NRC Health — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; compared with the three months ended March 31, 2016. Financial amounts are in U.S. dollars. NRC Health provides analytics and insights to healthcare organizations, including patient and employee experience, engagement, and market research solutions.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $30.3 million | $27.9 million | +8.6% |
| Operating income | $10.0 million | $8.0 million | +24.7% |
| Operating margin | 32.9% | 28.7% | +4.2 percentage points |
| Net income | $6.5 million | $5.5 million | +18.4% |
| Net cash from operations | $8.1 million | $4.4 million | +$3.8 million |
| Capital expenditures | $1.4 million | $1.1 million | +$0.3 million |
Direct expenses were $12.5 million, or 41.3% of revenue, versus $11.5 million, or 41.4%. Selling, general and administrative expense fell 9.1% to $6.7 million, or 22.1% of revenue, from 26.4%. Depreciation and amortization increased to $1.1 million from $1.0 million. The effective tax rate rose to 34.7% from 31.2%, mainly because the 2016 period included tax benefits related to equity awards and IRS examination adjustments.
Basic and diluted EPS were $0.15 and $0.15 for Class A, and $0.93 and $0.91 for Class B, respectively. Dividends per share were $0.10 for Class A and $0.60 for Class B. The filing explains that the classes have different contractual dividend participation rights.
Cash, debt, and liquidity
Cash and cash equivalents were $34.7 million at March 31, 2017, up from $33.0 million at year-end. Working capital was $18.0 million, compared with $15.6 million at December 31, 2016. Operating cash flow was $8.1 million; investing activities used $1.4 million and financing activities used $5.2 million. Financing outflows included $4.2 million of dividends and $0.8 million of term-debt repayments.
Notes payable totaled $2.7 million, down from $3.5 million at year-end; capital lease obligations were $0.2 million. The $6.5 million revolving facility had no balance and was fully available under the borrowing base at quarter-end. The facility was scheduled to expire June 30, 2017. The company reported compliance with its debt covenants. Cash held in Canada was $11.2 million and was intended to remain invested in foreign operations.
Changes, outlook, and risks
- Revenue growth reflected new customer sales and increased sales to existing clients. Operating margin improved as SG&A costs declined, including lower compensation, public-company, and legal costs.
- Management said existing cash, borrowing availability, and operating cash flow should cover projected capital and debt needs and the dividend policy for the foreseeable future.
- The company expected capital expenditures for the remainder of 2017 to be similar to Q1, primarily for software, hardware, and equipment, funded from operating cash flow.
- The company expected to adopt the new revenue standard on January 1, 2018 using retrospective transition. Anticipated significant changes included deferring commissions over estimated client relationship lives and estimating variable consideration at contract inception; the overall financial impact was still being evaluated.
- Risks identified include client non-renewals and retention, competition and price pressure, healthcare-sector consolidation and regulatory changes, personnel retention, and cybersecurity or intellectual-property risks. Management reported no material changes to the risk factors in the 2016 Form 10-K.
- No stock was repurchased during Q1. The filing reported no material changes in market-risk disclosures and stated that disclosure controls were effective.
Key facts for investors to verify
- Whether the revolving credit facility was renewed or replaced before its June 30, 2017 expiration.
- Whether revenue growth and improved operating margins continued beyond this quarter, and how much reflected new versus existing customers.
- The realized effects of the revenue-recognition standard, particularly commission deferrals and variable-consideration estimates.
- Cash-flow sustainability given receivables, deferred revenue, dividend payments, and the timing of client billings and collections.
- The potential timing and cash impact of $0.5 million in uncertain-tax-position liabilities; settlement dates were not estimable in the filing.