10-K 1 a201510-k.htm 10-K FOR THE PERIOD ENDED JANUARY 2, 2016 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(X)    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: January 2, 2016

OR

( )    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to ___________

Commission File Number: 0-15386

CERNER CORPORATION
(Exact name of registrant as specified in its charter)

Delaware
 
43-1196944
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification
Number)
2800 Rockcreek Parkway
North Kansas City, MO
 
64117
(Address of principal executive offices)
 
(Zip Code)

(816) 201-1024
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class
  
Name of each exchange on which registered
Common Stock, $0.01 par value per share
  
The NASDAQ Stock Market LLC
(NASDAQ Global Select Market)

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [X]     No [  ]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes [  ]     No [X]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X]     No [  ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [X]     No [  ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [X]     Accelerated filer [  ]     Non-accelerated filer [  ]     Smaller reporting company [  ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [  ]       No [X]
As of July 4, 2015, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $21.0 billion based on the closing sale price as reported on the NASDAQ Global Select Market. Shares of common stock held by each executive officer, director and holder of 10% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status for purposes of this calculation is not intended as a conclusive determination of affiliate status for other purposes.

Indicate the number of shares outstanding of the issuer’s classes of common stock, as of the latest practicable date.
Class
  
Outstanding at February 12, 2016
Common Stock, $0.01 par value per share
  
340,016,851 shares

DOCUMENTS INCORPORATED BY REFERENCE
Document
  
Parts into Which Incorporated
Portions of the registrant's Proxy Statement for the Annual Shareholders' Meeting to be held May 27, 2016
  
Part III





CERNER CORPORATION

TABLE OF CONTENTS
 
Part I
 
 
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Mine Safety Disclosures
 
 
 
Part II
 
 
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6.
Selected Financial Data
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
 
 
 
Part III
 
 
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accountant Fees and Services
 
 
 
Part IV
 
 
Item 15.
Exhibits and Financial Statement Schedules
 
 
 
Signatures




PART I.

Item 1. Business

Overview
Cerner Corporation started doing business as a Missouri Corporation in 1980, and it was merged into a Delaware corporation in 1986. Unless the context otherwise requires, references in this report to “Cerner,” the “Company,” “we,” “us” or “our” mean Cerner Corporation and its subsidiaries.

Our corporate world headquarters is located in a Company-owned office park in North Kansas City, Missouri, with our principal place of business located at 2800 Rockcreek Parkway, North Kansas City, Missouri 64117. Our telephone number is 816.201.1024. Our Web site, which we use to communicate important business information, can be accessed at: www.cerner.com. We make our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports available free of charge on or through this Web site as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission (SEC). We do not intend for information contained in our website to be part of this annual report on Form 10-K.
 
Cerner is a leading supplier of health care information technology (HCIT). Our mission is to contribute to the improvement of health care delivery and the health of communities. We offer a wide range of intelligent solutions and services that support the clinical, financial and operational needs of organizations of all sizes. We have systems in more than 20,000 facilities worldwide, including hospitals, physician practices, laboratories, ambulatory centers, behavioral health centers, cardiac facilities, radiology clinics, surgery centers, extended care facilities, retail pharmacies, and employer sites.

Cerner solutions are offered on the unified Cerner Millennium® architecture and on the HealtheIntent cloud-based platform. Cerner Millennium is a person-centric computing framework, which includes integrated clinical, financial and management information systems. This architecture allows providers to securely access an individual’s electronic health record (EHR) at the point of care, and it organizes and proactively delivers information to meet the specific needs of physicians, nurses, laboratory technicians, pharmacists, front- and back-office professionals and consumers. Our HealtheIntent platform is a cloud-based platform designed to scale at a population level while facilitating health and care at a person and provider level. On the HealtheIntent platform, we offer EHR-agnostic solutions that help health care systems aggregate, transform and reconcile data across the continuum of care, manage the health of populations they serve, improve outcomes and lower costs.

On February 2, 2015, Cerner acquired substantially all of the assets, and assumed certain liabilities of Siemens AG's health information technology business unit, Siemens Health Services (now referred to as "Cerner Health Services"). Cerner Health Services offers a portfolio of enterprise-level clinical and financial health care information technology solutions, as well as departmental, connectivity, population health, and care coordination solutions globally. Solutions are offered on the Soarian®, Invision®, and i.s.h.med® platforms, among others.

We offer a broad range of services, including implementation and training, remote hosting, operational management services, revenue cycle services, support and maintenance, health care data analysis, clinical process optimization, transaction processing, employer health centers, employee wellness programs and third party administrator (TPA) services for employer-based health plans.

In addition to software and services, we offer a wide range of complementary hardware and devices, both directly from Cerner and as a reseller for third parties.

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The following table presents our consolidated revenues by major solutions and services and by segment, as a percentage of total revenues:

 
For the Years Ended
 
2015
2014
2013
 
 
 
 
Revenues by Solutions & Services
 
 
 
System sales
29
%
28
%
29
%
Support and maintenance
22
%
21
%
23
%
Services
47
%
48
%
46
%
Reimbursed travel
2
%
3
%
2
%
 
100
%
100
%
100
%
 
 
 
 
Revenues by Segment
 
 
 
Domestic
88
%
89
%
88
%
Global
12
%
11
%
12
%
 
100
%
100
%
100
%

Health Care and Health Care IT Industry
There are several trends in health care that we believe create a favorable environment for Cerner. One is the unsustainable rate of growth in health care spending. In 2014, U.S. health care spending increased 5.5 percent to $3.0 trillion, representing 17.7 percent of the Gross Domestic Product (GDP). The Centers for Medicare and Medicaid Services (CMS) estimates U.S. health care spending in 2015 at $3.2 trillion, or 18.0 percent of GDP, and projects it to be 19.6 percent of GDP by 2024. We believe health care IT is one of few remaining levers that can change this trajectory. Further, health care providers continue to operate in an environment that includes what we call ‘raining measures and mandates’. Examples of these include:

Health Information Technology for Economic and Clinical Health (HITECH) provisions within the American Recovery and Reinvestment Act (ARRA) that offer incentives for health care organizations to modernize operations through “Meaningful Use” of HCIT and penalizes for non-compliance;
Value-Based Purchasing programs that link reimbursement to quality, clinical process, patient experience, and outcomes;
Increasing requirements to report quality metrics; and
Readmission reduction programs that penalize hospitals for unnecessary readmissions.

Collectively, these measures and mandates are driving providers to focus on delivering higher quality care at a lower cost, and we believe HCIT is a key lever that can help providers accomplish this goal. They also represent a shift away from traditional fee-for-service (FFS) reimbursement models to models more aligned with quality, outcomes, and efficiency. The largest signal of this shift occurred in January of 2015 when the U.S. Department of Health & Human Services laid out a plan to shift 50% of Medicare payments to value-based payment models by the end of 2018, and to tie 90% of the remaining traditional FFS payments to quality measures. We believe that tying payment to health outcomes is going to produce some major shifts in the way health care is provided in the next decade, and we expect a much greater focus on patient engagement, wellness and prevention. As health care providers become accountable for proactively managing the health of the populations they serve, we expect them to need ongoing investment in sophisticated information technology solutions that will enable them to predict when intervention is needed so they can improve outcomes and lower the cost of providing care.

The increasingly complex and more clinical outcomes-based reimbursement environment is also contributing to a heightened demand for revenue cycle solutions and services and a desire for these solutions and services to be closely aligned with clinical solutions. We believe this trend is positive for Cerner because our Cerner Millennium revenue cycle solutions and services are integrated with our clinical solutions, creating a clinically driven revenue cycle solution that has had significant adoption in recent years.

Over the past several years, we have seen a shift in the U.S. marketplace towards a preference for a single platform across inpatient and ambulatory settings. The number of physicians employed by hospitals has increased as hospitals have acquired physician groups, and health systems are recognizing the benefit of having a single patient record at the hospital and the physician office. We are benefiting from this trend due to our unified Cerner Millennium platform that spans multiple venues and significant enhancements we have made to our physician solutions in recent years.

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While health care providers are showing a preference for a single platform across multiple venues, there is also an increased push for interoperability across disparate systems to address the reality that no patient’s record will only have information from a single health care IT system. We believe our health information should be shareable and accessible among our primary care physicians, specialists, and hospital physicians. In recent years, a great deal of money has been spent on health care IT for the purpose of creating a digital health care system. And while that has largely occurred, the day-to-day lack of interoperability across health care organizations and platforms limits the benefits to individuals and reduces the return on the investments made to digitize the health system.

As a result, Cerner has led or been a key participant in nearly every major industry effort to advance interoperability and system openness. One example is Cerner’s role as a founding member of the CommonWell Health Alliance, an open, not-for-profit industry consortium that brought health care IT firms together for the purpose of enabling safe nationwide interoperability. We believe CommonWell complements federal policy by providing a solution for identity management, record location and consent management. The vision of CommonWell is for a patient to be able to visit a new doctor, give their consent, and, within moments, have his or her lifetime record available from all the prior places he or she has visited.

CommonWell members represent about 70% of the acute care market and about 25% of the ambulatory market. CommonWell membership also spans a diverse range of clinical care settings beyond acute and ambulatory, including health IT market leaders in imaging, perinatal, emergency department, laboratory, retail pharmacy, oncology, care management, patient portal, post-acute care, and state and federal government agencies. As of the end of 2015, more than 1,200 provider sites across 49 states have gone live with CommonWell Services and have already generated nearly 30 million queries. There are an additional 6,000 sites that have committed to CommonWell Services.

Outside the United States, we believe Cerner’s growth opportunities are good, as most countries are also dealing with health care expenditures growing faster than their economies, which is leading to a focus on controlling costs while also improving quality of care.

Cerner Vision and Growth Strategy
For over three decades, Cerner has been continuously building intelligent solutions for the health care industry. Together with our clients, we are creating a future where the health care system works to improve the well-being of individuals and communities. Our vision has always guided our large investments in research and development (R&D), which have created strong levels of organic growth throughout our history. Our proven ability to innovate has led to what we believe to be industry-leading architectures and an unmatched breadth and depth of solutions and services. The strength of our solutions and services has led to our ability to gain market share in recent years, which has contributed to our growth. We believe we are positioned to continue gaining share in coming years as regulatory requirements and industry shifts continue to pressure health care providers to improve quality while lowering costs, which will require having more sophisticated information technology than many of our competitors provide.

In addition to growth by gaining market share, we believe we have a significant opportunity to grow revenues by expanding our solution footprint with existing clients. There is opportunity to expand penetration of our core solutions, such as EHRs and computerized physician order entry, and increase penetration of our broad range of complementary solutions that can be offered into our existing client base. Examples include women’s health, anesthesiology, imaging, clinical process optimization, critical care, health care devices, device connectivity, emergency department, revenue cycle and surgery.

We also have an opportunity to grow by expanding penetration of services we offer that are targeted at capturing a larger percentage of our clients’ existing IT spending. These services leverage our proven operational capabilities and the success of our CernerWorksSM managed services business, where we have demonstrated the ability to improve our clients’ service levels at a cost that is at or below amounts they were previously spending. One of these services is Cerner ITWorksSM, a suite of solutions and services that improves the ability of hospital IT departments to meet their organization’s needs while also creating a closer alignment between Cerner and our clients. A second example is Cerner RevWorksSM, which includes solutions and services to help health care organizations improve their revenue cycle functions.

We have made progress over the past several years at reducing the total cost of our solutions, which expands our end market opportunities by allowing us to offer lower-cost, higher-value solutions and services to smaller community hospitals, critical access hospitals and physician practices. For example, our CommunityWorksTM offering leverages a shared instance of the Cerner Millennium platform across multiple clients, which decreases the total cost for these clients.


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We also expect to drive growth over the course of the next decade through initiatives outside the core HCIT market. For example, we offer clinic, pharmacy, wellness and third-party administrator services directly to employers. These offerings have been shaped by what we have learned from changes we have implemented at Cerner. We have removed our third-party administrator and become self-administered, launched an on-site clinic and pharmacy, incorporated biometric measurements for our population, realigned the economic incentives for associates in our health plan, and implemented a data-driven wellness management program. These changes have had a positive impact on the health of our associates while also keeping our health care costs below industry averages.

As discussed below, another opportunity for future growth, and a significant area of investment for Cerner, is leveraging the vast amounts of data being created as the health care industry is digitized and using this data to help providers and employers manage the health of populations.

Population Health
Population Health Management involves a shift from solely automating health systems to managing a person’s health. Getting there requires complete, accurate patient data and meaningfully using that data to engage individuals, exchange information between providers and ultimately drive better outcomes at a lower cost. This shift will shape the future of health care and enable a system driven by accountability, transparency and value.

Cerner's approach to population health is to enable organizations to:

KNOW what is happening and predict what will happen within their population through solutions for data exchange, longitudinal record, enterprise data warehouse, analytics and quality and regulatory reporting;
ENGAGE providers and patients in health and care delivery through personal health portals and solutions for care management, home care, long-term care, and retail pharmacy; and
MANAGE health and improve care with capacity and workforce management, clinical research, predictive modeling, health registries, and contract and network management.

These solutions are enabled by Cerner’s HealtheIntent platform, which is a multi-purpose, programmable platform designed to scale at a population level while facilitating health and care at a person and provider level. This cloud-based platform enables organizations to aggregate, transform and reconcile data across the continuum of care, and helps improve outcomes and lower costs.

HealtheIntent is scalable, secure and can be accessed anywhere, anytime. It is able to receive data from any EHR, existing HCIT system and other data sources, such as pharmacy benefits managers or insurance claims. HealtheIntent collects data from multiple, disparate sources in near real-time, providing clarity to millions of data points in an actionable and programmable workflow. It enables organizations to identify, score and predict the risks of individual patients, allowing them to match the right care programs to the right individuals. The EHR-agnostic nature of our HealtheIntent platform allows us to offer our solutions to the entire marketplace, not just existing Cerner clients.

We have created a series of initial solutions on the HealtheIntent platform, including the following solutions that are generally available or scheduled to be released in the next year:

Longitudinal Record - provides clinicians and the patient a view of their consolidated clinical record, gathered and normalized from multiple sources.
Registries - identifies and automatically segments patients by disease, guides interventions according to clinical best practice, provides visibility to quality measures for provider’s population, produces client-defined performance scorecards, and tracks their health and their interventions according to clinical best practice.
Analytics - allows the integrated data to be analyzed for the purpose of population health management and research.
Provider Performance Management - creates visibility for providers on their performance against key clinical and operation metrics and can be aligned with payment models that incentivize high quality and efficient care.
Patient/Member Engagement - an enhanced patient portal complemented by engagement services to help health care organizations create more meaningful interactions and engagement with the members they serve, and provides the ability to target individuals at risk of becoming chronically ill.
Care Management - provides a person-centric approach of proactive surveillance, coordination and facilitation of health services across the care continuum to achieve optimal health status, quality and costs.
Population Health Programs - leverages evidence-based guidelines and the contextual information within HealtheIntent to provide identification, prediction and management of a condition at the population, provider and person level and facilitates a personalized plan of care for each member.

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Contract Network Management - for managing provider networks, modeling to inform payer negotiations, determining appropriate business models, and managing contract performance in near real-time.

In summary, we believe our comprehensive architectural approach to population health is differentiated in the marketplace. We expect population health to be a large contributor to our long-term growth as health care continues to evolve towards a model that incents keeping people healthy.

Software Development
We commit significant resources to developing new health information system solutions and services. As of the end of 2015, approximately 5,900 associates were engaged in research and development activities. Total expenditures for the development and enhancement of our software solutions were approximately $685 million, $467 million and $419 million during the 2015, 2014 and 2013 fiscal years, respectively. These figures include both capitalized and non-capitalized portions and exclude amounts amortized for financial reporting purposes.

As discussed above, continued investment in R&D remains a core element of our strategy. This will include ongoing enhancement of our core solutions and development of new solutions and services.

Intellectual Property
We have developed a broad portfolio of intellectual property rights to protect the proprietary interests in our solutions, services and brands. Our solutions embody valuable trade secrets preserved through a variety of technical and legal measures and constitute works of authorship protected by copyrights in the U.S. and globally. We have registered or applied to register certain trademarks and service marks in a number of countries with particular emphasis on the Cerner branding elements. We continue to develop our patent portfolio and own more than 300 issued patents with hundreds of patent applications pending. We do not consider any of our businesses to be dependent upon any one patent, copyright, trademark, or trade secret, or any family or families of the same.
Our solutions and services incorporate or rely on intellectual property licensed from third parties. Certain technologies licensed to Cerner are also important for internal use in running our business and supporting our clients. Although replacing any existing licenses could be inconvenient, based on our experiences, existing contractual relationships, and the incentives of our technology suppliers, we believe that Cerner will continue to obtain these technologies or suitable alternatives for commercially reasonable prices and on commercially reasonable terms.

Sales and Marketing
The markets for Cerner HCIT solutions, health care devices and services include integrated delivery networks, physician groups and networks, managed care organizations, hospitals, medical centers, free-standing reference laboratories, home health agencies, blood banks, imaging centers, pharmacies, pharmaceutical manufacturers, employers, governments and public health organizations. The majority of our sales are clinical and revenue cycle solutions and services to hospitals and health systems, but our solutions and services are highly scalable and sold to organizations ranging from physician practices, to community hospitals, to complex integrated delivery networks, to local, regional and national government agencies. Sales to large health systems typically take approximately nine to 18 months, while the sales cycle is often shorter when selling to smaller hospitals and physician practices.

Our executive marketing management is located at our Innovation Campus in Kansas City, Missouri, while our client representatives are deployed across the United States and globally. In addition to the United States, through our subsidiaries, we have sales associates and/or offices giving us a presence in more than 25 countries.

We support our sales force with technical personnel who perform demonstrations of Cerner solutions and services and assist clients in determining the proper hardware and software configurations. Our primary direct marketing strategy is to generate sales contacts from our existing client base and through presentations at industry seminars and tradeshows. We market the PowerWorks® solutions, offered on a subscription basis, directly to the physician practice market using lead generation activities and through existing acute care clients that are looking to extend Cerner solutions to affiliated physicians. We attend a number of major tradeshows each year and sponsor executive user conferences, which feature industry experts who address the HCIT needs of large health care organizations.

Client Services
Substantially all of Cerner’s clients that buy software solutions also enter into software support agreements with us for maintenance and support of their Cerner systems. In addition to immediate software support in the event of problems, these agreements allow clients to access new releases of the Cerner solutions covered by support agreements. Each client has

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24-hour access to the applicable client support teams, including those located at our world headquarters in North Kansas City, Missouri, our Continuous Campus in Kansas City, Kansas, our campus in Malvern, Pennsylvania, and our global support organizations in Germany, England and Ireland.

Most clients who buy hardware through Cerner also enter into hardware maintenance agreements with us. These arrangements normally provide for a fixed monthly fee for specified services. In the majority of cases, we utilize subcontractors to meet our hardware maintenance obligations. We also offer a set of managed services that include remote hosting, operational management services and disaster recovery.

Backlog
At the end of 2015, we had a revenue backlog of $14.2 billion, which compares to $10.6 billion at the end of 2014. Such backlog represents contracted revenue that has not yet been recognized. We estimate that approximately 27 percent of the backlog at the end of 2015 will be recognized as revenue during 2016.

Competition
The market for HCIT solutions, devices and services is intensely competitive, rapidly evolving and subject to rapid technological change. Our principal competitors in the health care solutions and services market each offer a suite of software solutions that compete with many of our software solutions and services. These competitors include, but are not limited to:

Ÿ Allscripts Healthcare Solutions, Inc.
Ÿ Healthland, Inc.
Ÿ Computer Programs and Systems, Inc.
Ÿ McKesson Corporation
Ÿ Epic Systems Corporation
Ÿ MEDHOST, Inc.
Ÿ GE Healthcare Technologies
Ÿ Medical Information Technology, Inc.

Other competitors focus on only a portion of the market that we address. For example, we deem the following competitors, which offer HCIT services that compete directly with some of our service offerings, as principal competitors in the HCIT services space:
Ÿ Clinovations, Inc.
Ÿ Impact Advisors
Ÿ Dell, Inc. (Dell)
Ÿ S&P Consultants
Ÿ Encore Health Resources, LLC
Ÿ The Advisory Board Company (Advisory Board)
Ÿ IBM Corporation (IBM)
Ÿ Xerox Corporation, Ltd.

We view the following competitors that offer solutions to the ambulatory market, but do not currently have a significant presence in the broader health systems and independent hospital market, as principal competitors in this market:
Ÿ AmazingCharts.com, Inc.
Ÿ Practice Fusion, Inc.
Ÿ athenahealth, Inc. (athenahealth)
Ÿ Quality Systems, Inc.
Ÿ eClinicalWorks, LLC
Ÿ SRSsoft
Ÿ e-MDs, Inc.
Ÿ Vitera Healthcare Solutions
Ÿ Netsmart Technologies
 
 
Cerner partners with third parties as a reseller of devices and markets its own competing proprietary health care devices. We view our principal competitors in the health care device market to include, without limitation:
Ÿ CapsuleTech, Inc.
Ÿ PerfectServe, Inc.
Ÿ Becton, Dickinson and Company
Ÿ Qualcomm, Inc.
Ÿ Connexall Company, Ltd.
Ÿ Siemens AG
Ÿ Nanthealth, LLC
Ÿ Vocera Communication, Inc.
Ÿ Omnicell, Inc.
 


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We view our principal competitors in the health care revenue cycle and transaction services market to include, without limitation:
Ÿ 3M Company
Ÿ Emdeon Corporation
Ÿ Accretive Health, Inc.
Ÿ Experian plc
Ÿ athenahealth
Ÿ MedAssets, Inc.
Ÿ Conifer Health Solutions
Ÿ Optum, Inc. (Optum)
Ÿ Dell
Ÿ Quadramed Corporation
Ÿ Deloitte Consulting, LLP
Ÿ SSI Group, Inc.

We view our competitors in the population health market to range from small niche competitors, to large health insurance companies including, without limitation:
Ÿ ActiveHealth Management
Ÿ IBM
Ÿ Advisory Board
Ÿ Influence Health, Inc.
Ÿ Aetna, Inc.
Ÿ MedeAnalytics, Inc.
Ÿ athenahealth
Ÿ Optum
Ÿ Evolent Health, LLC
Ÿ WellCentive, Inc.
Ÿ Health Catalyst
 

In addition, we expect that major software information systems companies, large information technology consulting service providers and system integrators, start-up companies, managed care companies, healthcare insurance companies, accountable care organizations and others specializing in the health care industry may offer competitive software solutions, devices or services. The pace of change in the HCIT market is rapid and there are frequent new software solutions, devices or services introductions, enhancements and evolving industry standards and requirements. We believe that the principal competitive factors in this market include the breadth and quality of solution and service offerings, the stability of the solution provider, the features and capabilities of the information systems and devices, the ongoing support for the systems and devices and the potential for enhancements and future compatible software solutions and devices.

Number of Employees (Associates)
At the end of 2015, we employed approximately 22,200 associates worldwide.

Operating Segments
Information about our operating segments, which are geographically based, may be found in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” below and in Note (18) to the consolidated financial statements.

Executive Officers of the Registrant
The following table sets forth the names, ages, positions and certain other information regarding the Company’s executive officers as of February 12, 2016. Officers are elected annually and serve at the discretion of the Board of Directors.

Name
 
Age
 
Positions
Neal L. Patterson
 
66
 
Chairman of the Board of Directors and Chief Executive Officer
 
 
 
 
 
Clifford W. Illig
 
65
 
Vice Chairman of the Board of Directors
 
 
 
 
 
Zane M. Burke
 
50
 
President
 
 
 
 
 
Marc G. Naughton
 
60
 
Executive Vice President and Chief Financial Officer
 
 
 
 
 
Michael R. Nill
 
51
 
Executive Vice President and Chief Operating Officer
 
 
 
 
 
Randy D. Sims
 
55
 
Senior Vice President, Chief Legal Officer and Secretary
 
 
 
 
 
Jeffrey A. Townsend
 
52
 
Executive Vice President and Chief of Staff
 
 
 
 
 
Julia M. Wilson
 
53
 
Executive Vice President and Chief People Officer


7


Neal L. Patterson, co-founder of the Company, has been Chairman of the Board of Directors and Chief Executive Officer of the Company for more than five years. Mr. Patterson served as President of the Company from July 2010 to September 2013, which position he also held from March of 1999 until August of 1999.

Clifford W. Illig, co-founder of the Company, has been a Director of the Company for more than five years. He previously served as Chief Operating Officer of the Company until October 1998 and as President of the Company until March of 1999. Mr. Illig was appointed Vice Chairman of the Board of Directors in March of 1999.

Zane M. Burke joined the Company in September 1996. Since that time, he has held a variety of client-facing sales, implementation and support roles, including Corporate Controller and Vice President of Finance. He was promoted to President of the Company’s West region in 2002 and Senior Vice President of National Alignment in 2006. He was further promoted to Executive Vice President - Client Organization in July 2011 and to President of the Company in September 2013.

Marc G. Naughton joined the Company in November 1992 as Manager of Taxes. In November 1995 he was named Chief Financial Officer and in February 1996 he was promoted to Vice President. He was promoted to Senior Vice President in March 2002 and promoted to Executive Vice President in March 2010.

Michael R. Nill joined the Company in November 1996. Since that time he has held several positions in the Technology, Intellectual Property and CernerWorks Client Hosting Organizations. He was promoted to Vice President in January 2000, promoted to Senior Vice President in April 2006 and promoted to Executive Vice President and named Chief Engineering Officer in February 2009. Mr. Nill was appointed Chief Operating Officer in May 2011.

Randy D. Sims joined the Company in March 1997 as Vice President and Chief Legal Officer and was promoted to Senior Vice President in March 2011. Prior to joining the Company, Mr. Sims worked at Farmland Industries, Inc. for three years where he last served as Associate General Counsel. Prior to Farmland, Mr. Sims was in-house legal counsel at The Marley Company for seven years, holding the position of Assistant General Counsel when he left to join Farmland.

Jeffrey A. Townsend joined the Company in June 1985. Since that time he has held several positions in the Intellectual Property Organization and was promoted to Vice President in February 1997. He was appointed Chief Engineering Officer in March 1998, promoted to Senior Vice President in March 2001, named Chief of Staff in July 2003 and promoted to Executive Vice President in March 2005.

Julia M. Wilson first joined the Company in July 1990. Since that time, she has held several positions in the Functional Group Organization. She was promoted to Vice President and Chief People Officer in August 2003, to Senior Vice President in March 2007 and to Executive Vice President in March 2013.



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Item 1A. Risk Factors

Risks Related to our Business

We may incur substantial costs related to product-related liabilities. Many of our software solutions, health care devices or services (including life sciences/research services) are intended for use in collecting, storing and displaying clinical and health care-related information used in the diagnosis and treatment of patients and in related health care settings such as admissions, billing, etc. We attempt to limit by contract our liability; however, the limitations of liability set forth in the contracts may not be enforceable or may not otherwise protect us from liability for damages. We may also be subject to claims that are not covered by contract. Although we maintain liability insurance coverage, there can be no assurance that such coverage will cover any particular claim that has been brought or that may be brought in the future, that such coverage will prove to be adequate or that such coverage will continue to remain available on acceptable terms, if at all. A successful material claim or series of claims brought against us, if uninsured or under-insured, could materially harm our business, results of operations and financial condition. Product-related claims, even if not successful, could damage our reputation, cause us to lose existing clients, limit our ability to obtain new clients, divert management’s attention from operations, result in significant revenue loss, create potential liabilities for our clients and us and increase insurance and other operational costs.

We may be subject to claims for system errors and warranties. Our software solutions and health care devices are very complex and may contain design, coding or other errors, especially when first introduced. It is not uncommon for HCIT providers to discover errors in software solutions and/or health care devices after their introduction to the market. Similarly, the installation of our software solutions and health care devices is very complex and errors in the implementation and configuration of our systems can occur. Our software solutions and health care devices are intended for use in collecting, storing, and displaying clinical and health care-related information used in the diagnosis and treatment of patients and in related health care settings such as admissions, billing, etc. Therefore, users of our software solutions and health care devices have a greater sensitivity to errors than the market for software products and devices generally. Our client agreements typically provide warranties concerning material errors and other matters. If a client’s Cerner software solution or health care devices fail to meet these warranties or leads to faulty clinical decisions or injury to patients, it could 1) constitute a material breach under the client agreement, allowing the client to terminate the agreement and possibly obtain a refund or damages or both, or require us to incur additional expense in order to make the software solution or health care device meet these criteria or 2) subject us to claims or litigation by our clients or clinicians or directly by the patient. Additionally, such failures could damage our reputation and could negatively affect future sales. Our client agreements generally limit our liability arising from such claims but such limits may not be enforceable in certain jurisdictions or circumstances. Although we maintain liability insurance coverage, there can be no assurance that such coverage will cover any particular claim that has been brought or that may be brought in the future, that such coverage will prove to be adequate or that such coverage will continue to remain available on acceptable terms, if at all. A successful material claim or series of claims brought against us, if uninsured or under-insured, could materially harm our business, results of operations and financial condition.

We may experience interruptions at our data centers or client support facilities, which could interrupt clients’ access to their data, exposing us to significant costs and reputational harm. Our business relies on the secure electronic transmission, data center storage and hosting of sensitive information, including protected health information, personally identifiable information, financial information and other sensitive information relating to our clients, company and workforce. We perform data center and/or hosting services for certain clients, including the storage of critical patient and administrative data and support services through various client support facilities. If any of these systems are interrupted, damaged or breached by an unforeseen event or actions of a Cerner associate or contractor or a third party or fail for any extended period of time, it could have a material adverse impact on our results of operations. Complete failure of all local public power and backup generators; impairment of all telecommunications lines; a concerted denial of service attack; a significant system, network or data breach; damage, injury or impairment (environmental, accidental or intentional) to the buildings, the equipment inside the buildings housing our data centers, the personnel operating such facilities or the client data contained therein; or errors by the personnel trained to operate such facilities could cause a disruption in operations and negatively impact clients who depend on us for data center and system support services. We offer our clients disaster recovery services for additional fees to protect clients from isolated data center failures, leveraging our multiple data center facilities, however only a small percentage of our hosted clients choose to contract for these services. Additionally, Cerner’s core systems are disaster tolerant as we have implemented redundancy across physically diverse data centers. Any interruption in operations at our data centers and/or client support facilities could damage our reputation, cause us to lose existing clients, hurt our ability to obtain new clients, result in significant revenue loss, create potential liabilities for our clients and us and increase insurance and other operating costs.


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If our IT security is breached, we could be subject to increased expenses, exposure to legal claims and regulatory actions, and clients could be deterred from using our solutions and services. We are in the information technology business, and our products and services store, retrieve, manipulate and manage our clients’ information and data (and that of their patients), as well as our own data. We believe we have a reputation for secure and reliable solution offerings and related services, and we have invested a great deal of time and resources in protecting the security, confidentiality, integrity and availability of our solutions, services and the internal and external data that we manage. At times, we encounter attempts by third parties to identify and exploit solution and service vulnerabilities, penetrate or bypass our security measures, and gain unauthorized access to our or our clients’, partners’ and suppliers’ software, hardware and cloud offerings, networks and systems, any of which could lead to the compromise of personal information or the confidential information or data of Cerner, our clients or their patients.

High-profile security breaches at other companies have increased in recent years, and security industry experts and government officials have warned about the risks of hackers and cyber-attacks targeting information technology products and businesses. Although this is an industry-wide problem that affects other software and hardware companies, we may be targeted by computer hackers because we are a prominent health care IT company. These risks will increase as we continue to grow our cloud offerings and store and process increasingly large amounts of data, including personal health information, and our clients’ confidential information and data, and host or manage parts of our clients’ businesses in cloud-based IT environments.

If a cyber-attack or other security incident described above were to allow unauthorized access to or modification of our clients’ or suppliers’ data, our own data or our IT systems, or if our solutions or services are perceived as having security vulnerabilities, we could suffer significant damage to our brand and reputation. This in turn could lead to fewer clients using our solutions and services and result in reduced revenue and earnings. The costs we would incur to address and fix these security incidents would increase our expenses. These types of security incidents could also lead to lawsuits, regulatory investigations and claims and increased legal liability, including in some cases contractual costs related to notification and fraud monitoring of impacted persons.

Our proprietary technology may be subject to claims for infringement or misappropriation of intellectual property rights of others, or may be infringed or misappropriated by others. We rely upon a combination of license agreements, confidentiality policies and procedures, confidentiality provisions in employment agreements, confidentiality agreements with third parties and technical security measures to maintain the confidentiality, exclusivity and trade secrecy of our proprietary information. We also rely on trademark and copyright laws to protect our intellectual property rights in the U.S. and abroad. We continue to develop our patent portfolio of U.S. and global patents, but these patents do not provide comprehensive protection for the wide range of solutions, devices and services we offer. Despite our protective measures and intellectual property rights, we may not be able to adequately protect against theft, copying, reverse-engineering, misappropriation, infringement or unauthorized use or disclosure of our intellectual property, which could have an adverse effect on our competitive position.

In addition, we are routinely involved in intellectual property infringement or misappropriation claims, and we expect this activity to continue or even increase as the number of competitors, patents and patent enforcement organizations in the HCIT market increases, the functionality of our software solutions and services expands, the use of open-source software increases and we enter new geographies and new market segments. These claims, even if unmeritorious, are expensive to defend and are often incapable of prompt resolution. If we become liable to third parties for infringing or misappropriating their intellectual property rights, we could be required to pay a substantial damage award, develop alternative technology, obtain a license or cease using, selling, offering for sale, licensing, importing, implementing or supporting the applicable solutions, devices and services.

We may become subject to legal proceedings that could have a material adverse impact on our business, results of operations and financial condition. From time to time and in the ordinary course of our business, we and certain of our subsidiaries may become involved in various legal proceedings. All such legal proceedings are inherently unpredictable and, regardless of the merits of the claims, litigation may be expensive, time-consuming and disruptive to our operations and distracting to management. If resolved against us, such legal proceedings could result in excessive verdicts, injunctive relief or other equitable relief that may affect how we operate our business. Similarly, if we settle such legal proceedings, it may affect how we operate our business. Future court decisions, alternative dispute resolution awards, business expansion or legislative activity may increase our exposure to litigation and regulatory investigations. In some cases, substantial non-economic remedies or punitive damages may be sought. Although we maintain liability insurance coverage, there can be no assurance that such coverage will cover any particular verdict, judgment or settlement that may be entered against us, that such coverage will prove to be adequate or that such coverage will continue to remain available on acceptable terms, if at

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all. If we incur liability that exceeds our insurance coverage or that is not within the scope of the coverage in legal proceedings brought against us, it could have a material adverse effect on our business, results of operations and financial condition.

We are subject to risks associated with our global operations. We market, sell and service our solutions, devices and services globally. We have established offices around the world, including in the Americas, Europe, the Middle East and the Asia Pacific region. Our acquisition of the Cerner Health Services business increased our assets and operations within Europe and, accordingly, our exposure to economic conditions in Europe. We plan to continue to expand our non-U.S. operations and enter new global markets. This expansion will require significant management attention and financial resources to develop successful direct and indirect non-U.S. sales and support channels. Our business is generally transacted in the local functional currency. In some countries, our success will depend in part on our ability to form relationships with local partners. There is a risk that we may sometimes choose the wrong partner. For these and other reasons, we may not be able to maintain or increase non-U.S. market demand for our solutions, devices and services.

Non-U.S. operations are subject to inherent risks, and our business, results of operations and financial condition, including our revenue growth and profitability, could be adversely affected by a variety of uncontrollable and changing factors. These include, but are not limited to:

Greater difficulty in collecting accounts receivable and longer collection periods;
Difficulties and costs of staffing and managing non-U.S. operations;
The impact of global economic conditions;
Effects of sovereign debt conditions, including budgetary constraints;
Unfavorable or volatile foreign currency exchange rates;
Legal compliance costs or business risks associated with our global operations where: i) local laws and customs differ from, or are more stringent than those in the U.S., such as those relating to privacy or security breaches or ii) risk is heightened with respect to laws prohibiting improper payments and bribery, including without limitation the U.S. Foreign Corrupt Practices Act, the U.K. Anti-Bribery Act and similar laws and regulations in foreign jurisdictions;
Certification, licensing or regulatory requirements;
Unexpected changes in regulatory requirements;
Changes to or reduced protection of intellectual property rights in some countries;
Potentially adverse tax consequences as a result of changes in tax laws or otherwise, and difficulties associated with repatriating cash generated or held abroad in a tax-efficient manner;
Different or additional functionality requirements or preferences;
Trade protection measures;
Export control regulations;
Health service provider or government spending patterns;
Natural disasters, war or terrorist acts;
Labor disruptions that may occur in a country;
Poor selection of a partner in a country; or
Political unrest which may impact sales or threaten the safety of associates or our continued presence in these countries and the related potential impact on global stability.

Fluctuations in foreign currency exchange rates could materially affect our financial results. Our consolidated financial statements are presented in U.S. dollars. In general, the functional currency of our subsidiaries is the local currency. For each subsidiary, assets and liabilities denominated in foreign currencies are translated into U.S. dollars at the exchange rates in effect at the balance sheet dates and revenues and expenses are translated at the average exchange rates prevailing during the month of the transaction. Therefore, increases or decreases in the value of the U.S. dollar against other major currencies affect our revenues, net earnings and the value of balance sheet items denominated in foreign currencies. Future fluctuations in foreign currency exchange rates, particularly the strengthening of the U.S. dollar against major currencies, could materially affect our financial results.
 
We are subject to tax legislation in numerous countries; tax legislation initiatives or challenges to our tax positions could adversely affect our business, results of operations and financial condition. We are a global corporation with a presence in more than 25 countries. As such, we are subject to tax laws, regulations and policies of the U.S. federal, state and local governments and of comparable taxing authorities in other country jurisdictions. From time to time, various legislative

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initiatives may be proposed that could adversely affect our tax positions and/or our tax liabilities. There can be no assurance that our effective tax rate, tax payments, tax credits or incentives will not be adversely affected by these initiatives. In addition, U.S. federal, state and local, as well as other countries’ tax laws and regulations are extremely complex and subject to varying interpretations. There can be no assurance that our tax positions will not be challenged by relevant tax authorities or that we would be successful in any such challenge, which could result in additional taxation, penalties and interest payments.

Our success depends upon the recruitment and retention of key personnel. To remain competitive in our industries, we must attract, motivate and retain highly skilled managerial, sales, marketing, consulting and technical personnel, including executives, consultants, programmers and systems architects skilled in the HCIT, health care devices, health care transactions, population health management, revenue cycle and life sciences industries and the technical environments in which our solutions, devices and services are offered. Competition for such personnel in our industries is intense in both the U.S. and abroad. Our failure to attract additional qualified personnel to meet our needs could have a material adverse effect on our prospects for long-term growth. In addition, we invest significant time and expense in training our associates, which increases their value to clients and competitors who may seek to recruit them and increases the cost of replacing them. Our success is dependent to a significant degree on the continued contributions of key management, sales, marketing, consulting and technical personnel. The unexpected loss of key personnel could have a material adverse impact on our business, results of operations and financial condition, and could potentially inhibit development and delivery of our solutions, devices and services and market share advances.

We depend on third party suppliers and our revenue and operating earnings could suffer if we fail to manage suppliers properly. We license or purchase intellectual property and technology (such as software, hardware and content) from third parties, including some competitors, and incorporate such third party software, hardware or content into, or sell or license it in conjunction with, our solutions, devices and services. We depend on some of the third party software, hardware or content in the operation and delivery of our solutions, devices and services. For instance, we currently depend on Microsoft Oracle and IBM technologies for portions of the operational capabilities of our Millennium solutions. Our remote hosting and cloud services businesses also rely on a limited number of suppliers for certain functions of these businesses, such as Oracle database technologies, CITRIX technologies and Cisco networking technologies. Additionally, we rely on EMC, Hewlett Packard, NetApp, IBM and others for our hardware technology platforms.

Most of our third party software license support contracts expire within one to five years, can be renewed only by mutual consent and may be terminated if we breach the terms of the license and fail to cure the breach within a specified period of time. Most of these third party software licenses are non-exclusive; therefore, our competitors may obtain the right to use any of the technology covered by these licenses and use the technology to compete directly with us.

If any of our third party suppliers were to change product offerings, cease actively supporting the technologies, fail to update and enhance the technologies to keep pace with changing industry standards, encounter technical difficulties in the continuing development of these technologies, significantly increase prices, terminate our licenses or supply contracts, suffer significant capacity or supply chain constraints or suffer significant disruptions, we would need to seek alternative suppliers and incur additional internal or external development costs to ensure continued performance of our solutions, devices and services. Such alternatives may not be available on attractive terms, or may not be as widely accepted or as effective as the intellectual property or technology provided by our existing suppliers. If the cost of licensing, purchasing or maintaining our third party intellectual property or technology significantly increases, our operating earnings could significantly decrease. In addition, interruption in functionality of our solutions, devices or services as a result of changes in third party suppliers could adversely affect our commitments to clients, future sales of solutions, devices and services, and negatively affect our revenue and operating earnings.

We may encounter difficulties in successfully completing the integration of our Cerner Health Services business into our business or fail to realize the anticipated benefits of the acquisition of the Cerner Health Services business. The integration of two independent businesses is a complex, costly and time-consuming process and involves numerous risks, including difficulties in the assimilation of operations, services, solutions and personnel, the diversion of management’s attention from other business concerns, the expansion into markets in which we have little or no direct prior experience, and the potential inability to maintain the goodwill of existing clients. Potential difficulties that we may encounter as part of the integration process, which may preclude us from fully realizing the anticipated benefits of the acquisition, including the anticipated synergies, growth opportunities and cost savings, include, among other factors:

managing a larger company;

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the possibility of faulty assumptions underlying expectations regarding the integration process, including known and unknown liabilities in the legacy Cerner Health Services business or arising out of the integration, or assumptions around client retention;
integrating two business cultures;
creating uniform standards, controls, procedures, policies and information systems and minimizing the costs associated with such matters;
integrating information systems, purchasing, accounting, finance, legal, sales, billing, payroll and regulatory compliance functions;
preserving client, supplier, research and development, distribution, marketing, promotion and other important relationships;
commercializing "go forward" solutions under development and increasing revenues from existing marketed solutions;
combining the sales force territories and competencies associated with the sale of solutions and services presently sold or provided by legacy Cerner or the Cerner Health Services business;
integrating personnel from different businesses while maintaining focus on providing consistent, high-quality solutions and client support and attracting prospective clients;
integrating complex technologies and solutions from different businesses in a manner that is seamless to clients; and
performance shortfalls as a result of the diversion of management’s attention to the integration of the Cerner Health Services business.

If our management is unable to successfully integrate the Cerner Health Services business in a manner that permits us to achieve the cost savings and operating synergies anticipated to result from the Cerner Health Services acquisition, such anticipated benefits may not be realized fully or at all or may take longer to realize than expected. The significant diversion of our management’s attention away from the ongoing businesses, and any difficulties encountered in the transition and integration process, could adversely affect our financial results. Moreover, the failure to achieve the anticipated benefits of the Cerner Health Services acquisition could result in material increases in costs or material decreases in the amount of expected revenues. Any of the above difficulties could adversely affect our ability to maintain relationships with clients, partners, suppliers and associates or our ability to achieve the anticipated benefits of the Cerner Health Services acquisition, or could reduce our earnings or otherwise adversely affect our business, results of operations and financial condition.

We intend to continue strategic business acquisitions and other combinations, which are subject to inherent risks. In order to expand our solutions, device offerings and services and grow our market and client base, we may continue to seek and complete strategic business acquisitions and other combinations that we believe are complementary to our business. Acquisitions have inherent risks which may have a material adverse effect on our business, results of operations, financial condition or prospects, including, but not limited to: 1) failure to successfully integrate the business and financial operations, services, intellectual property, solutions or personnel of an acquired business and to maintain uniform standard controls, policies and procedures; 2) diversion of our management’s attention from other business concerns; 3) entry into markets in which we have little or no direct prior experience; 4) failure to achieve projected synergies and performance targets; 5) loss of clients or key personnel; 6) incurrence of debt or assumption of known and unknown liabilities; 7) write-off of software development costs, goodwill, client lists and amortization of expenses related to intangible assets; 8) dilutive issuances of equity securities; and, 9) accounting deficiencies that could arise in connection with, or as a result of, the acquisition of an acquired company, including issues related to internal control over financial reporting and the time and cost associated with remedying such deficiencies. If we fail to successfully integrate acquired businesses or fail to implement our business strategies with respect to these acquisitions, we may not be able to achieve projected results or support the amount of consideration paid for such acquired businesses.

We could suffer losses due to asset impairment charges. We assess our goodwill for impairment during the second quarter every year and on an interim date should events or changes in circumstances indicate the carrying value of goodwill may not be recoverable in accordance with provisions of Accounting Standards Codification Topic 350, Intangibles – Goodwill and Other. Declines in business performance or other factors could cause the fair value of a reporting unit to be revised downward and could result in a non-cash impairment charge. This could negatively affect our reported net earnings.

Volatility and disruption resulting from global economic or market conditions could negatively affect our business, results of operations and financial condition. Our business, results of operations, financial condition and outlook may be impacted by the health of the global economy. Volatility and disruption in global capital and credit markets may lead to slowdowns or declines in client spending which could adversely affect our business and financial performance. Our business and financial performance, including new business bookings and collection of our accounts receivable, may be adversely affected by current and future economic conditions (including a reduction in the availability of credit, higher energy costs,

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rising interest rates, financial market volatility and lower than expected economic growth) that cause a slowdown or decline in client spending. Reduced purchases by our clients or changes in payment terms could adversely affect our revenue growth and cause a decrease in our cash flow from operations. Bankruptcies or similar events affecting clients may cause us to incur bad debt expense at levels higher than historically experienced. Further, volatility and disruption in global financial markets may also limit our ability to access the capital markets at a time when we would like, or need, to raise capital, which could have an impact on our ability to react to changing economic and business conditions. Accordingly, if global financial and economic volatility continues or worsens, our business, results of operations and financial condition could be materially and adversely affected.

If we are unable to manage our growth in the new markets in which we offer solutions, health care devices or services, our business, results of operations and financial condition could suffer. Our future financial results will depend in part on our ability to profitably manage our business in the new markets that we enter. Over the past several years, we have engaged in the identification of, and competition for, growth and expansion opportunities in the areas of analytics, revenue cycle and population health. In order to achieve those initiatives, we will need to, among other things, recruit, train, retain and effectively manage associates, manage changing business conditions and implement and improve our technical, administrative, financial control and reporting systems for offerings in those areas. Difficulties in managing future growth in new markets could have a material adverse impact on our business, results of operations and financial condition.

We will continue to incur significant expenses in connection with the integration of the Cerner Health Services business into Cerner. As we work to integrate the business, we expect to continue to incur significant expenses relating to the integration of personnel, geographically diverse operations, information technology systems, accounting systems, clients, and strategic partners of each business and the implementation of consistent standards, policies, and procedures, and we may be subject to material write downs in assets and charges to earnings. The integration process will be long-term and will continue to create significant expenses.

Our work with government clients exposes us to additional risks inherent in the government contracting environment. Our clients include national, provincial, state and local governmental entities. Our government work carries various risks inherent in the government contracting process. These risks include, but are not limited to, the following:

Government entities, particularly in the U.S., often reserve the right to audit our contracts and conduct inquiries and investigations of our business practices with respect to government contracts. U.S. government agencies conduct reviews and investigations and make inquiries regarding our systems in connection with our performance and business practices with respect to our government contracts. Negative findings from audits, investigations or inquiries could affect our future sales and profitability by preventing us, by operation of law or in practice, from receiving new government contracts for some period of time.

If a government client discovers improper or illegal activities in the course of audits or investigations, we may become subject to various civil and criminal penalties, including those under the civil U.S. False Claims Act, and administrative sanctions, which may include termination of contracts, forfeiture of profits, suspension of payments, fines and suspensions or debarment from doing business with other agencies of that government. The inherent limitations of internal controls may not prevent or detect all improper or illegal activities.

U.S. government contracting regulations impose strict compliance and disclosure obligations. Disclosure is required if certain company personnel have knowledge of “credible evidence” of a violation of federal criminal laws involving fraud, conflict of interest, bribery or improper gratuity, a violation of the civil U.S. False Claims Act or receipt of a significant overpayment from the government. Failure to make required disclosures could be a basis for suspension and/or debarment from federal government contracting in addition to breach of the specific contract and could also impact contracting beyond the U.S. federal level. Reported matters also could lead to audits or investigations and other civil, criminal or administrative sanctions.

Government contracts are subject to heightened reputational and contractual risks compared to contracts with commercial clients. For example, government contracts and the proceedings surrounding them are often subject to more extensive scrutiny and publicity. Negative publicity, including allegations of improper or illegal activity, poor contract performance, deficiencies in services or other deliverables, or information security breaches, regardless of accuracy, may adversely affect our reputation.

Terms and conditions of government contracts also tend to be more onerous and are often more difficult to negotiate.


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Government entities typically fund projects through appropriated monies. While these projects are often planned and executed as multi-year projects, government entities usually reserve the right to change the scope of or terminate these projects for lack of approved funding and/or at their convenience. Changes in government or political developments, including budget deficits, shortfalls or uncertainties, government spending reductions (e.g., Congressional sequestration of funds under the Budget Control Act of 2011) or other debt constraints, such as those recently experienced in the U.S. and Europe, could result in our projects being reduced in price or scope or terminated altogether, which also could limit our recovery of incurred costs, reimbursable expenses and profits on work completed prior to the termination. Furthermore, if insufficient funding is appropriated to the government entity to cover termination costs, we may not be able to fully recover our investments.

The occurrences or conditions described above could affect not only our business with the particular government entities involved, but also our business with other entities of the same or other governmental bodies or with certain commercial clients, and could have a material adverse effect on our business, results of operations and financial condition.

There are risks associated with our outstanding and future indebtedness. We have customary restrictive covenants in our current debt agreements, which may limit our flexibility to operate our business. These covenants include limitations on priority debt, liens, mergers, asset dispositions, and transactions with affiliates, and require us to maintain certain leverage and interest coverage ratios. Failure to comply with these covenants could result in an event of default that, if not cured or waived, could result in reduced liquidity for the Company and could have a material adverse effect on our business, results of operations and financial condition. Additionally, our ability to pay interest and repay the principal for our indebtedness is dependent upon our ability to manage our business operations, generate sufficient cash flows to service such debt and the other factors discussed in this section. There can be no assurance that we will be able to manage any of these risks successfully.

Risks Related to the Health Care Information Technology, Health Care Device, Health Care Transaction, Revenue Cycle Management and Population Health Management Industries

The health care industry is subject to changing political, economic and regulatory influences, which could impact the purchasing practices and operations of our clients and increase our costs to deliver compliant solutions and services. For example, the Health Insurance Portability and Accountability Act of 1996 (as modified by The Health Information Technology for Economic and Clinical Health Act (HITECH) provisions of the American Recovery and Reinvestment Act of 2009) (collectively, HIPAA) continues to have a direct impact on the health care industry by requiring national provider identifiers and standardized transactions/code sets, operating rules and necessary security and privacy measures in order to ensure the appropriate level of privacy of protected health information. These regulatory factors affect the purchasing practices and operation of health care organizations.

Many health care providers are consolidating to create integrated health care delivery systems with greater market power. These providers may try to use their market power to negotiate price reductions for our solutions, health care devices and services. As the health care industry consolidates, our client base could be eroded, competition for clients could become more intense and the importance of landing new client relationships becomes greater.

The Patient Protection and Affordable Care Act, which was amended by the Health Care and Education Reconciliation Act of 2010, became law in 2010. This comprehensive health care reform legislation included provisions to control health care costs, improve health care quality, and expand access to affordable health insurance. Together with ongoing statutory and budgetary policy developments at a federal level, this health care reform legislation could include changes in Medicare and Medicaid payment policies and other health care delivery administrative reforms that could potentially negatively impact our business and the business of our clients. Because not all the administrative rules implementing health care reform under the legislation have been finalized, and because of ongoing federal fiscal budgetary pressures yet to be resolved for federal health programs, the full impact of the health care reform legislation and of further statutory actions to reform healthcare payment on our business is unknown, but there can be no assurances that health care reform legislation will not adversely impact either our operational results or the manner in which we operate our business. Health care industry participants may respond by reducing their investments or postponing investment decisions, including investments in our devices, solutions and services.

The health care industry is highly regulated, and thus, we are subject to a number of laws, regulations and industry initiatives, non-compliance with certain of which could materially adversely affect our operations or otherwise adversely affect our business, results of operations and financial condition. As a participant in the health care industry, our operations and relationships, and those of our clients, are regulated by a number of U.S. federal, state, local and foreign governmental entities. The impact of these regulations on us is direct, to the extent that we are ourselves subject to these

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laws and regulations, and is also indirect, both in terms of the level of government reimbursement available to our clients and because, in a number of situations, even though we may not be directly regulated by specific health care laws and regulations, our solutions, devices and services must be capable of being used by our clients in a way that complies with those laws and regulations. There is a significant and wide-ranging number of regulations both within the U.S. and abroad, such as regulations in the areas of health care fraud, e-prescribing, claims processing and transmission, health care devices, the security and privacy of patient data and interoperability standards, that may be directly or indirectly applicable to our operations and relationships or the business practices of our clients. Specific risks include, but are not limited to, the following:

Health Care Fraud. U.S. federal and state governments continue to enhance regulation of and increase their scrutiny over practices involving health care fraud, waste and abuse perpetuated by health care providers and professionals whose services are reimbursed by Medicare, Medicaid and other government health care programs. Our health care provider clients, as well as our provision of products and services to government entities, subject our business to laws and regulations on fraud and abuse which, among other things, prohibit the direct or indirect payment or receipt of any remuneration for patient referrals, or arranging for or recommending referrals or other business paid for in whole or in part by these federal or state health care programs. U.S. federal enforcement personnel have substantial funding, powers and remedies to pursue suspected or perceived fraud and abuse. The effect of this government regulation on our clients is difficult to predict. Many of the regulations applicable to our clients and that may be applicable to us, including those relating to marketing incentives offered in connection with health care device sales, are vague or indefinite and have not been interpreted by the courts. They may be interpreted or applied by a prosecutorial, regulatory or judicial authority in a manner that could broaden their applicability to us or require our clients to make changes in their operations or the way in which they deal with us. If such laws and regulations are determined to be applicable to us and if we fail to comply with any applicable laws and regulations, we could be subject to civil and criminal penalties, sanctions or other liability, including exclusion from government health programs, which could have a material adverse effect on our business, results of operations and financial condition. Even an unsuccessful challenge by a regulatory or prosecutorial authority of our activities could result in adverse publicity, could require a costly response from us and could adversely affect our business, results of operations and financial condition.

Preparation, Transmission and Submission of Medical Claims for Reimbursement. Our solutions are capable of electronically transmitting claims for services and items rendered by a physician to many patients' payers for approval and reimbursement. We also provide revenue cycle management services to our clients that include the coding, preparation and submission of claims for medical service to payers for reimbursement. Such claims are governed by U.S. federal and state laws. U.S. federal law provides civil liability to any persons that knowingly submit, or cause to be submitted, a claim to a payer, including Medicare, Medicaid and private health plans, seeking payment for any services or items that overbills or bills for services or items that have not been provided to the patient. U.S. federal law may also impose criminal penalties for intentionally submitting such false claims. We have policies and procedures in place that we believe result in the accurate and complete preparation, transmission, submission and collection of claims, provided that the information given to us by our clients is also accurate and complete. The HIPAA security, privacy and transaction standards, as discussed below, also have a potentially significant effect on our claims preparation, transmission and submission services, since those services must be structured and provided in a way that supports our clients' HIPAA compliance obligations. In connection with these laws, we may be subjected to U.S. federal or state government investigations and possible penalties may be imposed upon us; false claims actions may have to be defended; private payers may file claims against us; and we may be excluded from Medicare, Medicaid or other government-funded health care programs. Any investigation or proceeding related to these laws, even if unwarranted or without merit, may have a material adverse effect on our business, results of operations and financial condition.

Implementation of ICD-10 Coding for Medical Coding. The Centers for Medicare & Medicaid Services (CMS) mandated that all providers, payers, clearinghouses and billing services implement the use of new patient codes for medical coding, referred to as ICD-10 codes on and after October 1, 2015. This mandate substantially increased the number of medical billing codes by which providers will seek reimbursement, increasing the complexity of submitting claims for reimbursement. Claims submitted for services performed after October 1, 2015 must use ICD-10 codes or they may not be paid. Our efforts to provide services and solutions that enable our clients to comply with the ICD-10 mandate could be time consuming and expensive. In addition, due to the effort and expense of complying with the ICD-10 mandate, our clients may postpone or cancel decisions to purchase our solutions and services. Either of the foregoing could have a material adverse effect on our business, results of operations and financial condition.

Regulation of Health Care Devices. The U.S. Food and Drug Administration (FDA) has determined that certain of our solutions are medical devices that are actively regulated under the Federal Food, Drug and Cosmetic Act (Act) and amendments to the Act. Other countries have similar regulations in place related to medical devices, that now or may in the future apply to certain of our solutions. If other of our solutions are deemed to be actively regulated medical devices by the FDA or similar regulatory agencies in countries where we do business, we could be subject to extensive requirements governing pre- and

16


post-marketing activities including pre-market notification clearance. Complying with these medical device regulations on a global perspective is time consuming and expensive and could be subject to unanticipated and significant delays. Further, it is possible that these regulatory agencies may become more active in regulating software and devices that are used in health care. If we are unable to obtain the required regulatory approvals for any such solutions or health care devices, our short and long term business plans for these solutions or health care devices could be delayed or canceled.

There have been eight FDA inspections at various Cerner sites since 2003. Inspections conducted at our World Headquarters and Innovations Campus in 2010 resulted in the issuance of an FDA Form 483 observation to which we responded promptly. The FDA has taken no further action with respect to the Form 483 observation that was issued in 2010. The remaining FDA inspections, including inspections at our world headquarters in 2006, 2007 and 2014, resulted in no issuance of a Form 483. We remain subject to periodic FDA inspections and we could be required to undertake additional actions to comply with the Act and any other applicable regulatory requirements. Our failure to comply with the Act and any other applicable regulatory requirements could have a material adverse effect on our ability to continue to manufacture, distribute and deliver our solutions, services and devices. The FDA has many enforcement tools including recalls, product corrections, seizures, injunctions, refusal to grant pre-market clearance of products, civil fines and criminal prosecutions. Any of the foregoing could have a material adverse effect on our business, results of operations and financial condition.

Security and Privacy of Patient Information. U.S. federal, state and local and foreign laws regulate the confidentiality of personal information, how that information may be used, and the circumstances under which such information may be released. These regulations govern both the disclosure and use of confidential personal and patient medical record information and require the users of such information to implement specified security and privacy measures. U.S. regulations currently in place governing electronic health data transmissions continue to evolve and are often unclear and difficult to apply. Laws in non-U.S. jurisdictions may have similar or even stricter requirements related to the treatment of personal or patient information.

In the U.S., HIPAA regulations require national standards for some types of electronic health information transactions and the data elements used in those transactions to ensure the integrity, security and confidentiality of health information and standards to protect the privacy of individually identifiable health information. Covered entities under HIPAA, which include health care organizations such as our clients, our employer clinic business model and our claims processing, transmission and submission services, are required to comply with the privacy standards, the transaction regulations and the security regulations. Moreover, the HITECH provisions of ARRA, and associated regulatory requirements, extend many of the HIPAA obligations, formerly imposed only upon covered entities, to business associates as well. As a business associate of our clients who are covered entities, we were in most instances already contractually required to ensure compliance with the HIPAA regulations as they pertain to handling of covered client data. However, the extension of these HIPAA obligations to business associates by law has created additional liability risks related to the privacy and security of individually identifiable health information.

Evolving HIPAA and HITECH-related laws or regulations in the U.S. and data privacy and security laws or regulations in non-U.S. jurisdictions could restrict the ability of our clients to obtain, use or disseminate patient information. This could adversely affect demand for our solutions if they are not re-designed in a timely manner in order to meet the requirements of any new interpretations or regulations that seek to protect the privacy and security of patient data or enable our clients to execute new or modified health care transactions. We may need to expend additional capital, software development and other resources to modify our solutions and devices to address these evolving data security and privacy issues. Furthermore, our failure to maintain confidentiality of sensitive personal information in accordance with the applicable regulatory requirements could damage our reputation and expose us to claims, fines and penalties.

In Europe, we are subject to European Union (“EU”) data protection legislation, including the 1995 EU Directive on Data Protection, which requires member states to impose minimum restrictions on the collection and use of personal data that, in some respects, are more stringent, and impose more significant burdens on subject businesses, than current privacy standards in the U.S. The EU directives establish several obligations that organizations must follow with respect to use of personal data, including a prohibition on the transfer of personal information from the EU to other countries whose laws do not protect personal data to an adequate level of privacy or security. In addition to this EU-wide legislation, certain member states have adopted more stringent data protection standards. Cerner had addressed these requirements by certification to the U.S. - EU and U.S. - Switzerland Safe Harbor Frameworks prior to such Frameworks being invalidated in October 2015 by the European Court of Justice. Although negotiations between the U.S. and the EU to establish a successor to the Safe Harbor Framework are underway, the outcome of those negotiations are uncertain. In the interim, we are pursuing alternative methods of compliance, but those methods may be subject to scrutiny by data protection authorities in European member states. On December 15, 2015, the European Parliament and the Council of the European Union (Council) reached a political

17


agreement on the future EU data protection legal framework. Subject to formal adoption by the European Parliament in 2016, the General Data Protection Regulation (GDPR) will replace the 1995 Data Protection Directive. Although the final text of the GDPR has not yet been released, and minor modifications remain possible, it is expected that the regulation will have significant impacts on how businesses can collect and process the personal data of EU individuals. The GDPR is expected to become effective sometime in 2018, two years after its final adoption in 2016. The costs of compliance with, and other burdens imposed by, such laws, regulations and policies, or modifications thereto, that are applicable to us may limit the use and adoption of our solutions and could have a material adverse impact on our business, results of operations and financial condition.

Applicable statutes and regulations have granted broad enforcement powers to regulatory agencies to investigate and enforce our compliance with these privacy and security laws and regulations. Governmental enforcement personnel, particularly in the EU, have substantial funding, powers and remedies to pursue suspected or perceived violations. If we fail to comply with any applicable laws or regulations, we could be subject to civil penalties, sanctions or other liability. Enforcement investigations, even if meritless, could have a negative impact on our reputation, cause us to lose existing clients or limit our ability to attract new clients.

Interoperability Standards. Our clients are concerned with and often require that our software solutions and health care devices be interoperable with other third party HCIT suppliers. Market forces or governmental/regulatory authorities could create software interoperability standards that would apply to our solutions, health care devices or solutions, and if our software solutions, health care devices or services are not consistent with those standards, we could be forced to incur substantial additional development costs to conform. The Office of the National Coordinator for Health Information Technology (ONC) has developed a comprehensive set of criteria for the functionality, interoperability and security of various software modules in the HCIT industry. ONC, however, continues to modify and refine those standards. Achieving certification is becoming a competitive requirement, resulting in increased software development and administrative expense to conform to these requirements.

ARRA Meaningful Use Program. Various U.S. federal and state and non-U.S. government agencies are also developing standards for the use of information technology that could become mandatory in connection with health care services that are paid for by these agencies. For example, ARRA requires “meaningful use of certified electronic health record technology” by health care providers in order to receive stimulus funds from the U.S. federal government. Regulations have been issued that identify standards and implementation specifications and establish the certification standards for qualifying electronic health record technology. Nevertheless, these standards and specifications are subject to interpretation by the entities designated to certify such technology. While a combination of our solutions have been certified as meeting the Stage 1 and Stage 2 standards for certified health record technology, the regulatory standards to achieve certification continue to evolve, and we will face requirements in late 2016 and early 2017 to certify to the criteria edition applicable to Stage 3. We may incur increased development costs and delays in delivering solutions as we need to update our software, devices or health care devices to be in compliance with these varying and evolving standards. In addition, delays in interpreting these standards may result in postponement or cancellation of our clients’ decisions to purchase our solutions or health care devices. If our software solutions, devices or health care devices are not compliant with these evolving standards, our market position and sales could be impaired and we may have to invest significantly in changes to our software solutions, devices or health care devices. Further, we bear potential financial risks where we have entered into agreements with clients to warrant their ability to meet future stage meaningful use certification requirements. While a client’s ability to meet future stage meaningful use attestation requirements may be dependent on such client’s ability to adopt, rollout and attain sufficient use of our certified solutions on a timely basis, we may face risks that come from issues in full adoption of our certified solutions, which in turn could lead to a client missing its attestation targets. These risks are enhanced when we are under agreements to provide application management services to our clients that place responsibilities on us for application configuration and implementation as a prerequisite to or impactful to meaningful use attainment ordinarily borne by the client in other circumstances.

We operate in intensely competitive and dynamic industries, and our ability to successfully compete and continue to grow our business depends on our ability to respond quickly to market changes and changing technologies and to bring competitive new solutions, devices, features and services to market in a timely fashion. The market for health care information systems, health care solutions and services to the health care industry is intensely competitive, dynamically evolving and subject to rapid technological and innovative changes. Development of new proprietary technology or services is complex, entails significant time and expense and may not be successful. We cannot guarantee that we will be able to introduce new solutions, devices or services on schedule, or at all, nor can we guarantee that such solutions, devices or services will achieve market acceptance. Moreover, we cannot guarantee that errors will not be found in our new solution releases, devices or services before or after commercial release, which could result in solution, device or service delivery

18


redevelopment costs, harm to our reputation, lost sales, license terminations or renegotiations, product liability claims, diversion of resources to remedy errors and loss of, or delay in, market acceptance.

Certain of our competitors have greater financial, technical, product development, marketing or other resources than us and some of our competitors offer software solutions, devices or services that we do not offer. Our principal existing competitors are set forth above under Part I, Item 1 "Competition".

In addition, we expect that major software information systems companies, large information technology consulting service providers and system integrators, start-up companies and others specializing in the health care industry may offer competitive software solutions, devices or services. As we continue to develop new health care devices and services to address areas such as analytics, transaction services, HCIT and device integration, revenue cycle and population health management, we expect to face new competitors, and these competitors may have more experience in these markets and/or more established relationships with prospective clients. We face strong competition and often face downward price pressure, which could adversely affect our results of operations or liquidity. Additionally, the pace of change in the health care information systems market is rapid and there are frequent new software solution introductions, software solution enhancements, device introductions, device enhancements and evolving industry standards and requirements. There are a limited number of hospitals and other health care providers in the U.S. market and in recent years, the health care industry has been subject to increasing consolidation. If we are unable to recognize the impact of industry consolidation, falling costs and technological advancements in a timely manner, or we are too inflexible to rapidly adjust our business models, our prospects and financial results could be negatively affected materially.

Risks Related to Our Common Stock

Our quarterly operating results may vary, which could adversely affect our stock price. Our quarterly operating results have varied in the past and may continue to vary in future periods, including variations from guidance, expectations or historical results or trends. Quarterly operating results may vary for a number of reasons including demand for our solutions, devices and services, the financial condition of our current and potential clients, our long sales cycle, potentially long installation and implementation cycles for larger, more complex systems, accounting policy changes and other factors described in this section and elsewhere in this report. As a result of health care industry trends and the market for our solutions, a large percentage of our revenues are generated by the sale and installation of larger, more complex and higher-priced systems. The sales process for these systems is lengthy and involves a significant technical evaluation and commitment of capital and other resources by the client. Sales may be subject to delays due to changes in clients’ internal budgets, procedures for approving large capital expenditures, competing needs for other capital expenditures, additions or amendments to U.S. federal, state or local regulations, availability of personnel resources or by actions taken by competitors. Delays in the expected sale, installation or implementation of these large systems may have a significant negative impact on our anticipated quarterly revenues and consequently our earnings, since a significant percentage of our expenses are relatively fixed.

Revenue recognized in any quarter may depend upon our or our clients’ abilities to meet project milestones. Delays in meeting these milestone conditions or modification of the project plan could result in a shift of revenue recognition from one quarter to another and could have a material adverse effect on results of operations for a particular quarter.
 
Our revenues from system sales historically have been lower in the first quarter of the year and greater in the fourth quarter of the year, primarily as a result of clients’ year-end efforts to make final capital expenditures for the then-current year.
 
Our sales forecasts may vary from actual sales in a particular quarter. We use a “pipeline” system, a common industry practice, to forecast sales and trends in our business. Our sales associates monitor the status of all sales opportunities, such as the date when they estimate that a client will make a purchase decision and the potential dollar amount of the sale. These estimates are aggregated periodically to generate a sales pipeline. We compare this pipeline at various points in time to evaluate trends in our business. This analysis provides guidance in business planning and forecasting, but these pipeline estimates are by their nature speculative. Our pipeline estimates are not necessarily reliable predictors of revenues in a particular quarter or over a longer period of time, partially because of changes in the pipeline and in conversion rates of the pipeline into contracts that can be very difficult to estimate. A negative variation in the expected conversion rate or timing of the pipeline into contracts, or in the pipeline itself, could cause our plan or forecast to be inaccurate and thereby adversely affect business results. For example, a slowdown in information technology spending, adverse economic conditions, new U.S. federal, state or local regulations related to our industry or a variety of other factors can cause purchasing decisions to be delayed, reduced in amount or cancelled, which would reduce the overall pipeline conversion rate in a particular period of time. Because a substantial portion of our contracts are completed in the latter part of a quarter, we may not be able to

19


adjust our cost structure quickly enough in response to a revenue shortfall resulting from a decrease in our pipeline conversion rate in any given fiscal quarter.

The trading price of our common stock may be volatile. The market for our common stock may experience significant price and volume fluctuations in response to a number of factors including actual or anticipated variations in operating results, articles or rumors about our performance or solutions, devices or services, announcements of technological innovations or new services or products by our competitors or us, changes in expectations of future financial performance or estimates of securities analysts, governmental regulatory action, health care reform measures, client relationship developments, economic conditions and changes occurring in the securities markets in general and other factors, many of which are beyond our control. For instance, our quarterly operating results have varied in the past and may continue to vary in future periods, due to a number of reasons including, but not limited to, demand for our solutions, devices and services, the financial condition of our current and potential clients, our long sales cycle, potentially long installation and implementation cycles for larger, more complex and higher-priced systems, key management changes, accounting policy changes and other factors described herein. As a matter of policy, we do not generally comment on our stock price or rumors.

Furthermore, the stock market in general, and the markets for software, health care devices, other health care solutions and services and information technology companies in particular, have experienced extreme volatility that often has been unrelated to the operating performance of particular companies. These broad market and industry fluctuations may adversely affect the trading price of our common stock, regardless of actual operating performance.

Our Directors have authority to issue preferred stock and our corporate governance documents contain anti-takeover provisions. Our Board of Directors has the authority to issue up to 1,000,000 shares of preferred stock and to determine the preferences, rights and privileges of those shares without any further vote or action by the shareholders. The rights of the holders of common stock may be harmed by rights granted to the holders of any preferred stock that may be issued in the future and issuances of preferred stock could be used to delay or hinder a change of control of the Company.

In addition, some provisions of our Certificate of Incorporation and Bylaws could make it more difficult for a potential acquirer to acquire a majority of our outstanding voting stock or otherwise effect a change of control of the Company. These include provisions that provide for a classified board of directors, require advance notice of stockholder proposals at stockholder meetings, prohibit shareholders from taking action by written consent and restrict the ability of shareholders to call special meetings. We are also subject to provisions of Delaware law that prohibit us from engaging in any business combination with any interested shareholder for a period of three years from the date the person became an interested shareholder, unless certain conditions are met, which could have the effect of delaying or preventing a change of control.

Cautions about Forward-looking Statements

Statements made in this report, the Annual Report to Shareholders of which this report is made a part, other reports and proxy statements filed with the Securities and Exchange Commission (SEC), communications to shareholders, press releases and oral statements made by representatives of the Company that are not historical in nature, or that state the Company’s or management’s intentions, hopes, beliefs, expectations, plans, goals or predictions of future events or performance, may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). Forward-looking statements can often be identified by the use of forward-looking terminology, such as "could," "should," "will," "intended," "continue," "believe," "may," "expect," "hope," "anticipate," "goal," "forecast," "plan," "guidance," "opportunity," "prospects" or "estimate" or the negative of these words, variations thereof or similar expressions. Forward-looking statements are not guarantees of future performance or results. They involve risks, uncertainties and assumptions. It is important to note that any such performance and actual results, financial condition or business, could differ materially from those expressed in such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this Item 1A. Risk Factors and elsewhere herein or in other reports filed with the SEC. Other unforeseen factors not identified herein could also have such an effect. Any forward-looking statements made in this report speak only as of the date of this report. Except as required by law, we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in future operating results, financial condition or business over time.

Item 1B. Unresolved Staff Comments

None


20


Item 2. Properties

Our properties consist mainly of owned and leased office and data center facilities.

Our corporate world headquarters is located in a Company-owned office park (the Headquarters Campus) in North Kansas City, Missouri. The Headquarters Campus and two other nearby locations, collectively contain approximately 2.22 million gross square feet of useable space situated on 278 acres of land. The Headquarters Campus and the nearby properties primarily house office space, but also include space for other business needs, such as our Healthe Clinic and our Headquarters Campus data centers.

Company-owned office space, known as the Innovation Campus, houses associates from our intellectual property organization and consists of 830,000 gross square feet of useable space located in Kansas City, Missouri.

Owned office space known as the Continuous Campus, houses associates who manage and support our clients' IT systems and consists of 650,000 gross square feet of useable space located in Kansas City, Kansas.

In connection with our acquisition of Siemens Health Services on February 2, 2015, we acquired approximately 110 acres of property in Malvern, Pennsylvania. This property includes approximately 675,000 gross square feet of office space, and a 100,000 square foot data center.

Our Cerner-operated data center facilities, which are used to provide remote hosting, disaster recovery and other services to our clients, are located at the Headquarters Campus and newly purchased office space in Lee’s Summit, Missouri, known as the Lee's Summit Tech Center. The Lee's Summit Tech Center consists of 550,000 gross square feet and houses data center space and certain third-party tenants in a multi-tenant office building.

We have purchased approximately 286 acres of land located in Kansas City, Missouri. This property, known as the Trails Campus, was acquired as a site for future office space development to further accommodate our anticipated growth. Construction on the Trails Campus began in November 2014. The first two phases of the project are expected to include approximately 985,000 gross square feet of office and warehouse space, and are expected to be complete in the second quarter of 2017.

As of the end of 2015, we leased additional domestic office space in the following locations:
Ÿ Brooklyn, New York
Ÿ Durham, North Carolina
Ÿ New York, New York
Ÿ Burlington, Vermont
Ÿ Franklin, Tennessee
Ÿ North Kansas City, Missouri
Ÿ Carlsbad, California
Ÿ Garden Grove, California
Ÿ Rochester, Minnesota
Ÿ Columbia, Missouri
Ÿ Kansas City, Missouri
Ÿ Salt Lake City, Utah
Ÿ Costa Mesa, California
Ÿ Mason, Ohio
Ÿ Tempe, Arizona
Ÿ Culver City, California
Ÿ Minneapolis, Minnesota
Ÿ Waltham, Massachusetts
Ÿ Denver, Colorado
Ÿ Nevada, Missouri
Ÿ Yardley, Pennsylvania
Ÿ Downington, Pennsylvania
Ÿ New Concord, Ohio
 


21


Globally, we also leased office space in the following locations:
Ÿ Abu Dhabi, United Arab Emirates
Ÿ Gmund, Austria
Ÿ Oviedo, Spain
Ÿ Augsburg, Germany
Ÿ Gothenburg, Sweden
Ÿ Paris, France
Ÿ Bangalore, India
Ÿ Hamburg, Germany
Ÿ Perth, Australia
Ÿ Berlin, Germany
Ÿ Idstein, Germany
Ÿ Peterborough, Ontario, Canada
Ÿ Brasov, Romania
Ÿ Kolkata, India
Ÿ Riyadh, Saudi Arabia
Ÿ Brisbane, Australia
Ÿ Kosice, Slovakia
Ÿ Sao Paulo, Brazil
Ÿ Cairo, Egypt
Ÿ Kuala Lumpur, Malaysia
Ÿ Singapore
Ÿ Doha, Qatar
Ÿ Lisbon, Portugal
Ÿ St. Wolfgang, Germany
Ÿ Dubai, United Arab Emirates
Ÿ London, England
Ÿ Sydney, Australia
Ÿ Dublin, Ireland
Ÿ Madrid, Spain
Ÿ The Hague, Netherlands
Ÿ Erlangen, Germany
Ÿ Malmo, Sweden
Ÿ Toronto, Ontario, Canada
Ÿ Essen, Germany
Ÿ Melbourne, Australia
Ÿ Upplands Vasby, Sweden
Ÿ Frankfurt, Germany
Ÿ Murcia, Spain
Ÿ Vienna, Austria
Ÿ Getafe, Spain
Ÿ Oslo, Norway
 

Item 3. Legal Proceedings

We are not a party to and none of our property is subject to any material pending legal proceedings, other than ordinary routine litigation incidental to our business.
 
Item 4. Mine Safety Disclosures

Not applicable

22


Part II

Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock trades on the NASDAQ Global Select MarketSM under the symbol CERN. The following table sets forth the high, low and last sales prices for the fiscal quarters of 2015 and 2014 as reported by the NASDAQ Global Select Market.
 
2015
 
2014
 
 
 
 
 
 
 
 
 
 
 
 
 
High
 
Low
 
Last
 
High
 
Low
 
Last
 
 
 
 
 
 
 
 
 
 
 
 
First Quarter
$
74.83

 
$
63.19

 
$
72.77

 
$
63.07

 
$
51.65

 
$
56.15

Second Quarter
75.72

 
65.67

 
68.48

 
56.94

 
48.39

 
51.27

Third Quarter
75.00

 
57.42

 
61.34

 
60.07

 
50.30

 
58.66

Fourth Quarter
68.31

 
55.82

 
60.17

 
66.45

 
55.75

 
65.03


At February 12, 2016, there were approximately 960 owners of record. To date, we have paid no cash dividends and we do not intend to pay cash dividends in the foreseeable future. We believe it is in the shareholders’ best interest for us to reinvest funds in the operation of the business.

The following table provides information with respect to Common Stock purchases by the Company during the fourth fiscal quarter of 2015:
 
 
Total Number of Shares Purchased (a)
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (b)
 
Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs (b)
Period
 
 
 
 
October 4, 2015 - October 31, 2015
 

 

 

 
$
145,000,000

November 1, 2015 - November 28, 2015
 
2,481,853

 
$
58.40

 
2,481,853

 

November 29, 2015 - January 2, 2016
 
8,868

 
59.94

 

 

Total
 
2,490,721

 
$
58.41

 
2,481,853

 
 
(a)
Of the 2,490,721 shares of common stock, par value $0.01 per share, presented on the table above, 8,868 were originally granted to employees as restricted stock pursuant to our 2011 Omnibus Equity Incentive Plan (the Omnibus Plan). The Omnibus Plan allows for the withholding of shares to satisfy minimum tax obligations due upon the vesting of restricted stock. Pursuant to the Omnibus Plan, the shares reflected above were relinquished by employees in exchange for our agreement to pay U.S. federal and state withholding obligations resulting from the vesting of the Company’s restricted stock.
(b)
As announced on September 8, 2015, our Board of Directors authorized a new share repurchase program for an aggregate purchase of up to $245 million of our common stock, excluding transaction costs. During 2015, the Company repurchased 4.1 million shares for total consideration of $245 million pursuant to a Rule 10b5-1 plan. As of January 2, 2016, the program was complete.
See Part III, Item 12 for information relating to securities authorized for issuance under our equity compensation plans.

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Item 6. Selected Financial Data
(In thousands, except per share data)
2015
 
2014
 
2013
 
2012
 
2011
 
(1)(2)
 
(1)(3)
 
(1)(4)
 
(1)
 
(1)
 
 
 
 
 
 
 
 
 
 
Statement of Operations Data:
 
 
 
 
 
 
 
 
 
Revenues
$
4,425,267

 
$
3,402,703

 
$
2,910,748

 
$
2,665,436

 
$
2,203,153

Operating earnings
781,136

 
763,084

 
576,012

 
571,662

 
459,798

Earnings before income taxes
781,380

 
774,174

 
588,054

 
587,708

 
469,694

Net earnings
539,362

 
525,433

 
398,354

 
397,232

 
306,627

 
 
 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
 
 
Basic
1.57

 
1.54

 
1.16

 
1.16

 
0.91

Diluted
1.54

 
1.50

 
1.13

 
1.13

 
0.88

 
 
 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
 
 
 
 
 
Basic
343,178

 
342,150

 
343,636

 
341,861

 
337,267

Diluted
350,908

 
350,386

 
352,281

 
351,394

 
347,734

 
 
 
 
 
 
 
 
 
 
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
Working capital
$
1,049,967

 
$
1,714,471

 
$
1,121,276

 
$
1,210,394

 
$
1,063,593

Total assets
5,561,984

 
4,530,565

 
4,098,364

 
3,704,468

 
3,000,358

Long-term debt and capital lease obligations, excl. current installments
563,353

 
62,868

 
111,717

 
136,557

 
86,821

Shareholders' equity
3,870,384

 
3,565,968

 
3,167,664

 
2,833,650

 
2,310,681


(1)
Includes share-based compensation expense. The impact of this expense is as follows:
(In thousands, except share data)
2015
 
2014
 
2013
 
2012
 
2011
 
 
 
 
 
 
 
 
 
 
Total share-based compensation expense
$
74,926

 
$
62,965

 
$
48,954

 
$
38,112

 
$
29,479

Amount of related income tax benefit
(23,435
)
 
(22,101
)
 
(18,607
)
 
(14,578
)
 
(11,256
)
Net impact on earnings
$
51,491

 
$
40,864

 
$
30,347

 
$
23,534

 
$
18,223

 
 
 
 
 
 
 
 
 
 
Decrease to diluted earnings per share
$
0.15

 
$
0.12

 
$
0.09

 
$
0.07

 
$
0.05


(2)
Includes pre-tax charges for amortization of acquisition-related intangibles of $79 million and acquisition costs and related adjustments of $46 million, both associated with our acquisition and integration of the Cerner Health Services business, as well as costs related to our voluntary separation plan of $46 million.

(3)
Includes $16 million of pre-tax acquisition costs and related adjustments associated with our acquisition of the Cerner Health Services business.

(4)
Includes a pre-tax settlement charge of $106 million, as further described in Note 10 of the notes to consolidated financial statements.


24


Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management Discussion and Analysis (MD&A) is intended to help the reader understand our results of operations and financial condition. This MD&A is provided as a supplement to, and should be read in conjunction with, our financial statements and the accompanying notes to the financial statements (Notes).

Our fiscal year ends on the Saturday closest to December 31. Fiscal years 2015 and 2013 each consisted of 52 weeks and ended on January 2, 2016 and December 28, 2013, respectively. Fiscal year 2014 consisted of 53 weeks and ended on January 3, 2015. The additional week in fiscal 2014 impacts the results of operations discussion below. All references to years in this MD&A represent fiscal years unless otherwise noted.

Management Overview

Our revenues are primarily derived by selling, implementing and supporting software solutions, clinical content, hardware, devices and services that give health care providers secure access to clinical, administrative and financial data in real or near-real time, helping them to improve quality, safety and efficiency in the delivery of health care.

Our fundamental strategic focus is the creation of organic growth by investing in research and development (R&D) to create solutions and services for the health care industry. This strategy has driven strong growth over the long-term, as reflected in five- and ten-year compound annual revenue growth rates of 14% or more. This growth has also created an important strategic footprint in health care, with Cerner® solutions in more than 20,000 facilities worldwide, including hospitals, physician practices, laboratories, ambulatory centers, behavioral health centers, cardiac facilities, radiology clinics, surgery centers, extended care facilities, retail pharmacies, and employer sites. Selling additional solutions back into this client base is an important element of our future revenue growth. We are also focused on driving growth through market share expansion by strategically aligning with health care providers that have not yet selected a supplier and by displacing competitors in health care settings that are looking to replace their current supplier. We may also supplement organic growth with acquisitions.

We expect to drive growth through solutions and services that reflect our ongoing ability to innovate and expand our reach into health care. Examples of these include our CareAware® health care device architecture and devices, Cerner ITWorks services, revenue cycle solutions and services, and population health solutions and services. Finally, we believe there is significant opportunity for growth outside of the United States, with many non-U.S. markets focused on health care information technology as part of their strategy to improve the quality and lower the cost of health care.

Beyond our strategy for driving revenue growth, we are also focused on earnings growth. Similar to our history of growing revenue, our net earnings have increased at compound annual rates of 17% or more over the most recent five- and ten-year periods. We expect to drive continued earnings growth through ongoing revenue growth coupled with margin expansion, which we expect to achieve through efficiencies in our implementation and operational processes and by leveraging R&D investments and controlling general and administrative expenses.

We are also focused on continuing to deliver strong levels of cash flow, which we expect to do by continuing to grow earnings and prudently managing capital expenditures.

Siemens Health Services

On February 2, 2015, we acquired substantially all of the assets, and assumed certain liabilities of Siemens AG's health information technology business unit, Siemens Health Services, as further described in Note (2) of the notes to consolidated financial statements. The acquired business (now referred to as "Cerner Health Services") offers a portfolio of enterprise-level clinical and financial health care information technology solutions, as well as departmental, connectivity, population health, and care coordination solutions globally. Solutions are offered on the Soarian, Invision, and i.s.h.med platforms, among others. Cerner Health Services also offers a range of complementary services including support, hosting, managed services, implementation services, and strategic consulting.

We believe the acquisition enhances our organic growth opportunities as it provides us a larger base into which we can sell our combined portfolio of solutions and services. The acquisition also augments our non-U.S. footprint and growth opportunities, increases our scale for R&D investment, and adds over 5,000 highly-skilled associates that will enhance our capabilities.


25


The addition of this business has a significant impact on the comparability of our 2015 consolidated financial statements in relation to the comparative periods presented herein.

Results Overview

The Company delivered strong levels of bookings, revenues, earnings and operating cash flows in 2015.

New business bookings revenue in 2015, which reflects the value of executed contracts for software, hardware, professional services and managed services, was $5.4 billion, which is an increase of 28% compared to $4.3 billion in 2014.

Revenues for 2015 increased 30% to $4.4 billion compared to $3.4 billion in 2014. Our fiscal year 2015 revenues include approximately $930 million attributable to the acquired Cerner Health Services business. The remaining year-over-year increase in revenue reflects ongoing demand for Cerner's core solutions and services driven by our clients' needs to keep up with regulatory requirements; contributions from Cerner ITWorks and revenue cycle solutions and services; and attaining new clients.

Our 2015 net earnings were $539 million compared to $525 million in 2014. Diluted earnings per share were $1.54 in 2015 compared to $1.50 in 2014. Disclosure of the earnings contribution from the Cerner Health Services business is not practicable, as we have already integrated operations in many areas. The overall increase in net earnings and diluted earnings per share was primarily a result of increased revenues, partially offset by elevated operating expenses, which included costs associated with the acquisition and integration of the Cerner Health Services business, and our voluntary separation plan, as discussed further below.

The 2015 and 2014 net earnings and diluted earnings per share reflect the impact of stock-based compensation expense. The effect of these expenses reduced the 2015 net earnings and diluted earnings per share by $51 million and $0.15, respectively, and the 2014 net earnings and diluted earnings per share by $41 million and $0.12, respectively.

The 2015 net earnings and diluted earnings per share also reflect the impact of amortization of acquisition-related intangibles and acquisition costs and related adjustments, both associated with our acquisition and integration of the Cerner Health Services business, as well as costs related to the voluntary separation plan, as further described in Note (1) of the notes to consolidated financial statements. Amortization of acquisition-related intangibles related to the Cerner Health Services business reduced 2015 net earnings and diluted earnings per share by $54 million and $0.15, respectively. Acquisition costs and related adjustments related to the Cerner Health Services business reduced 2015 net earnings and diluted earnings per share by $31 million and $0.09, respectively. Costs related to the voluntary separation plan reduced net earnings and diluted earnings per share by $31 million and $0.09, respectively.

The 2014 net earnings and diluted earnings per share also reflect the impact of acquisition costs and related adjustments associated with our acquisition of the Cerner Health Services business, which reduced net earnings and diluted earnings per share by $10 million and $0.03, respectively.

We had cash collections of receivables of $4.4 billion in 2015 compared to $3.5 billion in 2014. Days sales outstanding was 80 days for the 2015 fourth quarter compared to 85 days for the 2015 third quarter and 66 days for the 2014 fourth quarter. Operating cash flows for 2015 were strong at $948 million compared to $847 million in 2014.

Health Care Information Technology Market Outlook

We have provided an assessment of the health care information technology market under “Health Care and Health Care IT Industry” in Part I, Item 1 "Business," which is incorporated herein by reference.


26


Results of Operations
Fiscal Year 2015 Compared to Fiscal Year 2014
(In thousands)
2015
% of
Revenue
 
2014
 
% of
Revenue
 
% Change  
Revenues
 
 
 
 
 
 
 
 
System sales
$
1,281,890

29
%
 
$
945,858

 
28
%
 
36
 %
Support and maintenance
975,701

22
%
 
724,840

 
21
%
 
35
 %
Services
2,094,874

47
%
 
1,642,119

 
48
%
 
28
 %
Reimbursed travel
72,802

2
%
 
89,886

 
3
%
 
(19
)%
 
 

 
 
 
 
 
 
Total revenues
4,425,267

100
%
 
3,402,703

 
100
%
 
30
 %
 
 
 
 
 
 
 
 
 
Costs of revenue
 
 
 
 
 
 
 
 
Costs of revenue
750,781

17
%
 
604,377

 
18
%
 
24
 %
 
 

 
 
 
 
 
 
Total margin
3,674,486

83
%
 
2,798,326

 
82
%
 
31
 %
 
 
 
 
 
 
 
 
 
Operating expenses
 
 
 
 
 
 
 
 
Sales and client service
1,838,600

42
%
 
1,395,568

 
41
%
 
32
 %
Software development
539,799

12
%
 
392,805

 
12
%
 
37
 %
General and administrative
423,424

10
%
 
233,393

 
7
%
 
81
 %
Amortization of acquisition-related intangibles
91,527

2
%
 
13,476

 
%
 
579
 %
 
 
 
 
 
 


 
 
Total operating expenses
2,893,350

65
%
 
2,035,242

 
60
%
 
42
 %
 
 
 
 
 
 


 
 
Total costs and expenses
3,644,131

82
%
 
2,639,619

 
78
%
 
38
 %
 
 
 
 
 
 


 
 
Operating earnings
781,136

18
%
 
763,084

 
22
%
 
2
 %
 
 
 
 
 
 
 
 
 
Other income, net
244

 
 
11,090

 
 
 
 
Income taxes
(242,018
)
 
 
(248,741
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net earnings
$
539,362

 
 
$
525,433

 
 
 
3
 %
Revenues & Backlog
Revenues increased 30% to $4.4 billion in 2015, as compared to $3.4 billion in 2014.
 
System sales, which include revenues from the sale of licensed software (including perpetual license sales and software as a service), technology resale (hardware, devices, and sublicensed software), deployment period licensed software upgrade rights, installation fees, transaction processing and subscriptions, increased 36% to $1.3 billion in 2015 from $946 million in 2014. The increase in system sales was primarily driven by contributions from the Cerner Health Services business.
Support and maintenance revenues increased 35% to $976 million in 2015 compared to $725 million in 2014. This increase was primarily attributable to contributions from the Cerner Health Services business.
Services revenue, which includes professional services, excluding installation, and managed services, increased 28% to $2.1 billion in 2015 from $1.6 billion in 2014. This increase was driven by contributions from the Cerner Health Services business.
Revenue backlog, which reflects contracted revenue that has not yet been recognized as revenue, increased 34% to $14.2 billion in 2015 compared to $10.6 billion in 2014. This increase was driven by growth in new business bookings during the past four quarters, including continued strong levels of managed services, Cerner ITWorks and Cerner revenue cycle services bookings that typically have longer contract terms, coupled with contributions from the Cerner Health Services business.

27


Costs of Revenue
Cost of revenues as a percentage of total revenues was 17% in 2015 compared to 18% in 2014. The lower cost of revenues as a percent of revenue was primarily driven by a lower mix of technology resale, which carries a higher cost of revenue.
Cost of revenues includes the cost of reimbursed travel expense, sales commissions, third party consulting services and subscription content and computer hardware, devices and sublicensed software purchased from manufacturers for delivery to clients. It also includes the cost of hardware maintenance and sublicensed software support subcontracted to the manufacturers. Such costs, as a percent of revenues, typically have varied as the mix of revenue (software, hardware, devices, maintenance, support, services and reimbursed travel) carrying different margin rates changes from period to period. Cost of revenues does not include the costs of our client service personnel who are responsible for delivering our service offerings. Such costs are included in sales and client service expense.
Operating Expenses
Total operating expenses increased 42% to $2.9 billion in 2015, compared with $2.0 billion in 2014.
 
Sales and client service expenses as a percent of total revenues were 42% in 2015, compared to 41% in 2014. These expenses increased 32% to $1.8 billion in 2015, from $1.4 billion in 2014. Sales and client service expenses include salaries and benefits of sales, marketing, support, and services personnel, depreciation and other expenses associated with our managed service business, communications expenses, unreimbursed travel expenses, expense for share-based payments, and trade show and advertising costs. The increase was primarily driven by the addition of the Cerner Health Services business.
Software development expenses as a percent of revenue were 12% in 2015 and 2014. Expenditures for software development reflect ongoing development and enhancement of the Cerner Millennium and HealtheIntent platforms, with a focus on supporting key initiatives to enhance physician experience, revenue cycle and population health solutions. Software development expenses in 2015 also include expenditures related to Cerner Health Services solutions. A summary of our total software development expense in 2015 and 2014 is as follows:
 
For the Years Ended
(In thousands)
2015
 
2014
 
 
 
 
Software development costs
$
685,260

 
$
467,158

Capitalized software costs
(262,177
)
 
(175,262
)
Capitalized costs related to share-based payments
(2,479
)
 
(2,538
)
Amortization of capitalized software costs
119,195

 
103,447

 
 
 
 
Total software development expense
$
539,799

 
$
392,805

 
General and administrative expenses as a percent of total revenues were 10% in 2015, compared to 7% in 2014. These expenses increased 81% to $423 million in 2015, from $233 million in 2014. General and administrative expenses include salaries and benefits for corporate, financial and administrative staffs, utilities, communications expenses, professional fees, depreciation and amortization, transaction gains or losses on foreign currency, expense for share-based payments, acquisition costs and related adjustments. The increase in general and administrative expenses was primarily driven by the addition of the Cerner Health Services business. General and administrative expenses in 2015 and 2014 include acquisition costs and related adjustments associated with our Cerner Health Services business of $46 million and $16 million, respectively. General and administrative expenses in 2015 also include $46 million of costs associated with our voluntary separation plan. We expect acquisition costs and related adjustments to significantly decline in future periods. At the end of 2015, our voluntary separation plan was complete. Refer to Note (1) of the notes to consolidated financial statements for further detail regarding the voluntary separation plan.
Amortization of acquisition-related intangibles increased 579% to $92 million in 2015, from $13 million in 2014. Amortization of acquisition-related intangibles includes the amortization of customer relationships, acquired technology, trade names, and non-compete agreements recorded in connection with our business acquisitions. The increase in amortization of acquisition-related intangibles was driven by the acquisition of the Cerner Health Services business in the first quarter of 2015. Refer to Note (2) of the notes to consolidated financial statements for further detail regarding intangible assets recorded in connection with our acquisition of the Cerner Health Services business.

28


Non-Operating Items
 
Other income was less than $1 million in 2015 compared to $11 million in 2014. This decline is primarily due to increased interest expense as a result of the issuance of Senior Notes in January 2015, as further discussed in Note (9) of the notes to consolidated financial statements. Interest income also declined in 2015 due to lower average investment balances throughout the year. Refer to Note (11) of the notes to consolidated financial statements for further detail on the composition of other income.

Our effective tax rate was 31% in 2015 compared to 32% in 2014. The rates include net favorable permanent differences recognized in both periods. Refer to Note (12) of the notes to consolidated financial statements for further information regarding our effective tax rate.

The research and development credit expired on December 31, 2013, but in the fourth quarter of 2014, was retroactively reinstated from January 1, 2014 to December 31, 2014. We recognized the research and development tax credit related to 2014 in the fourth quarter of 2014. In the fourth quarter of 2015, the research and development credit was made permanent for amounts paid or incurred after December 31, 2014. We recognized the research and development tax credit related to 2015 in the fourth quarter of 2015.

Operations by Segment
We have two operating segments: Domestic and Global. The Domestic segment includes revenue contributions and expenditures associated with business activity in the United States. The Global segment includes revenue contributions and expenditures linked to business activity in Aruba, Australia, Austria, Belgium, Brazil, Canada, Cayman Islands, Chile, Denmark, Egypt, England, Finland, France, Germany, Guam, India, Ireland, Luxembourg, Malaysia, Mexico, Netherlands, Norway, Portugal, Qatar, Romania, Saudi Arabia, Singapore, Slovakia, Spain, Sweden, Switzerland and the United Arab Emirates. Refer to Note (18) of the notes to consolidated financial statements for further information regarding our reportable segments.

The following table presents a summary of our operating segment information for the years ended 2015 and 2014:
 
(In thousands)
2015
 
% of Revenue
 
2014
 
% of Revenue
 
% Change  
 
 
 
 
 
 
 
 
 
 
Domestic Segment
 
 
 
 
 
 
 
 
 
Revenues
$
3,904,454

 
100%
 
$
3,021,790

 
100%
 
29%
Costs of revenue
651,826

 
17%
 
542,210

 
18%
 
20%
Operating expenses
1,577,594

 
40%
 
1,163,413

 
39%
 
36%
Total costs and expenses
2,229,420

 
57%
 
1,705,623

 
56%
 
31%
 
 
 
 
 
 
 

 
 
Domestic operating earnings
1,675,034

 
43%

1,316,167

 
44%
 
27%
 
 
 
 
 
 
 
 
 
 
Global Segment
 
 
 
 
 
 
 
 
 
Revenues
520,813

 
100%
 
380,913

 
100%
 
37%
Costs of revenue
98,955

 
19%
 
62,167

 
16%
 
59%
Operating expenses
233,047

 
45%
 
182,965

 
48%
 
27%
Total costs and expenses
332,002

 
64%
 
245,132

 
64%
 
35%
 
 
 
 
 
 
 

 
 
Global operating earnings
188,811

 
36%
 
135,781

 
36%
 
39%
 
 
 
 
 
 
 
 
 
 
Other, net
(1,082,709
)
 
 
 
(688,864
)
 
 
 
57%
 
 
 
 
 
 
 
 
 
 
Consolidated operating earnings
$
781,136

 
 
 
$
763,084

 
 
 
2%
Domestic Segment
Revenues increased 29% to $3.9 billion in 2015 from $3.0 billion in 2014. This increase was primarily driven by contributions from the Cerner Health Services business.
Cost of revenues was 17% of revenues in 2015 compared to 18% in 2014. The lower cost of revenues as a percent of revenue was primarily driven by a lower mix of technology resale, which carries a higher cost of revenue.

29


Operating expenses were 40% of revenues in 2015 compared to 39% in 2014. The slight increase as a percent of revenues was primarily driven by the addition of the Cerner Health Services business.

Global Segment
Revenues increased 37% to $521 million in 2015 from $381 million in 2014. This increase was driven by contributions from the Cerner Health Services business.
Cost of revenues was 19% of revenues in 2015 compared to 16% of revenues in 2014. The higher cost of revenues in 2015 was primarily driven by a higher amount of third party resources utilized for support and services.
Operating expenses increased 27% to $233 million in 2015 from $183 million in 2014, due primarily to the addition of the Cerner Health Services business.

Other, net
Operating results not attributed to an operating segment include expenses, such as software development, general and administrative expenses, acquisition costs and related adjustments, share-based compensation expense, and certain amortization and depreciation. These expenses increased 57% to $1.1 billion in 2015 from $689 million in 2014. This increase is primarily due to the addition of corporate and development personnel from our acquisition of the Cerner Health Services business. Additionally, 2015 includes amortization of acquisition-related intangibles associated with our Cerner Health Services business, acquisition costs and related adjustments, and costs related to our voluntary separation plan of $79 million, $46 million, and $46 million, respectively. Our 2014 fiscal year includes acquisition costs and related adjustments of $16 million.

Fiscal Year 2014 Compared to Fiscal Year 2013
(In thousands)
2014
% of
Revenue
 
2013
 
% of
Revenue
 
% Change  
Revenues
 
 
 
 
 
 
 
 
System sales
$
945,858

28
%
 
$
847,809

 
29
%
 
12
 %
Support and maintenance
724,840

21
%
 
661,979

 
23
%
 
9
 %
Services
1,642,119

48
%
 
1,330,851

 
46
%
 
23
 %
Reimbursed travel
89,886

3
%
 
70,109

 
2
%
 
28
 %
 
 
 
 
 
 
 
 
 
Total revenues
3,402,703

100
%
 
2,910,748

 
100
%
 
17
 %
 
 
 
 
 
 
 
 
 
Costs of revenue
 
 
 
 
 
 
 
 
Costs of revenue
604,377

18
%
 
514,722

 
18
%
 
17
 %
 
 
 
 
 
 
 
 
 
Total margin
2,798,326

82
%
 
2,396,026

 
82
%
 
17
 %
 
 
 
 
 
 
 
 
 
Operating expenses
 
 
 
 
 
 
 
 
Sales and client service
1,395,568

41
%
 
1,173,051

 
40
%
 
19
 %
Software development
392,805

12
%
 
338,786

 
12
%
 
16
 %
General and administrative
233,393

7
%
 
295,383

 
10
%
 
(21
)%
Amortization of acquisition-related intangibles
13,476

%
 
12,794

 
%
 
5
 %
 
 
 
 
 
 
 
 
 
Total operating expenses
2,035,242

60
%
 
1,820,014

 
63
%
 
12
 %
 
 
 
 
 
 
 
 
 
Total costs and expenses
2,639,619

78
%
 
2,334,736

 
80
%
 
13
 %
 
 
 
 
 
 
 
 
 
Operating earnings
763,084

22
%
 
576,012

 
20
%
 
32
 %
 
 
 
 
 
 
 
 
 
Other income, net
11,090

 
 
12,042

 
 
 
 
Income taxes
(248,741
)
 
 
(189,700
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net earnings
$
525,433

 
 
$
398,354

 
 
 
32
 %

30


Revenues & Backlog
Revenues increased 17% to $3.4 billion in 2014, as compared to $2.9 billion in 2013.
 
System sales increased 12% to $946 million in 2014 from $848 million in 2013. The increase in system sales was primarily driven by strong growth in software and subscriptions of $65 million and $23 million, respectively.
Support and maintenance revenues increased 9% to $725 million in 2014 compared to $662 million in 2013. This increase was attributable to continued success at selling Cerner Millennium applications and implementing them at client sites.
Services revenue increased 23% to $1.6 billion in 2014 from $1.3 billion in 2013. This increase was driven by growth in CernerWorks managed services of $70 million as a result of continued demand for our hosting services and a $241 million increase in professional services due to increased implementation and consulting activities.

Revenue backlog increased 19% to $10.6 billion in 2014 compared to $8.9 billion in 2013. This increase was driven by growth in new business bookings during the past four quarters, including continued strong levels of managed services, Cerner ITWorks and Cerner revenue cycle services bookings that typically have longer contract terms.
Costs of Revenue
Cost of revenues as a percentage of total revenues was 18% of total revenues in both 2014 and 2013.
Operating Expenses
Total operating expenses increased 12% to $2.0 billion in 2014, compared with $1.8 billion in 2013.
 
Sales and client service expenses as a percent of total revenues were 41% in 2014, compared to 40% in 2013. These expenses increased 19% to $1.4 billion in 2014, from $1.2 billion in 2013. The increase as a percent of revenue reflects a higher mix of services during the period that was driven by strong services revenue growth.

Software development expenses as a percent of revenue were 12% in 2014 and 2013. Expenditures for software development reflect ongoing development and enhancement of the Cerner Millennium and HealtheIntent platforms, with a focus on supporting key initiatives to enhance physician experience, revenue cycle, and population health solutions. A summary of our total software development expense in 2014 and 2013 is as follows:
 
For the Years Ended
(In thousands)
2014
 
2013
 
 
 
 
Software development costs
$
467,158

 
$
418,747

Capitalized software costs
(175,262
)
 
(172,211
)
Capitalized costs related to share-based payments
(2,538
)
 
(2,438
)
Amortization of capitalized software costs
103,447

 
94,688

 
 
 
 
Total software development expense
$
392,805

 
$
338,786


General and administrative expenses as a percent of total revenues were 7% in 2014, compared to 10% in 2013. These expenses decreased 21% to $233 million in 2014 from $295 million in 2013. The 2013 amount includes a $106 million settlement charge, as further described in Note (10) of our notes to consolidated financial statements. The decrease of $62 million was primarily driven by the 2013 settlement charge, offset by $16 million of acquisition costs related to the acquisition of Siemens Health Services and a $15 million increase in corporate personnel costs, as we increased such personnel to support our overall revenue growth.

Amortization of acquisition-related intangibles was approximately $13 million in both 2014 and 2013.

Non-Operating Items
 
Other income was $11 million in 2014 and $12 million in 2013. Refer to Note (11) of the notes to consolidated financial statements for further detail on the composition of other income.


31


Our effective tax rate was 32% in both 2014 and 2013. The rates include net favorable permanent differences recognized in both periods. Refer to Note (12) of the notes to consolidated financial statements for further information regarding our effective tax rate.
Operations by Segment

The following table presents a summary of our operating segment information for the years ended 2014 and 2013:
(In thousands)
2014
 
% of Revenue
 
2013
 
% of Revenue
 
% Change  
 
 
 
 
 
 
 
 
 
 
Domestic Segment
 
 
 
 
 
 
 
 
 
Revenues
$
3,021,790

 
100%
 
$
2,550,115

 
100%
 
18%
Costs of revenue
542,210

 
18%
 
458,540

 
18%
 
18%
Operating expenses
1,163,413

 
39%
 
977,334

 
38%
 
19%
Total costs and expenses
1,705,623

 
56%
 
1,435,874

 
56%
 
19%
 
 
 
 
 
 
 
 
 
 
Domestic operating earnings
1,316,167

 
44%
 
1,114,241

 
44%
 
18%
 
 
 
 
 
 
 
 
 
 
Global Segment
 
 
 
 
 
 
 
 
 
Revenues
380,913

 
100%
 
360,633

 
100%
 
6%
Costs of revenue
62,167

 
16%
 
56,182

 
16%
 
11%
Operating expenses
182,965

 
48%
 
155,093

 
43%
 
18%
Total costs and expenses
245,132

 
64%
 
211,275

 
59%
 
16%
 
 
 
 
 
 
 
 
 
 
Global operating earnings
135,781

 
36%
 
149,358

 
41%
 
(9)%
 
 
 
 
 
 
 
 
 
 
Other, net
(688,864
)
 
 
 
(687,587
)
 
 
 
—%
 
 
 
 
 
 
 
 
 
 
Consolidated operating earnings
$
763,084

 
 
 
$
576,012

 
 
 
32%
Domestic Segment
Revenues increased 18% to $3.0 billion in 2014 from $2.6 billion in the same period in 2013. This increase was driven by growth across most of our business.
Cost of revenues was 18% of revenues in both 2014 and 2013.
Operating expenses increased 19% to $1.2 billion in 2014, from $977 million in 2013, due primarily to an increase in personnel expenses.

Global Segment
Revenues increased 6% to $381 million in 2014 from $361 million in 2013. This increase was primarily driven by increases in managed services and professional services of $11 million and $13 million, respectively, partially offset by a decline in software revenues of $7 million.
Cost of revenues was 16% of revenues in 2014 and 2013.
Operating expenses increased 18% to $183 million in 2014 from $155 million in 2013, due primarily to increases in personnel expense and bad debt expense of $14 million and $7 million, respectively.
Other, net
These expenses were $689 million in 2014 compared to $688 million in 2013. The 2013 amount includes a $106 million settlement charge, as further described in Note (10) of our notes to consolidated financial statements. The 2013 settlement charge was offset primarily by increases in personnel expenses and acquisition costs of $57 million and $16 million, respectively, in 2014.


32


Liquidity and Capital Resources
Our liquidity is influenced by many factors, including the amount and timing of our revenues, our cash collections from our clients and the amount we invest in software development, acquisitions and capital expenditures.
Our principal sources of liquidity are our cash, cash equivalents, which primarily consist of money market funds and time deposits with original maturities of less than 90 days, and short-term investments. At the end of 2015, we had cash and cash equivalents of $402 million and short-term investments of $111 million, as compared to cash and cash equivalents of $635 million and short-term investments of $786 million at the end of 2014. We utilized a large amount of cash and investments to fund the acquisition of the Cerner Health Services business in February 2015.
The non-U.S. subsidiaries for which we have elected to indefinitely reinvest earnings outside the U.S. held approximately 35% of our aggregate cash, cash equivalents and short-term investments at January 2, 2016. As part of our current business strategy, we plan to indefinitely reinvest the earnings of these foreign operations; however, should the earnings of these foreign operations be repatriated, we would accrue and pay tax on such earnings, which may be material.

We maintain a $100 million multi-year revolving credit facility, which expires in October 2020. The facility provides an unsecured revolving line of credit for working capital purposes, which includes a letter of credit facility. We have the ability to increase the maximum capacity to $200 million at any time during the facility's term, subject to lender participation. As of the end of 2015, we had no outstanding borrowings under this facility; however, we had $16 million of outstanding letters of credit, which reduced our available borrowing capacity to $84 million. Refer to Note (9) of the notes to consolidated financial statements for additional information regarding our credit facility.

We believe that our present cash position, together with cash generated from operations, short-term investments and, if necessary, our available line of credit, will be sufficient to meet anticipated cash requirements during 2016.
The following table summarizes our cash flows in 2015, 2014 and 2013:
 
For the Years Ended
(In thousands)
2015
 
2014
 
2013
 
 
 
 
 
 
Cash flows from operating activities
$
947,526

 
$
847,027

 
$
695,865

Cash flows from investing activities
(1,405,943
)
 
(284,567
)
 
(688,429
)
Cash flows from financing activities
236,249

 
(120,324
)
 
(119,389
)
Effect of exchange rate changes on cash
(10,913
)
 
(9,310
)
 
(2,790
)
Total change in cash and cash equivalents
(233,081
)
 
432,826

 
(114,743
)
 
 
 
 
 
 
Cash and cash equivalents at beginning of period
635,203

 
202,377

 
317,120

 
 
 
 
 
 
Cash and cash equivalents at end of period
$
402,122

 
$
635,203

 
$
202,377

 
 
 
 
 
 
Free cash flow (non-GAAP)
$
320,738

 
$
392,643

 
$
168,339


Cash from Operating Activities
 
For the Years Ended
(In thousands)
2015
 
2014
 
2013
 
 
 
 
 
 
Cash collections from clients
$
4,419,650

 
$
3,480,591

 
$
3,050,633

Cash paid to employees and suppliers and other
(3,340,551
)
 
(2,483,559
)
 
(2,172,418
)
Cash paid for interest
(13,164
)
 
(5,682
)
 
(6,973
)
Cash paid for taxes, net of refunds
(118,409
)
 
(144,323
)
 
(175,377
)
 
 
 
 
 
 
Total cash from operations
$
947,526

 
$
847,027

 
$
695,865

Cash flow from operations increased $100 million in 2015 compared to 2014, due primarily to an increase in cash impacting earnings. Operating cash flows in 2015 include payments in connection with our voluntary separation program and acquisition and related costs associated with our acquisition of the Cerner Health Services business of $46 million and $46 million, respectively. Operating cash flows in 2014 included payments in connection with our acquisition of the Cerner Health Services business of $16 million. Disclosure of the operating cash flow contribution from the Cerner Health Services business is not

33


practicable, as we have already integrated operations in many areas. Cash flow from operations increased $151 million in 2014 compared to 2013, due primarily to 2013 including a payment related to the previously mentioned settlement charge, along with an increase in 2014 of cash impacting earnings. During 2015, 2014 and 2013, we received total client cash collections of $4.4 billion, $3.5 billion and $3.1 billion, respectively. Days sales outstanding was 80 days in the fourth quarter of 2015, compared to 85 days for the 2015 third quarter and 66 days for the 2014 fourth quarter. Revenues provided under support and maintenance agreements represent recurring cash flows. We expect these revenues to continue to grow as the base of installed systems grows.
Cash from Investing Activities
 
For the Years Ended
(In thousands)
2015
 
2014
 
2013
 
 
 
 
 
 
Capital purchases
$
(362,132
)
 
$
(276,584
)
 
$
(352,877
)
Capitalized software development costs
(264,656
)
 
(177,800
)
 
(174,649
)
Sales and maturities of investments, net of purchases
720,406

 
190,810

 
(36,221
)
Acquisition of businesses, net of cash acquired
(1,478,129
)
 
(7,476
)
 
(67,877
)
Purchases of other intangibles
(21,432
)
 
(13,517
)
 
(56,805
)
 
 
 
 
 
 
Total cash flows from investing activities
$
(1,405,943
)
 
$
(284,567
)
 
$
(688,429
)
Cash flows from investing activities consist primarily of capital spending, short-term investment, and acquisition activities.
Our capital spending in 2015 was driven by capitalized equipment purchases primarily to support growth in our CernerWorks managed services business, investments in a cloud infrastructure to support cloud-based solutions, building and improvement purchases to support our facilities requirements and capitalized spending to support our ongoing software development initiatives. Total capital spending is expected to increase in 2016 in excess of $100 million, primarily driven by an increase in spending on our Trails Campus and ongoing investments in growth initiatives.
Short-term investment activity historically consists of the investment of cash generated by our business in excess of what is necessary to fund operations. The 2014 activity is impacted by a change in investment mix, whereas we invested more heavily in cash equivalents versus short-term and long-term investments, as we prepared to fund our acquisition of the Cerner Health Services business in February 2015. The increase in net cash from investments in 2015 is due to the use of proceeds from additional investment sales and maturities to partially fund our acquisition of the Cerner Health Services business. We expect 2016 to reflect net purchases of investments, as we expect strong levels of cash flow.
During 2015, we paid cash to acquire the Cerner Health Services business and the Lee's Summit Tech Center of $1.39 billion and $85 million, respectively. In 2014, we acquired 100% of the outstanding membership interests of InterMedHx, LLC for $7 million. In 2013, we acquired the net assets of Kaufman & Keen, LLC (doing business as PureWellness) and 100% of the outstanding stock of Labotix Corporation for an aggregate of $68 million, net of cash acquired. We expect to continue seeking and completing strategic business acquisitions that are complementary to our business. Refer to Note (2) of the notes to consolidated financial statements for additional information regarding our business acquisitions.
Cash from Financing Activities
 
For the Years Ended
(In thousands)
2015
 
2014
 
2013
 
 
 
 
 
 
Long-term debt issuance
$
500,000

 
$

 
$

Repayment of long-term debt and capital lease obligations
(14,325
)
 
(14,930
)
 
(24,700
)
Cash from option exercises (including excess tax benefits)
107,434

 
71,411

 
71,330

Treasury stock purchases
(345,057
)
 
(217,082
)
 
(170,042
)
Contingent consideration payments for acquisition of businesses
(11,012
)
 
(10,617
)
 
(800
)
Cash grants

 
48,000

 

Other, net
(791
)
 
2,894

 
4,823

 
 
 
 
 
 
Total cash flows from financing activities
$
236,249

 
$
(120,324
)
 
$
(119,389
)

34


In January 2015, we issued $500 million in aggregate principal amount of Senior Notes. Proceeds from the Senior Notes are available for general corporate purposes. Refer to Note (9) of the notes to condensed consolidated financial statements for additional information regarding the Senior Notes.
Cash inflows from stock option exercises are dependent on a number of factors, including the price of our common stock, grant activity under our stock option and equity plans, and overall market volatility. We expect cash inflows from stock option exercises to continue in 2016 based on the number of exercisable options at the end of 2015 and our current stock price.
During 2015, 2014 and 2013, we purchased 5.7 million shares of our common stock for total consideration of $345 million, 4.1 million shares of our common stock for total consideration of $217 million, and 3.6 million shares of our common stock for total consideration of $170 million, respectively. At the end of 2015, all repurchase programs were complete. Refer to Note (14) of the notes to consolidated financial statements for further information regarding our share repurchase programs.
During 2015, we paid an aggregate of $11 million of contingent consideration related to our acquisitions of InterMedHx, LLC and Kaufman & Keen, LLC (doing business as PureWellness). In 2014, we paid $11 million of the contingent consideration related to our acquisition of PureWellness. We expect additional contingent consideration payments in 2016 related to our acquisitions of the Lee's Summit Tech Center and InterMedHx. Refer to Note (2) of the notes to consolidated financial statements for additional information regarding our contingent consideration arrangements.
In January 2014 we received $48 million of cash grants from the Kansas Department of Commerce for project costs in connection with the construction of our Continuous Campus. Refer to Note (16) of the notes to consolidated financial statements for additional information.

Free Cash Flow
 
For the Years Ended
(In thousands)
2015
 
2014
 
2013
 
 
 
 
 
 
Cash flows from operating activities (GAAP)
$
947,526

 
$
847,027

 
$
695,865

Capital purchases
(362,132
)
 
(276,584
)
 
(352,877
)
Capitalized software development costs
(264,656
)
 
(177,800
)
 
(174,649
)
 
 
 
 
 
 
Free cash flow (non-GAAP)
$
320,738

 
$
392,643

 
$
168,339


Free cash flow decreased $72 million in 2015, compared to 2014. This decrease is due to higher levels of both capital spending to support our growth initiatives and facilities requirements, and capitalized spending to support our ongoing software development initiatives, partially offset by an increase in cash flows from operations. Free cash flow increased $224 million in 2014, compared to 2013. This increase is largely due to an increase in cash flows from operations combined with a decrease in capital purchases, primarily due to the completion of construction on our Continuous Campus. Free cash flow for 2013 also includes a payment related to the settlement charge, described in Note (10) of our notes to consolidated financial statements. We believe our free cash flow levels reflect continued strength in our earnings. Free cash flow is a non-GAAP financial measure used by management along with GAAP results to analyze our earnings quality and overall cash generation of the business. We define free cash flow as cash flows from operations reduced by capital purchases and capitalized software development costs. The table above sets forth a reconciliation of free cash flow to cash flows from operating activities, which we believe to be the GAAP financial measure most directly comparable to free cash flow. The presentation of free cash flow is not meant to be considered in isolation, nor as a substitute for, or superior to, GAAP results, and investors should be aware that non-GAAP measures have inherent limitations and should be read only in conjunction with our consolidated financial statements prepared in accordance with GAAP. Free cash flow may also be different from similar non-GAAP financial measures used by other companies and may not be comparable to similarly titled captions of other companies due to potential inconsistencies in the method of calculation. We believe free cash flow is important to enable investors to better understand and evaluate our ongoing operating results and allows for greater transparency in the review of our overall financial, operational and economic performance, because free cash flow takes into account the capital expenditures necessary to operate our business.


35


Contractual Obligations, Commitments and Off Balance Sheet Arrangements

The following table represents a summary of our contractual obligations and commercial commitments at the end of 2015, except short-term purchase order commitments arising in the ordinary course of business.
 
Payments Due by Period
(In thousands)
2016
 
2017
 
2018
 
2019
 
2020
 
2021 and thereafter
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance sheet obligations(a):
 
 
 
 
 
 
 
 
 
 
 
 

Long-term debt obligations
$

 
$
2,500

 
$

 
$

 
$
1,100

 
$
509,850

 
$
513,450

Interest on long-term debt obligations
15,588

 
16,099

 
16,474

 
16,714

 
16,892

 
46,391

 
128,158

Capital lease obligations
41,797

 
23,035

 
14,225

 
10,016

 
3,343

 

 
92,416

Interest on capital lease obligations
2,248

 
1,236

 
654

 
254

 
27

 

 
4,419

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other obligations:
 
 
 
 
 
 
 
 
 
 
 
 

Operating lease obligations
26,436

 
25,076

 
20,290

 
15,390

 
9,757

 
15,875

 
112,824

Purchase obligations
77,610

 
57,981

 
24,454

 
9,601

 
3,927

 
6,000

 
179,573

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
163,679