NRC Health (National Research Corporation) — Q2 2023 Form 10-Q
Business and period: NRC Health provides analytics, insights, and subscription services to healthcare organizations, focused on patient and employee experience, engagement, and loyalty. This unaudited filing covers the quarter and six months ended June 30, 2023; comparisons are with the corresponding 2022 periods. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $36.2m | $37.3m | $72.6m | $75.7m |
| Operating income | $9.4m | $11.5m | $18.4m | $23.2m |
| Operating margin | 25.9% | 30.8% | 25.3% | 30.6% |
| Net income | $7.3m | $8.3m | $14.2m | $16.9m |
| Diluted EPS | $0.29 | $0.33 | $0.58 | $0.67 |
| Operating cash flow | Not separately stated | Not separately stated | $16.6m | $18.1m |
- At June 30, cash and cash equivalents were $22.5m; current assets were $41.0m and current liabilities $33.7m. The company reported a $7.3m working-capital surplus.
- Debt was $20.1m, including $4.6m current; the $30m revolver was undrawn. A separate $75m delayed-draw facility is available only for permitted acquisitions or share repurchases. The term loan bears fixed interest at 5% and amortizes through May 2027.
- Six-month investing cash outflow was $7.5m, primarily capital expenditures; financing cash outflow was $11.6m, including $3.8m of share repurchases and $5.9m of dividends. Cash decreased $2.5m from year-end 2022.
Changes and management commentary
- Revenue declined 3.0% in Q2 and 4.1% for the first half. Management attributed the decline to lower U.S. recurring revenue from existing clients and new customer sales, as well as the Canadian office closure. NRC Health said it does not expect future Canadian revenue.
- Recurring Contract Value was $146.6m, down 0.8% from $147.7m a year earlier. Management attributed the decline primarily to its focus on core digital solutions; recurring value for core solutions increased slightly.
- Operating income and margins fell as revenue declined and selling, general and administrative costs rose. Those costs increased 11.3% in Q2 and 11.0% for the first half, largely reflecting marketing, sales and client-support spending. Lower fixed direct costs, primarily from workforce attrition and automation, partly offset the pressure.
- Property and equipment, net, increased to $22.6m from $17.2m at year-end, alongside $7.5m of first-half capital spending. Management estimated remaining headquarters renovation costs of $9.1m in 2023 and $8.2m in 2024, expected to be funded from operating cash flows.
- In June, the credit agreement was amended to exclude up to $25m of qualifying headquarters renovation costs from the fixed-charge coverage ratio calculation. The company reported compliance with its financial covenants at June 30.
Outlook, risks, and contingencies
- The filing provides no specific revenue, earnings, or margin guidance. Management said existing cash, borrowing availability, and operating cash flows should be sufficient for projected capital and debt needs for the foreseeable future.
- Management highlighted risks including client non-renewal or reduced services and pricing, competition and price pressure, economic downturn, healthcare-industry consolidation and regulation, employee retention, and technology or cybersecurity failures. Subscription agreements are generally renewable annually and may be cancellable on short or no notice without penalty.
- The company reported routine claims and litigation and said their final disposition was not expected to materially adversely affect financial position, results, or liquidity. It cautioned that proceedings can still entail defense or settlement costs and reputational harm. Gross unrecognized tax benefits were $1.8m.
- Other notable items included higher depreciation following shortened estimated useful lives for certain building assets, increased software amortization, and higher marketing investment. The filing states disclosure controls were effective and reports no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether recurring-revenue trends, new customer sales, renewals, and the shift toward core digital solutions stabilize or improve.
- Whether planned renovation spending and other capital investment remain within estimates and are funded from operating cash flow as expected.
- Future operating margins and cash generation as marketing and sales-support spending rises.
- Debt covenant headroom, terms and permitted uses of the undrawn facilities, and the effect of dividends and repurchases on liquidity.
- Any developments in client retention, litigation, tax positions, or cybersecurity and technology risks.