CERNER (CERN) 10-Q 2006 Q1 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

      (Mark One)

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

For the quarterly period ended April 1, 2006

OR

o 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	(I.R.S. Employer
of incorporation or organization)	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) with the Commission, and (2) has been subject to such filing requirements for the past 90 days.

Yesþ Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filerþ Accelerated filero Non-accelerated filero

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yeso Noþ

     There were 77,511,729 shares of Common Stock, $.01 par value, outstanding at May 9, 2006.

CERNER CORPORATION AND SUBSIDIARIES

I N D E X

Part I.	Financial Information:
Item 1.	Financial Statements:
	Condensed Consolidated Balance Sheets as of April 1, 2006 (unaudited) and December 31, 2005	1
	Condensed Consolidated Statements of Earnings for the three months ended April 1, 2006 and April 2, 2005 (unaudited)	2
	Condensed Consolidated Statements of Cash Flows for the three months ended April 1, 2006 and April 2, 2005 (unaudited)	3
	Notes to Condensed Consolidated Financial Statements (unaudited)	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	17
Item 4.	Controls and Procedures	17
Part II.	Other Information:	17
Item 6.	Exhibits	17
Certification of Chairman of the Board and CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Certification Pursuant to 18 U.S.C. Section 1350
Certification Pursuant to 18 U.S.C. Section 1350

Part I. Financial Information

Item 1. Financial Statements

CERNER CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	April 1,		December 31,
	2006		2005
(In thousands, except share data)	(unaudited)
Assets
Current Assets:
Cash and cash equivalents	$	103,890	$	113,057
Short-term investments		174,929		161,230
Receivables, net		320,439		316,965
Inventory		12,297		9,585
Prepaid expenses and other		49,844		42,685
Deferred income taxes		7,338		8,109
Total current assets		668,737		651,631
Property and equipment, net		309,313		292,608
Software development costs, net		177,047		172,548
Goodwill, net		118,143		116,142
Intangible assets, net		58,842		60,448
Other assets		10,710		10,252
Total Assets	$	1,342,792	$	1,303,629
Liabilities and Shareholders’ Equity
Current Liabilities:
Accounts payable	$	58,065	$	65,377
Current installments of long-term debt		28,569		28,743
Deferred revenue		87,711		79,890
Accrued payroll and tax withholdings		65,939		66,002
Other accrued expenses		20,777		20,078
Total current liabilities		261,061		260,090
Long-term debt		191,555		194,265
Deferred income taxes		74,668		72,922
Deferred revenue		16,415		14,533
Minority owners’ equity interest in subsidiaries		1,286		1,286
Shareholders’ Equity:
Common stock, $.01 par value, 150,000,000 shares authorized, 77,408,788 shares issued at April 1, 2006 and 77,011,464 issued at December 31, 2005		774		770
Additional paid-in capital		341,396		325,134
Retained earnings		450,406		430,262
Accumulated other comprehensive income:
Foreign currency translation adjustment		5,231		4,367
Total shareholders’ equity		797,807		760,533
Total liabilities and shareholders’ equity	$	1,342,792	$	1,303,629

See notes to condensed consolidated financial statements.

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CERNER CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(UNAUDITED)

	Three Months Ended
	April 1,			April 2,
	2006			2005
(In thousands, except per share data)
Revenues:
System sales	$	116,850		$	99,942
Support, maintenance and services		195,585			156,001
Reimbursed travel		8,789			6,591
Total revenues		321,224			262,534
Costs and expenses:
Cost of System Sales		46,165			36,034
Cost of support, maintenance and services		13,064			12,783
Cost of reimbursed travel		8,789			6,591
Sales and client service		139,524			110,840
Software development		59,017			49,329
General and administrative		22,671			17,922
Write off of in-process research and development		—			6,382
Total costs and expenses		289,230			239,881
Operating earnings		31,994			22,653
Other income (expense):
Interest expense, net		(693	)		(1,742	)
Other income		2,125			30
Total other expense, net		1,432			(1,712	)
Earnings before income taxes		33,426			20,941
Income taxes		(13,282	)		(8,421	)
Net earnings		20,144			12,520
Basic earnings per share	$	0.26		$	0.17
Basic weighted average shares outstanding		77,156			73,480
Diluted earnings per share	$	0.25		$	0.16
Diluted weighted average shares outstanding		81,406			76,588

See notes to condensed consolidated financial statements.

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CERNER CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Three Months Ended
	April 1, 2006			April 2, 2005
(In thousands)
Cash flows from operating activities:
Net earnings	$	20,144		$	12,520
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization		29,907			26,683
Share-based compensation expense		4,715			—
Write-off of acquired in process research and development		—			6,382
Provision for deferred income taxes		1,141			871
Tax benefit from disqualifying dispositions of stock options		4,419			—
Excess tax benefits from share based compensation		(3,080	)		—
Changes in assets and liabilities, net of businesses acquired and sold:
Receivables, net		(3,591	)		8,363
Inventory		(2,698	)		(745	)
Prepaid expenses and other		(10,684	)		(3,605	)
Accounts payable		(884	)		(6,322	)
Accrued income taxes		1,522			(1,931	)
Deferred revenue		9,643			(2,000	)
Other accrued liabilities		635			4,108
Total adjustments		31,044			31,804
Net cash provided by operating activities		51,189			44,324
Cash flows from investing activities:
Purchase of capital equipment		(21,187	)		(11,392	)
Purchase of land, buildings and improvements		(16,494	)		(1,702	)
Acquisition of businesses, net of cash acquired		—			(101,977	)
Net purchases in short-term investments		(12,772	)		—
Repayment of notes receivable		—			20
Capitalized software development costs		(15,749	)		(16,510	)
Net cash used in investing activities		(66,202	)		(131,561	)
Cash flows from financing activities:
Proceeds from revolving line of credit		—			35,000
Repayment of revolving line of credit and long-term debt		(2,887	)		(15,669	)
Excess tax benefits from share based compensation		3,080			—
Proceeds from exercise of options		5,849			5,720
Associate stock purchase plan discounts		—			(205	)
Net cash provided by financing activities		6,042			24,846
Effect of exchange rate changes on cash		(196	)		(713	)
Net decrease in cash and cash equivalents		(9,167	)		(63,104	)
Cash and cash equivalents at beginning of period		113,057			189,784
Cash and cash equivalents at end of period	$	103,890		$	126,680
Supplemental disclosures of cash flow information
Cash paid during the year for:
Income taxes, net of refund	$	6,707		$	9,757
Non-cash changes resulting from acquisitions:
Increase in accounts receivable		—			10,158
Increase in property and equipment, net		—			1,282
Increase in goodwill and intangibles		—			105,361
Increase in deferred revenue		—			(6,954	)
Increase in long term debt		—			(2,822	)
Decrease in other working capital components		—			(5,048	)
Total		—			101,977

See notes to condensed consolidated financial statements.

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CERNER CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(1) Interim Statement Presentation & Accounting Policies

The condensed 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 condensed 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 for the three-month period are not necessarily indicative of the operating results for the entire year.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Statement of Financial Accounting Standards (SFAS) No. 130, “Reporting Comprehensive Income,” establishes requirements for reporting and display of comprehensive income and its components. Total Comprehensive Income, which includes net earnings, foreign currency translation adjustments, and gains and losses from a hedge of the Company’s net investment in the United Kingdom, amounted to $21,008,000 and $11,058,000 for the three months ended April 1, 2006 and April 2, 2005, respectively. On January 3, 2006, the Company designated a notional amount of approximately 59,700,000 GBP of its GBP-denominated long-term debt as a net investment hedge of its U.K. operations. The objective of the hedge is to reduce the Company’s foreign currency exposure in the U.K. Changes in the exchange rate between the USD and GBP related to the notional amount of the hedge are being recognized as a component of accumulated other comprehensive income and the net loss totaled approximately $836,000 for the three months ended April 1, 2006.

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.

(2) 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 the earnings of the Company. A reconciliation of the numerators and denominators of the basic and diluted per-share computations is as follows:

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	Three months ended						Three months ended
	April 1, 2006						April 2, 2005
	Earnings		Shares		Per-Share		Earnings		Shares		Per-Share
	(Numerator)		(Denominator)		Amount		(Numerator)		(Denominator)		Amount
(In thousands, except per share data)
Basic earnings per share:
Income available to common shareholders	$	20,144		77,156	$	.26	$	12,520		73,480	$	.17
Effect of dilutive securities:
Stock options		—		4,250				—		3,108
Diluted earnings per share:
Income available to common shareholders including assumed conversions	$	20,144		81,406	$	.25	$	12,520		76,588	$	.16

Options to purchase 551,000 and 1,214,000 shares of common stock at per share prices ranging from $33.86 to $136.86 and $25.44 to $136.86 were outstanding at the three-months ended April 1, 2006 and April 2, 2005, respectively, but were not included in the computation of diluted earnings per share because the options were anti-dilutive.

(3) Accounting for Share-Based Awards

On January 1, 2006, the Company adopted SFAS No. 123(R), “Share-Based Payments,” using the modified prospective method of adoption. SFAS 123R replaces SFAS 123, “Accounting for Stock-Based Compensation,” and supersedes Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS No. 123R addresses the accounting for share-based payment transaction with employees and other third parties and requires that the compensation costs relating to such transactions be recognized in the consolidated statement of earnings.

The impact of adopting SFAS 123R had the following cumulative effects:

(In thousands, except per share data)
Change on income before income taxes	$	4,715
Change on net earnings		2,912
Change on cash flows from operations		(3,080	)
Change on cash flows from financing activities		3,080
Change on basic earnings per share		.04
Change on diluted earnings per share		.03

Prior to the adoption of SFAS 123R, the Company applied the intrinsic-value-based method of accounting prescribed by APB opinion No. 25 to account for its fixed-plan stock options. Under this method, compensation expense was recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. As previously allowed under SFAS 123, the Company only adopted the disclosure requirements of SFAS 123, which established a fair-value-based method of accounting for stock-based employee compensation plans. The following is a reconciliation of reported net earnings to adjusted net earnings had the Company recorded compensation expense based on the fair value at the grant date for its stock options under SFAS 123 for the three months ended April 2, 2005.

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	Three months
	ended
(In thousands, except per share data)	April 2, 2005
Reported net earnings	$	12,520
Less: stock-based compensation expense determined under fair-value-based method for all awards		(2,045	)
Pro-forma net earnings		10,475
Basic earnings per share:
Reported net earnings	$	.17
Less: stock-based compensation expense determined under fair-value-based method for all awards, net of tax		(.03	)
Pro-forma net earnings		.14
Diluted earnings per share:
Reported net earnings	$	.16
Less: stock-based compensation expense determined under fair-value-based method for all awards		(.02	)
Pro-forma net earnings		.14

As of April 1, 2006, the Company had four fixed stock option and equity plans for associates, which are described below. Amounts recognized in the consolidated financial statements with respect to these plans are as follows:

	Three months			Three months
	ended			Ended
	April 1, 2006			April 2, 2005
Total cost of share-based payments for the quarter		4,954,000			87,000
Amounts capitalized in software development costs		(239,000	)		—
Amounts charged against earnings, before income tax benefit		4,715,000			87,000
Amount of related income tax benefit recognized in earnings		1,803,000			35,000

During the first quarter of 2006, the Company had two long-term incentive plans from which it could issue grants.

Under the 2001 Long-Term Incentive Plan F, the Company is authorized to grant to associates, directors and consultants 4,000,000 shares of common stock awards taking into account the stock-split effective January 10, 2006. Awards under this plan may consist of stock options, restricted stock and performance shares, as well as other awards such as stock appreciation rights, phantom stock and performance unit awards which may be payable in the form of common stock or cash. However, not more than 1,000,000 of such shares will be available to granting any types of grants other than options or stock appreciation rights. Options under Plan F are exercisable at a price not less than fair market value on the date of grant as determined by the Stock Option Committee. Options under this plan typically vest over a period of five years as determined by the Stock Option Committee and are exercisable for periods of up to 25 years.

Long-Term Incentive Plan G was approved by the Company’s shareholders on May 28, 2004. Under the 2004 Long-Term Incentive Plan G, the Company is authorized to grant to associates and directors 4,000,000 shares of common stock awards taking into account the stock-split effective January 10, 2006. Awards under this plan may consist of stock options, restricted stock and performance shares, as well as other awards such as stock appreciation rights, phantom stock and performance unit awards which may be payable in the form of common stock or cash. Options under Plan G are exercisable at a price not less than fair market value on the date of grant as determined by the Stock Option Committee. Options under this plan typically vest over a period of five years as determined by the Stock Option Committee and are exercisable for periods of up to 12 years.

The Company has also granted 1,708,170 other non-qualified stock options over time through April 1, 2006, under separate agreements to employees and certain third parties. These options are exercisable

6

at a price equal to or greater than the fair market value on the date of grant. These options vest over periods of up to six years and are exercisable for periods of up to 10 years.

The fair value of each stock option award is estimated on the date of grant using a lattice option-pricing model for the three months ended April 1, 2006 and using the Black-Scholes option-pricing model for the three months ended April 2, 2005 based on the assumptions noted in the following table. Expected volatilities under the lattice model are based on an equal weighting of implied volatilities from traded options on the Company’s shares and historical volatility. Expected volatilities under the Black-Scholes model was based entirely on historical volatility. The Company uses historical data to estimate stock option exercise and associate departure behavior used in the lattice model; groups of associates (executives and non-executives) that have similar historical behavior are considered separately for valuation purposes. The expected term of stock options granted is derived from the output of the lattice option-pricing model and represents the period of time that stock options granted are expected to be outstanding; the range given below results from certain groups of associates exhibiting different post-vesting behaviors. The expected term under the Black-Scholes model was determined using the simplified method of estimating the term as allowed under Staff Accounting Bulletin 107. The risk-free rate used in 2006 and 2005 is based on the zero-coupon U.S. Treasury bond with a term equal to the expected term of the awards.

	Three months ended			Three months ended
	April 1, 2006			April 2, 2005
Expected volatility		47.7	%		66.2	%
Expected term (in years)		7.7 — 8.58			6.6
Risk-free rate		4.7	%		4.3	%

     A combined summary of the stock option activity of the Company’s four fixed stock option and equity plans (Non-Qualified Stock option Plans D and E were in effect during 2003 and 2004; no grants were permitted to be issued from Plans D and E after January 1, 2005 pursuant to the terms of the Plans) and other stock options as of April 1, 2006 and changes during the quarter ended April 1, 2006 is presented below:

	Three months ended April 1,
	2006
				Weighted-
	Number of			average		Aggregate
Fixed options	Shares			exercise price		Intrinsic Value
Outstanding at beginning of year		11,039,522		$	18.51
Granted		297,200			43.58
Exercised		(395,658	)		15.86
Forfeited or expired		(50,482	)		23.19
Outstanding at April 1, 2006		10,890,582		$	19.27	$	307,064,000
Options exercisable at April 1, 2006		4,731,282		$	15.46	$	151,532,000

     The following table summarizes information about fixed and other stock options outstanding at April 1, 2006.

	Options outstanding							Options exercisable
			Weighted-							Weighted-
	Number		average			Weighted-		Number		average	Weighted-
Range of	outstanding		remaining			average		exercisable at		remaining	average
Exercise Prices	at 4/1/06		contractual life			exercise price		4/1/06		contractual life	exercise price
$ 6.25 —  11.78		2,824,847	9.03		years	$	9.19		1,414,115		$	8.77
11.81 —  19.58		2,825,528		8.16			15.09		1,962,198			14.75
19.59 —  24.60		2,825,473		6.79			22.05		1,000,729			22.18
24.68 — 136.86		2,414,734		8.50			32.70		354,240			27.08
		10,890,582		8.10			19.27		4,731,282	8.39 years		15.46

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The weighted-average grant date fair value of stock options granted during the first quarter of 2006 and 2005 was $22.43 and $13.38, respectively. The total intrinsic value of stock options exercised during the first quarter of 2006 and 2005 was $11,554,000 and $6,014,000 respectively. The Company issues new shares to satisfy option exercises.

The Company also has an Associate Stock Purchase Plan (ASPP), which qualifies under Section 423 of the Internal Revenue Code. All full-time USD paid associates are eligible to participate. Participants may elect to make contributions from 1% to 20% of compensation to the ASPP, subject to annual limitations determined by the Internal Revenue Service. Participants may purchase Company Common Stock at a 15% discount on the last day of the purchase period. Previously under APB No. 25 the ASPP qualified as a non-compensatory plan and no compensation expense was recognized. Under FAS 123R, the Company expenses the entire 15% discount. The purchase of the Company’s common stock is made through the ASPP on the open market and subsequently reissued to the associates.

The Company granted 15,000 shares of restricted stock from Plan F to members of the Board of Directors on July 6, 2004 valued at $21.16 and vesting on May 26, 2005. The Company made additional grants of restricted stock from Plan F to members of the Board of Directors during 2005. 5,000 shares of restricted stock were granted on April 4, 2005 valued at $26.19, vesting as follows: 1,666 on February 2, 2006; 1,666 on February 2, 2007; and, 1,668 on February 2, 2008. 25,000 shares of restricted stock were granted on June 3, 2005 valued at $31.41, vesting on May 25, 2006. The Company granted 5,000 shares of restricted stock from Plan G to a member of the Board of Directors on June 3, 2005 valued at $31.41, vesting as follows: 1,666 on May 25, 2006; 1,666 on May 24, 2007; and, 1,668 on May 22, 2008. All grants were valued at the fair market value on the date of grant and vest provided the recipient has continuously served on the Board of Directors through such vest date. The expense associated with these grants is being recognized over the period from the date of grant to the vesting date. The Company recognized expenses related to the restricted stock of $234,000 and $87,000 in the first quarter of 2006 and 2005, respectively.

A summary of the Company’s nonvested shares as of April 1, 2006, and changes during the quarter ended April 1, 2006 is presented below:

				Weighted-
				Average
	Number of			Grant Date
Nonvested stock	Shares			Fair Value
Outstanding at beginning of year		40,000		$	30.80
Granted		—			—
Vested		(1,666	)	$	26.19
Forfeited		—			—
Outstanding at April 1, 2006		38,334		$	31.00

As of April 1, 2006 there was $30,533,000 of total unrecognized compensation cost related to nonvested share-based compensation arrangements (including stock option and nonvested share awards) granted under all plans. That cost is expected to be recognized over a weighted-average period of 1.65 years. The total fair value of shares vested during the quarter ended April 1, 2006 was $81,000. No shares vested during the quarter ended April 2, 2005.

(4) Business Acquisition and Divestiture

On January 3, 2005, the Company completed the purchase of assets of the medical business division of VitalWorks, Inc. for approximately $100,000,000, which was funded with existing cash of approximately $65,000,000 and borrowings on the revolving line of credit of approximately $35,000,000. The medical business consists of delivering and supporting physician practice management, electronic medical record, electronic data interchange and emergency department information solutions and related products and services to physician practices, hospital emergency departments, management service organizations and other related entities. The acquisition of VitalWorks’ medical business division expanded the Company’s presence in the physician practice market. $6,382,000 of the purchase price was allocated to in-process research and development that had not reached technological feasibility and is reflected as a charge to earnings in 2005. The allocation of the purchase price to the estimated fair values of the identified tangible and intangible assets acquired and liabilities assumed, resulted in goodwill of $55,166,000 and $43,450,000 in intangible assets that will be amortized over five years.

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(5) Receivables

Receivables consist of accounts receivable and contracts receivable. Accounts receivable represent recorded revenues that have been billed. Contracts receivable represent recorded revenues that are billable by the Company 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 under the percentage-of –completion method are recorded as deferred revenue. A summary of receivables is as follows:

	April 1,		December 31,
(In thousands)	2006		2005
Accounts receivable	$	212,458		216,248
Contracts receivable		107,981		100,717
Total receivables	$	320,439		316,965

The Company performs ongoing credit evaluations of its clients and generally does not require collateral from its clients. The Company provides an allowance for estimated uncollectible accounts based on specific identification, historical experience and management’s judgment. At April 1, 2006 and December 31, 2005 the allowance for estimated uncollectible accounts was $15,754,000 and $18,855,000, respectively.

(6) Goodwill and Other Intangible Assets

Goodwill and intangible assets with indefinite lives are evaluated for impairment annually or whenever there is an impairment indicator. All goodwill is assigned to a reporting unit, where it is subject to an impairment test based on fair value. The Company’s 2005 review of goodwill was completed in the second quarter of 2005 and indicated that goodwill was not impaired.

The Company’s intangible assets, other than goodwill or intangible assets with indefinite lives, are all subject to amortization and are summarized as follows:

			April 1, 2006				December 31, 2005
	Weighted
	Average		Gross				Gross
	Amortization		Carrying		Accumulated		Carrying		Accumulated
(In thousands)	Period (Yrs)		Amount		Amortization		Amount		Amortization
Purchased software		5.0	$	56,011		31,883		53,307		29,690
Customer lists		5.0		45,677		12,750		45,642		10,514
Patents		14.0		1,664		138		1,556		133
Non-compete agreements		5.0		382		121		382		102
Total		5.14	$	103,734		44,892		100,887		40,439

Aggregate amortization expense for the three months ended April 1, 2006 and April 2, 2005 was $4,453,000 and $4,303,000, respectively. Estimated aggregate amortization expense for each of the next five years is as follows:

(In thousands)

For the remaining nine months:	2006	$	13,801
For year ended:	2007		15,295
	2008		13,479
	2009		11,761
	2010		968

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The changes in the carrying amount of goodwill for the three months ended April 1, 2006 are as follows:

(In thousands)

Balance as of December 31, 2005	$	116,142
Deferred tax liabilities adjustment		1,362
Foreign currency translation adjustment		639
Balance as of April 1, 2006	$	118,143

The Company recorded $1,362,000 of additional goodwill in the first quarter of 2006 to adjust the impact of accounting for deferred tax liabilities associated with intangible assets in connection with previous stock acquisitions of businesses. At the date of acquisitions, the Company did not recognize deferred tax liabilities related to the difference between the book and tax basis of certain intangible assets. The impact on net earnings related to this oversight was insignificant.

(7) Segment Reporting

In the fourth quarter of 2005, the Company changed its reportable segments to reflect how the chief operating decision maker currently reviews the Company’s results in terms of allocating resources and assessing performance. This change effectively presents the Company’s operating results by its two geographical operating segments, Domestic and Global. As a result, the prior period has been retroactively adjusted to reflect the change in reportable segments.

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 and sublicensed software purchased from computer and software 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 such as software development, marketing, general and administrative and depreciation that have not been allocated to the operating segments. The Company does not track assets by geographical business segment.

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 months ended April 1, 2006 and April 2, 2005.

	Operating Segments
	Domestic		Global		Other			Total
Three months ended April 1, 2006
Revenues	$	277,816	$	42,161	$	1,247		$	321,224
Cost of revenues		60,419		7,545		54			68,018
Operating expenses		57,413		20,997		142,802			221,212
Total costs and expenses		117,832		28,542		142,856			289,230
Operating earnings	$	159,984	$	13,619	$	(141,609	)	$	31,994

	Operating Segments
	Domestic		Global		Other			Total
Three months ended April 2, 2005
Revenues	$	238,363	$	21,789	$	2,381		$	262,534
Cost of revenues		53,916		1,534		(43	)		55,408
Operating expenses		54,128		8,560		121,786			184,473
Total costs and expenses		108,044		10,094		121,743			239,881
Operating earnings	$	130,319	$	11,695	$	(119,362	)	$	22,653

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(8) Stock Split

On December 14, 2005 the Company’s Board of Directors announced a two-for-one stock split, payable on January 9, 2006 in the form of a one hundred percent (100%) stock dividend to shareholders of record on December 30, 2005. In connection with the stock split, a portion of the distribution of the stock dividend came from 1,502,999 treasury shares previously reflected in the consolidated balance sheets. 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. The number of common shares issued and outstanding at December 31, 2005 previously presented in the Company’s 2005 Annual Report on Form 10-K was overstated by 1,502,999 shares. This has been corrected in the accompanying condensed consolidated balance sheet noting the correct number of common shares issued and outstanding at December 31, 2005 was 77,011,464.

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

Introduction

Cerner Corporation (“Cerner” or the “Company”) is headquartered in North Kansas City, Missouri. The Company derives revenue by selling, implementing and supporting software solutions and hardware that gives healthcare 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 healthcare. Cerner implements these solutions as stand-alone, combined or enterprise-wide systems.Cerner Millennium®software solutions can be managed by the Company’s clients or in the Company’s data center via a managed services model.

Results Overview

The Company delivered strong levels of new business bookings, revenue, earnings and operating cash flow in the first quarter of 2006. New business bookings revenue, which reflects the value of executed contracts for software, hardware, services and managed services (hosting of software in the Company’s data center), in the first quarter was $262.0 million, which is up 12% over the first quarter of 2005, and an all-time high level for bookings in the first quarter. Revenues for the first quarter of 2006 increased 22% to $321.2 million compared to $262.5 million in the year-ago quarter.

First quarter 2006 net earnings were $20.1 million, and diluted earnings per share were $0.25. First quarter 2005 net earnings were $12.5 million and diluted earnings per share were $0.16. First quarter 2006 net earnings and diluted earnings per share reflect the impact of adopting Statement of Financial Accounting Standards (SFAS) No. 123R, “Share-Based Payment,” which requires the expensing of stock options. Adoption of SFAS 123R reduced first quarter 2006 net earnings and diluted earnings per share by $2.9 million and $0.03, respectively. First quarter of 2005 included a charge for the write-off of acquired in-process research and development related to the acquisition of the medical business division of VitalWorks, Inc. This charge impacted first quarter 2005 net earnings by $3.9 million and diluted earnings per share by $0.05.

The Company had strong cash collections of receivables of $341.5 compared to $278.9 million in the first quarter of 2005 and lowered days sales outstanding to 91 days compared to 99 days in the first quarter of 2005. Operating cash flows for the first quarter of 2006 were $51.2 million compared to $44.3 million in the first quarter of 2005.

Healthcare Information Technology Market

The fundamentals of the Healthcare Information Technology (“HIT”) market remain good. The financial health of acute care hospitals remains solid, with Moody’s reporting in January 2006 that hospital upgrades beat downgrades in 2005 for the first time since 1997. Further, USA Today reported in January 2006 that hospital profit margins reached a six-year high at an average of 5.2%.

Proposed legislation that favors HIT continues to emerge. For example, in April of 2006, U.S. Senator Sam Brownback of Kansas detailed his vision for consumer-driven care. One of Senator Brownback’s core proposals is the Independent Health Record Bank Act of 2006. This legislation, if passed, would allow Americans to carry their electronic health records with them in “debit-card” fashion so any healthcare provider could access health records, plans and payment information at the point of care. Senator Brownback also introduced the Medicare Payment Rate Disclosure Act, which seeks to create transparency around medical costs. The Company views this legislation positively because of the important role information technology will play in creating a national health record bank and providing true transparency to the cost of healthcare while making it safer and more efficient.

This legislation is among almost 60 pieces of Health Information Technology legislation that have been introduced in this Congress. These bills propose facilitating HIT investments by offering incentives such as direct grants, favorable tax treatment, reduced Stark and anti-kickback rules, HIT loans, and differential reimbursement. While it is unclear exactly how the legislative process will unfold, it is evident that there is broad bipartisan support for HIT initiatives in Washington.

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Results of Operations

Three Months Ended April 1, 2006 Compared to Three Months Ended April 2, 2005

The Company’s net earnings increased 61% to $20,144,000 in the first quarter of 2006 from $12,520,000 in the first quarter of 2005 period. First quarter 2006 net earnings included the impact of adopting SFAS No. 123R, which requires the expensing of stock options. The adoption of SFAS 123R reduced net earnings in the first quarter of 2006 by $2,912,000, net of $1,803,000 tax benefit. First quarter of 2005 included a write-off of acquired in-process research and development related to the acquisition of the medical business division of VitalWorks, Inc. of $3,941,000, net of $2,441,000 tax benefit. Excluding these two items, net earnings increased 40% in the first quarter of 2006 compared to the first quarter of 2005.

Revenues increased 22% to $321,224,000 for the three-month period ended April 1, 2006 from $262,534,000 for the three-month period ended April 2, 2005. The revenue composition for the first quarter of 2006 was $116,850,000 in system sales, $80,286,000 in support and maintenance, $115,299,000 in services and $8,789,000 in reimbursed travel.

System sales revenues increased 17% to $116,850,000 for the three-month period ended April 1, 2006 from $99,942,000 for the corresponding period in 2005. Included in system sales are revenues from the sale of software, hardware and sublicensed software, installation fees, transaction processing and subscriptions. The increase in system sales revenue was driven by growth in software, hardware and sub-licensed software revenue.

Support, maintenance and service revenues increased 25% to $195,585,000 during the first quarter of 2006 from $156,001,000 during the same period in 2005. Included in support, maintenance and service revenues are support and maintenance of software and hardware, professional services excluding installation, and managed services. Support and maintenance revenues were $80,286,000 and $71,226,000 for the first quarter of 2006 and 2005, respectively. Service revenues were $115,299,000 and $84,775,000 for the first quarter of 2006 and 2005, respectively. These increases were driven by an increase in the number of professional services and strong performance in deliveringCerner Millenniumsolutions to clients.

Contract backlog, which reflects new business bookings that have not yet been recognized as revenue, increased 36% in the first quarter of 2006 compared to the first quarter of 2005. This increase is due to strong levels of new business bookings during the past four quarters. On April 1, 2006, the Company had $1,753,620,000 in contract backlog and $430,493,000 in support and maintenance backlog, compared to $1,244,758,000 in contract backlog and $364,524,000 in support and maintenance backlog on April 2, 2005.

The cost of revenue was 21% of total revenues in the first quarter of 2006 and 2005. The cost of revenues includes the cost of reimbursed travel expense, third party consulting services and subscription content, computer hardware and sublicensed software purchased from hardware and software 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, maintenance, support, services and reimbursed travel) carrying different margin rates changes from period to period.

Sales and client service expenses as a percent of total revenues were 43% and 42% in the first quarter of 2006 and 2005. Sales and client service expenses include salaries of sales and client service personnel, communications expenses, unreimbursed travel expenses and expense for share-based payment. Also included are sales and marketing salaries, trade show costs and advertising costs. The increase in total sales and client service expenses to $139,524,000 in the first quarter of 2006 from $110,840,000 in the same period of 2005 was primarily attributable to an increase in personnel expense and marketing related expenses. Included in sales and client service expenses in the first quarter of 2006 was $2,811,000 of expense related to share-based payment.

Software development expenses include salaries, documentation, expense for share-based payment and other direct expenses incurred in product development and amortization of software development costs. Total expenditures for software development, including both capitalized and noncapitalized portions, for

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the first quarter of 2006 and 2005 were $64,200,000 and $53,742,000, respectively. These amounts exclude amortization. Capitalized software costs were $15,988,000 and $16,510,000 for the first quarter of 2006 and 2005, respectively. Capitalized software costs for the first quarter of 2006 include $239,000 of capitalized expense related to share-based payments. Amortization of capitalized software costs was $10,805,000 and $12,097,000 for the first quarter of 2006 and 2005, respectively. The increase in aggregate expenditures for software development in 2006 is due to continued development ofCerner Millenniumsoftware solutions. The decrease in amortization of capitalized software costs is due to the Company moving from multiple releases of software each year to an annual release of software. Amortization will increase at the annual release date of software, which is expected in the second half of 2006. Included in software development expenses in the first quarter of 2006 was $1,132,000 of expense related to share-based payments.

General and administrative expenses as a percent of total revenues were 7% in the first quarter of 2006 and 2005, respectively. General and administrative expenses include salaries for corporate, financial and administrative staffs, utilities, communications expenses, professional fees, the transaction gains or losses on foreign currency and expense for share based payment. Total general and administrative expenses for the first quarter of 2006 and 2005 were $22,671,000 and $17,922,000, respectively. Included in general and administrative expenses in the first quarter of 2006 was $773,000 of expense related to share-based payment. This increase in total general and administrative expense is due primarily to the growth of the Company’s core business, a result of acquisitions and increased presence in the global market. The Company had net transaction gains on foreign currency of $202,000 for 2006 compared to net transaction losses on foreign currency of $511,000 for 2005.

The write-off of in-process research and development in the first quarter of 2005 was an expense resulting from the acquisition of the medical business division of VitalWorks, Inc.

Net interest expense was $693,000 in the first quarter of 2006 compared to $1,742,000 in the first quarter of 2005. This decrease in net interest expense is due to an increase in the interest rate of invested funds.

Other income was $2,125,000 in the first quarter of 2006 compared to $30,000 in the first quarter of 2005. This increase is due primarily to a gain recorded related to the renegotiation of a supplier contract that eliminated a liability related to unfavorable future commitments due to that supplier. The Company was able to renegotiate the contract to eliminate certain minimum volume requirements and reduce pricing to market rates leading to the elimination of the previously recorded liability.

The Company’s effective tax rate was 40% in the first quarter of 2006 and 2005.

Operations by Segment

In the fourth quarter of 2005, the Company changed its reportable segments to reflect how the chief operating decision maker currently reviews the Company’s results in terms of allocating resources and assessing performance. This change effectively presents the Company’s operating results by its two geographical operating segments, Domestic and Global. As a result, the prior periods have been retroactively adjusted to reflect the change in reportable segments.

The following table presents a summary of the operating information for the three months ended April 1, 2006 and April 2, 2005:

	Operating Segments
	Domestic		Global		Other			Total
Three months ended April 1, 2006
Revenues	$	277,816	$	42,161	$	1,247		$	321,224
Cost of revenues		60,419		7,545		54			68,018
Operating expenses		57,413		20,997		142,802			221,212
Total costs and expenses		117,832		28,542		142,856			289,230
Operating earnings	$	159,984	$	13,619	$	(141,609	)	$	31,994

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	Operating Segments
	Domestic		Global		Other			Total
Three months ended April 2, 2005
Revenues	$	238,363	$	21,789	$	2,381		$	262,534	��
Cost of revenues		53,916		1,534		(43	)		55,408
Operating expenses		54,128		8,560		121,786			184,473
Total costs and expenses		108,044		10,094		121,743			239,881
Operating earnings	$	130,319	$	11,695	$	(119,362	)	$	22,653

Operating earnings in the Domestic segment increased 23% for the quarter ended April 1, 2006 compared to the quarter ended April 2, 2005. Total Domestic segment revenues increased 17% in the first quarter of 2006 compared to the first quarter of 2005 driven by strong bookings growth.Cost of revenues was basically unchanged at 22% and 23% of total Domestic segment revenues for the first quarter of 2006 and 2005, respectively. Domestic segment operating expenses in the first three months of 2006 increased 9% compared to the 2005 period as a result of hiring additional associates.

Operating earnings in the Global segment increased 16% for the quarter ended April 1, 2006 compared to the quarter ended April 2, 2005. Total Global segment revenues increased 93% in the first quarter of 2006 compared to the first quarter of 2005. Revenue from the Company’s major contract in the Southern region of England accounted for $11,415,000 million of the revenue increase. Revenue growth excluding this revenue would have been 39%. The revenues from this contract did not affect operating earnings as the Company is accounting for this contract using a zero-margin approach of applying percentage-of-completion accounting until the software customization and development services are completed. Once software customization and development services are completed, the remaining unrecognized portion of the fee will be recognized ratably over the remaining term of the arrangement, which expires in 2014. In the first quarter of 2005 no revenue was recorded for this contract. Cost of revenues was 18% and 7% of total Global segment revenues for the first quarters of 2006 and 2005, respectively. Operating expenses in the 2006 period increased 145% compared to the 2005 period due to hiring personnel for the higher level of activity outside the United States.

Operating losses in Other increased 19% for the quarter ended April 1, 2006 compared to the quarter ended April 2, 2005.Included in Other are revenues and expenses not tracked by geographic segment. Operating expenses increased 17% in the 2006 period compared to the 2005 period. This increase in operating expenses is due to an increase in expenses such as software development, marketing, general and administrative and depreciation in the first three months of 2006 compared to the first three months of 2005. Operating expenses in the 2005 period includes the write-off of acquired in-process research and development of $6,382,000.

Capital Resources and Liquidity

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 and short-term investments consist of U.S. Government Federal Agency Securities, short-term marketable securities and overnight repurchase agreements. At April 1, 2006 the Company had cash and cash equivalents of $103,890,000, short-term investments of $174,929,000 and working capital of $407,676,000 compared to cash and cash equivalents of $113,057,000, short-term investments of $161,230,000 and working capital of $391,541,000 at December 31, 2005.

The Company generated cash of $51,188,000 and $44,324,000 from operations in the first quarters of 2006 and 2005, respectively. Cash flow from operations increased in the first quarter of 2006 due primarily to a stronger performance in net earnings. The Company has periodically provided long-term financing options to creditworthy clients through third party financing institutions and has on occasion directly provided extended payment terms from contract date. 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

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on-going obligations under the client contract. During the first quarters of 2006 and 2005, the Company received total client cash collections of $341,510,000 and $278,900,000, respectively, of which 6.1% and 7.6% were received from third party client financing arrangements and non-recourse payment assignments. Days sales outstanding were 91 days at April 1, 2006, decreasing from 99 days at April 2, 2005. Revenues provided under support and maintenance agreements represent recurring cash flows. Support and maintenance revenues increased 13% in the first quarter of 2006 compared to the first quarter of 2005, and the Company expects these revenues to continue to grow as the base of installed systems grows.

Cash used in investing activities in the first quarter of 2006 consisted primarily of capital purchases of $37,681,000, which includes $21,187,000 of capital equipment and $16,494,000 of land, buildings and improvements. Capitalized software development costs were $15,749,000 in the first quarter of 2006. Cash used in investing activities in the first quarter of 2005 consisted primarily of the acquisition of businesses of $101,977,000 in 2005. Capitalized software development costs were $16,510,000. Capital purchases for the first quarter of 2005 were $13,094,000 which includes $11,392,000 of capital equipment and $1,702,000 of land, buildings and improvements.

The Company’s financing activities for the first quarter of 2006 consisted of proceeds from the exercise of stock options of $5,850,000 and the excess tax benefits from share based compensation of $3,080,000 and repayment of debt of $2,887,000. For the first quarter of 2005 the Company’s financing activities consisted primarily of proceeds of debt of $35,000,000, repayment of debt of $15,669,000 and of the proceeds from the exercise of stock options of $5,720,000.

The Company is currently constructing a new data center on its campus in North Kansas City at an approximate cost of $60,000,000. The construction is expected to be completed in 2007.

The Company believes that its present cash position, together with cash generated from operations and, if necessary, its line of credit, will be sufficient to meet anticipated cash requirements during 2006.

The effects of inflation on the Company’s business during the period discussed herein were minimal.

Forward Looking and Cautionary Statements

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 subjected to infringement claims or may be infringed upon; risks associated with our global operations; recruitment and retention of key personnel; risks related to third party suppliers; risks inherent with business acquisitions; changing political, economic and regulatory influences; government regulation; significant competition and market changes; variations in the our quarterly operating results; potential inconsistencies in our sales forecasts compared to actual sales; trading price of our common stock may be volatile; our Board of Directors have authority to issue preferred stock and our corporate governance documents contain anti-takeover provisions; and, other risks, uncertainties and factors discussed elsewhere in this Form 10-Q, in the Company’s 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. The Company undertakes 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.

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Item 3.Quantitative and Qualitative Disclosures about Market Risk

No material changes.

Item 4.Controls and Procedures

a)	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.
b)	There were no changes in the Company’s internal controls over financial reporting during the three months ended April 1, 2006 that have materially affected, or are reasonably likely to materially affect, its internal controls over financial reporting.
c)	The Company’s management, including its CEO and CFO, cannot provide complete assurance that its disclosure controls and procedures or the Company’s internal controls will prevent all error and all fraud. 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 detected.

Part II. Other Information

Item 6.Exhibits

(a)   Exhibits

31.1	Certification of Neal L. Patterson, Chairman of the Board and 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.

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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
May 11, 2006	By:	/s/ Marc G. Naughton
Date		Marc G. Naughton
		Chief Financial Officer

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