NRC Health — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019; filed November 8, 2019. Financial amounts below are in millions unless stated otherwise. NRC Health provides healthcare analytics and insights, including patient and employee experience, engagement, and governance solutions. It reports six operating segments as one reportable segment.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $32.5 | $30.0 | $95.4 | $89.0 |
| Operating income | $10.2 | $9.2 | $31.1 | $25.9 |
| Operating margin | 31.5% | 30.5% | 32.6% | 29.1% |
| Net income | $8.1 | $7.0 | $23.7 | $22.2 |
| Diluted EPS | $0.31 | $0.27 | $0.92 | $0.73 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $29.0 | $25.9 |
- Quarterly revenue increased 8.2% year over year; nine-month revenue rose 7.1%. Management attributed growth to new customers and increased sales to existing clients.
- Direct expenses were 37.3% of revenue in Q3, versus 39.3% a year earlier, and 37.0% for the nine months, versus 40.1%. SG&A was 26.8% of Q3 revenue, up from 25.6%; nine-month SG&A was 25.9%, down from 26.4%.
- Net income rose 16.1% in Q3 and 6.6% for the nine-month period. The nine-month effective tax rate increased to 18.7% from 11.6%, partly offsetting operating income growth; Q3 rates were 17.2% and 16.6%, respectively.
- Digital Voice of the Customer solutions accounted for 63.8% of Q3 revenue and 61.3% of nine-month revenue, up from 51.2% and 48.7%, respectively, in 2018.
- Operating cash flow was $29.0 million for nine months, compared with $25.9 million. Capital expenditures were $3.4 million, versus $4.9 million. Cash declined by $4.6 million during the period to $8.4 million, mainly reflecting financing outflows.
- At September 30, cash was $8.4 million and working capital was negative $11.7 million. The working capital deficit improved from $18.7 million at December 31, 2018; management noted that advance billings and deferred revenue significantly affect working capital.
- Notes payable totaled $35.2 million, including $4.1 million current. No revolving credit borrowings were outstanding, leaving $15 million available; a separate $15 million delayed-draw facility is available only for permitted acquisitions or share repurchases. The term loan carries a fixed 5% rate and matures in April 2023.
Material changes and notable items
- Nine-month interest expense increased to $1.6 million from $1.0 million, primarily due to the term loan originated in April 2018 and line-of-credit borrowings during the period. The line of credit was fully repaid by September 30.
- Nine-month dividends paid were $26.6 million, compared with $12.7 million in 2018; the 2019 payment included a special dividend declared in 2018 and paid in January 2019. The company declared dividends of $0.19 per share in each of the first three quarters of 2019.
- Adoption of the new lease standard on January 1, 2019 added operating lease right-of-use assets and liabilities; the company reported no significant impact on income or cash flows. Operating lease liabilities were $1.8 million at September 30.
- The 2018 comparison includes the April 2018 recapitalization, which eliminated Class B shares and involved $72.4 million in cash payments. Different share classes and the recapitalization affect year-over-year comparability of 2018 EPS and financing flows.
Outlook, risks, and contingencies
- No quantified revenue or earnings guidance is provided. Management said it expects existing cash, operating cash flows, and borrowing availability to meet projected capital and debt needs and its dividend policy for the foreseeable future. It expected capital expenditures for the rest of 2019 to be similar to the first nine months, primarily for software, hardware, and equipment.
- Management identified risks including customer non-renewals and retention, competition and pricing pressure, economic weakness, healthcare-industry consolidation and regulation, hiring and retention, technology failures, and cybersecurity incidents.
- The company was in compliance with its credit agreement covenants at September 30, 2019: minimum fixed-charge coverage ratio of 1.10x and maximum cash-flow leverage ratio of 3.00x. Debt is secured by substantially all company assets. The report also discusses uncertainty associated with the expected phaseout of LIBOR.
- Ordinary-course claims and litigation are possible; management did not expect their resolution, taking existing reserves into account, to materially adversely affect the financial statements. The filing reports $298,000 of uncertain-tax-position liabilities but says settlement timing cannot be reasonably estimated.
- Management reported effective disclosure controls and no material changes in risk factors from the 2018 Form 10-K. It expected no significant impact from adoption of the new expected-credit-loss standard; the impact of another pending accounting update remained under evaluation.
Investor verification checklist
- Check whether revenue growth and rising digital VoC contribution continued, and whether customer retention and new-customer sales support the trend.
- Monitor the balance between operating growth and higher SG&A, including salary, hosting, software, legal, and marketing costs.
- Verify cash conversion, receivable collections, deferred-revenue movements, and the effect of dividends and repurchases on liquidity.
- Review debt amortization, covenant headroom, the April 2023 term-loan maturity, and any changes to floating-rate benchmarks or borrowing costs.
- Assess the sustainability of the dividend policy in light of the working capital deficit, financing obligations, and cash balance.