NRC Health — Q1 2019 Form 10-Q
Business and period: National Research Corporation, doing business as NRC Health, provides analytics and insights to healthcare organizations, including patient and employee experience, engagement, and governance solutions. This unaudited report covers the three months ended March 31, 2019; comparisons are with Q1 2018. Amounts below are in U.S. dollars unless noted.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 / prior date |
|---|---|---|
| Revenue | $31.5 million | $31.0 million |
| Operating income / margin | $10.7 million / 34.0% | $9.0 million / 28.9% |
| Net income | $8.2 million | $7.3 million |
| Diluted EPS | $0.32 | $0.17 Common (formerly Class A); $1.01 Class B |
| Cash from operations | $7.3 million | $8.2 million |
| Capital expenditures | $1.1 million | $1.3 million |
| Cash and cash equivalents | $2.6 million | $13.0 million at Dec. 31, 2018 |
| Total debt, including line of credit | $38.8 million | $38.0 million in notes payable at Dec. 31, 2018; no line balance |
| Working capital | Deficit of $16.4 million | Deficit of $18.7 million at Dec. 31, 2018 |
Direct expenses were $11.7 million (37.0% of revenue), versus $12.9 million (41.6%); SG&A was $7.7 million (24.5%), versus $7.9 million (25.4%). Depreciation and amortization rose to $1.4 million from $1.3 million. Net income was approximately 26.0% of revenue, compared with 23.6% in Q1 2018.
Financing activities used $16.8 million, including $17.1 million of dividend payments, partly offset by $8.5 million of line-of-credit borrowings. Cash declined $10.4 million during the quarter. Deferred revenue was $18.2 million, up from $16.2 million at year-end; management notes that advance billings and deferred revenue materially affect working capital.
Changes and notable items
- Revenue increased 1.5%, primarily from new customer sales and higher sales to existing clients. Digital Voice of the Customer platform solutions contributed 57.9% of revenue, up from 44.6%.
- Operating income rose 19.5%, with the operating margin improving 5.1 percentage points. Lower variable direct costs—particularly postage, printing, paper, and conference costs—and lower legal and accounting costs contributed; higher software/platform hosting and compensation costs partly offset savings.
- Other expense was $844,000 versus $9,000 of other income, largely reflecting $570,000 of interest expense on debt originated in April 2018 and foreign-exchange revaluation expense.
- The 2018 recapitalization eliminated Class B shares. Consequently, the 2018 EPS figures are presented separately by former share class and are not directly comparable with 2019’s single common-stock EPS.
- The company adopted lease accounting standard Topic 842 on January 1, 2019, recording $2.3 million of operating lease right-of-use assets and $2.4 million of lease liabilities at transition; management reported no significant effect on income or cash flows.
- The effective tax rate declined to 16.9% from 18.5%, principally due to an insurance-related tax benefit and increased tax benefits from option exercises and dividends to nonvested shareholders.
Liquidity, debt, outlook, and risks
At March 31, 2019, NRC Health had $2.6 million in cash, $13.2 million of unused availability on its $15 million revolving credit facility, and access to a separate $15 million delayed-draw facility restricted to permitted acquisitions or share repurchases. The term loan had a 5% fixed rate and matures in April 2023; the revolver balance was $1.75 million and bears floating interest. The company reported compliance with its financial covenants. Management believes cash, borrowing availability, and operating cash flows will be sufficient for projected capital and debt needs and its dividend policy for the foreseeable future. It expected capital spending for the rest of 2019 to be similar to Q1, mainly for software, hardware, and equipment, funded from operating cash flows. No specific earnings or revenue guidance was provided.
Risks highlighted include potential client nonrenewals and retention, competition and price pressure, healthcare-sector consolidation and regulatory changes, ability to retain key personnel, and technology-platform failures, security breaches, or copying of proprietary technology. The company also noted uncertainty around the LIBOR transition expected in 2021 and whether a replacement rate would approximate current borrowing costs. Ordinary-course claims and litigation are possible; the filing gives no clear quantified exposure. No material changes to previously reported risk factors were disclosed.
Important facts for investors to verify
- Whether modest revenue growth and the improved operating margin persist, particularly as digital VoC expands and hosting and compensation costs rise.
- Cash conversion and working-capital trends: operating cash flow declined year over year, receivables increased, and quarter-end cash was $2.6 million despite positive earnings.
- The sustainability and funding of dividends given the financing outflow, working-capital deficit, and debt obligations.
- Debt covenant headroom, the use and cost of revolver borrowing, and the eventual LIBOR replacement terms.
- Client renewal/retention trends and execution, cybersecurity, and platform risks; the filing does not quantify potential effects.