NRC Health (National Research Corporation) — FY2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. This is an annual report, not a standalone fourth-quarter filing; selected Q4 results are included below. Filed March 4, 2014. Amounts are in U.S. dollars.
Business context
NRC provides subscription-based analytics, research, and performance-improvement solutions to healthcare providers, payers, and other healthcare organizations. Its services cover patient experience, growth, retention, engagement, and governance. The company reported one aggregated reporting segment, with U.S. and Canadian operations.
Financial performance and liquidity
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Revenue | $92.6 million | $86.4 million | +7.1% |
| Operating income | $24.8 million | $22.7 million | +9.2% |
| Operating margin | 26.8% | 26.3% | +0.5 percentage points |
| Net income | $15.5 million | $15.1 million | +2.8% |
| Net margin | 16.7% | 17.4% | Down |
| Operating cash flow | $19.3 million | $19.1 million | +1.0% |
- Subscription revenue represented 81.9% of revenue, up from 76.0%. Management attributed revenue growth to market-share gains and expansion within existing clients.
- Direct expenses rose 9.5%, faster than revenue, to $38.8 million; they increased to 42.0% of revenue from 41.0%, reflecting higher survey-related costs and investments in technology, research, and service resources. SG&A was $25.2 million, or 27.2% of revenue. Depreciation and amortization declined 20.6% to $3.7 million.
- Income tax expense was $9.0 million, with a 36.8% effective rate versus 32.1%. The increase reflected, among other items, a $575,000 adjustment related to deferred state tax rates and nondeductible recapitalization fees.
- Cash and cash equivalents were $22.1 million, including $7.5 million held in Canada. Working capital was a $12.8 million surplus, compared with an $11.5 million deficit at year-end 2012.
- Year-end debt and capital-lease obligations totaled $10.5 million, including a $10.3 million term note. The company had no revolver borrowings and reported $6.5 million of available capacity. Shareholders’ equity was $71.8 million.
- Investing cash outflow was $2.2 million, principally capital expenditures; financing cash outflow was $2.8 million. Cash increased by $13.8 million during the year.
Fourth-quarter results and changes
For Q4 2013, revenue was $22.9 million, versus $22.0 million in Q4 2012; net income was $3.8 million versus $3.7 million. Q4 operating income was $6.0 million versus $5.8 million.
In May 2013, NRC recapitalized into Class A and Class B common stock. Class A has one-hundredth of a vote per share; Class B has one vote per share. The Class B shares represented approximately 94% of voting power as of February 2014, and CEO Michael Hays held approximately 52% of total voting power. NRC also refinanced its term notes at a fixed 3.12% rate, with monthly payments through April 2018; the prior notes carried a 3.79% rate.
Outlook, risks, and unusual items
- The filing gives no specific revenue or earnings guidance. Management expected 2014 capital expenditures to be similar to 2013 and forecast direct expenses to remain at a similar revenue rate, SG&A at approximately 26% of revenue, and depreciation and amortization at a similar rate.
- The board suspended cash dividends through 2014 to preserve funds for potential investment opportunities. Dividends paid in 2013 were $2.1 million, compared with $17.4 million in 2012, which included a special dividend.
- NRC expects existing cash, operating cash flow, and borrowing availability to meet projected needs. It expected to renew its revolving credit facility before its June 30, 2014 maturity; the filing says operating cash flow could cover needs if renewal were unavailable.
- Connect, formed in 2013, is consolidated as a variable-interest entity despite NRC’s 49% ownership. NRC may contribute up to $2.5 million and must acquire the other members’ interests if specified contract-value and margin targets are met. Connect recorded an $837,000 operating loss in 2013.
- Key risks include annually renewable, generally cancelable contracts; competition and pricing pressure; healthcare-sector regulation and consolidation; reliance on key clients (the ten largest provided 19% of revenue); data collection and cybersecurity risks; and dependence on key personnel. No single client accounted for more than 5% of revenue.
- NRC reported no material pending litigation and no goodwill or intangible-asset impairment. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Renewal rates, client retention, and whether subscription growth can continue to outpace direct-cost growth.
- Renewal status and terms of the revolving credit facility, which matured June 30, 2014.
- Connect’s progress toward the $12.5 million recurring-contract-value and 35% EBITDA-margin thresholds, and the resulting acquisition obligation or capital needs.
- Dividend policy after the stated suspension through 2014, and the intended use of accumulated cash.
- Class A and Class B voting and economic rights, and the implications of the CEO’s controlling voting position.
- Tax implications if foreign earnings are repatriated; NRC estimated an additional $705,000 tax liability at year-end 2013.