NRC Health (National Research Corporation) — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; the filing also reports fourth-quarter results. NRC Health provides subscription-based analytics and insights to healthcare organizations, including patient and employee experience, consumer engagement, reputation, and governance solutions. Its digital Voice of the Customer platform generated 73.3% of 2020 revenue. Most revenue is recurring, but client contracts are generally renewable annually and may be cancellable on short notice.
Financial performance and liquidity
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Revenue | $133.3 million | $128.0 million | +4.1% |
| Operating income | $42.7 million | $43.0 million | -0.8% |
| Operating margin | 32.0% | 33.6% | -1.6 percentage points |
| Net income | $37.3 million | $32.4 million | +15.0% |
| Diluted EPS | $1.45 | $1.26 | +15.1% |
| Operating cash flow | $40.6 million | $40.9 million | -0.7% |
| Capital expenditures | $4.0 million | $4.7 million | Lower |
| Cash and cash equivalents at year-end | $34.7 million | $13.5 million | +$21.2 million |
| Working capital | $22.4 million surplus | $9.0 million deficit | Improved |
Fourth-quarter revenue was $34.8 million versus $32.6 million a year earlier; operating income was $10.2 million versus $12.0 million, and net income was $8.2 million versus $8.7 million.
Year-end notes payable were $30.6 million net of issuance costs, including $4.1 million current; finance lease obligations were approximately $1.3 million. The term loan’s stated balance was $30.7 million, bears fixed interest at 5%, and matures in May 2025. The $30 million revolving facility and $15 million delayed-draw facility were undrawn. The delayed-draw facility is restricted to permitted acquisitions or share repurchases. NRC reported compliance with its financial covenants. Cash was $34.7 million, of which $5.4 million was held in Canada.
Financing activities used $15.5 million, including $10.5 million of dividend payments and $3.6 million of term-loan repayments. The company declared $5.3 million in dividends in 2020. Management said available cash, borrowing capacity, and operating cash flows should meet projected needs for the foreseeable future.
Changes, outlook, and material matters
- Revenue growth came from new clients and increased contract value with existing clients, partly offset by customers reducing or cancelling services amid COVID-19. Subscription revenue was $122.5 million, compared with $114.2 million in 2019.
- Operating expenses rose 7.3%, faster than revenue. Direct expenses increased 5.9%; selling, general and administrative expenses rose 4.5%. Depreciation, amortization and impairment increased 35.5% to $7.5 million, including about $1.1 million of additional depreciation related to workforce and office changes and a $714,000 Canadian goodwill impairment.
- Net income increased despite slightly lower operating income, principally because the effective tax rate fell to 10.1% from 20.0%. The lower rate primarily reflected $4.8 million of additional tax benefits from exercise and vesting of share-based awards.
- Operating cash flow remained strong, but the increase in receivables and other working-capital items reduced 2020 operating cash flow. Receivables rose to $13.9 million from $11.6 million; management noted some clients delayed payments due to cash-flow pressures.
- Management did not provide numerical forward guidance and said recent revenue and earnings growth should not be considered indicative of future expectations. COVID-19 duration and effects on revenue, expenses and cash flows remained uncertain. The company had paused business travel, while most employees worked remotely; management reported services continued without significant disruption.
- In February 2020, an external cyberattack temporarily suspended services. NRC received $3.3 million in related insurance recoveries, including $533,000 recorded as revenue recovery; the filing says the incident did not significantly affect consolidated financial statements. Cybersecurity, privacy, service continuity and third-party-provider risks remain material.
- NRC elected not to renew its major Canadian customer’s contract beyond September 2022 and announced plans to close its Canada office at contract end. That customer concentration prompted the $714,000 goodwill impairment; further impairment could result if cash-flow assumptions weaken.
- On January 4, 2021, NRC acquired substantially all assets of PatientWisdom for $5.0 million in cash consideration: $3.0 million paid at closing and $2.0 million due by February 1, 2022, subject to indemnification offsets.
- Other risks include annual contract renewal and client retention, competition and pricing pressure, healthcare-sector consolidation and regulation, dependence on survey data and vendors, personnel retention, intellectual-property protection, and family-related control. Family-controlled entities held approximately 54% of shares as of February 26, 2021.
- The auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management and the auditor concluded controls were effective. The auditor identified revenue terms in new and modified subscription agreements as a critical audit matter. Management did not believe pending ordinary-course claims would materially affect financial position, results or liquidity.
Important facts for investors to verify
- Whether client renewals, new sales and contract expansions can sustain growth as COVID-related budget pressures and suspended healthcare assessments evolve.
- Whether operating margins recover after higher direct costs and accelerated depreciation, and how much of 2020 net-income growth reflected unusually large share-based compensation tax benefits.
- Receivables collection, client payment delays, and the quality and sustainability of operating cash flow and reported liquidity.
- Execution and financial effects of the Canada exit after September 2022, including potential additional goodwill impairment and customer concentration.
- Cybersecurity remediation and insurance coverage, plus any future operational, legal, regulatory or client-retention effects from the February 2020 incident.
- PatientWisdom integration, the deferred purchase payment, planned 2021 platform and building investment, and debt covenant headroom.
- Dividend decisions, given the Board’s discretion and credit-agreement restrictions; 2020 dividends were materially lower than those declared in 2019.