NRC Health (National Research Corporation) — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. NRC provides analytics and insights to healthcare organizations, including patient and employee experience, engagement, and loyalty solutions. Its six operating segments are reported as one segment.
Financial results
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $27.9 million | $26.3 million | +6.1% |
| Operating income | $8.0 million | $5.8 million | +37.3% |
| Operating margin | 28.7% | 22.2% | +6.5 percentage points |
| Net income | $5.2 million | $3.5 million | +$1.7 million |
| Operating cash flow | $4.0 million | $1.6 million | +$2.5 million |
Revenue growth reflected new customer sales and increased sales to existing clients. Lower direct and selling, general and administrative expenses, alongside higher revenue, contributed to margin expansion. Diluted EPS was $0.12 for Class A and $0.73 for Class B, compared with $0.08 and $0.49, respectively, in Q1 2015; the classes have different contractual dividend participation rights. Dividends per share rose to $0.08 for Class A and $0.48 for Class B, from $0.06 and $0.36.
Cash, liquidity, and debt
- Cash and cash equivalents were $25.4 million at March 31, down from $42.1 million at year-end. The quarter included $18.4 million of dividend payments, largely for dividends declared in 2015.
- Working capital was $12.3 million, versus $10.9 million at December 31. Current deferred revenue was $17.9 million, up from $14.8 million; the company generally bills clients before services are completed.
- Operating cash flow was $4.0 million; capital spending was $1.1 million. Financing cash outflow was $20.3 million, including dividends, $2.0 million paid to acquire Connect’s remaining noncontrolling interest, and debt repayments.
- Notes payable totaled approximately $5.1 million, including a $5.1 million term note bearing 3.12% interest. The $6.5 million revolver had no borrowings and was fully available under the borrowing base at quarter-end. Capital lease obligations were $152,000.
- The company said existing cash, borrowing availability, and operating cash flow should cover projected capital and debt needs and its dividend policy for the foreseeable future. It expected to renew the revolver before its June 30, 2016 expiration; if renewal were unavailable, management believed operating cash flow would be adequate.
Material developments, outlook, and risks
- NRC acquired Connect’s remaining outside ownership in March for $2.0 million in total, making Connect wholly owned. Because Connect was already consolidated, the purchase was recorded as an equity transaction.
- The effective tax rate fell to 35.4% from 39.8%. The filing attributes the decrease mainly to a prior-year capital-loss valuation allowance related to a purchase-option write-off and a $48,000 tax benefit from federal examination adjustments. The 2013 federal tax examination was completed in Q1.
- Management expected 2016 capital expenditures to be similar to Q1’s $1.1 million, primarily for software, hardware, and equipment. The filing gives no numerical revenue or earnings guidance.
- Management cited risks including client non-renewal and retention, competition and price pressure, economic downturns, healthcare industry consolidation and regulation, recruiting and retention, intellectual-property risks, and security breaches or computer viruses. No material changes to previously reported risk factors were identified.
- Disclosure controls were reported effective, with no material changes to internal control over financial reporting during the quarter.
- NRC was in compliance with debt covenants at March 31. It reported no indication of impairment of goodwill or other nonfinancial assets.
Important facts for investors to verify
- Whether the revolving credit facility was renewed before June 30, 2016, and on what terms.
- Whether revenue growth and improved operating margins continued, given the filing’s reliance on new sales, existing-client growth, and expense reductions.
- Cash conversion and receivables collection trends: receivables rose $4.3 million during the quarter, while working-capital movements reduced operating cash flow.
- Dividend sustainability and cash held abroad: $9.7 million was held in Canada and intended to remain invested there; the company estimated an additional $534,000 tax liability if undistributed foreign earnings were repatriated.
- The impact of the pending revenue-recognition standard, for which the company expected changes including deferral of commissions and estimation of variable consideration.