NRC Health (National Research Corporation) — 2017 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2017; it is an annual report, not a report for Q4 alone. NRC Health provides subscription-based analytics, insights, and feedback solutions to healthcare providers, payers, and other healthcare organizations, principally in the United States and Canada. Its offerings span patient and employee experience, market insights, transparency, transitions, and governance.
Financial performance and liquidity
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Revenue | $117.6 million | $109.4 million |
| Operating income | $34.2 million; 29.1% margin | $31.2 million; 28.5% margin |
| Net income | $22.9 million | $20.5 million |
| Diluted EPS, Class A / Class B | $0.52 / $3.18 | $0.48 / $2.88 |
| Operating cash flow | $28.1 million | $26.8 million |
| Cash at year-end | $34.7 million | $33.0 million |
| Working capital surplus | $19.9 million | $15.6 million |
Revenue grew 7.5%, which management attributed primarily to market-share gains and growth within existing clients. Subscription agreements provided 89.3% of 2017 revenue. Direct expenses were 41.7% of revenue in both years; SG&A declined to 25.3% from 25.9%. The 2017 effective tax rate was 33.1%, compared with 34.6% in 2016. Class A and Class B diluted EPS are not directly comparable because the two share classes have different contractual dividend participation rights.
Investing activities used $6.1 million, including $4.6 million of capital expenditures and a $1.3 million investment in PracticingExcellence.com. Financing activities used $21.1 million, including dividends, debt repayments, and share withholding repurchases. Total debt and capital lease obligations were approximately $1.2 million at year-end. The $1.1 million term note was scheduled to be repaid by April 2018; the $12 million revolving facility was undrawn, with a June 2018 maturity. Cash included $14.2 million held in Canada.
For Q4 2017, revenue was $29.9 million versus $28.4 million in Q4 2016; net income was $6.5 million versus $5.7 million.
Material changes and unusual items
- Revenue increased 7.5%, faster than the 6.9% growth reported in 2016. Operating margin rose to 29.1% from 28.5%.
- SG&A included approximately $1.4 million of proposed-recapitalization costs. These expenses included amounts reimbursed to CEO Michael Hays for strategic-alternatives work.
- The Tax Act produced a provisional net tax benefit of approximately $1.9 million from deferred-tax remeasurement, partly offset by deemed-repatriation and other tax effects. NRC Health also recorded $706,000 of withholding tax related to planned repatriation of Canadian earnings; the tax accounting remained subject to revision during 2018.
- The company declared $16.9 million of dividends in 2017. Future dividends remain at the board’s discretion.
Outlook, risks, and contingencies
Management stated that cash, available borrowing capacity, and operating cash flow should meet projected capital and debt needs and the dividend policy for the foreseeable future. It expected 2018 capital expenditures to be similar to 2017, primarily for computer equipment and software, funded from operating cash flow. The filing provides no formal revenue or earnings guidance.
The board approved a proposed recapitalization under which each Class B share would convert into one Class A share plus $19.59 cash, for stated total value of $53.44 per Class B share. The proposal was subject to financing and shareholder approvals. A financing commitment contemplated a $40 million term loan, a $15 million delayed-draw term loan, and a $15 million revolving line; these were proposed facilities, not reported as funded at year-end. The company had incurred approximately $1.4 million in related expenses.
Three shareholder class or derivative lawsuits challenged the proposed recapitalization, alleging fiduciary-duty and other violations. The company disputed the allegations; no loss was accrued because management did not consider a loss probable or estimable. Other key risks include annual contract renewal and short-notice cancellation, competition and pricing pressure, healthcare-sector regulation and consolidation, dependence on timely and reliable survey data and third-party vendors, cybersecurity and privacy incidents, and recruiting and retaining key personnel. The top ten clients represented 19% of 2017 revenue; no single client exceeded 5%.
The company’s dual-class structure gives Class A shares one-hundredth of a vote per share versus one vote per Class B share. Following transfers by the CEO to a family trust in early 2018, the trust held approximately 52% of total voting power as of February 16, 2018. The company reported no goodwill or intangible-asset impairments in 2017. KPMG issued an unqualified opinion on the financial statements and an unqualified opinion on the effectiveness of internal control over financial reporting.
Important facts for investors to verify
- Whether the recapitalization received the required shareholder approvals, financing, and closing, and its final cash, debt, and share-count effects.
- The final accounting impact of the Tax Act and the company’s adoption of the new revenue-recognition standard, including its estimated retained-earnings adjustment of up to $2.7 million, net of tax.
- Client renewal and retention trends, subscription revenue growth, and concentration among the largest clients.
- Repayment or refinancing of the existing term note and revolving facility, and the terms and actual use of any replacement credit facilities.
- Developments and potential costs from litigation relating to the recapitalization, and the continuing voting control of the family trust.