NRC Health (National Research Corporation) — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Financial amounts are in U.S. dollars; statements are unaudited. NRC Health provides analytics and insights to healthcare organizations, primarily through renewable subscription services.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $37.292 million | $36.425 million | $75.734 million | $71.889 million |
| Operating income | $11.496 million | $12.239 million | $23.194 million | $24.259 million |
| Operating margin | 30.8% | 33.6% | 30.6% | 33.7% |
| Net income | $8.322 million | $8.944 million | $16.861 million | $18.176 million |
| Diluted EPS | $0.33 | $0.35 | $0.67 | $0.71 |
| Operating cash flow | Not separately reported | Not separately reported | $18.111 million | $25.566 million |
Q2 revenue grew 2.4% year over year, while operating income fell 6.1% and net income fell 7.0%. For the first half, revenue rose 5.3%, but operating income declined 4.4% and net income declined 7.2%. Expense growth—particularly compensation, client-support and innovation spending—outpaced revenue growth. First-half operating cash flow decreased 29.2% year over year.
Balance sheet, liquidity and capital allocation
- At June 30, cash and cash equivalents were $32.974 million, versus $54.361 million at December 31, 2021. Working capital was $12.2 million, down from $33.3 million.
- Total notes payable were $24.493 million, including $4.390 million current; the revolving credit facility was undrawn. The term loan bears fixed interest at 5% and matures in May 2025. The company reported compliance with its financial covenants.
- Cash used in investing activities was $3.886 million in the first half, including capital expenditures. Cash used in financing activities was $35.564 million, including $22.154 million for share repurchases and $9.091 million for dividends.
- Management cited $10.0 million of expected headquarters renovation costs in 2022 and $10.5 million in 2023, expected to be funded from operating cash flow. First-half capital expenditures were $3.886 million, including $1.5 million for headquarters renovations.
- The company declared dividends of $0.24 per share in each of the first two quarters. In May it approved a new authorization to repurchase up to 2.5 million shares; 2,074,652 shares remained available at quarter-end.
Business changes and management commentary
- Management attributed revenue growth to new customer sales and increased sales to existing clients; first-half conference revenue also improved. Lower Canadian revenue partly offset growth, with the Canadian office scheduled to close later in 2022.
- Recurring contract value was $147.732 million, down 1.4% year over year. Management cited elimination of certain legacy offerings, sales challenges during the pandemic and increased sales-force turnover. Core digital solutions, however, had 3.2% positive recurring contract value growth.
- Management attributed lower operating margins to higher salary and benefit costs, innovation and automation investments, marketing, travel, and renovation costs. It said recent revenue and earnings growth should not be viewed as indicative of future expectations, while expressing confidence that liquidity would meet foreseeable needs.
- No specific financial guidance was provided in the filing. The company noted that most associates had been working remotely and that services had continued without significant disruption; COVID-19’s future effects on revenue, expenses and cash flows remained uncertain.
Risks, contingencies and notable items
- Key stated risks include client non-renewals and retention, competition and price pressure, economic weakness, healthcare-sector consolidation and regulation, personnel attrition, technology failures, and cybersecurity incidents. COVID-19 may adversely affect sales, earnings, financial condition and liquidity.
- The company reported ordinary-course claims and litigation and did not believe their final disposition would materially adversely affect financial position, results or liquidity.
- The first-half effective tax rate rose to 25.1% from 22.7%, mainly due to reduced tax benefits from share-based compensation and higher state taxes. The company expected to pay $656,000 of deferred employer Social Security taxes and $175,000 of deemed repatriation tax by the end of 2022.
- First-half share repurchases and dividends materially reduced cash. The credit agreement restricts certain dividends and repurchases and is secured by substantially all company assets.
Investor verification priorities
- Track recurring contract value, renewal and client-retention trends, and whether core digital growth offsets legacy-product declines.
- Assess whether compensation, innovation, marketing and renovation spending can be absorbed without continued margin and cash-flow pressure.
- Verify progress and cash requirements for the headquarters renovation, and the effect of the Canadian office closure.
- Review cash levels, debt amortization, covenant headroom, dividend commitments and the pace of share repurchases.
- Monitor sales-force turnover, COVID-19-related customer impacts, tax payments and any changes in legal or cybersecurity exposures.