Recommendation: Price/Book 5 - CFA Institute · 2018. 9. 5. · CERNER CORP. Report Created Jan 11,...

Price Target: $92.38 Current Price (as of 1/11/13): $81.62

Recommendation: BUY % Increase (Decrease): 13.18%

Earnings/Share:

Q1 Q2 Q3 Q4 Year P/E Ratio

2010A $0.30 $0.34 $0.37 $0.43 $1.44 34.1x

2011A 0.38 0.43 0.47 0.54 1.82 34.8

2012A/E 0.52 0.57 0.58 0.48 2.15 36.1

2013E 0.66 0.66 0.66 0.66 2.64 35.0

2014E 0.80 0.80 .080 0.80 3.18 29.1

BUY Recommendation: We issued a buy recommendation for CERN based on a target

price of $92.38. This is a 13.18% premium to the current price. We valued CERN using

three intrinsic valuation models: (1)Residual Income, (2)Discounted Free Cash Flow to

the Firm and (3)Discounted Free Cash Flow to Equity. We also used two relative valua-

tion methods to analyze the firm compared to its peer group based on (1)Price Multiples

and (2)Enterprise Value Multiples.

Broad Solution Portfolio: Through a number of newer initiatives, such as ITWorks,

RevWorks, and Population Health Management, CERN has diversified its product portfo-

lio. On average, CERN accounts for approximately 17% of its clients' total annual IT

spending. This percentage will increase and drive revenue growth as clients begin to

adopt these newer offerings.

International Growth: Currently, CERN's international revenue segment only accounts

for approximately15% of total revenues. As the global economy recovers, global health-

care spending is expected to increase. CERN is well positioned to capture this growth,

especially in places where the firm has already established a client base, such as Canada,

Europe, Australia and the Middle East.

Operating Margin Expansion: As CERN continues to grow, it will expand margins by

further leveraging R&D and SG&A spending. In the last several years, margin expansion

from increased operational efficiencies has been diluted by a rapidly growing lower-

margin technology hardware resale segment. Moving forward, this dilutive effect will be

diminished as growth in this lower-margin segment begins to plateau. Expect operating

margin expansion of 100-200 basis points annually.

Favorable Regulatory Environment: Domestic revenue growth will continue to be

driven by government incentive programs. CERN is an industry leader in providing solu-

tions that meet and exceed government standards to receive this incentive money. As

these standards become increasingly stringent, CERN's reputation as a market leader will

position the firm to capture additional market share.

CAVE CAPITAL MANAGEMENT CFA Institute Research Challenge Student Research

NASDAQ: CERN

CERNER CORP. Report Created Jan 11, 2013

Highlights Key Statistics

Figure 1: Comparative Historical Stock Price Performance

Industry: Healthcare Information Services

Sector: Technology

Market Overview

Current Price $81.62

52 Week Price Range $59.36 - $88.32

Shares Outstanding 171.56M

Financial Strength

Debt/Equity Ratio 7.29%

Return on Equity 15.36%

Profit Margin 14.96%

Current Ratio 3.52

Revenue $ 2.52B

After-Tax Income $376.62B

Valuation

Price/Sales 5.56

Price/Book 5.19

Book Value/Share $15.90

Market Capitalization $14.00B

Risk

Beta 0.89

Institutional Ownership 83.50%

Insider Ownership 14.80%

(as of January 11, 2013)

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1


NASDAQ: CERN


Founded in 1979, Cerner is a leading provider of healthcare information technology (HCIT) solu-

tions. The firm's core product offering is the Millennium platform, which offers a wide range of

software solutions for healthcare providers. Additionally, CERN offers products and services that

are integrated with the Millennium platform, such as hardware technology devices, implementa-

tion and training, remote hosting, revenue cycle and IT management, and support and mainte-

nance services. CERN's broad and fully-integrated portfolio of healthcare IT solutions allows it to

serve nearly all types of healthcare providers. However, a majority of the firm's revenue comes

primarily from hospitals, integrated delivery networks, physician groups and networks, and ambu-

latory providers such as reference labs and blood banks. Headquartered in Kansas City, MO, ap-

proximately 85% of CERN's revenue comes from domestic clients. The remaining revenue is gen-

erated from primarily in Canada, Europe, Australia and the Middle East.

CERN breaks its revenues into six main business segments (see Figure 2 for Revenue Mix break-

down):

Licensed Software revenue is from the sale of licenses to use its various Millennium software

solutions, which are primarily developed in-house.

Technology revenue results from the sale of technology hardware and medical devices. CERN

buys or licenses equipment from third-party manufacturers, fits the equipment to work with its

software solutions, then re-sells the equipment to existing clients in order to offer a fully-

integrated set of solutions.

Subscriptions/Transactions is another method through which CERN offers its software solu-

tions. Instead of paying a large up-front fee for the license to use its products, healthcare providers

pay a periodic usage charge for access to CERN's software.

Professional Services revenue is generated by assisting clients with the implementation of

CERN's healthcare information systems, such as education/training of the client's employees, pro-

ject management services and clinical process optimization. RevWorks, which is CERN's revenue

cycle management solution, is also included under professional services.

Managed Services comes from the sale of CERN's technical services. Most of these services are

part of the CernerWorks suite of solutions, the largest of which is remote hosting, followed by

application/operational management services and disaster recovery. The newest of these solutions

is ITWorks, which allows clients to outsource a majority of their general IT functions to CERN.

Support & Maintenance revenues are comprised of contracts for CERN to provide troubleshoot-

ing, emergency response, and hardware maintenance services to clients after CERN systems are

implemented. These contracts give clients access to updated versions of CERN's software. Be-

cause nearly every client signs an on-going support and maintenance contract, a majority of these

revenues are recurring.

Business Description

Founded:

1979

Employees:

11,900

Headquarters:

2800 Rockcreek Parkway

Kansas City, MO 64117

E-Mail:

[email protected]

Website:

www.cerner.com

General Information

Key Officers

Figure 2: Revenue Mix

Chairman & Chief

Executive Officer:

Neal Patterson

Vice Chairman:

Cliff Illig

Chief Operating Officer:

Mike Nill

Chief of Staff:

Jeff Townsend

Chief of Innovation:

Paul Gorup

Chief Financial Officer:

Marc Naughton

Client Organization:

Zane Burke

Licensed Software

15%

Technology Resale

11%

Subscription / Transaction

6%

Professional Services

26%

Managed Services

16%

Support & Maintenance

26%

Figure 3: Company Timeline

Source: Cerner 2011 Annual Report

Source: Cerner 2011 Annual Report

2

JCJ GROUP INC. CFA Institute Research Challenge Student Research

NASDAQ: CERN


While the HCIT industry remains fragmented, Cerner and its primary rival, Epic Systems, are widely accepted as the market

leaders. Combined, CERN and Epic account for approximately 44% of the total market, and have been quickly gaining market

share from competitors. Although MediTech has been struggling to compete with CERN and Epic, with roughly 20% of the mar-

ket share for hospitals with more than 200 beds, they are the third largest competitor in the HCIT industry. Other competitors

include McKesson, QuadraMed, Siemens, GE, and AllScripts. (See Figure 3 for market share illustration).

Industry Overview and Competitive Positioning


NASDAQ: CERN


Source: JP Morgan Healthcare Conference

24%

21%

20%

13% 8% 7%

2%

2%3%

1%

Epic - 24% Cerner - 21% Meditech - 20%McKesson - 13% Siemens - 8% Allscripts - 7%QuadraMed - 2% GE - 2% Other - 3%None - 1%

Figure 3: Market Share: Hospitals > 200 Beds

Meaningful Use Changes the Market Landscape: The HITECH Act of 2009 allows healthcare providers to receive incentive

money for implementing HCIT systems that display "Meaningful Use" (MU). As a result, the HCIT industry has experienced

tremendous growth over the past three years. Implementing a new HCIT system is expensive, typically involving a large up-front

capital expenditure. Because of this, healthcare providers want to ensure that an HCIT system will meet both current and future

MU requirements before selecting a vendor. CERN and Epic have emerged as the only two systems to consistently meet these

requirements, and have begun to dominate the HCIT market.

Opportunities In Population Health Management Space: Another industry trend has been a push towards employing more

pre-emptive care and analyzing population-wide trends through the use of predictive algorithms and population health manage-

ment systems. For example, at a recent healthcare conference, CERN CEO Neal Patterson cited a CERN algorithm that could

predict, with an 80% success rate, whether a patient would be readmitted within 30-days of being discharged from a hospital.

HCIT companies are predicting enormous potential in the population health management space, and CERN has made it a priority

to distinguish itself as a leader in this area.

High Potential in International HCIT Industry: Internationally, industry growth has been slow given a slower economic re-

covery and the absence of incentive programs. CERN has been an industry leader in adapting its software to foreign languages,

and the company has a significant presence in places such as Qatar, Saudi Arabia, Europe, Canada, and Australia. In the five

years before the recession, CERN's international revenue grew at an average rate of 35% per year; however, in 2009 international

revenue growth slowed to only 5%. While CERN's international growth has rebounded to approximately 12% per year, we an-

ticipate this rate to climb further as CERN continues to utilize its competitive advantages in the international market.

Advantage Through Interoperability: The capability of a vendor's HCIT solutions to be compatible with other systems,

known as interoperability, is becoming increasingly important to healthcare providers. Interoperability has become a key differ-

entiator between Epic and CERN. To maintain high switching costs, Epic maintains a system that is incompatible with any other

systems. At the same time, CERN has become an industry leader in interoperability. The versatility of CERN's Millennium suite

should lead to a sizeable competitive advantage.

An increasing need for communication and data sharing between a patient's various providers, who often use entirely different

HCIT systems, will place a greater emphasis on interoperability. Even in cases where CERN is not a client’s sole vendor, the

company is positioned to take advantage of their existing relationships as increasing dissatisfaction with other vendors, concern

over MU certification, and demand for a single, comprehensive HCIT system causes increased market churn.

3


NASDAQ: CERN


Investment Summary

We have valued CERN to be worth $92.38, which is 13.18%

higher than their current trading price of $78.09. Therefore, we

have placed a BUY recommendation for CERN. Our buy rec-

ommendation is justified by CERN’s strong historical perform-

ance and growth potential and is supported by our relative and

intrinsic valuation.

EHR Growth: One of the primary reasons to be optimistic

about CERN’s future performance is driven by advances in the

Electronic Health Reporting (EHR) market. In 2009 the gov-

ernment implemented the HITECH Act, which authorizes in-

centive payments to physicians who are meaningful users of

certified EHR technology. CERN is in an excellent position to

capitalize on these incentives due to their likelihood to qualify

for meaningful use phases 2 and 3, their integrated system, and

their outstanding reputation in the HCIT industry. CERN

should see strong growth due to EHR sales until at least the

2014 deadline for meaningful use implementation. In addition,

CERN should expect solid growth from support and continued

improvements related to EHR.

Consolidation in the Healthcare Field: The healthcare indus-

try is witnessing a recent trend of large hospitals acquiring

smaller hospitals and practices. Therefore, the large hospitals

are starting to dominate the industry and there’s no reason to

believe this trend will stop. Naturally, the large hospitals will

want their newly acquired hospitals and practices to all use the

same HCIT systems. Consequently, the niche HCIT providers,

which account for 50% of the market, will lose their market

share as the practices continue to switch to larger providers.

CERN receives 81% of their revenue from large hospitals and

should expect to see this number grow as their biggest custom-

ers increase in size. Therefore, the consolidation in the health-

care field will continue to increase CERN’s competitive advan-

tage.

Integrated System: CERN and EPIC are the only HCIT pro-

viders that have fully integrated systems, meaning their EHR

systems are the only ones on the market that provide every as-

pect of the electronic health reporting process. Physicians and

hospitals desire an integrated system because it makes EHR

easier and more effective. Patients desire an integrated system

because it allows them to conveniently access and transfer

online records. As meaningful use phases 2 and 3 come into

effect, we believe CERN will acquire a larger market share due

to their integrated system.

Ease of Use: Healthcare providers desire increased profitability

that comes from physicians visiting with more patients. A phy-

sician can increase the number of patients he/she serves by

increasing his/her efficiency. Reporting systems that are fully-

integrated and easy to use provide physicians with the in-

creased efficiency they desire to earn higher profits. Therefore,

fully integrated EHR systems that are easy to use will be in the

highest demand. CERN’s easy-to-use technology should create

high demand from the primary decision-makers in hospitals.


NASDAQ: CERN


The HITECH Act was instituted to promote and accelerate the adoption of HCIT among healthcare provider through incentives

and/or penalties related to the meaningful use criteria. From 2009-2019 the HITECH Act is expected to provide approximately

$32.7 billion in incentives to healthcare providers who implement healthcare information systems that demonstrate “meaningful

use”. With the increased demand for these systems and availability of government subsidies, CERN should continue to experi-

ence strong domestic revenue growth for the foreseeable future.

Meaningful Use is defined by the Centers for Medicare & Medicaid Services using three stages:

Stage 1: Focuses on electronically recording health information to track conditions, coordinate care, implement clini-

cal decision support tools and report clinical quality measures.

Stage 2: Focuses on improving the quality of care through interoperability and the exchange of patient information

between a patient’s various healthcare providers.

Stage 3: Focuses on improving the quality of care through safety and efficiency from decision-support tools. The re-

quirements for stage three have not yet been finalized.

(for a detailed explanation of Meaningful Use requirements, see Appendix K)

EHR Incentives: 2014 is the final year for healthcare providers to begin participating in the Medicare EHR incentive program.

Starting in 2014, providers that do not successfully demonstrate meaningful use will be subject to penalties. Medicare incentive

payments are scheduled to end completely in 2016 as it moves to a penalty-based system. Medicaid will continue issuing com-

pensation through 2021. Professionals may qualify for both programs but are only allowed to participate in one.

ObamaCare (Patient Protection and Affordable Care Act): CERN management states that the firm is not “expecting” any

major impact on business due to ObamaCare. However, as ObamaCare initiatives begin to be implemented and health insurance

becomes universally required, higher demand for healthcare services is inevitable. As a result, healthcare providers may experi-

ence a large increase in the number of patients they see, and as such will need to significantly increase their capacity to keep up

with demand. This trend will almost certainly benefit CERN as demand for its products increase along with healthcare providers’

need for improved operational efficiency.

Regulatory Environment & Political/Legal Overview

4


NASDAQ: CERN


Investment Summary (cont)

Cash Flow: Cerner has seen strong cash flows in recent years,

with operating cash flows growing at a compound annual

growth rate of 24% over the past decade. Likewise, free cash

flows have more than tripled in the past four years, growing

from approximately $94 million in 2007 to approximately $303

million in 2011.

In the past year, however, free cash flows declined, falling by

2.8% from 2010 to 2011. This is due in large part to increased

capital expenditures as Cerner began construction of two office

buildings at its new Kansas City, Kansas office complex. As a

result of this expansion, the company increased capital expen-

ditures from approximately $155 million to $228 million. Man-

agement stated that they expect capital expenditures to remain

in the $225-250 million range through fiscal year 2013, and

then tapering back towards pre-2011 levels as the company

wraps-up construction on its new campus. (For an illustration

of free cash flow growth, see Figure 4).

Balance Sheet and Financing: With over $1 billion in cash on

hand, and slightly less than $200 million in debt, Cerner con-

tinues to maintain a very sound financial position. By the end

of 2012, Cerner is scheduled to retire the remaining $9.75 mil-

lion of its 6.42% coupon bonds issued in December 2002. The

firm also increased the maximum amount of its revolving credit

facility to $100 million in early 2012. Moving forward, expect

Cerner to maintain fairly consistent lower levels of debt, as

such a high amount of cash on hand gives the firm the ability to

avoid borrowing.

When asked about potential cash deployment options, manage-

ment stated that offering a dividend was highly unlikely in the

near term. The firm could potentially deploy some of its cash

reserves through share repurchases, likely purchasing enough

shares to gives its employee share compensation programs a

net-neutral effect. The firm may also seek to grow through stra-

tegic acquisitions. As the Health IT industry continues to

evolve, look for Cerner to purchase best-of-breed type compa-

nies, primarily in emerging, niche segments of the industry,

such as population health management.

Figure 4: Free Cash Flow Growth

0.00

200.00

400.00

600.00

800.00

1000.00

1200.00

FY 2007A

FY 2008A

FY 2009A

FY 2011A

FY 2012E

FY 2013E

FY 2014E

FY 2015E

FY 2016E


NASDAQ: CERN


Pricing Power: Due to their market share and advanced technology, CERN and EPIC are on the verge of becoming a duopoly in

the HCIT industry. Consolidation in healthcare will continue to give these two firms a distinct advantage, which will increase the

market share gap. Consequently, CERN and EPIC have strong barriers to entry, which has resulted in pricing power within the

market. CERN has a strong competitive advantage because they are cheaper than EPIC but are also regarded throughout the mar-

ket as being higher quality.

Global Growth: EHR is still an unknown technology the majority of the global economy. However this is predicted to change

within the next decade as foreign countries are expected to follow the U.S.’s lead on EHR. This will increase the global demand

within the HCIT industry and put CERN in position to acquire a large market share. It is logical to assume that foreign health-

care providers will desire fully integrated EHR systems that have already proven their effectiveness. Currently, CERN earns

15% of their revenue from foreign business with only 3% of the market share. As the meaningful use phases come to a close in

the U.S., we believe CERN will begin rapidly acquiring international business.

Encouraging Signs From Management: The Medical Device Certification Program and HotSpot Dictation Certification have

earned CERN several new partnerships with industry leaders. They also have strong relationships with Dell, H.P., IBM, the

NBA, and the University of Pittsburgh Medical Center. These relationships with suppliers and providers are one of CERN’s big-

gest competitive advantages. In addition, CERN’s capital structure is only 4% debt and they have a large amount of excess cash

to repurchase shares and acquire competitors. These are both very strong signs for their continued growth.

Financial Analysis

Total Cash (mrq): $1.04B

Total Cash Per Share (mrq): $6.06

Total Debt (mrq): $196.66M

Total Debt/Equity (mrq): 7.29

Current Ratio (mrq): 3.52

Figure 5: Financial Position Overview

5


NASDAQ: CERN


Financial Analysis (cont)

Earnings: Cerner has seen tremendous earnings growth the

past several years. Over the last decade, Cerner has increased

revenue at a compound annual growth rate of approximately

15%, and has increased earnings per share at a compound an-

nual growth rate of approximately 23% over the same period.

In 59 of the previous 60 quarters, performance has either met

or exceeded management guidance.

Due to the unique regulatory and technological environment in

which the company operates, Cerner has been able to grow its

top-line revenue while simultaneously increasing operating

margins. This trend is expected to continue over the next sev-

eral years. (See Figure 6 for an illustration of historical earn-

ings performance).

Earnings are being driven in large part by meaningful use requirements, and healthcare providers seeking HCIT systems that will

meet all of the upcoming stages of these requirements. Earnings growth is also being driven by healthcare providers desiring a

fully-integrated system. Currently, Cerner and its primary competitor, Epic, offer the only two systems that cover the full spec-

trum of HCIT offerings. Because of this, Cerner is not only increasing market share through market penetration, but also by

gaining new clients that are switching from competing systems.

Another key earnings driver results as nearly every client using

Cerner's Millennium software platform also signs a contract

with the company for ongoing support and maintenance ser-

vices. As the company increases its client base, it increases the

amount of support and maintenance revenue it generates. While

the company has seen tremendous growth in system sales, it

has seen even greater growth in its recurring revenue segments

as it retains previous client contracts while adding new ones.

Newer ventures such as ITWorks, RevWorks, and population

health management are also expected to contribute significantly

to future earnings.

Currently, only about 15% of Cerner's revenue mix comes from

its international segment. Of this 15%, a majority of revenue comes from clients in the Middle East, Europe, Australia and Can-

ada. While management does not expect the international/domestic revenue composition to change in the immediate future, a

rebounding global economy could offer Cerner an opportunity for more rapid long-term growth in the international segment.

In the 3rd Quarter of 2012, Cerner came in slightly below its

expected level of margin expansion, increasing operating mar-

gins by approximately 90 basis points, while management pre-

dicted margins to grow by 100 to 200 basis points. This is due

in large part to a larger percentage of revenue coming from

Cerner's lower margin segments, predominantly the technology

hardware resale, or iBus, segment. According to the firm's most

recent 10-K, the technology resale segment has a contribution

margin of only 13%, which is drastically lower than its highest-

margin segment, licensed technology, which had a contribution

margin of 86% in fiscal year 2011. (See Figure 8 for a compre-

hensive breakdown of historical contribution margin per busi-

ness segment). Though growing sales of iBus products have

greatly contributed to increases in both top-line revenue and

earnings in absolute terms, the lower margins earned per sale on these items have overshadowed margin expansion elsewhere.

Predominantly, the company expects to see its margins grow as it leverages investments in research and development, as well as

spending in sales, general, and administrative expenses. As the growth of iBus sales flatten out compared to overall revenue

growth, Cerner expects to see a greater impact from this operating leverage, and should see margin expansion hitting its target of

100 to 200 basis points per year.

Contribution Margin % 2007 2008 2009 2010 2011

Licensed Software 89% 88% 88% 87% 87%

Technology Resale 12% 12% 11% 11% 13%

Subscription / Transaction 49% 50% 52% 52% 56%

Professional Services 29% 29% 28% 30% 30%

Managed Services 25% 26% 28% 29% 31%

Support & Maintenance 69% 72% 74% 76% 76%

Total Contribution Margin 47% 48% 50% 50% 49%

Figure 8: Business Segment Contribution Margins

0.00

500.00

1000.00

1500.00

2000.00

2500.00

2007 2008 2009 2010 2011

Tota

l Re

ven

ue

(m

illio

ns)

Net Income Expenses

Figure 6: Revenue, Net Income & Expenses


NASDAQ: CERN


Figure 7: Recurring vs. Non-Recurring Revenue

Revenue Type Percentage of Total Business Segment

Recurring 48%

Managed Services, Support

& Maintenance,

Subscriptions

Visible 26% Professional Services

Non-Recurring 26%Licensed Software,

Technology Resale

Figure 7: Recurring vs. Non-Recurring Revenue

6


NASDAQ: CERN


Valuation

Figure 10: Market Risk Prem.


NASDAQ: CERN


$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

2012A/E 2013E 2014E 2015E 2016E

Operating Income (EBIT)

Net Income

Figure 9: EPS/EBIT

Cost of Capital: To calculate CERN’s cost of

capital we used a weighted average of their as-

sumed cost of equity and cost of debt. To calculate

the cost of debt we took a weighted average of the

coupon payments on their outstanding bonds, and

assumed a 35% effective tax rate. The after tax

cost of debt computed to be 3.68%. For cost of

equity calculation we used the Capital Asset Pric-

ing Model. Market risk premium was determined

by using a supply-side risk premium model. Based

on the equation ((1+inflation rate)(1+real GDP

growth)(1+P/E growth)-1))+(dividend yield)-(risk-

free rate), and using the assumptions of 1.8% infla-

tion, 2.7% real GDP growth, 2% P/E growth,

2.05% dividend yield, and a 20-year risk-free rate

of 2.59%, we calculated a market risk premium of

6.1%. For our beta calculation we regressed

CERN’s returns over the past 3 years against the

S&P 500, giving us a raw beta of .89. To find an

adjusted beta, we gave the calculated beta a weight

of 2/3 and gave the peer group average beta a

weight of 1/3. This gave us a final adjusted beta

of .99, which was used in the CAPM assumption.

Using the 20-year treasury rate of 2.59%, CERN

cost of equity equated to 8.65%. Based on a target

debt/equity ratio of 5% CERN WACC was esti-

Inflation 1.80%

Real GDP Growth 2.70%

P/E Growth 2.00%

Dividend Yield 2.05%

Risk Free Rate (20 Yr Tr.) 2.59%

Market Risk Premium 6.10%

Bond Issue (12/12) (12/15)

Cpn 6.42% 5.54%

Amt. Out. $9,750.00 $60,363.18

% Debt 13.91% 86.09%

W.A. Cpn 0.89% 4.77%

Tax Rate 35.00% 35.00%

Cpn (1-Tax) 0.58% 3.10%

Cost of Debt 3.68%

Figure x: CAPM

Figure 13: WACC Calculation

Figure 11: Cost of Debt

Target D/E 5.00%

Debt % 4.76%

Cost of Debt (1-Tax) 3.68%

Equity % 95.24%

Cost of Equity 8.65%

WACC 8.42%

Market Risk Premium 6.10%

CERN Beta (2/3) 0.89

Industry Beta (1/3) 1.20

Adjusted Beta 0.99

Equity Risk Premium 6.06%

Risk-Free Rate (20 Yr Tr.) 2.59%

Cost of Equity 8.65%

Figure 12: Market Risk Prem.

Overview: We valued CERN using five different valuation methods: Discounted Cash Flow to

the Firm and Equity, Residual Income, and Relative Price and Enterprise Value Multiples. The

three intrinsic value models, DCFF, DCFE, and RI, respectively gave valuations of $96.28,

$96.87, and $94.45, supporting an undervaluation of CERN based on current market levels. The

enterprise value and price multiple models, computed slightly weaker valuations of $84.86 and

$89.42 respectively. Based on relative trading multiples CERN appears to be fairly valued with

an expected 12-month return on par with cost of capital. We believe that CERN is an industry

leader and are well positioned to capture additional market share. CERN’s peer group consists

of large software companies, many of which revenue streams are not supported by government

incentives through the HITECH Act. For these reasons we believe CERN holds a strong com-

petitive advantage against it’s peer group warranting a premium on their trading multiples. In

our assessment of CERN’s 12-month target price we placed equal weight on all 5 of our valua-

tions. Averaging the relative and intrinsic valuations strengthens the confidence in our projec-

tions, and hedges against the sensitivity of misguiding WACC and terminal value assumptions.

With a calculated 12-month price target of $92.38, we support a BUY Recommendation.

Growth: To give a better assessment of CERN’s growth we segmented our time horizon into 3 stages. Due to a large portion of

CERN’s revenue growth being driven by meaningful use incentives, we didn’t have the clarity to project granular pro-forma

statements past FY 2016. With CERN still being in the high growth stage, as well as being well positioned to capture unsaturated

international market growth, placing them in an terminal growth period after FY 2016 would be a poor projection of intrinsic

value. We decided to use a 10-year stair-step approach to taper our free cash flow growth to its terminal rate of 2.5% in FY 2026.

We project earnings to have a CAGR of 16% over the next 5 years. This will be driven from double-digit top-line revenue

growth, as well as 100-200 basis points of margin expansion per year. We believe that CERN’s gross margins will increase due

to a diminishing portion of their revenue mix being driven by technology resale (low margin business), but will continue to lev-

erage R&D and SG&A expense to drive operating margin expansion. CERN currently only captures 17% of their current clients

total annual IT spending. As EHR implementation incentive dollars start to decrease, we believe that CERN will drive revenue

growth by expanding its broad based solution portfolio to capture additional IT market share from existing clients. This will re-

sult in less of their revenue mix coming from software sales. CERN’s current international sales only comprise of 15% of their

total revenue. This will create a huge opportunity in the later half of the decade as the global economy recovers, which will drive

an increase in global healthcare spending. CERN is the best positioned of it’s competitors to seize this new market share, due to

the interoperability of their systems and their expertise in language translation and implementation of their systems.

7

Method Price Target % Weight Price x Weight

Residual Income $94.45 20.00% $18.89

DCFF $96.28 20.00% $19.26

DCFE $96.87 20.00% $19.37

Price Multiple $89.42 20.00% $17.88

Enterprise Multiple $84.86 20.00% $16.97

Target Share Price ($) $92.38


NASDAQ: CERN


Valuation (continued)

Intrinsic Valuation: For our intrinsic valuations we used the

data assumed in CERN’s pro-forma financial statements to

project future free cash flow. As stated earlier we assumed

CERN to be a 3-stage growth company. We assumed CERN

will maintain relatively stable amounts of depreciation and

amortization, as well as a consistent slight decline in net work-

ing capital. CERN is currently undergoing higher than normal

levels of capital expenditures, due to the building of a new

campus. Following management guidance we calculated

CAPEX to increase to $250 million for the next two years.

Management expects CAPEX to return to normal levels of

$160 million after FY 2014. We used the WACC calculation of

8.42% as the discount rate to free cash flow. To calculate

CERN terminal value, we used the stair-step approach dis-

cussed in the growth expectations. Starting with 10% free cash

flow growth in FY 2017, we tapered growth expectations to a

conservative terminal growth rate of 2.5% in FY 2026. The

free cash flow valuations were highly sensitive to WACC and

terminal growth rate assumptions. To accurately address this

issue we created a sensitivity chart to show the effects of differ-

ing WACC and terminal growth rate assumptions. We used

conservative estimates of all our assumptions to hedge against

an inflated price target. According to the DCFF, DCFE, and

Residual Income we computed CERN has an intrinsic value of

$96.28, $96.87, and $94.45 respectively. This supports an un-

dervaluation to the current market price of $81.62.

Figure 17: Weighted Average 12-Month Price Target


NASDAQ: CERN


Method Bear-Price Base-Price Bull-Price

Residual Income $86.50 $94.45 $102.40

DCFF $88.18 $96.28 $104.39

DCFE $88.72 $96.87 $105.03

Price Multiples $83.36 $89.42 $95.48

Enterprise Multiples $78.80 $84.86 $96.98

Scenario Price $85.11 $92.38 $100.86

Economic Probability 20.00% 60.00% 20.00%

Price x Weight $17.02 $55.43 $20.17


Figure 14: Bear/Base/Bull Analysis

$70 $80 $90 $100 $110

Figure 20: Price Target Range

8


NASDAQ: CERN


Relative Valuation: To get a better assessment of CERN’s financial position relative to it’s competitors we valued CERN on a

relative basis. We found that historic enterprise and price trading multiples were the best proxy for CERN’s valuation. The selec-

tion of a peer group was difficult due to limited number of like-sized competitors in the HIT space. CERN’s main rival, and most

equitable in enterprise value, is EPIC Systems Corp. Exploring into the public company universe, Allscripts (MDRX) is the larg-

est company in the HIT space; with 1/6 the market-cap of CERN. Due to the small size, less than $1 billion market-cap, of many

HIT companies, we comprised half of our peer group of large-cap software companies such as, Symantec Corp. (SYMC) and

Adobe Systems Inc., to adjust for market-cap discrepancies without compromising the high margin business CERN deals in.

Including these large-cap companies with some of CERN’s small-cap competitors, such as Allscripts (MDRX and Quality Sys-

tems Inc. (QSII), we averaged 4 price and enterprise value multiples of each company in our peer group to procreate trading

multiples that we could use to place a share price value on CERN’s trailing twelve-month financials. To capture the full view of

CERN’s income statement we multiplied Sales, EBITDA, EBIT, and Net Income by the respective trading multiple to find the

implied share price of CERN. The price target was acquired by finding the product of CERN trailing twelve-month sales,

EBITDA, EBIT, and earnings and the peer group’s trading multiples. The implied price chart shows the range of relative valua-

tions we computed. A bear/base/bear case was done for each multiple. By having a larger range of possible multiples we reduce

the risk to our price target, and address volatility future economic conditions could bring. As stated earlier in our valuation sum-

mary the relative valuation placed CERN near fairly valued compared to its peer group. The relative fair value rationale is

stemmed from required rate of return CERN must receive to meet or exceed their cost of capital. Even though the average rela-

tive price target is $87.14 the investor must receive 8.42% of capital appreciation to justify their assumed risk. This would equate

to a 12-month price target of $88.49 based on current market price. This would technically warrant a slight overvaluation of

1.55%. As stated in the overview we believe that CERN holds a competitive advantage to it’s HIT competitors, and also has

government incentives to support revenue growth where the peer software companies do not. Although we place a fair value

recommendation compared to a peer group we still hold an overall BUY recommendation on CERN with a 12-month target price

of $92.38.

Risks to Price Target: Miscalculation of WACC: CERN price is very sensitive to the discount rate of the DCFF. As shown in the sensitivity analysis

a slight variation in WACC will drive a different value. CERN beta has an R2 of 35% showing little correlation to market, which

could affect CAPM assumptions. Risk premium of the market is also an assumption with variability.

Inaccurate Margin Expansion and Revenue Growth Guidance: CERN management is very optimistic for the future. The

forecasted double-digit revenue growth and leveraging of R&D and SG&A for operating margin expansion could not go in their

favor. CERN is very dependent on government regulation and incentives to drive revenue growth. If meaningful use incentive

dollars were decreased it could have a material impact on CERN growth forecasts.

Weak Peer Group: There is not a publicly traded healthcare IT company with similar market cap to CERN. Valuing Cerner

against software companies with similar size and margins was the most accurate assessment for relative valuation. These com-

panies may not accurately portray CERN, warranting a premium P/E multiple to other software companies.

Terminal Growth Projections: CERN price is very vulnerable to the terminal growth projections. The 10-year stair step

method was used to help mitigate some of the terminal growth risk. CERN could reach a terminal growth phase sooner or later

than expected. This could cause a large fluctuation in target price.


Figure 18: Historic Enterprise Multiples ($ in millions)


NASDAQ: CERN


Trading Multiple LTM Bear Base Bull Bear-EV Base-EV Bull-EV Net Debt Bear-Eq. Val Base-Eq. Val Bull-Eq. Val Shares Bear-Price Base-Price Bull-Price

EV/Sales $2,570.68 5.2x 6.2x 8.2x $13,277.61 $15,848.29 $20,989.64 $196.66 $13,080.95 $15,651.63 $20,792.99 175.87 $74.38 $89.00 $118.23

EV/EBITDA $767.00 18.5x 19.5x 21.5x $14,193.12 $14,960.13 $16,494.13 $196.66 $13,996.47 $14,763.47 $16,297.48 175.87 $79.58 $83.95 $92.67

EV/EBIT $548.95 27.7x 28.7x 30.7x $15,218.01 $15,766.96 $16,864.86 $196.66 $15,021.35 $15,570.30 $16,668.21 175.87 $85.41 $88.53 $94.78

EV/Net Income $376.62 35.9x 36.9x 38.9x $13,533.66 $13,910.28 $14,663.51 $196.66 $13,337.01 $13,713.62 $14,466.86 175.87 $75.83 $77.98 $82.26

Target Share Price ($) $78.80 $84.86 $96.98

Figure 19: Historic Price Multiples ($ in millions)

Trading Multiple LTM Bear Base Bull Bear-EV Base-EV Bull-EV Net Debt Bear-Eq. Val Base-Eq. Val Bull-Eq. Val Shares Bear-Price Base-Price Bull-Price

Price/Sales $2,570.68 5.3x 6.3x 7.3x $13,833.00 $16,403.68 $18,974.35 $196.66 $13,636.34 $16,207.02 $18,777.70 175.87 $77.54 $92.15 $106.77

Price/EBITDA $767.00 21.0x 22.0x 23.0x $16,330.05 $17,097.05 $17,864.06 $196.66 $16,133.39 $16,900.40 $17,667.40 175.87 $91.73 $96.10 $100.46

Price/EBIT $548.95 24.1x 25.1x 26.1x $13,453.80 $14,002.75 $14,551.70 $196.66 $13,257.14 $13,806.09 $14,355.05 175.87 $75.38 $78.50 $81.62

Price/Net Income $376.62 41.5x 42.5x 43.5x $15,811.49 $16,188.11 $16,564.73 $196.66 $15,614.84 $15,991.45 $16,368.07 175.87 $88.79 $90.93 $93.07

Target Share Price ($) $83.36 $89.42 $95.48

9


NASDAQ: CERN



Government EHR Funding: The U.S. government currently has a deficit exceeding $15 trillion. CERN is extremely depend-

ent upon the government providing incentives for physicians and hospitals that adopt meaningful use EHR systems. With such

an unstable economy and large deficit it is always risky to rely upon government funding to drive revenues. Consequently,

CERN is naturally at risk to the government decreasing or eliminating the EHR funding.

Failing to Qualify for Meaningful Use Phase 2 and 3: CERN is one of only two HCIT providers that is considered a lock to

meet the Meaningful Use phase 2 and 3 qualifications. Revenue and growth projections for CERN are dependent upon fulfilling

these requirements and continuing to increase market share. If CERN were to fail to qualify for Meaningful Use Phases 2 and 3

then they would completely lose out on the advances in the HCIT industry. This would be effect their growth rate.

Decrease in HCIT Spending: Relying upon increased spending in the HCIT industry could potentially be a risky assumption.

Healthcare providers could decrease their HCIT spending for a variety of reasons. The biggest threat is providers funding drying

up after meaningful use phase 1. CERN would take a major hit if providers halted their EHR spending after completing mean-

ingful use phase 1.

Customer Implementation Issues: Ease of use is a primary decision factor when providers are deciding which EHR to pur-

chase. Healthcare providers demand integrated systems that are easy to use for their physicians and patients. Therefore if a phy-

sician is having trouble implementing the new EHR systems into his daily routine they are likely to switch providers. Also, if the

IT department of the healthcare provider is having difficulty using their HCIT system they pressure the management to switch

systems. Consequently if CERN’s system is considered difficult to implement that would negatively their revenue and conse-

quently our valuation.

Strong competition in the growing market: The competition remains strong in this industry and with the risk of meeting the

future stages of meaningful use, we fill there will be fewer firms competing in this space in the future. Currently, the U.S. HCIT

industry is the most competitive of the global HCIT regions; however, if they competitors are able to meet these satisfactory

stages there will be less room for CERN to grow later in the decade.

Growth through Acquisitions: CERN has generally grown organically, unlike many of its peers. This has proven favorable

thus far when comparing CERN to competitors like Allscripts or McKesson. Most of these acquisitions make interoperability

more difficult between systems making it more of a stretch to reach meaningful use in the later stages. With the plethora of prod-

ucts and platforms offered by companies recently merged, there often tends to be a lack of consistency. A large acquisition could


NASDAQ: CERN


$70 $80 $90 $100 $110

Investment Risks

Bear/Base/Bull: The HIT sector is currently undergoing favorable

market conditions through government incentive programs. It is esti-

mated that incentive dollars for EHR implementation are boosting the

entire sectors top-line revenue growth by 3-6%. CERN is a large

benefactor of these fortunate market conditions. If the future of the

HIT sector turns out to be less positive than expected, CERN could

experience a diminishing growth rate sooner than expected. CERN’s

earnings guidance is known to take a conservative approach, and has

met or exceeded guidance 59 out of the last 60 quarters. We sided

with management and valued CERN with conservative growth as-

sumptions. This could create an opportunity for underestimating their

growth and coincidentally underestimating their price target. To ad-

dress the issue of a more bearish or bullish economy than expected we

did a Bear/Base/Bull scenario analysis. We placed the probability of a

more bearish or bullish economy than our expected case at 20% each.

This weighted our target price of $92.38 at 60%, a bear case scenario

of $85.11 at 20%, and a bull case scenario at $100.86. After weighing

in economic improbabilities we calculated a target share price of

$92.62; only $0.24 higher than our 12-month target price. Even in a

bear case scenario where EHR incentives are less prevalent than ex-

pected CERN will still have capital appreciation over a 12-month time

horizon. This warrants s a BUY recommendation for CERN, and vali-

dates our 12-month target price of $92.38

Figure 20: Price Target Range

10


NASDAQ: CERN


Appendix Table of Contents


NASDAQ: CERN


Order Appendix Name Page #

Appendix A Pro-Forma Income Statement 12

Appendix B Pro-Forma Balance Sheet 13

Appendix C Pro-Forma Statement of Cash Flows 14

Appendix D Benchmarking Analysis- Financial Statistics and Ratios, Page 1 15

Appendix E Benchmarking Analysis- Financial Statistics and Ratios, Page 2 16

Appendix F Comparable Company Analysis 17

Appendix G Discounted Cash Flow to the Firm Valuation 18

Appendix H Discounted Cash Flow to Equity Valuation 19

Appendix I Residual Income Valuation 20

Appendix K Meaningful Use Requirements, Page 1 21

Appendix L Meaningful Use Requirements, Page 2 22

Appendix M Meaningful Use Requirements, Page 3 23

Appendix N Meaningful Use Requirements, Page 4 24

Appendix O Meaningful Use Adoption Table 25

11

CA

VE C

AP

ITAL M

AN

AG

EMEN

T CFA

Institu

te Resea

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hallen

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NA

SD

AQ

: CERN

CER

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CO

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Appen

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12

Period Ended2007

20082009

20101Q

112Q

113Q

114Q

112011

1Q12A

2Q12A

3Q12A

4Q12E

2012A/E

2013E2014E

2015E2016E

Revenues:

System Sales

500.32522.37

504.56550.79

140.38157.15

188.70220.49

706.71225.82

195.30229.93

253.01904.05

1015.461141.42

1274.451403.92

Support, Maintenance &

Services982.78

1115.901136.87

1266.98340.99

355.33371.47

383.961451.75

403.90426.05

432.28439.50

1701.731955.13

2222.772510.27

2797.12

Reimbursed Travel

36.7837.76

30.4332.45

10.2911.75

11.4711.18

44.6911.49

16.0214.28

11.4053.18

60.6268.66

77.2485.74

Total Revenue1519.88

1676.031671.86

1850.22491.66

524.22571.64

615.632203.15

641.21637.36

676.48703.91

2658.963031.21

3432.853861.96

4286.77

Cost of Revenues:

Cost of System Sales

181.74197.15

186.63221.06

58.1061.89

84.2792.31

296.56116.96

100.57100.67

106.71424.90

475.74533.04

593.25651.42

Cost of Support, Maintenance &

Services61.59

61.1564.14

66.8522.29

24.8524.72

28.56100.42

29.5730.91

34.6332.52

127.63145.90

165.04185.46

205.62

Cost of Reimbursed Travel

36.7837.76

30.4332.45

10.2911.75

11.4711.18

44.6911.49

16.0214.28

11.4053.18

60.6268.66

77.2485.74

Total Cost of Revenue280.11

296.06281.20

320.3690.68

98.48120.46

132.05441.67

158.01147.50

149.58150.63

605.71682.27

766.75855.95

942.77

Gross Profit

1239.771379.97

1390.671529.87

400.98425.74

451.18483.58

1761.48483.20

489.86526.90

553.292053.25

2348.952666.10

3006.003344.00

Operating Expenses:

Selling / General / Adm

inistrative Expense665.42

711.86702.61

774.28205.06

216.21224.99

236.02882.28

251.21246.93

265.87287.51

1051.521183.58

1323.241469.33

1609.52

Research & D

evelopment

217.10221.39

207.44203.86

52.0949.87

51.6354.11

207.7051.76

53.4257.21

60.43222.82

231.28239.61

244.46243.49

EBITDA

357.25446.72

480.62551.73

143.84159.65

174.56193.45

671.50180.23

189.51203.82

205.34778.91

934.091103.25

1292.211490.99

Depreciation / Am

ortization153.17

167.83188.61

192.4050.14

52.5354.17

55.72211.70

52.7953.43

56.1258.35

220.69247.04

274.63303.16

330.08

Operating Incom

e (EBIT)204.08

278.89292.01

359.3393.70

107.98120.39

137.73459.80

127.44136.08

147.70146.99

558.21687.04

828.63989.05

1160.90

Other Incom

e (Expenses):

Interest Expense - Non-O

perating-11.94

-10.55-8.49

-6.91-1.50

-1.07-1.35

-1.42-5.34

-1.460.00

0.00-5.19

-6.65-6.06

-5.49-4.94

-4.39

Interest / Investment Incom

e, Non-O

perating13.21

13.608.80

10.353.48

3.954.12

3.6415.19

4.080.00

0.0010.54

14.6215.16

15.7916.53

17.25

Other, N

et-1.39

-0.510.37

-0.560.04

0.010.01

0.000.05

0.012.81

3.35-6.17

0.000.00

0.000.00

0.00

Total Other Incom

e (Expenses)-0.12

2.540.68

2.882.01

2.892.78

2.229.90

2.632.81

3.35-0.81

7.989.09

10.3011.59

12.86

Net Incom

e Before Taxes203.97

281.43292.68

362.2195.71

110.85123.17

139.96469.69

130.06138.90

151.05146.18

566.19696.14

838.921000.63

1173.77

Income Tax Expense

76.8492.77

99.22124.94

31.1538.82

44.3348.77

163.0741.36

41.0752.16

63.58198.17

243.65293.62

350.22410.82

Net Incom

e127.13

188.66193.47

237.2764.55

72.0578.84

91.19306.63

88.7197.83

98.8982.59

368.02452.49

545.30650.41

762.95

Basic Weighted Average Shares

158.79161.10

161.96164.92

169.88168.30

169.14169.47

168.63169.97

170.71171.25

171.25171.25

171.28171.32

171.35171.39

Basic EPS0.80

1.171.19

1.440.38

0.430.47

0.541.82

0.520.57

0.580.48

2.152.64

3.183.80

4.45

Diluted W

eighted Average Shares166.44

166.87167.76

170.85172.65

173.59174.28

174.49173.87

175.03175.63

175.87175.00

175.00175.00

175.00175.00

175.00

Diluted EPS

0.761.13

1.151.39

0.370.42

0.450.52

1.760.51

0.560.56

0.472.10

2.593.12

3.724.36

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JCJ G

RO

UP

INC.

CFA In

stitute R

esearch

Challen

ge

NA

SD

AQ

: CERN

CER

NER

CO

RP.

Rep

ort Crea

ted Ja

n 1

1, 2

01

3

Appen

dix

C: P

ro-Fo

rma S

tatem

ent o

f Cash

Flow

s

14

CA

VE C

AP

ITAL M

AN

AG

EMEN

T CFA

Institu

te Resea

rch C

hallen

ge

NA

SD

AQ

: CERN

CER

NER

CO

RP.

Period Ended2008

20092010

1Q11

2Q11

3Q11

4Q11

20111Q

12A2Q

12A3Q

12A4Q

12E2012A/E

2013E2014E

2015E2016E

Net Incom

e188.66

193.47237.27

64.5572.05

78.8491.19

306.6388.71

97.8398.89

82.59368.02

452.49545.30

650.41762.95

Operating Activities:

Depreciation/Amortization

167.83188.61

192.4050.14

52.5354.17

55.72211.70

52.7953.43

56.1258.35

220.69247.04

274.63303.16

330.08

Net Change in Current Assets-75.93

-37.5212.44

-17.87-38.17

-36.83-59.61

-152.4829.92

16.84-26.01

-146.24-125.49

-2.76-3.06

-3.23-3.13

Net Change in Current Liabilities53.11

16.87-52.16

8.8936.12

26.5561.22

132.784.80

21.6130.88

24.5971.75

-15.82-17.07

-18.24-18.05

Net Change in Working Capital

-22.82-20.65

-39.72-8.99

-2.05-10.28

1.61-19.70

34.7238.45

4.87-121.64

-53.74-18.59

-20.13-21.46

-21.19

Other Adjustm

ents to Net Income

-27.26-22.44

-43.77190.16

-68.29-71.65

-73.20-22.12

73.27-22.47

61.55-99.04

23.45-32.57

-62.14-100.59

-127.22

Cash from O

perating Activities306.41

338.99346.18

295.8754.24

51.0875.32

476.51249.49

167.24221.43

-79.73558.43

648.38737.66

831.52944.62

Investing Activities:

Net CapEx on Fixed Assets (Land, Buildings, Equip.)-109.01

-98.68-80.83

-95.530.00

0.000.00

-95.53-26.36

-78.16-129.97

84.49-150.00

-150.00-100.00

-50.00-50.00

Net CapeEx on Intangible Assets-96.91

-79.80-74.71

-132.790.00

0.000.00

-132.79-100.27

0.000.00

0.00-100.27

-100.27-107.83

-110.01-109.57

Net Change in Goodwill

-2.75-4.81

-9.89-1.26

-26.571.33

-23.97-50.46

0.000.00

0.000.00

0.000.00

0.000.00

0.00

Net Change in Short Term Investm

ents123.20

-278.71-39.39

-69.81-41.65

-56.04-7.63

-175.13-81.01

-64.57-73.69

-45.58-264.84

-205.58-271.98

-343.44-400.88

Net Change in Long Term Investm

ents & O

ther LT Assets-103.91

46.72-258.62

-80.03-3.43

-19.96-36.47

-139.89-41.52

-51.90-67.35

36.33-124.44

-140.10-181.26

-225.37-259.65

Cash from Investing Activities

-189.38-415.28

-463.44-379.42

-71.65-74.67

-68.07-593.80

-249.16-194.63

-271.0175.25

-639.55-595.95

-661.06-728.82

-820.10

Financing Activities:

Net Stock Issued (Repurchased)11.21

66.4988.28

41.0231.20

21.7412.57

106.5336.37

35.7722.52

0.0094.66

0.000.00

0.000.00

Net Long Term Debt Issued (Repurchased)

-40.66-18.97

1.7712.59

15.6918.99

-7.8739.40

1.3513.21

12.3734.97

61.9029.80

32.1934.67

35.83

Cash from Financing Activities

-29.4547.52

90.0553.60

46.9040.73

4.70145.93

37.7248.98

34.8934.97

156.5629.80

32.1934.67

35.83

Net Change in Cash87.58

-28.77-27.21

-29.9429.49

17.1411.95

28.6438.05

21.59-14.69

30.4975.44

82.23108.79

137.37160.35

Net Cash - Beginning Balance182.91

270.49241.72

214.51184.57

214.06231.19

214.51243.15

281.20302.79

288.10243.15

318.59400.82

509.61646.99

Net Cash - Ending Balance270.49

241.72214.51

184.57214.06

231.19243.15

243.15281.20

302.79288.10

318.59318.59

400.82509.61

646.99807.34

JCJ G

RO

UP

INC.

CFA In

stitute R

esearch

Challen

ge

NA

SD

AQ

: CERN

CER

NER

CO

RP.

Rep

ort Crea

ted Ja

n 1

1, 2

01

3

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ench

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ing A

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ancia

l Sta

tistics and R

atio

s, Page 1

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Institu

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SD

AQ

: CERN

CER

NER

CO

RP.

Company ($ in m

illions)Ticker

RevenueGross

ProfitEBITDA

EBITFCF

Net Income

Gross Profit

(%)EBITDA (%)

EBIT (%)FCF (%)

Net Income

(%)1-Yr Sales

1-Yr EBITDA1-Yr EPS

Cerner CorpCERN

$2,570.68$1,983.55

$767.00$548.95

$537.09$376.62

77.16%29.84%

21.35%20.89%

14.65%18.34%

16.76%23.40%

Comparable Com

panies

CA Inc.CA

$4,748.00$4,110.00

$1,874.00$1,456.00

$1,370.00$936.00

86.56%39.47%

30.67%28.85%

19.71%-4.00%

7.78%2.13%

Intuit Inc.INTU

$4,262.00$3,486.00

$1,409.00$1,185.00

$1,050.00$837.00

81.79%33.06%

27.80%24.64%

19.64%12.52%

-25.00%10.53%

Adobe Systems Inc.

ADBE$4,402.41

$3,927.23$1,504.85

$1,210.42$1,258.49

$784.1689.21%

34.18%27.49%

28.59%17.81%

6.65%3.76%

5.13%

Symantec Corp

SYMC

$6,763.00$5,637.00

$1,817.00$1,164.00

$1,278.00$1,164.00

83.35%26.87%

17.21%18.90%

17.21%1.07%

6.78%12.50%

Quality Systems Inc.

QSII$456.18

$281.15$125.28

$103.66$57.85

$67.3761.63%

27.46%22.72%

12.68%14.77%

7.89%-15.00%

-25.71%

Greenway Medical Technologies

GWAY

$131.14$72.67

$10.85$5.15

$1.31$3.32

55.41%8.27%

3.93%1.00%

2.53%27.77%

0.12%-96.00%

Red Hat Inc.RHT

$1,224.36$1,041.03

$260.24$206.11

$390.49$146.67

85.03%21.26%

16.83%31.89%

11.98%14.67%

-1.64%-14.29%

Check Point Software TechnologyCHKP

$1,330.88$1,176.70

$753.90$728.68

$779.94$605.83

88.42%56.65%

54.75%58.60%

45.52%7.80%

8.65%15.38%

Medidata Solutions Inc.

MDSO

$206.91$147.74

$27.35$19.44

$13.68$30.16

71.40%13.22%

9.39%6.61%

14.58%20.60%

-7.36%-50.00%

Autodesk Inc.ADSK

$2,297.70$2,063.70

$473.20$349.80

$534.00$244.90

89.82%20.59%

15.22%23.24%

10.66%-0.11%

-12.46%-59.38%

ANSYS Inc.ANSS

$775.48$639.30

$368.47$285.76

$279.02$194.88

82.44%47.51%

36.85%35.98%

25.13%13.86%

15.75%14.29%

Computer Program

s & Systems Inc.

CPSI$177.61

$78.06$42.52

$39.44$15.13

$27.3943.95%

23.94%22.21%

8.52%15.42%

7.44%4.84%

16.67%

Synopsys Inc.SNPS

$1,756.02$1,386.36

$352.21$195.37

$431.88$182.40

78.95%20.06%

11.13%24.59%

10.39%16.31%

-14.44%-32.14%

Nuance Comm

unications Inc.NUAN

$1,651.51$1,046.58

$380.38$193.20

$410.09$207.14

63.37%23.03%

11.70%24.83%

12.54%27.72%

36.62%85.71%

Allscripts Healthcare SolutionM

DRX$1,483.56

$646.10$242.32

$96.57$205.49

$49.1743.55%

16.33%6.51%

13.85%3.31%

-0.84%-14.60%

-50.00%

Mean

73.66%27.46%

20.96%22.85%

16.08%10.62%

-0.41%-11.01%

Median

81.79%23.94%

17.21%24.59%

14.77%7.89%

0.12%2.13%

Min

43.55%8.27%

3.93%1.00%

2.53%-4.00%

-25.00%-96.00%

Max

89.82%56.65%

54.75%58.60%

45.52%27.77%

36.62%85.71%

Growth Rates

LTM Financial Statistics

LTM Profitability M

argins

JCJ G

RO

UP

INC.

CFA In

stitute R

esearch

Challen

ge

NA

SD

AQ

: CERN

CER

NER

CO

RP.

Rep

ort Crea

ted Ja

n 1

1, 2

01

3

Appen

dix

E: Ben

chm

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ing A

naly

sis– Fin

ancia

l Statistics a

nd R

atio

s, Page 2

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AN

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EMEN

T CFA

Institu

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SD

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: CERN

CER

NER

CO

RP.

TickerROIC (%)

ROE (%)ROA (%)

Debt/EquityBook

Value/ShareDebt/Assets

Quick RatioCurrent Ratio

Cash RatioEBIT/ Int. Exp.

A/R Turn.

Days

A/P Turn.

Days

R&D/Sales

(%)

CAPEX/

Sales (%)

Cerner CorpCERN

7.96%15.36%

11.93%7.29%

$15.905.67%

3.2x3.5x

2.1x147.7x

77.265.0

17.41%7.66%

Comparable Com

panies

CA Inc.CA

8.00%17.02%

8.28%24.28%

$11.7411.62%

0.9x1.0x

0.7x35.0x

45.753.1

10.53%0.87%

Intuit Inc.INTU

-2.55%32.79%

18.24%18.87%

$9.2611.53%

0.7x1.2x

0.5x-8.6x

15.079.0

16.24%10.82%

Adobe Systems Inc.

ADBE5.97%

13.07%8.65%

23.47%$13.01

15.69%3.3x

3.4x2.8x

16.3x46.5

47.416.88%

7.17%

Symantec Corp

SYMC

7.89%24.15%

9.20%60.16%

$7.3322.74%

0.9x1.0x

0.8x9.4x

38.594.5

14.48%5.24%


QSII12.79%

23.18%15.43%

0.00%$5.26

0.00%2.1x

2.4x1.0x

0.0x121.2

15.97.02%

1.28%


GWAY

-0.37%0.00%

3.09%0.00%

$3.450.00%

1.9x2.1x

1.1x0.0x

57.462.8

13.20%3.82%

Red Hat Inc.RHT

40.29%10.31%

5.97%0.00%

$7.680.00%

1.3x1.5x

1.0x0.0x

58.5154.9

18.96%6.31%


290.84%19.33%

14.72%0.00%

$16.070.00%

2.3x2.3x

1.9x0.0x

60.3605.7

8.23%0.35%


MDSO

130.34%29.09%

15.97%0.13%

$4.970.08%

2.2x2.4x

1.8x96.3x

45.218.9

19.27%1.21%

Autodesk Inc.ADSK

23.61%12.74%

7.61%5.45%

$8.983.21%

1.6x1.8x

1.3x711.0x

44.0149.5

26.12%3.01%

ANSYS Inc.ANSS

5.18%10.86%

7.94%4.20%

$20.483.12%

1.4x1.8x

1.2x116.5x

33.711.4

16.53%1.80%

Computer Program

s & Systems Inc.

CPSI24.76%

46.29%34.79%

0.00%$5.77

0.00%2.7x

3.1x1.2x

0.0x56.7

10.70.00%

1.44%

Synopsys Inc.SNPS

2.27%7.93%

4.85%5.40%

$16.583.25%

0.8x0.9x

0.6x0.0x

51.7339.2

33.12%4.73%

Nuance Comm

unications Inc.NUAN

1.62%7.92%

4.19%77.16%

$8.7936.49%

1.6x1.8x

1.2x2.7x

73.359.3

13.65%1.23%


DRX1.22%

3.59%2.03%

35.39%$7.58

19.10%0.9x

1.2x0.2x

5.5x91.6

19.79.67%

4.64%

Mean

36.79%17.22%

10.73%16.97%

979.74%8.45%

1.6x1.9x

1.2x65.6x

55.9114.8

14.93%3.59%

Median

7.89%13.07%

8.28%5.40%

878.67%3.21%

1.6x1.8x

1.1x2.7x

51.759.3

14.48%3.01%

Min

-2.55%0.00%

2.03%0.00%

344.72%0.00%

0.7x0.9x

0.2x-8.6x

15.010.7

0.00%0.35%

Max

290.84%46.29%

34.79%77.16%

2048.22%36.49%

3.3x3.4x

2.8x711.0x

121.2605.7

33.12%10.82%

Return on Investment

Capital StructureCoverage

Asset Managem

ent

JCJ G

RO

UP

INC.

CFA In

stitute R

esearch

Challen

ge

NA

SD

AQ

: CERN

CER

NER

CO

RP.

Rep

ort Crea

ted Ja

n 1

1, 2

01

3

Appen

dix

F: Com

para

ble Co

mpany A

naly

sis

17

CA

VE C

AP

ITAL M

AN

AG

EMEN

T CFA

Institu

te Resea

rch C

hallen

ge

NA

SD

AQ

: CERN

CER

NER

CO

RP.

Company

TickerStock Price

(1/12/13)

EV

(1/12/13)

Diluted

SharesEV/Sales

EV/EBITDAEV/EBIT

EV/

Net Income

EV/FCFP/E

P/BP/FCF

P/SalesP/EBITDA

P/EBIT

Cerner CorpCERN

$81.62$13,160.00

175.875.1x

17.2x24.0x

34.9x24.5x

38.1x5.1x

26.7x5.6x

18.7x26.1x

Comparable Com

panies

CA Inc.CA

$174.01$24,590.00

459.005.2x

13.1x16.9x

26.3x17.9x

85.3x14.8x

58.3x16.8x

42.6x54.9x

Intuit Inc.INTU

$62.62$18,480.00

296.004.3x

13.1x15.6x

22.1x17.6x

22.1x6.8x

17.7x4.3x

13.2x15.6x

Adobe Systems Inc.

ADBE$38.09

$16,820.00499.76

3.8x11.2x

13.9x21.4x

13.4x24.3x

2.9x15.1x

4.3x12.6x

15.7x

Symantec Corp

SYMC

$19.94$12,890.00

708.001.9x

7.1x11.1x

11.1x10.1x

12.1x2.7x

11.0x2.1x

7.8x12.1x


QSII$17.90

$940.6959.39

2.1x7.5x

9.1x14.0x

16.3x15.8x

3.4x18.4x

2.3x8.5x

10.3x


GWAY

$15.98$437.81

30.603.3x

40.4x85.0x

131.7x333.0x

147.1x4.6x

372.0x3.7x

45.1x95.0x

Red Hat Inc.RHT

$54.45$9,630.00

195.807.9x

37.0x46.7x

65.7x24.7x

72.7x7.1x

27.3x8.7x

41.0x51.7x


$48.46$8,430.00

208.726.3x

11.2x11.6x

13.9x10.8x

16.7x3.0x

13.0x7.6x

13.4x13.9x


MDSO

$43.53$960.83

25.684.6x

35.1x49.4x

31.9x70.3x

37.1x8.8x

81.7x5.4x

40.9x57.5x

Autodesk Inc.ADSK

$36.80$7,050.00

229.903.1x

14.9x20.2x

28.8x13.2x

34.5x4.1x

15.8x3.7x

17.9x24.2x

ANSYS Inc.ANSS

$72.83$6,270.00

94.768.1x

17.0x21.9x

32.2x22.5x

35.4x3.6x

24.7x8.9x

18.7x24.1x

Computer Program

s & Systems Inc.

CPSI$51.18

$543.4611.07

3.1x12.8x

13.8x19.8x

35.9x20.7x

8.9x37.4x

3.2x13.3x

14.4x

Synopsys Inc.SNPS

$31.81$4,240.00

153.272.4x

12.0x21.7x

23.2x9.8x

26.7x1.9x

11.3x2.8x

13.8x25.0x

Nuance Comm

unications Inc.NUAN

$23.02$8,180.00

322.425.0x

21.5x42.3x

39.5x19.9x

35.8x2.6x

18.1x4.5x

19.5x38.4x


DRX$10.10

$2,090.00172.75

1.4x8.6x

21.6x42.5x

10.2x35.5x

1.3x8.5x

1.2x7.2x

18.1x

Mean

4.2x17.5x

26.7x34.9x

41.7x41.5x

5.1x48.7x

5.3x21.0x

31.4x

Median

3.8x13.1x

20.2x26.3x

17.6x34.5x

3.6x18.1x

4.3x13.8x

24.1x

Min

1.4x7.1x

9.1x11.1x

9.8x12.1x

1.3x8.5x

1.2x7.2x

10.3x

Max

8.1x40.4x

85.0x131.7x

333.0x147.1x

14.8x372.0x

16.8x45.1x

95.0x

Enterprise Multiples

Price Multiples


NASDAQ: CERN


Appendix G: Discounted Cash Flow to the Firm Valuation


NASDAQ: CERN


($ in mill ions) FY 2007A FY 2008A FY 2009A FY 2010A FY 2011A FY 2012E FY 2013E FY 2014E FY 2015E FY 2016E

Net Income $127.13 $188.66 $193.47 $237.27 $306.63 $368.02 $452.49 $545.30 $650.41 $762.95

Interest Expense (1-Tax) -$7.44 -$7.07 -$5.61 -$4.53 -$3.49 -$4.32 -$3.94 -$3.57 -$3.21 -$2.85

Depreciation & Amortization $153.17 $167.83 $188.61 $192.40 $211.70 $220.69 $247.04 $274.63 $303.16 $330.08

Other Non-Cash Charges -$27.26 -$22.44 -$43.77 -$22.12 $23.45 -$32.57 -$62.14 -$100.59 -$127.22

CAPEX -$184.26 -$205.92 -$178.48 -$155.54 -$228.32 -$250.27 -$250.27 -$207.83 -$160.01 -$159.57

Change in Net Working Capital -$16.58 -$22.82 -$20.65 -$39.72 -$19.70 -$53.74 -$18.59 -$20.13 -$21.46 -$21.19

Free Cash Flow to the Firm $120.06 $180.46 $229.86 $318.38 $313.20 $396.51 $471.79 $635.80 $818.24 $957.50

Discount Period $0.92 $0.85 $0.78 $0.72 $0.67

Present Value of Free Cash Flow $365.73 $401.38 $498.91 $592.22 $639.21

Free Cash Flow Growth 50.31% 27.37% 38.51% -1.63% 26.60% 18.99% 34.76% 28.69% 17.02%

FY 2017E FY 2018E FY 2019E FY 2020E FY 2021E FY 2022E FY 2023E FY 2024E FY 2025E FY 2026E

Free Cash Flow to the Firm $1,053.25 $1,148.04 $1,239.89 $1,326.68 $1,406.28 $1,476.59 $1,535.66 $1,581.73 $1,629.18 $1,678.05

Growth Rate 10.00% 9.00% 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 3.00% 3.00%

Discount Period 0.62 0.57 0.52 0.48 0.45 0.41 0.38 0.35 0.32 0.30

Present Value of Free Cash Flow 648.54$ 652.03$ 649.52$ 641.02$ 626.73$ 606.98$ 582.25$ 553.15$ 525.51$ 499.25$

Total PV of FCFF $8,482 Enterprise Value $17,130 Terminal Year FCFE $1,678

Terminal Value $29,067 Less: MV Debt 197 WACC 8.42%

Discount Factor 0.30 Terminal Growth 2.50%

PV of Terminal Value $8,648 Implied Equity Value $16,933

% of Enterprise Value 50.48% Diluted Shares Outstanding 175.87 Terminal Value $29,067

Enterprise Value $17,130 Target Share Price ($) $96.28

Terminal

GrowthWACC

96.28$ 7.0% 7.5% 8.0% 8.5% 9.0% 9.5% 10.0% 10.5% 11.0%

2.0% $123.24 $110.43 $99.80 $90.85 $83.22 $76.63 $70.90 $65.87 $61.42

2.5% $131.46 $116.73 $104.72 $94.76 $86.35 $79.18 $72.99 $67.60 $62.86

3% $141.74 $124.43 $110.63 $99.37 $90.01 $82.12 $75.39 $69.57 $64.49

3.5% $154.95 $134.06 $117.85 $104.91 $94.34 $85.56 $78.15 $71.81 $66.34

4.0% $172.57 $146.44 $126.87 $111.67 $99.53 $89.62 $81.37 $74.40 $68.44

Enterprise Value Implied Equity Value Terminal Value

Sensitivity Analysis (Possible Price Targets)

Historical Projected

Terminal Stair-Step

18


NASDAQ: CERN


Appendix H: Discounted Cash Flow to Equity Valuation


NASDAQ: CERN



Net Income $127.13 $188.66 $193.47 $237.27 $306.63 $368.02 $452.49 $545.30 $650.41 $762.95

Net Borrowing -$50.38 -$20.97 -$27.76 $33.78 $68.43 $31.67 $38.17 $45.53 $53.41

Depreciation & Amortization $153.17 $167.83 $188.61 $192.40 $211.70 $220.69 $247.04 $274.63 $303.16 $330.08

Other Non-Cash Charges -$27.26 -$22.44 -$43.77 -$22.12 $23.45 -$32.57 -$62.14 -$100.59 -$127.22

CAPEX -$184.26 -$205.92 -$178.48 -$155.54 -$228.32 -$250.27 -$250.27 -$207.83 -$160.01 -$159.57

Change Net Working Capital -$16.58 -$22.82 -$20.65 -$39.72 -$19.70 -$53.74 -$18.59 -$20.13 -$21.46 -$21.19

Free Cash Flow to Equity $112.62 $123.01 $203.28 $286.09 $343.49 $460.62 $499.52 $670.40 $860.56 $1,008.05

Discount Period 0.92 0.85 0.78 0.72 0.66

Present Value of Free Cash Flow $423.93 $423.12 $522.63 $617.44 $665.66

Free Cash Flow Growth 9.23% 65.25% 40.74% 20.06% 34.10% 8.45% 34.21% 28.36% 17.14%


Free Cash Flow to Equity $1,108.86 $1,197.57 $1,281.40 $1,371.09 $1,453.36 $1,526.03 $1,587.07 $1,634.68 $1,683.72 $1,734.23

Growth Rate 10.00% 8.00% 7.00% 7.00% 6.00% 5.00% 4.00% 3.00% 3.00% 3.00%

Discount Period 0.61 0.56 0.51 0.47 0.44 0.40 0.37 0.34 0.31 0.29

Present Value of Free Cash Flow $673.90 $669.84 $659.65 $649.60 $633.73 $612.42 $586.19 $555.68 $526.77 $499.35

Total PV of FCFE $8,720 Terminal Year FCF $1,734 Equity Value $17,037

Terminal Value $28,884 Cost of Equity 8.65% Add: MV Debt 197

Discount Factor 0.29 Terminal Growth 2.50%

PV of Terminal Value $8,317 Implied Enterprise Value $17,234% of Enterprise Value 48.82% Terminal Value $28,884

Equity Value $17,037

Diluted Shares Outstanding 175.87


Terminal

Growth

96.87$ 7.0% 7.5% 8.0% 8.5% 9.0% 9.5% 10.0% 10.5% 11.0%

2.0% $129.17 $115.92 $104.93 $95.67 $87.77 $80.96 $75.03 $69.82 $65.21

2.5% $137.67 $122.44 $110.02 $99.71 $91.02 $83.59 $77.19 $71.61 $66.71

3% $148.29 $130.40 $116.12 $104.47 $94.80 $86.64 $79.66 $73.64 $68.39

3.5% $161.95 $140.35 $123.58 $110.20 $99.27 $90.18 $82.52 $75.96 $70.30

4.0% $180.16 $153.14 $132.91 $117.19 $104.63 $94.38 $85.85 $78.64 $72.48

WACC

Sensitivity Analysis (Possible Price Targets)

Enterprise ValueEquity Value


Terminal Stair-Step

Terminal Value

19


NASDAQ: CERN


Appendix I: Residual Income Valuation


NASDAQ: CERN



Beginning Book Value Per Share $7.06 $8.17 $9.66 $11.44 $13.63 $16.24 $18.87 $22.05 $25.84 $30.29

Net Income Per Share $0.80 $1.17 $1.19 $1.44 $1.82 $2.15 $2.64 $3.18 $3.80 $4.45

Return on Equity 11.32% 14.32% 12.31% 12.58% 13.36% 13.24% 14.00% 14.43% 14.69% 14.70%

Equity Charge Per Share $0.61 $0.71 $0.84 $0.99 $1.18 $1.41 $1.63 $1.91 $2.24 $2.62

Abnormal Rate of Return 2.67% 5.67% 3.66% 3.93% 4.70% 4.58% 5.34% 5.78% 6.03% 6.04%

Ending Book Value Per Share $7.86 $9.34 $10.85 $12.88 $15.45 $18.38 $21.51 $25.23 $29.64 $34.74

Residual Income Per Share $0.19 $0.46 $0.35 $0.45 $0.64 $0.74 $1.01 $1.27 $1.56 $1.83

Discount Period 0.92 0.85 0.78 0.72 0.66

Present Value of Residual Income $0.68 $0.85 $0.99 $1.12 $1.21

Residual Income Growth 16% 36% 26% 22% 17%


Residual Income Per Share $2.01 $2.21 $2.41 $2.63 $2.84 $3.04 $3.25 $3.45 $3.66 $3.84

Residual Income Growth 10% 10% 9% 9% 8% 7% 7% 6% 6% 5%

Discount Period 0.61 0.56 0.51 0.47 0.44 0.40 0.37 0.34 0.31 0.29

Present Value of Residual Income $1.22 $1.24 $1.24 $1.25 $1.24 $1.22 $1.20 $1.17 $1.14 $1.11

Beginning Book Value Per Share $13.63

PV of Future RI Per Share $16.89

Terminal Growth Rate 2.50%

Terminal Value $63.93



Terminal Stair-Step

Valuation

20


NASDAQ: CERN


Appendix K: Meaningful Use Requirements, Page 1

Source: CMS


NASDAQ: CERN


Source: Centers for Medicare & Medicaid Services (CMS)

Stage 1 Eligible Hospital (EH) and Critical Access Hospital (CAH) Meaningful use Core Objectives (must meet all)

1 Use CPOE for medication orders directly entered by any licensed healthcare professional who can enter orders into the

medical record per state, local, and professional guidelines.

2 Implement drug-drug and drug-allergy interaction checks.

3 Maintain an up-to-date problem list of current and active diagnoses.

4 Maintain active medication list.

5 Maintain active medication allergy list.

6 Record all of the following demographics: preferred language, sex, race, ethnicity, date of birth, date and preliminary

cause of death in the event of mortality in the eligible hospital or CAH.

7 Record and chart changes in the following vital signs: height, weight, blood pressure, calculate and display body mass

index (BMI), and plot and display growth charts for children 2-20 years, including BMI.

8 Record smoking for patients 13 years old or older.

9 Report hospital clinical quality measures to CMS or in the case of Medicaid eligible hospitals, the states.

10 Implement on clinical decision support rule related to a high priority hospital condition along with the ability to track

compliance with that rule.

11 Provide patients with an electronic copy of their health information (including diagnostic test results, problem list, medi-

cation lists, medication allergies, discharge summary, procedures), upon request.

12 Provide patients with an electronic copy of their discharge instructions at time of discharge, upon request.

13 Capability to exchange key clinical information (for example, problem list, medication list, medication allergies, and

diagnostic test results), among providers of care and patients authorized entities electronically.

14 Protect electronic health information created maintained by the certified EHR technology through the implementation of

appropriate technical capabilities.

Stage 1 Eligible Hospital (EH) and Critical Access Hospital (CAH) Meaningful Use Menu Measures (must meet 5 of 10)

1 Implement drug formulary checks.

2 Record advance directives for patients 65 years old or older.

3 Incorporate clinical lab-test results into EHR as structured data.

4 Generate lists of patients by specific conditions to use for quality improvement, reduction of disparities, research or out-

reach.

5 Use certified EHR technology to identify patient-specific education resources and provide those resources to the patient

is appropriate.

6 The eligible hospital or CAH who receives a patient from another setting of care or provider of care or believes an en-

counter is relevant should perform medication reconciliation.

7 The eligible hospital or CAH that transitions their patients to another setting of care or provider of care or refers their

patient to another provider of care should provide summary care record for each transition of care or referral.

8 Capability to submit electronic data to immunization registries or immunization information systems and actual submis-

sion according to applicable law and practice.

9 Capability to submit electronic data on reportable (as required by state of local law) lab results to public health agencies

and actual submission according to applicable law and practice.

10 Capability to submit electronic syndromic surveillance date to public health agencies and actual submission according to

applicable law and practice.

21


NASDAQ: CERN



Source: CMS


NASDAQ: CERN


Source: CMS

Stage 1 Eligible Professional (EP) Meaningful Use Core Objectives (must meet all)

1 Use CPOE for medication orders directly entered by any licensed healthcare professional who can enter orders into the

medical record per state, local and professional guidelines.

2 Implement drug-drug and drug-allergy interaction checks.

3 Maintain an up-to-date problem list of current and active diagnoses.

4 Generate and transmit permissible prescriptions electronically (eRx).

5 Maintain active medication list.

6 Maintain active medication allergy list.

7 Record all of the following demographics: preferred language, sex, race, ethnicity, date of birth.

8 Record and chart changes in the following vital signs: height, weight, blood pressure, calculate and display body mass

index (BMI).

9 Record smoking status for patients 13years old or older.

10 Report ambulatory clinical quality measures to CMS or, in the case of Medicaid EPs, the States.

11 Implement one clinical decision support rule relevant to specialty or high clinical priority along with the ability to track

compliance with that rule.

12 Provide Patients with an electronic copy of their health information (including diagnostics test results, problem list,

medication lists, medication allergies) upon request.

13 Provide clinical summaries for patients for each office visit.

14 Capability to exchange key clinical information (for example, problem list, medication list, medication allergies, and

diagnostic test results), among providers of care and patient authorized entities electronically.

15 Protect electronic health information created or maintained by the certified EHR technology through the implementation

of appropriate technical capabilities.

Stage 1 Eligible Professional (EP) Meaningful Use Menu Measures

1 Implement drug formulary checks.

2 Incorporate clinical lab test results into Certified EHR Technology as structured data.

3 Generate lists of patients by specific conditions to use for quality improvement, reduction of disparities, research, or out-

reach.

4 Use clinically relevant information to identify patients who should receive reminders for preventive/follow-up care and

send these patients the reminders, per patient preference.

5 Provide patients the ability to view online, download, and transmit their health information within four business days of

the information being available to the EP.

6 Use certified EHR technology to identify patient-specific education resources and provide those resources to the patient

is appropriate.

7 The EP who receives a patient from another setting of care or provider of care or believes an encounter is relevant should

perform medication reconciliation.


9 Capability to submit electronic data on reportable (as required by state of local law) lab results to public health agencies

and actual submission according to applicable law and practice.



22


NASDAQ: CERN


Appendix XX: Use This For Portrait Template

Source: CMS

Source: CMS


NASDAQ: CERN



Stage 2 Eligible Hospital (EH) and Critical Access Hospital (CAH) Meaningful Use Core Objectives (must meet all)

1

Use computerized provider order entry (CPOE) for medication, laboratory, and radiology orders directly entered by any

licensed healthcare professional who can enter orders into the medical record per state, local, and professional guide-

lines.

2 Record all of the following demographics: preferred language, sex, race, ethnicity, date of birth, date and preliminary

cause of death in the event of mortality in the eligible hospital or CAH.

3

Record and chart changes in the following vital signs: height/length and weight (no age limit); blood pressure (ages 3

and over); calculate and display body mass index (BMI); and plot and display growth charts for patients 0-20 years, in-

cluding BMI.

4 Record smoking status for patients 13 years old or older.

5 Use clinical decision support to improve performance on high-priority health conditions.

6 Provide patients the ability to view online, download, and transmit information about a hospital admission.

7 Protect electronic health information created or maintained by the Certified EHR Technology through the implementa-

tion of appropriate technical capabilities.


9 Generate lists of patients by specific conditions to use for quality improvement, reduction of disparities, research, or

outreach.

10 Use clinically relevant information from Certified EHR Technology to identify patient-specific education resources and

provide those resources to the patient.

11 The eligible hospital or CAH who receives a patient from another setting of care or provider of care or believes an en-

counter is relevant should perform medication reconciliation.

12 The eligible hospital or CAH who transitions their patient to another setting of care or provider of care or refers their

patient to another provider of care provides a summary care record for each transition of care or referral.

13 Capability to submit electronic data to immunization registries or immunization information systems except where pro-

hibited, and in accordance with applicable law and practice.

14 Capability to submit electronic reportable laboratory results to public health agencies, except where prohibited, and in

accordance with applicable law and practice.

15 Capability to submit electronic syndromic surveillance data to public health agencies, except where prohibited, and in

accordance with applicable law and practice.

16 Automatically track medications from order to administration using assistive technologies in conjunction with an elec-

tronic medication administration record (eMAR).

Stage 2 Eligible Hospital (EH) and Critical Access Hospital (CAH) Meaningful Use Menu Measures (must meet 3 of 6)

1 Record advance directives for patients 65 years old or older.

2 Record electronic notes in patient records.

3 Imaging results accessible through CEHRT.

4 Record patient family health history.

5 Generate and transmit permissible discharge prescriptions electronically (eRx).

6 Provide structured electronic lab results to ambulatory providers

23


NASDAQ: CERN


Appendix XX: Use This For Portrait Template

Source: CMS


NASDAQ: CERN



Source: CMS

Stage 2 Eligible Professional (EP) Meaningful Use Menu Measures (must meet 3 of 6)



2 Record electronic notes in patient records.

3 Imaging results accessible through CEHRT.

4 Record patient family health history.

5 Identify and report cancer cases to a state cancer registry.

6 Identify and report specific cases to a specialized registry (other than a cancer registry).

Stage 2 Eligible Professional (EP) Meaningful Use Core Objectives (must meet all)

1

Use computerized provider order entry (CPOE) for medication, laboratory, and radiology orders directly entered by any

licensed healthcare professional who can enter orders into the medical record per state, local, and professional guide-

lines.

2 Generate and transmit permissible prescriptions electronically (eRx).

3 Record all of the following demographics: preferred language, sex, race, ethnicity, date of birth.

4

Record and chart changes in the following vital signs: height/length and weight (no age limit); blood pressure (ages 3

and over); calculate and display body mass index (BMI); and plot and display growth charts for patients 0-20 years,

including BMI.

5 Record smoking status for patients 13 years old or older.

6 Use clinical decision support to improve performance on high-priority health conditions.

7 Provide patients the ability to view online, download, and transmit their health information within four business days of

the information being available to the EP.


9 Protect electronic health information created or maintained by the Certified EHR Technology through the implementa-

tion of appropriate technical capabilities.


11 Generate lists of patients by specific conditions to use for quality improvement, reduction of disparities, research, or

outreach.

12 Use clinically relevant information to identify patients who should receive reminders for preventive/follow-up care and

send these patients the reminders, per patient preference.

13 Use clinically relevant information from Certified EHR Technology to identify patient-specific education resources and

provide those resources to the patient.

14 The EP who receives a patient from another setting of care or provider of care or believes an encounter is relevant

should perform medication reconciliation.

15 The EP who transitions their patient to another setting of care or provider of care or believes an encounter is relevant

should perform medication reconciliation.

16 Capability to submit electronic data to immunization registries or immunization information systems except where pro-

hibited, and in accordance with applicable law and practice.

17 Use secure electronic messaging to communicate with patients on relevant health information.

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Appendix N: Meaningful Use Adoption

Year Calendar Year for which Medicaid EPs Who Adopted In

2011 2012 2013 2014 2015 2016

2011 $21,250

2012 $8,500 $21,250

2013 $8,500 $8,500 $21,250

2014 $8,500 $8,500 $8,500 $21,250

2015 $8,500 $8,500 $8,500 $8,500 $21,250

2016 $8,500 $8,500 $8,500 $8,500 $8,500 $21,250

2017 $8,500 $8,500 $8,500 $8,500 $8,500

2018 $8,500 $8,500 $8,500 $8,500

2019 $8,500 $8,500 $8,500

2020 $8,500 $8,500

2021 $8,500

Total $63,750 $63,750 $63,750 $63,750 $63,750 $63,750

Year Calendar Year for which Medicare EP Qualifies to Receive Incentive Payment

2011 2012 2013 2014 2015

2011 $18,000

2012 $12,000 $18,000

2013 $8,000 $12,000 $15,000

2014 $4,000 $8,000 $12,000 $12,000

2015 $2,000 $4,000 $8,000 $8,000 $0

2016 $2,000 $4,000 $4,000 $0

Total $44,000 $44,000 $39,000 $24,000 $0

10% bonus for

shortage area

$48,400 $48,400 $42,900 $26,400 $0

EPs may only qualify for one of the following Incentive programs.

Source: CMS

Source: CMS


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