NRC Health (National Research Corporation) — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. This is an annual filing, not a standalone fourth-quarter filing; Q4 figures below are unaudited quarterly data included in the 10-K. NRC provides subscription-based analytics, research, and performance-improvement services to healthcare providers, payers, and related organizations.
Financial performance and liquidity
- Revenue: $86.4 million, up 14.1% from $75.8 million in 2011. Management attributed growth to market-share gains and expansion within existing clients. Subscription revenue was 76% of total revenue versus 63% in 2011.
- Profit: Operating income was $22.7 million, up 21.3%; operating margin rose to 26.3% from 24.7%. Net income was $15.1 million, up 30.3%; diluted EPS was $2.17 versus $1.69. The effective tax rate declined to 32.1% from 36.3%, largely reflecting a $661,000 deferred-tax adjustment from state tax-rate changes.
- Costs: Direct expenses increased 23.7% to $35.5 million and rose to 41.0% of revenue from 37.8%, reflecting higher survey volumes, postage, labor, contracted survey work, and staffing investments. SG&A increased 1.0% to $23.5 million, declining to 27.2% of revenue from 30.8%.
- Cash flow: Operating cash flow was $19.1 million, versus $18.5 million in 2011. Investing used $2.3 million, principally for equipment and software; financing used $16.7 million, largely reflecting $17.4 million of dividends. Cash increased $204,000 to $8.3 million.
- Liquidity: Working capital deficiency widened to $11.5 million from $2.3 million, primarily because $10.6 million of term debt became current. Current liabilities also include $15.8 million of deferred revenue, generally expected to be recognized within 12 months.
- Debt: Notes payable totaled $12.4 million at year-end; the two 3.79% fixed-rate term notes had balloon payments due July 31, 2013. The $6.5 million revolving facility had no balance and was fully available under the borrowing base at year-end; it matured June 30, 2013. Management expected to refinance or extend these facilities and stated operating cash flow could cover needs if extensions were unavailable. The company was compliant with debt covenants at year-end.
- Balance sheet: Total assets were $100.0 million and shareholders’ equity was $56.7 million. Goodwill was $57.8 million. No impairment was recorded in 2012.
Fourth quarter
Unaudited Q4 2012 revenue was $22.0 million, up from $19.1 million in Q4 2011; operating income was $5.8 million versus $5.0 million, and net income was $3.7 million versus $3.1 million. Diluted EPS was $0.53 versus $0.46.
Material changes versus the prior comparable period
- Annual revenue growth accelerated the business, while operating margin expanded by 1.6 percentage points and net income increased by $3.5 million year over year.
- Direct expenses grew faster than revenue, reducing the direct-cost contribution to margin; management expected direct expenses to remain at a similar percentage of revenue in 2013.
- Subscription-based revenue became a larger share of sales, increasing from 63% to 76%.
- Cash dividends declared and paid rose to $17.4 million from $5.9 million, including a $10.3 million special dividend in Q4. Annual dividends per share were $2.54 versus $0.88.
- Debt shifted substantially into current liabilities because of the 2013 balloon maturities. Year-end cash was nearly unchanged from 2011.
Outlook, risks, and unusual items
- Management expected 2013 capital expenditures to be similar to 2012’s $2.3 million and projected depreciation expense at approximately 4.0% of revenue. SG&A and direct expenses as percentages of revenue were expected to remain near 2012 levels. The filing provides no specific revenue or earnings guidance.
- Growth plans include cross-selling, winning new clients, developing solutions, and pursuing complementary acquisitions. Care Transition and Point-of-Care offerings had been piloted.
- Key risks include annual contract non-renewals and short-notice cancellations, competition and pricing pressure, healthcare-sector consolidation and regulatory changes, dependence on healthcare clients and key personnel, data collection and security risks, technology interruptions, and acquisition integration risks. The top ten clients represented 22% of 2012 revenue; no single client exceeded 5%.
- The company held $5.6 million of its $8.3 million cash in Canada and considered foreign earnings indefinitely reinvested. It estimated $732,000 of additional tax if those earnings were repatriated.
- No material pending litigation was reported. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
Important facts for investors to verify
- Whether the term-note balloons and revolving-credit facility were refinanced or extended before their 2013 maturities, and the resulting interest rates and covenants.
- Whether subscription growth and client renewals continued, and whether direct-cost growth moderated as management expected.
- Whether the unusually high 2012 dividend level, including the special dividend, was recurring; future dividends remain at the board’s discretion.
- Whether client concentration, healthcare consolidation, regulatory changes, or data-security events affected renewals, demand, or operating costs.
- Whether cash held abroad remains indefinitely reinvested and whether any repatriation would trigger the estimated tax liability.