million tax benefit recorded in 2007 related to periods prior to 2007. The tax benefit relates to the over-expensing of state income taxes, which resulted in an increase to diluted earnings per share of $0.04 in the year ended December 29, 2007. |
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(5) | Includes an adjustment to correct the amounts previously reported for the second quarter of 2007 for a previously disclosed out-of-period tax item relating to foreign net operating losses. The effect of this adjustment increases tax expense for the year ended December 29, 2007, by $4.2 million and increases January 1, 2005 retained earnings (Shareholders Equity) by the same amount. | |
(6) | Includes a tax benefit of $2.0 million for adjustments relating to prior periods. This results in an increase to diluted earnings per share of $0.02. | |
(7) | Includes a tax benefit of $4.8 million relating to the carry-back of a capital loss generated by the sale of Zynx Health Incorporated (Zynx) in the first quarter of 2004. The impact of this refund claim is a $4.8 million increase in net earnings and an increase in diluted earnings per share of $0.06 for 2005. | |
(8) | Includes a charge for the write-off of acquired in process research and development related to the acquisition of the medical business division of VitalWorks, Inc. The impact of this charge is a $3.9 million decrease, net of $2.4 million tax benefit, in net earnings and a decrease to diluted earnings per share of $0.05 for 2005. |
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following Management Discussion and Analysis (MD&A) is intended to help the reader understand
our results of operations and financial condition. This MD&A is provided as a supplement to, and
should be read in conjunction with, our financial statements and the accompanying notes to the
financial statements (Notes).
Our fiscal year ends on the Saturday closest to December 31. Fiscal year 2009 consisted of 52
weeks and ended on January 2, 2010; fiscal year 2008 consisted of 53 weeks and ended on January 3,
2009; and fiscal year 2007 consisted of 52 weeks and ended on December 29, 2007. All references to
years in this MD&A represent fiscal years unless otherwise noted.
Management Overview
Our revenues are primarily derived by selling, implementing and supporting software solutions,
clinical content, hardware, healthcare devices and services that allow healthcare providers to
securely access clinical, administrative and financial data in real time, allowing them to improve
the quality, safety and efficiency in the delivery of healthcare. We implement the healthcare
solutions as stand-alone, combined or enterprise-wide systems. Cerner Millennium® software
solutions can be managed by our clients or in our data center via a managed services model.
Our fundamental strategy centers on creating organic growth by investing in research and
development (R&D) to create solutions and services for the healthcare industry. This strategy has
driven strong growth over the long-term, as reflected in five- and ten-year compound annual revenue
growth rates of 13% or more. This growth has also created a very strategic footprint in
healthcare, with
Cerner®
solutions licensed by over 8,500 facilities, including approximately 2,300
hospitals; 3,400 physician practices with over 30,000 physicians; 600 ambulatory facilities, such
as laboratories, ambulatory centers, cardiac facilities, radiology
clinics and surgery centers; 700
home health facilities; and 1,500 retail pharmacies. Selling additional solutions back into this
client base is an important element of our future revenue growth. We are also focused on driving
growth through market share expansion by replacing competitors in healthcare settings that are
looking to replace their current HIT partners or those who have not yet strategically aligned with
a supplier. We expect the HITECH provisions in ARRA will create a period of increased demand
within the United States during which we believe we can gain additional market share. We also
expect to drive growth through new initiatives and services that reflect our ongoing ability to
innovate and expand our reach into healthcare. Examples of these
include our CareAware® healthcare
device architecture and devices, Healthe employer services, Cerner ITWorksSM services, Cerner
RevWorksSM services, physician practice solutions and solutions and services for the pharmaceutical
market. Finally, we are focused on selling our solutions and services outside of the United
States. Many non-U.S. markets have a low penetration of HIT
20
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solutions and their governing bodies
are in many cases focused on HIT as part of their strategy to improve the quality and lower the
cost of healthcare.
Beyond our strategy for driving revenue growth, we are also focused on earnings growth. Similar to
our history of growing revenue, our net earnings have increased at more than 20% compound annual
rates over five- and ten-year periods. We believe we can continue driving strong levels of
earnings growth by continuing to grow revenue while also leveraging key areas to create operating
margin expansion. The primary areas of opportunity for margin expansion include:
| becoming more efficient at implementing our software by leveraging implementation tools and methodologies we have developed that can reduce the amount of effort required to implement our software; | ||
| leveraging our investments in R&D by addressing new markets that do not require significant incremental R&D but can contribute significantly to revenue growth; and, | ||
| leveraging our scalable business infrastructure to reduce the rate of increase in general and administrative spending to below our revenue growth rate. |
We are also focused on increasing cash flow by growing earnings, reducing the use of working
capital and controlling capital expenditures.
Results Overview
In a challenging economic environment, we continued to execute on our core strategies to drive
top-line growth, expand operating margins, grow earnings and generate good cash flow in 2009. The
2009 results included strong levels of new business bookings, earnings and cash flow.
New business bookings revenue in 2009, which reflects the value of executed contracts for software,
hardware, professional services and managed services, was $1.83 billion, which is an increase of
19% compared to $1.54 billion in 2008. This growth was concentrated in the second half of 2009,
which included strong bookings growth that offset slight declines in the first half of the year.
The improvement in the second half of the year reflects slightly better economic conditions and
some early demand driven by the HITECH stimulus incentives.
Our 2009 revenues remained flat at $1.7 billion as compared to 2008, with the lack of growth
largely the result of the challenging economic conditions that persisted through much of the year.
Additionally, our revenue comparisons in 2009 were impacted by a $28.6 million cumulative catch-up
adjustment recognized in the fourth quarter of 2008, resulting from a significant change in an
accounting estimate related to our contract in London as part of the NHS initiative to automate
clinical processes and digitize medical records in England.
Our 2009 net earnings increased 3% to $193.5 million compared to $188.7 million in 2008. Diluted
earnings per share increased 2% to $2.31 compared to $2.26 in 2008. The 2009 and 2008 net earnings
and diluted earnings per share reflect the impact of accounting for stock-based compensation using
the fair value method to measure and record expense for stock options, pursuant to Accounting
Standards Codification (ASC), 718, Stock Compensation. The effect of these expenses reduced the
2009 net earnings and diluted earnings per share by $10.5 million and $0.12, and the 2008 earnings
and diluted earnings per share by $9.5 million and $0.11, respectively. Our 2008 net earnings also
include the previously discussed cumulative catch-up adjustment. The after-tax effect of this
catch-up increased 2008 net earnings and diluted earnings per share by $20.6 million and $0.24,
respectively. The growth in net earnings and diluted earnings per share was driven primarily by
continued progress with our margin expansion initiatives, particularly expanding the profitability
of support and maintenance revenue, leveraging R&D investments, and controlling sales and client
services expenses, partially offset by the 2008 catch-up adjustment. Our 2009 operating margin was
17.5%, compared to 16.6% in 2008, and we remain on target to achieve our long term goal of 20%
operating margins.
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We had cash collections of receivables of $1.8 billion in 2009 compared to $1.7 billion in
2008. Days sales outstanding decreased to 90 days for the 2009 fourth quarter compared to 105 days
for 2009 third quarter and 92 days for the 2008 fourth quarter. Approximately 12 days of this
quarterly decline is driven by the reclassification of our Fujitsu receivables to other long term
assets, which are not included in our days sales outstanding calculation. The remaining decline is
reflective of improved cash collections. Operating cash flows for 2009 were $347.3 million
compared to $281.8 million in 2008, with the growth driven by increased earnings and decreased use
of working capital.
Healthcare Information Technology Market Outlook
We have provided a detailed assessment of the healthcare information technology market under Part
I, Item 1, The Healthcare and Healthcare IT Industry.
Results of Operations
Fiscal Year 2009 Compared to Fiscal Year 2008
% of | % of | |||||||||||||||||||
(in thousands) | 2009 | Revenue | 2008 | Revenue | % Change | |||||||||||||||
Revenues |
||||||||||||||||||||
System sales |
$ | 504,561 | 30% | $ | 522,373 | 31% | -3 | % | ||||||||||||
Support and maintenance |
493,193 | 29% | 472,579 | 28% | 4 | % | ||||||||||||||
Services |
643,678 | 39% | 643,317 | 38% | 0 | % | ||||||||||||||
Reimbursed travel |
30,432 | 2% | 37,759 | 2% | -19 | % | ||||||||||||||
Total revenues |
1,671,864 | 100% | 1,676,028 | 100% | 0 | % | ||||||||||||||
Costs of revenue |
||||||||||||||||||||
Costs of revenue |
281,198 | 17% | 296,063 | 18% | -5 | % | ||||||||||||||
Total margin |
1,390,666 | 83% | 1,379,965 | 82% | 1 | % | ||||||||||||||
Operating expenses |
||||||||||||||||||||
Sales and client |
700,639 | 42% | 715,512 | 43% | -2 | % | ||||||||||||||
Software development |
271,051 | 16% | 272,519 | 16% | -1 | % | ||||||||||||||
General and administrative |
126,970 | 8% | 113,049 | 7% | 12 | % | ||||||||||||||
Total operating expenses |
1,098,660 | 66% | 1,101,080 | 66% | 0 | % | ||||||||||||||
Total costs and expenses |
1,379,858 | 83% | 1,397,143 | 83% | -1 | % | ||||||||||||||
Operating earnings |
292,006 | 17% | 278,885 | 17% | 5 | % | ||||||||||||||
Interest income (expense), net |
308 | 3,056 | ||||||||||||||||||
Other income (expense), net |
367 | (510 | ) | |||||||||||||||||
Income taxes |
(99,216 | ) | (92,773 | ) | ||||||||||||||||
Net earnings |
$ | 193,465 | $ | 188,658 | 3 | % | ||||||||||||||
As discussed in the results overview, our 2008 consolidated and global segment revenues and margin
included a cumulative catch-up adjustment recognized in the fourth quarter, in the amount of $28.6
million, resulting from a significant change in accounting estimate related to our contract in
London. The majority of the catch-up
adjustment revenue was included in support, maintenance and services. Refer to Note (1a) of the
notes to consolidated financial statements for more information on this adjustment.
Revenues & Backlog
Revenues were $1.7 billion in 2009, which is flat compared to 2008.
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| System sales, which include revenues from the sale of software, technology resale (hardware and sublicensed software), deployment period licensed software upgrade rights, installation fees, transaction processing and subscriptions, decreased 3% to $504.6 million in 2009 from $522.4 million in 2008. The decrease in system sales was driven by a decline in technology resale, with licensed software basically flat and subscriptions increasing slightly. | ||
| Support and maintenance revenues increased 4% to $493.2 million in 2009 compared to $472.6 million in 2008. This increase is attributable to continued success at selling Cerner Millennium applications, implementing them at client sites and initiating billing for support and maintenance fees. The growth rate of support and maintenance revenue was negatively impacted by the extra week in 2008 (53) compared to 2009 (52) and the catch-up adjustment in 2008. | ||
| Services revenue, which includes professional services excluding installation, and managed services, remained flat, with growth in CernerWorksSM managed services being offset by declines in professional services. The decline in professional services reflects the impact of the economy and lower billable headcount in 2009 compared to 2008. |
Contract backlog, which reflects new business bookings that have not yet been recognized as
revenue, increased 23% in 2009 compared to 2008. This increase was driven by growth in new
business bookings during the past four quarters, including continued strong levels of managed
services bookings that typically have longer contract terms. In the second quarter of 2008,
contract backlog was reduced by approximately $178.0 million as a result of the contract withdrawal
by Fujitsu Limited as the prime contractor in the southern region of England. A summary of our
total backlog for 2009 and 2008 follows:
(In thousands) | 2009 | 2008 | ||||||
Contract backlog |
$ | 3,591,026 | $ | 2,907,762 | ||||
Support and maintenance backlog |
620,616 | 580,915 | ||||||
Total backlog |
$ | 4,211,642 | $ | 3,488,677 | ||||
Costs of Revenue
Cost of revenues was 17% of total revenues in 2009, as compared to 18% in 2008, with the slightly
lower level reflective of the decline in technology resale, which includes higher third party
costs. The cost of revenues includes the cost of reimbursed travel expense, sales commissions,
third party consulting services and subscription content, computer hardware and sublicensed
software purchased from hardware and software 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, maintenance, support, services and reimbursed travel) carrying different
margin rates changes from period to period. Costs of revenues does not include the costs of our
client service personnel who are responsible for delivering our service offerings, such costs are
included in sales and client service expense.
Operating Expenses
Total operating expenses remained flat in 2009 at $1.1 billion as compared to 2008. Accounting
pursuant to ASC 718, which results in the expensing of share-based compensation, impacted expenses
in 2009 and 2008 as indicated below:
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(In thousands) | 2009 | 2008 | ||||||
Sales and client service expenses |
$ | 7,552 | $ | 7,750 | ||||
Software development expense |
4,374 | 3,232 | ||||||
General and administrative expenses |
4,916 | 4,162 | ||||||
Total stock-based compensation expense |
$ | 16,842 | $ | 15,144 | ||||
| Sales and client service expenses as a percent of total revenues were 42% in 2009, as compared to 43% in 2008. These expenses decreased 2% to $700.6 million in 2009, from $715.5 million in 2008. Sales and client service expenses include salaries of sales and client service personnel, depreciation and other expenses associated with our CernerWorks managed service business, communications expenses, unreimbursed travel expenses, expense for share-based payments, sales and marketing salaries and trade show and advertising costs. The decrease was primarily attributable to lower professional services expense, partially offset by growth in the managed services business. | ||
| Software development expense decreased 1% in 2009 to $271.1 million, from $272.5 million in 2008. Expenditures for software development in 2009 reflect continued development and enhancement of the Cerner Millennium platform and software solutions and investments in new growth initiatives. A summary of our total software development expense in 2009 and 2008 is as follows: |
(In
thousands) |
2009 | 2008 | ||||||
Software development costs |
$ | 285,187 | $ | 291,368 | ||||
Capitalized software costs |
(76,876 | ) | (69,039 | ) | ||||
Capitalized costs related to share-based payments |
(871 | ) | (942 | ) | ||||
Amortization of capitalized software costs |
63,611 | 51,132 | ||||||
Total software development expense |
$ | 271,051 | $ | 272,519 | ||||
| General and administrative expenses as a percent of total revenues were 8% in 2009, as compared to 7% in 2008. These expenses increased 12% to $127.0 million in 2009 from $113.0 million in 2008. General and administrative expenses include salaries for corporate, financial and administrative staff, utilities, communications expenses, professional fees, the transaction gains or losses on foreign currency and expense for share-based payments. We recorded a net transaction gain on foreign currency of $4.0 million and $9.9 million in 2009 and 2008, respectively. The lower gain in 2009 compared to 2008 was the primary reason for the increase in general and administrative expenses, with the balance driven by legal fees and other corporate expenses. |
Non-Operating Items
| Net interest income was $0.3 million in 2009, compared with net interest income of $3.1 million in 2008. Interest income decreased to $8.8 million in 2009 from $13.6 million in 2008, due primarily to a decline in investment returns. Interest expense decreased to $8.5 million in 2009 from $10.5 million in 2008, due primarily to a reduction in long-term debt. | ||
| Other income was $0.4 million in 2009, compared to other expense of $0.5 million in 2008. Other income and expense in 2009 and 2008 includes offsetting unrealized gains and losses included in earnings related to our auction rate securities and put-like settlement feature in the amounts of $10.5 million and $19.9 million, respectively. Refer to Liquidity and Capital Resources within this MD&A and Notes 3 and 4 of the notes to consolidated financial statements for additional information on our auction rate securities. | ||
| Our effective tax rate was 34% and 33% in 2009 and 2008, respectively. This net increase is primarily due to higher tax expense recorded at the statutory rates of approximately $5.0 million and prior period tax |
24
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expense of $2.3 million, offset by a decrease in our unrecognized tax benefits of $5.6 million. The tax rate for 2008 was slightly lower than normal due to strong income levels from global regions that have lower tax rates. Tax expense for 2009 includes expense of approximately $2.3 million and 2008 includes benefits of approximately $2.9 million for corrections relating to prior periods. |
Operations by Segment
We have two operating segments, Domestic and Global. The Domestic segment includes
revenue contributions and expenditures associated with business activity in the United States. The
Global segment includes revenue contributions and expenditures linked to business activity in
Aruba, Australia, Austria, Belgium, Canada, Cayman Islands, Chile, China (Hong Kong), Egypt,
England, France, Germany, India, Ireland, Malaysia, Puerto Rico, Saudi Arabia, Singapore, Spain,
Sweden, Switzerland and the United Arab Emirates.
The following table presents a summary of our operating segment information for the years ended
2009 and 2008:
% of | % of | |||||||||||||||||||
(in thousands) | 2009 | Revenue | 2008 | Revenue | % Change | |||||||||||||||
Domestic Segment |
||||||||||||||||||||
Revenues |
$ | 1,398,715 | 100% | $ | 1,307,510 | 100% | 7 | % | ||||||||||||
Costs of revenue |
240,847 | 17% | 225,955 | 17% | 7 | % | ||||||||||||||
Operating expenses |
372,370 | 27% | 361,213 | 28% | 3 | % | ||||||||||||||
Total costs and expenses |
613,217 | 44% | 587,168 | 45% | 4 | % | ||||||||||||||
Domestic operating earnings |
785,498 | 56% | 720,342 | 55% | 9 | % | ||||||||||||||
Global Segment |
||||||||||||||||||||
Revenues |
273,149 | 100% | 368,518 | 100% | -26 | % | ||||||||||||||
Costs of revenue |
40,351 | 15% | 70,108 | 19% | -42 | % | ||||||||||||||
Operating expenses |
130,256 | 48% | 150,729 | 41% | -14 | % | ||||||||||||||
Total costs and expenses |
170,607 | 62% | 220,837 | 60% | -23 | % | ||||||||||||||
Global operating earnings |
102,542 | 38% | 147,681 | 40% | -31 | % | ||||||||||||||
Other, net |
(596,034 | ) | (589,138 | ) | 1 | % | ||||||||||||||
Consolidated operating earnings |
$ | 292,006 | $ | 278,885 | 5 | % | ||||||||||||||
Domestic Segment
| Revenues increased 7% to $1.4 billion in 2009 from $1.3 billion in 2008. This increase was driven by growth in managed services, licensed software, technology resale, and support and maintenance, partially offset by a decline in professional services. | ||
| Cost of revenues was 17% of revenues in both 2009 and 2008. | ||
| Operating expenses increased 3% to $372.4 million in 2009, from $361.2 million in 2008, due primarily to growth in managed services. | ||
| Operating earnings of the Domestic segment increased 9% to $785.5 million in 2009 from $720.3 million in 2008. |
Global Segment
| Revenues decreased 26% to $273.1 million in 2009 from $368.5 million in 2008. This decrease was driven by the previously discussed cumulative catch-up adjustment in 2008 and a decline in revenue from Middle Eastern and European countries resulting from the challenging global economic conditions. |
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| Cost of revenues was 15% and 19% of revenues in 2009 and 2008, respectively. The lower cost of revenues was driven by a lower mix of hardware revenues in 2009. | ||
| Operating expenses decreased 14% to $130.3 million in 2009, from $150.7 million in 2008, primarily due to a decrease in professional services expense. | ||
| Operating earnings of the Global segment decreased 31% to $102.5 million in 2009 from $147.7 million in 2008. This decline was driven by the catch-up adjustment in 2008 and the lower level of revenues in 2009. |
Other, net
Operating results not attributed to an operating segment include expenses, such as software
development, marketing, general and administrative, stock-based compensation and depreciation.
These expenses increased 1% to $596.0 million in 2009 from $589.1 million in 2008.
Fiscal Year 2008 Compared to Fiscal Year 2007
% of | % of | |||||||||||||||||||
(in thousands) | 2008 | Revenue | 2007 | Revenue | % Change | |||||||||||||||
Revenues |
||||||||||||||||||||
System sales |
$ | 522,373 | 31% | $ | 500,319 | 33% | 4 | % | ||||||||||||
Support and maintenance |
472,579 | 28% | 397,713 | 26% | 19 | % | ||||||||||||||
Services |
643,317 | 38% | 585,067 | 38% | 10 | % | ||||||||||||||
Reimbursed travel |
37,759 | 2% | 36,778 | 2% | 3 | % | ||||||||||||||
Total revenues |
1,676,028 | 100% | 1,519,877 | 100% | 10 | % | ||||||||||||||
Costs of revenue |
||||||||||||||||||||
Costs of revenue |
296,063 | 18% | 280,110 | 18% | 6 | % | ||||||||||||||
Total margin |
1,379,965 | 82% | 1,239,767 | 82% | 11 | % | ||||||||||||||
Operating expenses |
||||||||||||||||||||
Sales and client |
715,512 | 43% | 657,956 | 43% | 9 | % | ||||||||||||||
Software development |
272,519 | 16% | 270,576 | 18% | 1 | % | ||||||||||||||
General and administrative |
113,049 | 7% | 107,152 | 7% | 6 | % | ||||||||||||||
Total operating expenses |
1,101,080 | 66% | 1,035,684 | 68% | 6 | % | ||||||||||||||
Total costs and expenses |
1,397,143 | 83% | 1,315,794 | 87% | 6 | % | ||||||||||||||
Operating earnings |
278,885 | 17% | 204,083 | 13% | 37 | % | ||||||||||||||
Interest income (expense), net |
3,056 | 1,269 | ||||||||||||||||||
Other income (expense), net |
(510 | ) | (1,385 | ) | ||||||||||||||||
Income taxes |
(92,773 | ) | (76,842 | ) | ||||||||||||||||
Net earnings |
$ | 188,658 | $ | 127,125 | 48 | % | ||||||||||||||
As discussed in the results overview, our 2008 consolidated and global segment revenues and margin
included a cumulative catch-up adjustment recognized in the fourth quarter, in the amount of $28.6
million, resulting from a significant change in accounting estimate related to our contract in
London. The majority of the catch-up adjustment revenue was included in support, maintenance and
services. Refer to Note (1a) of the notes to consolidated financial statements for more information
on this adjustment.
Revenues and Backlog
Revenues increased 10% to $1.7 billion in 2008, compared with $1.5 billion in 2007.
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| System sales revenues increased 4% to $522.4 million in 2008 from $500.3 million in 2007. The increase in system sales was driven by growth in licensed software, sublicensed software and subscriptions. | ||
| Support and maintenance revenues increased 19% to $472.6 million in 2008 from $397.7 million in 2007, mainly due to continued success at selling Cerner Millennium applications, implementing them at client sites and initiating billing for support and maintenance fees. | ||
| Services revenue increased 10% to $643.3 million in 2008 from $585.1 million in 2007 primarily attributable to growth in CernerWorks managed services. |
Contract backlog, which reflects new business bookings that have not yet been recognized as
revenue, increased 7% in 2008 compared to 2007. This increase was driven by growth in new business
bookings during the past four quarters, including continued strong levels of managed services
bookings that typically have longer contract terms. In the second quarter of 2008, contract
backlog was reduced by approximately $178.0 million as a result of the contract withdrawal by the
prime contractor in the southern region of England. A summary of our total backlog for 2008 and
2007 follows:
(In thousands) | 2008 | 2007 | ||||||
Contract backlog |
$ | 2,907,762 | $ | 2,712,195 | ||||
Support and maintenance backlog |
580,915 | 541,095 | ||||||
Total backlog |
$ | 3,488,677 | $ | 3,253,290 | ||||
Costs of Revenue
Cost of revenues was 18% of total revenues in both 2008 and 2007. Such costs, as a percent of
revenues, typically have varied as the mix of revenue (software, hardware, maintenance, support,
services and reimbursed travel) carrying different margin rates changes from period to period.
Operating Expenses
Total operating expenses increased 6% to $1.1 billion in 2008 from $1.0 billion in 2007.
Accounting pursuant to ASC 718, which results in the expensing of share-based compensation,
impacted expenses in 2008 and 2007 as indicated below:
(In thousands) | 2008 | 2007 | ||||||
Sales and client service expenses |
$ | 7,750 | $ | 9,518 | ||||
Software development expense |
3,232 | 3,032 | ||||||
General and administrative expenses |
4,162 | 3,639 | ||||||
Total stock-based compensation expense |
$ | 15,144 | $ | 16,189 | ||||
| Sales and client service expenses as a percent of total revenues were 43% in both 2008 and 2007. These expenses increased 9% to $715.5 million in 2008, from $658.0 million in 2007. The increase was primarily attributable to growth in the managed services business, including $8.0 million of expense recorded in the second quarter of 2008 for a settlement with a third party provider of software related to the use of the third partys software in this business. | ||
| Total expense for software development in 2008 increased 1% to $272.5 million, from $270.6 million in 2007. Included in 2007 software development expense is $8.6 million of research and development activities for the RxStation® medical dispensing device. $3.4 million of this amount recorded in 2007 is related to periods prior to 2007. A summary of our total software development expense in 2008 and 2007 is as follows: |
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(In thousands) | 2008 | 2007 | ||||||
Software development costs |
$ | 291,368 | $ | 283,086 | ||||
Capitalized software costs |
(69,039 | ) | (64,789 | ) | ||||
Capitalized costs related to share-based payments |
(942 | ) | (1,196 | ) | ||||
Amortization of capitalized software costs |
51,132 | 53,475 | ||||||
Total software development expense |
$ | 272,519 | $ | 270,576 | ||||
| General and administrative expenses as a percent of total revenues were 7% in 2008 and 2007. These expenses increased 6% to $113.0 million in 2008 from $107.2 million in 2007. This increase was due primarily to the growth of our core business and increased presence in the global market. We recorded a net transaction gain on foreign currency of $9.9 million and $3.7 million in 2008 and 2007, respectively. |
Non-Operating Items
| Net interest income was $3.1 million in 2008, compared with net interest income of $1.3 million in 2007. Interest income increased to $13.6 million in 2008 from $13.2 million in 2007, due primarily to higher returns received from our investments in auction rate securities. Interest expense decreased to $10.5 million in 2008 from $11.9 million in 2007, due primarily to a reduction in long-term debt. | ||
| Other expense was $0.5 million in 2008, compared to $1.4 million in 2007. As a result of entering into a settlement agreement with an investment firm relating to auction rate securities, other expense in 2008 includes the recognition of a gain of $19.9 million for a put-like feature. This gain was offset by the recognition of an unrealized loss recorded on our auction rate securities due to a transfer of these securities from available-for-sale to trading. | ||
| Our effective tax rate was 33% and 38% in 2008 and 2007, respectively. This decrease is primarily due to a higher than normal rate in 2007. The effective rate in 2007 was impacted primarily by a recognition of a valuation allowance in the third quarter of 2007 on certain of our foreign tax loss carry-forwards. Such additional tax expense in 2007 was partially offset by a tax benefit for adjustments relating to prior periods. The tax rate for 2008 was slightly lower than normal due to strong income levels from global regions that have lower tax rates. | ||
During the second quarter of 2007, we determined that due to a change in circumstances in the quarter, it was more likely than not that certain tax operating loss carry-forwards in a non-U.S. jurisdiction would not be realized resulting in the recognition of a valuation allowance totaling approximately $8.0 million. The 2007 valuation allowance was used in 2008 to offset a reduction in the operating loss carry-forward for the non-U.S. jurisdiction. | |||
Tax expense for 2008 and 2007 include benefits of approximately $2.9 million and $3.1 million, respectively, for corrections relating to prior periods. |
Operations by Segment
The following table presents a summary of our operating segment information for the years ended
2008 and 2007:
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% of | % of | |||||||||||||||||||
(in thousands) | 2008 | Revenue | 2007 | Revenue | % Change | |||||||||||||||
Domestic Segment |
||||||||||||||||||||
Revenues |
$ | 1,307,510 | 100% | $ | 1,227,434 | 100% | 7 | % | ||||||||||||
Costs of revenue |
225,955 | 17% | 221,154 | 18% | 2 | % | ||||||||||||||
Operating expenses |
361,213 | 28% | 331,124 | 27% | 9 | % | ||||||||||||||
Total costs and expenses |
587,168 | 45% | 552,278 | 45% | 6 | % | ||||||||||||||
Domestic operating earnings |
720,342 | 55% | 675,156 | 55% | 7 | % | ||||||||||||||
Global Segment |
||||||||||||||||||||
Revenues |
368,518 | 100% | 290,677 | 100% | 27 | % | ||||||||||||||
Costs of revenue |
70,108 | 19% | 53,367 | 18% | 31 | % | ||||||||||||||
Operating expenses |
150,729 | 41% | 151,355 | 52% | 0 | % | ||||||||||||||
Total costs and expenses |
220,837 | 60% | 204,722 | 70% | 8 | % | ||||||||||||||
Global operating earnings |
147,681 | 40% | 85,955 | 30% | 72 | % | ||||||||||||||
Other, net |
(589,138 | ) | (557,028 | ) | 6 | % | ||||||||||||||
Consolidated operating earnings |
$ | 278,885 | $ | 204,083 | 37 | % | ||||||||||||||
Domestic Segment
| Revenues increased 7% to $1.3 billion in 2008 from $1.2 billion in 2007. This increase
was primarily driven by growth in managed services and support and
maintenance. |
||
|
Cost of revenues was 17% and 18% of revenues in 2008 and 2007, respectively. The
decline was driven primarily by a lower level of hardware sales. |
||
|
Operating expenses increased 9% to $361.2 million 2008, from $331.1 million in 2007, due
primarily to growth in managed services. |
||
|
Operating earnings of the Domestic segment increased 7% to $720.3 million in 2008 from
$675.2 million in 2007. |
Global Segment
|
Revenues increased 27% to $368.5 million in 2008 from $290.7 million in 2007. This
increase was primarily driven by an increase in sales in Europe and the Middle East and the
previously discussed cumulative catch-up adjustment. |
||
|
Cost of revenues was 19% and 18% of revenues in 2008 and 2007, respectively. The higher
cost of revenues was driven by a higher mix of hardware revenues in 2008. |
||
|
Operating expenses remained flat in 2008 as compared to 2007. |
||
|
Operating earnings of the Global segment increased 72% to $147.7 million in 2008 from
$86.0 million in 2007. |
Other, net
Net operating expenses not attributed to an operating segment increased 6% to $589.1 million in
2008 from $557.0 million in 2007. This increase was primarily due to increased research and
development and general and administrative spending and a settlement with a third party supplier in
the second quarter of 2008 related to the prior period usage of their software in our remote
hosting business. The third party supplier settlement increased expense by $8.0 million in the
second quarter of 2008.
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Liquidity and Capital Resources
Our liquidity is influenced by many factors, including the amount and timing of our revenues, our
cash collections from our clients, and the amount we invest in software development, acquisitions
and capital expenditures.
Our principal sources of liquidity are our cash, cash equivalents, which consist of money market
funds, time deposits and bonds with original maturities of less than 90 days and short-term
investments. At the end of 2009, we had cash of $144.8 million, cash equivalents of $97.0 million
and short-term investments of $317.1 million, as compared to cash of $199.5 million, cash
equivalents of $71.0 million and short-term investments of $38.4 million at the end of 2008.
We believe that our present cash position, together with cash generated from operations, short-term
investments and, if necessary, our available lines of credit, will be sufficient to meet
anticipated cash requirements during 2010.
During the second quarter of 2008, Fujitsu Services Limiteds (Fujitsu) contract as the prime
contractor in the National Health Service (NHS) initiative to automate clinical processes and
digitize medical records in the Southern region of England was terminated by the NHS. This had the
effect of automatically terminating our subcontract for the project. We are in dispute with
Fujitsu regarding Fujitsus obligation to pay the amounts comprised of accounts receivable and
contracts receivable related to that subcontract, and we are working with Fujitsu to resolve these
issues based on processes provided for in the contract. Part of that process requires resolution
of disputes between Fujitsu and the NHS regarding the contract termination. During the 2009 fourth
quarter certain events occurred in the resolution process between Fujitsu and the NHS which reduced
the likelihood the matter will be resolved in the next 12 months. Therefore we reclassified the
receivables, which represented more than 10% of our net receivables, from current assets to other
long term assets during the 2009 fourth quarter. These receivables represent the significant majority of other
long-term assets at the end of 2009. While the ultimate collectability of the receivables pursuant
to this process is uncertain, management believes that it has valid and equitable grounds for
recovery of such amounts and that collection of recorded amounts is probable.
In February and March 2008, liquidity issues in the global credit markets resulted in the
progressive failure of auctions representing all the auction rate securities held by us. These
conditions persisted through the remainder of 2008 and into 2009. During the fourth quarter of
2008, we entered into a settlement agreement with the investment firm that sold us the auction rate
securities. Under the terms of the settlement agreement, we received the right to redeem the
securities at par value during a period from mid-2010 through mid-2012. The settlement is in
effect a put-like instrument with a fair value generally equal to the difference between the
auction rate securities fair value and par value. In the fourth quarter of 2009, these securities
were reclassified to short term investments based on our intention to exercise the put-like
settlement feature and redeem the securities within the next year. At the end of 2009, we held
auction rate securities with a par value of $94.6 million and an estimated fair value of $85.2
million.
We anticipate that any future changes in the fair value of the put-like feature will be offset by
the changes in the fair value of the related auction rate securities with no material net impact to
the Consolidated Statements of Operations. For a more detailed discussion of the auction rate
securities, please refer to Note (3), Cash and Investments, in the Consolidated Financial
Statements. We do not expect the auction failures to impact our ability to fund our working
capital needs, capital expenditures or other business requirements.
The following table provides details about our cash flows in 2009, 2008 and 2007:
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For the Years Ended | ||||||||||||
(In thousands) | 2009 | 2008 | 2007 | |||||||||
Cash flows from operating activities |
$ | 347,291 | $ | 281,802 | $ | 274,565 | ||||||
Cash flows from investing activities |
(394,321 | ) | (170,607 | ) | (287,666 | ) | ||||||
Cash flows from financing activities |
16,770 | (11,654 | ) | 37,083 | ||||||||
Effect of exchange rate changes on cash |
1,489 | (11,961 | ) | (3,613 | ) | |||||||
Total change in cash and cash equivalents |
$ | (28,771 | ) | $ | 87,580 | $ | 20,369 | |||||
Cash Flows from Operating Activities
Cash flows from operations increased in 2009 due primarily
to the increase in cash impacting
earnings and decreased use of working capital. During 2009, 2008 and 2007, we received total
client cash collections of $1.8 billion, $1.7 billion and $1.6 billion, respectively, of which
approximately 3%, 5% and 5% were received from third party client financing arrangements and
non-recourse payment assignments, respectively. Days sales outstanding decreased to 90 days for the
2009 fourth quarter compared to 105 days for 2009 third quarter and 92 days for the 2008 fourth
quarter. Approximately 12 days of this quarterly decline is driven by the reclassification of our
Fujitsu receivables to other long term assets, which are not included in our days sales outstanding
calculation. The remaining decline is reflective of our improved cash collections. Revenues
provided under support and maintenance agreements represent recurring cash flows. Support and
maintenance revenues increased 4% in 2009 and 19% in 2008, and we expect these revenues to continue
to grow as the base of installed Cerner Millennium systems grows.
Cash Flows from Investing Activities
For the Years Ended | ||||||||||||
(In thousands) | 2009 | 2008 | 2007 | |||||||||
Capital purchases |
$ | (131,265 | ) | $ | (108,099 | ) | $ | (180,723 | ) | |||
Capitalized software development costs |
(77,747 | ) | (70,098 | ) | (66,063 | ) | ||||||
Purchases of investments, net of maturities |
(169,295 | ) | 17,510 | (13,277 | ) | |||||||
Other, net |
(16,014 | ) | (9,920 | ) | (27,603 | ) | ||||||
Total cash flows from investing activities |
$ | (394,321 | ) | $ | (170,607 | ) | $ | (287,666 | ) | |||
Cash flows from investing activities consists primarily of capital spending and our short-term
investment activities. Capital spending consists of capitalized equipment purchases primarily to
support growth in our CernerWorks managed services business, capitalized land, building and
improvement purchases to support our facilities requirements and capitalized spending to support
our ongoing software development initiatives. Capital spending in 2010 is expected to approximate
our 2009 levels.
Cash Flows from Financing Activities
For the Years Ended | ||||||||||||
(In thousands) | 2009 | 2008 | 2007 | |||||||||
Line of credit and long-term debt borrowings and repayments, net |
$ | (32,352 | ) | $ | (15,317 | ) | $ | (22,359 | ) | |||
Cash from option exercises (incl. excess tax benefits) |
47,234 | 24,530 | 59,442 | |||||||||
Purchase of treasury stock |
- | (28,002 | ) | - | ||||||||
Other, net |
1,888 | 7,135 | - | |||||||||
Total cash flows from financing activities |
$ | 16,770 | $ | (11,654 | ) | $ | 37,083 | |||||
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In November 2005, we completed a £65.0 million private placement of debt at 5.54% pursuant to a
Note Agreement. The Note Agreement is payable in seven equal annual installments, which commenced
in November 2009. The proceeds were used to repay the outstanding amount under our credit facility
and for general corporate purposes. The Note Agreement contains certain net worth and fixed charge
coverage covenants and provides certain restrictions on our ability to borrow, incur liens, sell
assets and pay dividends. We were in compliance with all covenants at the end of 2009.
In December 2002, we completed a $60.0 million private placement of debt pursuant to a Note
Agreement. The Series A Senior Notes, with a $21.0 million principal amount at 5.57% were paid in
full by the end of 2008. The Series B Senior notes, with a $39.0 million principal amount at
6.42%, are payable in four equal annual installments, which commenced in December 2009. The proceeds were used to repay the outstanding
amount under our credit facility and for general corporate purposes. The Note Agreement contains
certain net worth and fixed charge coverage covenants and provides certain restrictions on our
ability to borrow, incur liens, sell assets and pay dividends. We were in compliance with all
covenants at the end of 2009.
In April 1999, we completed a $100.0 million private placement of debt pursuant to a Note
Agreement. The Series A Senior Notes, with a $60.0 million principal amount at 7.14%, were paid in
full by the end of 2006. The Series B Senior Notes, with a $40.0 million principal amount at
7.66%, were paid in full by the end of 2009.
We maintain a $90 million, multi-year revolving credit facility, which provides an unsecured
revolving line of credit for working capital purposes. Interest is payable at a rate based on
prime or LIBOR plus a spread that varies depending on the net worth ratios maintained. The
agreement contains certain net worth, current ratio and fixed charge coverage covenants and
provides certain restrictions on our ability to borrow, incur liens, sell assets and pay dividends.
The current agreement expires on May 31, 2013. As of the end of 2009, we had no outstanding
borrowings under this agreement and were in compliance with all covenants.
Contractual Obligations, Commitments and Off Balance Sheet Arrangements
The following table represents a summary of our contractual obligations and commercial commitments,
excluding interest, at the end of 2009, except short-term purchase order commitments arising in the
ordinary course of business.
Payments due by period | ||||||||||||||||||||||||||||
(In thousands) | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 and thereafter |
Total | |||||||||||||||||||||
Long-term debt obligations |
$ | 24,765 | $ | 25,338 | $ | 24,765 | $ | 15,015 | $ | 15,015 | $ | 15,015 | $ | 119,913 | ||||||||||||||
Capital lease obligations |
249 | 250 | 108 | - | - | - | 607 | |||||||||||||||||||||
Operating lease obligations |
25,504 | 23,041 | 20,573 | 17,677 | 15,143 | 60,195 | 162,133 | |||||||||||||||||||||
Purchase obligations |
15,592 | 6,067 | 5,644 | 5,597 | 2,797 | 10,665 | 46,362 | |||||||||||||||||||||
Uncertain tax positions |
- | 314 | 3,226 | 3,059 | - | - | 6,599 | |||||||||||||||||||||
Total |
$ | 66,110 | $ | 55,010 | $ | 54,316 | $ | 41,348 | $ | 32,955 | $ | 85,875 | $ | 335,614 | ||||||||||||||
The effects of inflation on our business during 2009, 2008 and 2007 were not significant.
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Recent Accounting Pronouncements
In September 2009, Accounting Standards Update (ASU) 09-13, Revenue Recognition (Topic 605)
Multiple Deliverable Revenue Arrangements, was issued, which will require an entity to apply the
relative selling price allocation method in order to estimate selling price for all units of
accounting, including delivered items, when vendor-specific objective evidence (VSOE) or acceptable
third party evidence (TPE) does not exist and expands the disclosure requirements to require an
entity to provide both qualitative and quantitative information about the significant judgments
made in applying the guidance in ASU 09-13 and subsequent changes in those judgments that may
significantly affect the timing or amount of revenue recognition. ASU 09-13 is effective for
revenue arrangements entered into or materially modified in fiscal years beginning on or after June
15, 2010 and shall be applied on a prospective basis. Earlier application is permitted. We are
assessing the potential impact of ASU 09-13 on our financial position and results of operations.
In September 2009, ASU 09-14, Software (Topic 985) Certain Revenue Arrangements that Include
Software Elements, was issued, which requires the exclusion from the scope of ASC 985 of all
tangible products containing both software and non-software components that function together to
deliver the products essential functionality. ASU 09-14 is effective for revenue arrangements
entered into or materially modified in fiscal years beginning on or after June 15, 2010 and shall
be applied on a prospective basis. Earlier application is permitted. We are assessing the impact of
ASU 09-14 on our financial position and results of operations.
In December 2009, ASU 09-16, Accounting for Transfers of Financial Assets, was issued, which among
other things creates more stringent conditions for reporting a transfer of a portion of a financial
asset as a sale. ASU 09-16 is effective for financial asset transfers as of the beginning of fiscal
years that begin after November 15, 2009. Earlier adoption is prohibited. We are assessing the
impact of ASU 09-16 on our financial position and results of operations.
Critical Accounting Policies
We believe that there are several accounting policies that are critical to understanding our
historical and future performance, as these policies affect the reported amount of revenue and
other significant areas involving our judgments and estimates. These significant accounting
policies relate to revenue recognition, software development, potential impairments of goodwill and
income taxes. These policies and our procedures related to these policies are described in detail
below and under specific areas within this MD&A. In addition, Note (1) to the consolidated
financial statements expands upon discussion of our accounting policies.
Revenue Recognition
We recognize revenue within our multiple element arrangements, including software and
software-related services, using the residual method under ASC 985-605, Software Revenue
Recognition. Key factors in our revenue recognition model are our assessments that installation
services are essential to the functionality of our software whereas implementation services are
not; and the length of time it takes for us to achieve the delivery and installation milestones for
our licensed software. If our business model were to change such that implementation services are
deemed to be essential to the functionality of our software, the period of time over which our
licensed software revenue would be recognized would lengthen. We generally recognize revenue from
the sale of our licensed software over two key milestones, delivery and installation, based on
percentages that reflect the underlying effort from planning to installation. Generally, both
milestones are achieved in the quarter the contracts are executed. If the period of time to
achieve our delivery and installation milestones for our licensed software were to lengthen, our
milestones would be adjusted and the timing of revenue recognition for our licensed software could
materially change.
We also recognize revenue for certain projects using the percentage of completion method pursuant
to ASC 605-35, Revenue Recognition Construction-Type and Production-Type Contracts, as
prescribed by ASC 985-605. Our revenue recognition is dependent upon our ability to reliably
estimate the direct labor hours to complete a project which generally can span several years. We
utilize our historical project experience and detailed planning process
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as a basis for our future
estimates to complete current projects. Significant delays in completion of the projects,
unforeseen cost increases or penalties could result in significant reductions to revenue and
margins on these
contracts. The actual project results can be significantly different from the estimated results.
When adjustments are indentified near or at the end of a project, the full impact of the change in
estimate is recognized in that period. This can result in a material impact on our results for a
single reporting period.
Software Development Costs
Costs incurred internally in creating computer software solutions and enhancements to those
solutions are expensed until completion of a detailed program design, which is when we determine
that technological feasibility has been established. Thereafter, all software development costs are
capitalized until such time as the software solutions and enhancements are available for general
release, and the capitalized costs subsequently are reported at the lower of amortized cost or net
realizable value.
Net realizable value is computed as the estimated gross future revenues from each software solution
less the amount of estimated future costs of completing and disposing of that product. Because the
development of projected net future revenues related to our software solutions used in our net
realizable value computation is based on estimates, a significant reduction in our future revenues
could impact the recovery of our capitalized software development costs. We historically have not
experienced significant inaccuracies in computing the net realizable value of our software
solutions and the difference between the net realizable value and the unamortized cost has grown
over the past three years. We expect that trend to continue in the future. If we missed our
estimates of net future revenues by up to 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 healthcare
industry may offer competitive products or services. The pace of change in the HIT 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.
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 entitys 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. |
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| 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. |
As of the end of 2009, we held investments in money market funds, time deposits, commercial paper,
government and corporate bonds and auction rate securities. Auction rate securities are debt
instruments with long-term nominal maturities, for which the interest rates regularly reset every
7-35 days under an auction system. Due to the lack of availability of observable market quotes on
our investment portfolio of auction rate securities, we utilize valuation models that are based on
discounted cash flow streams, including assessments of counterparty credit quality, default risk
underlying the security, discount rates and overall capital market liquidity. The valuation is
subject to uncertainties that are difficult to predict. If different assumptions were used for the
various inputs to the valuation, including, but not limited to, assumptions involving the estimated
holding periods for the auction rate securities, the estimated cash flows over those estimated
lives, and the estimated discount rates, including the liquidity discount rate, applied to those
cash flows, the estimated fair value of these investments could be significantly higher or lower
than the fair value we determined.
A considerable amount of judgment and estimation is applied in the valuation of auction rate
securities. In addition, we also apply judgment in determining whether the marketable securities
are other-than-temporarily impaired. We typically consider the severity and duration of the
decline, future prospects of the issuer and our ability and intent to hold the security to
recovery.
Goodwill
We account for goodwill under the provisions of ASC 350, Intangibles Goodwill and Other. As a
result, goodwill and intangible assets with indefinite lives are not amortized but are 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 test based on fair value. We assess
goodwill for impairment in the second quarter of each fiscal year and evaluate impairment
indicators at each quarter end. We assessed our goodwill for impairment in the second quarters of
2009 and 2008 and concluded that goodwill was not impaired. In each respective year, the fair
values of each of our reporting units exceeded their carrying amounts by a significant margin. We
used a discounted cash flow analysis utilizing Level 3 inputs, to determine the fair value of the
reporting units for all periods. Goodwill amounted to $151.5 million and $146.7 million at the end
of 2009 and 2008, respectively. If future, anticipated cash flows from our reporting units that
recognized goodwill do not materialize as expected, our goodwill could be impaired, which could
result in significant charges to earnings.
Income Taxes
We account for income taxes under the provisions of ASC 740, Income Taxes. We make a number of
assumptions and estimates in determining the appropriate amount of expense to record for income
taxes. These assumptions and estimates consider the taxing jurisdictions in which we operate as
well as current tax regulations. Accruals are established for estimates of tax effects for certain
transactions, business structures and future projected profitability of our businesses based on our
interpretation of existing facts and circumstances. If these assumptions and estimates were to
change as a result of new evidence or changes in circumstances, the change in estimate could result
in a material adjustment to the consolidated financial statements.
We have discussed the development and selection of these critical accounting estimates with the
Audit Committee of our Board of Directors and the Audit Committee has reviewed our disclosure
contained herein.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We use a foreign-currency denominated debt instrument to reduce our foreign currency exposure in
the U.K. As of the end of 2009, we designated all of our Great Britain Pound (GBP) denominated
long-term debt (55.7 million GBP) as a net investment hedge of our U.K. operations. Because the
borrowing is denominated in pounds, we are exposed to movements in the foreign currency exchange
rate between the U.S. dollar (USD) and the GPB. We
35
Table of Contents
estimate that a hypothetical 10% change in the
foreign currency exchange rate between the USD and GBP would have impacted the unrealized loss, net
of related income tax effects, of the net investment hedge recognized in other comprehensive income
by approximately $6.6 million. Please refer to Notes (9) and (10) to the Consolidated Financial
Statements for a more detailed discussion of the foreign-currency denominated debt instrument.
Item 8. Financial Statements and Supplementary Data
The Financial Statements and Notes required by this Item are submitted as a separate part of this
report.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
N/A
Item 9.A. Controls and Procedures
a) | Evaluation of disclosure controls and procedures. The Companys Chief Executive
Officer (CEO) and Chief Financial Officer (CFO) have evaluated the effectiveness of the
Companys 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 the Annual Report (the
Evaluation Date). They have concluded that, as of the Evaluation Date and based on the
evaluation of these controls and procedures required by paragraph (b) of Exchange Act Rule
13a-15 or 15d-15, these disclosure controls and procedures were effective to ensure that
material information relating to the Company and its consolidated subsidiaries would be
made known to them by others within those entities and would be disclosed on a timely
basis. The CEO and CFO have concluded that the Companys disclosure controls and
procedures are designed, and are effective, to give reasonable assurance that the
information required to be disclosed by the Company in reports that it files under the
Exchange Act is recorded, processed, summarized and reported within the time period
specified in the rules and forms of the SEC. They have also concluded that the Companys
disclosure controls and procedures are effective to ensure that information required to be
disclosed in the reports that are filed or submitted under the Exchange Act are accumulated
and communicated to the Companys management, including the CEO and CFO, to allow timely
decisions regarding required disclosure. |
||
b) | There were no changes in the Companys internal controls over financial reporting
during the three months ended January 2, 2010, that have materially affected, or are
reasonably likely to materially affect, its internal controls over financial reporting. |
||
c) | The Companys management, including its Chief Executive Officer and Chief Financial
Officer, have concluded that our disclosure controls and procedures and internal control
over financial reporting are designed to provide reasonable assurance of achieving their
objectives and are effective at that reasonable assurance level. However, the Companys
management can provide no assurance that our disclosure controls and procedures or our
internal control over financial reporting can prevent all errors and all fraud under all
circumstances. A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their costs.
Because of the inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if any, within
the Company have been or will be detected. The design of any system of controls also is
based in part upon certain assumptions about the likelihood of future events, and there can
be no assurance that any design will succeed in achieving its stated goals under all
potential future conditions; over time, controls may become inadequate because of changes
in conditions, or the degree of compliance with policies or procedures may deteriorate.
Because of the inherent limitations in a cost-effective control system, misstatements due
to error or fraud may occur and not be detected. |
36
Table of Contents
Managements Report on Internal Control over Financial Reporting
The Companys management is responsible for establishing and maintaining adequate internal control
over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934,
as amended). The Companys management assessed the effectiveness of the Companys internal control
over financial reporting as of January 2, 2010. In making this assessment, the Companys
management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in its Internal Control-Integrated Framework. The Companys management has
concluded that, as of January 2, 2010, the Companys internal
control over financial reporting is effective based on these criteria. The Companys independent
registered public accounting firm that audited the consolidated financial statements included in
the annual report has issued an audit report on the effectiveness of the Companys internal control
over financial reporting, which is included herein under Report of Independent Registered Public
Accounting Firm.
Item 9.B. Other Information
N/A
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this Item 10 regarding our Directors will be set forth under the
caption Election of Directors in our Proxy Statement in connection with the 2010 Annual
Shareholders Meeting scheduled to be held May 28, 2010, and is incorporated in this Item 10 by
reference. The information required by this Item 10 concerning compliance with Section 16(a) of
the Securities Exchange Act of 1934 will be set forth under the caption Section 16(a) Beneficial
Ownership Reporting Compliance in our Proxy Statement in connection with the 2010 Annual
Shareholders Meeting scheduled to be held May 28, 2010, and is incorporated in this Item 10 by
reference.
The information required by this Item 10 concerning our Code of Business Conduct and Ethics will be
set forth under the caption Code of Business Conduct and Ethics in our Proxy Statement in
connection with the 2010 Annual Shareholders Meeting scheduled to be held May 28, 2010, and is
incorporated in this Item 10 by reference. The information required by this Item 10 concerning our
Audit Committee and our Audit Committee financial expert will be set forth under the caption Audit
Committee in our Proxy Statement in connection with the 2010 Annual Shareholders Meeting
scheduled to be held May 28, 2010, and is incorporated in this Item 10 by reference.
There have been no material changes to the procedures by which security holders may recommend
nominees to our Board of Directors since our last disclosure thereof. The names of our executive
officers and their ages, titles and biographies are incorporated by reference under the caption
Executive Officers of the Registrant under Part I, above.
Item 11. Executive Compensation
The information required by this Item 11 concerning our executive compensation will be set forth
under the caption Compensation Discussion and Analysis in our Proxy Statement in connection with
the 2010 Annual Shareholders Meeting scheduled to be held May 28, 2010, and is incorporated in
this Item 11 by reference. The information required by this Item 11 concerning Compensation
Committee interlocks and insider participation will be set forth under the caption Compensation
Committee Interlocks and Insider Participation in our Proxy Statement in connection with the 2010
Annual Shareholders Meeting scheduled to be held May 28, 2010, and is incorporated in this Item 11
by reference. The information required by this Item 11 concerning Compensation Committee report
will be set forth under the caption Compensation Committee Report in our Proxy Statement in
connection with the 2010 Annual Shareholders Meeting scheduled to be held May 28, 2010 and is
incorporated in this Item 11 by reference.
37
Table of Contents
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The information required by this Item 12 will be set forth under the caption Voting Securities and
Principal Holders Thereof in our Proxy Statement in connection with the 2010 Annual Shareholders
Meeting scheduled to be held May 28, 2010, and is incorporated in this Item 12 by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item 13 concerning our transactions with related parties will be
set forth under the caption Certain Transactions in our Proxy Statement in connection with the
2010 Annual Shareholders Meeting scheduled to be held May 28, 2010, and is incorporated in this
Item 13 by reference. The information required by this Item 13 concerning director independence
will be set forth under the caption Director Independence in our Proxy Statement in connection
with the 2010 Annual Shareholders Meeting scheduled to be held May 28, 2010, and is incorporated
in this Item 13 by reference.
Item 14. Principal Accountant Fees and Services
The information required by this Item 14 will be set forth under the caption Relationship with
Independent Registered Public Accounting Firm in our Proxy Statement in connection with the 2010
Annual Shareholders Meeting scheduled to be held May 28, 2010, and is incorporated in this Item 14
by reference.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) | Financial Statements and Exhibits. |
||
(1) | Consolidated Financial Statements: |
||
Reports of Independent Registered Public Accounting Firm |
|||
Consolidated Balance Sheets - As of January 2, 2010 and January 3, 2009 |
|||
Consolidated Statements of Operations - Years Ended January 2, 2010, January 3, 2009, and December 29, 2007 |
|||
Consolidated Statements of Changes in Equity Years Ended January 2, 2010, January 3, 2009, and December 29, 2007 |
|||
Consolidated Statements of Cash Flows Years Ended January 2, 2010, January 3, 2009, and December 29, 2007 |
|||
Notes to Consolidated Financial Statements |
|||
(2) | The following financial statement schedule and Report of Independent Registered Public Accounting Firm of the Registrant for the three-year period ended January 2, 2010 are included herein: |
||
Schedule II Valuation and Qualifying Accounts, |
|||
Report of Independent Registered Public Accounting Firm |
38
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All other schedules are omitted, as the required information is inapplicable
or the information is presented in the consolidated financial statements or
related notes. |
|||
(3) | The exhibits required to be filed by this item are set forth
below: |
Number | Description | |
3(a) |
Second Restated Certificate of Incorporation of the Registrant, dated December 5, 2003 (filed
as exhibit 3(a) to Registrants Annual Report on Form 10-K for the year ended January 3, 2004
and incorporated herein by reference). |
|
3(b)
|
Amended and Restated Bylaws, dated September 16, 2008 (filed as Exhibit 3.1 to Registrants
Form 8-K filed on September 22, 2008 and incorporated
herein by reference). |
|
4(a)
|
Specimen stock certificate (filed as Exhibit 4(a) to Registrants Annual Report on Form 10-K
for the year ended December 30, 2006 and incorporated herein by
reference). |
|
4(b)
|
Amended and Restated Credit Agreement between Cerner Corporation and U.S. Bank N.A., Bank of
America, N.A. (successor in interest to LaSalle Bank National Association), Commerce Bank,
N.A. and UMB Bank, N.A., dated November 30, 2006 (filed as Exhibit 99.1 to Registrants Form
8-K filed on December 6, 2006, and incorporated herein by
reference). |
|
4(c)
|
First Amendment to Amended and Restated Credit Agreement between Cerner Corporation, U.S.
Bank National Association, Bank of America, N.A., Commerce Bank, N.A. and UMB Bank, N.A.,
dated November 12, 2009 (filed as Exhibit 99.1 to Registrants Form 8-K filed on November 18,
2009, and incorporated herein by reference). |
|
4(d)
|
Cerner Corporation Note Agreement dated April 1, 1999 among Cerner Corporation, Principal
Life Insurance Company, Principal Life Insurance Company, on behalf of one or more separate
accounts, Commercial Union Life Insurance Company of America, Nippon Life Insurance Company of
America, John Hancock Mutual Life Insurance Company, John Hancock Variable Life Insurance
Company, and Investors Partner Life Insurance Company (filed as Exhibit 4(e) to Registrants
Form 8-K dated April 23, 1999 and incorporated herein by
reference). |
|
4(e)
|
Note Purchase Agreement between Cerner Corporation and the purchasers therein, dated December
15, 2002 (filed as Exhibit 10(x) to Registrants Annual Report on Form 10-K for the year ended
December 28, 2002 and incorporated herein by reference). |
|
4(f)
|
Cerner Corporation Note Purchase Agreement dated November 1, 2005 among Cerner Corporation,
as issuer, and AIG Annuity Insurance Company, American General Life Insurance Company and
Principal Life Insurance Company, as purchasers, (filed as Exhibit 99.1 to Registrants Form
8-K filed on November 7, 2005 and incorporated herein by
reference). |
|
10(a)
|
Indemnification Agreement Form for use between the Registrant and its Directors (filed as
Exhibit 10(a) to Registrants Annual Report on Form 10-K for the year ended December 30, 2006
and incorporated herein by reference).* |
|
10(b) |
Employment
Agreement of Earl H. Devanny, III dated August 13, 1999 (filed as Exhibit 10(q)
to Registrants Annual Report on Form 10-K for the year ended January 1, 2000 and incorporated
herein by reference).* |
|
10(c)
|
Amendment Number One to Cerner Associate Employment Agreement between Cerner Corporation and
E. H. Devanny, III, dated November 1, 2008 (filed as Exhibit 10(c) to Registrants Annual
Report on Form 10-K for the year ended January 3, 2009 and
incorporated herein by reference).* |
39
Table of Contents
Number | Description | |
10(d)
|
Amended & Restated Executive Employment Agreement of Neal L. Patterson dated January 1, 2008 (filed as Exhibit 10(c) to Registrants Annual Report on Form 10-K for the year ended December 29, 2007 and incorporated herein by reference).* | |
10(e)
|
Amended Stock Option Plan D of Registrant dated December 8, 2000 (filed as Exhibit 10(f) to
Registrants Annual Report on Form 10-K for the year ended December 30, 2000 and incorporated
herein by reference).* |
|
10(f)
|
Amended Stock Option Plan E of Registrant dated December 8, 2000 (filed as Exhibit 10(g) to
Registrants Annual Report on Form 10-K for the year ended December 30, 2000 and incorporated
herein by reference).* |
|
10(g)
|
Cerner Corporation 2001 Long-Term Incentive Plan F (filed as Annex I to Registrants 2001
Proxy Statement and incorporated herein by reference).* |
|
10(h)
|
Cerner Corporation 2004 Long-Term Incentive Plan G Amended & Restated dated October 1, 2007
(filed as Exhibit 10(g) to Registrants Annual Report on Form 10-K for the year ended December
29, 2007 and incorporated herein by reference).* |
|
10(i)
|
Cerner Corporation 2001 Associate Stock Purchase Plan (filed as Annex II to Registrants
2001 Proxy Statement and incorporated herein by reference).* |
|
10(j)
|
Qualified Performance-Based Compensation Plan dated December 3, 2007 (filed as Exhibit 10(i)
to the Registrants Annual Report on Form 10-K for the year ended December 29, 2007 and
incorporated herein by reference).* |
|
10(k)
|
Form of 2009 Executive Performance Agreement (filed as Exhibit 99.1 to Registrants Form 8-K
on April 6, 2009 and incorporated herein by reference).* |
|
10(l)
|
Cerner Corporation Executive Deferred Compensation Plan as Amended & Restated dated January
1, 2008 (filed as Exhibit 10(k) to Registrants Annual Report on Form 10-K for the year ended
December 29, 2007 and incorporated herein by reference.)* |
|
10(m)
|
Cerner Corporation 2005 Enhanced Severance Pay Plan as Amended and Restated dated January 1,
2008 (filed as Exhibit 10(l) to Registrants Annual Report on Form 10-K for the year ended
December 29, 2007 and incorporated herein by reference.)* |
|
10(n)
|
Cerner Corporation 2001 Long-Term Incentive Plan F Nonqualified Stock Option Agreement
(filed as Exhibit 10(v) to Registrants Annual Report on Form 10-K for the year ended January
1, 2005 and incorporated herein by reference).* |
|
10(o)
|
Cerner Corporation 2001 Long-Term Incentive Plan F Nonqualified Stock Option Grant
Certificate (filed as Exhibit 10(a) to Registrants Quarterly Report on Form 10-Q for the
quarter ended October 1, 2005 and incorporated herein by
reference).* |
|
10(p)
|
Cerner Corporation 2001 Long-Term Incentive Plan F Nonqualified Stock Option Director
Agreement (filed as Exhibit 10(x) to Registrants Annual Report on Form 10-K for the year
ended January 1, 2005 and incorporated herein by
reference).* |
|
10(q)
|
Cerner Corporation 2001 Long-Term Incentive Plan F Director Restricted Stock Agreement
(filed as Exhibit 10(w) to Registrants Annual Report on Form 10-K for the year ended January
1, 2005 and incorporated herein by reference).* |
40
Table of Contents
Number | Description | |
10(r)
|
Cerner Corporation 2004 Long-Term Incentive Plan G Nonqualified Stock Option Grant
Certificate (filed as Exhibit 10(q) to Registrants Annual Report on Form 10-K for the year
ended December 29, 2007 and incorporated herein by
reference).* |
|
10(s)
|
Time Sharing Agreements between the Registrant and Neal L. Patterson and Clifford W. Illig,
both dated February 7, 2007 (filed as Exhibits 10.2 and 10.3, respectively, to Registrants
Form 8-K filed on February 9, 2007 and incorporated herein
by reference).* |
|
10(t)
|
Notice of Change of Aircraft Provided Under Time Sharing Agreements from Registrant to Neal
L. Patterson and Clifford W. Illig, both notices dated
December 28, 2009.* |
|
*Management contracts or compensatory plans or arrangements required to be
identified by Item 15(a)(3) |
||
11
|
Computation of Registrants Earnings Per Share. (Exhibit omitted. Information contained in
notes to consolidated financial statements.) |
|
21 |
Subsidiaries of Registrant. |
|
23 |
Consent of Independent Registered Public Accounting Firm. |
|
31.1 |
Certification of Neal L. Patterson pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. |
|
31.2 |
Certification of Marc G. Naughton pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
|
32.1
|
Certification pursuant to 18 U.S.C. Section. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
|
32.2
|
Certification pursuant to 18 U.S.C. Section. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
|
(b)
|
Exhibits. | |
The response to this portion of Item 15 is submitted as a
separate section of this report. |
||
(c)
|
Financial Statement Schedules. |
|
The response to this portion of Item 15 is submitted as a
separate section of this report. |
41
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
CERNER CORPORATION |
||||
Date: February 22, 2010 | By: | /s/ Neal L. Patterson | ||
Neal L. Patterson | ||||
Chairman of the Board and Chief Executive Officer |
||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated:
Signature and Title | Date | |||
/s/Neal L. Patterson
|
February 22, 2010 | |||
Neal L. Patterson, Chairman of the Board and |
||||
Chief Executive Officer (Principal Executive Officer)
|
||||
/s/Clifford W. Illig
|
February 22, 2010 | |||
Clifford W. Illig, Vice Chairman and Director |
||||
/s/Marc G. Naughton
|
February 22, 2010 | |||
Marc G. Naughton, Senior Vice President and |
||||
Chief Financial Officer (Principal Financial Officer) |
||||
/s/Michael R. Battaglioli
|
February 22, 2010 | |||
Michael R. Battaglioli, Vice President and |
||||
Chief Accounting Officer |
||||
/s/Gerald E. Bisbee, Jr.
|
February 22, 2010 | |||
Gerald E. Bisbee, Jr., Ph.D., Director |
||||
/s/John C. Danforth
|
February 22, 2010 | |||
John C. Danforth, Director |
||||
/s/Michael E. Herman
|
February 22, 2010 | |||
Michael E. Herman, Director |
||||
/s/William B. Neaves
|
February 22, 2010 | |||
William B. Neaves, Ph.D., Director |
||||
/s/William D. Zollars
|
February 22, 2010 | |||
William D. Zollars, Director |
42
Table of Contents
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Cerner Corporation:
Cerner Corporation:
We have audited Cerner Corporations (the Corporation) internal control over financial reporting as
of January 2, 2010, based on criteria established in Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Corporations
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 Managements Report on Internal Control over Financial Reporting, appearing in
Item 9.A. Our responsibility is to express an opinion on the Corporations internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys 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
companys 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 companys assets that could have a material
effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Cerner Corporation maintained, in all material respects, effective internal control
over financial reporting as of January 2, 2010, based on criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of Cerner Corporation and subsidiaries as of
January 2, 2010 and January 3, 2009, and the related consolidated statements of operations, changes
in stockholders equity, and cash flows for each of the years in the three-year period ended
January 2, 2010, and our report dated February 22, 2010 expressed an unqualified opinion on those
consolidated financial statements.
/s/ KPMG LLP | ||||
Kansas City, Missouri | ||||
February 22, 2010 |
43
Table of Contents
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Cerner Corporation:
Cerner Corporation:
We have audited the accompanying consolidated balance sheets of Cerner Corporation and subsidiaries
(collectively, the Corporation) as of January 2, 2010 and January 3, 2009, and the related
consolidated statements of operations, changes in stockholders equity, and cash flows for each of
the years in the three-year period ended January 2, 2010. These consolidated financial statements
are the responsibility of the Corporations management. Our responsibility is to express an opinion
on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of the Cerner Corporation and subsidiaries as of
January 2, 2010 and January 3, 2009, and the results of their operations and their cash flows for
each of the years in the three-year period ended January 2, 2010, in conformity with U.S. generally
accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), Cerner Corporations internal control over financial reporting as of January
2, 2010, based on criteria established in Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated
February 22, 2010 expressed an unqualified opinion on the effectiveness of Cerner Corporations
internal control over financial reporting.
/s/ KPMG LLP | ||||
Kansas City, Missouri | ||||
February 22, 2010 | ||||
Managements Report
The management of Cerner Corporation is responsible for the consolidated financial statements and
all other information presented in this report. The financial statements have been prepared in
conformity with U.S. generally accepted accounting principles appropriate to the circumstances,
and, therefore, included in the financial statements are certain amounts based on managements
informed estimates and judgments. Other financial information in this report is consistent with
that in the consolidated financial statements. The consolidated financial statements have been
audited by Cerner Corporations independent registered public accountants and have been reviewed by
the Audit Committee of the Board of Directors.
44
Table of Contents
CERNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of January 2, 2010 and January 3, 2009
(In thousands, except share data) | 2009 | 2008 | ||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 241,723 | $ | 270,494 | ||||
Short-term investments |
317,113 | 38,400 | ||||||
Receivables, net |
461,411 | 468,928 | ||||||
Inventory |
11,242 | 10,096 | ||||||
Prepaid expenses and other |
106,791 | 69,553 | ||||||
Deferred income taxes |
8,055 | 1,402 | ||||||
Total current assets |
1,146,335 | 858,873 | ||||||
Property and equipment, net |
509,178 | 483,399 | ||||||
Software development costs, net |
233,265 | 218,811 | ||||||
Goodwill |
151,479 | 146,666 | ||||||
Intangible assets, net |
33,719 | 51,925 | ||||||
Long-term investments |
- | 105,300 | ||||||
Other assets |
74,591 | 16,014 | ||||||
Total assets |
$ | 2,148,567 | $ | 1,880,988 | ||||
Liabilities and Stockholders Equity |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 36,893 | $ | 93,667 | ||||
Current installments of long-term debt |
25,014 | 30,116 | ||||||
Deferred revenue |
137,095 | 107,554 | ||||||
Accrued payroll and tax withholdings |
80,093 | 67,266 | ||||||
Other accrued expenses |
79,008 | 42,620 | ||||||
Total current liabilities |
358,103 | 341,223 | ||||||
Long-term debt |
95,506 | 111,370 | ||||||
Deferred income taxes and other liabilities |
98,372 | 100,546 | ||||||
Deferred revenue |
15,788 | 15,554 | ||||||
Total Liabilities |
567,769 | 568,693 | ||||||
Stockholders Equity: |
||||||||
Cerner Corporation stockholders equity: |
||||||||
Common stock, $.01 par value, 150,000,000 shares authorized, 82,564,708 shares issued at January 2, 2010 and 81,043,345 issued at January 3, 2009 |
826 | 810 | ||||||
Additional paid-in capital |
557,545 | 491,080 | ||||||
Retained earnings |
1,053,563 | 860,098 | ||||||
Treasury stock |
(28,002 | ) | (28,002 | ) | ||||
Accumulated other comprehensive loss, net |
(3,254 | ) | (12,977 | ) | ||||
Total Cerner Corporation stockholders equity |
1,580,678 | 1,311,009 | ||||||
Noncontrolling interest |
120 | 1,286 | ||||||
Total stockholders equity |
1,580,798 | 1,312,295 | ||||||
Total liabilities and stockholders equity |
$ | 2,148,567 | $ | 1,880,988 | ||||
See notes to consolidated financial statements.
45
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CERNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended January 2, 2010, January 3, 2009 and December 27, 2007
For the Years Ended | ||||||||||||
(In thousands, except per share data) | 2009 | 2008 | 2007 | |||||||||
Revenues: |
||||||||||||
System sales |
$ | 504,561 | $ | 522,373 | $ | 500,319 | ||||||
Support, maintenance and services |
1,136,871 | 1,115,896 | 982,780 | |||||||||
Reimbursed travel |
30,432 | 37,759 | 36,778 | |||||||||
Total revenues |
1,671,864 | 1,676,028 | 1,519,877 | |||||||||
Costs and expenses: |
||||||||||||
Cost of system sales |
186,626 | 197,150 | 181,744 | |||||||||
Cost of support, maintenance and services |
64,140 | 61,154 | 61,588 | |||||||||
Cost of reimbursed travel |
30,432 | 37,759 | 36,778 | |||||||||
Sales and client service |
700,639 | 715,512 | 657,956 | |||||||||
Software development (Includes amortization of $63,611, $51,132 and $53,475, respectively) |
271,051 | 272,519 | 270,576 | |||||||||
General and administrative |
126,970 | 113,049 | 107,152 | |||||||||
Total costs and expenses |
1,379,858 | 1,397,143 | 1,315,794 | |||||||||
Operating earnings |
292,006 | 278,885 | 204,083 | |||||||||
Other income (expense): |
||||||||||||
Interest income (expense), net |
308 | 3,056 | 1,269 | |||||||||
Other income (expense), net |
367 | (510 | ) | (1,385 | ) | |||||||
Total other income (expense), net |
675 | 2,546 | (116 | ) | ||||||||
Earnings before income taxes |
292,681 | 281,431 | 203,967 | |||||||||
Income taxes |
(99,216 | ) | (92,773 | ) | (76,842 | ) | ||||||
Net earnings |
$ | 193,465 | $ | 188,658 | $ | 127,125 | ||||||
Basic earnings per share |
$ | 2.39 | $ | 2.34 | $ | 1.60 | ||||||
Diluted earnings per share |
$ | 2.31 | $ | 2.26 | $ | 1.53 | ||||||
Basic weighted average shares outstanding |
80,981 | 80,549 | 79,395 | |||||||||
Diluted weighted average shares outstanding |
83,882 | 83,435 | 83,218 |
See notes to consolidated financial statements.
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CERNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
Accumulated | ||||||||||||||||||||||||||||
Additional | Other | |||||||||||||||||||||||||||
Common Stock | Paid-in | Retained | Treasury | Comprehensive | Comprehensive | |||||||||||||||||||||||
Shares | Amount | Capital | Earnings | Stock | Income (Loss) | Income (Loss) | ||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||
Balance at December 31,
2006 |
78,392 | $ | 784 | $ | 376,595 | $ | 544,315 | $ | - | $ | 600 | |||||||||||||||||
Exercise of options |
1,756 | 17 | 29,068 | - | - | - | ||||||||||||||||||||||
Employee stock option
compensation expense |
- | - | 16,348 | - | - | - | ||||||||||||||||||||||
Employee stock option
compensation net excess
tax benefit |
- | - | 29,865 | - | - | - | ||||||||||||||||||||||
Foreign currency
translation adjustments
and other |
- | - | - | - | - | 7,711 | $ | 7,711 | ||||||||||||||||||||
Net earnings |
- | - | - | 127,125 | - | - | 127,125 | |||||||||||||||||||||
Comprehensive Income |
$ | 134,836 | ||||||||||||||||||||||||||
Balance at December 29,
2007 |
80,148 | $ | 801 | $ | 451,876 | $ | 671,440 | $ | - | $ | 8,311 | |||||||||||||||||
Exercise of options |
895 | 9 | 15,250 | - | - | - | ||||||||||||||||||||||
Employee stock option
compensation expense |
- | - | 14,788 | - | - | - | ||||||||||||||||||||||
Employee stock option
compensation net excess
tax benefit |
- | - | 9,166 | - | - | - | ||||||||||||||||||||||
Purchase of treasury shares |
- | - | - | - | (28,002 | ) | - | |||||||||||||||||||||
Foreign currency
translation adjustments
and other |
- | - | - | - | - | (21,288 | ) | $ | (21,288 | ) | ||||||||||||||||||
Net earnings |
- | - | - | 188,658 | - | - | 188,658 | |||||||||||||||||||||
Comprehensive Income |
$ | 167,370 | ||||||||||||||||||||||||||
Balance at January 3, 2009 |
81,043 | $ | 810 | $ | 491,080 | $ | 860,098 | $ | (28,002 | ) | $ | (12,977 | ) | |||||||||||||||
Exercise of options |
1,522 | 16 | 29,773 | - | ||||||||||||||||||||||||
Employee stock option
compensation expense |
- | 15,786 | - | - | ||||||||||||||||||||||||
Employee stock option
compensation net excess
tax benefit |
- | 20,906 | - | - | ||||||||||||||||||||||||
Foreign currency
translation adjustments
and other |
- | - | - | - | 9,723 | $ | 9,723 | |||||||||||||||||||||
Net earnings |
- | - | 193,465 | - | 193,465 | |||||||||||||||||||||||
Comprehensive Income |
$ | 203,188 | ||||||||||||||||||||||||||
Balance at January 2, 2010 |
82,565 | $ | 826 | $ | 557,545 | $ | 1,053,563 | $ | (28,002 | ) | $ | (3,254 | ) | |||||||||||||||
See notes to consolidated financial statements.
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CERNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended January 2, 2010, January 3, 2009 and December 29, 2007
For the Years Ended | ||||||||||||
(In thousands) |
2009 | 2008 | 2007 | |||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||||||
Net earnings |
$ | 193,465 | $ | 188,658 | $ | 127,125 | ||||||
Adjustments to reconcile net earnings to net cash provided by operating activities: |
||||||||||||
Depreciation and amortization |
189,603 | 170,466 | 152,817 | |||||||||
Share-based compensation expense |
15,786 | 14,683 | 16,189 | |||||||||
Provision for deferred income taxes |
(4,141 | ) | (2,521 | ) | (4,496 | ) | ||||||
Changes in assets and liabilities (net of businesses acquired): |
||||||||||||
Receivables, net |
(46,599 | ) | (108,072 | ) | (22,802 | ) | ||||||
Inventory |
290 | (2,542 | ) | 5,435 | ||||||||
Prepaid expenses and other |
(26,350 | ) | (11,735 | ) | 5,752 | |||||||
Accounts payable |
(53,417 | ) | 2,320 | 1,768 | ||||||||
Accrued income taxes |
29,263 | 22,827 | (5,236 | ) | ||||||||
Deferred revenue |
28,127 | 8,345 | 10,993 | |||||||||
Other accrued liabilities |
21,264 | (627 | ) | (12,980 | ) | |||||||
Net cash provided by operating activities |
347,291 | 281,802 | 274,565 | |||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||||||
Capital purchases |
(131,265 | ) | (108,099 | ) | (180,723 | ) | ||||||
Capitalized software development costs |
(77,747 | ) | (70,098 | ) | (66,063 | ) | ||||||
Purchases of investments |
(266,776 | ) | (488,761 | ) | (495,508 | ) | ||||||
Maturities of investments |
97,481 | 506,271 | 482,231 | |||||||||
Purchase of other intangibles |
(12,485 | ) | (4,201 | ) | (3,542 | ) | ||||||
Acquisition of businesses, net of cash acquired |
(3,529 | ) | (5,719 | ) | (24,061 | ) | ||||||
Net cash used in investing activities |
(394,321 | ) | (170,607 | ) | (287,666 | ) | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||||||
Proceeds from sale of future receivables |
1,888 | 7,135 | - | |||||||||
Proceeds from revolving line of credit and long-term debt |
- | 44,500 | 40,000 | |||||||||
Repayment of revolving line of credit and long-term debt |
(32,352 | ) | (59,817 | ) | (62,359 | ) | ||||||
Proceeds from excess tax benefits from stock compensation |
17,445 | 9,166 | 30,357 | |||||||||
Proceeds from exercise of options |
29,789 | 15,364 | 29,085 | |||||||||
Purchase of treasury stock |
- | (28,002 | ) | - | ||||||||
Net cash provided by (used in) financing activities |
16,770 | (11,654 | ) | 37,083 | ||||||||
Effect of exchange rate changes on cash |
1,489 | (11,961 | ) | (3,613 | ) | |||||||
Net (decrease) increase in cash and cash equivalents |
(28,771 | ) | 87,580 | 20,369 | ||||||||
Cash and cash equivalents at beginning of period |
270,494 | 182,914 | 162,545 | |||||||||
Cash and cash equivalents at end of period |
$ | 241,723 | $ | 270,494 | $ | 182,914 | ||||||
Supplemental disclosures of cash flow information |
||||||||||||
Cash paid during the year for: |
||||||||||||
Interest |
$ | 8,583 | $ | 10,512 | $ | 12,024 | ||||||
Income taxes, net of refund |
47,114 | 56,066 | 54,301 | |||||||||
Non-cash changes resulting from acquisitions: |
||||||||||||
Increase in accounts receivable |
$ | - | $ | - | $ | 930 | ||||||
Increase in property and equipment, net |
- | - | 391 | |||||||||
Increase in goodwill and intangibles |
- | 4,025 | 23,368 | |||||||||
Increase in deferred revenue |
- | (25 | ) | (476 | ) | |||||||
Increase in long term debt |
- | - | - | |||||||||
Decrease in other working capital components |
- | - | (152 | ) | ||||||||
Total |
$ | - | $ | 4,000 | $ | 24,061 | ||||||
See notes to consolidated financial statements.
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Notes to Consolidated Financial Statements
(1) Basis of Presentation, Nature of Operations and Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include all the accounts of Cerner Corporation and its
subsidiaries. All significant intercompany transactions have been eliminated in consolidation.
The consolidated financial statements were prepared using accounting principles generally accepted
in the United States. These principles require us to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and
the reported amounts of revenues and expenses. Actual results could differ from those estimates.
Certain prior year amounts in the consolidated financial statements have been reclassified to
conform to the current year presentation. These reclassifications had no effect on the results of
operations or stockholders equity as previously reported.
Our fiscal year ends on the Saturday closest to December 31. Fiscal year 2009 consisted of 52
weeks and ended on January 2, 2010; fiscal year 2008 consisted of 53 weeks and ended on January 3,
2009; and fiscal year 2007 consisted of 52 weeks and ended on December 29, 2007. All references to
years in these notes to consolidated financial statements represent fiscal years unless otherwise
noted.
Nature of Operations
We design, develop, market, install, host and support healthcare information technology, healthcare
devices and content solutions for healthcare organizations and consumers. We also provide a wide
range of value-added services, including implementing solutions as individual, combined or
enterprise-wide systems; hosting solutions in our data center; and clinical process optimization
services. Furthermore, we provide fullyautomated on-site employer health clinics and third party
administrator health plan services for employers.
Summary of Significant Accounting Policies
(a) Revenue Recognition We recognize software-related revenue in accordance with the provisions
of ASC 985-605, Software Revenue Recognition and non software-related revenue in accordance ASC
605, Revenue Recognition. The following are our major components of revenue:
| System sales includes the licensing of computer software, deployment period upgrades, installation, content subscriptions, transaction processing and the sale of computer hardware and sublicensed software; | ||
| Support, Maintenance and Service includes software support and hardware maintenance, remote hosting and managed services, training, consulting and implementation services; | ||
| Reimbursed Travel includes reimbursable out-of-pocket expenses (primarily travel) incurred in connection with our client service activities. |
We provide for several models of procurement of our information systems and related services. The
predominant model involves multiple deliverables and includes a perpetual software license
agreement, project-related installation services, implementation and consulting services, software
support and either hosting services or computer hardware and sublicensed software.
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Allocation of Revenue to Multiple Element Arrangements
ASC 985-605 generally requires revenue earned on software arrangements involving multiple-elements
to be allocated to each element based on the relative fair values of those elements if fair values
exist for all elements of the arrangement. Since we do not have vendor specific objective evidence
(VSOE) of fair values on all the elements within our multiple element arrangements, we recognize
revenue using the residual method.
Under the residual method, revenue is recognized in a multiple-element arrangement when
vendor-specific objective evidence of fair value exists for all of the undelivered elements in the
arrangement (i.e. professional services, software support, hardware maintenance, remote hosting
services, hardware and sublicensed software), but does not exist for one or more of the delivered
elements in the arrangement (i.e. licenses for software solutions including project-related
installation services). We allocate revenue to each undelivered element in a multiple-element
arrangement based on the elements respective fair value, with the fair value determined by the
price charged when that element is sold separately. Specifically, we determine the fair value of
the software support, hardware maintenance, sublicensed software support, remote hosting and
subscriptions portions of the arrangement based on the substantive renewal price for these services
charged to clients; professional services (including training and consulting) portion of the
arrangement, other than installation services, based on hourly rates which we charge for these
services when sold apart from a software license; and, the hardware and sublicensed software, based
on the prices for these elements when they are sold separately from the software. The residual
amount of the fee after allocating revenue to the fair value of the undelivered elements is
attributed to the licenses for software solutions, including project-related installation services.
If evidence of the fair value cannot be established for the undelivered elements of a license
agreement, the entire amount of revenue under the arrangement is deferred until these elements have
been delivered or objective evidence can be established.
For certain arrangements, the implementation services are deemed to be essential to the
functionality of the licenses for software solutions due to significant modifications and
customization of the software. For such software arrangements, revenue for both product and
services are accounted for using the percentage-of-completion method under ASC 605-35, Revenue
Recognition Construction-Type and Production-Type Contracts. Such arrangements typically include
post-contract support (PCS). In certain arrangements for which fair value of PCS cannot be
established, we classify revenue as systems sales or support, maintenance and services based on the
nature of costs incurred. For similar arrangements for which VSOE of PCS exists, PCS is separated
from the arrangement based on VSOE and the residual amount is allocated to the software and
services accounted for on a combined basis under ASC 605-35. For these arrangements, the service
component of the ASC 605-35 deliverable is classified as service revenue based on the VSOE of the
services as if provided on a stand-alone basis and the residual is classified as systems sales
revenue. Approximately $18.1 million, $26.7 million and $20.0 million of such revenues in 2009,
2008 and 2007, respectively, were included in system sales. Approximately $60.4 million, $86.6
million and $95.0 million of such revenues were included in 2009, 2008 and 2007, respectively, were
included in support, maintenance and services for such arrangements.
Revenue Recognition Models for Each Element
We provide project-related installation services when licensing our software solutions, which
include project-scoping services, conducting pre-installation audits and creating initial
environments. We have deemed installation services to be essential to the functionality of the
software, and therefore recognize the software license over the software installation period using
the percentage of completion method pursuant ASC 605-35, Revenue Recognition Construction-Type
and Production-Type Contracts, as prescribed by ASC 985-605. We measure the percentage of
completion based on output measures which reflect direct labor hours incurred, beginning at
software delivery and culminating at completion of installation. The installation services process
length is dependent upon client specific factors and generally occurs in the same period the
contracts are executed but can extend up to one year.
We provide implementation and consulting services. These services vary depending on the scope and
complexity requested by the client. Examples of such services may include database consulting,
system configuration, project management, testing assistance, network consulting, post conversion
review and application management services. Implementation and consulting services generally are
not deemed to be essential to the functionality of
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the software, and thus do not impact the timing of the software license recognition, unless
software license fees are tied to implementation milestones. In those instances, the portion of the
software license fee tied to implementation milestones is deferred until the related milestone is
accomplished and related fees become billable and non-forfeitable. Implementation fees are
recognized over the service period, which may extend from nine months to three years for
multi-phased projects.
Remote hosting and managed services are marketed under long-term arrangements generally over
periods of five to 10 years. These services are typically provided to clients that have acquired a
perpetual license for licensed software and have contracted with us to host the software in our
data center. Under these arrangements, the client generally has the contractual right to take
possession of the licensed software at any time during the hosting period without significant
penalty and it is feasible for the client to either run the software on its own equipment or
contract with another party unrelated to us to host the software. These services are not deemed to
be essential to the functionality of the licensed software or other elements of the arrangement and
as such, we account for these arrangements under ASC 985-605 (EITF Issue No. 00-3, Application of
AICPA Statement of Position 97-2 to Arrangements That Include the Right to Use Software Stored on
Another Entitys Hardware). For those arrangements where the client does not have the contractual
right or the ability to take possession of the software at any time, we account for the arrangement
as a service contract and thereby recognize revenues for the arrangement over the hosting service
period. The hosting and managed services are recognized as the services are performed.
We also offer our solutions on an application service provider (ASP) model, making available time
based licenses for our software functionality and providing the software solutions on a remote
processing basis from our data centers. The data centers provide system and administrative support
as well as processing services. Revenue on software and services provided on an ASP or term
license basis is combined and recognized on a monthly basis over the term of the contract. We
capitalize related direct costs consisting of third party costs and direct software installation
and implementation costs associated with the initial set up of the client on the ASP service.
These costs are amortized over the term of the arrangement.
Software support fees are marketed under annual and multi-year arrangements and are recognized as
revenue ratably over the contracted support term. Hardware and sublicensed software maintenance
revenues are recognized ratably over the contracted maintenance term.
Subscription and content fees are generally marketed under annual and multi-year agreements and are
recognized ratably over the contracted terms.
Hardware and sublicensed software sales are generally recognized when delivered to the client,
assuming title and risk of loss have transferred to the client.
Where we have contractually agreed to develop new or customized software code for a client as a
single element arrangement, we utilize percentage of completion accounting, labor-hours method, in
accordance with ASC 605-35.
Payment Arrangements
Our payment arrangements with clients typically include an initial payment due upon contract
signing and date-based licensed software payment terms and payments based upon delivery for
services, hardware and sublicensed software. Revenue recognition on payments received in advance of
the services being performed are deferred and classified as either current or long term deferred
revenue depending on whether the revenue will be earned within one year.
We have periodically provided long-term financing options to creditworthy clients through third
party financing institutions and have directly provided extended payment terms to clients from
contract date. These extended payment term arrangements typically provide for date based payments
over periods ranging from 12 months up to seven years. Pursuant to ASC 985-605, because a
significant portion of the fee is due beyond one year, we have
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analyzed our history with these types of arrangements and have concluded that we have a standard
business practice of using extended payment term arrangements and a long history of successfully
collecting under the original payment terms for arrangements with similar clients, product
offerings, and economics without granting concessions. Accordingly, we consider the fee to be
fixed and determinable in these extended payment term arrangements and, thus, the timing of revenue
is not impacted by the existence of extended payments.
Some of these payment streams have been assigned on a non-recourse basis to third party financing
institutions. We account for the assignment of these receivables as true sales as defined in ASC
860, Transfers and Servicing. Provided all revenue recognition criteria have been met, we
recognize revenue for these arrangements under our normal revenue recognition criteria, and if
appropriate, net of any payment discounts from financing transactions.
NHS Initiative
In England, we have contracted with third parties to customize software and provide implementation
and support services under long term arrangements (nine years). Prior to 2008 we accounted for the
arrangements as single units of accounting under ASC 605-35 because the arrangements require
customization and development of software, and fair value for the support services had not been
established. Also prior to 2008 we believed it was reasonably assured that no loss would be
incurred under these arrangements and therefore we utilized the zero margin approach of applying
percentage-of-completion accounting.
During 2008 we established fair value of the undelivered elements of the arrangement that are not
subject to percentage of completion accounting. Also, during the fourth quarter of 2008 we
realized a significant milestone in London which significantly enhances our ability to reliably
estimate work effort for the remainder of the contract and estimate a minimum level of profit on
the arrangement. These events, combined with our experience since the contract signed in 2006 and
the experience gained in the South, allowed us to conclude that reasonably dependable work effort
estimates could be produced and allow for margin recognition.
As a result, our fourth quarter 2008 revenues included a cumulative catch-up adjustment, resulting
from the significant change in accounting estimate, in the amount of $28.6 million which represents
the margin on the contract which had been previously deferred as a result of the zero margin
approach of applying percentage of completion accounting. Greater than a majority of the catch-up
adjustment revenue was included in support, maintenance and services. The remaining margin
attributed to the services subject to ASC 605-35 will be recognized over the remaining service
period until the services are complete and amounts allocated to the other support services subject
to ASC 985-605 will be recognized over the relevant support periods. The contract expires in 2014.
(b) Cash Equivalents Cash equivalents consist of short-term marketable securities with original
maturities less than 90 days.
(c) Investments Our short-term investments are primarily invested in time deposits, commercial
paper, government and corporate bonds and auction rate securities. Refer to Note (3) and Note (4)
for a comprehensive description of these assets and their value.
(d) Concentrations Substantially all of our cash and cash equivalents and short-term
investments are held at two 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 and, therefore,
bear minimal risk.
Substantially all of our clients are integrated delivery networks, physicians, hospitals and other
healthcare related organizations. If significant adverse macro-economic factors were to impact
these organizations it could materially adversely affect us. Our access to certain software and
hardware components is dependent upon single and sole source suppliers. The inability of any
supplier to fulfill our supply requirements could affect future results.
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As of the end of 2009, we had significant concentration of receivables owed to us by Fujitsu
Services Limited, which are currently in dispute. Refer to Note 5 for additional information.
(e) Inventory - Inventory consists primarily of computer hardware, sublicensed software held for
resale and RxStation medication dispensing units. Inventory is recorded at the lower of cost
(first-in, first-out) or market.
(f) Property 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
two 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 two to 15
years.
(g) Software Development Costs Software development costs are accounted for in accordance with
ASC 985-20, Costs of Software to be Sold, Leased or Marketed. Costs incurred internally in creating
computer software products are expensed until technological feasibility has been established upon
completion of a detailed program design. Thereafter, all software development costs are
capitalized and subsequently reported at the lower of amortized cost or net realizable value.
Capitalized costs are amortized based on current and expected future revenue for each software
solution with minimum annual amortization equal to the straight-line amortization over the
estimated economic life of the solution.
(h) Goodwill and Other Intangible Assets We account for goodwill under the provisions of ASC
350, Intangibles Goodwill and Other. As a result, goodwill and intangible assets with indefinite
lives are not amortized but are evaluated for impairment annually or whenever there is an
impairment indicator. Based on these evaluations, there was no impairment of goodwill in 2009, 2008
or 2007. Refer to Note (7) for more information of Goodwill and other intangible assets.
(i) Contingencies We accrue for legal and other contingencies in accordance with ASC 450,
Contingencies. We currently have no material pending litigation.
The terms of our software license agreements with our clients generally provide for a limited
indemnification of such intellectual property against losses, expenses and liabilities arising from
third party claims based on alleged infringement by our solutions of an intellectual property right
of such third party. The terms of such indemnification often limit the scope of and remedies for
such indemnification obligations and generally include a right to replace or modify an infringing
solution. To date, we have not had to reimburse any of our clients for any losses related to these
indemnification provisions pertaining to third party intellectual property infringement claims. For
several reasons, including the lack of prior indemnification claims and the lack of a monetary
liability limit for certain infringement cases under the terms of the corresponding agreements with
our clients, we cannot determine the maximum amount of potential future payments, if any, related
to such indemnification provisions.
From time to time we are involved in routine litigation incidental to the conduct of our business,
including for example, employment disputes and litigation alleging solution defects, intellectual
property infringement, violations of law and breaches of contract and warranties. We believe that
no such routine litigation currently pending against us, if adversely determined, would have a
material adverse effect on our consolidated financial position, results of operations or cash
flows.
(j) Derivative Instruments and Hedging Activities We follow ASC 815, Derivatives and Hedging to
account for our hedging activities. Refer to Note (10) for more information on our hedging
activities.
(k) 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.
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(l) Earnings per Common Share Earnings per common share is computed in accordance with ASC 260,
Earnings Per Share. Refer to Note (13) for additional details of our earnings per share
computations.
(m) Accounting for Share-based payments We follow ASC 718, Stock Compensation, which addresses
the accounting for share-based payment transactions with employees and other third parties and
requires that the compensation costs relating to such transactions be recognized in the
consolidated statement of earnings. Refer to Note (14) for a detailed discussion of share-based
payments.
(n) Foreign Currency - Assets and liabilities of non-U.S. subsidiaries whose functional currency is
the local currency are translated into U.S. dollars at exchange rates prevailing at the balance
sheet date. Revenues and expenses are translated at average exchange rates during the year. The
net exchange differences resulting from these translations are reported in accumulated other
comprehensive income. Gains and losses resulting from foreign currency transactions are included
in the consolidated statements of operations. The net gain resulting from foreign currency
transactions is included in general and administrative expenses in the consolidated statements of
operations and amounted to $4.0 million, $9.9 million, and $3.7 million in 2009, 2008 and 2007,
respectively.
(o) Collaborative Arrangements - We account for arrangements involving joint operating activities
of two or more parties that are each actively involved and exposed to risks and rewards of the
activities in accordance with ASC 808, Collaborative Arrangements. Third party costs incurred and
revenues generated by such activities are classified in the consolidated statements of operations
based on the gross or net reporting requirements included in ASC 605. Payments between participants
are recorded based on the nature of the payments in accordance with the applicable authoritative
guidance.
(p) Recent Accounting Pronouncements
In September 2009, Accounting Standards Update (ASU) 09-13, Revenue Recognition (Topic 605)
Multiple Deliverable Revenue Arrangements, was issued, which will require an entity to apply the
relative selling price allocation method in order to estimate selling price for all units of
accounting, including delivered items, when vendor-specific objective evidence (VSOE) or acceptable
third party evidence (TPE) does not exist and expands the disclosure requirements to require an
entity to provide both qualitative and quantitative information about the significant judgments
made in applying the guidance in ASU 09-13 and subsequent changes in those judgments that may
significantly affect the timing or amount of revenue recognition. ASU 09-13 is effective for
revenue arrangements entered into or materially modified in fiscal years beginning on or after June
15, 2010 and shall be applied on a prospective basis. Earlier application is permitted. We are
assessing the potential impact of ASU 09-13 on our financial position and results of operations.
In September 2009, ASU 09-14, Software (Topic 985) Certain Revenue Arrangements that Include
Software Elements, was issued, which requires the exclusion from the scope of ASC 985 of all
tangible products containing both software and non-software components that function together to
deliver the products essential functionality. ASU 09-14 is effective for revenue arrangements
entered into or materially modified in fiscal years beginning on or after June 15, 2010 and shall
be applied on a prospective basis. Earlier application is permitted. We are assessing the impact of
ASU 09-14 on our financial position and results of operations.
In December 2009, ASU 09-16, Accounting for Transfers of Financial Assets, was issued, which among
other things creates more stringent conditions for reporting a transfer of a portion of a financial
asset as a sale. ASU 09-16 is effective for financial asset transfers as of the beginning of fiscal
years that begin after November 15, 2009. Earlier adoption is prohibited. We are assessing the
impact of ASU 09-16 on our financial position and results of operations.
(2) Business Acquisitions
There were no business acquisitions by the Company during 2009. During the 2008 and 2007, we
completed two acquisitions, which were accounted for under the purchase method of accounting. The
results of each acquisition
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were included in our consolidated statements of operations from the date of each acquisition. Below
is a description of the acquisitions.
On August 1, 2008, we completed the purchase of LingoLogix, Inc. (LingoLogix), for $4.0 million in
cash. LingoLogix was a provider of software used for computer automated coding technology. The
acquisition of LingoLogix enhanced our revenue cycling offerings as the solutions can be used in
both inpatient and outpatient environments to improve physician workflow and drive more accurate
and efficient reimbursement through automated coding. The operating results of LingoLogix were
combined with our operating results subsequent to the purchase date of August 1, 2008. The
allocation of the purchase price to the estimated fair values of the identified tangible and
intangible assets acquired and liabilities assumed resulted in goodwill of $1.3 million and $4.1
million in intangible assets. The goodwill was allocated to our Domestic operating segment. The
intangible assets are being amortized over 5 years. Pro-forma results of operations have not been
presented because the effect of this acquisition was not material to our results.
On February 22, 2007, we completed the purchase of assets of Etreby Computer Company, Inc.
(Etreby), for $25.1 million in cash, which was reduced by $1.6 million for a working capital
adjustment in the second quarter of 2007. Etreby was a software provider of retail pharmacy
management systems. The acquisition of Etrebys assets expanded our pharmacy systems portfolio.
The operating results of Etreby were combined with our operating results subsequent to the purchase
date of February 22, 2007. The allocation of the purchase price to the estimated fair values of
the identified tangible and intangible assets acquired and liabilities assumed resulted in goodwill
of $12.7 million and $10.2 million in intangible assets. The goodwill was allocated to our Domestic
operating segment and is expected to be deductible for tax purposes. The intangible assets are
being amortized over five years. Pro-forma results of operations have not been presented because
the effect of this acquisition was not material to our results.
A summary of our purchase acquisitions for the three years ended 2009, is as follows:
Developed | Form of | |||||||||||||||||||||||
(In millions) | Date | Goodwill | (Tax Basis) | Intangibles | Technology | Consideration | ||||||||||||||||||
Fiscal Year 2008 Acquisition |
||||||||||||||||||||||||
Name: |
||||||||||||||||||||||||
LingoLogix, Inc. |
||||||||||||||||||||||||
Description of Business: |
||||||||||||||||||||||||
Computer Automated Coding Technology |
8/08 | $1.3 | $ - | $0.5 | $3.6 | $4.0 cash | ||||||||||||||||||
Reason for Acquisition: |
||||||||||||||||||||||||
Integrate technology into Cerner Millennium |
||||||||||||||||||||||||
Fiscal Year 2007 Acquisition |
||||||||||||||||||||||||
Name: |
||||||||||||||||||||||||
Etreby Computer Company, Inc. |
||||||||||||||||||||||||
Description of Business: |
||||||||||||||||||||||||
Software provider of retail pharmacy |
2/07 | $ | 12.7 | ($12.7 | ) | $8.3 | $1.9 | $23.5 cash | ||||||||||||||||
management systems |
||||||||||||||||||||||||
Reason for Acquisition: |
||||||||||||||||||||||||
Integrate technology into Cerner Millennium |
||||||||||||||||||||||||
The assets and liabilities of the acquired companies at the date of acquisition are as
follows:
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Etreby Computer | ||||||||
(In thousands) | LingoLogix, Inc. | Company, Inc. | ||||||
Current assets |
$ | - | $ | 1,002 | ||||
Total assets |
5,306 | 24,280 | ||||||
Current liabilities |
25 | 748 | ||||||
Total liabilities |
1,306 | 748 |
(3) Cash and Investments
Our cash, cash equivalents and investment securities consisted of the following:
(In thousands) | 2009 | 2008 | ||||||
Cash and cash equivalents: |
||||||||
Cash |
$ | 144,764 | $ | 199,543 | ||||
Money market funds |
80,242 | 70,951 | ||||||
Time deposits |
8,523 | - | ||||||
Corporate bonds |
8,194 | |||||||
Total cash and cash equivalents |
$ | 241,723 | $ | 270,494 | ||||
Short-term investments |
||||||||
Time deposits |
$ | 37,784 | $ | 4,084 | ||||
Commercial paper |
19,987 | 34,316 | ||||||
Government and corporate bonds |
164,792 | - | ||||||
Auction rate securities |
85,203 | - | ||||||
Put-like feature |
9,347 | - | ||||||
Total short-term investments |
$ | 317,113 | $ | 38,400 | ||||
Long-term investments |
||||||||
Auction rate securities |
$ | - | $ | 85,440 | ||||
Put-like feature |
- | 19,860 | ||||||
Total long-term investments |
$ | - | $ | 105,300 | ||||
Refer to Note (4) for details of the fair value measurements within the fair value hierarchy
of these financial assets.
Auction rate securities are debt instruments with long-term nominal maturities, for which the
interest rates regularly reset every 7-35 days under an auction system. Because auction rate
securities historically re-priced frequently, they traded in the market on a par-in, par-out basis.
In prior periods, we regularly liquidated our investments in these securities for reasons
including, among others, changes in the market interest rates and changes in the availability of,
and the yield on, alternative investments. Beginning in February 2008, liquidity issues in the
global credit markets resulted in the progressive failure of auctions representing all of the
auction rate securities we hold, because the amount of securities submitted for sale in those
auctions exceeded the amount of bids. To date we have collected all interest receivable on our
auction rate securities when due and expect to continue to do so in the future; however, the
principal associated with failed auctions will not be accessible until successful auctions occur, a
buyer is found outside of the auction process, the issuers establish a different form of financing
to replace these securities or final payments come due according to contractual maturities ranging
from 13 to 30 years.
In August 2008, our broker agreed to a settlement in principle with the Securities and Exchange
Commission, the New York Attorney General and other regulatory agencies to restore liquidity to
clients who hold auction rate securities. During the fourth quarter of 2008, we entered into a
settlement agreement (the Settlement
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Agreement) with the investment firm that sold us the auction rate securities. Under the terms of the Settlement Agreement, we received the right to redeem the securities at par during a
period from mid-2010
through mid-2012. Additionally, we have the option to obtain a loan, secured by such securities,
at no net cost prior to the redemption period.
In conjunction with the execution of the Settlement Agreement, we transferred the auction rate
securities from available-for-sale to trading securities. As trading securities, these investments
are carried at fair value with changes recorded through earnings. At the end of 2009, we held
auction rate securities with a par value of $94.6 million and recognized an unrealized trading gain
of $10.5 million for the year then ended in other income within the Consolidated Statements of
Operations.
The Settlement Agreement is being accounted for as a put-like feature and is carried at fair value
with changes recorded through earnings. We have valued the put-like feature as the difference
between the par value of the auction rate securities and the fair value of the securities,
discounted by the credit risk of the broker. The loan option was also valued taking into account
the settlement discount and credit risk during the time necessary to administer the loan. At the
end of 2009, we valued the put-like feature at $9.3 million and recognized an unrealized loss of
$10.5 million for the year then ended in other income within the Consolidated Statement of
Operations. We anticipate that any future changes in the fair value of the put-like feature will
be substantially offset by changes in the fair value of the related auction rate securities with no
material net impact to the Consolidated Statements of Operations.
All of the auction rate securities that we currently hold are A rated or higher and are
collateralized by student loan portfolios, the majority of which are backed by the U.S. government
through its Federal Family Education Loan Program.
In the fourth quarter of 2009, we reclassified our auction rate securities from long-term to
short-term investments based on our intention of exercising the put-like settlement feature and
redeeming the securities within the next year.
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 the market
decline, our intent and ability to hold to maturity or until forecasted recovery, and the financial
health of and specific prospects for the issuer. Unrealized losses that are other than temporary
are recognized in earnings.
(4) Fair Value Measurements
We determine fair value measurements used in our consolidated financial statements based upon the
price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. The fair value hierarchy
distinguishes between (1) market participant assumptions developed based on market data obtained
from independent sources (observable inputs) and (2) an entitys 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. |
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| 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 at fair value within the fair value
hierarchy at the end of 2009:
Fair Value Measurements at Reporting Date Using | ||||||||||||||||||||
(In thousands) | Quoted Prices in | Significant | ||||||||||||||||||
Active Markets | Other | Significant | ||||||||||||||||||
for Identical | Observable | Unobservable | ||||||||||||||||||
Balance Sheet | Assets | Inputs | Inputs | |||||||||||||||||
Description | Classification | 2009 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||||
Money market funds |
Cash equivalents | $ | 80,242 | $ | 80,242 | $ | - | $ | - | |||||||||||
Time deposits |
Cash equivalents | 8,523 | - | 8,523 | - | |||||||||||||||
Corporate bonds |
Cash equivalents | 8,194 | - | 8,194 | - | |||||||||||||||
Time deposits |
Short-term investments | 37,784 | - | 37,784 | - | |||||||||||||||
Commercial paper |
Short-term investments | 19,987 | - | 19,987 | - | |||||||||||||||
Government and corporate bonds |
Short-term investments | 164,792 | - | 164,792 | - | |||||||||||||||
Auction rate securities |
Short-term investments | 85,203 | - | - | 85,203 | |||||||||||||||
Put-like feature |
Short-term investments | 9,347 | - | - | 9,347 |
Refer to Note (3) for a comprehensive description of these assets. Our auction rate securities
have been classified as Level 3 assets within the fair value hierarchy, as their valuation requires
substantial judgment and estimation of factors that are not currently observable in the market due
to the lack of trading in the securities. If different assumptions were used for the various
inputs to the valuation, including, but not limited to, assumptions involving the estimated holding
periods for the auction rate securities, the estimated cash flows over those estimated lives, and
the estimated discount rates, including the liquidity discount rate, applied to those cash flows,
the estimated fair value of these investments could be significantly higher or lower than the fair
value we determined.
The table below presents the activity of our assets measured at fair value on a recurring basis
using significant unobservable inputs (Level 3) for the years ended 2009 and 2008:
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
(In thousands) | 2009 | 2008 | ||||||
Beginning balance |
$ | 105,300 | $ | 160,900 | ||||
Purchases and settlements, net |
- | (54,950 | ) | |||||
Transfer to Level 3 |
- | 105,950 | ||||||
Redemptions at par |
(10,750 | ) | (650 | ) | ||||
Unrealized gain (loss) on auction rate securities included in earnings |
10,513 | (19,860 | ) | |||||
Unrealized gain (loss) on put-like feature included in earnings |
(10,513 | ) | 19,860 | |||||
Ending balance |
$ | 94,550 | $ | 105,300 | ||||
On January 4, 2009, we fully adopted ASC 820, Fair Value Measurements and Disclosures, to
include all non-financial assets and liabilities that are not recognized or disclosed at fair value
in the financial statements on a recurring basis, which includes goodwill and non-financial
long-lived assets, and are measured at fair value in certain circumstances (for example, when there
is evidence of impairment). As of the end of 2009, there was no indication of impairment related
to our non-financial assets and liabilities. Refer to Note (7) Goodwill and Other Intangible
Assets for further description of the inputs used to measure fair value of goodwill as part of our
annual impairment test.
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(5) Receivables
Receivables consist of accounts receivable and contracts receivable. Accounts receivable represent
recorded revenues that have been billed. Contracts receivable represent recorded revenues that are
billable by us at future dates under the terms of a contract with a client. Billings and other
consideration received on contracts in excess of related revenues recognized are recorded as
deferred revenue. Substantially all receivables are derived from sales and related support and
maintenance and professional services of our clinical, administrative and financial information systems and solutions to healthcare providers located throughout the United States and
in certain non-U.S. countries.
We perform ongoing credit evaluations of our clients and generally do not require collateral from
our clients. We provide an allowance for estimated uncollectible accounts based on specific
identification, historical experience and our judgment. Provisions for losses on uncollectible
accounts for 2009, 2008 and 2007 totaled $3.1 million, $10.0 million and $7.4 million,
respectively.
A summary of receivables, net is as follows:
2009 | 2008 | |||||||
(In thousands) |
||||||||
Gross accounts receivable |
$ | 342,992 | $ | 346,063 | ||||
Less: Allowance for doubtful accounts |
16,895 | 18,149 | ||||||
Accounts receivable, net of allowance |
326,097 | 327,914 | ||||||
Contracts receivable |
135,314 | 141,014 | ||||||
Total receivables, net |
$ | 461,411 | $ | 468,928 | ||||
During the second quarter of 2008, Fujitsu Services Limiteds (Fujitsu) contract as the prime
contractor in the National Health Service (NHS) initiative to automate clinical processes and
digitize medical records in the Southern region of England was terminated by the NHS. This had the
effect of automatically terminating our subcontract for the project. We are in dispute with
Fujitsu regarding Fujitsus obligation to pay the amounts comprised of accounts receivable and
contracts receivable related to that subcontract, and we are working with Fujitsu to resolve these
issues based on processes provided for in the contract. Part of that process requires resolution
of disputes between Fujitsu and the NHS regarding the contract termination. During the 2009 fourth
quarter certain events occurred in the resolution process between Fujitsu and the NHS which reduced
the likelihood the matter will be resolved in the next 12 months. Therefore we reclassified the
receivables, which represented more than 10% of our net receivables, from current assets to other
long term assets during the 2009 fourth quarter. These receivables
represent the significant majority of other
long-term assets at the end of 2009. While the ultimate collectability of the receivables pursuant
to this process is uncertain, management believes that it has valid and equitable grounds for
recovery of such amounts and that collection of recorded amounts is probable.
During 2009 and 2008, we received total client cash collections of $1.8 billion and $1.7 billion,
respectively, of which $54.0 million and $89.9 million were received from third party arrangements
with non-recourse payment assignments.
(6) Property and Equipment
A summary of property, equipment and leasehold improvements stated at cost, less accumulated
depreciation and amortization, is as follows:
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(In thousands) | Depreciable Lives (Yrs | ) | 2009 | 2008 | ||||||||
Furniture and fixtures |
5 | - | 12 | $ | 56,631 | $ | 58,334 | |||||
Computer and communications equipment |
2 | - | 5 | 585,685 | 513,652 | |||||||
Leasehold improvements |
2 | - | 15 | 139,331 | 135,792 | |||||||
Capital lease equipment |
3 | - | 5 | 17,147 | 16,797 | |||||||
Land, buildings and improvements |
12 | - | 50 | 204,080 | 177,596 | |||||||
Other equipment |
5 | - | 20 | 964 | 2,983 | |||||||
1,003,838 | 905,154 | |||||||||||
Less accumulated depreciation and amortization |
494,660 | 421,755 | ||||||||||
Total property and equipment, net |
$ | 509,178 | $ | 483,399 | ||||||||
Depreciation expense for 2009, 2008 and 2007 was $104.6 million, $96.7 million and $80.0
million, respectively.
(7) Goodwill and Other Intangible Assets
Goodwill and intangible assets with indefinite lives are tested for impairment annually or whenever
there is an impairment indicator. All goodwill is assigned to a reporting unit, where it is
subject to an impairment test based on fair value using Level 3 inputs as defined in the fair value
hierarchy. Refer to Note (4) Fair Value Measurements for the definition of the levels in the fair
value hierarchy as defined by ASC 820. The inputs used to calculate the fair value included the
projected cash flows and a discount rate that we estimated would be used by a market participant in
valuing these assets. Our most recent annual test of goodwill impairment indicated that goodwill
was not impaired. The fair values of each of our reporting units exceeded their carrying amounts by
a significant margin.
The changes in the carrying amounts of goodwill were as follows:
(In thousands) | 2009 | 2008 | ||||||
Beginning Balance |
$ | 146,666 | $ | 143,924 | ||||
Goodwill acquired and earnout payments for prior acquisitions |
3,425 | 2,392 | ||||||
Foreign currency translation adjustment and other |
1,388 | 350 | ||||||
Ending Balance |
$ | 151,479 | $ | 146,666 | ||||
Our intangible assets, other than goodwill or intangible assets with indefinite lives, are all
subject to amortization, are amortized on a straight-line basis, and are summarized as follows:
Weighted-Average | 2009 | 2008 | ||||||||||||||||||
Amortization | Gross Carrying | Accumulated | Gross Carrying | Accumulated | ||||||||||||||||
(In thousands) | Period (Yrs) | Amount | Amortization | Amount | Amortization | |||||||||||||||
Purchased software |
5.0 | $ | 84,968 | $ | 62,802 | $ | 83,302 | $ | 53,233 | |||||||||||
Customer lists |
5.0 | 55,606 | 50,960 | 55,553 | 40,604 | |||||||||||||||
Patents |
14.5 | 8,184 | 1,729 | 7,491 | 1,275 | |||||||||||||||
Non-compete
agreements |
3.0 | 1,057 | 605 | 2,011 | 1,320 | |||||||||||||||
Total |
5.5 | $ | 149,815 | $ | 116,096 | $ | 148,357 | $ | 96,432 | |||||||||||
Amortization expense for 2009, 2008 and 2007 was $20.4 million, $20.0 million and $19.7
million, respectively.
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Estimated aggregate amortization expense for each of the next five years is as follows:
(In thousands) | ||||||||
For year ended: |
2010 | $ | 10,161 | |||||
2011 | 8,163 | |||||||
2012 | 4,977 | |||||||
2013 | 3,218 | |||||||
2014 | 1,877 |
(8) Software Development Costs
Information regarding our software development costs is included in the following table:
For the Years Ended | ||||||||||||
(in thousands) | 2009 | 2008 | 2007 | |||||||||
Software development costs |
$ | 285,187 | $ | 291,368 | $ | 283,086 | ||||||
Capitalized software development costs |
(77,747 | ) | (69,981 | ) | (65,985 | ) | ||||||
Amortization of capitalized software development costs |
63,611 | 51,132 | 53,475 | |||||||||
Total software development expense |
$ | 271,051 | $ | 272,519 | $ | 270,576 | ||||||
Included in 2007 total software development costs is $8.6 million of research and development
activities for the RxStation medical dispensing devices. Of this amount, $3.4 million was related
to periods prior to 2007 and was immaterial to both 2007 and the prior periods to which it related.
We are amortizing capitalized costs over five years. Accumulated amortization as of the end of
2009 and 2008 was $474.3 million and $410.4 million, respectively.
(9) Indebtedness
The following is a summary of indebtedness outstanding:
(In thousands) | 2009 | 2008 | ||||||
Note agreement, 5.54% |
$ | 90,090 | $ | 94,556 | ||||
Senior Notes, Series B, 6.42% |
29,250 | 39,000 | ||||||
Senior Notes, Series B, 7.66% |
- | 6,667 | ||||||
Other obligations |
1,180 | 1,263 | ||||||
120,520 | 141,486 | |||||||
Less: current portion |
(25,014 | ) | (30,116 | ) | ||||
$ | 95,506 | $ | 111,370 | |||||
In November 2005, we completed a £65.0 million private placement of debt at 5.54% pursuant to
a Note Agreement. The Note Agreement is payable in seven equal annual installments, which
commenced November 2009. The proceeds were used to repay the outstanding amount under our credit
facility and for general corporate purposes. The Note Agreement contains certain net worth and
fixed charge coverage covenants and provides certain restrictions on our ability to borrow, incur
liens, sell assets and pay dividends. We were in compliance with all covenants at the end of 2009.
In December 2002, we completed a $60.0 million private placement of debt pursuant to a Note
Agreement. The Series A Senior Notes, with a $21.0 million principal amount at 5.57% were paid in
full in 2008. The Series B Senior notes, with a $39.0 million principal amount at 6.42%, are
payable in four equal annual installments, which commenced December 2009. The proceeds were used
to repay the outstanding amount under our credit facility
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and for general corporate purposes. The Note Agreement contains certain net worth and fixed charge coverage covenants and provides certain
restrictions on our ability to borrow, incur liens, sell assets and pay dividends. We were in
compliance with all covenants at the end of 2009.
In April 1999, we completed a $100.0 million private placement of debt pursuant to a Note
Agreement. The Series A Senior Notes, with a $60.0 million principal amount at 7.14% were paid in
full in 2006. The Series B Senior Notes, with a $40.0 million principal amount at 7.66%, were paid
in full in 2009.
We maintain a $90 million, multi-year revolving credit facility, which provides an unsecured
revolving line of credit for working capital purposes. Interest is payable at a rate based on
prime or LIBOR plus a spread that varies depending on the net worth ratios maintained. The
agreement contains certain net worth, current ratio and fixed charge coverage covenants and
provides certain restrictions on our ability to borrow, incur liens, sell assets and pay dividends.
The current agreement expires on May 31, 2013. As of the end of 2009, under this agreement we
had $6.6 million of outstanding letters of credit, no direct borrowings and were in compliance with
all covenants.
We also have capital lease obligations amounting to $0.6 million, payable over the next three
years.
The aggregate maturities for our long-term debt, including capital lease obligations, are as
follows (in thousands):
2010 |
$ | 25,014 | ||
2011 |
25,588 | |||
2012 |
24,873 | |||
2013 |
15,015 | |||
2014 |
15,015 | |||
2015 and thereafter |
15,015 | |||
Total maturities |
$ | 120,520 | ||
We estimate the fair value of our long-term, fixed-rate debt using a level 3 discounted cash
flow analysis based on our current borrowing rates for debt with similar maturities. The fair
value of our long-term debt was approximately $124.8 million and $159.3 million at the end of 2009
and 2008, respectively.
(10) Hedging Activities
We designated all of our Great Britain Pound (GBP) denominated long-term debt as a net investment
hedge of our U.K. operations. The objective of the hedge is to reduce our foreign currency
exposure in our U.K. subsidiary investment. Changes in the exchange rate between the United States
Dollar (USD) and GBP, related to the notional amount of the hedge, are recognized as a component of
accumulated other comprehensive loss, to the extent the hedge is effective. The following table
represents the fair value of the net investment hedge included within the Consolidated Balance
Sheet and the unrealized loss, net of related income tax effects, on the net investment hedge
recognized in accumulated other comprehensive income:
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2009
(In thousands) |
Balance Sheet | Net Unrealized | ||||||||||
Derivatives designated | Classification | Fair Value | Gain (Loss) | |||||||||
Net investment hedge |
Short-term liabilities | $ | 15,015 | $ | (1,192 | ) | ||||||
Net investment hedge |
Long-term liabilities | 75,075 | (5,543 | ) | ||||||||
Total net investment hedge |
$ | 90,090 | $ | (6,735 | ) | |||||||
2008
(In thousands) |
Balance Sheet | Net Unrealized | ||||||||||
Derivatives designated | Classification | Fair Value | Gain (Loss) | |||||||||
Net investment hedge |
Short-term liabilities | $ | 13,508 | $ | 3,158 | |||||||
Net investment hedge |
Long-term liabilities | 81,048 | 18,945 | |||||||||
Total net investment hedge |
$ | 94,556 | $ | 22,103 | ||||||||
We recognize foreign currency transaction gains and losses within the Consolidated Statements
of Operations as a component of general and administrative expenses. We realized foreign currency
gains in 2009, 2008 and 2007 of $4.0 million, $9.9 million and $3.7 million, respectively.
(11) Interest Income
A summary of interest income and expense is as follows:
For the Years Ended | ||||||||||||
(In thousands) | 2009 | 2008 | 2007 | |||||||||
Interest income |
$ | 8,801 | $ | 13,604 | $ | 13,206 | ||||||
Interest expense |
(8,493 | ) | (10,548 | ) | (11,937 | ) | ||||||
Interest income, net |
$ | 308 | $ | 3,056 | $ | 1,269 | ||||||
(12) Income Taxes
Income tax expense (benefit) for 2009, 2008 and 2007 consists of the following:
For the Years Ended | ||||||||||||
(In thousands) | 2009 | 2008 | 2007 | |||||||||
Current: |
||||||||||||
Federal |
$ | 90,992 | $ | 68,466 | $ | 66,701 | ||||||
State |
8,350 | 9,338 | 3,600 | |||||||||
Foreign |
4,015 | 9,789 | 24,629 | |||||||||
Total Current Expense |
103,357 | 87,593 | 94,930 | |||||||||
Deferred: |
||||||||||||
Federal |
(1,545 | ) | 10,873 | (1,726 | ) | |||||||
State |
845 | (1,105 | ) | (1,360 | ) | |||||||
Foreign |
(3,441 | ) | (4,588 | ) | (15,002 | ) | ||||||
Total deferred expense (benefit) |
(4,141 | ) | 5,180 | (18,088 | ) | |||||||
Total income tax expense |
$ | 99,216 | $ | 92,773 | $ | 76,842 | ||||||
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Temporary differences between the financial statement carrying amounts and tax basis of assets
and liabilities that give rise to significant portions of deferred income taxes at the end of 2009
and 2008 relate to the following:
(In thousands) | 2009 | 2008 | ||||||
Deferred tax assets |
||||||||
Accrued expenses |
$ | 17,920 | $ | 24,077 | ||||
Separate return net operating losses |
23,403 | 22,156 | ||||||
Share based compensation |
18,548 | 15,678 | ||||||
Other |
814 | 7,914 | ||||||
Total deferred tax assets |
60,685 | 69,825 | ||||||
Deferred tax liabilities |
||||||||
Software development costs |
(84,947 | ) | (80,623 | ) | ||||
Contract and service revenues and costs |
(9,205 | ) | (17,070 | ) | ||||
Depreciation and amortization |
(45,762 | ) | (39,814 | ) | ||||
Other |
(4,489 | ) | (17,621 | ) | ||||
Total deferred tax liabilities |
(144,403 | ) | (155,128 | ) | ||||
Net deferred tax liability before valuation allowance |
(83,718 | ) | (85,303 | ) | ||||
Valuation allowance |
- | - | ||||||
Net deferred tax liability |
$ | (83,718 | ) | $ | (85,303 | ) | ||
During 2007, we determined that due to a change in circumstances, it is more likely than not
that certain tax operating loss carry-forwards in a non-U.S. jurisdiction would not be realized
resulting in the recognition of a valuation allowance totaling approximately $8.0 million. During
2008, this non-U.S. jurisdiction audited us. As a result of the audit, certain tax positions previously taken were disallowed by the foreign
jurisdiction, which reduced the deferred tax asset relating to the net operating loss carryforward
in that jurisdiction. The valuation allowance related to the net operating loss carryforward was
released because we believe it is more likely than not we will realize the remaining operating loss
carry-forward amount. Based upon the level of historical taxable income and projections for future
taxable income over the periods which the remaining deferred tax assets are expected to be
deductible, as well as the scheduled reversal of deferred tax liabilities, we believe it is more
likely than not we will realize the remaining deferred tax assets and no valuation allowance is
required.
At the end of 2009, we had net operating loss carry-forwards subject to Section 382 of the Internal
Revenue Code for Federal income tax purposes of $11.6 million which are available to offset future
Federal taxable income, if any, through 2020. We had net operating loss carry-forwards from
non-U.S. jurisdictions of $1.5 million which are available to offset future taxable income, if any,
through 2015 and $49.7 million which are available to offset future taxable income, if any, with no
expiration.
The effective income tax rates for 2009, 2008, and 2007 were 34%, 33%, and 38%, respectively.
These effective rates differ from the Federal statutory rate of 35% as follows:
For the Years Ended | ||||||||||||
(In thousands) | 2009 | 2008 | 2007 | |||||||||
Tax expense at statutory rates |
$ | 102,438 | $ | 98,500 | $ | 71,389 | ||||||
State income tax, net of federal benefit |
6,658 | 6,403 | 4,640 | |||||||||
Prior period adjustments |
2,310 | (2,879 | ) | (3,125 | ) | |||||||
Valuation allowance |
- | (7,982 | ) | 7,982 | ||||||||
Audit settlements |
- | 4,412 | - | |||||||||
Tax Credits |
(5,150 | ) | (5,150 | ) | (4,150 | ) | ||||||
Unrecognized Tax Benefit |
(5,581 | ) | 5,691 | 2,882 | ||||||||
Other, net |
(1,459 | ) | (6,223 | ) | (2,776 | ) | ||||||
Total income tax expense |
$ | 99,216 | $ | 92,772 | $ | 76,842 | ||||||
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The 2009 tax expense amount includes $2.3 million expense related to adjustments from prior
period tax returns. The impact to any one of these tax years was not material. The 2008 and 2007
tax expense amounts include the recognition of approximately $2.9 million and $3.1 million,
respectively, of tax benefits. The 2008 amount was related to an adjustment of a foreign tax credit
claimed. The adjustments in 2007 were recorded primarily to correct an error in our 2006 state
income tax rate. These differences have accumulated over several years and the impact to any one
of these prior periods is not material.
The 2009 beginning and ending amounts of accrued interest related to the underpayment of taxes was
$0.9 million and $0.1 million, respectively. We classify interest and penalties as income tax
expense in our consolidated statement of operations, which is consistent with how we previously
classified interest and penalties related to the underpayment of income taxes. No accrual for tax
penalties was recorded at the end of the year.
During 2008, we settled IRS examinations for the 2005 to 2006 periods and as a result reversed
previously recorded reserves for tax uncertainties by $1.3 million. During 2009, the Internal
Revenue Service (IRS) completed its examination of the 2007 income tax return and refund claim
related to the foreign tax credit for the 2004, 2005 and 2006 income tax returns. We decreased the
unrecognized tax benefits by $8.0 million primarily due to the settlement of the 2007 IRS audit.
As of the end of 2009, the total amount of unrecognized tax benefits, including interest, was $6.6
million. We do not expect to resolve any of these matters within the next 12 months.
A reconciliation of the beginning and ending amount of unrecognized tax is presented below:
(In thousands) | 2009 | 2008 | 2007 | |||||||||
Unrecognized tax benefit beginning balance |
$ | 12,440 | $ | 8,069 | $ | 13,300 | ||||||
Gross decreases- tax positions in prior periods |
(7,961 | ) | - | (1,732 | ) | |||||||
Gross increases- in current-period tax positions |
2,379 | 5,690 | 4,614 | |||||||||
Settlements |
(259 | ) | (1,319 | ) | (8,113 | ) | ||||||
Unrecognized tax benefit ending balance |
$ | 6,599 | $ | 12,440 | $ | 8,069 | ||||||
(13) Earnings Per Share
Basic earnings per share (EPS) excludes dilution and is computed 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. A reconciliation of the numerators and the denominators of
the basic and diluted per-share computations are as follows:
2009 | 2008 | 2007 | ||||||||||||||||||||||||||||||||||
Earnings | Shares | Per-Share | Earnings | Shares | Per-Share | Earnings | Shares | Per-Share | ||||||||||||||||||||||||||||
(Numerator) | (Denominator) | Amount | (Numerator) | (Denominator) | Amount | (Numerator) | (Denominator) | Amount | ||||||||||||||||||||||||||||
(In thousands, except per share data) | ||||||||||||||||||||||||||||||||||||
Basic earnings per
share: |
||||||||||||||||||||||||||||||||||||
Income available to
common
stockholders |
$ | 193,465 | 80,981 | $ | 2.39 | $ | 188,658 | 80,549 | $ | 2.34 | $ | 127,125 | 79,395 | $ | 1.60 | |||||||||||||||||||||
Effect of dilutive
securities: |
||||||||||||||||||||||||||||||||||||
Stock options |
2,901 | - | 2,886 | - | 3,823 | |||||||||||||||||||||||||||||||
Diluted earnings per
share: |
||||||||||||||||||||||||||||||||||||
Income available to
common
stockholders including
| ||||||||||||||||||||||||||||||||||||
assumed conversions |
$ | 193,465 | 83,882 | $ | 2.31 | $ | 188,658 | 83,435 | $ | 2.26 | $ | 127,125 | 83,218 | $ | 1.53 | |||||||||||||||||||||
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Options to purchase 1.8 million, 2.3 million and 1.1 million shares of common stock at per
share prices ranging from $38.64 to $136.86, $33.63 to $136.86 and $40.84 to $136.86, were
outstanding at the end of 2009, 2008 and 2007, respectively, but were not included in the
computation of diluted earnings per share because they were anti-dilutive.
(14) Share Based Compensation and Equity
Stock Option and Equity Plans
As of the end of 2009, we had four fixed stock option and equity plans in effect for associates.
This includes two plans from which we could issue grants, (Plans F & G); and two plans from which
no new grants were permitted to be issued after January 1, 2005, but some awards remain
outstanding, (Plans D & E).
Under the 2001 Long-Term Incentive Plan F, we are authorized to grant to associates, directors and
consultants 4.0 million shares of common stock awards taking into account the stock-split effective
January 10, 2006. Awards under this plan may consist of stock options, restricted stock and
performance shares, as well as other awards such as stock appreciation rights, phantom stock and
performance unit awards which may be payable in the form of common stock or cash at our discretion.
However, not more than 1.0 million of such shares will be available for granting any types of
grants other than options or stock appreciation rights. Options under Plan F are exercisable at a
price not less than fair market value on the date of grant as determined by the Section 16 Insider
Equity and Incentive Compensation Subcommittee (the Committee). Options under this plan typically
vest over a period of five years as determined by the Committee and are exercisable for periods of
up to 25 years.
Under the 2004 Long-Term Incentive Plan G, we are authorized to grant to associates and directors
4.0 million shares of common stock awards taking into account the stock-split effective January 10,
2006. Awards under this plan may consist of stock options, restricted stock and performance
shares, as well as other awards such as stock appreciation rights, phantom stock and performance
unit awards which may be payable in the form of common stock or cash at our discretion. Options
under Plan G are exercisable at a price not less than fair market value on the date of grant as
determined by the Committee. Options under this plan typically vest over a period of five years as
determined by the Committee and are exercisable for periods of up to 12 years. In 2007, Long-Term
Incentive Plan G was amended to provide us the ability to recover fringe benefit tax payments made
by us on behalf of our associates in India.
Stock Options
The fair market value of each stock option award is estimated on the date of grant using a lattice
option-pricing model. The pricing model requires the use of the following estimates and
assumptions:
| Expected volatilities
under the lattice model are based on an equal weighting of implied
volatilities from traded options on our shares and historical volatility. We use
historical data to estimate the stock option exercise and associate departure behavior used
in the lattice model; groups of associates (executives and non-executives) that have
similar historical behavior are considered separately for valuation
purposes. |
||
| The expected term of stock options granted is derived from the output of the lattice
model and represents the period of time that stock options granted are expected to be
outstanding; the range given below results from certain groups of associates exhibiting
different post-vesting behaviors. |
||
| The risk-free rate is based on the zero-coupon U.S. Treasury bond with a term equal to
the contractual term of the awards. |
The weighted-average assumptions used to estimate the fair market value of stock options are as
follows:
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(In thousands) | 2009 | 2008 | 2007 | |||||||||||||
Expected volatility (%) |
45.2 - 51.5 | 45.9 - 52.4 | 43.1 - 46.1 | |||||||||||||
Expected term (yrs) |
9.3 - 9.6 | 8.4 - 9.7 | 9.6 - 9.9 | |||||||||||||
Risk-free rate (%)
|
3.8 | 4.4 | 4.6 |
A combined summary of the stock option activity of our four fixed stock option and equity
plans is presented below:
2009 | ||||||||||||||||
Weighted- | ||||||||||||||||
Weighted- | Average | |||||||||||||||
Average | Aggregate | Remaining | ||||||||||||||
Number of | Exercise | Intrinsic | Contractual | |||||||||||||
Options | Shares | Price | Value | Term | ||||||||||||
Outstanding at beginning of year |
8,924,321 | $ | 27.25 | |||||||||||||
Granted |
950,680 | 52.04 | ||||||||||||||
Exercised |
(1,504,863 | ) | 19.80 | |||||||||||||
Forfeited and Expired |
(88,214 | ) | 42.13 | |||||||||||||
Outstanding at end of year |
8,281,924 | $ | 31.29 | $ | 423,581,294 | 6.31 | ||||||||||
Options exercisable at the end of the year |
5,436,321 | $ | 22.81 | $ | 318,812,325 | 5.36 |
For the Years Ended | ||||||||||||
(In thousands, except for grant date fair value) | 2009 | 2008 | 2007 | |||||||||
Weighted-average grant date fair values |
$ | 27.96 | $ | 22.99 | $ | 29.17 | ||||||
Total intrinsic value of options exercised |
$ | 63,465 | $ | 26,841 | $ | 67,336 | ||||||
Cash received from exercise of stock options |
$ | 29,789 | $ | 15,364 | $ | 29,085 | ||||||
Tax benefit realized upon exercise of stock options |
$ | 23,654 | $ | 10,001 | $ | 29,865 |
As of the end of 2009, there was $49.3 million of total unrecognized compensation cost related
to stock options granted under all plans. That cost is expected to be recognized over a
weighted-average period of 3.09 years.
Nonvested Shares
Nonvested shares were valued at the fair market value on the date of grant and will vest provided
the recipient has continuously served on the Board of Directors through such vesting date or in the
case of an associate provided
that performance measures are attained. The expense associated with these grants is being
recognized over the period from the date of grant to the vesting date.
A summary of our nonvested restricted stock compensation arrangements granted under all plans is
presented below:
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2009 | ||||||||
Weighted-Average | ||||||||
Grant Date | ||||||||
Nonvested shares | Number of Shares | Fair Value | ||||||
Outstanding at beginning of year |
19,800 | $ | 45.91 | |||||
Granted |
13,500 | 56.52 | ||||||
Vested |
(16,500 | ) | 45.91 | |||||
Forfeited |
(3,300 | ) | 45.91 | |||||
Outstanding at end of year |
13,500 | 56.52 | ||||||
For the Years Ended | ||||||||||||
(In thousands, except for grant date fair value) | 2009 | 2008 | 2007 | |||||||||
Weighted average grant date fair values |
$ | 56.52 | $ | 45.91 | $ | 54.20 | ||||||
Total fair value of shares vested during the year |
$ | 923 | $ | 797 | $ | 1,380 |
As of the end of 2009, there was $0.3 million of total unrecognized compensation cost related
to nonvested share awards granted under all plans. That cost is expected to be recognized over a
weighted-average period of 0.4 years.
Associate Stock Purchase Plan
We established an Associate Stock Purchase Plan (ASPP) in 2001, which qualifies under Section 423
of the Internal Revenue Code. Each individual employed by us and associates of our United States
based subsidiaries, except as provided below, are eligible to participate in the Plan
(Participants). The following individuals are excluded from participation: (a) persons who, as of
the beginning of a purchase period under the Plan, have been continuously employed by us or our
domestic subsidiaries for less than two weeks; (b) persons who, as of the beginning of a purchase
period, own directly or indirectly, or hold options or rights to acquire under any agreement or
Company plan, an aggregate of 5% or more of the total combined voting power or value of all
outstanding shares of all classes of Company Common Stock; and, (c) persons who are customarily
employed by us for less than 20 hours per week or for less than five months in any calendar year.
Participants may elect to make contributions from 1% to 20% of compensation to the ASPP, subject to
annual limitations determined by the Internal Revenue Service. Participants may purchase Company
Common Stock at a 15% discount on the last business day of the option period. The purchase of our
Common Stock is made through the ASPP on the open market and subsequently reissued to the
associates. Under ASC 718, the difference of the open market purchase and the participants
purchase price is being recognized as compensation expense.
Share Based Compensation Cost
Our stock option and nonvested share awards qualify for equity classification pursuant to ASC 718,
Stock Compensation. 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, nonvested shares and ASPP are as follows:
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For the Years Ended | ||||||||||||
(In thousands) | 2009 | 2008 | 2007 | |||||||||
Stock option
and non-vested share compensation expense |
$ | 15,786 | $ | 14,674 | $ | 16,348 | ||||||
Associate stock purchase plan expense |
1,318 | 1,310 | 986 | |||||||||
Amounts capitalized in software development costs, net of amortization |
(262 | ) | (840 | ) | (1,145 | ) | ||||||
Amounts charged against earnings, before income tax benefit |
$ | 16,842 | $ | 15,144 | $ | 16,189 | ||||||
Amount of related income tax benefit recognized in earnings |
$ | 6,274 | $ | 5,641 | $ | 6,030 | ||||||
Treasury Stock
In March 2008, our Board of Directors authorized a stock repurchase program of up to $45 million of
our Common Stock on the open market and/or in privately-negotiated purchase. There were no shares
repurchased by us during 2009. The stock repurchase activity in 2008 was as follows:
Shares repurchased |
790,000 | |||
Average price per share |
$ | 35.45 | ||
Cost of shares repurchased, net of commissions |
$ | 28,002,000 |
These repurchased shares are recorded as treasury stock and are accounted for under the cost
method. No repurchased shares have been retired.
Preferred Stock
As of the end of 2009 and 2008, we had 1.0 million shares of authorized but unissued preferred
stock, $0.01 par value.
(15) Foundations Retirement Plan
The Cerner Corporation Foundations Retirement Plan (the Plan) was established under Section 401(k)
of the Internal Revenue Code. All associates age 18 and older and who are not a member of an
excluded class are eligible to participate. Participants may elect to make pretax contributions
from 1% to 80% of eligible compensation to the Plan, subject to annual limitations determined by
the Internal Revenue Service. Participants may direct contributions into mutual funds, a stable
value fund, a Company stock fund, or a self-directed brokerage account. We have a first tier
discretionary match that is made on behalf of participants in an amount equal to 33% of the first
6% of the participants salary contribution. Our first tier discretionary match expenses for the
Plan amounted to $8.7 million, $8.7 million and $8.3 million for 2009, 2008 and 2007, respectively.
We added a second tier discretionary match to the Plan in 2000. Contributions are based on
attainment of established earnings per share goals for the year or the established financial metric
for the Plan. Only participants who defer 2% of their paid base salary, are actively employed as
of the last day of the Plan year and are employed before October 1st of the Plan year
are eligible to receive the discretionary match contribution. For the years ended 2009, 2008 and
2007 we expensed $2.0 million, $2.2 million and $6.0 million for the second tier discretionary
distributions, respectively.
(16) Related Party Transactions
From July 1994 until August 2008 we leased an airplane from PANDI, Inc. (PANDI), a company owned by
Neal L. Patterson and Clifford W. Illig, our Chairman of the Board and CEO and Vice Chairman of the
Board, respectively.
During 2009, 2008 and 2007 we paid an aggregate of $1.4 million, $0.4 million and $0.6 million for
the rental of the airplane, respectively. The airplane was used principally by us for client
development and support and business development activities; and in particular, to reduce business
related travel time of our executives and associates,
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increase travel flexibility and increase the
number of client visits than would have been possible using solely commercial travel. On August 14,
2008, PANDI sold the airplane to a third party and the lease agreement with us was terminated.
Following the sale of the airplane, PANDI undertook a complete accounting of the actual financing,
operation, depreciation and maintenance costs of the airplane during the 14 year time period that
we leased the airplane from PANDI. Following the due diligence efforts by a committee comprised of
the independent members of the Board of Directors, we were authorized to pay PANDI the sum of $1.4
million.
(17) Commitments
Leases
We are committed under operating leases for office space and computer equipment through October
2027. Rent expense for office and warehouse space for our regional and global offices for 2009,
2008 and 2007 was $16.6 million, $16.1 million and $12.4 million, respectively. Aggregate minimum
future payments under these non-cancelable operating leases are as follows:
Operating Lease | ||||
Obligations | ||||
(In thousands) | ||||
2010 |
$ | 25,504 | ||
2011 |
23,041 | |||
2012 |
20,573 | |||
2013 |
17,677 | |||
2014 |
15,143 | |||
2015 and thereafter |
60,195 | |||
Total: |
$ | 162,133 | ||
Purchase Obligations
We have purchase commitments with various vendors through 2020. These commitments represent
non-cancellable commitments primarily to provide ongoing support, maintenance and service to our
clients. Aggregate future payments under these commitments are as follows:
Purchase | ||||
Obligations | ||||
(In thousands) | ||||
2010 |
$ | 15,592 | ||
2011 |
6,067 | |||
2012 |
5,644 | |||
2013 |
5,597 | |||
2014 |
2,797 | |||
2015 and thereafter |
10,665 | |||
Total: |
$ | 46,362 | ||
(18) Segment Reporting
We have two operating segments, Domestic and Global. Revenues are derived primarily from the sale
of clinical, financial and administrative information systems and solutions. The cost of revenues
includes the cost of third party consulting services, computer hardware and sublicensed software
purchased from computer and software manufacturers for delivery to clients. It also includes the
cost of hardware maintenance and sublicensed software support subcontracted to the manufacturers.
Operating expenses incurred by the geographic business segments consist of sales and client service
expenses including salaries of sales and client service personnel, communications
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expenses and
unreimbursed travel expenses. Performance of the segments is assessed at the operating earnings
level and, therefore, the segment operations have been presented as such. Other includes
revenues not generated by the operating segments and expenses such as software development,
marketing, general and administrative, share-based compensation expense and depreciation that has
not been allocated to the operating segments. It is impractical for us to track assets by
geographical business segment.
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 the operating information for 2009,
2008 and 2007.
Operating Segments | ||||||||||||||||
(In thousands) | Domestic | Global | Other | Total | ||||||||||||
2009 |
||||||||||||||||
Revenues |
$ | 1,398,715 | $ | 273,149 | $ | - | $ | 1,671,864 | ||||||||
Cost of revenues |
240,847 | 40,351 | - | 281,198 | ||||||||||||
Operating expenses |
372,370 | 130,256 | 596,034 | 1,098,660 | ||||||||||||
Total costs and expenses |
613,217 | 170,607 | 596,034 | 1,379,858 | ||||||||||||
Operating earnings (loss) |
$ | 785,498 | $ | 102,542 | $ | (596,034 | ) | $ | 292,006 | |||||||
Operating Segments | ||||||||||||||||
(In thousands) | Domestic | Global | Other | Total | ||||||||||||
2008 |
||||||||||||||||
Revenues |
$ | 1,307,510 | $ | 368,518 | $ | - | $ | 1,676,028 | ||||||||
Cost of revenues |
225,955 | 70,108 | - | 296,063 | ||||||||||||
Operating expenses |
361,213 | 150,729 | 589,138 | 1,101,080 | ||||||||||||
Total costs and expenses |
587,168 | 220,837 | 589,138 | 1,397,143 | ||||||||||||
Operating earnings (loss) |
$ | 720,342 | $ | 147,681 | $ | (589,138 | ) | $ | 278,885 | |||||||
Operating Segments | ||||||||||||||||
(In thousands) | Domestic | Global | Other | Total | ||||||||||||
2007 |
||||||||||||||||
Revenues |
$ | 1,227,434 | $ | 290,677 | $ | 1,766 | $ | 1,519,877 | ||||||||
Cost of revenues |
221,154 | 53,367 | 5,589 | 280,110 | ||||||||||||
Operating expenses |
331,124 | 151,355 | 553,205 | 1,035,684 | ||||||||||||
Total costs and expenses |
552,278 | 204,722 | 558,794 | 1,315,794 | ||||||||||||
Operating earnings (loss) |
$ | 675,156 | $ | 85,955 | $ | (557,028 | ) | $ | 204,083 | |||||||
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(19) Quarterly Results (unaudited)
Selected quarterly financial data for 2009 and 2008 is set forth below:
Earnings | ||||||||||||||||||||
Before Income | Basic Earnings | Diluted Earnings | ||||||||||||||||||
(In thousands,except per share data) | Revenues | Taxes | Net Earnings | Per Share | Per Share | |||||||||||||||
2009 quarterly results: |
||||||||||||||||||||
First Quarter |
$ | 392,322 | $ | 61,863 | $ | 40,830 | $ | 0.51 | $ | 0.49 | ||||||||||
Second Quarter |
403,806 | 66,223 | 43,745 | 0.54 | 0.52 | |||||||||||||||
Third Quarter |
409,415 | 70,887 | 48,394 | 0.60 | 0.57 | |||||||||||||||
Fourth Quarter |
466,321 | 93,708 | 60,496 | 0.74 | 0.71 | |||||||||||||||
Total |
$ | 1,671,864 | $ | 292,681 | $ | 193,465 | ||||||||||||||
2008 quarterly results: |
||||||||||||||||||||
First Quarter |
$ | 384,765 | $ | 57,284 | $ | 36,817 | $ | 0.46 | $ | 0.44 | ||||||||||
Second Quarter |
402,800 | 53,723 | 35,287 | 0.44 | 0.42 | |||||||||||||||
Third Quarter |
422,728 | 67,958 | 45,014 | 0.56 | 0.54 | |||||||||||||||
Fourth Quarter (1) |
465,735 | 102,466 | 71,540 | 0.89 | 0.86 | |||||||||||||||
Total |
$ | 1,676,028 | $ | 281,431 | $ | 188,658 | ||||||||||||||
(1) | Includes margin of $28.6 million related to our contract in London as part of the National Health Service (NHS) initiative to automate clinical processes and digitize medical records in England. This represents a one-time catch-up resulting from a change in accounting estimate and the ability to separate the support services element of the contract. The after tax effect of this item increased fourth quarter 2008 net earnings and diluted earnings per share by $20.6 million and $0.24, respectively. |
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Schedule II
Cerner Corporation
Valuation and Qualifying Accounts
Valuation and Qualifying Accounts
Additions | ||||||||||||||||||||
Through | ||||||||||||||||||||
Additions | Acquisitions and | |||||||||||||||||||
Balance at | Charged to | Consolidation of | ||||||||||||||||||
Beginning | Costs and | Variable Interest | Balance at | |||||||||||||||||
Description | of Period | Expenses | Entity | Deductions | End of Period | |||||||||||||||
(in thousands) | ||||||||||||||||||||
2007 |
||||||||||||||||||||
Doubtful Accounts and Sale Allowances |
$ | 14,628 | $ | 7,392 | $ | 31 | $ | (6,582 | ) | $ | 15,469 | |||||||||
2008 |
||||||||||||||||||||
Doubtful Accounts and Sale Allowances |
$ | 15,469 | $ | 9,957 | - | $ | (7,277 | ) | $ | 18,149 | ||||||||||
2009 |
||||||||||||||||||||
Doubtful Accounts and Sale Allowances |
$ | 18,149 | $ | 3,108 | - | $ | (4,362 | ) | $ | 16,895 | ||||||||||
See accompanying report of independent registered public accounting firm.
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Table of Contents
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Cerner Corporation:
Cerner Corporation:
Under date of February 22, 2010, we reported on the consolidated balance sheets of Cerner
Corporation and subsidiaries (collectively, the Corporation) as of January 2, 2010 and January 3,
2009, and the related consolidated statements of operations, changes in stockholders equity, and
cash flows for each of the years in the three-year period ended January 2, 2010, which are included
in the Corporations 2009 Annual Report on Form 10-K. In connection with our audits of the
aforementioned consolidated financial statements, we also audited the related consolidated
financial statement schedule as listed under Item 15(a)(2). This consolidated financial statement
schedule is the responsibility of the Corporations management. Our responsibility is to express an
opinion on this financial statement schedule based on our audits.
In our opinion, this financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
/s/ KPMG LLP
Kansas City, Missouri
February 22, 2010
Kansas City, Missouri
February 22, 2010
74