NRC Health (National Research Corporation) — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; filed May 8, 2015. NRC provides analytics, insights, and subscription-based solutions to healthcare organizations and payers in the U.S. and Canada. Unless otherwise noted, financial amounts below are in millions of dollars.
Key financial results
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenue | $26.270 | $26.030 | +0.9% |
| Operating expenses | $20.441 | $17.630 | +15.9% |
| Operating income / margin | $5.829 / 22.2% | $8.400 / 32.3% | Income down 30.6% |
| Net income | $3.480 | $5.453 | Down 36.2% |
| Net margin | 13.2% | 20.9% | Down 7.7 percentage points |
| Operating cash flow | $1.578 | $5.163 | Down $3.585 |
| Capital expenditures | $0.757 | $0.605 | Up $0.152 |
| Cash and cash equivalents, quarter-end | $37.010 | $26.453 | Q1 2014 comparative |
Operating cash flow less capital expenditures was $0.821 million, versus $4.558 million in Q1 2014. Basic and diluted EPS were $0.08 and $0.08 for Class A, and $0.50 and $0.49 for Class B, respectively; all were lower than the prior-year quarter. Dividends per share were $0.06 for Class A and $0.36 for Class B, versus none in Q1 2014.
Liquidity, debt, and balance sheet
- At March 31, 2015, cash was $37.0 million, working capital was $25.6 million, and total assets were $128.5 million. Cash declined $3.0 million from year-end 2014, primarily reflecting dividends and currency effects.
- Notes payable totaled $7.492 million, including $2.346 million current; capital lease obligations were $0.268 million. The term note carried a 3.12% annual rate. The $6.5 million revolving facility had no borrowings and was fully available under the stated borrowing base.
- The revolving credit facility was due to expire June 30, 2015. Management expected to renew it; if unable, management believed cash from operations would meet debt and capital needs. NRC was in compliance with debt covenants at quarter-end.
- Current deferred revenue was $15.483 million, reflecting advance billing; the company stated substantially all deferred revenue and unbilled revenue would be recognized or billed within 12 months.
Material changes and unusual items
- Revenue grew modestly from new customer sales and increased sales to existing clients, but operating costs rose substantially faster. Direct expenses increased 14.2%, including higher postage, printing, survey-related and conference costs, as well as acquired-business salary and benefit costs.
- SG&A increased 19.8%. It included a $0.657 million write-off of an option related to a potential acquisition. The option was extended to June 30, 2015, and amended terms reduced its likelihood of exercise and value. The write-off also contributed to a higher effective tax rate, 39.8% versus 34.6%.
- Cash from operations was pressured by a $3.838 million increase in trade receivables, which management attributed to billing and collection timing on new and renewed contracts. Foreign exchange reduced cash by $0.718 million and comprehensive income by $1.054 million.
- Management changed the internal operating-segment structure from three segments to seven; the seven operating segments continued to be aggregated into one reportable segment. The filing reported no goodwill impairment following the reorganization.
- NRC consolidated Connect, in which it owns 49%, as a variable interest entity. NRC had contributed $2.8 million and could contribute up to an additional $1.3 million as needed. A future purchase obligation for the other members’ interests is triggered by specified revenue and margin targets; the stated purchase price as of quarter-end was zero.
Outlook, risks, and contingencies
Management said existing cash, borrowing availability, and operating cash flows should be sufficient for projected capital and debt needs and the dividend policy for the foreseeable future. It expected 2015 capital expenditures similar to Q1, primarily software, hardware, and equipment, funded from operations. No specific revenue or earnings guidance was provided.
Risks identified include client contract non-renewals and dependence on a limited number of key clients; intense competition and price pressure; healthcare-sector consolidation, economic downturns, and regulatory changes; retention of key personnel; protection of intellectual property; and cybersecurity incidents. The company reported no material changes to its previously disclosed risk factors or market-risk exposures. Disclosure controls were assessed as effective, with no material internal-control changes reported.
Other items to monitor include $0.371 million of unrecognized tax benefits, plus accrued interest and penalties; the filing also states $0.380 million of uncertain-tax-position liabilities in its contractual-obligations discussion, with settlement timing not reasonably estimable. NRC was evaluating the effects of new accounting standards on revenue recognition, consolidation, and cloud-computing arrangements.
Important facts for investors to verify
- Whether the receivables increase and the steep decline in operating cash flow were temporary timing effects, and whether collections improved after quarter-end.
- Whether revenue growth can recover enough to offset higher direct and administrative expenses and restore operating margins.
- Whether the revolving credit facility was renewed before its June 30, 2015 expiration, and on what terms.
- Whether the Connect capital contribution needs, growth targets, margin conditions, and potential acquisition obligation changed.
- Whether the acquisition-option write-off, related tax valuation allowance, and uncertain tax positions resulted in further charges or cash payments.
- Whether the dividend policy and repurchase authorization remain consistent with cash generation and debt obligations.