NRC Health (National Research Corporation) — Q3 2015 Form 10-Q
Business and period. NRC provides analytics and insights to healthcare providers, payers, and other healthcare organizations, including patient experience, engagement, retention, and population-health solutions. This unaudited report covers the quarter and nine months ended September 30, 2015; comparisons are with 2014.
Key financial results
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $25.244m | $23.682m | $75.979m | $73.713m |
| Operating income | $6.548m | $7.159m | $18.741m | $21.878m |
| Operating margin | 26.0% | 30.2% | 24.7% | 29.7% |
| Net income | $4.139m | $4.552m | $11.683m | $14.057m |
| Diluted EPS, Class A / Class B | $0.10 / $0.59 | $0.11 / $0.64 | $0.28 / $1.65 | $0.33 / $1.99 |
| Operating cash flow | Not separately stated | Not separately stated | $14.776m | $20.616m |
Q3 revenue grew 6.6%, while operating income fell 8.5% and net income fell 9.1%. For the first nine months, revenue grew 3.1%, while operating income declined 14.3% and net income declined 16.9%. Operating expenses rose faster than revenue: direct costs and SG&A increased, and operating margin contracted. Nine-month cash from operations fell $5.840m year over year, chiefly reflecting lower net income and a $5.1m increase in receivables.
Financial position, cash flow, and capital allocation
- At September 30, cash and cash equivalents were $37.580m; working capital was $24.5m. Cash included $8.5m held in Canada and intended to remain invested in foreign operations.
- Notes payable totaled $6.328m ($2.383m current); capital lease obligations were $0.191m. The $6.5m revolver was undrawn, with $6.5m borrowing capacity. NRC reported compliance with debt covenants.
- Nine-month investing cash use was $2.207m, mainly for property and equipment. Financing cash use was $13.836m, including $7.545m of dividends, $2.789m for Connect interests, $1.629m of share repurchases, and debt and lease repayments. Cash declined $2.462m during the period.
- Current deferred revenue rose to $17.454m from $15.095m at year-end; the company generally bills clients before completing services. Receivables increased to $12.889m from $8.116m, which management attributed to billing and collection timing on new and renewed contracts.
Material changes, outlook, and risks
- Costs and margins: Management attributed higher direct costs to postage, printing, survey costs, and staffing; SG&A increases included acquisition-related compensation, added sales staff, and a $0.657m write-off of a purchase option for a potential acquisition. The option was terminated unexercised. Higher amortization also reflected an October 2014 acquisition and software investment.
- Connect: NRC paid $2.8m in July to acquire additional interests, raising ownership from 49% to approximately 89%. It may have to purchase further equity from the remaining owner for $1m at each of specified new annual recurring contract-value thresholds of $7m, $14m, and $20m; NRC also committed to up to $1.3m of additional capital contributions as needed.
- Potential divestiture: NRC was in discussions to sell selected Predictive Analytics assets and liabilities. The sale remained subject to a definitive agreement; related net assets of $0.773m were classified as held for sale, not discontinued operations. Management said the divestiture would not have a major effect on operations or results.
- Taxes and contingencies: The nine-month effective tax rate rose to 37.2% from 35.3%, primarily due to a capital-loss valuation allowance and higher projected state tax rates. NRC was under a federal tax examination for 2013 and reported $0.394m of unrecognized tax benefits, excluding interest and penalties.
- Outlook: Management said cash, borrowing availability, and operating cash flow should meet projected capital and debt needs and the dividend policy for the foreseeable future. It expected capital expenditures for the remainder of 2015 to be similar, primarily software, hardware, and equipment. No specific earnings or revenue guidance was provided.
- Risks: The filing highlights contract non-renewals, competition and pricing pressure, economic and healthcare-industry changes, dependence on a limited number of key clients, personnel retention, intellectual-property exposure, and cybersecurity risks. NRC reported no material changes to its previously disclosed risk factors and no material changes in internal control over financial reporting.
Facts investors should verify
- Whether revenue growth can outpace direct and SG&A cost growth and restore operating margins.
- Whether receivable growth reflects timing only, and how collections affect operating cash flow.
- The status, terms, and financial impact of the proposed Predictive Analytics asset sale.
- Connect’s recurring-revenue progress, potential $1m staged equity purchases, and additional funding needs.
- Developments in the federal tax examination and resolution of uncertain tax positions.
- Client renewal and concentration trends, and the sustainability of dividends and repurchases alongside debt repayment.