NRC Health (National Research Corporation) — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021; filed August 6, 2021. NRC Health provides analytics and insights to healthcare organizations, with most revenue from annually renewable subscription services. In March 2021, the company changed its operating segments from six to one.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $36.4 million | $31.2 million | $71.9 million | $65.0 million |
| Operating income | $12.2 million | $9.3 million | $24.3 million | $20.5 million |
| Operating margin | 33.6% | 29.8% | 33.7% | 31.4% |
| Net income | $8.9 million | $7.7 million | $18.2 million | $19.5 million |
| Diluted EPS | $0.35 | $0.30 | $0.71 | $0.76 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $25.6 million | $13.9 million |
- Q2 revenue rose 16.9% year over year, attributed to new customer sales and increased sales to existing clients. Six-month revenue increased 10.6%.
- Q2 operating income increased 32.0%; operating margin expanded 3.8 percentage points. Direct expenses grew more slowly than revenue. Six-month operating margin increased 2.3 points.
- Q2 net income increased 15.9%, while six-month net income declined 6.6%. Higher income-tax provisions were the key drag on the six-month comparison: effective tax rates were 22.7% in 2021 versus 2.3% in 2020, principally reflecting fewer tax benefits from share-based awards and higher state taxes.
- Six-month operating cash flow was $25.6 million, versus $13.9 million; cash and cash equivalents increased to $48.9 million from $34.7 million at year-end 2020. Investing used $5.8 million and financing used $5.6 million.
- At June 30, cash was $48.9 million, current assets $67.6 million, current liabilities $40.0 million, and working capital $27.6 million. Deferred revenue was $16.8 million.
- Term-loan debt was $28.7 million, including $4.2 million current; no revolving-credit borrowings were outstanding. Cash exceeded reported term debt by approximately $20.2 million. The company reported compliance with its financial covenants.
Changes, outlook, and notable items
- Management attributed 2020 comparison-period revenue weakness partly to COVID-19-related client service reductions. NRC Health said its workforce remained intact and services continued without significant disruption, but the pandemic’s duration and business effects remained uncertain.
- Management cautioned that recent revenue and earnings growth should not be considered indicative of future expectations. It gave no quantified revenue or earnings guidance in the filing, and said it expected adequate liquidity for foreseeable needs.
- Travel restrictions were expected to ease, with limited company travel anticipated to resume in Q3 2021. The company expected substantially higher capital spending on building improvements, with the total not yet determined, funded from operating cash flow.
- In January 2021, NRC Health acquired substantially all assets and assumed certain liabilities of PatientWisdom for $5.0 million in cash consideration: $3.0 million paid at closing and $2.0 million deferred, due by February 1, 2022, subject to permitted indemnification offsets. The acquisition’s 2021 results were described as insignificant.
- The company recorded a $324,000 impairment of the Seattle office lease right-of-use asset after agreeing to sublease the office amid remote-work arrangements. It continued to be obligated under the original lease.
- Dividends of $3.1 million were paid in April; another $3.1 million declared in June was paid in July. The company had $30 million of unused revolving capacity and a $15 million delayed-draw facility restricted to permitted acquisitions or share repurchases.
- Risks highlighted include COVID-19 impacts, client non-renewals and retention, competition and pricing pressure, healthcare-industry consolidation and regulation, personnel retention, and information-technology failures or cyberattacks. The company said ordinary-course claims and litigation were not expected to materially affect its financial position, results, or liquidity. LIBOR transition could affect floating-rate facilities; the replacement rate and impact were uncertain.
Important facts for investors to verify
- Whether subscription growth and customer additions continued after Q2, given management’s warning that recent growth may not indicate future results.
- How much of the six-month cash-flow improvement reflects sustainable operations versus timing of deferred revenue, taxes, and accrued liabilities.
- The final PatientWisdom purchase-price allocation and payment of the deferred consideration.
- The amount and timing of planned building-improvement capital expenditures, and the effect of the Seattle sublease and remaining lease obligations.
- Future effective tax rates, dividend capacity, debt repayment, covenant compliance, and the eventual LIBOR replacement terms.