NRC Health (National Research Corporation) — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; balance-sheet figures are as of March 31, 2021 unless noted. NRC Health provides analytics and insights for healthcare organizations, primarily through annually renewable subscription services.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $35.5 million | $33.9 million | +4.7% |
| Operating income | $12.0 million | $11.2 million | +7.4% |
| Operating margin | 33.9% | 33.1% | +0.8 percentage points |
| Net income | $9.2 million | $11.8 million | −21.5% |
| Diluted EPS | $0.36 | $0.46 | −21.7% |
| Operating cash flow | $14.4 million | $5.5 million | +$8.9 million |
Revenue growth reflected new customer sales and higher sales to existing clients, partly offset by $605,000 less conference revenue. Subscription services generated $33.1 million, up from $30.4 million. Net income fell despite higher operating income, principally reflecting a $2.4 million tax provision versus a $385,000 tax benefit in Q1 2020; the effective tax rate shifted to 20.5% from a 3.4% benefit rate. The filing attributes this mainly to $2.8 million less in tax benefits from share-based award exercises and vesting, and higher state taxes.
Direct expenses declined 4.8% to $11.9 million, while SG&A increased 8.8% to $9.5 million. Depreciation, amortization and impairment rose to $2.0 million from $1.4 million. The filing does not report a gross margin; operating margin was 33.9%, compared with 33.1%.
Cash, debt and liquidity
- Cash and cash equivalents were $43.5 million, up $8.8 million from December 31, 2020; working capital was $25.3 million, versus $22.4 million.
- Operating cash flow of $14.4 million was supported in part by working-capital movements, including increased deferred revenue. Investing used $4.2 million, including $3.0 million for the PatientWisdom acquisition and $1.2 million for capital expenditures. Financing used $1.4 million, including $1.0 million of term-loan repayments.
- Term-loan carrying amount was $29.7 million, including $4.1 million current; the loan carries a fixed 5% rate and matures in May 2025. No revolving-credit or delayed-draw borrowings were outstanding. The company reported up to $30 million of revolver availability and up to $15 million under the delayed-draw facility, subject to its terms.
- The credit agreement requires a minimum 1.10x fixed-charge coverage ratio and a maximum 3.00x cash-flow leverage ratio. NRC Health said it was in compliance at quarter-end.
Material changes, outlook and risks
- In January, NRC Health acquired substantially all assets and assumed certain liabilities of PatientWisdom for $5.0 million in cash consideration: $3.0 million paid at closing and $2.0 million deferred, due by February 1, 2022, subject to potential indemnification offsets. 2021 results from the acquisition were insignificant.
- In March, the company changed its operating segments from six to one following a reporting-structure change. It reported no goodwill impairment following its assessment. A $324,000 impairment charge related to the Seattle office right-of-use asset followed a sublease arrangement; the company remains responsible under the original lease.
- Management said the workforce remained intact and services continued without significant disruption, but COVID-19 had affected clients, sales activity and travel. It temporarily halted company travel and expected limited travel to resume in Q3 2021. Management cautioned that recent revenue and earnings growth should not be viewed as indicative of future expectations, while stating it expected sufficient liquidity for foreseeable needs.
- No formal revenue or earnings guidance is provided in the filing. The company expects substantially higher capital expenditures for building improvements, with the amount not yet determined, funded from operating cash flow. It reported a $3.1 million dividend paid in April 2021; no dividend was declared or paid during Q1.
- Key risks include COVID-19 impacts, client retention and contract renewals, competition and pricing pressure, healthcare-industry consolidation and regulation, personnel retention, and technology failures or cybersecurity incidents. The company also noted uncertainty around the transition from LIBOR. It said ordinary-course claims and litigation were not expected to materially adversely affect its financial position, results or liquidity.
Important facts for investors to verify
- Whether subscription growth and client additions continue, and how COVID-19 effects and conference revenue affect comparisons.
- Whether the higher cash flow is sustainable, given the contribution from deferred revenue and timing-sensitive working-capital items.
- PatientWisdom’s integration, contribution to results and payment of the deferred acquisition consideration.
- The scale and timing of planned building improvements and their effect on capital spending and liquidity.
- Future tax rates and share-based compensation tax benefits, as well as compliance with debt covenants and the LIBOR replacement process.