Edgar Filing: CERNER CORP /MO/

Q1 2014 10-Q

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended: March 29, 2014

( ) 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)

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.

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]

Indicate the number of shares outstanding of the issuer's classes of common stock, as of the latest practicable date.



Class		Outstanding at April 18, 2014
Common Stock, $0.01 par value per share		343,371,936 shares

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CERNER CORPORATION

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Part I.	Financial Information:

Item 1.	Financial Statements:

	Condensed Consolidated Balance Sheets as of March 29, 2014 (unaudited) and December 28, 2013	1

	Condensed Consolidated Statements of Operations for the Three Months Ended March 29, 2014 and March 30, 2013 (unaudited)	2

	Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 29, 2014 and March 30, 2013 (unaudited)	3

	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 29, 2014 and March 30, 2013 (unaudited)	4

	Notes to Condensed Consolidated Financial Statements (unaudited)	5

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

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	22

Item 4.	Controls and Procedures	22

Part II.	Other Information:

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	23

Item 6.	Exhibits	24

Signatures

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Part I. Financial Information

Item 1. Financial Statements

CERNER CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

As of March 29, 2014 (unaudited) and December 28, 2013



(In thousands, except share data)	2014			2013

Assets
Current assets:
Cash and cash equivalents	$	219,928		$	202,377
Short-term investments	811,327			677,004
Receivables, net	564,086			582,926
Inventory	28,257			32,299
Prepaid expenses and other	198,961			175,488
Deferred income taxes, net	92,622			91,614
Total current assets	1,915,181			1,761,708

Property and equipment, net	845,104			792,781
Software development costs, net	366,676			347,077
Goodwill	307,081			307,422
Intangible assets, net	138,696			144,132
Long-term investments	436,995			554,873
Other assets	181,615			190,371

Total assets	$	4,191,348		$	4,098,364

Liabilities and Shareholders’ Equity

Current liabilities:
Accounts payable	$	125,741		$	145,019
Current installments of long-term debt and capital lease obligations	55,657			54,107
Deferred revenue	231,512			209,746
Accrued payroll and tax withholdings	123,242			147,986
Other accrued expenses	75,515			83,574
Total current liabilities	611,667			640,432

Long-term debt and capital lease obligations	104,827			111,717
Deferred income taxes and other liabilities	219,857			170,392
Deferred revenue	8,600			8,159
Total liabilities	944,951			930,700

Shareholders’ Equity:
Common stock, $.01 par value, 500,000,000 shares authorized, 345,193,355 shares issued at March 29, 2014 and 344,338,030 shares issued at December 28, 2013	3,452			3,443
Additional paid-in capital	843,953			812,853
Retained earnings	2,512,574			2,393,048
Treasury stock, 1,850,593 shares at March 29, 2014 and 570,616 shares at December 28, 2013	(103,277		)	(28,251		)
Accumulated other comprehensive loss, net	(10,305		)	(13,429		)
Total shareholders’ equity	3,246,397			3,167,664

Total liabilities and shareholders’ equity	$	4,191,348		$	4,098,364

See notes to condensed consolidated financial statements (unaudited).

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CERNER CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

For the three months ended March 29, 2014 and March 30, 2013

(unaudited)



	Three Months Ended
(In thousands, except per share data)	2014			2013

Revenues:
System sales	$	206,687		$	198,902
Support, maintenance and services	557,429			466,556
Reimbursed travel	20,645			14,571

Total revenues	784,761			680,029
Costs and expenses:
Cost of system sales	65,113			81,483
Cost of support, maintenance and services	43,341			31,175
Cost of reimbursed travel	20,645			14,571
Sales and client service	330,901			267,356
Software development (Includes amortization of $25,101 and $22,016, respectively)	91,545			81,063
General and administrative	55,213			47,812

Total costs and expenses	606,758			523,460

Operating earnings	178,003			156,569

Other income, net	2,990			3,044

Earnings before income taxes	180,993			159,613
Income taxes	(61,467		)	(49,573		)

Net earnings	$	119,526		$	110,040

Basic earnings per share	$	0.35		$	0.32
Diluted earnings per share	$	0.34		$	0.31
Basic weighted average shares outstanding	343,701			344,063
Diluted weighted average shares outstanding	352,230			352,825

See notes to condensed consolidated financial statements (unaudited).

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CERNER CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the three months ended March 29, 2014 and March 30, 2013

(unaudited)



	Three Months Ended
(In thousands)	2014		2013

Net earnings	$	119,526	$	110,040
Foreign currency translation adjustment and other (net of taxes of $367 and $1,846, respectively)	3,027		(9,208		)
Unrealized holding gain (loss) on available-for-sale investments (net of taxes of $62 and $115, respectively)	97		176

Comprehensive income	$	122,650	$	101,008

See notes to condensed consolidated financial statements (unaudited).

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CERNER CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the three months ended March 29, 2014 and March 30, 2013

(unaudited)



	Three Months Ended
(In thousands)	2014			2013

CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings	$	119,526		$	110,040
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization	70,094			59,341
Share-based compensation expense	13,649			10,594
Provision for deferred income taxes	2,490			1,427
Changes in assets and liabilities (net of businesses acquired):
Receivables, net	24,844			71,944
Inventory	3,903			2,105
Prepaid expenses and other	(16,823		)	(29,504		)
Accounts payable	(29,531		)	(11,183		)
Accrued income taxes	(22,197		)	4,922
Deferred revenue	22,279			2,960
Other accrued liabilities	(32,447		)	(8,998		)

Net cash provided by operating activities	155,787			213,648

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital purchases	(69,661		)	(49,451		)
Capitalized software development costs	(44,544		)	(34,334		)
Purchases of investments	(256,027		)	(312,845		)
Sales and maturities of investments	235,948			296,239
Purchase of other intangibles	(3,301		)	(23,307		)
Acquisition of businesses, net of cash acquired	—			(67,802		)

Net cash used in investing activities	(137,585		)	(191,500		)

CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt and capital lease obligations	(66		)	(9,750		)
Proceeds from excess tax benefits from share-based compensation	14,308			8,973
Proceeds from exercise of options	8,173			7,912
Treasury stock purchases	(75,026		)	(63,241		)
Contingent consideration payments for acquisition of businesses	—			(800		)
Cash grants	48,000			—
Other	2,894			475

Net cash used in financing activities	(1,717		)	(56,431		)

Effect of exchange rate changes on cash and cash equivalents	1,066			(1,379		)

Net increase (decrease) in cash and cash equivalents	17,551			(35,662		)
Cash and cash equivalents at beginning of period	202,377			317,120

Cash and cash equivalents at end of period	$	219,928		$	281,458

Summary of acquisition transactions:
Fair value of net tangible assets acquired	$	—		$	2,381
Fair value of intangible assets acquired	—			25,489
Fair value of goodwill	—			59,567
Less: Fair value of contingent liability payable	—			(18,982		)

Cash paid for acquisitions	—			68,455
Cash acquired	—			(653		)

Net cash used	$	—		$	67,802

See notes to condensed consolidated financial statements (unaudited).

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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 (we or 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 (GAAP) 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 management’s opinion, the accompanying unaudited condensed consolidated financial statements include all adjustments (consisting of only normal recurring adjustments) 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 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 first fiscal quarter ends on the Saturday closest to March 31. The 2014 and 2013 first quarters ended on March 29, 2014 and March 30, 2013, respectively. All references to years in these notes to condensed consolidated financial statements represent the respective three months ended on such dates, unless otherwise noted.

Stock Split

On May 24, 2013, the Board of Directors of the Company approved a two-for-one split of our common stock in the form of a 100% stock dividend, which was distributed on or about June 28, 2013 to shareholders of record as of June 17, 2013. In connection with the stock split, 3.0 million treasury shares, which represented the amount held in treasury on June 28, 2013, 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.

Available-for-sale Investments

Our short-term investments are primarily invested in time deposits, commercial paper, government and corporate bonds, with maturities of less than one year. Our long-term investments are primarily invested in government and corporate bonds with maturities of less than two years.

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(2) Fair Value Measurements

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


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


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


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

The following table details our financial assets measured and recorded at fair value on a recurring basis at March 29, 2014:



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

Money market funds	Cash equivalents	$	61,473	$	—	$	—
Time deposits	Cash equivalents	—		11,471		—
Government and corporate bonds	Cash equivalents	—		1,630		—
Time deposits	Short-term investments	—		71,523		—
Commercial paper	Short-term investments	—		28,508		—
Government and corporate bonds	Short-term investments	—		711,296		—
Government and corporate bonds	Long-term investments	—		424,015		—

The following table details our financial assets measured and recorded at fair value on a recurring basis at December 28, 2013:



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

Money market funds	Cash equivalents	$	57,254	$	—	$	—
Time deposits	Cash equivalents	—		7,771		—
Commercial paper	Cash equivalents	—		3,000		—
Government and corporate bonds	Cash equivalents	—		410		—
Time deposits	Short-term investments	—		70,315		—
Commercial paper	Short-term investments	—		33,742		—
Government and corporate bonds	Short-term investments	—		572,947		—
Government and corporate bonds	Long-term investments	—		542,711		—

We estimate the fair value of our long-term, fixed rate debt using a Level 3 discounted cash flow analysis based on current borrowing rates for debt with similar maturities. The fair value of our long-term debt, including current maturities, at March 29, 2014 and December 28, 2013 was approximately $33.1 million and $32.6 million, respectively. The carrying amount of such fixed-rate debt at March 29, 2014 and December 28, 2013 was $30.9 million and $30.6 million, respectively.

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(3) Investments

Available-for-sale investments at March 29, 2014 were as follows:



(In thousands)	Adjusted Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value

Cash equivalents:
Money market funds	$	61,473	$	—	$	—		$	61,473
Time deposits	11,471		—		—			11,471
Government and corporate bonds	1,630		—		—			1,630
Total cash equivalents	74,574		—		—			74,574

Short-term investments:
Time deposits	71,521		4		(2		)	71,523
Commercial paper	28,500		9		(1		)	28,508
Government and corporate bonds	710,928		519		(151		)	711,296
Total short-term investments	810,949		532		(154		)	811,327

Long-term investments:
Government and corporate bonds	423,887		335		(207		)	424,015

Total available-for-sale investments	$	1,309,410	$	867	$	(361	)	$	1,309,916

Available-for-sale investments at December 28, 2013 were as follows:



(In thousands)	Adjusted Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value

Cash equivalents:
Money market funds	$	57,254	$	—	$	—		$	57,254
Time deposits	7,771		—		—			7,771
Commercial paper	3,000		—		—			3,000
Government and corporate bonds	410		—		—			410
Total cash equivalents	68,435		—		—			68,435

Short-term investments:
Time deposits	70,303		12		—			70,315
Commercial paper	33,750		1		(9		)	33,742
Government and corporate bonds	572,670		356		(79		)	572,947
Total short-term investments	676,723		369		(88		)	677,004

Long-term investments:
Government and corporate bonds	542,644		346		(279		)	542,711

Total available-for-sale investments	$	1,287,802	$	715	$	(367	)	$	1,288,150

Investments reported under the cost method of accounting as of March 29, 2014 and December 28, 2013 were $8.2 million and $7.2 million, respectively. Investments reported under the equity method of accounting as of March 29, 2014 and December 28, 2013 were $4.8 million and $5.0 million, respectively.

We sold available-for-sale investments for proceeds of $54.8 million and $4.5 million during the three months ended March 29, 2014 and March 30, 2013, respectively, resulting in insignificant gains in each period.

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(4) Receivables

A summary of net receivables is as follows:



(In thousands)	March 29, 2014		December 28, 2013

Gross accounts receivable	$	563,581	$	583,312
Less: Allowance for doubtful accounts	37,781		36,286

Accounts receivable, net of allowance	525,800		547,026

Current portion of lease receivables	38,286		35,900

Total receivables, net	$	564,086	$	582,926

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 continue to be 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 final resolution of disputes between Fujitsu and the NHS regarding the contract termination. As of March 29, 2014, it remains unlikely that our matter with Fujitsu will be resolved in the next 12 months. Therefore, these receivables have been classified as long-term and represent less than the majority of other long-term assets at March 29, 2014 and December 28, 2013. 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 three months of 2014 and 2013, we received total client cash collections of $867.7 million and $784.0 million, respectively, of which $25.5 million and $14.6 million were received from third party arrangements with non-recourse payment assignments.

(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.

Our effective tax rate was 34.0% and 31.1% for the first three months of 2014 and 2013, respectively.

In January 2013, the American Taxpayer Relief Act of 2012 (Act) became law. The Act reinstated the research and development tax credit retroactively from January 1, 2012. In the first quarter of 2013, we recognized the research and development tax credit related to 2012 as a favorable discrete item and the credit related to 2013 as a component of the overall 2013 effective tax rate. This credit expired on December 31, 2013. The increase in our effective tax rate in 2014 relative to 2013 is due to the favorable discrete item recorded in the first quarter of 2013 for the retroactive extension of the 2012 credit and the expiration of the credit in 2014.

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(6) Earnings Per Share

A reconciliation of the numerators and the denominators of the basic and diluted per share computations are as follows:



	Three Months Ended
	2014					2013
	Earnings		Shares	Per-Share		Earnings		Shares	Per-Share
(In thousands, except per share data)	(Numerator)		(Denominator)	Amount		(Numerator)		(Denominator)	Amount

Basic earnings per share:
Income available to common shareholders	$	119,526	343,701	$	0.35	$	110,040	344,063	$	0.32
Effect of dilutive securities:
Stock options and non-vested shares	—		8,529			—		8,762
Diluted earnings per share:
Income available to common shareholders including assumed conversions	$	119,526	352,230	$	0.34	$	110,040	352,825	$	0.31

For the three months ended March 29, 2014 and March 30, 2013, options to purchase 3.7 million and 4.0 million shares of common stock at per share prices ranging from $41.08 to $60.37 and $30.42 to $47.37, respectively, were outstanding but were not included in the computation of diluted earnings per share because they were anti-dilutive.

(7) Share-Based Compensation and Equity

Stock Options

Options activity for the three months ended March 29, 2014 was as follows:



(In thousands, except per share data)	Number of Shares		Weighted- Average Exercise Price		Aggregate Intrinsic Value		Weighted-Average Remaining Contractual Term (Yrs)
Outstanding at beginning of year	24,407		$	22.24
Granted	540		60.21
Exercised	(894	)	10.59
Forfeited and expired	(68	)	38.14
Outstanding as of March 29, 2014	23,985		23.48		$	785,713	6.19

Exercisable as of March 29, 2014	13,830		$	11.30	$	620,300	4.74

The weighted-average assumptions used to estimate the fair value of stock options granted in 2014 were as follows:



Expected volatility (%)	29.7		%
Expected term (yrs)	9.2
Risk-free rate (%)	3.0		%
Fair value per option	$	26.29

As of March 29, 2014, there was $122.8 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 3.15 years.

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Non-vested Shares

Non-vested share activity for the three months ended March 29, 2014 was as follows:



(In thousands, except per share data)	Number of Shares	Weighted-Average Grant Date Fair Value

Outstanding at beginning of year	552	$	38.54
Granted	78	59.97
Vested	—	—
Forfeited	—	—

Outstanding as of March 29, 2014	630	$	41.19

As of March 29, 2014, there was $13.8 million of total unrecognized compensation cost related to non-vested share awards granted under all plans. That cost is expected to be recognized over a weighted-average period of 1.44 years.

The following table presents total compensation expense recognized with respect to stock options, non-vested shares and our associate stock purchase plan:



	Three Months Ended
(In thousands)	2014			2013

Stock option and non-vested share compensation expense	$	13,649		$	10,594
Associate stock purchase plan expense	1,283			831
Amounts capitalized in software development costs, net of amortization	(164		)	(199		)

Amounts charged against earnings, before income tax benefit	$	14,768		$	11,226

Amount of related income tax benefit recognized in earnings	$	5,184		$	4,356

Treasury Stock

In December 2013, our Board of Directors authorized a stock repurchase program of up to $217.0 million, excluding transaction costs, of our common stock. The repurchases were to be effectuated in the open market, by block purchase, or possibly through other transactions managed by broker-dealers. No time limit was set for completion of the program.

During the three months ended March 29, 2014, we repurchased 1.3 million shares for total consideration of $75.0 million. These shares were recorded as treasury stock and accounted for under the cost method. No repurchased shares have been retired. At March 29, 2014, $142.0 million remains available for purchases under the program.

(8) Hedging Activities

The following table represents the fair value of our net investment hedge included within the condensed consolidated balance sheets:



		Fair Value
(in thousands) Derivatives Designated	Balance Sheet Classification	March 29, 2014		December 28, 2013

Net investment hedge	Short-term liabilities	$	15,452	$	15,304
Net investment hedge	Long-term liabilities	15,452		15,304

Total net investment hedge		$	30,904	$	30,608

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The following table represents the related unrealized gain or loss, net of related income tax effects, on the net investment hedge recognized in comprehensive income:



(In thousands)		Net Unrealized Gain (Loss) For the Three Months Ended
Derivatives Designated	Balance Sheet Classification	2014			2013

Net investment hedge	Short-term liabilities	$	(91	)	$	532
Net investment hedge	Long-term liabilities	(91		)	1,063

Total net investment hedge		$	(182	)	$	1,595

(9) Contingencies

The terms of our software license agreements with our clients generally provide for a limited indemnification of such clients against losses, expenses and liabilities arising from third party claims based on alleged infringement by our solutions of an intellectual property right of such third party. The terms of such indemnification often limit the scope of and remedies for such indemnification obligations and generally include a right to replace or modify an infringing solution. To date, we have not had to reimburse any of our clients for any losses related to these indemnification provisions pertaining to third party intellectual property infringement claims. For several reasons, including the lack of prior indemnification claims and the lack of a monetary liability limit for certain infringement cases under the terms of the corresponding agreements with our clients, we cannot determine the maximum amount of potential future payments, if any, related to such indemnification provisions.

(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. “Other” includes expenses that have not been allocated to the operating segments, such as software development, marketing, general and administrative, share-based compensation expense and depreciation. Performance of the segments is assessed at the operating earnings level and, therefore, the segment operations have been presented as such. Items such as interest, income taxes, capital expenditures and total assets are managed at the consolidated level and thus are not included in our operating segment disclosures. Accounting policies for each of the reportable segments are the same as those used on a consolidated basis.

The following table presents a summary of our operating segments and other expense for the three months ended March 29, 2014 and March 30, 2013:



(In thousands)	Domestic		Global		Other			Total

Three Months Ended 2014
Revenues	$	697,704	$	87,057	$	—		$	784,761

Cost of revenues	115,345		13,754		—			129,099
Operating expenses	161,066		33,342		283,251			477,659
Total costs and expenses	276,411		47,096		283,251			606,758

Operating earnings (loss)	$	421,293	$	39,961	$	(283,251	)	$	178,003

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(In thousands)	Domestic		Global		Other			Total

Three Months Ended 2013
Revenues	$	576,639	$	103,390	$	—		$	680,029

Cost of revenues	106,697		20,532		—			127,229
Operating expenses	147,756		25,630		222,845			396,231
Total costs and expenses	254,453		46,162		222,845			523,460

Operating earnings (loss)	$	322,186	$	57,228	$	(222,845	)	$	156,569

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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 financial statements and the accompanying notes to the financial statements (Notes) found above.

Our first fiscal quarter ends on the Saturday closest to March 31. The 2014 and 2013 first quarters ended on March 29, 2014 and March 30, 2013, respectively. All references to years in this MD&A represent the respective three months ended on such dates, unless otherwise noted.

Except for the historical information and discussions contained herein, statements contained in this quarterly report on Form 10-Q 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 and Exchange Act of 1934, as amended (the Exchange Act). Forward-looking statements can often be identified by the use of forward-looking terminology, such as "could," "should," “will,” "intended," "continue," "believe," "may," "expect," "hope," "anticipate," "goal," "forecast," “plan,” “guidance” or “estimate” or the negative of these words, variations thereof or similar expressions. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, including without limitation: 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 and other combinations; the potential for losses resulting from asset impairment charges; risks associated with volatility and disruption resulting from global economic conditions; managing growth in the new markets in which we offer solutions, health care devices and services; changing political, economic, regulatory and judicial 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 and the timing and volume of market activity; the authority of our Board of Directors to issue preferred stock and anti-takeover provisions contained in our corporate governance documents; material adverse resolution of legal proceedings; 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 herein or therein by reference. Forward looking statements are not guarantees of future performance or results. The reader should not place undue reliance on forward-looking statements since the statements speak only as to the date they are made. 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, devices and services that give health care providers secure access to clinical, administrative and financial data in real time, allowing them to improve quality, safety and efficiency in the delivery of health care.

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 12% or more. This growth has also created an important strategic footprint in health care, with Cerner^® solutions licensed by approximately 14,000 facilities around the world, including more than 3,000 hospitals; 4,900 physician practices; 60,000 physicians; 590 ambulatory facilities, such as laboratories, ambulatory centers, behavioral health centers, cardiac facilities, radiology clinics and surgery centers; 3,500 extended care facilities; 150 employer sites and 1,790 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

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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 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^SM 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 more than 16% 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 accomplish by continuing to grow earnings and prudently managing capital expenditures.

Results Overview

The Company delivered strong levels of bookings, revenue, earnings, and operating cash flow in the first quarter of 2014.

New business bookings revenue, which reflects the value of executed contracts for software, hardware, professional services and managed services, was $910.2 million in the first quarter of 2014, which is an increase of 14% compared to $801.6 million in the first quarter of 2013. Revenues for the first quarter of 2014 increased 15% to $784.8 million compared to $680.0 million in the first quarter of 2013. The year-over-year increase in revenue reflects ongoing demand for Cerner's core solutions and services driven by the HITECH Act and other regulatory requirements, and increased contributions from Cerner ITWorks and Cerner revenue cycle solutions and services.

First quarter 2014 net earnings increased 9% to $119.5 million compared to $110.0 million in the first quarter of 2013. Diluted earnings per share increased 10% to $0.34 compared to $0.31 in the first quarter of 2013. The growth in net earnings and diluted earnings per share was driven by strong growth in services and higher margin components of system sales that more than offset a decline in technology resale. Additionally, our margin expansion initiatives, which include creating efficiencies in our implementation and operational processes, have contributed to our earnings growth.

First quarter 2014 and 2013 net earnings and diluted earnings per share reflect the impact of stock-based compensation expense. The effect of these expenses reduced the first quarter 2014 net earnings and diluted earnings per share by $9.6 million and $0.03, respectively, and the first quarter 2013 net earnings and diluted earnings per share by $6.9 million and $0.02, respectively.

We had cash collections of receivables of $867.7 million in the first quarter of 2014 compared to $784.0 million in the first quarter of 2013. Days sales outstanding was 66 days for the first quarter of 2014 compared to 67 days for the fourth quarter of 2013 and 69 days for the first quarter of 2013. Operating cash flows for the first quarter of 2014 were $155.8 million compared to $213.6 million in the first quarter of 2013.

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Results of Operations

Three Months Ended March 29, 2014 Compared to Three Months Ended March 30, 2013

The following table presents a summary of the operating information for the first quarters of 2014 and 2013:



(In thousands)	2014			% of Revenue		2013			% of Revenue		% Change
Revenues
System sales	$	206,687		26	%	$	198,902		29	%	4	%
Support and maintenance	174,930			22	%	160,957			24	%	9	%
Services	382,499			49	%	305,599			45	%	25	%
Reimbursed travel	20,645			3	%	14,571			2	%	42	%

Total revenues	784,761			100	%	680,029			100	%	15	%

Costs of revenue
Costs of revenue	129,099			16	%	127,229			19	%	1	%

Total margin	655,662			84	%	552,800			81	%	19	%

Operating expenses
Sales and client service	330,901			42	%	267,356			39	%	24	%
Software development	91,545			12	%	81,063			12	%	13	%
General and administrative	55,213			7	%	47,812			7	%	15	%

Total operating expenses	477,659			61	%	396,231			58	%	21	%

Total costs and expenses	606,758			77	%	523,460			77	%	16	%

Operating earnings	178,003			23	%	156,569			23	%	14	%

Other income, net	2,990					3,044
Income taxes	(61,467		)			(49,573		)

Net earnings	$	119,526				$	110,040				9	%

Revenues & Backlog

Revenues increased 15% to $784.8 million in the first quarter of 2014, as compared to $680.0 million in the first quarter of 2013.

•

System sales, which include revenues from the sale of 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 4% to $206.7 million in the first quarter of 2014 from $198.9 million for the same period in 2013. The increase in system sales was primarily driven by strong growth in software of $21.9 million, which was partially offset by a $19.8 million decline in technology resale.

•

Support and maintenance revenues increased 9% to $174.9 million in the first quarter of 2014 compared to $161.0 million during the same period in 2013. This increase was attributable to continued success at selling Cerner Millennium^® applications and implementing them at client sites. We expect that 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 25% to $382.5 million in the first quarter of 2014 from $305.6 million for the same period in 2013. This increase was driven by growth in CernerWorks^SMmanaged services of $11.9 million as a result of continued demand for our hosting services and a $65.0 million increase in professional services due to growth in implementation and consulting activities.

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Contract backlog, which reflects new business bookings that have not yet been recognized as revenue, increased 24% in the first quarter of 2014 when compared to the same period 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, Cerner revenue cycle solutions and services bookings that typically have longer contract terms. A summary of our total backlog follows:



(In thousands)	March 29, 2014		March 30, 2013

Contract backlog	$	8,448,933	$	6,831,667
Support and maintenance backlog	795,902		747,872

Total backlog	$	9,244,835	$	7,579,539

Costs of Revenue

Cost of revenues as a percentage of total revenues was 16% in the first quarter of 2014, compared to 19% in the same period of 2013. The lower cost of revenues as a percent of revenue was 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 21% to $477.7 million in the first quarter of 2014, compared with $396.2 million in the first quarter of 2013.

•

Sales and client service expenses as a percent of total revenues were 42% in the first quarter of 2014, compared to 39% in the same period of 2013. These expenses increased 24% to $330.9 million in the first quarter of 2014, from $267.4 million in the same period of 2013. 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 as a percent of revenue reflects a higher mix of services during the quarter that was driven by strong services revenue growth and the decline in technology resale revenue.

•

Software development expenses as a percent of revenue were 12% in the first quarters of 2014 and 2013. Expenditures for software development reflect ongoing development and enhancement of the Cerner Millennium platform, 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 the first quarters of 2014 and 2013 is as follows:



	Three Months Ended
(In thousands)	2014			2013

Software development costs	$	110,988		$	93,381
Capitalized software costs	(43,984		)	(33,820		)
Capitalized costs related to share-based payments	(560		)	(514		)
Amortization of capitalized software costs	25,101			22,016

Total software development expense	$	91,545		$	81,063

•

General and administrative expenses as a percent of total revenues were 7% in the first quarters of 2014 and 2013. These expenses increased 15% to $55.2 million in 2014, from $47.8 million for the same period in 2013. General and administrative expenses include salaries for corporate, financial and administrative staffs, utilities, communications expenses, professional fees, depreciation and amortization, transaction gains or losses on foreign

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currency and expense for share-based payments. The increase in general and administrative expenses was primarily driven by a $2.7 million increase in corporate personnel costs, as we have continued to increase such personnel to support our overall revenue growth, and a $1.2 million increase in amortization expense due to acquired intangibles.

Non-Operating Items


•	Other income was $3.0 million in the first quarters of 2014 and 2013.

•

Our effective tax rate was 34.0% for the first quarter of 2014 and 31.1% for the first quarter of 2013. This increase is a result of the favorable discrete item recorded in the first quarter of 2013 for the retroactive extension of the 2012 research and development credit and the expiration of the same credit at the end of 2013. Refer to Note (5) of the notes to condensed consolidated financial statements.

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, Brazil, Canada, Cayman Islands, Chile, Egypt, England, France, Germany, Guam, India, Ireland, Israel, Malaysia, Mexico, Qatar, Saudi Arabia, Singapore, Spain, Switzerland and the United Arab Emirates.

The following table presents a summary of the operating information for the first quarters of 2014 and 2013:



(In thousands)	2014			% of Revenue	2013			% of Revenue	% Change

Domestic Segment
Revenues	$	697,704		100%	$	576,639		100%	21%

Costs of revenue	115,345			17%	106,697			19%	8%
Operating expenses	161,066			23%	147,756			26%	9%
Total costs and expenses	276,411			40%	254,453			44%	9%

Domestic operating earnings	421,293			60%	322,186			56%	31%

Global Segment
Revenues	87,057			100%	103,390			100%	(16)%

Costs of revenue	13,754			16%	20,532			20%	(33)%
Operating expenses	33,342			38%	25,630			25%	30%
Total costs and expenses	47,096			54%	46,162			45%	2%

Global operating earnings	39,961			46%	57,228			55%	(30)%

Other, net	(283,251		)		(222,845		)		27%

Consolidated operating earnings	$	178,003			$	156,569			14%

Domestic Segment


•	Revenues increased 21% to $697.7 million in the first quarter of 2014 from $576.6 million in the same period of 2013. This increase was driven by growth across most of our business, partially offset by a $9.5 million decline in technology resale.


•	Cost of revenues was 17% of revenues in the first quarter of 2014, compared to 19% of revenues in the same period of 2013. 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.


•	Operating expenses increased 9% to $161.1 million in the first quarter of 2014 from $147.8 million in the same period of 2013, due primarily to growth in professional services expenses.

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Global Segment


•	Revenues decreased 16% to $87.1 million in the first quarter of 2014 from $103.4 million in the same period of 2013. This decrease was primarily driven by a decline in technology resale revenue. The first quarter 2013 comparable period included significant contributions to technology resale revenues from expansion of our footprint in the Middle East.


•	Cost of revenues was 16% in the first quarter of 2014 and 20% in the same period of 2013. The lower cost of revenues in 2014 was primarily driven by a lower mix of technology resale, which carries a higher cost of revenue.


•	Operating expenses were at $33.3 million in the first quarter of 2014, compared to $25.6 million in the same period of 2013, primarily due to an increase in bad debt 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 27% to $283.3 million in the first quarter of 2014 from $222.8 million in the same period of 2013. This increase was primarily due to a $51.5 million increase in corporate and development personnel costs, as we have increased such personnel to support our overall revenue growth and development initiatives. This was partially offset by a $7.1 million increase in net software capitalization.

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 March 29, 2014, we had cash and cash equivalents of $219.9 million and short-term investments of $811.3 million, as compared to cash and cash equivalents of $202.4 million and short-term investments of $677.0 million at December 28, 2013.

The non-U.S. subsidiaries for which we have elected to indefinitely reinvest earnings outside of the U.S. held approximately 15% of our aggregate cash, cash equivalents and short-term investments at March 29, 2014. 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.

Additionally, we maintain a $100.0 million multi-year revolving credit facility, which expires in February 2017. The facility provides an unsecured revolving line of credit for working capital purposes, along with a letter of credit facility. Interest is payable at a rate based on prime, LIBOR, or the U.S. federal funds rate, plus a spread that varies depending on the leverage ratios maintained. The agreement provides certain restrictions on our ability to borrow, incur liens, sell assets and pay dividends and contains certain cash flow and liquidity covenants. As of March 29, 2014, we were in compliance with all debt covenants. As of March 29, 2014, we had no outstanding borrowings under this agreement; however, we had $15.8 million of outstanding letters of credit, which reduced our available borrowing capacity to $84.2 million.

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 2014.

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The following table summarizes our cash flows in the first three months of 2014 and 2013:



	Three Months Ended
(In thousands)	2014			2013

Cash flows from operating activities	$	155,787		$	213,648
Cash flows from investing activities	(137,585		)	(191,500		)
Cash flows from financing activities	(1,717		)	(56,431		)
Effect of exchange rate changes on cash	1,066			(1,379		)
Total change in cash and cash equivalents	17,551			(35,662		)

Cash and cash equivalents at beginning of period	202,377			317,120

Cash and cash equivalents at end of period	$	219,928		$	281,458

Free cash flow (non-GAAP)	$	41,582		$	129,863

Cash from Operating Activities



	Three Months Ended
(In thousands)	2014			2013

Cash collections from clients	$	867,657		$	784,031
Cash paid to employees and suppliers and other	(628,484		)	(535,129		)
Cash paid for interest	(1,024		)	(1,378		)
Cash paid for taxes, net of refunds	(82,362		)	(33,876		)

Total cash from operations	$	155,787		$	213,648

Cash flow from operations decreased $57.9 million in the first three months of 2014 when compared to the same period of 2013 due primarily to cash used to fund working capital requirements, partially offset by an increase in cash impacting earnings. During the first three months of 2014 and 2013, we received total client cash collections of $867.7 million and $784.0 million, of which 3% and 2%, respectively, were received from third party client financing arrangements and non-recourse payment assignments. Days sales outstanding was 66 days in the first quarter of 2014, 67 days in the fourth quarter of 2013 and 69 days in the first quarter of 2013. Revenues provided under support and maintenance agreements represent recurring cash flows. Support and maintenance revenues increased 9% in the first three months of 2014 compared to the same period of 2013. We expect these revenues to continue to grow as the base of installed Cerner Millennium systems grows.

Cash from Investing Activities



	Three Months Ended
(In thousands)	2014			2013

Capital purchases	$	(69,661	)	$	(49,451	)
Capitalized software development costs	(44,544		)	(34,334		)
Purchases of investments, net of sales and maturities	(20,079		)	(16,606		)
Purchases of other intangibles	(3,301		)	(23,307		)
Acquisition of businesses, net of cash acquired	—			(67,802		)

Total cash flows from investing activities	$	(137,585	)	$	(191,500	)

Cash flows from investing activities consist primarily of capital spending and our short-term investment activities. The increased level of capital spending has been 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. Capital spending is expected to remain elevated in 2014, but is expected to moderate by the third or fourth quarter of the year, at which point free cash flow is expected to strengthen.

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Short-term investment activity consists of the investment of cash generated by our business in excess of what is necessary to fund operations. We expect to continue such short-term investment activity through 2014, as we expect strong levels of cash flow.

During 2013, we acquired the net assets of PureWellness and 100% of the outstanding stock of Labotix for $67.4 million, net of cash acquired. We expect to continue seeking and completing strategic business acquisitions that are complementary to our business.

Cash from Financing Activities



	Three Months Ended
(In thousands)	2014			2013

Repayment of long-term debt and capital lease obligations	$	(66	)	$	(9,750	)
Cash from option exercises (including excess tax benefits)	22,481			16,885
Treasury stock purchases	(75,026		)	(63,241		)
Cash grants	48,000			—
Other, net	2,894			(325		)

Total cash flows from financing activities	$	(1,717	)	$	(56,431	)

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 throughout 2014 based on the number of exercisable options as of March 29, 2014 and our current stock price.

In December 2013, our Board of Directors authorized a stock repurchase program of up to $217.0 million of our common stock. During the three months ended March 29, 2014, we repurchased 1.3 million shares for total consideration of $75.0 million. We may continue to repurchase shares under this program in 2014, which will be dependent on a number of factors, including the price of our common stock.

During the three months ended March 30, 2013, we purchased 1.4 million shares for total consideration of $63.2 million, under a separate program which is now complete. These shares were utilized to settle a portion of the stock split distribution, as further described in Note 1 of the notes to condensed consolidated financial statements.

In January 2014 we received $48.0 million of cash grants from the Kansas Department of Commerce for project costs in connection with the construction of our Continuous Campus.

Free Cash Flow



				Three Months Ended
(In thousands)				2014			2013

Cash flows from operating activities (GAAP)				$	155,787		$	213,648
Capital purchases				(69,661		)	(49,451		)
Capitalized software development costs				(44,544		)	(34,334		)

Free cash flow (non-GAAP)	$	(88,281	)	$	41,582		$	129,863

Free cash flow decreased $88.3 million in the first three months of 2014 compared to the same period in 2013. This decrease is primarily due to increased cash used to fund working capital requirements, increased capital spending to support our growth initiatives and facilities requirements, and increased capitalized spending to support our ongoing software development initiatives. 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. 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

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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.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

No material changes.

Item 4. 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 this quarterly report on Form 10-Q (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 to allow timely decisions regarding required disclosure.


b)	There were no changes in the Company’s internal controls over financial reporting during the fiscal quarter ended March 29, 2014, that have materially affected, or are reasonably likely to materially affect, the Company’s 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.

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Part II. Other Information

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The table below provides information with respect to Common Stock purchases by the Company during the first fiscal quarter of 2014.



(In thousands, except per share data)	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (a)	Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs (a)
Period	Total Number of Shares Purchased	Average Price Paid per Share
December 29, 2013 - January 25, 2014	—	—		—	$	217,000
January 26, 2014 - February 22, 2014	885	$	57.43	885	166,200
February 23, 2014 - March 29, 2014	395	61.21		395	142,000

Total	1,280	$	58.59	1,280

(a)

As announced on December 13, 2013, our Board of Directors authorized a stock repurchase program for an aggregate purchase of up to $217.0 million of our Common Stock. During the three months ended March 29, 2014, the Company repurchased 1.3 million shares for total consideration of $75.0 million pursuant to a Rule 10b5-1 plan. Refer to Note (7) of the notes to condensed consolidated financial statements for further information regarding our stock repurchase program.

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Item 6. Exhibits



(a)		Exhibits

10.1		2014 Executive Performance Agreement Pursuant to Cerner's Performance-Based Compensation Plan

31.1		Certification of Neal L. Patterson pursuant to Section 302 of Sarbanes-Oxley Act of 2002

31.2		Certification of Marc G. Naughton pursuant to Section 302 of Sarbanes-Oxley Act of 2002

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

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

101.INS		XBRL Instance Document

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

Table of Contents

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

Date: April 25, 2014	By:	/s/ Marc G. Naughton
		Marc G. Naughton
		Executive Vice President and Chief
		Financial Officer (duly authorized
		officer and principal financial officer)