NRC Health — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021; comparisons are with the corresponding 2020 periods. Amounts are in U.S. dollars. NRC Health provides analytics and insights to healthcare organizations, with most revenue generated from renewable subscription services.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $37.8m | $33.5m | $109.7m | $98.5m |
| Operating income | $13.1m | $12.0m | $37.4m | $32.5m |
| Operating margin | 34.8% | 35.9% | 34.1% | 33.0% |
| Net income | $9.7m | $9.6m | $27.8m | $29.0m |
| Diluted EPS | $0.38 | $0.37 | $1.08 | $1.13 |
- Revenue and expenses: Revenue rose 12.8% in Q3 and 11.3% year to date, primarily from new customers and higher sales to existing clients. Subscription revenue was $34.6m in Q3 and $101.9m year to date. Direct expenses rose more slowly than revenue year to date, improving their share of revenue to 34.8% from 36.9%. SG&A grew faster than revenue, reaching 25.2% of Q3 revenue and 26.5% year to date.
- Profit and taxes: Q3 net income was nearly flat year over year; nine-month net income declined 4.2% despite higher operating income. The effective tax rate rose to 23.5% in Q3 from 17.9%, and to 23.0% year to date from 8.1%, mainly because of fewer tax benefits from share-based awards and higher state taxes.
- Cash flow: Nine-month operating cash flow was $34.3m, up from $24.4m. Capital expenditures were $3.8m, compared with $2.4m; investing cash use also included $3.0m for the PatientWisdom acquisition. Financing cash use was $9.7m, including $6.1m in dividends and $3.0m of term-loan repayments.
- Liquidity: Cash and equivalents were $52.5m at September 30, up from $34.7m at year-end; working capital was $33.6m versus $22.4m. The company reported $30m available on its revolver and a $15m delayed-draw facility, subject to permitted uses. It declared $3.1m in dividends in August, paid in October.
- Debt: Term-loan carrying amount was $27.7m, with $4.2m current; the revolver and delayed-draw facility had no borrowings. The term loan bears fixed interest of 5% and matures in May 2025. The company reported compliance with financial covenants.
Changes, outlook, and notable items
- Year-to-date operating margin improved, but Q3 operating margin declined year over year. Q3 SG&A growth reflected higher personnel, contracted-service, tax, insurance, and travel costs. Comparisons also include a reclassification of approximately $0.5m per quarter from direct expenses to SG&A following reporting-structure changes.
- The company acquired substantially all assets of PatientWisdom in January for $5.0m in total consideration: $3.0m paid at closing and $2.0m deferred. The acquisition’s 2021 results were described as insignificant.
- A $0.324m impairment was recorded on the Seattle office right-of-use asset after the location was subleased. Management reported no goodwill impairment trigger at September 30.
- Management said it expects recent revenue and earnings growth not to indicate future expectations, citing uncertainty around COVID-19 impacts. It nevertheless expects liquidity to be sufficient for foreseeable needs. No numerical revenue or earnings guidance was provided.
- Management expects substantially higher capital expenditures for building improvements, with the amount undetermined, funded from operating cash flow. LIBOR transition may affect floating-rate borrowing terms; the company said the replacement rate’s effect was uncertain.
- Key disclosed risks include COVID-19 and client demand, contract renewals and retention, competition and pricing pressure, healthcare-sector consolidation and regulation, personnel retention, and technology failures or cyberattacks. The company said routine-course claims and litigation were not expected to materially adversely affect its financial position, results, or liquidity; outcomes remain uncertain.
Investor facts to verify
- Whether revenue growth and customer additions persist, given management’s warning that recent growth may not be indicative of future results.
- Whether SG&A growth, higher planned building investment, and the Q3 margin decline affect future profitability and cash generation.
- Cash deployment and obligations: declared dividends, the deferred PatientWisdom payment, debt amortization, and covenant capacity.
- The effective tax-rate trend and any future impact from share-based compensation tax benefits.
- COVID-19-related client demand, contract renewals, and the eventual effect of replacing LIBOR on any floating-rate borrowings.