CERNER CORP /MO/ - 10-Q Quarterly Report

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) with the Commission, and (2) has been subject to such filing requirements for the past 90 days.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

There were 35,426,698 shares of Common Stock, $.01 par value, outstanding at September 27, 2003.


Part I	Financial Information:
Item 1.	Financial Statements:
	Condensed Consolidated Balance Sheets as of September 27, 2003 (unaudited) and December 28, 2002	1
	Condensed Consolidated Statements of Earnings for the three and nine months ended September 27, 2003 and September 28, 2002 (unaudited)	2
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 27, 2003 and September 28, 2002 (unaudited)	3
	Notes to Condensed Consolidated Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	10
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	19
Item 4.	Controls and Procedures	19
Part II	Other Information:	19
Item 1.	Legal Proceedings	19
Item 6.	Exhibits and Reports on Form 8-K	20


			September 27,			December 28,
(In thousands)			2003			2002

			(unaudited)
Assets
	Current Assets:
	Cash and cash equivalents		$	119,805		$	142,543
	Receivables			252,296			272,668
	Inventory			10,435			9,041
	Prepaid expenses and other			24,680			23,434

	Total current assets			407,216			447,686
	Property and equipment, net			173,154			134,283
	Software development costs, net			134,820			117,327
	Goodwill, net			47,222			45,938
	Intangible assets, net			20,850			23,155
	Investments, net			1,156			964
	Other assets			7,344			9,926

			$	791,762		$	779,279

Liabilities and Stockholders’ Equity
	Current Liabilities:
	Accounts payable		$	29,255		$	46,822
	Current installments of long-term debt			12,235			12,202
	Deferred revenue			53,805			45,055
	Income taxes			12,919			4,691
	Accrued payroll and tax withholdings			38,952			47,262
	Other accrued expenses			10,832			9,519

	Total current liabilities			157,998			165,551
	Long-term debt			124,386			136,636
	Deferred income taxes			39,906			35,848
	Minority owners’ equity interest in subsidiary			1,166			—
	Stockholders’ Equity:
	Common stock, $.01 par value, 150,000,000 shares authorized, 36,929,697 shares issued at September 27, 2003 and 36,732,532 issued in 2002			369			367
	Additional paid-in capital			230,399			226,912
	Retained earnings			263,155			236,572
	Treasury stock, at cost (1,502,999 and 1,202,999 shares in 2003 and 2002, respectively)			(26,793	)		(20,863	)
	Accumulated other comprehensive income:
		Foreign currency translation adjustment		1,099			(1,668	)
		Unrealized gain/(loss) on available-for-sale equity securities (net of deferred tax liability of $43 for 2003 and deferred tax asset of $23 in 2002)		77			(76	)

		Total stockholders’ equity		468,306			441,244

			$	791,762		$	779,279

CERNER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)


		Three Months Ended						Nine Months Ended

		September			September			September			September
		27,			28,			27,			28,
		2003			2002			2003			2002

(In thousands, except per share data)
Revenues:
	System sales	$	80,193		$	84,866		$	241,529		$	239,401
	Support, maintenance and services		118,774			105,465			347,946			306,783
	Reimbursed travel		7,325			6,658			22,703			19,051

	Total revenues		206,292			196,989			612,178			565,235

Costs and expenses:
	Cost of revenues		45,435			43,829			146,783			135,660
	Sales and client service		84,794			82,166			259,531			233,421
	Software development		39,255			33,850			115,170			95,112
	General and administrative		15,083			13,216			41,374			37,558

	Total costs and expenses		184,567			173,061			562,858			501,751

Operating earnings			21,725			23,928			49,320			63,484
Other income (expense):
	Interest expense, net		(1,703	)		(1,245	)		(5,152	)		(4,141	)
	Other income		24			33			167			64
	Gain on sale of investment		—			—			—			4,308

	Total other, net		(1,679	)		(1,212	)		(4,985	)		231

Earnings before income taxes and cumulative effect of a change in accounting principle			20,046			22,716			44,335			63,715
Income taxes			(7,999	)		(8,948	)		(17,752	)		(24,851	)

Earnings before cumulative effect of a change in accounting principle			12,047			13,768			26,583			38,864
Cumulative effect of a change in accounting for goodwill, net of $486 income tax benefit			—			—			—			786

Net earnings			12,047			13,768			26,583			38,078

Basic earnings per share:
Earnings before cumulative effect of a change in accounting principle		$	.34		$	.39		$	.75		$	1.10
Cumulative effect of a change in accounting for goodwill			—			—			—			(.02	)

Net earnings per share		$	.34		$	.39		$	.75		$	1.08

Basic weighted average shares outstanding			35,359			35,496			35,437			35,438
Diluted earnings per share:
Earnings before cumulative effect of a change in accounting principle		$	.33		$	.37		$	.73		$	1.05
Cumulative effect of a change in accounting for goodwill			—			—			—			(.02	)

Net earnings per share		$	.33			.37		$	.73			1.03

Diluted weighted average shares outstanding			36,365			36,913			36,259			37,189

CERNER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)


			Nine Months Ended

			September 27, 2003			September 28, 2002

(In thousands)
Cash flows from operating activities:
	Net earnings		$	26,583		$	38,078
	Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
		Depreciation and amortization		50,172			41,521
		Goodwill impairment		—			1,272
		Gain on sale of investment		—			(4,308	)
		Non-employee stock option compensation expense		23			34
		Provision for deferred income taxes		4,174			1,519
		Payment of tax on gain from the sale of WebMD		—			(31,200	)
	Changes in assets and liabilities:
		Receivables, net		24,703			(42,489	)
		Inventory		(1,394	)		(2,351	)
		Prepaid expenses and other		(3,559	)		(7,948	)
		Accounts payable		(17,270	)		14,613
		Accrued income taxes		7,964			14,326
		Deferred revenue		8,018			(23,343	)
		Other accrued liabilities		(7,589	)		(5,356	)

	Total adjustments			65,242			(43,710	)

	Net cash provided by (used in) operating activities			91,825			(5,632	)

Cash flows from investing activities:
		Purchase of capital equipment		(17,380	)		(29,279	)
		Purchase of land, buildings and improvements		(40,716	)		(18,822	)
		Acquisition of business, net of cash aquired		—			(19,129	)
		Proceeds from sale of available-for-sale securities		—			90,119
		Repayment of notes receivable		305			—
		Capitalized software development costs		(43,720	)		(36,089	)

	Net cash used in investing activities			(101,511	)		(13,200	)

Cash flows from financing activities:
		Proceeds from issuance of long-term debt		867			10,102
		Repayment of long-term debt		(13,084	)		(12,808	)
		Purchase of treasury stock		(5,930	)		—
		Proceeds from exercise of options		3,893			2,726
		Associate stock purchase plan discounts		(427	)		(430	)

	Net cash used in financing activities			(14,681	)		(410	)

Foreign currency translation adjustment				1,478			264

Increase in cash from the consolidation of a variable interest entity				151			—

	Net decrease in cash and cash equivalents			(22,738	)		(18,978	)
	Cash and cash equivalents at beginning of period			142,543			107,536

	Cash and cash equivalents at end of period		$	119,805		$	88,558

CERNER CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The consolidated financial statements included herein have been prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s latest annual report on Form 10-K.

In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position, and the results of operations and cash flows for the periods presented. The results of the three and nine-month periods are not necessarily indicative of the operating results for the entire year. Certain prior year amounts have been reclassified to conform with current year presentation.

Statement of Financial Accounting Standards No. 130, “Reporting Comprehensive Income,” establishes requirements for reporting and display of comprehensive income and its components. For the nine months ended September 27, 2003 and September 28, 2002, total Comprehensive Income, which includes net earnings, foreign currency translation adjustments and unrealized gains and losses on available-for-sale equity security adjustments, amounted to $29,503,000 and $26,326,000, respectively.

The Company incurs out-of-pocket expenses in connection with its client service activities, which are reimbursed by its clients. The amounts of “out-of-pocket” expenses, which are included in the cost of revenues in the accompanying Statement of Earnings, and equal amounts of related reimbursements were $7,325,000 and $6,658,000 for the three months and $22,703,000 and $19,051,000 for the nine months ended September 27, 2003 and September 28, 2002, respectively.

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

On September 27, 2003, the Company adopted Financial Accounting Standards Board Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities an Interpretation of APB No. 51.” The Interpretation provides guidance on the identification of entities for which control is achieved through means other than through voting rights (“variable interest entities” or “VIEs”) and how to determine when and which business enterprises should consolidate the VIE (the “primary beneficiary”). In addition, FIN 46 requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures.

For the three-month and nine-month period ended September 27, 2003, the Company consolidated the operations of Cerner Arabia Ltd (“Cerner Arabia”). Cerner Arabia is a software company located in Riyadh. Revenues are derived primarily from the sale of clinical, financial and administrative information systems and solutions. The consolidation of Cerner Arabia resulted in an increase to revenues of $291,000 and net earnings of $39,000 for the nine-month period ended September 27, 2003.

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


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

		For the quarterly period ended September 27, 2003

		OR

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

		For the transition period from to


Delaware		43-1196944

(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)


Part I. Financial Information
	Item 1. Financial Statements
		CONDENSED CONSOLIDATED BALANCE SHEETS
		CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures about Market Risk
	Item 4. Controls and Procedures
Part II. Other Information
	Item 1. Legal Proceedings
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EX-31.1 Certification of CEO - Rule 13a-15(e)
EX-31.2 Certification of CFO - Rule 13a-15(e)
EX-32.1 Certification of CEO - Section 906
EX-32.2 Certification of CFO - Section 906

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