CPSI(CPSI) - 2021 Q4 - Annual Report

Part I Business CPSI provides healthcare solutions for community hospitals and post-acute care facilities, with $280.6 million in 2021 revenues - CPSI provides healthcare solutions through six companies: Evident, TruBridge, American HealthTech (AHT), Get Real Health, TruCode, and Healthcare Resource Group (HRG)[21] Company Segments and Offerings | Segment/Company | Business Focus | | :--- | :--- | | Evident (Acute Care EHR) | Comprehensive EHR solutions (Thrive, Centriq) for community hospitals | | AHT (Post-acute Care EHR) | EHR solutions for skilled nursing and assisted living facilities | | TruBridge | Business management, consulting, managed IT, and Revenue Cycle Management (RCM) services | | Get Real Health | Patient engagement technology solutions | | TruCode | Cloud-based medical coding solutions | | HRG | Specialized RCM solutions (acquired March 1, 2022) | Fiscal Year 2021 Revenue | Metric | Value (USD) | | :--- | :--- | | 2021 Revenues | $280.6 million | Overview CPSI targets community hospitals (under 200 beds) and skilled nursing facilities, generating $280.6 million in 2021 revenues - The company's target market for acute care solutions is community hospitals with fewer than 200 beds, primarily focusing on those under 100 beds, which constitute 98% of its acute care hospital EHR customer base[25] - The target market for post-acute care solutions includes approximately 15,500 skilled nursing facilities[25] Industry Dynamics The U.S. healthcare industry faces significant challenges from COVID-19, regulatory changes, and the shift to value-based care - The COVID-19 pandemic has created historic financial and operational pressures for hospitals, including high costs for patient surges, supply chain disruptions, and revenue loss from lower non-emergent care volumes[27] - The company's community hospital clients are heavily impacted by changes in Medicare and Medicaid programs, which are under pressure due to federal and state budget constraints[31][32] - The ARRA's 'meaningful use' program, now called 'Promoting Interoperability', drove significant add-on sales from 2017-2019, but the passing of the October 1, 2019 compliance deadline reduced these revenue opportunities in 2020 and 2021[38] - In response to the pandemic-driven demand for virtual care, the company accelerated the release of its 'Talk With Your Doc' telehealth portal in April 2020, providing it free to customers through 2021[42] Strategy CPSI's strategy focuses on Core Growth, Margin Optimization, and Digital Innovation, supported by debt reduction and share repurchases - The company's transformation initiative focuses on Core Growth (cross-selling TruBridge, EHR takeaways), Margin Optimization (modernizing business for cost savings), and Digital Innovation (patient engagement, analytics)[44][45][46] - CPSI has shifted its capital allocation strategy to enhance flexibility, evidenced by reducing total bank debt from $143.5 million in 2017 to $100.4 million in 2021, increasing revolving credit availability, and replacing quarterly dividends with a $30.0 million stock repurchase program[55][57] - The company is exploring new revenue streams by targeting ambulatory surgery centers, behavioral health facilities, and expanding its inpatient EHR product into the Canadian market[59] Our Products and Services CPSI provides comprehensive EHR, RCM, and patient engagement solutions via subsidiaries, including a Cloud EHR (SaaS) option - Evident offers two main acute care EHR platforms: Thrive, a fully integrated system, and Centriq, a web-based platform with an intuitive user interface[65][66][73] - AHT provides integrated software solutions for the post-acute care industry, focusing on care management and financial/enterprise management for long-term care facilities[79] - TruBridge offers a suite of RCM products and services, managed IT services, patient engagement solutions through its Get Real Health acquisition, and encoder solutions through its TruCode acquisition[94][101][103] - The company offers a Cloud EHR (SaaS) option, allowing customers to access advanced EHR capabilities for a monthly fee without a large initial capital outlay[88] Software Development The company continuously invests in product enhancements, capitalizing software development costs amortized over five years Software Development Costs (in millions) | Year | Capitalized Costs | Total R&D Expenditures | | :--- | :--- | :--- | | 2021 | $9.4 | $30.4 | | 2020 | $3.3 | $33.5 | | 2019 | $0.0 | $36.9 | Clients, Sales and Marketing CPSI targets community hospitals and long-term care facilities, cross-selling TruBridge services into its EHR client base - The primary growth strategy for the TruBridge business is to leverage established sales relationships to cross-sell services into the substantial acute and post-acute EHR client base[118] Revenue by Geography (in thousands) | Region | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Domestic | $274,521 | $257,883 | $270,966 | | International | $6,108 | $6,605 | $3,668 | | Total | $280,629 | $264,488 | $274,634 | Backlog The company's twelve-month backlog shows increased recurring services and decreased non-recurring system purchases in 2021 Twelve-Month Revenue Backlog (in millions) | Backlog Type | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Non-recurring system purchases | ~$5 | ~$10 | | Recurring support, maintenance & TruBridge | ~$281 | ~$242 | Competition CPSI competes in a dynamic market based on product features, service quality, and price across acute care, post-acute care, and RCM segments - Acute Care EHR Competitors: Cerner, Meditech, and MEDHOST are principal competitors, with Allscripts and Epic Systems as secondary competitors in larger hospital markets[131][132] - Post-acute Care EHR Competitors: PointClickCare Corporation and MatrixCare, Inc. are the main competitors[134] - Business/RCM Services Competitors: Key competitors include Resolution Health, Ensemble Health Partners, nThrive, RelayHealth, and Change Healthcare[135] Human Capital CPSI had approximately 2,000 employees in 2021, focusing on talent retention, DEI, and competitive compensation, with COVID-19 safety measures - As of December 31, 2021, the company had approximately 2,000 employees, with the majority located in Alabama, Mississippi, Pennsylvania, and Minnesota[153] - The company launched its Inclusion, Diversity, Equity Alliance ("Team IDEA") in 2020 to strengthen engagement on DEI initiatives[160] - The company's COVID-19 response included forming an internal taskforce, hosting on-site vaccine clinics, and offering paid time off for vaccinations[156][157] Risk Factors The company faces diverse risks including COVID-19 impacts, market competition, regulatory uncertainty, system failures, and substantial indebtedness - Industry Risk: The ongoing COVID-19 pandemic could materially affect revenue, gross margin, and income due to decreased patient volumes at client hospitals and disruptions to new EHR system installations[185][186] - Business Risk: The company faces competition from companies with greater financial, technical, and marketing resources, which could lead to loss of clients or downward pressure on prices[228] - Product Risk: Breaches of security, viruses, or other cyber attacks could result in client claims, harm to reputation, and loss of clients, as healthcare information is a prime target for attackers[261][262] - Indebtedness Risk: As of December 31, 2021, the company had approximately $100.4 million of indebtedness, which could make it difficult to satisfy obligations and limit operational flexibility[293][294][295] Properties The company's corporate campus in Mobile, Alabama, has 135,500 square feet of office space on 16.5 acres, plus leased facilities - The company's principal executive office and corporate campus are located in Mobile, Alabama, consisting of approximately 135,500 square feet of office space on a 16.5-acre campus[335] Legal Proceedings The company is involved in routine litigation but has no claims considered material to its financial condition or results of operations Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities CPSI's common stock is on NASDAQ, with dividends suspended and a $30.0 million stock repurchase program initiated in 2020 - On September 4, 2020, the Board of Directors indefinitely suspended quarterly dividends and authorized a stock repurchase program of up to $30.0 million[341][342] Equity Repurchases (Q4 2021) | Period | Total Shares Purchased | Average Price Paid per Share ($) | | :--- | :--- | :--- | | Oct 2021 | — | — | | Nov 2021 | 3,134 | 29.68 | | Dec 2021 | — | — | | Total | 3,134 | 29.68 | Management's Discussion and Analysis of Financial Condition and Results of Operations CPSI's 2021 revenues increased 6% to $280.6 million, driven by TruBridge growth, with net income rising to $18.4 million despite decreased operating cash flow 2021 Financial Highlights vs. 2020 | Metric | 2021 | 2020 | Change | | :--- | :--- | :--- | :--- | | Total Revenues | $280.6M | $264.5M | +6% | | Net Income | $18.4M | $14.2M | +$4.2M | | Net Cash from Operations | $47.7M | $49.1M | -$1.4M | - The shift in customer preference to a SaaS license model continued, with SaaS installations representing 63% of new acute care EHR installations in 2021, compared to 68% in 2020 and 43% in 2019[363] - A reduction in force in February 2021, impacting 1.0% of the workforce, is expected to realize approximately $3.9 million in annual savings[367] - A change in the method for estimating capitalized software development labor costs resulted in an increase of approximately $4.6 million in capitalized amounts during 2021[370] Results of Operations Total revenues increased 6% to $280.6 million in 2021, driven by TruBridge growth, leading to increased operating and net income Revenue Breakdown by Segment (2021 vs 2020, in millions) | Revenue Source | 2021 | 2020 | % Change | | :--- | :--- | :--- | :--- | | System sales and support | $143.1 | $153.0 | -6.5% | | TruBridge | $137.5 | $111.5 | +23.3% | | Total sales revenues | $280.6 | $264.5 | +6.1% | - TruBridge revenues increased by $26.0 million (23%), driven by improving hospital patient volumes and the May 2021 acquisition of TruCode, which contributed $7.4 million[387] - Non-recurring system sales and support revenues decreased by $12.9 million (41%), primarily due to a decline in new non-SaaS customer implementations and fewer add-on application sales[387] - Product development expenses decreased by $3.1 million (9%), mainly due to a $5.5 million increase in capitalized labor costs following a change in estimation methodology[394] - The effective income tax rate decreased to 20% in 2021 from 24% in 2020, primarily due to lower provision-to-return adjustments and decreased tax shortfalls from stock-based compensation[402] Liquidity and Capital Resources As of December 31, 2021, CPSI had $11.4 million cash, $79.0 million credit availability, $100.4 million debt, and decreased operating cash flow Liquidity Position (as of Dec 31, 2021) | Item | Amount (USD) | | :--- | :--- | | Cash and cash equivalents | $11.4 million | | Remaining borrowing capacity | $79.0 million | | Outstanding indebtedness | $100.4 million | Cash Flow Summary (2021 vs 2020, in millions) | Cash Flow Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash from Operating | $47.7 | $49.1 | | Net cash used in Investing | ($69.9) | ($6.7) | | Net cash from/(used in) Financing | $20.9 | ($37.0) | - The acquisition of HRG on March 1, 2022, was funded by an additional $48 million draw on the revolving credit facility, increasing total indebtedness to approximately $148.4 million[294][406] Bookings Total bookings for 2021 decreased 14% to $70.2 million, primarily due to first-half headwinds and declining core EHR client bookings Bookings by Segment (in thousands) | Segment | 2021 | 2020 | | :--- | :--- | :--- | | Acute Care EHR | $37,633 | $42,449 | | Post-acute Care EHR | $3,240 | $6,341 | | TruBridge | $29,340 | $33,238 | | Total Bookings | $70,213 | $82,028 | - Bookings in the first half of 2021 were negatively impacted by COVID-19 distractions, reorganization transitions, and a focus on lower-value regulatory purchases[420] Critical Accounting Policies and Estimates Key accounting estimates include revenue recognition, credit losses, goodwill valuation, and capitalized software costs, with heightened impairment risk for Acute Care EHR - Revenue recognition requires significant judgment in identifying distinct performance obligations and determining standalone selling prices (SSP), often using the residual method for bundled software and services[442][443] - The company tests goodwill for impairment annually on October 1, and as of the 2021 test, the fair value of the Acute Care EHR reporting unit exceeded its carrying value by 23%, indicating a heightened risk of future impairment if operating results decline[458] - Software development costs for SaaS solutions are capitalized under ASC 350-40, with direct labor costs capitalized after the preliminary project phase and amortized over an estimated five-year life[461] Financial Statements and Supplementary Data This section presents consolidated financial statements for 2021, 2020, and 2019, including balance sheets, income statements, cash flows, and auditor reports Consolidated Statement of Operations Highlights (Year ended Dec 31, in thousands) | Line Item | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Total sales revenues | $280,629 | $264,488 | $274,634 | | Gross profit | $140,882 | $136,246 | $144,145 | | Operating income | $24,707 | $21,054 | $24,583 | | Net income | $18,430 | $14,246 | $20,468 | | Diluted EPS | $1.26 | $0.98 | $1.43 | Consolidated Balance Sheet Highlights (As of Dec 31, in thousands) | Line Item | 2021 | 2020 | | :--- | :--- | :--- | | Total current assets | $68,998 | $67,144 | | Total assets | $383,350 | $326,272 | | Total current liabilities | $46,427 | $37,442 | | Total liabilities | $160,778 | $126,272 | | Total stockholders' equity | $222,572 | $200,000 | Consolidated Statement of Cash Flows Highlights (Year ended Dec 31, in thousands) | Line Item | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $47,744 | $49,142 | $43,602 | | Net cash used in investing activities | ($69,919) | ($6,664) | ($12,493) | | Net cash provided by (used in) financing activities | $20,935 | ($37,164) | ($29,484) | Controls and Procedures Management concluded disclosure controls were effective as of December 31, 2021, with ongoing integration of TruCode's internal controls - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report[676] Part III Directors, Executive Compensation, Security Ownership, and Accountant Fees Information for these items is incorporated by reference from the company's definitive Proxy Statement for the 2022 Annual Meeting - The information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the 2022 Proxy Statement[687][688][690][691][692] Part IV Exhibits and Financial Statement Schedules This section lists financial statements, schedules, and exhibits filed as part of the Form 10-K, with financial statements in Part II, Item 8