NRC Health (National Research Corporation) — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014; unaudited. Financial statement amounts below are in millions of dollars, except per-share data. NRC provides healthcare analytics and insights, primarily through subscription-based offerings, in the United States and Canada.
Financial performance
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Revenue | $24.0 | $22.4 | $50.0 | $47.3 |
| Operating income | $6.3 | $5.5 | $14.7 | $12.8 |
| Operating margin | 26.3% | 24.8% | 29.4% | 27.0% |
| Net income | $4.1 | $3.4 | $9.5 | $7.9 |
| Diluted EPS, Class A / Class B | $0.10 / $0.57 | $0.08 / $0.49 | $0.22 / $1.34 | $0.19 / $1.12 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $11.4 | $6.0 |
Q2 revenue increased 7.4%; operating income rose about 14% and net income about 18%. First-half revenue grew 5.9%, operating income about 15%, and net income about 20%. Direct costs rose faster than revenue: Q2 direct expenses were 44.9% of revenue versus 42.5% a year earlier, reflecting mailing volumes and contracted survey services. SG&A fell to 24.9% of revenue from 28.6%, partly because prior-year costs included recapitalization-related legal and accounting fees. First-half effective tax rate was 34.9%, down from 37.2%; management attributed the decrease mainly to lower projected state tax rates and prior-year recapitalization fees.
Cash, liquidity, and debt
- Cash and cash equivalents were $31.5 at June 30, up from $22.1 at year-end. Working capital was $22.2, compared with $12.8 at December 31, 2013.
- First-half operating cash flow was $11.4, versus $6.0 in 2013. The increase reflected higher earnings, improved collections, and higher deferred revenue from contract billing timing. Capital expenditures were $1.4; management expected similar spending for the rest of 2014, funded from operating cash flow.
- Term-note debt was $9.2, at a 3.12% annual rate. The $6.5 revolving facility was undrawn, with $6.5 available at period-end; it was renewed through June 30, 2015. NRC was in compliance with debt covenants. Capital lease obligations were $0.4.
- Deferred revenue was $16.1, up from $13.9 at year-end, primarily reflecting advance billings on new and renewed contracts. Management said substantially all deferred revenue and all unbilled revenue would be earned or billed within 12 months.
- Cash held in Canada was $8.5 and intended to remain invested in foreign operations; repatriation could incur U.S. federal tax, with the amount not quantified.
Material developments, outlook, and risks
- Revenue growth was attributed to new customer sales and increased sales to existing clients. Higher mailing, printing, survey-related, labor, publication, and conference costs pressured direct margins.
- NRC consolidates Connect, a healthcare patient-engagement venture in which it owns 49%, because NRC directs key activities and may absorb significant losses or benefits. Connect incurred losses of $0.7 in the first half. NRC had contributed $2.1 of a possible $2.5 in as-needed funding.
- NRC must buy the other Connect members’ units if specified milestones are met: at least $12.5 in annual recurring contract value and approval of financial statements showing a pro forma minimum 35% EBITDA margin. The stated purchase price at June 30 was $0.
- Management said existing cash, borrowing availability, and operating cash flows should meet projected capital and debt needs and the dividend policy for the foreseeable future. No specific revenue or earnings guidance was provided. The filing states that expected remaining-2014 capital expenditures should be similar to first-half spending.
- Key disclosed risks include contract non-renewals, competition and pricing pressure, healthcare-sector consolidation and regulation, dependence on a limited number of key clients, personnel retention, and protection of proprietary technology. NRC reported no material changes to its previously disclosed risk factors, no material changes in market-risk disclosures, and effective disclosure controls.
- The company was evaluating the new revenue-recognition standard, effective for NRC beginning January 1, 2017; it had not determined the impact or transition method.
Important facts for investors to verify
- Whether revenue growth can continue while direct costs, particularly mailing and contracted survey costs, remain elevated.
- How much of the improved cash flow reflects sustainable operating performance versus the timing of contract billings, collections, and deferred revenue.
- Connect’s funding needs, operating losses, milestone progress, and potential cost if the mandatory unit-purchase conditions are achieved.
- Debt repayment, covenant headroom, and the renewal or use of the revolving credit facility after its June 2015 maturity.
- Potential tax consequences of repatriating foreign cash and developments in the $0.194 of liabilities associated with uncertain tax positions.