NRC Health — Q2 2019 Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2019. National Research Corporation, doing business as NRC Health, provides analytics and insights to healthcare organizations in the U.S. and Canada. Figures below are in U.S. dollars; financial amounts are in millions unless noted.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $31.4 | $28.0 | $62.9 | $59.0 |
| Operating income | $10.1 | $7.8 | $20.9 | $16.7 |
| Operating margin | 32.3% | 27.7% | 33.2% | 28.3% |
| Net income | $7.4 | $7.9 | $15.6 | $15.3 |
| Diluted EPS, common stock | $0.29 | $0.28 | $0.61 | $0.45 |
| Operating cash flow | Not separately presented | Not separately presented | $16.1 | $18.4 |
Q2 revenue increased 12.1%; first-half revenue increased 6.5%. Management attributed growth to new customers and increased sales to existing clients; Q2 also benefited from conference timing. Subscription services recognized over time contributed $27.9 million of Q2 revenue and $55.8 million for the first half. Digital Voice of the Customer (VoC) solutions represented 62.1% of Q2 revenue and 60.0% of first-half revenue, up from 50.4% and 47.4%, respectively, in 2018.
Operating income and margin improved as revenue growth exceeded expense growth. Direct expenses declined as a share of revenue to 36.6% in Q2 and 36.8% in the first half. SG&A was 26.5% and 25.5%, respectively. Net income declined in Q2 despite higher revenue and operating income, largely reflecting a higher tax provision and unfavorable changes in other income and expense. First-half net income increased 2.2%.
Cash, debt and liquidity
- Cash and cash equivalents were $4.0 million at June 30, 2019, down $9.0 million from year-end 2018. First-half operating cash flow was $16.1 million; capital expenditures were $2.3 million.
- Financing activities used $23.3 million, including $21.8 million of dividends paid. Cash flow from operations was lower than the prior-year period, mainly due to working-capital changes, including higher receivables.
- Notes payable totaled $36.2 million, with $3.9 million current; the company also had $1.0 million drawn on its revolving credit line. The $40 million term loan bears fixed interest at 5% and matures in April 2023. Total debt including the line draw was approximately $37.2 million, excluding $0.9 million of finance lease liabilities.
- The revolving facility had $14.0 million of remaining availability. A separate $15 million delayed-draw facility was unused and restricted to permitted acquisitions or share repurchases. The company reported compliance with its financial covenants.
- Working capital was negative $14.2 million. Management said this is significantly affected by deferred revenue, which was $17.0 million and largely reflects advance billings expected to be earned within 12 months. Management believed cash, borrowing availability and operating cash flow would fund projected needs and its dividend policy for the foreseeable future.
Changes, outlook and risks
- First-half operating cash flow fell to $16.1 million from $18.4 million. Capital expenditures were lower year over year. The company expected similar capital spending for the remainder of 2019, primarily for software, hardware and equipment.
- Interest expense rose due to the term loan originated in 2018 and revolving-credit borrowings. Other expense included foreign-exchange revaluation of intercompany transactions: $0.6 million of adverse year-over-year change in Q2 and $0.9 million for the first half.
- Q2’s effective tax rate was 22.1%, versus a 1.7% tax benefit in Q2 2018; the first-half rates were 19.4% and 9.1%. Prior-year tax benefits included recapitalization-related items, option exercises and dividends to non-vested shareholders.
- The company adopted the new lease accounting standard on January 1, 2019, recording $2.3 million of operating lease right-of-use assets and $2.4 million of lease liabilities at transition. It reported no significant effect on income or cash flows.
- No formal financial guidance was provided in the filing. Management noted that subscription agreements are generally annually renewable but may be cancelable on short or no notice. Forward-looking risks include client non-renewals and retention, competition and price pressure, healthcare-sector consolidation and regulation, personnel retention, and technology, cybersecurity and service-platform risks.
- Routine claims and litigation may arise in the ordinary course; the filing reports no specific material proceeding or quantified loss. The company said there were no material changes to its previously disclosed risk factors and no material changes to market-risk disclosures.
Important facts for investors to verify
- Whether revenue growth and the increasing VoC contribution continue, and how much Q2 conference timing affected growth.
- Whether receivables and working capital convert to cash as expected, given lower first-half operating cash flow and the $14.2 million working-capital deficit.
- Dividend sustainability relative to cash generation, debt amortization and the company’s available liquidity.
- Debt covenant headroom and the effects of interest rates or the expected LIBOR transition on floating-rate facilities.
- Tax-rate comparability: 2018 included recapitalization-related tax benefits, making year-over-year net-income comparisons less straightforward.