Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 28, 2008
OR
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o |
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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)
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Delaware
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43-1196944 |
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(State or other jurisdiction of
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(I.R.S. Employer Identification |
incorporation or organization)
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Number) |
2800 Rockcreek Parkway
North Kansas City, Missouri 64117
(816) 201-1024
(Address of Principal Executive Offices, including zip code;
registrants telephone number, including area code)
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) with the Commission, 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 is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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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
There were 80,795,084 shares of Common Stock, $.01 par value, outstanding at July 29, 2008.
CERNER CORPORATION AND SUBSIDIARIES
INDEX
Part I. Financial Information
Item 1. Financial Statements
CERNER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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June 28, |
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December 29, |
(In thousands, except share data) |
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2008 |
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2007 |
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(unaudited) |
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Assets |
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Current Assets: |
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Cash and cash equivalents |
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$ |
291,395 |
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$ |
182,914 |
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Short-term investments |
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161,600 |
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Receivables, net |
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398,371 |
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391,060 |
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Inventory |
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12,741 |
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10,744 |
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Prepaid expenses and other |
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65,980 |
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61,878 |
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Deferred income taxes |
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10,218 |
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10,368 |
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Total current assets |
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778,705 |
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818,564 |
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Property and equipment, net |
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470,701 |
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462,839 |
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Software development costs, net |
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211,488 |
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200,380 |
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Goodwill |
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148,440 |
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143,924 |
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Intangible assets, net |
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54,641 |
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46,854 |
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Long-term investments |
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101,649 |
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Other assets |
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17,152 |
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17,395 |
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Total assets |
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$ |
1,782,776 |
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$ |
1,689,956 |
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Liabilities and Shareholders Equity |
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Current Liabilities: |
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Accounts payable |
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$ |
75,464 |
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$ |
79,812 |
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Current installments of long-term debt |
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13,847 |
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14,260 |
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Deferred revenue |
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103,682 |
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98,802 |
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Accrued payroll and tax withholdings |
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58,532 |
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65,011 |
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Other accrued expenses |
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39,700 |
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30,238 |
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Total current liabilities |
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291,225 |
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288,123 |
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Long-term debt |
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170,820 |
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177,606 |
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Deferred income taxes |
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78,252 |
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68,738 |
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Deferred revenue |
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17,974 |
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21,775 |
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Minority owners equity interest in subsidiary |
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1,286 |
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1,286 |
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Stockholders Equity: |
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Common stock, $.01 par value, 150,000,000 shares
authorized, 80,754,245 shares issued at June 28, 2008
and 80,147,955 issued at December 29, 2007 |
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808 |
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801 |
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Additional paid-in capital |
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475,576 |
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451,876 |
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Retained earnings |
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743,545 |
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671,440 |
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Accumulated other comprehensive income |
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3,290 |
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8,311 |
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Total stockholders equity |
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1,223,219 |
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1,132,428 |
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Commitments |
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Total liabilities and stockholders equity |
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$ |
1,782,776 |
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$ |
1,689,956 |
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See notes to condensed consolidated financial statements.
1
CERNER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
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Three Months Ended |
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Six Months Ended |
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June 28, |
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June 30, |
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June 28, |
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June 30, |
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2008 |
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2007 |
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2008 |
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2007 |
(In thousands, except per share data) |
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Revenues: |
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System sales |
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$ |
120,633 |
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$ |
130,097 |
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$ |
236,865 |
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$ |
252,967 |
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Support, maintenance and services |
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271,470 |
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246,210 |
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531,264 |
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480,099 |
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Reimbursed travel |
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10,697 |
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10,281 |
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19,436 |
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19,374 |
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Total revenues |
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402,800 |
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386,588 |
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787,565 |
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752,440 |
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Costs and expenses: |
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Cost of system sales |
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45,844 |
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55,528 |
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86,027 |
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102,528 |
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Cost of support, maintenance and
services |
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15,245 |
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15,153 |
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30,697 |
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31,523 |
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Cost of reimbursed travel |
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10,697 |
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10,281 |
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19,436 |
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19,374 |
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Sales and client service |
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182,915 |
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165,844 |
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353,997 |
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323,002 |
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Software development |
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65,890 |
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63,715 |
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135,054 |
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130,313 |
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(Includes amortization of software
development costs of $13,409 and
$24,425, for the three and six months
ended June 28, 2008; and $13,357 and
$26,687 for the three and six months
ended June 30, 2007.) |
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General and administrative |
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28,988 |
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27,887 |
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52,667 |
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54,342 |
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Total costs and expenses |
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349,579 |
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338,408 |
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677,878 |
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661,082 |
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Operating earnings |
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53,221 |
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48,180 |
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109,687 |
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91,358 |
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Other income (expense): |
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Interest income, net |
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460 |
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424 |
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1,491 |
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544 |
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Other income (expense) |
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42 |
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(415 |
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(171 |
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(737 |
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Total other income (expense), net |
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502 |
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9 |
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1,320 |
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(193 |
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Earnings before income taxes |
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53,723 |
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48,189 |
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111,007 |
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91,165 |
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Income taxes |
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(18,436 |
) |
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(21,340 |
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(38,903 |
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(36,605 |
) |
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Net earnings |
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$ |
35,287 |
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$ |
26,849 |
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$ |
72,104 |
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$ |
54,560 |
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Basic earnings per share |
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$ |
0.44 |
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$ |
0.34 |
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$ |
0.90 |
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$ |
0.69 |
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Basic weighted average shares
outstanding |
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80,618 |
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79,223 |
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80,500 |
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78,967 |
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Diluted earnings per share |
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$ |
0.42 |
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$ |
0.32 |
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$ |
0.86 |
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$ |
0.66 |
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Diluted weighted average shares
outstanding |
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83,581 |
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83,092 |
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83,553 |
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82,879 |
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See notes to condensed consolidated financial statements.
2
CERNER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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Six Months Ended |
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June 28, |
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June 30, |
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2008 |
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2007 |
(In thousands) |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net earnings |
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$ |
72,104 |
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$ |
54,560 |
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Adjustments to reconcile net earnings to net cash provided by
operating activities: |
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Depreciation and amortization |
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80,448 |
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71,974 |
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Share-based compensation expense |
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6,752 |
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8,197 |
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Non-employee stock option compensation expense |
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440 |
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Provision for deferred income taxes |
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2,420 |
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(2,507 |
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Tax benefit from stock options |
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6,975 |
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20,362 |
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Excess tax benefits from share based compensation |
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(6,512 |
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(19,494 |
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Changes in assets and liabilities (net of businesses acquired): |
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Receivables, net |
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(9,706 |
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1,669 |
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Inventory |
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(2,879 |
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5,759 |
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Prepaid expenses and other |
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(4,178 |
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(1,060 |
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Accounts payable |
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(3,467 |
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(19,760 |
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Accrued income taxes |
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(7,169 |
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(14,322 |
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Deferred revenue |
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1,036 |
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6,139 |
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Other accrued liabilities |
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173 |
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(7,490 |
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Total adjustments |
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63,893 |
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49,907 |
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Net cash provided by operating activities |
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135,997 |
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104,467 |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Purchase of capital equipment |
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(46,865 |
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(51,565 |
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Purchase of land, buildings and improvements |
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(6,814 |
) |
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(48,320 |
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Purchase of intangibles |
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(895 |
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(565 |
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Acquisition of businesses, net of cash acquired |
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(3,181 |
) |
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(23,845 |
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Purchases of investments |
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(75,960 |
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(297,384 |
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Maturities of investments |
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131,220 |
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321,121 |
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Capitalized software development costs |
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(35,238 |
) |
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(32,680 |
) |
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Net cash provided (used) in investing activities |
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(37,733 |
) |
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(133,238 |
) |
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CASH FLOWS FROM FINANCING ACTIVITES: |
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Repayment of long-term debt |
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(7,249 |
) |
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(12,487 |
) |
Proceeds from excess tax benefits from share based compensation |
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6,512 |
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19,494 |
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Proceeds from exercise of options |
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10,442 |
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17,536 |
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Proceeds from sale of future receivables |
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4,655 |
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Net cash provided by financing activities |
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14,360 |
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|
24,543 |
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Effect of exchange rate changes on cash |
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(4,143 |
) |
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(39 |
) |
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Net increase (decrease) in cash and cash equivalents |
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108,481 |
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(4,267 |
) |
Cash and cash equivalents at beginning of period |
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182,914 |
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|
162,545 |
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Cash and cash equivalents at end of period |
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$ |
291,395 |
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$ |
158,278 |
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Supplemental
disclosures of cash flow information Cash paid during the year for: |
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Interest |
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$ |
4,115 |
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$ |
6,104 |
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Income taxes, net of refund |
|
|
31,168 |
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|
32,839 |
|
See notes to condensed consolidated financial statements.
3
CERNER CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) Interim Statement Presentation & Accounting Policies
The condensed consolidated financial statements included herein have been prepared by the Company
without audit, pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in annual financial statements
prepared in accordance with accounting principles generally accepted in the United States of
America have been condensed or omitted pursuant to such rules and regulations, although the Company
believes that the disclosures are adequate to make the information presented not misleading. These
condensed consolidated financial statements should be read in conjunction with the consolidated
financial statements and the notes thereto included in the Companys latest annual report on Form
10-K.
In the opinion of management, the accompanying unaudited consolidated financial statements include
all adjustments (consisting of only normal recurring accruals) necessary to present fairly the
financial position and the results of operations and cash flows for the periods presented. Interim
results as presented in this 10-Q are not necessarily indicative of the operating results for the
entire year.
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Statement of Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income,
establishes requirements for reporting and displaying of comprehensive income and its components.
Total Comprehensive Income, which includes net earnings, foreign currency translation adjustments,
unrealized gains and losses from available-for-sale securities (net of income taxes), and gains and
losses from a hedge of the Companys net investment in the United Kingdom, amounted to $36,077,000
and $29,126,000 for the three months ended June 28, 2008 and June 30, 2007, and $67,083,000 and
$57,229,000 for the six months ended June 28, 2008 and June 30, 2007, respectively. On March 29,
2008, the Company designated all of its Great Britain Pound (GBP) denominated long-term debt
(65,000,000 GBP) as a net investment hedge of its U.K. operations. The objective of the hedge is
to reduce the Companys foreign currency exposure in the U.K. Changes in the exchange rate between
the United States Dollar (USD) and GBP related to the notional amount of the hedge are being
recognized as a component of accumulated other comprehensive income. These fluctuations resulted
in a net gain of approximately $33,000 and a net loss of approximately $2,665,000 for the three
months ended June 28, 2008 and June 30, 2007 and a net loss of approximately $111,000 and
$3,427,000 for the six months ended June 28, 2008 and June 30, 2007, respectively.
Cerner recognizes transaction gains and losses from foreign currency on the income statement as a
component of general and administrative expenses. The Company realized a foreign currency gain of
$244,000 and a loss of $310,000 during the three months ended June 28, 2008 and June 30, 2007 and
gains of $5,891,000 and $187,000 for the six months ended June 28, 2008 and June 30, 2007,
respectively.
During the second quarter, the Company finalized a settlement with a third party provider of
software related to the use of the third partys software in the Companys remote hosting business.
Second quarter 2008 net earnings and diluted earnings per share include the impact of the
settlement which increased sales and client service expense by $8.0 million and
reduced net earnings by $5.0 million, or $.06 of diluted earnings per share. The settlement
included compensation for the use of the software for periods prior to the second quarter of 2008
as well as compensation for licenses of the software for future use for existing and additional
clients through January 2009. Based on a relative value allocation of the settlement amount, the
amount attributable to the utilization of software for current and prior periods is $8.0 million,
which was recognized in the second quarter.
Of the $8 million, the Company determined that approximately $5 million should have been recorded
in prior periods, primarily 2005 through the first quarter of 2008. $3 million of the charge is a
change of estimate appropriately recorded in the second quarter, but also primarily related to
prior periods. The amount of the
4
settlement attributable to the license for future use is
approximately $15 million, which will be purchased between now and January 2009 and amortized
ratably over the shorter of the hosting period for the applicable arrangement or the useful life of
the software. The Company determined that the effect of this adjustment on prior annual and
interim periods is not material to any previously reported results.
Financial Accounting Standards Board (FASB) Interpretation No. 48 (FIN 48), Accounting for
Uncertainty in Income Taxes, clarifies how companies calculate and disclose uncertain tax
positions. The Company classifies interest and penalties related to income taxes as income tax
expense in its consolidated statement of earnings.
The terms of the Companys software license agreements with its 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 the Companys 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, the Company has not had to reimburse any of its 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 its clients, the Company cannot determine the maximum amount of
potential future payments, if any, related to such indemnification provisions.
(2) 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 the earnings of the Company. A reconciliation of the numerators and the
denominators of the basic and diluted per-share computations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Three Months Ended |
|
|
June 28, 2008 |
|
June 30, 2007 |
|
|
Earnings |
|
Shares |
|
Per-Share |
|
Earnings |
|
Shares |
|
Per-Share |
|
|
(Numerator) |
|
(Denominator) |
|
Amount |
|
(Numerator) |
|
(Denominator) |
|
Amount |
(In thousands, except per share data) |
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per
share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to
common
stockholders |
|
$ |
35,287 |
|
|
|
80,618 |
|
|
$ |
0.44 |
|
|
$ |
26,849 |
|
|
|
79,223 |
|
|
$ |
0.34 |
|
Effect of dilutive
securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
|
|
|
|
|
2,963 |
|
|
|
|
|
|
|
|
|
|
|
3,869 |
|
|
|
|
|
|
|
|
Diluted earnings per
share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to
common
stockholders including
assumed conversions |
|
$ |
35,287 |
|
|
|
83,581 |
|
|
$ |
0.42 |
|
|
$ |
26,849 |
|
|
|
83,092 |
|
|
$ |
0.32 |
|
|
|
|
Options to purchase 2,382,000 and 1,163,000 shares of common stock at per share prices ranging from
$36.96 to $136.86 and $40.84 to $136.86 were outstanding at the three months ended June 28, 2008
and June 30, 2007, respectively, but were not included in the computation of diluted earnings per
share because the options were anti-dilutive.
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
Six Months Ended |
|
|
June 28, 2008 |
|
June 30, 2007 |
|
|
Earnings |
|
Shares |
|
Per-Share |
|
Earnings |
|
Shares |
|
Per-Share |
|
|
(Numerator) |
|
(Denominator) |
|
Amount |
|
(Numerator) |
|
(Denominator) |
|
Amount |
(In thousands, except per share data) |
|
|
|
|
|
|
|
|
|
Basic earnings per
share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to
common
stockholders |
|
$ |
72,104 |
|
|
|
80,500 |
|
|
$ |
0.90 |
|
|
$ |
54,560 |
|
|
|
78,967 |
|
|
$ |
0.69 |
|
Effect of dilutive
securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
|
|
|
|
|
3,053 |
|
|
|
|
|
|
|
|
|
|
|
3,912 |
|
|
|
|
|
|
|
|
Diluted earnings per
share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to
common
stockholders including
assumed conversions |
|
$ |
72,104 |
|
|
|
83,553 |
|
|
$ |
0.86 |
|
|
$ |
54,560 |
|
|
|
82,879 |
|
|
$ |
0.66 |
|
|
|
|
Options to purchase 2,110,000 and 1,352,000 shares of common stock at per share prices ranging from
$36.96 to $136.86 and $38.37 to $136.86 were outstanding at the six months ended June 28, 2008 and
June 30, 2007, respectively, but were not included in the computation of diluted earnings per share
because the options were anti-dilutive.
(3) Accounting for Share-Based Awards
SFAS No. 123(R) 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.
As of June 28, 2008, the Company had four stock option and equity plans in effect for associates.
Amounts recognized in the consolidated financial statements with respect to these plans are as
follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Three Months Ended |
|
|
June 28, 2008 |
|
June 30, 2007 |
(In thousands) |
|
|
|
|
Total cost of share-based payments for the period |
|
$ |
3,663 |
|
|
$ |
4,718 |
|
Amounts capitalized in software development costs |
|
|
(235 |
) |
|
|
(332 |
) |
|
|
|
Amounts charged against earnings, before income tax benefit |
|
$ |
3,428 |
|
|
$ |
4,386 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of related income tax benefit recognized in earnings |
|
$ |
1,277 |
|
|
$ |
1,678 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
Six Months Ended |
|
|
June 28, 2008 |
|
June 30, 2007 |
(In thousands) |
|
|
|
|
|
|
|
|
Total cost of share-based payments for the period |
|
$ |
7,435 |
|
|
$ |
8,808 |
|
Amounts capitalized in software development costs |
|
|
(445 |
) |
|
|
(611 |
) |
|
|
|
Amounts charged against earnings, before income tax benefit |
|
$ |
6,990 |
|
|
$ |
8,197 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of related income tax benefit recognized in earnings |
|
$ |
2,604 |
|
|
$ |
3,136 |
|
|
|
|
A summary of the stock option activity of the Companys four stock option and equity plans as of
June 28, 2008 and changes during the six months ended June 28, 2008 is presented below:
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 28, 2008 |
|
|
|
|
|
|
Weighted-Average |
|
Aggregate |
Fixed Options |
|
Number of Shares |
|
Exercise Price |
|
Intrinsic Value(1) |
Outstanding at the beginning of the year |
|
|
9,145,563 |
|
|
$ |
24.94 |
|
|
|
|
|
Granted |
|
|
790,060 |
|
|
|
44.70 |
|
|
|
|
|
Exercised |
|
|
(590,728 |
) |
|
|
17.68 |
|
|
|
|
|
Forfeited or expired |
|
|
(231,507 |
) |
|
|
32.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 28, 2008 |
|
|
9,113,388 |
|
|
$ |
26.93 |
|
|
$ |
175,592,725 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at June 28, 2008 |
|
|
5,738,212 |
|
|
$ |
18.93 |
|
|
$ |
150,680,697 |
|
|
|
|
(1) |
|
The intrinsic value of stock options outstanding represents the amount that would have been
received by the option holders had all option holders exercised their stock options as of June 28,
2008. |
The weighted average grant date fair value of stock options granted during the first six months of
2008 and 2007 was $24.22 and $28.89, respectively. The total intrinsic value of stock options
exercised during the first six months of 2008 and 2007 was $18,718,000 and $36,330,000,
respectively. The Company issues new shares to satisfy option exercises.
As of June 28, 2008, there was $47,527,249 of total unrecognized compensation cost related to
nonvested share-based compensation arrangements (including stock option and nonvested share awards)
granted under all plans. That cost is expected to be recognized over a weighted-average period of
2.95 years.
(4) Business Acquisition and Divestiture
No acquisition or divestiture activity took place during the three or six months ended June 28,
2008.
(5) Adoption of SFAS 157 Fair Value Measurements
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 157 (SFAS 157), Fair Value Measurements. This statement establishes a
single authoritative definition of fair value to be used when accounting rules require the use of
fair value, sets out a framework for measuring fair value and requires additional disclosures about
fair value measurement. On February 12, 2008, the FASB issued FASB Staff Position (FSP) No. FAS
157-2. This FSP defers the effective date of SFAS 157 to fiscal years beginning after November 15,
2008 for items within the scope of the FSP.
On December 30, 2007, the Company adopted the portions of SFAS 157, Fair Value Measurements
except for the non-financial assets and liabilities within the scope of the deferral provided by
FSP No. FAS 157-2. The following table details the fair value measurements within the fair value
hierarchy of our financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
Fair Value Measurements at Reporting Date Using |
|
|
|
|
|
|
Quoted Prices |
|
|
|
|
|
|
|
|
|
|
in Active |
|
Significant |
|
|
|
|
|
|
|
|
Markets for |
|
Other |
|
Significant |
|
|
|
|
|
|
Identical |
|
Observable |
|
Unobservable |
|
|
|
|
|
|
Assets |
|
Inputs |
|
Inputs |
Description |
|
June 28, 2008 |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
Available-for-sale securities |
|
$ |
101,624 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
101,624 |
|
|
Included in available-for-sale securities are auction rate securities with an estimated fair value
of $101,624,000 classified as non-current assets on the balance sheet. In February and March 2008,
liquidity issues in the global credit markets resulted in the failure of auctions representing all
of the auction rate securities held by Cerner. As a result, at the end of the first quarter the
Company assessed the decline in fair value of the securities as a
7
temporary impairment and
recognized an unrealized loss of $3,014,000 through other comprehensive income, net of an income
tax benefit of $1,575,000.
Based upon the change in the market and availability of observable inputs during the first quarter,
the Company changed its valuation methodology to a discounted cash flow model based on various
assumptions, which changed the input category from level 1 to level 3 (significant unobservable
inputs) within the SFAS 157 fair value hierarchy. Included in the assumptions are the current
interest rate environment, the credit rating of the issuers, the
underlying collateral including the amount of support by the Federal Family Education Loan Program
(FFELP) and the insurance issued by monoline insurance companies.
During the second quarter, overall market conditions did not improve and auctions continued to
fail. At June 28, 2008, the Company held auction rate securities with a par value of $105,950,000.
The Companys updated valuation model resulted in an estimated fair value of $101,624,000.
Accordingly, the Company recognized an unrealized gain of $139,000 through other comprehensive
income, net of a deferred tax provision of $122,000 in the second quarter. For a more detailed
discussion of the auction rate securities held by Cerner, please refer to note (8).
The table below presents the Companys assets measured at fair value on a recurring basis using
significant unobservable inputs (level 3) as defined in SFAS 157 at June 28, 2008:
|
|
|
|
|
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
For the Quarter Ended June 28, 2008 |
(In thousands) |
|
Auction Rate Securities |
Balance at 3/29/2008 |
|
$ |
101,363 |
|
Total unrealized gain |
|
|
|
|
included in other comprehensive
income |
|
$ |
139 |
|
included in deferred income taxes |
|
$ |
122 |
|
Balance at 6/28/2008 |
|
$ |
101,624 |
|
|
|
|
|
|
|
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
For the Six Months Ended June 28, 2008 |
(In thousands) |
|
Auction Rate Securities |
Balance at 12/30/2007 |
|
$ |
160,900 |
|
Purchases and settlements (net) |
|
$ |
(54,950 |
) |
Transfers to Level 3 |
|
$ |
105,950 |
|
Total unrealized losses |
|
|
|
|
included in other comprehensive
income |
|
$ |
(2,873 |
) |
included in deferred income taxes |
|
$ |
(1,453 |
) |
Balance at 6/28/2008 |
|
$ |
101,624 |
|
The effect of adopting the required portions of SFAS 157 did not have a material impact on the
Companys consolidated financial statements. The Company is currently assessing the impact of full
adoption of SFAS 157 on its results of operations and its financial position and will be required
to fully adopt SFAS 157 as of the first day of the 2009 fiscal year. The effect of adopting the
remainder of SFAS 157 is not expected to be material to the Companys consolidated financial
statements. At the end of the second quarter of 2008, categories where SFAS 157 had not been
applied consisted of goodwill and intangible assets.
(6) 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 the Company at future dates under the terms of a contract with a client. Billings and
other consideration received on
8
contracts in excess of related revenues recognized are recorded as
deferred revenue. A summary of receivables is as follows:
|
|
|
|
|
|
|
|
|
(In thousands) |
|
June 28, 2008 |
|
December 29, 2007 |
|
|
|
Accounts receivable, net of allowance |
|
$ |
299,126 |
|
|
$ |
261,456 |
|
Contracts receivable |
|
|
99,245 |
|
|
|
129,604 |
|
|
|
|
Total receivables, net |
|
$ |
398,371 |
|
|
$ |
391,060 |
|
|
|
|
The Company performs ongoing credit evaluations of its clients and generally does not require
collateral from its clients. The Company provides an allowance for estimated uncollectible
accounts based on specific identification, historical experience and managements judgment. At
June 28, 2008 and June 30, 2007, the allowance for estimated uncollectible accounts was $17,964,000
and $16,170,000, respectively.
At June 28, 2008, more than ten percent of total net receivables represent accounts receivable and
contracts receivable related to a contract with Fujitsu that was terminated in the second quarter
of 2008 when Fujitsu withdrew from the National Health Service (NHS) initiative to automate
clinical processes and digitize medical records the Southern region of England. The Company
expects to collect these receivables in full based on the terms of the contract.
During the first six months of 2008 and 2007, the Company received total client cash collections of
$852,386,000 and $832,600,000, respectively, of which $48,845,000 and $42,634,000 were received
from third party arrangements with non-recourse payment assignments.
(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. The Companys most recent test of goodwill
impairment indicated that goodwill was not impaired.
The Companys intangible assets, other than goodwill or intangible assets with indefinite lives,
are all subject to amortization and are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
June 28, 2008 |
|
|
December 29, 2007 |
|
|
|
Amortization |
|
|
Gross Carrying |
|
|
Accumulated |
|
|
Gross Carrying |
|
|
Accumulated |
|
(In thousands) |
|
Period (Yrs) |
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
|
Amortization |
|
|
|
|
|
|
|
|
|
Purchased software |
|
|
5.0 |
|
|
$ |
76,950 |
|
|
$ |
48,691 |
|
|
$ |
59,775 |
|
|
$ |
44,557 |
|
Customer lists |
|
|
5.0 |
|
|
|
55,524 |
|
|
|
35,493 |
|
|
|
55,384 |
|
|
|
30,236 |
|
Patents |
|
|
17.0 |
|
|
|
6,986 |
|
|
|
1,258 |
|
|
|
6,826 |
|
|
|
1,244 |
|
Non-compete agreements |
|
|
3.0 |
|
|
|
1,828 |
|
|
|
1,205 |
|
|
|
1,824 |
|
|
|
918 |
|
|
|
|
|
|
|
|
|
Total |
|
|
3.60 |
|
|
$ |
141,288 |
|
|
$ |
86,647 |
|
|
$ |
123,809 |
|
|
$ |
76,955 |
|
|
|
|
|
|
|
|
|
Aggregate amortization expense for the six months ended June 28, 2008 and June 30, 2007 was
$9,692,000 and $9,735,000, respectively. Estimated aggregate amortization expense for the
remainder of the current year and each of the next four years is as follows:
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
For the remaining six months: |
|
|
2008 |
|
|
|
10,027 |
|
For the year ended: |
|
|
2009 |
|
|
|
18,666 |
|
|
|
|
2010 |
|
|
|
7,675 |
|
|
|
|
2011 |
|
|
|
5,749 |
|
|
|
|
2012 |
|
|
|
2,629 |
|
9
The changes in the carrying amount of goodwill for the six months ended June 28, 2008 are as
follows:
|
|
|
|
|
(In thousands) |
|
|
|
|
Balance as of December 29, 2007 |
|
$ |
143,924 |
|
Goodwill acquired |
|
|
|
|
Foreign currency translation adjustment and other |
|
|
4,516 |
|
|
|
|
|
Balance as of June 28, 2008 |
|
$ |
148,440 |
|
|
|
|
|
Included in the Foreign currency translation adjustment and other line item is an approximately
$3 million earnout payment related to the 2005 acquisition of DKE SARL (Axya Systemes).
(8) Marketable Securities
As of June 28, 2008, the Company held investments in auction rate securities, which are debt
instruments having longer-dated (in most cases, many years) legal maturities, with interest rates
that are generally reset every 7-35 days under an auction system. Because auction rate securities
historically re-priced frequently, they traded in the market on par-in, par-out basis. In prior
periods, the Company regularly liquidated its 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. As a result, the Company has classified these securities
as available-for-sale securities. As available-for-sale securities, these investments are carried
at fair value with changes recorded to other comprehensive income. All of the auction rate securities
that the Company currently holds are AAA rated 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.
Management regularly reviews 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.
In February and March 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. These
liquidity issues persisted in the second quarter.
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. For each unsuccessful auction, the interest rate moves
to a maximum contractual rate defined for each security, generally reset periodically at a level
higher than defined short-term interest benchmarks. 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. We expect to
receive the principal associated with these auction-rate securities through one of the means
described above.
Consequently, the Company has categorized the securities as long-term investments and classified
them as non-current assets, as they are not generally available to support the Companys current
operations. There have been no realized gains or losses on these investments as the Company has
both the intent and ability to hold the securities until the earlier of market reestablishment or
maturity. The Company is using a discounted cash flow model with various assumptions in arriving
at the value of these auction rate securities. Included in these assumptions are the current
interest rate environment, the credit rating of the issuers, the underlying collateral including
the amount of support by the Federal Family Education Loan Program (FFELP) and the insurance issued
by monoline insurance companies.
At June 28, 2008, Cerner held auction rate securities with a par value of $105,950,000. The
decline in fair value has been assessed as temporary, therefore we have recognized a cumulative
unrealized loss of $2,873,000 through other comprehensive income, net of an income tax benefit of
$1,453,000. The second quarter impact of
10
the decline in fair value was an unrealized gain of
$139,000 recognized through other comprehensive income, net of a deferred tax provision of
$122,000.
While the recent auction failures may limit our ability to liquidate these investments for some
period of time, we do not believe the auction failures will materially impact our ability to fund
our working capital needs, capital expenditures or other business requirements.
(9) Income Taxes
During the second quarter, the Company settled and paid the Internal Revenue Service (IRS)
additional income taxes for the 1998-2004 periods which had previously been audited. The final
payments resulted in a reduction of the Companys liability for unrecognized tax benefit of
$700,000. The IRS examination of the Companys 2005 and 2006 income tax returns began this period.
We believe the examination will not have a material effect on Cerners financial position, results
of operations or liquidity.
It is reasonably possible that within the next 12 months we will resolve some of the matters
presently under examination which may increase or decrease unrecognized tax benefits for these open
tax years by $3,000,000. Any settlement of those unrecognized tax benefits will affect the
effective tax rate of the Company.
(10) Segment Reporting
The Company has 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 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 have not been allocated to the operating segments. The Company does not 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 the
three and six months ended June 28, 2008 and June 30, 2007.
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Segments |
|
(In thousands) |
|
Domestic |
|
|
Global |
|
|
Other |
|
|
Total |
|
Three months ended June 28, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
317,954 |
|
|
$ |
84,829 |
|
|
$ |
17 |
|
|
$ |
402,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues |
|
|
56,529 |
|
|
|
15,245 |
|
|
|
12 |
|
|
|
71,786 |
|
Operating expenses |
|
|
86,506 |
|
|
|
39,635 |
|
|
|
151,652 |
|
|
|
277,793 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
143,035 |
|
|
|
54,880 |
|
|
|
151,664 |
|
|
|
349,579 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings (loss) |
|
$ |
174,919 |
|
|
$ |
29,949 |
|
|
$ |
(151,647 |
) |
|
$ |
53,221 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Segments |
|
(In thousands) |
|
Domestic |
|
|
Global |
|
|
Other |
|
|
Total |
|
Three months ended June 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
300,296 |
|
|
$ |
86,292 |
|
|
$ |
|
|
|
$ |
386,588 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues |
|
|
57,420 |
|
|
|
23,542 |
|
|
|
|
|
|
|
80,962 |
|
Operating expenses |
|
|
83,405 |
|
|
|
39,069 |
|
|
|
134,972 |
|
|
|
257,446 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
140,825 |
|
|
|
62,611 |
|
|
|
134,972 |
|
|
|
338,408 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings (loss) |
|
$ |
159,471 |
|
|
$ |
23,681 |
|
|
$ |
(134,972 |
) |
|
$ |
48,180 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Segments |
|
(In thousands) |
|
Domestic |
|
|
Global |
|
|
Other |
|
|
Total |
|
Six months ended June 28, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
636,940 |
|
|
$ |
150,511 |
|
|
$ |
114 |
|
|
$ |
787,565 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues |
|
|
113,045 |
|
|
|
23,081 |
|
|
|
34 |
|
|
|
136,160 |
|
Operating expenses |
|
|
174,533 |
|
|
|
77,493 |
|
|
|
289,692 |
|
|
|
541,718 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
287,578 |
|
|
|
100,574 |
|
|
|
289,726 |
|
|
|
677,878 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings (loss) |
|
$ |
349,362 |
|
|
$ |
49,937 |
|
|
$ |
(289,612 |
) |
|
$ |
109,687 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Segments |
|
(In thousands) |
|
Domestic |
|
|
Global |
|
|
Other |
|
|
Total |
|
Six months ended June 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
599,890 |
|
|
$ |
152,550 |
|
|
$ |
|
|
|
$ |
752,440 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues |
|
|
114,400 |
|
|
|
39,025 |
|
|
|
|
|
|
|
153,425 |
|
Operating expenses |
|
|
163,857 |
|
|
|
74,096 |
|
|
|
269,704 |
|
|
|
507,657 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
278,257 |
|
|
|
113,121 |
|
|
|
269,704 |
|
|
|
661,082 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings (loss) |
|
$ |
321,633 |
|
|
$ |
39,429 |
|
|
$ |
(269,704 |
) |
|
$ |
91,358 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
Item 2. 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
the results of operations and financial condition of Cerner Corporation (Cerner or the
Company). 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) found above.
Management Overview
Cerner primarily derives revenue by selling, implementing and supporting software solutions,
clinical content, hardware, healthcare devices and services that give healthcare providers secure
access to 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 the Companys clients or in the Companys data center via a managed services model.
Cerners fundamental strategy has always centered 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, with revenue growing at compound rates of
more than 14 percent over the past three-, five- and ten-year periods. This growth has also
created a strategic client base of more than 6,000 hospital, health-system, physician practice,
clinic, laboratory and pharmacy clients around the world. Selling additional solutions back into
this client base is an important element of Cerners future revenue growth. Cerner is also focused
on driving growth through market share expansion by replacing competitors in healthcare settings
that are looking to replace their current healthcare information technology partners or those who
have not yet strategically aligned with a supplier. We also expect to drive growth through new
initiatives that reflect our ongoing ability to innovate such as our CareAwareTM
healthcare device architecture and devices, HealtheTM employer services, physician
practice solutions and solutions and services for the pharmaceutical market. Finally, Cerner
expects continued strong revenue contributions from the sale of our solutions and services outside
of the U.S. Many global markets have a low penetration of healthcare IT solutions and their
governing bodies are in many cases prepared to finance such enhancements.
Beyond our strategy for driving revenue growth, Cerner is also focused on earnings growth. Similar
to our history of growing revenue, our net earnings have increased at more than 20% compound annual
rates of three-, five- and ten-year periods. We believe we can continue driving strong levels of
earnings growth by 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 (i.e. non-U.S.) 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 below our revenue growth rate. |
We are also focusing on increasing cash flow by growing earnings, reducing the use of working
capital and controlling capital expenditures. While 2007 was a year of heavy capital investment
because of investments in a new data center to support our rapidly growing hosting business and
purchasing new buildings to accommodate growth in our associate base, we expect capital spending to
decrease in 2008.
13
Results Overview
The Company delivered strong levels of new business bookings, margin expansion, earnings and cash
flow in the second quarter of 2008. New business bookings revenue, which reflects the value of
executed contracts for software, hardware, professional services and managed services (hosting of
software in the Companys data center), in the second quarter of 2008 was $404 million. For the
second quarter of 2007, bookings were $487 million, including $98 million related to Cerners
participation in the National Health Service (NHS) initiative to automate clinical processes and
digitize medical records in England and approximately $20 million of higher than expected hardware
bookings. Second quarter 2008 bookings increased 10% over second quarter 2007s adjusted bookings
of $369 million. Revenues for the second quarter of 2008 increased 4% to $403 million compared to
$387 million in the year-ago quarter, with good growth in software, managed services, and support
being somewhat offset by declines in hardware revenue.
Second quarter 2008 net earnings were $35.3 million, and diluted earnings per share were $0.42.
Second quarter 2007 net earnings were $26.9 million and diluted earnings per share were $0.32.
Second quarter 2008 and 2007 net earnings and diluted earnings per share reflect the impact of
Statement of Financial Accounting Standards (SFAS) No. 123R, Share-Based Payment, which requires
the expensing of stock options. Share-based compensation expense reduced second quarter 2008 net
earnings and diluted earnings per share by $2.1 million and $0.03, respectively, and second quarter
2007 earnings and diluted earnings per share by $2.7 million and $0.03, respectively.
During the second quarter, the Company finalized a settlement with a third party provider of
software related to the use of the third partys software in the Companys remote hosting business.
Second quarter 2008 net earnings and diluted earnings per share include the impact of the
settlement which increased sales and client service expense by $8.0 million and reduced net
earnings by $5.0 million, or $.06 of diluted earnings per share. The settlement also included a
commitment to license an amount of approximately $15 million for future use, which will be
purchased between now and January 2009 and amortized ratably over the shorter of the hosting period
for the applicable arrangement or the useful life of the software (see Note 1 to the Condensed
Consolidated Financial Statements). The Company determined that the effect of this adjustment on
prior annual and interim periods is not material to any previously reported results.
The growth in net earnings and diluted earnings per share was driven primarily by continued
progress with the Companys margin expansion initiatives, particularly improving professional
services margins and leveraging R&D investments. Our second quarter operating margin was 13.2
percent, which is 70 basis points higher than the year-ago quarter. The third party software
supplier settlement impacted operating margin by approximately 200 basis points in the second
quarter of 2008. We remain on target with our long-term goal of achieving 20% operating margins.
The Company had strong cash collections of receivables of $426 million in the second quarter of
2008 compared to $438 million in the second quarter of 2007. Days sales outstanding increased
moderately to 90 days compared to 86 days in the second quarter of 2007. Operating cash flows for
the second quarter of 2008 were $85 million compared to $62 million in the second quarter of 2007.
The second quarter also included progress on our strategic initiatives that, while not material to
our current results, are an important part of our longer-term growth strategy. We made additional
progress at selling and implementing our CareAware MDBusTM healthcare device
connectivity solution that allows medical devices to be connected to an electronic medical record
through a USB-like connection. We signed several new clients for this solution and developed over
100 new drivers, which increased our library to over 250.
Healthcare Information Technology Market
There are several trends the Company believes create a positive market environment for the
healthcare information technology (HIT) market.
14
Healthcare spending continues to expand. The nonpartisan Congressional Budget Office projects that,
if left unchecked, total spending on healthcare in the United States would rise from 16 percent of
the gross national product in 2007 to 25 percent in 2025. HIT is one of the few answers. A study by
RAND Corp. published in October 2005 found that widespread adoption of HIT could cut the total cost
of healthcare by about 10 percent. Although policy experts have different opinions on the rates of
HIT adoption and how quickly benefits can be realized, there is consensus that HIT has the
potential to contribute to significant costs savings.
Problems in the quality of healthcare also drive interest in HIT. In July 2007, Health and Hospital
Networks, a publication of the American Hospital Association, released its annual list of the
nations 100 Most Wired Hospitals and Health Systems. Survey results indicate the hospitals with
good quality results also are dedicated to HIT. These Most Wired Hospitals lead the nation in
electronic ordering and bedside medication matching to reduce the number of potential medication
errors. We believe these results provide incentive for more hospitals to adopt HIT.
The Company also views the recent passage of the Medicare Bill (HR. 3661) into law as a positive.
This measure delays a proposed 10.6 percent cut to Medicare physician payments and allows for 18
months of stable payments. Additionally, the bill will foster adoption of electronic prescribing
by providing incentives for its use between 2009 and 2013 with penalties for not using it starting
in 2012.
Another factor we believe is favorable for the HIT industry in the United States is the continued
focus by Centers for Medicare and Medicaid Services (CMS) and other payers on linking medical care
payments to quality and safety, an approach commonly referred to as pay for performance. Some pay
for performance plans offer additional reimbursement for healthcare providers that can demonstrate
high levels of quality and safety. Based on CMS final rule for changes to the 2008 inpatient
prospective payment system (IPPS), there will also be instances where providers are not paid for
treatment of conditions acquired while in the hospital if the condition is deemed reasonably
preventable through the application of evidence-based guidelines. This change, effective in October
2008, is positive for the HIT industry because ensuring compliance with evidence-based guidelines
is easier for organizations with an HIT system. Additionally, an expected increase in the number of
Diagnosis-Related Groups (DRGs) that are used to determine how much providers are reimbursed for
providing care will also contribute to the need for HIT systems that can be used to more
efficiently and accurately document and accurately submit care charges for reimbursement.
As the 2008 United States presidential election approaches, rising costs and varying quality have
solidified healthcare as a tier-one issue. Presidential candidates in both parties favor using HIT
to create efficiencies in the system and address the underlying issue of chronic illness. While
there is bipartisan recognition of the benefits of HIT, we do not foresee a scenario in which the
United States government would invest a significant amount of money directly in HIT, and we cannot
predict how healthcare will be impacted by the upcoming election.
Increasing healthcare spending and challenges in the quality and efficiencies of care are not
isolated to the United States. Most other countries are experiencing similar trends, a fact that
creates a favorable environment internationally for HIT solutions and related services.
Reflective of these favorable national and global trends, the HIT market remains very competitive.
The market could also be impacted by factors such as changes in reimbursement rates to hospitals
and physicians, a slowdown in adoption of HIT and changes in the political, economic and regulatory
environment.
15
Results of Operations
Three Months Ended June 28, 2008 Compared to Three Months Ended June 30, 2007.
The Companys net earnings increased 31% to $35,287,000 in the three-month period ended June 28,
2008 from $26,849,000 for the three-month period ended June 30, 2007. Second quarter 2008 and 2007
net earnings include the impact of SFAS No. 123R, which requires the expensing of stock options.
Share-based compensation expense reduced net earnings in the second quarter of 2008 and 2007 by
$2,151,000, net of $1,277,000 tax benefit and $2,708,000, net of $1,678,000 tax benefit,
respectively. In addition, the previously discussed third party supplier settlement reduced net
earnings in the second quarter 2008 by $5,030,000, net of $2,984,000 tax benefit.
Revenues increased 4% to $402,800,000 for the three-month period ended June 28, 2008 from
$386,588,000 for the three-month period ended June 30, 2007. The revenue composition for the
second quarter of 2008 was $120,633,000 in system sales, $109,716,000 in support and maintenance,
$161,754,000 in services and $10,697,000 in reimbursed travel.
|
|
|
System sales revenues decreased 7% to $120,633,000 for the three-month period ended June
28, 2008 from $130,097,000 for the corresponding period in 2007. Included in system sales
are revenues from the sale of software, hardware, sublicensed software, deployment period
licensed software upgrade rights, installation fees, transaction processing and
subscriptions. The decline in system sales was driven by a significant decline in hardware
sales that was partially offset by growth in licensed software, sublicensed software and
subscriptions. |
|
|
|
|
Support, maintenance and services revenues increased 10% to $271,470,000 during the
second quarter of 2008 from $246,210,000 during the same period in 2007. Included in
support, maintenance and services revenues are support and maintenance of software and
hardware, professional services excluding installation, and managed services. Below is a
summary of support, maintenance and services revenues for the second quarter of 2008 and
2007. |
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Three Months Ended |
(In thousands) |
|
June 28, 2008 |
|
June 30, 2007 |
|
|
|
Support and maintenance revenues |
|
$ |
109,716 |
|
|
$ |
97,721 |
|
Services revenues |
|
|
161,754 |
|
|
|
148,489 |
|
|
|
|
Total support, maintenance and services revenues |
|
$ |
271,470 |
|
|
$ |
246,210 |
|
|
|
|
|
|
|
The $13,265,000, or 9%, increase in services revenue was primarily attributable to growth in
the CernerWorksTM managed services. The $11,995,000, or 12%, increase in support
and maintenance revenues is attributable to continued success at selling Cerner Millennium
applications, implementing them at client sites, and initiating billing for support and
maintenance fees. |
|
|
|
|
Contract backlog, which reflects new business bookings that have not yet been recognized
as revenue, increased 10% in the second quarter of 2008 compared to the second quarter of
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 $178,000,000 as a result of the contract withdrawal by the prime contractor
in the southern region of England. A summary of the Companys total backlog follows: |
|
|
|
|
|
|
|
|
|
|
|
As of |
|
As of |
(In thousands) |
|
June 28, 2008 |
|
June 30, 2007 |
|
|
|
Contract backlog |
|
|
2,734,436 |
|
|
$ |
2,492,797 |
|
Support and maintenance backlog |
|
|
560,116 |
|
|
|
512,590 |
|
|
|
|
Total backlog |
|
$ |
3,294,552 |
|
|
$ |
3,005,387 |
|
|
|
|
|
|
|
The cost of revenues was 18% of total revenues in the second quarter of 2008 and 21% in
the second quarter of 2007. The cost of revenues includes the cost of reimbursed travel
expense, third party
|
16
|
|
|
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. The decline in cost of revenues as a percent of revenue is primarily associated
with the lower level of hardware sales in the second quarter of 2008 compared to 2007. |
|
|
|
|
Total operating expenses increased 8% to $277,793,000 in the second quarter of 2008,
compared with $257,446,000 for the same period in 2007. Share-based compensation expense
recognized pursuant to SFAS 123(R) impacted expenses as indicated below: |
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Three Months Ended |
(In thousands) |
|
June 28, 2008 |
|
June 30, 2007 |
|
|
|
Sales and client service expenses |
|
$ |
1,732 |
|
|
$ |
2,648 |
|
Software development expense |
|
|
621 |
|
|
|
751 |
|
General and administrative expenses |
|
|
1,075 |
|
|
|
987 |
|
|
|
|
Total stock-based compensation expense |
|
$ |
3,428 |
|
|
$ |
4,386 |
|
|
|
|
|
|
|
Sales and client service expenses as a percent of total revenues were 45% in the second
quarter of 2008 and 43% for the same period in 2007. Sales and client service expenses
include salaries of sales and client service personnel, communications expenses,
unreimbursed travel expenses, expense for share-based payment, sales and marketing
salaries, depreciation on hardware used in the hosting business, and trade show and
advertising costs. The increase was primarily attributable to growth in the CernerWorks
managed services business and the previously mentioned third party supplier settlement. |
|
|
|
|
Total expense for software development for the second quarter of 2008 increased 5% to
$65,890,000, as compared to $62,873,000 for the same period in 2007. The increase in
aggregate expenditures for software development in 2008 was due to continued development
and enhancement of the Cerner Millennium platform and software
solutions. A summary of the Companys total software development expense is as follows: |
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Three Months Ended |
(In thousands) |
|
June 28, 2008 |
|
June 30, 2007 |
|
|
|
Software development costs |
|
$ |
70,606 |
|
|
$ |
65,750 |
|
Capitalized software costs |
|
|
(17,864 |
) |
|
|
(15,902 |
) |
Capitalized costs related to share-based payments |
|
|
(261 |
) |
|
|
(332 |
) |
Amortization of capitalized software costs |
|
|
13,409 |
|
|
|
13,357 |
|
|
|
|
Total software development expense |
|
$ |
65,890 |
|
|
$ |
62,873 |
|
|
|
|
General and administrative expenses as a percent of total revenues were 7% in the second quarter of
2008 as compared to 7% for the same period in 2007. General and administrative expenses include
salaries for corporate, financial and administrative staffs, utilities, communications expenses,
professional fees, the transaction gains or losses on foreign currency and expense for share based
payments. The Company realized a foreign currency gain of $244,000 and a loss of $310,000 during
the three months ended June 28, 2008 and June 30, 2007, respectively.
Net interest income was $460,000 in the second quarter of 2008 compared to net interest income of
$424,000 in the second quarter of 2007. This increase is primarily due to the higher returns
received from our investments in auction rate securities.
The Companys effective tax rate for the second quarter of 2008 and 2007 was 34% and 44%,
respectively. This decrease is primarily due to a higher than normal rate in the second quarter of
2007 that resulted from the establishment of a valuation allowance for foreign net operating
losses.
17
Operations by Segment
The Company has two operating segments, Domestic and Global. The following table presents a
summary of the operating information for the three months ended June 28, 2008 and June 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Segments |
|
(In thousands) |
|
Domestic |
|
|
Global |
|
|
Other |
|
|
Total |
|
Three months ended June 28, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
317,954 |
|
|
$ |
84,829 |
|
|
$ |
17 |
|
|
$ |
402,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues |
|
|
56,529 |
|
|
|
15,245 |
|
|
|
12 |
|
|
|
71,786 |
|
Operating expenses |
|
|
86,506 |
|
|
|
39,635 |
|
|
|
151,652 |
|
|
|
277,793 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
143,035 |
|
|
|
54,880 |
|
|
|
151,664 |
|
|
|
349,579 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings (loss) |
|
$ |
174,919 |
|
|
$ |
29,949 |
|
|
$ |
(151,647 |
) |
|
$ |
53,221 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Segments |
|
(In thousands) |
|
Domestic |
|
|
Global |
|
|
Other |
|
|
Total |
|
Three months ended June 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
300,296 |
|
|
$ |
86,292 |
|
|
$ |
|
|
|
$ |
386,588 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues |
|
|
57,420 |
|
|
|
23,542 |
|
|
|
|
|
|
|
80,962 |
|
Operating expenses |
|
|
83,405 |
|
|
|
39,069 |
|
|
|
134,972 |
|
|
|
257,446 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
140,825 |
|
|
|
62,611 |
|
|
|
134,972 |
|
|
|
338,408 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings (loss) |
|
$ |
159,471 |
|
|
$ |
23,681 |
|
|
$ |
(134,972 |
) |
|
$ |
48,180 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Segment
The Companys Domestic segment includes revenue contributions and expenditures linked to business
activity within the United States.
Operating earnings increased 10% for the quarter ended June 28, 2008, compared to the quarter ended
June 30, 2007.
|
|
|
Revenue increased 6% in the second quarter of 2008, compared to the same period in 2007.
This increase was primarily driven by growth in managed services and support and
maintenance. |
|
|
|
|
Cost of revenues was 18% of total Domestic revenue in the second quarter of 2008
compared to 19% in the second quarter of 2007, with the decline driven primarily by a lower
level of hardware sales. |
|
|
|
|
Operating expenses increased 4% for the three months ended June 28, 2008, as compared to
the prior year period, due primarily to growth in managed services. |
Global Segment
The Companys Global segment includes revenue contributions and expenditures linked to business
activity in Aruba, Australia, Austria, Belgium, Canada, Cayman Islands, Chile, China (Hong Kong),
Egypt, France, Germany, India, Ireland, Malaysia, Puerto Rico, Saudi Arabia, Singapore, Spain,
Sweden, Switzerland, United Arab Emirates and the United Kingdom.
18
Operating earnings increased 26% for the quarter ended June 28, 2008, compared to the quarter ended
June 30, 2007.
|
|
|
Revenues decreased 2% in the second quarter of 2008 compared to the same period in 2007.
This decrease was primarily driven by an increase in sales that was offset by a larger
decline in hardware sales and a decrease in revenue from the Companys participation in the
National Health Service (NHS) initiative to automate clinical processes and digitize
medical records in the London and the Southern regions of England. Revenue related to this
initiative totaled $19,984,000 and $25,800,000 for the quarter ended June 28, 2008 and June
30, 2007, respectively. These revenues did not affect operating earnings as the Company is
accounting for them at zero-margin using a zero-margin approach of applying
percentage-of-completion accounting until either the software customization and development
services are completed or the Company has the ability to accurately estimate costs to
complete the project and determine fair value for the elements not accounted for in
accordance with the percentage-of-completion accounting methodology. |
|
|
|
|
While uncertainties exist that need to be resolved, the Company does expect to begin
recognizing margin on its contract for the London portion of the project by 2009.
Currently, the Company expects a onetime catch-up of margin to be recognized in the period
margin recognition begins, with the remaining margin recognized based on the progress of the
project over the remaining term of the arrangement, which expires in 2014. |
|
|
|
|
During the second quarter, Fujitsu, the prime contractor in the Southern region of England,
withdrew from the project. Subsequently, a transition services agreement was signed that
provides for ongoing services for the Trusts that already have live systems. No formal
timeline has been set for when the government will name a new prime contractor, but the
Company currently expects to play on ongoing role in this region. The timing and nature of
the Companys contract with a newly appointed prime contractor will dictate the timing of
margin recognition for the Southern region portion of the project. |
|
|
|
|
Cost of revenues was 18% in the second quarter of 2008, compared with 27% in the same
period of 2007. The lower cost of revenues in the second quarter of 2008 was driven by a
decrease in Global hardware sales. |
|
|
|
|
Operating expenses for the three months ended June 28, 2008 increased 1% compared to the
three months ended June 30, 2007, primarily due to hiring personnel to support Global
growth. |
Other Segment
The Companys Other segment includes revenue and expenses which are not tracked by geographic
segment.
Operating losses increased by 12% in the second quarter of 2008 as compared to the same period in
2007. This increase was primarily due to increased research and development and general and
administrative spending and the third party supplier settlement.
Six Months Ended June 28, 2008 Compared to Six Months Ended June 30, 2007.
The Companys net earnings increased 32% to $72,104,000 in the six-month period ended June 28, 2008
from $54,560,000 for the six-month period ended June 30, 2007. Second quarter 2008 and 2007 net
earnings include the impact of SFAS No. 123R, which requires the expensing of stock options.
Share-based compensation expense reduced net earnings in the first six months of 2008 and 2007 by
$4,387,000, net of $2,604,000 tax benefit and $5,062,000, net of $3,136,000 tax benefit,
respectively. In addition, the previously discussed third party supplier settlement reduced net
earnings by $5,030,000, net of $2,984,000 tax benefit, in the six months ended June 28, 2008.
Revenues increased 5% to $787,565,000 for the six-month period ended June 28, 2008 from
$752,440,000 for the six-month period ended June 30, 2007. The revenue composition for the first
six months of 2008 was $236,865,000 in system sales, $217,606,000 in support and maintenance,
$313,658,000 in services and $19,436,000 in reimbursed travel.
19
|
|
|
System sales revenues decreased 6% to $236,865,000 for the six-month period ended
June 28, 2008 from $252,967,000 for the corresponding period in 2007. Included in system
sales are revenues from the sale of software, hardware, sublicensed software, deployment
period licensed software upgrade rights, installation fees, transaction processing and
subscriptions. The decline in system sales was driven by a significant decline in hardware
sales that was partially offset by growth in licensed software, sublicensed software and
subscriptions. |
|
|
|
|
Support, maintenance and services revenues increased 11% to $531,264,000 during the
first six months of 2008 from $480,099,000 during the same period in 2007. Included in
support, maintenance and services revenues are support and maintenance of software and
hardware, professional services excluding installation, and managed services. Below is a
summary of support, maintenance and services revenues for the first quarter of 2008 and
2007. |
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
Six Months Ended |
(In thousands) |
|
June 28, 2008 |
|
June 30, 2007 |
|
|
|
Support and maintenance revenues |
|
$ |
217,606 |
|
|
$ |
191,633 |
|
Services revenues |
|
|
313,658 |
|
|
|
288,466 |
|
|
|
|
Total support, maintenance and services revenues |
|
$ |
531,264 |
|
|
$ |
480,099 |
|
|
|
|
|
|
|
The $25,192,000, or 9%, increase in services revenue was primarily attributable to growth in
the CernerWorks managed services. The $25,973,000, or 14%, increase in support and
maintenance revenues is attributable to continued success at selling Cerner Millennium
applications, implementing them at client sites, and initiating billing for support and
maintenance fees. |
|
|
|
|
Contract backlog, which reflects new business bookings that have not yet been recognized
as revenue, increased 10% in the second quarter of 2008 compared to the second quarter of
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 $178,000,000 as a result of the contract withdrawal by the prime contractor
in the southern region of England. A summary of the Companys total backlog follows: |
|
|
|
|
|
|
|
|
|
|
|
As of |
|
As of |
(In thousands) |
|
June 28, 2008 |
|
June 30, 2007 |
|
|
|
Contract backlog |
|
|
2,734,436 |
|
|
$ |
2,492,797 |
|
Support and maintenance backlog |
|
|
560,116 |
|
|
|
512,590 |
|
|
|
|
Total backlog |
|
$ |
3,294,552 |
|
|
$ |
3,005,387 |
|
|
|
|
|
|
|
The cost of revenues was 17% of total revenues for the first six months of 2008 and 20%
for the same period of 2007. The cost of revenues includes the cost of reimbursed travel
expense, 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. The decline in cost of revenues as a percent of revenue is primarily associated
with the lower level of hardware sales in the first quarter of 2008 compared to 2007. |
|
|
|
|
Total operating expenses increased 7% to $541,718,000 in the first six months of 2008,
compared with $507,657,000 for the same period in 2007. Share-based compensation expense
recognized pursuant to SFAS 123(R) impacted expenses as indicated below: |
20
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
Six Months Ended |
(In thousands) |
|
June 28, 2008 |
|
June 30, 2007 |
|
|
|
Sales and client service expenses |
|
$ |
3,567 |
|
|
$ |
5,006 |
|
Software development expense |
|
|
1,397 |
|
|
|
1,518 |
|
General and administrative expenses |
|
|
2,027 |
|
|
|
1,674 |
|
|
|
|
Total stock-based compensation expense |
|
$ |
6,991 |
|
|
$ |
8,198 |
|
|
|
|
|
|
|
Sales and client service expenses as a percent of total revenues were 45% in the first
six months of 2008 and 43% for the same period in 2007. Sales and client service expenses
include salaries of sales and client service personnel, communications expenses,
unreimbursed travel expenses, expense for share-based payment, sales and marketing salaries
and trade show and advertising costs. The increase was primarily attributable to growth in
the CernerWorks managed services business. |
|
|
|
|
Total expense for software development for the first six months of 2008 increased 4% to
$135,054,000, as compared to $130,313,000 for the same period in 2007. The increase in
aggregate expenditures for software development in 2008 was due to continued development
and enhancement of the Cerner Millennium platform and software solutions. A summary of the
Companys total software development expense is as follows: |
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
Six Months Ended |
(In thousands) |
|
June 28, 2008 |
|
June 30, 2007 |
|
|
|
Software development costs |
|
$ |
145,775 |
|
|
$ |
135,884 |
|
Capitalized software costs |
|
|
(34,651 |
) |
|
|
(31,647 |
) |
Capitalized costs related to share-based payments |
|
|
(495 |
) |
|
|
(611 |
) |
Amortization of capitalized software costs |
|
|
24,425 |
|
|
|
26,687 |
|
|
|
|
Total software development expense |
|
$ |
135,054 |
|
|
$ |
130,313 |
|
|
|
|
|
|
|
General and administrative expenses as a percent of total revenues were 7% in the first
six months of 2008 as compared to 7% for the same period in 2007. General and
administrative expenses include salaries for corporate, financial and administrative
staffs, utilities, communications expenses, professional fees, the transaction gains or
losses on foreign currency and expense for share based payments. The Company realized
foreign currency gains of $5,891,000 and $187,000 for the six months ended June 28, 2008
and June 30, 2007, respectively. |
Net interest income was $1,491,000 in the first six months of 2008 compared to net interest income
of $544,000 in the first six months of 2007. This increase is primarily due to the higher returns
received from our investments in auction rate securities.
The Companys effective tax rate for the first six months of 2008 and 2007 was 35% and 40%,
respectively. This decrease is primarily due to a higher than normal rate in the second quarter of
2007 that resulted from the establishment of a valuation allowance for foreign net operating
losses.
Operations by Segment
The Company has two operating segments, Domestic and Global. The following table presents a
summary of the operating information for the six months ended June 28, 2008 and June 30, 2007:
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Segments |
|
(In thousands) |
|
Domestic |
|
|
Global |
|
|
Other |
|
|
Total |
|
Six months ended June 28, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
636,940 |
|
|
$ |
150,511 |
|
|
$ |
114 |
|
|
$ |
787,565 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues |
|
|
113,045 |
|
|
|
23,081 |
|
|
|
34 |
|
|
|
136,160 |
|
Operating expenses |
|
|
174,533 |
|
|
|
77,493 |
|
|
|
289,692 |
|
|
|
541,718 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
287,578 |
|
|
|
100,574 |
|
|
|
289,726 |
|
|
|
677,878 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings (loss) |
|
$ |
349,362 |
|
|
$ |
49,937 |
|
|
$ |
(289,612 |
) |
|
$ |
109,687 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Segments |
|
(In thousands) |
|
Domestic |
|
|
Global |
|
|
Other |
|
|
Total |
|
Six months ended June 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
599,890 |
|
|
$ |
152,550 |
|
|
$ |
|
|
|
$ |
752,440 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues |
|
|
114,400 |
|
|
|
39,025 |
|
|
|
|
|
|
|
153,425 |
|
Operating expenses |
|
|
163,857 |
|
|
|
74,096 |
|
|
|
269,704 |
|
|
|
507,657 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
278,257 |
|
|
|
113,121 |
|
|
|
269,704 |
|
|
|
661,082 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings (loss) |
|
$ |
321,633 |
|
|
$ |
39,429 |
|
|
$ |
(269,704 |
) |
|
$ |
91,358 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Segment
The Companys Domestic segment includes revenue contributions and expenditures linked to business
activity within the United States.
Operating earnings increased 9% for the six months ended June 28, 2008, compared to the six months
ended June 30, 2007.
|
|
|
Revenue increased 6% in the first six months of 2008, compared to the same period in
2007. This increase was primarily driven by growth in software, managed services and
support and maintenance. |
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Cost of revenues was 18% of total Domestic revenue in the first six months of 2008
compared to 19% in the first six months of 2007, with the decline driven primarily by a
lower level of hardware sales. |
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Operating expenses increased 7% for the six months ended June 28, 2008, as compared to
the prior year period, due primarily to growth in managed services. |
Global Segment
The Companys Global segment includes revenue contributions and expenditures linked to business
activity in Aruba, Australia, Austria, Belgium, Canada, Cayman Islands, Chile, China (Hong Kong),
Egypt, France, Germany, India, Ireland, Malaysia, Puerto Rico, Saudi Arabia, Singapore, Spain,
Sweden, Switzerland, United Arab Emirates and the United Kingdom.
Operating earnings increased 27% for the six months ended June 28, 2008, compared to the six months
ended June 30, 2007.
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Revenues decreased 1% in the first six months of 2008 compared to the same period in
2007. This decrease was primarily driven by a decline in hardware sales and a decrease in
revenue from the Companys participation in the National Health Service (NHS) initiative to
automate clinical processes and digitize medical records in the London and Southern regions
of England. Revenue related to this initiative |
22
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totaled $40,105,000 and $49,600,000 for the
six months ended June 28, 2008 and June 30, 2007, respectively. These revenues did not
affect operating earnings as the Company is accounting for them at zero-margin using a
zero-margin approach of applying percentage-of-completion accounting until either the
software customization and development services are completed or the Company is able to
determine fair value for the support services and other elements which would not be
accounted for in accordance with the percentage-of-completion accounting methodology. |
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The Company expects to begin recognizing margin on its contract for the London portion of
the project by 2009. Currently, the Company expects a catch-up of margin to be recognized
in the period margin recognition begins, with the remaining margin recognized over the
remaining term of the arrangement, which expires in 2014. |
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During the second quarter, Fujitsu, the prime contractor in the Southern region of England,
withdrew from the project. Subsequently, a transition services agreement was signed that
provides for ongoing services for the Trusts that already have live systems. No formal
timeline has been set for when the government will name a new prime contractor, but the
Company currently expects to play on ongoing role in this region. The timing and nature of
the Companys contract with a newly appointed prime contractor will dictate the timing of
margin recognition for the Southern region portion of the project. |
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Cost of revenues was 15% in the first six months of 2008, compared with 26% in the same
period of 2007. The lower cost of revenues in the first six months of 2008 was driven by a
decrease in Global hardware sales. |
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Operating expenses for the six months ended June 28, 2008 increased 5% compared to the
six months ended June 30, 2007, primarily due to hiring personnel to support Global growth. |
Other Segment
The Companys Other segment includes revenue and expenses which are not tracked by geographic
segment.
Operating losses increased by 7% in the first six months of 2008 as compared to the same period in
2007. This increase was primarily due to increased research and development and general and
administrative spending and the third party supplier settlement.
Capital Resources and Liquidity
The Companys liquidity is influenced by many factors, including the amount and timing of the
Companys revenues, its cash collections from clients and the amounts the Company invests in
software development, acquisitions and capital expenditures.
The Companys principal source of liquidity is its cash and cash equivalents. The majority of the
Companys cash and cash equivalents and investments consist of U.S. Government Federal Agency
Securities, short-term marketable securities and overnight repurchase agreements. At June 28,
2008, the Company had cash and cash equivalents of $291,395,000 and working capital of $487,480,000
compared to cash and cash equivalents of $182,914,000, short-term investments of $161,600,000 and
working capital of $530,441,000 at December 29, 2007. The increase in cash and cash equivalents
was primarily due to sales of short-term investments during the first quarter of 2008 and continued
strong cash collections. The decrease in short-term investments is the result of sales of
securities early in the first quarter and the reclassification of auction rate securities to long
term investments as of the end of the first quarter 2008 period.
At June 28, 2008, more than ten percent of total net receivables represent accounts receivable and
contracts receivable related to a contract with Fujitsu that was terminated in the second quarter
of 2008 when Fujitsu withdrew from the National Health Service (NHS) initiative to automate
clinical processes and digitize medical records the Southern region of England. The Company
expects to collect these receivables in full based on the terms of the contract.
23
At June 28, 2008, the Company held auction rate securities with a par value of $105,950,000 and an
estimated fair value of $101,624000. In February and March 2008, liquidity issues in the global
credit markets resulted in the progressive failure of auctions representing all of the auction rate
securities held by Cerner. These conditions persisted through the second quarter. As a result,
the Company assessed the securities as temporarily impaired and recognized a cumulative loss of
$2,873,000 through other comprehensive income, net of an income tax benefit of $1,453,000. For a
more detailed discussion of the auction rate securities situation, please refer to note (8) to the
condensed consolidated financial statements. Cerner has the intent and ability to hold the
investments in auction rate securities until the earlier of market reestablishment or maturity, and
does not expect the auction failures to impact the Companys ability to fund its working capital
needs, capital expenditures or other business requirements.
Cash from Operating Activities
The Company generated cash of $135,997,000 and $104,467,000 from operations in the first six months
of 2008 and 2007, respectively. Cash flow from operations increased in the first six months of
2008 due primarily to the increase in net earnings. The Company has periodically provided
long-term financing options to creditworthy clients through third party financing institutions and
has, on occasion, directly provided extended payment terms from contract date. Some of these
payment streams have been assigned on a non-recourse basis to third party financing institutions.
The Company has provided its usual and customary performance guarantees to the third party
financing institutions in connection with its on-going obligations under the client contracts.
During the first six months of 2008 and 2007, the Company received total client cash collections of
$852,386,000 and $832,600,000, respectively, of which 6% and 5% were received from third party
client financing arrangements and non-recourse payment assignments. Days sales outstanding were 90
days at June 28, 2008, increasing from 86 days at June 30, 2007. Revenues provided under support
and maintenance agreements represent recurring cash flows. Support and maintenance revenues
increased 14% in the first six months of 2008 compared to the first six months of 2007, and the
Company expects these revenues to continue to grow as the base of installed systems grows.
Cash from Investing Activities
Cash used in investing activities in the first six months of 2008 consisted primarily of capital
purchases of $53,679,000, which include $46,865,000 of capital equipment and $6,814,000 of land,
buildings and improvements. Capitalized software development costs were $35,238,000 in the first
six months of 2008. Cash of $3,181,000 was used for an earnout payment related to the 2005
acquisition of DKE SARL (Axya Systemes). Cash was also provided by sales and maturities of
short-term investments, net of purchases, of $55,260,000 in the first six months of 2008. Cash
used in investing activities in the first six months of 2007 consisted primarily of capital
purchases of $99,885,000, which includes $51,565,000 of capital equipment and $48,320,000 of land,
buildings and improvements. Capitalized software development costs were $32,680,000. Cash was
also provided by sales and maturities of short-term investments, net of purchases, of $23,737,000
in the first six months of 2007.
Cash from Financing Activities
The Companys financing activities for the first six months of 2008 consisted of proceeds from the
exercise of stock options of $10,442,000, the excess tax benefits from share based compensation of
$6,512,000, repayment of debt of $7,249,000, and sales of future receivables of $4,655,000. For
the first six months of 2007 the Companys financing activities consisted of proceeds from the
exercise of stock options of $19,494,000, the excess tax benefits from share based compensation of
$17,536,000 and repayment of debt of $12,487,000.
The Company believes that its present cash position, together with cash generated from operations
and, if necessary, its line of credit, will be sufficient to meet anticipated cash requirements
during 2008.
The effects of inflation on the Companys business during the period discussed herein were minimal.
Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial
24
Accounting Standards No. 157 (SFAS 157), Fair Value Measurements. This statement establishes
a single authoritative definition of fair value to be used when accounting rules require the use of
fair value, sets out a framework for measuring fair value and requires additional disclosures
about fair value measurements. On February 12, 2008, the FASB issued FASB Staff Position (FSP) No.
FAS 157-2. This FSP defers the effective date of SFAS 157 to fiscal years beginning after November
15, 2008 for nonfinancial assets and liabilities within the scope of the FSP. The Company adopted
SFAS 157 for fair value measurement outside of the scope of the FSP on December 30, 2007. The
Company is currently assessing the impact of full adoption of SFAS 157 on its results of operations
and its financial position and will be required to fully adopt SFAS 157 as of the first day of the
2009 fiscal year. The effect of adopting SFAS 157 is will depend on future acquisition activity,
but is not expected to be material to the Companys consolidated financial statements.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised
2007), Business Combinations (SFAS 141(R)) which replaces SFAS 141 and supersedes FIN 4,
Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase
Method. SFAS 141(R) establishes guidelines for how an acquirer measures and recognizes the
identifiable assets, goodwill, noncontrolling interest, and liabilities assumed in a business
combination. Additionally, SFAS 141(R) outlines the disclosures necessary to allow financial
statement users to assess the impact of the acquisition. The Company is currently assessing the
impact of adoption of SFAS 141(R) on its results of operations and its financial position, which
is expected to be immaterial, and will be required to adopt SFAS 141(R) prospectively for business
combinations occurring on or after the first day of the 2009 fiscal year.
Also in December 2007, the FASB issued Statement of Financial Accounting Standards No. 160,
Noncontrolling Interests in Consolidated Financial Statements, which amends ARB No. 51. SFAS 160
guides that a noncontrolling interest in a subsidiary should be reported as equity in the
consolidated financial statements, and that net income should be reported at amounts that include
the amounts attributable to both the parent and the noncontrolling interest. The Company is
currently assessing the impact of adoption of SFAS 160 on its results of operations and its
financial position, which is expected to be immaterial, and will be required to adopt SFAS 160 as
of the first day of the 2009 fiscal year.
In March 2008, the FASB issued Statement of Accounting Standards No. 161, Disclosures about
Derivative Instruments and Hedging Activities an amendment of FASB Statement No. 133. SFAS 161
requires enhanced disclosures about the uses of derivative instruments and hedging activities, how
these activities are accounted for, and their respective impact on an entitys financial position,
financial performance, and cash flows. The Company is currently assessing the impact of adoption
of SFAS 161 on its results of operations and its financial position, which is expected to be
immaterial, and will be required to adopt SFAS 161 as of the first day of the 2009 fiscal year.
25
Forward Looking and Cautionary Statements
Except for the historical information and discussions contained herein, statements contained in
this Form 10-Q may constitute forward looking statements within the meaning of Section 21E of the
Securities and Exchange Act of 1934, as amended (the 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. These statements involve a number of risks, uncertainties and other factors that
could cause actual results to differ materially, including: the possibility of product-related
liabilities; potential claims for system errors and warranties; the possibility of interruption at
our data centers or client support facilities; 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; risks associated with our non-U.S. operations; risks associated with
our ability to effectively hedge exposure to fluctuations in foreign currency exchange rates; risks
associated with our recruitment and retention of key personnel; risks related to our reliance on
third party suppliers; risks inherent with business acquisitions; changing political, economic and
regulatory influences; government regulation; significant competition and market changes;
variations in the our quarterly operating results; potential inconsistencies in our sales forecasts
compared to actual sales; volatility in the trading price of our common stock; the authority of our
Board of Directors to issue preferred stock and anti-takeover provisions contained in our corporate
governance documents; and, other risks, uncertainties and factors discussed elsewhere in this
Form 10-Q, in the Companys other filings with the Securities and Exchange Commission or in
materials incorporated therein by reference. Forward looking statements are not guarantees of
future performance or results. The Company undertakes 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.
26
Item 3. Quantitative and Qualitative Disclosures about Market Risk
No material changes.
Item 4. Controls and Procedures
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a) |
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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 Quarterly Report (the
Evaluation Date). They have concluded that, as of the Evaluation Date, 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. |
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b) |
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There were no changes in the Companys internal controls over financial reporting
during the three months ended June 28, 2008 that have materially affected, or are
reasonably likely to materially affect, its internal controls over financial reporting. |
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c) |
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The Companys management, including its Chief Executive Officer and Chief Financial
Officer, has 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. |
27
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
At the Companys annual shareholders meeting held on May 23, 2008, John C. Danforth, Neal L.
Patterson, and William D. Zollars were re-elected as Class I directors. Gerald E. Bisbee, Jr.,
PhD, Nancy-Ann DeParle, Michael E. Herman, Clifford W. Illig and William B. Neaves continued as
directors after the meeting.
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For |
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Withheld |
John C. Danforth |
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70,261,583 |
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5,944,732 |
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Neal L. Patterson |
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72,967,775 |
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3,238,540 |
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William D. Zollars |
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57,835,127 |
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18,371,188 |
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At the shareholders meeting, the appointment of KPMG LLP as independent registered public
accounting firm of the Company for 2008 was ratified.
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For |
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Against |
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Abstain |
KPMG LLP |
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75,392,016 |
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719,276 |
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95,022 |
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Item 6. Exhibits
(a) Exhibits
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31.1 |
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Certification of Neal L. Patterson, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
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31.2 |
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Certification of Marc G. Naughton, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
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32.1 |
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Certification pursuant to 18 U.S.C. Section. 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. |
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32.2 |
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Certification pursuant to 18 U.S.C. Section. 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. |
28
SIGNATURES
Pursuant to the requirements 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.
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CERNER
CORPORATION |
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Registrant |
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August 7, 2008
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By:
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/s/ Marc G. Naughton |
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Date
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Marc G. Naughton |
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Chief Financial Officer |
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29