Business context and reporting period
National Research Corporation (NRC), a provider of analytics and insights for healthcare organizations in the U.S. and Canada, reported results for the quarter and six months ended June 30, 2015. Amounts below are in U.S. dollars; financial statement figures are in thousands unless otherwise noted. NRC changed its operating structure from three to seven operating segments in Q1 2015; it continues to report one aggregated segment.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $24.464m | $24.001m | $50.734m | $50.031m |
| Operating income | $6.364m | $6.318m | $12.193m | $14.719m |
| Net income | $4.064m | $4.051m | $7.544m | $9.505m |
| Operating margin | 26.0% | 26.3% | 24.0% | 29.4% |
| Operating cash flow | Not presented separately for the quarter | $9.233m | $11.374m |
Q2 revenue rose 1.9% year over year, while operating income and net income were nearly flat. For the first half, revenue increased 1.4%, but operating income declined 17.2% and net income declined 20.6%. Six-month diluted EPS was $0.18 for Class A and $1.07 for Class B, versus $0.22 and $1.34, respectively, in 2014. Q2 diluted EPS was $0.10 for Class A and $0.57 for Class B, unchanged year over year.
- Q2 direct expenses were $10.440m (42.7% of revenue), down from $10.773m (44.9%). SG&A rose to $6.636m (27.1% of revenue) from $5.984m (24.9%). Depreciation and amortization increased to $1.024m from $0.926m.
- For the first half, direct expenses increased to $22.239m (43.9% of revenue) from $21.102m (42.2%); SG&A increased to $14.263m (28.1%) from $12.349m (24.7%).
- Cash and cash equivalents were $40.555m at June 30, 2015, including $9.4m held in Canada and intended to remain invested abroad. Working capital was $26.5m, versus $25.3m at year-end 2014. Current deferred revenue was $16.972m, up from $15.095m.
- Long-term debt carrying amount was $6.912m, consisting of the term note; no borrowings were outstanding on the $6.5m revolving facility. NRC reported compliance with debt covenants. Capital lease obligations were $0.240m.
- Six-month investing cash outflow was $1.632m, principally capital expenditures; financing outflow was $6.546m, including $5.029m of dividends, $1.156m of note repayments, and $0.271m of treasury-stock purchases. Cash increased by $0.513m over the period.
Material changes, outlook, and risks
- Management attributed revenue growth to new customer sales and increased sales to existing clients. Q2 direct costs benefited from fewer conferences and lower mailing volumes; first-half costs also reflected acquisition-related salaries, higher postage and printing, and contracted survey costs.
- First-half SG&A included a $657,000 write-off of an option related to a potential acquisition that NRC did not exercise. Higher compensation, share-based compensation, building repairs, and contracted services also contributed to the increase. The write-off and a capital-loss valuation allowance contributed to the higher first-half effective tax rate of 37.7%, versus 34.9% a year earlier; the Q2 rates were 35.7% and 35.3%.
- Management said cash, borrowing availability, and operating cash flows should be sufficient for projected capital and debt needs and the dividend policy for the foreseeable future. NRC expected capital spending for the rest of 2015 to be similar to the first-half level, primarily for software, hardware, and equipment. The filing provides no specific revenue or earnings guidance.
- In July 2015, NRC paid $2.8m to acquire additional interests in Connect, increasing ownership to approximately 89%. It also agreed to acquire further interests in increments tied to annual recurring contract value targets of $7m, $14m, and $20m, at $1m per increment.
- NRC was discussing a possible sale of selected Predictive Analytics assets and liabilities; no definitive agreement had been reached. The filing identifies contract non-renewals, competition and price pressure, healthcare-industry consolidation and regulation, dependence on key clients and personnel, and cybersecurity and intellectual-property risks. NRC was also under a U.S. federal tax examination for 2013.
Important facts for investors to verify
- Whether modest revenue growth can translate into improved operating margins, given the first-half expense increases and profit decline.
- Cash conversion and receivables collections: first-half operating cash flow fell year over year, with higher receivables cited as a key factor.
- The financial and operating implications of the Connect ownership increase and contingent future purchase obligations.
- Whether a Predictive Analytics asset sale proceeds, and its effect on reported results and operations.
- Dividend sustainability, particularly alongside debt repayment, share repurchases, and planned capital spending.
- Outcome of the 2013 federal tax examination and the potential cash or earnings effects of uncertain tax positions.