CPSI(US:CPSI)2023-03-15 16:00Part I Business Overview CPSI provides healthcare solutions and services to community hospitals, operating through RCM, EHR, and Patient Engagement segments with a focus on cross-selling and market expansion - CPSI is the parent company of six entities: Evident, American HealthTech (AHT), TruBridge, Get Real Health, TruCode, and Healthcare Resource Group (HRG)503 - The company operates in three reportable segments as of Q4 2022: RCM, EHR, and Patient Engagement, representing a change from the previous structure481504450 - The primary target market includes community hospitals with fewer than 400 beds, with approximately 98% of its acute care hospital EHR customer base having fewer than 100 beds5058 - The core growth strategy involves cross-selling RCM solutions into its EHR client base and expanding RCM market share with new hospital sales491514 Products and Services CPSI offers comprehensive healthcare solutions across Revenue Cycle Management, Electronic Health Records, and Patient Engagement segments - Revenue Cycle Management (RCM): Offered through TruBridge, HRG, and TruCode, this segment provides business management, consulting, managed IT services, and a complete RCM solution, including claim scrubbing, denial management, accounts receivable management, and medical coding software494521498 - Electronic Health Records (EHR): Offered through Evident (acute care) and AHT (post-acute care), with acute care solutions (Thrive and Centriq) providing integrated systems for patient management, clinical functions, and financial accounting, while post-acute solutions focus on care and financial management for long-term care facilities528560504 - Patient Engagement: Offered through Get Real Health, this segment provides a digital platform (InstantPHR and CHBase) to improve patient outcomes and engagement by integrating data from various sources into a single view for patients and clinicians604566493 Software Development The company capitalizes software development labor costs from the preliminary project phase until general release, with a five-year estimated useful life Software Development Costs (in millions) | Year | Total Expense | Capitalized Costs | | :--- | :--- | :--- | | 2022 | $30.9 | $19.1 | | 2021 | $30.4 | $9.4 | | 2020 | $33.5 | $3.3 | - The company capitalizes labor costs for software development from the preliminary project phase until general release, with an estimated useful life of five years for capitalized software4 Competition CPSI faces intense competition across its Acute Care EHR, RCM, Post-Acute Care EHR, and Patient Engagement segments from various industry players - Acute Care EHR: Primary competitors include Cerner Corporation, Meditech, and MEDHOST, Inc., with secondary competitors such as N. Harris Computer Corporation and Epic Systems Corporation61796 - RCM Solutions: Principal competitors include RelayHealth, SSI Group, Quadax, Change Healthcare, Availity, and Navicure15 - Post-Acute Care EHR: Main competitors are PointClickCare Corporation and MatrixCare, Inc16646 - Patient Engagement: Competitors include Relay Health, Get Well Network/Healthloop, and eClinicalWorks Patient Portal75618 Human Capital CPSI employs approximately 2,500 individuals, primarily remote, focusing on internal talent development, external hires, and diversity initiatives - As of December 31, 2022, the company had approximately 2,500 employees, most of whom work remotely, with none covered by a collective bargaining agreement654 - The company focuses on diversity and inclusion through its employee-led council, "Team IDEA," launched in 2020, which conducted over 20 employee engagement events in 2022598 - CPSI's talent strategy involves developing talent internally and supplementing with external hires, leveraging remote work to expand its talent pool geographically and enhance diversity626 Risk Factors The company identifies several risks across its industry, business operations, products, and financial structure, including public health crises, market saturation, regulatory changes, competition, technology development, security breaches, talent retention, substantial indebtedness, and restrictive debt covenants Industry Risks The healthcare industry presents risks such as public health crises, market saturation, evolving regulations, and intense competition - Public health crises, like the COVID-19 pandemic, can disrupt operations, decrease patient volumes for customers, and impact the financial health of the company and its clients6030 - The target market of hospitals with fewer than 200 beds is limited, and industry consolidation could reduce the potential client base and increase pricing pressure6162 - The healthcare industry is subject to significant and evolving regulation (e.g., HIPAA, HITECH, 21st Century Cures Act), and failure to comply could result in liability, adverse publicity, and increased costs366639 - The company faces intense competition from firms with greater financial, technical, and marketing resources, which could lead to loss of clients and lower prices4397 Business Risks Business risks include the impact of transitioning to a SaaS model, challenges with future acquisitions, difficulties in talent retention, and complexities of international operations - The transition to a subscription-based recurring revenue model (SaaS) may adversely affect near-term revenue growth and results of operations due to changes in revenue recognition timing7395 - Future acquisitions carry inherent risks, including failure to achieve synergies, significant integration costs, and potential dilution or incurrence of debt7698647 - The inability to attract and retain qualified personnel, particularly for client service and support, could negatively impact client satisfaction and growth7799 - International business activities expose the company to conflicting laws, data residency requirements, and other risks inherent in global operations81101119 Product and Service Risks Product and service risks encompass the need for continuous innovation, potential for product failures, cybersecurity threats, and reliance on third-party technology - Failure to develop new products or enhance existing ones in response to rapid technological change and market demands could harm the company's competitive position85105122 - Product failures or inaccurate data from clinical decision-support products could lead to client claims, substantial costs, and reputational damage87106 - Security breaches, viruses, or cyber-attacks (e.g., ransomware, DDoS) could jeopardize confidential patient data, leading to client claims, loss of market perception, and business disruption88107124 - The company is dependent on technology licensed from third parties, and disruptions or infringement claims related to this technology could force discontinuation or delay of product shipments145131 Indebtedness Risks The company's substantial indebtedness and restrictive debt covenants pose significant financial risks, limiting operational flexibility and increasing default potential - As of December 31, 2022, the company had approximately $141.1 million in principal amount of indebtedness, which could make it vulnerable to adverse economic conditions and limit operational flexibility156141 - The credit agreement contains restrictive covenants that limit the company's ability to, among other things, incur additional debt, pay dividends, make acquisitions, and dispose of assets162181183 - A breach of covenants could result in default, causing lenders to declare all outstanding borrowings immediately due and payable and to foreclose on pledged assets165 Legal Proceedings The company is cooperating with an SEC subpoena received on November 2, 2022, regarding accounting matters, including revenue recognition and goodwill impairment testing, with an unpredictable outcome - On November 2, 2022, the company received a subpoena from the SEC concerning accounting matters such as revenue recognition and goodwill impairment testing for the period starting May 1, 2019222 - The company is cooperating with the SEC investigation and cannot predict its timing or outcome222 Part II Market for Common Equity and Related Matters CPSI's common stock trades on NASDAQ, and the company has a stock repurchase program authorized for up to $30.0 million, while quarterly dividends were indefinitely suspended in September 2020 - The Board of Directors indefinitely suspended all quarterly dividends on September 4, 2020, concurrent with authorizing a stock repurchase program225 - A stock repurchase program of up to $30.0 million was approved and later extended to September 4, 2024, with approximately $17.9 million remaining available for repurchase as of December 31, 2022201226747 Share Repurchases in Q4 2022 | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Oct 2022 | 42,000 | $29.27 | | Nov 2022 | 42,345 | $28.79 | | Dec 2022 | 44,037 | $27.83 | | Total | 128,382 | $28.62 | Management's Discussion and Analysis (MD&A) In 2022, total revenues increased 16% to $326.6 million, driven by acquisitions and RCM segment growth, though net income decreased due to higher costs and interest expense, while liquidity is supported by cash, operating cash flow, and an expanded revolving credit facility Results of Operations Total sales revenues increased in 2022, primarily driven by RCM segment growth from acquisitions and organic expansion, while net income decreased due to higher operating costs and interest expense Financial Performance Summary (in thousands) | Metric | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Total Sales Revenues | $326,648 | $280,629 | $264,488 | | Gross Profit | $154,435 | $140,882 | $136,246 | | Operating Income | $22,783 | $24,707 | $21,054 | | Net Income | $15,867 | $18,430 | $14,246 | | Diluted EPS | $1.08 | $1.26 | $0.98 | - 2022 vs. 2021: - RCM revenues increased by $48.6 million (37%), primarily due to the acquisitions of TruCode ($13.8 million revenue in 2022) and HRG ($34.1 million revenue in 2022), plus $8.1 million in organic growth242244245 - EHR revenues decreased by $3.3 million (2%), as a decline in non-recurring perpetual license installations offset a slight increase in recurring SaaS revenue280 - Net income decreased by $2.6 million, impacted by higher costs of sales from the lower-margin HRG acquisition, increased sales & marketing expenses, and a $3.2 million rise in interest expense242244245280 - 2021 vs. 2020: - RCM revenues grew by $23.8 million (22%), driven by the TruCode acquisition ($7.4 million) and organic growth from increased demand for services284311 - EHR revenues decreased by $9.8 million (6%), mainly due to a $12.9 million drop in non-recurring revenues as customer preference shifted from perpetual licenses to SaaS arrangements257320 - Net income increased by $4.2 million, benefiting from higher RCM gross margins and lower operating expenses, partly due to a change in capitalizing product development labor284311257320 Liquidity and Capital Resources As of December 31, 2022, liquidity was supported by $7.0 million in cash and $86.3 million available under the revolving credit facility, which was amended and increased to $230 million in May 2022 - As of Dec 31, 2022, principal sources of liquidity were $7.0 million in cash and $86.3 million available under the revolving credit facility299 - Net cash from operating activities decreased to $32.4 million in 2022 from $47.7 million in 2021, primarily due to a $16.9 million expansion in accounts receivable and changes in deferred tax treatment for R&D expenses300 - Net cash used in investing activities was $62.7 million in 2022, mainly for the $43.4 million acquisition of HRG and $19.1 million in capitalized software development326 - In May 2022, the company amended its credit agreement, increasing total facilities to $230 million ($70 million term loan, $160 million revolver) and transitioning the benchmark interest rate from LIBOR to SOFR299711 Bookings RCM bookings increased 136% in 2022 due to strong demand and the HRG acquisition, while EHR bookings decreased 7% due to a challenging sales environment Bookings by Segment (in thousands) | Segment | 2022 | 2021 | | :--- | :--- | :--- | | RCM | $48,065 | $20,333 | | EHR | $38,152 | $40,873 | | Patient Engagement | $3,188 | $9,007 | | Total Bookings | $89,405 | $70,213 | - RCM bookings increased 136% in 2022, driven by strong demand for outsourced RCM services both within the existing EHR customer base and from new clients, enhanced by the HRG acquisition331 - EHR bookings decreased 7% in 2022 due to a challenging sales environment for new Acute Care EHR systems360 Critical Accounting Policies and Estimates Key accounting policies involve revenue recognition under ASC 606, annual goodwill impairment testing, and changes in software development cost capitalization - Revenue Recognition: The company uses the 5-step model under ASC 606, requiring significant judgment in determining standalone selling prices (SSP) and identifying distinct performance obligations363820 - Goodwill Impairment: Goodwill is tested annually on October 1, with the fair value of Acute Care EHR and Post-acute EHR reporting units exceeding carrying values by 13% and 24% respectively, indicating a heightened risk of future impairment if operating results decline369372 - Software Development Costs: In Q2 2021, the company changed its estimation method for capitalizing labor costs, resulting in an increase of approximately $4.6 million in capitalized amounts for 2021, treated as a change in accounting estimate213672 Financial Statements and Supplementary Data The consolidated financial statements provide the company's financial position, results of operations, and cash flows, with notes detailing business combinations, segment reporting changes, intangible assets, goodwill, and long-term debt, supported by an unqualified auditor's opinion Consolidated Financial Statements The consolidated financial statements present the company's financial position, results of operations, and cash flows for the three years ended December 31, 2022 Consolidated Balance Sheet Data (in thousands) | Account | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $6,951 | $11,431 | | Total current assets | $74,559 | $68,998 | | Goodwill | $198,253 | $177,713 | | Total assets | $430,963 | $383,350 | | Liabilities & Equity | | | | Total current liabilities | $44,455 | $46,427 | | Long-term debt, net | $136,388 | $94,966 | | Total liabilities | $199,252 | $160,778 | | Total stockholders' equity | $231,711 | $222,572 | Consolidated Statement of Cash Flows Data (in thousands) | Activity | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $32,375 | $47,744 | $49,142 | | Net cash used in investing activities | ($62,731) | ($69,919) | ($6,664) | | Net cash provided by (used in) financing activities | $25,876 | $20,935 | ($37,164) | | Net (decrease) in cash | ($4,480) | ($1,240) | $5,314 | Notes to Consolidated Financial Statements Notes to the financial statements detail business combinations, intangible assets, goodwill, long-term debt, and the realignment of segment reporting - Business Combinations (Note 3): The company acquired Healthcare Resource Group (HRG) on March 1, 2022, for net cash of $43.9 million, adding $20.8 million in goodwill, and TruCode on May 12, 2021, for net cash of $59.9 million plus a contingent earnout, adding $27.3 million in goodwill860851864 - Intangible Assets and Goodwill (Note 12): As of Dec 31, 2022, net intangible assets were $102.0 million and goodwill was $198.3 million, with no impairment recorded in 2022, 2021, or 2020707693 - Long-Term Debt (Note 13): As of Dec 31, 2022, total debt obligations were $141.1 million, consisting of a $67.4 million term loan and $73.7 million on the revolving credit facility, with an interest rate of 6.39%710 - Segment Reporting (Note 18): In Q4 2022, the company realigned its segments to RCM, EHR, and Patient Engagement, with management now evaluating performance based on revenues and adjusted EBITDA, and prior period data recast accordingly402755