NRC Health (National Research Corporation) — Q1 2014 Form 10-Q
Business context and reporting period
The unaudited quarter ended March 31, 2014. NRC provides subscription-based analytics and insights for healthcare providers, payers, and other healthcare organizations in the United States and Canada. Its two geographic operating segments are reported as one segment.
Financial performance and position
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Revenue | $26.03 million | $24.91 million; up 4.5% |
| Operating income | $8.40 million | $7.22 million; operating margin 32.3% vs. 29.0% |
| Net income | $5.45 million | $4.47 million; up 22.0% |
| Net margin | 21.0% (calculated) | 17.9% (calculated) |
| Diluted EPS | Class A $0.13; Class B $0.77 | Class A $0.11; Class B $0.64 |
| Operating cash flow | $5.16 million | $3.10 million |
| Capital expenditures | $0.61 million | $0.42 million |
At March 31, cash and cash equivalents were $26.45 million, including $7.4 million held in Canada and intended to remain invested there. Working capital was $18.3 million, up from $12.8 million at year-end; the current ratio was approximately 1.77 (calculated). Total notes payable were $9.77 million, capital lease obligations $0.19 million, and the $6.5 million revolving facility was undrawn. The company reported compliance with debt covenants.
Material changes versus the prior comparable period
- Revenue growth reflected new-customer sales and increased sales to existing clients.
- Operating expenses declined as a share of revenue to 67.7% from 71.0%. Direct costs were 39.7% of revenue versus 41.1%; SG&A was 24.4% versus 26.1%.
- SG&A decreased 2.0%, mainly due to lower recapitalization-related legal and accounting costs and lower share-based compensation, partly offset by higher sales, product development, marketing, and facility costs.
- Cash from operations increased to $5.16 million. Working-capital movements still reduced operating cash flow by $1.3 million, primarily reflecting billings and collections, prepaid commitments, and bonus payments.
- There were no common dividends paid in Q1 2014; Q1 2013 dividends were $2.14 million. No shares were repurchased during Q1 2014.
- The effective tax rate fell to 34.6% from 37.3%, primarily due to lower projected state tax rates following legislative changes.
Outlook, risks, contingencies, and unusual items
- Management said cash, borrowing availability, and operating cash flows should meet projected capital and debt needs and the dividend policy for the foreseeable future. It expected capital expenditures to remain similar for the rest of 2014 and be funded from operations. No specific earnings or revenue guidance was provided.
- The revolving credit note was due to expire June 30, 2014. Management expected to renew it; if renewal were unavailable, it believed operating cash flow would be adequate. The facility had no outstanding balance and $6.5 million of borrowing capacity at quarter-end.
- NRC consolidates Customer-Connect LLC, in which it owns 49%, as a variable interest entity. NRC had contributed $1.7 million toward a commitment of up to $2.5 million. A future mandatory purchase of the other members’ interests is triggered by specified recurring-contract-value and EBITDA-margin targets; the stated purchase price was $0 at March 31, 2014. Connect recorded a $331,000 quarterly net operating loss, all attributable to NRC.
- Key disclosed risks include client contract non-renewal and dependence on a limited number of key clients, competition and pricing pressure, economic and healthcare-industry changes, regulatory developments, and attracting and retaining key personnel. Management reported no material changes to the risk factors in its 2013 Form 10-K.
- Foreign currency translation produced a $405,000 other comprehensive loss. The filing reported no indication of impairment of goodwill or other non-financial assets.
Important facts for investors to verify
- Whether the revolving credit facility was renewed before its June 30, 2014 expiration, and on what terms.
- Whether revenue growth and improved operating margins continued beyond Q1, including the contribution from new customers and existing clients.
- Customer-Connect’s funding needs, progress toward its purchase-trigger thresholds, and possible impact on NRC’s cash commitments.
- The sustainability of operating cash conversion given billing timing, deferred revenue, and working-capital movements.
- The treatment and repatriation implications of cash held in Canada, and any subsequent developments in uncertain tax positions.