Edgar Filing: CERNER CORP /MO/

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Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended October 1, 2011

¨	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, Missouri 64117

(816) 201-1024

(Address of Principal Executive Offices, including zip code;

registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), 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 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.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

There were 169,405,814 shares of Common Stock, $.01 par value, outstanding at October 20, 2011.

CERNER CORPORATION AND SUBSIDIARIES

INDEX



Part I.	Financial Information:

Item 1.	Financial Statements:

	Condensed Consolidated Balance Sheets as of October 1, 2011 (unaudited) and January 1, 2011	1

	Condensed Consolidated Statements of Operations for the three and nine months ended October 1, 2011 and October 2, 2010 (unaudited)	2

	Condensed Consolidated Statements of Cash Flows for the nine months ended October 1, 2011 and October 2, 2010 (unaudited)	3

	Notes to Condensed Consolidated Financial Statements (unaudited)	4

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	26

Item 4.	Controls and Procedures	26

Part II.	Other Information:	27

Item 6.	Exhibits	27

	EX-31.1

	EX-31.2

	EX-32.1

	EX-32.2

	EX-101 INSTANCE DOCUMENT

	EX-101 SCHEMA DOCUMENT

	EX-101 CALCULATION LINKBASE DOCUMENT

	EX-101 LABELS LINKBASE DOCUMENT

	EX-101 PRESENTATION LINKBASE DOCUMENT

	EX-101 DEFINITION LINKBASE DOCUMENT

Part I. Financial Information

Item 1. Financial Statements

CERNER CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

As of October 1, 2011 (unaudited) and January 1, 2011


(In thousands, except share data)	2011			2010

Assets
Current assets:
Cash and cash equivalents	$	231,194		$	214,511
Short-term investments		524,011			356,501
Receivables, net		548,048			476,905
Inventory		12,286			11,036
Prepaid expenses and other		97,033			83,272
Deferred income taxes		10,560			3,836

Total current assets		1,423,132			1,146,061

Property and equipment, net		493,594			498,829
Software development costs, net		247,037			244,848
Goodwill		187,857			161,374
Intangible assets, net		55,323			38,468
Long-term investments		334,765			264,467
Other assets		101,860			68,743

Total assets	$	2,843,568		$	2,422,790

Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	79,345		$	65,035
Current installments of long-term debt		34,560			24,837
Deferred revenue		137,924			109,351
Accrued payroll and tax withholdings		93,411			86,921
Other accrued expenses		32,262			19,788

Total current liabilities		377,502			305,932

Long-term debt and other obligations		99,281			67,923
Deferred income taxes and other liabilities		147,518			126,215
Deferred revenue		11,913			17,303

Total liabilities		636,214			517,373

Shareholders’ Equity:
Cerner Corporation shareholders’ equity:
Common stock, $.01 par value, 250,000,000 shares authorized, 169,388,233 shares issued at October 1, 2011 and 168,058,570 shares issued at January 1, 2011		1,694			1,681
Additional paid-in capital		710,926			616,972
Retained earnings		1,506,270			1,290,835
Accumulated other comprehensive loss, net		(11,656	)		(4,191	)

Total Cerner Corporation shareholders’ equity		2,207,234			1,905,297

Noncontrolling interest		120			120

Total shareholders’ equity		2,207,354			1,905,417

Total liabilities and shareholders’ equity	$	2,843,568		$	2,422,790

See notes to condensed consolidated financial statements (unaudited).

- 1 -

CERNER CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

For the three and nine months ended October 1, 2011 and October 2, 2010

(unaudited)


	Three Months Ended						Nine Months Ended

(In thousands, except per share data)	2011			2010			2011			2010

Revenues:
System sales	$	188,698		$	133,439		$	486,222		$	386,292
Support, maintenance and services		371,467			321,289			1,067,791			939,909
Reimbursed travel		11,475			7,955			33,514			23,820

Total revenues		571,640			462,683			1,587,527			1,350,021

Costs and expenses:
Cost of system sales		84,268			57,396			204,254			155,087
Cost of support, maintenance and services		24,721			13,797			71,858			46,536
Cost of reimbursed travel		11,475			7,955			33,514			23,820
Sales and client service		220,177			189,320			631,738			566,943
Software development (Includes amortization of $20,919 and $59,887 for the three and nine months ended October 1, 2011; and $17,756 and $50,015 for the three and nine months ended October 2, 2010.)		72,544			67,257			213,478			202,024
General and administrative		38,063			32,966			110,621			99,611

Total costs and expenses		451,248			368,691			1,265,463			1,094,021

Operating earnings		120,392			93,992			322,064			256,000

Other income (expense):
Interest income, net		2,770			87			7,621			2,291
Other income (expense), net		5			5			45			(566	)

Total other income, net		2,775			92			7,666			1,725

Earnings before income taxes		123,167			94,084			329,730			257,725
Income taxes		(44,332	)		(33,212	)		(114,295	)		(91,090	)

Net earnings	$	78,835		$	60,872		$	215,435		$	166,635

Basic earnings per share	$	0.47		$	0.37		$	1.28		$	1.01

Diluted earnings per share	$	0.45		$	0.36		$	1.24		$	0.98

Basic weighted average shares outstanding		169,140			165,095			168,343			164,559

Diluted weighted average shares outstanding		174,283			170,721			173,656			170,546

See notes to condensed consolidated financial statements (unaudited).

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CERNER CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the nine months ended October 1, 2011 and October 2, 2010

(unaudited)


	Nine Months Ended

(In thousands)	2011			2010

CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings	$	215,435		$	166,635
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization		156,841			140,871
Share-based compensation expense		20,363			17,050
Provision for deferred income taxes		9,246			18,802

Changes in assets and liabilities (net of businesses acquired):
Receivables, net		(103,829	)		(2,915	)
Inventory		(1,200	)		3,174
Prepaid expenses and other		1,469			16,675
Accounts payable		8,026			24,455
Accrued income taxes		4,662			(21,393	)
Deferred revenue		18,932			(14,780	)
Other accrued liabilities		47,860			(13,877	)

Net cash provided by operating activities		377,805			334,697

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital purchases		(75,602	)		(75,341	)
Capitalized software development costs		(61,827	)		(61,783	)
Purchases of investments		(870,960	)		(627,904	)
Maturities of investments		615,219			379,705
Purchase of other intangibles		(8,395	)		(8,034	)
Acquisition of businesses, net of cash acquired		(28,069	)		(14,486	)

Net cash used in investing activities		(429,634	)		(407,843	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of future receivables		—			1,516
Repayment of long-term debt		(715	)		(2,404	)
Proceeds from excess tax benefits from stock compensation		34,009			17,884
Proceeds from exercise of options		36,463			23,266
Contingent consideration payments for acquisition of businesses		(779	)		—

Net cash provided by financing activities		68,978			40,262

Effect of exchange rate changes on cash		(466	)		2,908

Net increase (decrease) in cash and cash equivalents		16,683			(29,976	)
Cash and cash equivalents at beginning of period		214,511			241,723

Cash and cash equivalents at end of period	$	231,194		$	211,747

Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest	$	3,081		$	3,483
Income taxes, net of refund		62,328			88,238
Summary of acquisition transactions:
Fair value of net tangible assets (liabilities) acquired (assumed)	$	(8,053	)	$	1,069
Fair value of intangible assets acquired		18,204			5,076
Fair value of goodwill		26,130			11,290
Less: Fair value of contingent liability payable		(5,235	)		(1,725	)
Less: Fair value of working capital settlement payable		(939	)		—

Cash paid for acquisition		30,107			15,710
Cash acquired		(2,038	)		(1,224	)

Net cash used	$	28,069		$	14,486

See notes to condensed consolidated financial statements (unaudited).

- 3 -

CERNER CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(1)

Interim Statement Presentation

The condensed consolidated financial statements included herein have been prepared by Cerner Corporation (the Company) without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in our latest annual report on Form 10-K.

In our opinion, the accompanying unaudited condensed consolidated financial statements include all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position and the results of operations and cash flows for the periods presented. Our interim results as presented in this Form 10-Q are not necessarily indicative of the operating results for the entire year.

The condensed consolidated financial statements were prepared using accounting principles generally accepted in the United States (GAAP). These principles require us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. Actual results could differ from those estimates.

Our third fiscal quarter ends on the Saturday closest to September 30. The 2011 and 2010 third quarters ended on October 1, 2011 and October 2, 2010, respectively. All references to years in these notes to condensed consolidated financial statements represent the three or nine months ended of the third fiscal quarter, respectively, unless otherwise noted.

Stock Split

On May 27, 2011, the Board of Directors of the Company approved a two-for-one split of our common stock in the form of a one hundred percent (100%) stock dividend, which was distributed on June 24, 2011 to shareholders of record as of June 15, 2011. In connection with the stock split, 790,000 treasury shares previously reflected in the consolidated balance sheets were utilized to settle a portion of the distribution. All share and per share data have been retroactively adjusted for all periods presented to reflect the stock split including the use of treasury shares, as if the stock split had occurred at the beginning of the earliest period presented.

Under the terms of our outstanding equity awards, the stock split increased the number of shares of our common stock issuable upon exercise or vesting of such awards in proportion to the stock split ratio and caused a proportionate decrease in the exercise price of such awards to the extent they were stock options.

Recently Adopted Accounting Pronouncements

ASU 2009-13. In October 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2009-13 —Multiple-Deliverable Revenue Arrangements (ASU 2009-13). ASU 2009-13 requires a vendor to allocate revenue to each unit of accounting in many arrangements involving multiple deliverables based on the relative selling price of each deliverable. It also changes the level of evidence of standalone selling price required to separate deliverables by allowing a vendor to make its best estimate of the standalone selling price of deliverables when more objective evidence of selling price is not available.

We adopted ASU 2009-13 for all new and materially modified arrangements on a prospective basis beginning January 2, 2011. We have reviewed the primary accounting literature related to the elements that typically get bundled into our arrangements and determined that the majority of the elements fall in to two different accounting units. One unit is comprised of software and software-related elements which include our licensed software, licensed software support, application services provider, subscriptions, professional services, remote hosting, sublicensed software and sublicensed software support. The second unit of accounting is non-software elements, which include hardware and hardware maintenance.

- 4 -

The majority of our multiple-element arrangements do not contain both software and non-software deliverables such as hardware and thus are not impacted by the new guidance. For our arrangements that are impacted by ASU 2009-13, we determined fair value based upon vendor-specific objective evidence (VSOE), if it existed, and in instances where VSOE did not exist (primarily for our licensed software), we determined fair value based upon the estimated selling price concept. The application of this concept relies primarily on historical pricing and management guidance for similarly sized arrangements.

The adoption of ASU 2009-13 did not result in a material change in the timing of revenue recognition due to the small number of arrangements executed with both software and non-software deliverables and the existence of VSOE for most of our business models.

ASU 2009-14. In October 2009, the FASB issued ASU 2009-14 —Certain Revenue Arrangements That Include Software Elements (ASU 2009-14). Under ASU 2009-14, tangible products containing software components and non-software components that function together to deliver the tangible product’s essential functionality are no longer within the scope of the software revenue guidance in ASC 985-605. We adopted the amendment provisions of ASU 2009-14 on January 2, 2011; the adoption of this standard did not have material impact on the timing of revenue recognition.

Recently Issued Accounting Pronouncements

ASU 2011-05. In June 2011, the FASB issued ASU 2011-05 —Presentation of Comprehensive Income (ASU 2011-05). ASU 2011-05 requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in equity. ASU 2011-05 is effective for us in the first quarter of 2012 and is required to be applied retrospectively. The adoption of this standard is not expected to have a material effect on our consolidated financial statements.

ASU 2011-08. In September 2011, the FASB issued ASU 2011-08 —Testing for Goodwill Impairment (ASU 2011-08). ASU 2011-08 amends existing guidance by giving an entity the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than the carrying amount. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. If an entity determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then it is necessary to perform the two-step goodwill impairment test, as currently prescribed by ASC Topic 350. Otherwise, the two-step goodwill impairment test is not required. ASU 2011-08 is effective for us in 2012, with early adoption permitted. The adoption of this standard is not expected to have a material effect on our consolidated financial statements.

(2)

Acquisitions

On May 23, 2011, we completed the purchase of 100% of the outstanding common shares of Resource Systems, Inc., developer of the CareTracker^® point-of-care electronic documentation system primarily used within skilled nursing and assisted living facilities. Cerner believes that there is significant market opportunity for information technology solutions in the long-term care market as the U.S. population ages and life expectancy continues to increase.

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Consideration for the acquisition of Resource Systems is expected to total $36.3 million consisting of up-front cash plus additional contingent consideration, which is payable if we achieve certain revenue milestones through the quarters ending June 30, 2012 and December 29, 2012 and bookings milestones through the quarters ending June 30, 2012 and June 29, 2013 from the clients acquired from Resource Systems. We valued the contingent consideration at $5.2 million based on a probability-weighted assessment of potential contingent consideration payment scenarios, which remains unchanged at October 1, 2011. The allocation of the purchase price to the estimated fair values of the identified tangible and intangible assets acquired, net of liabilities assumed, is summarized below:


(In thousands)	Allocation Amount
Tangible assets and liabilities
Current assets	$	5,249
Property and equipment		209
Current liabilities		(6,803	)
Deferred tax liabilities		(6,708	)

Total net tangible liabilities acquired		(8,053	)
Intangible assets
Customer relationships		11,204
Existing technologies		6,401
Non-compete agreements		599

Total intangible assets acquired		18,204
Goodwill		26,130

Total purchase price	$	36,281

The fair values of the acquired intangible assets and the contingent consideration were estimated by applying the income approach. Such estimations required the use of inputs that were unobservable in the market place (Level 3), including a discount rate that we estimated would be used by a market participant in valuing these assets, projections of revenues and cash flows, probability weighting factors and client attrition rates. See Note 3 for further information about the fair value level hierarchy.

The goodwill of $26.1 million arising from the acquisition consists largely of the synergies and economies of scale, including the value of the assembled workforce, expected from combining the operations of Cerner and Resource Systems. All of the goodwill was allocated to our Domestic operating segment and is not expected to be deductible for tax purposes. The other identifiable intangible assets are being amortized over five years. The operating results of Resource Systems were combined with our operating results subsequent to the purchase date of May 23, 2011. Pro-forma results of operations, assuming this acquisition was made at the beginning of the earliest period presented, have not been presented because the effect of this acquisition was not material to our results.

(3)

Fair Value Measurements

We determine fair value measurements used in our condensed consolidated financial statements based upon the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:

•

Level 1 – Valuations based on quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.

•

Level 2 – Valuations based on quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities.

•

Level 3 – Valuations based on inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

- 6 -

The following table details our financial assets measured at fair value within the fair value hierarchy:


(In thousands)		October 1, 2011						January 1, 2011
Description	Balance Sheet Classification	Fair Value Measurements Using						Fair Value Measurements Using
Description	Balance Sheet Classification	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3

Money market funds	Cash equivalents	$	58,393	$	—	$	—	$	44,237	$	—	$	—
Time deposits	Cash equivalents		—		6,671		—		—		—		—
Time deposits	Short-term investments		—		57,028		—		—		41,764		—
Commercial paper	Short-term investments		—		31,750		—		—		44,500		—
Government and corporate bonds	Short-term investments		—		435,233		—		—		251,787		—
Auction rate securities	Short-term investments		—		—		—		—		18,450		—
Government and corporate bonds	Long-term investments		—		334,765		—		—		264,467		—

We classify our long-term, fixed rate debt as a long-term liability on the balance sheet and estimate the fair value using a Level 3 discounted cash flow analysis based on our current borrowing rates for debt with similar maturities. The fair value of our long-term debt, including current maturities, was approximately $99.0 million at October 1, 2011.

(4)

Receivables

Receivables consist primarily of accounts receivable and contracts receivable. Accounts receivable represent recorded revenues that have been billed. Contracts receivable represent recorded revenues that are billable by us at future dates under the terms of a contract with a client. Billings and other consideration received on contracts in excess of related revenues recognized are recorded as deferred revenue. Substantially all receivables are derived from sales and related support and maintenance and professional services of our clinical, administrative and financial information systems and solutions to health care providers located throughout the United States and in certain non-U.S. countries.

We perform ongoing credit evaluations of our clients and generally do not require collateral from our clients. We provide an allowance for estimated uncollectible accounts based on specific identification, historical experience and our judgment. Provisions for losses on uncollectible accounts for the first nine months of 2011 and 2010 totaled $8.4 million and $7.5 million, respectively. A summary of net receivables is as follows:


(In thousands)	October 1, 2011		January 1, 2011

Gross accounts receivable	$	467,315	$	352,554
Less: Allowance for doubtful accounts		22,554		15,550

Accounts receivable, net of allowance		444,761		337,004

Contracts receivable		103,287		139,901

Total receivables, net	$	548,048	$	476,905

During the second quarter of 2008, Fujitsu Services Limited’s (Fujitsu) contract as the prime contractor in the National Health Service (NHS) initiative to automate clinical processes and digitize medical records in the Southern region of England was terminated by the NHS. This had the effect of automatically terminating our subcontract for the project. We are in dispute with Fujitsu regarding Fujitsu’s obligation to pay the amounts comprised of accounts receivable and contracts receivable related to that subcontract, and we are working with Fujitsu to resolve these issues based on processes provided for in the contract. Part of that process requires resolution of disputes between Fujitsu and the NHS regarding the contract termination. As of October 1, 2011, it remains unlikely that the matter will be resolved in the next 12 months. Therefore these receivables have been classified as long-term and represent the majority of other long-term assets as of the third quarter ended October 1, 2011. While the ultimate collectability of the receivables pursuant to this process is uncertain, we believe that we have valid and equitable grounds for recovery of such amounts and that collection of recorded amounts is probable.

During the first nine months of 2011 and 2010, we received total client cash collections of $1.57 billion and $1.40 billion, respectively, of which $53.4 million and $45.8 million were received from third party arrangements with non-recourse payment assignments.

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(5)

Income Taxes

We determine the tax provision for interim periods using an estimate of our annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter we update our estimate of the annual effective tax rate, and if our estimated tax rate changes, we make a cumulative adjustment. We classify interest and penalties associated with unrecognized tax benefits as income tax expense in our Condensed Consolidated Statements of Operations.

Our effective tax rate was 34.7% and 35.3% for the first nine months of 2011 and 2010, respectively. This decrease was primarily due to the research and development tax credit being in effect for the first nine months of 2011 while it was not effective for the first nine months of 2010, a favorable foreign tax audit settlement during the first quarter of 2011 and other discrete items.

During the first quarter of 2010, the Internal Revenue Service commenced its examination of the 2008 and 2009 income tax returns. We do not believe this examination will have a material effect on our financial position, results of operations or liquidity.

We expect that a partial settlement related to this examination will occur within the next twelve months. Related to this settlement, we expect to recognize a decrease of approximately $2 million to $3 million in unrecognized tax benefits.

(6)

Earnings Per Share

Basic earnings per share (EPS) excludes dilution and is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in our earnings. A reconciliation of the numerators and the denominators of the basic and diluted per share computations are as follows:


	Three Months Ended
	2011						2010
In thousands, except per share data)	Earnings (Numerator)		Shares (Denominator)		Per-Share Amount		Earnings (Numerator)		Shares (Denominator)		Per-Share Amount

Basic earnings per share:
Income available to common shareholders	$	78,835		169,140	$	0.47	$	60,872		165,095	$	0.37
Effect of dilutive securities:
Stock options and non-vested restricted stock		—		5,143				—		5,626

Diluted earnings per share:
Income available to common shareholders including assumed conversions	$	78,835		174,283	$	0.45	$	60,872		170,721	$	0.36

Options to purchase 1.4 million shares of common stock at per share prices ranging from $42.84 to $64.68 and $29.11 to $43.35 were outstanding at October 1, 2011 and October 2, 2010, respectively, but were not included in the computation of diluted earnings per share because the options were anti-dilutive.

- 8 -


	Nine Months Ended
	2011						2010
	Earnings (Numerator)		Shares (Denominator)		Per-Share Amount		Earnings (Numerator)		Shares (Denominator)		Per-Share Amount

(In thousands, except per share data)
Basic earnings per share:
Income available to common shareholders	$	215,435		168,343	$	1.28	$	166,635		164,559	$	1.01
Effect of dilutive securities:
Stock options and non-vested restricted stock		—		5,313				—		5,987

Diluted earnings per share:
Income available to common shareholders including assumed conversions	$	215,435		173,656	$	1.24	$	166,635		170,546	$	0.98

Options to purchase 2.0 million and 1.0 million shares of common stock at per share prices ranging from $38.99 to $64.68 and $29.11 to $43.35 were outstanding at October 1, 2011 and October 2, 2010, respectively, but were not included in the computation of diluted earnings per share because the options were anti-dilutive.

(7)

Share-Based Compensation

Stock Options

Options activity for the nine months ended October 1, 2011 was as follows:


	For the Nine Months Ended October 1, 2011
Options	Number of Shares (thousands)			Weighted- Average Exercise Price		Aggregate Intrinsic Value (thousands)		Weighted- Average Remaining Contractual Term (years)

Outstanding at beginning of year		14,753		$	18.87
Granted		1,261			58.24
Exercised		(2,630	)		14.00
Forfeited and expired		(481	)		35.31

Outstanding as of October 1, 2011		12,903		$	23.09	$	586,136		6.34

Exercisable as of October 1, 2011		8,351		$	14.59	$	450,338		5.37

As of October 1, 2011, there was $66.8 million of total unrecognized compensation cost related to stock options granted under all plans. That cost is expected to be recognized over a weighted-average period of 3.13 years.

Non-vested Shares

Non-vested share activity for the nine months ended October 1, 2011 was as follows:


	For the Nine Months Ended October 1, 2011
Restricted Stock	Number of Shares (thousands)			Weighted- Average Grant Date Fair Value		Weighted- Average Remaining Contractual Term (years)

Outstanding at beginning of year		222		$	41.12
Granted		148			53.25
Vested		(38	)		41.48
Forfeited		(90	)		45.68

Outstanding as of October 1, 2011		242		$	46.78		1.74

As of October 1, 2011, restricted stock outstanding includes 206,800 shares of performance-based non-vested restricted stock. Vesting is contingent upon meeting certain pre-determined performance goals, subject to reduction based on an annual subjective performance assessment related to individual performance and performance goal attainment, as defined in the award agreements. The amount of compensation expense recognized is based on management’s estimate of the most likely outcome and will be reassessed at each reporting date through the final vesting date, which may result in adjustments to compensation cost.

- 9 -

As of October 1, 2011, there was $7.4 million of total unrecognized compensation cost related to non-vested restricted stock granted under all plans. That cost is expected to be recognized over a weighted-average period of 1.74 years.

The following table presents the total compensation expense recognized in the condensed consolidated statements of operations with respect to stock options, non-vested restricted shares and Associate Stock Purchase Plan shares:


	Three Months Ended						Nine Months Ended
(In thousands)	2011			2010			2011			2010

Stock option and non-vested restricted share compensation expense	$	7,232		$	6,244		$	20,363		$	17,050
Associate stock purchase plan expense		458			424			1,506			1,229

Amounts capitalized in software development costs, net of amortization		(175	)		(118	)		(425	)		(376	)

Amounts charged against earnings, before income tax benefit	$	7,515		$	6,550		$	21,444		$	17,903

Amount of related income tax benefit recognized in earnings	$	2,875		$	2,440		$	8,182		$	6,669

(8)

Comprehensive Income

Total comprehensive income, which includes net earnings, foreign currency translation adjustments and gains and losses from a hedge of our net investment in the United Kingdom (U.K.), amounted to $55.5 million and $80.7 million for the three months ended October 1, 2011 and October 2, 2010, respectively, and $208.0 and $167.8 million for the nine months ended October 1, 2011 and October 2, 2010, respectively. None of the items within comprehensive income, including net earnings, relate to non-controlling interests.

As of October 1, 2011, we designated all of our Great Britain Pound (GBP) denominated long-term debt as a net investment hedge of our U.K. operations. The objective of the hedge is to reduce our foreign currency exposure in the U.K. subsidiary investment. Changes in the exchange rate between the United States Dollar (USD) and GBP, related to the notional amount of the hedge, are recognized as a component of accumulated other comprehensive income (loss), to the extent the hedge is effective.

The following tables represent the fair value of the net investment hedge included within the Condensed Consolidated Balance Sheets and the related unrealized gain or loss, net of related income tax effects:


	Balance Sheet		Fair Value
(In thousands)	Classification		October 1, 2011			January 1, 2011

Net investment hedge	Short-term (S/T) liabilities		$	14,473		$	14,488
Net investment hedge	Long-term (L/T) liabilities			57,891			57,950

Total net investment hedge			$	72,364		$	72,438


	Net Unrealized Gain (Loss)		Net Unrealized Gain (Loss)
	For the Three Months Ended		For the Nine Months Ended
(In thousands)	2011	2010	2011			2010

Net investment hedge - S/T	$(281)	$(361)	$	(9	)	$	204
Net investment hedge - L/T	251	(1,803)		1,341			1,023

Total net investment hedge	$(30)	$(2,164)	$	1,332		$	1,227

We recognize foreign currency transaction gains and losses within the Condensed Consolidated Statements of Operations as a component of general and administrative expenses. We realized a foreign currency gain of $0.6 million and a loss of $0.9 million during the three months ended October 1, 2011 and October 2, 2010, respectively, and a gain of $0.6 million and a loss of $0.3 million during the nine months ended October 1, 2011 and October 2, 2010, respectively.

(9)

Contingencies

The terms of our software license agreements with our clients generally provide for a limited indemnification of such intellectual property against losses, expenses and liabilities arising from third party claims based on alleged infringement by our solutions of an intellectual property right of such third party. The terms of such indemnification often limit the scope of and remedies for such indemnification obligations and generally include a right to replace or

- 10 -

modify an infringing solution. To date, we have not had to reimburse any of our clients for any losses related to these indemnification provisions pertaining to third party intellectual property infringement claims. For several reasons, including the lack of prior indemnification claims and the lack of a monetary liability limit for certain infringement cases under the terms of the corresponding agreements with our clients, we cannot determine the maximum amount of potential future payments, if any, related to such indemnification provisions.

From time to time we are involved in routine litigation incidental to the conduct of our business, including for example, employment disputes and litigation alleging solution defects, intellectual property infringement, violations of law and breaches of contract and warranties. We believe that no such routine litigation currently pending against us, if adversely determined, would have a material adverse effect on our consolidated financial position, results of operations or cash flows.

(10)

Segment Reporting

We have two operating segments, Domestic and Global. Revenues are derived primarily from the sale of clinical, financial and administrative information systems and solutions. The cost of revenues includes the cost of third party consulting services, computer hardware, devices and sublicensed software purchased from manufacturers for delivery to clients. It also includes the cost of hardware maintenance and sublicensed software support subcontracted to the manufacturers. Operating expenses incurred by the geographic business segments consist of sales and client service expenses including salaries of sales and client service personnel, communications expenses and unreimbursed travel expenses. Performance of the segments is assessed at the operating earnings level and, therefore, the segment operations have been presented as such. “Other” includes revenues not generated by the operating segments and expenses that have not been allocated to the operating segments, such as software development, marketing, general and administrative, share-based compensation expense and depreciation. We manage our operating segments to the operating earnings level. Items such as interest, income taxes, capital expenditures and total assets are managed at the consolidated level and thus are not included in our operating segment disclosures.

- 11 -

Accounting policies for each of the reportable segments are the same as those used on a consolidated basis. The following table presents a summary of the operating information for the three and nine months ended October 1, 2011 and October 2, 2010:


	Operating Segments
(In thousands)	Domestic		Global		Other			Total
Three months ended 2011
Revenues	$	499,497	$	72,143	$	—		$	571,640

Cost of revenues		109,656		10,808		—			120,464
Operating expenses		110,775		33,412		186,597			330,784

Total costs and expenses		220,431		44,220		186,597			451,248

Operating earnings (loss)	$	279,066	$	27,923	$	(186,597	)	$	120,392


	Operating Segments
(In thousands)	Domestic		Global		Other			Total
Three months ended 2010
Revenues	$	394,052	$	68,631	$	—		$	462,683

Cost of revenues		64,150		14,998		—			79,148
Operating expenses		102,605		29,482		157,456			289,543

Total costs and expenses		166,755		44,480		157,456			368,691

Operating earnings (loss)	$	227,297	$	24,151	$	(157,456	)	$	93,992


	Operating Segments
(In thousands)	Domestic		Global		Other			Total
Nine months ended 2011
Revenues	$	1,370,741	$	216,786	$	—		$	1,587,527

Cost of revenues		274,994		34,632		—			309,626
Operating expenses		322,250		94,182		539,405			955,837

Total costs and expenses		597,244		128,814		539,405			1,265,463

Operating earnings (loss)	$	773,497	$	87,972	$	(539,405	)	$	322,064


	Operating Segments
(In thousands)	Domestic		Global		Other			Total
Nine months ended 2010
Revenues	$	1,130,384	$	219,637	$	—		$	1,350,021

Cost of revenues		189,540		35,903		—			225,443
Operating expenses		311,663		93,577		463,338			868,578

Total costs and expenses		501,203		129,480		463,338			1,094,021

Operating earnings (loss)	$	629,181	$	90,157	$	(463,338	)	$	256,000

(11)

Subsequent Events

On October 6, 2011, we reached an agreement to acquire Clairvia, Incorporated, an organization that has spent more than a decade developing health care workforce management solutions, including Care Value Management™ and Physician Scheduler™. The acquisition closed on October 17, 2011 and is not expected to have a material impact on Cerner’s 2011 financial results.

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Item 2.

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 the results of operations and financial condition of Cerner Corporation (Cerner, the Company, we, us or our). This MD&A is provided as a supplement to, and should be read in conjunction with, our condensed consolidated financial statements and the accompanying notes to the financial statements (Notes) found above.

Our third fiscal quarter ends on the Saturday closest to September 30. The 2011 and 2010 third quarters ended on October 1, 2011 and October 2, 2010, respectively. All references to years in the MD&A represent the respective three or nine months ended of the third fiscal quarters, unless otherwise noted.

Except for the historical information and discussions contained herein, statements contained in this Form 10-Q may constitute “forward looking statements” within the meaning of Section 21E of the Securities and Exchange Act of 1934, as amended (the Act). Forward-looking statements can often be identified by the use of forward-looking terminology, such as “could,” “should,” “will,” “intended,” “continue,” “believe,” “may,” “expect,” “hope,” “anticipate,” “goal,” “forecast,” “plan,” “guidance” or “estimate” or the negative of these words, variations thereof or similar expressions. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, including: the possibility of product-related liabilities; potential claims for system errors and warranties; the possibility of interruption at our data centers or client support facilities; our proprietary technology may be subject to claims for infringement or misappropriation of intellectual property rights of others, or may be infringed or misappropriated by others; risks associated with our non-U.S. operations; risks associated with our ability to effectively hedge exposure to fluctuations in foreign currency exchange rates; the potential for tax legislation initiatives that could adversely affect our tax position and/or challenges to our tax positions in the United States and non-U.S. countries; risks associated with our recruitment and retention of key personnel; risks related to our reliance on third party suppliers; risks inherent with business acquisitions; the potential for losses resulting from asset impairment charges; risks associated with the ongoing adverse financial market environment and uncertainty in global economic conditions; changing political, economic and regulatory influences; government regulation; significant competition and market changes; variations in our quarterly operating results; potential inconsistencies in our sales forecasts compared to actual sales; volatility in the trading price of our common stock; the authority of our Board of Directors to issue preferred stock and anti-takeover provisions contained in our corporate governance documents; and, other risks, uncertainties and factors discussed elsewhere in this Form 10-Q, in our other filings with the Securities and Exchange Commission or in materials incorporated therein by reference. Forward looking statements are not guarantees of future performance or results. 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.

Management Overview

Our revenues are primarily derived by selling, implementing and supporting software solutions, clinical content, hardware, health care devices and services that give health care providers secure access to clinical, administrative and financial data in real time, allowing them to improve the quality, safety and efficiency in the delivery of health care. We implement the health care solutions as stand-alone, combined or enterprise-wide systems. Cerner Millennium^® software solutions can be managed by our clients or in our data centers via a managed services model.

- 13 -

Our fundamental strategy centers on creating 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 10% or more. This growth has also created an important strategic footprint in health care, with Cerner^® solutions licensed by approximately 9,000 facilities around the world, including more than 2,600 hospitals; 3,500 physician practices covering more than 30,000 physicians; 500 ambulatory facilities, such as laboratories, ambulatory centers, cardiac facilities, radiology clinics and surgery centers; 800 home health facilities; and 1,600 retail pharmacies. Selling additional solutions back into this client base is an important element of our future revenue growth. We are also focused on driving growth through market share expansion by strategically aligning with health care providers who have not yet selected a supplier and by displacing competitors in health care settings that are looking to replace their current health care information technology (HCIT) partners.

We expect to drive growth through new initiatives 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 Healthe^TM employer services, Cerner ITWorks^SM services, Cerner RevWorks^SM services, physician practice solutions and solutions and services for the pharmaceutical market. Finally, we are focused on selling our solutions and services outside the United States. Many non-U.S. markets have a low penetration of HCIT solutions and their governing bodies are in many cases focused on HCIT 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 more than 20% compound annual rates over the most recent five-and ten-year periods. We believe we can continue driving strong levels of earnings growth and leverage key areas to create operating margin expansion. The primary areas of opportunity for margin expansion include:

•

becoming more efficient at implementing our software by leveraging implementation tools and methodologies we have developed that can reduce the amount of effort required to implement our software;

•

leveraging our investments in R&D by entering new markets that do not require significant incremental R&D but can contribute significantly to revenue growth; and

•

leveraging our scalable business infrastructure to reduce the rate of increase in general and administrative spending to below our revenue growth rate.

We are also focused on increasing cash flow by growing earnings, reducing the use of working capital and controlling capital expenditures.

The Health Care and Health Care IT Industry

We believe there are several factors that are favorable for the HCIT industry over the next decade, despite some lingering weakness in the global economy. Because HCIT solutions play an important role in health care by improving safety, efficiency and reducing cost, they are often viewed as more strategic than other capital purchases. Most United States health care providers also recognize that they must invest in HCIT to meet regulatory, compliance and government reimbursement requirements and incentive opportunities. In addition, with the Centers for Medicare and Medicaid Services estimating United States health care spending at $2.6 trillion or 17.5 percent of 2010 Gross Domestic Product, we believe the growing cost of our health care system is unsustainable. We further believe the intelligent use of information systems will improve health outcomes and, correspondingly, drive down costs. This belief is supported by a 2005 study by RAND Corp., which estimated that the widespread adoption of HCIT in the United States could cut health care costs by $162 billion annually.

The broad recognition that HCIT is essential to helping control health care costs and improving quality contributed to the inclusion of HCIT incentives in the American Recovery and Reinvestment Act of 2009 (ARRA). The Health Information Technology for Economic and Clinical Health (HITECH) provisions within ARRA include more than $35 billion in incentives for health care organizations to modernize operations through “meaningful use” of HCIT. These incentives are contributing to increased demand for HCIT solutions and services in the United States.

- 14 -

Another element in the United States marketplace is the health care reform legislation that passed in 2010. We believe the legislation, which promises to drive insurance coverage to up to 32 million additional consumers, could have many second order effects on our clients. For example, health care providers may face increased volumes that could create capacity constraints, and they may find it challenging to profitably provide care at the planned reimbursement rates under the expanded coverage models. We also expect additional compliance and reporting challenges for our clients in the areas of pay-for-quality, ICD-10 coding requirements, fraud, abuse and waste measures.

We believe the above factors create strong incentives for providers to maximize efficiency and create the need for additional investments in HCIT solutions and services. Cerner is well positioned to benefit from this expected increase in demand due to our large footprint in United States hospitals and physician practices and our proven ability to deliver value to our clients.

Outside the United States, the economic downturn of the last few years has impacted and could continue to impact our results. However, we believe long-term revenue growth opportunities outside the United States remain significant because other countries are also focused on controlling health care spending while improving the efficiency and quality of care that is delivered, and many of these countries recognize HCIT as an important piece of the solution to these issues.

In summary, while the current economic environment has impacted our business, we believe the fundamental value proposition of HCIT remains strong. The HCIT industry will likely benefit as health care providers and governments continue to recognize that these solutions and services contribute to safer, more efficient health care.

Results Overview

The Company delivered strong levels of bookings, revenues, earnings and cash flows in the third quarter of 2011. New business bookings revenue, which reflects the value of executed contracts for software, hardware, professional services and managed services, was $650.3 million in the third quarter of 2011, which was an increase of 31% compared to $495.7 million in the third quarter of 2010. Revenues for the third quarter of 2011 increased 24% to $571.6 million compared to $462.7 million in the year-ago quarter. The year-over-year increase in revenue reflects improved economic conditions and demand driven by the United States stimulus incentives related to HCIT. As discussed above in “Health Care and Health Care IT Industry”, we believe the HITECH incentives and the nation’s focus on improving the efficiency and quality of health care will create a period of increased HCIT demand in the United States.

Third quarter 2011 net earnings increased 30% to $78.8 million compared to $60.9 million in the third quarter of 2010. Diluted earnings per share increased 25% to $0.45 compared to $0.36 in the third quarter of 2010. Third quarter 2011 and 2010 net earnings and diluted earnings per share reflect the impact of accounting for stock-based compensation using the fair value method to measure and record expense for stock options, pursuant to Accounting Standards Codification (ASC), 718, Stock Compensation. The effect of these expenses reduced the third quarter 2011 net earnings and diluted earnings per share by $4.6 million and $0.03, respectively, and third quarter 2010 net earnings and diluted earnings per share by $4.1 million and $0.02, respectively.

The growth in net earnings and diluted earnings per share was driven primarily by strong revenue growth and continued progress with our margin expansion initiatives, particularly leveraging R&D investments and controlling selling, general and administrative expenses. Our third quarter 2011 operating margin was 21.1%, which is 80 basis points higher than the year-ago quarter.

We had strong cash collections of receivables of $532.8 million in the third quarter of 2011 compared to $471.8 million in the third quarter of 2010. Days sales outstanding was 87 days in the third quarter of 2011 compared to 88 days in the second quarter of 2011 and 91 days in the third quarter of 2010. Operating cash flows for the third quarter of 2011 were strong at $129.2 million compared to $119.0 million in the third quarter of 2010.

- 15 -

Results of Operations

Three Months Ended October 1, 2011 Compared to Three Months Ended October 2, 2010

The following table presents a summary of the operating information for the third quarters of 2011 and 2010:



(In thousands)	2011			% of Revenue			2010			% of Revenue			% Change

Revenues
System sales	$	188,698			33	%	$	133,439			29	%		41	%
Support and maintenance		138,573			24	%		130,199			28	%		6	%
Services		232,894			41	%		191,090			41	%		22	%
Reimbursed travel		11,475			2	%		7,955			2	%		44	%

Total revenues		571,640			100	%		462,683			100	%		24	%

Costs of revenue
Costs of revenue		120,464			21	%		79,148			17	%		52	%

Total margin		451,176			79	%		383,535			83	%		18	%

Operating expenses
Sales and client service		220,177			38	%		189,320			41	%		16	%
Software development		72,544			13	%		67,257			15	%		8	%
General and administrative		38,063			7	%		32,966			7	%		15	%

Total operating expenses		330,784			58	%		289,543			63	%		14	%

Total costs and expenses		451,248			79	%		368,691			80	%		22	%

Operating earnings		120,392			21.1	%		93,992			20.3	%		28	%

Interest income, net		2,770						87
Other income, net		5						5
Income taxes		(44,332	)					(33,212	)

Net earnings	$	78,835					$	60,872						30	%

Revenues & Backlog

Revenues increased 24% to $571.6 million for the third quarter of 2011 from $462.7 million for the same period in 2010.

•

System sales, which include revenues from the sale of licensed software, software as a service, technology resale (hardware, devices, and sublicensed software), deployment period licensed software upgrade rights, installation fees, transaction processing and subscriptions, increased 41% to $188.7 million for the third quarter of 2011 from $133.4 million for the same period in 2010. The increase in system sales was driven by a very strong increase in technology resale and a strong increase in licensed software and subscriptions.

•

Support and maintenance revenues increased 6% to $138.6 million during the third quarter of 2011 from $130.2 million during the same period in 2010. This increase was attributable to continued success at selling Cerner Millennium applications, implementing them at client sites and initiating billing for support and maintenance fees. We expect support and maintenance revenues will continue to grow as the base of installed Cerner Millennium systems grows.

•

Services revenue, which includes professional services, excluding installation, and managed services, increased 22% to $232.9 million from $191.1 million for the same period in 2010. This increase was driven by growth in CernerWorks^SM managed services as a result of continued demand for our hosting services and an increase in professional services due to increased implementation activities and growth in Cerner ITWorks services.

- 16 -

Contract backlog, which reflects new business bookings that have not yet been recognized as revenue, increased 24% in the third quarter of 2011 compared to the same period in 2010. This increase was driven by growth in new business bookings during the past four quarters, including continued strong levels of managed services and Cerner ITWorks services bookings that typically have longer contract terms. A summary of our total backlog follows:


(In thousands)	October 1, 2011		October 2, 2010

Contract backlog	$	4,964,942	$	4,018,475
Support and maintenance backlog		691,069		642,436

Total backlog	$	5,656,011	$	4,660,911

Costs of Revenue

Cost of revenues was 21% of total revenues in the third quarter of 2011, compared to 17% in the same period of 2010. The higher cost of revenues as a percent of revenue was primarily driven by a higher mix of technology resale, which carries a higher cost of revenue, and a slightly higher level of third party consulting costs. The cost of revenues includes the cost of reimbursed travel expense, third party consulting services and subscription content, 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. Costs of revenues does not include the costs of our client service personnel who are responsible for delivering our service offerings. Such costs are included in sales and client service expense.

Operating Expenses

Total operating expenses increased 14% to $330.8 million in the third quarter of 2011, compared with $289.5 million for the same period in 2010.

•

Sales and client service expenses as a percent of total revenues were 38% in the third quarter of 2011, compared to 41% in the same period of 2010. These expenses increased 16% to $220.2 million in the third quarter of 2011, from $189.3 million in the same period of 2010. Sales and client service expenses include salaries of sales and client service personnel, depreciation and other expenses associated with our CernerWorks managed service business, communications expenses, unreimbursed travel expenses, expense for share-based payments, sales and marketing salaries and trade show and advertising costs. The increase was primarily attributable to growth in managed services and professional services.

•

Software development expenses as a percent of revenue were 13% in the third quarter of 2011, compared to 15% in the same period of 2010. These expenses increased 8% to $72.5 million in the third quarter of 2011, from $67.3 million in the same period of 2010. Expenditures for software development in the third quarter of 2011 reflect continued development and enhancement of the Cerner Millennium platform and software solutions and investments in new growth initiatives. Although these expenses increased in the third quarter of 2011, the reduction as a percentage of revenue reflects our ongoing efforts to control spending relative to revenue growth. Because of the strong platform we have built, we are able to continue advancing our solutions and investing in new solutions without large increases in spending. A summary of our total software development expense in the third quarters of 2011 and 2010 is as follows:


	Three Months Ended
(In thousands)	2011			2010

Software development costs	$	72,397		$	70,037
Capitalized software costs		(20,368	)		(20,199	)
Capitalized costs related to share-based payments		(404	)		(337	)
Amortization of capitalized software costs		20,919			17,756

Total software development expense	$	72,544		$	67,257

- 17 -

General and administrative expenses as a percent of total revenues were 7% in the third quarter of 2011 and 2010. These expenses increased 15% to $38.1 million in the third quarter of 2011, from $33.0 million for the same period in 2010. General and administrative expenses include salaries for corporate, financial and administrative staffs, utilities, communications expenses, professional fees, transaction gains or losses on foreign currency and expense for share based payments. The increase in general and administrative expenses was driven primarily by corporate personnel costs.

Non-Operating Items

•

Net interest income was $2.8 million in the third quarter of 2011, compared to net interest income of $0.1 million in the third quarter of 2010. Interest income increased to $4.1 million in the third quarter of 2011 from $1.8 million for the same period in 2010 due primarily to growth in investments and an increase in investment returns. Interest expense decreased to $1.4 million in the third quarter of 2011 from $1.7 million for the same period in 2010, due to payments on our long-term debt.

•

Other income was insignificant for the third quarters of 2011 and 2010.

•

Our effective tax rate was 36.0% for the third quarter of 2011 and 35.3% for the third quarter of 2010. This increase was primarily due to a change in the mix of earnings between the U.S. and foreign jurisdictions and other discrete items.

Operations by Segment

We have two operating segments, Domestic and Global. The Domestic segment includes revenue contributions and expenditures associated with business activity in the United States. The Global segment includes revenue contributions and expenditures linked to business activity in Aruba, Australia, Austria, Belgium, Canada, Cayman Islands, Chile, China (Hong Kong), Egypt, England, France, Germany, India, Ireland, Malaysia, Puerto Rico, Qatar, Saudi Arabia, Singapore, Spain, Sweden, Switzerland and the United Arab Emirates.

The following table presents a summary of the operating information for the third quarters of 2011 and 2010:



(In thousands)	2011			% of Revenue			2010			% of Revenue			% Change

Domestic Segment
Revenues	$	499,497			100	%	$	394,052			100	%		27	%
Costs of revenue		109,656			22	%		64,150			16	%		71	%
Operating expenses		110,775			22	%		102,605			26	%		8	%

Total costs and expenses		220,431			44	%		166,755			42	%		32	%


Domestic operating earnings		279,066			56	%		227,297			58	%		23	%


Global Segment
Revenues		72,143			100	%		68,631			100	%		5	%
Costs of revenue		10,808			15	%		14,998			22	%		-28	%
Operating expenses		33,412			46	%		29,482			43	%		13	%

Total costs and expenses		44,220			61	%		44,480			65	%		-1	%


Global operating earnings		27,923			39	%		24,151			35	%		16	%


Other, net		(186,597	)					(157,456	)					19	%


Consolidated operating earnings	$	120,392					$	93,992						28	%

- 18 -

Domestic Segment

•

Revenues increased 27% to $499.5 million in the third quarter of 2011 from $394.1 million in the same period in 2010. This increase was driven by growth across all business models, with particular strength in technology resale and professional services.

•

Cost of revenues was 22% of revenues in the third quarter of 2011, compared to 16% of revenues in the same period in 2010. The higher cost of revenues as a percent of revenue was primarily driven by a higher mix of technology resale, which carries a higher cost of revenue, and a slightly higher level of third party consulting costs.

•

Operating expenses increased 8% to $110.8 million in the third quarter of 2011, from $102.6 million in the same period in 2010, due primarily to growth in managed services and professional services expenses.

Global Segment

•

Revenues increased 5% to $72.1 million in the third quarter of 2011 from $68.6 million in the same period in 2010. Overall, increases in licensed software and managed services revenue were partially offset by declines in professional services and technology resale revenue.

•

Cost of revenues was 15% of revenues in the third quarter of 2011, compared with 22% in the same period of 2010. The lower cost of revenues in 2011 was primarily driven by the decline in technology resale, which carries a higher cost of revenue.

•

Operating expenses increased 13% to $33.4 million for the third quarter of 2011, from $29.5 million in the same period in 2010, primarily due to an increase in personnel-related expense.

Other, net

Operating results not attributed to an operating segment include expenses, such as centralized professional services costs, software development, marketing, general and administrative, stock-based compensation, depreciation, and amortization. These expenses increased 19% to $186.6 million in the third quarter of 2011 from $157.5 million in the same period in 2010. This increase was primarily due to growth in professional services, software development, and corporate personnel costs.

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Nine Months Ended October 1, 2011 Compared to Nine Months Ended October 2, 2010

The following table presents a summary of the operating information for the first nine months of 2011 and 2010:



(In thousands)	2011			% of Revenue			2010			% of Revenue			% Change

Revenues
System sales	$	486,222			31	%	$	386,292			29	%		26	%
Support and maintenance		408,580			26	%		385,304			29	%		6	%
Services		659,211			41	%		554,605			41	%		19	%
Reimbursed travel		33,514			2	%		23,820			2	%		41	%

Total revenues		1,587,527			100	%		1,350,021			100	%		18	%

Costs of revenue
Costs of revenue		309,626			20	%		225,443			17	%		37	%

Total margin		1,277,901			80	%		1,124,578			83	%		14	%

Operating expenses
Sales and client service		631,738			40	%		566,943			42	%		11	%
Software development		213,478			13	%		202,024			15	%		6	%
General and administrative		110,621			7	%		99,611			7	%		11	%

Total operating expenses		955,837			60	%		868,578			64	%		10	%

Total costs and expenses		1,265,463			80	%		1,094,021			81	%		16	%

Operating earnings		322,064			20.3	%		256,000			19.0	%		26	%

Interest income, net		7,621						2,291
Other income (expense), net		45						(566	)
Income taxes		(114,295	)					(91,090	)

Net earnings	$	215,435					$	166,635						29	%

Revenues & Backlog

Revenues increased 18% to $1.59 billion for the first nine months of 2011 from $1.35 billion for the same period in 2010.

•

System sales, which include revenues from the sale of licensed software, software as a service, technology resale (hardware, devices, and sublicensed software), deployment period licensed software upgrade rights, installation fees, transaction processing and subscriptions, increased 26% to $486.2 million for the first nine months of 2011 from $386.3 million for the same period in 2010. The increase in system sales was driven by a strong increase in technology resale, subscriptions and licensed software.

•

Support and maintenance revenues increased 6% to $408.6 million during the first nine months of 2011 from $385.3 million during the same period in 2010. The increase is attributable to growth in Cerner Millennium applications for which support billing has been initiated.

•

Services revenue, which includes professional services, excluding installation, and managed services, increased 19% to $659.2 million from $554.6 million for the same period in 2010. This increase is driven by growth in CernerWorks managed services as a result of continued demand for our hosting services and an increase in professional services due to increased implementation activities and growth in Cerner ITWorks services.

- 20 -

Contract backlog, which reflects new business bookings that have not yet been recognized as revenue, increased 24% in the first nine months of 2011 compared to the same period in 2010. This increase was driven by growth in new business bookings during the past four quarters, including continued strong levels of managed services bookings that typically have longer contract terms. A summary of our total backlog follows:

		$000,000,000		$000,000,000
(In thousands)	October 1, 2011		October 2, 2010

Contract backlog	$	4,964,942	$	4,018,475
Support and maintenance backlog		691,069		642,436

Total backlog	$	5,656,011	$	4,660,911

Costs of Revenue

Cost of revenues was 20% of total revenues in the first nine months of 2011, as compared to 17% in the same period of 2010. The higher cost of revenues as a percent of revenue was primarily driven by a higher mix of technology resale, which carries a higher cost of revenue, and a slightly higher level of third party consulting costs. The cost of revenues includes the cost of reimbursed travel expense, third party consulting services and subscription content, 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. Costs of revenues does not include the costs of our client service personnel who are responsible for delivering our service offerings, such costs are included in sales and client service expense.

Operating Expenses

Total operating expenses increased 10% to $955.8 million in the first nine months of 2011, compared with $868.6 million for the same period in 2010.

•

Sales and client service expenses as a percent of total revenues were 40% in the first nine months of 2011, compared to 42% in the same period of 2010. These expenses increased 11% to $631.7 million in the first nine months of 2011, from $566.9 million in the same period of 2010. Sales and client service expenses include salaries of sales and client service personnel, depreciation and other expenses associated with our CernerWorks managed service business, communications expenses, unreimbursed travel expenses, expense for share-based payments, sales and marketing salaries and trade show and advertising costs. The increase was primarily attributable to growth in the managed services business and a higher level of professional services expenses, which were slightly offset by a decrease in bad debt expense.

•

Software development expense as a percent of total revenues was 13% in the first nine months of 2011, compared to 15% in the same period of 2010. These expenses increased 6% to $213.5 million in the first nine months of 2011, from $202.0 million in the same period of 2010. Expenditures for software development in the first three quarters of 2011 reflect continued development and enhancement of the Cerner Millennium platform and software solutions and investments in new growth initiatives. Although these expenses increased in the first nine months of 2011, the reduction as a percentage of revenue reflects our ongoing efforts to control spending relative to revenue growth. Because of the strong platform we have built, we are able to continue advancing our solutions and investing in new solutions without large increases in spending. A summary of our total software development expense in the first nine months of 2011 and 2010 is as follows:

		$000,000,000			$000,000,000
	Nine Months Ended
(In thousands)	2011			2010

Software development costs	$	215,418		$	213,793
Capitalized software costs		(60,713	)		(60,802	)
Capitalized costs related to share-based payments		(1,114	)		(982	)
Amortization of capitalized software costs		59,887			50,015

Total software development expense	$	213,478		$	202,024

•

General and administrative expenses as a percent of total revenues were 7% in the first nine months of 2011 and 2010. These expenses increased 11% to $110.6 million in the first nine months of 2011, from $99.6 million for the same period in 2010. General and administrative expenses include salaries for corporate, financial and administrative staffs, utilities, communications expenses, professional fees, transaction gains or losses on foreign currency and expense for share based payments. An increase in corporate personnel costs accounted for the majority of the overall increase in general and administrative expenses.

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Non-Operating Items

•

Net interest income was $7.6 million in the first nine months of 2011 compared to net interest income of $2.3 million in the first nine months of 2010. Interest income increased to $11.5 million in the first nine months of 2011 from $7.6 million for the same period in 2010, due primarily to growth in investments and an increase in investment returns. Interest expense decreased to $3.9 million in the first nine months of 2011 from $5.3 million for the same period in 2010, due primarily to long-term debt payments made in the fourth quarter of 2010.

•

Other income was insignificant in the first nine months of 2011, compared to other expense of $0.6 million for the same period in 2010. Other income and expense in the first nine months of 2010 includes offsetting unrealized gains and losses included in earnings related to our auction rate securities and put-like settlement feature in the net amount of $6.9 million.

•

Our effective tax rate was 34.7% for the first nine months of 2011 and 35.3% for the first nine months of 2010. This decrease was primarily due to the research and development tax credit being in effect for the first nine months of 2011 while it was not effective for the first nine months of 2010 and a favorable foreign tax audit settlement during the first quarter.

Operations by Segment

The following table presents a summary of the operating information for the first nine months of 2011 and 2010:



(In thousands)	2011			% of Revenue			2010			% of Revenue			% Change

Domestic Segment
Revenues	$	1,370,741			100	%	$	1,130,384			100	%		21	%
Costs of revenue		274,994			20	%		189,540			17	%		45	%
Operating expenses		322,250			24	%		311,663			28	%		3	%

Total costs and expenses		597,244			44	%		501,203			44	%		19	%


Domestic operating earnings		773,497			56	%		629,181			56	%		23	%


Global Segment
Revenues		216,786			100	%		219,637			100	%		-1	%
Costs of revenue		34,632			16	%		35,903			16	%		-4	%
Operating expenses		94,182			43	%		93,577			43	%		1	%

Total costs and expenses		128,814			59	%		129,480			59	%		-1	%


Global operating earnings		87,972			41	%		90,157			41	%		-2	%


Other, net		(539,405	)					(463,338	)					16	%


Consolidated operating earnings	$	322,064					$	256,000						26	%

Domestic Segment

•

Revenues increased 21% to $1.37 billion in the first nine months of 2011 from $1.13 billion in the same period in 2010. This increase was driven by growth across all business models, with particular strength in professional services, technology resale and managed services.

•

Cost of revenues increased to 20% of revenues in the first nine months of 2011, compared to 17% in the same period in 2010. The higher cost of revenues as a percent of revenue was primarily driven by a higher mix of technology resale, which carries a high cost of revenue, and a slightly higher level of third party consulting costs.

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•

Operating expenses increased 3% to $322.3 million in the first nine months of 2011, from $311.7 million in the same period in 2010, due primarily to growth in managed services and professional services expense, offset by a decrease in bad debt expense.

Global Segment

•

Revenues decreased 1% to $216.8 million in the first nine months of 2011 from $219.6 million in the same period in 2010. Overall, declines in technology resale and professional services revenue were partially offset by an increase in managed services, licensed software and support services revenue. The global revenue comparisons were also impacted by a change in certain contract accounting estimates during the first quarter of 2010.

•

Cost of revenues was 16% of revenues in the first nine months of 2011 and 2010.

•

Operating expenses increased 1% to $94.2 million for the first nine months of 2011, from $93.6 million in the same period in 2010, primarily due to an increase in personnel-related expense.

Other, net

Operating results not attributed to an operating segment include expenses, such as centralized professional services costs, software development, marketing, general and administrative, stock-based compensation, depreciation, and amortization. These expenses increased 16% to $539.4 million in the first nine months of 2011 from $463.3 million in the same period in 2010. This increase was primarily due to growth in professional services, software development, and corporate personnel costs, slightly offset by lower depreciation expense.

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 amounts we invest in software development, acquisitions and capital expenditures.

Our principal sources of liquidity are our cash, cash equivalents, which consist of money market funds and time deposits, and short-term investments. At October 1, 2011, we had cash and cash equivalents of $231.2 million and short-term investments of $524.0 million compared to cash and cash equivalents of $214.5 million and short-term investments of $356.5 million at January 1, 2011. Approximately 17% and 22% of our cash, cash equivalents and short-term investments as of October 1, 2011 and January 1, 2011, respectively, were held outside of the United States.

Additionally, we maintain a $90.0 million, multi-year revolving credit facility, which provides an unsecured revolving line of credit for working capital purposes. Interest is payable at a rate based on prime or LIBOR plus a spread that varies depending on the net worth ratios maintained. The agreement provides certain restrictions on our ability to borrow, incur liens, sell assets and pay dividends and contains certain net worth, current ratio and fixed charge coverage covenants, which as of October 1, 2011, we were in compliance with. The current agreement expires on May 31, 2013. As of October 1, 2011, we had no outstanding borrowings under this agreement; however, we have $9.9 million of outstanding letters of credit, which reduced our available borrowing capacity to $80.1 million.

We believe that our present cash position, together with cash generated from operations, short-term investments and, if necessary, our available lines of credit, will be sufficient to meet anticipated cash requirements during 2011.

During the second quarter of 2008, Fujitsu Services Limited’s (Fujitsu) contract as the prime contractor in the National Health Service (NHS) initiative to automate clinical processes and digitize medical records in the Southern region of England was terminated by the NHS. This had the effect of automatically terminating our subcontract for the project. We are in dispute with Fujitsu regarding Fujitsu’s obligation to pay the amounts comprised of accounts receivable and contracts receivable related to that subcontract, and we are working with Fujitsu to resolve these issues based on processes provided for in the contract. Part of that process requires resolution of disputes between Fujitsu and the NHS regarding the contract termination. As of October 1, 2011, it remains unlikely that the matter will be resolved in the next 12 months. Therefore these receivables have been classified as long-term and represent the significant majority of other long-term assets as of the third quarter ended October 1, 2011. While the ultimate collectability of the receivables pursuant to this process is uncertain, we believe that we have valid and equitable grounds for recovery of such amounts and that collection of recorded amounts is probable.

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The following table summarizes our cash flows in the first nine months of 2011 and 2010:


	Nine Months Ended
(In thousands)	2011			2010

Cash flows from operating activities	$	377,805		$	334,697
Cash flows from investing activities		(429,634	)		(407,843	)
Cash flows from financing activities		68,978			40,262
Effect of exchange rate changes on cash		(466	)		2,908

Total change in cash and cash equivalents		16,683			(29,976	)
Cash and cash equivalents at beginning of period		214,511			241,723

Cash and cash equivalents at end of period	$	231,194		$	211,747

Free cash flow (non-GAAP)	$	240,376		$	197,573

Cash from Operating Activities


	Nine Months Ended
(In thousands)	2011			2010

Cash collections from clients	$	1,572,917		$	1,402,553
Cash paid to employees and suppliers and other		(1,129,703	)		(976,135	)
Cash paid for interest		(3,081	)		(3,483	)
Cash paid for taxes, net of refund		(62,328	)		(88,238	)

Total cash from operations	$	377,805		$	334,697

Cash flow from operations increased in the first nine months of 2011 as compared to the same period of 2010 due primarily to the increase in cash impacting earnings, which was partially offset by cash used by working capital. During the first nine months of 2011 and 2010, we received total client cash collections of $1.57 billion and $1.40 billion, respectively, of which 3% in each period were received from third party client financing arrangements and non-recourse payment assignments. Days sales outstanding was 87 days in the third quarter of 2011, 88 days in the second quarter of 2011 and 91 days in the third quarter of 2010. Revenues provided under support and maintenance agreements represent recurring cash flows. Support and maintenance revenues increased 6% in the first nine months of 2011 compared to the first nine months of 2010. We expect these revenues to continue to grow as the base of installed Cerner Millennium systems grows.

Cash from Investing Activities

Cash flows from investing activities consist primarily of cash used in acquisitions, capital spending and our short-term investment activities. Capital spending consists of capitalized equipment purchases primarily to support growth in our CernerWorks managed services business, capitalized building and improvement purchases to support our facilities requirements and capitalized spending to support our ongoing software development initiatives.

In addition, during the second quarter 2011, we completed our acquisition of Resource Systems, Inc. for approximately $28.1 million, net of the cash acquired. During the first quarter 2010, we completed our acquisition of IMC Healthcare, Inc. for approximately $14.5 million, net of the cash acquired.

Cash from Financing Activities


	Nine Months Ended
(In thousands)	2011			2010

Long-term debt repayments	$	(715	)	$	(2,404	)
Cash from option exercises (including excess tax benefits)		70,472			41,150
Other, net		(779	)		1,516

Total cash flows from financing activities	$	68,978		$	40,262

Our primary financing obligations are long-term debt repayments. In the fourth quarter of 2009, we commenced payment on the first of seven equal annual installments on our 5.54% Great Britain Pound denominated Note Agreement as well as on the first of four equal annual installments on our 6.42% Series B Senior Notes. Based on current exchange rates, we expect our debt repayments related to these notes to approximate $25 million per year through 2012 and approximately $15 million per year from 2013 through 2015.

- 24 -

Free Cash Flow


	Three Months Ended						Nine Months Ended
(In thousands)	2011			2010			2011			2010

Cash flows from operating activities	$	129,177		$	118,956		$	377,805		$	334,697
Capital purchases		(23,925	)		(19,330	)		(75,602	)		(75,341	)
Capitalized software development costs		(20,772	)		(20,535	)		(61,827	)		(61,783	)

Free cash flow (non-GAAP)	$	84,480		$	79,091		$	240,376		$	197,573

Free cash flow increased $42.8 million in the first nine months of 2011 as compared to the same period in 2010, which we believe reflects continued strengthening of our earnings quality. 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. The presentation of free cash flow is not meant to be considered in isolation, nor as a substitute for, or superior to, GAAP results. 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.

- 25 -

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

No material changes.

Item 4.

Controls and Procedures

Evaluation of disclosure controls and procedures. The Company’s Chief Executive Officer (CEO) and Chief Financial Officer (CFO) have evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in the Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by the Quarterly Report (the Evaluation Date). They have concluded that, as of the Evaluation Date, these disclosure controls and procedures were effective to ensure that material information relating to the Company and its consolidated subsidiaries would be made known to them by others within those entities and would be disclosed on a timely basis. The CEO and CFO have concluded that the Company’s disclosure controls and procedures are designed, and are effective, to give reasonable assurance that the information required to be disclosed by the Company in reports that it files under the Exchange Act is recorded, processed, summarized and reported within the time period specified in the rules and forms of the SEC. They have also concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that are filed or submitted under the Exchange Act are accumulated and communicated to the Company’s management, including the CEO and CFO, to allow timely decisions regarding required disclosure.

There were no changes in the Company’s internal controls over financial reporting during the nine months ended October 1, 2011 that have materially affected, or are reasonably likely to materially affect, its internal controls over financial reporting.

The Company’s management, including its CEO and CFO, has concluded that our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives and are effective at that reasonable assurance level. However, the Company’s management can provide no assurance that our disclosure controls and procedures or our internal control over financial reporting can prevent all errors and all fraud under all circumstances. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been or will be detected. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

- 26 -

Part II. Other Information

Item 6.

Exhibits

(a)

Exhibits



31.1		Certification of Neal L. Patterson, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Marc G. Naughton, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS XBRL Instance Document

101.SCH XBRL Taxonomy Extension Schema Document

101.CAL XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB XBRL Taxonomy Extension Labels Linkbase Document

101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF XBRL Taxonomy Extension Definition Linkbase Document

- 27 -

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	CERNER CORPORATION
	Registrant

October 28, 2011	By:	/s/ Marc G. Naughton
Date		Marc G. Naughton
		Executive Vice President and
		Chief Financial Officer
		(duly authorized officer and principal financial officer)

- 28 -

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company