NRC Health (National Research Corporation) — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Business context
NRC Health provides analytics, insights, and subscription services to healthcare organizations, including patient and employee experience measurement, engagement, and governance solutions. The company reports six operating segments as one segment. Most revenue comes from annually renewable subscriptions.
Key financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $31.2 | $31.4 | $65.0 | $62.9 |
| Operating income | $9.3 | $10.1 | $20.5 | $20.9 |
| Operating margin | 29.8% | 32.3% | 31.4% | 33.2% |
| Net income | $7.7 | $7.4 | $19.5 | $15.6 |
| Diluted EPS | $0.30 | $0.29 | $0.76 | $0.61 |
| Operating cash flow | Not reported by quarter | Not reported by quarter | $13.9 | $16.1 |
- Q2 revenue fell 0.8% year over year; first-half revenue grew 3.4%. Digital Voice of the Customer solutions represented 72.9% of Q2 revenue, up from 62.1%.
- Q2 operating income declined 8.6%, despite net income rising 4.4%, primarily reflecting a lower tax provision. First-half net income rose about 24.9%; the effective tax rate fell to 2.3% from 19.4%, principally due to tax benefits from share-based award exercises and vesting.
- First-half operating cash flow was $13.9 million, down from $16.1 million. Capital expenditures were $1.4 million, implying operating cash flow less capital expenditures of approximately $12.5 million. Cash declined $1.6 million during the half to $12.0 million.
- At June 30, cash was $12.0 million; working capital was $4.4 million, versus a $9.0 million deficit at year-end. Accounts receivable rose to $19.9 million from $11.6 million, reflecting billing and collection timing, client payment delays, and deferred invoicing.
- Total term debt was $32.7 million, including $4.0 million current; no revolving-credit borrowings were outstanding. The company had a $30 million revolving facility and a $15 million delayed-draw facility, subject to contractual terms. It reported compliance with financial covenants.
Changes, outlook, and risks
- Management attributed Q2 revenue softness to COVID-19-related client reductions or cancellations of services, partly offset by growth in overall contract value. First-half growth reflected new customers and increased sales to existing clients, partly offset by COVID-19 impacts.
- Management said recent revenue and earnings growth should not be considered indicative of future expectations. It did not provide numerical guidance, and stated that the duration and severity of pandemic effects on revenue, expenses, and cash flows could not be predicted. It expected liquidity to be adequate for the foreseeable future.
- Operating costs grew faster than first-half revenue: direct expenses increased 4.4% and selling, general and administrative expenses rose 9.8%. Higher compensation, technology/platform costs, and other expenses contributed; reduced travel costs provided some offset.
- The February 2020 security incident led to delayed billing and collection activity. NRC received $2.4 million in insurance recoveries during Q2, with another $0.4 million paid directly to vendors by the insurer. A final claim was submitted; further recovery would be recorded when collection was probable. Management did not expect a significant financial-statement or liquidity impact after insurance recoveries.
- A $775,000 sales-tax accrual had been recorded in 2019; additional 2020 sales-tax expense was $58,000 for the first half. NRC began remitting tax in Q2 and collecting it in July. A July Washington ruling is expected to result in a $268,000 accrual reversal in Q3; assessments, interest, or penalties elsewhere could exceed estimates.
- Goodwill impairment testing was not triggered at June 30. However, one customer accounts for approximately 62.2% of the Canadian reporting unit’s annual revenue, under a contract expiring March 2021; failure to renew could impair $2.3 million of related goodwill.
- The company paid $10.5 million of dividends in the first half and declared none in Q2. The May 2020 credit-agreement amendment doubled the revolving facility to $30 million; the term loan bears fixed interest at 5% and matures in May 2025. Floating-rate facilities reference LIBOR, creating transition risk.
- No outstanding claims or litigation were reported at June 30. Disclosure controls were reported effective, with no material quarter-end change in internal control over financial reporting.
Important facts for investors to verify
- Whether COVID-19 client service reductions, delayed payments, and deferred invoicing persist, and how they affect renewals, receivables, and cash conversion.
- Collection of the increased receivables and the status and amount of any remaining insurance recovery related to the February security incident.
- Renewal of the concentrated Canadian customer contract expiring March 2021 and any resulting goodwill impairment assessment.
- Final sales-tax exposure across jurisdictions and the expected Q3 reversal following the Washington ruling.
- Future dividends, covenant headroom, and the availability and cost of credit, including the impact of LIBOR replacement terms.