NRC Health (National Research Corporation) — FY 2016 Form 10-K
Business and reporting period: Healthcare analytics and insights provider serving healthcare organizations and payers, primarily through recurring subscriptions. Fiscal year ended December 31, 2016; comparisons are with FY 2015 unless stated otherwise. The filing also provides unaudited quarterly results, including Q4.
Financial performance
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Revenue | $109.4 million | $102.3 million | +6.9% |
| Operating income | $31.2 million | $26.4 million | +18.0% |
| Operating margin | 28.5% | 25.8% | +2.7 percentage points |
| Net income | $20.5 million | $17.6 million | +16.5% |
| Class A diluted EPS | $0.48 | $0.41 | Up |
| Class B diluted EPS | $2.88 | $2.49 | Up |
| Operating cash flow | $26.8 million | $21.9 million | +$5.0 million |
Subscription-based agreements represented 88.0% of revenue, up from 86.6%. Revenue growth reflected market-share gains and expansion within existing clients. Direct expenses grew 2.2%, slower than revenue, while SG&A increased 4.4%. Net margin was approximately 18.8%, compared with 17.2% in 2015.
Q4 comparison: Revenue was $28.4 million versus $26.4 million in Q4 2015. Operating income was $8.8 million versus $7.7 million; net income was $5.7 million versus $5.9 million. Q4 2015 included $1.1 million of divestiture gain in other income, affecting the year-over-year net-income comparison.
Cash, debt and liquidity
- Cash and cash equivalents were $33.0 million at year-end, down from $42.1 million. Operating cash flow was $26.8 million; investing used $3.8 million and financing used $32.5 million, including $28.6 million of dividend payments.
- Working capital surplus was $15.6 million, versus $10.9 million. Deferred revenue was $15.5 million, compared with $14.8 million.
- Total debt and capital leases were approximately $3.7 million. Term-note balance was $3.5 million at a fixed 3.12% rate; no revolver borrowings were outstanding, and $6.5 million was available subject to borrowing-base terms. The company reported covenant compliance.
- Cash held in Canada was $11.7 million and was intended to remain invested abroad. The company estimated $536,000 of additional tax if undistributed foreign earnings were repatriated.
- FY 2016 dividends declared totaled $14.3 million. Future dividends remain at the board’s discretion.
Changes, outlook and notable items
- Operating margin improved as revenue growth outpaced operating-expense growth. The effective tax rate declined to 34.6% from 35.6%, including a $460,000 tax-expense benefit from adopting the share-based compensation accounting update.
- NRC Health acquired the remaining Connect ownership interests in 2016 for a total of $2.0 million and dissolved the subsidiary in June. In 2015 it sold selected clinical-workflow assets; the sale generated a $1.1 million gain in 2015 and an additional $223,000 gain in 2016 from escrow proceeds.
- Management said existing cash, borrowing availability and operating cash flows should meet projected capital and debt needs and dividend policy for the foreseeable future. It expected 2017 capital expenditures to be similar to 2016’s $4.0 million, primarily for computer equipment and software. No specific revenue or earnings guidance was provided.
- Principal risks include annual contract nonrenewals and client budget constraints; competition and pricing pressure; healthcare regulation and industry consolidation; dependence on survey data and vendors; cyber, privacy and system-security incidents; retention of key personnel; and acquisition integration risks. Ten largest clients generated 17% of revenue, with no single client above 5%.
- Class B shares held approximately 94% of voting power as of February 2017; CEO Michael Hays beneficially controlled approximately 54% of total voting power. The filing reports no material pending litigation and no goodwill or intangible-asset impairment in 2016.
Key facts investors should verify
- Whether subscription renewals, client retention and cross-selling sustain revenue growth, given contracts are generally annually renewable and can be canceled on short or no notice.
- How much of reported earnings and cash generation is recurring versus affected by divestiture gains, tax-accounting changes and working-capital timing.
- Cash availability and intended use, including foreign-held cash, dividend policy, and the timing and terms of debt and revolver maturities.
- Potential effects of healthcare-sector consolidation, competition, privacy/security incidents and regulatory changes on client demand and margins.
- Implications for shareholder oversight and corporate decisions of the dual-class voting structure and CEO control.