NRC Health (National Research Corporation) — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016; balance-sheet comparisons are with December 31, 2015. NRC provides analytics and insights for healthcare organizations, including patient and employee experience, engagement, and loyalty solutions. The filing reports one aggregated segment.
Financial performance
| Metric | Q2 2016 | Q2 2015 | First six months 2016 | First six months 2015 |
|---|---|---|---|---|
| Revenue | $26.1m | $24.5m | $54.0m | $50.7m |
| Operating income | $7.0m | $6.4m | $15.0m | $12.2m |
| Net income | $4.6m | $4.1m | $10.1m | $7.5m |
| Operating margin | 26.9% | 26.0% | 27.8% | 24.0% |
| Diluted EPS, Class A | $0.11 | $0.10 | $0.24 | $0.18 |
| Diluted EPS, Class B | $0.64 | $0.57 | $1.41 | $1.07 |
Q2 revenue rose 6.7% year over year and net income rose 12.2%. For the first half, revenue increased 6.4%, operating income 23.2%, and net income 33.4%. Management attributed revenue growth to new customers and increased sales to existing clients. First-half direct costs were nearly flat, while SG&A increased 2.6%; operating leverage improved the reported margin.
- Cash flow: First-half operating cash flow was $11.2m, versus $9.2m in 2015. Capital expenditures were $2.2m, making operating cash flow less capital expenditures approximately $9.0m.
- Cash and liquidity: Cash and equivalents were $27.2m at June 30, down from $42.1m at year-end. Working capital was $13.5m, up from $10.9m. Cash included $11.4m held in Canada and intended to remain invested there.
- Debt: Notes payable totaled $4.5m, including $2.4m current; capital lease obligations were $0.2m. The $6.5m revolving facility had no balance and was fully available. NRC reported compliance with debt covenants.
- Shareholder distributions: First-half cash dividends paid were $21.8m, including payment of $18.4m declared in 2015. Q2 dividends per share were $0.08 for Class A and $0.48 for Class B.
Material changes and notable items
- Revenue growth and improved operating margins were accompanied by higher Q2 SG&A, including increased compensation, marketing services, and bad-debt expense.
- NRC paid $2.0m to acquire the remaining noncontrolling interest in Customer-Connect LLC, becoming its sole owner; the entity was dissolved June 30. The transaction was accounted for as an equity transaction. A $1.8m deferred tax asset was recorded, with a corresponding increase to additional paid-in capital.
- The company early adopted ASU 2016-09 on share-based payment accounting. The standard moved excess tax benefits into income tax expense; first-half tax expense was reduced by $409,000. Adoption also changed cash-flow classification prospectively. The first-quarter 2016 results were revised, including an increase in net income from $5.173m to $5.506m.
- The effective tax rate was 35.2% for Q2 and 33.1% for the first half, compared with 35.7% and 37.7%, respectively, in 2015. The first-half comparison reflects, among other factors, the 2015 purchase-option write-off and 2016 share-based-payment tax benefits.
Outlook, risks, and controls
No quantified revenue or earnings guidance was provided. NRC expected capital expenditures for the remainder of 2016 to be similar to the first-half amount, primarily for software, hardware, and other equipment, funded from operating cash. Management said existing cash, borrowing capacity, and operating cash flows should meet projected capital and debt needs and its dividend policy for the foreseeable future.
Risks highlighted include client contract non-renewal and retention, competition and pricing pressure, economic downturns, healthcare-industry consolidation and regulatory changes, personnel retention, intellectual-property risks, and cybersecurity threats. NRC said there were no material changes to the risk factors in its 2015 Form 10-K. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported for the quarter.
Future accounting changes merit attention: NRC was evaluating the impact of revenue-recognition guidance, which it expected to adopt retrospectively; it anticipated changes particularly in commission deferral and estimation of variable consideration. It was also evaluating new lease and credit-loss standards.
Investor verification points
- Assess whether customer growth and sales to existing clients continue to support revenue growth and operating-margin improvement.
- Monitor cash conversion and working-capital movements, especially receivables, deferred revenue, and the effect of dividend payments on cash.
- Review the sustainability of dividends alongside capital spending, debt repayments, and the company’s stated liquidity needs.
- Track the effect of ASU 2016-09 and forthcoming revenue-recognition guidance on reported earnings, EPS, and cash-flow presentation.
- Confirm ongoing covenant compliance, revolver availability, and any developments in the disclosed contract-retention, competitive, regulatory, or cybersecurity risks.