National Research Corporation — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012; comparative periods ended September 30, 2011. The company provides healthcare performance measurement, analytics, improvement services, and governance education in the United States and Canada.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $21.4 million | $18.5 million | $64.4 million | $56.7 million |
| Operating income | $5.6 million | $4.2 million | $16.9 million | $13.7 million |
| Net income | $3.6 million | $2.6 million | $11.4 million | $8.4 million |
| Diluted EPS | $0.51 | $0.39 | $1.64 | $1.23 |
| Operating margin | 26.4% | 22.6% | 26.3% | 24.2% |
- Q3 revenue grew 15.3%; operating income grew 34.6% and net income grew 35.1% year over year. For the nine months, revenue increased 13.7%, operating income 23.5%, and net income 34.8%.
- Nine-month operating cash flow was $13.6 million, versus $14.4 million a year earlier. Investing used $1.9 million, primarily for property and equipment; financing used $4.9 million, including $5.3 million in dividends. Cash increased $6.9 million to $15.0 million.
- At September 30, cash was $15.0 million, total assets $109.4 million, and shareholders’ equity $64.1 million. Working capital was negative $5.2 million, compared with negative $2.3 million at year-end 2011; the filing attributes the change mainly to debt classified as current because of 2013 balloon maturities and notes that deferred revenue significantly affects working capital.
- Notes payable totaled $13.1 million, comprising two term notes bearing 3.79% and due July 31, 2013. The company had no revolving-credit borrowings and reported $6.5 million of available capacity. It was in compliance with debt covenants.
Changes, outlook, and risks
- Management attributed revenue growth to market-share gains and expansion within existing clients. Subscription agreements represented 74% of nine-month revenue, up from 60%; they represented 78% of contract value at September 30.
- Nine-month direct expenses rose 22.5% and increased to 40.9% of revenue from 37.9%, reflecting higher survey-related variable costs and investment in staffing, technology, research, and client service. SG&A declined 0.6% and fell to 27.2% of revenue from 31.2%.
- Management projected 2012 average direct expenses of about 41% of revenue, SG&A of about 27%, and depreciation and amortization of about 6% of revenue. It expected capital expenditures to remain similar to the first nine months and be funded from operating cash flow.
- The company expected to refinance its term notes before July 2013; if refinancing were unavailable, management believed operating cash flow would be adequate for debt and capital needs. In November, the company declared a regular $0.26-per-share dividend and a one-time $1.50-per-share dividend, both payable December 18, 2012.
- The nine-month effective tax rate fell to 31.3% from 36.6%, primarily due to state tax-rate changes, tax credits, and recognition of tax benefits related to statute expirations. The filing reports $225,000 of unrecognized tax benefits, excluding $11,000 of interest.
- Risks cited include contract non-renewal, competition and price pressure, economic conditions, healthcare-industry consolidation and regulation, reliance on a limited number of key clients, personnel retention, and protection of intellectual property. No material change to previously reported risk factors or market-risk disclosures was reported. Management said disclosure controls were effective and reported no material internal-control changes.
Important facts for investors to verify
- Progress and terms for refinancing the $13.1 million term-note balance before the July 2013 maturities.
- Whether subscription growth and client retention continue to support revenue, given contract-renewal and customer-concentration risks.
- Cash availability and potential tax costs associated with the $4.2 million held in Canada, which the company intended to keep invested in foreign operations.
- Sustainability of margins amid higher direct costs, and the effect of tax items and the one-time dividend on future earnings and cash.