NRC Health — Q3 2020 Form 10-Q
Business context and reporting period. National Research Corporation, doing business as NRC Health, provides analytics, insights, measurement and improvement services to healthcare organizations, primarily through annually renewable subscriptions. This unaudited report covers the quarter and nine months ended September 30, 2020; comparisons are with the corresponding 2019 periods. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $33.5 million | $32.5 million | $98.5 million | $95.4 million |
| Operating income | $12.0 million | $10.2 million | $32.5 million | $31.1 million |
| Operating margin | 35.9% | 31.5% | 33.0% | 32.6% |
| Net income | $9.6 million | $8.1 million | $29.0 million | $23.7 million |
| Diluted EPS | $0.37 | $0.31 | $1.13 | $0.92 |
- Q3 revenue grew 3.1%; nine-month revenue grew 3.3%. Digital Voice of the Customer platform solutions contributed 74.0% of Q3 revenue and 72.0% of nine-month revenue, up from 63.8% and 61.3%, respectively, in 2019.
- Q3 and nine-month results included $533,000 of insurance recoveries for lost revenue. Operating expenses also reflected insurance recoveries related to the February 2020 ransomware incident.
- Operating cash flow was $24.4 million for the first nine months, versus $29.0 million in 2019. Capital expenditures were $2.4 million; cash dividends paid were $10.5 million.
- Cash and cash equivalents were $21.9 million at September 30, 2020, versus $13.5 million at year-end 2019. Working capital was $15.3 million, compared with a $9.0 million deficit at year-end.
- Debt consisted of $31.7 million in term loans, down from $34.3 million at year-end; the revolving credit line was undrawn. The company reported compliance with its financial covenants.
- Total assets were $127.2 million and total liabilities were $70.5 million. Deferred revenue was $17.3 million, while accounts receivable rose to $17.4 million from $11.6 million at year-end.
Changes versus prior comparable periods
- Q3 operating income rose 17.6% and net income rose 18.0%; nine-month operating income rose 4.6% and net income rose 22.5%. The nine-month effective tax rate fell to 8.1% from 18.7%, mainly because of tax benefits from exercised and vested share-based awards.
- Q3 selling, general and administrative expenses fell 8.6%, including lower travel costs and a reversal of a sales-tax accrual; depreciation and amortization rose 29.2%, mainly due to changes in estimated useful lives of certain assets.
- Operating cash flow declined despite higher net income, primarily reflecting working-capital outflows, including higher receivables and income taxes receivable/payable. Financing cash use was lower than in 2019, when the company repaid $21.0 million of line-of-credit borrowings and paid larger dividends.
Outlook, commentary and risks
- Management said COVID-19 had affected client spending and sales activity, with some clients reducing or eliminating services. Most employees were working remotely and services continued without significant disruption; company travel was on indefinite hold. Management cautioned that recent revenue and earnings growth should not be viewed as indicative of future results, but expected liquidity to cover foreseeable needs. No numerical earnings or revenue guidance was provided.
- COVID-19-related client cash-flow pressure contributed to slower collections and higher receivables. The company identified client retention, competition, economic conditions, healthcare consolidation, regulation, personnel, technology failures and cybersecurity as risks.
- The February ransomware incident had, according to management, no significant financial-statement impact after insurance recoveries. The company recorded a further $913,000 insurance receivable in Q3 and expected to receive the proceeds in Q4 2020.
- One client represented approximately 65.7% of annual revenue for the Canadian reporting unit; its contract expires in March 2021. Failure to renew or retain it could result in goodwill impairment; related goodwill was $2.3 million.
- The credit agreement provides a $30 million revolving facility and a $15 million delayed-draw facility, in addition to the term loan. The term loan bears fixed interest of 5%; floating-rate facilities reference LIBOR, whose planned phaseout could change borrowing costs. The company also cited possible sales-tax assessments despite reporting no remaining accrual for past-due sales tax at September 30.
- The board declared no dividends in Q3; dividend decisions are made quarterly. The company expected slightly higher capital expenditures for the rest of 2020, primarily for software, hardware and building improvements.
Important facts for investors to verify
- Subsequent client renewals and collections, particularly the Canadian client contract expiring in March 2021.
- Receipt and final accounting for the $913,000 ransomware-related insurance recovery, and the sustainability of earnings excluding insurance effects and unusually low nine-month taxes.
- Whether COVID-19-related client reductions, slower receivable collections or service cancellations affect future revenue, cash flow and liquidity.
- Term-loan repayment, covenant headroom, future dividend decisions and the effect of LIBOR transition on any floating-rate borrowing.