NRC Health (National Research Corporation) — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also provides unaudited fourth-quarter results. NRC Health supplies subscription-based healthcare analytics and insights, including patient and employee experience, consumer feedback, governance, and brand and reputation solutions. Most revenue comes from renewable client agreements.
Financial performance
Amounts are in millions of dollars except per-share data. Annual comparisons are year over year.
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Revenue | $128.0 | $119.7 | +6.9% |
| Operating income | $43.0 | $35.3 | +22.0% |
| Operating margin | 33.6% | 29.5% | +4.1 percentage points |
| Net income | $32.4 | $30.0 | +7.9% |
| Diluted EPS | $1.26 | $1.04 | +21.2% |
| Operating cash flow | $40.9 | $39.8 | +2.7% |
- Net margin was 25.3%, compared with 25.1% in 2018. Direct expenses fell 2.4% to $46.4 million and declined to 36.3% of revenue from 39.7%; SG&A rose 5.1% to $33.0 million.
- Investing activities used $4.7 million, primarily for equipment and software. Operating cash flow less capital expenditures was approximately $36.3 million.
- At December 31, cash was $13.5 million, total assets $110.7 million, and shareholders’ equity $32.9 million. Working capital was a deficit of $9.0 million, improved from a deficit of $18.7 million in 2018.
- Debt and finance lease obligations were approximately $35.0 million, including $34.3 million of term debt and $0.8 million of finance leases. No revolving-credit balance was outstanding at year-end. The term loan bears fixed interest of 5% and matures in April 2023; the company was in compliance with its financial covenants.
- Available facilities included a $15 million revolving line and a $15 million delayed-draw term facility; the latter is restricted to permitted acquisitions or share repurchases. Management said cash, borrowing availability, and operating cash flow should cover projected needs and dividends for the foreseeable future.
Fourth-quarter results
For the quarter ended December 31, 2019, revenue was $32.6 million versus $30.6 million in Q4 2018; operating income was $12.0 million versus $9.4 million; net income was $8.7 million versus $7.8 million; and diluted EPS was $0.34 versus $0.30.
Changes, outlook, and notable items
- Growth was attributed primarily to new customer sales and increased sales to existing clients. Voice of the Customer platform solutions increased to 62.7% of revenue from 49.6%; clients buying multiple solutions rose to 27% from 24%.
- Operating margin improved as revenue grew while direct expenses declined. The company recorded approximately $1.9 million of Nebraska Advantage program refunds and credits as a reduction to operating expenses; this benefited reported results.
- Other expense increased to $2.5 million from $0.6 million, reflecting higher interest expense and foreign-exchange remeasurement. The effective tax rate rose to 20.0% from 13.4%, principally due to lower tax benefits from share-based compensation and higher state taxes.
- Management expected 2020 capital expenditures to be similar to 2019’s $4.7 million, mainly for computer equipment and software, funded from operations. No specific revenue or earnings guidance was provided.
- In February 2020, after year-end, the company was hit by an external cyberattack that temporarily suspended client services. The filing warns of possible client, financial, legal, regulatory, and reputational consequences; the text does not quantify any resulting loss.
- A $775,000 sales-tax expense and liability was recorded for taxes that should have been collected in 2019 and earlier periods. NRC Health expected to begin collecting and remitting sales tax in the second quarter of 2020, and noted further assessments, interest, penalties, and first-quarter 2020 expense were possible.
- Client concentration remains a consideration: the ten largest clients generated 16% of 2019 revenue, with no single client above 4%. A Canadian reporting unit had 56.5% of its revenue concentrated in one customer contract expiring in March 2021; failure to renew could trigger a $2.3 million goodwill impairment.
- Other principal risks include annual contract non-renewals, healthcare-sector consolidation and regulation, competition and pricing pressure, dependence on data collection and third-party vendors, technology outages and cybersecurity/privacy exposure, and reliance on key personnel. The Hays family and related entities held approximately 54.2% of shares as of February 2020.
Investor verification points
- Check subsequent disclosures on the February 2020 cyberattack, service restoration, client retention, remediation costs, and any claims or regulatory actions.
- Assess renewals, client concentration, cross-selling, and whether VoC platform mix gains continue to support revenue growth and margins.
- Review the scope and final cost of sales-tax liabilities and confirm implementation of collection procedures and Nebraska incentive benefits.
- Track debt amortization, covenant headroom, dividend and repurchase spending, and the use or availability of the delayed-draw facility.
- Monitor renewal of the Canadian customer contract expiring in March 2021 and related goodwill impairment risk.
The financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting as of December 31, 2019.