NRC Health (National Research Corporation) — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; comparisons are with Q1 2019 unless otherwise noted. NRC Health provides analytics and insights to healthcare organizations, primarily through subscription services. Financial amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $33.86 million | $31.48 million | +7.6% |
| Operating income | $11.19 million | $10.70 million | +4.6% |
| Operating margin | 33.1% | 34.0% | Down 0.9 percentage points |
| Net income | $11.76 million | $8.20 million | +43.4% |
| Diluted EPS | $0.46 | $0.32 | +43.8% |
| Operating cash flow | $5.52 million | $7.30 million | Down 24.3% |
| Capital expenditures | $0.59 million | $1.13 million | Down |
Revenue growth was primarily attributed to new customers and increased sales to existing clients, partly offset by service interruptions from the cyberattack. Subscription services were $30.42 million, or about 89.8% of revenue. The digital Voice of the Customer platform accounted for 69.1% of revenue, versus 57.8% a year earlier.
Direct expenses rose 7.7% to $12.55 million and remained 37.0% of revenue. Selling, general and administrative expenses rose 13.5% to $8.75 million, increasing to 25.8% of revenue from 24.5%. Higher compensation, hosting, insurance and professional costs contributed. Net income benefited from a $385,000 income tax benefit, compared with a $1.66 million tax provision in Q1 2019; the filing attributes the change mainly to $2.6 million of tax benefits from share-based award exercises and vesting.
Balance sheet, liquidity and capital
- Cash and cash equivalents were $10.02 million at March 31, 2020, down from $13.52 million at December 31, 2019. Current assets were $34.94 million and current liabilities $39.88 million, a $4.94 million working-capital deficit.
- Total debt was $33.32 million, comprising the term loan; $4.63 million was current. The $15 million revolving credit line had no balance, and the $15 million delayed-draw facility was undrawn. The term loan carries a fixed 5% rate and matures in April 2023. The company was in compliance with its financial covenants.
- Operating cash flow was lower year over year, chiefly reflecting working-capital outflows, including higher receivables and an insurance receivable, partly offset by increased deferred revenue. Financing used $7.54 million, including $5.24 million of dividends paid and $0.96 million of term-loan repayments.
- The company declared a $0.21-per-share dividend, totaling $5.28 million, paid in April. No decision had been made on a second-quarter dividend. Management said available cash, borrowing capacity and operating cash flow should meet foreseeable needs.
Material developments, outlook and risks
- COVID-19: Management said the pandemic’s duration and effects on revenue, expenses and cash flows could not be predicted, and cautioned that recent revenue and earnings growth should not be taken as indicative of future expectations. Client budget pressure, reduced elective care, suspended or reduced healthcare assessments, restrictions on travel and potential third-party disruption were identified risks. The workforce was largely remote, and services were being provided without significant disruption as of the filing.
- Cyberattack: A February 2020 ransomware attack temporarily interrupted client services, which were subsequently restored. The company recorded a $2.77 million insurance receivable for costs the insurer confirmed as reimbursable; it expected $2.4 million reimbursement in Q2 and the remaining $0.4 million to be paid directly to vendors. The attack also reduced revenue by about $280,000 and resulted in about $285,000 of other expenses; related recovery claims were still being evaluated. An outside investigation found a low probability of protected health information compromise, and management concluded the event was not a reportable breach under applicable laws. Future retention and sales effects remain possible.
- Sales taxes: A $775,000 accrual was recorded in 2019 for potential state sales-tax liabilities. The company recorded another $50,000 of expense in Q1 2020 and warned that assessments, interest and penalties could exceed estimates. It expected to begin collecting and remitting sales tax in June or July 2020.
- Customer concentration: One customer contract represents approximately 56.5% of the Canadian reporting unit’s annual revenue and expires in March 2021. Failure to renew could result in goodwill impairment; related goodwill was $2.0 million.
- Other items: Management found no COVID-related goodwill impairment trigger at March 31. There were no outstanding legal claims reported at quarter-end. The company expects capital expenditures for the remainder of 2020 to be similar to Q1, primarily for software, hardware and equipment. LIBOR-based facilities create transition risk as LIBOR is phased out.
Key facts for investors to verify
- How COVID-19 affected renewals, new sales, client service levels and cash conversion after March 31, 2020.
- Whether the cyber-insurance reimbursements were collected and whether the incident affected customer retention or incurred additional costs.
- The status and final amount of sales-tax obligations, voluntary disclosure agreements and collection procedures.
- Renewal prospects for the concentrated Canadian contract expiring in March 2021 and any resulting goodwill impairment assessment.
- Subsequent cash flow, debt repayment, covenant headroom and any dividend decisions.