NRC Health (National Research Corporation) — FY 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing also presents unaudited quarterly results, including the quarter ended December 31, 2015. Amounts below are in U.S. dollars unless stated otherwise.
Business context
NRC provides subscription-based analytics, research, and performance-improvement solutions to healthcare providers, payers, and other organizations. Its offerings address patient and employee experience, engagement, population health, reputation, and governance. Clients include more than 57 health plans and over 7,200 acute and post-acute facilities. Revenue is primarily generated through annually renewable contracts, generally cancelable on short or no notice without penalty.
Financial results and liquidity
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Revenue | $102.3 million | $98.8 million |
| Operating income / margin | $26.4 million / 25.8% | $28.3 million / 28.6% |
| Net income / net margin | $17.6 million / 17.2% | $18.2 million / 18.4% |
| Diluted EPS, Class A / Class B | $0.41 / $2.49 | $0.43 / $2.57 |
| Cash from operating activities | $21.9 million | $26.2 million |
| Cash and cash equivalents at year-end | $42.1 million | $40.0 million |
| Working capital | $11.9 million | $25.3 million |
| Total assets / shareholders’ equity | $129.1 million / $74.2 million | $129.5 million / $87.7 million |
Revenue increased 3.5%; subscription revenue represented 86.6% of total revenue, versus 82.3% in 2014. Direct expenses rose 6.9% and SG&A rose 8.6%, faster than revenue, contributing to lower operating income and margins. The effective tax rate was 35.6%, compared with 35.4%.
FY 2015 investing activities used $1.3 million, including $2.9 million of capital expenditures partly offset by $1.6 million of divestiture proceeds. Financing activities used $16.9 million, including $10.1 million of dividends paid, $2.8 million to acquire Connect non-controlling interests, and debt repayments. The company declared $26.0 million in dividends during 2015; $18.4 million was payable and paid in January 2016. Management said existing cash, borrowing availability, and operating cash flow should meet projected needs for the foreseeable future.
Year-end debt included a $5.7 million fixed-rate term note at 3.12% and $0.2 million of capital lease obligations. The $6.5 million revolving facility was undrawn, and NRC reported compliance with its debt covenants. Working capital fell principally because of declared dividends, including the $18.4 million payable at year-end. Approximately $9.3 million of cash was held in Canada and intended to remain invested abroad.
Changes, quarterly results, and unusual items
- FY 2015 revenue grew from $98.8 million to $102.3 million, while operating income declined 6.5% and net income declined 3.0%.
- Fourth-quarter revenue was $26.4 million versus $25.1 million a year earlier; operating income was $7.7 million versus $6.4 million, and net income was $5.9 million versus $4.1 million. Fourth-quarter results included a $1.1 million gain from selling selected clinical-workflow assets and liabilities.
- On December 21, 2015, NRC sold the selected clinical-workflow business assets for net cash proceeds of about $1.6 million. A further gain may be recognized if $0.3 million held in escrow is released. The disposal was not classified as discontinued operations.
- In July 2015, NRC increased its ownership of Connect to approximately 89% for $2.8 million. NRC also wrote off a $657,000 option related to a potential acquisition that it did not pursue.
- Operating cash flow decreased to $21.9 million from $26.2 million. The company attributed the year-over-year change in part to working-capital movements, including higher receivables and unbilled revenue.
Outlook, risks, and other disclosures
The filing gives no quantified revenue, earnings, or margin guidance. NRC expected 2016 capital expenditures to be similar to 2015’s $2.9 million, primarily for software, hardware, and equipment, funded by operating cash flow. Management cited market-share gains and growth within existing clients as FY 2015 revenue drivers, and identified cross-selling, new clients, new solutions, and complementary acquisitions as growth opportunities.
- Renewals and client retention are central risks: contracts are generally annual and cancelable with little or no notice. The ten largest clients accounted for 15% of revenue; no single client exceeded 5%.
- Other principal risks include competition and pricing pressure; healthcare regulation, reimbursement changes, and industry consolidation; dependence on survey data and third-party vendors; cybersecurity, privacy, and system interruptions; and attracting and retaining key personnel.
- Foreign currency translation reduced comprehensive income by $2.2 million in 2015. NRC reported no currency hedging; a hypothetical 100-basis-point U.S. dollar movement would affect reported cash by approximately $1.3 million.
- Undistributed foreign earnings of approximately $14.1 million were considered indefinitely reinvested; estimated additional U.S. tax upon repatriation was $534,000. Unrecognized tax benefits were $450,000, excluding interest and penalties; the company was under a U.S. federal tax examination for 2013.
- NRC reported no material pending litigation and no goodwill or intangible-asset impairment in 2015. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
- Class B shares represented approximately 94% of voting power at February 22, 2016. CEO Michael Hays held approximately 54% of total voting power, giving him substantial control over shareholder matters.
Important facts for investors to verify
- Whether revenue growth and the higher subscription mix continue, and whether operating costs moderate enough to restore margins.
- Client renewal rates, cross-selling progress, and the effect of healthcare-sector consolidation and competitive pricing.
- Cash generation after dividends, the continued availability and renewal terms of the revolving facility, and the impact of the 2016 dividend payment on liquidity.
- Connect’s recurring-revenue milestones and prospects, and any release or claims against the $0.3 million divestiture escrow.
- The eventual financial-statement effects of the forthcoming revenue-recognition standard, particularly commission deferral and variable-consideration estimates.