NRC Health — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022; comparisons are with the same periods in 2021. NRC Health provides healthcare analytics and insights, primarily through annually renewable subscription services. The filing was signed November 4, 2022. Amounts below are in U.S. dollars; financial statement figures are in millions unless otherwise stated.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $37.7 | $37.8 | $113.4 | $109.7 |
| Operating income | $11.1 | $13.1 | $34.3 | $37.4 |
| Operating margin | 29.5% | 34.8% | 30.2% | 34.1% |
| Net income | $8.3 | $9.7 | $25.2 | $27.8 |
| Diluted EPS | $0.33 | $0.38 | $1.00 | $1.08 |
- Q3 revenue declined 0.2%; nine-month revenue increased 3.4%. Subscription revenue recognized over time was $34.9 million in Q3 and $105.8 million for the nine months.
- Operating expenses rose 7.9% in Q3 and 9.5% for the nine months, weighing on operating income and margins. Gross margin is not separately presented in the filing.
- Nine-month cash from operating activities was $28.2 million, down from $34.3 million. Capital expenditures were $7.9 million, versus $3.8 million in the prior-year period. Cash and cash equivalents fell to $28.4 million from $54.4 million at December 31, 2021.
- At September 30, current assets were $49.1 million and current liabilities $41.1 million; reported working capital surplus was $8.0 million, versus $33.3 million at year-end 2021.
- Gross notes payable were $23.4 million, including $4.4 million current, compared with $26.6 million at year-end. The $30 million revolving facility and $75 million delayed-draw term facility were undrawn. Cash exceeded gross notes payable by approximately $5.0 million.
Changes and management commentary
- Q3 U.S. revenue increased $584,000, including $2.9 million growth from existing-client recurring revenue, partly offset by a $2.4 million decline in recurring revenue from new customer sales. The closure of the Canadian office eliminated $660,000 of Q3 2021 revenue; the company does not expect future Canadian revenue.
- For the nine months, existing-client recurring revenue grew $11.5 million, partly offset by declines in new-customer recurring revenue of $5.9 million and non-recurring revenue of $246,000. Canadian revenue declined $1.5 million year over year.
- Recurring contract value declined 2.3% to $148.0 million. Management attributed the decline partly to retiring legacy offerings while focusing on digital core solutions, which had 2.2% growth, as well as sales challenges and increased sales-force turnover.
- Higher associate salary and benefit costs, client-support and workforce-automation spending, marketing, innovation, conferences, and travel contributed to expense growth. Management said recent revenue and earnings growth should not be considered indicative of future expectations.
Liquidity, capital allocation, outlook and risks
- Management believes cash, available borrowing capacity, and operating cash flows will be adequate for projected capital and debt needs for the foreseeable future. The company was in compliance with credit-agreement financial covenants at September 30.
- The term loan bears fixed interest at 5%, with monthly installments through May 2027. Revolver and delayed-draw borrowings, if used, bear floating interest at 30-day SOFR plus 235 basis points; the credit agreement requires a minimum 1.10x fixed-charge coverage ratio and a cash-flow leverage ratio of 3.00x or less.
- Nine-month cash uses included $25.3 million for share repurchases and $15.0 million for dividends. A quarterly dividend of $5.9 million was declared in Q3 and paid in October. The May 2022 repurchase authorization covers up to 2.5 million shares; 1,987,517 shares remained available at quarter-end.
- The company spent $7.9 million on capital expenditures in the first nine months, including $3.5 million for headquarters renovations. It estimated further renovation costs of $3.1 million in 2022 and $16.4 million in 2023, expected to be funded from operating cash flows.
- Risks cited include client non-renewal and retention, competition and pricing pressure, healthcare-sector consolidation and economic conditions, attracting and retaining personnel, COVID-19 impacts, and information-technology failures or cyberattacks. Most subscription agreements are cancelable on short or no notice without penalty.
- Management does not expect the Inflation Reduction Act to materially affect the financial statements. It does not believe pending claims and litigation will materially adversely affect financial position, results, or liquidity. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether existing-client recurring growth can offset weaker new-customer sales and the 2.3% decline in recurring contract value.
- Whether expense growth moderates and operating margins stabilize after the reported contraction.
- Cash generation relative to planned headquarters renovation spending, dividends, repurchases, and debt service.
- Whether the company remains within credit covenants as it continues shareholder returns and funds capital needs.
- The effects of client attrition, sales-force turnover, healthcare market conditions, and the Canadian office closure; the filing provides no formal quantitative revenue or earnings guidance.