The ABCs of systemic healthcare reform - Cerner Corporation

Liquidity and Capital Resources
The Company's liquidity is influenced by many factors, including the amount and timing of the Company's revenues, its cash
collections from its clients and the amounts the Company invests in software development, acquisitions and capital
expenditures.
The Company’s principal source of liquidity is its cash, cash equivalents and short-term investments. The majority of the
Company’s cash and cash equivalents consist of money market funds. At January 3, 2009 the Company had cash and cash
equivalents of $270,494,000, short-term investments of $38,400,000 and working capital of $517,650,000 compared to cash
and cash equivalents of $182,914,000, short-term investments of $161,600,000 and working capital of $530,441,000 at
December 29, 2007.
At January 3, 2009, more than 10 percent of total net receivables represent accounts receivable and contracts receivable
related to a contract with Fujitsu that was terminated in the second quarter of 2008 when Fujitsu withdrew from the National
Health Service (NHS) initiative to automate clinical processes and digitize medical records in the Southern region of England.
The Company expects to collect these receivables in full based on the terms of the contract.
At January 3, 2009, the Company held auction rate securities with a par value of $105,300,000 and an estimated fair value of
$85,440,000. In February and March 2008, liquidity issues in the global credit markets resulted in the progressive failure of
auctions representing all the auction rate securities held by Cerner. These conditions persisted through the remainder of 2008
and into 2009. In November 2008, the Company entered into a settlement agreement with the investment firm that sold the
Company its auction rate securities. Under the terms of the settlement agreement the Company received the right to redeem
the securities at par value during a period from mid-2010 through mid-2012. The right to redeem the securities is being treated
similar to a put option, which the Company has elected to measure under the fair value option of Statement of Financial
Accounting Standards No. 159 (SFAS No. 159), “The Fair Value Option for Financial Assets and Financial Liabilities.” The
Company’s valuation model resulted in a pre-tax, estimated value of $19,860,000 for the value of the put-like settlement
feature, which such gain was recognized through other income.
Concurrently with the recognition of the put-like feature, the Company transferred the auction rate securities from available-forsale
to trading securities. As a result of the transfer, the Company recognized a pre-tax, other than temporary impairment loss
of approximately $19,860,000 in other income. The recording of the put-like feature and the recognition of the other than
temporary impairment loss on the securities resulted in no impact to the Consolidated Statements of Operating Earnings for the
year ended January 3, 2009. The Company anticipates that any future changes in the fair value of the put-like feature will be
offset by the changes in the fair value of the related auction rate securities with no material net impact to the Consolidated
Statements of Earnings. For a more detailed discussion of the auction rate securities situation, please refer to Note (7) to the
consolidated financial statements. Cerner does not expect the auction failures to impact the Company’s ability to fund its
working capital needs, capital expenditures or other business requirements.
Cash Flows from Operating Activities
The Company generated cash of $281,802,000, $274,565,000, and $232,718,000 from operations in 2008, 2007, and
2006, respectively. Cash flow from operations increased in 2008 due primarily to the increase in net earnings which was
partially offset by changes in working capital. The Company has periodically provided long-term financing options to
creditworthy clients through third party financing institutions and has directly provided extended payment terms to clients from
contract date. These extended payment term arrangements typically provide for date based payments over periods ranging
from 12 months to seven years. Pursuant to SOP 97-2, because a significant portion of the fee is due beyond one year, we have
analyzed our history with these types of arrangements and have concluded that we do have a standard business practice of
using extended payment term arrangements and have a long history of successfully collecting under the original payment terms
for arrangements with similar clients, product offerings and economics without granting concessions. Accordingly, we consider
the fee to be fixed and determinable in these extended payment term arrangements and, thus, the timing of revenue is not
impacted by the existence of extended payments. Some of these payment streams have been assigned on a non-recourse
basis to third party financing institutions. The Company has provided its usual and customary performance guarantees to the
third party financing institutions in connection with its on-going obligations under the client contract. During 2008, 2007, and
2006, the Company received total client cash collections of $1,729,526,000, $1,646,584,000, and $1,457,603,000,
respectively, of which approximately 5%, 5%, and 7% were received from third party client financing arrangements and nonrecourse
payment assignments, respectively. The days sales outstanding increased to 92 days for the quarter ended January 3,
2009 compared to 90 days for the quarter ended December 29, 2007. Revenues provided under support and maintenance
agreements represent recurring cash flows. Support and maintenance revenues increased 19% in 2008 and 17% in 2007, and
the Company expects these revenues to continue to grow as the base of installed Cerner Millennium systems grows.
Cash Flows from Investing Activities
Cash used in investing activities in 2008 consisted primarily of capital purchases of $108,099,000, which includes
$89,904,000 of capital equipment and $18,195,000 of land, buildings and improvements. Capitalized software development
costs were $70,098,000 in 2008. Payments aggregating $5,719,000 were made during 2008 for an acquisition of a business
and an earnout payment related to a 2005 acquisition. Cash received from short-term investments, net of purchases was
$17,510,000 in 2008. Cash used in investing activities in 2007 consisted primarily of capital purchases of $180,723,000,
which includes $105,678,000 of capital equipment and $75,045,000 of land, buildings and improvements. Capitalized
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